File No. 33-5648
File No. 811-4520
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. _____
Post-Effective Amendment No. 21
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 21
UNITED HIGH INCOME FUND II, INC.
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(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
__X__ on January 31, 1999 pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
==============================================================================
DECLARATION REQUIRED BY RULE 24f-2(a)(1)
The issuer has registered an indefinite amount of its securities under
the Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for the
Registrant's fiscal year ended September 30, 1998 will be filed on or about
December 28, 1998.
<PAGE>
January 31, 1999
GRAPHIC LOGO
GRAPHIC LOGO
UNITED HIGH INCOME FUND II, INC.
Class A Shares
----------------------------------------------------
This Fund seeks as its primary goal a high level of
current income. As a secondary goal, the Fund seeks
capital growth when consistent with its primary
goal. The Fund invests primarily in a diversified
portfolio of high-yield, high-risk, fixed-income
securities, the risks of which are, in the judgment
of the Fund's investment manager, consistent with
the Fund's goals.
LOGO OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
WADDELL & REED APPROVED OR DISAPPROVED THE FUND'S SHARES, OR
Financial Services DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR
COMPLETE. IT IS A CRIMINAL OFFENSE TO STATE
OTHERWISE.
P R O S P E C T U S
<PAGE>
T A B L E O F C O N T E N T S
AN OVERVIEW OF THE FUND 3
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PERFORMANCE 4
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EXPENSES 5
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THE INVESTMENT PRINCIPLES
OF THE FUND 6
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Investment Goals and Principal
Strategies 6
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Principal Risk Considerations 8
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FINANCIAL HIGHLIGHTS 9
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YOUR ACCOUNT 10
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Ways to Set Up Your Account 10
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Buying Shares 12
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Sales Charge Reductions and
Waivers 13
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Waivers for Certain Investors 14
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Minimum Investments 14
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Adding to Your Account 15
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Selling Shares 15
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Shareholder Services 17
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Personal Service 17
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Reports 18
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Exchanges 18
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Automatic Transactions 18
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Distributions and Taxes 19
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Distributions 19
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Taxes 20
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THE MANAGEMENT OF
THE FUND 22
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Portfolio Management 22
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Management Fee 23
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<PAGE>
An
Overview
of the
Fund
GRAPHIC LOGO
Goals:
United High Income Fund II, Inc. (the "Fund") seeks, as a primary goal, a high
level of current income. As a secondary goal, the Fund seeks capital growth
when consistent with its primary goal.
Strategies:
The Fund seeks to achieve its goals by investing in a diversified portfolio of
high-yield, high-risk, fixed-income securities, the risks of which are, in the
judgment of Waddell & Reed Investment Management Company ("WRIMCO"), the Fund's
investment manager, consistent with the Fund's goals. The Fund may invest,
without limit, in lower quality bonds, commonly called "junk bonds." The Fund
may also invest a significant portion of its assets in common or preferred
stock.
Principal Risks of Investing in the Fund:
Because the Fund owns different types of investments, a variety of factors can
affect its investment performance, such as:
o changes in interest rates
o changes in the maturities of bonds owned by the Fund
o the credit quality and other conditions of the companies whose securities the
Fund holds
o bond and stock market conditions, generally
o general economic and industry news
o the skill of WRIMCO in evaluating and managing the interest rate and credit
risks of the Fund's portfolio
Also, the Fund can invest in foreign securities, which present additional risks
such as those relating to currency fluctuations and political or economic
conditions in the foreign country.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment.
3
<PAGE>
Performance
GRAPHIC LOGO
Who May Want to Invest:
The Fund is designed for investors who primarily seek a level of current income
that is higher than is normally available with securities in the higher rated
categories and, secondarily, seek capital growth where consistent with this
income goal, through a diversified, actively managed portfolio. The Fund is not
suitable for all investors. You should consider whether the Fund fits with your
particular investment objectives.
The chart and table below show the past performance of the Fund's Class A
shares:
o The chart presents the annual returns for the past ten years and shows how
performance has varied from year to year.
o The table shows Class A average annual returns and compares them to the
market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does
not necessarily indicate how it will perform in the future.
Note that the performance information in the chart and table is based on
calendar-year periods, while the information shown in the Financial Highlights
section of this Prospectus and in the Fund's shareholder reports is based on
the Fund's fiscal year.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
'89.................... -3.24%
'90.................... -5.29%
'91.................... 31.31%
'92.................... 15.23%
'93.................... 17.39%
'94.................... -4.07%
'95.................... 16.88%
'96.................... 11.93%
'97.................... 14.97%
'98.................... --
In the period shown in the chart, the highest quarterly return was 11.52% (the
first quarter of 1991) and the lowest quarterly return was -4.23% (the first
quarter of 1990).
The chart does not reflect any sales charge that you may be required to pay
upon purchase of the Fund's Class A shares. If the sales charge were included,
the returns would be less than those shown.
4
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year 5 Years 10 Years
Class A Shares of the
Fund % % %
Salomon Brothers High
Yield Index
Lipper High Current
Yield Bond Fund
Universe Average
The indexes shown are broad-based, securities market indexes that are
unmanaged. The Lipper average is a composite of mutual funds with goals similar
to that of the Fund.
Expenses
GRAPHIC LOGO
The following table describes the fees and expenses that you may pay if you
buy and hold shares of the Fund:
Shareholder fees
(fees deducted directly from your investment)
Maximum sales charge (load) on purchases
(as a percentage of offering price) 5.75%
Maximum sales charge (load) on
reinvested dividends None
Deferred sales charge (load) None
Redemption fees None
Exchange fee None
Annual Fund Operating Expenses
(expenses deducted from Fund assets,
as a percentage of average net assets).
Management fees 0.54%
Distribution and Service (12b-1) fees (1) 0.22%
Other expenses 0.21%
Total annual Fund operating expenses 0.97%
(1)It is possible that long-term shareholders of the Fund may bear 12b-1
distribution fees that are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc.
5
<PAGE>
Example:
This example is intended to help you compare the cost of investing in the Class
A shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the Fund for each time period
specified, (b) your investment has a 5% return each year, and (c) the Class A
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be:
1 year $ 668
3 years $ 866
5 years $1,080
10 years $1,696
(2)Use of an assumed annual return of 5% is for illustration purposes only and
is not a representation of the Fund's future performance, which may be greater
or lesser.
Your costs would be the same whether or not you redeemed your shares at the end
of each time period. For a more complete discussion of certain expenses and
fees, see "Management Fees."
<PAGE>
The
Investment
Principles of
the Fund
GRAPHIC LOGO
Investment Goals and Principal Strategies
The primary goal of the Fund is to earn a high level of current income. As a
secondary goal, the Fund seeks capital growth when consistent with its primary
goal. The Fund seeks to achieve these goals by investing primarily in a
diversified portfolio of high-yield, high-risk, fixed-income securities, the
risks of which are, in the judgment of WRIMCO, consistent with the Fund's
goals. There is no guarantee that the Fund will achieve its goals.
There are three main types of securities that the Fund owns: debt securities,
preferred stock and common stock. The Fund may also own convertible securities.
In general, the high income that the Fund seeks is paid by debt securities in
the lower rating categories of the established rating services or unrated
securities that are determined by WRIMCO to be of comparable quality; these are
securities rated BBB or lower by Standard & Poor's, a division of The
McGraw-Hill Companies,
6
<PAGE>
Inc. ("S&P"), or Baa or lower by Moody's Investors Service, Inc. ("MIS") and
unrated securities. Lower-quality debt securities (commonly called "junk
bonds") are considered to be speculative and involve greater risk of default or
price changes due to changes in the issuer's creditworthiness. The market
prices of these securities may fluctuate more than higher-quality securities
and may decline significantly in periods of general economic difficulty.
The Fund will normally invest at least 80% of its total assets to seek a high
level of current income. The Fund limits its acquisition of common stock so
that no more than 20% of its assets will consist of common stock and no more
than 10% of its assets will consist of non-dividend-paying common stock.
WRIMCO may look at a number of factors in selecting securities for the Fund's
portfolio. These include an issuer's past, current and estimated future:
o financial strength;
o cash flow;
o management;
o borrowing requirements; and
o responsiveness to changes in interest rates and business conditions.
When WRIMCO believes that a full or partial temporary defensive position is
desirable, due to present or anticipated market or economic conditions, WRIMCO
may take any one or more of the following steps with respect to up to all of
the assets in the Fund's portfolio:
o shortening the average maturity of the Fund's debt portfolio;
o holding cash or cash equivalents (short-term investments, such as commercial
paper and certificates of deposit) in varying amounts designed for
defensive purposes; and
o emphasizing high-grade debt securities.
Going defensive in any one or more of these manners might reduce the yield on
the Fund's portfolio. As an alternative to taking a temporary defensive
position or in order to more quickly participate in anticipated market changes
or market conditions, the Fund may invest in options and futures. The Fund may
also invest in other types of investments and use certain other instruments in
seeking to achieve the Fund's goals. For example, the
7
<PAGE>
Fund may invest in options, futures contracts, asset-backed securities and
other derivative instruments if it is permitted to invest in the type of asset
by which the return on, or value of, the derivative is measured. See the SAI
for more information about the Fund's permitted investments and strategies, as
well as the restrictions that apply to them.
Principal Risk Considerations
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk. Market risk is the possibility of a
change in the price of the security because of market factors. Because of
market risks, the share price of the Fund will likely change as well. Financial
risk is based on the financial situation of the issuer of the securities. The
financial risk of the Fund depends on the credit quality of the securities in
which it is invested. Prepayment risk is the possibility that, during periods
of falling interest rates, a debt security with a high stated interest rate
will be prepaid before its expected maturity date. Because the Fund owns
different types of investments, its performance will be affected by a variety
of factors. In general, the value of the Fund's investments and the income it
generates will vary from day to day, generally due to changes in interest
rates, market conditions and other company and economic news. Performance will
also depend on WRIMCO's skill in selecting investments.
Certain types of the Fund's authorized investments and strategies (such as
derivative instruments) involve special risks. Lower-quality debt securities
are considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than higher-quality securities and may
decline significantly in periods of general economic difficulty. Foreign
securities and foreign currencies may involve risks relating to currency
fluctuations, political or economic conditions in the foreign country, and the
potentially less stringent investor protection and disclosure standards of
foreign markets. These factors could make foreign investments, especially those
in developing countries, more volatile.
8
<PAGE>
Financial Highlights
GRAPHIC LOGO
The following information is to help you understand the financial performance of
the Fund's Class A* shares for the fiscal periods shown. "Total return" shows
how much your investment would have increased (or decreased) during each period,
assuming reinvestment of all dividends and distributions. This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the SAI, which is available upon request.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
<S> <C> <C> <C> <C> <C>
Per-share Data 1998 1997 1996 1995 1994
Net asset value,
beginning of period $4.42 $4.14 $4.03 $3.96 $4.21
---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment
income 0.37 0.36 0.35 0.35 0.35
Net realized and
unrealized gain (loss)
on investments (0.30) 0.28 0.11 0.07 (0.25)
---------------------------------------------------------------------------------------------
Total from
investment
operations 0.07 0.64 0.46 0.42 0.10
---------------------------------------------------------------------------------------------
Less dividends
declared from net
investment income (0.37) (0.36) (0.35) (0.35) (0.35)
---------------------------------------------------------------------------------------------
Net asset value,
end of period $ 4.12 $ 4.42 $ 4.14 $ 4.03 $ 3.96
---------------------------------------------------------------------------------------------
Total return** 1.22% 16.20% 11.90% 11.25% 2.31%
Ratios/Supplemental Data
Net assets, end of
period (in millions) $ 416 $ 407 $ 368 $ 368 $ 363
Ratio of expenses to
average net assets 0.96% 0.93% 0.95% 0.89% 0.88%
Ratio of net
investment income
to average net assets 8.26% 8.54% 8.60% 8.93% 8.41%
Portfolio turnover
rate 58.85% 64.38% 55.64% 26.82% 47.05%
</TABLE>
*On January 12, 1996, Fund shares outstanding were designated Class A shares.
**Total return calculated without taking into account the sales load deducted
on an initial purchase.
9
<PAGE>
Your Account
GRAPHIC LOGO
The different ways to set up (register) your account are listed below.
Ways to Set Up Your Account
Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
Business or Organization
For investment needs of corporations, associations, partnerships, institutions
or other groups
Retirement Plans
To shelter your retirement savings from taxes
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts (other
than Roth IRAs and Education IRAs) may be tax deductible.
o Individual Retirement Accounts (IRAs) allow
1. anyone of legal age and under 70 1/2
2. with earned income to invest up to $2,000 per tax year.
3. The maximum annual contribution for an investor and his or her spouse is
$4,000 ($2,000 for each spouse) or, if less, the couple's combined
earned income for the taxable year.
o IRA Rollovers retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
o Roth IRAs allow certain individuals to make non-deductible contributions
up to $2,000 per year.
o Education IRAs are established for the benefit of a minor, nondeductible
contributions are made, tax-free withdrawals are permitted to pay the higher
education expenses of the beneficiary.
o Simplified Employee Pension Plans (SEP -- IRAs) provide small business owners
or those with self-employed income (and their eligible employees) with many
of the same advantages as a Keogh Plan, but with fewer administrative
requirements.
10
<PAGE>
o Savings Incentive Match Plans for Employees (SIMPLE Plans) can be established
by small employers to contribute to their employees' retirement accounts
and involve fewer administrative requirements than 401(k) or other
qualified plans generally.
o Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves up to 25% of their annual earned income, with a
maximum of $30,000 per year.
o 401(k) Programs allow employees of corporations and non-governmental
tax-exempt organizations of all sizes to contribute a percentage of their
wages on a tax-deferred basis. These accounts need to be established by the
administrator or trustee of the plan.
o 403(b) Custodial Accounts are available to employees of public school systems
or certain types of charitable organizations.
o 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA").
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.
11
<PAGE>
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its financial
advisors. To open your account you must complete and sign an application. Your
Waddell & Reed financial advisor can help you with any questions you might
have.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a Class A share (price to buy one Class A share) is the
Fund's Class A net asset value ("NAV") plus the sales charge shown in the table
below.
<TABLE>
<CAPTION>
Sales Charge Sales Charge as
as Percent of Approx. Percent of
Size of Purchase Offering Price Amount Invested
<S> <C> <C>
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
</TABLE>
The Fund's Class A NAV is the value of a single share.
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
o Other investment assets for which market prices are unavailable are valued at
their fair value by or at the direction of the Board of Directors.
The Fund is open for business each day the New York Stock Exchange (the "NYSE")
is open. The Fund normally calculates the NAVs of its shares as of the later of
the close of business of the NYSE, normally 4 p.m. Eastern time, or the close
of the regu-
12
<PAGE>
lar session of any other securities or commodities exchange on which an option
or futures contract held by the Fund is traded.
The Fund may invest in securities listed on foreign exchanges which may trade
on Saturdays or on U.S. national business holidays when the NYSE is closed.
Consequently, the NAV of Fund shares may be significantly affected on days when
the Fund does not price its shares and when you are not able to purchase or
redeem the Fund's shares.
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Sales Charge Reductions and Waivers
Lower sales charges are available by:
o combining additional purchases of Class A shares of any of the funds in the
United Group, except United Cash Management, Inc., with the NAV of Class A
shares already held ("rights of accumulation").
o grouping all purchases of Class A shares made during a thirteen-month period
("Statement of Intention"). Class A shares of another fund purchased
through a contractual plan may not be included unless the plan has been
completed.
o grouping purchases by certain related persons. Additional information and
applicable forms are available from Waddell & Reed financial advisors.
13
<PAGE>
Waivers for Certain Investors
Class A shares may be purchased at NAV by:
o The Directors and officers of the Fund, employees of Waddell & Reed, Inc.,
employees of their affiliates, financial advisors of Waddell & Reed, Inc. and
the spouse, children, parents, children's spouses and spouse's parents of
each.
o Purchases of Class A shares in certain retirement plans and certain trusts
for these persons.
o Purchases of Class A shares in a 401(k) plan having 100 or more eligible
employees and purchases of Class A shares in a 457 plan having 100 or more
eligible employees. Shares may also be issued at NAV in a merger, acquisition
or exchange offer made pursuant to a plan of reorganization to which the Fund
is a party.
The Fund has adopted a Distribution and Service Plan ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. Under the Plan, the Fund may
pay Waddell & Reed, Inc. a fee of up to 0.25%, on an annual basis, of the
average daily net assets of the Class A shares. This fee is to reimburse
Waddell & Reed, Inc. for the amounts it spends for distributing the Fund's
Class A shares, providing services to Class A shareholders or maintaining Class
A shareholder accounts. Because the Plan fees are paid out of the Class A
assets on an on-going basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales charges.
Minimum Investments
To Open an Account $500
For certain exchanges $100
For certain retirement accounts and accounts opened
with Automatic Investment Service $ 50
For certain retirement accounts and accounts opened
through payroll deductions for or by employees of
WRIMCO, Waddell & Reed, Inc. and their affiliates $ 25
To Add to an Account
For certain exchanges $100
For Automatic Investment Service $ 25
14
<PAGE>
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed, Inc. Mail
the check along with:
o the detachable form that accompanies the confirmation of a prior purchase or
your year-to-date statement; or
o a letter stating your account number, the account registration and that you
wish to purchase Class A shares of the Fund.
Mail to Waddell & Reed, Inc. at the address printed on your confirmation or
year-to-date statement.
Selling Shares
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The redemption price (price to sell one Class A share) is the Fund's Class A
NAV.
To sell shares, your request must be made in writing.
Complete an Account Service Request form, available from your Waddell & Reed
financial advisor, or write a letter of instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number of shares to be redeemed; and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.
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<PAGE>
Special Requirements for Selling Shares
<TABLE>
<CAPTION>
Account Type Special Requirements
<S> <C>
The written instructions must be signed by all
Individual or Joint persons required to sign for transactions, exactly as
Tenant their names appear on the account.
The written instructions must be signed by the
Sole Proprietorship individual owner of the business.
The custodian must sign the written instructions
UGMA, UTMA indicating capacity as custodian.
The written instructions must be signed by a
Retirement Account properly authorized person.
The trustee must sign the written instructions
indicating capacity as trustee. If the trustee's name is
Trust not in the account registration, provide a currently
certified copy of the trust document.
At least one person authorized by corporate
Business or Organization resolution to act on the account must sign the
written instructions.
The written instructions must be signed by the
Conservator, Guardian person properly authorized by court order to act in
or Other Fiduciary the particular fiduciary capacity.
</TABLE>
When you place an order to sell shares, your shares will be sold at the next
NAV calculated after receipt of a written request for redemption in good order
by Waddell & Reed, Inc. at its home office. Note the following:
o If more than one person owns the shares, each owner must sign the written
request.
o If you hold a certificate, it must be properly endorsed and sent to the Fund.
o If you recently purchased the shares by check, the Fund may delay payment of
redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance that
the check has cleared and been honored. If not, payment of the redemption
proceeds on these shares will be delayed until the earlier of 10 days or
the date the Fund can verify that your purchase check has cleared and been
honored.
o Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the Securities and Exchange Commission.
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<PAGE>
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
The Fund may require a signature guarantee in certain situations such as:
o a redemption request is made by a corporation, partnership or fiduciary;
o a redemption request is made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
This requirement protects you and Waddell & Reed from fraud. You can obtain a
signature guarantee from most banks and securities dealers, but not from a
notary public.
The Fund reserves the right to redeem at NAV all shares of the Fund owned by
you having an aggregate NAV of less than $500. The Fund will give you notice
and a 60-day opportunity to purchase a sufficient number of additional shares
to bring the aggregate NAV of your shares to $500.
You may reinvest, without charge, all or part of the amount you redeemed by
sending to the Fund the amount you want to reinvest. The reinvested amounts
must be received by the Fund within thirty days after the date of your
redemption. You may do this only once with Class A shares of the Fund.
Under the terms of the 401(k) prototype 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 Class A shares of any of the funds
in the United Group in which the plan may invest.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your account.
Personal Service
Your local Waddell & Reed financial advisor is available to provide personal
service. Additionally, one toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or TeleWaddell, our automated customer
telephone service.
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<PAGE>
During normal business hours, our Customer Services staff is available to
answer your questions or update your account records. At almost any time of the
day or night, you may access TeleWaddell from a touch-tone phone to:
o obtain information about your accounts;
o obtain price information about other funds in the United Group; or
o request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange,
transfer or redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports will be mailed to your household, even if you have more than one
account with the Fund. Call the telephone number listed above for Customer
Service if you need copies of annual or semiannual reports or account
information.
Exchanges
You may sell your Class A shares and buy Class A shares of other funds in the
United Group. You may exchange only into funds that are legally permitted for
sale in your state of residence. Note that exchanges out of the Fund may have
tax consequences for you. Before exchanging into a fund, read its prospectus.
The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
Automatic Transactions
Flexible withdrawal service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund account
automatically. While Regular Investment Plans do not guarantee a profit and
will not protect you against loss in a declining market, they can be an
excellent way to invest for retirement, a home, educational expenses and other
long-term financial goals.
18
<PAGE>
Certain restrictions and fees imposed by the plan custodian may also apply for
retirement accounts. Speak with your Waddell & Reed financial advisor for more
information.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Fund account
Minimum Frequency
$25 Monthly
Funds Plus Service
To move money from United Cash Management, Inc. to the Fund whether in the
same or a different account
Minimum Frequency
100 Monthly
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Dividends are declared daily from the
Fund's net investment income, which includes accrued interest, earned OID,
dividends and other income earned on portfolio assets less expenses.
Usually the Fund distributes net investment income monthly on the 27th day of
the month or on the last business day prior to the 27th if the 27th falls on a
weekend or a holiday. Dividends declared for a particular day are paid to
shareholders of record on the prior business day. Dividends declared for
Friday, Saturday and Sunday are paid to shareholders of record on the preceding
Thursday. Net capital gains (and any net gains from foreign currency
transactions) ordinarily are distributed in December.
Distribution Options. When you open an account, specify on your application how
you want to receive your distributions. The Fund offers three options:
1. Share Payment Option. Your dividends, capital gains and other distributions
will be automatically paid in additional Class A shares of the Fund. If
you do not indicate a choice on your application, you will be assigned
this option.
2. Income-Earned Option. Your capital gains and other distributions will be
automatically paid in Class A shares, but you will be sent a check for
each dividend distribution.
19
<PAGE>
3. Cash Option. You will be sent a check for your dividends, capital gains and
other distributions.
For retirement accounts, all distributions are automatically paid in Class A
shares.
Taxes
As with any investment, you should consider how your investment in the Fund
will be taxed. If your account is not a tax-deferred retirement account, you
should be aware of the following tax implications:
Taxes on distributions. Dividends from the Fund's investment company taxable
income generally are taxable to you as ordinary income whether received in cash
or paid in additional Fund shares. Distributions of the Fund's net capital
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or paid in additional Fund shares and regardless of
the length of time you have owned your shares. For Federal income tax purposes,
your long-term capital gains (if you are a noncorporate shareholder of the
Fund) generally are taxed at a maximum rate of 20%.
The Fund notifies you after year-end as to the amounts of dividends and other
distributions paid (or deemed paid) to you for that year.
A portion of the dividends paid by the Fund, whether received in cash or paid
in additional Fund shares, may be eligible for the dividends-received deduction
allowed to corporations. The eligible portion may not exceed the aggregate
dividends received by the Fund from U.S. corporations. However, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the Federal alternative
minimum tax.
Withholding. The Fund is required to withhold 31% of all dividends, capital
gains distributions and redemption proceeds payable to individuals and certain
other noncorporate shareholders who do not furnish the Fund with a correct
taxpayer identification number. Withholding at that rate from dividends and
capital gains distributions also is required for such shareholders who
otherwise are subject to backup withholding.
Taxes on transactions. 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 what you paid for the redeemed shares (which normally includes any
sales charge
20
<PAGE>
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
ninety days after your purchase and then 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. See "Your
Account." In these cases, any gain on the disposition of the original Fund
shares would be increased, or loss decreased, by the amount of the sales charge
you paid when those shares were acquired, and that amount will increase the
adjusted basis of the shares subsequently acquired. In addition, if you
purchase Fund shares within thirty days before or after redeeming other Fund
shares (regardless of class) at a loss, part or all of that loss will not be
deductible and will increase the basis of the newly purchased shares.
State and local income taxes. The portion of the dividends paid by the Fund
attributable to interest earned on its U.S. Government Securities' investments
generally is not subject to state and local income taxes, although
distributions by the Fund to its shareholders of net realized gains on the sale
of those securities are fully subject to those taxes. You should consult your
tax adviser to determine the taxability of dividends and other distributions by
the Fund in your state and locality.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for more information. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
21
<PAGE>
The Management of the Fund
GRAPHIC LOGO
Portfolio Management
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. Waddell & Reed, Inc. and its predecessors have served as
investment manager to each of the registered investment companies in the United
Group of Mutual Funds, except United Asset Strategy Fund, Inc., since 1940 or
the inception of the company, whichever was later, and to Target/United Funds,
Inc. since that fund's inception, until January 8, 1992, when it assigned its
duties as investment manager and assigned its professional staff for investment
management services to WRIMCO. WRIMCO has also served as investment manager for
Waddell & Reed Funds, Inc. since its inception in September 1992 and United
Asset Strategy Fund, Inc. since it commenced operations in March 1995.
Louise D. Rieke is primarily responsible for the 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 WRIMCO, Vice President of the Fund and Vice President of other
investment companies for which WRIMCO serves as investment manager. From
November 1985 to March 1998, Ms. Rieke was Vice President of Waddell & Reed
Asset Management Company, a former affiliate of WRIMCO. Ms. Rieke has served as
the portfolio manager for investment companies managed by Waddell & Reed, Inc.
and its successor, WRIMCO, since July 1986, and has been an employee of Waddell
& Reed, Inc. and its successor, WRIMCO, since May 1971. Other members of
WRIMCO's investment management department provide input on market outlook,
economic conditions, investment research and other considerations relating to
the Fund's investments.
WRIMCO is located at 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas
66201-9217.
22
<PAGE>
Management Fee
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained below.
The management fee of the Fund is calculated by adding a group fee to a
specific fee. It is accrued and paid to WRIMCO daily. The specific fee is
computed on the Fund's net asset value as of the close of business each day at
the annual rate of .15 of 1% of its net assets. The group fee is a pro rata
participation based on the relative net asset size of the Fund in the group fee
computed each day on the combined net asset values of all the funds in the
United Group at the annual rates shown in the following table:
Group Fee Rate
Group Net Asset Level Annual Group Fee Rate
(all dollars in millions) 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%
Growth in assets of the United Group assures a lower group fee rate.
The combined net asset values of all of the funds in the United Group were
approximately $18.9 billion as of September 30, 1998. Management fees for the
fiscal year ended September 30, 1998 were 0.54% of the Fund's average net
assets.
23
<PAGE>
United
High
Income
Fund II,
Inc.
GRAPHIC LOGO
Custodian
UMB Bank, n.a.
Kansas City, Missouri
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N. W.
Washington, D. C. 20036
Independent Auditors
Deloitte & Touche LLP
1010 Grand Avenue
Kansas City, Missouri 64106-2232
Investment Manager
Waddell & Reed Investment
Management Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
Underwriter
Waddell & Reed, Inc.
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Shareholder Servicing Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Accounting Services Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
24
<PAGE>
GRAPHIC LOGO
UNITED HIGH INCOME FUND II, INC.
CLASS A SHARES
You can get more information about the Fund in--
o its Statement of Additional Information (SAI) dated January 31, 1999, which
contains detailed information about the Fund, particularly its investment
policies and practices. You may not be aware of important information
about the Fund unless you read both the Prospectus and the SAI. The
current SAI is on file with the Securities and Exchange Commission (SEC)
and it is incorporated into this Prospectus by reference (that is, the SAI
is legally part of the Prospectus).
o its Annual and Semiannual Reports to Shareholders, which detail the Fund's
actual investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the year covered by
the report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the
Fund or Waddell & Reed, Inc. at the address and telephone number below or
through certain third parties through which shares of the Fund may be
purchased.
Information about the Fund (including its current SAI and most recent Annual
and Semiannual Reports) is available from the SEC's web site at
http://www.sec.gov and from the SEC's Public Reference Room in Washington, D.C.
You can find out about the operation of the Public Reference Room and
applicable copying charges by calling 1-800-SEC-0330.
The Fund's SEC file number is 811-4520.
Waddell & Reed, Inc.
6300 Lamar Avenue, P. O. Box 29217
Shawnee Mission, Kansas, 66201-9217
(913) 236-2000, (800) 366-5465
printed on recycled paper NUP2015(1-99)
LOGO OF WADDELL & REED FINANCIAL SERVICES
<PAGE>
January 31, 1999
GRAPHIC logo
- -------------------------------------------------------------------------------
UNITED HIGH INCOME FUND II, INC.
Class Y Shares
----------------------------------------------------
This Fund seeks as its primary goal a high level of
current income. As a secondary goal, the Fund seeks
capital growth when consistent with its primary
goal. The Fund invests 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 investment manager, consistent with
the Fund's goals.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THE FUND'S SHARES, OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR
COMPLETE. IT IS A CRIMINAL OFFENSE TO STATE
OTHERWISE.
P R O S P E C T U S
[LOGO OF WADDELL & REED FINANCIAL SERVICES]
<PAGE>
T A B L E O F C O N T E N T S
AN OVERVIEW OF THE FUND 3
-----------------------------------------------------------------------
PERFORMANCE 4
-----------------------------------------------------------------------
EXPENSES 5
-----------------------------------------------------------------------
THE INVESTMENT PRINCIPLES OF THE FUND 6
-----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 9
-----------------------------------------------------------------------
YOUR ACCOUNT 10
-----------------------------------------------------------------------
Buying Shares 10
--------------------------------------------------------------------
Minimum Investments 12
--------------------------------------------------------------------
Adding to Your Account 12
--------------------------------------------------------------------
Selling Shares 13
--------------------------------------------------------------------
Telephone Transactions 15
--------------------------------------------------------------------
Shareholder Services 16
--------------------------------------------------------------------
Personal Service 16
-----------------------------------------------------------------
Reports 16
-----------------------------------------------------------------
Exchanges 16
-----------------------------------------------------------------
Distributions and Taxes 17
--------------------------------------------------------------------
Distributions 17
-----------------------------------------------------------------
Taxes 17
-----------------------------------------------------------------
THE MANAGEMENT OF THE FUND 19
-----------------------------------------------------------------------
Portfolio Management 19
-----------------------------------------------------------------
Management Fee 20
-----------------------------------------------------------------
<PAGE>
An
Overview
of the
Fund
GRAPHIC LOGO
Goals:
United High Income Fund II, Inc. (the "Fund") seeks, as a primary goal, a high
level of current income. As a secondary goal, the Fund seeks capital growth
when consistent with its primary goal.
Strategies:
The Fund seeks to achieve its goal by investing in a diversified portfolio of
high-yield, high-risk, fixed-income securities, the risks of which are, in the
judgment of Waddell & Reed Investment Management Company ("WRIMCO"), the Fund's
investment manager, consistent with the Fund's goals. The Fund may invest,
without limit, in lower quality bonds, commonly called "junk bonds." The Fund
may also invest a significant portion of its assets in common or preferred
stock.
Principal Risks of Investing in the Fund:
Because the Fund owns different types of investments, a variety of factors can
affect its investment performance, such as:
o changes in interest rates
o changes in the maturities of bonds owned by the Fund
o the credit quality and other conditions of the companies whose securities the
Fund holds
o bond and stock market conditions, generally
o general economic and industry news
o the skill of WRIMCO in evaluating and managing the interest rate and credit
risks of the Fund's portfolio
Also, the Fund can invest in foreign securities, which present additional risks
such as those relating to currency fluctuations and political or economic
conditions in the foreign country.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment.
3
<PAGE>
Performance
GRAPHIC LOGO
Who May Want to Invest:
The Fund is designed for investors who primarily seek a level of current income
that is higher than is normally available with securities in the higher rated
categories and, secondarily, seek capital growth where consistent with this
income goal, through a diversified, actively managed portfolio. The Fund is not
suitable for all investors. You should consider whether the Fund fits with your
particular investment objectives.
The chart and table below show the past performance of the Fund's Class Y
shares:
o The chart presents the annual returns since these shares were first offered
and shows how performance has varied from year to year.
o The table shows Class Y average annual returns and compares them to the
market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does
not necessarily indicate how it will perform in the future.
Note that the performance information in the chart and table is based on
calendar-year periods, while the information shown in the Financial Highlights
section of this Prospectus and in the Fund's shareholder reports is based on
the Fund's fiscal year.
GRAPHIC LOGO
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
'96................... 15.14%
'97................... 8.99%
'98................... --
* For the period from February 27, 1996 through December 31, 1996.
In the period shown in the chart, the highest quarterly return was 5.91% (the
second quarter of 1997) and the lowest quarterly return was 0.59% (the first
quarter of 1997).
4
<PAGE>
Expenses
GRAPHIC LOGO
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year Life of Fund*
<S> <C> <C>
Class Y Shares of the Fund % %
Salomon Brothers High Yield Index
Lipper High Current Yield Bond Fund
Universe Average
</TABLE>
The indexes shown are broad-based, securities market indexes that are
unmanaged. The Lipper average is a composite of mutual funds with goals similar
to that of the Fund.
*Since February 27, 1996
The following table describes the fees and expenses that you may pay if you
buy and hold shares of the Fund:
<TABLE>
<CAPTION>
Shareholder Fees
(fees deducted directly from your investment).
<S> <C>
Maximum sales charge (load) on purchases None
Maximum sales charge (load)
on reinvested dividends None
Deferred sales charge (load) None
Redemption fees None
Exchange fee None
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(expenses deducted from Fund assets,
as a percentage of average net assets).
<S> <C>
Management fees 0.54%
Distribution and Service (12b-1) fees None
Other expenses 0.20%
Total Fund operating expenses 0.74%
</TABLE>
5
<PAGE>
Example
This example is intended to help you compare the cost of investing in the
Class Y shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the Fund for each time period
specified, (b) your investment has a 5% return each year, and (c) the Class Y
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be:
<TABLE>
<S> <C>
1 year $ 76
3 years $237
5 years $411
10 years $918
</TABLE>
Your costs would be the same whether or not you redeemed your shares at the end
of each time period. For a more complete discussion of certain expenses and
fees, see "Management Fee."
(1) Use of an assumed annual return of 5% is for illustration purposes only and
is not a representation of the Fund's future performance, which may be greater
or lesser.
<PAGE>
The
Investment
Principles
of the Fund
GRAPHIC LOGO
Investment Goals and Principal Strategies
The primary goal of the Fund is to earn a high level of current income. As a
secondary goal, the Fund seeks capital growth when consistent with its primary
goal. The Fund seeks to achieve these goals by investing primarily in a
diversified portfolio of high-yield, high-risk, fixed-income securities, the
risks of which are, in the judgment of WRIMCO, consistent with the Fund's
goals. There is no guarantee that the Fund will achieve its goals.
There are three main types of securities that the Fund owns: debt securities,
preferred stock and common stock. The Fund may also own convertible securities.
In general, the high income that the Fund seeks is paid by debt securities in
the lower rating categories of the established rating services or unrated
securities that are determined by WRIMCO to be of comparable quality; these are
securities rated BBB or lower by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), or Baa or lower by Moody's Investors
Service, Inc. ("MIS") and unrated securities. Lower-quality debt securities
(commonly called "junk bonds") are
6
<PAGE>
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than higher-quality securities and may
decline significantly in periods of general economic difficulty.
The Fund will normally invest at least 80% of its total assets to seek a high
level of current income. The Fund limits its acquisition of common stock so
that no more than 20% of its assets will consist of common stock and no more
than 10% of its assets will consist of non-dividend-paying common stock.
WRIMCO may look at a number of factors in selecting securities for the Fund's
portfolio. These include an issuer's past, current and estimated future:
o financial strength;
o cash flow;
o management;
o borrowing requirements; and
o responsiveness to changes in interest rates and business conditions.
When WRIMCO believes that a full or partial temporary defensive position is
desirable, due to present or anticipated market or economic conditions, WRIMCO
may take any one or more of the following steps with respect to up to all of
the assets in the Fund's portfolio:
o shortening the average maturity of the Fund's debt portfolio;
o holding cash or cash equivalents (short-term investments, such as commercial
paper and certificates of deposit) in varying amounts designed for
defensive purposes; and
o emphasizing high-grade debt securities.
Going defensive in any one or more of these manners might reduce the yield on
the Fund's portfolio. As an alternative to taking a temporary defensive
position or in order to more quickly participate in anticipated market changes
or market conditions, the Fund may invest in options and futures. The Fund may
also invest in other types of investments and use certain other instruments in
seeking to achieve the Fund's goals. For example, the Fund may invest in
options, futures contracts, asset-backed securities and other derivative
instruments if it is permitted to invest in the type of asset by which the
return on, or value of, the deriva-
7
<PAGE>
tive is measured. See the SAI for more information about the Fund's permitted
investments and strategies, as well as the restrictions that apply to them.
Principal Risk Considerations
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk. Market risk is the possibility of a
change in the price of the security because of market factors. Because of
market risks, the share price of the Fund will likely change as well. Financial
risk is based on the financial situation of the issuer of the securities. The
financial risk of the Fund depends on the credit quality of the securities in
which it is invested. Prepayment risk is the possibility that, during periods
of falling interest rates, a debt security with a high stated interest rate
will be prepaid before its expected maturity date. Because the Fund owns
different types of investments, its performance will be affected by a variety
of factors. In general, the value of the Fund's investments and the income it
generates will vary from day to day, generally due to changes in interest
rates, market conditions and other company and economic news. Performance will
also depend on WRIMCO's skill in selecting investments.
Certain types of the Fund's authorized investments and strategies (such as
derivative instruments) involve special risks. Lower-quality debt securities
are considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than higher-quality securities and may
decline significantly in periods of general economic difficulty. Foreign
securities and foreign currencies may involve risks relating to currency
fluctuations, political or economic conditions in the foreign country, and the
potentially less stringent investor protection and disclosure standards of
foreign markets. These factors could make foreign investments, especially those
in developing countries, more volatile.
8
<PAGE>
Financial Highlights
GRAPHIC LOGO
The following information is to help you understand the financial performance of
the Fund's Class Y shares for the fiscal periods shown. "Total return" shows how
much your investment would have increased (or decreased) during each period,
assuming reinvestment of all dividends and distributions. This information has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the SAI, which is available upon request.
<TABLE>
<CAPTION>
For the fiscal For the period
year ended from 2/27/96*
September 30, through
1998 1997 9/30/96
<S> <C> <C> <C>
Per-share Data
Net asset value,
beginning of period $ 4.42 $ 4.14 $ 4.15
----------------------------------------------------------------
Income from investment operations:
Net investment
income 0.37 0.37 0.21
Net realized and
unrealized gain (loss)
on investments (0.30) 0.28 (0.01)
----------------------------------------------------------------
Total from
investment
operations 0.07 0.65 0.20
----------------------------------------------------------------
Less dividends
declared
from net investment
income (0.37) (0.37) (0.21)
----------------------------------------------------------------
Net asset value,
end of period $ 4.12 $ 4.42 $ 4.14
Total return 1.38% 16.38% 5.00%
Ratios/Supplemental Data
Net assets, end of
period (in millions) $ 2 $ 2 $ 2
Ratio of expenses to
average net assets 0.79% 0.77% 0.77%**
Ratio of net
investment
income to average
net assets 8.43% 8.69% 8.83%**
Portfolio turnover
rate 58.85% 64.38% 55.64%**
</TABLE>
*Commencement of operations.
**Annualized.
9
<PAGE>
Your
Account
GRAPHIC LOGO
Class Y shares are designed for institutional investors or others investing
through certain intermediaries. Class Y shares are available for purchase by:
o participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401, including 401(k) plans, of the
Internal Revenue Code of 1986, as amended (the "Code"), when the plan has
100 or more eligible employees and holds the shares in an omnibus account
on the Fund's records;
o banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an
omnibus account on the Fund's records;
o government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more;
and
o certain retirement plans and trusts for employees and financial advisors of
Waddell & Reed, Inc. and its affiliates.
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its financial
advisors. To open your account you must complete and sign an application. Your
Waddell & Reed financial advisor can help you with any questions you might
have.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a Class Y share (price to buy one Class Y share) is the
Fund's Class Y net asset value ("NAV"). The Fund's Class Y shares are sold
without a sales charge.
To purchase by wire, you must first obtain an account number by calling
1-800-366-5465, then mail a completed application to Waddell & Reed, Inc., P.O.
Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to 913-236-5044.
Instruct your bank to wire the amount you wish to invest to UMB Bank, n.a., ABA
Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and
Account Number.
10
<PAGE>
To purchase by check, make your check payable to Waddell & Reed, Inc. Mail the
check, along with your completed application, to Waddell & Reed, Inc., P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
You may also buy shares of the Fund indirectly through certain broker-dealers,
banks and other third parties, some of which may charge you a fee. These firms
may have additional requirements to buy shares.
The Fund's Class Y NAV is the value of a single share.
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
o Other investment assets for which market prices are unavailable are valued at
their fair value by or at the direction of the Board of Directors.
The Fund is open for business each day the New York Stock Exchange (the "NYSE")
is open. The Fund normally calculates the NAVs of its shares as of the later of
the close of business of the NYSE, normally 4 p.m. Eastern time, or the close
of the regular session of any other securities or commodities exchange on which
an option or futures contract held by the Fund is traded.
The Fund may invest in securities listed on foreign exchanges which may trade
on Saturdays or on U.S. national business holidays when the NYSE is closed.
Consequently, the NAV of Fund shares may be significantly affected on days when
the Fund does not price its shares and when you are not able to purchase or
redeem the Fund's shares.
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
11
<PAGE>
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
o The Fund does not issue certificates representing Class Y shares of the Fund.
o If you purchase Fund shares from certain broker-dealers, banks or other
authorized third parties, the Fund will be deemed to have received your
purchase order when that third party (or its designee) has received your
order. Your order will receive the offering price next calculated after the
order has been received in proper form by the authorized third party (or
its designee). You should consult that firm to determine the time by which
it must receive your order for you to purchase Fund shares at that day's
price.
When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Minimum Investments
<TABLE>
<CAPTION>
To Open an Account
<S> <C>
For a government entity or authority or for a corporation:
(within first twelve months) $10 million
For other investors: Any amount
</TABLE>
Adding to Your Account
You can make additional investments of any amount at any time.
To add to your account by wire: Instruct your bank to wire the amount you wish
to invest, along with the account number and registration, to UMB Bank, n.a.,
ABA Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer Name
and Account Number.
12
<PAGE>
To add to your account by mail: Make your check payable to Waddell & Reed, Inc.
Mail the check along with a letter stating your account number, the account
registration and that you wish to purchase Class Y shares of the Fund to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
If you purchase Fund shares from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
Selling Shares
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The redemption price (price to sell one Class Y share) is the Fund's Class Y
NAV.
To sell shares by telephone or fax: If you have elected this method in your
application or by subsequent authorization, call 1-800-366-5465 or fax your
request to 913-236-5044 and give your instructions to redeem shares and make
payment by wire to your pre-designated bank account or by check to you at the
address on the account.
To sell shares by written request: Complete an Account Service Request form,
available from your Waddell & Reed financial advisor, or write a letter of
instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number of shares to be redeemed; and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.
13
<PAGE>
Special Requirements for Selling Shares
<TABLE>
<CAPTION>
Account Type Special Requirements
<S> <C>
Retirement Account The written instructions must be signed by a
properly authorized person.
Trust The trustee must sign the written instructions
indicating capacity as trustee. If the trustee's
name is not in the account registration, provide a
currently certified copy of the trust document.
Business or Organization At least one person authorized by corporate
resolution to act on the account must sign the
written instructions.
</TABLE>
When you place an order to sell shares, your shares will be sold at the next
NAV calculated after receipt of a written request for redemption in good order
by Waddell & Reed, Inc. at its home office. Note the following:
o If more than one person owns the shares, each owner must sign the written
request.
o If you recently purchased the shares by check, the Fund may delay payment of
redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance that
the check has cleared and been honored. If not, payment of the redemption
proceeds on these shares will be delayed until the earlier of 10 days or
the date the Fund can verify that your purchase check has cleared and been
honored.
o Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the Securities and Exchange Commission.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
o If you purchased Fund shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms,
some of which may charge you a fee and may have additional requirements to
sell Fund shares. The Fund will be deemed to have received your order to
sell shares when that firm (or its designee) has received your order. Your
order will receive the offering price next calculated after the order has
been received in proper form by the authorized firm (or its designee). You
should consult that firm to deter-
14
<PAGE>
mine the time by which it must receive your order for you to sell Fund
shares at that day's price.
The Fund may require a signature guarantee in certain situations such as:
o a redemption request is made by a corporation, partnership or fiduciary;
o a redemption request is made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
This requirement protects you and Waddell & Reed from fraud. You can obtain a
signature guarantee from most banks and securities dealers, but not from a
notary public.
The Fund reserves the right to redeem at NAV all shares of the Fund owned by
you having an aggregate NAV of less than $500. The Fund will give you notice
and a 60-day opportunity to purchase a sufficient number of additional shares
to bring the aggregate NAV of your shares to $500.
You may reinvest, without charge, all or part of the amount you redeemed by
sending to the Fund the amount you want to reinvest. The reinvested amounts
must be received by the Fund within thirty days after the date of your
redemption. You may do this only once with Class Y shares of the Fund.
Under the terms of the 401(k) prototype 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 Class Y shares of any of the funds
in the United Group in which the plan may invest.
Telephone Transactions
The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Fund fails to do so, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. Current procedures
relating to instructions communicated by telephone include tape recording
instructions, requiring personal identifi-
15
<PAGE>
cation and providing written confirmations of transactions effected pursuant to
such instructions.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your account.
Personal Service
Your local Waddell & Reed financial advisor is available to provide personal
service. Additionally, one toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or TeleWaddell, our automated customer
telephone service. During normal business hours, our Customer Service staff is
available to answer your questions or update your account records. At almost
any time of the day or night, you may access TeleWaddell from a touch-tone
phone to:
o obtain information about your accounts;
o obtain price information about other funds in the United Group; or
o request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, exchange, transfer or
redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports will be mailed to your household, even if you have more than one
account with the Fund. Call the telephone number listed above for Customer
Service if you need copies of annual or semiannual reports or account
information.
Exchanges
You may sell your Class Y shares and buy Class Y shares of other funds in the
United Group or Class A shares of United Cash Management, Inc. You may exchange
only into funds that are legally permitted for sale in your state of residence.
Note that exchanges out of the Fund may have tax consequences for you. Before
exchanging into a fund, read its prospectus.
The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
16
<PAGE>
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Dividends are declared daily from the
Fund's net investment income, which includes accrued interest, earned OID,
dividends and other income earned on portfolio assets less expenses.
Usually the Fund distributes net investment income monthly, on the 27th day of
the month or on the last business day prior to the 27th if the 27th falls on a
weekend or a holiday. Dividends declared for a particular day are paid to
shareholders of record on the prior business day. Dividends declared for
Friday, Saturday and Sunday are paid to shareholders of record on the preceding
Thursday. Net capital gains (and any net gains from foreign currency
transactions) usually are distributed in December.
Distribution Options. When you open an account, specify on your application how
you want to receive your distributions. The Fund offers three options:
1. Share Payment Option. Your dividends, capital gains and other distributions
will be automatically paid in additional Class Y shares of the Fund. If
you do not indicate a choice on your application, you will be assigned
this option.
2. Income-Earned Option. Your capital gains and other distributions will be
automatically paid in Class Y shares, but you will be sent a check for
each dividend distribution.
3. Cash Option. You will be sent a check for your dividends, capital gains and
other distributions.
For retirement accounts, all distributions are automatically paid in Class Y
shares.
Taxes
As with any investment, you should consider how your investment in the Fund
will be taxed. If your account is not a tax-deferred retirement account, you
should be aware of the following tax implications:
Taxes on distributions. Dividends from the Fund's investment company taxable
income generally are taxable to you as ordinary income whether received in cash
or paid in additional Fund shares. Distributions of the Fund's net capital
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or reinvested in additional Fund shares and regardless
of the length of time you have owned your shares.
17
<PAGE>
For Federal income tax purposes, your long-term capital gains (if you are a
noncorporate shareholder of the Fund) generally are taxed at a maximum rate of
20%.
The Fund notifies you after 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 paid
in additional Fund shares, may be eligible for the dividends-received deduction
allowed to corporations. The eligible portion may not exceed the aggregate
dividends received by the Fund from U.S. corporations. However, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the Federal alternative
minimum tax.
Withholding. The Fund is required to withhold 31% of all dividends, capital
gains distributions and redemption proceeds payable to individuals and certain
other noncorporate shareholders who do not furnish the Fund with a correct
taxpayer identification number. Withholding at that rate from dividends and
capital gains distributions also is required for such shareholders who
otherwise are subject to backup withholding.
Taxes on transactions. 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 what you paid for the redeemed shares. An exchange of Fund shares for
shares of any other fund in the United Group generally will have similar tax
consequences. In addition, if you purchase Fund shares within thirty days
before or after redeeming other Fund shares (regardless of class) at a loss,
part or all of that loss will not be deductible and will increase the basis of
the newly purchased shares.
State and local income taxes. The portion of the dividends paid by the Fund
attributable to interest earned on its U.S. Government Securities' investments
generally is not subject to state and local income taxes, although
distributions by the Fund to its shareholders of net realized gains on the sale
of those securities are fully subject to those taxes. You should consult your
tax adviser to determine the taxability of dividends and other distributions by
the Fund in your state and locality.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for more information. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
18
<PAGE>
The Management
of the Fund
GRAPHIC LOGO
Portfolio Management
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. Waddell & Reed, Inc. and its predecessors have served as
investment manager to each of the registered investment companies in the United
Group of Mutual Funds, except United Asset Strategy Fund, Inc., since 1940 or
the inception of the company, whichever was later, and to Target/United Funds,
Inc. since that fund's inception, until January 8, 1992, when it assigned its
duties as investment manager and assigned its professional staff for investment
management services to WRIMCO. WRIMCO has also served as investment manager for
Waddell & Reed Funds, Inc. since its inception in September 1992 and United
Asset Strategy Fund, Inc. since it commenced operations in March 1995.
Louise D. Rieke is primarily responsible for the 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 WRIMCO, Vice President of the Fund, and Vice President of other
investment companies for which WRIMCO serves as investment manager. From
November 1985 to March 1998, Ms. Rieke was Vice President of Waddell & Reed
Asset Management Company, a former affiliate of WRIMCO. Ms. Rieke has served as
the portfolio manager for investment companies managed by Waddell & Reed, Inc.
and its successor, WRIMCO, since July 1986 and has been an employee of Waddell
& Reed, Inc. and its successor, WRIMCO, since May 1971. Other members of
WRIMCO's investment management department provide input on market outlook,
economic conditions, investment research and other considerations relating to
the Fund's investments.
WRIMCO is located at 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas
66201-9217.
19
<PAGE>
Management Fee
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained below.
The management fee of the Fund is calculated by adding a group fee to a
specific fee. It is accrued and paid to WRIMCO daily. The specific fee is
computed on the Fund's net asset value as of the close of business each day at
the annual rate of .15 of 1% of its net assets. The group fee is a pro rata
participation based on the relative net asset size of the Fund in the group fee
computed each day on the combined net asset values of all the funds in the
United Group at the annual rates shown in the following table:
<TABLE>
<CAPTION>
Group Fee Rate
Group Net Asset Level Annual Group Fee Rate
(all dollars in millions) For Each Level
<S> <C>
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%
</TABLE>
Growth in assets of the United Group assures a lower group fee rate.
The combined net asset values of all of the funds in the United Group were
approximately $18.9 billion as of September 30, 1998. Management fees for the
fiscal year ended September 30, 1998 were 0.54% of the Fund's average net
assets.
20
<PAGE>
United
High
Income
Fund II,
Inc.
GRAPHIC LOGO
Custodian
UMB Bank, n.a.
Kansas City, Missouri
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
Independent Accountants
Deloitte & Touche LLP
1010 Grand Avenue
Kansas City, Missouri
64106-2232
Investment Manager
Waddell & Reed Investment
Management Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Underwriter
Waddell & Reed, Inc.
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Shareholder Servicing Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Accounting Services Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
21
<PAGE>
GRAPHIC LOGO
UNITED HIGH INCOME
FUND II, INC.
CLASS Y SHARES
You can get more information about the Fund in--
o its Statement of Additional Information (SAI) dated January 31, 1999, which
contains detailed information about the Fund, particularly its investment
policies and practices. You may not be aware of important information
about the Fund unless you read both the Prospectus and the SAI. The
current SAI is on file with the Securities and Exchange Commission (SEC)
and it is incorporated into this Prospectus by reference (that is, the SAI
is legally part of the Prospectus).
o its Annual and Semiannual Reports to Shareholders, which detail the Fund's
actual investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the year covered by
the report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the
Fund or Waddell & Reed, Inc. at the address and telephone number below or
through certain third parties through which shares of the Fund may be
purchased.
Information about the Fund (including its current SAI and most recent Annual
and Semiannual Reports) is available from the SEC's web site at
http://www.sec.gov and from the SEC's Public Reference Room in Washington, D.C.
You can find out about the operation of the Public Reference Room and
applicable copying charges by calling 1-800-SEC-0330.
The Fund's SEC file number is 811-4520.
- ----------------------------------------------------------------
[LOGO OF WADDELL & REED FINANCIAL SERVICES]
Waddell & Reed, Inc.
6300 Lamar Avenue, P. O. Box 29217
Shawnee Mission, Kansas, 66201-9217
(913) 236-2000, (800) 366-5465
printed on recycled paper NUP2015-Y(1-99)
<PAGE>
UNITED HIGH INCOME FUND II, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
January 31, 1999
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a
prospectus. Investors should read this SAI in conjunction with a prospectus
("Prospectus") for the Class A shares or the Class Y shares, as applicable, of
United High Income Fund II, Inc. (the "Fund"), dated January 31, 1999, which may
be obtained from the Fund or its underwriter, Waddell & Reed, Inc., at the
address or telephone number shown above.
TABLE OF CONTENTS
Performance Information........................................... 2
Goals and Investment Policies..................................... 4
Investment Management and Other Services.......................... 31
Purchase, Redemption and Pricing of Shares........................ 36
Directors and Officers............................................ 51
Payments to Shareholders.......................................... 57
Taxes ............................................................ 58
Portfolio Transactions and Brokerage.............................. 62
Other Information................................................. 64
Financial Statements ............................................. 66
<PAGE>
United High Income Fund II, Inc. is a mutual fund: an investment that pools
shareholders' money and invests it toward a specified goal. In technical terms,
the Fund is an open-end, diversified management company organized as a Maryland
corporation on May 8, 1986.
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
The total return is the overall change in the value of an investment
over a given period of time. An average annual total return quotation is
computed by finding the average annual compounded rates of return over the one-,
five-, and ten-year periods that would equate the initial amount invested to the
ending redeemable value. Standardized total return information is calculated by
assuming an initial $1,000 investment and, for Class A shares, deducting the
maximum sales load of 5.75%. All dividends and distributions are assumed to be
reinvested in shares of the applicable class at net asset value for the class as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions on Class A shares. The formula used to
calculate the total return for a particular class of the Fund is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000
investment for the periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares were reflected,
it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of
September 30, 1998, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
2
<PAGE>
With Without
Sales Load Sales Load
Deducted Deducted
One year period from October 1, 1997 to
September 30, 1998: -4.60% 1.22%
Five-year period from October 1, 1993 to
September 30, 1998: 7.14 8.42
Ten-year period from October 1, 1988 to
September 30, 1998: 8.25 8.89
Prior to January 12, 1996, the Fund offered only one class of shares to
the public. Shares outstanding on that date were designated as Class A shares.
Since that date, Class Y shares of the Fund have been available to certain
institutional investors.
The average annual total return quotation for Class Y shares as of
September 30, 1998, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
Period from October 1, 1997 to
September 30, 1998: 1.38%
Period from February 27, 1996* to
September 30, 1998: 8.62%
*Date of inception.
The Fund may also quote unaveraged or cumulative total return for a
class which reflects the change in value of an investment in that class over a
stated period of time. Cumulative total return will be calculated according to
the formula indicated above but without averaging the rate for the number of
years in the period.
Yield
A yield quoted for a class of the Fund is computed by dividing the net
investment income per share of that class earned during the period for which the
yield is shown by the maximum offering price per share of that class on the last
day of that period according to the following formula:
3
<PAGE>
6
Yield = 2((((a - b)/cd)+1) -1)
Where, with respect to a particular class of the Fund:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares of the class
outstanding during the period that were entitled to
receive dividends.
d = the maximum offering price per share of the class on the last
day of the period.
The yield for Class A shares of the Fund computed according to the
formula for the 30-day period ended on September 30, 1998, the date of the most
recent balance sheet included in this SAI, is 7.90%. The yield for Class Y
shares of the Fund computed according to the formula for the 30-day period ended
on September 30, 1998, the date of the most recent balance sheet included in
this SAI, is 8.75%.
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 of
the applicable class.
Performance Rankings
Waddell & Reed, Inc. or the Fund also may from time to time publish in
advertisements or sales material performance rankings as published by recognized
independent mutual fund statistical services such as Lipper Analytical Services,
Inc., or by publications of general interest such as Forbes, Money, The Wall
Street Journal, Business Week, Barron's, Fortune or Morningstar Mutual Fund
Values. Each class of the Fund may also compare its performance to that of other
selected mutual funds or selected recognized market indicators such as the
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones Industrial
Average. Performance information may be quoted numerically or presented in a
table, graph or other illustration.
All performance information that the Fund advertises or includes in
sales material is historical in nature and is not intended to represent or
guarantee future results. The value of a Fund's shares when redeemed may be more
or less than their original cost.
INVESTMENT STRATEGIES, POLICIES AND PRACTICES
This SAI supplements the information contained in the prospectus and
contains more detailed information about the investment strategies and policies
the Fund's investment manager,
4
<PAGE>
Waddell & Reed Investment Management Company ("WRIMCO"), may employ and the
types of instruments in which the Fund may invest, in pursuit of the Fund's
goal. A summary of the risks associated with these instrument types and
investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by the Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help the Fund achieve its goal. See "Investment
Restrictions" for a listing of the fundamental and non-fundamental (e.g.,
operating) investment restrictions and policies of the Fund.
The goals and investment 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. Although common stocks and
other equity securities have a history of long-term growth in value, their
prices tend to fluctuate in the short term, particularly those of smaller
companies. The Fund may invest in preferred stock that is rated by an
established rating service or, if unrated, judged by WRIMCO to be of equivalent
quality. Debt securities have varying levels of sensitivity to changes in
interest rates and varying degrees of quality. As a general matter, however,
when interest rates rise, the values of fixed-rate securities fall and,
conversely, when interest rates fall, the values of fixed-rate debt rise.
Similarly, long-term bonds are generally more sensitive to interest rate changes
than shorter-term bonds.
Lower quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than high-quality securities and may decline
significantly in periods of general economic difficulty. The market for
lower-rated debt securities may be thinner and less active than that for
higher-rated debt securities, which can adversely affect the prices at which the
former are sold. Adverse publicity and changing investor perceptions may
decrease the values and liquidity of lower-rated debt securities, especially in
a thinly traded market. Valuation becomes more difficult and judgment plays a
greater role in valuing lower-rated debt securities than with respect to
securities for which more external sources of quotations and last sale
information are available. Since the risk of default is higher for lower-rated
5
<PAGE>
debt securities, WRIMCO's research and credit analysis are an especially
important part of managing securities of this type held by the Fund. WRIMCO
continuously monitors the issuers of lower-rated debt securities in the Fund's
portfolio in an attempt to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments. The Fund may
choose, at its expense or in conjunction with others, to pursue litigation or
otherwise exercise its rights as a security holder to seek to protect the
interests of security holders if it determines this to be in the best interest
of the Fund's shareholders.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from time
to time, and the Fund may retain a portfolio security whose rating has been
changed.
The Fund may invest in debt securities rated in any rating category of
the established rating services, including securities rated in the lowest
category (such as those rated D by S&P and C by MIS). Debt securities rated at
least BBB by S&P or Baa by MIS are considered to be investment grade debt
securities. Securities rated BBB or Baa may have speculative characteristics.
Debt securities rated D by S&P or C by MIS are in payment default or are
regarded as having extremely poor prospects of ever attaining any real
investment standing. In addition, the Fund will treat unrated securities judged
by WRIMCO to be of equivalent quality to a rated security having that rating.
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.
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The Fund may invest in convertible securities. A convertible security
is a bond, debenture, note, preferred stock or other security that may be
converted into or exchanged for a prescribed amount of common stock of the same
or different issuer within a particular period of time at a specified price or
formula. Convertible securities generally have higher yields than common stocks
of the same or similar issuers, but lower yields than comparable nonconvertible
securities, are less subject to fluctuation in value than the underlying stock
because they have fixed income characteristics, and provide the potential for
capital appreciation if the market price of the underlying common stock
increases.
The value of a convertible security is influenced by changes in
interest rates, with investment value declining as interest rates increase and
increasing as interest rates decline. The credit standing of the issuer and
other factors also may have an effect on the convertible security's investment
value.
The Fund may also invest in a type of convertible preferred stock that
pays a cumulative, fixed dividend that is senior to, and expected to be in
excess of, the dividends paid on the common stock of the issuer. At the
mandatory conversion date, the preferred stock is converted into not more than
one share of the issuer's common stock at the "call price" that was established
at the time the preferred stock was issued. If the price per share of the
related common stock on the mandatory conversion date is less than the call
price, the holder of the preferred stock will nonetheless receive only one share
of common stock for each share of preferred stock (plus cash in the amount of
any accrued but unpaid dividends). At any time prior to the mandatory conversion
date, the issuer may redeem the preferred stock upon issuing to the holder a
number of shares of common stock equal to the call price of the preferred stock
in effect on the date of redemption divided by the market value of the common
stock, with such market value typically determined one or two trading days prior
to the date notice of redemption is given. The issuer must also pay the holder
of the preferred stock cash in an amount equal to any accrued but unpaid
dividends on the preferred stock. This convertible preferred stock is subject to
the same market risk as the common stock of the issuer, except to the extent
that such 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.
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Specific Securities and Investment Practices
Common Stocks
As a fundamental policy, the Fund 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 that 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.
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities ("U.S. Government Securities") are high quality debt
instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date they
are issued), Treasury Notes (which have maturities of one to ten years) and
Treasury Bonds (which generally have maturities of more than 10 years). All such
Treasury securities are backed by the full faith and credit of the United
States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (formerly, the Federal National Mortgage Association), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation, and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by the Federal National Mortgage
Association, are supported only by the credit of the
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instrumentality and by a pool of mortgage assets. If the securities are not
backed by the full faith and credit of the United States, the owner of the
securities must look principally to the agency issuing the obligation for
repayment and may not be able to assert a claim against the United States in the
event that the agency or instrumentality does not meet its commitment.
U.S. Government Securities may include mortgage-backed securities
issued by U.S. Government agencies or instrumentalities including, but not
limited to, Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed
securities include pass-through securities, participation certificates and
collateralized mortgage obligations. See "Mortgage-Backed and Asset-Backed
Securities." Timely payment of principal and interest on Ginnie Mae
pass-throughs is guaranteed by the full faith and credit of the United States.
Freddie Mac and Fannie Mae are both instrumentalities of the U.S. Government,
but their obligations are not backed by the full faith and credit of the United
States. It is possible that the availability and the marketability (i.e.,
liquidity) of the securities discussed in this section could be adversely
affected by actions of the U.S. Government to tighten the availability of its
credit.
Money Market Instruments
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government Securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
Zero Coupon Securities
Zero coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or that specify a
future date when the securities begin to pay current interest; instead, they are
sold at a deep discount from their face value and are redeemed at face value
when they mature. Because zero coupon securities do not pay current income,
their prices can be very volatile when interest rates change and generally are
subject to greater price fluctuations in response to changing interest rates
than prices of comparable maturities that make current distributions of interest
in cash.
The Fund may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds, zero coupon bonds of corporate issuers and other
securities that are issued with original issue discount ("OID"). The federal tax
law requires that a holder of a security with OID accrue a ratable portion of
the OID on the security as income each year, even though the holder may receive
no interest payment on the security during the year. Accordingly, although the
Fund will receive no payments on
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its zero coupon securities prior to their maturity or disposition, it will have
current income attributable to those securities and includable in the dividends
paid to its shareholders. Those dividends will be paid from the Fund's cash
assets or by liquidation of portfolio securities, if necessary, at a time when
the Fund otherwise might not have done so.
A broker-dealer creates a derivative zero by separating the interest
and principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury security and selling them as
individual securities. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) can also be separated in this
fashion. Original issue zeros are zero coupon securities originally issued by
the U.S. Government, a government agency or a corporation in zero coupon form.
Mortgage-Backed and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent direct
or indirect participations in, or are secured by and payable from, mortgage
loans secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund may
invest include mortgage-backed securities issued or guaranteed as to the payment
of principal and interest (but not as to market value) by Ginnie Mae, Fannie Mae
or Freddie Mac. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities. Payments of principal and interest (but not the market value)
of such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or
indirectly, by the U.S. Government or one of its agencies or instrumentalities,
or they may be issued without any government guarantee of the underlying
mortgage
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assets but with some form of non-government credit enhancement. These credit
enhancements do not protect investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage lenders, or other
financial institutions. Other types of mortgage-backed securities will likely be
developed in the future, and the Fund may invest in them if WRIMCO determines
they are consistent with the Fund's goals and investment policies.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities are created when a U.S. Government agency or a financial institution
separates the interest and principal components of a mortgage-backed security
and sells them as individual securities. The holder of the "principal-only"
security ("PO") receives the principal payments made by the underlying
mortgage-backed security, while the holder of the "interest-only" security
("IO") receives interest payments from the same underlying security.
For example, interest-only ("IO") classes are entitled to receive all
or a portion of the interest, but none (or only a nominal amount) of the
principal payments, from the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, then
the total amount of interest allocable to the IO class, and therefore the yield
to investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is government guaranteed or considered to be of the highest quality.
Conversely, principal-only ("PO") classes are entitled to receive all or a
portion of the principal payments, but none of the interest, from the underlying
mortgage assets. PO classes are purchased at substantial discounts from par, and
the yield to investors will be reduced if principal payments are slower than
expected. IOs, POs and other CMOs involve special risks, and evaluating them
requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present. The value of
asset-backed securities may also depend on
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the creditworthiness of the servicing agent for the loan pool, the originator of
the loans or the financial institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed-rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different
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characteristics, are priced on an assumption of average life determined for each
pool. In periods of declining interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of a pool of
mortgage-related securities. Conversely, in periods of rising interest rates,
the rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. Changes in the rate or "speed" of these payments can cause the
value of the mortgage-backed securities to fluctuate rapidly. However, these
effects may not be present, or may differ in degree, if the mortgage loans in
the pools have adjustable interest rates or other special payment terms, such as
a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics, such
as yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
reduced. These changes can result in volatility in the market value and, in some
instances, reduced liquidity of the CMO class.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and may carry
rights that permit holders to demand payment of the unpaid principal balance
plus accrued interest from the issuers or certain financial intermediaries on
dates prior to their stated maturities. Floating rate securities have interest
rates that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market value for the
instrument that approximates its par value.
Foreign Securities and Currencies
WRIMCO believes that there are investment opportunities as well as
risks in investing in foreign securities. Individual foreign economies may
differ favorably or unfavorably from the U.S. economy or each other in such
matters as gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Individual foreign
companies may also differ favorably or unfavorably from domestic companies in
the same industry. Foreign currencies may be stronger or weaker than the U.S.
dollar or than each other.
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Thus, the value of securities denominated in or indexed to foreign currencies,
and of dividends and interest from such securities, can change significantly
when foreign currencies strengthen or weaken relative to the U.S. dollar. WRIMCO
believes that the Fund's ability to invest a substantial portion of its assets
abroad might enable it to take advantage of these differences and strengths
where they are favorable.
However, foreign securities and foreign currencies involve additional
significant risks, apart from the risks inherent in U.S. investments. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial conditions and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S.
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investors, including the possibility of expropriation or nationalization of
assets, confiscatory taxation, restrictions on U.S. investment or on the ability
to repatriate assets or convert currency into U.S. dollars, or other government
intervention. There may be greater possibility of default by foreign governments
or government-sponsored enterprises. Investments in foreign countries also
involve a risk of local political, economic, or social instability, military
action or unrest, or adverse diplomatic developments. These is no assurance that
WRIMCO will be able to anticipate these potential events or counter their
effects.
The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is likely
to experience long-term gross domestic product growth above that expected to
occur in the United States, the United Kingdom, France, Germany, Italy, Japan
and Canada. Developing countries may have relatively unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities.
Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities are subject
to legal or contractual restrictions on resale because they are not registered
under the Securities Act of 1933, as amended (the "1933 Act"). Restricted
securities generally can be sold in privately negotiated transactions, pursuant
to an exemption from registration under the 1933 Act, or in a registered public
offering. Where registration is required, the Fund may be obligated to pay all
or part of the registration expense and a considerable period may elapse between
the time it decides to seek registration and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to seek registration of the
security.
There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities
that are traded in foreign markets are often subject to restrictions that
prohibit resale to U.S. persons or entities or permit sales only to foreign
broker-dealers who agree to limit their resale to such persons or entities. The
buyer of such securities must enter
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into an agreement that, usually for a limited period of time, it will resell
such securities subject to such restrictions. Restricted securities in which the
Fund seeks to invest need not be listed or admitted to trading on a foreign or
domestic exchange and may be less liquid than listed securities. Certain
restricted securities, e.g., 144A securities, may be determined to be liquid in
accordance with guidelines adopted by the Board of Directors. See "Illiquid
Investments" below.
Lending Securities
Securities loans may be made on a short-term or long-term basis for the
purpose of increasing the Fund's income. If the Fund lends securities, the
borrower pays the Fund an amount equal to the dividends or interest on the
securities that the Fund would have received if it had not lent the securities.
The Fund also receives additional compensation. The Fund makes loans of its
securities only to parties deemed by WRIMCO to be creditworthy.
Any securities loan that 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, U.S. Government Securities or bank letters
of credit, at least equal in value to the market value of the securities lent on
each day that the loan is outstanding. If the market value of the securities
lent exceeds the value of the collateral, the borrower must add more collateral
so that it at least equals the market value of the securities lent. If the
market value of the securities decreases, the borrower is entitled to return of
the excess collateral.
There are two methods of receiving compensation for making loans. The
first is to receive a negotiated loan fee from the borrower. This method is
available for all three types of collateral. The second method, which is not
available when letters of credit are used as collateral, is for the Fund to
receive interest on the investment of the cash collateral or to receive interest
on the U.S. Government Securities used as collateral. Part of the interest
received in either case may be shared with the borrower.
The letters of credit that the Fund may accept as collateral are
agreements by banks (other than the borrowers of the Fund's securities), entered
into at the request of the borrower and for its account and risk, under which
the banks are obligated to pay to the Fund, while the letter is in effect,
amounts demanded by the Fund if the demand meets the terms of the letter. The
Fund's right to make this demand secures the borrower's obligations to it. The
terms of any such letters and the creditworthiness of the banks providing them
(which might include the Fund's custodian bank) must be satisfactory to the
Fund. Under the
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Fund's current securities lending procedures, the Fund may lend securities only
to broker-dealers and financial institutions deemed creditworthy by WRIMCO. The
Fund will make loans only under rules of the NYSE, which presently require the
borrower to give the securities back to the Fund within five business days after
the Fund gives notice to do so. If the Fund loses its voting rights on
securities loaned, it will have the securities returned to it in time to vote
them if a material event affecting the investment is to be voted on. The Fund
may pay reasonable finder's, administrative and custodian fees in connection
with loans of securities.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned increases, risks of delay
in recovering the securities loaned or even loss of rights in the collateral
should the borrower of the securities fail financially.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules, which may be changed without shareholder vote, as
to: (i) whom securities may be loaned, (ii) the investment of cash collateral,
or (iii) voting rights.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. The
Fund will not enter into a repurchase transaction that will cause more than 10%
of its net assets to be invested in illiquid investments, which include
repurchase agreements not terminable within seven days. See "Illiquid
Investments." A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a commercial bank or
broker-dealer) agrees, at the time of purchase, that it will repurchase the
security at a specified time and price. The amount by which the resale price is
greater than the purchase price reflects an agreed-upon market interest rate
effective for the period of the agreement. The return on the securities subject
to the repurchase agreement may be more or less than the return on the
repurchase agreement.
The majority of the repurchase agreements in which the Fund would
engage are overnight transactions, and the delivery pursuant to the resale
typically will occur within one to five days of the purchase. The primary risk
is that the Fund may suffer a loss if the seller fails to pay the agreed-upon
amount on the delivery date and that amount is greater than the resale price of
the underlying securities and other collateral held by the Fund. In the event of
bankruptcy or other default by the seller, there may be possible delays and
expenses in liquidating the underlying securities or other collateral, decline
in their value and loss of interest. The return on such collateral may be more
or less than that from the repurchase agreement. The Fund's
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repurchase agreements will be structured so as to fully collateralize the loans.
In other words, the value of the underlying securities, which will be held by
the Fund's custodian bank or by a third party that qualifies as a custodian
under Section 17(f) of the Investment Company Act of 1940, as amended (the "1940
Act"), is and, during the entire term of the agreement, will remain at least
equal to the value of the loan, including the accrued interest earned thereon.
Repurchase agreements are entered into only with those entities approved by
WRIMCO on the basis of criteria established by the Board of Directors.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase securities in which it may invest on a
when-issued or delayed-delivery basis or sell them on a delayed-delivery basis.
In either case, payment and delivery for the securities take place at a future
date. The securities so purchased or sold by the Fund are subject to market
fluctuation; their value may be less or more when delivered than the purchase
price paid or received. When purchasing securities on a when-issued or
delayed-delivery basis, the Fund assumes the rights and risks of ownership,
including the risk of price and yield fluctuations. No interest accrues to the
Fund until delivery and payment is completed. When the Fund makes a commitment
to purchase securities on a when-issued or delayed-delivery basis, it will
record the transaction and thereafter reflect the value of the securities in
determining its net asset value per share. When the Fund sells a security on a
delayed-delivery basis, the Fund does not participate in further gains or losses
with respect to the security. When the Fund makes a commitment to sell
securities on a delayed basis, it will record the transaction and thereafter
value the securities at the sales price in determining the Fund's net asset
value per share. If the other party to a delayed-delivery transaction fails to
deliver or pay for the securities, the Fund could miss a favorable price or
yield opportunity, or could suffer a loss.
Ordinarily the Fund purchases securities on a when-issued or
delayed-delivery basis with the intention of actually taking delivery of the
securities. However, before the securities are delivered to the Fund and before
it has paid for them (the "settlement date"), the Fund could sell the securities
if WRIMCO decided it was advisable to do so for investment reasons. The
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Fund will hold aside or segregate cash or other securities, other than those
purchased on a when-issued or delayed-delivery basis, at least equal to the
amount it will have to pay on the settlement date; these other securities may,
however, be sold at or before the settlement date to pay the purchase price of
the when-issued or delayed-delivery securities.
Investment Company Securities
The Fund may purchase securities of closed-end investment companies. As
a shareholder in an investment company, the Fund would bear its pro rata share
of that investment company's expenses, which could result in duplication of
certain fees, including management and administrative fees.
Illiquid Investments
The Fund has an operating policy, which may be changed without
shareholder approval, which provides that the Fund may not invest more than 10%
of its net assets in illiquid investments. Investments currently considered to
be illiquid include: (i) repurchase agreements not terminable within seven days;
(ii) restricted securities not determined to be liquid pursuant to guidelines
established by the Fund's Board of Directors; (iii) securities for which market
quotations are not readily available; (iv) bank deposits, unless they are
payable at principal amount plus accrued interest on demand or within seven days
after demand; (v) securities involved in swap, cap, collar and floor
transactions; (vi) non-government stripped fixed-rate mortgage-backed
securities; and (vii) over-the-counter ("OTC") options and their underlying
collateral. The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
Indexed Securities
The Fund may purchase securities the value of which varies in relation
to the value of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators, subject to its
operating policy regarding derivative instruments. Indexed securities typically,
but not always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or statistic.
The performance of indexed securities depends to a great extent on the
performance of the security, currency or other instrument to which they are
indexed and may also be influenced by interest rate changes in the United States
and abroad. At the same time, indexed securities are subject to
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the credit risks associated with the issuer of the security and their values may
decline substantially if the issuer's creditworthiness deteriorates. Indexed
securities may be more volatile than the underlying investments.
Gold-indexed securities, for example, typically provide for a maturity
value that depends on the price of gold, resulting in a security whose price
tends to rise and fall together with gold prices. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government agencies. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
Warrants and Rights
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. Rights are similar to warrants, but
normally have a short duration and are distributed directly by the issuer to its
shareholders. Rights and warrants have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer. Warrants and rights
are highly volatile and, therefore, more susceptible to a sharp decline in value
than the underlying security might be. They are also generally less liquid
than an investment in the underlying shares.
Real Estate
As an operating 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.
Options, Futures and Other Strategies
General. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, forward currency
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contracts, swaps, caps, collars, floors, indexed securities and other derivative
instruments (collectively, "Financial Instruments") to attempt to enhance income
or yield or to attempt to hedge the Fund's investments. The strategies described
below may be used in an attempt to manage the Fund's foreign currency exposure
as well as other risks of the Fund's investments that can affect fluctuation in
its net asset value.
Generally, the Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, the Fund will only purchase or sell
a particular Financial Instrument if the Fund is authorized to invest in the
type of asset by which the return on, or value of, the Financial Instrument is
primarily measured. Since the Fund is authorized to invest in foreign
securities, it may purchase and sell foreign currency derivatives.
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential declines in the value of one or
more investments held in the Fund's portfolio. Thus, in a short hedge the Fund
takes a position in a Financial Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that the Fund intends to acquire.
Thus, in a long hedge the Fund takes a position in a Financial Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Financial Instruments on indices, in
contrast, generally are used to attempt to hedge against price movements in
market sectors in which the Fund has invested or expects to invest. Financial
Instruments on debt securities may be used to hedge either individual securities
or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations
of the Securities and Exchange Commission (the "SEC"), the several exchanges
upon which they are traded and the Commodity Futures Trading Commission (the
"CFTC"). In addition,
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the Fund's ability to use Financial Instruments will be limited by tax
considerations. See "Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with the Fund's goals and permitted by the
Fund's investment limitations and applicable regulatory authorities. The Fund
might not use any of these strategies, and there can be no assurance that any
strategy used will succeed. The Fund's Prospectus or SAI will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities and interest rate
markets, which requires different skills than predicting changes in the prices
of individual securities. There can be no assurance that any particular strategy
will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Financial Instrument and price movements of the
investments being hedged. For example, if the value of a Financial Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match the Fund's current or anticipated investments exactly. The Fund
may invest in options and futures contracts based on securities with
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different issuers, maturities, or other characteristics from the securities in
which it typically invests, which involves a risk that the options or futures
position will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Financial Instrument. Moreover, if the price of the
Financial Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets
as "cover," maintain segregated accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties (i.e.,
Financial Instruments other than purchased options). If the Fund were unable to
close out its positions in such Financial Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time.
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(5) The Fund's ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction (the "counterparty") to enter
into a transaction closing out the position. Therefore, there is no assurance
that any position can be closed out at a time and price that is favorable to the
Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies or other options, futures
contracts or forward contracts, or (2) cash and liquid assets with a value,
marked-to-market daily, sufficient to cover its potential obligations to the
extent not covered as provided in (1) above. The Fund will comply with SEC
guidelines regarding cover for these instruments and will, if the guidelines so
require, set aside cash or liquid assets in an account with its custodian in the
prescribed amount as determined daily.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Financial Instrument is open, unless
they are replaced with other appropriate assets. As a result, the commitment of
a large portion of the Fund's assets to cover or segregated accounts could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Options. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon price
during the option period. A put option gives the purchaser the right to sell,
and obligates the writer to buy, the underlying investment at the agreed-upon
price during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or call options
can enable the Fund to enhance income or yield by reason of the premiums paid by
the purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security or
currency appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Fund will
be obligated to sell the security or currency at less than its
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market value. If the call option is an OTC option, the securities or other
assets used as cover would be considered illiquid to the extent described under
"Illiquid Investments."
Writing put options can serve as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be obligated
to purchase the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions.
Options that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
A type of put that the Fund may purchase is an "optional delivery
standby commitment," which is entered into by parties selling debt securities to
the Fund. An optional delivery standby commitment gives the Fund the right to
sell the security back to the seller on specified terms. This right is provided
as an inducement to purchase the security.
Risks of Options on Securities. Options offer large amounts of
leverage, which will result in the Fund's net asset value being more sensitive
to changes in the value of the related instrument. The Fund may purchase or
write both exchange-traded and OTC options. Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between the Fund and its counterparty (usually a securities dealer or a bank)
with no clearing organization guarantee. Thus, when the Fund purchases an OTC
option, it relies on the counterparty from whom it purchased the option to make
or take delivery of the underlying investment upon exercise of the option.
Failure by
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the counterparty to do so would result in the loss of any premium paid by the
Fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating directly
with the counterparty, or by a transaction in the secondary market if any such
market exists. There can be no assurance that the Fund will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, the Fund might be unable to close
out an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
Options on Indices. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple (the
"multiplier"), which determines the total dollar value for each point of such
difference. When the Fund buys a call on an index, it pays a premium and has the
same rights as to such call as are indicated above. When the Fund buys a put on
an index, it pays a premium and has the right, prior to the expiration date, to
require the seller of the put, upon the Fund's exercise of the put, to deliver
to the Fund an amount of cash if the closing level of the index upon which the
put is based is less than the exercise price of the put, which amount of cash is
determined by the multiplier, as described above for calls. When the Fund writes
a put on an index, it receives a premium and the purchaser of the put has the
right, prior to the expiration date, to require the Fund to deliver to it an
amount of cash equal to the difference between the closing level of the index
and the exercise price times the multiplier if the closing level is less than
the exercise price.
Risks of Options on Indices. The risks of investment in options on
indices may be greater than options on securities.
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Because index options are settled in cash, when the Fund writes a call on an
index it cannot provide in advance for its potential settlement obligations by
acquiring and holding the underlying securities. The Fund can offset some of the
risk of writing a call index option by holding a diversified portfolio of
securities similar to those on which the underlying index is based. However, the
Fund cannot, as a practical matter, acquire and hold a portfolio containing
exactly the same securities as underlie the index and, as a result, bears a risk
that the value of the securities held will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size and
strike price, the terms of OTC options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Fund
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great flexibility to tailor the option to its needs, OTC options generally
involve greater risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
Generally, OTC foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
Futures Contracts and Options Thereon. The purchase of futures or call
options on futures can serve as a long hedge, and the sale of futures or the
purchase of put options on futures can serve as a short hedge. Writing call
options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing call options on securities or indices.
Similarly, writing put options on futures contracts can serve as a limited long
hedge. Futures contracts and options on futures contracts can also be purchased
and sold to attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average
duration of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten the
average duration of the Fund's fixed-income portfolio, the Fund may sell a debt
futures contract or a call option thereon, or purchase a put option on that
futures contract. If WRIMCO wishes to lengthen the average duration of the
Fund's fixed-income portfolio, the Fund may buy a debt futures contract or a
call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when
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the Fund purchases or sells a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls that could be substantial
in the event of adverse price movements. If the Fund has insufficient cash to
meet daily variation margin requirements, it might need to sell securities at a
time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on
a futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option or to maintain liquid
assets in an account.
Risk of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to the differences in the natures of those markets, are subject to
the following factors, which may create distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
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
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market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of general interest rate, currency exchange rate
or stock market trends by WRIMCO may still not result in a successful
transaction. WRIMCO may be incorrect in its expectations as to the extent of
various interest rate, currency exchange rate or stock market movements or the
time span within which the movements take place.
Index Futures. The risk of imperfect correlation between movements in
the price of an index futures and movements in the price of the securities that
are the subject of the hedge increases as the composition of the Fund's
portfolio diverges from the securities included in the applicable index. The
price of the index futures may move more than or less than the price of the
securities being hedged. If the price of the index futures moves less than the
price of the securities that are the subject of the hedge, the hedge will not be
fully effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge its common stocks against decline in the market, the
market may advance and the value of the securities held in the portfolio may
decline. If this occurred, the Fund would lose money on the futures contracts
and also experience a decline in value of its portfolio securities. However,
while this could occur for a very brief period or to a very small degree, over
time the value of a diversified portfolio of securities will tend to move in the
same direction as the market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase
in the price of securities before the Fund is able to invest in them in an
orderly fashion, it is possible that the market may decline instead. If the Fund
then concludes not to invest in them at that time because of concern as to
possible further market decline or for other reasons, it will realize a loss on
the futures contracts that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies
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traded on a CFTC-regulated exchange, in each case other than for bona fide
hedging purposes (as defined by the CFTC), the aggregate initial margin and
premiums required to establish those positions (excluding the amount by which
options are "in-the-money" at the time of purchase) will not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any contracts the Fund has entered into. (In
general, a call option on a futures contract is "in-the-money" if the value of
the underlying futures contract exceeds the strike, i.e., exercise, price of the
call; a put option on a futures contract is "in-the-money" if the value of the
underlying futures contract is exceeded by the strike price of the put.) This
policy does not limit to 5% the percentage of the Fund's assets that are at risk
in futures contracts, options on futures contracts and currency options.
Foreign Currency Hedging Strategies--Special Considerations. The Fund
may use options and futures contracts on foreign currencies, as described above,
and forward currency contracts, as described below, to attempt to hedge against
movements in the values of the foreign currencies in which the Fund's securities
are denominated or to attempt to enhance income or yield. Currency hedges can
protect against price movements in a security that the Fund owns or intends to
acquire that are attributable to changes in the value of the currency in which
it is denominated. Such hedges do not, however, protect against price movements
in the securities that are attributable to other causes.
The Fund might seek to hedge against changes in the value of a
particular currency when no Financial Instruments on that currency are available
or such Financial Instruments are more expensive than certain other Financial
Instruments. In such cases, the Fund may seek to hedge against price movements
in that currency by entering into transactions using Financial Instruments on
another currency or a basket of currencies, the values of which WRIMCO believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Financial Instrument
will not correlate perfectly with movements in the price of the currency subject
to the hedging transaction is magnified when this strategy is used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be
31
<PAGE>
firm or revised on a timely basis. Quotation information generally is
representative of very large transactions in the interbank market and thus might
not reflect odd-lot transactions where rates might be less favorable. The
interbank market in foreign currencies is a global, round-the-clock market. To
the extent the U.S. options or futures markets are closed while the markets for
the underlying currencies remain open, significant price and rate movements
might take place in the underlying markets that cannot be reflected in the
markets for the Financial Instruments until they reopen.
Settlement of transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
Forward Currency Contracts. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time of the forward
currency contract. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
Such transactions may serve as long hedges; for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges; for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security,
dividend or interest payment denominated in a foreign currency.
The Fund may also use forward currency contracts to hedge against a
decline in the value of existing investments denominated in foreign currency.
For example, if the Fund owned securities denominated in pounds sterling, it
could enter into a forward currency contract to sell pounds sterling in return
for U.S. dollars to hedge against possible declines in the pound's value. Such a
hedge, sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The Fund could also hedge the position
by selling another currency expected to perform similarly to the pound sterling,
for example, by entering into a forward currency contract to sell Deutsche Marks
or European Currency Units in return for U.S. dollars. This type of hedge,
sometimes referred
32
<PAGE>
to as a "proxy hedge," could offer advantages in terms of cost, yield or
efficiency, but generally would not hedge currency exposure as effectively as a
simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
The Fund also may use forward currency contracts to attempt to enhance
income or yield. The Fund could use forward currency contracts to increase its
exposure to foreign currencies that WRIMCO believes might rise in value relative
to the U.S. dollar, or shift its exposure to foreign currency fluctuations from
one country to another. For example, if the Fund owned securities denominated in
a foreign currency and WRIMCO believed that currency would decline relative to
another currency, it might enter into a forward currency contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second foreign currency.
The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When the Fund enters into a forward currency contract, it relies on
the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in an account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent
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<PAGE>
such foreign currencies are not covered by forward currency contracts. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the flexibility to enter into such forward currency contracts
when it determines that the best interests of the Fund will be served.
Successful use of forward currency contracts depends on WRIMCO's skill
in analyzing and predicting currency values. Forward currency contracts may
substantially change the Fund's exposure to changes in currency exchange rates
and could result in losses to the Fund if currencies do not perform as WRIMCO
anticipates. There is no assurance that WRIMCO's use of forward currency
contracts will be advantageous to the Fund or that WRIMCO will hedge at an
appropriate time.
Combined Positions. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Turnover. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate. Once
the Fund has received an exercise notice on an option it has written, it cannot
effect a closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
34
<PAGE>
Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed-rate payments. The purchase of a cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
value, to receive payments on a notional principal amount from the party selling
the cap. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling the floor. A collar combines
elements of buying a cap and selling a floor.
Swap agreements, including caps, collars and floors, can be
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors. Depending on their structure,
swap agreements may increase or decrease the overall volatility of the Fund's
investments and its share price and yield because, and to the extent, these
agreements affect the Fund's exposure to long- or short-term interest rates (in
the United States or abroad), foreign currency values, mortgage-backed security
values, corporate borrowing rates or other factors such as security prices or
inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to exchange
payments in U.S. dollars for payments in foreign currency, the swap agreement
would tend to decrease the Fund's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options.
The creditworthiness of firms with which the Fund enters into swaps,
caps or floors will be monitored by WRIMCO in accordance with procedures adopted
by the Fund's Board of Directors. If a firm's creditworthiness declines, the
value of the agreement would be likely to decline, potentially resulting in
losses. If a default occurs by the other party to such transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction.
The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap will be accrued on a daily basis and
an amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such accounts with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that
35
<PAGE>
are written by the Fund. WRIMCO and the Fund believe that such obligations do
not constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to the Fund's borrowing restrictions. The Fund
understands that the position of the SEC is that assets involved in swap
transactions are illiquid and are, therefore, subject to the limitations on
investing in illiquid securities.
Investment Restrictions and Limitations
Certain of the Fund's investment restrictions and other limitations are
described in this SAI. The following are the Fund's fundamental investment
limitations set forth in their entirety, which, like the Fund's goal, cannot be
changed without shareholder approval. For this purpose, shareholder approval
means the approval, at a meeting of Fund shareholders, by the lesser of (1) the
holders of 67% or more of the Fund's shares represented at the meeting, if more
than 50% of the Fund's outstanding shares are present in person or by proxy or
(2) more than 50% of the Fund's outstanding shares. The Fund may not:
(i) Purchase or sell physical commodities; however, this policy
shall not prevent the Fund from purchasing and selling foreign
currency, futures contracts, options, forward contracts,
swaps, caps, collars, floors and other financial instruments;
(ii) Invest in mineral related programs or leases;
(iii) With respect to 75% of its total assets, purchase securities
of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act), if immediately after
and as a result of such purchase, (a) the value of the
holdings of the Fund in the securities of such issuer exceeds
5% of the value of the Fund's total assets, or (b) the Fund
owns more than 10% of the outstanding voting securities of
such issuer; 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 that redeem their
shares. The Fund may buy shares of investment companies that
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;
(v) Invest for the purpose of exercising control or management of
other companies;
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<PAGE>
(vi) Participate on a joint, or a joint and several, basis in any
trading account in any securities;
(vii) Sell securities short (unless it owns or has the right to
obtain securities equivalent in kind and amount to the
securities sold short) or purchase securities on margin,
except that (1) this policy does not prevent the Fund from
entering into short positions in foreign currency, futures
contracts, options, forward contracts, swaps, caps, collars,
floors and other financial instruments, (2) the Fund may
obtain such short-term credits as are necessary for the
clearance of transactions, and (3) the Fund may make margin
payments in connection with futures contracts, options,
forward contracts, swaps, caps, collars, floors and other
financial instruments;
(viii) 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;
(ix) Borrow for investment purposes, that is, to purchase
securities. The Fund may borrow money from banks as a
temporary measure or for extraordinary or emergency purposes
but only up to 5% of its total assets; or
(x) Make loans other than certain limited types of loans; the Fund
may buy debt securities and other obligations consistent with
its goals and other investment policies and restrictions. The
Fund may also enter into repurchase agreements (see
"Repurchase Agreements" above) and lend its securities (see
"Lending Securities" above); or
(xi) issue senior securities.
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 for the fiscal years ended September
30, 1998 and 1997 was 58.85% and 64.38%, respectively.
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<PAGE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly owned subsidiary of Waddell & Reed, Inc.
Under the Management Agreement, WRIMCO is employed to supervise the investments
of the Fund and provide investment advice to the Fund. The address of WRIMCO and
Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate
of Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's Board of Directors prior to approving any Shareholder
Servicing Agreement or Accounting Services Agreement.
Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly
owned subsidiary of Waddell & Reed Financial, Inc., a publicly held company. The
address of these companies is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
Waddell & Reed, Inc. and its predecessors served as investment manager
to each of the registered investment companies in the United Group of Mutual
Funds, except United Asset Strategy Fund, Inc., since 1940 or the company's
inception date, whichever was later, and to Target/United Funds, Inc. since that
fund's inception, until January 8, 1992, when it assigned its duties as
investment manager for these funds (and the related professional staff) to
WRIMCO. WRIMCO has also served as investment manager for Waddell & Reed Funds,
Inc. since its inception in September 1992, and United Asset Strategy Fund, Inc.
since it commenced operations in March 1995. Waddell & Reed, Inc. serves as
38
<PAGE>
principal underwriter for the investment companies in the United Group of Mutual
Funds and Waddell & Reed Funds, Inc. and acts as principal underwriter and
distributor for variable life insurance and variable annuity policies issued by
United Investors Life Insurance Company for which Target/United Funds, Inc. is
the underlying investment vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund
and Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell &
Reed, Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund
and the Agent, the Agent provides the Fund with bookkeeping and accounting
services and assistance, including maintenance of the Fund's records, pricing of
the Fund's shares, and preparation of prospectuses for existing shareholders,
proxy statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Board of Directors
without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the
Fund pays WRIMCO a fee as described in the Prospectus. The management fees paid
by the Fund to WRIMCO during the Fund's fiscal years ended September 30, 1998,
1997 and 1996 were $2,302,825, $2,103,768 and $2,048,451, respectively.
For purposes of calculating the daily fee the Fund does not include
money owed to it by Waddell & Reed, Inc. for shares which it has sold but not
yet paid the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, for the Class A shares, the
Fund pays the Agent a monthly fee of $1.3125 for each shareholder account that
was in existence at any time during the prior month, plus $0.30 for each account
on which a dividend or distribution, of cash or shares, had a record date in
that month. For Class Y shares, the Fund pays the Agent a monthly fee equal to
one-twelfth of .15 of 1% of the average daily net assets of
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<PAGE>
that class for the preceding month. The Fund also pays certain out-of-pocket
expenses of the Agent, including long distance telephone communications costs;
microfilm and storage costs for certain documents; forms, printing and mailing
costs; and costs of legal and special services not provided by Waddell & Reed,
Inc., WRIMCO or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a
monthly fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
<TABLE>
<CAPTION>
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
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
</TABLE>
Fees paid to the Agent for accounting services for the fiscal years
ended September 30, 1998, 1997 and 1996 were $60,000 for each of the three
years.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement are
described above. Waddell & Reed, Inc. and affiliates pay the Fund's Directors
and officers who are affiliated with WRIMCO and its affiliates. The Fund pays
the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares and
thus sells shares only for purchase orders received. Under this agreement,
WRIMCO 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 Class A shares for the fiscal years ended September 30, 1998,
1997
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<PAGE>
and 1996 were $1,812,811, $1,267,590 and $931,980, respectively. The amounts
retained by WRIMCO for the same periods were $768,637, $537,529 and $415,341,
respectively.
No portion of the sales charge is reallowed to dealers. A major portion
of the sales charge for Class A shares is paid to account representatives and
managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may compensate its account
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 Distribution and Service Plan for Class A shares (the "Plan")
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay
Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed 0.25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with the distribution of the Class A shares, and the
service and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its registered
representatives and sales managers (sales force) unless it elects, which is not
currently contemplated for Class A shares, to make distribution of shares also
through other broker-dealers. In distributing shares through its sales force,
Waddell & Reed, Inc. will pay commissions and incentives to the sales force at
or about the time of sale and will incur other expenses including costs for
prospectuses, sales literature, advertisements, sales office maintenance,
processing of orders and general overhead with respect to its efforts to
distribute the Fund's shares. The Plan permits Waddell & Reed, Inc. to receive
reimbursement for these Class A-related distribution activities through the
distribution fee, subject to the limit contained in the Plan. The Plan also
permits Waddell & Reed, Inc. to be reimbursed for amounts it expends in
compensating, training and supporting registered account representatives, sales
managers and/or other appropriate personnel in providing personal services to
Class A shareholders of the Fund and/or maintaining Class A shareholder
accounts; increasing services provided to Class A shareholders of the Fund by
office personnel located at field sales offices; engaging in other activities
useful in providing personal service to Class A shareholders of the Fund and/or
maintenance of Class A shareholder accounts; and in compensating broker-dealers,
and other third parties, who may regularly sell Class A shares of the Fund, and
other third parties, for providing shareholder services and/or maintaining
41
<PAGE>
shareholder accounts with respect to Class A shares. Service fees and
distribution fees in the amounts of $900,703 and $6,186, respectively, were paid
(or accrued) by the Fund with respect to Class A shares for the fiscal year
ended September 30, 1998. To the extent that Waddell & Reed, Inc. incurs
expenses for which reimbursement may be made under the Plan that relate to
distribution activities also involving another fund in the United Group of Funds
or Waddell & Reed Funds, Inc., Waddell & Reed, Inc. typically determines the
amount attributable to the Fund's expenses under the Plan on the basis of a
combination of the respective classes' relative net assets and number of
shareholder accounts.
The only Directors or interested persons, as defined in the 1940 Act,
of the Fund who have a direct or indirect financial interest in the operation of
the Plan are the officers and Directors who are also officers of either Waddell
& Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. The Plan is
anticipated to benefit the Fund and its Class A shareholders through Waddell &
Reed, Inc.'s activities not only to distribute the Class A shares of the Fund
but also to provide personal services to Class A shareholders and thereby
promote the maintenance of their accounts with the Fund. The Fund anticipates
that Class A shareholders may benefit to the extent that Waddell & Reed's
activities are successful in increasing the assets of the Fund, through
increased sales or reduced redemptions, or a combination of these, and reducing
a Class A shareholder's share of Fund and Class A expenses. Increased Fund
assets may also provide greater resources with which to pursue the goal of the
Fund. Further, continuing sales of Class A shares may also reduce the likelihood
that it will be necessary to liquidate portfolio securities, in amounts or at
times that may be disadvantageous to the Fund, to meet redemption demands. In
addition, the Fund anticipates that the revenues from the Plan will provide
Waddell & Reed, Inc. with greater resources to make the financial commitments
necessary to continue to improve the quality and level of services to the Fund
and Class A shareholders.
The Plan was approved by the Fund's Board of Directors, including the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operations of the Plan or any agreement
referred to in the Plan (hereafter, the "Plan Directors"). The Plan was also
approved by the affected shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc.
will provide to the Directors of the Fund at least quarterly, and the Directors
will review, a report of amounts expended under the Plan and the purposes for
which such expenditures were made, (ii) the Plan will continue in effect only so
long as it is approved at least annually, and any material amendments thereto
will be effective only if approved, by the Directors including the Plan
Directors acting in person at
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<PAGE>
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 Class A 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 UMB Bank, n.a., Kansas City, Missouri. In
general, the Custodian is responsible for holding the Fund's cash and
securities. Deloitte & Touche LLP, Kansas City, Missouri, the Fund's independent
auditors, audits the Fund's financial statements.
Year 2000 Issue
Like other mutual funds, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by WRIMCO and the Fund's other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." WRIMCO is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Fund's other, major
service providers. Although there can be no assurances, WRIMCO believes these
steps will be sufficient to avoid any adverse impact on the Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each class of the shares of the Fund is the
value of the assets of that class, less the liabilities of that class, divided
by the total number of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined net asset
value plus the sales charge described in the Prospectus. The sales charge is
paid to Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of
September 30, 1998 was as follows:
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Net asset value per Class A share (Class A net assets divided by
Class A shares outstanding) ......................................... $4.12
Add: selling commission (5.75% of offering
price) .............................................................. .25
-----
Maximum offering price per Class A share
(Class A net asset value divided by 94.25%) ......................... $4.37
=====
The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge. The
offering price of a Class Y share is its net asset value next determined
following acceptance of a purchase order. The number of shares you receive for
your purchase depends on the next offering price after Waddell & Reed, Inc.
receives and accepts your order at its principal business office at the address
shown on the cover of this SAI. You will be sent a confirmation after your
purchase which will indicate how many shares you have purchased. Shares are
normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the
Fund may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily
computed once on each day that the NYSE is open for trading as of the later of
the close of the regular session of the NYSE or 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 NYSE annually announces the days on which
it will not be open for trading. The most recent announcement indicates that the
NYSE will not be open on the following days: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. However, it is possible that the NYSE
may close on other days. The net asset value will change every business day,
since the value of the assets and the number of shares outstanding change every
day.
The securities in the portfolio of the Fund, except as otherwise noted,
that are listed or traded on a stock exchange, are valued on the basis of the
last sale on that day or, lacking any sales, at a price that is the mean between
the closing bid and asked prices. Other securities that are traded
over-the-counter are priced using the Nasdaq stock market, which provides
information on bid and asked prices quoted by major dealers in such stocks.
Bonds, other than convertible bonds, are valued using a third-party pricing
system. Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Short-term debt securities and other assets are
valued at amortized cost, which approximates market. When market quotations are
not readily available, securities and other assets are valued at fair value as
determined in good faith under
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procedures established by and under the general supervision and responsibility
of the Board of Directors.
Options and futures contracts 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 options
trading on national securities exchanges is 4:10 p.m. Eastern time and the close
of the regular session for 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" (that is, treated as sold for its fair
market value) 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.
Foreign currency exchange rates are generally determined prior to the
close of trading of the regular session of the NYSE. Occasionally events
affecting the value of foreign investments and such exchange rates occur between
the time at which they are determined and the close of the regular session of
trading on the NYSE, which events will not be reflected in a computation of the
Fund's net asset value on that day. If events materially affecting the value of
such investments or currency exchange rates occur during such time period,
investments will be valued at their fair value as determined in good faith by or
under the direction of the Board of Directors. The foreign currency exchange
transactions of the Fund conducted on a spot (i.e., cash) basis are valued at
the spot rate for purchasing or selling currency prevailing on the foreign
exchange market. This rate under normal market conditions differs from the
prevailing exchange rate in an amount generally less than one-tenth of one
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percent due to the costs of converting from one currency to another.
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
For Class A shares, initial investments must be at least $500 with the
exceptions described in this paragraph. A $100 minimum initial investment
pertains to certain exchanges of shares from another fund in the United Group. A
$50 minimum initial investment pertains to purchases for certain retirement plan
accounts and to accounts for which an investor has arranged, at the time of
initial investment, to make subsequent purchases for the account by having
regular monthly withdrawals of $25 or more made from a bank account. A $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 WRIMCO, 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."
For Class Y shares, investments by government entities or authorities
or by corporations must total at least $10 million within the first twelve
months after initial investment. There is no initial investment minimum for
other Class Y investors.
Reduced Sales Charges (Applicable to Class A Shares Only)
Account Grouping
Large purchases of Class A shares are subject to lower sales charges.
The schedule of sales charges appears in the Prospectus for Class A shares. For
the purpose of taking advantage of the lower sales charges available for large
purchases, a purchase in any of categories 1 through 7 listed below made by an
individual or deemed to be made by an individual may be grouped with purchases
in any other of these categories:
1. Purchases by an individual for his or her own account (includes
purchases under the United Funds Revocable Trust Form);
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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 Gifts to Minors Act ("UGMA") or Uniform Transfers to Minors
Act ("UTMA") account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), salary reduction plan account
under Section 457 of the Internal Revenue Code of 1986, as amended,
(the "Code") provided that such purchases are subject to a sales charge
(see "Net Asset Value Purchases"), tax-sheltered annuity account
("TSA") or Keogh plan account, provided that the individual and spouse
are the only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or
her spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother
has an account in her own name; A's father has an account in
his own name; the UGMA account may be grouped with A's
father's account but may not be grouped with Grandmother's
account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase
made in the trust account is eligible for grouping with an IRA
account of W, H's wife;
C. H's will provides for the establishment of a trust for the
benefit of his minor children upon H's death; his bank is
named as trustee; upon H's death, an account is established in
the name of the bank, as trustee; a purchase in the account
may be grouped with an account held by H's wife in her own
name.
D. X establishes a trust naming herself as trustee and R, her
son, as successor trustee and R and S as beneficiaries; upon
X's death, the account is transferred to R as trustee; a
purchase in the account may not be grouped with R's individual
account. If X's
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spouse, Y, was successor trustee, this purchase could be
grouped with Y's individual account.
All purchases of Class A shares made for a participant in a
multi-participant Keogh plan may be grouped only with other purchases made under
the same plan; a multi-participant Keogh plan is defined as a plan in which
there is more than one participant where one or more of the participants is
other than the spouse of the owner/employer. All qualified employee benefit
plans of an employer who is a franchisor and those of its franchisee(s) may also
be grouped.
Example A: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made under
the plan with any purchases in categories 1 through 7 above.
Example B: H has established a Keogh plan; his wife, W, is a
participant and they have hired one or more employees who
also become participants in the plan; H and W may not
combine any purchases made under the plan with any purchases
in categories 1 through 7 above; however, all purchases made
under the plan for H, W or any other employee will be
combined.
All purchases of Class A shares made under a "qualified" employee
benefit plan of an incorporated business will be grouped. A "qualified" employee
benefit plan is established pursuant to Section 401 of the Code. All qualified
employee benefit plans of any one employer or affiliated employers will also be
grouped. An affiliate is defined as an employer that directly, or indirectly,
controls or is controlled by or is under control with another employer. All
qualified employee benefit plans of an employer who is a franchisor and those of
the franchisee(s) may also be grouped.
Example: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made under both
plans will be grouped.
All purchases of Class A shares made under a simplified employee
pension plan ("SEP"), payroll deduction plan or similar arrangement adopted by
an employer or affiliated employers (as defined above) may be grouped provided
that the employer elects to have all such purchases grouped at the time the plan
is set up. If the employer does not make such an election, the purchases made by
individual employees under the plan may be grouped with the other accounts of
the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
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One-time Purchases
A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $75,000; at the
same time, H's parents open up three UGMA accounts for H and
W's three minor children and invest $10,000 in each child's
name; the combined purchase of $105,000 of Class A shares is
subject to a reduced sales load of 4.75% provided that Waddell
& Reed, Inc. is advised that the purchases are entitled to
grouping.
Rights of Accumulation
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund
three years ago. His account has a net asset value of $80,000.
His wife, W, now wishes to invest $20,000 in Class A shares of
the Fund. W's purchase will be combined with H's existing
account and will be entitled to a reduced sales charge of
4.75%. H's original purchase was subject to a full sales
charge and the reduced charge does not apply retroactively to
that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a
contractual plan, the shares held under such plan may be combined with the
additional purchase only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases of Class A
shares 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
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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 of Intention is treated
as if the purchaser were buying at one time the total amount which he or she
intends to invest. The sales charge applicable to all purchases of Class A
shares made under the terms of the Statement of Intention 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, Class A shares already held in the same account in which the purchase is
being made or in any account eligible for grouping with that account, as
described above, will be included.
Example: H signs a Statement of Intention indicating his intent to invest in his
own name a dollar amount sufficient to entitle him to purchase Class A
shares at the sales charge applicable to a purchase of $100,000. H has
an IRA account and the Class A shares held under the IRA in the Fund
have a net asset value as of the date the Statement of Intention 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 Intention of $10,000;
H needs to invest $75,000 in Class A shares over the 13-month period in
order to qualify for the reduced sales load applicable to a purchase of
$100,000.
A copy of the 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 of Class A shares which must be purchased within the
13-month period in order to qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under a
contractual plan, the shares held under the plan will be taken into account in
determining the amount which must be invested under the Statement of Intention
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 of Intention will be held "in
escrow." If a purchaser does not, during the period covered by the Statement of
Intention, invest the amount required to qualify for the reduced sales charge
under the terms of the Statement of Intention, he or she will be responsible for
payment of the sales charge
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applicable to the amount actually invested. The additional sales charge owed on
purchases of Class A shares made under a Statement of Intention which is not
completed will be collected by redeeming part of the shares purchased under the
Statement of Intention 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 of Intention.
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 of Intention will be deducted in computing the aggregate purchases
under the Statement of Intention.
Statements of Intention are not available for purchases made under an
SEP 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 of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the United Group
subject to a sales charge. A purchase of Class A shares, or Class A shares held,
in any of the funds in the United Group subject to a sales charge will be
treated as an investment in the Fund in determining the applicable sales charge.
For these purposes, Class A shares of United Cash Management, Inc. that were
acquired by exchange of another United Group fund's Class A shares on which a
sales charge was paid, plus the shares paid as dividends on those acquired
shares, are also taken into account.
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Net Asset Value Purchases of Class A Shares
As stated in the Prospectus, Class A shares of the Fund may be
purchased at net asset value by the Directors and officers of the Fund,
employees of Waddell & Reed, Inc., employees of their affiliates, account
representatives of Waddell & Reed, Inc. and the spouse, children, parents,
children's spouses and spouse's parents of each such Director, officer, employee
and account representative. "Child" includes stepchild; "parent" includes
stepparent. Purchases of Class A shares in an IRA sponsored by Waddell & Reed,
Inc. established for any of these eligible purchasers may also be at net asset
value. Purchases 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 of Class A shares.
"Employees" includes retired employees. A retired employee is an individual
separated from service from Waddell & Reed, Inc. or affiliated companies with a
vested interest in any Employee Benefit Plan sponsored by Waddell & Reed, Inc.
or its affiliated companies. "Account representatives" includes retired account
representatives. A "retired account representative" is any account
representative who was, at the time of separation from service from Waddell &
Reed, Inc., a Senior Account Representative. A custodian under the UGMA or UTMA
purchasing for the child or grandchild of any employee or account representative
may purchase Class A shares at net asset value whether or not the custodian
himself is an eligible purchaser.
Purchases of Class A shares in a 401(k) plan having 100 or more
eligible employees and purchases of Class A shares in a 457 plan having 100 or
more eligible employees may be made at net asset value.
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Reasons for Differences in Public Offering Price of Class A Shares
As described herein and in the Prospectus for Class A shares, there are
a number of instances in which the Fund's Class A shares are sold or issued on a
basis other than the maximum public offering price, that is, the net asset value
plus the highest sales charge. Some of these relate to lower or eliminated sales
charges for larger purchases of Class A shares, whether made at one time or over
a period of time as under a 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 for Class A shares are as follows. Exchanges at net
asset value are permitted because a sales charge has already been paid on the
shares exchanged. Sales of Class A shares without sales charge are permitted to
Directors, officers and certain others due to reduced or eliminated selling
expenses and since such sales may aid in the development of a sound employee
organization, encourage incentive, responsibility and interest in the United
Group and an identification with its aims and policies. Limited reinvestments of
redemptions of Class A shares at no sales charge are permitted to attempt to
protect against mistaken or not fully informed redemption decisions. Class A
shares may be issued at no sales charge in plans of reorganization due to
reduced or eliminated sales expenses and since, in some cases, such issuance is
exempted by the 1940 Act from the otherwise applicable restrictions as to what
sales charge must be imposed. In no case in which there is a reduced or
eliminated sales charge are the interests of existing shareholders adversely
affected since, in each case, the Fund receives the net asset value per share of
all shares sold or issued.
Flexible Withdrawal Service for Class A Shareholders
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service (the "Service") regular monthly, quarterly, semiannual or
annual payments by redeeming on an ongoing basis Class A shares that you own of
the Fund or of any of the funds in the United Group. It would be a disadvantage
to an investor to make additional purchases of shares while a
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withdrawal program is in effect because it would result in duplication of sales
charges. Applicable forms to start the Service are available from Waddell &
Reed, Inc.
To qualify for the Service, you must have invested at least $10,000 in
Class A shares which you still own of any of the funds in the United Group; or,
you must own Class A shares having a value of at least $10,000. The value for
this purpose is the value at the offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to
one-twelfth of a percentage of the value of the shares in the Account (you
select the percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least five shares).
Shares are redeemed on the 20th day of the month in which the payment
is to be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
Retirement plan accounts may be subject to a fee imposed by the plan
custodian for use of their service.
If you have a share certificate for the shares you want to make
available for the Service, you must enclose the certificate with the form
initiating the Service.
The dividends and distributions on shares you have made available for
the Service are paid in additional Class A shares. All payments are made by
redeeming Class A shares, which may involve a gain or loss for tax purposes. To
the extent that payments under the Service exceed dividends and distributions,
the number of Class A shares you own will decrease. When all of the shares in
your account are redeemed, you will not receive any further payments. Thus, the
payments are not an annuity or an income or return on your investment.
You may, at any time, change the manner in which you have chosen to
have shares redeemed to any of the other choices originally available to you.
You may, at any time, redeem part or all of the shares in your account; if you
redeem all of the shares, the Service is terminated. The Fund can also terminate
the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed
will be sent to you to assist you in completing your Federal income tax return.
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Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
Once a sales charge has been paid on shares of a fund in the United
Group, these shares and any shares added to them from dividends or distributions
paid in shares may be freely exchanged for Class A shares of another fund in the
United Group. The shares you exchange must be worth at least $100 or you must
already own shares of the fund in the United Group into which you want to
exchange.
You may exchange Class A shares you own in another fund in the United
Group for Class A shares of the Fund without charge if (i) a sales charge was
paid on these shares, or (ii) the shares were received in exchange for shares
for which a sales charge was paid, or (iii) the shares were acquired from
reinvestment of dividends and distributions paid on such shares. (There may have
been one or more such exchanges so long as a sales charge was paid on the shares
originally purchased.) Also, shares acquired without a sales charge because the
purchase was $2 million or more will be treated the same as shares on which a
sales charge was paid.
United Municipal Bond Fund, Inc., United Government Securities Fund,
Inc. and United Municipal High Income Fund, Inc. shares are the exceptions and
special rules apply. Class A shares of these funds may be exchanged for Class A
shares of the Fund only if (i) you received those shares as a result of one or
more exchanges of shares on which a sales charge was originally paid, or (ii)
the shares have been held from the date of the original purchase for at least
six months.
Subject to the above rules regarding sales charges, you may have a
specific dollar amount of Class A shares of United Cash Management, Inc.
automatically exchanged each month into Class A shares of the Fund or any other
fund in the United Group. The shares of United Cash Management, Inc. which you
designate for automatic exchange must be worth at least $100 or you must own
Class A shares of the fund in the United Group into which you want to exchange.
The minimum value of shares which you may designate for automatic exchange is
$100, which may be allocated among the Class A shares of different funds in the
United Group so long as each fund receives a value of at least $25. Minimum
initial investment and minimum balance requirements apply to such automatic
exchange service.
You may redeem your Class A shares of the Fund and use the proceeds to
purchase Class Y shares of the Fund if you meet the criteria for purchasing
Class Y shares.
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Class Y Share Exchanges
Class Y shares of the Fund may be exchanged for Class Y shares of any
other fund in the United Group or for Class A shares of United Cash Management,
Inc.
General Exchange Information
When you exchange shares, the total shares you receive will have the
same aggregate net asset value as the total shares you exchange. The relative
values are those next figured after your exchange request is received in good
order.
These exchange rights and other exchange rights concerning the other
funds in the United Group can in most instances be eliminated or modified at any
time and any such exchange may not be accepted.
Retirement Plans
As described in the Prospectus for Class A shares, your account may be
set up as a funding vehicle for a retirement plan. For individual taxpayers
meeting certain requirements, Waddell & Reed, Inc. offers model or prototype
documents for the following retirement plans. All of these plans involve
investment in shares of the Fund (or shares of certain other funds in the United
Group).
Individual Retirement Accounts (IRAs). Investors having earned income
may set up a plan that is commonly called an IRA. Under a traditional IRA, an
investor can contribute each year up to 100% of his or her earned income, up to
an annual maximum of $2,000 (provided the investor has not reached the age
70 1/2. For a married couple, the annual maximum is $4,000 ($2,000 for each
spouse) or, if less, the couple's combined earned income for the taxable year,
even if one spouse had no earned income. Generally, the contributions are
deductible unless the investor (or, if married, either spouse) is an active
participant in a qualified retirement plan or if, notwithstanding that the
investor or one or both spouses so participate, their adjusted gross income does
not exceed certain levels. However, for tax years after 1997, a married investor
who is not an active participant, files jointly with his or her spouse and whose
combined adjusted gross income does not exceed $150,000, is not affected by the
spouse's active participant status.
An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be subject
to Federal income tax until distributed from the IRA. A direct rollover
generally applies to any distribution from an employer's
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plan (including a custodial account under Section 403(b)(7) of the Code, but not
an IRA) other than certain periodic payments, required minimum distributions and
other specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a portion
of that distribution generally may be rolled over to an IRA within 60 days after
receipt of the distribution. Because mandatory Federal income tax withholding
applies to any eligible rollover distribution which is not paid in a direct
rollover, investors should consult their tax advisers or pension consultants as
to the applicable tax rules. If you already have an IRA, you may have the assets
in that IRA transferred directly to an IRA offered by Waddell & Reed, Inc.
Roth IRAs. Investors whose adjusted gross income (or combined adjusted
gross income, if married) does not exceed certain levels may establish and
contribute up to $2,000 per tax year after 1997 to a Roth IRA. In addition, for
an investor whose adjusted gross income does not exceed $100,000 (and who is not
married filing a separate return), certain distributions from traditional IRAs
may be rolled over to a Roth IRA and any of the investor's traditional IRAs may
be converted into a Roth IRA; these rollover distributions and conversions are,
however, subject to Federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax free in the Roth IRA, and withdrawals of earnings are not subject
to Federal income tax if the account has been held for at least five years (or
in the case of earnings attributable to rollover contributions or conversions of
a traditional IRA, the rollover or conversion occurred more than five years
prior to the withdrawal) and the account holder has reached age 59 1/2 (or
certain other conditions apply).
Education IRAs. Although not technically for retirement savings,
Education IRAs provide a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than $500 may be contributed for any year
to Education IRAs for the same beneficiary. Contributions are not deductible and
may not be made after the beneficiary reaches age 18; however, earnings
accumulate tax free, and withdrawals are not subject to tax if used to pay the
qualified higher education expenses of the beneficiary (or a member of his or
her family).
Simplified Employee Pension (SEP) plans. Employers can make
contributions to SEP-IRAs established for employees. Generally, an employer may
contribute up to 15% of compensation, or $24,000, whichever is less, per year
for each employee.
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Savings Incentive Match Plans for Employees (SIMPLE Plans). An employer
with 100 or fewer employees who does not sponsor another active retirement plan
may sponsor a SIMPLE to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an
employer can choose to match employee contributions dollar-for-dollar
(generally, up to 3% of the employee's compensation) or may contribute to all
eligible employees 2% of their compensation, whether or not they defer salary to
their SIMPLE plans. SIMPLE plans involve fewer administrative requirements than
401(k) or other qualified plans generally.
Keogh Plans. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money purchase
plan or a profit-sharing plan. As a general rule, an investor under a defined
contribution Keogh plan can contribute each year up to 25% of his or her annual
earned income, with an annual maximum of $30,000.
457 Plans. If an investor is an employee of a state or local government
or of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is an
employee of a public school system or of certain types of charitable
organizations, he or she may be able to enter into a deferred compensation
arrangement through a custodian account under Section 403(b) of the Code. Some
organizations have adopted Title I plans, which are funded by employer
contributions in addition to employee deferrals.
401(k) Plans. With a 401(k) plan, employees can make tax-deferred
contributions into a plan to which the employer may also contribute, usually on
a matching basis. An employee may defer each year up to 25% of compensation,
subject to certain annual maximums, which may be increased each year based on
cost-of-living adjustments.
More detailed information about these arrangements and applicable forms
are available from Waddell & Reed, Inc. These plans may involve complex tax
questions as to premature distributions and other matters. Investors should
consult their tax adviser or pension consultant.
Redemptions
The Prospectus gives information as to redemption procedures.
Redemption payments are made within seven days unless delayed because of
emergency conditions determined by the SEC, when the NYSE is closed other than
for weekends or holidays, or when trading on the NYSE is restricted. Payment is
made in cash, although under extraordinary conditions redemptions may be made in
portfolio securities. Payment for redemption of shares
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of the Fund may be made in portfolio securities when the Fund's Board of
Directors determines that conditions exist making cash payments undesirable.
Redemptions made in securities will be made only in readily marketable
securities. Securities used for payment of redemptions are valued at the value
used in figuring net asset value. There would be brokerage costs to the
redeeming shareholder in selling such securities. The Fund, however, has elected
to be governed by Rule 18f-1 under the 1940 Act, pursuant to which it is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
its net asset value during any 90-day period for any one shareholder.
Reinvestment Privilege
The Prospectus for Class A shares discusses the reinvestment privilege
for Class A shares under which, if you redeem your Class A shares and then
decide it was not a good idea, you may reinvest. If Class A shares of the Fund
are then being offered, you can put all or part of your redemption payment back
into Class A shares of the Fund 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 Class A shares of the Fund. You do not use up
this privilege by redeeming Class A shares to invest the proceeds at net asset
value in a Keogh plan or an IRA.
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.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors. The majority of the
Directors are not affiliated with Waddell & Reed, Inc.
The principal occupation during at least the past five years of each
Director and officer is given below. Each of the persons listed through and
including Mr. Vogel is a member of the
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Fund's Board of Directors. The other persons are officers but not members of the
Board of Directors. For purposes of this section, the term "Fund Complex"
includes each of the registered investment companies in the United Group of
Mutual Funds, Waddell & Reed Funds, Inc. and Target/United Funds, Inc. Each of
the Fund's Directors is also a Director of each of the other funds in the Fund
Complex and each of its officers is also an officer of one or more of the funds
in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer, Principal Financial Officer and Director of Waddell & Reed Financial,
Inc.; President, Chairman of the Board of Directors and Chief Executive Officer
of Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
of WRIMCO, Waddell & Reed, Inc., Waddell & Reed Services Company, Waddell & Reed
Development, Inc., a business development company, and Waddell & Reed
Distributors, Inc.; formerly, President of the Fund and each of the other funds
in the Fund Complex; formerly, Vice Chairman of the Board of Directors of
Torchmark Corporation; formerly, Chairman of the Board of Directors of Waddell &
Reed Asset Management Company, a former affiliate of Waddell & Reed Financial,
Inc.; formerly, Director of Vesta Insurance Group, Inc.; formerly, Director of
Southwestern Life Corporation. Date of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President, JoDill Corp., an agricultural company; President and
Director of Dillingham Enterprises Inc.; formerly, Director and consultant,
McDougal Construction Company; formerly, Instructor at Central Missouri State
University; formerly, Member of the Board of Police Commissioners, Kansas City,
Missouri; formerly, Senior Vice President-Sales and Marketing, Garney Companies,
Inc., a specialty utility contractor. Date of birth: January 9, 1939.
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DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George S. and Delores
Dori Eccles Foundation. Director of First Security Corp., a bank holding
company, and Director of Fluor Corp., a company with interests in coal. Date of
birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Daughter of Ronald K. Richey, Director of the
Fund and each of the other funds in the Fund Complex. Date of birth: July 29,
1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct Professor of Law at
the University of Oklahoma College of Law; formerly, Vice President for
Executive Affairs of the University of Oklahoma; formerly, an Attorney with
Crowe & Dunlevy, a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES*
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman of the Board of
Directors, Gilliland & Hayes, P.A., a law firm; formerly, President, Gilliland &
Hayes, P.A. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Executive Vice President, Chief Operating
Officer and Director of Waddell & Reed Financial, Inc.; Vice President, Chief
Operating Officer, Director and Treasurer of Waddell & Reed Financial Services,
Inc.; Executive Vice President, Principal Financial Officer, Director and
Treasurer of WRIMCO; President, Chief Executive Officer, Principal Financial
Officer, Director and Treasurer of Waddell & Reed, Inc.; President, Director and
Treasurer of Waddell & Reed Services Company; President, Treasurer and Director
of Waddell & Reed Distributors, Inc.; President of Waddell & Reed Development,
Inc., a business development company; formerly, Vice President of the Fund and
each of the other funds in the Fund Complex; formerly, Director and Treasurer of
Waddell & Reed Asset Management Company. Date of birth: November 12, 1936.
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HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer, Treasurer and Director of Waddell
& Reed Financial, Inc.; Vice President, Chief Investment Officer and Director of
Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; Director of Waddell & Reed Development, Inc., a business development
company. Formerly, President, Chief Executive Officer, Chief Investment Officer
and Director of Waddell & Reed Asset Management Company. Date of birth: December
8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired. Formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and subsidiaries. Date of birth: February 19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of
the Fund and each fund in the Fund Complex then in existence. (Mr. Morgan
retired as Chairman of the Board of Directors and President of the funds in the
Fund Complex then in existence on April 30, 1993); formerly, President, Director
and Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company; formerly,
Director of Waddell & Reed Asset Management Company, Waddell & Reed Financial,
Inc. and United Investors Life Insurance Company, affiliates of Waddell & Reed,
Inc. Date of birth: April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director of Network Rehabilitation Services; formerly, Employment
Counselor and Director of McCue-Parker Center. Date of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm. Date of
birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Chancellor, University of Missouri-Kansas City. Date of birth: January
1, 1937.
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FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund
and each of the other funds in the Fund Complex; Vice President of Waddell &
Reed Services Company. Date of birth: July 18, 1942.
John M. Holliday
Vice President of the Fund and eight other funds in the Fund Complex;
Senior Vice President of WRIMCO; formerly, Senior Vice President of Waddell &
Reed Asset Management Company; formerly, Senior Vice President of Waddell &
Reed, Inc. Date of birth: June 11, 1935.
Louise D. Rieke
Vice President of the Fund and three other funds in the Fund Complex;
Vice President of WRIMCO; formerly, Vice President of Waddell & Reed Asset
Management Company; formerly, Vice President of Waddell & Reed, Inc. Date of
birth: April 24, 1949.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217,
Shawnee Mission, Kansas 66201-9217 unless a different address is given.
The Directors who may be deemed to be "interested persons" as defined
in the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc., or of WRIMCO
are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a director may elect after resignation from the Board
provided the director has attained the age of 70 and has served as a director of
the funds in the United Group for a total of at least five years. A Director
Emeritus receives fees in recognition of his or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Messrs.
Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey and Paul
S. Wise retired as Directors of the Fund and of each of the funds in the Fund
Complex and elected a
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position as Director Emeritus.
The funds in the United Group, Target/United Funds, Inc. and Waddell &
Reed Funds, Inc. pay to each Director a total of $48,000 per year, plus $2,500
for each meeting of the Board of Directors attended and $500 for each committee
meeting attended which is not in conjunction with a Board of Directors meeting,
other than Directors who are affiliates of Waddell & Reed, Inc. The fees to the
Directors who receive them are divided among the funds in the United Group,
Target/United Funds, Inc. and Waddell & Reed Funds, Inc. based on their relative
size. During the Fund's fiscal year ended September 30, 1998, the Fund's
Directors received the following fees for service as a director:
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex
- -------- ------------ ------------
<S> <C> <C>
Keith A Tucker $ 0 $ 0
Robert L. Hechler 0 0
Henry J. Herrmann 0 0
James M. Concannon 1,093 56,000
John A. Dillingham 1,093 56,000
David P. Gardner 0 0
Linda K. Graves 1,093 56,000
Joseph Harroz, Jr. 0 0
John F. Hayes 1,093 56,000
Glendon E. Johnson 1,073 55,000
William T. Morgan 1,093 56,000
Ronald C. Reimer 0 0
Frank J. Ross, Jr. 1,093 56,000
Eleanor B. Schwartz 1,093 56,000
Frederick Vogel III 1,093 56,000
</TABLE>
*No pension or retirement benefits have been accrued as a part of Fund expenses.
Mr. Gardner was elected as a Director on August 18, 1998. Messrs.
Harroz, Hechler, Herrmann and Reimer were elected as Directors on November 18,
1998. The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of November 30, 1998, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. The following
table sets forth information with respect to the Fund, as of November 30, 1998,
regarding the ownership of the Fund's shares.
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<TABLE>
<CAPTION>
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
- ------------------- ----- ------------ -------
<S> <C> <C> <C>
Waddell & Reed Financial, Inc. Class Y %
Savings & Investment Plan
6300 Lamar Avenue
Overland Park KS 66201
Torchmark Corporation Class Y
Savings & Investment Plan
2001 Third Avenue South
Birmingham AL 35202
</TABLE>
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is derived
from the dividends, interest and earned discount on the securities the Fund
holds ,less expenses (which will vary by class). The second source is net
realized capital gains, which are derived from the proceeds received from the
Fund's sale of securities at a price higher than the Fund's tax basis (usually
cost) in such securities, less losses from the sales of securities at a price
lower than the Fund's basis therein; these gains can be either long-term or
short-term, depending on how long the Fund has owned the securities before it
sells them. The third source is net realized gains from foreign currency
transactions. The payments made to shareholders from net investment income, net
short-term capital gains and net realized gains from certain foreign currency
transactions are called dividends.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may not
have such gains, depending on whether securities are sold and at what price. If
the Fund has net capital gains, it will ordinarily pay distributions once each
year, in the latter part of the fourth calendar quarter, except to the extent it
has net capital losses carried over from a prior year or years to offset the
gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you want
cash for your dividends and distributions, (ii) you want your dividends and
distributions paid in shares of the Fund of
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the same class as that with respect to which they were paid, or (iii) you want
cash for your dividends and want your distributions paid in shares of the Fund
of the same class as that with respect to which they were paid. You can change
your instructions at any time. If you give no instructions, your dividends and
distributions will be paid in shares of the Fund of the same class as that with
respect to which they were paid. All payments in Fund shares are at net asset
value without any sales charge. The net asset value used for this purpose is
that computed as of the record date for the dividend or distribution, although
this could be changed by the Board of Directors.
Even if you get dividends and distributions on Class A shares in cash,
you can thereafter reinvest them (or distributions only) in Class A shares of
the Fund at net asset value (i.e., with no sales charge) next determined after
receipt by Waddell & Reed, Inc. of the amount clearly identified as a
reinvestment. The reinvestment must be within 45 days after the payment.
TAXES
General
The Fund has qualified for treatment as a regulated investment company
("RIC") under the Code, so that it is relieved of Federal income tax on that
part of its investment company taxable income (consisting generally of net
investment income, net short-term capital gains and net gains from certain
foreign currency transactions) that is distributed to its shareholders. To
continue to qualify as a RIC, the Fund must distribute to its shareholders for
each taxable year at least 90% of its investment company taxable income
("Distribution Requirement") and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures contracts or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. Government
Securities, securities of other RICs and other securities that are limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities ("50% Diversification Requirement"); and
(3) at the close of each quarter of the Fund's taxable year, not more than 25%
of the value of its total assets
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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 its shareholders of record on a date in
any of those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year even if they are paid by the Fund
during the following January. Accordingly, those dividends and distributions
will be taxed to the shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any distributions received on those shares. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or distribution, the investor will receive some portion of the
purchase price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. It is the Fund's policy to pay sufficient dividends and
distributions each year to avoid imposition of the Excise Tax. The Code permits
the Fund to defer into the next calendar year net capital losses incurred
between November 1 and the end of the current calendar year.
Income from Foreign Securities
Dividends and interest received, and gains realized, by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
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
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treated as ordinary income or loss. These gains or losses, referred to under the
Code as "section 988" gains or losses, may increase or decrease the amount of
the Fund's investment company taxable income to be distributed to its
shareholders.
Income from Options, Futures and Forward Currency Contracts and Foreign
Currencies
The use of hedging and option income strategies, such as writing
(selling) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and losses
the Fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures contracts and forward currency contracts derived
by the Fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
Any income the Fund earns from writing options is treated as short-term
capital gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it received for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being exercised,
the premium it received also will be a short-term capital gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale.
Certain options, futures contracts and forward currency contracts in
which the Fund may invest may be "section 1256 contracts." Section 1256
contracts held by the Fund at the end of its taxable year, other than contracts
subject to a "mixed straddle" election made by the Fund, are "marked-to-market"
(that is, treated as sold at that time for their fair market value) for Federal
income tax purposes, with the result that unrealized gains or losses are treated
as though they were realized. Sixty percent of any net gains or losses
recognized on these deemed sales, and 60% of any net realized gains or losses
from any actual sales of section 1256 contracts, are treated as long-term
capital gains or losses, and the balance is treated as short-term capital gains
or losses. That 60% portion will qualify for the 20% (10% for taxpayers in the
15% marginal tax bracket) maximum tax rate on net capital gains enacted by the
Taxpayer Relief Act of 1997.
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Section 1256 contracts also may be marked-to-market for purposes of the Excise
Tax and other purposes. The Fund may need to distribute any mark-to-market gains
to its shareholders to satisfy the Distribution Requirement and/or avoid
imposition of the Excise Tax, even though it may not have closed the
transactions and received cash to pay the distributions.
Code section 1092 (dealing with straddles) also may affect the taxation
of options and futures contracts in which the Fund may invest. That section
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. The regulations under section
1092 also provides certain "wash sale" rules, that apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the Fund
makes certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions will be determined under
rules that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.
If the Fund has an appreciated financial position -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward currency contract entered into by the
Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale, such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.
Zero Coupon and Payment-in-Kind Securities
The Fund may acquire zero coupon or other securities issued with
original issue discount ("OID"). As the holder of those securities, the Fund
must include in its income the OID that accrues on the securities during the
taxable year, even if the
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<PAGE>
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 accrued OID and other non-cash income, in order to satisfy the Distribution
Requirement and 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 gain.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio of
the Fund. Transactions in securities other than those for which an exchange is
the primary market are generally done with dealers acting as principals or
market makers. Brokerage commissions are paid primarily for effecting
transactions in securities traded on an exchange and otherwise only if it
appears likely that a better price or execution can be obtained. The individual
who manages the Fund may manage other advisory accounts with similar investment
objectives. It can be anticipated that the manager will frequently place
concurrent orders for all or most accounts for which the manager has
responsibility or WRIMCO may otherwise combine orders for the Fund with those of
other funds in the United Group, Target/United Funds, Inc. and Waddell & Reed
Funds, Inc. or other accounts for which it has investment discretion.
Transactions effected pursuant to such combined orders are averaged as to price
and allocated in accordance with the purchase or sale orders actually placed for
each fund or advisory account, except where the combined order is not filled
completely. In this case, WRIMCO will ordinarily allocate the transaction pro
rata based on the orders placed. Sharing in large transactions could affect the
price the Fund pays or receives or the amount it buys or sells. However,
sometimes a better negotiated commission is available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is authorized
to engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution
74
<PAGE>
and/or research services and other services, including pricing or quotation
services directly or through others ("research and brokerage services")
considered by WRIMCO to be useful or desirable for its investment management of
the Fund and/or the other funds and accounts over which WRIMCO has investment
discretion.
Research and brokerage services are, in general, defined by reference
to Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers, (ii) furnishing
analyses and reports, or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than another qualified broker would charge for
effecting comparable transactions if a good faith determination is made by
WRIMCO that the commission is reasonable in relation to the research or
brokerage services provided. Subject to the foregoing considerations, WRIMCO may
also consider sales of Fund shares as a factor in the selection of
broker-dealers to execute portfolio transactions. No allocation of brokerage or
principal business is made to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful
only to one or more of the other advisory accounts of WRIMCO and investment
research received for the commissions of those other accounts may be useful both
to the Fund and one or more of such other accounts. To the extent that
electronic or other products provided by such brokers to assist WRIMCO in making
investment management decisions are used for administration or other
non-research purposes, a reasonable allocation of the cost of the product
attributable to its non-research use is made by WRIMCO.
Such investment research, which may be supplied by a third party at the
request of a broker, includes information on particular companies and industries
as well as market, economic or institutional activity areas. It serves to
broaden the scope and supplement the research activities of WRIMCO; serves to
make available additional views for consideration and comparisons; and enables
WRIMCO to obtain market information on the price of securities held in the
Fund's portfolio or being considered for purchase.
The Fund may also use its brokerage to pay for pricing or quotation
services to value securities. During the Fund's fiscal years ended September 30,
1998, 1997 and 1996, it paid
75
<PAGE>
brokerage commissions of $7,715, $19,948 and $18,746, respectively. These
figures do not include principal transactions or spreads or concessions on
principal transactions, i.e., those in which the Fund sells securities to a
broker-dealer firm or buys from a broker-dealer firm securities owned by it.
During the Fund's fiscal year ended September 30, 1998, the
transactions, other than principal transactions, which were directed to
broker-dealers who provided research as well as execution totaled $3,349,332 on
which $7,155 in brokerage commissions were paid. These transactions were
allocated to these broker-dealers by the internal allocation procedures
described above.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
OTHER INFORMATION
The Shares of the Fund
The Fund offers two classes of shares: Class A and Class Y. Each class
represents an interest in the same assets of the Fund and differ as follows:
each class of shares has exclusive voting rights on matters pertaining to
matters appropriately limited to that class; Class A shares are subject to an
initial sales charge and to an ongoing distribution and/or service fee and Class
Y shares, which are designated for institutional investors, have no sales charge
nor ongoing distribution and/or service fee; each class may bear differing
amounts of certain class-specific expenses; and each class has a separate
exchange privilege. The Fund does not anticipate that there will be any
conflicts between the interests of holders of the different classes of shares of
the Fund by virtue of those classes. On an ongoing basis, the Board of Directors
will consider whether any such conflict exists and, if so, take appropriate
action. Each share of the Fund is entitled to equal voting, dividend,
liquidation and redemption
76
<PAGE>
rights, except that due to the differing expenses borne by the two classes,
dividends and liquidation proceeds of Class A shares are expected to be lower
than for Class Y shares of the Fund. Each fractional share of a class has the
same rights, in proportion, as a full share of that class. Shares are fully paid
and nonassessable when purchased.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new investment
advisory agreement or a change in fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding not
less than 25% of all shares entitled to vote at such meeting, provided certain
conditions stated in the bylaws are met. There will normally be no meeting of
the shareholders for the purpose of electing directors until such time as less
than a majority of directors holding office have been elected by shareholders,
at 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 1940 Act
applies to the Fund, the directors are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
director when requested in writing to do so by the shareholders of record of not
less than 10% of the Fund's outstanding shares.
Each share (regardless of class) has one vote. All shares of the Fund
vote together as a single class, except as to any matter for which a separate
vote of any class is required by the 1940 Act, and except as to any matter which
affects the interests of one or more particular classes, in which case only the
shareholders of the affected classes are entitled to vote, each as a separate
class.
77
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON AND PREFERRED STOCKS
AND WARRANTS
Communication - 1.74%
Adelphia Communications Corporation,
13.0% Preferred ............................ 5,000 $ 577,500
Allegiance Telecom, Inc., Warrants (A)*....... 2,000 3,750
Concentric Network Corporation,
Warrants(A)* .............................. 1,000 90,000
IXC Communications, Inc.,
12.5% Preferred (A) ........................ 1,128 1,201,320
Intermedia Communications Inc., 13.5%
Preferred................................... 3,075 3,455,987
Iridium LLC, Warrants (A)* ................... 3,000 360,000
Jacor Communications, Inc.* .................. 25,000 1,264,844
MetroNet Communications Corp.,
Warrants (A)* .............................. 1,000 30,000
Microcell Telecommunications Inc.,
Warrants (A)* .............................. 20,000 265,000
Pathnet, Inc., Warrants (A)* ................. 1,000 15,000
Primus Telecommunications Group,
Incorporated, Warrants* .................... 2,000 10,000
Total ...................................... 7,273,401
Depository Institutions - 0.23%
California Federal Preferred Capital
Corporation, 9.125% Preferred .............. 37,500 960,938
Electric, Gas and Sanitary Services - 0.36%
Consolidated Hydro, Inc.,
Class B Warrants* .......................... 7,578 1,895
Consolidated Hydro, Inc.,
Class C Warrants* .......................... 4,919 2,459
El Paso Electric Company,
11.4% Preferred ............................ 13,195 1,431,657
IntelCom Group Inc., Warrants (A)* ........... 7,425 64,969
Total ...................................... 1,500,980
Electronic and Other Electric Equipment - 0.00%
Powertel, Inc., Warrants* .................... 5,600 15,400
Furniture and Fixtures - 0.36%
Lear Corporation* ............................ 34,000 1,487,500
General Building Contractors - 1.43%
Walter Industries, Inc.* ..................... 482,265 5,998,171
General Merchandise Stores - 0.51%
Fred Meyer, Inc.* ............................ 55,000 2,138,125
See Notes to Schedule of Investments on page .
78
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Shares Value
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND
WARRANTS (Continued)
Holding and Other Investment Offices - 0.76%
LTC Properties, Inc. ......................... 133,333 $ 2,324,994
National Health Investors, Inc. .............. 27,150 841,650
Total ...................................... 3,166,644
Instruments and Related Products - 0.43%
Maxxim Medical, Inc.* ........................ 70,000 1,798,125
Miscellaneous Retail - 0.06%
Finlay Enterprises, Inc.* .................... 30,000 247,500
Paper and Allied Products - 0.19%
SF Holdings Group, Inc., Class C (A)*......... 8,700 17,400
SF Holdings Group, Inc., 13.75%
Preferred (A)* ............................. 107 774,213
Total ...................................... 791,613
Printing and Publishing - 0.24%
PRIMEDIA Inc., 10.0% Preferred ............... 10,000 1,012,500
TOTAL COMMON AND PREFERRED STOCKS
AND WARRANTS - 6.31% $ 26,390,897
(Cost: $25,876,815)
<CAPTION>
Principal
Amount in
Thousands
<S> <C> <C>
CORPORATE DEBT SECURITIES
Agricultural Production - Crops - 0.80%
Frank's Nursery & Crafts, Inc.,
10.25%, 3-1-2008 ........................... $ 2,000 1,960,000
Hines Horticulture, Inc.,
11.75%, 10-15-2005 ......................... 1,301 1,380,686
Total ...................................... 3,340,686
Amusement and Recreation Services - 2.21%
American Skiing Company,
12.0%, 7-15-2006 ........................... 2,500 2,562,500
Premier Parks Inc.:
12.0%, 8-15-2003 ........................... 1,000 1,087,500
9.25%, 4-1-2006 ............................ 2,000 1,960,000
Showboat Marina Casino Partnership,
13.5%, 3-15-2003 ........................... 1,500 1,642,500
Trump Hotels & Casino Resorts
Holdings, L.P.,
15.5%, 6-15-2005 ........................... 2,000 2,000,000
Total ...................................... 9,252,500
See Notes to Schedule of Investments on page .
79
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Apparel and Accessory Stores - 0.25%
Wilsons The Leather Experts Inc.,
11.25%, 8-15-2004 .......................... $1,000 $ 1,037,500
Apparel and Other Textile Products - 0.50%
CONSOLTEX GROUP INC.,
11.0%, 10-1-2003 ........................... 2,000 2,075,000
Auto Repair, Services and Parking - 0.58%
Safelite Glass Corp.,
9.875%, 12-15-2006 (A)...................... 2,500 2,412,500
Building Materials & Garden Supplies - 0.65%
Central Tractor Farm & Country, Inc.,
10.625%, 4-1-2007 .......................... 1,000 968,750
JTM Industries, Inc.,
10.0%, 4-15-2008 (A) ....................... 1,750 1,763,125
Total ...................................... 2,731,875
Business Services - 3.28%
Adams Outdoor Advertising Limited Partnership,
10.75%, 3-15-2006 .......................... 1,500 1,578,750
Coinmach Corporation,
11.75%, 11-15-2005 ......................... 3,000 3,213,750
DecisionOne Corporation,
9.75%, 8-1-2007 ............................ 2,000 1,320,000
Federal Data Corporation,
10.125%, 8-1-2005 .......................... 1,000 950,000
Lamar Advertising Company:
9.625%, 12-1-2006 .......................... 2,000 2,120,000
8.625%, 9-15-2007 .......................... 1,250 1,284,375
Protect One,
6.75%, 9-15-2003 (Convertible).............. 2,000 2,280,000
Rental Service Corporation,
9.0%, 5-15-2008 ............................ 1,000 960,000
Total ...................................... 13,706,875
Chemicals and Allied Products - 3.27%
Aqua-Chem, Inc.,
11.25%, 7-1-2008 (A) ....................... 1,500 1,447,500
Dade International Inc.,
11.125%, 5-1-2006 .......................... 1,000 1,075,000
Marsulex Inc.,
9.625%, 7-1-2008 (A) ....................... 1,500 1,440,000
See Notes to Schedule of Investments on page .
80
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Chemicals and Allied Products (Continued)
Moll Industries, Inc.,
10.5%, 7-1-2008 (A) ........................ $ 2,000 $ 1,850,000
Spinnaker Industries, Inc.,
10.75%, 10-15-2006 ......................... 2,000 1,910,000
UCC Investors Holding, Inc.,
10.5%, 5-1-2002 ............................ 5,500 5,967,500
Total ...................................... 13,690,000
Communication - 21.31%
Adelphia Communications Corporation:
10.25%, 7-15-2000 .......................... 1,250 1,262,500
9.25%, 10-1-2002 ........................... 2,450 2,548,000
10.5%, 7-15-2004 ........................... 1,500 1,635,000
9.875%, 3-1-2007 ........................... 2,500 2,687,500
Allbritton Communications Company,
9.75%, 11-30-2007 .......................... 2,000 2,050,000
Allegiance Telecom, Inc.,
0.0%, 2-15-2008 (B) ........................ 2,000 860,000
American Radio Systems Corporation,
9.0%, 2-1-2006 ............................. 1,000 1,070,000
CenCall Communications Corp.,
0.0%, 1-15-2004 (B)......................... 2,500 2,462,500
Chancellor Media Corporation,
10.5%, 1-15-2007 ........................... 2,000 2,190,000
Comcast Corporation,
9.5%, 1-15-2008 ............................ 1,750 1,960,438
Comcast UK Cable Partners Limited,
0.0%, 11-15-2007 (B) ....................... 4,000 3,240,000
Concentric Network Corporation,
12.75%, 12-15-2007 ......................... 1,000 925,000
Diamond Cable Communications Plc,
0.0%, 12-15-2005 (B) ....................... 2,000 1,605,000
Diamond Holdings plc,
9.125%, 2-1-2008 ........................... 1,500 1,496,250
GST Telecommunications,
0.0%, 11-15-2007 (B) ....................... 2,500 2,375,000
Hyperion Telecommunications, Inc.,
0.0%, 4-15-2003 (B) ........................ 4,000 2,760,000
ICG Holdings, Inc.,
0.0%, 9-15-2005 (B) ........................ 2,250 1,755,000
ICG Services, Inc.,
0.0%, 5-1-2008 (B) ......................... 2,500 1,150,000
ITC /\ DeltaCom, Inc.,
8.875%, 3-1-2008 ........................... 1,000 980,000
See Notes to Schedule of Investments on page .
81
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
IXC Communications, Inc.,
9.0%, 4-15-2008 ............................ $ 1,500 $ 1,485,000
Intermedia Communications of Florida, Inc.,
0.0%, 5-15-2006 (B) ........................ 2,250 1,828,125
Iridium LLC,
13.0%, 7-15-2005 ........................... 4,000 3,520,000
Iridium LLC and Iridium Capital Corporation:
10.875%, 7-15-2005 ......................... 2,000 1,600,000
11.25%, 7-15-2005 .......................... 1,000 820,000
JCAC, Inc.,
10.125%, 6-15-2006 ......................... 1,000 1,070,000
LIN Holdings Corp.,
0.0%, 3-1-2008 (A)(B) ...................... 3,500 2,292,500
Marcus Cable Co.,
0.0%, 12-15-2005 (B) ....................... 3,250 3,022,500
Marcus Cable Operating Company, L. P.,
0.0%, 8-1-2004 (B) ......................... 3,500 3,430,000
MetroNet Communications Corp.,
0.0%, 6-15-2008 (A)(B) ..................... 2,500 1,381,250
Microcell Telecommunications Inc.,
0.0%, 6-1-2006 (B) ......................... 5,900 4,189,000
Nextel Communications, Inc.:
0.0%, 8-15-2004 (B) ........................ 4,275 4,104,000
0.0%, 9-15-2007 (B) ........................ 1,500 945,000
0.0%, 2-15-2008 (B) ........................ 2,500 1,475,000
NEXTLINK Communications, Inc.,
9.625%, 10-1-2007 .......................... 2,000 1,955,000
OnePoint Communications Corp., Units,
14.5%, 6-1-2008 (A)(C) ..................... 2,000 1,580,000
Pathnet, Inc.,
12.25%, 4-15-2008 (A) ...................... 1,000 760,000
Primus Telecommunications Group, Incorporated,
11.75%, 8-1-2004 ........................... 2,000 1,925,000
Rifkin Acquisition Partners, L.L.L.P.,
11.125%, 1-15-2006 ......................... 1,500 1,605,000
Rogers Communications Inc.,
9.125%, 1-15-2006 .......................... 3,000 2,985,000
SFX Broadcasting, Inc.,
10.75%, 5-15-2006 .......................... 986 1,074,740
Salem Communications Corporation,
9.5%, 10-1-2007 ............................ 1,000 1,005,000
See Notes to Schedule of Investments on page .
82
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
Satelites Mexicanos, S.A. de C.V.,
10.125%, 11-1-2004 (A) ..................... $ 375 $ 255,000
Sinclair Broadcast Group, Inc.,
9.0%, 7-15-2007 ............................ 2,000 2,010,000
Sprint Spectrum L.P.,
0.0%, 8-15-2006 (B) ........................ 3,600 3,024,000
Time Warner Telecom LLC and Time Warner
Telecom Inc.,
9.75%, 7-15-2008 ........................... 1,000 1,005,000
Vanguard Cellular Systems, Inc.,
9.375%, 4-15-2006 .......................... 1,000 1,010,000
WinStar Communications, Inc.:
0.0%, 10-15-2005 (A)(B)(Convertible) ....... 1,500 1,327,500
10.0%, 3-15-2008 (A) ....................... 2,000 1,440,000
Total ...................................... 89,135,803
Depository Institutions - 0.95%
First Nationwide Holdings Inc.:
9.125%, 1-15-2003 .......................... 2,000 2,240,000
12.5%, 4-15-2003 ........................... 1,500 1,721,250
Total ...................................... 3,961,250
Eating and Drinking Places - 0.96%
Foodmaker, Inc.,
8.375%, 4-15-2008 .......................... 1,750 1,697,500
Fresh Foods, Inc.,
10.75%, 6-1-2006 (A) ....................... 1,500 1,350,000
NE Restaurant Company, Inc.,
10.75%, 7-15-2008 (A) ...................... 1,000 982,500
Total ...................................... 4,030,000
Electric, Gas and Sanitary Services - 2.88%
Allied Waste North America, Inc.:
10.25%, 12-1-2006 .......................... 4,750 5,177,500
0.0%, 6-1-2007 (B) ......................... 3,000 2,220,000
El Paso Electric Company:
8.9%, 2-1-2006 ............................. 2,000 2,286,380
9.4%, 5-1-2011 ............................. 2,000 2,371,000
Total ...................................... 12,054,880
See Notes to Schedule of Investments on page .
83
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Electronic and Other Electric Equipment - 3.86%
Communications & Power Industries, Inc.,
12.0%, 8-1-2005 ............................ $ 2,000 $ 2,177,500
Communications Instruments, Inc.,
10.0%, 9-15-2004 ........................... 1,000 1,010,000
Echostar Communications Corporation:
0.0%, 3-15-2004 (B) ........................ 3,000 2,640,000
0.0%, 6-1-2004 (B) ......................... 3,000 2,895,000
Elgar Holdings, Inc.,
9.875%, 2-1-2008 ........................... 1,250 1,046,875
Intercel, Inc.,
0.0%, 2-1-2006 (B) ......................... 1,750 1,262,187
Omnipoint Corporation,
11.625%, 8-15-2006 ......................... 3,500 2,345,000
Telex Communications, Inc.,
10.5%, 5-1-2007 ............................ 1,000 791,250
WESCO Distribution, Inc.,
9.125%, 6-1-2008 (A) ....................... 1,500 1,455,000
WESCO International, Inc.,
0.0%, 6-1-2008 (A)(B) ...................... 1,000 547,500
Total ...................................... 16,170,312
Engineering and Management Services - 0.28%
United International Holdings, Inc.,
0.0%, 2-15-2008 (A)(B) ..................... 2,500 1,175,000
Fabricated Metal Products - 2.93%
AXIA Incorporated,
10.75%, 7-15-2008 (A) ...................... 1,000 965,000
American Safety Razor Company,
9.875%, 8-1-2005 ........................... 2,000 2,060,000
Neenah Corporation,
11.125%, 5-1-2007 .......................... 3,000 3,011,250
Nortek, Inc.,
9.875%, 3-1-2004 ........................... 3,000 2,925,000
Safety Components International, Inc.,
10.125%, 7-15-2007 ......................... 2,250 2,275,312
U.S. Can Corporation,
10.125%, 10-15-2006 ........................ 1,000 1,015,000
Total ...................................... 12,251,562
Food and Kindred Products - 0.90%
B & G Foods, Inc.,
9.625%, 8-1-2007 ........................... 2,000 1,850,000
Eagle Family Foods, Inc.,
8.75%, 1-15-2008 ........................... 1,000 895,000
Southern Foods Group, L.P.,
9.875%, 9-1-2007 ........................... 1,000 1,007,500
Total ...................................... 3,752,500
See Notes to Schedule of Investments on page .
84
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Food Stores - 0.96%
Big V Supermarkets, Inc.,
11.0%, 2-15-2004 ........................... $ 1,500 $ 1,507,500
Pueblo Xtra International, Inc.,
9.5%, 8-1-2003 ............................. 2,750 2,530,000
Total ...................................... 4,037,500
Health Services - 2.26%
Fountain View, Inc.,
11.25%, 4-15-2008 (A) ...................... 1,000 891,250
Multicare Companies, Inc. (The),
9.0%, 8-1-2007 ............................. 2,175 2,044,500
Paragon Health Network, Inc.:
0.0%, 11-1-2007 (B) ........................ 1,000 545,000
9.5%, 11-1-2007 ............................ 2,000 1,840,000
Quorum Health Group, Inc.,
8.75%, 11-1-2005 ........................... 2,000 2,050,000
Tenet Healthcare Corporation,
8.625%, 1-15-2007 .......................... 2,000 2,075,000
Total ...................................... 9,445,750
Heavy Construction, Except Building - 0.45%
Level 3 Communications, Inc.,
9.125%, 5-1-2008 ........................... 2,000 1,895,000
Holding and Other Investment Offices - 0.27%
LTC Properties, Inc.,
8.5%, 1-1-2001 (Convertible) ............... 1,000 1,121,250
Hotels and Other Lodging Places - 2.33%
CapStar Hotel Company,
8.75%, 8-15-2007 ........................... 1,000 945,000
HMH Properties, Inc.,
7.875%, 8-1-2008 ........................... 5,000 4,937,500
Prime Hospitality Corp.:
9.25%, 1-15-2006 ........................... 2,000 1,965,000
9.75%, 4-1-2007 ............................ 1,000 920,000
Station Casinos, Inc.,
10.125%, 3-15-2006 ......................... 1,000 1,000,000
Total ...................................... 9,767,500
Industrial Machinery and Equipment - 3.06%
American Standard Inc.,
9.25%, 12-1-2016 ........................... 1,276 1,301,520
Anchor Lamina Inc. and
Anchor Lamina America, Inc.,
9.875%, 2-1-2008 ........................... 1,000 825,000
See Notes to Schedule of Investments on page .
85
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Industrial Machinery and Equipment (Continued)
Falcon Building Products, Inc.,
0.0%, 6-15-2007 (B) ........................ $ 4,000 $ 2,320,000
Morris Material Handling, Inc.,
9.5%, 4-1-2008 ............................. 2,000 1,510,000
National Equipment Services, Inc.,
10.0%, 11-30-2004 (A) ...................... 1,750 1,662,500
Paragon Corporate Holdings, Inc.,
9.625%, 4-1-2008 ........................... 2,000 1,502,500
Terex Corporation,
8.875%, 4-1-2008 ........................... 3,000 2,790,000
Walbro Corporation,
9.875%, 7-15-2005 .......................... 1,000 900,000
Total ...................................... 12,811,520
Instruments and Related Products - 1.62%
Cole National Group, Inc.,
9.875%, 12-31-2006 ......................... 2,000 2,080,000
Maxxim Medical, Inc.,
10.5%, 8-1-2006 ............................ 3,500 3,762,500
Universal Hospital Services, Inc.,
10.25%, 3-1-2008 ........................... 1,000 951,250
Total ...................................... 6,793,750
Miscellaneous Manufacturing Industries - 0.45%
AAi.Fostergrant, Inc.,
10.75%, 7-15-2006 (A) ...................... 1,000 946,250
Hedstrom Corporation,
10.0%, 6-1-2007 ............................ 1,000 950,000
Total ...................................... 1,896,250
Miscellaneous Retail - 2.25%
Big 5 Corp.,
10.875%, 11-15-2007 ........................ 1,400 1,302,000
Eye Care Centers of America, Inc.,
9.125%, 5-1-2008 (A) ....................... 1,000 840,000
Finlay Fine Jewelry Corporation,
8.375%, 5-1-2008 ........................... 1,000 920,000
MTS INCORPORATED,
9.375%, 5-1-2005 (A) ....................... 1,750 1,557,500
Michaels Stores, Inc.,
10.875%, 6-15-2006 ......................... 3,500 3,815,000
TravelCenters of America, Inc.,
10.25%, 4-1-2007 ........................... 1,000 980,000
Total ...................................... 9,414,500
See Notes to Schedule of Investments on page .
86
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Motion Pictures - 1.78%
AMC Entertainment, Inc.,
9.5%, 3-15-2009 ............................ $ 3,000 $ 2,805,000
Hollywood Theaters, Inc.,
10.625%, 8-1-2007 .......................... 2,865 2,607,150
Regal Cinemas, Inc.,
9.5%, 6-1-2008 (A) ......................... 2,000 2,020,000
Total ...................................... 7,432,150
Oil and Gas Extraction - 0.36%
Cross Timbers Oil,
8.75%, 11-1-2009 ........................... 500 450,000
Flores & Rucks, Inc.,
9.75%, 10-1-2006 ........................... 1,000 1,042,500
Total ...................................... 1,492,500
Paper and Allied Products - 3.27%
Container Corporation of America,
10.75%, 5-1-2002 ........................... 2,000 2,040,000
Fonda Group, Inc. (The),
9.5%, 3-1-2007 ............................. 2,000 1,800,000
Fort Howard Corporation,
11.0%, 1-2-2002 ............................ 3,778 3,825,110
Four M Corporation,
12.0%, 6-1-2006 ............................ 500 492,500
Mail-Well Corporation,
10.5%, 2-15-2004 ........................... 1,000 1,035,000
Outsourcing Services Group, Inc.,
10.875%, 3-1-2006 (A) ...................... 1,500 1,430,625
Radnor Holdings Corporation,
10.0%, 12-1-2003 ........................... 1,000 995,000
Republic Group Incorporated,
9.5%, 7-15-2008 (A) ........................ 1,000 965,000
SF Holdings Group, Inc.,
0.0%, 3-15-2008 (B) ........................ 2,500 1,112,500
Total ...................................... 13,695,735
Personal Services - 0.24%
Prime Succession Acquisition Corp.,
10.75%, 8-15-2004 .......................... 1,000 992,500
Petroleum and Coal Products - 0.24%
Building Materials Corporation of America,
0.0%, 7-1-2004 (B) ......................... 1,000 990,000
See Notes to Schedule of Investments on page .
87
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Primary Metal Industries - 1.65%
Commonwealth Aluminum Corporation,
10.75%, 10-1-2006 .......................... $ 2,000 $ 1,920,000
Weirton Steel Corporation:
11.375%, 7-1-2004 .......................... 2,500 2,250,000
10.75%, 6-1-2005 ........................... 1,000 875,000
Wheeling-Pittsburgh Corporation,
9.25%, 11-15-2007 .......................... 2,000 1,860,000
Total ...................................... 6,905,000
Printing and Publishing - 2.43%
American Media Operations, Inc.,
11.625%, 11-15-2004 ........................ 3,000 3,105,000
K-III Communications Corporation,
8.5%, 2-1-2006 ............................. 1,000 1,010,000
Perry-Judd's Incorporated,
10.625%, 12-15-2007 ........................ 4,000 4,000,000
TransWestern Publishing Company LLC,
9.625%, 11-15-2007 ......................... 2,000 2,055,000
Total ...................................... 10,170,000
Railroad Transportation - 0.11%
TFM, S.A. de C.V.,
0.0%, 6-15-2009 (B) ........................ 1,000 480,000
Real Estate - 0.33%
Delco Remy International, Inc.,
8.625%, 12-15-2007 ......................... 1,400 1,386,000
Rubber and Miscellaneous Plastics Products - 2.18%
Furon Company,
8.125%, 3-1-2008 ........................... 1,000 980,000
Graham Packaging Company and
GPC Capital Corp. I,
8.75%, 1-15-2008 ........................... 3,000 2,857,500
Heafner (J.H.) Company, Inc. (The),
10.0%, 5-15-2008 (A) ....................... 1,400 1,316,000
Home Products International, Inc.,
9.625%, 5-15-2008 .......................... 2,500 2,212,500
LDM Technologies, Inc.,
10.75%, 1-15-2007 .......................... 2,000 1,740,000
Total ...................................... 9,106,000
See Notes to Schedule of Investments on page .
88
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Social Services - 0.29%
La Petite Academy, Inc. and LPA
Holding Corp.,
10.0%, 5-15-2008 ........................... $ 1,250 $ 1,215,625
Stone, Clay and Glass Products - 0.53%
SIMCALA, Inc.,
9.625%, 4-15-2006 .......................... 2,750 2,200,000
Textile Mill Products - 2.80%
Avondale Mills, Inc.,
10.25%, 5-1-2006 ........................... 1,000 1,031,250
Collins & Aikman Products Co.,
11.5%, 4-15-2006 ........................... 4,500 4,725,000
Galey & Lord, Inc.,
9.125%, 3-1-2008 ........................... 2,750 2,365,000
Glenoit Corporation,
11.0%, 4-15-2007 ........................... 1,000 990,000
Globe Manufacturing Corp.,
10.0%, 8-1-2008 (A) ........................ 2,750 2,585,000
Total ...................................... 11,696,250
Transportation Equipment - 1.46%
Federal-Mogul Corporation:
7.75%, 7-1-2006 ............................ 2,000 2,038,020
7.875%, 7-1-2010 ........................... 2,500 2,568,025
Westinghouse Air Brake Company,
9.375%, 6-15-2005 .......................... 1,500 1,515,000
Total ...................................... 6,121,045
Trucking and Warehousing - 0.72%
Iron Mountain Incorporated,
10.125%, 10-1-2006 ......................... 1,000 1,050,000
Pierce Leahy Corp.,
9.125%, 7-15-2007 .......................... 2,000 1,980,000
Total ...................................... 3,030,000
Wholesale Trade - Durable Goods - 1.07%
Alvey Systems, Inc.,
11.375%, 1-31-2003 ......................... 1,000 1,037,500
Exide Corporation,
10.0%, 4-15-2005 ........................... 1,010 954,450
Sealy Mattress Company:
0.0%, 12-15-2007 (B) ....................... 2,000 1,260,000
9.875%, 12-15-2007 ......................... 1,250 1,225,000
Total ...................................... 4,476,950
See Notes to Schedule of Investments on page .
89
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Wholesale Trade - Nondurable Goods - 1.41%
Core-Mark International, Inc.,
11.375%, 9-15-2003 ......................... $ 1,500 $ 1,503,750
NBC Acquisition Corp.,
0.0%, 2-15-2009 (B) ........................ 3,000 1,560,000
Nebraska Book Company, Inc.,
8.75%, 2-15-2008 ........................... 1,750 1,577,188
U.S. Office Products Company,
9.75%, 6-15-2008 (A) ....................... 1,500 1,252,500
Total ...................................... 5,893,438
TOTAL CORPORATE DEBT SECURITIES - 80.13% $335,244,456
(Cost: $346,710,607)
SHORT-TERM SECURITIES
Communication - 0.24%
Dominion Resources, Inc.,
5.67%, 10-20-98 ............................ 1,000 997,007
Electric, Gas and Sanitary Services - 3.82%
Commonwealth Edison Co.,
5.67%, 10-28-98 ............................ 5,000 4,978,738
Florida Power Corp.,
5.38%, 10-7-98 ............................. 11,000 10,990,137
Total ...................................... 15,968,875
Fabricated Metal Products - 0.43%
Danaher Corporation,
5.3438%, Master Note ....................... 1,804 1,804,000
Food and Kindred Products - 0.13%
General Mills, Inc.,
5.1988%, Master Note ....................... 560 560,000
Food Stores - 3.89%
Kroger Co. (The),
6.15%, 10-1-98 ............................. 7,200 7,200,000
Safeway Inc.:
5.77%, 10-6-98 ............................. 3,360 3,357,307
5.68%, 10-9-98 ............................. 5,725 5,717,774
Total ...................................... 16,275,081
Transportation Equipment - 2.59%
Echlin Inc.:
5.7%, 10-15-98 ............................. 1,040 1,037,695
5.7%, 10-26-98 ............................. 9,830 9,791,089
Total ...................................... 10,828,784
See Notes to Schedule of Investments on page .
90
<PAGE>
<CAPTION>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
<S> <C> <C>
SHORT-TERM SECURITIES (Continued)
Wholesale Trade - Nondurable Goods - 0.92%
Enron Corp.,
5.67%, 10-15-98 ............................ $ 3,850 $ 3,841,511
TOTAL SHORT-TERM SECURITIES - 12.02% $ 50,275,258
(Cost: $50,275,258)
TOTAL INVESTMENT SECURITIES - 98.46% $411,910,611
(Cost: $422,862,680)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.54% 6,434,867
NET ASSETS - 100.00% $418,345,478
</TABLE>
See Notes to Schedule of Investments on page .
91
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.
(A) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be resold in transactions exempt from registration, normally
to qualified institutional buyers. At September 30, 1998, the value of
these securities amounted to $42,712,652 or 10.21% of net assets.
(B) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(C) Each Unit of OnePoint Communications Corp. consists of $1,000 principal
amount of 14.5% senior notes due 2008 and one warrant to purchase 0.635
shares of common stock, $0.01 par value of the company.
See Note 1 to financial statements for security valuation and other
significant accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
92
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
(In Thousands, Except for Per Share Amounts)
<TABLE>
<S> <C>
Assets
Investment securities -- at value (Notes 1 and 3) ........... $411,911
Receivables:
Interest and dividends .................................... 7,593
Fund shares sold .......................................... 493
Prepaid insurance premium ................................... 15
--------
Total assets ............................................ 420,012
--------
Liabilities
Payable to Fund shareholders ................................ 1,070
Dividends payable ........................................... 440
Accrued service fee (Note 2) ................................ 81
Accrued transfer agency and dividend
disbursing (Note 2)........................................ 56
Accrued management fee (Note 2) ............................. 6
Accrued accounting services fee (Note 2) .................... 5
Accrued distribution fee (Note 2) ........................... 1
Due to custodian ............................................ 1
Other ...................................................... 7
--------
Total liabilities ....................................... 1,667
--------
Total net assets ...................................... $418,345
========
Net Assets
$1.00 par value capital stock
Capital stock ............................................. $101,484
Additional paid-in capital ................................ 364,293
Accumulated undistributed loss:
Accumulated undistributed net realized
loss on investment transactions ......................... (36,480)
Net unrealized depreciation in value of
investments ............................................. (10,952)
--------
Net assets applicable to outstanding
units of capital ...................................... $418,345
========
Net asset value per share (net assets divided
by shares outstanding)
Class A ..................................................... $4.12
Class Y ..................................................... $4.12
Capital shares outstanding
Class A ..................................................... 100,861
Class Y ..................................................... 623
Capital shares authorized ..................................... 400,000
</TABLE>
See notes to financial statements.
93
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1998
(In Thousands)
<TABLE>
<S> <C>
Investment Income
Income (Note 1B):
Interest and amortization ................................. $37,799
Dividends ................................................. 1,245
-------
Total income ............................................ 39,044
-------
Expenses (Note 2):
Investment management fee ................................. 2,303
Service fee - Class A ..................................... 901
Transfer agency and dividend disbursing - Class A.......... 614
Accounting services fee ................................... 60
Custodian fees ............................................ 21
Audit fees ................................................ 17
Distribution fee - Class A ................................ 6
Legal fees ................................................ 5
Shareholder servicing - Class Y............................ 3
Other ..................................................... 143
-------
Total expenses .......................................... 4,073
-------
Net investment income ................................. 34,971
-------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 3)
Realized net gain on investments ............................ 4,820
Unrealized depreciation in value of investments
during the period ......................................... (34,757)
-------
Net loss on investments ................................... (29,937)
-------
Net increase in net assets resulting
from operations ....................................... $ 5,034
=======
</TABLE>
See notes to financial statements.
94
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the fiscal year ended
September 30,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Increase in Net Assets
Operations:
Net investment income ...................... $ 34,971 $32,626
Realized net gain on
investments ............................. 4,820 8,525
Unrealized appreciation
(depreciation) ........................... (34,757) 17,456
-------- --------
Net increase in net assets
resulting from operations .............. 5,034 58,607
-------- --------
Dividends to shareholders from
net investment income (Note 1D):*
Class A .................................... (34,790) (32,497)
Class Y .................................... (181) (129)
-------- --------
(34,971) (32,626)
-------- --------
Capital share transactions:
Proceeds from sale of shares:
Class A (17,927,324 and 8,682,161
shares, respectively) .................. 77,845 36,917
Class Y (279,221 and 14,256
shares, respectively) .................. 1,264 60
Proceeds from reinvestment of
dividends:
Class A (7,125,552 and 6,869,010
shares, respectively) .................. 31,452 29,167
Class Y (40,487 and 29,866
shares, respectively) .................. 178 127
Payments for shares redeemed:
Class A (16,161,757 and 12,527,249
shares, respectively) .................. (70,753) (53,077)
Class Y (58,442 and 81,123
shares, respectively) .................. (261) (337)
-------- --------
Net increase in net assets
resulting from capital
share transactions .................... 39,725 12,857
-------- --------
Total increase ........................ 9,788 38,838
Net Assets
Beginning of period .......................... 408,557 369,719
-------- --------
End of period ................................ $418,345 $408,557
======== ========
Undistributed net investment
income ................................... $--- $---
==== ====
</TABLE>
*See "Financial Highlights" on pages - .
See notes to financial statements.
95
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended
September 30,
------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period................ $4.42 $4.14 $4.03 $3.96 $4.21
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ............. 0.37 0.36 0.35 0.35 0.35
Net realized and
unrealized gain
(loss) on
investments ........ (0.30) 0.28 0.11 0.07 (0.25)
----- ----- ----- ----- -----
Total from investment
operations ........... 0.07 0.64 0.46 0.42 0.10
----- ----- ----- ----- -----
Less dividends declared
from net investment
income................ (0.37) (0.36) (0.35) (0.35) (0.35)
----- ----- ----- ----- -----
Net asset value,
end of period ........ $4.12 $4.42 $4.14 $4.03 $3.96
===== ===== ===== ===== =====
Total return* .......... 1.22% 16.20% 11.90% 11.25% 2.31%
Net assets, end of
period (in
millions) ............ $416 $407 $368 $368 $363
Ratio of expenses to
average net assets.... 0.96% 0.93% 0.95% 0.89% 0.88%
Ratio of net investment
income to average
net assets ........... 8.26% 8.54% 8.60% 8.93% 8.41%
Portfolio turnover
rate ................. 58.85% 64.38% 55.64% 26.82% 47.05%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
See notes to financial statements.
96
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the
For the fiscal year period
ended September 30, from 2/27/96*
-------------------- through
1998 1997 9/30/96
------ ------ --------
<S> <C> <C> <C>
Net asset value,
beginning of period $4.42 $4.14 $4.15
----- ----- -----
Income from investment
operations:
Net investment
income ............. 0.37 0.37 0.21
Net realized and
unrealized gain (loss)
on investments...... (0.30) 0.28 (0.01)
----- ----- -----
Total from investment
operations............ 0.07 0.65 0.20
----- ----- -----
Less dividends declared
from net investment
income................ (0.37) (0.37) (0.21)
----- ----- -----
Net asset value,
end of period......... $4.12 $4.42 $4.14
===== ===== =====
Total return ........... 1.38% 16.38% 5.00%
Net assets, end of
period (in
millions) ............ $2 $2 $2
Ratio of expenses
to average net
assets................ 0.79% 0.77% 0.77%**
Ratio of net
investment income
to average net
assets................ 8.43% 8.69% 8.83%**
Portfolio
turnover rate......... 58.85% 64.38% 55.64%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
97
<PAGE>
UNITED HIGH INCOME FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 -- Significant Accounting Policies
United High Income Fund II, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Its investment objective is to provide a high level of current income,
by investing primarily in a diversified portfolio of high-yield, high-risk
fixed-income securities, with a secondary objective of capital growth when
consistent with the primary objective. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The policies are in conformity with generally accepted
accounting principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a pricing service or dealer in bonds.
Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Stocks which are traded over-the-counter are
priced using the Nasdaq Stock Market, which provides information on bid
and asked prices quoted by major dealers in such stocks. Restricted
securities and securities for which market quotations are not readily
available are valued at fair value as determined in good faith under
procedures established by and under the general supervision of the Fund's
Board of Directors. Short-term debt securities are valued at amortized
cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the Internal
Revenue Code), premiums on the purchase of bonds and post-1984 market
discount are amortized for both financial and tax reporting purposes over
the remaining lives of the bonds. Dividend income is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. See
Note 3 -- Investment Security Transactions.
C. Federal income taxes -- The Fund intends to distribute all of its net
investment income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code. In addition, the Fund intends to pay distributions
as required to avoid imposition of excise tax. Accordingly, provision has
not been made for Federal income taxes. See Note 4 -- Federal Income Tax
Matters.
98
<PAGE>
D. Dividends and distributions -- All of the Fund's net investment income is
declared and recorded by the Fund as dividends payable on each day to
shareholders of record as of the close of the preceding business day. Net
investment income dividends and capital gains distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are due to differing
treatments for items such as deferral of wash sales and post-October
losses, foreign currency transactions, net operating losses and expiring
capital loss carryovers.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .15% of net assets and (ii)
a "Group" fee computed each day on the combined net asset values of all of the
funds in the United Group of mutual funds (approximately $18.9 billion of
combined net assets at September 30, 1998) at annual rates of .51% of the first
$750 million of combined net assets, .49% on that amount between $750 million
and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between
$2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion, .40%
between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
99
<PAGE>
<TABLE>
<CAPTION>
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
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
</TABLE>
For Class A shares, the Fund also pays WARSCO a monthly per account charge
for transfer agency and dividend disbursement services of $1.3125 for each
shareholder account which was in existence at any time during the prior month,
plus $0.30 for each account on which a dividend or distribution of cash or
shares had a record date in that month. With respect to Class Y shares, the Fund
pays WARSCO a monthly fee at an annual rate of .15% of the average daily net
assets of the class for the preceding month. The Fund also reimburses W&R and
WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross sales
commissions for Class A shares (which are not an expense of the Fund) of
$1,812,811, out of which W&R paid sales commissions of $1,044,174 and all
expenses in connection with the sale of Fund shares, except for registration
fees and related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $14,940, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and
short-term securities, aggregated $225,571,400 while proceeds from maturities
and sales aggregated $235,831,991. Purchases of short-term securities and U. S.
Government securities aggregated $403,613,973 and $8,906,015, respectively,
100
<PAGE>
while proceeds from maturities and sales aggregated $369,594,784 and $9,040,000,
respectively.
For Federal income tax purposes, cost of investments owned at September
30, 1998 was $422,862,680, resulting in net unrealized depreciation of
$10,952,069, of which $9,361,716 related to appreciated securities and
$20,313,785 related to depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $5,280,197 during its fiscal year ended September 30, 1998, which was
entirely offset by utilization of capital loss carryovers. Remaining capital
loss carryovers aggregated $36,204,273 at September 30, 1998, and are available
to offset future realized capital gain net income for Federal income tax
purposes through the following fiscal year-ends: $19,801,215 through September
30, 1999; $8,229,670 through September 30, 2000; $390,078 through September 30,
2003 and $7,783,310 through September 30, 2004.
NOTE 5 -- Multiclass Operations
On January 12, 1996, the Fund was authorized to offer two classes of
shares, Class A and Class Y, each of which has equal rights as to assets and
voting privileges. Class Y shares are not subject to a sales charge on
purchases; they are not subject to a Rule 12b-1 Distribution and Service Plan
and have a separate transfer agency and dividend disbursement services fee
structure. A comprehensive discussion of the terms under which shares of either
class are offered is contained in the Prospectus and the Statement of Additional
Information for the Fund. The Fund commenced multiclass operations on February
27, 1996.
Income, non-class specific expenses and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
101
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United High Income Fund II, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United High Income Fund II, Inc. (the "Fund") as
of September 30, 1998, and the related statements of operations for the fiscal
year then ended and changes in net assets for each of the fiscal years in the
two-year period then ended, and the financial highlights for each of the fiscal
periods in the five-year period then ended. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
September 30, 1998 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of United High Income
Fund II, Inc. as of September 30, 1998, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 6, 1998
102
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
22. Financial Statements
--------------------
(a) Financial Statements -- United High Income Fund II, Inc.
Included in Part B:
-------------------
As of September 30, 1998
Statements of Assets and Liabilities
For the year ended September 30, 1998
Statements of Operations
For the two years ended September 30, 1998
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of September 30, 1998
Report of Independent Accountants
<PAGE>
23. Exhibits:
---------
(a) Articles of Incorporation, filed November 13, 1995 as
EX-99.B1-h2charter to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
Articles Supplementary, filed November 13, 1995 as EX-99.B1-h2artsup
to Post-Effective Amendment No. 17 to the Registration Statement on
Form N-1A*
(b) By-Laws, as amended, filed December 27, 1996 as EX-99.B2-h2bylaw to
Post-Effective Amendment No. 18 to the Registration Statement on Form
N-1A*
(c) Not applicable
(d) Investment Management Agreement filed November 13, 1995 as
EX-99.B5-h2ima to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
Assignment of the Investment Management Agreement filed November 13,
1995 as EX-99.B5-h2assign to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
(e) Underwriting Agreement filed November 13, 1995 as EX-99.B6-h2ua to
Post-Effective Amendment No. 17 to the Registration Statement on Form
N-1A*
(f) Not applicable
(g) Custodian Agreement, as amended, attached hereto as EX-99.B8-h2ca
(h) Shareholder Servicing Agreement attached hereto as EX-99.B9-h2ssa
Accounting Services Agreement filed November 13, 1995 as
EX-99.B9-h2asa to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
Service Agreement filed by electronic format on July 30, 1993 as
Exhibit (b)(15) to Post-Effective Amendment No. 14 to the Registration
Statement on Form N-1A*
Amendment to Service Agreement filed November 13, 1995 as
EX-99.B9-h2saa to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
Fund Class A Application, as amended, filed May 30, 1997 as
EX-99.B9-h2appca to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A*
Fund Class Y Application filed November 13, 1995 as EX-99.B9-h2appcy
to Post-Effective Amendment No. 17 to the Registration Statement on
Form N-1A*
Fund NAV Application filed November 13, 1995 as EX-99.B9-h2navapp to
Post-Effective Amendment No. 17 to the Registration Statement on Form
N-1A*
<PAGE>
Class Y letter of understanding filed December 27, 1996 as
EX-99.B9-h2lou to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A*
(i) Not applicable
(j) Consent of Deloitte & Touche LLP, Independent Accountants, attached
hereto as EX-99.B11-h2consnt
(k) Not applicable
(l) Agreement with initial shareholder, Waddell & Reed, Inc., (refiling by
EDGAR) filed November 13, 1995 as EX-99.B13-h2inital to Post-Effective
Amendment No. 17 to the Registration Statement on Form N-1A*
(m) Service Plan for Class A Shares filed November 13, 1995 as
EX-99.B15-h2spca to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
Distribution and Service Plan for Class A shares filed December 29,
1997 as EX-99.B15-h2dsp to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
(n) Financial Data Schedule attached hereto as EX-27.B17-h2fds
(o) Multiple Class Plan filed November 13, 1995 as EX-99.B18-h2mcp to
Post-Effective Amendment No. 17 to the Registration Statement on Form
N-1A*
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Section 7 of ARTICLE Seventh of the Articles of
Incorporation of Registrant attached hereto as EX-99.B1-h2charter and to
Article IV of the Underwriting Agreement filed November 13, 1995 as
Ex-99.B6-h2ua to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*, both of which provide indemnification. Also refer
to Section 2-418 of the Maryland General Corporation Law regarding
indemnification of directors, officers, employees and agents.
26. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the investment manager of
the Registrant. Under the terms of an Investment Management Agreement
between Waddell & Reed, Inc. and the Registrant, Waddell & Reed, Inc. is to
provide investment management services to the Registrant. Waddell & Reed,
Inc. assigned its investment management
<PAGE>
duties under this agreement to Waddell & Reed Investment Management Company
on January 8, 1992. Waddell & Reed Investment Management Company is not
engaged in any business other than the provision of investment management
services to those registered investment companies described in Part A and
Part B of this Post-Effective Amendment and to other investment advisory
clients.
Each director and executive officer of Waddell & Reed Investment Management
Company has had as his sole business, profession, vocation or employment
during the past two years only his duties as an executive officer and/or
employee of Waddell & Reed Investment Management Company or its
predecessors, except as to persons who are directors and/or officers of the
Registrant and have served in the capacities shown in the Statement of
Additional Information of the Registrant.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to the Prospectus and SAI of this Registrant.
27. Principal Underwriter
---------------------
(a) Waddell & Reed, Inc. is the principal underwriter. It is the principal
underwriter to the following investment companies:
United Funds, Inc.
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 Asset Strategy Fund, Inc.
Advantage I
Advantage II
Advantage Plus
Waddell & Reed Funds, Inc.
(b) The information contained in the underwriter's application on form BD,
under the Securities Exchange Act of 1934, is herein incorporated by
reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or any
affiliated person of such affiliated person.
28. Location of Accounts and Records
--------------------------------
<PAGE>
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant, each of
whose business address is Post Office Box 29217, Shawnee Mission, Kansas
66201-9217.
29. Management Services
-------------------
There are no service contracts other than as discussed in Part A and B of
this Post-Effective Amendment and as listed in response to Item 23.
30. Undertakings
------------
Not applicable
- ---------------------------------
*Incorporated herein by reference
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment pursuant to Rule
485(a) of the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Overland Park, and State of Kansas, on the 1st day of
December, 1998.
UNITED HIGH INCOME FUND II, INC.
(Registrant)
By /s/ Robert L. Hechler*
-------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
Signatures Title
---------- -----
/s/Keith A. Tucker* Chairman of the Board December 1, 1998
- ---------------------- ----------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal December 1, 1998
- ---------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and December 1, 1998
- ---------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer December 1, 1998
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon* Director December 1, 1998
- ------------------ ----------------
James M. Concannon
/s/John A. Dillingham* Director December 1, 1998
- ------------------ ----------------
John A. Dillingham
<PAGE>
/s/David P. Gardner* Director December 1, 1998
- ------------------ ----------------
David P. Gardner
/s/Linda K. Graves* Director December 1, 1998
- ------------------ ----------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director December 1, 1998
- ------------------ ----------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director December 1, 1998
- ------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson Director December 1, 1998
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director December 1, 1998
- ------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer* Director December 1, 1998
- ------------------ ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director December 1, 1998
- ------------------ ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director December 1, 1998
- ------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director December 1, 1998
- ------------------- ----------------
Frederick Vogel III
*By
Kristen A. Richards
Attorney-in-Fact
ATTEST:
David R. Burford
Assistant Secretary
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED
FUNDS, INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND,
INC., UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC.,
TARGET/UNITED FUNDS, INC. AND WADDELL & REED FUNDS, INC. (each hereinafter
called the "Corporation"), and certain directors and officers for the
Corporation, do hereby constitute and appoint KEITH A. TUCKER, ROBERT L.
HECHLER, and KRISTEN A. RICHARDS, and each of them individually, their true and
lawful attorneys and agents to take any and all action and execute any and all
instruments which said attorneys and agents may deem necessary or advisable to
enable each Corporation to comply with the Securities Act of 1933 and/or the
Investment Company Act of 1940, as amended, and any rules, regulations, orders
or other requirements of the United States Securities and Exchange Commission
thereunder, in connection with the registration under the Securities Act of 1933
and/or the Investment Company Act of 1940, as amended, including specifically,
but without limitation of the foregoing, power and authority to sign the names
of each of such directors and officers in his/her behalf as such director or
officer as indicated below opposite his/her signature hereto, to any
Registration Statement and to any amendment or supplement to the Registration
Statement filed with the Securities and Exchange Commission under the Securities
Act of 1933 and/or the Investment Company Act of 1940, as amended, and to any
instruments or documents filed or to be filed as a part of or in connection with
such Registration Statement or amendment or supplement thereto; and each of the
undersigned hereby ratifies and confirms all that said attorneys and agents
shall do or cause to be done by virtue hereof.
Date: November 18, 1998 /s/Robert L. Hechler
----------------------------
Robert L. Hechler, President
/s/Keith A. Tucker Chairman of the Board November 18, 1998
- ------------------- -----------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal November 18, 1998
- -------------------- Financial Officer and -----------------
Robert L. Hechler Director
/s/Henry J. Herrmann Vice President and November 18, 1998
- -------------------- Director -----------------
Henry J. Herrmann
/s/Theodore W. Howard Vice President, Treasurer November 18, 1998
- -------------------- and Principal Accounting -----------------
Theodore W. Howard Officer
<PAGE>
/s/James M. Concannon Director November 18, 1998
- -------------------- -----------------
James M. Concannon
/s/John A. Dillingham Director November 18, 1998
- -------------------- -----------------
John A. Dillingham
/s/David P. Gardner Director November 18, 1998
- ------------------- -----------------
David P. Gardner
/s/Linda K. Graves Director November 18, 1998
- -------------------- ----------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director November 18, 1998
- -------------------- -----------------
Joseph Harroz, Jr.
/s/John F. Hayes Director November 18, 1998
- -------------------- -----------------
John F. Hayes
/s/Glendon E. Johnson Director November 18, 1998
- -------------------- -----------------
Glendon E. Johnson
/s/William T. Morgan Director November 18, 1998
- -------------------- -----------------
William T. Morgan
/s/Ronald C. Reimer Director November 18, 1998
- -------------------- -----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr. Director November 18, 1998
- -------------------- -----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director November 18, 1998
- -------------------- -----------------
Eleanor B. Schwartz
<PAGE>
/s/Frederick Vogel III Director November 18, 1998
- -------------------- -----------------
Frederick Vogel III
Attest:
/s/Kristen A. Richards
- --------------------------
Kristen A. Richards
Assistant Secretary
EX-99.B8-h2ca
CUSTODIAN AGREEMENT
Dated as of November 26, 1991
Amended and Restated as of May 13, 1998
Between
UMB BANK, n.a.
and
UNITED HIGH INCOME FUND II, INC.
<PAGE>
Table of Contents
ARTICLE
I. Appointment of Custodian
II. Powers and Duties of Custodian
2.01 Safekeeping
2.02 Manner of Holding Securities
2.03 Purchase of Assets
2.04 Exchanges of Securities
2.05 Sales of Securities
2.06 Depositary Receipts
2.07 Exercise of Rights, Tender Offers, Etc.
2.08 Stock Dividends, Rights, Etc.
2.09 Options
2.10 Futures Contracts
2.11 Borrowing
2.12 Interest Bearing Deposits
2.13 Foreign Exchange Transactions
2.14 Securities Loans
2.15 Collections
2.16 Dividends, Distributions and Redemptions
2.17 Proceeds from Shares Sold
2.18 Proxies, Notices, Etc.
2.19 Bills and Other Disbursements
2.20 Nondiscretionary Functions
2.21 Bank Accounts
2.22 Deposit of Fund Assets in Securities System
2.23 Other Transfers
2.24 Establishment of Segregated Account
2.25 Custodian's Books and Records
2.26 Opinion of Fund's Independent
Certified Public Accountants
2.27 Reports by Independent Certified Public
Accountants
2.28 Overdraft Facility
III. Proper Instructions, Special Instructions
and Related Matters
3.01 Proper Instruction and Special Instructions
3.02 Authorized Persons
3.03 Persons Having Access to Assets of the Portfolios
3.04 Actions of Custodian Based on Proper
Instructions and Special Instructions
<PAGE>
IV. Subcustodians
4.01 Domestic Subcustodians
4.02 Foreign Sub-Subcustodians and
Interim Sub-Subcustodians
4.03 Special Subcustodians
4.04 Termination of a Subcustodian
4.05 Certification Regarding Foreign Sub-Subcustodians
V. Standard of Care, Indemnification
5.01 Standard of Care
5.02 Liability of the Custodian for Actions
of Other Person
5.03 Indemnification by Fund
5.04 Investment Limitations
5.05 Fund's Right to Proceed
5.06 Indemnification by Custodian
5.07 Custodian's Right to Proceed
VI. Compensation
VII. Termination
VIII. Defined Terms
IX. Miscellaneous
9.01 Execution of Documents, Etc.
9.02 Representations and Warranties
9.03 Entire Agreement
9.04 Waivers and Amendments
9.05 Interpretation
9.06 Captions
9.07 Governing Law
9.08 Notices
9.09 Assignment
9.10 Counterparts
9.11 Confidentiality; Survival of Obligations
Appendix "B"
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of the 26th day of November, 1991 between United High
Income Fund II, Inc. (the "Fund") and UMB Bank, n.a., formerly, United Missouri
Bank, n.a. (the "Custodian") and as amended and restated as of May 13, 1998.
WITNESSETH
WHEREAS, the Fund desires to appoint the Custodian as custodian on behalf
of the Fund in accordance with the provisions of the Investment Company Act of
1940, as amended (the "1940 Act") and the rules and regulations thereunder,
under the terms and conditions set forth in this Agreement, and the Custodian
has agreed so to act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
Subject to the terms and provisions of this Agreement, the Fund hereby
employs and appoints the Custodian as a custodian of the cash, securities and
other assets owned by the Fund and deposited from time to time with the
Custodian ("Assets"). The Fund shall deliver to the Custodian, or shall cause to
be delivered to the Custodian, Assets during the term of this Agreement. The
Custodian is authorized to act under the terms and conditions of this Agreement
as the Fund's agent and shall be representing the Fund when acting within the
scope of this Agreement. The Custodian hereby accepts such appointment as
custodian and shall perform the duties and responsibilities set forth herein on
the terms and conditions set forth herein.
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
As custodian, the Custodian shall have and perform the powers and duties
set forth in this Article II. Pursuant to and in accordance with Article IV
hereof, the Custodian may appoint one or more Subcustodians (as hereinafter
defined) to exercise the powers and perform the duties of the Custodian set
forth in this Article II and references to the Custodian in this Article II
shall include any Subcustodian so appointed.
Section 2.01. Safekeeping. The Custodian shall accept delivery of and keep
safely the Assets in accordance with the terms and conditions hereof on behalf
of the Fund.
<PAGE>
Section 2.02. Manner of Holding Securities.
(a) The Custodian shall at all times hold securities of the Fund either:
(i) by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form; or (ii) in book-entry
form by a Securities System (as hereinafter defined) in accordance with the
provisions of Section 2.22 below.
(b) The Custodian may at all times hold registered securities of the Fund
in the name of the Fund or the Fund's nominee, or in the nominee name of the
Custodian unless specifically directed by Proper Instructions (as hereinafter
defined) to hold such registered securities in so-called street name; provided
that, in any event, all Assets shall be held in an account of the Custodian
containing only assets of the Fund. Notwithstanding the foregoing, unless it
receives Proper Instructions to the contrary, the Custodian shall register all
securities in the name of the Custodian's nominee as authorized by the Fund. All
securities held directly or indirectly by the Custodian hereunder shall at all
times be identifiable on the records of the Custodian. Except as otherwise
provided herein, the Custodian shall keep the Assets physically segregated from
those of other persons or entities. The Custodian shall execute and deliver all
certificates and documents in connection with registration of securities as may
be required by the applicable provisions of the Internal Revenue Code, the laws
of any State or territory of the United States and the laws of any jurisdiction
in which the securities are held.
Section 2.03. Purchase of Assets.
(a) Security Purchases. Upon receipt of Proper Instructions, the Custodian
shall pay for and receive securities purchased for the account of the Fund,
provided that payment shall be made by Custodian only upon receipt of the
securities: (a) by the Custodian; (b) by a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) by a Securities
System. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i)
in the case of a repurchase agreement, the Custodian may release funds to a
Securities System prior to the receipt of advice from the Securities System that
the securities underlying such repurchase agreement have been transferred by
book-entry into the Account (as hereinafter defined) maintained with such
Securities System by the Custodian, provided that the Custodian's instructions
to the Securities System require that the Securities System may make payment of
such funds to the other party to the repurchase agreement only upon transfer by
book-entry of the securities underlying the repurchase agreement into the
Account; (ii) in the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures contracts or
options, pursuant to Sections 2.09, 2.10, 2.12 and 2.13 hereof, the Custodian
may make payment therefor before receipt of an advice or transaction; and (iii)
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make payment therefor
and receive delivery of such securities in accordance with local custom and
practice generally accepted by Institutional Clients (as hereinafter defined) in
the country in which the
<PAGE>
settlement occurs, but in all events subject to the standard of care set forth
in Article V hereof. For purposes of this Agreement, an "Institutional Client"
shall mean a major commercial bank, corporation, insurance company, or
substantially similar institution, which, as a substantial part of its business
operations, purchases or sells securities and makes use of custodial services.
(b) Other Asset Purchases. Upon receipt of Proper Instructions and except
as otherwise provided herein, the Custodian shall pay for and receive other
Assets for the account of the Fund as provided in Proper Instructions.
Section 2.04. Exchanges of Securities. Upon receipt of Proper Instructions,
the Custodian shall exchange securities held by it for the account of the Fund
for other securities in connection with any reorganization, recapitalization,
split-up of shares, change of par value, conversion or other event relating to
the securities or the issuer of such securities, and shall deposit any such
securities in accordance with the terms of any reorganization or protective
plan. The Custodian shall, without receiving Proper Instructions: surrender
securities for transfer into the name of the Fund, the Fund's nominee or the
nominee name of the Custodian as permitted by Section 2.02(b); and surrender
securities for a different number of certificates or instruments representing
the same number of shares or same principal amount of indebtedness, provided
that the securities to be issued will be delivered to the Custodian.
Section 2.05. Sales of Securities. Upon receipt of Proper Instructions, the
Custodian shall make delivery of securities which have been sold for the account
of the Fund, but only against payment therefor in the form of: (a) cash,
certified check, bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) credit to the
Account of the Custodian with a Securities System, in accordance with the
provisions of Section 2.22 hereof. Notwithstanding the foregoing: (i) in the
case of the sale of securities, the settlement of which occurs outside of the
United States of America, such securities shall be delivered and paid for in
accordance with local custom and practice generally accepted by Institutional
Clients in the country in which the settlement occurs, but in all events subject
to the standard of care set forth in Article V hereof; and (ii) in the case of
securities held in physical form, such securities shall be delivered and paid
for in accordance with "street delivery custom" to a broker or its clearing
agent, against delivery to the Custodian of a receipt for such securities,
provided that the Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such securities by the broker or
its clearing agent, and provided further that, subject to the standard of care
set forth in Article V hereof, the Custodian shall not be responsible for the
selection of or the failure or inability to perform of such broker or its
clearing agent.
<PAGE>
Section 2.06. Depositary Receipts. Upon receipt of Proper Instructions, the
Custodian shall surrender securities to the depositary used for such securities
by an issuer of American Depositary Receipts or International Depositary
Receipts (hereinafter referred to, collectively , as "ADRs"), against a written
receipt therefor adequately describing such securities and written evidence
satisfactory to the Custodian that the depositary has acknowledged receipt of
instructions to issue ADRs with respect to such securities in the name of the
Custodian or a nominee of the Custodian, for delivery to the Custodian at such
place as the Custodian may from time to time designate. Upon receipt of Proper
Instructions, the Custodian shall surrender ADRs to the issuer thereof, against
a written receipt therefor adequately describing the ADRs surrendered and
written evidence satisfactory to the Custodian that the issuer of the ADRs has
acknowledged receipt of instructions to cause its depository to deliver the
securities underlying such ADRs to the Custodian.
Section 2.07. Exercise of Rights, Tender Offers, Etc. Upon receipt of
Proper Instructions, the Custodian shall: (a) deliver warrants, puts, calls,
rights or similar securities to the issuer or trustee thereof (or to the agent
of such issuer or trustee) for the purpose of exercise or sale, provided that
the new securities, cash or other Assets, if any, acquired as a result of such
actions are to be delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the consideration for such
securities is to be paid or delivered to the Custodian, or the tendered
securities are to be returned to the Custodian. Notwithstanding any provision of
this Agreement to the contrary, the Custodian shall promptly notify the Fund in
writing of (i) any default in payment of funds on securities; (ii) any
securities that have matured, been called or redeemed; and (iii) to the extent
the Custodian has notice which is contained in services to which it normally
subscribes for such purposes, or actual knowledge if not contained in such
services, any other default involving securities; and all announcements of
defaults, bankruptcies, reorganizations, mergers, consolidations,
recapitalizations or rights or privileges to subscribe, convert, exchange, put,
redeem or tender securities held subject to this Agreement. The Custodian shall,
following receipt or knowledge, convey such information to the Fund in a timely
manner based upon the circumstances of each particular case. Whenever any such
rights or privileges exist, the Fund will, in a timely manner based upon the
circumstances of each particular case, provide the Custodian with Proper
Instructions. Absent the Custodian's timely receipt of Proper Instructions, the
Custodian shall not be liable for not taking any action or not exercising such
rights prior to their expiration unless such failure is due to Custodian's
failure to give timely notice to the Fund in accordance with this Section 2.07.
Section 2.08. Stock Dividends, Rights, Etc. The Custodian shall receive and
collect all stock dividends, rights and other items of like nature and, upon
receipt of Proper Instructions, take action with respect to the same as directed
in such Proper Instructions.
<PAGE>
Section 2.09. Options. Upon receipt of Proper Instructions and in
accordance with the provisions of any agreement between the Custodian, any
registered broker-dealer and, if necessary, the Fund relating to compliance with
the rules of the Options Clearing Corporation (the "OCC") or of any registered
national securities exchange or similar organization(s), the Custodian shall:
(a) receive and retain confirmations or other documents, if any, evidencing the
purchase or writing of an option by the Fund; (b) deposit and maintain in a
segregated account, securities (either physically or by book-entry in a
Securities System), cash or other Assets; and (c) pay, release and/or transfer
such securities, cash or other Assets in accordance with any such agreement and
with notices or other communications evidencing the expiration, termination or
exercise of such options furnished by the OCC, the securities or options
exchange on which such options are traded or such other organization as may be
responsible for handling such option transactions. The Fund and the
broker-dealer shall be responsible for determining the sufficiency of assets
held in any segregated account established in compliance with applicable margin
maintenance requirements and the performance of other terms of any option
contract; provided, however, that the Custodian shall be liable for performance
of its duties under this Agreement and in accordance with Proper Instructions,
and shall be liable for performance of its duties under any other agreement
between the Custodian, any registered broker-dealer and, if necessary, the Fund.
Notwithstanding anything herein to the contrary, if the Fund issues Proper
Instructions to sell a naked option (including stock index options), then as
part of the transaction, the Custodian, the Fund and the broker-dealer shall
have entered into a tri-party agreement, as described above.
Section 2.10. Futures Contracts. Upon receipt of Proper Instructions, or
pursuant to the provisions of any futures margin procedural agreement among the
Fund, the Custodian and any futures commission merchant (a "Procedural
Agreement"), the Custodian shall: (a) receive and retain confirmations, if any
evidencing the purchase of or sale of a futures contract or an option on a
futures contract by the Fund; (b) deposit and maintain in a segregated account
cash, securities and other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written by the Fund, in accordance with the provisions of the
Commodity Futures Trading Commission and/or any commodity exchange or contract
market (such as the Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release assets from and/or transfer
assets into such margin accounts only in accordance with any such Procedural
Agreements. The Fund and such futures commission merchant shall be responsible
for determining the sufficiency of assets held in the segregated account in
compliance with applicable margin maintenance requirements and the performance
of any futures contract or option on a futures contract in accordance with its
terms; provided, however, that the Custodian shall be liable for performance of
its duties under this
<PAGE>
Agreement and in accordance with Proper Instructions, and shall be liable for
performance of its duties under any Procedural Agreement.
Section 2.11. Borrowing. Upon receipt of Proper Instructions, the Custodian
shall deliver securities of the Fund to lenders or their agents, or otherwise
establish a segregated account as agreed to by the Fund and the Custodian, as
collateral for borrowings effected by the Fund, provided that such borrowed
money is payable by the lender (a) to or upon the Custodian's order, as
Custodian for the Fund, and (b) concurrently with delivery of such securities.
Section 2.12. Interest Bearing Deposits. Upon receipt of Proper
Instructions directing the Custodian to purchase interest bearing fixed term and
call deposits (hereinafter referred to collectively, as "Interest Bearing
Deposits") for the account of the Fund, the Custodian shall purchase such
Interest Bearing Deposits in the name of the Fund with such banks or trust
companies (including the Custodian, any Subcustodian or any subsidiary or
affiliate of the Custodian) (hereinafter referred to as "Banking Institutions")
and in such amounts as the Fund may direct pursuant to Proper Instructions. Such
Interest Bearing Deposits may be denominated in U.S. Dollars or other
currencies, as the Fund may determine and direct pursuant to Proper
Instructions. The Custodian shall include in its records with respect to the
Assets of the Fund appropriate notation as to the amount and currency of each
such Interest Bearing Deposit, the accepting Banking Institution and all other
appropriate details, and shall retain such forms of advice or receipt evidencing
such account, if any, as may be forwarded to the Custodian by the Banking
Institution. The responsibilities of the Custodian to the Fund for Interest
Bearing Deposits accepted on the Custodian's books in the United States shall be
that of a U.S. bank for a similar deposit. With respect to Interest Bearing
Deposits other than those accepted on the Custodian's books, (a) the Custodian
shall be responsible for the collection of income as set forth in Section 2.15
and the transmission of cash and instructions to and from such accounts; and (b)
the Custodian shall have no duty with respect to the selection of the Banking
Institution or, so long as the Custodian acts in accordance with Proper
Instructions and the terms and conditions of this Agreement, for the failure of
such Banking Institution to pay upon demand. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable actions as the Fund deems
necessary or appropriate to cause each such Interest Bearing Deposit account to
be insured to the maximum extent possible by all applicable deposit insurers
including, without limitation, the Federal Deposit Insurance Corporation.
Section 2.13. Foreign Exchange Transactions.
(a) Foreign Exchange Transactions Other than as Principal. Upon receipt of
Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may determine and
<PAGE>
direct pursuant to Proper Instructions. The Fund accepts full responsibility for
its use of third party foreign exchange brokers (any dealer other than the
Foreign Subcustodian) (as hereinafter defined) and for execution of said foreign
exchange contracts and understands that the Fund shall be responsible for any
and all costs and interest charges which may be incurred as a result of the
failure or delay of its third party broker to deliver foreign exchange unless
such loss, damage, or expense is caused by, or results from the negligence,
misfeasance or misconduct of the Custodian. Notwithstanding the foregoing, the
Custodian shall be responsible for the transmission of cash and instructions to
and from the currency broker or Banking Institution with which the contract or
option is made, the safekeeping of all certificates and other documents and
agreements evidencing or relating to such foreign exchange transactions and the
maintenance of proper records as set forth in Section 2.25. The Custodian shall
have no duty with respect to the selection of the currency brokers or Banking
Institutions with which the Fund deals or, so long as the Custodian acts in
accordance with Proper Instructions, for the failure of such brokers or Banking
Institutions to comply with the terms of any contract or option.
(b) Foreign Exchange Contracts as Principal. The Custodian shall not be
obligated to enter into foreign exchange transactions as principal. However, if
the Custodian has made available to the Fund its services as a principal in
foreign exchange transactions, upon receipt of Proper Instructions, the
Custodian shall enter into foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with the Custodian as principal. The
Custodian shall be responsible for the selection of the currency brokers or
Banking Institutions and the failure of such currency brokers or Banking
Institutions to comply with the terms of any contract or option.
(c) Payments. Notwithstanding anything to the contrary contained herein,
upon receipt of Proper Instructions the Custodian may, in connection with a
foreign exchange contract, make free outgoing payments of cash in the form of
U.S. Dollars or foreign currency prior to receipt of confirmation of such
foreign exchange contract or confirmation that the countervalue currency
completing such contract has been delivered or received.
Section 2.14. Securities Loans. Upon receipt of Proper Instructions, the
Custodian shall, in connection with loans of securities by the Fund, deliver
securities of the Fund to the borrower thereof and may, except as otherwise
provided below, deliver such securities prior to receipt of the collateral, if
any, for such borrowing; provided that, in cases of loans of securities secured
by cash collateral, the Custodian's instructions to the Securities System shall
require that the Securities System deliver the securities of the Fund to the
borrower thereof only upon receipt of the collateral for such borrowing. The
Custodian shall retain on the Fund's behalf the right to any dividends, interest
or distribution on such loaned securities and any other rights specified in
Proper
<PAGE>
Instructions. Upon receipt of Proper Instructions and the loaned securities, the
Custodian will release the collateral to the borrower.
Section 2.15. Collections. The Custodian shall: (a) collect amounts due and
payable to the Fund with respect to portfolio securities and other Assets; (b)
promptly credit to the account of the Fund all income and other payments
relating to portfolio securities and other Assets held by the Custodian
hereunder upon Custodian's receipt of such income or payments or as otherwise
agreed in writing by the Custodian and the Fund; (c) promptly endorse and
deliver any instruments required to effect such collection; and (d) promptly
execute ownership and other certificates and affidavits for all federal, state,
local and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio securities and other Assets, or in connection
with the transfer of such securities or other Assets; provided, however, that
with respect to portfolio securities registered in so-called street name, or
physical securities with variable interest rates, the Custodian shall use its
best efforts to collect amounts due and payable to the Fund. The Custodian shall
promptly notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian may agree in writing if any amount payable with
respect to portfolio securities or other Assets is not received by the Custodian
when due. The Custodian shall not be responsible for the collection of amounts
due and payable with respect to portfolio securities or other Assets that are in
default.
Section 2.16. Dividends, Distributions and Redemptions. To enable the Fund
to pay dividends or other distributions to shareholders of the Fund and to make
payment to shareholders who have requested repurchase or redemption of their
shares of the Fund (collectively, the "Shares"), the Custodian shall promptly
release cash or securities (a) in the case of cash, upon receipt of Proper
Instructions, to one or more Distribution Accounts (as hereinafter defined)
designated by the Fund in such Proper Instructions; or (b) in the case of
securities, upon the receipt of Special Instructions (as hereinafter defined) to
such entity or account designated by the Fund in such Special Instructions. For
purposes of this Agreement, a "Distribution Account" shall mean an account
established at a Banking Institution designated by the Fund in Special
Instructions.
Section 2.17. Proceeds from Shares Sold. The Custodian shall receive funds
representing cash payments received for Shares issued or sold from time to time
by the Fund, and shall promptly credit such funds to the account of the Fund.
The Custodian shall promptly notify the Fund of Custodian's receipt of cash in
payment for Shares issued by the Fund by facsimile transmission or in such other
manner as the Fund and Custodian may agree in writing. Upon receipt of Proper
Instructions, the Custodian shall: (a) deliver all federal funds received by the
Custodian in payment for Shares in payment for such investments as may be set
forth in such Proper Instructions and at a time agreed upon between the
Custodian and the Fund; and (b) make federal funds available to the Fund as of
specified times agreed upon from time to time by the Fund and the Custodian, in
the
<PAGE>
amount of checks received in payment for Shares which are deposited to the
accounts of the Fund.
Section 2.18. Proxies, Notices, Etc. The Custodian shall deliver or cause
to be delivered to the Fund, in the most expeditious manner practicable, all
forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Proper Instructions, the Custodian shall execute and
deliver, or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as directed pursuant
to Proper Instructions, neither the Custodian nor any Subcustodian or nominee
shall vote upon any such securities, or execute any proxy to vote thereon, or
give any consent or take any other action with respect thereto. The Custodian
will not release the identity of the Fund to an issuer which requests such
information pursuant to the Shareholder Communications Act of 1985, for the
specific purpose of direct communications between such issuer and the Fund
unless the Fund directs the Custodian otherwise in writing.
Section 2.19. Bills and Other Disbursements. Upon receipt of Proper
Instructions, the Custodian shall pay or cause to be paid, all bills,
statements, or other obligations of the Fund.
Section 2.20. Nondiscretionary Functions. The Custodian shall attend to all
nondiscretionary details not specifically covered by this Agreement in
accordance with industry standards in connection with the sale, exchange,
substitution, purchase, transfer or other dealings with securities or other
Assets held by the Custodian, except as otherwise directed from time to time
pursuant to Proper Instructions.
Section 2.21. Bank Accounts.
(a) Accounts with the Custodian. The Custodian shall open and operate a
bank account or accounts (hereinafter referred to collectively, as "Bank
Accounts") on the books of the Custodian; provided that such Bank Account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
the Fund, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
(b) Deposit Insurance. Upon receipt of Proper Instructions, the Custodian
shall take such action as the Fund deems necessary or appropriate to cause each
deposit account established by the Custodian pursuant to this Section 2.21 to be
insured to the maximum extent possible by all applicable deposit insurers,
including, without limitation, the Federal Deposit Insurance Corporation.
<PAGE>
Section 2.22. Deposit of Fund Assets in Securities Systems. The Custodian
may deposit and/or maintain domestic securities owned by the Fund in: (a) The
Depository Trust Company; (b) the Participants Trust Company; (c) any book-entry
system as provided in (i) Subpart O of Treasury Circular No. 300, 31 CFR 306.115
(ii) Subpart B of Treasury Circular Public Debt Series No. 27-76, 31 CFR 350.2,
or (iii) the book-entry regulations of federal agencies substantially in the
form of 31 CFR 306.115; or (d) any other domestic clearing agency registered
with the Securities and Exchange Commission ("SEC") under Section 17A of the
Securities Exchange Act of 1934 (or as may otherwise be authorized by the
Securities and Exchange Commission to serve in the capacity of depository or
clearing agent for the securities or other assets of investment companies) which
acts as a securities depository; provided, however, that no such deposit or
maintenance of securities may be made except with respect to those agencies and
entities the use of which the Fund has previously approved by Special
Instructions (each of the foregoing being referred to in this Agreement as a
"Securities System"). Use of a Securities System shall be in accordance with
applicable Federal Reserve Board and SEC rules and regulations, if any, and
subject to the following provisions:
(A) The Custodian or any Subcustodian may deposit and/or maintain
securities held hereunder in a Securities System, provided that such securities
are represented in an account ("Account") of the Custodian in the Securities
System which Account shall not contain any assets of the Custodian other than
assets held as fiduciary, custodian or otherwise for customers.
(B) The books and records of the Custodian shall at all times identify
those securities belonging to the Fund which are maintained in a Securities
System.
(C) The Custodian shall pay for securities purchased for the account of the
Fund only upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account of the Custodian, and (ii) the
making of an entry on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund only upon (iii) receipt of advice from the
Securities System that payment for such securities has been transferred to the
Account of the Custodian, and (iv) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System relating to transfers of
securities for the account of the Fund shall identify the Fund, and shall be
maintained for the Fund by the Custodian. The Custodian shall deliver to the
Fund on the next succeeding business day daily transaction reports which shall
include each day's transactions in the Securities System for the account of the
Fund. Such transaction reports shall be delivered to the Fund or any agent
designated by the Fund pursuant to Proper Instructions, by computer or in such
other manner as the Fund and Custodian may agree in writing.
<PAGE>
(D) The Custodian shall, if requested by the Fund pursuant to Proper
Instructions, provide the Fund with all reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Securities System.
(E) Upon receipt of Special Instructions, the Custodian shall terminate the
use of any Securities System (except the federal book-entry system) on behalf of
the Fund as promptly as practicable and shall take all actions reasonably
practicable to safeguard the securities of the Fund maintained with such
Securities System.
Section 2.23. Other Transfers. Upon receipt of Special Instructions, the
Custodian shall make such other dispositions of securities, funds, or other
Assets of the Fund in a manner or for purposes other than as expressly set forth
in this Agreement, provided that the Special Instructions relating to such
disposition shall include a statement of the purposes for which the delivery is
to be made, the amount of funds, Assets and/or securities to be delivered and
the name of the person or persons to whom delivery is to be made, and shall
otherwise comply with the provisions of Sections 3.01 and 3.03 hereof.
Section 2.24. Establishment of Segregated Account. Upon receipt of Proper
Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other Assets of the
Fund, including securities maintained by the Custodian in a Securities System
pursuant to Section 2.22 hereof, said account or accounts to be maintained: (a)
for the purposes set forth in Section 2.09, 2.10 and 2.11 hereof; (b) for the
purposes of compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as may be set forth, from time to
time, in Special Instructions. The Custodian shall not be responsible for the
determination of the type or amount of Assets to be held in any segregated
account referred to in this Section 2.24.
Section 2.25. Custodian's Books and Records. The Custodian shall provide
any assistance reasonably requested by the Fund in the preparation of reports to
Fund shareholders and others, audits of accounts, and other ministerial matters
of like nature. The Custodian shall maintain complete and accurate records with
respect to securities and other Assets held for the accounts of the Fund as
required by the rules and regulations of the SEC applicable to investment
companies registered under the 1940 Act, including, but not limited to: (a)
journals or other records of original entry containing a detailed and itemized
daily record of all receipts and deliveries of securities (including certificate
and transaction identification numbers, if any), and all receipts and
disbursements of cash; (b) ledgers or other records reflecting (i) securities in
transfer,
<PAGE>
(ii) securities in physical possession, (iii) securities borrowed, loaned or
collateralizing obligations of the Fund, (iv) monies borrowed and monies loaned
(together with a record of the collateral therefor and substitutions of such
collateral), and (v) dividends and interest received; and (c) cancelled checks
and bank records relating thereto. The Custodian shall keep such other books and
records of the Fund as the Fund shall reasonably request. All such books and
records maintained by the Custodian shall be maintained in a form acceptable to
the Fund and in compliance with the rules and regulations of the SEC, including,
but not limited to, books and records required to be maintained by Section 31(a)
of the 1940 Act and the rules and regulations from time to time adopted
thereunder. All books and records maintained by the Custodian pursuant to this
Agreement shall at all times be the property of the Fund and shall be available
during normal business hours for inspection and use by the Fund and its agents,
including without limitation, its independent certified public accountants.
Notwithstanding the preceding sentence, the Funds shall not take any actions or
cause the Custodian to take any actions which would knowingly cause, either
directly or indirectly, the Custodian to violate any applicable laws,
regulations or orders. Notwithstanding the provisions of this Section 2.25, in
the event the Fund purchases cash, securities and other Assets requiring the use
of a Domestic Subcustodian or Foreign Sub-Subcustodian, the Custodian shall be
entitled to rely upon and use the books, records and accountings of the Domestic
Subcustodian as its means of accounting to the Fund for all cash, securities and
other Assets deposited with such entities; provided however, that such books,
records and accountings on which the Bank may rely must be maintained in the
United States by such Domestic Subcustodian and, provided further, that any
agreement between the Custodian and such Domestic Subcustodian must state that
the Domestic Subcustodian agrees to make any records available upon request and
preserve, for the periods described in Rule 31a-2 of the 1940 Act, the records
required to be maintained by Rule 31a-1 of the 1940 Act. In no event shall the
Custodian be entitled to rely upon and use books, records and accountings which
are maintained outside of the United States.
Section 2.26. Opinion of Fund's Independent Certified Public Accountants.
The Custodian shall take all reasonable action as the Fund may request to obtain
from year to year favorable opinions from the Fund's independent certified
public accountants with respect to the Custodian's activities hereunder in
connection with the preparation of the Fund's Form N-1A and the Fund's Form
N-SAR or other periodic reports to the SEC and with respect to any other
requirements of the SEC.
Section 2.27. Reports by Independent Certified Public Accountants. At the
request of the Fund, the Custodian shall deliver to the Fund a written report
prepared by the Custodian's independent certified public accountants with
respect to the services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
assets, including cash, securities and other assets deposited and/or maintained
in a Securities System or with a Subcustodian.
<PAGE>
Such report shall be of sufficient scope and in sufficient detail as may
reasonably be required by the Fund and as may reasonably be obtained by the
Custodian.
Section 2.28. Overdraft Facility. In the event that the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its sole discretion, provide an
overdraft (an "Overdraft") to the Fund in an amount sufficient to allow the
completion of such payment. Any Overdraft provided hereunder: (a) shall be
payable on the next business day, unless otherwise agreed by the Fund and the
Custodian; and (b) shall accrue interest from the date of the Overdraft to the
date of payment in full by the Fund at a rate agreed upon in writing, from time
to time, by the Custodian and the Fund. The purpose of such Overdrafts is to
temporarily finance extraordinary or emergency expenses not reasonably
foreseeable by the Fund. The Custodian shall promptly notify the Fund in writing
("Overdraft Notice") of any Overdraft by facsimile transmission or in such other
manner as the Fund and the Custodian may agree in writing. The Custodian shall
have a right of set-off against all Assets (except for Assets held in a
segregated margin account or otherwise pledged in connection with options or
futures contracts held for the benefit of the Fund and for Assets allocated to
any other Overdraft or loan made hereunder); provided, however, the Custodian
shall promptly notify the Fund in writing of any intent to exercise a right of
set-off against Assets hereunder and shall not exercise any such right of
set-off against Assets hereunder unless and until the Fund has failed to pay
(within ten (10) days after the Fund's receipt of such notice of intent to
exercise a right of set-off), any Overdraft, together with all accrued interest
thereon. Notwithstanding the provisions of any applicable law, including,
without limitation, the Uniform Commercial Code, the only rights or remedies
which the Custodian is entitled to with respect to Overdrafts is the right of
set-off granted herein.
<PAGE>
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
Section 3.01. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used herein, the term "Proper Instructions"
shall mean: (i) a tested telex, a written (including, without limitation,
facsimile transmission) request, direction, instruction or certification signed
or initialed by or on behalf of the Fund by two or more Authorized Persons (as
hereinafter defined); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) by or on behalf of the Fund by one or more Authorized
Persons; provided, however, that communications of the types described in
clauses (ii) and (iii) above purporting to be given by an Authorized Person
shall be considered Proper Instructions only if the Custodian reasonably
believes such communications to have been given by an Authorized Person with
respect to the transaction involved. Proper Instructions in the form of oral
communications shall be confirmed by the Fund by tested telex or in writing in
the manner set forth in clause (i) above, but the lack of such confirmation
shall in no way affect any action taken by the Custodian in reliance upon such
oral instructions prior to the Custodian's receipt of such confirmation. The
Fund and the Custodian are hereby authorized to record any and all telephonic or
other oral instructions communicated to the Custodian. Proper Instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
(b) Special Instructions. As used herein, the term "Special Instructions"
shall mean Proper Instructions countersigned or confirmed in writing by the
Treasurer or any Assistant Treasurer of the Fund or any other person designated
by the Treasurer of the Fund in writing, which countersignature or confirmation
shall be (i) included on the same instrument containing the Proper Instructions
or on a separate instrument relating thereto, and (ii) delivered by hand, by
facsimile transmission or in such other manner as the Fund and the Custodian
agree in writing.
(c) Address for Proper Instructions and Special Instructions. Proper
Instructions and Special Instructions shall be delivered to the Custodian at the
address and/or telephone, telecopy or telex number agreed upon from time to time
by the Custodian and the Fund.
Section 3.02. Authorized Persons. Concurrently with the execution of this
Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian, duly certified as appropriate by a Treasurer or
Assistant Treasurer of the Fund, a certificate setting forth: (a) the names,
titles, signatures, and scope of authority of all persons authorized to give
Proper Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of the Fund
<PAGE>
(collectively, the "Authorized Persons" and individually, an "Authorized
Person"); and (b) the names, titles and signatures of those persons authorized
to issue Special Instructions. Such certificate may be accepted and relied upon
by the Custodian as conclusive evidence of the facts set forth therein and shall
be considered to be in full force and effect until delivery to the Custodian of
a similar certificate to the contrary. Upon delivery of a certificate which
deletes or does not include the name(s) of a person previously authorized to
give Proper Instructions or to issue Special Instructions, such persons shall no
longer be considered an Authorized Person or authorized to issue Special
Instructions.
Section 3.03. Persons Having Access to Assets of the Portfolios.
Notwithstanding anything to the contrary contained in this Agreement, no
Authorized Person, Director, officer, employee or agent of the Fund shall have
physical access to the Assets of the Fund held by the Custodian nor shall the
Custodian deliver any Assets of the Fund to an account of such person; provided,
however, that nothing in this Section 3.03 shall prohibit (a) any Authorized
Person from giving Proper Instructions, or any person authorized to issue
Special Instructions from issuing Special Instructions, so long as such action
does not result in delivery of or access to Assets of the Fund prohibited by
this Section 3.03; or (b) the Fund's independent certified public accountants
from examining or reviewing the Assets of the Fund held by the Custodian. The
Fund will deliver from time to time a written certificate executed by two
Authorized Persons identifying such Authorized Persons, Directors, officers,
employees and agents of the Fund. Notwithstanding the foregoing, to the extent
that the person acting on behalf of the Custodian in making such delivery has
actual knowledge that any person is an Authorized Person, Director, officer,
employee or agent of the Fund, the Custodian will comply with this Section 3.03
as if the name of such Authorized Person, Director, officer, employee or agent
had been contained in a written certificate provided pursuant to this Section
3.03.
Section 3.04. Actions of Custodian Based on Proper Instructions and Special
Instructions. So long as and to the extent that the Custodian acts in accordance
with (a) Proper Instructions or Special Instructions, as the case may be, and
(b) the terms of this Agreement, the Custodian shall not be responsible for the
title, validity or genuineness of any property, or evidence of title thereof,
received by it or delivered by it pursuant to this Agreement.
ARTICLE IV
SUBCUSTODIANS
From time to time, in accordance with the relevant provisions of this
Agreement, (i) the Custodian may appoint one or more Domestic Subcustodians and
Special Subcustodians (each, as hereinafter defined) to act on behalf of the
Fund; and (ii) any Domestic Subcustodian so appointed and which has been
designated as a Foreign Custody Manager (as such term is defined in Rule 17f-5
of the 1940 Act) by the Custodian and approved by the Fund's board ("Approved
Foreign Custody Manager") may appoint a Foreign Sub-
<PAGE>
Subcustodian or Interim Sub-Subcustodian (as each are hereinafter defined) in
accordance with this Article IV; provided that the Fund's board also has
approved the agreement between the Custodian and the Foreign Custody Manager
specifying the Foreign Custody Manager's duties ("Delegation Agreement"). For
purposes of this Agreement, all Domestic Subcustodians, Special Subcustodians,
Foreign Sub-Subcustodians and Interim Sub-Subcustodians shall be referred to
collectively as "Subcustodians".
Section 4.01. Domestic Subcustodians. The Custodian may, at any time and
from time to time, appoint any bank as defined in Section 2(a)(5) of the 1940
Act or any trust company or other entity any of which meet requirements of a
custodian under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act as agent for the Custodian on behalf of the Fund as a
subcustodian for purposes of holding cash, securities and other Assets of the
Fund and performing other functions of the Custodian within the United States (a
"Domestic Subcustodian"); provided, that, the Custodian shall notify the Fund in
writing of the identity and qualifications of any proposed Domestic Subcustodian
at least sixty (60) days prior to the desired appointment of such Domestic
Subcustodian, and the Fund will notify the Custodian, in writing signed by two
or more Authorized Persons, of approval or disapproval of the appointment of the
proposed Domestic Subcustodian; and provided, further, that the Custodian may
not appoint any such Domestic Subcustodian without such prior written approval
of the Fund by such Authorized Persons. Each such duly approved Domestic
Subcustodian and the countries where, Foreign Sub-Subcustodians and the
securities depositories and clearing agencies through which they may hold
securities and other Assets of the Fund shall be as agreed upon by the parties
hereto in writing, from time to time, in accordance with the provisions of
Section 9.04 hereof (the "Subcustodian List").
Section 4.02. Foreign Sub-Subcustodians and Interim Sub-Subcustodians.
(a) Foreign Sub-Subcustodians. Provided that the Custodian of a Domestic
Subcustodian is an Approved Foreign Custody Manager, the Custodian or any such
Domestic Subcustodian, as applicable, may appoint any (1)(a) "Qualified Foreign
Bank" (as such term is defined in Rule 17f-5) meeting the requirements of an
"Eligible Foreign Custodian" (as such term is defined in Rule 17f-5) or by SEC
order exempt therefrom; (b) majority-owned direct or indirect subsidiary of a
"U.S. bank" (as such term is defined in Rule 17f-5) or bank holding company
meeting the requirements of an Eligible Foreign Custodian or exempt by SEC order
therefrom; or (c) any bank (as such term is defined in Section 2(a)(5) of the
1940 Act) meeting the requirements of a custodian under Section 17(f) of the
1940 Act and the rules and regulations thereunder (each a "Foreign
Sub-Subcustodian") or (2) any "Securities Depository" (as such term is defined
in Rule 17f-5) or clearing agency meeting the requirements of an Eligible
Foreign Custodian or exempt by SEC order therefrom ("Securities Depositories and
Clearing Agencies"), provided that the Foreign Custody Manager's appointments of
<PAGE>
such Eligible Foreign Custodians shall at all times be governed by the
Delegation Agreement.
(b) Interim Sub-Subcustodians. Notwithstanding the foregoing, in the event
that the Fund shall invest in a security or other Asset to be held in a country
in which the Foreign Custody Manager has not appointed an Eligible Foreign
Custodian, the Custodian shall, or shall cause the Domestic Subcustodian to,
promptly notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian shall agree in writing of the unavailability of
an approved Foreign Sub-Subcustodian in such country; and upon the receipt of
Special Instructions, the Custodian shall, or shall cause the Domestic
Subcustodian to, appoint or approve any Person (as hereinafter defined)
designated by the Fund in such Special Instructions, to hold such security or
other Asset. (Any Person appointed or approved as a sub-subcustodian pursuant to
this Section 4.02(b) is hereinafter referred to as an "Interim
Sub-Subcustodian.")
Section 4.03. Special Subcustodians. Upon receipt of Special Instructions,
the Custodian shall, on behalf of the Fund, appoint one or more banks, trust
companies or other entities designated in such Special Instructions to act as a
subcustodian for the purpose of (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities, (ii) providing
depository and clearing agency services with respect to certain variable rate
demand note securities; and (iii) effecting any other transactions designated by
the Fund in Special Instructions. (Each such designated subcustodian is
hereinafter referred to as a "Special Subcustodian.") Each such duly appointed
Special Subcustodian shall be listed on the Subcustodian List. In connection
with the appointment of any Special Subcustodian, the Custodian shall enter into
a subcustodian agreement with the Special Subcustodian in form and substance
approved by the Fund, provided that such agreement shall in all events comply
with the provisions of the 1940 Act and the rules and regulations thereunder and
the terms and provisions of this Agreement. The Custodian shall not amend any
subcustodian agreement entered into with a Special Subcustodian, or agree to
change or permit any changes thereunder, or waive any rights under such
agreement, except upon prior approval pursuant to Special Instructions.
Section 4.04. Termination of a Subcustodian. The Custodian shall (i) cause
each Domestic Subcustodian to, and (ii) use its best efforts to cause each
Interim Sub-Subcustodian and Special Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Domestic Subcustodian and Special
Subcustodian or between the Domestic Subcustodian and a Foreign Sub-Subcustodian
or Interim Sub-Subcustodian. In the event that the Custodian is unable to cause
such subcustodian or sub-subcustodian to fully perform its obligations
thereunder, the Custodian shall promptly notify the Fund in writing and
forthwith, upon the receipt of Special Instructions, terminate or cause the
termination of such Subcustodian or Sub-Subcustodian with respect to the Fund
and, if necessary or desirable, appoint or cause
<PAGE>
the appointment of a replacement Subcustodian or Sub-Subcustodian in accordance
with the provisions of this Article IV. In addition to the foregoing, the
Custodian (A) may, at any time in its discretion, upon written notification to
the Fund, terminate any Domestic Subcustodian which is not an approved Foreign
Custody Manager, and (B) shall, upon receipt of Special Instructions, terminate
any Special Subcustodian or Domestic Subcustodian which is an Approved Foreign
Custody Manager with respect to the Fund, in accordance with the termination
provisions under the applicable subcustodian agreement, and (C) shall, upon
receipt of Special Instructions, cause the Domestic Subcustodian to terminate
any Foreign Sub-Subcustodian or Interim Sub-Subcustodian as to its use of such
entities with respect to the Fund, in accordance with the termination provisions
under the applicable sub-subcustodian agreement.
Section 4.05. Certification Regarding Foreign Sub-Subcustodians. Upon
request of the Fund, the Custodian shall deliver to the Fund a certificate
stating: (i) the identity of each Foreign Sub-Subcustodian then acting on behalf
of the Custodian; (ii) the countries in which and the Securities Depositories
and Clearing Agents through which each such Foreign Sub-Subcustodian is then
holding cash, securities and other Assets of the Fund; and (iii) such other
information as may be requested by the Fund to ensure compliance with rules and
regulations under the 1940 Act.
ARTICLE V
STANDARD OF CARE: INDEMNIFICATION
Section 5.01. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise reasonable care
and diligence in carrying out all of its duties and obligations under this
Agreement, and shall be liable to the Fund for all loss, damage and expense
suffered or incurred by the Fund resulting from the failure of the Custodian to
exercise such reasonable care and diligence.
(b) Actions Prohibited by Applicable Law, Etc. In no event shall the
Custodian incur liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities Depository or Clearing Agency
utilized by any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement provides
shall be performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United States of
America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction (and the Custodian
nor any other Person shall not be obligated to take any action contrary
thereto); or (ii) any act of God or war or other similar circumstance beyond the
control of the Custodian unless in each case, such delay or nonperformance is
caused by the negligence, misfeasance or misconduct of the Custodian.
<PAGE>
(c) Mitigation by Custodian. Upon the occurrence of any event which causes
or may cause any loss, damage or expense to the Fund, (i) the Custodian shall,
(ii) the Custodian shall cause any applicable Domestic Subcustodian or Foreign
Sub-Subcustodian to, and (iii) the Custodian shall use its best efforts to cause
any applicable Interim Sub-Subcustodian or Special Subcustodian to, use all
commercially reasonable efforts and take all reasonable steps under the
circumstances to mitigate the effects of such event and to avoid continuing harm
to the Fund.
(d) Advice of Counsel. The Custodian shall be without liability for any
action reasonably taken or omitted in good faith pursuant to the written advise
of (i) counsel for the Fund, or (ii) at the expense of the Custodian, such other
counsel as the Fund and the Custodian may agree upon in writing; provided,
however, with respect to the performance of any action or omission of any action
upon such advice, the Custodian shall be required to conform to the standard of
care set forth in Section 5.01 (a).
(e) Expenses of the Fund. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all expenses
incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim; provided however, that the Fund has
recovered from the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no liability in
respect of any loss, damage or expense suffered by the Fund, insofar as such
loss, damage or expense arises from the performance of the Custodian in reliance
upon records that were maintained for the Fund by entities other than the
Custodian prior to the Custodian's employment hereunder which the Custodian has
no reason to believe are inaccurate or incomplete after reasonable inquiry.
Section 5.02. Liability of the Custodian for Actions of Other Persons.
(a) Domestic Subcustodian and Foreign Sub-Subcustodian. The Custodian shall
be liable for the actions or omissions of any Domestic Subcustodian or Foreign
Sub-Subcustodian (excluding any Securities Depository or Clearing Agency
appointed by them) to the same extent as if such actions or omissions were
performed by the Custodian itself. In the event of any loss, damage or expense
suffered or incurred by the Fund caused by or resulting from the actions or
omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian for which the
Custodian would otherwise be liable, the Custodian shall promptly reimburse the
Fund in the amount of any such loss, damage or expense.
<PAGE>
(b) Special Subcustodians, Interim Sub-Subcustodians, Security Systems,
Securities Depositories and Clearing Agencies. The Custodian shall not be liable
to the Fund for any loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of a Special Subcustodian, Interim
Sub-Subcustodian, Securities System, Securities Depository or Clearing Agency
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, in
the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against such Special
Subcustodian, Interim Sub-Subcustodian, Security System, Securities Depository
or Clearing Agency to protect the interest of the Fund.
(c) Reimbursement of Expenses. The Fund agrees to reimburse the Custodian
for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under Section 5.01(c) as it
relates to Interim Sub-Subcustodians and Special Subcustodians and 5.02(b);
provided however, that such reimbursement shall not apply to expenses occasioned
by or resulting from the negligence, misfeasance or misconduct of the Custodian.
Section 5.03. Indemnification by Fund.
(a) Indemnification Obligations of Fund. Subject to the limitations set
forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Custodian or its nominee
caused by or arising from actions taken by the Custodian, its employees or
agents in the performance of its duties and obligations under this Agreement;
provided, however, that such indemnity shall not apply to loss, damage and
expense occasioned by or resulting from the negligence, misfeasance or
misconduct of the Custodian or its nominee. In addition, the Fund agrees to
indemnify any Person against liability incurred by reason of taxes assessed to
such Person resulting from the fact that securities and other property of the
Fund are registered in the name of such Person in accordance with the provisions
of this Agreement; provided, however, that in no event shall such
indemnification be applicable to income, franchise or similar taxes which may be
imposed or assessed against any Person. It is also understood that the Fund
agrees to indemnify and hold harmless the Custodian and its nominee for any loss
arising from a foreign currency transaction or contract, where the loss results
from a Sovereign Risk (as hereinafter defined) or where any Person maintaining
securities, currencies, deposits or other Assets of the Fund in connection with
any such transactions has exercised reasonable care maintaining such property or
in connection with any such transaction involving such Assets. A "Sovereign
Risk" shall mean nationalization, expropriation, devaluation, revaluation,
confiscation, seizure, cancellation, destruction or similar action by any
governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority
<PAGE>
of currency restrictions, exchange controls, taxes, levies or other charges
affecting the Fund's property; or acts of war, terrorism, insurrection or
revolution.
(b) Notice of Litigation. Right to Prosecute, Etc. The Fund shall not be
liable for indemnification under this Section 5.03 unless a Person shall have
promptly notified the Fund in writing of the commencement of any litigation or
proceeding brought against the Custodian or other Person in respect of which
indemnity may be sought under this Section 5.03. With respect to claims in such
litigation or proceedings for which indemnity by the Fund may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Fund shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Fund may be subject to an indemnification obligation;
provided, however, a Person shall be entitled to participate in (but not
control) at its own cost and expense, the defense of any such litigation or
proceeding if the Fund has not acknowledged in writing it obligation to
indemnify the Person with respect to such litigation or proceeding. If the Fund
is not permitted to participate or control such litigation or proceeding under
applicable law or by a ruling of a court of competent jurisdiction, or if the
Fund chooses not to so participate, the Custodian or other Person shall not
consent to the entry of any judgment or enter into any settlement in any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment, and without the Fund's prior written consent which
consent shall not be unreasonably withheld or delayed. All Persons shall submit
written evidence to the Fund with respect to any cost or expense for which they
are seeking indemnification in such form and detail as the Fund may reasonably
request.
Section 5.04. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its duty
generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund and the Fund agrees to indemnify the Custodian and its
nominees, for any loss, damage or expense suffered or incurred by the Custodian
and its nominees arising out of any violation of any investment or other
limitation to which the Fund is subject except for violations of which the
Custodian has actual knowledge. For purposes of this Section 5.04 the term
"actual knowledge" shall mean knowledge gained by the Custodian by means other
than from any prospectus published by the Fund or contained in any filing by the
Fund with the SEC.
Section 5.05. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Fund by such Subcustodian, Securities System or other Person, which
the Custodian may have as a consequence
<PAGE>
of any such loss, damage or expense, if and to the extent that the Fund has not
been made whole for any such loss, expense or damage. If the Custodian makes the
Fund whole for any such loss, expense or damage, the Custodian shall retain the
ability to enforce its rights directly against such Subcustodian, Securities
System or other Person. Upon the Fund's election to enforce any rights of the
Custodian under this Section 5.05, the Fund shall reasonably prosecute all
actions and proceedings directly relating to the rights of the Custodian in
respect of the loss, damage or expense incurred by the Fund; provided that, so
long as the Fund has acknowledged in writing its obligation to indemnify the
Custodian under Section 5.03 hereof with respect to such claim, the Fund shall
retain the right to settle, compromise and/or terminate any action or proceeding
in respect of the loss, damage or expense incurred by the Fund without the
Custodian's consent and provided further, that if the Fund has not made an
acknowledgement of its obligation to indemnify, the Fund shall not settle,
compromise or terminate any such action or proceeding without the written
consent of the Custodian, which consent shall not be unreasonably withheld or
delayed. The Custodian agrees to cooperate with the Fund and take all actions
reasonably requested by the Fund in connection with the Fund's enforcement of
any rights of the Custodian. Nothing contained in this Section 5.05 shall be
construed as an obligation of the Fund to enforce the Custodian's rights. The
Fund agrees to reimburse the Custodian for out-of-pocket expenses incurred by it
in connection with the fulfillment of its obligations under this Section 5.05;
provided, however, that such reimbursement shall not apply to expenses
occasioned by or resulting from the negligence, misfeasance or misconduct of the
Custodian.
Section 5.06. Indemnification by Custodian.
(a) Indemnification Obligations of Custodian. Subject to the limitations
set forth in this Agreement and in addition to the reimbursement obligations
provided in Section 5.02(a), the Custodian agrees to indemnify and hold harmless
the Fund and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Fund or its nominee
caused by or arising from the failure of the Custodian, its nominee, employees
or agents to comply with the terms or conditions of this Agreement or arising
out of the negligence, misfeasance or misconduct of the Custodian or its
nominee.
(b) Notice of Litigation, Right to Prosecute, Etc. The Custodian shall not
be liable for indemnification under this Section 5.06 unless the Fund shall have
promptly notified the Custodian in writing of the commencement of any litigation
or proceeding brought against the Fund in respect of which indemnity may be
sought under this Section 5.06. With respect to claims in such litigation or
proceedings for which indemnity by the Custodian may be sought and subject to
applicable law and the ruling of any court of competent jurisdiction, the
Custodian shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Custodian may be subject to an indemnification
obligation; provided,
<PAGE>
however, the Fund shall be entitled to participate in (but not control) at its
own cost and expense, the defense of any such litigation or proceeding if the
Custodian has not acknowledged in writing its obligation to indemnify the Fund
with respect to such litigation or proceeding. If the Custodian is not permitted
to participate or control such litigation or proceeding under applicable law or
by a ruling of a court of competent jurisdiction, or if the Custodian chooses
not to so participate, the Fund shall not consent to the entry of any judgement
or enter into any settlement in any such litigation or proceeding without
providing the Custodian with adequate notice of any such settlement or
judgement, and without the Custodian's prior written consent which consent shall
not be unreasonably withheld or delayed. The Fund shall submit written evidence
to the Custodian with respect to any cost or expense for which it is seeking
indemnification in such form and detail as the Custodian may reasonably request.
Section 5.07. Custodian's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Custodian shall have, at its election upon
reasonable notice to the Fund, the right to enforce, to the extent permitted by
any applicable agreement and applicable law, the Fund's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Custodian by such Subcustodian, Securities System or other Person,
which the Fund may have as a consequence of any such loss, damage or expense, if
and to the extent that the Custodian has not been made whole for any such loss,
expense or damage. If the Fund makes the Custodian whole for any such loss,
expense or damage, the Fund shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Custodian's election to enforce any rights of the Fund under this Section 5.07,
the Custodian shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Fund in respect of the loss, damage and expense
incurred by the Custodian; provided that, so long as the Custodian has
acknowledged in writing its obligation to indemnify the Fund under Section 5.06
hereof with respect to such claim, the Custodian shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Custodian without the Fund's consent and
provided further, that if the Custodian has not made an acknowledgement of its
obligation to indemnify, the Custodian shall not settle, compromise or terminate
any such action or proceeding without the written consent of the Fund, which
consent shall not be unreasonably withheld or delayed. The Fund agrees to
cooperate with the Custodian and take all actions reasonably requested by the
Custodian in connection with the Custodian's enforcement of any rights of the
Fund. Nothing contained in this Section 5.07 shall be construed as an obligation
of the Custodian to enforce the Fund's rights. The Custodian agrees to reimburse
the Fund for out-of-pocket expenses incurred by it in connection with the
fulfillment of its obligations under this Section 5.07; provided, however, that
such reimbursement shall not apply to expenses occasioned by or resulting from
the negligence, misfeasance or misconduct of the Fund.
<PAGE>
ARTICLE VI
COMPENSATION
For the initial three year period beginning on the effective date of this
Agreement, the Fund shall compensate the Custodian in the amount and at the
times specified in Appendix "B" attached hereto. Thereafter, the Fund shall
compensate the Custodian in the amount, and at times, as may be agreed upon in
writing, from time to time, by the Custodian and the Fund.
ARTICLE VII
TERMINATION
This Agreement shall continue in full force and effect until the first to
occur of: (a) termination by the Custodian by an instrument in writing delivered
or mailed (certified mail, return receipt requested) to the Fund, such
termination to take effect not sooner than ninety (90) days after the date of
such delivery or receipt; (b) termination by the Fund by an instrument in
writing delivered or mailed (certified mail, return receipt requested) to the
Custodian, such termination to take effect not sooner than ninety (90) days
after the date of such delivery or receipt; or (c) termination by the Fund by an
instrument in writing delivered to the Custodian, based upon the Fund's
determination that there is reasonable basis to conclude that the Custodian is
insolvent or that the financial condition of the Custodian is deteriorating in
any material respect, in which case termination shall take effect upon the
Custodian's receipt of such notice or at such later time as the Fund shall
designate. In the event of termination pursuant to this Article VII, the Fund
shall make payment of all accrued fees and unreimbursed expenses within a
reasonable time following termination and delivery of a statement to the Fund
setting forth such fees and expenses. The Fund shall identify in any notice of
termination a successor custodian to which the cash, securities and other Assets
of the Fund shall, upon termination of this Agreement, be delivered. In the
event that securities and other Assets remain in the possession of the Custodian
after the date of termination hereof owing to failure of the Fund to appoint a
successor custodian, the Custodian shall be entitled to compensation for its
services in accordance with the fee schedule most recently in effect, for such
period as the Custodian retains possession of such securities and other Assets,
and the provisions of this Agreement relating to the duties and obligations of
the Custodian and the Fund shall remain in full force and effect for such
period. In the event of the appointment of a successor custodian, the cash,
securities and other Assets owned by the Fund and held by the Custodian, any
Subcustodian or nominee shall be delivered, at the terminating party's expense,
to the successor custodian; and the Custodian agrees to cooperate with the Fund
in the execution of documents and performance of other actions necessary or
desirable in order to substitute the successor custodian for the Custodian under
this Agreement.
<PAGE>
ARTICLE VIII
DEFINED TERMS
The following terms are defined in the following sections:
Term Section
Account 2.22(A)
ADRs 2.06
Approved Foreign Custody Manager Article IV
Assets Article I
Authorized Person 3.02
Banking Institution 2.12
Bank Accounts 2.21
Clearing Agency 4.02(a)
Delegation Agreement Article IV
Distribution Account 2.16
Domestic Subcustodian 4.01
Eligible Foreign Custodian 4.02(a)
Foreign Sub-Subcustodian 4.02(a)
Institutional Client 2.03
Interest Bearing Deposit 2.12
Interim Sub-Subcustodian 4.02(b)
OCC 2.09
Overdraft 2.28
Overdraft Notice 2.28
Person 5.01(b)
Procedural Agreement 2.10
Proper Instruction 3.01(a)
SEC 2.22
Securities Depositories 4.02(a)
Securities System 2.22
Shares 2.16
Sovereign Risk 5.03(a)
Special Instruction 3.01(b)
Special Subcustodian 4.03
Subcustodian Article IV
1940 Act Preamble
ARTICLE IX
MISCELLANEOUS
Section 9.01. Execution of Documents, Etc.
(a) Actions by the Fund. Upon request, the Fund shall execute and deliver
to the Custodian such proxies, powers of attorney or other instruments as may be
reasonable and necessary or desirable in connection with the performance by the
Custodian or any Subcustodian of their respective obligations under this
Agreement or any applicable subcustodian agreement, provided that the exercise
by the Custodian or any Subcustodian of any such rights shall in all events be
in compliance with the terms of this Agreement.
<PAGE>
(b) Actions by Custodian. Upon receipt of Proper Instructions, the
Custodian shall execute and deliver to the Fund or to such other parties as the
Fund may designate in such Proper Instructions, all such documents, instruments
or agreements as may be reasonable and necessary or desirable in order to
effectuate any of the transactions contemplated hereby and designated therein.
Section 9.02. Representations and Warranties.
(a) Representations and Warranties of the Fund. The Fund hereby represents
and warrants that each of the following shall be true, correct and complete as
of the date of execution of this Agreement and, unless notice to the contrary is
provided by the Fund to the Custodian, at all times during the term of this
Agreement: (i) the Fund is duly organized under the laws of its jurisdiction of
organization and is registered as an open-end management investment company
under the 1940 Act or is a series of portfolio of such entity; and (ii) the
execution, delivery and performance by the Fund of this Agreement are (w) within
its power, (x) have been duly authorized by all necessary action, and (y) will
not (A) contribute to or result in a breach of or default under or conflict with
any existing law, order, regulation or ruling of any governmental or regulatory
agency or authority, or (B) violate any provision of the Fund's corporate
charter or other organizational document, or bylaws, or any amendment thereof or
any provision of its most recent Prospectus or Statement of Additional
Information.
(b) Representations and Warranties of the Custodian. The Custodian hereby
represents and warrants that each of the following shall be true, correct and
complete as of the date of execution of this Agreement and, unless notice to the
contrary is provided by the Custodian to the Fund, at all times during the term
of this Agreement: (i) the Custodian is duly organized under the laws of its
jurisdiction of organization and qualifies to serve as a custodian to open-end
management investment companies under the provisions of the 1940 Act; and (ii)
the execution, delivery and performance by the Custodian of this Agreement are
(w) within its power (x) have been duly authorized by all necessary action, and
(y) will not (A) contribute to or result in a breach of or default under or
conflict with any existing law, order, regulation or ruling of any governmental
or regulatory agency or authority, or (B) violate any provision of the
Custodian's corporate charter, or other organizational document, or bylaws, or
any amendment thereof. The Custodian acknowledges receipt of a copy of the
Fund's most recent Prospectus and Statement of Additional Information.
Section 9.03. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and accordingly, supersedes as of the effective date of this
Agreement any custodian agreement heretofore in effect between the Fund and the
Custodian.
<PAGE>
Section 9.04. Waivers and Amendments. No provisions of this Agreement may
be waived, amended or deleted except by a statement in writing signed by the
party against which enforcement of such waiver, amendment or deletion is sought.
Section 9.05. Interpretation. In connection with the operation of this
Agreement, the Custodian and the Fund may agree in writing from time to time on
such provisions interpretative of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general tenor of
this Agreement. No interpretative or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
Section 9.06. Captions. Headings contained in this Agreement, which are
included as convenient references only, shall have no bearing upon the
interpretation of the terms of the Agreement or the obligations of the parties
hereto.
Section 9.07. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Missouri, in each case
without giving effect to principles of conflicts of law.
Section 9.08. Notices. Except in the case of Proper Instructions or Special
Instructions, and as otherwise provided in this Agreement, notices and other
writings contemplated by this Agreement shall be delivered by hand or by
facsimile transmission or as otherwise agreed to by the Fund and the Custodian
in writing (provided that in the case of delivery by facsimile transmission,
notice shall also be mailed postage prepaid) to the parties at the following
addresses:
(a) If to the Fund:
United High Income Fund II, Inc.
6300 Lamar Avenue
Overland Park, Kansas 66202
Attn: Fund Treasurer
Telephone: 913-236-2000
Telefax: 913-236-1595
(b) If to the Custodian:
UMB Bank, n.a.
928 Grand Avenue, 10th Floor
Kansas City, Missouri 64106
Attn: Securities Administration
Telephone: 816-860-7764
Telefax: 816-860-4869
or such other address as either party may have designated in writing to the
other party hereto.
<PAGE>
Section 9.09. Assignment. This Agreement shall be binding on and shall
inure to the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that, subject to the provisions of Section 7.01
hereof, neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
Section 9.10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties.
Section 9.11. Confidentiality; Survival of Obligations. The parties hereto
agree that each shall treat confidentially the terms and conditions of this
Agreement and all information provided by each party to the other regarding its
business and operations. All confidential information provided by a party hereto
shall be used by any other party hereto solely for the purpose of rendering
services pursuant to this Agreement and, except as may be required in carrying
out this Agreement, shall not be disclosed to any third party without the prior
consent of such providing party. The foregoing shall not be applicable to any
information that is publicly available when provided or thereafter becomes
publicly available other than through a breach of this Agreement, or that is
required to be disclosed by any bank examiner of the Custodian or any
Subcustodians, any auditor or examiner of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation. The
provisions of this Section 9.11 and Section 9.01, 9.07, Section 2.28, Section
3.04, Section 4.05, Section 7.01, Article V and Article VI hereof and any other
rights or obligations incurred or accrued by any party hereto prior to
termination of this Agreement shall survive any termination of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
UNITED HIGH INCOME FUND II, INC. UMB BANK, n.a.
By: /s/Sharon K. Pappas By: /s/Ralph Santoro
Name: Sharon K. Pappas Name: Ralph Santoro
Title: Vice President Title: Senior Vice President
<PAGE>
APPENDIX "B"
TO
CUSTODIAN AGREEMENT
BETWEEN
UNITED HIGH INCOME FUND II, INC.
AND
UMB BANK, N.A.
Dated as of May 1, 1997
The Fund shall be responsible for providing the Custodian the net asset
levels the Custodian requires to calculate the net asset portion of the
Custodian's fees. Such determinations shall be based upon the average monthly
assets of each Fund and shall specify the level of domestic assets and foreign
assets by country, as appropriate. Domestic assets shall include all assets held
in the United States including but not limited to American Depositary Receipts.
Foreign assets shall include all assets held outside the United States including
but not limited to securities which clear through Euroclear or CEDEL. The
Custodian will provide as soon as practicable after receiving the information
provided by the Fund with respect to the net asset level numbers, a bill for the
Fund, including such reasonable detail in support of each bill as may be
reasonably requested by the Fund. As used in this Appendix "B", "United Funds"
shall mean all funds in the United Group of Funds, TMK/United Funds, Inc. and
Waddell & Reed Funds, Inc.
DOMESTIC CUSTODY FEE SCHEDULE
A. Annual Fee (combining all domestic assets):
An annual fee to be computed as of month end and payable each month of the
Fund's fiscal year (after receipt of the bill issued to each Fund based
upon its portion of domestic assets), at the annual rate of:
.00005 for the first $5,000,000,000 of the net assets of all the United
Funds, plus .00004 for any net assets exceeding $5,000,000,000 of the
assets of all the United Funds.
B. Portfolio Transaction Fees (billed to each Fund):
(a) For each portfolio transaction* processed through a
Depository (DTC, PTC or Fed) $ 7.00
(b) For each portfolio transaction* processed through
the New York office (physical settlement) $20.00
(c) For each futures/option contract written $25.00
(d) For each principal/interest paydown $ 6.00
(e) For each interfund note transaction $ 5.00
* A portfolio transaction includes a receive, delivery, maturity, free
security movement and corporate action.
C. Earnings Credits:
Positive earnings credits will be applied on all collected custody and cash
management balances of each Fund at the Custodian to earn the Custodian's
daily repurchase agreement rate less reserve requirements and FDIC
premiums. Negative earnings credits will be charged on all uncollected
custody and cash management balances of each Fund at the Custodian's prime
rate less 150 basis points on each day a negative balance occurs. Positive
and/or negative earnings credits will be monitored daily for each Fund and
the net positive or negative amount for each Fund
<PAGE>
will be included in the monthly statements. Excess positive credits for
each Fund will be carried forward indefinitely.
D. Out-of-Pocket Expenses (passed directly from Special Subcustodians):
Includes all charges by any Special Subcustodian to the Custodian as
Custodian for any Assets held at the Special Subcustodian.
GLOBAL CUSTODY FEE SCHEDULE
A. Global Fee Schedule:
Market: Annual Asset Fees Transaction Fees
------ ----------------- ----------------
Argentina .0037 $85
Australia .0009 $85
Austria .0011 $70
Belgium .0011 $60
Brazil .0035 $60
Canada .0008 $35
Chile .0045 $85
China .0045 $75
Czech Republic .0055 $135
Denmark .0011 $60
Finland .0011 $85
France .0011 $85
Germany .0008 $60
Hong Kong .0009 $85
Hungary .0065 $210
India .0055 $135
Indonesia .0009 $85
Ireland .0011 $60
Israel .0035 $160
Italy .0011 $70
Japan .0008 $40
Korea .0035 $60
Malaysia .0009 $85
Mexico .0016 $60
Netherlands .0011 $35
New Zealand .0009 $85
Norway .0011 $85
Peru .0070 $160
Phillippines .0035 $95
Poland .0060 $110
Portugal .0035 $145
Singapore .0009 $85
Spain .0009 $85
Sweden .0011 $70
Switzerland .0009 $85
Taiwan .0035 $85
Thailand .0009 $85
Turkey .0045 $110
U.K. .0011 $60
Note: Fee Schedule eliminates sub-custodian asset and transaction-based
out-of-pocket expenses. Other sub-custodian out-of-pocket expenses (i.e.
Scrip fees, stamp duties, certificate fees, etc.)
B. Out-of-Pocket Expenses (passed directly from Brown Brothers Harriman &
Co.):
<PAGE>
Includes, but is not limited to telex, legal, telephones, postage, and
direct expenses including but not limited to tax reclaim, customized
systems programming, certificate fees, duties, and registration fees.
C. Short-term Dollar Denominated Global Assets Eurodollar CDs, Time Deposits:
(1) An annual fee to be computed as of month end and payable each month of
the Fund's fiscal year (after receipt of the bill issued to the Fund
based upon its portion of short-term dollar denominated assets), at
the annual rate of:
.0004 on all short-term dollar denominated assets of the United Funds.
(2) Portfolio Transaction Fees:
First Chicago Clearing Centre-Trades with Members $136.00
First Chicago Clearing Centre-Trades with Non-members $153.00
First Chicago Clearing Centre-Income Collection $ 64.00
D. Euroclear Eligible Issues:
(1) An annual fee to be computed as of month end and payable each month of
the Fund's fiscal year (after receipt of the bill issued to the Fund
based upon its portion of Euroclear issues), at the annual rate of:
2.5 basis points on all United Funds Euroclear assets held in account
at UMB Bank, n.a.
(2) Portfolio Transaction Fees:
Euroclear $60.00
<PAGE>
SUBCUSTODIAN LIST
PURSUANT TO CUSTODIAN AGREEMENT
BETWEEN
UNITED HIGH INCOME FUND II, INC.
AND
UMB BANK, n.a.
Dated as of August 31, 1998
This Subcustodian List relates to the Custodian Agreements between UMB
Bank, n.a. and each of the following funds dated the date specified by the
fund's name, as subsequently amended and restated:
Fund Date
---- ----
United Asset Strategy Fund, Inc. February 22, 1995
United Cash Management, Inc. November 26, 1991
United Continental Income Fund, Inc. November 26, 1991
United Gold & Government Fund, Inc. November 26, 1991
United Government Securities Fund, Inc. November 26, 1991
United High Income Fund, Inc. November 26, 1991
United High Income Fund II, Inc. November 26, 1991
United International Growth Fund, Inc. November 26, 1991
United Municipal Bond Fund, Inc. November 26, 1991
United Municipal High Income Fund, Inc. November 26, 1991
United New Concepts Fund, Inc. November 26, 1991
United Retirement Shares, Inc. November 26, 1991
United Vanguard Fund, Inc. November 26, 1991
United Funds, Inc.
United Bond Fund November 26, 1991
United Income Fund November 26, 1991
United Accumulative Fund November 26, 1991
United Science and Technology Fund November 26, 1991
Target/United Funds, Inc.*
High Income Portfolio November 26, 1991
Money Market Portfolio November 26, 1991
Bond Portfolio November 26, 1991
Income Portfolio November 26, 1991
Growth Portfolio November 26, 1991
Balanced Portfolio April 29, 1994
International Portfolio April 29, 1994
Limited-Term Bond Portfolio April 29, 1994
Small Cap Portfolio April 29, 1994
Asset Strategy Portfolio May 1, 1995
Science and Technology Portfolio April 4, 1997
Waddell & Reed Funds, Inc.
Total Return Fund April 24, 1992
Municipal Bond Fund April 24, 1992
Limited-Term Bond Fund April 24, 1992
International Growth Fund April 24, 1992
Growth Fund April 24, 1992
Asset Strategy Fund April 20, 1995
High Income Fund July 31, 1997
Science and Technology Fund July 31, 1997
*Formerly, TMK/United Funds, Inc.
The following is a list of Domestic Subcustodians, Foreign Subcustodian and
Special Subcustodians under the Custodian Agreement as amended:
<PAGE>
A. Domestic Custodians:
Brown Brothers Harriman & Co.
United Missouri Trust Company of New York
B. Foreign Sub-Custodians
<TABLE>
<CAPTION>
Country Sub-Custodian Depository
<S> <C> <C>
Argentina Citibank, n.a. CDV; CRYL
Australia National Australia Bank Ltd. AUSTRACLEAR, RITs
Austria Creditanstalt Bankverein KONTROLLBANK (OEKB)
Belgium Banque Bruxelles Lambert CIK, BNB
Brazil First National Bank of Boston, Brazail BOVESPA, CLC
Canada Canadian Imperial Bank of Commerce CDS; The Bank of Canada
Chile Citibank, n.a. None
China Standard Chartered Bank SSCCRC; SSCC
Czech Republic Ceskoslovenska Obchodni Banka A.S. CNB; SCP
Denmark Den Danske Bank VP
Finland Merita Securities Association; Finnish Central
Securities Depository Ltd.
France Banque Indosuez SICOVAM; Banque de France
Germany Deutsche Bank KASSENVEREIN
Hungary Citibank, N.A. KELER Ltd.
Hong Kong HongKong & Shanghai Banking Corp. HongKong Securities Clearing Company
India Citibank, N.A., Mumbai National Securities Depository Limited
Indonesia Citibank, n.a. None
Ireland Allied Irish Banks PLC Gilt Settlement Office
Israel Bank Hapoalim B.M. TASE Clearinghouse Ltd.
Italy Banca Commerciale Italiana MONTE TITOLI, Banca D'Italia
Japan The Bank of Tokyo, Ltd. JASDEC, Bank of Japan
Korea Citibank, n.a. Korean Securities Depository
Corporation (KSD)
Malaysia Hong Kong Bank Malaysia Berhad MCD; Bank Negara Malaysia
Mexico Citibank Mexico, s.a. INDEVAL; Banco De Mexico
Netherlands ABN - Amro Bank NECIGER; De Nederlandsche Bank
Norway Christiana Bank VPS
Peru Citibank, n.a. Caja De Valores (CAVAL)
Philippines Citibank, n.a. Phillipines Central Depository, Inc.
Poland Bank Polska Kasa Opieki S.A. NPB
Portugal Banco Espirito Santo E Comercial De Lisboa Interbolsa
Singapore HongKong & Shanghai Banking Corp. CDP
Spain Banco Santander SCLV; Banco De Espana
Sweden Skandinaviska Enskilda Banken VPC
Switzerland Union Bank of Switzerland SEGA
Taiwan Standard Chartered Bank, Taipei TSCD
Thailand HongKong & Shanghai Banking Corp. Share Depository Center (SDC)
Turkey Citibank, n.a. TvS, Central Bank of Turkey
United Kingdom Midland Securities PLC CMO; CGO; CrestCo
</TABLE>
C. Special Subcustodians:
Wilmington Trust Co.
The Bank of New York, n.a.
Euroclear
EX-99.B9-h2ssa
SHAREHOLDER SERVICING AGREEMENT
THIS AGREEMENT, made as of the 1ST day of November, 1992, by and between
UNITED HIGH INCOME FUND II, INC., and Waddell & Reed Services Company (the
"Agent"), as amended and restated as of April 1, 1996,
W I T N E S S E T H :
WHEREAS, The Company wishes, as applicable, to appoint the Agent or to
continue the appointment of the Agent to be its shareholder servicing agent
upon, and subject to, the terms and provisions of this Agreement;
NOW THEREFORE, in consideration of the mutual covenants contained in this
Agreement, the parties agree as follows:
1. Appointment of Agent as Shareholder Servicing Agent for the Company;
Acceptance.
(1) The Company hereby appoints the Agent to act as Shareholder
Servicing Agent for the Company upon, and subject to, the terms and
provisions of this Agreement.
(2) The Agent hereby accepts the appointment as Shareholder Servicing
Agent for the Company and agrees to act as such upon, and subject to, the
terms and provisions of this Agreement.
(3) The Agent may appoint an entity or entities approved by the
Company in writing to perform any portion of Agent's duties hereunder (the
"Subagent").
2. Definitions.
(1) In this Agreement -
(a) The term the "Act" means the Investment Company Act of 1940
as amended from time to time;
(b) The term "account" means the shares of the Company registered
on the books of the Company in the name of a shareholder under a
particular account registration number and includes shares subject to
instructions by the shareholder with respect to periodic redemptions
and/or reinvestment in additional shares of any dividends payable on
said shares;
(c) The term "affiliate" of a person shall mean a person
controlling, controlled by, or under common control with that person;
(d) The term "Class" shall mean each separate sub-class of a
class of shares of the Company, as may now or in the future exist;
<PAGE>
(e) The term "Fund" shall mean each separate class of shares of
the Company, as may now or in the future exist;
(f) The term "officers' instruction" means an instruction given
on behalf of the Company to the Agent and signed on behalf of the
Company by any one or more persons authorized to do so by the
Company's Board of Directors;
(g) The term "prospectus" means the prospectus and Statement of
Additional Information of the applicable Fund or Class from time to
time in effect;
(h) The term "shares" means shares including fractional shares of
capital stock of the Company, whether or not such shares are evidenced
by an outstanding stock certificate issued by the Company;
(i) The term "shareholder" shall mean the owner of record of
shares of the Company;
(j) The term "stock certificate" means a certificate representing
shares in the form then currently in use by the Company.
3. Duties of the Agent.
The Agent shall perform such duties as shall be set forth in this
paragraph 3 and in accordance with the practice stated in Exhibit A of this
Agreement or any amendment thereof, any or all of which duties may be
delegated to or performed by one or more Subagents pursuant to Paragraph
(3) above.
(1) Transfers.
Subject to the provisions of this Agreement the Agent hereby
agrees to perform the following functions as transfer agent for the
Company:
(a) Recording the ownership, transfer, exchange and cancellation
of ownership of shares of the Company on the books of the Company;
(b) Causing the issuance, transfer, exchange and cancellation of
stock certificates;
(c) Establishing and maintaining records of accounts;
(d) Computing and causing to be prepared and mailed or otherwise
delivered to shareholders payment checks and notices of reinvestment
in additional shares of dividends, stock dividends or stock
<PAGE>
splits declared by the Company on shares and of redemption proceeds
due by the Company on redemption of shares;
(e) Furnishing to shareholders such information as may be
reasonably required by the Company, including appropriate income tax
information;
(f) Addressing and mailing to shareholders prospectuses, annual
and semi-annual reports and proxy materials for shareholder meetings
prepared by or on behalf of the Company;
(g) Replacing allegedly lost, stolen or destroyed stock
certificates in accordance with and subject to procedures and
conditions agreed upon and set out in officers' instructions;
(h) Maintaining such books and records relating to transactions
effected by the Agent pursuant to this Agreement as are required by
the Act, or by rules or regulations thereunder, or by any other
applicable provisions of law, to be maintained by the Company or its
transfer agent with respect to such transactions; preserving, or
causing to be preserved, any such books and records for such periods
as may be required by any such law, rule or regulation; furnishing the
Company such information as to such transactions and at such time as
may be reasonably required by it to comply with applicable laws and
regulations;
(i) Providing such services and carrying out such
responsibilities on behalf of the Company, or imposed on the Agent as
the Company's transfer agent, not otherwise expressly provided for in
this Paragraph 3, as may be required by or be reasonably necessary to
comply with any statute, act, governmental rule, regulation or
directive or court order, including, without limitation, the
requirements imposed by the Tax Equity and Fiscal Responsibility Act
of 1982 and the Income and Dividend Tax Compliance Act of 1983
relating to the withholding of tax from distributions to shareholders.
(2) Correspondence.
The Agent agrees to deal with and answer all correspondence from or on
behalf of shareholders relating to its functions under this Agreement.
4. Compensation of the Agent.
The Company agrees to pay the Agent for its services under this Agreement
in accordance with the schedule as then in effect set forth in Exhibit B of this
Agreement or any amendment thereof. In addition, the Company agrees to reimburse
the Agent for the following "out-of-pocket" expenses of the Agent within five
days after receipt of an itemized statement of such expenses, to the extent that
payment of such expenses has not been or is not to be made directly by the
Company: (i) costs of
<PAGE>
stationery, appropriate forms, envelopes, checks, postage, printing (except cost
of printing prospectuses, annual and semi-annual reports and proxy materials)
and mailing charges, including returned mail and proxies, incurred by the Agent
with respect to materials and communications sent to shareholders in carrying
out its duties to the Company under this Agreement; (ii) long distance telephone
costs incurred by the Agent for telephone communications and microfilm and
storage costs for transfer agency records and documents; (iii) costs of all
ancillary and supporting services and related expenses (other than insurance
premiums) reasonably required by and provided to the Agent, other than by its
employees or employees of an affiliate, with respect to functions of the Company
being performed by it in its capacity as Agent hereunder, including legal advice
and representation in litigation to the extent that such payments are permitted
under Paragraph 7 of this Agreement and charges to Agent made by any Subagent;
(iv) costs for special reports or information furnished on request pursuant to
this Agreement and not specifically required by the Agent by Paragraph 3 of this
Agreement; and (v) reasonable costs and expenses incurred by the Agent in
connection with the duties of the Agent described in Paragraph (3)(1)(i). In
addition, the Company agrees to promptly pay over to the Agent any fees or
payment of charges it may receive from a shareholder for services furnished to
the shareholder by the Agent.
Services and operations incident to the sale and distribution of the
Company's shares, including sales communications, confirmations of investments
(not including reinvestment of dividends) and the clearing or collection of
payments will not be for the account or at the expense of the Company under this
Agreement.
5. Right of Company to Inspect Records, etc.
The Company will have the right under this Agreement to perform on site
inspection of records and accounts and to perform audits directly pertaining to
the Company shareholder accounts serviced by the Agent hereunder at the Agent's
or any Subagent's facilities in accordance with reasonable procedures at the
frequency necessary to assure proper administration of the Agreement. The Agent
will cooperate with the Company's auditors or representatives of appropriate
regulatory agencies and furnish all reasonably requested records and data.
6. Insurance.
The Agent now has the insurance coverage described in Exhibit C, attached
hereto, and the Agent will not take any action to eliminate or decrease such
coverage during the term of this Agreement without receiving the approval of the
Fund in advance of any change, except the Agent, after giving reasonable notice
to the Company, may eliminate or decrease any coverage if the premiums for such
coverage are substantially increased.
<PAGE>
7. Standard of Care; Indemnification.
The Agent will at all times exercise due diligence and good faith in
performing its duties hereunder. The Agent will make every reasonable effort and
take all reasonably available measures to assure the adequacy of its personnel
and facilities as well as the accurate performance of all services to be
performed by it hereunder within, at a minimum, the time requirements of any
applicable statutes, rules or regulations or as set forth in the prospectus.
The Agent shall not be responsible for, and the Company agrees to indemnify
the Agent for any losses, damages or expenses (including reasonable counsel fees
and expenses) (i) resulting from any claim, demand, action or suit not resulting
from the Agent's failure to exercise good faith or due diligence and arising out
of or in connection with the Agent's duties on behalf of the Company hereunder;
(ii) for any delay, error or omission by reason of circumstances beyond its
control, including acts of civil or military authority, national emergencies,
labor difficulties (except with respect to the Agent's employees), fire,
mechanical breakdown beyond its control, flood or catastrophe, acts of God,
insurrection, war, riots, or failure beyond its control of transportation,
communication or power supply; or (iii) for any action taken or omitted to be
taken by the Agent in good faith in reliance on (a) the authenticity of any
instrument or communication reasonably believed by it to be genuine and to have
been properly made and signed or endorsed by an appropriate person, (b) the
accuracy of any records or information provided to it by the Company, (c) any
authorization or instruction contained in any officers' instruction, or (d) with
respect to the functions performed for the Company listed under Paragraph 3(1)
of this Agreement, any advice of counsel approved by the Company who may be
internally employed counsel or outside counsel, in either case for the Company
and/or the Agent.
In order for the rights to indemnification to apply, it is understood that
if in any case the Company may be asked to indemnify or hold the Agent harmless,
the Company shall be advised of all pertinent facts concerning the situation in
question, and it is further understood that the Agent will use reasonable care
to identify and notify the Company promptly concerning any situation which
presents or appears likely to present a claim for indemnification against the
Company. The Company shall have the option to defend the Agent against any claim
which may be the subject of this indemnification and, in the event that the
Company so elects, it will so notify the Agent and thereupon the Company shall
take over complete defense of the claim and the Agent shall sustain no further
legal or other expenses in such situation for which the Agent shall seek
indemnification under this paragraph. The Agent will in no case confess any
claim or make any compromise in any case in which the Company will be asked to
indemnify the Agent except with the Company's prior written consent.
<PAGE>
8. Term of the Agreement; Taking Effect; Amendments.
This Agreement shall become effective at the start of business on the date
hereof and shall continue, unless terminated as hereinafter provided, for a
period of one year and from year to year thereafter, provided that such
continuance shall be specifically approved as provided below.
This Agreement shall go into effect, or may be continued, or may be amended
or a new agreement between the Company and the Agent covering the substance of
this Agreement may be entered into only if the terms of this Agreement, such
continuance, the terms of such amendment or the terms of such new agreement have
been approved by the Board of Directors of the Company, including the vote of a
majority of the directors who are not "interested persons," as defined in the
Act, of either party to this Agreement or of Waddell & Reed Investment
Management Company, cast in person at a meeting called for the purpose of voting
on such approval. Such a vote is hereinafter referred to as a "disinterested
director vote."
Any disinterested director vote shall include a determination that (i) the
Agreement, amendment, new agreement or continuance in question is in the best
interests of the Company and its shareholders; (ii) the services to be performed
under the Agreement, the Agreement as amended, new agreement or agreement to be
continued, are services required for the operation of the Company; (iii) the
Agent can provide services the nature and quality of which are at least equal to
those provided by others offering the same or similar services; and (iv) the
fees for such services are fair and reasonable in the light of the usual and
customary charges made by others for services of the same nature and quality.
9. Termination.
(1) This Agreement may be terminated by the Agent at any time without
penalty upon giving the Company 120 days' written notice (which notice may be
waived by the Company) and may be terminated by the Company at any time without
penalty upon giving the Agent sixty (60) days' written notice (which notice may
be waived by the Agent), provided that such termination by the Company shall be
directed or approved by the vote of a majority of the Board of Directors of the
Company in office at the time or by the vote of the holders of a majority (as
defined in or under the Act) of the outstanding shares of the Company.
(2) On termination, the Agent will deliver to the Company or its designee
all files, documents and records of the Company used, kept or maintained by the
Agent in the performance of its services hereunder, including such of the
Company's records in machine readable form as may be maintained by the Agent, as
well as such summary and/or control data relating thereto used by or available
to the Agent.
(3) In the event of any termination which involves the appointment of a new
shareholder servicing agent, including the Company's acting as such on its own
behalf, the Company shall have the non-exclusive
<PAGE>
right to the use of the data processing programs used by the Agent in connection
with the performance of its duties under this Agreement without charge.
(4) In addition, on such termination or in preparation therefore, at the
request of the Company and at the Company's expense the Agent shall provide to
the extent that its capabilities then permit such documentation, personnel and
equipment as may be reasonably necessary in order for a new agent or the Company
to fully assume and commence to perform the agency functions described in this
Agreement with a minimum disruption to the Company's activities.
10. Construction; Governing Law.
The headings used in this Agreement are for convenience only and shall not
be deemed to constitute a part hereof. Whenever the context requires, words
denoting singular shall be read to include the plural. This Agreement and the
rights and obligations of the parties hereunder, shall be construed and
interpreted in accordance with the laws of the State of Kansas, except to the
extent that the laws of the State of Maryland apply with respect to share
transactions.
11. Representations and Warranties of Agent.
Agent represents and warrants that it is a corporation duly organized and
existing and in good standing under the laws of the State of Missouri, that it
is duly qualified to carry on its business in the State of Kansas and wherever
its duties require, that it has the power and authority under laws and by its
Articles of Incorporation and Bylaws to enter into this Shareholder Servicing
Agreement and to perform the services contemplated by this Agreement.
12. Entire Agreement.
This Agreement and the Exhibits annexed hereto constitutes the entire and
complete agreement between the parties hereto relating to the subject matter
hereof, supersedes and merges all prior discussions between the parties hereto,
and may not be modified or amended orally.
IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be
duly executed on the day and year first above written.
UNITED HIGH INCOME FUND II, INC.
By:_________________________________
Sharon K. Pappas, Vice President
<PAGE>
ATTEST:
By:____________________________
Sheryl Strauss, Assistant Secretary
WADDELL & REED SERVICES COMPANY
By:_________________________________
Robert L. Hechler, President
ATTEST:
By:___________________________
Sharon K. Pappas, Secretary
<PAGE>
EXHIBIT A
A. DUTIES IN SHARE TRANSFERS AND REGISTRATION
1. The Agent in carrying out its duties shall follow general commercial
practices and the Rules of the Stock Transfer Association, Inc. except as they
may conflict or be inconsistent with the specific provisions of the Company's
Articles of Incorporation and Bylaws, prospectus, applicable Federal and state
laws and regulations and this Agreement.
2. The Agent shall not require that the signature of the appropriate person
be guaranteed, witnessed or verified in order to effect a redemption, transfer,
exchange or change of address except as may from time to time be directed by the
Company as set forth in an officers' instruction. In the event a signature
guarantee is required by the Company, the Agent shall not inquire as to the
genuineness of the guarantee.
3. The Agent shall not replace a lost, stolen or misplaced stock
certificate without requiring and being furnished with an open penalty surety
bond protecting the Company and the Agent against loss.
B. The practices, procedures and requirements specified in A above may be
modified, altered, varied or supplemented as from time to time may be mutually
agreed upon by the Company and the Agent and evidenced on behalf of the Company
by an officers' instruction. Any such change shall not be deemed to be an
amendment to the Agreement within the meaning of Paragraph 8 of the Agreement.
<PAGE>
EXHIBIT B
COMPENSATION
Class A Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class Y Shares
An amount payable on the first day of each month equal to 1/12 of .15 of 1% of
the average daily net assets of the Class for the preceding month.
<PAGE>
EXHIBIT C
<TABLE>
<CAPTION>
Bond or
Name of Bond Policy No. Insurer
<S> <C> <C>
Investment Company 87015198B ICI
Blanket Bond Form Mutual
Insurance
Company
Fidelity $20,400,000
Audit Expense 50,000
On Premises 20,400,000
In Transit 20,400,000
Forgery or Alteration 20,400,000
Securities 20,400,000
Counterfeit Currency 20,400,000
Uncollectible Items of
Deposit 25,000
Phone-Initiated Transactions 500,000
Total Limit 20,400,000
Directors and Officers/ 87015198D ICI
Errors and Omissions Liability Mutual
Insurance Form Insurance
Total Limit $ 5,000,000 Company
Blanket Lost Instrument Bond (Mail Loss) 30S100639551 Aetna Life & Casualty
Blanket Undertaking Lost Instrument
Waiver of Probate 42SUN339806 Hartford Casualty Insurance
</TABLE>
INDEPENDENT AUDITORS' CONSENT
United High Income Fund II, Inc.:
We consent to the use in Post-Effective Amendment No. 21 to Registration
Statement No. 33-5648 of our report dated November 6, 1998 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectuses, which also are a part of such Registration
Statement.
Deloitte & Touche LLP
Kansas City, Missouri
November 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000793300
<NAME> UNITED HIGH INCOME FUND II, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 422,863
<INVESTMENTS-AT-VALUE> 411,911
<RECEIVABLES> 8,086
<ASSETS-OTHER> 15
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 420,012
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,667
<TOTAL-LIABILITIES> 1,667
<SENIOR-EQUITY> 101,484
<PAID-IN-CAPITAL-COMMON> 364,293
<SHARES-COMMON-STOCK> 101,484
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (36,480)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10,952)
<NET-ASSETS> 418,345
<DIVIDEND-INCOME> 1,245
<INTEREST-INCOME> 37,799
<OTHER-INCOME> 0
<EXPENSES-NET> (4,073)
<NET-INVESTMENT-INCOME> 34,971
<REALIZED-GAINS-CURRENT> 4,820
<APPREC-INCREASE-CURRENT> (34,757)
<NET-CHANGE-FROM-OPS> 5,034
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (34,971)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,207
<NUMBER-OF-SHARES-REDEEMED> (16,220)
<SHARES-REINVESTED> 7,166
<NET-CHANGE-IN-ASSETS> 9,788
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,303
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,073
<AVERAGE-NET-ASSETS> 423,467
<PER-SHARE-NAV-BEGIN> 4.42
<PER-SHARE-NII> .37
<PER-SHARE-GAIN-APPREC> (.30)
<PER-SHARE-DIVIDEND> (.37)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.12
<EXPENSE-RATIO> .96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
