<PAGE>
UNITED HIGH INCOME FUND II, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
- -----------------------------------------------------------------
December 31, 1994
PROSPECTUS
- -----------------------------------------------------------------
United High Income Fund II, Inc. (the "Fund") is a management investment
company which seeks a high level of current income by investing primarily in a
diversified portfolio of high-yield, high-risk fixed income securities, the
risks on which are, in the judgment of the Fund's Manager, Waddell & Reed
Investment Management Company, consistent with the Fund's goals. As a secondary
goal, the Fund seeks capital growth when consistent with its primary goal.
This Prospectus contains concise information about the Fund of which you
should be aware before investing. Additional information has been filed with
the Securities and Exchange Commission and is contained in a Statement of
Additional Information (the "SAI"), dated December 31, 1994. You may obtain a
copy of the SAI free of charge by request to the Fund or its underwriter,
Waddell & Reed, Inc., at the address or telephone number shown below. The SAI
is incorporated by reference into this Prospectus and you will not be aware of
all facts unless you read both this Prospectus and the Statement of Additional
Information.
Investments in high-yield, high-risk securities (sometimes referred to as
"junk bonds") may entail risks that are different or more pronounced than those
involved in higher-rated securities. See "Risk Factors of High-Yield Investing"
included in this Prospectus for a discussion of the risks associated with non-
investment grade securities.
Retain This Prospectus For Future Reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This supplement is required by the Division of Securities of the State of
Missouri
The security offered hereby may be considered speculative due to the Fund's
intention to invest in lower rated debt securities. See the SAI for a
description of these ratings.
To be attached on the front cover page of United High Income Fund II, Inc.
prospectus
NUS:1015MO
This supplement is required by the Securities Division of the State of
Washington
This fund invests primarily in lower rated bonds commonly known as "junk
bonds." Investments of this type are subject to a greater risk of loss of
principal and interest than higher rated bonds. Purchasers should carefully
assess the risks associated with an investment in this fund.
To be attached to the cover page of the Prospectus of
United High Income Fund, Inc.
United High Income Fund II, Inc.
This supplement is dated June 1, 1992
NUS1127
Supplement to Prospectus
This supplement is required by the Securities Division of the State of Arizona
This fund invests primarily in high-yield, high-risk securities and
therefore may not be suitable for all investors.
To be attached to the cover page of the Prospectus of
United High Income Fund, Inc.
United High Income Fund II, Inc.
United Municipal High Income Fund, Inc.
This supplement is dated July 8, 1992
NUS1129
<PAGE>
UNITED HIGH INCOME FUND II, INC.
Summary of Expenses
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Load Imposed on Purchases 5.75%
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested None
Dividends (as a percentage of offering price)
Deferred Sales Load (as a percentage
of original purchase price or redemption
proceeds, as applicable) None
Redemption Fees (as a percentage
of amount redeemed, if applicable) None
Exchange Fee None
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
Management Fees 0.57%
12b-1 Fees* 0.10%
Other Expenses 0.22%
(Includes, among other expenses, transfer
agency, accounting, custodian, audit and legal fees)
Total Fund Operating Expenses 0.89%
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of each
time period: $66 $84 $104 $161
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown.
*See "Management and Services" for further information about the 12b-1 service
fees.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
(Audited)
The following information has been audited by Price Waterhouse LLP,
independent accountants, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Price Waterhouse LLP.
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the
period
from July 1,
For the fiscal year ended
September 30, 1986 through
----------------------------------------------------
- ---------------------- September 30,
1994 1993 1992 1991 1990
1989 1988 1987 1986*
---- ---- ---- ---- ---- --
- -- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Net asset value,
beginning of period $4.21 $4.06 $3.75 $3.45 $4.22
$4.66 $4.71 $4.96 $5.00
----- ----- ----- ----- ----- ---
- -- ----- ----- -----
Income from investment operations:
Net investment income .35 .36 .39 .45 .44
.54 .53 .55 .13
Net realized and
unrealized gain (loss)
on investments (0.25) .15 .31 .30 (0.77)
(0.44) (0.05) (0.25) (0.04)
----- ----- ----- ----- ----- ---
- -- ----- ----- -----
Total from investment
operations .... .10 .51 .70 .75 (0.33)
.10 .48 .30 .09
Less distributions:
Dividends declared from
net investment
income ...... (0.35) (0.36) (0.39) (0.45) (0.44)
(0.54) (0.53) (0.55) (0.13)
----- ----- ----- ----- ----- ---
- -- ----- ----- -----
Net asset value,
end of period $3.96 $4.21 $4.06 $3.75 $3.45
$4.22 $4.66 $4.71 $4.96
===== ===== ===== ===== =====
===== ===== ===== =====
Total return** .. 2.31% 13.07% 19.31% 23.66% -8.03%
1.96% 10.98% 5.89% 7.11%***
Net assets, end of
period (000 omitted) $362,643 $380,819 $345,376 $291,436 $257,118
$313,339 $259,606 $165,392 $36,091
Ratio of expenses to
average net assets 0.88% 0.80% 0.82% 0.89% 0.89%
0.83% 0.87% 0.88% 0.19%****
Ratio of net investment
income to average
net assets ... 8.41% 8.64% 9.79% 12.94% 11.74%
11.90% 11.45% 11.11% 2.82%
Portfolio turnover
rate ......... 47.05% 69.24% 80.28% 53.88% 55.94%
122.30% 147.01% 178.30% 5.36%
*The Fund's inception date is May 8, 1986; however, since the Fund did not
have investment activity or incur expenses
prior to the date of public offering, the per share data and ratios are for
a capital share outstanding for the period
from July 1, 1986 (initial public offering) through September 30, 1986. On
an annual basis, the ratios of expenses and
net investment income to average net assets would have been approximately
0.77% and 11.20%, respectively.
**Total return calculated without taking into account the sales load deducted
on an initial purchase.
***Annualized.
****For the period from July 1, 1986 through December 31, 1986, Waddell & Reed,
Inc. agreed to a voluntary assumption of
Fund expenses. The ratio of expenses to average net assets for the period
ended September 30, 1986 shown in the table
would have been 0.22% without this assumption of expenses.
</TABLE>
Information regarding the performance of the Fund is contained in the
Fund's annual report to shareholders which may be obtained without charge by
request to the Fund at the address or phone number shown on the cover of this
Prospectus.
<PAGE>
What is United High Income Fund II, Inc.?
United High Income Fund II, Inc. is a corporation organized under Maryland
law on April 22, 1986. It is an open-end diversified management investment
company commonly called a "mutual fund." The Fund has a Board of Directors
which has overall responsibility for the management of its affairs. For the
names of the Directors and other information about them, see the SAI. The Fund
has only one class of shares. Each share has the same rights to dividends and
to vote. Shares are fully paid and nonassessable when bought. 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 a fundamental investment policy, which require shareholder approval, will be
presented to shareholders at an annual or special meeting called by the Board of
Directors for such purpose.
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 of the Fund are met. There will normally be no meeting of
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
which time the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the Investment
Company Act of 1940, as amended, 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.
Performance Information
From time to time Waddell & Reed, Inc. or the Fund may include performance
data in advertisements or in information furnished to present or prospective
shareholders. Fund performance may be shown by presenting one or more
performance measurements, including yield, total return and performance
rankings.
The Fund's yield is based on a 30-day period ending on a specific date and
is computed by dividing the Fund's net investment income per share earned during
the period by the Fund's maximum offering price per share on the last day of the
period.
The Fund's total return is its overall change in value for the period shown
including the effect of reinvesting dividends and capital gains distributions
and any change in the net asset value per share. A cumulative total return
reflects the Fund's change in value over a stated period of time. An average
annual total return reflects the hypothetical annually compounded return that
would have produced the cumulative total return for a stated period if the
Fund's performance had been constant during each year of that period. Average
annual total returns are not actual year-by-year results and investors should
realize that total returns will fluctuate.
Standardized total return figures reflect payment of the maximum sales
charge. The Fund may also provide non-standardized performance information
which does not reflect deduction of such sales charge or which is for periods
other than those required to be presented or which differs otherwise from
standardized performance information. See the SAI for yield and total return
and methods of computation.
From time to time in advertisements and information furnished to present or
prospective shareholders the Fund may discuss its 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. The Fund may also compare its performance to
that of other selected mutual funds or selected recognized market indicators.
Performance information may be quoted numerically or presented in a table, graph
or other illustration.
All performance information which the Fund advertises or includes in
information provided to present or prospective shareholders 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.
Goals and Investment Policies of the Fund
The primary goal of the Fund is to earn a high level of current income. As
a secondary goal, it will seek capital growth when consistent with its primary
goal. These goals are fundamental policies which may be changed only by
shareholder vote. The Fund will try to achieve its goals by investing primarily
in a diversified portfolio of high-yield, high-risk fixed income securities, the
risks on which are, in the judgment of the Fund's Manager, Waddell & Reed
Investment Management Company, consistent with the Fund's goals. There can be
no assurance that the Fund will achieve its goals; some market risks are
inherent in all securities to varying degrees.
There are three main types of securities the Fund will own: debt
securities, preferred stocks and common stocks. These securities in which the
Fund may invest include preferred stock that converts to common stock either
automatically or after a specified period of time or at the option of the
issuer, and debt securities whose performance is linked to a specified equity
security or securities index. Debt securities and preferred stocks are both
fixed income securities. The Fund may invest in any fixed income securities
whether convertible or nonconvertible, without restriction. Preferred stocks
and common stocks both represent ownership interests in a company, but preferred
stocks are usually entitled to a stated amount of dividends. Each of these
types of securities has different potential rewards and risks. In general, the
high income which the Fund seeks is paid by debt securities in the lower rating
categories of the established rating services or unrated securities which are,
in the opinion of the Manager, of similar quality to rated bonds in these
categories; these are securities rated Baa through C by Moody's Investors
Service, Inc. or BBB through D by Standard & Poor's Ratings Group (S&P) and
unrated securities. See Appendix A for a description of these bond ratings and
see "Risk Factors of High-Yield Investing" for a discussion of the risks
associated with non-investment grade debt securities.
At least 80% of the value of the Fund's total assets will be invested to
seek a high level of current income. As a fundamental policy it will not
purchase or otherwise voluntarily acquire any common stocks unless after such
purchase or acquisition not more than 20% of the value of its total assets would
be invested in common stocks. This 20% limit includes common stocks acquired on
conversion of convertible securities, on exercise of warrants or call options or
in any other voluntary manner. It does not include premiums paid or received in
connection with put or call options or the amount of any margin deposits as to
options or futures contracts. If the Fund is invested up to 20% in common
stocks it may still purchase or sell futures and options relating to common
stocks. The common stocks which the Fund purchases will be selected to try to
achieve either a combination of the Fund's primary and secondary goals, in which
case they will be dividend-paying, or its secondary goal, in which case they may
not be dividend-paying; however, the Fund does not intend to invest more than 4%
of its total assets in non-dividend-paying common stocks.
The Manager may look at a number of factors in selecting securities for the
Fund's portfolio. These include the past, current and estimated future: (i)
financial strength of the issuer; (ii) its cash flow; (iii) its management; (iv)
its borrowing requirements; and (v) its responsiveness to changes in interest
rates and business conditions. Sometimes the Manager may believe that a full or
partial temporary defensive position is desirable, due to present or anticipated
market or economic conditions. To achieve a defensive posture, the Manager may
take any one or more of the following steps: (i) shortening the average maturity
of the Fund's debt portfolio; (ii) holding cash or cash equivalents (short-term
investments such as commercial paper and certificates of deposit) in varying
amounts designed for defensive purposes; and (iii) emphasizing high-grade debt
securities. Going defensive in any one or more of these manners might involve a
reduction in the yield on the Fund's portfolio. As an alternative to taking a
temporary defensive position in order to more quickly participate in anticipated
changes in market or economic conditions, the Fund may invest in options and
futures.
The Fund may, subject to certain limitations which are set forth in the
SAI, buy and write (sell) put and call options on: debt securities; common
stocks; broadly-based stock indices; futures contracts relating to debt
securities ("Debt Futures"); or futures contracts on broadly-based (i.e., not
limited to particular or similar industries) stock indices ("Stock Index
Futures"). It may write options on securities for the purpose of increasing its
income by receiving premiums paid by the purchaser of the options. It may
purchase calls to take advantage of an expected rise in the market value of
securities which the Fund does not hold in its portfolio. It is a fundamental
policy that calls written by the Fund must be "covered" (i.e., the Fund must own
the securities which are subject to the call or have the right to acquire them
without additional payment) except in the case of calls on stock indices and
calls on Debt Futures and Stock Index Futures, which may be uncovered. Calls on
stock indices cannot be covered because a stock index cannot be purchased.
However, the Fund has undertaken to a State Securities Commission that any calls
written by it will be covered. It may purchase puts on related investments it
owns ("protective puts") or on related investments it does not own
("nonprotective puts"). Buying a protective put permits the Fund to protect
itself during the put period against a decline in the value of the related
investments below the exercise price by selling them through the exercise of the
put. Buying a nonprotective put permits the Fund, if the market price of the
related investments is below the put price during the put period, either to
resell the put or to buy the related investments and sell them at the exercise
price. 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
investment.
The Fund may also buy and sell futures contracts but only Debt Futures and
Stock Index Futures on broadly-based stock indices. At the present time, the
debt securities to which Debt Futures relate are long-term U.S. Treasury Bonds,
Treasury Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities and three-month U.S. Treasury Bills. The Fund will
use futures and options thereon only to attempt to hedge against market risks
which could adversely affect the value of its portfolio.
The primary risks associated with the use of options and futures are: (i)
loss of the increase in the value of securities owned by the Fund, if a call
option sold by the Fund is exercised thereby requiring the Fund to deliver the
securities at a price which is lower than the market value of the securities;
(ii) incurring higher costs to purchase securities which are subject to a put
option sold by the Fund if the put is exercised and the option price is higher
than the market value of the security; (iii) loss of premiums paid by the Fund
on options it purchases; (iv) imperfect correlation between the change in the
market value of the securities held in the Fund's portfolio and the prices of
futures and options thereon relating to securities purchased or sold by the
Fund; (v) incorrect forecasts by the Manager concerning interest rates and stock
market movements which may result in the hedge being ineffective; and (vi)
possible lack of a liquid secondary market for any option or futures contract;
the resulting inability to close an option or futures position could have an
adverse impact on the Fund's ability to hedge or increase income. For a hedge
to be completely effective, the price change of the hedging instrument should
equal the price change of the security being hedged. Such equal price changes
are not always possible because the investment underlying the hedging instrument
may not be the same investment that is being hedged. Because the Fund may write
certain uncovered calls on Debt Futures and Stock Index Futures, there is the
additional risk that if an uncovered call the Fund wrote was exercised, to meet
the exercise the Fund would have to purchase the future at whatever the market
price might be at the time of the exercise. See the SAI for additional
information concerning the use of options and futures and their risks.
Option transactions may increase the portfolio turnover rate. This results
in correspondingly greater commission expenses and transaction costs and may
result in certain tax consequences.
The Fund may purchase securities subject to repurchase agreements (which
can be considered as collateralized loans by the Fund) but as an operating
policy will not cause more than 10% of its net assets to be invested in illiquid
securities, which include repurchase agreements not terminable within seven
days. The majority of the repurchase transactions in which the Fund would
engage run from day to day, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The Fund's risk is limited
to the ability of the vendor to pay the agreed-upon sum upon the delivery date.
The Fund may purchase an unlimited amount of foreign securities including
foreign securities which are not traded in the United States. In connection
with the purchase of foreign securities denominated in foreign currencies, the
Fund may engage in currency conversion transactions. There are certain risks
associated with foreign securities not usually associated with U.S. securities
including the absence of uniform accounting, auditing and financial standards,
less government regulation, changes in currency rates and in exchange
regulations, and political instability. Most foreign stock markets have
substantially less trading volume than U. S. markets and securities traded on
them are typically less liquid and more volatile than comparable domestic
securities. See the SAI for a discussion of these risks. The Fund may buy
shares of other investment companies which do not redeem their shares, subject
to the conditions stated in the SAI.
The Fund may purchase restricted securities if, as a result of such
purchase, not more than 10% of its net assets would be invested in such
securities. Restricted securities may be illiquid due to restriction on their
resale.
The Fund may also lend its securities on a short-term or long-term basis
for the purpose of realizing income. The Fund will not loan more than 10% of
its assets at any one time. The percentage limit and the requirement that such
loans be on a collateralized basis in accordance with certain regulatory
requirements are fundamental policies which can only be changed by shareholder
vote. 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 upon. There are certain risks associated with
lending securities in that the Fund may experience delay in recovering the
collateral or even loss of the collateral. See the SAI for further discussion
of these risks.
The Fund may invest up to 5% of its net assets in warrants, which are
rights to purchase securities but the Fund has undertaken to a certain State
Securities Commission that it will not invest more than 2% of its net assets in
warrants which are not listed on the New York or American stock exchanges.
The Fund may have a high portfolio turnover. See the Financial
Highlights table for past turnover. This results in correspondingly greater
commission expenses and transaction costs and may result in certain tax
consequences.
The Fund may invest in zero coupon securities. Although the Manager does
not believe that investing in such securities results in material risks, such
investing may jeopardize the Fund's ability to meet its investment objectives or
meet the requirements of Subchapter M of the Internal Revenue Code.
Risk Factors of High-Yield Investing
The market for high-yield, high-risk debt securities is relatively new and
much of its growth paralleled a long economic expansion, during which this
market involved a significant increase in the use of high-yield debt securities
to fund highly leveraged corporate acquisitions and restructurings. Thereafter,
this market was affected by a relatively high percentage of defaults with
respect to high-yield securities as compared with higher rated securities. An
economic downturn or increase in interest rates is likely to have a greater
negative effect on this market, the value of high-yield debt securities in the
Fund's portfolio, the Fund's net asset value and the ability of the bonds'
issuers to repay principal and interest, meet projected business goals and
obtain additional financing than on higher rated securities. An investment in
this Fund may be considered more speculative than investment in shares of a fund
which invests primarily in higher rated debt securities.
Prices of high-yield debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities. Market
prices of high-yield debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash.
Where it deems it appropriate and in the best interests of Fund shareholders,
the Fund may incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to protect the interests
of security holders of its portfolio companies.
Because the market for lower rated securities may be thinner and less
active than for higher rated securities, there may be market price volatility
for these securities and limited liquidity in the resale market. Unrated
securities are usually not as attractive to as many buyers as rated securities
are, a factor which may make unrated securities less marketable. These factors
may have the effect of limiting the availability of the securities for purchase
by the Fund and may also limit the ability of the Fund to sell such securities
at their fair value either to meet redemption requests or in response to changes
in the economy or the financial markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield debt securities, especially in a thinly
traded market. To the extent the Fund owns or may acquire illiquid or
restricted high-yield securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties. Changes in values of debt securities which the Fund
owns will affect its net asset value per share. If market quotations are not
readily available for the Fund's lower rated or unrated securities, these
securities will be valued by a method that the Fund's Board of Directors
believes accurately reflects fair value. Valuation becomes more difficult and
judgment plays a greater role in valuing high-yield debt securities than with
respect to securities for which more external sources of quotations and last
sale information are available.
New and proposed laws may have an impact on the market for high-yield debt
securities. Special tax considerations are associated with investing in high-
yield debt securities structured as zero coupon or pay-in-kind securities. See
"Taxes" in the SAI.
While credit ratings are only one factor the Manager 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. Credit rating agencies may fail to timely
change the credit ratings to reflect subsequent events; however, the Manager
continuously monitors the issuers of high-yield debt securities in its portfolio
in an attempt to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments. Achievement of the
Fund's investment objective may be more dependent upon the Manager's credit
analysis than is the case for higher quality debt securities. Credit ratings
for individual securities may change from time to time and the Fund may retain a
portfolio security whose rating has been changed.
During the Fund's fiscal year ended September 30, 1994, the percentage of
the Fund's assets invested in debt securities in each of the rating categories
of S&P, and the corporate debt securities not rated by an established rating
service, determined on a dollar weighted average, were as follows:
Rated by Percentage of
S&P Fund Assets
-------- -------------
AAA 0.7%
AA 0.0
A 0.5
BBB 0.3
BB 10.8
B 68.6
CCC 3.7
CC 0.0
C 2.0
D 0.2
Unrated 5.2
-------
The percentage of assets in each category was calculated on the basis of a
monthly dollar weighted average. The monthly dollar weighted average was
calculated using the market value of the securities in the Fund's portfolio at
the end of each month of the thirteen-month period ended with the Fund's last
fiscal year, averaged over the Fund's last fiscal year. The rating used for
each security is that security's rating as of the end of each month and, as
ratings may change over time, does not necessarily indicate past or future
ratings of any particular security or the ratings of securities in the portfolio
in general. Asset composition of the Fund by rating categories at any
particular time does not necessarily indicate future asset composition by rating
categories.
Management and Services
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the inception of the investment company, whichever was later, and
to TMK/United Funds, Inc. since its inception. On January 8, 1992, subject to
the authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned
its investment management duties (and assigned its professional staff for
investment management services) to Waddell & Reed Investment Management Company,
a wholly-owned subsidiary of Waddell & Reed, Inc. The Manager has also served
as investment manager for Waddell & Reed Funds, Inc. since its inception in
September 1992 and Torchmark Government Securities Fund, Inc. and Torchmark
Insured Tax-Free Fund, Inc. since each commenced operations in February 1993.
Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter for
each of the investment companies in the United Group of Mutual Funds, TMK/United
Funds, Inc. and Waddell & Reed Funds, Inc. Waddell & Reed, Inc. is an indirect
subsidiary of Torchmark Corporation, a holding company, and United Investors
Management Company, a holding company, and a direct subsidiary of Waddell & Reed
Financial Services, Inc., a holding company.
Subject to authority of the Fund's Board of Directors, the Manager provides
investment advice and supervises investments for which it is paid a fee
consisting of two elements: (i) a "Specific" fee computed on the Fund's net
asset value as of the close of business each day at the annual rate of 0.15 of
1% of net assets and (ii) a pro rata participation based on the relative net
asset size of the Fund in a "Group" fee computed each day on the combined net
asset values of all of the funds in the United Group at the annual rates shown
in the following table. The fee is accrued and paid daily. Prior to the above-
described assignment to the Manager on January 8, 1992, the fees were paid to
Waddell & Reed, Inc.
Group Fee Rate
Group Net Asset Level Annual Group Fee
(all dollars in millions) Rate for Each 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%
Waddell & Reed Services Company, a subsidiary of Waddell & Reed, Inc., acts
as transfer agent ("Shareholder Servicing Agent") for the Fund and processes the
payments of dividends. See the SAI for the fees paid for these services.
Inquiries concerning shareholder accounts should be sent to that company at the
address shown on the inside back cover of this Prospectus or to the Fund at the
address shown on the front cover of this Prospectus.
Waddell & Reed Services Company also acts as agent ("Accounting Services
Agent") in providing bookkeeping and accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services,
the Fund pays the Accounting Services 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
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to Waddell &
Reed, Inc., the principal underwriter for the Fund, in an amount not to exceed
.25% of the Fund's average annual net assets. The fee is to be paid to
reimburse Waddell & Reed, Inc. for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts. In particular, the Service Plan and a related Service
Agreement between the Fund and Waddell & Reed, Inc. contemplate that these
expenditures may include costs and expenses incurred by Waddell & Reed, Inc. and
its affiliates in compensating, training and supporting registered sales
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located at
field sales offices; engaging in other activities useful in providing personal
services to Fund shareholders and/or maintenance of shareholder accounts; and in
compensating broker-dealers, and other third parties, who may regularly sell
Fund shares for providing shareholder services and/or maintaining shareholder
accounts. See the SAI for additional information and terms of the Service Plan.
The combined net asset values of all of the funds in the United Group were
approximately $11.2 billion as of September 30, 1994. Management fees for the
fiscal year ended September 30, 1994 were 0.57% of the Fund's average net
assets. The Fund's total expenses for that year were 0.88% of its average net
assets.
The Manager places transactions for the Fund's portfolio and in doing so
may consider sales of shares of the Fund and other funds it manages as a factor
in the selection of brokers to execute portfolio transactions. See the SAI for
further information.
Louise D. Rieke is primarily responsible for the day-to-day management of
the portfolio of the Fund. Ms. Rieke has held her Fund responsibilities from
the Fund's inception to January 1990 and from May 1992 to the present. She is
Vice President of the Manager and Vice President of Waddell & Reed Asset
Management Company, an affiliate of the Manager. She is Vice President of the
Fund and Vice President of other investment companies for which the Manager
serves as investment manager. She has served as portfolio manager for other
investment companies managed by Waddell & Reed, Inc. or the Manager since
January 1990 and has been an employee of Waddell & Reed, Inc. or its successor,
the Manager, since May 1971. Other members of the Manager's investment
management department provide input on market outlook, economic conditions,
investment research and other considerations relating to the Fund's investments.
Dividends, Distributions and Taxes
Dividends are declared daily from net investment income, which includes
accrued interest, earned discount, dividends and other income earned on
portfolio securities less expenses. Ordinarily, dividends are paid on the 27th
day of each month or on the last business day prior to the 27th if the 27th
falls on a weekend or a holiday. When shares are redeemed, any declared but
unpaid dividends on those shares will be paid with the next regular dividend
payment and not at the time of redemption. The Fund also distributes
substantially all of its net capital gains (the excess of net long-term capital
gains over net short-term capital losses) and net short-term capital gains, if
any, after deducting any available capital loss carryovers, and any net realized
gains from foreign currency transactions, with its regular dividend at the end
of the calendar year. The Fund may make additional distributions if necessary
to avoid Federal income or excise taxes on certain undistributed income and
capital gains.
You have the option to receive dividends and distributions in cash, to
reinvest them in additional Fund shares without charge or to receive dividends
in cash and reinvest distributions, as you may instruct. In the absence of
instructions, dividends and distributions will be reinvested.
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986 so that it will be
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) and net capital
gains that is distributed to its shareholders.
Dividends from the Fund's investment company taxable income are taxable to
you as ordinary income, to the extent of the Fund's earnings and profits,
whether received in cash or reinvested in additional Fund shares. Distributions
of the Fund's realized net capital gains, when designated as such, are taxable
to you as long-term capital gains, whether received in cash or reinvested in
additional Fund shares and regardless of the length of time you have owned your
shares. The Fund notifies you after each calendar year-end as to the amounts of
dividends and distributions paid (or deemed paid) to you for that year.
A portion of the dividends paid by the Fund, whether received in cash or
reinvested 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 alternative minimum
tax.
The Fund is required to withhold 31% of all dividends, distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not furnish the Fund with a correct taxpayer identification
number. Withholding at that rate from dividends and distributions also is
required for such shareholders who otherwise are subject to backup withholding.
Your redemption of Fund shares will result in taxable gain or loss to you,
depending on whether the redemption proceeds are more or less than your adjusted
basis 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 Fund shares through a redemption or exchange within 90 days after
your purchase thereof and subsequently reacquire Fund shares or acquire shares
of another fund in the United Group without paying a sales charge due to the
thirty-day reinvestment privilege or exchange privilege. In these cases, any
gain on the disposition of the 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 after redeeming other Fund shares at a loss, all or part of that loss will
not be deductible and will increase the basis of the newly purchased shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for further discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
Purchase of Shares
You may purchase shares through Waddell & Reed, Inc. and its sales
representatives. To open an account you must complete an application. Orders
are accepted only at the home office of Waddell & Reed, Inc. (see inside back
cover of this Prospectus for address), and it need not accept any orders. The
offering price of a share is its net asset value next determined following
acceptance plus the sales charge shown in the table below. This net asset value
per share is the value of the Fund's assets, less liabilities, divided by the
number of shares outstanding. Net asset value is determined once each day as of
the later of the close of the regular session of the New York Stock Exchange or
the close of the regular session of any domestic securities exchange or
commodities exchange on which an option or future held by the Fund is traded on
each day the New York Stock Exchange is open. The Fund's portfolio securities
listed or traded on an exchange are valued using market quotations or, if not
available, at their fair value in a manner determined in good faith by the Board
of Directors. Bonds are valued according to prices quoted by a dealer in bonds
which offers a pricing service. Short-term debt securities are valued at
amortized cost which approximates market value. Other assets are valued at
their fair value.
Sales Charge
Sales Charge as Approximate
as Percent of Percent of
Size of Purchase Offering PriceAmount 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
Ordinarily, the minimum initial investment is $500. A $50 minimum initial
investment pertains to certain retirement plan accounts. A $50 minimum initial
investment also pertains to accounts for which an investor has arranged, at the
time of initial investment, to make subsequent purchases for the account through
automatic bank withdrawals, as described below. A $100 minimum initial
investment pertains to certain exchanges of shares from other funds in the
United Group.
A shareholder may arrange with Waddell & Reed, Inc. to purchase shares by
having regular monthly withdrawals of $25 or more made from a bank account. A
shareholder may also arrange with Waddell & Reed, Inc. to purchase shares by
having monthly exchanges of shares with a value of $25 or more made from United
Cash Management, Inc., subject to certain conditions explained in the SAI.
Lower sales charges are available by combining additional purchases of any
of the funds in the United Group, to the extent otherwise permitted, except
United Municipal Bond Fund, Inc., United Cash Management, Inc., United
Government Securities Fund, Inc. and United Municipal High Income Fund, Inc.,
with the net asset value of shares already held ("rights of accumulation") and
by grouping all purchases made during a thirteen-month period ("Statement of
Intention"). Shares of another fund purchased through a "contractual plan" may
not be included unless the plan has been completed. Purchases by certain
related persons may be grouped. Shares of the Fund may be exchanged for shares
of another fund in the United Group (listed on the back cover of this
Prospectus) without payment of an additional sales charge. Subject to certain
conditions, automatic monthly exchanges of shares of United Cash Management,
Inc. and exchanges of shares of certain other funds in the United Group (listed
on the back cover of this Prospectus) may be made into the Fund. These exchange
privileges may be eliminated or modified at any time, upon notice in certain
instances. Information as to rights of accumulation, Statements of Intention,
grouping by related persons, exchange privileges, Flexible Withdrawal Service,
Individual Retirement Accounts, Section 403(b) plans, Keogh, 401(k), 457 plans
and other qualified employee benefit plans is contained in the SAI. Applicable
forms are available from Waddell & Reed, Inc.'s representatives.
Fund shares may be purchased at net asset value by the Directors and
officers of the Fund, employees of Waddell & Reed, Inc., employees of their
affiliates, sales representatives of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each such
Director, officer, employee and sales representative. Purchases in certain
retirement plans and certain trusts for these persons may also be made at net
asset value. Purchases in a 401(k) plan having 100 or more eligible employees
and purchases in a 457 plan having 100 or more eligible employees may be made at
net asset value. Shares may also be issued at net asset value in a merger,
acquisition or exchange offer made pursuant to a plan of reorganization to which
the Fund is a party. See the SAI for additional information.
Redemption
You have the right to sell your shares back to the Fund (redeem) at any
time by sending a written request to the address on the front cover of this
Prospectus, stating how many shares or the amount in dollars you wish to redeem.
The written request must be in good order which requires that if more than one
person owns the shares, each owner must sign the written request. If you hold a
certificate, it must be properly endorsed and sent to the Fund. The Fund
reserves the right to require a signature guarantee by a national bank, a
federally chartered savings and loan or a member firm of a national stock
exchange or other eligible guarantor in accordance with procedures of the Fund's
transfer agent in certain situations, such as: the request for redemption is
made by a corporation, partnership or fiduciary, or the redemption request is
made by, or redemption proceeds are payable to, someone other than the owner of
record. If you recently purchased the shares by check, the payment of
redemption proceeds on these shares may be delayed. You may arrange for the
bank upon which the purchase check was drawn to provide the Fund telephone or
written assurance, satisfactory to the Fund, that the check has cleared and been
honored. If no such assurance is given, payment of the redemption proceeds on
these shares will be delayed until the earlier of 10 days or when the Fund has
been able to verify that your purchase check has cleared and been honored.
The Fund will redeem your shares at their net asset value (which may be
more or less than what you paid) next computed after receipt of your written
request for redemption in good order at the Fund's address shown on the front
cover of this Prospectus. Payment is made within seven days, unless delayed
because of emergency conditions determined by the Securities and Exchange Com-
mission, because the New York Stock Exchange is closed (other than on weekends
and holidays) or when trading on the Exchange is restricted. Payment is made in
cash, although under extraordinary conditions redemptions may be made in
portfolio securities.
You may reinvest in the Fund all or part of the amount you redeemed without
charge by sending to the Fund the amount you wish to reinvest. The reinvested
amounts must be received within thirty days after the date of your redemption.
You may do this only once as to shares of the Fund.
The Fund reserves the right to redeem at net asset value all shares owned
by a particular shareholder in the Fund having an aggregate net asset value less
than $500. The Fund will give the shareholder notice of intention to redeem and
a 60-day opportunity to purchase a sufficient number of additional shares to
bring the net asset value of his or her shares in the Fund to $500. See the SAI
for further information.
Under the terms of the 401(k) plan which Waddell & Reed, Inc. has
available, the plan may have the right to make a loan to a plan participant by
redeeming Fund shares held by the plan. Principal and interest payments on the
loan made in accordance with the terms of the plan may be reinvested by the
plan, without payment of a sales charge, in shares of any of the funds in the
United Group in which the plan may invest.
Information concerning the establishment of automatic payments from an
account is available from sales representatives of Waddell & Reed, Inc.
<PAGE>
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 Ratings Group. A Standard & Poor's corporate or
municipal 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 Standard & Poor's
by the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform any audit in connection with any
ratings 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.
A brief description of the applicable Standard & Poor's rating symbols and
their meanings follow:
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the 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.
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 Standard & Poor's 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 Standard & Poor's
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 Legal
Investment 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. A brief description of the applicable Moody's
Investors Service 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 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.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1994
Shares Value
COMMON AND PREFERRED STOCKS
AND WARRANTS
Banks and Savings and Loans - 0.15%
California Federal Bank, F.S.B.,
Preferred ............................. 5,000 $ 529,375
Reliance Group Holdings, Inc., Warrants* 1,061 2,122
WestFed Holdings, Inc., Preferred* ..... 14,243 14
WestFed Holdings, Inc., Series B* ...... 7,610 8
Total ................................. 531,519
Building - 0.49%
NVR L.P., Warrants* ................... 34,286 47,143
Triangle Pacific Corp.* ................ 127,442 1,744,299
Total ................................. 1,791,442
Chemicals Specialty and Miscellaneous
Technology - 0.01%
Plastic Specialties and Technologies, Inc. 20,000 20,000
Hospital Management - 0.49%
LTC Properties, Inc. ................... 75,000 1,021,875
National Health Investors, Preferred,
Convertible ........................... 30,000 761,250
Total ................................. 1,783,125
Leisure Time - 0.43%
FLAGSTAR COMPANIES, INC.* .............. 24,600 212,175
Infinity Broadcasting Corporation* ..... 45,000 1,361,250
Total ................................. 1,573,425
Public Utilities - Electric - 0.38%
Consolidated Hydro, Inc., Preferred* ... 3,000 1,350,000
Consolidated Hydro, Inc., Warrants (A)* 5,400 32,400
Total ................................. 1,382,400
Publishing and Advertising - 0.27%
Advanstar Communications Inc.* ......... 30,000 960,000
Textiles and Apparel - 0.01%
American Marketing Industries
Holdings, Inc., Preferred (A)* ........ 2,275 20,475
TOTAL COMMON AND PREFERRED STOCKS
AND WARRANTS - 2.23% $ 8,062,386
(Cost: $14,524,139)
See Notes to Schedule of Investments on page 27.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Airlines - 1.87%
GP Group, Inc.,
8.75%, 12-15-98 ....................... $ 3,500 $ 2,913,750
NWA, Inc.,
8.625%, 8-1-96 ........................ 4,000 3,860,000
Total ................................. 6,773,750
Automotive - 3.01%
Aftermarket Technology Corp.,
12.0%, 8-1-2004 (A) ................... 1,500 1,530,000
Burlington Motor Holdings Inc.,
11.5%, 11-1-2003 ...................... 2,500 2,425,000
Doehler-Jarvis Limited Partnership,
11.875%, 6-1-2002 ..................... 1,500 1,511,250
Lear Siegler Seating Corp.,
8.25%, 2-1-2002 ....................... 4,000 3,570,000
Motor Wheel Corporation,
11.5%, 3-1-2000 ....................... 1,000 990,000
Venture Holdings Trust,
9.75%, 4-1-2004 ....................... 1,000 897,500
Total ................................. 10,923,750
Beverages - 1.10%
Dr Pepper Bottling Company of Texas,
10.25%, 2-15-2000 ..................... 500 510,000
Dr Pepper Bottling Holdings, Inc.,
0.0%, 2-15-2003 (B) ................... 1,000 705,000
ROYAL CROWN CORPORATION,
9.75%, 8-1-2000 ....................... 3,000 2,775,000
Total ................................. 3,990,000
Biotechnology and Medical Services - 1.68%
Abbey Healthcare Group Incorporated,
9.5%, 11-1-2002 ....................... 2,000 1,835,000
Quorum Health Group, Inc.,
11.875%, 12-15-2002 ................... 4,000 4,260,000
Total ................................. 6,095,000
Building - 10.64%
American Standard Inc.:
9.875%, 6-1-2001 ...................... 2,500 2,450,000
14.25%, 6-30-2003 ..................... 800 823,504
11.375%, 5-15-2004 .................... 500 532,500
0.0%, 6-1-2005 (B) .................... 1,250 815,625
9.25%, 12-1-2016 ...................... 5,000 4,662,500
See Notes to Schedule of Investments on page 27.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Building (Continued)
Beazer Homes USA, Inc.,
9.0%, 3-1-2004 ........................ $ 3,000 $ 2,595,000
Del Webb Corporation:
9.75%, 3-1-2003 ....................... 3,000 2,730,000
9.0%, 2-15-2006 ....................... 2,000 1,650,000
Eagle Industries, Inc.,
0.0%, 7-15-2003 (B) ................... 4,000 2,540,000
Hillsborough Company:
16.625%, 1-1-95 (C) ................... 5,863 5,100,659
17.0%, 1-1-96 (C) ..................... 11,000 9,020,000
NVR L.P.,
11.0%, 4-15-2003 ...................... 1,500 1,350,000
Nortek, Inc.,
9.875%, 3-1-2004 ...................... 2,000 1,860,000
Triangle Pacific Corp.,
10.5%, 8-1-2003 ....................... 2,500 2,450,000
Total ................................. 38,579,788
Chemicals Major - 2.02%
UCC Investors Holding, Inc.:
10.5%, 5-1-2002 ....................... 5,500 5,665,000
0.0%, 5-1-2005 (B) .................... 2,500 1,662,500
Total ................................. 7,327,500
Chemicals Specialty and Miscellaneous
Technology - 2.12%
Carlisle Plastics, Inc.,
10.25%, 6-15-97 ....................... 2,000 2,000,000
Envirotest Systems Corp.,
9.125%, 3-15-2001 ..................... 1,000 925,000
LaRoche Industries Inc.,
13.0%, 8-15-2014 ...................... 2,500 2,468,750
OSi Specialties, Inc.,
9.25%, 10-1-2003 ...................... 2,500 2,300,000
Total ................................. 7,693,750
See Notes to Schedule of Investments on page 27.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Computers and Office Equipment - 0.75%
Corporate Express, Inc.,
9.625%, 3-15-2004 (A) ................. $ 2,000 $ 1,835,000
Mail-Well Corporation,
10.5%, 2-15-2004 ...................... 1,000 880,000
Total ................................. 2,715,000
Consumer Electronics and Appliances - 1.49%
Levitz Furniture Corporation,
9.625%, 7-15-2003 ..................... 4,000 3,520,000
Sealy Corporation,
9.5%, 5-1-2003 ........................ 2,000 1,900,000
Total ................................. 5,420,000
Domestic Oil - 0.97%
Clark R&M Holdings, Inc.,
0.0%, 2-15-2000 ...................... 6,000 3,525,000
Drugs and Hospital Supply - 1.28%
Alco Health Distribution Corporation,
11.25%, 7-15-2005 ..................... 1,668 1,636,596
General Medical Corporation,
10.875%, 8-15-2003 .................... 3,000 3,015,000
Total ................................. 4,651,596
Electronics - 0.54%
Essex Group, Inc.,
10.0%, 5-1-2003 ....................... 2,000 1,945,000
Food and Related - 1.19%
Specialty Foods Corporation:
10.25%, 8-15-2001 .................... 2,000 1,780,000
11.25%, 8-15-2003 .................... 3,000 2,520,000
Total ................................. 4,300,000
Hospital Management - 3.24%
Hallmark Healthcare Corporation,
10.625%, 11-15-2003 ................... 1,250 1,262,500
Hillhaven Corporation (The),
10.125%, 9-1-2001 ..................... 3,000 3,030,000
LTC Properties, Inc.,
8.5%, 1-1-2000 ........................ 2,000 2,010,000
Multicare Companies, Inc. (The),
12.5%, 7-1-2002 ....................... 415 458,575
See Notes to Schedule of Investments on page 27.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Hospital Management (Continued)
Pathmark:
9.625%, 5-1-2003 ...................... $ 3,000 $ 2,715,000
0.0%, 11-1-2003 (B) ................... 2,500 1,237,500
Surgical Health Corporation,
11.5%, 7-15-2004 ...................... 1,000 1,022,500
Total ................................. 11,736,075
Household Products - 1.25%
Exide Corporation:
10.75%, 12-15-2002 .................... 3,000 3,090,000
0.0%, 12-15-2004 (B) .................. 2,000 1,430,000
Total ................................. 4,520,000
Insurance - 1.08%
American Annuity Group, Inc.:
9.5%, 8-15-2001 ....................... 2,500 2,400,000
11.125%, 2-1-2003 ..................... 1,500 1,515,000
Total ................................. 3,915,000
Leisure Time - 15.75%
Act III Broadcasting, Inc.,
9.625%, 12-15-2003 .................... 2,000 1,900,000
Argosy Gaming Company,
12.0%, 6-1-2001 ....................... 2,200 2,403,500
Cablevision Industries Corporation:
10.75%, 1-30-2002 ..................... 3,000 2,985,000
9.25%, 4-1-2008 ...................... 2,000 1,750,000
California Hotel Finance Corporation,
11.0%, 12-1-2002 ...................... 4,000 3,880,000
COMCAST CELLULAR CORPORATION,
0.0%, 3-5-2000 ........................ 3,700 2,284,750
Comcast Corporation,
9.5%, 1-15-2008 ....................... 4,000 3,660,000
Continental Cablevision, Inc.:
10.625%, 6-15-2002 .................... 1,000 1,010,000
8.875%, 9-15-2005 ..................... 2,000 1,800,000
11.0%, 6-1-2007 ....................... 1,200 1,218,000
Embassy Suites, Inc.,
10.875%, 4-15-2002 .................... 2,000 2,110,000
Family Restaurants, Inc.:
9.75%, 2-1-2002 ....................... 2,500 2,200,000
0.0%, 2-1-2004 (B) .................... 1,000 590,000
FLAGSTAR COMPANIES, INC.,
10.75%, 9-15-2001 ..................... 6,000 5,655,000
See Notes to Schedule of Investments on page 27.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Leisure Time (Continued)
GNS Finance Corp.,
9.25%, 3-15-2003 ...................... $ 1,500 $ 1,410,000
Infinity Broadcasting Corporation,
10.375%, 3-15-2002 .................... 5,000 5,175,000
La Quinta Motor Inns, Inc.,
9.25%, 5-15-2003 ...................... 2,000 1,880,000
NewCity Communications, Inc.,
11.375%, 11-1-2003 .................... 1,000 977,500
Plitt Theatres, Inc.,
10.875%, 6-15-2004 .................... 2,000 1,990,000
Rogers Communications Incorporated,
10.875%, 4-15-2004 .................... 4,000 4,080,000
Showboat, Inc.,
9.25%, 5-1-2008 ....................... 4,000 3,300,000
Sinclair Broadcast Group, Inc.,
10.0%, 12-15-2003 ..................... 1,250 1,209,375
Treasure Island Finance Corp.,
9.875%, 10-1-2000 ..................... 1,000 1,040,000
Viacom International, Inc.,
8.0%, 7-7-2006 ........................ 3,000 2,610,000
Total ................................. 57,118,125
Machinery - 0.55%
Fairfield Manufacturing Company, Inc.,
11.375%, 7-1-2001 ..................... 2,000 2,000,000
Multi-Industry - 1.42%
Federal Industries Ltd.,
10.25%, 6-15-2000 ..................... 2,000 1,942,500
Jordan Industries, Inc.,
10.375%, 8-1-2003 ..................... 2,000 1,825,000
Mark IV Industries, Inc.,
8.75%, 4-1-2003 ....................... 1,500 1,395,000
Total ................................. 5,162,500
Oil Services - 1.65%
Falcon Drilling, Inc.,
9.75%, 1-15-2001 ...................... 1,500 1,470,000
Noble Drilling Corporation,
9.25%, 10-1-2003 ...................... 2,500 2,406,250
Wainoco Oil Corporation,
12.0%, 8-1-2002 ....................... 2,000 2,120,000
Total ................................. 5,996,250
See Notes to Schedule of Investments on page 27.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Packaging and Containers - 4.20%
Anchor Glass Container Corporation,
9.875%, 12-15-2008 .................... $ 2,500 $ 2,275,000
Container Corporation of America,
10.75%, 5-1-2002 ...................... 2,000 2,060,000
Gaylord Container Corporation,
11.5%, 5-15-2001 ...................... 4,000 4,090,000
Owens-Illinois, Inc.,
9.75%, 8-15-2004 ...................... 4,500 4,365,000
Silgan Corporation,
0.0%, 12-15-2002 (B) .................. 3,000 2,430,000
Total ................................. 15,220,000
Paper - 3.74%
Fort Howard Corporation:
9.25%, 3-15-2001 ...................... 4,500 4,320,000
11.0%, 1-2-2002 ....................... 4,270 4,313,066
Stone Container Corporation,
10.75%, 10-1-2002 ..................... 3,000 3,003,750
Williamhouse-Regency of Delaware, Inc.,
11.5%, 6-15-2005 ...................... 2,000 1,940,000
Total ................................. 13,576,816
Propane - 1.29%
National Propane Corporation,
13.125%, 3-1-99 ....................... 4,669 4,680,673
Public Utilities - Electric - 0.49%
Consolidated Hydro, Inc.,
0.0%, 7-15-2003 (B) ................... 3,000 1,791,180
Publishing and Advertising - 1.96%
Big Flower Press, Inc.,
10.75%, 8-1-2003 ...................... 2,500 2,325,000
Lamar Advertising Company,
11.00%, 5-15-2003 ..................... 2,000 1,960,000
Outdoor Systems, Inc.,
10.75%, 8-15-2003 ..................... 3,000 2,820,000
Total ................................. 7,105,000
Railroad Equipment - 0.49%
Harmon Industries, Inc.,
12.0%, 8-1-2002 ....................... 1,635 1,765,800
Railroads - 1.07%
Southern Pacific Rail Corporation,
9.375%, 8-15-2005 ..................... 4,000 3,892,520
See Notes to Schedule of Investments on page 27.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Retailing - 12.38%
Barnes & Noble, Inc.,
11.875%, 1-15-2003 ................... $ 1,000 $ 1,086,250
Big V Supermarkets, Inc.,
11.0%, 2-15-2004 ...................... 1,500 1,230,000
Bradlees, Inc.,
9.25%, 3-1-2003 ...................... 3,000 2,655,000
COLOR TILE, INC.,
10.75%, 12-15-2001 .................... 2,500 2,350,000
Eckerd (Jack) Corporation,
9.25%, 2-15-2004 ...................... 5,500 5,280,000
Grand Union Capital Company (The),
0.0%, 7-15-2004 (B) ................... 8,500 935,000
Grand Union Company (The):
11.375%, 2-15-99 ..................... 2,500 2,318,750
12.25%, 7-15-2002 ..................... 2,500 1,856,250
Macy (R.H.) & Co., Incorporated,
14.5%, 10-15-98 (C) ................... 4,000 2,800,000
Musicland Stores Corporation,
9.0%, 6-15-2003 ....................... 2,000 1,800,000
Orchard Supply Hardware Stores Corporation,
9.375%, 2-15-2002 ..................... 2,500 2,187,500
Penn Traffic Company:
10.25%, 2-15-2002...................... 3,500 3,543,750
8.625%, 12-15-2003 .................... 3,000 2,745,000
9.625%, 4-15-2005 ..................... 4,000 3,640,000
Safeway Inc.,
10.0%, 12-1-2001 ...................... 5,000 5,275,000
SuperRite, Inc.,
10.625%, 4-01-2002..................... 3,400 3,400,000
WestPoint Stevens Inc.,
9.375%, 12-15-2005 .................... 2,000 1,805,000
Total ................................. 44,907,500
Services, Consumer and Business - 1.00%
Bell & Howell Company:
9.25%, 7-15-2000 ...................... 2,000 1,840,000
10.75%, 10-01-2002 .................... 1,750 1,767,500
Total ................................. 3,607,500
See Notes to Schedule of Investments on page 27.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Steel - 1.61%
AK Steel, Inc.,
10.75%, 4-1-2004 ...................... $ 3,000 $ 3,022,500
Inland Steel Industries, Inc.,
12.75%, 12-15-2002 .................... 2,500 2,806,250
Total ................................. 5,828,750
Telecommunications - 5.01%
CenCall Communications Corp.,
0.0%, 1-15-2004 (B) ................... 4,000 1,940,000
Dial Call Communications, Inc., Units,
0.0%, 4-15-2004 (B)(D) ................ 2,000 1,060,000
Dial Page, Inc.,
12.25%, 2-15-2000 ..................... 1,000 1,002,500
MFS Communications Company, Inc.,
0.0%, 1-15-2004 (B) ................... 2,000 1,160,000
PanAmSat, L.P.:
9.75%, 8-1-2000 ....................... 2,500 2,506,250
0.0%, 8-1-2003 (B) .................... 5,000 3,375,000
Rogers Cantel Mobile Communications, Inc.,
10.75%, 11-1-2001 ..................... 3,000 3,090,000
Summit Communications Group, Inc.,
10.5%, 4-15-2005 ...................... 3,000 3,165,000
USA Mobile Communications, Inc. II,
9.5%, 2-1-2004 ........................ 1,000 880,000
Total ................................. 18,178,750
Textiles and Apparel - 1.44%
CMI Industries, Inc.,
9.5%, 10-1-2003 ....................... 1,500 1,260,000
CONSOLTEX GROUP INC.,
11.0%, 10-1-2003 ...................... 2,000 1,875,000
JPS Textile Group, Inc.,
10.25%, 6-1-99 ........................ 2,724 2,043,000
Linter Textiles Corporation Limited,
13.75%, 10-1-2000 (C) ................. 2,500 25,000
Total ................................. 5,203,000
TOTAL CORPORATE DEBT SECURITIES - 88.28% $320,145,573
(Cost: $332,172,819)
See Notes to Schedule of Investments on page 27.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES
Banks and Savings and Loans - 1.68%
U.S. Bancorp,
Master Note............................ $ 6,094 $ 6,094,000
Computers and Office Equipment - 2.49%
Electronic Data Systems Corp.,
4.79%, 10-14-94........................ 9,050 9,034,346
Financial - 3.15%
AT&T Capital Corp.,
4.86%, 10-21-94 ....................... 9,015 8,990,660
Associates Corporation of North America,
Master Note............................ 2,438 2,438,000
Total ................................. 11,428,660
Food and Related - 0.24%
Sara Lee Corporation,
Master Note............................ 865 865,000
TOTAL SHORT-TERM SECURITIES - 7.56% $ 27,422,006
(Cost: $27,422,006)
TOTAL INVESTMENT SECURITIES - 98.07% $355,629,965
(Cost: $374,118,964)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.93% 7,012,653
NET ASSETS - 100.00% $362,642,618
See Notes to Schedule of Investments on page 27.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1994
Notes to Schedule of Investments
* No income dividends were paid during the preceding 12 months.
(A) As of September 30, 1994, the following restricted securities were owned:
Shares/
Principal
Acquisition Amount Market
Security Date in 000's Cost Value
-------- ----------- --------------------------------
American Marketing
Industries
Holdings, Inc.,
Preferred Stock 5/12/89 2,275$ 56,875 $ 20,475
Consolidated Hydro, Inc.,
Warrants 6/15/93 5,400 127,817 32,400
Aftermarket Technology Corp.,
12.0%, 8-1-2004 7/21/94 $1,500 1,500,000 1,530,000
Corporate Express, Inc.,
9.625%, 3-15-2004 2/22/94 2,000 2,000,000 1,835,000
---------- ----------
$3,684,692 $3,417,875
========== ==========
The total market value of restricted securities represents approximately
0.94% of the total net assets at September 30, 1994.
(B) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(C) Non-income producing as the issuer has either missed its most recent
interest payment or declared bankruptcy.
(D) Each unit consists of one bond and one warrant.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1994
Assets
Investment securities - at value
(Notes 1 and 3) ................................. $355,629,965
Cash ............................................. 9,990
Receivables:
Interest and dividends .......................... 7,067,782
Investment securities sold ...................... 4,413,194
Fund shares sold ................................ 273,950
Prepaid insurance premium ........................ 19,381
------------
Total assets .................................. 367,414,262
------------
Liabilities
Payable for investment securities purchased ...... 2,980,590
Payable for Fund shares redeemed ................. 1,370,358
Dividends payable ................................ 285,091
Accrued service fee .............................. 75,283
Accrued transfer agency and dividend disbursing .. 45,204
Accrued accounting services fee .................. 5,000
Other ............................................ 10,118
------------
Total liabilities ............................. 4,771,644
------------
Total net assets ............................. $362,642,618
============
Net Assets
$1.00 par value capital stock, authorized --
400,000,000; shares outstanding -- 91,462,458
Capital stock ................................... $ 91,462,458
Additional paid-in capital ...................... 330,125,857
Accumulated undistributed loss:
Accumulated undistributed net realized
loss on investment transactions ............... (40,456,698)
Net unrealized depreciation in value of
investments at end of period .................. (18,488,999)
------------
Net assets applicable to outstanding
units of capital ............................. $362,642,618
============
Net asset value per share (net assets divided
by shares outstanding) ........................... $3.96
Sales load (offering price x 5.75%)................. .24
-----
Offering price per share (net asset value divided
by 94.25%) ........................................ $4.20
=====
On sales of $100,000 or more the sales load
is reduced as set forth on page 13.
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1994
Investment Income
Income:
Interest ....................................... $35,195,288
Dividends ....................................... 203,706
-----------
Total income .................................. 35,398,994
-----------
Expenses (Note 2):
Investment management fee ....................... 2,157,608
Transfer agency and dividend disbursing ......... 583,175
Service fee ..................................... 376,074
Accounting services fee ......................... 60,000
Audit fees ...................................... 33,418
Custodian fees .................................. 28,278
Legal fees ...................................... 11,485
Other ........................................... 110,222
-----------
Total expenses ................................ 3,360,260
-----------
Net investment income ........................ 32,038,734
-----------
Realized and Unrealized Gain (Loss) on Investments
Realized net gain on investments ................. 7,099,487
Unrealized depreciation in value of investments
during the period ............................... (30,013,344)
-----------
Net loss on investments ......................... (22,913,857)
-----------
Net increase in net assets resulting
from operations .............................. $ 9,124,877
===========
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year
ended September 30,
------------ ------------
1994 1993
------------ ------------
Increase (Decrease) in Net Assets
Operations:
Net investment income ...............$ 32,038,734 $ 31,212,297
Realized net gain on investments .... 7,099,487 7,571,126
Unrealized appreciation
(depreciation) .................... (30,013,344) 6,403,334
------------ ------------
Net increase in net assets
resulting from operations ........ 9,124,877 45,186,757
------------ ------------
Dividends to shareholders from
net investment income* .............. (32,038,734) (31,212,297)
------------ ------------
Capital share transactions:
Proceeds from sale of shares
(9,117,319 and 10,779,291
shares, respectively) ............. 38,145,169 44,311,353
Proceeds from reinvestment of
dividends (6,784,080 and 6,652,442
shares, respectively) ............. 28,264,415 27,439,954
Payments for shares redeemed
(14,806,281 and 12,223,553 shares,
respectively) ..................... (61,672,228) (50,282,400)
------------ ------------
Net increase in net assets
resulting from capital share
transactions ..................... 4,737,356 21,468,907
------------ ------------
Total increase (decrease) ........ (18,176,501) 35,443,367
Net Assets
Beginning of period .................. 380,819,119 345,375,752
------------ ------------
End of period ........................$362,642,618 $380,819,119
============ ============
Undistributed net investment
income ............................ $--- $---
==== ====
*See "Financial Highlights" on page 31.
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the
period
from July 1,
For the fiscal year ended September 30, 1986 through
-------------------------------------------------------------------------- September 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986*
---- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $4.21 $4.06 $3.75 $3.45 $4.22 $4.66 $4.71 $4.96 $5.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from investment operations:
Net investment income .35 .36 .39 .45 .44 .54 .53 .55 .13
Net realized and
unrealized gain (loss)
on investments (0.25) .15 .31 .30 (0.77) (0.44) (0.05) (0.25) (0.04)
----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations .... .10 .51 .70 .75 (0.33) .10 .48 .30 .09
Less distributions:
Dividends declared from
net investment
income ...... (0.35) (0.36) (0.39) (0.45) (0.44) (0.54) (0.53) (0.55) (0.13)
----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period $3.96 $4.21 $4.06 $3.75 $3.45 $4.22 $4.66 $4.71 $4.96
===== ===== ===== ===== ===== ===== ===== ===== =====
Total return** .. 2.31% 13.07% 19.31% 23.66% -8.03% 1.96% 10.98% 5.89% 7.11%***
Net assets, end of
period (000 omitted) $362,643 $380,819 $345,376 $291,436 $257,118 $313,339 $259,606 $165,392 $36,091
Ratio of expenses to
average net assets 0.88% 0.80% 0.82% 0.89% 0.89% 0.83% 0.87% 0.88% 0.19%****
Ratio of net investment
income to average
net assets ... 8.41% 8.64% 9.79% 12.94% 11.74% 11.90% 11.45% 11.11% 2.82%
Portfolio turnover
rate ......... 47.05% 69.24% 80.28% 53.88% 55.94% 122.30% 147.01% 178.30% 5.36%
*The Fund's inception date is May 8, 1986; however, since the Fund did not have investment activity or incur expenses
prior to the date of public offering, the per share data and ratios are for a capital share outstanding for the period
from July 1, 1986 (initial public offering) through September 30, 1986. On an annual basis, the ratios of expenses and
net investment income to average net assets would have been approximately 0.77% and 11.20%, respectively.
**Total return calculated without taking into account the sales load deducted on an initial purchase.
***Annualized.
****For the period from July 1, 1986 through December 31, 1986, Waddell & Reed, Inc. agreed to a voluntary assumption of
Fund expenses. The ratio of expenses to average net assets for the period ended September 30, 1986 shown in the table
would have been 0.22% without this assumption of expenses.
</TABLE>
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
NOTE 1 -- Significant Accounting Policies
United High Income Fund II, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a major dealer in bonds. Convertible bonds are
valued using this pricing system only on days when there is no sale
reported. Stocks which are traded over-the-counter are priced using NASDAQ
(National Association of Securities Dealers Automated Quotations) which
provides information on bid and asked or closing prices quoted by major
dealers in such stocks. Restricted securities and securities for which
market quotations are not readily available are valued at fair value as
determined in good faith under procedures established by and under the
general supervision of the Fund's Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the Internal
Revenue Code), premiums on the purchase of bonds and post-1984 market
discount are amortized for both financial and tax reporting purposes over
the remaining lives of the bonds. Dividend income is recorded on the ex-
dividend date. Interest income is recorded on the accrual basis. See Note
3 -- Investment Security Transactions.
C. Federal income taxes -- The Fund intends to distribute all of its net
investment income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under the Internal Revenue Code.
In addition, the Fund intends to pay distributions as required to avoid
imposition of excise tax. Accordingly, provision has not been made for
Federal income taxes. See Note 4 -- Federal Income Tax Matters.
D. Dividends and distributions -- All of the Fund's net investment income is
declared and recorded by the Fund as dividends payable on each day to
shareholders of record at the time of the previous determination of net
asset value. During the period ended September 30, 1994, the Fund adopted
Statement of Position 93-2 Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. Accordingly, permanent book and tax
basis differences relating to future shareholder distributions have been
reclassified to additional paid-in capital. As of October 1, 1993, the
cumulative effect of such differences totaling $1,428,894 was reclassified
from accumulated undistributed net realized gain on investment transactions
to additional paid-in capital. Net investment income, net realized gains
and net assets were not affected by this change.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .15% of net assets and (ii)
a "Group" fee computed each day on the combined net asset values of all of the
funds in the United Group of mutual funds (approximately $11.2 billion of
combined net assets at September 30, 1994) at annual rates of .51% of the first
$750 million of combined net assets, .49% on that amount between $750 million
and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between
$2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion, .40%
between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly-owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The Fund also pays WARSCO a monthly per account charge for transfer agency
and dividend disbursement services of $1.0208 for each shareholder account which
was in existence at any time during the prior month, plus $0.30 for each account
on which a dividend or distribution of cash or shares had a record date in that
month. The Fund also reimburses W&R and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received direct and
indirect gross sales commissions (which are not an expense of the Fund) of
$1,437,569, out of which W&R paid sales commissions of $803,800 and all expenses
in connection with the sale of Fund shares, except for registration fees and
related expenses.
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to W&R in an
amount not to exceed .25% of the Fund's average annual net assets. The fee is
to be paid to reimburse W&R for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts.
The Fund paid Directors' fees of $14,236.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and short-
term securities, aggregated $169,179,639 while proceeds from maturities and
sales aggregated $181,785,540. Purchases of short-term securities aggregated
$255,221,024. Proceeds from maturities and sales of short-term securities and
U.S. Government securities aggregated $234,291,104 and $5,633,594, respectively.
For Federal income tax purposes cost of investments owned at September 30,
1994 was $373,650,228, resulting in net unrealized depreciation of $18,020,263,
of which $9,967,486 related to appreciated securities and $27,987,749 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $7,099,487 during its fiscal year ended September 30, 1994, which was fully
offset by utilization of capital loss carryforwards. Remaining prior year
capital loss carryforwards of the Fund aggregated $40,649,981 at September 30,
1994. This amount is available to offset future net realized gains for Federal
income tax purposes through September 30, 1998; $40,158,670 of this amount is
available through September 30, 1999 and $8,229,670 is available through
September 30, 2000.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
United High Income Fund II, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of United High Income Fund II, Inc.
(the "Fund") at September 30, 1994, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1994 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
October 31, 1994
<PAGE>
United High Income Fund II, Inc.
Custodian Underwriter
United Missouri Bank, n. a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas 66201-9217
Kirkpatrick & Lockhart (913) 236-2000
1800 M Street N. W.
Washington, D. C. Shareholder Servicing Agent
Waddell & Reed Services Company
Independent Accountants 6300 Lamar Avenue
Price Waterhouse LLP P. O. Box 29217
Kansas City, Missouri Shawnee Mission, Kansas 66201-9217
(913) 236-2000
Investment Manager
Waddell & Reed Investment Accounting Services Agent
Management Company Waddell & Reed Services Company
6300 Lamar Avenue 6300 Lamar Avenue
P. O. Box 29217 P. O. Box 29217
Shawnee Mission, Kansas Shawnee Mission, Kansas 66201-9217
66201-9217 (913) 236-2000
(913) 236-2000
<PAGE>
United High Income Fund II, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
PROSPECTUS
December 31, 1994
The United Group of Mutual Funds
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
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.
TABLE OF CONTENTS
Summary of Expenses .......... 2
Financial Highlights.......... 3
What is United High Income
Fund II, Inc.? ............ 4
Performance Information ...... 4
Goals and Investment Policies
of the Fund ............... 5
Risk Factors of High-Yield
Investing ................. 8
Management and Services ...... 9
Dividends, Distributions
and Taxes .................11
Purchase of Shares ...........12
Redemption ...................14
Appendix A ...................15
Financial Statements .........18
NUP1015(12-94)
printed on recycled paper
<PAGE>
UNITED HIGH INCOME FUND II, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
December 31, 1994
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 (the
"Prospectus") of United High Income Fund II, Inc. (the "Fund"), dated December
31, 1994, 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............................. 2
Investment Objective and Policies................... 4
Investment Management and Other Services............ 21
Purchase, Redemption and Pricing of Shares.......... 25
Directors and Officers.............................. 38
Payments to Shareholders............................ 42
Taxes .............................................. 43
Portfolio Transactions and Brokerage................ 47
Other Information................................... 49
<PAGE>
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may from time to
time publish the Fund's total return information, yield information and/or
performance information in advertisements and sales materials.
Total Return
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 the initial
$1,000 investment from which the maximum sales load of 5.75% is deducted. All
dividends and distributions are assumed to be reinvested at net asset value as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions. The formula used to calculate the total
return 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 and it may
not reflect the sales charge. For example, the Fund may also compute total
return 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 were reflected, it would
reduce the performance quoted.
The average annual total return quotations as of September 30, 1994, which
is the most recent balance sheet included in the Prospectus, for the periods
shown were as follows:
With Without
Sales LoadSales Load
Deducted Deducted
One year period from October 1, 1993 to
September 30, 1994: -3.57% 2.31%
Five-year period from October 1, 1989 to
September 30, 1994: 8.15% 9.43%
Period from July 1, 1986* to
September 30, 1994: 7.40% 8.17%
*Date of initial public offering
The Fund may also quote unaveraged or cumulative total return which reflect
the change in value of an investment 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.
Yield
A yield quoted for the Fund is computed by dividing the net investment
income per share earned during the period for which the yield is shown by the
maximum offering price per share on the last day of that period according to the
following formula:
6
Yield = 2((((a - b)/cd)+1) -1)
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
The yield computed according to the formula for the 30-day period ended on
September 30, 1994, the date of the most recent balance sheet included in the
Prospectus, is 9.69%.
Change in yields primarily reflect different interest rates received by the
Fund as its portfolio securities change. Yield is also affected by portfolio
quality, portfolio maturity, type of securities held and operating expenses.
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. 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 Stock Index and the Dow Jones Industrial Average. Performance
information may be quoted numerically or presented in a table, graph or other
illustration.
All performance information which 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 a Fund's shares when redeemed may be more or less
than their original cost.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are described in the
Prospectus, which refers to the following investment methods and practices.
Securities -- General
The Fund may invest in securities including common stock, preferred stock,
debt securities and convertible securities, as described in the Prospectus.
These securities may include the following described securities from time to
time.
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
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 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
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.
Foreign Securities
The Fund may purchase foreign securities without limitation. The Fund will
not speculate in foreign currencies, but may briefly hold foreign currencies in
connection with the purchase or sale of foreign securities.
Waddell & Reed Investment Management Company (the "Manager"), the Fund's
investment manager, believes that while there are investment risks (see below)
in investing in foreign securities, there are also investment opportunities in
foreign securities. Individual foreign economics 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. The Manager believes that the Fund's ability to invest a
substantial portion of its assets abroad will enable it to take advantage of
these differences and strengths where they are favorable.
Further, an investment may be affected by changes in currency rates and in
exchange control regulations (i.e., currency blockage). The Fund may bear a
transaction charge in connection with the exchange of currency. There may be
less publicly available information about a foreign company than about a
domestic company. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Most foreign stock markets have substantially
less volume than the New York Stock Exchange and securities of some foreign
companies are less liquid and more volatile than securities of comparable
domestic companies. There is generally less government regulation of stock
exchanges, brokers and listed companies than in the United States. In addition,
with respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments which could adversely affect investments in securities
of issuers located in those countries. If it should become necessary, the Fund
would normally encounter greater difficulties in commencing a lawsuit against
the issuer of a foreign security than it would against a United States' issuer.
Restricted Securities
Restricted securities, which are also referred to as private placements,
are subject to legal or contractual restrictions on resale because they are not
registered under the Securities Act of 1933, as amended. In many cases, issuers
expect to sell these securities to institutional investors, such as the Fund,
initially under an exemptive provision and then file a registration statement to
register the securities for public distribution. Once securities have been
registered, they may sell at a premium over the initial offering price.
In the event that the securities are not registered by the issuer, the
Fund's ability to resell the unregistered securities may be limited. Limitation
on the resale of unregistered securities may have an adverse effect on their
marketability and may prevent the Fund's prompt disposition of them at
reasonable prices. The Fund may have to bear the expense of registering such
securities for resale and the risk of substantial delays in effecting such
registration. Valuation of restricted securities for which market quotations
are readily available will be at market value. Valuation for restricted
securities for which market quotations are not available will be at fair value
as determined in good faith under procedures established by the Board of
Directors.
Lending Securities
One of the ways in which the Fund may try to realize income is by lending
its securities. If the Fund does this, 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 loaned the securities. The Fund also receives additional
compensation as discussed below.
Any securities loan which the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). This
policy can only be changed by shareholder vote. Under the present Guidelines,
the collateral must consist of cash or securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities ("Government Securities")
or bank letters of credit, at least equal in value to the market value of the
securities loaned on each day that the loan is outstanding. If the market value
of the loaned 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 loaned. 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 Government Securities used as collateral. Part of the interest received
in either case may be shared with the borrower.
The letters of credit which 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 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.
The Manager, subject to the direction and control of the Board of
Directors, has adopted additional rules concerning lending of securities which
may be changed without shareholder vote. At present, under these rules, the
Fund will lend securities only to creditworthy broker-dealers and financial
institutions. The Fund will make loans only under rules of the New York Stock
Exchange, 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.
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.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned goes up, risks of delay in
recovering the securities loaned or even loss of rights in the collateral should
the borrower of the securities fail financially.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. The
Fund has an operating policy which provides that it will not enter into a
repurchase transaction which will cause more than 10% of its net assets to be
invested in illiquid securities, which include repurchase agreements not
terminable within seven days. A repurchase transaction occurs when, at the time
the Fund purchases securities, it also agrees to resell them to the vendor
(normally a commercial bank or broker-dealer), and must deliver those securities
and/or securities substituted for them under the repurchase agreement to the
vendor on an agreed-upon date in the future. In this section, such securities,
including any securities so substituted, are referred to as the "Resold
Securities." The resale price is in excess of the purchase price in that it
reflects an agreed-upon market interest rate effective for the period of time
during which the Fund's money is invested in the Resold Securities. The
majority of the repurchase transactions in which the Fund would engage run from
day to day, and the delivery pursuant to the resale typically will occur within
one to five days of the purchase. The Fund's risk is limited to the ability of
the vendor to pay the agreed-upon sum upon the delivery date. In the event of
bankruptcy or other default by the vendor, there may be possible delays or
expenses in liquidating the Resold Securities, decline in their value or loss of
interest. Upon default, the Resold Securities constitute collateral security
for the repurchase obligation. The return on such collateral may be more or
less than that from the repurchase agreement. Repurchase agreements will be
structured so as to fully collateralize the loans, i.e., the value of the Resold
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, is and, during the entire term of the agreement, remains 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 on the
basis of criteria established by the Board of Directors.
Illiquid Investments
The Fund has an operating policy, which may be changed without shareholder
approval, which provides that due to their possible limited liquidity, the Fund
may not make certain illiquid investments if as a result more than 10% of its
net assets would consist of such investments. The investments which are
included in this 10% limit are: (i) repurchase agreements not terminable within
seven days; (ii) restricted securities except certain securities that are
determined by the Manager to be liquid pursuant to procedures adopted by the
Fund's Board of Directors, such as commercial paper that is sold without
registration under the Securities Act of 1933 in transactions exempt under
Section 4(2) of such Act; (iii) securities for which market quotations are not
readily available; and (iv) unlisted options and their underlying collateral.
Investments in Warrants
Warrants are options to purchase equity securities at specific prices valid
for a specific period of time. The prices do not necessarily move parallel to
the prices of the underlying securities. Warrants have no voting rights,
receive no dividends and have no rights with respect to the assets of the
issuer.
As a fundamental policy, the Fund may not invest more than 5% of its net
assets, valued at the lower of cost or market, in warrants. The Fund has
undertaken to certain State Securities Commissions that not more than 2% of the
Fund's net assets may be invested in warrants which are not listed on the New
York or American Stock Exchange. Warrants acquired in units or attached to
other securities are not considered for purposes of computing these limitations.
Investments in Unseasoned Issuers
In order to comply with the regulations of certain states, the Fund will
not purchase securities of unseasoned issuers, including their predecessors,
which have been in operation for less than three years, if the value of its
investment in such securities will exceed 5% of its total assets.
Investments in Real Estate
As an operating (i.e., non-fundamental) policy, the Fund may not invest in
real estate; however, the Fund may invest in securities (other than limited
partnership interests) issued by companies engaged in such business, including
real estate investment trusts.
Put and Call Options
The Fund has a fundamental policy (i.e., a policy which may only be changed
by shareholder vote) which provides that it may purchase call options ("calls")
and write (i.e., sell) calls but only if (i) the investments to which the call
relates (the "related investments") are: (a) debt securities; (b) common stocks;
(c) "broadly-based" stock indices (i.e., include stocks that are not limited to
issuers in any particular industry or similar industries); (d) futures contracts
("Debt Futures") relating to debt securities; or (e) futures contracts ("Stock
Index Futures") on broadly-based stock indices; (ii) in the case of calls
written by the Fund either (a) such calls are (except for calls on stock
indices) covered, i.e., the Fund owns the related investments (or other
investments suitable for escrow arrangements) while the call is outstanding; or
(b) the related investments are Debt Futures or Stock Index Futures. The Fund
may purchase put options ("puts") or write (i.e., sell) puts but only if the
related investment is one of those listed above as to calls. The Fund may
purchase puts as to related investments it owns ("protective puts") or as to
related investments it does not own ("nonprotective puts").
The above limitations on the puts and calls the Fund may write or purchase
are fundamental policies, i.e., rules which may not be changed unless
shareholders vote to change them. The Fund has no fundamental policies as to
percentage limitations on its purchase and sale of options.
The Fund has undertaken to certain State Securities Commissions that it
will not purchase put options or call options if after such purchase, the
premiums paid for all such options owned at that time would exceed 5% of its
total assets. The Fund has also undertaken to a State Securities Commission
that all calls written by the Fund will be covered.
Optional delivery standby commitments are entered into by parties (other
than broker-dealers) selling debt securities to the Fund as an inducement to the
Fund to purchase such securities and give the Fund the right to sell them back
to the seller on specified terms. They are thus a form of "protective puts."
However, unlike exchange listed puts, the Fund must rely on the creditworthiness
of the seller, which is evaluated by the Manager, should the Fund exercise its
right to make the delivery.
The Fund may write options on securities for the purpose of increasing
income by receiving premiums from the purchaser of options. It may purchase
puts on securities to protect against major price declines in the value of its
portfolio securities. It may purchase calls on securities to take advantage of
a rise in the market value of securities it does not hold in its portfolio (or
in a "closing purchase transaction" as discussed below).
Except for calls on stock indices, when the Fund writes a call, it will
receive a premium and agrees to sell the related investments to a purchaser of a
call during the call period (usually not more than nine months) at a fixed
exercise price (which may differ from the market price of the related
investments) regardless of market price changes during the call period. If the
call is exercised, the Fund foregoes any gain from an increase in the market
price over the exercise price. Also, in the case of an uncovered call on a Debt
Future or Stock Index Future, if such a call was exercised, to meet the exercise
the Fund would have to purchase the future at whatever the market price of the
future was at the time of exercise. The Fund will, until it enters into a
closing purchase transaction as to an uncovered call it has written, segregate
and maintain designated cash or readily marketable assets adequate to purchase
the related future should the call be exercised, less any margin deposit as to
such call.
To terminate its obligation on a call which it has written, the Fund may
purchase a call in a "closing purchase transaction." A profit or loss will be
realized depending on the amount of option transaction costs and whether the
premium previously received is more or less than the price of the call
purchased. A profit may also be realized if the call lapses unexercised,
because (except for the uncovered calls which the Fund may write) the Fund
retains the related investments and the premium received.
Except for calls on stock indices, when the Fund buys a call, it pays a
premium and has the right to buy the related investments from a seller of a call
during the call period at a fixed exercise price. The Fund benefits only if the
market price of the related investments is above the call price during the call
period and the call is either exercised or sold at a profit. If the call is not
exercised or sold (whether or not at a profit), it will become worthless at its
expiration date and the Fund will lose the premium payment and the right to
purchase the related investments.
Except for puts on stock indices, when the Fund buys a put, it pays a
premium and has the right to sell the related investments to a seller of a put
during the put period at a fixed exercise price. Buying a protective put (as
defined above) permits the Fund to protect itself during the put period against
a decline in the value of the related investments below the exercise price by
selling them through the exercise of the put. Buying a nonprotective put (as
defined above) permits the Fund, if the market price of the related investments
is below the put price during the put period, either to resell the put or to buy
the related investments and sell them at the exercise price. If the market
price of the related investments is above the exercise price and as a result,
the put is not exercised or resold (whether or not at a profit), the put will
become worthless at its expiration date.
Except for puts on stock indices, when the Fund writes a put, it receives a
premium and agrees to purchase the related investments from a purchaser of a put
during the put period at a fixed exercise price (which may differ from the
market price of the related investments) regardless of market price changes
during the put period. If the put is exercised, the Fund must purchase the
related investments at the exercise price, regardless of how the market price of
the related investments has declined below the exercise price. The Fund's cost
of purchasing the investments will be adjusted by the amount of the premium it
has received. The Fund has undertaken to a State Securities Commission that it
will write a put only when it has determined that it would be willing to
purchase the underlying security at the exercise price.
To terminate its obligation on a put which the Fund has written, it may
purchase a put in a "closing purchase transaction." As discussed above, it may
also purchase puts other than as part of such closing transaction. A profit or
loss will be realized depending on the amount of option transaction costs and
whether the premium previously received is more or less than the cost of the put
purchased. A profit will also be realized if the put lapses unexercised because
the Fund retains the premium received.
Except for puts on stock indices, when the Fund writes a put it will, until
it enters into a closing purchase transaction, maintain designated cash or
readily marketable assets adequate to purchase the related investments should
the put be exercised. The Fund may hold cash or acquire readily marketable
assets for this purpose.
Puts and calls on stock indices are similar to puts and calls on securities
or futures except that all settlements are in cash and gain or loss depends on
changes in the broad-based index in question (and thus on price movements in the
stock market generally) rather than on price movements in individual securities
or futures contracts. When the Fund writes a call on a stock index, it receives
a premium and agrees that during the call period a purchaser of a call, upon
exercise of the call, will receive from the Fund an amount of cash if the
closing level of the stock index upon which the call is based is greater than
the exercise price of the call, which 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 (the "multiplier") which determines the total dollar value
for each point of such difference. When the Fund buys a call on a stock index
it pays a premium and has the same rights as to a writer of such a call as are
indicated above as the Fund's obligation when it writes such a call. When the
Fund buys a put on a stock index, it pays a premium and has the right during the
put period to require a seller of such a put, upon the Fund's exercise of the
put, to deliver to the Fund an amount of cash if the closing level of the stock
index upon which the put is based is lesser than the exercise price of the put,
which amount of cash is determined by the multiplier, as described above the
calls. When the Fund writes a put on a stock index it receives a premium and a
purchaser of such a put has the same rights against the Fund as indicated above
as to the Fund's rights when it buys such a put.
Calls on stock indices the Fund writes cannot be covered (as defined above)
because it is impossible to purchase and hold a stock index and thus to write a
covered call against it.
When the Fund writes a call on a stock index it will, until it enters into
a closing purchase transaction as to that call, segregate and maintain cash or
readily marketable assets adequate to make the required cash delivery if the
call is exercised. When it writes a put as to any related investments,
including puts on stock indices, it will, until it enters into a closing
purchase transaction as to that put, maintain designated cash or readily
marketable assets adequate to purchase the related investments should the put be
exercised.
A position in a listed option may be closed out only on an exchange which
provides a secondary market for options covering the same related investment
having the same exercise price and expiration date and there is no assurance
that a liquid secondary market will exist for any particular option. On options
on U.S. Government Securities which are not listed on an exchange, the Fund must
rely on the creditworthiness of the party with whom it has entered into the
options transaction. The Manager will evaluate the creditworthiness of all such
parties and intends to enter into unlisted option transactions only with major
dealers in such unlisted options. The market for these options may be less
active than the market for exchange-listed options. The Manager will evaluate
the ability to enter into closing purchase transactions on unlisted options
prior to investing in them.
The Fund's put and call activities may affect its turnover rate and
brokerage commission payments. The exercise of calls or puts written by the
Fund may cause it to sell or purchase related investments, thus increasing its
turnover rate in a manner beyond its control. The exercise of puts 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 which 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 buys or sells an underlying investment in connection with the
exercise of a put or call. Such commissions may be higher than those which
would apply to direct purchases or sales. The Fund's custodian bank, or a
securities depository acting for it, will act as the Fund's escrow agent as to
the related investments on which it has written covered calls, or as to other
assets acceptable for such escrow, so that pursuant to the rules of the Option
Clearing Corporation and certain exchanges, no margin deposit will be required
of the Fund on such calls. Until the related investments or other investments
held in escrow are released from escrow, they cannot be sold by the Fund; this
release will take place on the expiration of the call or by the Fund's entering
into a closing purchase transaction.
Option premiums paid to control an amount of related investments are small
in relation to the market value of related investments and, consequently, put
and call options offer large amounts of leverage. The leverage offered by
trading in debt options will result in the Fund's net asset value being more
sensitive to changes in the value of the related investment. Markets for
options on debt instruments and options on Debt Futures contracts are in their
initial stages so it is not possible to predict the amount of trading interest
which may exist in them or whether viable exchange markets will develop or
continue over time.
As indicated under "Taxes" to continue to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), the Fund must derive less than 30% of its gross income each taxable
year from the disposition of certain investments held for less than three
months. Due to this limitation, the Fund will limit the extent to which it
engages in the following activities, but will not be precluded from them: (i)
selling investments, including options and futures (defined below), held for
less than three months, whether or not they were purchased on the exercise of a
call held by the Fund; (ii) writing calls on investments held for less than
three months; (iii) writing or purchasing of puts or calls which expire in less
than three months; (iv) effecting closing transactions with respect to puts or
calls written or purchased less than three months previously; and (v) exercising
puts or calls held by the Fund for less than three months.
Futures Contracts and Options Thereon
The Fund may engage in buying and selling futures contracts but only "Debt
Futures" and "Stock Index Futures" on "broadly-based" stock indices (see "Put
and Call Options" above for definitions). Debt Futures and Stock Index Futures
are referred to below as "futures." The limitation of buying and selling in fu-
tures contracts to the futures described above is a fundamental policy which may
only be changed by shareholders. The Fund has no other fundamental policies as
to its use of futures and, thus, no fundamental policy as to a percentage
limitation thereon; see below, however, as to limitations relating to the
Commodities Futures Trading Commission (the "CFTC").
At the present time, Debt Futures are available only as to a limited number
of debt securities and Stock Index Futures are available as to only a limited
number of such indices.
The Fund will use futures and options thereon only to attempt to hedge
against four kinds of market risks which could adversely affect the value of its
portfolio. In the case of debt securities, there is a market risk that the
value of debt securities could decline due to a rise in interest rates; the Fund
could sell a Debt Future or write a call or buy a put on a future to attempt to
protect against this risk. Also, as to debt securities, there is a market risk
that debt securities or cash held by the Fund are not fully included in an
increase in value due to a decline in interest rates at times when the Fund is
not fully invested in long-term debt securities; the Fund could purchase a Debt
Future or purchase a call or write a put on a Debt Future to attempt to protect
against this risk. In the case of common stocks, there is a market risk that
the value of common stocks held by the Fund could decline due to a market
decline; the Fund could sell a Stock Index Future or buy a put on a Stock Index
Future to attempt to protect against this risk. Also in the case of common
stocks, there is a market risk that common stocks held by the Fund are not fully
included in an increase in value due to a market increase at times when the Fund
is not fully invested (up to the 20% limit on purchases of common stocks) in
common stocks; the Fund could purchase a Stock Index Future or write a put or
purchase a call on a Stock Index Future to attempt to protect against this risk.
The "sale" of a Debt Future by the Fund means the acquisition by it of an
obligation to deliver the related debt securities (i.e., those called for by the
contract) at a specified price on a specified date. The "purchase" of a Debt
Future means the acquisition by the Fund of an obligation to acquire the related
debt securities at a specified time on a specified date. The "sale" of a Stock
Index Future means the acquisition by the Fund of an obligation to deliver an
amount of cash equal to a specified dollar amount times the difference between
the index value at the close of the last trading day of the future and the price
at which the future is originally struck. No physical delivery of the stocks
making up the index is made. The "purchase" of a Stock Index Future means the
acquisition by the Fund of an obligation to take delivery of such an amount of
cash.
Unlike when the Fund purchases or sells a debt security or common stock, no
price is paid or received by it upon the purchase or sale of a future.
Initially, the Fund will be required to deposit an amount of cash or U.S.
Treasury Bills equal to a varying specified percentage of the contract amount.
This amount is known as initial margin. Cash held in the margin account is not
income producing. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying debt
securities or index fluctuates making the future more or less valuable, a
process known as mark to the market. Changes in variation margin are recorded
by the Fund as unrealized gains or losses. Initial margin payments will be
deposited in the Fund's custodian bank in an account registered in the broker's
name; access to the assets in that account may be made by the broker only under
specified conditions. At any time prior to expiration of the future, the Fund
may elect to close the position by taking an opposite position which will
operate to terminate its position in the future. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to it and it realizes a loss or gain. Although futures by their terms
call for the actual delivery or acquisition of the debt securities or cash, in
most cases the contractual obligation is so fulfilled without having to make or
take delivery. The Fund does not intend to make or take delivery of these
securities or such cash. All transactions in the futures markets are made,
offset or fulfilled through a clearing house associated with the exchange on
which the contracts are traded. Although the Fund intends to buy and sell
futures only on exchanges where there appears to be an active secondary market,
there is no assurance that a liquid secondary market will exist for any
particular future at any particular time. In such event, it may not be possible
to close a futures position.
One risk in employing futures to attempt to protect against the price
volatility of the debt securities or common stocks held in the Fund's portfolio
is the prospect that the prices of futures will correlate imperfectly with the
behavior of the cash (i.e., market value) prices of the debt securities or
common stocks held by the Fund. For a hedge to be completely effective, the
price change of the hedging instrument should equal the price change of the
security being hedged. Such equal price changes are not always possible because
the investment underlying the hedging instrument may not be the same investment
that is being hedged. The Manager will attempt to create a closely correlated
hedge but hedging activity may not be completely successful in eliminating
market value fluctuation. (See below for additional discussion of correlation
as it relates to Stock Index Futures.) The ordinary spreads between prices in
the cash and futures markets, due to the differences in the natures of those
markets, are subject to distortions. A discussion of some factors which may
create such distortions follows. 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 future contracts
through offsetting transactions which could distort the normal relationship
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 or stock market trends by the
Manager may still not result in a successful transaction.
Other risks are that the Manager would be incorrect in its expectations as
to the extent of various interest rate movements in the case of a Debt Future,
or stock market movements in the case of a Stock Index Future, or the time span
within which the movements take place. For example, if the Fund sold a Debt
Future in anticipation of an increase in interest rates, and then interest rates
went down instead, the Fund would lose money on the sale.
Another risk as to Stock Index Futures arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The risk of
imperfect correlation increases as the composition of the Fund's common stock
portfolio diverges from the common stocks included in the applicable index. The
price of the Stock Index Future may move more than or less than the price of the
securities being hedged. If the price of the Stock Index Future moves less than
the price of the securities which are the subject of the hedge, the hedge will
not be fully effective but, if the price of the common stocks 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 common stocks being hedged has
moved in a favorable direction, this advantage will be partially offset by the
future. If the price of the future moves more than the price of the stock, the
Fund will experience either a loss or a gain on the future which will not be
completely offset by movements in the price of the securities which 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
Stock Index Futures, the Fund may buy or sell Stock Index Futures in a greater
dollar amount than the dollar amount of common stocks being hedged if the
historical volatility of the prices of such common stocks being hedged is less
than the historical volatility of the stock index. It is also possible that,
where the Fund has sold futures to hedge its common stocks against decline in
the market, the market may advance and the value of common stocks held in the
portfolio may decline. If this occurred, the Fund would lose money on the
future and also experience a decline in value in 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 common stocks will
tend to move in the same direction as the market indices upon which the futures
are based.
Where Stock Index Futures are purchased to hedge against a possible
increase in the price of stock before the Fund is able to invest in common
stocks in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest in common stocks at that time
because of concern as to possible further market decline or for other reasons,
it will realize loss on the future that is not offset by a reduction in the
price of the common stocks it had anticipated purchasing.
The Fund will deposit in a segregated account with its custodian bank high-
quality debt obligations maturing in one year or less, or cash, in an amount
equal to the fluctuating market value of long futures contracts it has purchased
less any margin deposited on its long position. It may hold cash or acquire
such debt obligations for the purpose of making these deposits.
The use of futures and options thereon to attempt to protect against the
market risk of a decline in the value of portfolio securities is referred to as
having a "short futures position." The use of futures and options thereon to
attempt to protect against the market risk that the Fund might not be fully
invested in common stocks or debt securities to the extent permissible at a time
when the value of these securities is increasing is referred to as having a
"long futures position." The Fund must operate within certain restrictions as
to its long and short positions in futures and options thereon under a rule (the
"CFTC Rule") adopted by the CFTC under the Commodity Exchange Act (the "CEA") to
be eligible for the exclusion provided by the CFTC Rule from registration by the
Fund with the CFTC as a "commodity pool operator" (as defined under the CEA),
and must represent to the CFTC that it will operate within such restrictions.
Under these restrictions the Fund will not, as to any positions, whether long,
short or a combination thereof, enter into futures and options thereon for which
the aggregate initial margins and premiums exceed 5% of the fair market value of
the Fund's assets after taking into account unrealized profits and losses on
options it has entered into; in the case of an option that is "in-the-money" (as
defined under the CEA) the "in-the-money" amount may be excluded in computing
such 5%. (In general a call option on a future is "in-the-money" if the value
of the future exceeds the strike, i.e., exercise, price of the call; a put
option on a future is "in-the-money" if the value of the future which is the
subject of the put is exceeded by the strike price of the put.) Under the
restrictions, the Fund also must, as to its short positions, use futures and
options thereon solely for bona fide hedging purposes within the meaning and
intent of the applicable provisions under the CEA; see the third paragraph under
"Futures Contracts and Options Thereon" as to the meaning of "hedging" in the
case of the Fund. As to its long positions which are used as part of the Fund's
portfolio strategy and are incidental to the Fund's activities in the underlying
cash market, the "underlying commodity value" (see below) of the Fund's futures
and options thereon must not exceed the sum of (i) cash set aside in an
identifiable manner, or short-term U.S. debt obligations or other U.S. dollar-
denominated high-quality short-term money market instruments so set aside, plus
any funds deposited as margin; (ii) cash proceeds from existing investments due
in 30 days, and (iii) accrued profits held at the futures commission merchant.
(There is described above the segregated accounts which the Fund must maintain
with its custodian bank as to its option and futures activities due to
Securities and Exchange Commission ("SEC") requirements; the Fund will, as to
its long positions, be required to abide by the more restrictive of these SEC
and CFTC requirements.) The "underlying commodity value" of a future is
computed by multiplying the size (dollar amount) of the future by the daily
settlement price of the future. For an option on a future that value is the
underlying commodity value of the future underlying the option.
The Fund has no fundamental policy setting a percentage limitation on the
purchase and sale of futures; see, however, the CFTC limitation discussed above.
Investment Restrictions
Certain of the Fund's investment restrictions are described in the
Prospectus. Except as noted otherwise, the following are fundamental policies
and, together with certain restrictions described in the Prospectus, cannot be
changed without shareholder approval. Under these additional restrictions, the
Fund may not:
(i) Buy commodities or commodity contracts; however, it may buy and sell
options and futures as permitted by any other fundamental policy,
whether or not any such option or future is considered to be a commodity
or a commodity contract;
(ii) Invest in mineral related programs or leases;
(iii) Buy the securities of a company if it would then own more than 10% of
the voting securities or any class of securities of that company; or buy
the securities of any company if more than 5% of the Fund's total assets
(valued at market value) would then be invested in that company; or buy
the securities of companies in any one industry if more than 25% of the
Fund's total assets would then be invested in companies in that
industry;
(iv) Buy shares of other investment companies which redeem their shares. The
Fund may buy shares of investment companies which do not redeem their
shares if it does so 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. As an operating policy, the Fund does not have any
intent to invest more than 5% of its assets in such securities in the
foreseeable future. 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;
(v) Invest for the purpose of exercising control or management of other
companies;
(vi) Buy or continue to hold securities of a company if the Fund's Directors
or officers or certain others who own more than .5 of 1% of the shares
of that company own in the aggregate more than 5% of the shares of that
company;
(vii) Participate on a joint, or a joint and several, basis in any trading
account in any securities;
(viii) Sell securities short or buy securities on margin; also, the Fund may
not engage in arbitrage transactions; however, the Fund may make margin
deposits in connection with any of the financial instruments it is
permitted to buy or sell in accordance with any other fundamental
policies;
(ix) Engage in the underwriting of securities, except to the extent it may be
deemed to be an underwriter in connection with the sale of restricted
securities; however, the Fund will not purchase restricted securities if
as a result of such purchase more than 10% of its assets would be
invested in such securities;
(x) Borrow for investment purposes, that is, to purchase securities or
mortgage or pledge any of its assets; this does not prohibit the escrow
arrangements contemplated by the writing of covered call options. 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) Make loans other than certain limited types of loans; the Fund may buy
debt securities which have been sold to the public; it may also buy
other obligations customarily acquired by institutional investors; this
can be considered to be making loans. The Fund may also enter into
repurchase agreements (see "Repurchase Agreements" above) and lend its
securities (see "Lending Securities" above).
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. The Fund's
portfolio turnover rate decreased from 69.24% for the fiscal year ended
September 30, 1993 to 47.05% for the fiscal year ended September 30, 1994. A
high turnover rate will increase transaction expenses of the Fund and could
generate taxable gain.
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 Waddell & Reed Investment Management Company, a wholly-
owned subsidiary of Waddell & Reed, Inc. Under the Management Agreement, the
Manager is employed to supervise the investments of the Fund and provide
investment advice to the Fund. The address of the Manager 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 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 Directors prior to approving any Shareholder Servicing
Agreement or Accounting Services Agreement.
Torchmark Corporation and United Investors Management Company
The Manager 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 United Investors Management Company. United Investors
Management Company is a wholly-owned subsidiary of Torchmark Corporation.
Torchmark Corporation is a publicly held company. The address of Torchmark
Corporation and United Investors Management Company is 2001 Third Avenue South,
Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the company's inception date, whichever was later, and to
TMK/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 the Manager. The Manager has also served as investment
manager for Waddell & Reed Funds, Inc. since its inception in September 1992 and
Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund,
Inc. since they each commenced operations in February 1993. Waddell & Reed,
Inc. serves as principal underwriter for the investment companies in the United
Group of Mutual Funds, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between Waddell &
Reed Services Company (the "Agent"), a subsidiary of Waddell & Reed, Inc., and
the Fund, 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 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 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 Directors without
shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for the Manager's management services, the
Fund pays the Manager a fee as described in the Prospectus.
Prior to the above-described assignment from Waddell & Reed, Inc. to
Waddell & Reed Investment Management Company, all fees were paid to Waddell &
Reed, Inc. The management fees accrued by the Fund for the fiscal years ended
September 30, 1994, 1993 and 1992 were $2,157,608, $2,062,352 and $1,840,853,
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 to the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, the Fund pays the Agent a
monthly fee of $1.0208 for each shareholder account which was in existence at
any time during the prior month, plus $0.30 for each account on which a dividend
or distribution, of cash or shares, had a record date in that month. It 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., the Manager or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a fee for
accounting services as described in the Prospectus. Fees paid to the Agent for
the fiscal years ended September 30, 1994, 1993 and 1992 were $60,000, $56,667
and $50,000, respectively.
The State of California imposes limits on the amount of certain expenses
the Fund can pay and requires the Manager to reduce its fee if these expense
amounts are exceeded. The Manager must reduce the amount of such expenses to
the extent they exceed these expense limits. Not all of the Fund's expenses are
included in the limit. The excluded expenses include interest, taxes, brokerage
commissions and extraordinary expenses such as litigation that usually do not
arise in the normal operations of a mutual fund. The Fund's other expenses,
including its management fee, are included.
The Manager must, under California law, reduce the cost of any included
expenses which are over 2.5% of the Fund's first $30 million of average net
assets, 2% of the next $70 million of average net assets and 1.5% of any
remaining average net assets during a fiscal year. The Fund will notify
shareholders of any change in the limitation.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, the Manager
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 the Manager 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, the
Manager 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 amount of underwriting
commissions for the fiscal years ended September 30, 1994, 1993 and 1992 were
$1,437,569, $1,766,782 and $2,204,322, respectively. The amounts retained by
the Manager for the same periods were $633,769, $775,731 and $962,888,
respectively.
A major portion of the sales charge is paid to sales representatives and
managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may compensate its sales
representatives as to purchases for which there is no 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 a Service Plan (the "Plan") adopted by the Fund pursuant to Rule 12b-
1 under the Investment Company Act of 1940, 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, paid monthly, to reimburse Waddell & Reed,
Inc. for its costs and expenses in connection with the provision of personal
services to Fund shareholders and/or maintenance of shareholder accounts.
The Plan and a related Service Agreement between the Fund and Waddell &
Reed, Inc. contemplate that Waddell & Reed, Inc. may be reimbursed for amounts
it expends in compensating, training and supporting registered sales
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located at
field sales offices; engaging in other activities useful in providing personal
service to Fund shareholders and/or maintenance of shareholder accounts; and in
compensating broker-dealers, and other third parties, who may regularly sell
Fund shares for providing shareholder services and/or maintaining shareholder
accounts. Service fees in the amount of $376,074 were paid (or accrued) by the
Fund for the fiscal year ended September 30, 1994.
The Plan and the Service Agreement were 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 Plan was also approved by 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 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.
Custodial and Auditing Services
The Fund's Custodian is United Missouri Bank, n.a., Kansas City, Missouri.
In general, the custodian is responsible for holding the Fund's cash and
securities. The Fund may place and maintain foreign securities and cash with a
foreign custodian in accordance with Rule 17f-5 of the Investment Company Act of
1940. Price Waterhouse LLP, Kansas City, Missouri, the Fund's independent
accountants, audits the Fund's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each of the shares of the Fund is the value of the
Fund's assets, less what it owes, divided by the total number of shares. For
example, if on a particular day the Fund owned securities worth $100 and had
cash of $15, the total value of the assets would be $115. If it owed $5, the
net asset value would be $110 ($115 minus $5). If it had 11 shares outstanding,
the net asset value of one share would be $10 ($110 divided by 11).
Shares of the Fund are sold at their next determined net asset value plus
the sales charge described in the Prospectus. The price makeup as of September
30, 1994 was as follows:
Net asset value per share (net assets divided
by capital shares outstanding) ............ $3.96
Add: selling commission (5.75% of offering
price) .................................... .24
-----
Maximum offering price per share (net asset
value divided by 94.25%) .................. $4.20
=====
The offering price of a share is its net asset value next determined
following acceptance of a purchase order plus the sales charge. 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 New York Stock Exchange is open for trading as of the
later of the close of the regular session of the New York Stock Exchange
(ordinarily 4:00 p.m. Eastern time) or of the close of the regular session of
any domestic securities or commodities exchange on which an option or future
held by the Fund is traded. The New York Stock Exchange annually announces the
days on which it will not be open for trading. The most recent announcement
indicates that the New York Stock Exchange will not be open on the following
days: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. However, it is possible
that the New York Stock Exchange may close on other days. The net asset value
will change every business day, since the value of the assets changes every day
and so does the number of shares.
The Fund's portfolio securities, except as otherwise noted, 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 NASDAQ (National Association of Securities Dealers Automated Quotations),
which provides information on bid and asked prices quoted by major dealers in
such stocks. Bonds, other than convertible bonds, are valued using a pricing
system provided by a major dealer in bonds. 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. When
market quotations are not readily available, securities are valued at fair value
as determined in good faith under procedures established by and under the
general supervision and responsibility of the Board of Directors.
Options and futures purchased and held by the Fund are valued at the last
sales price thereof on the securities or commodities exchanges on which they are
traded, or, if there are no transactions, at the mean between bid and asked
prices. Ordinarily, the close of the regular session for option trading on
national securities exchanges is 4:10 p.m. Eastern time and the close of the
regular session of commodities exchanges is 4:15 p.m. Eastern time. Futures
contracts will be valued by reference to established futures exchanges. The
value of a futures contract purchased by the Fund will be either the closing
purchase price of the contract or the bid price. Conversely, the value of a
futures contract sold by the Fund will be either the closing price or the asked
price.
When the Fund writes a put or call, an amount equal to the premium received
is included in the Fund's 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
put or call. If a call the Fund 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 the Fund exercised a call it purchased, the amount paid
to purchase the related investment is increased by the amount of the premium
paid. If a put written by the Fund is exercised, the amount that the Fund pays
to purchase the related investment is decreased by the amount of the premium it
received. If the Fund exercises a put it purchased, the amount received from
the sale of the related investment is reduced by the amount of the premium it
paid. If a put or 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.
Optional delivery standby commitments are valued at fair value under the
general supervision and responsibility of the Fund's Board of Directors. They
are accounted for in the same manner as exchange-listed puts.
Minimum Initial and Subsequent Investments
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 sales to certain retirement plan accounts. A $50 minimum
initial investment also pertains 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 the Manager, Waddell & Reed, Inc.,
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. See "Exchanges for Shares of
Other Funds in the United Group."
Reduced Sales Charges
Account Grouping
Large purchases are subject to lower sales charges. The schedule of sales
charges appears in the Prospectus. 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;
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
account;
6. Purchases by that individual or his or her spouse for his or her Individual
Retirement Account ("IRA"), Section 457 of the Internal Revenue Code of
1986, as amended (the "Code") salary reduction plan account provided that
such purchases are subject to a sales charge (see "Net Asset Value
Purchases."), tax sheltered annuity account ("T.S.A.") 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 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
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 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.
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 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 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 accounts for H and W's three
minor children and invest $10,000 in each child's name; the combined
purchase of $105,000 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 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 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 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 the plan may be combined with the additional purchase
only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases is also
available under a Statement of Intention. By signing a Statement of Intention
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 Statement is accepted by Waddell & Reed, Inc.
Each purchase made from time to time under the Statement 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 made under the terms of
the Statement will be the sales charge in effect on the beginning date of the
13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, 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 Statement of Intention indicating his intent to invest in
his own name a dollar amount sufficient to entitle him to purchase
shares at the sales charge applicable to a purchase of $100,000. H
has an IRA account and the shares held under the IRA in the Fund have
a net asset value as of the date the Statement 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 Statement of $10,000; H needs to invest $75,000 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 Statement of Intention 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 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 Statement only if the contractual
plan has been completed.
The minimum initial investment under a Statement of Intention is 5% of the
dollar amount which must be invested under the Statement. An amount equal to 5%
of the purchase required under the Statement will be held "in escrow." If a
purchaser does not, during the period covered by the Statement, invest the
amount required to qualify for the reduced sales charge under the terms of the
Statement, 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 made under a Statement which is not completed will be collected by
redeeming part of the shares purchased under the Statement 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 sales charge lower than that
available under the Statement of Intention, the lower sales charge will apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell &
Reed, Inc. to sell, the shares covered by the Statement.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, 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
Statement will be deducted in computing the aggregate purchases under the
Statement.
Statements of Intention are not available for purchases made under a
simplified employee pension plan 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 apply to purchases of any of the
funds in the United Group which are subject to a sales charge. A purchase of,
or shares held, in any of the funds in the United Group which are subject to the
same sales charge as the Fund will be treated as an investment in the Fund for
the purpose of determining the applicable sales charge. The following funds in
the United Group are subject to a maximum 5.75% ("full") sales charge as
described in the prospectus of each Fund: United Funds, Inc., United
International Growth Fund, Inc., United Continental Income Fund, Inc., United
Vanguard Fund, Inc., United Retirement Shares, Inc., United High Income Fund,
Inc., United New Concepts Fund, Inc., United Gold & Government Fund, Inc. and
United High Income Fund II, Inc. The following funds in the United Group are
subject to a "reduced" sales charge as described in the prospectus of each fund:
United Municipal Bond Fund, Inc., United Government Securities Fund, Inc. and
United Municipal High Income Fund, Inc. For the purposes of obtaining the lower
sales charge which applies to large purchases, purchases in a fund in the United
Group which is subject to a full sales charge may not be grouped with purchases
in a fund in the United Group which is subject to a reduced sales charge;
conversely, purchases made in a fund with a reduced sales charge may not be
grouped or combined with purchases of a fund which is subject to a full sales
charge.
United Cash Management, Inc. is not subject to a sales charge. Purchases
in that fund are not eligible for grouping with purchases in any other fund.
Net Asset Value Purchases
As stated in the Prospectus, Fund shares may be purchased at net asset
value by the Directors and officers of the Fund, employees of Waddell & Reed,
Inc., employees of their affiliates, sales representatives of Waddell & Reed,
Inc. and the spouse, children, parents, children's spouses and spouse's parents
of each such Director, officer, employee and sales representative. "Child"
includes stepchild; "parent" includes stepparent. Purchases in an IRA sponsored
by Waddell & Reed, Inc. established for any of these eligible purchasers may
also be at net asset value. Purchases 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 or a co-trustee
are each an eligible purchaser are also eligible for net asset value purchases.
"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. "Sales representatives" includes retired sales
representatives. A "retired sales representative" is any sales representative
who was, at the time of separation from service from Waddell & Reed, Inc., a
Senior Account Representative. A custodian under the Uniform Gifts (or
Transfers) to Minors Act purchasing for the child or grandchild of any employee
or sales representative may purchase at net asset value whether or not the
custodian himself is an eligible purchaser.
Purchases in a 401(k) plan having 100 or more eligible employees and
purchases in a 457 plan having 100 or more eligible employees may be made at net
asset value.
Reasons for Differences in Public Offering Price
As described herein and in the Prospectus, there are a number of instances
in which the Fund's 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, whether made at one time or over a period of time as under a
Statement of Intention or right of accumulation. See the table of sales charges
in the Prospectus. 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 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 are as follows. Exchanges at net asset value are
permitted because a sales charge has already been paid on the shares exchanged.
Sales 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 at no sales charge are
permitted to attempt to protect against mistaken or not fully informed
redemption decisions. 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 by the Investment Company Act of 1940 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 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
If you qualify, you may arrange to receive regular monthly, quarterly,
semiannual or annual payments; this can be done by redeeming shares on a regular
basis. This service is called Flexible Withdrawal Service (the "Service"). It
is available not only for Fund shares but also for shares of any of the funds in
the United Group. It would be a disadvantage to an investor to make additional
purchases of shares while a withdrawal program is in effect as this would result
in duplication of sales charges.
To qualify for the Service, you must have invested at least $10,000 in
shares which you still own of any of the funds in the United Group; or, you must
own shares having a value of at least $10,000. The value of this purpose is not
the net asset value but the value at the offering price, i.e., the net asset
value plus the sales charge.
To start this Service, you must fill out a form (available from Waddell &
Reed, Inc.), advising Waddell & Reed, Inc. how you want your shares redeemed to
make the payments. You have three choices:
First. To get a monthly, quarterly, semiannual or annual payment of $50 or
more;
Second. To get 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 fix
the percentage; or
Third. To get a monthly or quarterly payment, which will change each month
or quarter, by redeeming a fixed number of shares (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.
The Fund, not Waddell & Reed, Inc., pays the costs of this Service. Having
the Service costs you nothing extra individually. There is a $2.00 fee for each
withdrawal from Retirement Plan accounts.
If you have a share certificate for the shares you want to make available
for this Service, you must enclose the certificate with the form initiating the
Service.
The dividends and distributions on shares you have made available for this
Service are reinvested in additional shares. All payments 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 your account are redeemed, you will not
receive any 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. For
example, if you started out with a $50 monthly payment, you could change to a
$200 quarterly payment. You can 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
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 reinvestment of dividends or
distributions may be freely exchanged for 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.
You may exchange shares you own in another fund in the United Group for
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. Shares of these funds may be exchanged for shares of the
Fund only if (i) you have 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 the original purchase for at least six
months.
Subject to the above rules regarding sales charges, you may have a specific
dollar amount of shares of United Cash Management, Inc. automatically exchanged
each month into 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 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 is $100, which may be allocated among 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.
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 written 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
For individual taxpayers meeting certain requirements, Waddell & Reed, Inc.
offers four retirement plan arrangements which provide tax deferral and
contribute to retirement assets. All four of them involve investment in shares
of the Fund (or the shares of certain other funds in the United Group).
First. A self-employed person may set up a plan that is commonly called a
Keogh 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
a maximum of $30,000.
Second. An investor having earned income may set up a plan that is
commonly called an IRA. Under an IRA, an investor can contribute each year up
to 100% of his or her earned income up to a maximum of $2,000. The maximum is
$2,250 if an investor's spouse has no earned income in a taxable year. If an
investor's spouse has at least $2,000 of earned income in a taxable year, the
maximum is $4,000 ($2,000 for each spouse).
These 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 participates, the
adjusted gross income does not exceed certain levels.
An investor may also use an IRA to receive a rollover contribution which is
either (a) a direct rollover 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 an 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.
Third. 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 custodial account under Section
403(b) of the Code.
Fourth. 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.
Waddell & Reed, Inc. also offers to businesses prototype employee benefit
plans qualified under Section 401 of the Code. Investments may be made in the
Fund in accordance with the terms of the plans.
More detailed information about these arrangements is in the applicable
forms which 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; the emergency
or other extraordinary conditions there indicated under which payment may be
delayed beyond seven days are certain emergency conditions determined by the
Securities and Exchange Commission, when the New York Stock Exchange is closed
other than for weekends or holidays, or when trading on the Exchange is
restricted. The extraordinary conditions mentioned in the Prospectus under
which redemptions may be made in portfolio securities are that the Fund's Board
of Directors can decide that conditions exist making cash payments undesirable.
If they should, redemption payments could be made in securities. They would be
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 Investment Company
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.
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 of Directors 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.
Reinvestment Privilege
The Prospectus discusses the reinvestment privilege under which, if you
redeem and then decide it was not a good idea, you may reinvest. If Fund shares
are then being offered, you can put all or part of your redemption payment back
into the Fund's shares without any sales charge 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 request was received. You
can do this only once as to Fund shares. You do not use up this privilege by
redeeming shares to invest the proceeds at net asset value in a Keogh plan or an
IRA.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board 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.
Each of the Fund's Directors is also a Director of each of the other funds
in the United Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc.,
Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund,
Inc. and each of its officers is also an officer of one or more of these funds.
The principal occupation of each Director and officer during at least the past
five years is given below. Each of the persons listed through and including Mr.
Wright is a member of the Fund's Board of Directors. The other persons are
officers but not Board members.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund; Chairman of the Board of
Directors of Waddell & Reed Financial Services, Inc., United Investors
Management Company and United Investors Life Insurance Company; Chairman of the
Board of Directors and Chief Executive Officer of Torchmark Corporation;
Chairman of the Board of Directors of Vesta Insurance Group, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed, Inc.
KEITH A. TUCKER*
President of the Fund; President, Chief Executive Officer and Director of
Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors of
the Manager, Waddell & Reed, Inc., Waddell & Reed Services Company, Waddell &
Reed Asset Management Company and Torchmark Distributors, Inc., an affiliate of
Waddell & Reed, Inc.; Vice Chairman of the Board of Directors, Chief Executive
Officer and President of United Investors Management Company; Vice Chairman of
the Board of Directors of Torchmark Corporation; Director of Southwestern Life
Corporation; formerly, partner in Trivest, a private investment concern;
formerly, Director of Atlantis Group, Inc., a diversified company.
HENRY L. BELLMON
Route 1
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma; prior to his current service as Director of the funds in the United
Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc., he served in
such capacity for the funds in the United Group and TMK/United Funds, Inc.
DODDS I. BUCHANAN
University of Colorado
Campus Box 419
Boulder, Colorado 80309
Advisory Director, The Hand Companies; President, Buchanan Ranch Corp.;
formerly, Senior Vice President and Director of Marketing Services, The Meyer
Group of Management Consultants; formerly, Chairman, Department of Marketing,
Transportation and Tourism, University of Colorado; formerly, Professor of
Marketing, College of Business, University of Colorado.
JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Formerly, President and Director of Kansas City Stock Yards Company;
formerly, Partner in Dillingham Farms, a farming operation.
JOHN F. HAYES*
335 N. Washington
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; formerly, President of Gilliland & Hayes, P.A., a law firm.
GLENDON E. JOHNSON
7300 Corporate Center Drive
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Financial Corporation
and related subsidiaries.
WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of the
Fund, each Fund in the United Group, TMK/United Funds, Inc., Waddell & Reed
Funds, Inc., Torchmark Government Securities Fund, Inc. and Torchmark Insured
Tax-Free Fund, Inc. (Mr. Morgan retired as Chairman of the Board of Directors
and President of these Funds on April 30, 1993); formerly, President, Director
and Chief Executive Officer of the Manager and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company; formerly,
Director of Waddell & Reed Asset Management Company, United Investors Management
Company and United Investors Life Insurance Company, affiliates of Waddell &
Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management and
investment; formerly, Director of The Vendo Company, a manufacturer and
distributor of vending machines.
FREDERICK VOGEL, III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired.
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
LESLIE S. WRIGHT
Samford University
800 Lakeshore Drive
Birmingham, Alabama 35209
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association; formerly, President of Samford University.
Robert L. Hechler
Vice President and Principal Financial Officer of the Fund; Vice President,
Chief Operations Officer, Director and Treasurer of Waddell & Reed Financial
Services, Inc.; Executive Vice President, Principal Financial Officer, Director
and Treasurer of the Manager; President, Chief Executive Officer, Principal
Financial Officer, Director and Treasurer of Waddell & Reed, Inc.; Director and
Treasurer of Waddell & Reed Asset Management Company; President, Director and
Treasurer of Waddell & Reed Services Company; Vice President, Treasurer and
Director of Torchmark Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund; 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 the Manager and Waddell & Reed Asset Management Company; Senior Vice
President and Chief Investment Officer of United Investors Management Company.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund;
Vice President of Waddell & Reed Services Company.
Sharon K. Pappas
Vice President, Secretary and General Counsel of the Fund; Vice President,
Secretary and General Counsel of Waddell & Reed Financial Services, Inc.; Senior
Vice President, Secretary and General Counsel of the Manager and Waddell & Reed,
Inc.; Director, Senior Vice President, Secretary and General Counsel of Waddell
& Reed Services Company; Director, Secretary and General Counsel of Waddell &
Reed Asset Management Company; Vice President, Secretary and General Counsel of
Torchmark Distributors, Inc.; formerly, Assistant General Counsel of the
Manager, Waddell & Reed Financial Services, Inc., Waddell & Reed, Inc., Waddell
& Reed Asset Management Company and Waddell & Reed Services Company.
John M. Holliday
Vice President of the Fund; Senior Vice President of the Manager; Senior
Vice President of Waddell & Reed Asset Management Company; formerly, Senior Vice
President of Waddell & Reed, Inc.
Louise D. Rieke
Vice President of the Fund; Vice President of the Manager; Vice President
of Waddell & Reed Asset Management Company; formerly, Vice President of Waddell
& Reed, Inc.
Carl E. Sturgeon
Vice President of the Fund; Vice President of the Manager; formerly, Vice
President of Waddell & Reed, Inc.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
As of the date of this SAI, four of the Fund's Directors may be deemed to
be "interested persons" as defined in the Investment Company Act of 1940 of its
underwriter, Waddell & Reed, Inc., or the Manager. The Directors who may be
deemed to be "interested persons" are indicated as such by an asterisk.
The Board 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 75 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 past services whether or not services are
rendered in his capacity as Director Emeritus, but has no authority or
responsibility with respect to management of the Fund. Currently, no person
serves as Director Emeritus.
The funds in the United Group, TMK/United Funds, Inc. and Waddell & Reed
Funds, Inc. pay to each Director a total of $40,000 per year, plus $500 for each
meeting of the Board of Directors attended 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,
TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. based on their relative
size. During the Fund's fiscal year ended September 30, 1994, its share was
$14,236. The officers are paid by the Manager or its affiliates.
Shareholdings
As of November 30, 1994, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. As of such date
no person owned of record or was known by the Fund to own beneficially 5% or
more of the Fund's outstanding shares.
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder of the Fund, other than payments when you redeem your shares. The
first source is the Fund's net investment income, which is derived from the
dividends, interest and earned discount on the securities it holds less its
expenses. The second source is realized capital gains, which are derived from
the proceeds received from the sale of securities at a price higher than the
Fund's tax basis (usually cost) in such securities; 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. Payments, if any, from long-term
capital gains are called distributions.
The Fund pays distributions only if it has net capital gains (the excess of
net long-term capital gains over net short-term capital losses). It may or may
not have such gain, depending on whether or not securities are sold and at what
price. If the Fund has net capital gains, it will ordinarily pay distributions
once each year, in the latter part of the fourth calendar quarter. Even if it
has capital gains for a year, the Fund does not pay out the gains if it has
applicable prior year losses to offset the gains.
Choices You Have on Your Dividends and Distributions
In your application form, you can give instructions that (i) you want cash
for your dividends and distributions, (ii) you want your dividends and
distributions reinvested in Fund shares or (iii) you want cash for your
dividends and want your distributions reinvested in Fund shares. You can change
your instructions at any time. If you give no instruction, your dividends and
distributions will be reinvested in Fund shares. All reinvestments 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 dividend and distributions in cash, you can thereafter
reinvest them (or distributions only) in Fund shares 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
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Code, the Fund must distribute to its shareholders for
each taxable year at least 90% 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) 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) the Fund must derive less than 30% of its
gross income each taxable year from the sale or other disposition of securities,
or any of the following, that were held for less than three months: (i)
options, futures contracts or forward contracts or (ii) foreign currencies (or
options, futures contracts or forward contracts thereon) that are not directly
related to the Fund's principal business of investing in securities (or in
options and futures with respect to securities) ("Short-Short Limitation"); (3)
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 outstanding voting securities of the issuer; and (4) 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.
Dividends and distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months are deemed to have been paid by the Fund and received by you 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
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 purchaser 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 make sufficient 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 each November 1 and the end of
the current calendar year.
Income from Foreign Securities
Dividends and interest received by the Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
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 Currencies
The use of hedging strategies, such as writing (selling) and purchasing
options and futures, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses the
Fund realizes in connection therewith. Income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in options and futures derived by the Fund with respect to its
business of investing in securities, will qualify as permissible income under
the Income Requirement. However, income from the disposition of options and
futures will be subject to the Short-Short Limitation if they are held for less
than three months. Income from the disposition of foreign currencies that are
not directly related to the Fund's principal business of investing in securities
(or options and futures with respect to securities) also will be subject to the
Short-Short Limitation if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all of the Fund's hedging transactions. To the
extent this treatment is not available, the Fund may be forced to defer the
closing out of certain options and futures beyond the time when it otherwise
would be advantageous to do so, in order for the Fund to continue to qualify as
a RIC.
Any income the Fund earns from writing options is taxed as short-term
capital gains. 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 expires without being
exercised, the premium it receives also will be a short-term gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale. The Fund will not write so many options
that it could fail to continue to qualify as a RIC.
Certain options and futures contracts in which the Fund may invest may be
"section 1256 contracts." Section 1256 contracts held by the Fund at the end of
each taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which the Fund has made an election not to have the
following rules apply, are "marked-to-market" (that is, treated as sold 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 gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, are
treated as long-term capital gains or losses, and the balance is treated as
short-term capital gains or losses. Section 1256 contracts also may be marked-
to-market for purposes of the Excise Tax and for other purposes.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Fund may invest. Section 1092
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. Section 1092 also provides
certain "wash sale" rules, which 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.
Zero Coupon and Payment-in Kind Securities
The Fund may acquire zero coupon or other securities issued with original
issue discount. As the holder of those securities, the Fund must include in its
income the original issue discount that accrues on the securities during the
taxable year, even if the Fund receives no corresponding payment on the
securities during the year. Similarly, the Fund must include in its gross
income securities it receives as "interest" on payment-in-kind securities.
Because the Fund annually must distribute substantially all of its investment
company taxable income, including any original issue discount and other non-cash
income, in order to qualify for treatment as a RIC and to avoid imposition of
the Excise Tax, it may be required in a particular year to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions will be made from the Fund's cash assets or from
the proceeds of sales of portfolio securities, if necessary. The Fund may
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gains. In
addition, any such gains may be realized on the disposition of securities held
for less than three months. Because of the Short-Short Limitation, any such
gains would reduce the Fund's ability to sell other securities, or certain
options or futures, held for less than three months that it might wish to sell
in the ordinary course of its portfolio management.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by the Manager 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. 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.
To effect the portfolio transactions of the Fund, the Manager 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 achieve "best
execution" (prompt and reliable execution at the best price obtainable) for
reasonable and competitive commissions. The Manager 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 ("brokerage services")
considered by the Manager to be useful or desirable for its investment
management of the Fund and/or the other funds and accounts over which the
Manager or its affiliates have investment discretion.
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 brokerage services may be
higher than another qualified broker would charge for effecting comparable
transactions if a good faith determination is made by the Manager that the
commission is reasonable in relation to the brokerage services provided.
Subject to the foregoing considerations, the Manager may also consider the
willingness of particular brokers and dealers to sell shares of the Fund and
other funds managed by the Manager or its affiliates as a factor in its
selection. No allocation of brokerage or principal business is made to provide
any other benefits to the Manager or its affiliates.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of the Manager or its affiliates
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 the
Manager 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 the Manager.
Such investment research, which may be supplied by a third party at the
instance 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 the
Manager; serves to make available additional views for consideration and
comparisons; and enables the Manager to obtain market information on the price
of securities held in the Fund's portfolio or being considered for purchase.
In placing transactions for the Fund's portfolio, the Manager may consider
sales of shares of the Fund and other funds managed by the Manager and its
affiliates as a factor in the selection of brokers to execute portfolio
transactions. The Manager intends to allocate brokerage on the basis of this
factor only if the sale is $2 million or more and there is no sales charge.
This results in the consideration only of sales which by their nature would not
ordinarily be made by Waddell & Reed, Inc.'s direct sales force and is done in
order to prevent the direct sales force from being disadvantaged by the fact
that it cannot participate in Fund brokerage.
During the Fund's fiscal years ended September 30, 1994, 1993 and 1992, it
paid brokerage commissions of $37,454, $43,462 and $30,896, 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 bro-
ker-dealer firm or buys from a broker-dealer firm securities owned by it.
During the Fund's last fiscal year, the transactions, other than principal
transactions, which were directed to broker-dealers who provided research as
well as execution totaled $5,976,726 on which $19,592 in brokerage commissions
were paid. These transactions were allocated to these broker-dealers by the
internal allocation procedures described above.
Buying and Selling With Other Funds
The Fund and one or more of the other funds in the United Group, TMK/United
Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government Securities Fund,
Inc. and Torchmark Insured Tax-Free Fund, Inc. or accounts over which Waddell &
Reed Asset Management Company exercises investment discretion frequently buy or
sell the same securities at the same time. If this happens, the amount of each
purchase or sale is divided. This is done on the basis of the amount of
securities each fund or account wanted to buy or sell. 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.
OTHER INFORMATION
The Shares of the Fund
The Fund presently has only one kind (class) of shares. Each share has the
same rights to dividends, to vote and to receive assets if the Fund liquidates
(winds up). Each fractional share has the same rights, in proportion, as a full
share. Shares are fully paid and nonassessable when bought.
