File No. 811-2004
File No. 2-36007
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. _____
Post-Effective Amendment No. 58
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 30
UNITED INTERNATIONAL GROWTH FUND, INC.
- -------------------------------------------------------------------------
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66201-9217
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
- -------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
__X__ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
==============================================================================
DECLARATION REQUIRED BY RULE 24f-2 (a) (1)
The issuer has registered an indefinite amount of its securities under the
Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for the
<PAGE>
Registrant's fiscal year ended June 30, 1999 will be filed on or about September
28, 1999.
<PAGE>
The Securities and Exchange Commission has not approved or disapproved the
Fund's securities, or determined whether this Prospectus is accurate or
adequate. It is a criminal offense to state otherwise.
United International Growth Fund, Inc.
This Fund seeks the long-term appreciation of your investment. Realization of
income is a secondary goal.
Prospectus
September 1, 1999
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
AN OVERVIEW OF THE FUND...........................................................................................3
PERFORMANCE.......................................................................................................5
FEES AND EXPENSES.................................................................................................7
THE INVESTMENT PRINCIPLES OF THE FUND.............................................................................9
Investment Goals, Principal Strategies and Other Investments...................................................9
Risk Considerations of Principal Strategies and Other Investments..........................................10
Year 2000 and Euro Issues.....................................................................................10
YOUR ACCOUNT.....................................................................................................12
Choosing a Share Class...........................................................................................
Sales Charge Reductions and Waivers...........................................................................
Waivers for Certain Investors.................................................................................
Ways to Set Up Your Account...................................................................................18
Buying Shares.................................................................................................20
Minimum Investments...........................................................................................22
Adding to Your Account........................................................................................22
Selling Shares................................................................................................23
Telephone Transactions........................................................................................26
Shareholder Services..........................................................................................27
Personal Service...........................................................................................27
Reports....................................................................................................27
Exchanges..................................................................................................27
Automatic Transactions for Class A, B and C Shareholders...................................................28
Distributions and Taxes.......................................................................................28
Distributions..............................................................................................28
Taxes......................................................................................................29
THE MANAGEMENT OF THE FUND.......................................................................................31
Portfolio Management..........................................................................................31
Management Fee................................................................................................31
FINANCIAL HIGHLIGHTS.............................................................................................33
</TABLE>
<PAGE>
An Overview of the Fund
Goals
United International Growth Fund, Inc. (the "Fund") seeks, as a primary goal,
long-term appreciation of capital. As a secondary goal, the Fund seeks current
income.
Principal Strategies
The Fund seeks to achieve its goals by investing primarily in common stocks of
foreign companies that Waddell & Reed Investment Management Company ("WRIMCO"),
the Fund's investment manager, believes have the potential for long-term growth
represented by economic expansion and restructuring programs. The Fund will
primarily invest in issuers of developed countries. The Fund may invest in
companies of any size.
Principal Risks of Investing in the Fund
Because the Fund owns different types of investments, a variety of factors can
affect its investment performance, such as:
o changes in foreign exchange rates, which may affect the value of the
securities the Fund holds;
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
o the earnings performance, credit quality and other conditions of the
issuers whose securities the Fund holds; and
o WRIMCO's skill in evaluating and selecting securities for the Fund.
Investing in foreign securities presents additional risks, such as currency
fluctuations and political or economic conditions affecting the foreign country.
Accounting and disclosure standards also differ from country to country, which
makes obtaining reliable research information more difficult. There is the
possibility that, under unusual international monetary or political conditions,
the Fund's assets might be more volatile than would be the case with other
investments.
Market risk for small or medium sized companies may be greater than that for
large companies. For example, smaller companies have limited financial
resources, limited product lines or inexperienced management.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
3
<PAGE>
Who May Want to Invest
The Fund is designed for investors seeking long-term appreciation of capital by
investing primarily in securities issued by foreign companies. You should
consider whether the Fund fits with your investment objectives.
4
<PAGE>
Performance
The chart and table below provide some indication of the risks of investing in
the Fund by showing changes in the Fund's performance from year to year and by
showing how the Fund's average annual returns for the periods shown compare with
those of a broad measure of market performance.
o The chart presents the total annual returns for Class A and shows how
performance has varied from year to year over the past ten years.
o The chart does not reflect any sales charge that you may be required to pay
upon purchase of the Fund's Class A shares. If the sales charge were
included, the returns would be less than those shown.
o The table shows Class A and Class Y average annual returns and compares
them to the market indicators listed. No performance information is
provided for Class B or Class C shares since these classes had not
commenced operations as of December 31, 1998.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does
not necessarily indicate how it will perform in the future.
Note that the performance information in the chart and table is based on
calendar-year periods, while the information shown in the Financial Highlights
section of this Prospectus and in the Fund's shareholder reports is based on the
Fund's fiscal year.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1989 12.88%
1990 -13.20%
1991 19.27%
1992 -0.67%
1993 46.56%
1994 1.81%
1995 8.09%
1996 18.23%
1997 17.38%
1998 21.41%
In the period shown in the chart, the highest quarterly return was 19.80% (the
first quarter of 1998) and the lowest quarterly return was -17.43% (the third
quarter of 1990). The Class A return for the quarter ended June 30, 1999 was
___%.
5
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year 5 Years 10 Years Life of Class*
<S> <C> <C> <C> <C>
Class A Shares of the Fund 14.43% 11.81% 11.43%
Morgan Stanley Capital
International E.A.FE.
Index 20.00% 9.19% 5.54% 9.57%
Lipper International Fund
Universe Average 13.03% 7.80% 9.02% 9.61%
Class Y Shares of the Fund 21.91% N/A N/A 16.37%
Morgan Stanley Capital
International E.A.FE.
Index 20.00% 9.19% 5.54% 9.57%
Lipper International Fund
Universe Average 13.03% 7.80% 9.02% 9.61%
</TABLE>
The index shown is a broad-based, securities market index that is unmanaged. The
Lipper average is a composite of mutual funds with goals similar to the goals of
the Fund.
* Since September 27, 1995, the date on which Class Y commenced operations.
Because the Class commenced operations on a date other than at the end of a
month, and partial month calculations of the performances of the index is
not available, index performance is from September 30, 1995.
6
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Shareholder Fees Class A Class B Class C Class Y
(fees paid directly from Shares Shares Shares Shares
your investment) ------ ------ ------ ------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases
(as a percentage of
offering price) 5.75% None None None
Maximum Deferred Sales
Charge (Load)(1) None 5% 1% None
(as a percentage of
amount invested)
Annual Fund Operating Expenses(2)
(expenses that are deducted from Fund assets)
Management Fees 0.% 0.% 0.% 0.%
Distribution and
Service (12b-1) Fees(3) 0.% 1.00% 1.00% None
Other Expenses 0.% 0.% 0.% 0.%
Total Annual Fund
Operating Expenses 0.% 0.% 0.% 0.%
</TABLE>
Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class A, Class B,
Class C or Class Y shares for each time period specified, (b) your investment
has a 5% return each year, and (c) the expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions, your costs
would be:
<TABLE>
<CAPTION>
If shares are redeemed
at end of period: 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A shares $ $ $ $
Class B shares $ $ $ $
Class C shares $ $ $ $
Class Y shares $ $ $ $
</TABLE>
- ------------
(1) The contingent deferred sales charge which is imposed on redemption
proceeds of Class B shares declines from 5% of the amount invested to 0%
after 6 years. For Class C shares, a 1% contingent deferred sales charge
applies to the proceeds of redemption of Class C shares held for less than
12 months.
(2) Management Fees and Total Annual Fund Operating Expenses have been restated
to reflect the change in management fees effective June 30, 1999;
otherwise, expense ratios are based on the management fees and other
Fund-level expenses of the Fund for the fiscal year ended June 30, 1999,
and for Class B and Class C, the expenses attributable to each Class that
are anticipated for the current year. Actual expenses may be greater or
less than those shown.
(3) It is possible that long-term Class A , Class B and Class C shareholders of
the Fund may bear 12b-1 distribution fees that are more than the maximum
asset-based sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
7
<PAGE>
<TABLE>
<CAPTION>
If shares are not redeemed
at end of period: 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A shares $ $ $ $
Class B shares $ $ $ $
Class C shares $ $ $ $
Class Y shares $ $ $ $
</TABLE>
8
<PAGE>
The Investment Principles of the Fund
Investment Goals, Principal Strategies and Other Investments
The primary goal of the Fund is long-term capital appreciation, with current
income as a secondary goal. The Fund seeks to achieve these goals by investing
primarily in a diversified portfolio of common stocks, preferred stocks and debt
securities (mostly of investment grade) of foreign issuers. There is no
guarantee that the Fund will achieve its goals.
Under normal conditions, the Fund invests at least 80% of its total assets in
foreign securities and at least 65% of its total assets in issuers of at least
three foreign countries. The Fund generally limits its holdings so that no more
than 75% of its total assets are invested in issuers of a single foreign country
and no more than 25% of its total assets are invested in securities issued by
the government of a foreign country.
WRIMCO may look at a number of factors in selecting securities for the Fund's
portfolio. These include the issuer's:
o growth potential;
o earnings potential;
o management;
o industry position; and
o applicable economic and market conditions.
In determining whether to sell a stock, WRIMCO will use the same type of
analysis that it uses in buying stocks in order to determine whether the
security no longer offers significant growth potential. As well, WRIMCO may wish
to take advantage of more attractive investment opportunities.
When WRIMCO believes that a temporary defensive position is desirable, WRIMCO
may take certain steps with respect to up to all of the Fund's assets in debt
securities (including commercial paper or short-term U.S. Government securities)
or preferred stocks, or both. Taking a defensive position may reduce the
potential for appreciation in the Fund.
The Fund may also invest in other types of investments and use certain other
instruments in seeking to achieve the Fund's goals. For example, the Fund may
also invest in options, futures contracts, asset-backed securities and other
derivative instruments if it is permitted to invest in the type of asset by
which the return on, or value of, the derivative is measured. At this time, the
Fund has limited exposure to derivatives. You
9
<PAGE>
will find more information in the Statement of Additional Information ("SAI")
about the Portfolio's permitted investments and strategies, as well the
restrictions that apply to them.
Risk Considerations of Principal Strategies and Other Investments
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk.
o Market risk is the possibility of a change in the price of the security
because of market factors including changes in interest rates. Bonds with
longer maturities are more interest-rate sensitive. For example, if
interest rates increase, the value of a bond with a longer maturity is more
likely to decrease. Because of market risk, the share price of the Fund
will likely change as well.
o Financial risk is based on the financial situation of the issuer of the
security. The financial risk of the Fund may depend, for example, on the
earnings performance of the issuer of stock held by the Fund. To the extent
the Fund invests in debt securities, the financial risk of the Fund may
also depend on the credit quality of the underlying securities in which it
invests.
o Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid
before its expected maturity date.
Because the Fund owns different types of investments, its performance will be
affected by a variety of factors. In general, the value of the Fund's
investments and the income it may generate will vary from day to day, generally
due to changes in market conditions, interest rates and other company and
economic news. Performance will also depend on WRIMCO's skill in selecting
investments.
Certain types of the Fund's authorized investments and strategies (such as
foreign securities ad derivative instruments) involve special risks. Depending
on how much the Fund invests or uses these strategies, these special risks may
become significant. For example, foreign investments may subject the Fund to
restrictions on receiving the investment proceeds from a foreign country,
foreign taxes, and potential difficulties in enforcing contractual obligations,
as well as fluctuations in foreign currency values and other developments that
may adversely affect a foreign country. Derivative instruments may expose the
Fund to greater volatility than an investment in a more traditional stock, bond
or other security.
Year 2000 and Euro Issues
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by WRIMCO and the Fund's
10
<PAGE>
other service providers do not properly process and calculate date-related
information and data from and after January 1, 2000. WRIMCO is taking steps that
it believes are reasonably designed to address year 2000 computer-related
problems with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Fund's other, major
service providers. Although there can be no assurances, WRIMCO believes these
steps will be sufficient to avoid any adverse impact on the Fund. Similarly, the
companies and other issuers in which the Fund invests could be adversely
affected by year 2000 computer-related problems, and there can be no assurance
that the steps taken, if any, by these issuers will be sufficient to avoid any
adverse impact on the Fund.
Also, the Fund could be adversely affected by the conversion of certain European
currencies into the Euro. This conversion, which is underway, is scheduled to be
completed in 2002. However, problems with the conversion process and delays
could increase volatility in world capital markets and affect European capital
markets in particular.
11
<PAGE>
Your Account
Choosing a Share Class
This Prospectus offers four classes of shares for the Fund: Class A, Class B,
Class C and Class Y. Each class has its own sales charge, if any, and expense
structure. The decision as to which class of shares is best suited to your needs
depends on a number of factors that you should discuss with your financial
advisor. Some factors to consider are how much you plan to invest and how long
you plan to hold your investment. For example, if you are investing a
substantial amount and plan to hold your shares for a long time, Class A shares
may be the most appropriate for you. If you are investing a lesser amount, you
may want to consider Class B shares (if investing for at least seven years) or
Class C shares (if investing for less than seven years). Class Y shares are
designed for institutional investors and others investing through certain
intermediaries, as described below. Since your objectives may change over time,
you may want to consider another class when you buy additional Fund shares. All
of your future investments in the Fund will be made in the class you select when
you open your account, unless you inform the Fund otherwise, in writing, when
you make the future investment.
General comparison of Class A, B and C shares
<TABLE>
<CAPTION>
Class A Class B Class C
- ------- ------- -------
<S> <C> <C>
o Initial sales charge o No initial sales charge o No initial sales charge
o No deferred sales charge o Deferred sales charge on shares o A 1% deferred sales charge on
you sell within six years shares you sell within one year
o Maximum distribution and service o Distribution and service o Distribution and service
(12b-1) fees of 0.25% (12b-1) fees of 1.00% (12b-1) fees of 1.00%
o Converts to Class A shares in o Does not convert to Class A
eighth year, thus reducing shares, so annual expenses do
future annual expenses not decrease
o An investment of $300,000 or o An investment of $2,000,000 or more may
may be placed in Class A will be placed in Class A shares due to
shares due to no sales no sales charge and lower annual expenses.
charge lower annual expenses.
</TABLE>
12
<PAGE>
The Fund has adopted a Distribution and Service Plan ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940 for each of its Class A, Class B
and Class C shares. Under the Class A Plan, the Fund may pay Waddell & Reed,
Inc. a fee of up to 0.25%, on an annual basis, of the average daily net assets
of the Class A shares. This fee is to reimburse Waddell & Reed, Inc. for the
amounts it spends for distributing the Fund's Class A shares, providing services
to Class A shareholders and/or maintaining Class A shareholder accounts. Under
the Class B Plan and the Class C Plan, the Fund may pay Waddell & Reed, Inc., on
an annual basis, a service fee of up to 0.25% of the average daily net assets of
the class to compensate Waddell & Reed, Inc. for providing services to
shareholders of that class and/or maintaining shareholders accounts for that
class and a distribution fee of up to 0.75% of the average daily net assets of
the class to compensate Waddell & Reed, Inc. for distributing shares of that
class. Because a class's fees are paid out of the assets of that class on an
on-going basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.
Class A shares are subject to a sales charge when you buy them, based on the
amount of your investment, according to the table below. Class A shares pay an
annual 12b-1 fee of up to 0.25% of average Class A net assets. The ongoing
expenses of this class are lower than those for Class B or Class C shares and
higher than those for Class Y shares.
13
<PAGE>
Sales
Sales Charge
Charge as
as Approx.
Percent Percent
of of
Size of Offering Amount
Purchase Price Invested
- -------- -------- -------
Under
$100,000 5.75% 6.10%
$100,000
to less
than
$200,000 4.75 4.99
$200,000
to less
than
$300,000 3.50 3.63
$300,000
to less
than
$500,000 2.50 2.56
$500,000
to less
than
$1,000,000 1.50 1.52
$1,000,000
to less
than
$2,000,000 1.00 1.01
$2,000,000
and over 0.00 0.00
Sales Charge Reductions and Waivers
Lower sales charges are available by:
o Combining additional purchases of Class A shares of any of the funds
in the United Group, except shares of United Cash Management, Inc.
unless acquired by exchange for Class A shares on which a sales charge
was paid (or as a dividend or distribution on such acquired shares),
with the NAV of Class A shares already held ("Rights of
Accumulation");
o Grouping all purchases of Class A shares made during a thirteen-month
period ("Letter of Intent"); and
o Grouping purchases by certain related persons.
14
<PAGE>
Additional information and applicable forms are available from Waddell & Reed
financial advisors.
Waivers for Certain Investors
Class A shares may be purchased at NAV by:
o The Directors and officers of the Fund, employees of Waddell & Reed,
Inc., employees of their affiliates, financial advisors of Waddell &
Reed, Inc. and the spouse, children, parents, children's spouses and
spouse's parents of each;
o Certain retirement plans and certain trusts for these persons; and
o A 401(k) plan having 100 or more eligible employees.
You will find more information in the SAI about sales charge reductions and
waivers.
Class B shares are not subject to a sales charge when you buy them. However, you
may pay a contingent deferred sales charge ("CDSC") if you sell your Class B
shares within six years of their purchase, based on the table below. Class B
shares pay an annual 12b-1 service fee of up to 0.25% of average net assets and
distribution fee of up to 0.75% of average net assets. If you hold your Class B
shares for seven years, in the eighth year they will automatically convert to
Class A shares of the Fund, which have lower ongoing expenses.
The Fund will redeem your Class B shares at their NAV next calculated after
receipt of a written request for redemption in good order, subject to the CDSC
discussed below.
Deferred
Date of Sales
Redemption Charge
- ---------- ------
within 1st calendar year 5%
2nd full calendar year 4%
3rd full calendar year 3%
4th full calendar year 3%
5th full calendar year 2%
6th full calendar year 1%
after 6th full calendar year 0%
The CDSC will be applied to the total amount invested during a calendar year to
acquire Class B shares or the value of the Class
15
<PAGE>
B shares redeemed, whichever is less. All Class B investments made during a
calendar year are deemed a single investment during that calendar year for
purposes of calculating the CDSC.
Contingent Deferred Sales Charge. A CDSC may be assessed against your redemption
amount and paid to Waddell & Reed, Inc. (the "Distributor"), as further
described below. The purpose of the CDSC is to compensate the Distributor for
the costs incurred by it in connection with the sale of the Fund's Class B
shares. The CDSC will not be imposed on Class B shares representing payment of
dividends or distributions or on amounts which represent an increase in the
value of a shareholder's account resulting from capital appreciation above the
amount paid for Class B shares purchased during the CDSC period.
To keep your CDSC as low as possible, each time you place a request to redeem
shares the Fund first redeems any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, the Fund will
next redeem your Class B shares in the order they were purchased.
Unless instructed otherwise, the Fund, when requested to redeem a specific
dollar amount, will redeem additional Class B shares equal in value to the CDSC.
For example, should you request a $1,000 redemption and the applicable CDSC is
$27, the Fund will redeem shares having an aggregate NAV of $1,027, absent
different instructions.
The CDSC will not apply in the following circumstances:
o redemptions of Class B shares requested within one year of the
shareholder's death or disability, provided the Fund is notified of the
death or disability at the time of the request and furnished proof of such
event satisfactory to the Distributor.
o redemptions of Class B shares made to satisfy required minimum
distributions after age 70 1/2 from a qualified retirement plan, a required
minimum distribution from an individual retirement account, Keogh plan or
custodial account under section 403(b)(7) of the Internal Revenue Code of
1986, as amended ("Code"), or a tax-free return of an excess contribution,
or that otherwise results from the death or disability of the employee, as
well as in connection with redemptions by any tax-exempt employee benefit
plan for which, as a result of a subsequent law or legislation, the
continuation of its investment would be improper.
o redemptions of Class B shares purchased by current or retired directors of
the Fund, or current or retired officers or employees of the Fund, WRIMCO,
the Distributor or their affiliated companies, registered representatives
of Waddell & Reed, Inc., and by the members of immediate families of such
persons.
16
<PAGE>
o redemptions of Class B shares made pursuant to a shareholder's
participation in any systematic withdrawal plan adopted for a Fund. (The
Plan and this exclusion from the CDSC do not apply to a one-time
withdrawal.)
o redemptions the proceeds of which are reinvested in Class B shares of the
Fund within thirty days after such redemption.
o the exercise of certain exchange privileges.
o on redemptions effected pursuant to the Fund's right to liquidate a
shareholder's Class B shares if the aggregate NAV of those shares is less
than $500.
o redemptions effected by another registered investment company by virtue of
a merger or other reorganization with the Fund or by a former shareholder
of such investment company of Class B shares of the Fund acquired pursuant
to such reorganization.
These exceptions may be modified or eliminated by the Fund at any time without
prior notice to shareholders, except with respect to redemptions effected
pursuant to the Fund's right to liquidate a shareholder's shares, which requires
certain notices.
Class C shares are not subject to a sales charge when you buy them, but if you
sell your Class C shares within 12 months of buying them, you will pay a 1%
CDSC. Class C shares pay an annual 12b-1 service fee of up to 0.25% of average
net assets and distribution fee of up to 0.75% of average net assets. Over time,
these fees will increase the cost of your investment and may cost you more than
if you had bought Class A shares. Class C shares do not convert to any other
class.
Class Y shares are not subject to a sales charge or annual 12b-1 fees.
Class Y shares are only available for purchase by:
o participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401, including 401(k) plans, of the
Code , when the plan has 100 or more eligible employees and holds the
shares in an omnibus account on the Fund's records;
o banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an
omnibus account on the Fund's records;
o government entities or authorities and corporations whose investment within
the first twelve months after initial
17
<PAGE>
investment is $10 million or more; and
o certain retirement plans and trusts for employees and financial advisors of
Waddell & Reed, Inc. and its affiliates.
The different ways to set up (register) your account are listed below.
Ways to Set Up Your Account
- -------------------------------------------------
Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
- -------------------------------------------------
Business or Organization
For investment needs of corporations, associations, partnerships, institutions
or other groups
- -------------------------------------------------
Retirement
To shelter your retirement savings from taxes
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts (other
than Roth IRAs and Education IRAs) may be tax-deductible.
o Individual Retirement Accounts (IRAs) allow an individual under 70 1/2,
with earned income, to invest up to $2,000 per tax year. The maximum annual
contribution for an investor and his or her spouse is $4,000 ($2,000 for
each spouse) or, if less, the couple's combined earned income for the
taxable year.
o Rollover IRAs retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
o Roth IRAs allow certain individuals to make non-deductible contributions up
to $2,000 per year. Withdrawals of earnings may be tax-free if the account
is at least five years old and certain other requirements are met.
o Education IRAs are established for the benefit of a minor, with
non-deductible contributions, and permit tax-free withdrawls to pay the
higher education expenses of the beneficiary.
18
<PAGE>
o Simplified Employee Pension Plans (SEP - IRAs) provide small business
owners or those with self-employed income (and their eligible employees)
with many of the same advantages as a Keogh Plan, but with fewer
administrative requirements.
o Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves up to 25% of their annual earned income, with
a maximum of $30,000 per year.
o 401(k) Programs allow employees of corporations and non-governmental
tax-exempt organizations of all sizes to contribute a percentage of their
wages on a tax-deferred basis. These accounts need to be established by the
administrator or trustee of the plan.
o 403(b) Custodial Accounts are available to employees of public school
systems or certain types of charitable organizations.
o 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.
o Savings Incentive Match Plans for Employees (SIMPLE Plans) can be
established by small employers to contribute to their employees' retirement
accounts and involve fewer administrative requirements than 401(k) or other
qualified plans generally.
- -------------------------------------------------
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA").
- -------------------------------------------------
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.
- -------------------------------------------------
19
<PAGE>
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its financial
advisors. To open your account you must complete and sign an application. Your
Waddell & Reed financial advisor can help you with any questions you might have.
To purchase any class of shares by check, make your check payable to Waddell &
Reed, Inc. Mail the check, along with your completed application, to Waddell &
Reed, Inc., P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
To purchase Class Y shares by wire, you must first obtain an account number by
calling 1-800-366-5465, then mail a completed application to Waddell & Reed,
Inc., P.O. Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to
913-236-5044. Instruct your bank to wire the amount you wish to invest, along
with the account number and registration, to UMB Bank, n.a., ABA Number
101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and Account
Number.
You may also buy Class Y shares of the Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements to buy Class Y shares.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a share (price to buy one share of a particular class) is
the net asset value ("NAV") per share of that class plus, for Class A shares,
the sales charge shown in the table above.
In the calculation of the Fund's NAV:
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an
independent pricing service.
o Short-term debt securities are valued at amortized cost, which
approximates market value.
o Other investment assets for which market prices are unavailable are
valued at their fair value by or at the direction of the Board of
Directors.
The Fund is open for business each day the New York Stock Exchange (the "NYSE")
is open. The Fund normally calculates the NAVs of its shares as of the close of
business of the NYSE, normally 4 p.m. Eastern time, except that an option or
futures contract held by the Fund may be priced at the close of the
20
<PAGE>
regular session of any other securities or commodities exchange on which that
instrument is traded.
The Fund may invest in securities listed on foreign exchanges which may trade on
Saturdays or on U.S. national business holidays when the NYSE is closed.
Consequently, the NAV of Fund shares may be significantly affected on days when
the Fund does not price its shares and when you are not able to purchase or
redeem the Fund's shares. Similarly, if an event materially affecting the value
of foreign investments or foreign currency exchange rates occurs prior to the
close of business of the NYSE but after the time their values are otherwise
determined, such investments or exchange rates may be valued at their fair value
as determined in good faith by or under the direction of the Board of Directors.
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
o The Fund does not issue certificates representing Class B, C or Y shares of
the Fund.
o If you purchase Class Y shares of the Fund from certain broker-dealers,
banks or other authorized third parties, the Fund will be deemed to have
received your purchase order when that third party (or its designee) has
received your order. Your order will receive the Class Y offering price
next calculated after the order has been received in proper form by the
authorized third party (or its designee). You should consult that firm to
determine the time by which it must receive your order for you to purchase
shares of the Fund at that day's price.
When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders, including
purchases by exchange, and it and the Fund reserve the right to discontinue
offering Fund shares for purchase.
21
<PAGE>
Minimum Investments
For Class A, B and C:
To Open an Account $500
For certain exchanges $100
For certain retirement accounts
and accounts opened with
Automatic Investment Service $50
For certain retirement accounts and
accounts opened through payroll
deductions for or by employees of
WRIMCO, Waddell & Reed, Inc. and
their affiliates $25
To Add to an Account
For certain exchanges $100
For Automatic Investment Service $25
For Class Y:
To Open an Account
For a government entity or authority
authority or for a corporation: $10 million
(within
first
twelve
months)
For other
investors: Any amount
To Add to An Account Any amount
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed, Inc. Mail the
check along with:
o the detachable form that accompanies the confirmation of a prior purchase
or your year-to-date statement; or
o a letter stating your account number, the account registration and the
class of shares that you wish to purchase.
22
<PAGE>
Mail to Waddell & Reed, Inc. at:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
To add to your Class Y account by wire: Instruct your bank to wire the amount
you wish to invest, along with the account number and registration, to UMB Bank,
n.a., ABA Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer
Name and Account Number.
If you purchase Class Y shares from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
Selling Shares
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The redemption price (price to sell one share of a particular class) is the NAV
per share of that class, subject to any CDSC applicable to Class B or Class C
shares.
To sell shares by written request: Complete an Account Service Request form,
available from your Waddell & Reed financial advisor, or write a letter of
instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number, and the class, of shares to be redeemed; and o
any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.
To sell Class Y shares by telephone or fax: If you have elected this method in
your application or by subsequent authorization, call 1-800-366-5465, or fax
your request to 913-236-5044, and give your instructions to redeem Class Y
shares and make payment by wire to your pre-designated bank account or by check
to you at the address on the account.
23
<PAGE>
When you place an order to sell shares, your shares will be sold at the next NAV
calculated after receipt of a written request for redemption in good order by
Waddell & Reed, Inc. at its home office, subject to any CDSC. Note the
following:
o If more than one person owns the shares, each owner must sign the written
request.
o If you hold a certificate, it must be properly endorsed and sent to the
Fund.
o If you recently purchased the shares by check, the Fund may delay payment
of redemption proceeds. You may arrange for the bank upon which the
purchase check was drawn to provide to the Fund telephone or written
assurance that the check has cleared and been honored. If you do not,
payment of the redemption proceeds on these shares will be delayed until
the earlier of 10 days or the date the Fund can verify that your purchase
check has cleared and been honored.
o Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE
is restricted, or as permitted by the Securities and Exchange Commission.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
o If you purchased Class Y shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms,
some of which may charge you a fee and may have additional requirements to
sell Fund shares. The Fund will be deemed to have received your order to
sell Class Y shares when that firm (or its designee) has received your
order. Your order will receive the Class Y NAV next calculated after the
order has been received in proper form by the authorized firm (or its
designee). You should consult that firm to determine the time by which it
must receive your order for you to sell Class Y shares at that day's price.
The Fund may require a signature guarantee in certain situations such as:
o a redemption request made by a corporation, partnership or fiduciary;
o a redemption request made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
This requirement is intended to protect you and Waddell & Reed from fraud. You
can obtain a signature guarantee from most banks and securities dealers, but not
from a notary public.
The Fund reserves the right to redeem at NAV all your Fund shares if their
aggregate NAV is less than $500. The Fund will give you notice and a 60-day
opportunity to purchase a sufficient number of additional shares to bring the
aggregate NAV of your shares to $500.
24
<PAGE>
You may reinvest, without charge, all or part of the amount of Class A shares
you redeemed by sending to the Fund the amount you want to reinvest. The
reinvested amounts must be received by the Fund within thirty days after the
date of your redemption. You may do this only once with Class A shares of the
Fund.
The deferred sales charge will not apply to the proceeds of Class B or Class C
shares which are redeemed and then reinvested in Class B or Class C shares, as
applicable, within thirty days after such redemption. You may do this only once
as to Class B shares of the Fund and once as to Class C shares of the Fund.
Payments of principal and interest on loans made pursuant to Waddell & Reed's
401(k) prototype plan may be reinvested, without payment of a sales charge, in
Class A shares of any United Group fund in which the plan may invest.
25
<PAGE>
Special Requirements for Selling Shares
Account Type Special Requirements
------------ --------------------
Individual or Joint Tenant The written instructions must be
signed by all persons required to
sign for transactions, exactly as
their names appear on the account.
Sole Proprietorship The written instructions must be
signed by the individual owner of the
business.
UGMA, UTMA The custodian must sign the written
instructions indicating capacity as
custodian.
Retirement The written instructions must be
Account signed by a properly authorized person.
Trust The trustee must sign the written
instructions indicating capacity
as trustee. If the trustee's name
is not in the account
registration, provide a currently
certified copy of the trust
document.
Business At least one person authorized by
or Organization corporate resolution to act on the
account must sign the written
instructions.
Conservator, The written instructions must be signed
Guardian or Other Fiduciary by the person properly authorized by
court order to act in the particular
fiduciary capacity.
Telephone Transactions
The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
will employ reasonable
26
<PAGE>
procedures to confirm that instructions communicated by telephone are genuine.
If the Fund fails to do so, the Fund may be liable for losses due to
unauthorized or fraudulent instructions. Current procedures relating to
instructions communicated by telephone include tape recording instructions,
requiring personal identification and providing written confirmations of
transactions effected pursuant to such instructions.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your account.
Personal Service
Your local Waddell & Reed financial advisor is available to provide personal
service. Additionally, one toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or TeleWaddell, our automated customer telephone
service. During normal business hours, our Customer Services staff is available
to answer your questions or update your account records. At almost any time of
the day or night, you may access TeleWaddell from a touch-tone phone to:
o obtain information about your accounts;
o obtain price information about other funds in the United Group; or
o request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange,
transfer or redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports will be mailed to your household, even if you have more than one account
with the Fund. Call the telephone number listed above for Customer Service if
you need copies of annual or semiannual reports or account information.
Exchanges
You may sell your shares and buy shares of the same class of other funds in the
United Group without payment of additional sales charge if you buy Class A
shares or a CDSC when you
27
<PAGE>
exchange Class B or Class C shares. For Class B and Class C shares, the time
period for the CDSC will continue to run. As well, exchanging Class Y
shareholders may buy Class A shares of United Cash Management, Inc.
You may exchange only into funds that are legally permitted for sale in your
state of residence. Note that exchanges out of the Fund may have tax
consequences for you. Before exchanging into a fund, read its prospectus.
The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
Automatic Transactions for Class A, B and C Shareholders
Flexible withdrawal service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund account
automatically. While Regular Investment Plans do not guarantee a profit and will
not protect you against loss in a declining market, they can be an excellent way
to invest for retirement, a home, educational expenses and other long-term
financial goals.
Certain restrictions and fees imposed by the plan custodian may also apply for
retirement accounts. Speak with your Waddell & Reed financial advisor for more
information.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Fund account
Minimum Frequency
$25 Monthly
Funds Plus Service
To move money from United Cash Management, Inc. to the Fund whether in the same
or a different account
Minimum Frequency
$100 Monthly
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to its shareholders each year. Usually the Fund distributes net
investment income semiannually in June and December. Net capital gains (and any
net gains from foreign currency transactions) usually are distributed in
December.
28
<PAGE>
Distribution Options. When you open an account, specify on your application how
you want to receive your distributions. The Fund offers three options:
1. Share Payment Option. Your dividend, capital gains and other distributions
with respect to a class will be automatically paid in additional shares of
the same class of the Fund. If you do not indicate a choice on your
application, you will be assigned this option.
2. Income-Earned Option. Your capital gains and other distributions with
respect to a class will be automatically paid in additional shares of the
same class, but you will be sent a check for each dividend distribution.
However, if the dividend distribution is less than ten dollars, the
distribution will be automatically paid in additional shares of the same
class of the Fund.
3. Cash Option. You will be sent a check for your dividends, capital gains and
other distributions if the total distribution is equal to or greater than
ten dollars. If the distribution is less than ten dollars, it will be
automatically paid in additional shares of the same class of the Fund.
For retirement accounts, all distributions are automatically paid in additional
shares.
Taxes
As with any investment, you should consider how your investment in the Fund will
be taxed. If your account is not a tax-deferred retirement account (or you are
not otherwise exempt from income tax), you should be aware of the following tax
implications:
Taxes on distributions. Dividends from the Fund's investment company taxable
income generally are taxable to you as ordinary income whether received in cash
or paid in additional Fund shares. Distributions of the Fund's net capital
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or paid in additional Fund shares and regardless of the
length of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains (if you are a noncorporate shareholder of the Fund) may
be taxable at different rates depending on how long the Fund held the assets
generating the gains, but generally are taxed at a maximum rate of 20%.
The Fund notifies you after each calendar year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that year.
29
<PAGE>
A portion of the dividends paid by the Fund, whether received in cash or paid in
additional Fund shares, may be eligible for the dividends-received deduction
allowed to corporations. The eligible portion may not exceed the aggregate
dividends received by the Fund from U.S. corporations. However, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the Federal alternative
minimum tax.
Withholding. The Fund must withhold 31% of all dividends, capital gains
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate from dividends and capital gains
distributions also is required for shareholders subject to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in a taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than what you paid for the redeemed shares (which normally includes any
sales charge paid). An exchange of Fund shares for shares of any other fund in
the United Group generally will have similar tax consequences. However, special
rules apply when you dispose of Class A Fund shares through a redemption or
exchange within ninety days after your purchase and then reacquire Class A Fund
shares or acquire Class A shares of another fund in the United Group without
paying a sales charge due to the thirty-day reinvestment privilege or exchange
privilege. See "Your Account." In these cases, any gain on the disposition of
the original Class A Fund shares would be increased, or loss decreased, by the
amount of the sales charge you paid when those shares were acquired, and that
amount will increase the adjusted basis of the shares subsequently acquired. In
addition, if you purchase Fund shares within thirty days before or after
redeeming other Fund shares (regardless of class) at a loss, part or all of that
loss will not be deductible and will increase the basis of the newly purchased
shares.
State and local income taxes. The portion of the dividends paid by the Fund
attributable to interest earned on its U.S. Government securities generally is
not subject to state and local income taxes, although distributions by the Fund
to its shareholders of net realized gains on the sale of those securities are
fully subject to those taxes. You should consult your tax adviser to determine
the taxability of dividends and other distributions by the Fund in your state
and locality.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; you will find
more information in the SAI. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
30
<PAGE>
The Management of the Fund
Portfolio Management
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. WRIMCO and its predecessors have served as investment
manager to each of the registered investment companies in the United Group of
Mutual Funds, Waddell & Reed Funds, Inc., and Target/United Funds, Inc. since
the inception of the company. WRIMCO is located at 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
Thomas A. Mengel is primarily responsible for the management of the portfolio of
the Fund. Mr. Mengel has held his Fund responsibilities since May 1996. He is
Vice President of WRIMCO, Vice President of the Fund and Vice President of other
investment companies for which WRIMCO serves as investment manager. From 1993 to
1996, Mr. Mengel was the President of Sal. Oppenheim jr. & Cie. Securities, Inc.
Other members of WRIMCO's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to the Fund's investments.
Management Fee
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained in the SAI.
The management fee is payable by the Fund at the annual rates of: 0.85% of net
assets up to $1 billion, 0.83% of net assets over $1 billion and up to $2
billion, 0.80% of net assets over $2 billion and up to $3 billion, and 0.76% of
net assets over $3 billion.
Prior to June 30, 1999, the management fee of the Fund was calculated by adding
a group fee to a specific fee. The specific fee was computed on the Fund's net
asset value as of the close of business each day at the annual rate of .30 of 1%
of its net assets. The group fee was determined on the basis of the combined net
asset values of all the funds in the United Group and then allocated pro rata to
the Fund based on its relative net assets at the annual rates shown in the
following table:
31
<PAGE>
Group Fee Rate
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Management fees for the fiscal year ended June 30, 1999 were 0.% of the
Fund's average net assets.
32
<PAGE>
Financial Highlights
The following information is to help you understand the financial performance of
the Fund's Class A* and Class Y shares for the fiscal periods shown. Certain
information reflects financial results for a single Fund share. "Total return"
shows how much your investment would have increased (or decreased) during each
period, assuming reinvestment of all dividends and distributions. This
information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended June 30, 1999, are included in the SAI, which is available upon request.
For a Class A share outstanding throughout each period.*
For the fiscal year ended June 30,
-----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Class A Per-Share Data
Net asset value,
beginning
of period ................ $ $10.61 $8.95 $8.68 $8.98
----- ------ ----- ----- -----
Income from investment
operations:
Net investment
income ............... 0.07 0.07 0.08 0.07
Net realized and
unrealized gain
(loss) on
investments .......... 3.01 1.94 0.86 0.60
----- ------ ----- ----- -----
Total from investment
operations ............... 3.08 2.01 0.94 0.67
------ ------ ----- ----- -----
Less distributions:
From net investment
income ............... (0.06) (0.09) (0.07) (0.04)
From capital gains ....... (1.78) (0.26) (0.60) (0.93)
----- ------ ----- ----- -----
Total distributions ........... (1.84) (0.35) (0.67) (0.97)
----- ------ ----- ----- -----
Net asset value,
end of period ............ $ $11.85 $10.61 $8.95 $8.68
===== ====== ====== ===== =====
Class A Ratios\Supplemental Data
Total return** ................ % 34.49% 23.03% 11.70% 7.98%
Net assets, end of period
(in millions) ............ $0.__ $1,331 $978 $771 $679
Ratio of
expenses to
average
net assets ............... % 1.23% 1.28% 1.25% 1.25%
Ratio of net
investment income
to average
net assets ............... % 0.67% 0.78% 0.89% 0.86%
Portfolio turn-
over rate ................ 114.34% 109.71% 58.64% 57.45%
* On July 4, 1995, Fund shares outstanding were designated Class A shares.
There were no Class B or Class C shares outstanding during the periods
shown.
** Total return calculated without taking into account the sales load deducted
on an initial purchase.
33
<PAGE>
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
For the
For the fiscal year period
ended June 30, from 9/27/95*
------------------------------- through
1999 1998 1997 6/30/96
----- ----- ----- --------
<S> <C> C> <C> <C>
Class Y Per-Share Data
Net asset value,
beginning of period.............. $ $10.62 $8.95 $9.21
----- ------ ------ ------
Income from investment
operations:
Net investment
income ....................... .10 .09 .12
Net realized and
unrealized gain
on investments................ 3.00 1.95 .30
----- ------ ------ ------
Total from investment
operations....................... 3.10 2.04 .42
----- ------ ------ ------
Less distributions:
From net investment
income........................ (0.09) (0.11) (0.08)
From capital gains............... (1.78) (0.26) (0.60)
----- ------ ------ ------
Total distributions................. (1.87) (0.37) (0.68)
----- ------ ------ ------
Net asset value,
end of period.................... $ $11.85 $10.62 $8.95
===== ====== ====== ======
Class Y Ratios\Supplemental Data
Total return ....................... % 34.71% 23.45% 5.44%
Net assets, end of
period (in
millions) ....................... $0.0 $9 $7 $5
Ratio of expenses
to average net
assets........................... % 0.97% 1.04% 0.98%**
Ratio of net
investment income
to average net
assets........................... % 0.93% 1.02% 2.60%**
Portfolio
turnover rate.................... % 114.34% 109.71% 58.64%**
</TABLE>
* Commencement of operations.
** Annualized.
34
<PAGE>
United International Growth Fund, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 Massachusetts Avenue, N. W. (913) 236-2000
Washington, D. C. 20036 (800) 366-5465
Independent Auditors Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Avenue Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment (913) 236-2000
Management Company (800) 366-5465
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
(800) 366-5465 P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
35
<PAGE>
United International Growth Fund, Inc.
PROSPECTUS
September 1, 1999
You can get more information about the Fund in--
o its Statement of Additional Information (SAI) dated September 1, 1999,
which contains detailed information about the Fund, particularly its
investment policies and practices. You may not be aware of important
information about the Fund unless you read both the Prospectus and the
SAI. The current SAI is on file with the Securities and Exchange
Commission (SEC) and it is incorporated into this Prospectus by
reference (that is, the SAI is legally part of the Prospectus).
o its Annual and Semiannual Reports to Shareholders, which detail the
Fund's actual investments and include financial statements as of the
close of the particular annual or semiannual period. The annual report
also contains a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during
the year covered by the report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the Fund
or Waddell & Reed, Inc. at the address and telephone number below. Copies of the
SAI, Annual and/or Semiannual reports may also be requested at
[email protected].
Information about the Fund (including its current SAI and most recent Annual and
Semiannual Reports) is available from the SEC's web site at http://www.sec.gov
and from the SEC's Public Reference Room in Washington, D.C. You can find out
about the operation of the Public Reference Room and applicable copying charges
by calling 1-800-SEC-0330.
The Fund's SEC file number is: 811-2004.
WADDELL & REED, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
800-366-5465
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UNITED INTERNATIONAL GROWTH FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
September 1, 1999
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus ("Prospectus")
for the United International Growth Fund, Inc. (the "Fund") dated September 1,
1999, which may be obtained from the Fund or its underwriter, Waddell & Reed,
Inc., at the address or telephone number shown above.
TABLE OF CONTENTS
Performance Information........................................
Investment Strategies, Policies and Practices..................
Investment Management and Other Services.......................
Purchase, Redemption and Pricing of Shares.....................
Directors and Officers.........................................
Payments to Shareholders.......................................
Taxes .........................................................
Portfolio Transactions and Brokerage...........................
Other Information .............................................
Appendix A.....................................................
Financial Statements ..........................................
<PAGE>
United International Growth Fund, Inc. is a mutual fund; an investment that
pools shareholders' money and invests it toward a specified goal. In technical
terms, the Fund is an open-end, diversified management company organized as a
Maryland corporation on December 18, 1969.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may, from time to
time, publish the Fund's total return information and/or performance rankings in
advertisements and sales materials.
Total Return
Total return is the overall change in the value of an investment over a
given period of time. An average annual total return quotation is computed by
finding the average annual compounded rates of return over the one-, five-, and
ten-year periods that would equate the initial amount invested to the ending
redeemable value. Standardized total return information is calculated by
assuming an initial $1,000 investment and, for Class A shares, deducting the
maximum sales load of 5.75%. All dividends and distributions are assumed to be
reinvested in shares of the applicable class at net asset value for the class as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions on Class A shares. The formula used to
calculate the total return for a particular class of the Fund is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for the
periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares were reflected,
it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of June
30, 1999, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
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With Without
Sales Load Sales Load
Deducted Deducted
One-year period from July 1, 1998 to
June 30, 1999: % %
Five-year period from July 1, 1994 to
June 30, 1999: % %
Ten-year period from July 1, 1989 to
June 30, 1999: % %
Prior to July 4, 1995, the Fund offered only one class of shares to the
public. Shares outstanding on that date were designated as Class A shares. Since
that date, Class Y shares of the Fund have been available for certain
institutional investors.
The average annual total return quotations for Class Y shares as of June
30, 1999, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
Period from July 1, 1998 to
June 30, 1999: %
Period from September 27, 1995* to
June 30, 1999: %
*Date of inception
No performance information is provided for Class B or Class C since neither
had commenced operations as of June 30, 1999.
The Fund may also quote unaveraged or cumulative total return for a class
which reflects the change in value of an investment in that class over a stated
period of time. Cumulative total return will be calculated according to the
formula indicated above but without averaging the rate for the number of years
in the period.
Performance Rankings
Waddell & Reed, Inc. or the Fund also may, from time to time, publish in
advertisements or sales material performance rankings as published by recognized
independent mutual fund statistical services such as Lipper Analytical Services,
Inc., or by publications of general interest such as Forbes, Money, The Wall
Street Journal, Business Week, Barron's, Fortune or Morningstar Mutual Fund
Values. Each class of the Fund may also compare its performance to that of other
selected mutual funds or selected recognized market indicators such as the
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones Industrial
Average. Performance information may be quoted numerically or presented in a
table, graph or other illustration.
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In connection with a ranking, the Fund may provide additional information, such
as the particular category to which it related, the number of funds in the
category, the criteria upon which the ranking is based, and the effect of sales
charges, fee waivers and/or expense reimbursements.
All performance information that the Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of the Fund's shares when redeemed may be more or less
than their original cost.
INVESTMENT STRATEGIES, POLICIES AND PRACTICES
This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and policies
the Fund's investment manager, Waddell & Reed Investment Management Company
("WRIMCO"), may employ and the types of instruments in which the Fund may
invest, in pursuit of the Fund's goal. A summary of the risks associated with
these instrument types and investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by the Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help the Fund achieve its goal. See "Investment
Restrictions and Limitations" for a listing of the fundamental and
non-fundamental (e.g., operating) investment restrictions and policies of the
Fund.
Securities - General
The Fund may invest in securities including common stock, preferred stock, debt
securities and convertible securities. Although common stocks and other equity
securities have a history of long-term growth in value, their prices tend to
fluctuate in the short term, particularly those of smaller companies. The Fund
may invest in preferred stock that is rated by an established rating service or,
if unrated, judged by WRIMCO to be of equivalent quality. Debt securities have
varying levels of sensitivity to changes in interest rates and varying degrees
of quality. As a general matter, however, when interest rates rise, the values
of fixed-rate securities fall and, conversely, when interest rates fall, the
values of fixed-rate debt rise. Similarly, long-term bonds are generally more
sensitive to interest rate changes than shorter-term bonds.
Lower quality debt securities (commonly called "junk bonds") are considered
to be speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. The market prices of these securities
may
4
<PAGE>
fluctuate more than high-quality securities and may decline significantly in
periods of general economic difficulty. The market for lower-rated debt
securities may be thinner and less active than that for higher-rated debt
securities, which can adversely affect the prices at which the former are sold.
Adverse publicity and changing investor perceptions may decrease the values and
liquidity of lower-rated debt securities, especially in a thinly traded market.
Valuation becomes more difficult and judgment plays a greater role in valuing
lower-rated debt securities than with respect to securities for which more
external sources of quotations and last sale information are available. Since
the risk of default is higher for lower-rated debt securities, WRIMCO's research
and credit analysis are an especially important part of managing securities of
this type held by the Fund. WRIMCO continuously monitors the issuers of
lower-rated debt securities in the Fund's portfolio in an attempt to determine
if the issuers will have sufficient cash flow and profits to meet required
principal and interest payments. The Fund may choose, at its expense or in
conjunction with others, to pursue litigation or otherwise exercise its rights
as a security holder to seek to protect the interests of security holders if it
determines this to be in the best interest of the Fund's shareholders.
The Fund may invest in debt securities rated in any rating category of the
established rating services, including securities rated in the lowest category
(such as those rated D by Standard & Poor's ("S&P") and C by Moody's Investors
Service, Inc. ("MIS")). Debt securities rated D by S&P or C by MIS are in
payment default or are regarded as having extremely poor prospects of ever
attaining any real investment standing. Debt securities rated at least BBB by
S&P or Baa by MIS are considered to be investment grade debt securities.
Securities rated BBB or Baa may have speculative characteristics. In addition,
the Fund will treat unrated securities judged by WRIMCO to be of equivalent
quality to a rated security having that rating.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from time
to time, and the Fund may retain a portfolio security whose rating has been
changed.
The Fund may purchase debt securities whose principal amount at maturity is
dependent upon the performance of a specified equity security. The issuer of
such debt securities, typically an investment banking firm, is unaffiliated with
the issuer of the equity security to whose performance the debt security is
linked. Equity-linked debt securities differ from ordinary debt securities in
that the principal amount received at maturity is not fixed, but is based on the
price of the linked equity security at the time the debt security matures. The
performance of equity-linked debt securities depends primarily on the
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<PAGE>
performance of the linked equity security and may also be influenced by interest
rate changes. In addition, although the debt securities are typically adjusted
for diluting events such as stock splits, stock dividends and certain other
events affecting the market value of the linked equity security, the debt
securities are not adjusted for subsequent issuances of the linked equity
security for cash. Such an issuance could adversely affect the price of the debt
security. In addition to the equity risk relating to the linked equity security,
such debt securities are also subject to credit risk with regard to the issuer
of the debt security. In general, however, such debt securities are less
volatile than the equity securities to which they are linked.
The Fund may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or
different issuer within a particular period of time at a specified price or
formula. Convertible securities generally have higher yields than common stocks
of the same or similar issuers, but lower yields than comparable nonconvertible
securities, are less subject to fluctuation in the value that the underlying
stock because they have fixed income characteristics, and provide the potential
for capital appreciation if the market price of the underlying common stock
increases.
The value of a convertible security is influenced by changes in interest
rates, with investment value declining as interest rates increase and increasing
as interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value.
The Fund may also invest in a type of convertible preferred stock that pays
a cumulative, fixed dividend that is senior to, and expected to be in excess of,
the dividends paid on the common stock of the issuer. At the mandatory
conversion date, the preferred stock is converted into not more than one share
of the issuer's common stock at the "call price" that was established at the
time the preferred stock was issued. If the price per share of the related
common stock on the mandatory conversion date is less than the call price, the
holder of the preferred stock will nonetheless receive only one share of common
stock for each share of preferred stock (plus cash in the amount of any accrued
but unpaid dividends). At any time prior to the mandatory conversion date, the
issuer may redeem the preferred stock upon issuing to the holder a number of
shares of common stock equal to the call price of the preferred stock in effect
on the date of redemption divided by the market value of the common stock, with
such market value typically determined one or two trading days prior to the date
notice of redemption is given. The issuer must also pay the holder of the
preferred stock cash in an amount equal to any accrued but unpaid dividends on
the preferred stock. This convertible preferred stock is subject to the same
market risk as the common stock of the issuer, except to the extent that such
6
<PAGE>
risk is mitigated by the higher dividend paid on the preferred stock. The
opportunity for equity appreciation afforded by an investment in such
convertible preferred stock, however, is limited, because in the event the
market value of the issuer's common stock increases to or above the call price
of the preferred stock, the issuer may (and would be expected to) call the
preferred stock for redemption at the call price. This convertible preferred
stock is also subject to credit risk with regard to the ability of the issuer to
pay the dividend established upon issuance of the preferred stock. Generally,
convertible preferred stock is less volatile than the related common stock of
the issuer.
Specific Securities and Investment Practices
Foreign Securities and Currencies
The Fund may invest in the securities of foreign issuers, including
depositary receipts. In general, depositary receipts are securities convertible
into and evidencing ownership of securities of foreign corporate issuers,
although depositary receipts may not necessarily be denominated in the same
currency as the securities into which they may be converted. American depositary
receipts, in registered form, are dollar-denominated receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. International depositary receipts and European depositary receipts,
in bearer form, are foreign receipts evidencing a similar arrangement and are
designed for use by non-U.S. investors and traders in non-U.S. markets. Global
depositary receipts are designed to facilitate the trading of securities of
foreign issuers by U.S. and non-U.S. investors and traders.
WRIMCO believes that there are investment opportunities as well as risks in
investing in foreign securities. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy or each other in such matters as
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Individual foreign companies
may also differ favorably or unfavorably from domestic companies in the same
industry. Foreign currencies may be stronger or weaker than the U.S. dollar or
than each other. Thus, the value of securities denominated in or indexed to
foreign currencies, and of dividends and interest from such securities, can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. dollar. WRIMCO believes that the Fund's policy of investing a
substantial portion of its assets abroad might enable it to take advantage of
these differences and strengths where they are favorable.
However, foreign securities and foreign currencies involve additional
significant risks, apart from the risks inherent in U.S. investments. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices
7
<PAGE>
on some foreign markets can be highly volatile. Many foreign countries lack
uniform accounting and disclosure standards comparable to those applicable to
U.S. companies, and it may be more difficult to obtain reliable information
regarding an issuer's financial conditions and operations. In addition, the
costs of foreign investing, including withholding taxes, brokerage commissions
and custodial costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be greater possibility of
default by foreign governments or government-sponsored enterprises. Investments
in foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
These is no assurance that WRIMCO will be able to anticipate these potential
events or counter their effects.
The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is likely
to experience long-term gross domestic product growth above that expected to
occur in the United States, the United Kingdom, France, Germany, Italy, Japan
and Canada. Developing countries may have relatively unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities.
Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The Fund may purchase and sell foreign currency and invest in foreign
currency deposits, and may enter into forward currency contracts, as described
in the Prospectus and this SAI. The Fund may incur a transaction charge in
connection with the exchange of currency. Currency conversion involves dealer
spreads and other costs, although commissions are not usually charged. See
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"Options, Futures and Other Strategies - Forward Currency Contracts" below.
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government securities") are high quality debt
instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date they
are issued), Treasury Notes (which have maturities of one to ten years) and
Treasury Bonds (which generally have maturities of more than 10 years). All such
Treasury securities are backed by the full faith and credit of the United
States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (formerly, the Federal National Mortgage Association), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by Fannie Mae, are supported only by
the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United States, the
owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment.
U.S. Government securities may include mortgage-backed securities issued by
U.S. Government agencies or instrumentalities including, but not limited to,
Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed securities include
pass-through securities, participation certificates and collateralized mortgage
obligations. See "Mortgage-Backed and Asset-Backed Securities." Timely payment
of principal and interest on Ginnie Mae pass-throughs is guaranteed by the full
faith and credit of the United States. Freddie Mac and Fannie Mae are both
instrumentalities of the U.S. Government, but their obligations are not backed
by the full faith and credit of the United States. It is possible that the
availability and the marketability (i.e., liquidity) of the securities discussed
in
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this section could be adversely affected by actions of the U.S. Government to
tighten the availability of its credit.
Money Market Instruments
Money market instruments are high-quality, short-term debt instruments that
present minimal credit risk. They may include U.S. Government Securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
Mortgage-Backed and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund may invest
include mortgage-backed securities issued or guaranteed as to the payment of
principal and interest (but not as to market value) by Ginnie Mae, Fannie Mae or
Freddie Mac. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities. Payments of principal and interest (but not the market value)
of such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or
indirectly, by the U.S. Government or one of its agencies or instrumentalities,
or they may be issued without any government guarantee of the underlying
mortgage assets but with some form of non-government credit enhancement. These
credit enhancements do not protect investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both government
and non-government entities such as banks, mortgage lenders or other financial
institutions. Other types of mortgage-backed securities will likely be developed
in the future, and the Fund may invest in them as long as WRIMCO determines they
are consistent with the Fund's goals and investment policies.
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<PAGE>
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
are created when a U.S. Government agency or a financial institution separates
the interest and principal components of a mortgage-backed security and sells
them as individual securities. The holder of the "principal-only" security
("PO") receives the principal payments made by the underlying mortgage-backed
security, while the holder of the "interest-only" security ("IO") receives
interest payments from the same underlying security.
For example, interest-only ("IO") classes are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets underlying
an IO experience greater than anticipated principal prepayments, then the total
amount of interest allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is government guaranteed or considered to be of the highest quality.
Conversely, principal-only ("PO") classes are entitled to receive all or a
portion of the principal payments, but none of the interest, from the underlying
mortgage assets. PO classes are purchased at substantial discounts from par, and
the yield to investors will be reduced if principal payments are slower than
expected. IOs, POs and other CMOs involve special risks, and evaluating them
requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans or the financial
institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities. The
yield characteristics of mortgage-backed and asset-backed securities differ from
those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced
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by a variety of economic, geographic, social and other factors, including
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties and servicing decisions. Generally,
however, prepayments on fixed-rate mortgage loans will increase during a period
of falling interest rates and decrease during a period of rising interest rates.
Similar factors apply to prepayments on asset-backed securities, but the
receivables underlying asset-backed securities generally are of a shorter
maturity and thus are likely to experience substantial prepayments. Such
securities, however, often provide that for a specified time period the issuers
will replace receivables in the pool that are repaid with comparable
obligations. If the issuer is unable to do so, repayment of principal on the
asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed-rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Changes in the rate or "speed" of these payments can
cause the value of the mortgage backed securities to fluctuate rapidly. However,
these effects may not be present, or may differ in degree, if the mortgage loans
in the pools have adjustable interest rates or other special payment terms, such
as a prepayment charge. Actual prepayment experience
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<PAGE>
may cause the yield of mortgage-backed securities to differ from the assumed
average life yield.
The market for privately issued mortgage-backed and asset-backed securities
is smaller and less liquid than the market for U.S. Government mortgage-backed
securities. CMO classes may be specifically structured in a manner that provides
any of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and especially during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of some CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be reduced.
These changes can result in volatility in the market value and in some instances
reduced liquidity, of the CMO class.
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, or in a registered
public offering. Where registration is required, the Fund may be obligated to
pay all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
There are risks associated with investment in restricted securities in that
there can be no assurance of a ready market for resale. Also, the contractual
restrictions on resale might prevent the Fund from reselling the securities at a
time when such sale would be desirable. Restricted securities that are traded in
foreign markets are often subject to restrictions that prohibit resale to U.S.
persons or entities or permit sales only to foreign broker-dealers who agree to
limit their resale to such persons or entities. The buyer of such securities
must enter into an agreement that, usually for a limited period of time, it will
resell such securities subject to such restrictions. Restricted securities in
which the Fund seeks to invest need not be listed or admitted to trading on a
foreign or domestic exchange and may be less liquid than listed securities.
Certain restricted securities, e.g., Rule 144A securities, may be determined to
be liquid in accordance with guidelines adopted by the Board of Directors. See
"Illiquid Investments" below.
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Warrants and Rights
Warrants are options to purchase equity securities at specified prices
valid for a specific period of time. The prices do not necessarily move parallel
to the prices of the underlying securities. Rights are similar to warrants, but
normally have a short duration and are distributed directly by the issuer to its
shareholders. Rights and warrants have no voting rights, receive no dividends,
and have no rights with respect to the assets of the issuer. Warrants and rights
are highly volatile and, therefore, more susceptible to sharp decline in value
than the underlying security might be. They are also generally less liquid than
an investment in the underlying shares.
Lending Securities
Securities loans may be made on a short-term or long-term basis for the
purpose of increasing the Fund's income. If the Fund lends securities, the
borrower pays the Fund an amount equal to the dividends or interest on the
securities that the Fund would have received if it had not lent the securities.
The Fund also receives additional compensation. The Fund makes loans of its
securities only to parties deemed by WRIMCO to be creditworthy.
Any securities loans that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). Under the
present Guidelines, the collateral must consist of cash or U.S. Government
securities or bank letters of credit, at least equal in value to the market
value of the securities lent on each day that the loan is outstanding. If the
market value of the lent securities exceeds the value of the collateral, the
borrower must add more collateral so that it at least equals the market value of
the securities lent. If the market value of the securities decreases, the
borrower is entitled to return of the excess collateral.
There are two methods of receiving compensation for making loans. The first
is to receive a negotiated loan fee from the borrower. This method is available
for all three types of collateral. The second method, which is not available
when letters of credit are used as collateral, is for the Fund to receive
interest on the investment of the cash collateral or to receive interest on the
U.S. Government securities used as collateral. Part of the interest received in
either case may be shared with the borrower.
The letters of credit that the Fund may accept as collateral are agreements
by banks (other than the borrowers of the Fund's securities), entered into at
the request of the borrower and for its account and risk, under which the banks
are obligated to pay to the Fund, while the letter is in effect, amounts
demanded by the Fund if the demand meets the terms of the letter. The Fund's
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right to make this demand secures the borrower's obligations to it. The terms of
any such letters and the creditworthiness of the banks providing them (which
might include the Fund's custodian bank) must be satisfactory to the Fund. Under
the Fund's current securities lending procedures, the Fund may lend securities
only to broker-dealers and financial institutions deemed creditworthy by WRIMCO.
The Fund will make loans only under rules of the NYSE, which presently require
the borrower to give the securities back to the Fund within five business days
after the Fund gives notice to do so. If the Fund loses its voting rights on
securities loaned, it will have the securities returned to it in time to vote
them if a material event affecting the investment is to be voted on. The Fund
may pay reasonable finder's, administrative and custodian fees in connection
with loans of securities.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned increases, risks of delay
in recovering the securities loaned or even loss of rights in collateral should
the borrower of the securities fail financially.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules which may be changed without shareholder vote as to
(i) whom securities may be loaned, (ii) the investment of cash collateral, or
(iii) voting rights.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. The Fund
will not enter into a repurchase transaction that will cause more than 10% of
its net assets to be invested in illiquid investments, which include repurchase
agreements not terminable within seven days. See "Illiquid Investments." A
repurchase agreement is an instrument under which the Fund purchases a security
and the seller (normally a commercial bank or broker-dealer) agrees, at the time
of purchase, that it will repurchase the security at a specified time and price.
The amount by which the resale price is greater than the purchase price reflects
an agreed-upon market interest rate effective for the period of the agreement.
The return on the securities subject to the repurchase agreement may be more or
less than the return on the repurchase agreement.
The majority of the repurchase agreements in which the Fund would engage
are overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is that the
Fund may suffer a loss if the seller fails to pay the agreed-upon amount on the
delivery date and that amount is greater than the resale price of the underlying
securities and other collateral held by the Fund. In the event of bankruptcy or
other default by the
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seller, there may be possible delays and expenses in liquidating the underlying
securities or other collateral, decline in their value and loss of interest. The
return on such collateral may be more or less than that from the repurchase
agreement. The Fund's repurchase agreements will be structured so as to fully
collateralize the loans. In other words, the value of the underlying securities,
which will be held by the Fund's custodian bank or by a third party that
qualifies as a custodian under section 17(f) of the Investment Company Act of
1940, as amended (the "1940 Act"), is and, during the entire term of the
agreement, will remain at least equal to the value of the loan, including the
accrued interest earned thereon. Repurchase agreements are entered into only
with those entities approved by WRIMCO on the basis of criteria established by
the Fund's Board of Directors.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase securities in which it may invest on a when-issued or
delayed-delivery basis or sell them on a delayed-delivery basis. In either case
payment and delivery for the securities take place at a future date. The
securities so purchased or sold are subject to market fluctuation; their value
may be less or more when delivered than the purchase price paid or received.
When purchasing securities on a when issued or delayed-delivery basis, the Fund
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. No interest accrues to the Fund until delivery and payment is
completed. When the Fund makes a commitment to purchase securities on a
when-issued or delayed-delivery basis, it will record the transaction and
thereafter reflect the value of securities in determining its net asset value
per share. When the Fund sells a security on a delayed-delivery basis, the Fund
does not participate in further gains or losses with respect to the security.
When the Fund makes a commitment to sell securities on a delayed-delivery basis,
it will record the transaction and thereafter value the securities at the sale
price in determining the Fund's net asset value per share. If the other party to
a delayed-delivery transaction fails to deliver or pay for the securities, the
Fund could miss a favorable price or yield opportunity, or could suffer a loss.
Ordinarily the Fund purchases securities on a when-issued or
delayed-delivery basis with the intention of actually taking delivery of the
securities. However, before the securities are delivered to the Fund and before
it has paid for them (the "settlement date"), the Fund could sell the securities
if WRIMCO decided it was advisable to do so for investment reasons. The Fund
will hold aside or segregate cash or other securities, other than those
purchased on a when-issued or delayed-delivery basis, at least equal to the
amount it will have to pay on the settlement date; these other securities may,
however, be sold at or before the settlement date to pay the purchase price of
the when-issued or delayed-delivery securities.
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Investment Company Securities
The Fund may purchase securities of closed-end investment companies. As a
shareholder in an investment company, the Fund would bear its pro rata share of
that investment company's expenses, which could result in duplication of certain
fees, including management and administrative fees.
Illiquid Investments
Illiquid investments are investments that cannot be sold or otherwise
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Investments currently
considered to be illiquid include:
(i) repurchase agreements not terminable within seven days;
(ii) restricted securities not determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors;
(iii) non-government stripped fixed-rate mortgage-backed securities;
(iv) bank deposits, unless they are payable at principal amount plus
accrued interest on demand or within seven days after demand;
(v) over-the-counter ("OTC") options and their underlying collateral;
(vi) securities for which market quotations are not readily available; and
(vii) securities involved in swaps, caps, collar and floor transactions.
The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
If through a change in values, net assets, or other circumstances, the Fund
were in a position where more than 10% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
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Indexed Securities
Indexed securities are securities the value of which varies in relation to
the value of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. The performance of indexed securities depends to a great extent on
the performance of the security, currency or other instrument to which they are
indexed and may also be influenced by interest rate changes in the United States
and abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security and their values may decline
substantially if the issuer's creditworthiness deteriorates. Indexed securities
may be more volatile than the underlying investments. Gold-indexed securities,
for example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
Recent issuers of indexed securities have included banks, corporations, and
certain U.S. Government agencies. Certain indexed securities that are not traded
on an established market may be deemed illiquid.
Options, Futures and Other Strategies
General. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, forward currency
contracts, swaps, caps, collars, floors, indexed securities and other derivative
instruments (collectively, "Financial Instruments") to attempt to enhance the
Fund's income or yield or to attempt to hedge the Fund's investments. The
strategies described below may be used in an attempt to manage the Fund's
foreign currency exposure as well as other risks of the Fund's investments that
can affect fluctuation in its net asset value.
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Generally, the Fund may purchase and sell any type of Financial Instrument.
However, as an operating policy, the Fund will only purchase or sell a
particular Financial Instrument if the Fund is authorized to invest in the type
of asset by which the return on, or value of, the Financial Instrument is
primarily measured. Since the Fund is authorized to invest in foreign
securities, it may purchase and sell foreign currency derivatives.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Financial Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge, the Fund takes
a position in a Financial Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Financial Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to hedge
against price movements in one or more particular securities positions that the
Fund owns or intends to acquire. Financial Instruments on indices, in contrast,
generally are used to attempt to hedge against price movements in market sectors
in which the Fund has invested or expects to invest. Financial Instruments on
debt securities may be used to hedge either individual securities or broad debt
market sectors.
The use of Financial Instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several exchanges upon
which they are traded and the Commodity Futures Trading Commission (the "CFTC").
In addition, the Fund's ability to use Financial Instruments may be limited by
tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory
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authorities broaden the range of permitted transactions and as new Financial
Instruments or other techniques are developed. WRIMCO may utilize these
opportunities to the extent that they are consistent with the Fund's goals and
permitted by the Fund's investment limitations and applicable regulatory
authorities. The Fund might not use any of these strategies, and there can be no
assurance that any strategy used will succeed. The Fund's Prospectus or SAI will
be supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities and currency and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Financial Instrument and price movements of the investments
being hedged. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements on
the index and price movement in the securities being hedged.
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match the Fund's current or anticipated investments exactly. The Fund may
invest in options and futures contracts based on securities with different
issuers, maturities or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and
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futures prices are affected by such factors as current and anticipated
short-term interest rates, changes in volatility of the underlying instrument,
and the time remaining until expiration of the contract, which may not affect
security prices the same way. Imperfect correlation may also result from
differing levels of demand in the options and futures markets and the securities
markets, from structural differences in how options, futures and securities are
traded, or from imposition of daily price fluctuation limits or trading halts.
The Fund may purchase or sell options and futures contracts with a greater or
lesser value than the securities it wishes to hedge or intends to purchase in
order to attempt to compensate for differences in volatility between the
contract and the securities, although this may not be successful in all cases.
If price changes in the Fund's options or futures positions are poorly
correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
(3) If successful, the above-discussed strategies can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Financial Instrument. Moreover, if the price of the
Financial Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If the Fund were unable to close out
its positions in such Financial Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time.
(5) The Fund's ability to close out a position in a Financial Instrument
prior to expiration or maturity depends on the existence of a liquid secondary
market or, in the absence of such a market, the ability and willingness of the
other party to the transaction (the "counterparty") to enter into a transaction
closing out the position. Therefore, there is no assurance that any position can
be closed out at a time and price that is favorable to the Fund.
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Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies or other options, futures
contracts or forward contracts, or (2) cash and liquid assets with a value,
marked-to-market daily, sufficient to cover its potential obligations to the
extent not covered as provided in (1) above. The Fund will comply with SEC
guidelines regarding cover for these instruments and will, if the guidelines so
require, set aside cash or liquid assets in an account with its custodian in the
prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover or accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. A call option gives the purchaser the right to buy, and obligates
the writer to sell, the underlying investment at the agreed-upon price during
the option period. A put option gives the purchaser the right to sell, and
obligates the writer to buy, the underlying investment at the agreed-upon price
during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the purchase of
put options can serve as a short hedge. Writing put or call options can enable
the Fund to enhance income or yield by reason of the premiums paid by the
purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value. If the call option is an OTC
option, the securities or other assets used as cover would be considered
illiquid to the extent described under "Illiquid Investments."
Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security or currency
depreciates to a
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price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Fund will be obligated to purchase the
security or currency at more than its market value. If the put option is an OTC
option, the securities or other assets used as cover would be considered
illiquid to the extent described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an option
by entering into an offsetting closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
A type of put that the Fund may purchase is an "optional delivery standby
commitment," which is entered into by parties selling debt securities to the
Fund. An optional delivery standby commitment gives the Fund the right to sell
the security back to the seller on specified terms. This right is provided as an
inducement to purchase the security.
Risks of Options on Securities. Options offer large amounts of leverage,
which will result in the Fund's net asset value being more sensitive to changes
in the value of the related instrument. The Fund may purchase or write both
exchange-traded options and OTC options. Exchange-traded options in the United
States are issued by a clearing organization affiliated with the exchange on
which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between the Fund and its counterparty (usually a securities dealer or a bank)
with no clearing organization guarantee. Thus, when the Fund purchases an OTC
option, it relies on the counterparty from whom it purchased the option to make
or take delivery of the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be
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made for OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. There can be no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Options on Indices. Puts and calls on indices are similar to puts and calls
on securities or futures contracts except that all settlements are in cash and
gain or loss depends on changes in the index in question rather than on price
movements in individual securities or futures contracts. When the Fund writes a
call on an index, it receives a premium and agrees that, prior to the expiration
date, the purchaser of the call, upon exercise of the call, will receive from
the Fund an amount of cash if the closing level of the index upon which the call
is based is greater than the exercise price of the call. The amount of cash is
equal to the difference between the closing price of the index and the exercise
price of the call times a specified multiple ("multiplier"), which determines
the total dollar value for each point of such difference. When the Fund buys a
call on an index, it pays a premium and has the same rights as to such call as
are indicated above. When the Fund buys a put on an index, it pays a premium and
has the right, prior to the expiration date, to require the seller of the put,
upon the Fund's exercise of the put, to deliver to the Fund an amount of cash if
the closing level of the index upon which the put is based is less than the
exercise price of the put, which amount of cash is determined by the multiplier,
as described above for calls. When the Fund writes a put on an index, it
receives a premium and the purchaser of the put has the right, prior to the
expiration date, to require the Fund to deliver to it an amount of cash equal to
the difference between the closing level of the index and the exercise price
times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices. The risks of investment in options on indices
may be greater than options on securities. Because index options are settled in
cash, when the Fund writes a call on an index it cannot provide in advance for
its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of writing a call index option
by holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as
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underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows the Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
Generally, OTC foreign currency options used by the Fund are European-style
options. This means that the option is only exercisable immediately prior to its
expiration. This is in
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contrast to American-style options, which are exercisable at any time prior to
the expiration date of the option.
Futures Contracts and Options on Futures Contracts. The purchase of futures
or call options on futures can serve as a long hedge, and the sale of futures or
the purchase of put options on futures can serve as a short hedge. Writing call
options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing call options on securities or indices.
Similarly, writing put options on futures contracts can serve as a limited long
hedge. Futures contracts and options on futures contracts can also be purchased
and sold to attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average duration
of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten the average
duration of the Fund's fixed-income portfolio, the Fund may sell a debt futures
contract or a call option thereon, or purchase a put option on that futures
contract. If WRIMCO wishes to lengthen the average duration of the Fund's
fixed-income portfolio, the Fund may buy a debt futures contract or a call
option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
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Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions in
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures contracts and options on
futures may be closed only on an exchange or board of trade that provides a
secondary market. However, there can be no assurance that a liquid secondary
market will exist for a particular contract at a particular time. In such event,
it may not be possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or an option on a futures
contract can vary from the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price beyond the limit. Daily price
limits do not limit potential losses because prices could move to the daily
limit for several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option or to maintain liquid
assets in an account.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to differences in the natures of those markets, are subject to the
following factors, which may create distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationships between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate, currency exchange rate or stock market trends by WRIMCO may still
not result in a successful transaction. WRIMCO may be incorrect in its
expectations as to the extent of various interest rate, currency exchange rate
or stock market movements or the time span within which the movements take
place.
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Index Futures. The risk of imperfect correlation between movements in the
price of an index future and movements in the price of the securities that are
the subject of the hedge increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable index. The price of the
index futures may move more than or less than the price of the securities being
hedged. If the price of the index future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase in
the price of securities before the Fund is able to invest in them in an orderly
fashion, it is possible that the market may decline instead. If the Fund then
concludes not to invest in them at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
To the extent that the Fund enters into futures contracts, options on
futures contracts or options on foreign currencies traded on a CFTC-regulated
exchange, in each case other than for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums required to establish those
positions (excluding the amount by which options are "in-the-money" at the time
of purchase) will not exceed 5% of the liquidation value of that Fund's
portfolio, after taking into account unrealized profits and unrealized losses on
any
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contracts the Fund has entered into. (In general, a call option on a futures
contract is "in-the-money" if the value of the underlying futures contract
exceeds the strike, i.e., exercise, price of the call; a put option on a futures
contract is "in-the-money" if the value of the underlying futures contract is
exceeded by the strike price of the put.) This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
Foreign Currency Hedging Strategies--Special Considerations. The Fund may
use options and futures contracts on foreign currencies (including the Euro), as
described above, and forward currency contracts, as described below, to attempt
to hedge against movements in the values of the foreign currencies in which the
Fund's securities are denominated or to attempt to enhance income or yield.
Currency hedges can protect against price movements that are attributable to
changes in the value of the currency in which it is denominated. Such hedges do
not, however, protect against price movements in the securities that are
attributable to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no Financial Instruments on that currency are available or such
Financial Instruments are more expensive than certain other Financial
Instruments. In such cases, the Fund may seek to hedge against price movements
in that currency by entering into transactions using Financial Instruments on
another currency or a basket of currencies, the values of which WRIMCO believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Financial Instrument
will not correlate perfectly with movements in the price of the currency subject
to the hedging transaction is magnified when this strategy is used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the
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markets for the underlying currencies remain open, significant price and rate
movements might take place in the underlying markets that cannot be reflected in
the U.S. markets for the Financial Instruments until they reopen.
Settlement of transactions involving foreign currencies might be required
to take place within the country issuing the underlying currency. Thus, the Fund
might be required to accept or make delivery of the underlying foreign currency
in accordance with any U.S. or foreign regulations regarding the maintenance of
foreign banking arrangements by U.S. residents and might be required to pay any
fees, taxes and charges associated with such delivery assessed in the issuing
country.
Forward Currency Contracts. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time of the forward
currency contract. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
Such transactions may serve as long hedges; for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges; for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security,
dividend or interest payment denominated in a foreign currency.
The Fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if
the Fund owned securities denominated in Euros, it could enter into a forward
currency contract to sell Euros in return for U.S. dollars to hedge against
possible declines in the Euro's value. Such a hedge, sometimes referred to as a
"position hedge," would tend to offset both positive and negative currency
fluctuations, but would not offset changes in security values caused by other
factors. The Fund could also hedge the position by selling another currency
expected to perform similarly to the Euro. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost, yield,
or efficiency, but generally would not hedge currency exposure as effectively as
a simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
The Fund also may use forward currency contracts to attempt to enhance
income or yield. The Fund could use forward currency
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contracts to increase its exposure to foreign currencies that WRIMCO believes
might rise in value relative to the U.S. dollar, or shift its exposure to
foreign currency fluctuations from one country to another. For example, if the
Fund owned securities denominated in a foreign currency and WRIMCO believed that
currency would decline relative to another currency, it might enter into a
forward currency contract to sell an appropriate amount of the first foreign
currency, with payment to be made in the second foreign currency.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in an account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the
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flexibility to enter into such forward currency contracts when it determines
that the best interests of the Fund will be served.
Successful use of forward currency contracts depends on WRIMCO's skill in
analyzing and predicting currency values. Forward currency contracts may
substantially change the Fund's exposure to changes in currency exchange rates
and could result in losses to the Fund if currencies do not perform as WRIMCO
anticipates. There is no assurance that WRIMCO's use of forward currency
contracts will be advantageous to the Fund or that WRIMCO will hedge at an
appropriate time.
Combined Positions. The Fund may purchase and write options in combination
with each other, or in combination with futures or forward contracts, to adjust
the risk and return characteristics of its overall position. For example, the
Fund may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
Turnover. The Fund's options and futures activities may affect its turnover
rate and brokerage commission payments. The exercise of calls or puts written by
the Fund, and the sale or purchase of futures contracts, may cause it to sell or
purchase related investments, thus increasing its turnover rate. Once the Fund
has received an exercise notice on an option it has written, it cannot effect an
offsetting closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed-rate payments. The purchase of a cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
value, to
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receive payments on a notional principal amount from the party selling the cap.
The purchase of a floor entitles the purchaser, to the extent that a specified
index falls below a predetermined value, to receive payments on a notional
principal amount from the party selling the floor. A collar combines elements of
buying a cap and selling a floor.
Swap agreements, including caps, collars and floors, can be individually
negotiated and structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap agreements may
increase or decrease the overall volatility of the Fund's investments and its
share price and yield because, and to the extent, these agreements affect the
Fund's exposure to long- or short-term interest rates (in the United States or
abroad), foreign currency values, mortgage-backed security values, corporate
borrowing rates, or other factors such as security prices or inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agrees to exchange
payments in U.S. dollars for payments in foreign currency, the swap agreement
would tend to decrease the Fund's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options.
The creditworthiness of firms with which the Fund enters into swaps, caps
or floors will be monitored by WRIMCO. If a firm's creditworthiness declines,
the value of the agreement would be likely to decline, potentially resulting in
losses. If a default occurs by the other party to such transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such account with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that are written by the Fund. WRIMCO and the Fund believe that such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions. The Fund understands that the position of the SEC is that assets
involved in swap transactions are illiquid and are, therefore, subject to the
limitations on investing in illiquid securities.
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Risk Factors of High-Yield Investing
As an operating (i.e., nonfundamental) policy, the Fund does not intend to
invest more than 5% of its assets in non-investment grade debt securities.
Lower-quality debt securities ("junk bonds") are considered to be speculative
and involve greater risk of default or price changes due to changes in the
issuer's creditworthiness. The market prices of these securities may fluctuate
more than high-quality securities and may decline significantly in periods of
general economic difficulty.
While the market for high-yield, high-risk corporate debt securities has
been in existence for many years and has weathered previous economic downturns,
the 1980s brought a dramatic increase in the use of such securities to fund
highly leveraged corporate acquisitions and restructurings. Past experience may
not provide an accurate indication of the future performance of the high-yield,
high-risk bond market, especially during periods of economic recession. The
market for lower-rated debt securities may be thinner and less active than that
for higher-rated debt securities, which can adversely affect the prices at which
the former are sold. Adverse publicity and changing investor perceptions may
decrease the values and liquidity of lower-rated debt securities, especially in
a thinly traded market.
Valuation becomes more difficult and judgment plays a greater role in
valuing lower-rated debt securities than with respect to securities for which
more external sources of quotations and last sale information are available.
Since the risk of default is higher for lower-rated debt securities, WRIMCO's
research and credit analysis are an especially important part of managing
securities of this type held by the Fund. WRIMCO continuously monitors the
issuers of lower-rated debt securities in the Fund's portfolio in an attempt to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments.
The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder to
seek to protect the interests of security holders if it determines this to be in
the best interest of the Fund's shareholders.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with using credit
ratings. Credit ratings evaluate the safety of principal and interest payments,
not market value risk.
Investment Restrictions and Limitations
Certain of the Fund's investment restrictions and other limitations are
described in this SAI. The following are the
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Fund's fundamental investment limitations set forth in their entirety, which,
like the Fund's goals and the types of securities in which the Fund may invest,
cannot be changed without shareholder approval. For this purpose, shareholder
approval means the approval, at a meeting of Fund shareholders, by the lesser of
(1) the holders of 67% or more of the Fund's shares represented at the meeting,
if more than 50% of the Fund's outstanding shares are present in person or by
proxy or (2) more than 50% of the Fund's outstanding shares. The Fund may not:
(i) Buy real estate nor any nonliquid interests in real estate
investment trusts;
(ii) With respect to 75% of its total assets, purchase securities of any
one issuer (other than cash items and "Government securities" as
defined in the 1940 Act), if immediately after and as a result of
such purchase, (a) the value of the holdings of the Fund in the
securities of such issuer exceeds 5% of the value of the Fund's
total assets, or (b) the Fund owns more than 10% of the outstanding
voting securities of such issuer;
(iii) Buy the securities of companies in any one industry if more than 25%
of the Fund's total assets would then be in companies in that
industry;
(iv) Buy shares of other investment companies that redeem their shares.
The Fund can buy shares of investment companies that do not redeem
their shares if it does it in a regular transaction in the open
market and then does not have more than one tenth (i.e., 10%) of its
total assets in these shares. The Fund may also buy these shares as
part of a merger or consolidation;
(v) Make loans other than certain limited types of loans described
herein; the Fund can buy debt securities and other obligations
consistent with its goals and its other investment policies and
restrictions; it can also lend its portfolio securities to the
extent allowed, and in accordance with the requirements, under the
1940 Act or, except as provided above, enter into repurchase
agreements (see "Repurchase Agreements" above);
(vi) Invest for the purpose of exercising control or management of other
companies;
(vii) Participate on a joint, or a joint and several, basis in any trading
account in any securities;
(viii) Sell securities short (unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short) or purchase securities on margin, except that (1) this policy
does not prevent the Fund from entering into short positions in
foreign currency, futures contracts, options, forward
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contracts, swaps, caps, collars, floors and other financial
instruments, (2) the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and (3) the Fund may
make margin payments in connection with futures contracts, options,
forward contracts, swaps, caps, collars, floors and other financial
instruments;
(ix) Engage in the underwriting of securities;
(x) Borrow for investment purposes, that is, to purchase securities. The
Fund may borrow money from banks as a temporary measure or for
extraordinary or emergency purposes but only up to 5% of its total
assets;
(xi) Purchase or sell physical commodities; however, this policy shall
not prevent the Fund from purchasing and selling foreign currency,
futures contracts, options, forward contracts, swaps, caps, collars,
floors and other financial instruments; or
(xii) Issue senior securities.
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval:
(i) At least 65% the Fund's total assets will be invested during normal
market conditions in growth securities.
(ii) During normal market conditions, at least 80% of the Fund's total
assets will be invested in foreign securities and at least 65% of
its total assets will be invested in at least three different
countries outside the United States. The Fund may not purchase a
foreign security if, as a result, more than 75% of its total assets
would be invested in issuers of any one foreign country. The Fund
will not invest more than 25% of its total assets in securities
issued by the government of any one foreign country.
(iii) The Fund does not currently intend to invest in non-investment grade
debt securities if, as a result, more than 5% of its total assets
would consist of such investments.
(iv) The Fund may not purchase a security if, as a result, more than 10%
of its net assets would consist of illiquid investments.
(v) The Fund does not currently intend to invest more than 5% of its
assets in the securities of other investment companies.
(vi) The Fund does not currently intend to purchase the
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securities of any issuer if, as a result, more than 5% of its total
assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years
of continuous operation. This restriction does not apply to any
obligations issued or guaranteed by the U.S. government or a state
or local government authority, or their respective
instrumentalities, or to CMOs, other mortgage-related securities,
asset-backed securities, indexed securities or OTC derivative
instruments.
An investment policy or limitation that states a maximum percentage of the
Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities for a year and dividing
it by the monthly average of the market value of such securities during the
year, excluding certain short-term securities. The Fund's turnover rate may vary
greatly from year to year as well as within a particular year and may be
affected by cash requirements for the redemption of its shares. For the fiscal
year ended June 30, 1999, the Fund's portfolio turnover rate was %. For the
fiscal year ended June 30, 1998, its portfolio turnover rate was 114.34%.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly owned subsidiary of Waddell & Reed, Inc.
Under the Management Agreement, WRIMCO is employed to supervise the investments
of the Fund and provide investment advice to the Fund. The address of WRIMCO and
Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing
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Agreement") and a separate agreement for accounting services ("Accounting
Services Agreement") with the Fund. The Management Agreement contains detailed
provisions as to the matters to be considered by the Fund's Board of Directors
prior to approving any Shareholder Servicing Agreement or Accounting Services
Agreement.
Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell & Reed,
Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services, Inc., a
holding company. Waddell & Reed Financial Services, Inc. is a wholly owned
subsidiary of Waddell & Reed Financial, Inc., a publicly held company. The
address of these companies is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
Waddell & Reed, Inc. and its predecessors have served as investment manager
to each of the registered investment companies in the United Group of Mutual
Funds, except United Asset Strategy Fund, Inc., since the company's inception
date and to Target/United Funds, Inc. since that fund's inception, until January
8, 1992, when it assigned its duties as investment manager for these funds (and
the related professional staff) to WRIMCO. WRIMCO has also served as investment
manager for Waddell & Reed Funds, Inc. since its inception in September 1992 and
United Asset Strategy Fund, Inc. since it commenced operations in March 1995.
Waddell & Reed, Inc. serves as principal underwriter for the investment
companies in the United Group of Mutual Funds and Waddell & Reed Funds, Inc. and
acts as principal underwriter and distributor for variable life insurance and
variable annuity policies for which Target/United Funds, Inc. is the underlying
investment vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund and
Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell & Reed,
Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including
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maintenance of the Fund's records, pricing of the Fund's shares, and preparation
of prospectuses for existing shareholders, proxy statements and certain reports.
A new Accounting Services Agreement, or amendments to an existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the Fund
pays WRIMCO a fee as described in the Prospectus. The management fees paid to
WRIMCO during the fiscal years ended June 30, 1999, 1998 and 1997 were $___,
$7,746,698 and $5,965,040, respectively.
For purposes of calculating the daily fee, the Fund does not include money
owed to it by Waddell & Reed, Inc. for shares which it has sold but not yet paid
the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, with respect to Class A shares
the Fund pays the Agent a monthly fee of $1.3125 for each shareholder account
that 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. For Class Y shares, the Fund pays the agent a monthly fee
equal to one-twelfth of .15 of 1% of the average daily net assets of that class
for the preceding month. The Fund also pays certain out-of-pocket expenses of
the Agent, including long distance telephone communications costs; microfilm and
storage costs for certain documents; forms, printing and mailing costs; and
costs of legal and special services not provided by Waddell & Reed, Inc., WRIMCO
or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent 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 Fund
------------------------- ------------------
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
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<PAGE>
Fees paid to the Agent for the fiscal years ended June 30, 1999, 1998 and
1997 were $__, $100,000 and $85,000, respectively.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement are
described above. Waddell & Reed, Inc. and affiliates pay the Fund's Directors
and officers who are affiliated with WRIMCO and its affiliates. The Fund pays
the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The aggregate dollar amounts of
underwriting commissions for Class A shares for the fiscal years ended June 30,
1999, 1998 and 1997 were $__, $4,119,854 and $3,772,737, respectively, and the
amounts retained by Waddell & Reed, Inc. for each fiscal year were $__,
$1,740,247 and $1,615,133, respectively.
No portion of the sales charge is reallowed to dealers. A major portion of
the sales charge for Class A shares the contingent deferred sales charges
("CDSC") for Class B and Class C shares is paid to the financial advisors and
managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may compensate its
financial advisors as to purchases for which there is no sales or deferred sales
charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under the Distribution and Service Plan (the "Plan") for Class A shares
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay
Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed .25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with the distribution of the Class A shares and/or the
service and/or maintenance of Class A shareholder accounts.
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<PAGE>
Waddell & Reed, Inc. offers the Fund's shares through its registered
representatives and sales managers (sales force) unless it elects, which is not
currently contemplated for Class A, Class B and Class C shares, to make
distribution of shares also through other broker-dealers. In distributing shares
through its sales force, Waddell & Reed, Inc. will pay commissions and
incentives to the sales force at or about the time of sale and will incur other
expenses including costs for prospectuses, sales literature, advertisements,
sales office maintenance, processing of orders and general overhead with respect
to its efforts to distribute the Fund's shares. The Class A Plan permits Waddell
& Reed, Inc. to receive reimbursement for these Class A-related distribution
activities through the distribution fee, subject to the limit contained in the
Plan. The Class A Plan also contemplates that Waddell & Reed, Inc. may be
reimbursed for amounts it expends in compensating, training and supporting
registered financial advisors, sales managers and/or other appropriate personnel
in providing personal services to Class A shareholders of the Fund and/or
maintaining Class A shareholder accounts; increasing services provided to Class
A shareholders of the Fund by office personnel located at field sales offices;
engaging in other activities useful in providing personal service to Class A
shareholders of the Fund and/or maintenance of Class A shareholder accounts; and
in compensating broker-dealers who may regularly sell Class A shares of the
Fund, and other third parties, for providing shareholder services and/or
maintaining shareholder accounts with respect to Class A shares. Fees paid (or
accrued) with respect to Class A shares as distribution fees and service fees by
the Fund under the Class A Plan for the fiscal year ended June 30, 1999 were $
and $, respectively. To the extent that Waddell & Reed, Inc. incurs expenses for
which reimbursement may be made under the Plan that relate to distribution and
service activities also involving another fund in the United Group of Funds or
Waddell & Reed Funds, Inc., Waddell & Reed, Inc. typically determines the amount
attributable to the Fund's expenses under the Plan on the basis of a combination
of the respective classes' relative net assets and number of shareholder
accounts.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for providing services to shareholders of that
class and/or maintaining shareholder accounts for that class and a distribution
fee of up to 0.75% of the average daily net assets of the class to compensate
Waddell & Reed, Inc. for distributing the shares of that class. The Class B Plan
and the Class C Plan each permit Waddell & Reed, Inc. to receive compensation,
through the distribution and service fee, respectively, for its distribution
activities for that class, which are similar to the distribution activities
described with respect to the Class A Plan, and for its activities in providing
personal services to
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<PAGE>
shareholders of that class and/or maintaining shareholder accounts of that
class, which are similar to the corresponding activities for which it is
entitled to reimbursement under the Class A Plan.
The only Directors or interested persons, as defined in the 1940 Act, of
the Fund who have a direct or indirect financial interest in the operation of a
Plan are the officers and Directors who are also officers of either Waddell &
Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. Each Plan
is anticipated to benefit the Fund and its shareholders of the affected class
through Waddell & Reed, Inc.'s activities not only to distribute the shares of
the affected class but also to provide personal services to shareholders of that
class and thereby promote the maintenance of their accounts with the Fund. The
Fund anticipates that shareholders of a particular class may benefit to the
extent that Waddell & Reed's activities are successful in increasing the assets
of the Fund, through increased sales or reduced redemptions, or a combination of
these, and reducing a shareholder's share of Fund and class expenses. Increased
Fund assets may also provide greater resources with which to pursue the goal of
the Fund. Further, continuing sales of Class A shares may also reduce the
likelihood that it will be necessary to liquidate portfolio securities, in
amounts or at times that may be disadvantageous to the Fund, to meet redemption
demands. In addition, the Fund anticipates that the revenues from the Plan will
provide Waddell & Reed, Inc. with greater resources to make the financial
commitments necessary to continue to improve the quality and level of services
to the Fund and the shareholders of the affected class.
Each Plan was approved by the Fund's Board of Directors, including the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operations of the Plan or any agreement
referred to in the Plan (hereafter, the "Plan Directors"). The Class A Plan was
also approved by the affected shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will be
effective only if approved, by the Directors including the Plan Directors acting
in person at a meeting called for that purpose, (iii) amounts to be paid by the
Fund under the Plan may not be materially increased without the vote of the
holders of a majority of the outstanding shares of the affected class of the
Fund, and (iv) while the Plan remains in effect, the selection and nomination of
the Directors who are Plan Directors will be committed to the discretion of the
Plan Directors.
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<PAGE>
Custodial and Auditing Services
The Fund's Custodian is UMB Bank, n.a., Kansas City, Missouri. In general,
the Custodian is responsible for holding the Fund's cash and securities.
Deloitte & Touche LLP, Kansas City, Missouri, the Fund's independent auditors,
audits the Fund's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each class of the shares of the Fund is the value of
the assets of that class, less the class's liabilities, divided by the total
number of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined net asset
value plus the sales charge described in the Prospectus. The sales charge is
paid to Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of
June 30, 1999 was as follows:
Net asset value per Class A share (Class A net assets
divided by Class A shares outstanding) ................. $
Add: selling commission (5.75% of offering
price) ................................................. .
------
Maximum offering price per Class A share
(Class A net asset value divided by 94.25%)............. $
======
The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge. The
offering price of a Class B, Class C or a Class Y share is its net asset value
next determined following acceptance of a purchase order. The number of shares
you receive for your purchase depends on the next offering price after Waddell &
Reed, Inc. receives and accepts your order at its principal business office at
the address shown on the cover of this SAI. You will be sent a confirmation
after your purchase which will indicate how many shares you have purchased.
Shares are normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the Fund
may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily computed
once on each day that the NYSE is open for trading as of the later of the close
of the regular session of the NYSE or the close of the regular session of any
other
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<PAGE>
securities or commodities exchange on which an option or future held by the Fund
is traded. The NYSE annually announces the days on which it will not be open for
trading. The most recent announcement indicates that it will not be open on the
following days: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, it is possible that the NYSE may close on other days.
The net asset value will change every business day, since the value of the
assets and the number of shares outstanding change every business day.
The securities in the portfolio of the Fund, except as otherwise noted,
that are listed or traded on a stock exchange, are valued on the basis of the
last sale on that day or, lacking any sales, at a price which is the mean
between the closing bid and asked prices. Other securities 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 foreign securities for which market quotations are readily available
are valued at market value. Bonds, other than convertible bonds, are valued
using a third-party pricing system. Convertible bonds are valued using this
pricing system only on days when there is no sale reported. Short-term debt
securities are valued at amortized cost, which approximates market. Warrants and
rights to purchase securities are valued at market value. When market quotations
are not readily available, securities and other assets are valued at fair value
as determined in good faith under procedures established by and under the
general supervision and responsibility of the Fund's Board of Directors.
Foreign currency exchange rates are generally determined prior to the close
of trading of the regular session of the NYSE. Occasionally events affecting the
value of foreign investments and such exchange rates occur between the time at
which they are determined and the close of the regular session of trading on the
NYSE, which events will not be reflected in a computation of the Fund's net
asset value on that day. If events materially affecting the value of such
investments or currency exchange rates occur during such time period,
investments will be valued at their fair value as determined in good faith by or
under the direction of the Board of Directors. The foreign currency exchange
transactions of the Fund conducted on a spot (that is, cash) basis are valued at
the spot rate for purchasing or selling currency prevailing on the foreign
exchange market. This rate under normal market conditions differs from the
prevailing exchange rate in an amount generally less than one-tenth of one
percent due to the costs of converting from one currency to another.
When the Fund writes a call, an amount equal to the premium received is
included in the Statement of Assets and Liabilities as an asset, and an
equivalent deferred credit is included in the liability section. The deferred
credit is marked-to-market to reflect the current market value of the call. If a
call the Fund
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<PAGE>
wrote is exercised, the proceeds received on the sale of the related investment
are increased by the amount of the premium the Fund received. If a call written
by the Fund expires, it has a gain in the amount of the premium; if it enters
into a closing purchase transaction, it will have a gain or loss depending on
whether the premium was more or less than the cost of the closing transaction.
Minimum Initial and Subsequent Investments
For Class A, Class B and Class C shares, initial investments must be at
least $500 with the exceptions described in this paragraph. A $100 minimum
initial investment pertains to certain exchanges of shares from another fund in
the United Group. A $50 minimum initial investment pertains to purchases for
certain retirement plan accounts and to accounts for which an investor has
arranged, at the time of initial investment, to make subsequent purchases for
the account by having regular monthly withdrawals of $25 or more made from a
bank account. A minimum initial investment of $25 is applicable to purchases
made through payroll deduction for or by employees of Waddell & Reed, Inc.,
WRIMCO, their affiliates or certain retirement plan accounts. Except with
respect to certain exchanges and automatic withdrawals from a bank account, a
shareholder may make subsequent investments of any amount.
For Class Y shares, investments by government entities or authorities or by
corporations must total at least $10 million within the first twelve months
after initial investment. There is no initial investment minimum for other Class
Y investors.
Reduced Sales Charges (Applicable to Class A shares only)
Account Grouping
Large purchases of Class A shares are subject to lower sales charges. The
schedule of sales charges appears in the Prospectus for Class A shares. For the
purpose of taking advantage of the lower sales charges available for large
purchases, a purchase in any of categories 1 through 7 listed below made by an
individual or deemed to be made by an individual may be grouped with purchases
in any other of these categories:
1. Purchases by an individual for his or her own account (includes purchases
under the United Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own account
(includes United Funds Revocable Trust Form of spouse);
3. Purchases by that individual or his or her spouse in their joint account;
45
<PAGE>
4. Purchases by that individual or his or her spouse for the account of their
child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in a
Uniform Gift to Minors Act ("UGMA") or Uniform Transfers to Minors Act
("UTMA") account;
6. Purchases by that individual or his or her spouse for his or her Individual
Retirement Account ("IRA"), salary reduction plan account under Section 457
of the Internal Revenue Code of 1986, as amended (the "Code"), provided
that such purchases are subject to a sales charge (see "Net Asset Value
Purchases"), tax-sheltered annuity account ("TSA") or Keogh plan account,
provided that the individual and spouse are the only participants in the
Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or her
spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother has an
account in her own name; A's father has an account in his own name;
the UGMA account may be grouped with A's father's account but may not
be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in the
trust account is eligible for grouping with an IRA account of W, H's
wife;
C. H's will provides for the establishment of a trust for the benefit of
his minor children upon H's death; his bank is named as trustee; upon
H's death, an account is established in the name of the bank, as
trustee; a purchase in the account may be grouped with an account held
by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account may
not be grouped with R's individual account. (If X's spouse, Y, was
successor trustee, this purchase could be grouped with Y's individual
account.)
All purchases of Class A shares made for a participant in a
multi-participant Keogh plan may be grouped only with other purchases made under
the same plan; a multi-participant Keogh plan is defined as a plan in which
there is more than one
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<PAGE>
participant where one or more of the participants is other than the spouse of
the owner/employer.
Example A: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made
under the plan with any purchases in categories 1 through 7
above.
Example B: H has established a Keogh plan; his wife, W, is a participant and
they have hired one or more employees who also become
participants in the plan; H and W may not combine any purchases
made under the plan with any purchases in categories 1 through 7
above; however, all purchases made under the plan for H, W or any
other employee will be combined.
All purchases of Class A shares made under a "qualified" employee benefit
plan of an incorporated business will be grouped. (A "qualified" employee
benefit plan is established pursuant to Section 401 of the Code.) All qualified
employee benefit plans of any one employer or affiliated employers will also be
grouped. (An affiliate is defined as an employer that directly, or indirectly,
controls or is controlled by or is under control with another employer.) All
qualified employee benefit plans of an employer who is a franchisor and those of
its franchisee(s) may also be grouped.
Example: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made
under both plans will be grouped.
All purchases of Class A shares made under a simplified employee pension
plan ("SEP"), payroll deduction plan or similar arrangement adopted by an
employer or affiliated employers (as defined above) may be grouped provided that
the employer elects to have all such purchases grouped at the time the plan is
set up. If the employer does not make such an election, the purchases made by
individual employees under the plan may be grouped with the other accounts of
the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase of Class A shares in accounts eligible for grouping may
be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $75,000; at the
same time, H's parents open up three UGMA
47
<PAGE>
accounts for H and W's three minor children and invest $10,000 in
each child's name; the combined purchase of $105,000 of Class A
shares is subject to a reduced sales load of 4.75% provided that
Waddell & Reed, Inc. is advised that the purchases are entitled
to grouping.
Rights of Accumulation
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund three
years ago. His account has a net asset value of $80,000. His
wife, W, now wishes to invest $20,000 in Class A shares of the
Fund. W's purchase will be combined with H's existing account and
will be entitled to a reduced sales charge of 4.75%. H's original
purchase was subject to a full sales charge and the reduced
charge does not apply retroactively to that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan, the shares held under such plan may be combined with the additional
purchase only if the contractual plan has been completed.
Letter of Intent
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Letter of Intent. By signing a Letter of Intent
form, which is available from Waddell & Reed, Inc., the purchaser indicates an
intention to invest, over a 13-month period, a dollar amount which is sufficient
to qualify for a reduced sales charge. The 13-month period begins on the date
the first purchase made under the Letter of Intent is accepted by Waddell &
Reed, Inc. Each purchase made from time to time under the Letter of Intent is
treated as if the purchaser were buying at one time the total amount which he or
she intends to invest. The sales charge applicable to all purchases of Class A
shares made under the terms of the Letter of Intent will be the sales charge in
effect on the beginning date of the 13-month period.
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<PAGE>
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Letter of Intent, the investor's
Rights of Accumulation (see above) will be taken into account; that is, Class A
shares already held in the same account in which the purchase is being made or
in any account eligible for grouping with that account, as described above, will
be included.
Example: H signs a Letter of Intent indicating his intent to invest in his
own name a dollar amount sufficient to entitle him to purchase
Class A shares at the sales charge applicable to a purchase of
$100,000. H has an IRA account and the Class A shares held under
the IRA in the Fund have a net asset value as of the date the
Letter of Intent is accepted by Waddell & Reed, Inc. of $15,000;
H's wife, W, has an account in her own name invested in another
fund in the United Group which charges the same sales load as the
Fund, with a net asset value as of the date of acceptance of the
Letter of Intent of $10,000; H needs to invest $75,000 in Class A
shares over the 13-month period in order to qualify for the
reduced sales load applicable to a purchase of $100,000.
A copy of the Letter of Intent signed by a purchaser will be returned to
the purchaser after it is accepted by Waddell & Reed, Inc. and will set forth
the dollar amount of Class A shares which must be purchased within the 13-month
period in order to qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under a contractual
plan, the shares held under the plan will be taken into account in determining
the amount which must be invested under the Letter of Intent only if the
contractual plan has been completed.
The minimum initial investment under a Letter of Intent is 5% of the dollar
amount which must be invested under the Letter of Intent. An amount equal to 5%
of the purchase required under the Letter of Intent will be held "in escrow." If
a purchaser does not, during the period covered by the Letter of Intent, invest
the amount required to qualify for the reduced sales charge under the terms of
the Letter of Intent, he or she will be responsible for payment of the sales
charge applicable to the amount actually invested. The additional sales charge
owed on purchases of Class A shares made under a Letter of Intent which is not
completed will be collected by redeeming part of the shares purchased under the
Letter of Intent and held "in escrow" unless the purchaser makes payment of this
amount to Waddell & Reed, Inc. within 20 days of Waddell & Reed, Inc.'s request
for payment.
If the actual amount invested is higher than the amount an investor intends
to invest, and is large enough to qualify for a
49
<PAGE>
sales charge lower than that available under the Letter of Intent, the lower
sales charge will apply.
A Letter of Intent does not bind the purchaser to buy, or Waddell & Reed,
Inc. to sell, the shares covered by the Letter of Intent.
With respect to Letters of Intent for $2,000,000 or purchases otherwise
qualifying for no sales charge under the terms of the Letter of Intent, the
initial investment must be at least $200,000, and the value of any shares
redeemed during the 13-month period which were acquired under the Letter of
Intent will be deducted in computing the aggregate purchases under the Letter of
Intent.
Letters of Intent are not available for purchases made under an SEP where
the employer has elected to have all purchases under the SEP grouped.
Other Funds in the United Group
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the United Group
subject to a sales charge. A purchase of Class A shares, or Class A shares held,
in any of the funds in the United Group subject to a sales charge will be
treated as an investment in the Fund in determining the applicable sales charge.
For these purposes, Class A shares of United Cash Management, Inc. that were
acquired by exchange of another United Group fund's Class A shares on which a
sales charge was paid, plus the shares paid as dividends on those acquired
shares, are also taken into account.
Holders of an uncompleted United International Growth Investment Program
("Program") on May 30, 1996, with a face amount of less than $12,000 may
purchase Class A shares of the Fund at net asset value, up to the amount
representing the unpaid balance of the Program, if the purchase order is so
designated.
Net Asset Value Purchases of Class A Shares
As stated in the Prospectus, Class A shares of the Fund may be purchased at
net asset value by the Directors and officers of the Fund, employees of Waddell
& Reed, Inc., employees of their affiliates, financial advisors of Waddell &
Reed, Inc. and the spouse, children, parents, children's spouses and spouse's
parents of each such Director, officer, employee and financial advisor. "Child"
includes stepchild; "parent" includes stepparent. Purchases of Class A shares in
an IRA sponsored by Waddell & Reed, Inc. established for any of these eligible
purchasers may also be at net asset value. Purchases of Class A shares in any
tax qualified retirement plan under which the eligible purchaser is the sole
participant may also be made at net asset value. Trusts under which the grantor
and the trustee
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<PAGE>
or a co-trustee are each an eligible purchaser are also eligible for net asset
value purchases of Class A shares. "Employees" includes retired employees. A
retired employee is an individual separated from service from Waddell & Reed,
Inc. or affiliated companies with a vested interest in any Employee Benefit plan
sponsored by Waddell & Reed, Inc. or its affiliated companies. "Employees" also
includes individuals who, on November 6, 1998, were employees (including retired
employees) of a company that on that date was an affiliate of Waddell & Reed,
Inc. "Financial advisors" includes retired financial advisors. A "retired
financial advisor" is any financial advisor who was, at the time of separation
from service from Waddell & Reed, Inc., a Senior Financial Advisor. A custodian
under the UGMA or UTMA purchasing for the child or grandchild of any employee or
financial advisor may purchase Class A shares at net asset value whether or not
the custodian himself is an eligible purchaser.
Purchases of Class A shares in a 401(k) plan having 100 or more eligible
employees and purchases of Class A shares in a 457 plan having 100 or more
eligible employees may be made at net asset value.
Holders of an uncompleted Program on May 30, 1996 may purchase Class A
shares of the Fund at net asset value, up to the amount representing the unpaid
balance of the Program, if the purchase order is so designated. In addition, any
person who was a Program holder on May 30, 1996 may purchase Class A shares of
the Fund at net asset value up to the amount representing partial Program
withdrawals outstanding on May 30, 1996, provided the purchase is so designated.
Shares may also be issued at NAV in a merger, acquisition or exchange offer
made pursuant to a plan of reorganization to which the Fund is a party.
Reasons for Differences in Public Offering Price of Class A Shares
As described herein and in the Prospectus for Class A shares, there are a
number of instances in which the Fund's Class A shares are sold or issued on a
basis other than the maximum public offering price, that is, the net asset value
plus the highest sales charge. Some of these relate to lower or eliminated sales
charges for larger purchases of Class A shares, whether made at one time or over
a period of time as under a Letter of Intent or right of accumulation. See the
table of sales charges in the Prospectus for the Class A shares. The reasons for
these quantity discounts are, in general, that (i) they are traditional and have
long been permitted in the industry and are therefore necessary to meet
competition as to sales of shares of other funds having such discounts, (ii)
certain quantity discounts are required by rules of the National Association of
Securities Dealers, Inc. (as are elimination of sales charges on the
reinvestment of dividends and distributions), and (iii) they are designed to
avoid an unduly
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large dollar amount of sales charge on substantial purchases in view of reduced
selling expenses. Quantity discounts are made available to certain related
persons for reasons of family unity and to provide a benefit to tax-exempt plans
and organizations.
The reasons for the other instances in which there are reduced or
eliminated sales charges for Class A shares are as follows. Exchanges at net
asset value are permitted because a sales charge has already been paid on the
shares exchanged. Sales of Class A shares without sales charge are permitted to
Directors, officers and certain others due to reduced or eliminated selling
expenses and since such sales may aid in the development of a sound employee
organization, encourage incentive, responsibility and interest in the United
Group and an identification with its aims and policies. Limited reinvestments of
redemptions of Class A shares at no sales charge are permitted to attempt to
protect against mistaken or not fully informed redemption decisions. Class A
shares may be issued at no sales charge in plans of reorganization due to
reduced or eliminated sales expenses and since, in some cases, such issuance is
exempted in the 1940 Act from the otherwise applicable restrictions as to what
sales charge must be imposed. In no case in which there is a reduced or
eliminated sales charge are the interests of existing Class A shareholders
adversely affected since, in each case, the Fund receives the net asset value
per share of all shares sold or issued.
Flexible Withdrawal Service for Class A, Class B and Class C Shareholders
If you qualify, you may arrange to receive through the Flexible Withdrawal
Service (the "Service") regular monthly, quarterly, semiannual or annual
payments by redeeming on an ongoing basis Class A, Class B or Class C shares
that you own of the Fund or of any of the funds in the United Group. It would be
a disadvantage to an investor to make additional purchases of Class A shares
while a withdrawal program is in effect because it would result in duplication
of sales charges. Class C shares purchased within the past year remain subject
to the CDSC; however, Class B shares redeemed under the Service are not subject
to a CDSC. Applicable forms to start the Service are available through Waddell &
Reed, Inc.
To qualify for the Service, you must have invested at least $10,000 in
Class A, Class B or Class C shares which you still own of any of the funds in
the United Group; or, you must own Class A, Class B or Class C shares having a
value of at least $10,000. The value for this purpose is the value at the
offering price.
You can choose to have shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
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2. a monthly payment, which will change each month, equal to one-twelfth of
a percentage of the value of the shares in the Account; (you select the
percentage); or
3. a monthly or quarterly payment, which will change each month or quarter,
by redeeming a number of shares fixed by you (at least five shares).
Shares are redeemed on the 20th day of the month in which the payment is to
be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
Retirement plan accounts may be subject to a fee imposed by the Plan
Custodian for use of their services.
If you have a share certificate for the shares you want to make available
for the Service, you must enclose the certificate with the form initiating the
Service.
The dividends and distributions on shares of a class you have made
available for the Service are paid in additional shares of that class. All
payments under the Service are made by redeeming shares, which may involve a
gain or loss for tax purposes. To the extent that payments exceed dividends and
distributions, the number of shares you own will decrease. When all of the
shares in an account are redeemed, you will not receive any further payments.
Thus, the payments are not an annuity or an income or return on your investment.
You may, at any time, change the manner in which you have chosen to have
shares redeemed to any of the other choices originally available to you. You
may, at any time, redeem part or all of the shares in your account; if you
redeem all of the shares, the Service is terminated. The Fund can also terminate
the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed will be
sent to you to assist you in completing your Federal income tax return.
Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
Once a sales charge has been paid on shares of a fund in the United Group,
these shares and any shares added to them from dividends or distributions paid
in shares may be freely exchanged for Class A shares of another fund in the
United Group. The shares you exchange must be worth at least $100 or you must
already own shares of the fund in the United Group into which you want to
exchange.
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You may exchange Class A shares you own in another fund in the United Group
for Class A shares of the Fund without charge if (i) a sales charge was paid on
these shares, or (ii) the shares were received in exchange for shares for which
a sales charge was paid, or (iii) the shares were acquired from reinvestment of
dividends and distributions paid on such shares. There may have been one or more
such exchanges so long as a sales charge was paid on the shares originally
purchased. Also, shares acquired without a sales charge because the purchase was
$2 million or more will be treated the same as shares on which a sales charge
was paid.
United Municipal Bond Fund, Inc., United Government Securities Fund, Inc.
and United Municipal High Income Fund, Inc. shares are the exceptions and
special rules apply. Class A shares of any of these funds may be exchanged for
Class A shares of the Fund only if (i) you received those shares as a result of
one or more exchanges of shares on which a sales charge was originally paid, or
(ii) the shares have been held from the date of original purchase for at least
six months.
Subject to the above rules regarding sales charges, you may have a specific
dollar amount of Class A shares of United Cash Management, Inc. automatically
exchanged each month into Class A shares of the Fund or any other fund in the
United Group. The shares of United Cash Management, Inc. which you designate for
automatic exchange must be worth at least $100 or you must own Class A shares of
the fund in the United Group into which you want to exchange. The minimum value
of shares which you may designate for automatic exchange monthly is $100, which
may be allocated among the Class A shares of different funds in the United Group
so long as each fund receives a value of at least $25. Minimum initial
investment and minimum balance requirements apply to such automatic exchange
service.
You may redeem your Class A shares of the Fund and use the proceeds to
purchase Class Y shares of the Fund if you meet the criteria for purchasing
Class Y shares.
Class B Share Exchanges
You may exchange Class B shares of one Fund of the Corporation for Class B
shares of other Funds in the United Group without charge.
The redemption of the Fund's Class B shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class B shares of United Cash
Management, Inc. automatically redeemed each month and invested in Class B
shares of the Fund. The shares of United
54
<PAGE>
Cash Management, Inc. which you designate must be worth at least $100, which may
be allocated among different Funds so long as each Fund receives a value of at
least $25. Minimum initial investment and minimum balance requirements apply to
such service.
Class C Share Exchanges
You may exchange Class C shares of one Fund of the Corporation for Class C
shares of other Funds in the United Group without charge.
The redemption of the Fund's Class C shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class C shares of United Cash
Management, Inc. automatically redeemed each month and invested in Class C
shares of a Fund. The shares of United Cash Management, Inc. which you designate
must be worth at least $100, which may be allocated among different Funds so
long as each Fund receives a value of at least $25. Minimum initial investment
and minimum balance requirements apply to such service.
Class Y Share Exchanges
Class Y shares of the Fund may be exchanged for Class Y shares of any other
fund in the United Group or for Class A shares of United Cash Management, Inc.
General Exchange Information
When you exchange shares, the total shares you receive will have the same
aggregate net asset value as the total shares you exchange. The relative values
are those next figured after your exchange request is received in good order.
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any time
and any such exchange may not be accepted.
Retirement Plans
As described in the Prospectus for Class A shares, your account may be set
up as a funding vehicle for a retirement plan. For individual taxpayers meeting
certain requirements, Waddell & Reed, Inc. offers model or prototype documents
for the following retirement plans. All of these plans involve investment in
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<PAGE>
shares of a Fund (or shares of certain other funds in the United Group).
Individual Retirement Accounts (IRAs). Investors having earned income may
set up a plan that is commonly called an IRA. Under a traditional IRA, an
investor can contribute each year up to 100% of his or her earned income, up to
an annual maximum of $2,000 (provided the investor has not reached age 70 1/2).
For a married couple, the annual maximum is $4,000 ($2,000 for each spouse) or,
if less, the couple's combined earned income for the taxable year, even if one
spouse had no earned income. Generally, the contributions are deductible unless
the investor (or, if married, either spouse) is an active participant in a
qualified retirement plan or if, notwithstanding that the investor or one or
both spouses so participate, their adjusted gross income does not exceed certain
levels. However, a married investor who is not an active participant, files
jointly with his or her spouse and whose combined adjusted gross income does not
exceed $150,000 is not affected by the spouse's active participant status.
An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be subject
to Federal income tax until distributed from the IRA. A direct rollover
generally applies to any distribution from an employer's plan (including a
custodial account under Section 403(b)(7) of the Code, but not an IRA) other
than certain periodic payments, required minimum distributions and other
specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a portion
of that distribution generally may be rolled over to an IRA within 60 days after
receipt of the distribution. Because mandatory Federal income tax withholding
applies to any eligible rollover distribution which is not paid in a direct
rollover, investors should consult their tax advisers or pension consultants as
to the applicable tax rules. If you already have an IRA, you may have the assets
in that IRA transferred directly to an IRA offered by Waddell & Reed, Inc.
Roth IRAs. Investors whose adjusted gross income (or combined adjusted
gross income, if married) does not exceed certain levels may establish and
contribute up to $2,000 per tax year to a Roth IRA. In addition, for an investor
whose adjusted gross income does not exceed $100,000 (and who is not a married
person filing a separate return), certain distributions from traditional IRAs
may be rolled over to a Roth IRA and any of the investor's traditional IRAs may
be converted into a Roth IRA; these rollover distributions and conversions are,
however, subject to Federal income tax.
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<PAGE>
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in the Roth IRA, and withdrawals of earnings are not subject
to Federal income tax if the account has been held for at least five years and
the account holder has reached age 59 1/2 (or certain other conditions apply).
Education IRAs. Although not technically for retirement savings, Education
IRAs provide a vehicle for saving for a child's higher education. An Education
IRA may be established for the benefit of any minor, and any person whose
adjusted gross income does not exceed certain levels may contribute up to $500
to an Education IRA (or to each of multiple Education IRAs), provided that no
more than $500 may be contributed for any year to Education IRAs for the same
beneficiary. Contributions are not deductible and may not be made after the
beneficiary reaches age 18; however, earnings accumulate tax-free, and
withdrawals are not subject to tax if used to pay the qualified higher education
expenses of the beneficiary (or a member of his or her family).
Simplified Employee Pension (SEP) plans. Employers can make contributions
to SEP-IRAs established for employees. Generally an employer may contribute up
to 15% of compensation or $24,000, whichever is less, per year for each
employee.
Savings Incentive Match Plans for Employees (SIMPLE Plans). An employer
with 100 or fewer employees who does not sponsor another active retirement plan
may sponsor a SIMPLE to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an
employer can choose to match employee contributions dollar-for-dollar (up to 3%
of an employee's compensation) or may contribute to all eligible employees 2% of
their compensation, whether or not they defer salary to their retirement plans.
SIMPLE plans involve fewer administrative requirements than 401(k) or other
qualified plans generally.
Keogh Plans. Keogh plans, which are available to self-employed individuals,
are defined contribution plans that may be either a money purchase plan or a
profit-sharing plan. As a general rule, an investor under a defined contribution
Keogh plan can contribute each year up to 25% of his or her annual earned
income, with an annual maximum of $30,000.
457 Plans. If an investor is an employee of a state or local government or
of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is an employee
of a public school system or of certain types of charitable organizations, he or
she may be able to enter into a deferred compensation arrangement through a
custodian account under Section 403(b) of the Code. Some organizations have
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<PAGE>
adopted Title I plans, which are funded by employer contributions in addition to
employee deferrals.
401(k) Plans. With a 401(k) plan, employees can make tax-deferred
contributions into a plan to which the employer may also contribute, usually on
a matching basis. An employee may defer each year up to 25% of compensation,
subject to certain annual maximums, which may be increased each year based on
cost-of-living adjustments.
More detailed information about these arrangements and applicable forms are
available from Waddell & Reed, Inc. These plans may involve complex tax
questions as to premature distributions and other matters. Investors should
consult their tax adviser or pension consultant.
Redemptions
The Prospectus gives information as to redemption procedures. Redemption
payments are made within seven days unless delayed because of emergency
conditions determined by the SEC, when the NYSE is closed other than for
weekends or holidays, or when trading on the NYSE is restricted. Payment is made
in cash, although under extraordinary conditions redemptions may be made in
portfolio securities. Payment for redemptions of shares of the Fund may be made
in portfolio securities when the Fund's Board of Directors determines that
conditions exist making cash payments undesirable. Securities used for payment
of redemptions are valued at the value used in figuring net asset value. There
would be brokerage costs to the redeeming shareholder in selling such
securities. The Fund, however, has elected to be governed by Rule 18f-1 under
the 1940 Act, pursuant to which it is obligated to redeem shares solely in cash
up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder.
Reinvestment Privilege
The Fund offers a one-time reinvestment privilege that allows you to
reinvest all or part of any amount of Class A shares you redeem from the Fund by
sending to the Fund the amount you wish to reinvest. The amount you return will
be reinvested in Class A shares at the net asset value next determined after the
Fund receives the returned amount. Your written request to reinvest and the
amount to be reinvested must be received within 30 days after your redemption
request was received, and the Fund must be offering Class A shares at the time
your reinvestment request is received. You can do this only once as to Class A
shares of the Fund. You do not use up this privilege by redeeming Class A shares
to invest the proceeds at net asset value in a Keogh plan or an IRA.
There is also a reinvestment privilege for Class B and Class C shares under
which you may reinvest all or part of any amount
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of Class B or Class C shares you redeemed and have the corresponding amount of
the deferred sales charge, if any, which you paid restored to your account by
adding the amount of that charge to the amount you are reinvesting in Class B or
Class C shares, as applicable. If Class B or Class C shares of the Fund are then
being offered, you can put all or part of your redemption payment back into the
Class B or Class C shares of the Fund at the net asset value next determined
after you have returned the amount. Your written request to do this must be
received within 30 days after your redemption. You can do this only once as to
Class B shares of the Fund and only once as to Class C shares of the Fund. For
purposes of determining future deferred sales charges, the reinvestment will be
treated as a new investment. You do not use up this privilege by redeeming Class
B or Class C shares to invest the proceeds at net asset value in a Keogh plan or
an IRA.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to compel the redemption of shares held under any
account or any plan if the aggregate net asset value of such shares (taken at
cost or value as the Board of Directors may determine) is less than $500. The
Board has no intent to compel redemptions in the foreseeable future. If it
should elect to compel redemptions, shareholders who are affected will receive
prior written notice and will be permitted 60 days to bring their accounts up to
the minimum before this redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors. The majority of the
Directors are not affiliated with Waddell & Reed, Inc.
The principal occupation during at least the past five years of each
Director and officer of the Fund is given below. Each of the persons listed
through and including Mr. Vogel is a member of the Fund's Board of Directors.
The other persons are officers but not members of the Board of Directors. For
purposes of this section, the term "Fund Complex" includes each of the
registered investment companies in the United Group of Mutual Funds,
Target/United Funds, Inc. and Waddell & Reed Funds, Inc. Each of the Fund's
Directors is also a Director of each of the other funds in the Fund Complex and
each of the Fund's officers is also an officer of one or more of the funds in
the Fund Complex.
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KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other funds
in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer, Principal Financial Officer and Director of Waddell & Reed Financial,
Inc.; President, Chairman of the Board of Directors and Chief Executive Officer
of Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
of WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of each of the funds in the Fund Complex; formerly, Chairman of the
Board of Directors of Waddell & Reed Asset Management Company, a former
affiliate of Waddell & Reed Financial, Inc. Date of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President, JoDill Corp., an agricultural company; President and Director of
Dillingham Enterprises Inc.; formerly, Director and consultant, McDougal
Construction Company; formerly, Instructor at Central Missouri State University;
formerly, Member of the Board of Police Commissioners, Kansas City, Missouri;
formerly, Senior Vice President-Sales and Marketing, Garney Companies, Inc., a
specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George S. and Delores Dori
Eccles Foundation. Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal. Date of birth: March
24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Partner, Levy and Craig, P.C., a law firm. Date of
birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct Professor of Law at the
University of Oklahoma College of Law; formerly, Vice President for Executive
Affairs of the University of Oklahoma; formerly, an Attorney with Crowe &
Dunlevy, a law
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firm. Date of birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman of the Board of
Directors, Gilliland & Hayes, P.A., a law firm; formerly, President, Gilliland &
Hayes, P.A. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the other
funds in the Fund Complex; Executive Vice President, Chief Operating Officer and
Director of Waddell & Reed Financial, Inc.; Vice President, Chief Operating
Officer, Director and Treasurer of Waddell & Reed Financial Services, Inc.;
Executive Vice President, Principal Financial Officer, Director and Treasurer of
WRIMCO; President, Chief Executive Officer, Principal Financial Officer,
Director and Treasurer of Waddell & Reed, Inc.; President, Director and
Treasurer of Waddell & Reed Services Company; formerly, Vice President of each
of the funds in the Fund Complex; formerly, Director and Treasurer of Waddell &
Reed Asset Management Company, a former affiliate of Waddell & Reed Financial,
Inc. Date of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund Complex;
President, Chief Investment Officer, Treasurer and Director of Waddell & Reed
Financial, Inc.; Vice President, Chief Investment Officer and Director of
Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; formerly, President, Chief Executive Officer, Chief Investment Officer
and Director of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. Date of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and subsidiaries. Date of birth: February 19, 1924.
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WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of each
of the funds in the Fund Complex then in existence. (Mr. Morgan retired as
Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company. Date of birth:
April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director of Network Rehabilitation Services; formerly, Employment
Counselor and Director of McCue-Parker Center. Date of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm. Date of
birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Professor of Business Administration, University of Missouri-Kansas City;
formerly, Chancellor, University of Missouri-Kansas City. Date of birth: January
1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
Helge K. Lee
Vice President, Secretary and General Counsel of the Fund and each of the
other funds in the Fund Complex; Secretary and General Counsel of Waddell & Reed
Financial, Inc.; Vice President, Secretary, General Counsel and Director of
Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary and
General Counsel of WRIMCO and Waddell & Reed, Inc.; Senior Vice President,
Secretary, General Counsel and Director of Waddell & Reed Services Company;
formerly, Executive Vice President, Secretary and Chief Compliance Officer of
LGT Asset Management, Inc. and affiliates; formerly, Senior Vice President,
General Counsel and Secretary of Strong Capital Management, Inc. and affiliates.
Date of birth: March 30, 1946.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer
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of the Fund and each of the other funds in the Fund Complex; Vice President of
Waddell & Reed Services Company. Date of birth: July 18, 1942.
Thomas A. Mengel
Vice President of the Fund and two other funds in the Fund Complex; Vice
President of WRIMCO; formerly, President of Sal. Oppenheim jr. & Cie.
Securities, Inc.; formerly, Vice President of Hauck and Hope Securities. Date of
birth: April 13, 1957.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
The Directors who may be deemed to be interested persons as defined in the
1940 Act of the Fund's underwriter, Waddell & Reed, Inc. or WRIMCO are indicated
as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a director may elect after resignation from the Board
provided the director has attained the age of 70 and has served as a director of
the funds in the United Group for a total of at least five years. A Director
Emeritus receives fees in recognition of his or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Messrs.
Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey and Paul
S. Wise retired as Directors of the Fund and of each of the funds in the Fund
Complex and elected a position as Director Emeritus.
The Funds in the United Group, Target/United Funds, Inc. and Waddell & Reed
Funds, Inc. pay to each Director a total of $48,000 per year, plus $2,500 for
each meeting of the Board of Directors attended plus reimbursement of expenses
of attending such meeting and $500 for each committee meeting attended which is
not in conjunction with a Board of Directors' meeting, other than Directors who
are affiliates of Waddell & Reed, Inc. The fees to the Directors who receive
them are divided among the funds in the United Group, Target/United Funds, Inc.
and Waddell & Reed Funds, Inc. based on their relative size.
During the Fund's fiscal year ended June 30, 1999, the Fund's Directors
received the following fees for service as a director:
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COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann $ 0 $ 0
Keith A. Tucker $ 0 $ 0
James M. Concannon
John A. Dillingham
David P. Gardner
Linda K. Graves
Joseph Harroz, Jr.
John F. Hayes
Glendon E. Johnson
William T. Morgan
Ronald C. Reimer
Frank J. Ross, Jr.
Eleanor B. Schwartz
Frederick Vogel III
*No pension or retirement benefits have been accrued as a part of Fund expenses.
Mr. Gardner was elected as a Director on August 19, 1998. Messrs. Harroz,
Hechler, Herrmann and Reimer were elected as Directors on November 18, 1998. The
officers are paid by WRIMCO or its affiliates.
Shareholdings
As of July 31, 1999, all of the Fund's Directors and officers as a group
owned less than 1% of the outstanding shares of the Fund. The following table
sets forth information with respect to the Fund, as of July 31, 1999, regarding
the beneficial ownership of the classes thereof of the Fund's shares.
Name and Address Shares owned
of Record or Beneficially
Beneficial Owner Class or of Record Percent
- ------------------- ----- ------------ -------
Waddell & Reed Class Y %
Financial, Inc.
Savings & Investment Plan
6300 Lamar Avenue
Overland Park KS 66201
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Torchmark Corporation Class Y %
Savings & Investment Plan
2001 Third Avenue South
Birmingham AL 35233
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is derived
from the dividends, interest and earned discount on the securities the Fund
holds less expenses (which will vary by class). The second source is net
realized capital gains, which are derived from the proceeds received from the
Fund's sale of securities at a price higher than the Fund's tax basis (usually
cost) in such securities, less losses from sales of securities at a price lower
than the Fund's basis therein; these gains can be either long-term or
short-term, depending on how long the Fund has owned the securities before it
sells them. The third source is net realized gains from foreign currency
transactions. The payments made to shareholders from net investment income, net
short-term capital gains and net realized gains from certain foreign currency
transactions are called dividends.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may not
have such gains, depending on whether securities are sold and at what price. If
the Fund has net capital gains, it will pay distributions once each year, in the
latter part of the fourth calendar quarter, except to the extent it has net
capital losses carried over from a prior year or years to offset the gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you want cash
for your dividends and distributions, however, a total dividend and/or
distribution amount less than ten dollars will be automatically paid in shares
of the Fund of the same class as that with respect to which they were paid (ii)
you want your dividends and distributions paid in shares of the Fund of the same
class as that with respect to which they were paid or (iii) you want cash for
your dividends, however, a total dividend amount less than ten dollars will be
automatically paid in shares of the Fund of the same class as that with respect
to which it was paid and want your distributions paid in shares of the Fund of
the same class as that with respect to which they were paid. You can change your
instructions at any time. If you give no instructions, your dividends and
distributions will be paid in shares of the Fund of the same class as that with
respect to
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which they were paid. All payments in shares are at net asset value without any
sales charge. The net asset value used for this purpose is that computed as of
the record date for the dividend or distribution, although this could be changed
by the Directors.
Even if you get dividends and distributions on Class A shares in cash, you
can thereafter reinvest them (or distributions only) in Class A shares of the
Fund at net asset value (i.e., no sales charge) next determined after receipt by
Waddell & Reed, Inc., of the amount clearly identified as a reinvestment. The
reinvestment must be within 45 days after the payment.
TAXES
General
The Fund has qualified for treatment as a regulated investment company
("RIC") under the Code, so that it is relieved of Federal income tax on that
part of its investment company taxable income (consisting generally of net
investment income, net short-term capital gains and net gains from certain
foreign currency transactions) that is distributed to its shareholders. To
continue to qualify as a RIC, the Fund must distribute to its shareholders for
each taxable year at least 90% of the sum of its investment company taxable
income ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the Fund must derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures contracts or forward contracts) derived with respect
to its business of investing in securities or those currencies ("Income
Requirement"); (2) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government securities, securities of other RICs and other securities
that are limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund's total assets and that does not represent
more than 10% of the issuer's outstanding voting securities ("50%
Diversification Requirement"); and (3) at the close of each quarter of the
Fund's taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. Government securities or the securities
of other RICs) of any one issuer.
If the Fund failed to qualify for treatment as a RIC for any taxable year,
(a) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year (even if it distributed that income to its
shareholders) and (b) the shareholders would treat all distributions out of its
earnings
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and profits, including distributions of net capital gain (the excess of net
long-term capital gain over net short-term capital loss), as dividends (that is,
ordinary income). In addition, the Fund could be required to recognize
unrealized gains, pay substantial taxes and interest, and make substantial
distributions before requalifying for RIC treatment.
Dividends and distributions declared by the Fund in October, November or
December of any year and payable to its shareholders of record on a date in any
of those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year even if they are paid by the Fund
during the following January. Accordingly, those dividends and distributions
will be taxed to the shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any distributions received on those shares. Investors also should
be aware that if shares are purchased shortly before the record date for a
dividend or distribution, the investor will receive some portion of the purchase
price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
It is the Fund's policy to pay sufficient dividends and distributions each year
to avoid imposition of the Excise Tax. The Code permits the Fund to defer into
the next calendar year net capital losses incurred between November 1 and the
end of the current calendar year.
Income from Foreign Securities
Dividends and interest received, and gains realized, by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
Because more than 50% of the value of the Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible to, and may, file an election with the Internal Revenue Service
that will enable the shareholders, in effect, to receive the benefit of the
foreign tax credit with respect to any foreign and U.S. possessions income taxes
paid by the Fund. Pursuant to any such election, the Fund would treat those
taxes as dividends paid to
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its shareholders and each shareholder would be required to (1) include in gross
income, and treat as paid by the shareholder, the shareholder's proportionate
share of those taxes; (2) treat the shareholder's share of those taxes and of
any dividend paid by the Fund that represents income from foreign or U.S.
possessions sources as the shareholder's own income from those sources; and (3)
either deduct the taxes deemed paid by the shareholder in computing the
shareholder's taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against the shareholder's federal income tax.
The Fund will report to its shareholders shortly after each taxable year the
share of its income from sources within, and taxes paid to, foreign countries
and U.S. possessions if it makes this election.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation -- other than a "controlled foreign
corporation" (i.e., a foreign corporation in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which the Fund is a U.S. shareholder -that, in general,
meets either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for
the production of, passive income. Under certain circumstances, the Fund will be
subject to Federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on disposition of the stock (collectively
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain -- which
probably would have to be distributed by the Fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if those earnings and
gain were not distributed to the Fund by the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
The Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the Fund's adjusted basis therein as of the end of that year. Pursuant to the
election,
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the Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years. The Fund's adjusted basis in each PFIC's stock with respect
to which it makes this election will be adjusted to reflect the amounts of
income included and deductions taken under the election. Regulations proposed in
1992 provided a similar election with respect to the stock of certain PFICs.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of a debt security denominated in a foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest, dividends or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally are treated
as ordinary income or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its shareholders.
Income from Options, Futures and Forward Currency Contracts and Foreign
Currencies
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures contracts and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the amount, character and timing of recognition of the gains and losses the Fund
realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures contracts and forward currency contracts derived
by the Fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
Any income the Fund earns from writing options is treated as short-term
capital gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being exercised,
the premium it received also will be a short-term capital gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund
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receives will be added to the exercise price to determine the gain or loss on
the sale.
Certain options, futures contracts and forward currency contracts in which
the Fund may invest may be "section 1256 contracts." Section 1256 contracts held
by the Fund at the end of its taxable year, other than contracts subject to a
"mixed straddle" election made by the Fund, are "marked-to-market" (that is,
treated as sold at that time for their fair market value) for Federal income tax
purposes, with the result that unrealized gains or losses are treated as though
they were realized. Sixty percent of any net gains or losses recognized on these
deemed sales, and 60% of any net realized gains or losses from any actual sales
of section 1256 contracts, are treated as long-term capital gains or losses, and
the balance are treated as short-term capital gains or losses. That 60% portion
will qualify for the 20% (10% for taxpayers in the 15% marginal tax bracket)
maximum tax rate on net capital gains enacted by the Taxpayer Relief Act of
1997. Section 1256 contracts also may be marked-to-market for purposes of the
Excise Tax and other purposes. The Fund may need to distribute any
mark-to-market gains to its shareholders to satisfy the Distribution Requirement
and/or avoid imposition of the Excise Tax, even though it may not have closed
the transactions and received cash to pay the distributions.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Fund may invest. That section defines
a "straddle" as offsetting positions with respect to personal property; for
these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. The regulations under section
1092 also provide certain "wash sale" rules, that apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the Fund
makes certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions will be determined under
rules that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.
If the Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal
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contract or futures or forward currency contract entered into by the Fund or a
related person with respect to the same or substantially similar property. In
addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management Agreement
is to arrange the purchase and sale of securities for the portfolio of the Fund.
Transactions in securities other than those for which an exchange is the primary
market are generally done with dealers acting as principals or market makers.
Brokerage commissions are paid primarily for effecting transactions in
securities traded on an exchange and otherwise only if it appears likely that a
better price or execution can be obtained. The individual who manages the Fund
may manage other advisory accounts with similar investment objectives. It can be
anticipated that the manager will frequently place concurrent orders for all or
most accounts for which the manager has responsibility or WRIMCO may otherwise
combine orders for the Fund with those of other funds in the United Group,
Target/United Funds, Inc. and Waddell & Reed Funds, Inc. or other accounts for
which it has investment discretion. Transactions effected pursuant to such
combined orders are averaged as to price and allocated in accordance with the
purchase or sale orders actually placed for each fund or advisory account,
except where the combined order is not filled completely. In this case, WRIMCO
will ordinarily allocate the transaction pro rata based on the orders placed.
Sharing in large transactions could affect the price the Fund pays or receives
or the amount it buys or sells. However, sometimes a better negotiated
commission is available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is authorized to
engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution and/or
research services and other services, including pricing or quotation services
directly or through others ("research and brokerage services") considered by
WRIMCO to be useful or desirable for its investment management of the Fund
and/or the other funds and accounts over which WRIMCO has investment discretion.
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Research and brokerage services are, in general, defined by reference to
Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers; (ii) furnishing
analyses and reports; or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or brokerage
services may be higher than another qualified broker would charge for effecting
comparable transactions if a good faith determination is made by WRIMCO that the
commission is reasonable in relation to the research or brokerage services
provided. Subject to the foregoing considerations, WRIMCO may also consider
sales of Fund shares as a factor in the selection of broker-dealers to execute
portfolio transactions. No allocation of brokerage or principal business is made
to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of WRIMCO, and investment research
received for the commissions of those other accounts may be useful both to the
Fund and one or more of such other accounts. To the extent that electronic or
other products provided by such brokers to assist WRIMCO in making investment
management decisions are used for administration or other non-research purposes,
a reasonable allocation of the cost of the product attributable to its
non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party at the
request of a broker) includes information on particular companies and industries
as well as market, economic or institutional activity areas. It serves to
broaden the scope and supplement the research activities of WRIMCO; serves to
make available additional views for consideration and comparisons; and enables
WRIMCO to obtain market information on the price of securities held in the
Fund's portfolio or being considered for purchase. The Fund may also use its
brokerage to pay for pricing or quotation services to value securities.
During the Fund's fiscal years ended June 30, 1999, 1998 and 1997, it paid
brokerage commissions of $_____, $5,833,418 and $5,160,651, respectively. These
figures do not include principal transactions or spreads or concessions on
principal transactions, i.e., those in which the Fund sells securities to a
broker-dealer firm or buys from a broker-dealer firm securities owned by it.
During the Fund's fiscal year ended June 30, 1999, the transactions, other than
principal transactions, which were directed to broker-dealers who provided
research as well as
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execution totaled $_____ on which $______ in brokerage commissions were paid.
These transactions were allocated to these broker-dealers by the internal
allocation procedures described above.
As of June 30, 1999, the Fund owned in the aggregate amount of $______ and
in the aggregate amount of $______. are regular brokers of the Fund.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investing activities of their
employees, officers and interested directors.
OTHER INFORMATION
The Shares of the Fund
The Fund offers four classes of its shares: Class A, Class B, Class C and
Class Y. Each class represents an interest in the same assets of the Fund and
differ as follows: each class of shares has exclusive voting rights on matters
appropriately limited to that class; Class A shares are subject to an initial
sales charge and to an ongoing distribution and/or service fee; Class B and
Class C are subject to a CDSC and to ongoing distribution and service fees;
Class B shares convert in the eighth year to Class A shares; and Class Y shares,
which are designated for institutional investors, have no sales charge nor
ongoing distribution and/or service fee; each class may bear differing amounts
of certain class-specific expenses; and each class has a separate exchange
privilege. The Fund does not anticipate that there will be any conflicts between
the interests of holders of the different classes of shares of the Fund by
virtue of those classes. On an ongoing basis, the Board of Directors will
consider whether any such conflict exists and, if so, take appropriate action.
Each share of the Fund is entitled to equal voting, dividend, liquidation and
redemption rights, except that due to the differing expenses borne by the four
classes, dividends and liquidation proceeds of Class B shares and Class C shares
are expected to be lower than for Class A shares, which in turn are expected to
be lower than for Class Y shares of the Fund. Each fractional share of a class
has the same rights, in proportion, as a full share of that class. Shares are
fully paid and nonassessable when purchased.
The Fund does not hold annual meetings of shareholders; however, certain
significant corporate matters, such as the approval of a new investment advisory
agreement or a change in fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
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Special meetings of shareholders may be called for any purpose upon receipt
by the Fund of a request in writing signed by shareholders holding not less than
25% of all shares entitled to vote at such meeting, provided certain conditions
stated in the bylaws are met. There will normally be no meeting of the
shareholders for the purpose of electing directors until such time as less than
a majority of directors holding office have been elected by shareholders, at
time which the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the 1940 Act
applies to the Fund, the directors are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
director when requested in writing to do so by the shareholders of record of not
less than 10% of the Fund's outstanding shares.
Each share (regardless of class) has one vote. All shares of the Fund vote
together as a single class, except as to any matter for which a separate vote of
any class is required by the 1940 Act, and except as to any matter which affects
the interests of one or more particular classes, in which case only the
shareholders of the affected classes are entitled to vote, each as a separate
class.
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APPENDIX A
The following are descriptions of some of the ratings of securities which
the Fund may use. The Fund may also use ratings provided by other nationally
recognized statistical rating organizations in determining the securities
eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. An S&P
corporate bond rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment of
creditworthiness may take into consideration obligors such as guarantors,
insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to pay
interest and repay principal is very strong, and debt rated AA differs from AAA
issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the
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adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
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CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. It is used when interest payments
or principal payments are not made on a due date even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace periods. The D rating will also be used upon a filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "investment grade" ratings)
are generally regarded as eligible for bank investment. In addition, the laws of
various states governing legal investments may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable MIS
rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be
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other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Description of preferred stock ratings
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. An S&P
preferred stock rating is an assessment of the capacity and willingness of an
issuer to pay preferred stock dividends and any applicable sinking fund
obligations. A preferred stock rating differs from a bond rating inasmuch as it
78
<PAGE>
is assigned to an equity issue, which issue is intrinsically different from, and
subordinated to, a debt issue. Therefore, to reflect this difference, the
preferred stock rating symbol will normally not be higher than the debt rating
symbol assigned to, or that would be assigned to, the senior debt of the same
issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA -- This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A -- An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB -- An issue rated BBB is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB, B, CCC -- Preferred stock rated BB, B, and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC -- The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
79
<PAGE>
C -- A preferred stock rated C is a non-paying issue.
D -- A preferred stock rated D is a non-paying issue with the issuer in
default on debt instruments.
NR -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-) -- To provide more detailed indications of preferred
stock quality, the rating from AA to CCC may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
A preferred stock rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information or based on other circumstances.
Moody's Investors Service, Inc. Because of the fundamental differences
between preferred stocks and bonds, a variation of MIS' familiar bond rating
symbols is used in the quality ranking of preferred stock. The symbols are
designed to avoid comparison with bond quality in absolute terms. It should
always be borne in mind that preferred stock occupies a junior position to bonds
within a particular capital structure and that these securities are rated within
the universe of preferred stocks.
Note: MIS applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Preferred stock rating symbols and their definitions are as follows:
aaa -- An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well-maintained in the foreseeable
future.
80
<PAGE>
a -- An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the aaa
and aa classification, earnings and asset protection are, nevertheless, expected
to be maintained at adequate levels.
baa -- An issue which is rated baa is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba -- An issue which is rated ba is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b -- An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated caa is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca -- An issue which is rated ca is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
c -- This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
81
<PAGE>
22. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements -- United International Growth Fund, Inc.
Included in Part B:
-------------------
As of June 30, 1999
Statement of Assets and Liabilities
For the year ended June 30, 1999
Statement of Operations
For each of the two years in the period ended June 30, 1999
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of June 30, 1999
Report of Independent Accountants
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits:
(a) Articles of Incorporation, as amended, filed by EDGAR on
September 28, 1998 as EX-99.B1-charter to Post-Effective
Amendment No. 57 to the Registration Statement on Form N-1A*
Articles Supplementary, filed by EDGAR on May 5, 1995, as
EX-99.B1-igartsup to Post-Effective Amendment No. 52 to the
Registration Statement on Form N-1A*
Articles Supplementary, attached hereto as EX-99.B(a)igartsup
(b) Bylaws, as amended, filed by EDGAR on September 26, 1996 as
EX-99.B2-igbylaw to Post-Effective Amendment No. 54 to the
Registration Statement on Form N-1A*
Amendment to Bylaws attached hereto as EX-99.B(b)igbylaw2
(c) Not applicable
(d) Investment Management Agreement, as amended, filed by EDGAR on
May 5, 1995 as EX-99.B(5)-igima to Post-Effective Amendment No.
52 to the Registration Statement on Form N-1A*
Fee Schedule (Exhibit A) to the Investment Management Agreement,
as amended, attached hereto as EX-99.B(d)igimafee
Assignment of the Investment Management Agreement, filed by EDGAR
on May 5, 1995, as EX-99.B5-igassign to Post-Effective Amendment
No. 52 to the Registration Statement on Form N-1A*
(e) Underwriting Agreement, filed by EDGAR on May 5, 1995, as
EX-99.B6-igua to Post-Effective Amendment No. 52 to the
Registration Statement on Form N-1A*
(f) Not applicable
(g) Custodian Agreement, as amended, attached hereto as
EX-99.B(g)-igca
(h) Shareholder Servicing Agreement filed by EDGAR on September 28,
1998 as EX-99.B(9)-igssa to Post-Effective Amendment No. 57 to
the Registration Statement on Form N-1A*
Compensation Table (Exhibit B) to the Shareholder Servicing
Agreement, as amended, attached hereto as EX-99.B(h)igssacom
<PAGE>
Fund Class A application, as amended, filed by EDGAR on May 30,
1997 as EX-99.B9-igappca to Post-Effective Amendment No. 55 to
the Registration Statement on Form N-1A*
Fund Class Y application, filed by EDGAR on May 5, 1995, as
EX-99.B9-igappcy to Post-Effective Amendment No. 52 to the
Registration Statement on Form N-1A*
Fund NAV application, filed by EDGAR on May 5, 1995, as
EX-99.B9-igappnav to Post-Effective Amendment No. 52 to the
Registration Statement on Form N-1A*
Class Y Letter of Understanding filed by EDGAR on September 26,
1996 as EX-99.B9-iglou to Post-Effective Amendment No. 54 to the
Registration Statement on Form N-1A*
Accounting Services Agreement, filed by EDGAR on May 5, 1995, as
EX-99.B9-igasa to Post-Effective Amendment No. 52 to the
Registration Statement on Form N-1A*
Service Agreement filed by EDGAR on August 4, 1993 as Exhibit
(b)(15) to Post-Effective Amendment No. 49 to the Registration
Statement on Form N-1A*
Amendment to Service Agreement, filed by EDGAR on May 5, 1995, as
EX-99.B9-igsaa to Post-Effective Amendment No. 52 to the
Registration Statement on Form N-1A*
(i) Opinion and Consent of Counsel attached hereto as
EX-99.B(i)-iglegopn
(j) Consent of Deloitte & Touche LLP, Independent Accountants, will
be attached as EX-99.B(j)-igconsnt in the 485(b) filing to be
completed on August 27, 1999
(k) Not applicable
(l) Not applicable
(m) Distribution and Service Plan, as restated, filed by EDGAR on
September 26, 1997 as EX-99.B15-igspca to Post-Effective
Amendment No. 56 to the Registration Statement on Form N-1A*
Distribution and Service Plan for Class B shares attached hereto
as EX-99.B(m)igdspb
Distribution and Service Plan for Class C shares attached hereto
as EX-99.B(m)igdspc
(n) Not applicable
(o) Multiple Class Plan, as amended, attached hereto as
EX-99.B(o)igmcp
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
<PAGE>
None
25. Indemnification
---------------
Reference is made to Article SEVENTH paragraph 6(b) through 6(f) of the
Articles of Incorporation of Registrant, as amended, filed September 28,
1998 as EX-99.B1-charter to Post-Effective Amendment No. 57 to the
Registration Statement on Form N-1A*, and to Article IV of the Underwriting
Agreement, filed by EDGAR on May 5, 1995, as EX-99.B6-igua to
Post-Effective Amendment No. 52 to the Registration Statement on Form
N-1A*, both of which provide indemnification. Also refer to section 2-418
of the Maryland Corporation Law regarding indemnification of directors,
officers, employees and agents.
26. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the investment manager of
the Registrant. Under the terms of an Investment Management Agreement
between Waddell & Reed, Inc. and the Registrant, Waddell & Reed, Inc. is to
provide investment management services to the Registrant. Waddell & Reed,
Inc. assigned its investment management duties under this agreement to
Waddell & Reed Investment Management Company on January 8, 1992. Waddell &
Reed Investment Management Company is a corporation which is not engaged in
any business other than the provision of investment management services to
those registered investment companies described in Part A and Part B of
this Post-Effective Amendment and to other investment advisory clients.
Each director and executive officer of Waddell & Reed Investment Management
Company has had as his sole business, profession, vocation or employment
during the past two years only his duties as an executive officer and/or
employee of Waddell & Reed Investment Management Company or its
predecessors, except as to persons who are directors and/or officers of the
Registrant and have served in the capacities shown in the Statement of
Additional Information of the Registrant. The address of the officers is
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to the Prospectus and SAI of this Registrant.
27. Principal Underwriter
---------------------
(a) Waddell & Reed, Inc. is the principal underwriter of the Registrant.
It is also the principal underwriter to the following investment
companies:
United Funds, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
<PAGE>
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
Advantage I
Advantage II
Advantage Plus
Waddell & Reed Funds, Inc.
(b) The information contained in the underwriter's application on Form BD,
under the Securities Exchange Act of 1934, is herein incorporated by
reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or any
affiliated person of such affiliated person.
28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant, each of
whose business address is Post Office Box 29217, Shawnee Mission, Kansas
66201-9217.
29. Management Services
-------------------
There is no service contract other than as discussed in Part A and B of
this Post-Effective Amendment and as listed in response to Items 23.(h) and
23.(m) hereof.
30. Undertakings
-----------
Not applicable
- ---------------------------------
*Incorporated herein by reference
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED FUNDS,
INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND, INC.,
UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC.,
TARGET/UNITED FUNDS, INC. AND WADDELL & REED FUNDS, INC. (each hereinafter
called the "Corporation"), and certain directors and officers for the
Corporation, do hereby constitute and appoint KEITH A. TUCKER, ROBERT L.
HECHLER, HELGE K. LEE and KRISTEN A. RICHARDS, and each of them individually,
their true and lawful attorneys and agents to take any and all action and
execute any and all instruments which said attorneys and agents may deem
necessary or advisable to enable each Corporation to comply with the Securities
Act of 1933 and/or the Investment Company Act of 1940, as amended, and any
rules, regulations, orders or other requirements of the United States Securities
and Exchange Commission thereunder, in connection with the registration under
the Securities Act of 1933 and/or the Investment Company Act of 1940, as
amended, including specifically, but without limitation of the foregoing, power
and authority to sign the names of each of such directors and officers in
his/her behalf as such director or officer as indicated below opposite his/her
signature hereto, to any Registration Statement and to any amendment or
supplement to the Registration Statement filed with the Securities and Exchange
Commission under the Securities Act of 1933 and/or the Investment Company Act of
1940, as amended, and to any instruments or documents filed or to be filed as a
part of or in connection with such Registration Statement or amendment or
supplement thereto; and each of the undersigned hereby ratifies and confirms all
that said attorneys and agents shall do or cause to be done by virtue hereof.
Date: May 19, 1999 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
<TABLE>
<S> <C> <C>
/s/Keith A. Tucker Chairman of the Board May 19, 1999
- --------------------- -------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal May 19, 1999
- --------------------- Financial Officer and -------------
Robert L. Hechler Director
/s/Henry J. Herrmann Vice President and May 19, 1999
- --------------------- Director -------------
Henry J. Herrmann
/s/Theodore W. Howard Vice President, Treasurer May 19, 1999
- --------------------- and Principal Accounting -------------
Theodore W. Howard Officer
/s/James M. Concannon Director May 19, 1999
- --------------------- -------------
James M. Concannon
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/John A. Dillingham Director May 19, 1999
- --------------------- -------------
John A. Dillingham
/s/David P. Gardner Director May 19, 1999
- --------------------- -------------
David P. Gardner
/s/Linda K. Graves Director May 19, 1999
- --------------------- -------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director May 19, 1999
- --------------------- -------------
Joseph Harroz, Jr.
/s/John F. Hayes Director May 19, 1999
- --------------------- -------------
John F. Hayes
/s/Glendon E. Johnson Director May 19, 1999
- --------------------- -------------
Glendon E. Johnson
/s/William T. Morgan Director May 19, 1999
- --------------------- -------------
William T. Morgan
/s/Ronald C. Reimer Director May 19, 1999
- --------------------- -------------
Ronald C. Reimer
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Frank J. Ross, Jr. Director May 19, 1999
- --------------------- -------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director May 19, 1999
- ---------------------- -------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director May 19, 1999
- ---------------------- -------------
Frederick Vogel III
</TABLE>
Attest:
/s/Kristen A. Richards
- ----------------------
Kristen A. Richards
Assistant Secretary
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment pursuant to
Rule 485(a) of the Securities Act of 1933 and the Registrant has duly caused
this Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Overland Park, and State of Kansas, on
the 2nd day of July, 1999.
UNITED INTERNATIONAL GROWTH FUND, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C> <C>
/s/Keith A. Tucker* Chairman of the Board July 2, 1999
- ---------------------- ---------------
Keith A. Tucker
/s/Robert L. Hechler* President July 2, 1999
- ---------------------- (Principal Financial Officer) ---------------
Robert L. Hechler and Director
/s/Henry J. Herrmann* Vice President and Director July 2, 1999
- ---------------------- ---------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer July 2, 1999
- ---------------------- and Principal Accounting ---------------
Theodore W. Howard Officer
/s/James M. Concannon* Director July 2, 1999
- ---------------------- ---------------
James M. Concannon
/s/John A. Dillingham* Director July 2, 1999
- ---------------------- ---------------
John A. Dillingham
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/David P. Gardner* Director July 2, 1999
- ---------------------- ---------------
David P. Gardner
/s/Linda K. Graves* Director July 2, 1999
- ---------------------- ---------------
Linda Graves
/s/Joseph Harroz, Jr.* Director July 2, 1999
- ---------------------- ---------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director July 2, 1999
- ---------------------- ---------------
John F. Hayes
/s/Glendon E. Johnson* Director July 2, 1999
- ---------------------- ---------------
Glendon E. Johnson
/s/William T. Morgan* Director July 2, 1999
- ---------------------- ---------------
William T. Morgan
/s/Ronald C. Reimer* Director July 2, 1999
- ---------------------- ---------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director July 2, 1999
- ---------------------- ---------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz* Director July 2, 1999
- ----------------------- ---------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director July 2, 1999
- ----------------------- ---------------
Frederick Vogel III
</TABLE>
*By
Helge K. Lee
Attorney-in-Fact
ATTEST:
Kristen A. Richards
Assistant Secretary
EX-99.B(a)igartsup
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
UNITED INTERNATIONAL GROWTH FUND, INC.
United International Growth Fund, Inc. (the "Corporation"), a Maryland
corporation, having its principal office in Baltimore, Maryland, hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority vested in the Board of Directors of the
Corporation by Article FIFTH of the Articles of Incorporation of the
Corporation, the Board of Directors has heretofore duly designated, in
accordance with Maryland General Corporation Law, the aggregate number of shares
of capital stock which the Corporation is authorized to issue at Four Hundred
Million (400,000,000) shares of capital stock, (par value $1.00 per share),
amounting in the aggregate to a par value of Four Hundred Million Dollars
($400,000,000.00).
SECOND: Pursuant to the authority vested in the Board of Directors of the
Corporation by Article FIFTH of the Articles of Incorporation of the
Corporation, the Board of Directors, in accordance with Maryland General
Corporation Law, now duly designates and classifies the capital stock of the
Corporation among the classes of the Corporation as follows:
<TABLE>
<S> <C>
Class A 200,000,000 shares
Class Y 100,000,000 shares
Class B 50,000,000 shares
Class C 50,000,000 shares
</TABLE>
The aggregate number of shares of all classes of stock of the Corporation
remains at Four Hundred Million (400,000,000) shares of capital stock, the par
value remains $1.00 per share, and the aggregate value of all authorized stock
remains Four Hundred Million Dollars ($400,000,000.00).
THIRD: The capital stock of the Corporation is divided into classes and
there are no changes in the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption as shares of capital stock as set forth in the
Corporation's Articles of Incorporation and Articles Supplementary thereto,
except as follows:
(1) The capital stock of Class A shares shall be subject to fees,
including a front-end sales load and a Rule 12b-1 fee, as
determined by the Board of Directors of the Corporation from time
to time;
<PAGE>
(2) The capital stock of the Class Y shares shall not be subject to
either a front-end or contingent deferred sales charge or Rule
12b-1 fees and is subject to a shareholder servicing fee which
differs from that of the Class A shares;
(3) To the extent not otherwise set forth in the Corporation's
Articles of Incorporation, each Class or Series of the
Corporation shall have such preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption as shares
of capital stock as are determined by the Corporation's Board of
Directors and described in the Corporation's registration
statement under the Securities Act of 1933 ("1933 Act") or any
amendment thereto or any supplement to a prospectus or statement
of additional information contained therein.
FOURTH: The Corporation is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended.
IN WITNESS WHEREOF, the undersigned Vice President of the Corporation
hereby executes these Articles Supplementary on behalf of the Corporation this
30th day of June, 1999.
----------------------------
Helge K. Lee, Vice President
Attest: _______________________
Kristen A. Richards
Assistant Secretary
The undersigned, Vice President of United International Growth Fund, Inc.
who executed on behalf said Corporation the foregoing Articles Supplementary, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said Corporation, the foregoing Articles Supplementary to be the act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
UNITED INTERNATIONAL GROWTH FUND, INC.
By: __________________________________
Helge K. Lee, Vice President
EX-99.B(b)igbylaw2
AMENDMENT TO BYLAWS
RESOLVED, That the Bylaws of each of United Funds, Inc., United Asset
Strategy Fund, Inc., United Cash Management, Inc., United Continental Income
Fund, Inc., United Gold & Government Fund, Inc., United Government Securities
Fund, Inc., United High Income Fund, Inc., United High Income Fund II, Inc.,
United International Growth Fund, Inc., United Municipal Bond Fund, Inc., United
Municipal High Income Fund, Inc., United New Concepts Fund, Inc., United
Retirement Shares, Inc., United Vanguard Fund, Inc., Target/United Funds, Inc.
and Waddell & Reed Funds, Inc. are amended by substitution of the following for
the initial paragraph of Article I, Section 7, regarding voting and inspectors;
and, with respect to United Asset Strategy Fund, Inc., United Retirement Shares,
Inc. and Waddell & Reed Funds, Inc., for Article II, Section 2, regarding voting
and proxies:
At all meetings of the stockholders, every stockholder of record entitled
to vote thereat shall be entitled to vote either in person or by proxy,
which term shall include proxies provided by such stockholder, or his duly
authorized attorney, through written, electronic, telephonic, computerized,
facsimile, telecommunications, telex or oral communication or by any other
form of communication, each pursuant to such voting procedures and through
such systems as are authorized by the Board of Directors or one or more
executive officers of the Corporation. No proxy which is dated or, if
otherwise provided as permitted by these Bylaws and applicable Maryland
law, provided more than three months before the meeting at which it is
offered shall be accepted, unless such proxy shall, on its face, name or,
if otherwise provided as permitted by these Bylaws and applicable Maryland
law, provide a longer period for which it is to remain in force.
I certify that I am Assistant Secretary of each of the following
Corporations, and as such officer, have custody of the minute books of the
Corporations, and that the foregoing resolutions are true and correct
resolutions duly passed by the Board of Directors of each of the following
Corporations at a meeting held on February 10, 1999.
United Funds, Inc.
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Gold & Government Fund, Inc.
United Government Securities Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United International Growth Fund, Inc.
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United New Concepts Fund, Inc.
United Retirement Shares, Inc.
United Vanguard Fund, Inc.
Target/United Funds, Inc.
Waddell & Reed Funds, Inc.
----------------------------------------
Kristen A. Richards, Assistant Secretary
Dated this 10th day of February, 1999.
EX-99.B(d)igimafee
EXHIBIT A TO INVESTMENT MANAGEMENT AGREEMENT
UNITED INTERNATIONAL GROWTH FUND, INC.
FEE SCHEDULE
A cash fee computed each day on net asset value for the Fund at the annual rates
listed below:
<TABLE>
<CAPTION>
Net Assets Fee
- ---------- ---
<S> <C>
Up to $1 billion 0.85% of net assets
Over $1 billion and up to $2 billion 0.83% of net assets
Over $2 billion and up to $3 billion 0.80% of net assets
Over $3 billion 0.76% of net assets
</TABLE>
As Amended and Effective June 30, 1999.
EX-99.B(g)-igca
CUSTODIAN AGREEMENT
Dated as of November 26, 1991
Amended and Restated as of May 13, 1998
Between
UMB BANK, n.a.
and
UNITED INTERNATIONAL GROWTH FUND, INC.
<PAGE>
Table of Contents
ARTICLE
I. Appointment of Custodian
II. Powers and Duties of Custodian
2.01 Safekeeping
2.02 Manner of Holding Securities
2.03 Purchase of Assets
2.04 Exchanges of Securities
2.05 Sales of Securities
2.06 Depositary Receipts
2.07 Exercise of Rights, Tender Offers, Etc.
2.08 Stock Dividends, Rights, Etc.
2.09 Options
2.10 Futures Contracts
2.11 Borrowing
2.12 Interest Bearing Deposits
2.13 Foreign Exchange Transactions
2.14 Securities Loans
2.15 Collections
2.16 Dividends, Distributions and Redemptions
2.17 Proceeds from Shares Sold
2.18 Proxies, Notices, Etc.
2.19 Bills and Other Disbursements
2.20 Nondiscretionary Functions
2.21 Bank Accounts
2.22 Deposit of Fund Assets in Securities System
2.23 Other Transfers
2.24 Establishment of Segregated Account
2.25 Custodian's Books and Records
2.26 Opinion of Fund's Independent
Certified Public Accountants
2.27 Reports by Independent Certified Public
Accountants
2.28 Overdraft Facility
III. Proper Instructions, Special Instructions
and Related Matters
3.01 Proper Instruction and Special Instructions
3.02 Authorized Persons
3.03 Persons Having Access to Assets of the Portfolios
3.04 Actions of Custodian Based on Proper
Instructions and Special Instructions
<PAGE>
IV. Subcustodians
4.01 Domestic Subcustodians
4.02 Foreign Sub-Subcustodians and
Interim Sub-Subcustodians
4.03 Special Subcustodians
4.04 Termination of a Subcustodian
4.05 Certification Regarding Foreign Sub-Subcustodians
V. Standard of Care, Indemnification
5.01 Standard of Care
5.02 Liability of the Custodian for Actions
of Other Person
5.03 Indemnification by Fund
5.04 Investment Limitations
5.05 Fund's Right to Proceed
5.06 Indemnification by Custodian
5.07 Custodian's Right to Proceed
VI. Compensation
VII. Termination
VIII. Defined Terms
IX. Miscellaneous
9.01 Execution of Documents, Etc.
9.02 Representations and Warranties
9.03 Entire Agreement
9.04 Waivers and Amendments
9.05 Interpretation
9.06 Captions
9.07 Governing Law
9.08 Notices
9.09 Assignment
9.10 Counterparts
9.11 Confidentiality; Survival of Obligations
Appendix "B"
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of the 26th day of November, 1991 between United
International Growth Fund, Inc. (the "Fund") and UMB Bank, n.a., formerly,
United Missouri Bank, n.a. (the "Custodian") and as amended and restated as of
May 13, 1998.
WITNESSETH
WHEREAS, the Fund desires to appoint the Custodian as custodian on behalf
of the Fund in accordance with the provisions of the Investment Company Act of
1940, as amended (the "1940 Act") and the rules and regulations thereunder,
under the terms and conditions set forth in this Agreement, and the Custodian
has agreed so to act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
Subject to the terms and provisions of this Agreement, the Fund hereby
employs and appoints the Custodian as a custodian of the cash, securities and
other assets owned by the Fund and deposited from time to time with the
Custodian ("Assets"). The Fund shall deliver to the Custodian, or shall cause to
be delivered to the Custodian, Assets during the term of this Agreement. The
Custodian is authorized to act under the terms and conditions of this Agreement
as the Fund's agent and shall be representing the Fund when acting within the
scope of this Agreement. The Custodian hereby accepts such appointment as
custodian and shall perform the duties and responsibilities set forth herein on
the terms and conditions set forth herein.
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
As custodian, the Custodian shall have and perform the powers and duties
set forth in this Article II. Pursuant to and in accordance with Article IV
hereof, the Custodian may appoint one or more Subcustodians (as hereinafter
defined) to exercise the powers and perform the duties of the Custodian set
forth in this Article II and references to the Custodian in this Article II
shall include any Subcustodian so appointed.
Section 2.01. Safekeeping. The Custodian shall accept delivery of and keep
safely the Assets in accordance with the terms and conditions hereof on behalf
of the Fund.
Section 2.02. Manner of Holding Securities.
(a) The Custodian shall at all times hold securities of the Fund either:
(i) by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form; or (ii) in book-entry
form by a Securities System (as hereinafter defined) in accordance with the
provisions of Section 2.22 below.
<PAGE>
(b) The Custodian may at all times hold registered securities of the Fund
in the name of the Fund or the Fund's nominee, or in the nominee name of the
Custodian unless specifically directed by Proper Instructions (as hereinafter
defined) to hold such registered securities in so-called street name; provided
that, in any event, all Assets shall be held in an account of the Custodian
containing only assets of the Fund. Notwithstanding the foregoing, unless it
receives Proper Instructions to the contrary, the Custodian shall register all
securities in the name of the Custodian's nominee as authorized by the Fund. All
securities held directly or indirectly by the Custodian hereunder shall at all
times be identifiable on the records of the Custodian. Except as otherwise
provided herein, the Custodian shall keep the Assets physically segregated from
those of other persons or entities. The Custodian shall execute and deliver all
certificates and documents in connection with registration of securities as may
be required by the applicable provisions of the Internal Revenue Code, the laws
of any State or territory of the United States and the laws of any jurisdiction
in which the securities are held.
Section 2.03. Purchase of Assets.
(a) Security Purchases. Upon receipt of Proper Instructions, the Custodian
shall pay for and receive securities purchased for the account of the Fund,
provided that payment shall be made by Custodian only upon receipt of the
securities: (a) by the Custodian; (b) by a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) by a Securities
System. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i)
in the case of a repurchase agreement, the Custodian may release funds to a
Securities System prior to the receipt of advice from the Securities System that
the securities underlying such repurchase agreement have been transferred by
book-entry into the Account (as hereinafter defined) maintained with such
Securities System by the Custodian, provided that the Custodian's instructions
to the Securities System require that the Securities System may make payment of
such funds to the other party to the repurchase agreement only upon transfer by
book-entry of the securities underlying the repurchase agreement into the
Account; (ii) in the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures contracts or
options, pursuant to Sections 2.09, 2.10, 2.12 and 2.13 hereof, the Custodian
may make payment therefor before receipt of an advice or transaction; and (iii)
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make payment therefor
and receive delivery of such securities in accordance with local custom and
practice generally accepted by Institutional Clients (as hereinafter defined) in
the country in which the settlement occurs, but in all events subject to the
standard of care set forth in Article V hereof. For purposes of this Agreement,
an "Institutional Client" shall mean a major commercial bank, corporation,
insurance company, or substantially similar institution, which, as a substantial
part of its business operations, purchases or sells securities and makes use of
custodial services.
(b) Other Asset Purchases. Upon receipt of Proper Instructions and except
as otherwise provided herein, the Custodian shall pay for and receive other
Assets for the account of the Fund as provided in Proper Instructions.
<PAGE>
Section 2.04. Exchanges of Securities. Upon receipt of Proper Instructions,
the Custodian shall exchange securities held by it for the account of the Fund
for other securities in connection with any reorganization, recapitalization,
split-up of shares, change of par value, conversion or other event relating to
the securities or the issuer of such securities, and shall deposit any such
securities in accordance with the terms of any reorganization or protective
plan. The Custodian shall, without receiving Proper Instructions: surrender
securities for transfer into the name of the Fund, the Fund's nominee or the
nominee name of the Custodian as permitted by Section 2.02(b); and surrender
securities for a different number of certificates or instruments representing
the same number of shares or same principal amount of indebtedness, provided
that the securities to be issued will be delivered to the Custodian.
Section 2.05. Sales of Securities. Upon receipt of Proper Instructions, the
Custodian shall make delivery of securities which have been sold for the account
of the Fund, but only against payment therefor in the form of: (a) cash,
certified check, bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) credit to the
Account of the Custodian with a Securities System, in accordance with the
provisions of Section 2.22 hereof. Notwithstanding the foregoing: (i) in the
case of the sale of securities, the settlement of which occurs outside of the
United States of America, such securities shall be delivered and paid for in
accordance with local custom and practice generally accepted by Institutional
Clients in the country in which the settlement occurs, but in all events subject
to the standard of care set forth in Article V hereof; and (ii) in the case of
securities held in physical form, such securities shall be delivered and paid
for in accordance with "street delivery custom" to a broker or its clearing
agent, against delivery to the Custodian of a receipt for such securities,
provided that the Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such securities by the broker or
its clearing agent, and provided further that, subject to the standard of care
set forth in Article V hereof, the Custodian shall not be responsible for the
selection of or the failure or inability to perform of such broker or its
clearing agent.
Section 2.06. Depositary Receipts. Upon receipt of Proper Instructions, the
Custodian shall surrender securities to the depositary used for such securities
by an issuer of American Depositary Receipts or International Depositary
Receipts (hereinafter referred to, collectively , as "ADRs"), against a written
receipt therefor adequately describing such securities and written evidence
satisfactory to the Custodian that the depositary has acknowledged receipt of
instructions to issue ADRs with respect to such securities in the name of the
Custodian or a nominee of the Custodian, for delivery to the Custodian at such
place as the Custodian may from time to time designate. Upon receipt of Proper
Instructions, the Custodian shall surrender ADRs to the issuer thereof, against
a written receipt therefor adequately describing the ADRs surrendered and
written evidence satisfactory to the Custodian that the issuer of the ADRs has
acknowledged receipt of instructions to cause its depository to deliver the
securities underlying such ADRs to the Custodian.
Section 2.07. Exercise of Rights, Tender Offers, Etc. Upon receipt of
Proper Instructions, the Custodian shall: (a) deliver warrants, puts,
<PAGE>
calls, rights or similar securities to the issuer or trustee thereof (or to the
agent of such issuer or trustee) for the purpose of exercise or sale, provided
that the new securities, cash or other Assets, if any, acquired as a result of
such actions are to be delivered to the Custodian; and (b) deposit securities
upon invitations for tenders thereof, provided that the consideration for such
securities is to be paid or delivered to the Custodian, or the tendered
securities are to be returned to the Custodian. Notwithstanding any provision of
this Agreement to the contrary, the Custodian shall promptly notify the Fund in
writing of (i) any default in payment of funds on securities; (ii) any
securities that have matured, been called or redeemed; and (iii) to the extent
the Custodian has notice which is contained in services to which it normally
subscribes for such purposes, or actual knowledge if not contained in such
services, any other default involving securities; and all announcements of
defaults, bankruptcies, reorganizations, mergers, consolidations,
recapitalizations or rights or privileges to subscribe, convert, exchange, put,
redeem or tender securities held subject to this Agreement. The Custodian shall,
following receipt or knowledge, convey such information to the Fund in a timely
manner based upon the circumstances of each particular case. Whenever any such
rights or privileges exist, the Fund will, in a timely manner based upon the
circumstances of each particular case, provide the Custodian with Proper
Instructions. Absent the Custodian's timely receipt of Proper Instructions, the
Custodian shall not be liable for not taking any action or not exercising such
rights prior to their expiration unless such failure is due to Custodian's
failure to give timely notice to the Fund in accordance with this Section 2.07.
Section 2.08. Stock Dividends, Rights, Etc. The Custodian shall receive and
collect all stock dividends, rights and other items of like nature and, upon
receipt of Proper Instructions, take action with respect to the same as directed
in such Proper Instructions.
Section 2.09. Options. Upon receipt of Proper Instructions and in
accordance with the provisions of any agreement between the Custodian, any
registered broker-dealer and, if necessary, the Fund relating to compliance with
the rules of the Options Clearing Corporation (the "OCC") or of any registered
national securities exchange or similar organization(s), the Custodian shall:
(a) receive and retain confirmations or other documents, if any, evidencing the
purchase or writing of an option by the Fund; (b) deposit and maintain in a
segregated account, securities (either physically or by book-entry in a
Securities System), cash or other Assets; and (c) pay, release and/or transfer
such securities, cash or other Assets in accordance with any such agreement and
with notices or other communications evidencing the expiration, termination or
exercise of such options furnished by the OCC, the securities or options
exchange on which such options are traded or such other organization as may be
responsible for handling such option transactions. The Fund and the
broker-dealer shall be responsible for determining the sufficiency of assets
held in any segregated account established in compliance with applicable margin
maintenance requirements and the performance of other terms of any option
contract; provided, however, that the Custodian shall be liable for performance
of its duties under this Agreement and in accordance with Proper Instructions,
and shall be liable for performance of its duties under any other agreement
between the Custodian, any registered broker-dealer and, if necessary, the Fund.
Notwithstanding anything herein to the contrary, if the Fund issues Proper
Instructions to sell a naked option
<PAGE>
(including stock index options), then as part of the transaction, the Custodian,
the Fund and the broker-dealer shall have entered into a tri-party agreement, as
described above.
Section 2.10. Futures Contracts. Upon receipt of Proper Instructions, or
pursuant to the provisions of any futures margin procedural agreement among the
Fund, the Custodian and any futures commission merchant (a "Procedural
Agreement"), the Custodian shall: (a) receive and retain confirmations, if any
evidencing the purchase of or sale of a futures contract or an option on a
futures contract by the Fund; (b) deposit and maintain in a segregated account
cash, securities and other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written by the Fund, in accordance with the provisions of the
Commodity Futures Trading Commission and/or any commodity exchange or contract
market (such as the Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release assets from and/or transfer
assets into such margin accounts only in accordance with any such Procedural
Agreements. The Fund and such futures commission merchant shall be responsible
for determining the sufficiency of assets held in the segregated account in
compliance with applicable margin maintenance requirements and the performance
of any futures contract or option on a futures contract in accordance with its
terms; provided, however, that the Custodian shall be liable for performance of
its duties under this Agreement and in accordance with Proper Instructions, and
shall be liable for performance of its duties under any Procedural Agreement.
Section 2.11. Borrowing. Upon receipt of Proper Instructions, the Custodian
shall deliver securities of the Fund to lenders or their agents, or otherwise
establish a segregated account as agreed to by the Fund and the Custodian, as
collateral for borrowings effected by the Fund, provided that such borrowed
money is payable by the lender (a) to or upon the Custodian's order, as
Custodian for the Fund, and (b) concurrently with delivery of such securities.
Section 2.12. Interest Bearing Deposits. Upon receipt of Proper
Instructions directing the Custodian to purchase interest bearing fixed term and
call deposits (hereinafter referred to collectively, as "Interest Bearing
Deposits") for the account of the Fund, the Custodian shall purchase such
Interest Bearing Deposits in the name of the Fund with such banks or trust
companies (including the Custodian, any Subcustodian or any subsidiary or
affiliate of the Custodian) (hereinafter referred to as "Banking Institutions")
and in such amounts as the Fund may direct pursuant to Proper Instructions. Such
Interest Bearing Deposits may be denominated in U.S. Dollars or other
currencies, as the Fund may determine and direct pursuant to Proper
Instructions. The Custodian shall include in its records with respect to the
Assets of the Fund appropriate notation as to the amount and currency of each
such Interest Bearing Deposit, the accepting Banking Institution and all other
appropriate details, and shall retain such forms of advice or receipt evidencing
such account, if any, as may be forwarded to the Custodian by the Banking
Institution. The responsibilities of the Custodian to the Fund for Interest
Bearing Deposits accepted on the Custodian's books in the United States shall be
that of a U.S. bank for a similar deposit. With respect to Interest Bearing
Deposits other than those accepted on the Custodian's books, (a) the Custodian
shall
<PAGE>
be responsible for the collection of income as set forth in Section 2.15 and the
transmission of cash and instructions to and from such accounts; and (b) the
Custodian shall have no duty with respect to the selection of the Banking
Institution or, so long as the Custodian acts in accordance with Proper
Instructions and the terms and conditions of this Agreement, for the failure of
such Banking Institution to pay upon demand. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable actions as the Fund deems
necessary or appropriate to cause each such Interest Bearing Deposit account to
be insured to the maximum extent possible by all applicable deposit insurers
including, without limitation, the Federal Deposit Insurance Corporation.
Section 2.13. Foreign Exchange Transactions.
(a) Foreign Exchange Transactions Other than as Principal. Upon receipt of
Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may determine and direct pursuant to Proper
Instructions. The Fund accepts full responsibility for its use of third party
foreign exchange brokers (any dealer other than the Foreign Subcustodian) (as
hereinafter defined) and for execution of said foreign exchange contracts and
understands that the Fund shall be responsible for any and all costs and
interest charges which may be incurred as a result of the failure or delay of
its third party broker to deliver foreign exchange unless such loss, damage, or
expense is caused by, or results from the negligence, misfeasance or misconduct
of the Custodian. Notwithstanding the foregoing, the Custodian shall be
responsible for the transmission of cash and instructions to and from the
currency broker or Banking Institution with which the contract or option is
made, the safekeeping of all certificates and other documents and agreements
evidencing or relating to such foreign exchange transactions and the maintenance
of proper records as set forth in Section 2.25. The Custodian shall have no duty
with respect to the selection of the currency brokers or Banking Institutions
with which the Fund deals or, so long as the Custodian acts in accordance with
Proper Instructions, for the failure of such brokers or Banking Institutions to
comply with the terms of any contract or option.
(b) Foreign Exchange Contracts as Principal. The Custodian shall not be
obligated to enter into foreign exchange transactions as principal. However, if
the Custodian has made available to the Fund its services as a principal in
foreign exchange transactions, upon receipt of Proper Instructions, the
Custodian shall enter into foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with the Custodian as principal. The
Custodian shall be responsible for the selection of the currency brokers or
Banking Institutions and the failure of such currency brokers or Banking
Institutions to comply with the terms of any contract or option.
(c) Payments. Notwithstanding anything to the contrary contained herein,
upon receipt of Proper Instructions the Custodian may, in connection with a
foreign exchange contract, make free outgoing payments of cash in the form of
U.S. Dollars or foreign currency prior to receipt of confirmation of such
foreign exchange contract or confirmation that the
<PAGE>
countervalue currency completing such contract has been delivered or received.
Section 2.14. Securities Loans. Upon receipt of Proper Instructions, the
Custodian shall, in connection with loans of securities by the Fund, deliver
securities of the Fund to the borrower thereof and may, except as otherwise
provided below, deliver such securities prior to receipt of the collateral, if
any, for such borrowing; provided that, in cases of loans of securities secured
by cash collateral, the Custodian's instructions to the Securities System shall
require that the Securities System deliver the securities of the Fund to the
borrower thereof only upon receipt of the collateral for such borrowing. The
Custodian shall retain on the Fund's behalf the right to any dividends, interest
or distribution on such loaned securities and any other rights specified in
Proper Instructions. Upon receipt of Proper Instructions and the loaned
securities, the Custodian will release the collateral to the borrower.
Section 2.15. Collections. The Custodian shall: (a) collect amounts due and
payable to the Fund with respect to portfolio securities and other Assets; (b)
promptly credit to the account of the Fund all income and other payments
relating to portfolio securities and other Assets held by the Custodian
hereunder upon Custodian's receipt of such income or payments or as otherwise
agreed in writing by the Custodian and the Fund; (c) promptly endorse and
deliver any instruments required to effect such collection; and (d) promptly
execute ownership and other certificates and affidavits for all federal, state,
local and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio securities and other Assets, or in connection
with the transfer of such securities or other Assets; provided, however, that
with respect to portfolio securities registered in so-called street name, or
physical securities with variable interest rates, the Custodian shall use its
best efforts to collect amounts due and payable to the Fund. The Custodian shall
promptly notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian may agree in writing if any amount payable with
respect to portfolio securities or other Assets is not received by the Custodian
when due. The Custodian shall not be responsible for the collection of amounts
due and payable with respect to portfolio securities or other Assets that are in
default.
Section 2.16. Dividends, Distributions and Redemptions. To enable the Fund
to pay dividends or other distributions to shareholders of the Fund and to make
payment to shareholders who have requested repurchase or redemption of their
shares of the Fund (collectively, the "Shares"), the Custodian shall promptly
release cash or securities (a) in the case of cash, upon receipt of Proper
Instructions, to one or more Distribution Accounts (as hereinafter defined)
designated by the Fund in such Proper Instructions; or (b) in the case of
securities, upon the receipt of Special Instructions (as hereinafter defined) to
such entity or account designated by the Fund in such Special Instructions. For
purposes of this Agreement, a "Distribution Account" shall mean an account
established at a Banking Institution designated by the Fund in Special
Instructions.
Section 2.17. Proceeds from Shares Sold. The Custodian shall receive funds
representing cash payments received for Shares issued or sold from time to time
by the Fund, and shall promptly credit such funds to the account of the Fund.
The Custodian shall promptly notify the Fund of
<PAGE>
Custodian's receipt of cash in payment for Shares issued by the Fund by
facsimile transmission or in such other manner as the Fund and Custodian may
agree in writing. Upon receipt of Proper Instructions, the Custodian shall: (a)
deliver all federal funds received by the Custodian in payment for Shares in
payment for such investments as may be set forth in such Proper Instructions and
at a time agreed upon between the Custodian and the Fund; and (b) make federal
funds available to the Fund as of specified times agreed upon from time to time
by the Fund and the Custodian, in the amount of checks received in payment for
Shares which are deposited to the accounts of the Fund.
Section 2.18. Proxies, Notices, Etc. The Custodian shall deliver or cause
to be delivered to the Fund, in the most expeditious manner practicable, all
forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Proper Instructions, the Custodian shall execute and
deliver, or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as directed pursuant
to Proper Instructions, neither the Custodian nor any Subcustodian or nominee
shall vote upon any such securities, or execute any proxy to vote thereon, or
give any consent or take any other action with respect thereto. The Custodian
will not release the identity of the Fund to an issuer which requests such
information pursuant to the Shareholder Communications Act of 1985, for the
specific purpose of direct communications between such issuer and the Fund
unless the Fund directs the Custodian otherwise in writing.
Section 2.19. Bills and Other Disbursements. Upon receipt of Proper
Instructions, the Custodian shall pay or cause to be paid, all bills,
statements, or other obligations of the Fund.
Section 2.20. Nondiscretionary Functions. The Custodian shall attend to all
nondiscretionary details not specifically covered by this Agreement in
accordance with industry standards in connection with the sale, exchange,
substitution, purchase, transfer or other dealings with securities or other
Assets held by the Custodian, except as otherwise directed from time to time
pursuant to Proper Instructions.
Section 2.21. Bank Accounts.
(a) Accounts with the Custodian. The Custodian shall open and operate a
bank account or accounts (hereinafter referred to collectively, as "Bank
Accounts") on the books of the Custodian; provided that such Bank Account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
the Fund, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
(b) Deposit Insurance. Upon receipt of Proper Instructions, the Custodian
shall take such action as the Fund deems necessary or appropriate to cause each
deposit account established by the Custodian pursuant to this Section 2.21 to be
insured to the maximum extent possible by all applicable deposit insurers,
including, without limitation, the Federal Deposit Insurance Corporation.
<PAGE>
Section 2.22. Deposit of Fund Assets in Securities Systems. The Custodian
may deposit and/or maintain domestic securities owned by the Fund in: (a) The
Depository Trust Company; (b) the Participants Trust Company; (c) any book-entry
system as provided in (i) Subpart O of Treasury Circular No. 300, 31 CFR 306.115
(ii) Subpart B of Treasury Circular Public Debt Series No. 27-76, 31 CFR 350.2,
or (iii) the book-entry regulations of federal agencies substantially in the
form of 31 CFR 306.115; or (d) any other domestic clearing agency registered
with the Securities and Exchange Commission ("SEC") under Section 17A of the
Securities Exchange Act of 1934 (or as may otherwise be authorized by the
Securities and Exchange Commission to serve in the capacity of depository or
clearing agent for the securities or other assets of investment companies) which
acts as a securities depository; provided, however, that no such deposit or
maintenance of securities may be made except with respect to those agencies and
entities the use of which the Fund has previously approved by Special
Instructions (each of the foregoing being referred to in this Agreement as a
"Securities System"). Use of a Securities System shall be in accordance with
applicable Federal Reserve Board and SEC rules and regulations, if any, and
subject to the following provisions:
(A) The Custodian or any Subcustodian may deposit and/or maintain
securities held hereunder in a Securities System, provided that such securities
are represented in an account ("Account") of the Custodian in the Securities
System which Account shall not contain any assets of the Custodian other than
assets held as fiduciary, custodian or otherwise for customers.
(B) The books and records of the Custodian shall at all times identify
those securities belonging to the Fund which are maintained in a Securities
System.
(C) The Custodian shall pay for securities purchased for the account of the
Fund only upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account of the Custodian, and (ii) the
making of an entry on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund only upon (iii) receipt of advice from the
Securities System that payment for such securities has been transferred to the
Account of the Custodian, and (iv) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System relating to transfers of
securities for the account of the Fund shall identify the Fund, and shall be
maintained for the Fund by the Custodian. The Custodian shall deliver to the
Fund on the next succeeding business day daily transaction reports which shall
include each day's transactions in the Securities System for the account of the
Fund. Such transaction reports shall be delivered to the Fund or any agent
designated by the Fund pursuant to Proper Instructions, by computer or in such
other manner as the Fund and Custodian may agree in writing.
(D) The Custodian shall, if requested by the Fund pursuant to Proper
Instructions, provide the Fund with all reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Securities System.
<PAGE>
(E) Upon receipt of Special Instructions, the Custodian shall terminate the
use of any Securities System (except the federal book-entry system) on behalf of
the Fund as promptly as practicable and shall take all actions reasonably
practicable to safeguard the securities of the Fund maintained with such
Securities System.
Section 2.23. Other Transfers. Upon receipt of Special Instructions, the
Custodian shall make such other dispositions of securities, funds, or other
Assets of the Fund in a manner or for purposes other than as expressly set forth
in this Agreement, provided that the Special Instructions relating to such
disposition shall include a statement of the purposes for which the delivery is
to be made, the amount of funds, Assets and/or securities to be delivered and
the name of the person or persons to whom delivery is to be made, and shall
otherwise comply with the provisions of Sections 3.01 and 3.03 hereof.
Section 2.24. Establishment of Segregated Account. Upon receipt of Proper
Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other Assets of the
Fund, including securities maintained by the Custodian in a Securities System
pursuant to Section 2.22 hereof, said account or accounts to be maintained: (a)
for the purposes set forth in Section 2.09, 2.10 and 2.11 hereof; (b) for the
purposes of compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as may be set forth, from time to
time, in Special Instructions. The Custodian shall not be responsible for the
determination of the type or amount of Assets to be held in any segregated
account referred to in this Section 2.24.
Section 2.25. Custodian's Books and Records. The Custodian shall provide
any assistance reasonably requested by the Fund in the preparation of reports to
Fund shareholders and others, audits of accounts, and other ministerial matters
of like nature. The Custodian shall maintain complete and accurate records with
respect to securities and other Assets held for the accounts of the Fund as
required by the rules and regulations of the SEC applicable to investment
companies registered under the 1940 Act, including, but not limited to: (a)
journals or other records of original entry containing a detailed and itemized
daily record of all receipts and deliveries of securities (including certificate
and transaction identification numbers, if any), and all receipts and
disbursements of cash; (b) ledgers or other records reflecting (i) securities in
transfer, (ii) securities in physical possession, (iii) securities borrowed,
loaned or collateralizing obligations of the Fund, (iv) monies borrowed and
monies loaned (together with a record of the collateral therefor and
substitutions of such collateral), and (v) dividends and interest received; and
(c) cancelled checks and bank records relating thereto. The Custodian shall keep
such other books and records of the Fund as the Fund shall reasonably request.
All such books and records maintained by the Custodian shall be maintained in a
form acceptable to the Fund and in compliance with the rules and regulations of
the SEC, including, but not limited to, books and records required to be
maintained by Section 31(a) of the 1940 Act and the rules and regulations from
time to time adopted thereunder. All books and
<PAGE>
records maintained by the Custodian pursuant to this Agreement shall at all
times be the property of the Fund and shall be available during normal business
hours for inspection and use by the Fund and its agents, including without
limitation, its independent certified public accountants. Notwithstanding the
preceding sentence, the Funds shall not take any actions or cause the Custodian
to take any actions which would knowingly cause, either directly or indirectly,
the Custodian to violate any applicable laws, regulations or orders.
Notwithstanding the provisions of this Section 2.25, in the event the Fund
purchases cash, securities and other Assets requiring the use of a Domestic
Subcustodian or Foreign Sub-Subcustodian, the Custodian shall be entitled to
rely upon and use the books, records and accountings of the Domestic
Subcustodian as its means of accounting to the Fund for all cash, securities and
other Assets deposited with such entities; provided however, that such books,
records and accountings on which the Bank may rely must be maintained in the
United States by such Domestic Subcustodian and, provided further, that any
agreement between the Custodian and such Domestic Subcustodian must state that
the Domestic Subcustodian agrees to make any records available upon request and
preserve, for the periods described in Rule 31a-2 of the 1940 Act, the records
required to be maintained by Rule 31a-1 of the 1940 Act. In no event shall the
Custodian be entitled to rely upon and use books, records and accountings which
are maintained outside of the United States.
Section 2.26. Opinion of Fund's Independent Certified Public Accountants.
The Custodian shall take all reasonable action as the Fund may request to obtain
from year to year favorable opinions from the Fund's independent certified
public accountants with respect to the Custodian's activities hereunder in
connection with the preparation of the Fund's Form N-1A and the Fund's Form
N-SAR or other periodic reports to the SEC and with respect to any other
requirements of the SEC.
Section 2.27. Reports by Independent Certified Public Accountants. At the
request of the Fund, the Custodian shall deliver to the Fund a written report
prepared by the Custodian's independent certified public accountants with
respect to the services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
assets, including cash, securities and other assets deposited and/or maintained
in a Securities System or with a Subcustodian. Such report shall be of
sufficient scope and in sufficient detail as may reasonably be required by the
Fund and as may reasonably be obtained by the Custodian.
Section 2.28. Overdraft Facility. In the event that the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its sole discretion, provide an
overdraft (an "Overdraft") to the Fund in an amount sufficient to allow the
completion of such payment. Any Overdraft provided hereunder: (a) shall be
payable on the next business day, unless otherwise agreed by the Fund and the
Custodian; and (b) shall accrue interest from the date of the Overdraft to the
date of payment in full by the Fund at a rate agreed upon in writing, from time
to time, by the Custodian and the Fund. The purpose of such Overdrafts is to
temporarily finance extraordinary or emergency expenses not reasonably
foreseeable by the Fund. The Custodian
<PAGE>
shall promptly notify the Fund in writing ("Overdraft Notice") of any Overdraft
by facsimile transmission or in such other manner as the Fund and the Custodian
may agree in writing. The Custodian shall have a right of set-off against all
Assets (except for Assets held in a segregated margin account or otherwise
pledged in connection with options or futures contracts held for the benefit of
the Fund and for Assets allocated to any other Overdraft or loan made
hereunder); provided, however, the Custodian shall promptly notify the Fund in
writing of any intent to exercise a right of set-off against Assets hereunder
and shall not exercise any such right of set-off against Assets hereunder unless
and until the Fund has failed to pay (within ten (10) days after the Fund's
receipt of such notice of intent to exercise a right of set-off), any Overdraft,
together with all accrued interest thereon. Notwithstanding the provisions of
any applicable law, including, without limitation, the Uniform Commercial Code,
the only rights or remedies which the Custodian is entitled to with respect to
Overdrafts is the right of set-off granted herein.
<PAGE>
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
Section 3.01. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used herein, the term "Proper Instructions"
shall mean: (i) a tested telex, a written (including, without limitation,
facsimile transmission) request, direction, instruction or certification signed
or initialed by or on behalf of the Fund by two or more Authorized Persons (as
hereinafter defined); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) by or on behalf of the Fund by one or more Authorized
Persons; provided, however, that communications of the types described in
clauses (ii) and (iii) above purporting to be given by an Authorized Person
shall be considered Proper Instructions only if the Custodian reasonably
believes such communications to have been given by an Authorized Person with
respect to the transaction involved. Proper Instructions in the form of oral
communications shall be confirmed by the Fund by tested telex or in writing in
the manner set forth in clause (i) above, but the lack of such confirmation
shall in no way affect any action taken by the Custodian in reliance upon such
oral instructions prior to the Custodian's receipt of such confirmation. The
Fund and the Custodian are hereby authorized to record any and all telephonic or
other oral instructions communicated to the Custodian. Proper Instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
(b) Special Instructions. As used herein, the term "Special Instructions"
shall mean Proper Instructions countersigned or confirmed in writing by the
Treasurer or any Assistant Treasurer of the Fund or any other person designated
by the Treasurer of the Fund in writing, which countersignature or confirmation
shall be (i) included on the same instrument containing the Proper Instructions
or on a separate instrument relating thereto, and (ii) delivered by hand, by
facsimile transmission or in such other manner as the Fund and the Custodian
agree in writing.
(c) Address for Proper Instructions and Special Instructions. Proper
Instructions and Special Instructions shall be delivered to the Custodian at the
address and/or telephone, telecopy or telex number agreed upon from time to time
by the Custodian and the Fund.
Section 3.02. Authorized Persons. Concurrently with the execution of this
Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian, duly certified as appropriate by a Treasurer or
Assistant Treasurer of the Fund, a certificate setting forth: (a) the names,
titles, signatures, and scope of authority of all persons authorized to give
Proper Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of the Fund (collectively, the "Authorized
Persons" and individually, an "Authorized Person"); and (b) the names, titles
and signatures of those persons authorized to issue Special Instructions. Such
certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and shall be considered to be in full
force and effect until delivery to the Custodian of a similar certificate to the
contrary. Upon
<PAGE>
delivery of a certificate which deletes or does not include the name(s) of a
person previously authorized to give Proper Instructions or to issue Special
Instructions, such persons shall no longer be considered an Authorized Person or
authorized to issue Special Instructions.
Section 3.03. Persons Having Access to Assets of the Portfolios.
Notwithstanding anything to the contrary contained in this Agreement, no
Authorized Person, Director, officer, employee or agent of the Fund shall have
physical access to the Assets of the Fund held by the Custodian nor shall the
Custodian deliver any Assets of the Fund to an account of such person; provided,
however, that nothing in this Section 3.03 shall prohibit (a) any Authorized
Person from giving Proper Instructions, or any person authorized to issue
Special Instructions from issuing Special Instructions, so long as such action
does not result in delivery of or access to Assets of the Fund prohibited by
this Section 3.03; or (b) the Fund's independent certified public accountants
from examining or reviewing the Assets of the Fund held by the Custodian. The
Fund will deliver from time to time a written certificate executed by two
Authorized Persons identifying such Authorized Persons, Directors, officers,
employees and agents of the Fund. Notwithstanding the foregoing, to the extent
that the person acting on behalf of the Custodian in making such delivery has
actual knowledge that any person is an Authorized Person, Director, officer,
employee or agent of the Fund, the Custodian will comply with this Section 3.03
as if the name of such Authorized Person, Director, officer, employee or agent
had been contained in a written certificate provided pursuant to this Section
3.03.
Section 3.04. Actions of Custodian Based on Proper Instructions and Special
Instructions. So long as and to the extent that the Custodian acts in accordance
with (a) Proper Instructions or Special Instructions, as the case may be, and
(b) the terms of this Agreement, the Custodian shall not be responsible for the
title, validity or genuineness of any property, or evidence of title thereof,
received by it or delivered by it pursuant to this Agreement.
ARTICLE IV
SUBCUSTODIANS
From time to time, in accordance with the relevant provisions of this
Agreement, (i) the Custodian may appoint one or more Domestic Subcustodians and
Special Subcustodians (each, as hereinafter defined) to act on behalf of the
Fund; and (ii) any Domestic Subcustodian so appointed and which has been
designated as a Foreign Custody Manager (as such term is defined in Rule 17f-5
of the 1940 Act) by the Custodian and approved by the Fund's board ("Approved
Foreign Custody Manager") may appoint a Foreign Sub-Subcustodian or Interim
Sub-Subcustodian (as each are hereinafter defined) in accordance with this
Article IV; provided that the Fund's board also has approved the agreement
between the Custodian and the Foreign Custody Manager specifying the Foreign
Custody Manager's duties ("Delegation Agreement"). For purposes of this
Agreement, all Domestic Subcustodians, Special Subcustodians, Foreign
Sub-Subcustodians and Interim Sub-Subcustodians shall be referred to
collectively as "Subcustodians".
Section 4.01. Domestic Subcustodians. The Custodian may, at any time and
from time to time, appoint any bank as defined in Section 2(a)(5) of the 1940
Act or any trust company or other entity any of which meet requirements of a
custodian under Section 17(f) of the 1940 Act and the
<PAGE>
rules and regulations thereunder, to act as agent for the Custodian on behalf of
the Fund as a subcustodian for purposes of holding cash, securities and other
Assets of the Fund and performing other functions of the Custodian within the
United States (a "Domestic Subcustodian"); provided, that, the Custodian shall
notify the Fund in writing of the identity and qualifications of any proposed
Domestic Subcustodian at least sixty (60) days prior to the desired appointment
of such Domestic Subcustodian, and the Fund will notify the Custodian, in
writing signed by two or more Authorized Persons, of approval or disapproval of
the appointment of the proposed Domestic Subcustodian; and provided, further,
that the Custodian may not appoint any such Domestic Subcustodian without such
prior written approval of the Fund by such Authorized Persons. Each such duly
approved Domestic Subcustodian and the countries where, Foreign
Sub-Subcustodians and the securities depositories and clearing agencies through
which they may hold securities and other Assets of the Fund shall be as agreed
upon by the parties hereto in writing, from time to time in accordance with the
provisions of Section 9.04 hereof (the "Subcustodian List").
Section 4.02. Foreign Sub-Subcustodians and Interim Sub-Subcustodians.
(a) Foreign Sub-Subcustodians. Provided that the Custodian of a Domestic
Subcustodian is an Approved Foreign Custody Manager, the Custodian or any such
Domestic Subcustodian, as applicable, may appoint any (1)(a) "Qualified Foreign
Bank" (as such term is defined in Rule 17f-5) meeting the requirements of an
"Eligible Foreign Custodian" (as such term is defined in Rule 17f-5) or by SEC
order exempt therefrom; (b) majority-owned direct or indirect subsidiary of a
"U.S. bank" (as such term is defined in Rule 17f-5) or bank holding company
meeting the requirements of an Eligible Foreign Custodian or exempt by SEC order
therefrom; or (c) any bank (as such term is defined in Section 2(a)(5) of the
1940 Act) meeting the requirements of a custodian under Section 17(f) of the
1940 Act and the rules and regulations thereunder (each a "Foreign
Sub-Subcustodian") or (2) any "Securities Depository" (as such term is defined
in Rule 17f-5) or clearing agency meeting the requirements of an Eligible
Foreign Custodian or exempt by SEC order therefrom ("Securities Depositories and
Clearing Agencies"), provided that the Foreign Custody Manager's appointments of
such Eligible Foreign Custodians shall at all times be governed by the
Delegation Agreement.
(b) Interim Sub-Subcustodians. Notwithstanding the foregoing, in the event
that the Fund shall invest in a security or other Asset to be held in a country
in which the Foreign Custody Manager has not appointed an Eligible Foreign
Custodian, the Custodian shall, or shall cause the Domestic Subcustodian to,
promptly notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian shall agree in writing of the unavailability of
an approved Foreign Sub-Subcustodian in such country; and upon the receipt of
Special Instructions, the Custodian shall, or shall cause the Domestic
Subcustodian to, appoint or approve any Person (as hereinafter defined)
designated by the Fund in such Special Instructions, to hold such security or
other Asset. (Any Person appointed or approved as a sub-subcustodian pursuant to
this Section 4.02(b) is hereinafter referred to as an "Interim
Sub-Subcustodian.")
<PAGE>
Section 4.03. Special Subcustodians. Upon receipt of Special Instructions,
the Custodian shall, on behalf of the Fund, appoint one or more banks, trust
companies or other entities designated in such Special Instructions to act as a
subcustodian for the purpose of (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities, (ii) providing
depository and clearing agency services with respect to certain variable rate
demand note securities; and (iii) effecting any other transactions designated by
the Fund in Special Instructions. (Each such designated subcustodian is
hereinafter referred to as a "Special Subcustodian.") Each such duly appointed
Special Subcustodian shall be listed on the Subcustodian List. In connection
with the appointment of any Special Subcustodian, the Custodian shall enter into
a subcustodian agreement with the Special Subcustodian in form and substance
approved by the Fund, provided that such agreement shall in all events comply
with the provisions of the 1940 Act and the rules and regulations thereunder and
the terms and provisions of this Agreement. The Custodian shall not amend any
subcustodian agreement entered into with a Special Subcustodian, or agree to
change or permit any changes thereunder, or waive any rights under such
agreement, except upon prior approval pursuant to Special Instructions.
Section 4.04. Termination of a Subcustodian. The Custodian shall (i) cause
each Domestic Subcustodian to, and (ii) use its best efforts to cause each
Interim Sub-Subcustodian and Special Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Domestic Subcustodian and Special
Subcustodian or between the Domestic Subcustodian and a Foreign Sub-Subcustodian
or Interim Sub-Subcustodian. In the event that the Custodian is unable to cause
such subcustodian or sub-subcustodian to fully perform its obligations
thereunder, the Custodian shall promptly notify the Fund in writing and
forthwith, upon the receipt of Special Instructions, terminate or cause the
termination of such Subcustodian or Sub-Subcustodian with respect to the Fund
and, if necessary or desirable, appoint or cause the appointment of a
replacement Subcustodian or Sub-Subcustodian in accordance with the provisions
of this Article IV. In addition to the foregoing, the Custodian (A) may, at any
time in its discretion, upon written notification to the Fund, terminate any
Domestic Subcustodian which is not an approved Foreign Custody Manager, and (B)
shall, upon receipt of Special Instructions, terminate any Special Subcustodian
or Domestic Subcustodian which is an Approved Foreign Custody Manager with
respect to the Fund, in accordance with the termination provisions under the
applicable subcustodian agreement, and (C) shall, upon receipt of Special
Instructions, cause the Domestic Subcustodian to terminate any Foreign
Sub-Subcustodian or Interim Sub-Subcustodian as to its use of such entities with
respect to the Fund, in accordance with the termination provisions under the
applicable sub-subcustodian agreement.
Section 4.05. Certification Regarding Foreign Sub-Subcustodians. Upon
request of the Fund, the Custodian shall deliver to the Fund a certificate
stating: (i) the identity of each Foreign Sub-Subcustodian then acting on behalf
of the Custodian; (ii) the countries in which and the Securities Depositories
and Clearing Agents through which each such Foreign Sub-Subcustodian is then
holding cash, securities and other Assets of the Fund; and (iii) such other
information as may be requested by the Fund to ensure compliance with rules and
regulations under the 1940 Act.
<PAGE>
ARTICLE V
STANDARD OF CARE: INDEMNIFICATION
Section 5.01. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise reasonable care
and diligence in carrying out all of its duties and obligations under this
Agreement, and shall be liable to the Fund for all loss, damage and expense
suffered or incurred by the Fund resulting from the failure of the Custodian to
exercise such reasonable care and diligence.
(b) Actions Prohibited by Applicable Law, Etc. In no event shall the
Custodian incur liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities Depository or Clearing Agency
utilized by any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement provides
shall be performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United States of
America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction (and the Custodian
nor any other Person shall not be obligated to take any action contrary
thereto); or (ii) any act of God or war or other similar circumstance beyond the
control of the Custodian unless in each case, such delay or nonperformance is
caused by the negligence, misfeasance or misconduct of the Custodian.
(c) Mitigation by Custodian. Upon the occurrence of any event which causes
or may cause any loss, damage or expense to the Fund, (i) the Custodian shall,
(ii) the Custodian shall cause any applicable Domestic Subcustodian or Foreign
Sub-Subcustodian to, and (iii) the Custodian shall use its best efforts to cause
any applicable Interim Sub-Subcustodian or Special Subcustodian to, use all
commercially reasonable efforts and take all reasonable steps under the
circumstances to mitigate the effects of such event and to avoid continuing harm
to the Fund.
(d) Advice of Counsel. The Custodian shall be without liability for any
action reasonably taken or omitted in good faith pursuant to the written advise
of (i) counsel for the Fund, or (ii) at the expense of the Custodian, such other
counsel as the Fund and the Custodian may agree upon in writing; provided,
however, with respect to the performance of any action or omission of any action
upon such advice, the Custodian shall be required to conform to the standard of
care set forth in Section 5.01 (a).
(e) Expenses of the Fund. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all expenses
incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim; provided however, that the Fund has
recovered from the Custodian for such claim.
<PAGE>
(f) Liability for Past Records. The Custodian shall have no liability in
respect of any loss, damage or expense suffered by the Fund, insofar as such
loss, damage or expense arises from the performance of the Custodian in reliance
upon records that were maintained for the Fund by entities other than the
Custodian prior to the Custodian's employment hereunder which the Custodian has
no reason to believe are inaccurate or incomplete after reasonable inquiry.
Section 5.02. Liability of the Custodian for Actions of Other Persons.
(a) Domestic Subcustodian and Foreign Sub-Subcustodian. The Custodian shall
be liable for the actions or omissions of any Domestic Subcustodian or Foreign
Sub-Subcustodian (excluding any Securities Depository or Clearing Agency
appointed by them) to the same extent as if such actions or omissions were
performed by the Custodian itself. In the event of any loss, damage or expense
suffered or incurred by the Fund caused by or resulting from the actions or
omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian for which the
Custodian would otherwise be liable, the Custodian shall promptly reimburse the
Fund in the amount of any such loss, damage or expense.
(b) Special Subcustodians, Interim Sub-Subcustodians, Security Systems,
Securities Depositories and Clearing Agencies. The Custodian shall not be liable
to the Fund for any loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of a Special Subcustodian, Interim
Sub-Subcustodian, Securities System, Securities Depository or Clearing Agency
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, in
the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against such Special
Subcustodian, Interim Sub-Subcustodian, Security System, Securities Depository
or Clearing Agency to protect the interest of the Fund.
(c) Reimbursement of Expenses. The Fund agrees to reimburse the Custodian
for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under Section 5.01(c) as it
relates to Interim Sub-Subcustodians and Special Subcustodians and 5.02(b);
provided however, that such reimbursement shall not apply to expenses occasioned
by or resulting from the negligence, misfeasance or misconduct of the Custodian.
Section 5.03. Indemnification by Fund.
(a) Indemnification Obligations of Fund. Subject to the limitations set
forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Custodian or its nominee
caused by or arising from actions taken by the Custodian, its employees or
agents in the performance of its duties and obligations under this Agreement;
provided, however, that such indemnity shall not apply to loss, damage and
expense occasioned by or resulting from the negligence, misfeasance or
misconduct of the Custodian or its nominee. In addition, the Fund agrees to
indemnify any Person against liability incurred by reason of taxes assessed to
such Person resulting from the fact that
<PAGE>
securities and other property of the Fund are registered in the name of such
Person in accordance with the provisions of this Agreement; provided, however,
that in no event shall such indemnification be applicable to income, franchise
or similar taxes which may be imposed or assessed against any Person. It is also
understood that the Fund agrees to indemnify and hold harmless the Custodian and
its nominee for any loss arising from a foreign currency transaction or
contract, where the loss results from a Sovereign Risk (as hereinafter defined)
or where any Person maintaining securities, currencies, deposits or other Assets
of the Fund in connection with any such transactions has exercised reasonable
care maintaining such property or in connection with any such transaction
involving such Assets. A "Sovereign Risk" shall mean nationalization,
expropriation, devaluation, revaluation, confiscation, seizure, cancellation,
destruction or similar action by any governmental authority, de facto or de
jure; or enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting the Fund's property; or acts of war,
terrorism, insurrection or revolution.
(b) Notice of Litigation. Right to Prosecute, Etc. The Fund shall not be
liable for indemnification under this Section 5.03 unless a Person shall have
promptly notified the Fund in writing of the commencement of any litigation or
proceeding brought against the Custodian or other Person in respect of which
indemnity may be sought under this Section 5.03. With respect to claims in such
litigation or proceedings for which indemnity by the Fund may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Fund shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Fund may be subject to an indemnification obligation;
provided, however, a Person shall be entitled to participate in (but not
control) at its own cost and expense, the defense of any such litigation or
proceeding if the Fund has not acknowledged in writing it obligation to
indemnify the Person with respect to such litigation or proceeding. If the Fund
is not permitted to participate or control such litigation or proceeding under
applicable law or by a ruling of a court of competent jurisdiction, or if the
Fund chooses not to so participate, the Custodian or other Person shall not
consent to the entry of any judgment or enter into any settlement in any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment, and without the Fund's prior written consent which
consent shall not be unreasonably withheld or delayed. All Persons shall submit
written evidence to the Fund with respect to any cost or expense for which they
are seeking indemnification in such form and detail as the Fund may reasonably
request.
Section 5.04. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its duty
generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund and the Fund agrees to indemnify the Custodian and its
nominees, for any loss, damage or expense suffered or incurred by the Custodian
and its nominees arising out of any violation of any investment or other
limitation to which the Fund is subject except for violations of which the
Custodian has actual knowledge. For purposes of this Section 5.04 the term
"actual knowledge" shall mean knowledge gained
<PAGE>
by the Custodian by means other than from any prospectus published by the Fund
or contained in any filing by the Fund with the SEC.
Section 5.05. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Fund by such Subcustodian, Securities System or other Person, which
the Custodian may have as a consequence of any such loss, damage or expense, if
and to the extent that the Fund has not been made whole for any such loss,
expense or damage. If the Custodian makes the Fund whole for any such loss,
expense or damage, the Custodian shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Fund's election to enforce any rights of the Custodian under this Section 5.05,
the Fund shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Custodian in respect of the loss, damage or
expense incurred by the Fund; provided that, so long as the Fund has
acknowledged in writing its obligation to indemnify the Custodian under Section
5.03 hereof with respect to such claim, the Fund shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Fund without the Custodian's consent and
provided further, that if the Fund has not made an acknowledgement of its
obligation to indemnify, the Fund shall not settle, compromise or terminate any
such action or proceeding without the written consent of the Custodian, which
consent shall not be unreasonably withheld or delayed. The Custodian agrees to
cooperate with the Fund and take all actions reasonably requested by the Fund in
connection with the Fund's enforcement of any rights of the Custodian. Nothing
contained in this Section 5.05 shall be construed as an obligation of the Fund
to enforce the Custodian's rights. The Fund agrees to reimburse the Custodian
for out-of-pocket expenses incurred by it in connection with the fulfillment of
its obligations under this Section 5.05; provided, however, that such
reimbursement shall not apply to expenses occasioned by or resulting from the
negligence, misfeasance or misconduct of the Custodian.
Section 5.06. Indemnification by Custodian.
(a) Indemnification Obligations of Custodian. Subject to the limitations
set forth in this Agreement and in addition to the reimbursement obligations
provided in Section 5.02(a), the Custodian agrees to indemnify and hold harmless
the Fund and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Fund or its nominee
caused by or arising from the failure of the Custodian, its nominee, employees
or agents to comply with the terms or conditions of this Agreement or arising
out of the negligence, misfeasance or misconduct of the Custodian or its
nominee.
(b) Notice of Litigation, Right to Prosecute, Etc. The Custodian shall not
be liable for indemnification under this Section 5.06 unless the Fund shall have
promptly notified the Custodian in writing of the commencement of any litigation
or proceeding brought against the Fund in respect of which indemnity may be
sought under this Section 5.06. With respect to claims in such litigation or
proceedings for which indemnity by the Custodian may be sought and subject to
applicable law and the ruling of
<PAGE>
any court of competent jurisdiction, the Custodian shall be entitled to
participate in any such litigation or proceeding with counsel of its choice at
its own expense in respect of that portion of the litigation for which the
Custodian may be subject to an indemnification obligation; provided, however,
the Fund shall be entitled to participate in (but not control) at its own cost
and expense, the defense of any such litigation or proceeding if the Custodian
has not acknowledged in writing its obligation to indemnify the Fund with
respect to such litigation or proceeding. If the Custodian is not permitted to
participate or control such litigation or proceeding under applicable law or by
a ruling of a court of competent jurisdiction, or if the Custodian chooses not
to so participate, the Fund shall not consent to the entry of any judgement or
enter into any settlement in any such litigation or proceeding without providing
the Custodian with adequate notice of any such settlement or judgement, and
without the Custodian's prior written consent which consent shall not be
unreasonably withheld or delayed. The Fund shall submit written evidence to the
Custodian with respect to any cost or expense for which it is seeking
indemnification in such form and detail as the Custodian may reasonably request.
Section 5.07. Custodian's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Custodian shall have, at its election upon
reasonable notice to the Fund, the right to enforce, to the extent permitted by
any applicable agreement and applicable law, the Fund's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Custodian by such Subcustodian, Securities System or other Person,
which the Fund may have as a consequence of any such loss, damage or expense, if
and to the extent that the Custodian has not been made whole for any such loss,
expense or damage. If the Fund makes the Custodian whole for any such loss,
expense or damage, the Fund shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Custodian's election to enforce any rights of the Fund under this Section 5.07,
the Custodian shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Fund in respect of the loss, damage and expense
incurred by the Custodian; provided that, so long as the Custodian has
acknowledged in writing its obligation to indemnify the Fund under Section 5.06
hereof with respect to such claim, the Custodian shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Custodian without the Fund's consent and
provided further, that if the Custodian has not made an acknowledgement of its
obligation to indemnify, the Custodian shall not settle, compromise or terminate
any such action or proceeding without the written consent of the Fund, which
consent shall not be unreasonably withheld or delayed. The Fund agrees to
cooperate with the Custodian and take all actions reasonably requested by the
Custodian in connection with the Custodian's enforcement of any rights of the
Fund. Nothing contained in this Section 5.07 shall be construed as an obligation
of the Custodian to enforce the Fund's rights. The Custodian agrees to reimburse
the Fund for out-of-pocket expenses incurred by it in connection with the
fulfillment of its obligations under this Section 5.07; provided, however, that
such reimbursement shall not apply to expenses occasioned by or resulting from
the negligence, misfeasance or misconduct of the Fund.
ARTICLE VI
COMPENSATION
<PAGE>
For the initial three year period beginning on the effective date of this
Agreement, the Fund shall compensate the Custodian in the amount and at the
times specified in Appendix "B" attached hereto. Thereafter, the Fund shall
compensate the Custodian in the amount, and at times, as may be agreed upon in
writing, from time to time, by the Custodian and the Fund.
ARTICLE VII
TERMINATION
This Agreement shall continue in full force and effect until the first to
occur of: (a) termination by the Custodian by an instrument in writing delivered
or mailed (certified mail, return receipt requested) to the Fund, such
termination to take effect not sooner than ninety (90) days after the date of
such delivery or receipt; (b) termination by the Fund by an instrument in
writing delivered or mailed (certified mail, return receipt requested) to the
Custodian, such termination to take effect not sooner than ninety (90) days
after the date of such delivery or receipt; or (c) termination by the Fund by an
instrument in writing delivered to the Custodian, based upon the Fund's
determination that there is reasonable basis to conclude that the Custodian is
insolvent or that the financial condition of the Custodian is deteriorating in
any material respect, in which case termination shall take effect upon the
Custodian's receipt of such notice or at such later time as the Fund shall
designate. In the event of termination pursuant to this Article VII, the Fund
shall make payment of all accrued fees and unreimbursed expenses within a
reasonable time following termination and delivery of a statement to the Fund
setting forth such fees and expenses. The Fund shall identify in any notice of
termination a successor custodian to which the cash, securities and other Assets
of the Fund shall, upon termination of this Agreement, be delivered. In the
event that securities and other Assets remain in the possession of the Custodian
after the date of termination hereof owing to failure of the Fund to appoint a
successor custodian, the Custodian shall be entitled to compensation for its
services in accordance with the fee schedule most recently in effect, for such
period as the Custodian retains possession of such securities and other Assets,
and the provisions of this Agreement relating to the duties and obligations of
the Custodian and the Fund shall remain in full force and effect for such
period. In the event of the appointment of a successor custodian, the cash,
securities and other Assets owned by the Fund and held by the Custodian, any
Subcustodian or nominee shall be delivered, at the terminating party's expense,
to the successor custodian; and the Custodian agrees to cooperate with the Fund
in the execution of documents and performance of other actions necessary or
desirable in order to substitute the successor custodian for the Custodian under
this Agreement.
ARTICLE VIII
DEFINED TERMS
The following terms are defined in the following sections:
<TABLE>
<CAPTION>
Term Section
<S> <C>
Account 2.22(A)
ADRs 2.06
Approved Foreign Custody Manager Article IV
Assets Article I
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Authorized Person 3.02
Banking Institution 2.12
Bank Accounts 2.21
Clearing Agency 4.02(a)
Delegation Agreement Article IV
Distribution Account 2.16
Domestic Subcustodian 4.01
Eligible Foreign Custodian 4.02(a)
Foreign Sub-Subcustodian 4.02(a)
Institutional Client 2.03
Interest Bearing Deposit 2.12
Interim Sub-Subcustodian 4.02(b)
OCC 2.09
Overdraft 2.28
Overdraft Notice 2.28
Person 5.01(b)
Procedural Agreement 2.10
Proper Instruction 3.01(a)
SEC 2.22
Securities Depositories 4.02(a)
Securities System 2.22
Shares 2.16
Sovereign Risk 5.03(a)
Special Instruction 3.01(b)
Special Subcustodian 4.03
Subcustodian Article IV
1940 Act Preamble
</TABLE>
ARTICLE IX
MISCELLANEOUS
Section 9.01. Execution of Documents, Etc.
(a) Actions by the Fund. Upon request, the Fund shall execute and deliver
to the Custodian such proxies, powers of attorney or other instruments as may be
reasonable and necessary or desirable in connection with the performance by the
Custodian or any Subcustodian of their respective obligations under this
Agreement or any applicable subcustodian agreement, provided that the exercise
by the Custodian or any Subcustodian of any such rights shall in all events be
in compliance with the terms of this Agreement.
(b) Actions by Custodian. Upon receipt of Proper Instructions, the
Custodian shall execute and deliver to the Fund or to such other parties as the
Fund may designate in such Proper Instructions, all such documents, instruments
or agreements as may be reasonable and necessary or desirable in order to
effectuate any of the transactions contemplated hereby and designated therein.
Section 9.02. Representations and Warranties.
(a) Representations and Warranties of the Fund. The Fund hereby represents
and warrants that each of the following shall be true, correct and complete as
of the date of execution of this Agreement and, unless notice to the contrary is
provided by the Fund to the Custodian, at all times during the term of this
Agreement: (i) the Fund is duly organized
<PAGE>
under the laws of its jurisdiction of organization and is registered as an
open-end management investment company under the 1940 Act or is a series of
portfolio of such entity; and (ii) the execution, delivery and performance by
the Fund of this Agreement are (w) within its power, (x) have been duly
authorized by all necessary action, and (y) will not (A) contribute to or result
in a breach of or default under or conflict with any existing law, order,
regulation or ruling of any governmental or regulatory agency or authority, or
(B) violate any provision of the Fund's corporate charter or other
organizational document, or bylaws, or any amendment thereof or any provision of
its most recent Prospectus or Statement of Additional Information.
(b) Representations and Warranties of the Custodian. The Custodian hereby
represents and warrants that each of the following shall be true, correct and
complete as of the date of execution of this Agreement and, unless notice to the
contrary is provided by the Custodian to the Fund, at all times during the term
of this Agreement: (i) the Custodian is duly organized under the laws of its
jurisdiction of organization and qualifies to serve as a custodian to open-end
management investment companies under the provisions of the 1940 Act; and (ii)
the execution, delivery and performance by the Custodian of this Agreement are
(w) within its power (x) have been duly authorized by all necessary action, and
(y) will not (A) contribute to or result in a breach of or default under or
conflict with any existing law, order, regulation or ruling of any governmental
or regulatory agency or authority, or (B) violate any provision of the
Custodian's corporate charter, or other organizational document, or bylaws, or
any amendment thereof. The Custodian acknowledges receipt of a copy of the
Fund's most recent Prospectus and Statement of Additional Information.
Section 9.03. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and accordingly, supersedes as of the effective date of this
Agreement any custodian agreement heretofore in effect between the Fund and the
Custodian.
Section 9.04. Waivers and Amendments. No provisions of this Agreement may
be waived, amended or deleted except by a statement in writing signed by the
party against which enforcement of such waiver, amendment or deletion is sought.
Section 9.05. Interpretation. In connection with the operation of this
Agreement, the Custodian and the Fund may agree in writing from time to time on
such provisions interpretative of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general tenor of
this Agreement. No interpretative or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
Section 9.06. Captions. Headings contained in this Agreement, which are
included as convenient references only, shall have no bearing upon the
interpretation of the terms of the Agreement or the obligations of the parties
hereto.
Section 9.07. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Missouri, in each case
without giving effect to principles of conflicts of law.
<PAGE>
Section 9.08. Notices. Except in the case of Proper Instructions or Special
Instructions, and as otherwise provided in this Agreement, notices and other
writings contemplated by this Agreement shall be delivered by hand or by
facsimile transmission or as otherwise agreed to by the Fund and the Custodian
in writing (provided that in the case of delivery by facsimile transmission,
notice shall also be mailed postage prepaid) to the parties at the following
addresses:
(a) If to the Fund:
United International Growth Fund, Inc.
6300 Lamar Avenue
Overland Park, Kansas 66202
Attn: Fund Treasurer
Telephone: 913-236-2000
Telefax: 913-236-1595
(b) If to the Custodian:
UMB Bank, n.a.
928 Grand Avenue, 10th Floor
Kansas City, Missouri 64106
Attn: Securities Administration
Telephone: 816-860-7764
Telefax: 816-860-4869
or such other address as either party may have designated in writing to the
other party hereto.
Section 9.09. Assignment. This Agreement shall be binding on and shall
inure to the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that, subject to the provisions of Section 7.01
hereof, neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
Section 9.10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties.
Section 9.11. Confidentiality; Survival of Obligations. The parties hereto
agree that each shall treat confidentially the terms and conditions of this
Agreement and all information provided by each party to the other regarding its
business and operations. All confidential information provided by a party hereto
shall be used by any other party hereto solely for the purpose of rendering
services pursuant to this Agreement and, except as may be required in carrying
out this Agreement, shall not be disclosed to any third party without the prior
consent of such providing party. The foregoing shall not be applicable to any
information that is publicly available when provided or thereafter becomes
publicly available other than through a breach of this Agreement, or that is
required to be disclosed by any bank examiner of the Custodian or any
Subcustodians, any auditor or examiner of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation.
<PAGE>
The provisions of this Section 9.11 and Section 9.01, 9.07, Section 2.28,
Section 3.04, Section 4.05, Section 7.01, Article V and Article VI hereof and
any other rights or obligations incurred or accrued by any party hereto prior to
termination of this Agreement shall survive any termination of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
UNITED INTERNATIONAL GROWTH FUND, INC. UMB BANK, n.a.
By: /s/Sharon K. Pappas By: /s/Ralph Santoro
------------------- ----------------
Name: Sharon K. Pappas Name: Ralph Santoro
Title: Vice President Title: Senior Vice President
<PAGE>
APPENDIX "B"
TO
CUSTODIAN AGREEMENT
BETWEEN
UNITED INTERNATIONAL GROWTH FUND, INC.
AND
UMB BANK, N.A.
Dated as of May 1, 1997
The Fund shall be responsible for providing the Custodian the net asset
levels the Custodian requires to calculate the net asset portion of the
Custodian's fees. Such determinations shall be based upon the average monthly
assets of each Fund and shall specify the level of domestic assets and foreign
assets by country, as appropriate. Domestic assets shall include all assets held
in the United States including but not limited to American Depositary Receipts.
Foreign assets shall include all assets held outside the United States including
but not limited to securities which clear through Euroclear or CEDEL. The
Custodian will provide as soon as practicable after receiving the information
provided by the Fund with respect to the net asset level numbers, a bill for the
Fund, including such reasonable detail in support of each bill as may be
reasonably requested by the Fund. As used in this Appendix "B", "United Funds"
shall mean all funds in the United Group of Funds, TMK/United Funds, Inc. and
Waddell & Reed Funds, Inc.
DOMESTIC CUSTODY FEE SCHEDULE
A. Annual Fee (combining all domestic assets):
An annual fee to be computed as of month end and payable each month of the
Fund's fiscal year (after receipt of the bill issued to each Fund based
upon its portion of domestic assets), at the annual rate of:
.00005 for the first $5,000,000,000 of the net assets of all the United
Funds, plus .00004 for any net assets exceeding $5,000,000,000 of the
assets of all the United Funds.
B. Portfolio Transaction Fees (billed to each Fund):
(a) For each portfolio transaction* processed through a
Depository (DTC, PTC or Fed) $ 7.00
(b) For each portfolio transaction* processed through
the New York office (physical settlement) $20.00
(c) For each futures/option contract written $25.00
(d) For each principal/interest paydown $ 6.00
(e) For each interfund note transaction $ 5.00
* A portfolio transaction includes a receive, delivery, maturity, free
security movement and corporate action.
C. Earnings Credits:
Positive earnings credits will be applied on all collected custody and cash
management balances of each Fund at the Custodian to earn the Custodian's
daily repurchase agreement rate less reserve requirements and FDIC
premiums. Negative earnings credits will be charged on all uncollected
custody and cash management balances of each Fund at the Custodian's prime
rate less 150 basis points on each day a negative balance occurs. Positive
and/or negative earnings credits will be monitored daily for each Fund and
the net positive or negative amount for each Fund will be included in the
monthly statements. Excess positive credits for each Fund will be carried
forward indefinitely.
D. Out-of-Pocket Expenses (passed directly from Special Subcustodians):
Includes all charges by any Special Subcustodian to the Custodian as
Custodian for any Assets held at the Special Subcustodian.
GLOBAL CUSTODY FEE SCHEDULE
<PAGE>
A. Global Fee Schedule:
<TABLE>
<CAPTION>
Market: Annual Asset Fees Transaction Fees
------ ----------------- ----------------
<S> <C> <C>
Argentina .0037 $85
Australia .0009 $85
Austria .0011 $70
Belgium .0011 $60
Brazil .0035 $60
Canada .0008 $35
Chile .0045 $85
China .0045 $75
Czech Republic .0055 $135
Denmark .0011 $60
Finland .0011 $85
France .0011 $85
Germany .0008 $60
Hong Kong .0009 $85
Hungary .0065 $210
India .0055 $135
Indonesia .0009 $85
Ireland .0011 $60
Israel .0035 $160
Italy .0011 $70
Japan .0008 $40
Korea .0035 $60
Malaysia .0009 $85
Mexico .0016 $60
Netherlands .0011 $35
New Zealand .0009 $85
Norway .0011 $85
Peru .0070 $160
Phillippines .0035 $95
Poland .0060 $110
Portugal .0035 $145
Singapore .0009 $85
Spain .0009 $85
Sweden .0011 $70
Switzerland .0009 $85
Taiwan .0035 $85
Thailand .0009 $85
Turkey .0045 $110
U.K. .0011 $60
</TABLE>
Note: Fee Schedule eliminates sub-custodian asset and transaction-based
out-of-pocket expenses. Other sub-custodian out-of-pocket expenses
(i.e. Scrip fees, stamp duties, certificate fees, etc.)
B. Out-of-Pocket Expenses (passed directly from Brown Brothers Harriman &
Co.):
Includes, but is not limited to telex, legal, telephones, postage, and
direct expenses including but not limited to tax reclaim, customized
systems programming, certificate fees, duties, and registration fees.
C. Short-term Dollar Denominated Global Assets
Eurodollar CDs, Time Deposits:
(1) An annual fee to be computed as of month end and payable each month of
the Fund's fiscal year (after receipt of the bill issued to the Fund
based upon its portion of short-term dollar denominated assets), at
the annual rate of:
.0004 on all short-term dollar denominated assets of the United Funds.
(2) Portfolio Transaction Fees:
First Chicago Clearing Centre-Trades with Members $136.00
First Chicago Clearing Centre-Trades with Non-members $153.00
<PAGE>
First Chicago Clearing Centre-Income Collection $ 64.00
D. Euroclear Eligible Issues:
(1) An annual fee to be computed as of month end and payable each month of
the Fund's fiscal year (after receipt of the bill issued to the Fund
based upon its portion of Euroclear issues), at the annual rate of:
2.5 basis points on all United Funds Euroclear assets held in account
at UMB Bank, n.a.
(2) Portfolio Transaction Fees:
Euroclear $60.00
<PAGE>
SUBCUSTODIAN LIST
PURSUANT TO CUSTODIAN AGREEMENT
BETWEEN
UNITED INTERNATIONAL GROWTH FUND, INC.
AND
UMB BANK, n.a.
Dated as of August 31, 1998
This Subcustodian List relates to the Custodian Agreements between UMB
Bank, n.a. and each of the following funds dated the date specified by the
fund's name, as subsequently amended and restated:
<TABLE>
<CAPTION>
Fund Date
---- ----
<S> <C>
United Asset Strategy Fund, Inc. February 22, 1995
United Cash Management, Inc. November 26, 1991
United Continental Income Fund, Inc. November 26, 1991
United Gold & Government Fund, Inc. November 26, 1991
United Government Securities Fund, Inc. November 26, 1991
United High Income Fund, Inc. November 26, 1991
United High Income Fund II, Inc. November 26, 1991
United International Growth Fund, Inc. November 26, 1991
United Municipal Bond Fund, Inc. November 26, 1991
United Municipal High Income Fund, Inc. November 26, 1991
United New Concepts Fund, Inc. November 26, 1991
United Retirement Shares, Inc. November 26, 1991
United Vanguard Fund, Inc. November 26, 1991
United Funds, Inc.
United Bond Fund November 26, 1991
United Income Fund November 26, 1991
United Accumulative Fund November 26, 1991
United Science and Technology Fund November 26, 1991
Target/United Funds, Inc.*
High Income Portfolio November 26, 1991
Money Market Portfolio November 26, 1991
Bond Portfolio November 26, 1991
Income Portfolio November 26, 1991
Growth Portfolio November 26, 1991
Balanced Portfolio April 29, 1994
International Portfolio April 29, 1994
Limited-Term Bond Portfolio April 29, 1994
Small Cap Portfolio April 29, 1994
Asset Strategy Portfolio May 1, 1995
Science and Technology Portfolio April 4, 1997
Waddell & Reed Funds, Inc.
Total Return Fund April 24, 1992
Municipal Bond Fund April 24, 1992
Limited-Term Bond Fund April 24, 1992
International Growth Fund April 24, 1992
Growth Fund April 24, 1992
Asset Strategy Fund April 20, 1995
High Income Fund July 31, 1997
Science and Technology Fund July 31, 1997
</TABLE>
*Formerly, TMK/United Funds, Inc.
The following is a list of Domestic Subcustodians, Foreign Subcustodian and
Special Subcustodians under the Custodian Agreement as amended:
<PAGE>
A. Domestic Custodians:
Brown Brothers Harriman & Co.
United Missouri Trust Company of New York
B. Foreign Sub-Custodians
<TABLE>
<CAPTION>
Country Sub-Custodian Depository
<S> <C> <C>
Argentina Citibank, n.a. CDV; CRYL
Australia National Australia Bank Ltd. AUSTRACLEAR, RITs
Austria Creditanstalt Bankverein KONTROLLBANK (OEKB)
Belgium Banque Bruxelles Lambert CIK, BNB
Brazil First National Bank of Boston, BOVESPA, CLC
Brazil
Canada Canadian Imperial Bank of Commerce CDS; The Bank of Canada
Chile Citibank, n.a. None
China Standard Chartered Bank SSCCRC; SSCC
Czech Republic Ceskoslovenska Obchodni CNB; SCP
Banka A.S.
Denmark Den Danske Bank VP
Finland Merita Securities Association; Finnish
Central
Securities Depository Ltd.
France Banque Indosuez SICOVAM; Banque de France
Germany Deutsche Bank KASSENVEREIN
Hungary Citibank, N.A. KELER Ltd.
Hong Kong HongKong & Shanghai Banking Corp. HongKong Securities Clearing Company
India Citibank, N.A., Mumbai National Securities Depository
Limited
Indonesia Citibank, n.a. None
Ireland Allied Irish Banks PLC Gilt Settlement Office
Israel Bank Hapoalim B.M. TASE Clearinghouse Ltd.
Italy Banca Commerciale Italiana MONTE TITOLI, Banca D'Italia
Japan The Bank of Tokyo, Ltd. JASDEC, Bank of Japan
Korea Citibank, n.a. Korean Securities Depository
Corporation (KSD)
Malaysia Hong Kong Bank Malaysia Berhad MCD; Bank Negara Malaysia
Mexico Citibank Mexico, s.a. INDEVAL; Banco De Mexico
Netherlands ABN - Amro Bank NECIGER; De Nederlandsche Bank
Norway Christiana Bank VPS
Peru Citibank, n.a. Caja De Valores (CAVAL)
Philippines Citibank, n.a. Phillipines Central Depository, Inc.
Poland Bank Polska Kasa Opieki S.A. NPB
Portugal Banco Espirito Santo E Comercial Interbolsa
De Lisboa
Singapore HongKong & Shanghai Banking Corp. CDP
Spain Banco Santander SCLV; Banco De Espana
Sweden Skandinaviska Enskilda Banken VPC
Switzerland Union Bank of Switzerland SEGA
Taiwan Standard Chartered Bank, Taipei TSCD
Thailand HongKong & Shanghai Banking Corp. Share Depository Center (SDC)
Turkey Citibank, n.a. TvS, Central Bank of Turkey
United Kingdom Midland Securities PLC CMO; CGO; CrestCo
</TABLE>
C. Special Subcustodians:
Wilmington Trust Co.
The Bank of New York, n.a.
Euroclear
EX-99.B(h)igssacom
EXHIBIT B
COMPENSATION
Class A Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class B Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class C Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class Y Shares
An amount payable on the first day of each month equal to 1/12 of .15 of 1% of
the average daily net assets of the Class for the preceding month.
EX-99.B(i)iglegopn
July 2, 1999
United International Growth Fund, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
RE: United International Growth Fund, Inc.
Post-Effective Amendment No. 58
Dear Sir or Madam:
In connection with the public offering of shares of Capital Stock of United
International Growth Fund, Inc. (the "Fund"), I have examined such corporate
records and documents and have made such further investigation and examination
as I deemed necessary for the purpose of this opinion.
It is my opinion that the indefinite number of shares of such Capital Stock
covered by the Fund's Registration Statement on Form N-1A, when issued and paid
for in accordance with the terms of the offering, as set forth in the Prospectus
and Statement of Additional Information forming a part of the Registration
Statement, will be, when such Registration shall have become effective, legally
issued, fully paid and non-assessable by the Fund.
I hereby consent to the filing of this opinion as an Exhibit to the said
Registration Statement and to the reference to me in such Statement of
Additional Information.
Yours truly,
Helge K. Lee
General Counsel
HKL/fr
EX-99.B(m)igdspb
DISTRIBUTION AND SERVICE PLAN
FOR CLASS B SHARES
(Adopted on February 10, 1999)
This Plan is adopted by United International Growth Fund, Inc. (the "Fund"),
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"Act") to provide for payment by the Fund of certain expenses in connection with
the distribution of the Fund's Class B shares, provision of personal services to
the Fund's Class B shareholders and/or maintenance of its Class B shareholder
accounts. Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R")
which serves as the principal underwriter for the Fund under the terms of the
Underwriting Agreement pursuant to which W&R offers and sells the shares of the
Fund.
Distribution Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.75 of 1% of the Fund's average net assets of its Class B shares as a
"distribution fee" to finance the distribution of the Fund's Class B shares
payable to W&R daily or at such other intervals as the board of directors may
determine.
Service Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.25 of 1% of the Fund's average net assets of its Class B shares as a "service
fee" to finance shareholder servicing by W&R or its affiliated companies to
encourage and foster the maintenance of shareholder accounts of the Fund's Class
B shares. The amounts shall be payable to W&R daily or at such other intervals
as the board of directors may determine.
NASD Definition
For purposes of this Plan, the "distribution fee" may be considered as a sales
charge that is deducted from the Class B net assets of the Fund and does not
include the service fee. The "service fee" shall be considered a payment made by
the Fund for personal service and/or maintenance of Class B shareholder
accounts, as such is now defined by the National Association of Securities
Dealers, Inc. ("NASD"), provided, however, if the NASD adopts a definition of
"service fee" for purposes of Rule 2830 of the NASD Conduct Rules that differs
from the definition of "service fee" as presently used, or if the NASD adopts a
related definition intended to define the same concept, the definition of
"service fee" as used herein shall be automatically amended to conform to the
NASD definition.
<PAGE>
Quarterly Reports
W&R shall provide to the board of directors of the Fund and the board of
directors shall review at least quarterly a written report of the amounts so
expended of the distribution fee and/or service fee paid or payable to it under
this Plan and the purposes for which such expenditures were made.
Approval of Plan
This Plan shall become effective when it has been approved by a vote of the
board of directors of the Fund and of the directors who are not interested
persons of the Fund and have no direct or indirect financial interest in the
operation of the Plan or any agreement related to this Plan (other than as
directors or shareholders of the Fund) ("independent directors") cast in person
at a meeting called for the purposes of voting on such Plan.
Continuance
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the directors,
including the independent directors, as specified hereinabove for the adoption
of the Plan by the directors and independent directors.
Director Continuation
In considering whether to adopt, continue or implement this Plan, the directors
shall have a duty to request and evaluate, and W&R shall have a duty to furnish,
such information as may be reasonably necessary to an informed determination of
whether this Plan should be adopted, implemented or continued.
Termination
This Plan may be terminated at any time by a vote of a majority of the
independent directors of the Fund or by a vote of the majority of the
outstanding Class B voting securities of the Fund without penalty. On
termination, the payment of all distribution fees and service fees shall cease,
and the Fund shall have no obligation to W&R to reimburse it for any cost or
expenditure it has made or may make to distribute the Class B shares or service
Class B shareholder accounts.
Amendments
This Plan may not be amended to increase materially the amount to be spent for
distribution of Class B shares, personal service and/or maintenance of
shareholder accounts without approval of the Class B shareholders, and all
material amendments of this Plan must be approved in the manner prescribed for
the adoption of the Plan as provided hereinabove. The distribution and service
fees may be
2
<PAGE>
reduced by action of the board of directors without shareholder approval.
Directors
While this Plan is in effect, the selection and nomination of the directors who
are not interested persons of the Fund shall be committed to the discretion of
the directors who are not interested persons of the Fund.
Records
Copies of this Plan, the Underwriting Agreement and reports made pursuant to
this Plan shall be preserved as provided in Rule 12b-1(f) under the Act.
3
EX-99.B(m)igdspc
DISTRIBUTION AND SERVICE PLAN
FOR CLASS C SHARES
(Adopted on February 10, 1999)
This Plan is adopted by United International Growth Fund, Inc. (the "Fund"),
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"Act") to provide for payment by the Fund of certain expenses in connection with
the distribution of the Fund's Class C shares, provision of personal services to
the Fund's Class C shareholders and/or maintenance of its Class C shareholder
accounts. Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R")
which serves as the principal underwriter for the Fund under the terms of the
Underwriting Agreement pursuant to which W&R offers and sells the shares of the
Fund.
Distribution Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.75 of 1% of the Fund's average net assets of its Class C shares as a
"distribution fee" to finance the distribution of the Fund's Class C shares
payable to W&R daily or at such other intervals as the board of directors may
determine.
Service Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.25 of 1% of the Fund's average net assets of its Class C shares as a "service
fee" to finance shareholder servicing by W&R or its affiliated companies to
encourage and foster the maintenance of shareholder accounts of the Fund's Class
C shares. The amounts shall be payable to W&R daily or at such other intervals
as the board of directors may determine.
NASD Definition
For purposes of this Plan, the "distribution fee" may be considered as a sales
charge that is deducted from the Class C net assets of the Fund and does not
include the service fee. The "service fee" shall be considered a payment made by
the Fund for personal service and/or maintenance of Class C shareholder
accounts, as such is now defined by the National Association of Securities
Dealers, Inc. ("NASD"), provided, however, if the NASD adopts a definition of
"service fee" for purposes of Rule 2830 of the NASD Conduct Rules that differs
from the definition of "service fee" as presently used, or if the NASD adopts a
related definition intended to define the same concept, the definition of
"service fee" as used herein shall be automatically amended to conform to the
NASD definition.
<PAGE>
Quarterly Reports
W&R shall provide to the board of directors of the Fund and the board of
directors shall review at least quarterly a written report of the amounts so
expended of the distribution fee and/or service fee paid or payable to it under
this Plan and the purposes for which such expenditures were made.
Approval of Plan
This Plan shall become effective when it has been approved by a vote of the
board of directors of the Fund and of the directors who are not interested
persons of the Fund and have no direct or indirect financial interest in the
operation of the Plan or any agreement related to this Plan (other than as
directors or shareholders of the Fund) ("independent directors") cast in person
at a meeting called for the purposes of voting on such Plan.
Continuance
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the directors,
including the independent directors, as specified hereinabove for the adoption
of the Plan by the directors and independent directors.
Director Continuation
In considering whether to adopt, continue or implement this Plan, the directors
shall have a duty to request and evaluate, and W&R shall have a duty to furnish,
such information as may be reasonably necessary to an informed determination of
whether this Plan should be adopted, implemented or continued.
Termination
This Plan may be terminated at any time by a vote of a majority of the
independent directors of the Fund or by a vote of the majority of the
outstanding Class C voting securities of the Fund without penalty. On
termination, the payment of all distribution fees and service fees shall cease,
and the Fund shall have no obligation to W&R to reimburse it for any cost or
expenditure it has made or may make to distribute the Class C shares or service
Class C shareholder accounts.
Amendments
This Plan may not be amended to increase materially the amount to be spent for
distribution of Class C shares, personal service and/or maintenance of
shareholder accounts without approval of the Class C shareholders, and all
material amendments of this Plan must be approved in the manner prescribed for
the adoption of the Plan as provided hereinabove. The distribution and service
fees may be
<PAGE>
reduced by action of the board of directors without shareholder approval.
Directors
While this Plan is in effect, the selection and nomination of the directors who
are not interested persons of the Fund shall be committed to the discretion of
the directors who are not interested persons of the Fund.
Records
Copies of this Plan, the Underwriting Agreement and reports made pursuant to
this Plan shall be preserved as provided in Rule 12b-1(f) under the Act.
EX-99.B(o)igmcp
UNITED INTERNATIONAL GROWTH FUND, INC.
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
This Multiple Class Plan ("Plan") pursuant to Rule 18f-3 under the
Investment Company Act of 1940, as amended ("1940 Act"), sets forth the multiple
class structure for United International Growth Fund, Inc. ("Fund"). This
multiple class structure was approved by the Board of Directors of the Fund on
February 8, 1995, under an order of exemption issued by the Securities and
Exchange Commission on January 11, 1995. Subsequent to such approval, Rule 18f-3
under the 1940 Act was adopted. It was determined that the Fund operate under
Rule 18f-3, and this Plan was adopted pursuant to Rule 18f-3. This Plan
describes the classes of shares of stock of the Fund -- Class A shares and Class
Y shares -- offered to the public on or after July 4, 1995 ("Implementation
Date").
General Description of the Classes:
Class A Shares. Class A shares will be sold to the general public subject
to an initial sales charge. The maximum sales charge is 5.75% of the amount
invested and declines to 0% based on discounts for volume purchases. The initial
sales charge is waived for certain eligible purchasers.
Class A shares also will be subject to a service fee charged pursuant to a
Service Plan adopted pursuant to Rule 12b-1 under the 1940 Act ("Rule 12b-1")
that provides for a maximum fee of .25% of the average annual net assets of the
Class A shares of the Fund. All of the shares of the Fund issued pursuant to a
Fund prospectus effective prior to the Implementation Date and that are
outstanding on the Implementation Date will be designated as Class A shares.
Class B Shares. Class B shares will be sold subject to a contingent
deferred sales charge, which will be imposed on redemption proceeds. The maximum
contingent deferred sales charge will be 5.0% and will decline 1% per year after
the first full calendar year after investment to 0% after seven years, as
follows: in the first year, the contingent deferred sales charge will be 5%; in
the second year, 4%; in the third and fourth years, 3%; in the fifth year, 2%;
in the sixth year, 1%; and in the seventh year, 0%. Class B shares will also be
subject to distribution and service fees charged pursuant to a Distribution and
Service Plan adopted pursuant to Rule 12b-1 that provides for a maximum service
fee of 0.25% and a maximum distribution fee of 0.75% of the average annual net
assets of the Class B shares of the Fund. Class B shares convert automatically
into Class A shares in the eighth year held.
Class C Shares. Class C shares will be sold without an initial sales charge
and will be subject to a contingent deferred sales charge of 1% if the shares
are redeemed within twelve months of purchase. Class C shares will be subject to
<PAGE>
distribution and service fees charged pursuant to a Distribution and Service
Plan adopted pursuant to Rule 12b-1 that provides for a maximum service fee of
0.25% and a maximum distribution fee of 0.75% of the average annual net assets
of the Class C shares of the Fund.
Class Y Shares. Class Y shares will be sold without an initial sales charge
and without a Rule 12b-1 fee. Class Y shares are designed for institutional
investors and will be available for purchase by: (i) participants of employee
benefit plans established under section 403(b) or section 457, or qualified
under section 401, including 401(k) plans, of the Internal Revenue Code of 1986
("Code"), when the plan has 100 or more eligible employees and holds the shares
in an omnibus account on the Fund's records; (ii) banks, trust institutions,
investment fund administrators and other third parties investing for their own
accounts or for the accounts of their customers where such investments for
customer accounts are held in an omnibus account on the Fund's records; (iii)
government entities or authorities and corporations whose investment within the
first twelve months after initial investment is $10 million or more; and (iv)
certain retirement plans and trusts for employees and sales representatives of
Waddell & Reed, Inc. and its affiliates.
Expense Allocations of Each Class:
In addition to the difference with respect to 12b-1 fees, Class A, Class B
and Class C shares differ from Class Y shares of the Fund with respect to the
applicable shareholder servicing fees. Class A, Class B and Class C shares,
respectively, pay a monthly shareholder servicing fee of $1.0208 for each Class
A, Class B or Class C shareholder account which was in existence during the
prior month, plus $0.30 for each Class A, Class B or Class C account on which a
dividend or distribution had a record date in that month. Class Y shares pay a
monthly shareholder servicing fee equal to one-twelfth of .15 of 1% of the
average daily net Class Y assets for the preceding month.
Each Class may also pay a different amount of the following other expenses:
(a) stationery, printing, postage and delivery expenses related to
preparing and distributing materials such as shareholder reports,
prospectuses, and proxy statements to current shareholders of a specific
Class of shares;
(b) Blue Sky registration fees incurred by a specific Class of shares;
(c) SEC registration fees incurred by a specific Class of shares;
(d) expenses of administrative personnel and services required to
support the shareholders of a specific Class of shares;
(e) Directors' fees or expenses incurred as a result of issues
relating to a specific Class of shares;
<PAGE>
(f) accounting expenses relating solely to a specific Class of shares;
(g) auditors' fees, litigation expenses, and legal fees and expenses
relating to a specific Class of shares; and
(h) expenses incurred in connection with shareholders meetings as a
result of issues relating to a specific Class of shares.
These expenses may, but are not required to, be directly attributed and
charged to a particular Class. The shareholder servicing fees and other expenses
listed above that are attributed and charged to a particular Class are borne on
a pro rata basis by the outstanding shares of that Class.
Certain expenses that may be attributable to the Fund, but not a particular
Class, are allocated based on the relative daily net assets of that Class.
Exchange Privileges:
Class A shares of the Fund may be exchanged for Class A shares of any other
fund in the United Group of Mutual Funds.
Class B shares of the Fund may be exchanged for Class B shares of any other
fund in the United Group of Mutual Funds.
Class C shares of the Fund may be exchanged for Class C shares of any other
fund in the United Group of Mutual Funds.
Class Y shares of the Fund may be exchanged for Class Y shares of any other
fund in the United Group of Mutual Funds.
These exchange privileges may be modified or terminated by the Fund, and
exchanges may only be made into funds that are legally registered for sale in
the investor's state of residence.
Additional Information:
This Plan is qualified by and subject to the terms of the then current
prospectus for the applicable Class after the Implementation Date; provided,
however, that none of the terms set forth in any such prospectus shall be
inconsistent with the terms of the Classes contained in this Plan. The
prospectus for each Class contains additional information about that Class and
the Fund's multiple class structure.
Adopted: April 26, 1995
As Amended: December 6, 1995, Effective: January 9, 1996
As Amended: February 10, 1999, Effective: September 1, 1999
