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WADDELL & REED ADVISORS HIGH INCOME FUND II, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
June 30, 2000
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus ("Prospectus")
for Waddell & Reed Advisors High Income Fund II, Inc. (the "Fund"), formerly,
United High Income Fund II, Inc., dated June 30, 2000, which may be obtained
from the Fund or its underwriter, Waddell & Reed, Inc., at the address or
telephone number shown above.
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TABLE OF CONTENTS
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Performance Information................................................ 2
Investment Strategies, Policies and Practices.......................... 5
Investment Management and Other Services............................... 39
Purchase, Redemption and Pricing of Shares............................. 44
Directors and Officers................................................. 61
Payments to Shareholders............................................... 68
Taxes ................................................................. 69
Portfolio Transactions and Brokerage................................... 73
Other Information...................................................... 75
Appendix A............................................................. 77
Financial Statements .................................................. 84
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Waddell & Reed Advisors 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:
P(1 + T) to the power of n = 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
March 31, 2000, which is the most recent balance sheet included in this SAI, for
the periods shown were as follows:
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<CAPTION>
With Without
Sales Load Sales Load
Deducted Deducted
<S> <C> <C>
One year period from April 1, 1999 to
March 31, 2000: -6.73% -1.04%
Five-year period from April 1, 1995 to
March 31, 2000: 6.67% 7.94%
Ten-year period from Aprilr 1, 1990 to
March 31, 2000: 9.36% 10.01%
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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 cumulative total return quotation for Class B shares with the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was -4.52%.
The cumulative total return quotation for Class B shares without the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was 0.31%.
The cumulative total return quotation for Class C shares with the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was -0.69%.
The cumulative total return quotation for Class C shares without the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was 0.28%.
The average annual total return quotation for Class Y shares as of
March 31, 2000, which is the most recent balance sheet included in this SAI, for
the periods shown were as follows:
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Period from April 1, 1999 to
March 31, 2000: -0.75%
Period from February 27, 1996* to
March 31, 2000: 6.41%
*Date of inception.
</TABLE>
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.
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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
Yield refers to the income generated by an investment in the Fund over
a given period of time. 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:
Yield = 2((((a - b)/cd)+1) to the power of 6 -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 March 31, 2000, the date of the most
recent balance sheet included in this SAI, is 8.75%. The yield for Class B
shares of the Fund computed according to the formula for the 30-day period ended
on March 31, 2000, the date of the most recent balance sheet included in this
SAI, is 8.60%. The yield for Class C shares of the Fund computed according to
the formula for the 30-day period ended on March 31, 2000, the date of the most
recent balance sheet included in this SAI, is 8.21%. The yield for Class Y
shares of the Fund computed according to the formula for the 30-day period ended
on March 31, 2000, the date of the most recent balance sheet included in this
SAI, is 9.68%.
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 AND OTHER INFORMATION
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
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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. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
related, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of sales charges, fee waivers and/or expense
reimbursements.
Performance information for the Fund may be accompanied by information
about market conditions and other factors that affected the Fund's performance
for the period(s) shown.
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, 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 goals. 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 goals. See "Investment
Restrictions and Limitations" for a listing of the fundamental and
non-fundamental (e.g., operating) investment restrictions and policies of the
Fund.
SECURITIES - GENERAL
The Fund may invest in securities including common stock, preferred
stock, debt securities and convertible securities. Although common stocks and
other equity securities have a history of long-term growth in value, their
prices tend to fluctuate in the short term, particularly those of smaller
companies. The Fund may invest in preferred stock rated in any rating category
of the established rating services or, if unrated, judged by WRIMCO to be of
equivalent quality. Debt securities have varying
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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 securities rise. Similarly, long-term bonds are
generally more sensitive to interest rate changes than short-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
debt securities, WRIMCO's research and credit analysis are an especially
important part of managing securities of this type held by the Fund. WRIMCO
continuously monitors the issuers of lower-rated debt securities in the Fund's
portfolio in an attempt to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments. The Fund may
choose, at its expense or in conjunction with others, to pursue litigation or
otherwise exercise its rights as a security holder to seek to protect the
interests of security holders if it determines this to be in the best interest
of the Fund's shareholders.
The Fund may invest in debt securities rated in any rating category of
the established rating services, including securities rated in the lowest
category (securities rated D by Standard & Poor's ("S&P") and C by Moody's
Investors Service, Inc. ("MIS")). Debt securities rated D by S&P or C by MIS are
in payment default or are regarded as having extremely poor prospects of ever
attaining any real investment standing. Debt securities rated at least BBB by
S&P or Baa by MIS are considered to be investment grade debt securities.
Securities rated BBB or Baa may have speculative characteristics. In addition,
the Fund will treat unrated securities judged by WRIMCO to be of equivalent
quality to a rated security as having that rating.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from time
to
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time, and the Fund may retain a portfolio security whose rating has been
changed.
The Fund may purchase debt securities whose principal amount at
maturity is dependent upon the performance of a specified equity security. The
issuer of such debt securities, typically an investment banking firm, is
unaffiliated with the issuer of the equity security to whose performance the
debt security is linked. Equity-linked debt securities differ from ordinary debt
securities in that the principal amount received at maturity is not fixed, but
is based on the price of the linked equity security at the time the debt
security matures. The performance of equity-linked debt securities depends
primarily on the performance of the linked equity security and may also be
influenced by interest rate changes. In addition, although the debt securities
are typically adjusted for diluting events such as stock splits, stock dividends
and certain other events affecting the market value of the linked equity
security, the debt securities are not adjusted for subsequent issuances of the
linked equity security for cash. Such an issuance could adversely affect the
price of the debt security. In addition to the equity risk relating to the
linked equity security, such debt securities are also subject to credit risk
with regard to the issuer of the debt security. In general, however, such debt
securities are less volatile than the equity securities to which they are
linked.
The Fund may invest in convertible securities. A convertible security
is a bond, debenture, note, preferred stock or other security that may be
converted into or exchanged for a prescribed amount of common stock of the same
or different issuer within a particular period of time at a specified price or
formula. Convertible securities generally have higher yields than common stocks
of the same or similar issuers, but lower yields than comparable nonconvertible
securities, are less subject to fluctuation in 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. A convertible security may be subject to redemption at the option of the
issuer at a price established in the security's offering document. If a
convertible security held by the Fund is called for redemption, the Fund will be
required to convert it into the underlying stock, sell it to a third party or
permit the issuer to redeem the security. Convertible securities are typically
issued by smaller capitalized companies whose stock prices may be volatile.
Thus, any of these actions could have an adverse
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effect on the Fund's ability to achieve its investment objectives.
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.
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
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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 10% 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 (also known as 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 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
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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 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
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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 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"
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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 guaranteed by the U.S. Government or considered to be of the highest
quality. Conversely, principal-only ("PO") classes are entitled to receive all
or a portion of the principal payments, but none of the interest, from the
underlying mortgage assets. PO classes are purchased at substantial discounts
from par, and the yield to investors will be reduced if principal payments are
slower than expected. IOs, POs and other CMOs involve special risks, and
evaluating them requires special knowledge.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans or the financial
institution providing the credit enhancement.
SPECIAL CHARACTERISTICS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced 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
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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 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.
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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
The Fund may invest in the securities of foreign issuers, including
depositary receipts. In general, depositary receipts are securities convertible
into and evidencing ownership of securities of foreign corporate issuers,
although depositary receipts may not necessarily be denominated in the same
currency as the securities into which they may be converted. American depositary
receipts, in registered form, are dollar-denominated receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. International depositary receipts and European depositary receipts,
in bearer form, are foreign receipts evidencing a similar arrangement and are
designed for use by non-U.S. investors and traders in non-U.S. markets. Global
depositary receipts are designed to facilitate the trading of securities of
foreign issuers by U.S. and non-U.S. investors and traders.
WRIMCO believes that there are investment opportunities as well as
risks in investing in foreign securities. Individual foreign economies may
differ favorably or unfavorably from the U.S. economy or each other in such
matters as gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Individual foreign
companies may also differ favorably or unfavorably from domestic companies in
the same industry. Foreign currencies may be
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stronger or weaker than the U.S. dollar or than each other. Thus, the value of
securities denominated in or indexed to foreign currencies, and of dividends
and interest from such securities, can change significantly when foreign
currencies strengthen or weaken relative to the U.S. dollar. WRIMCO believes
that the Fund's 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. 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.
There is no assurance that WRIMCO will be able to anticipate these potential
events or counter their effects.
The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is likely
to experience long-term gross domestic product growth above that expected to
occur in the United States, the United Kingdom, France, Germany, Italy, Japan
and Canada. Developing countries may have relatively unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities.
Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The Fund could also be adversely affected by the conversion of certain
European currencies into the euro. This conversion, which is underway, is
scheduled to be completed in 2002. However, problems with the conversion process
and delays could increase volatility in world capital markets and affect
European capital markets in particular.
The Fund may purchase and sell foreign currency and invest in foreign
currency deposits, and may enter into forward currency contracts. The Fund may
incur a transaction charge in connection with the exchange of currency. Currency
conversion involves dealer spreads and other costs, although commissions are not
usually charged. See "Options, Futures and Other Strategies - Forward Currency
Contracts."
RESTRICTED SECURITIES
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, or in a registered
public offering. Where registration is required, the Fund may be obligated to
pay all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities
that are traded in foreign markets are often subject to restrictions that
prohibit resale to U.S. persons or entities or permit sales only to foreign
broker-dealers who agree to limit their resale to such persons or entities. The
buyer of such securities must enter into an agreement that, usually for a
limited period of time, it will resell such securities subject to such
restrictions. Restricted securities in which the Fund seeks to invest need not
be listed or admitted to trading on a foreign or domestic exchange and may be
less liquid than listed securities. Certain restricted securities, e.g., Rule
144A securities, may be determined to be liquid in accordance with guidelines
adopted by the Board of Directors. See "Illiquid Investments".
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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.
Under the Fund's current securities lending procedures, the Fund may lend
securities only to broker-dealers and financial institutions deemed creditworthy
by WRIMCO.
Any securities loan that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). At the
time of each loan, the Fund must receive collateral equal to no less than 100%
of the market value of the securities loaned. 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. 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
<PAGE>
pay reasonable finder's, administrative and custodian fees in connection with
loans of securities.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not, however, cover the present rules, which may be changed without shareholder
vote, as to: (i) whom securities may be loaned, (ii) the investment of cash
collateral, or (iii) voting rights.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned increases, as well as
risks of delay in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially.
REPURCHASE AGREEMENTS
The Fund may purchase securities subject to repurchase agreements. The
Fund 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 will 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 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
<PAGE>
interest earned thereon. Repurchase agreements are entered into only with those
entities approved by WRIMCO.
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 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
Illiquid investments are investments that cannot be sold or otherwise
disposed of in the ordinary course of business within
<PAGE>
seven days at approximately the prices at which they are valued. Investments
currently considered to be illiquid include:
(i) repurchase agreements not terminable within seven days;
(ii) restricted securities not determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors;
(iii) 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, floor and collar 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.
If through a change in values, net assets, or other circumstances, the
Fund were in a position where more than 10% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
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 the credit risks
associated with the issuer of the security and
<PAGE>
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.
OPTIONS, FUTURES AND OTHER STRATEGIES
GENERAL. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, forward currency
contracts, swaps, caps, floors, collars, 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.
<PAGE>
Generally, the Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, the Fund will only purchase or sell
a particular Financial Instrument if the Fund is authorized to invest in the
type of asset by which the return on, or value of, the Financial Instrument is
primarily measured. Since the Fund is authorized to invest in foreign
securities, it may purchase and sell foreign currency derivatives.
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential declines in the value of one or
more investments held in the Fund's portfolio. Thus, in a short hedge the Fund
takes a position in a Financial Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that the Fund intends to acquire.
Thus, in a long hedge the Fund takes a position in a Financial Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Financial Instruments on indices, in
contrast, generally are used to attempt to hedge against price movements in
market sectors in which the Fund has invested or expects to invest. Financial
Instruments on debt securities may be used to hedge either individual securities
or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several exchanges upon
which they are traded and the Commodity Futures Trading Commission (the "CFTC").
In addition, the Fund's ability to use Financial Instruments 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
<PAGE>
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 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.
(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
<PAGE>
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
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 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
<PAGE>
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 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
<PAGE>
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. 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
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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 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. The Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies or other options,
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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.
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
<PAGE>
plus transaction costs is all that is at risk. In contrast, when the Fund
purchases or sells a futures contract or writes a call or put option thereon,
it is subject to daily variation margin calls that could be substantial in
the event of adverse price movements. If the Fund has insufficient cash to
meet daily variation margin requirements, it might need to sell securities at
a time when such sales are disadvantageous.
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
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less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest rate, currency exchange rate or stock market trends by WRIMCO
may still not result in a successful transaction. WRIMCO may be incorrect in its
expectations as to the extent of various interest rate, currency exchange rate
or stock market movements or the time span within which the movements
take place.
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.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. The Fund
may use options and futures contracts on foreign currencies (including the
euro), as described above, and forward currency contracts, as described below,
to attempt to hedge against movements in the values of the foreign currencies in
which the Fund's securities are denominated or to attempt to enhance income or
yield. Currency hedges can protect against price movements 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 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
<PAGE>
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 euros, it could enter
into a forward currency contract to sell euros in return for U.S. dollars to
hedge against possible declines in the euro's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the euro. This type of hedge,
sometimes referred to as a "proxy hedge," could offer advantages in terms of
cost, yield or efficiency, but generally would not hedge currency exposure as
effectively as a simple hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.
The Fund also may use forward currency contracts to attempt to enhance
income or yield. The Fund could use forward currency 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
<PAGE>
enter into a forward currency contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign currency.
The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When the Fund enters into a forward currency contract, it relies on
the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in an account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the 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.
<PAGE>
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.
SWAPS, CAPS, FLOORS AND COLLARS. The Fund may enter into swaps, caps,
floors and collars 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 on a notional
principal amount, 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
<PAGE>
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, floors and collars, can be
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors. Depending on their structure,
swap agreements may increase or decrease the overall volatility of the Fund's
investments and its share price and yield because, and to the extent, these
agreements affect the Fund's exposure to long- or short-term interest rates (in
the United States or abroad), foreign currency values, mortgage-backed security
values, corporate borrowing rates or other factors such as security prices or
inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to exchange
payments in U.S. dollars for payments in foreign currency, the swap agreement
would tend to decrease the Fund's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options.
The creditworthiness of firms with which the Fund enters into swaps,
caps or floors will be monitored by WRIMCO. If a firm's creditworthiness
declines, the value of the agreement would be likely to decline, potentially
resulting in losses. If a default occurs by the other party to such transaction,
the Fund will have contractual remedies pursuant to the agreements related to
the transaction.
The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap will be accrued on a daily basis and
an amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such 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 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.
BORROWING
The Fund may borrow money, but only from banks and for emergency or
extraordinary purposes. If the Fund does borrow, its share price may be subject
to greater fluctuation until the borrowing is paid off.
<PAGE>
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 goals, 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, floors, collars, 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;
(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,
<PAGE>
forward contracts, swaps, caps, floors, collars 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, floors, collars 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. The Fund may not pledge
its assets in connection with any permitted borrowings;
however, this policy does not prevent the Fund from pledging
its assets in connection with its purchase and sale of futures
contracts, options, forward contracts, swaps, caps, floors,
collars and other financial instruments;
(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; it
can also lend its portfolio securities to the extent allowed,
and in accordance with the requirements, under the 1940 Act
and enter into repurchase agreements;
(xi) Buy real estate nor any nonliquid interest in real estate
investment trusts; however, the Fund may invest in securities
(other than limited partnership interests) issued by companies
engaged in such business, including real estate investment
trusts; or
(xii) Issue senior securities.
THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL AND MAY BE
CHANGED BY THE BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL:
(i) At least 80% of the Fund's total assets normally will be
invested to seek a high level of current income.
(ii) The Fund does not intend to invest more than 10% of its total
assets in non-dividend-paying common stocks.
(iii) The Fund may not purchase a security if, as a result, more
than 10% of its net assets would consist of illiquid
securities.
<PAGE>
(iv) The Fund does not intend to invest more than 5% of its total
assets in the securities of investment companies that do not
redeem their shares.
(v) To the extent that the Fund enters into futures contracts,
options on futures contracts or options on foreign currencies
traded on a CFTC-regulated exchange, in each case other than
for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish
those positions (excluding the amount by which options are
"in-the-money" at the time of purchase) will not exceed 5% of
the liquidation value of 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.
An investment policy or limitation that states a maximum percentage of
the Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year and
dividing it by the monthly average of the market value of such securities during
the year, excluding certain short-term securities. The Fund's turnover rate may
vary greatly from year to year as well as within a particular year and may be
affected by cash requirements for the redemption of its shares.
The Fund's portfolio turnover rate for the fiscal years ended September
30, 1999 and 1998 was 46.17% and 58.85%, respectively.
<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 WRIMCO, or an affiliate of WRIMCO, 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, which is a wholly owned subsidiary of Waddell & Reed
Financial, Inc., a publicly held company. The address of these companies is 6300
Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
Waddell & Reed, Inc. and its predecessors have served as investment
manager to each of the registered investment companies in the Waddell & Reed
Advisors Funds (formerly, the United Group of Mutual Funds) 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 W&R Funds, Inc.
(formerly, Waddell & Reed Funds, Inc.) since its inception in September 1992.
Waddell & Reed, Inc. serves as principal underwriter for the investment
companies in the Waddell & Reed Advisors Funds and W&R Funds, Inc. and acts as
principal underwriter and distributor for variable life insurance and variable
annuity policies for which Target/United Funds, Inc. is the underlying
investment vehicle.
<PAGE>
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, preparation of prospectuses for existing shareholders,
preparation of proxy statements and certain shareholder 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, 1999,
1998 and 1997 were $2,247,697, $2,302,825 and $2,103,768, 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, Class B and
Class C shares, the Fund pays the Agent a monthly fee of $1.3125 for each
shareholder account that was in existence at any time during the prior month,
plus $0.30 for each account on which a dividend or distribution, of cash or
shares, had a record date in that month. For Class Y shares, the Fund pays the
Agent a monthly fee equal to one-twelfth of .15 of 1% of the average daily net
assets of that class for the preceding month. The Fund also pays certain
out-of-pocket expenses of the Agent, including long distance telephone
communications costs; microfilm and storage costs for certain documents; forms,
printing and mailing costs; charges of any sub-agent used by Agent in performing
services under the Shareholder Servicing Agreement; and costs of
<PAGE>
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, 1999, 1998 and 1997 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, 1999,
1998 and 1997 were $1,114,812, $1,812,811 and $1,267,590, respectively. The
amounts retained by WRIMCO for the same periods were $470,096, $768,637 and
$537,529, respectively.
<PAGE>
As described in the Prospectus, Waddell & Reed, Inc. reallows to
selling broker-dealers a portion of the sales charge paid for purchases of Class
A shares. A major portion of the sales charge for Class A shares and the
contingent deferred sales charge ("CDSC") for Class B and Class C shares and for
certain Class A shares may be paid paid to financial advisors and managers of
Waddell & Reed, Inc. and selling broker-dealers. Waddell & Reed, Inc. may
compensate its financial advisors as to purchases for which there is no sales or
deferred sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under the Distribution and Service Plan (the "Plan") for Class A shares
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay
Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed 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, either directly or through others, the distribution
of the Class A shares, the provision of personal services to Class A
shareholders and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its financial
advisors, registered representatives and sales managers ("sales force") and
through other broker-dealers, banks and other appropriate intermediaries. In
distributing shares through its sales force, Waddell & Reed, Inc. will pay
commissions and incentives to the sales force at or about the time of sale and
will incur other expenses including costs for prospectuses, sales literature,
advertisements, sales office maintenance, processing of orders and general
overhead with respect to its efforts to distribute the Fund's shares. The Class
A Plan permits Waddell & Reed, Inc. to receive reimbursement for these Class
A-related distribution activities through the distribution fee, subject to the
limit contained in the Plan. The Class A Plan also permits Waddell & Reed, Inc.
to be reimbursed for amounts it expends in compensating, training and supporting
registered financial advisors, sales managers and/or other appropriate personnel
in providing personal services to Class A shareholders of the Fund and/or
maintaining Class A shareholder accounts; increasing services provided to Class
A shareholders of the Fund by office personnel located at field sales offices;
engaging in other activities useful in providing personal service to Class A
shareholders of the Fund and/or maintenance of Class A shareholder accounts; and
in compensating broker-dealers, and other third parties, who may regularly sell
Class A shares of the Fund, and other third parties, for providing shareholder
services
<PAGE>
and/or maintaining shareholder accounts with respect to Class A shares.
Service fees and distribution fees in the amounts of $896,909 and $89,113,
respectively, were paid (or accrued) by the Fund under the Class A Plan for the
fiscal year ended September 30, 1999.
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 Waddell & Reed Advisors Funds or W&R Funds,
Inc., Waddell & Reed, Inc. typically determines the amount attributable to the
Fund's expenses under the Plan on the basis of a combination of the respective
classes' relative net assets and number of shareholder accounts.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for, either directly or through others,
providing personal services to shareholders of that class and/or maintaining
shareholder accounts for that class and a distribution fee of up to 0.75% of the
average daily net assets of the class to compensate Waddell & Reed, Inc. for,
either directly or through others, distributing the shares of that class. The
Class B Plan and the Class C Plan each permit Waddell & Reed, Inc. to receive
compensation, through the distribution and service fee, respectively, for its
distribution activities for that class, which are similar to the distribution
activities described with respect to the Class A Plan, and for its activities in
providing personal services to shareholders of that class and/or maintaining
shareholder accounts of that class, which are similar to the corresponding
activities for which it is entitled to reimbursement under the Class A Plan.
The only Directors or interested persons, as defined in the 1940 Act,
of the Fund who have a direct or indirect financial interest in the operation of
a Plan are the officers and Directors who are also officers of either Waddell &
Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. Each Plan
is anticipated to benefit the Fund and its shareholders of the affected class
through Waddell & Reed, Inc.'s activities not only to distribute the shares of
the affected class but also to provide personal services to shareholders of that
class and thereby promote the maintenance of their accounts with the Fund. The
Fund anticipates that shareholders of a particular class may benefit to the
extent that Waddell & Reed's activities are successful in increasing the assets
of the Fund, through increased sales or reduced redemptions, or a combination of
these, and reducing a shareholder's share of Fund and class expenses. Increased
Fund assets may also provide greater resources with which to pursue the goals of
the Fund. Further, continuing sales of shares may also reduce the likelihood
that it
<PAGE>
will be necessary to liquidate portfolio securities, in amounts or at
times that may be disadvantageous to the Fund, to meet redemption demands. In
addition, the Fund anticipates that the revenues from the Plan will provide
Waddell & Reed, Inc. with greater resources to make the financial commitments
necessary to continue to improve the quality and level of services to the Fund
and the shareholders of the affected class. Each Plan was approved by the Fund's
Board of Directors, including the Directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operations
of the Plan or any agreement referred to in the Plan (hereafter, the "Plan
Directors"). The Class A Plan was also approved by the affected shareholders of
the Fund.
Among other things, each Plan provides that (i) Waddell & Reed, Inc.
will provide to the Directors of the Fund at least quarterly, and the Directors
will review, a report of amounts expended under the Plan and the purposes for
which such expenditures were made, (ii) the Plan will continue in effect only so
long as it is approved at least annually, and any material amendments thereto
will be effective only if approved, by the Directors including the Plan
Directors acting in person at a meeting called for that purpose, (iii) amounts
to be paid by the Fund under the Plan may not be materially increased without
the vote of the holders of a majority of the outstanding shares of the affected
class of the Fund, and (iv) while the Plan remains in effect, the selection and
nomination of the Directors who are Plan Directors will be committed to the
discretion of the Plan Directors.
CUSTODIAL AND AUDITING SERVICES
The Fund's Custodian is UMB Bank, n.a., 928 Grand Boulevard, Kansas
City, Missouri. In general, the Custodian is responsible for holding the Fund's
cash and securities. Deloitte & Touche LLP, 1010 Grand Boulevard, Kansas City,
Missouri, the Fund's independent auditors, audits the Fund's financial
statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DETERMINATION OF OFFERING PRICE
The net asset value ("NAV") 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 NAV 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 March 31,
2000, which is e most recent balance sheet included in this SAI, was as follows:
<PAGE>
<TABLE>
<S> <C>
NAV per Class A share (Class A
net assets divided by Class A shares
outstanding)................................ $3.75
Add: selling commission (5.75% of offering
price)...................................... .23
-----
Maximum offering price per Class A share
(Class A NAV divided by 94.25%)............. $3.98
=====
</TABLE>
The offering price of a Class A share is its NAV next calculated
following acceptance of a purchase order plus the sales charge. The offering
price of a Class B, Class C or Class Y share is its NAV next calculated
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. or an authorized third party
receives and accepts your order at its principal business office. 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 NAV 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 futures
contract 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 NAV 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
<PAGE>
quotations are not readily available, securities and other assets are valued
at fair value as determined in good faith under procedures established by, and
under the general supervision and responsibility of, the Board of Directors.
Options and futures contracts purchased and held by the Fund are valued
at the last sales price 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 NAV 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
<PAGE>
conditions differs from the prevailing exchange rate in an amount generally
less than one-tenth of one percent due to the costs of converting from one
currency to another.
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, Class B and Class C shares, initial investments must be at
least $500 with the exceptions described in this paragraph. A $100 minimum
initial investment pertains to certain exchanges of shares from another fund in
the Waddell & Reed Advisors Funds or W&R Funds, Inc. 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 Waddell & Reed Advisors Funds and W&R Funds, Inc."
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 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 Waddell & Reed Advisors Funds Revocable Trust Form);
<PAGE>
2. Purchases by that individual's spouse purchasing for his or her own
account (includes Waddell & Reed Advisors 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 Transfers to Minors Act ("UTMA") or Uniform Gifts to Minors
Act ("UGMA") 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).
For the foregoing categories, an individual's domestic partner is
treated as his or her spouse.
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
<PAGE>
beneficiaries; upon X's death, the account is transferred to R
as trustee; a purchase in the account may not be grouped with
R's individual account. If X's spouse, Y, was successor trustee,
this purchase could be grouped with Y's individual account.
All purchases of Class A shares made under a "qualified" plan --
either an employee benefit plan of an incorporated business or, for an
unincorporated business, a Keogh 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 will be grouped. A "qualified" plan is established
pursuant to Section 401 of the Code. All qualified plans of any one
employer or affiliated employers will also be grouped. An affiliate is
defined as an employer that directly, or indirectly, controls or is
controlled by or is under control with another employer. All qualified
employee benefit plans of an employer who is a franchisor and those of
its franchisee(s) may also be grouped.
Example A: 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.
Example B: 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 C: 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 simplified employee
pension plan ("SEP"), payroll deduction plan or similar arrangement adopted by
an employer or affiliated employers (as defined above) may be grouped provided
that the employer elects to have all such purchases grouped at the time the plan
is set up. If the employer does not make such an election, the purchases made by
individual employees under the plan may be grouped with the other accounts of
the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
ONE-TIME PURCHASES
A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible
<PAGE>
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 NAV 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 NAV 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(s) with which the purchase may be combined.
LETTER OF INTENT
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under an Letter of Intent ("LOI"). By signing an LOI
form, which is available from Waddell & Reed, Inc., the purchaser indicates an
intention to invest, over a 13-month period, a dollar amount which is sufficient
to qualify for a reduced sales charge. The 13-month period begins on the date
the first purchase made under the Letter is accepted by Waddell & Reed, Inc.
Each purchase made from time to time under the LOI 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 LOI will be the sales charge in effect on the beginning
date of the 13-month period.
<PAGE>
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under an LOI, 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 an LOI 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
NAV as of the date the LOI 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 Waddell & Reed Advisors Funds which charges the
same sales load as the Fund, with a NAV as of the date of acceptance
of the LOI 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 LOI 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 LOI only if the
contractual plan has been completed.
The minimum initial investment under an LOI is 5% of the dollar amount
which must be invested under the Letter. An amount equal to 5% of the purchase
required under the LOI will be held "in escrow." If a purchaser does not, during
the period covered by the LOI, invest the amount required to qualify for the
reduced sales charge under the terms of the LOI, he or she will be responsible
for payment of the sales charge applicable to the amount actually invested. The
additional sales charge owed on purchases of Class A shares made under an LOI
which is not completed will be collected by redeeming part of the shares
purchased under the LOI 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 LOI, the lower sales charge will apply.
<PAGE>
An LOI does not bind the purchaser to buy, or Waddell & Reed, Inc. to
sell, the shares covered by the LOI.
With respect to LOIs for $2,000,000 or purchases otherwise qualifying
for no sales charge under the terms of the LOI, the initial investment must be
at least $200,000.
The value of any shares redeemed during the 13-month period which were
acquired under the LOI will be deducted in computing the aggregate purchases
under the LOI.
Letters of Intent 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 WADDELL & REED ADVISORS FUNDS AND W&R FUNDS, INC.
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 Waddell & Reed
Advisors Funds and the W&R Funds, Inc. subject to a sales charge. A purchase of
Class A shares, or Class A shares held, in any of the funds in the Waddell &
Reed Advisors Funds and/or the W&R Funds, Inc. 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 Waddell & Reed Advisors Cash Management,
Inc. (formerly, United Cash Management, Inc.) that were acquired by exchange of
another Waddell & Reed Advisors Fund or W&R Funds, Inc. 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.
NET ASSET VALUE PURCHASES OF CLASS A SHARES
Class A shares of the Fund may be purchased at NAV by the Directors and
officers of the Fund or of any affiliated entity of Waddell & Reed, Inc.,
employees of Waddell & Reed, Inc. or of any of its affiliates, financial
advisors of Waddell & Reed, Inc. and the spouse, children, parents, children's
spouses and spouse's parents of each such Director, officer, employee and
financial advisor. "Child" includes stepchild; "parent" includes stepparent.
Purchases of Class A shares in an IRA sponsored by Waddell & Reed, Inc.
established for any of these eligible purchasers may also be at NAV. Purchases
of Class A shares in any tax-qualified retirement plan under which the eligible
purchaser is the sole participant may also be made at NAV. Trusts under which
the grantor and the trustee or a co-trustee are each an eligible purchaser are
also eligible for NAV purchases of Class A shares. "Employees" include retired
employees. A "retired employee" is an individual separated from service from
Waddell & Reed, Inc., or from an affiliated company, with a vested interest in
any Employee Benefit Plan sponsored by Waddell & Reed, Inc. or any of its
affiliated companies.
<PAGE>
"Employees" also include individuals who, on November 6,
1998, were employees (including retired employees) of a company that on that
date was an affiliate of Waddell & Reed, Inc. "Financial advisors" include
retired financial advisors. A "retired financial advisor" is any financial
advisor who was, at the time of separation from service from Waddell & Reed,
Inc., a Senior Financial Advisor. A custodian under the UGMA or UTMA purchasing
for the child or grandchild of any employee or financial advisor may purchase
Class A shares at NAV whether or not the custodian himself is an eligible
purchaser.
Until March 31, 2001, Class A shares may also be purchased at NAV by
persons who are clients of Legend Equities Corporation ("Legend") if the
purchase is made with the proceeds of the redemption of shares of a mutual fund
which is not within the Waddell & Reed Advisors Funds or W&R Funds, Inc. and the
purchase is made within 60 days of such redemption.
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, and the shares are held in individual plan participant
accounts on the Fund's records, may be made at NAV.
Shares may also be issued at NAV in a merger, acquisition or exchange
offer made pursuant to a plan of reorganization to which the Fund is a party.
REASONS FOR DIFFERENCES IN PUBLIC OFFERING PRICE OF CLASS A SHARES
As described herein and in the Prospectus, there are a number of
instances in which the Fund's Class A shares are sold or issued on a basis
other than at the maximum public offering price, that is, the NAV plus the
highest sales charge. Some of these instances 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 an LOI or Rights 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 is 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.
In general, the reasons for the other instances in which there are
reduced or eliminated sales charges for Class A shares are as follows.
Exchanges at NAV are permitted because a sales
<PAGE>
charge has already been paid on the shares exchanged. Sales of Class A shares
without a 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 responsibility and
interest in the Waddell & Reed Advisors Funds 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.
Reduced or eliminated sales charges may also be used for certain short-term
promotional activities by Waddell & Reed, Inc. 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
NAV per share of all shares sold or issued.
FLEXIBLE WITHDRAWAL SERVICE FOR CLASS A, CLASS B AND CLASS C SHAREHOLDERS
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service (the "Service") regular monthly, quarterly, semiannual or
annual payments by redeeming on an ongoing basis Class A, Class B or Class C
shares that you own of the Fund or of any of the funds in the Waddell & Reed
Advisors Funds or W&R Funds, Inc. It would be a disadvantage to an investor to
make additional purchases of Class A shares while the Service is in effect
because it would result in duplication of sales charges. Class B and Class C
shares and certain Class A shares to which the CDSC otherwise applies that are
redeemed under the Service are not subject to a CDSC. Applicable forms to start
the Service are available through Waddell & Reed Services Company.
The maximum amount of the withdrawal for monthly, quarterly, semiannual
and annual withdrawals is 2%, 6%, 12% and 24% respectively of the value of your
account at the time the Service is established. The withdrawal proceeds are not
subject to the deferred sales charge, but only within these percentage
limitations. The minimum withdrawal is $50. The Service, and this exclusion from
the deferred sales charge, does not apply to a one-time withdrawal.
To qualify for the Service, you must have invested at least $10,000 in
Class A, Class B or Class C shares which you still own of any of the funds in
the Waddell & Reed Advisors Funds or W&R Funds, Inc.; or, you must own Class A,
Class B or Class C shares having a value of at least $10,000. The value for this
purpose is the value at the current offering price.
You can choose to have your shares redeemed to receive:
<PAGE>
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 the 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 of a class you have made
available for the Service are paid in additional shares of that class. All
payments are made by redeeming 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 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, an income or return on your investment.
You may, at any time, change the manner in which you have chosen to
have shares redeemed to any of the other choices originally available to you.
You may, at any time, redeem part or all of the shares in your account; if you
redeem all of the shares, the Service is terminated. The Fund can also terminate
the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed
will be sent to you to assist you in completing your Federal income tax return.
EXCHANGES FOR SHARES OF OTHER FUNDS IN THE WADDELL & REED ADVISORS FUNDS AND W&R
FUNDS, INC.
CLASS A SHARE EXCHANGES
Once a sales charge has been paid on Class A shares of a fund in the
Waddell & Reed Advisors Funds or the W&R Funds, Inc., these shares and any
shares added to them from dividends or
<PAGE>
distributions paid in shares may be freely exchanged for Class A shares of
another fund in the Waddell & Reed Advisors Funds or the W&R Funds, Inc. The
shares you exchange must be worth at least $100 or you must already own shares
of the fund in the Waddell & Reed Advisors Funds or the W&R Funds, Inc. into
which you want to exchange.
You may exchange Class A shares you own in another fund in the Waddell
& Reed Advisors Funds or the W&R Funds, Inc. 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.
Shares of Waddell & Reed Advisors Municipal Bond Fund, Inc., Waddell &
Reed Advisors Government Securities Fund, Inc., Waddell & Reed Advisors
Municipal High Income Fund, Inc. (formerly, United Municipal Bond Fund, Inc.,
United Government Securities Fund, Inc., United Municipal High Income Fund,
Inc., respectively), W&R Funds, Inc. Municipal Bond Fund and Limited-Term Bond
Fund (formerly, Waddell & Red Funds, Inc.) 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 maximum sales charge was originally paid (currently 5.75%),
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 Waddell & Reed Advisors Cash
Management, Inc. automatically exchanged each month into Class A shares of the
Fund or any other fund in the Waddell & Reed Advisors Funds, provided you
already own Class A shares of the fund. The shares of Waddell & Reed Advisors
Cash Management, Inc. which you designate for automatic exchange must be worth
at least $100, which may be allocated among the Class A shares of different
funds in the Waddell & Reed Advisors Funds 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.
<PAGE>
CLASS B SHARE EXCHANGES
You may exchange Class B shares of the Fund for Class B shares of other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc. without
charge.
The redemption of the Fund's Class B shares as part of an exchange is
not subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class B shares of Waddell &
Reed Advisors Cash Management, Inc. automatically exchanged each month into
Class B shares of the Fund or any other fund in the Waddell & Reed Advisors
Funds, provided you already own Class B shares of a fund. The shares of Waddell
& Reed Advisors Cash Management, Inc. which you designate for automatic exchange
must be worth at least $100, which may be allocated among different Funds so
long as each Fund receives a value of at least $25. Minimum initial investment
and minimum balance requirements apply to such automatic exchange service.
CLASS C SHARE EXCHANGES
You may exchange Class C shares of the Fund for Class C shares of other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc. without
charge.
The redemption of the Fund's Class C shares as part of an exchange is
not subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class C shares of Waddell &
Reed Advisors Cash Management, Inc. automatically exchanged each month into
Class C shares of the Fund or any other fund in the Waddell & Reed Advisors
Funds, provided you already own Class C shares of a fund. The shares of Waddell
& Reed Advisors Cash Management, Inc. which you designate for automatic exchange
must be worth at least $100, which may be allocated among different Funds so
long as each Fund receives a value of at least $25. Minimum initial investment
and minimum balance requirements apply to such automatic exchange service.
CLASS Y SHARE EXCHANGES
Class Y shares of the Fund may be exchanged for Class Y shares of any
other fund in the Waddell & Reed Advisors Funds or for Class A shares of Waddell
& Reed Advisors Cash Management, Inc.
<PAGE>
GENERAL EXCHANGE INFORMATION
When you exchange shares, the total shares you receive will have the
same aggregate NAV 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 Waddell & Reed Advisors Funds and/or W&R Funds, Inc., can, in most
instances, be eliminated or modified at any time and any such exchange may not
be accepted.
RETIREMENT PLANS
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 Waddell & Reed Advisors Funds or W&R Funds, Inc.).
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, a married investor who is not an active participant, files
jointly with his or her spouse and whose combined adjusted gross income does not
exceed $150,000, is not affected by the spouse's active participant status.
An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be subject
to Federal income tax until distributed from the IRA. A direct rollover
generally applies to any distribution from an employer's plan (including a
custodial account under Section 403(b)(7) of the Code, but not an IRA) other
than certain periodic payments, required minimum distributions and other
specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
<PAGE>
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 to a Roth IRA (or to any combination of Roth and
traditional IRAs). 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 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 $25,500, whichever is less, per year for
each employee.
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLANS). An employer
with 100 or fewer employees who does not sponsor another active retirement plan
may sponsor a SIMPLE plan 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
<PAGE>
compensation, whether or not they defer salary to their SIMPLE plans. SIMPLE
plans involve fewer administrative requirements, generally, than 401(k) or
other qualified plans.
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.
PENSION AND PROFIT-SHARING PLANS, INCLUDING 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 from receipt of request, 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 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 NAV. There would be brokerage costs to the redeeming
shareholder in selling
<PAGE>
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 NAV
during any 90-day period for any one shareholder.
REINVESTMENT PRIVILEGE
The Fund offers a one-time reinvestment privilege that allows you to
reinvest without charge all or part of any amount of Class A shares you redeem
from the Fund by sending the Fund the amount you wish to reinvest. The amount
you return will be reinvested in Class A shares at the NAV next calculated after
the Fund receives the returned amount. Your written request to reinvest and the
amount to be reinvested must be received within forty-five days after your
redemption request was received, and the Fund must be offering Class A shares at
the time your reinvestment request is received. You can do this only once as to
Class A shares of the Fund. You do not use up this privilege by redeeming Class
A shares to invest the proceeds at NAV in a Keogh plan or an IRA.
There is also a reinvestment privilege for Class B and Class C shares
and, where applicable, certain Class A shares under which you may reinvest all
or part of any amount of the shares you redeemed and have the corresponding
amount of the deferred sales charge, if any, which you paid restored to your
account by adding the amount of that charge to the amount you are reinvesting in
shares of the same class. If Fund shares of that class are then being offered,
you can put all or part of your redemption payment back into such shares at the
NAV next calculated after you have returned the amount. Your written request to
do this must be received within forty-five days after your redemption request
was received. You can do this only once as to Class B, Class C and Class A
shares of the Fund. For purposes of determining future deferred sales charges,
the reinvestment will be treated as a new investment. You do not use up this
privilege by redeeming shares to invest the proceeds at NAV 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 NAV 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.
<PAGE>
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 the past five years of each Director
and officer is stated below. Each of the persons listed through and including
Mr. Vogel is a member of the Fund's Board of Directors. The other persons are
officers of the Fund but are 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 Waddell & Reed Advisors Funds, W&R 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 and Director of Waddell & Reed Financial, Inc.; President, Chairman of
the Board of Directors, Director and Chief Executive Officer of Waddell & Reed
Financial Services, Inc.; Chairman of the Board of Directors and Director of
WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of each of the funds in the Fund Complex; formerly, Chairman of the
Board of Directors of Waddell & Reed Asset Management Company, a former
affiliate of Waddell & Reed Financial, Inc. Date of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President of 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 of Garney
Companies, Inc., a specialty utility contractor. Date of birth:
January 9, 1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e
Eccles Foundation; Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal; formerly, President
of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, Partner, Levy and Craig, P.C., a law
firm. Date of birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of Oklahoma;
Adjunct Professor of Law at the University of Oklahoma College of Law; Managing
Member, Harroz Investments, L.L.C.; formerly, Vice President for Executive
Affairs of the University of Oklahoma; formerly, 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; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a law
firm; formerly, President of Gilliland & Hayes, P.A.; formerly, Director of
Central Properties, Inc. 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.; Executive 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.; Director and
Treasurer of Waddell & Reed Services Company; Chairman of the Board of
Directors, Chief Executive Officer, President and Director of Fiduciary Trust
Company of New Hampshire, an affiliate of Waddell & Reed, Inc.; Director of
Legend Group Holdings, LLC, Legend Advisory Corporation, Legend Equities
Corporation, Advisory Services Corporation, The Legend Group, Inc. and LEC
Insurance Agency, Inc.; formerly, Vice President of each of the funds in the
Fund Complex; formerly, Director and Treasurer of Waddell & Reed Asset
Management Company; formerly, President of Waddell & Reed Services Company. Date
of birth: November 12, 1936.
<PAGE>
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer, and Director of Waddell & Reed
Financial, Inc.; Executive 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; Chairman of the Board of Directors of Austin, Calvert & Flavin, Inc., an
affiliate of WRIMCO; 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 its 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
each of the funds in the Fund Complex then in existence. (Mr. Morgan retired as
Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company. Date of birth:
April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director and Vice President of Network Rehabilitation Services; Board
Member, Member of Executive Committee and Finance Committee of Truman Medical
Center; 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; Director
of Columbian Bank and Trust. Date of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
Professor of Business Administration, University of Missouri-Kansas
City; formerly, Chancellor, University of Missouri-Kansas City.
Date of birth: January 1, 1937.
<PAGE>
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
DANIEL C. SCHULTE
Vice President, Assistant Secretary and General Counsel of the Fund and
each of the other funds in the Fund Complex; Vice President, Secretary and
General Counsel of Waddell & Reed Financial, Inc.; Senior Vice President,
Secretary and General Counsel of Waddell & Reed Financial Services Company,
Waddell & Reed, Inc., WRIMCO and Waddell & Reed Services Company; Secretary and
Director of Fiduciary Trust Company of New Hampshire, an affiliate of Waddell &
Reed, Inc.; formerly, Assistant Secretary of Waddell & Reed Financial, Inc.;
formerly, an attorney with Klenda, Mitchell, Austerman & Zuercher, L.L.C. Date
of birth: December 8, 1965.
KRISTEN A. RICHARDS
Vice President, Secretary and Associate General Counsel of the Fund and
each of the other funds in the Fund Complex; Vice President and Associate
General Counsel of WRIMCO; formerly, Assistant Secretary of the Fund and each of
the other funds in the Fund Complex; formerly, Compliance Officer of WRIMCO.
Date of birth:
December 2, 1967.
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.
LOUISE D. RIEKE
Vice President of the Fund and two 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, whereby an incumbent Director who has attained the age of 70 may, or
if elected on or after May 31, 1993 and has attained the age of 75 must, resign
his or her position as Director and, unless he or she elects otherwise, will
serve as Director Emeritus provided the Director has served as a Director of the
Funds for at least five years which need not have been consecutive.A Director
Emeritus receives fees in recognition of his or her past services whether or not
services are rendered in
<PAGE>
his or her capacity as Director Emeritus, but he or she has no authority or
responsibility with respect to the 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 each serves as Director Emeritus.
The funds in the Waddell & Reed Advisors Funds, Target/United Funds,
Inc. and W&R Funds, Inc. pay to each Director, effective October 1, 1999, an
annual base fee of $50,000, plus $3,000 for each meeting of the Board of
Directors attended and effective January 1, 2000, an annual base fee of $52,000
plus $3,250 for each meeting of the Board of Directors attended, plus
reimbursement of expenses for attending such meeting and $500 for each committee
meeting attended which is not in conjunction with a Board of Directors meeting,
other than Directors who are affiliates of Waddell & Reed, Inc. (prior to
October 1, 1999, the funds in the Waddell & Reed Advisors Funds, Target/United
Funds, Inc. and Waddell & Reed Funds, Inc. paid to each Director an annual base
fee of $48,000 plus $2,500 for each meeting of the Board of Directors attended).
The fees to the Directors are divided among the funds in the Waddell & Reed
Advisors Funds, Target/United Funds, Inc. and W&R Funds, Inc. based on the
funds' relative size. During the Fund's fiscal year ended September 30, 1999,
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>
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 992 59,000
John A. Dillingham 992 59,000
David P. Gardner 952 56,500
Linda K. Graves 992 59,000
Joseph Harroz, Jr. 929 56,500
John F. Hayes 992 59,000
Glendon E. Johnson 1,001 59,500
William T. Morgan 992 59,000
Ronald C. Reimer 926 56,500
Frank J. Ross, Jr. 992 59,000
Eleanor B. Schwartz 1,001 59,500
Frederick Vogel III 1,001 59,500
</TABLE>
*No pension or retirement benefits have been accrued as a part of
Fund expenses.
The officers are paid by WRIMCO or its affiliates.
SHAREHOLDINGS
As of May 31, 2000, 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 May 31, 2000, regarding
the ownership of the Fund's shares.
<TABLE>
<CAPTION>
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
------------------- ----- ------------ -------
<S> <C> <C> <C>
Fiduciary Tr Co NH Cust Class B 36,458 8.56%
IRA
FBO Henry Hicks Moore
417 E Intendencia St
Pensacola FL 32501-6139
Fiduciary Tr Co NH Cust Class B 23,988 5.63%
IRA Rollover
FBO David L Thompson
1401 S Glendale Ave
Sioux Falls SD 57105-1415
Florence Groce Class B 32,157 7.55%
3203 W 7th St
The Dalles OR 97058-4471
Ray B. Holzhuter & Class C 8,141 17.15%
Jean M. Holzhuter Jtn Ros (TOD)
2124 Pheasant Ln
Salina KS 67401-1316
Frances Snow Robinson (TOD) Class C 2,604 5.49%
818 South Judson
Fort Scott KS 66701-2610
Fiduciary Trust Co NH Cust Class C 4,243 8.94%
IRA Rollover
FBO Gene Bunting Jr
440 Quarry Rd NW
Albany OR 97321-1554
Stephen J Uramkin (TOD) Class C 3,921 8.26%
2104 E Lilac Ter
Arlington Heights IL 60004-3503
Laurene M Simpson (TOD) Class C 2,539 5.35%
2115 White Cloud Cir
Twin Falls ID 83301-8345
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Judity E Laudien (TOD) Class C 5,049 10.64%
402 Beacon Ln #701
Valparaiso IN 46383-3583
Fiduciary Tr Co NH Cust Class C 2,603 5.48%
IRA
Fbo Henry Hicks Moore
417 E Indendencia St
Pensacola FL 32501-6139
Phila Alumnae Chapter Class C 2,732 5.76%
Delta Sigma
Theta Sorority Inc
P. O. Box 7496
Philadelphia PA 19101-7496
Waddell & Reed Class Y 629,579 95.29%
Financial, Inc.
401(k) and Thrift Plan
6300 Lamar Avenue
Overland Park KS 66201
</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 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. However, a total dividend and/or distribution amount
less than five dollars will be automatically 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 NAV without
any sales charge. The NAV 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 receive dividends and distributions on Fund shares in cash,
you can thereafter reinvest them (or distributions only) in shares of the Fund
at NAV (i.e., with no sales charge) next calculated after receipt by Waddell &
Reed, Inc. of the amount clearly identified as a reinvestment. The reinvestment
must be within forty-five days after the payment.
TAXES
GENERAL
The Fund has qualified since inception 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 it distributes to its
shareholders. To continue to qualify for treatment 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
<PAGE>
securities that are limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities ("50%
Diversification Requirement"); and (3) at the close of each quarter of the
Fund's taxable year, not more than 25% of the value of its total assets may
be invested in securities (other than U.S. Government securities or
the securities of other RICs) of any one issuer.
If the Fund failed to qualify for treatment as a RIC for any taxable
year, (a) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year (even if it distributed that income to its
shareholders) and (b) the shareholders would treat all distributions out of its
earnings and profits, including distributions of net capital gains, as dividends
(that is, ordinary income). In addition, the Fund could be required to recognize
unrealized gains, pay substantial taxes and interest and make substantial
distributions before qualifying for RIC treatment.
Dividends and distributions declared by the Fund in December of any
year and payable to its shareholders of record on a date in that month 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 a 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. For these purposes, the Fund may defer into the next calendar
year net capital losses incurred between November 1 and the end of the current
calendar year. It is the policy of the Fund to pay sufficient dividends and
distributions each year to avoid imposition of the Excise Tax.
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
<PAGE>
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
including forward currency contracts, (2) on the disposition of each 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 expenses or other liabilities,
denominated in a foreign currency and the time the Fund actually collects the
receivables or pays the liabilities, generally are treated as ordinary income or
loss. These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of the Fund's investment company
taxable income to be distributed to its shareholders as ordinary income, rather
than affecting the amount of its net capital gain.
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
<PAGE>
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. 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, futures contracts and forward currency 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.
In addition, these rules may postpone the recognition of loss that would
otherwise be recognized under the mark-to-market rules discussed above. The
regulations under section 1092 also provide certain "wash sale" rules which
apply to transactions where a position is sold at a loss and a new offsetting
position is acquired within a prescribed period, and "short sale" rules
applicable to straddles. If the Fund makes certain elections, the amount,
character and timing of the recognition of gains and losses from the affected
straddle positions will be determined under rules that vary according to the
elections made. Because only a few of the regulations implementing the straddle
rules have been promulgated, the tax consequences of straddle transactions to
the Fund are not entirely clear.
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 position, 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 identical property. In addition, if the appreciated
financial position is itself a short
<PAGE>
sale or such a contract, acquisition of the underlying property or substantially
identical property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction during any taxable year that otherwise would
be treated as a constructive sale if the transaction is closed within 30 days
after the end of that year and the Fund holds the appreciated financial position
unhedged for 60 days after that closing (I.E., at no time during that 60-day
period is the Fund's risk of loss regarding that position reduced by reason of
certain specified transactions with respect to substantially identical or
related property, such as having an option to sell, being contractually
obligated to sell, making a short sale, or granting an option to buy
substantially identical stock or securities).
ZERO COUPON AND PAYMENT-IN-KIND SECURITIES
The Fund may acquire zero coupon or other securities issued with 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 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 effected 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 Waddell & Reed Advisors Funds, Target/United Funds, Inc. and
W&R Funds, Inc. or other accounts for which it has investment
<PAGE>
discretion, including accounts affiliated with WRIMCO. WRIMCO, at its
discretion, may aggregate such orders. Under current written procedures,
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, for a transaction not involving an initial
public offering ("IPO"), WRIMCO will ordinarily allocate the transaction pro
rata based on the orders placed, subject to certain variances provided for in
the written procedures. For a partially filled IPO order, subject to certain
variances specified in the written procedures, WRIMCO generally allocates the
shares as follows: the IPO shares are initially allocated pro rata among the
included funds and/or advisory accounts grouped according to investment
objective, based on relative total assets of each group; and the shares are
then allocated within each group prorata based on relative total assets of
the included funds and/or advisory accounts, except that (a) within a group
having a small cap-related investment objective, shares are allocated on a
rotational basis after taking into account the impact of the anticipated
initial gain on the value of the included fund or advisory account and (b)
within a group having a mid-cap-related investment objective, shares are
allocated based on the portfolio manager's judgment, including but not
limited to such factors as the fund's or advisory account's investments
strategies and policies, cash availability, any minimum investment
policy, liquidity, anticipated term of the investment and current securities
positions.
In all cases, WRIMCO seeks to implement its allocation procedures to
achieve a fair and equitable allocation of securities among its funds and other
advisory accounts. Sharing in large transactions could affect the price the Fund
pays or receives or the amount it buys or sells. As well, a better negotiated
commission may be available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is authorized
to engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution and/or
research services and other services, including pricing or quotation services
directly or through others ("research and brokerage services") considered by
WRIMCO to be useful or desirable for its investment management of the Fund
and/or the other funds and accounts over which WRIMCO has investment discretion.
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
<PAGE>
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 the commission 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, 1999, 1998 and 1997,
it paid brokerage commissions of $43,015, $7,715 and $19,948, 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, 1999, the
transactions, other than principal transactions, which were directed to
broker-dealers who provided research services as well
<PAGE>
as execution totaled $12,734,199 on which $22,854 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
under Rule 17j-1 of the 1940 Act that permits their respective directors,
officers and employees to invest in securities, including securities that may be
purchased or held by the Fund. The Code of Ethics subjects covered personnel to
certain restrictions that include prohibited activities, pre-clearance
requirements and reporting obligations.
OTHER INFORMATION
THE SHARES OF THE FUND
The Fund offers four classes of shares: Class A, Class B, Class C and
Class Y. Each class represents an interest in the same assets of the Fund and
differ as follows: each class of shares has exclusive voting rights on matters
appropriately limited to that class; Class A shares are subject to an initial
sales charge and to an ongoing distribution and/or service fee and certain Class
A shares are subject to a contingent deferred sales charge; Class B and Class C
are subject to a CDSC and to ongoing distribution and service fees; Class B
shares converts to Class A shares eight years after the month in which the
shares were purchased; and Class Y shares, which are designated for
institutional investors, have no sales charge nor ongoing distribution and/or
service fee. Each class may bear differing amounts of certain class-specific
expenses and each class has a separate exchange privilege. The Fund does not
anticipate that there will be any conflicts between the interests of holders of
the different classes of shares of the Fund by virtue of those classes. On an
ongoing basis, the Board of Directors will consider whether any such conflict
exists and, if so, take appropriate action. Each share of the Fund is entitled
to equal voting, dividend, liquidation and redemption rights, except that due to
the differing expenses borne by the classes, dividends and liquidation proceeds
of Class B shares and Class C shares are expected to be lower than for Class A
shares, which in turn are expected to be lower than for Class Y shares of the
Fund. Each fractional share of a class has the same rights, in proportion, as a
full share of that class. Shares are fully paid and nonassessable when
purchased.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new investment
advisory agreement or a change in a 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.
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities
which the Fund may use. The Fund may also use ratings provided by other
nationally recognized statistical rating organizations in determining the
securities eligible for investment.
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC. An S&P
corporate bond rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment of
creditworthiness may take into consideration obligors such as guarantors,
insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to
pay interest and repay principal is very strong, and debt rated AA differs from
AAA issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
<PAGE>
adverse effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
<PAGE>
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace periods. The D rating will also be used upon a filing of
a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "investment grade" ratings)
are generally regarded as eligible for bank investment. In addition, the laws of
various states governing legal investments may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
MOODY'S INVESTORS SERVICE, INC. A brief description of the applicable MIS
rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be
<PAGE>
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF PREFERRED STOCK RATINGS
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC. An S&P
preferred stock rating is an assessment of the capacity and willingness of an
issuer to pay preferred stock dividends and any applicable sinking fund
obligations. A preferred stock rating differs from a bond rating inasmuch as it
<PAGE>
is assigned to an equity issue, which issue is intrinsically different from, and
subordinated to, a debt issue. Therefore, to reflect this difference, the
preferred stock rating symbol will normally not be higher than the debt rating
symbol assigned to, or that would be assigned to, the senior debt of the same
issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA -- This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A -- An issue rated A is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB -- An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB, B, CCC -- Preferred stock rated BB, B, and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC -- The rating CC is reserved for a preferred stock issue in arrears
on dividends or sinking fund payments but that is currently paying.
<PAGE>
C -- A preferred stock rated C is a non-paying issue.
D -- A preferred stock rated D is a non-paying issue with the issuer in
default on debt instruments.
NR -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-) -- To provide more detailed indications of
preferred stock quality, the rating from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
A preferred stock rating is not a recommendation to purchase, sell or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
or unavailability of, such information or based on other circumstances.
MOODY'S INVESTORS SERVICE, INC. Because of the fundamental differences
between preferred stocks and bonds, a variation of MIS' familiar bond rating
symbols is used in the quality ranking of preferred stock. The symbols are
designed to avoid comparison with bond quality in absolute terms. It should
always be borne in mind that preferred stock occupies a junior position to
bonds within a particular capital structure and that these securities are rated
within the universe of preferred stocks.
NOTE: MIS applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Preferred stock rating symbols and their definitions are as follows:
aaa -- An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is a
<PAGE>
reasonable assurance the earnings and asset protection will remain relatively
well-maintained in the foreseeable future.
a -- An issue which is rated a is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than in the
aaa and aa classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa -- An issue which is rated baa is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba -- An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b -- An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated caa is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
ca -- An issue which is rated ca is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
c -- This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON AND PREFERRED STOCKS
AND WARRANTS
BUSINESS SERVICES - 0.63%
Clear Channel Communications, Inc.* ................................ 28,932 $ 1,998,116
Cybernet Internet Services
International, Inc., Warrants (A)* .............................. 1,000 100,000
Total ........................................................... 2,098,116
CABLE AND OTHER PAY TELEVISION SERVICES - 0.16%
Adelphia Communications Corporation,
13.0% Preferred ................................................. 5,000 540,000
CHEMICALS AND ALLIED PRODUCTS - 1.52%
Smith International, Inc.* ......................................... 65,000 5,037,500
COMMUNICATION - 2.18%
Allegiance Telecom, Inc., Warrants (A)*............................. 2,500 375,000
Crown Castle International Corp.* .................................. 30,000 1,135,312
IXC Communications, Inc.,
12.5% Preferred ................................................. 317 326,510
IntelCom Group Inc., Warrants (A)* ................................. 7,425 222,750
Intermedia Communications Inc.,
13.5% Preferred* ................................................ 3,751 3,601,625
MetroNet Communications Corp.,
Warrants (A)* ................................................... 1,000 145,000
ONO Finance Plc, Rights (A)* ....................................... 2,500 375,000
OnePoint Communications Corp.,
Warrants (A)* ................................................... 2,000 40,000
Primus Telecommunications Group,
Incorporated, Warrants* ......................................... 2,000 124,000
VersaTel Telecom International N.V.,
Warrants (A)* ................................................... 1,500 900,000
Total ........................................................... 7,245,197
ELECTRIC, GAS AND SANITARY SERVICES - 0.00%
Consolidated Hydro, Inc.,
Class B Warrants* ............................................... 7,578 15
Consolidated Hydro, Inc.,
Class C Warrants* ............................................... 4,919 10
Total ........................................................... 25
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT - 0.50%
Level 3 Communications, Inc.* ...................................... 15,000 1,585,781
Metricom, Inc., Warrants* .......................................... 1,250 62,500
Total ........................................................... 1,648,281
ENGINEERING AND MANAGEMENT SERVICES - 0.05%
Harris Interactive Inc.* ........................................... 26,400 174,488
FOOD AND KINDRED PRODUCTS - 0.50%
Keebler Foods Company .............................................. 57,500 1,649,531
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND
WARRANTS (CONTINUED)
NONDEPOSITORY INSTITUTIONS - 0.25%
California Federal Preferred Capital
Corporation, 9.125% Preferred ................................... 37,500 $ 820,313
OIL AND GAS EXTRACTION - 0.67%
Burlington Resources Incorporated .................................. 60,000 2,220,000
PAPER AND ALLIED PRODUCTS - 0.18%
SF Holdings Group, Inc., Class C (A)*............................... 870 9
SF Holdings Group, Inc., 13.75%
Preferred ....................................................... 100 455,000
SF Holdings Group, Inc., 13.75%
Preferred (A)* .................................................. 30 135,554
Total ........................................................... 590,563
PETROLEUM AND COAL PRODUCTS - 1.43%
Exxon Mobil Corporation ............................................ 35,000 2,723,437
Royal Dutch Petroleum Company,
NY Shares ....................................................... 35,000 2,014,688
Total ........................................................... 4,738,125
PRINTING AND PUBLISHING - 0.30%
PRIMEDIA Inc., 10.0% Preferred ..................................... 10,000 1,007,500
RADIO AND TELEVISION BROADCASTING STATIONS - 0.78%
Infinity Broadcasting Corporation,
Class A* ........................................................ 80,500 2,606,188
RADIO TELEPHONE COMMUNICATIONS - 0.64%
Microcell Telecommunications Inc.,
Warrants (A)* ................................................... 20,000 1,798,120
Powertel, Inc., Warrants* .......................................... 5,600 324,800
Total ........................................................... 2,122,920
TOTAL COMMON AND PREFERRED STOCKS
AND WARRANTS - 9.79% $ 32,498,747
(Cost: $24,742,589)
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
<S> <C> <C>
CORPORATE DEBT SECURITIES
AGRICULTURAL PRODUCTION - CROPS - 0.39%
Hines Horticulture, Inc.,
11.75%, 10-15-05 ................................................ $ 1,301 1,307,505
AMUSEMENT AND RECREATION SERVICES - 3.80%
Aztar Corporation,
8.875%, 5-15-07 ................................................. 1,150 1,040,750
Hollywood Park, Inc.,
9.25%, 2-15-07 .................................................. 1,750 1,723,750
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
AMUSEMENT AND RECREATION SERVICES (CONTINUED)
Mohegan Tribal Gaming Authority,
8.75%, 1-1-09 ................................................... $ 1,000 $ 937,500
Premier Parks Inc.:
9.25%, 4-1-06 ................................................... 2,000 1,860,000
9.75%, 6-15-07 .................................................. 2,500 2,356,250
Station Casinos, Inc.:
10.125%, 3-15-06 ................................................ 1,000 1,007,500
8.875%, 12-1-08 ................................................. 2,500 2,300,000
YankeeNets LLC,
12.75%, 3-1-07 (A) .............................................. 1,500 1,380,000
Total ........................................................... 12,605,750
AUTO REPAIR, SERVICES AND PARKING - 0.59%
Avis Rent A Car, Inc.,
11.0%, 5-1-09 ................................................... 2,000 1,970,000
AUTOMOTIVE DEALERS AND SERVICE STATIONS - 0.29%
TravelCenters of America, Inc.,
10.25%, 4-1-07 .................................................. 1,000 960,000
BUSINESS SERVICES - 5.24%
Adams Outdoor Advertising Limited Partnership,
10.75%, 3-15-06 ................................................. 1,750 1,785,000
Coinmach Corporation,
11.75%, 11-15-05 ................................................ 3,000 2,850,000
Cybernet Internet Services
International, Inc.,
14.0%, 7-1-09 ................................................... 1,000 800,000
Lamar Advertising Company:
9.625%, 12-1-06 ................................................. 2,000 2,000,000
8.625%, 9-15-07 ................................................. 1,250 1,181,250
National Equipment Services, Inc.,
10.0%, 11-30-04 ................................................. 3,750 3,553,125
PSINet, Inc.:
10.0%, 2-15-05 .................................................. 4,000 3,780,000
10.5%, 12-1-06 (A) .............................................. 1,500 1,440,000
Total ........................................................... 17,389,375
CABLE AND OTHER PAY TELEVISION SERVICES - 7.53%
Adelphia Communications Corporation:
10.25%, 7-15-00 ................................................. 1,250 1,250,000
9.25%, 10-1-02 .................................................. 950 940,500
10.5%, 7-15-04 .................................................. 1,500 1,515,000
CSC Holdings, Inc.,
8.125%, 8-15-09 ................................................. 2,000 2,016,300
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
CABLE AND OTHER PAY TELEVISION SERVICES (CONTINUED)
Charter Communications Holdings, LLC
and Charter Communications Holdings
Capital Corporation,
8.625%, 4-1-09 .................................................. $ 1,750 $ 1,540,000
Classic Cable, Inc.,
9.375%, 8-1-09 .................................................. 1,750 1,618,750
Comcast UK Cable Partners Limited,
0.0%, 11-15-07 (B) .............................................. 4,000 3,800,000
Diamond Cable Communications Plc,
0.0%, 12-15-05 (B) .............................................. 3,000 2,865,000
Diamond Holdings plc,
9.125%, 2-1-08 .................................................. 1,500 1,432,500
FrontierVision Holdings, L.P.,
11.0%, 10-15-06 ................................................. 1,500 1,533,750
Renaissance Media Group LLC,
0.0%, 4-15-08 (B) ............................................... 1,750 1,155,000
Telewest Communications plc:
0.0%, 10-1-07 (B) ............................................... 1,500 1,402,500
0.0%, 4-15-09 (A)(B) ............................................ 1,000 565,000
United International Holdings, Inc.,
0.0%, 2-15-08 (B) ............................................... 5,000 3,375,000
Total ........................................................... 25,009,300
CHEMICALS AND ALLIED PRODUCTS - 0.26%
Chattem, Inc.,
8.875%, 4-1-08 .................................................. 1,000 855,000
COMMUNICATION - 20.61%
Alestra, S. de R.L. de C.V.,
12.625%, 5-15-09 ................................................ 2,250 2,255,625
Allegiance Telecom, Inc.,
0.0%, 2-15-08 (B) ............................................... 3,250 2,307,500
Concentric Network Corporation,
12.75%, 12-15-07 ................................................ 1,000 1,045,000
Crown Castle International Corp.:
0.0%, 5-15-11 (B) ............................................... 5,000 2,862,500
9.0%, 5-15-11 ................................................... 1,000 920,000
EchoStar DBS Corporation,
9.375%, 2-1-09 .................................................. 6,500 6,272,500
ESAT Telecom Group PLC,
11.875%, 11-1-09 (C) ............................................ EUR2,000 2,432,050
GST Telecommunications,
0.0%, 11-15-07 (B) .............................................. $ 2,500 2,100,000
Global Crossing Holdings Ltd.,
9.5%, 11-15-09 (A) .............................................. 2,000 1,920,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
COMMUNICATION (CONTINUED)
Hyperion Telecommunications, Inc.:
0.0%, 4-15-03 (B) ............................................... $ 5,000 $ 4,600,000
12.0%, 11-1-07 .................................................. 750 753,750
ICG Holdings, Inc.,
0.0%, 9-15-05 (B) ............................................... 2,250 2,103,750
ICG Services, Inc.,
0.0%, 5-1-08 (B) ................................................ 2,500 1,350,000
ITC /\ DeltaCom, Inc.:
11.0%, 6-1-07 ................................................... 2,500 2,537,500
8.875%, 3-1-08 .................................................. 1,000 930,000
9.75%, 11-15-08 ................................................. 1,500 1,462,500
Intermedia Communications of Florida, Inc.,
0.0%, 5-15-06 (B) ............................................... 1,250 1,165,625
Leap Wireless International, Inc., Units,
12.5%, 4-15-10 (A)(D) ........................................... 2,000 2,000,000
MetroNet Communications Corp.,
0.0%, 6-15-08 (B) ............................................... 2,500 1,997,400
NEXTLINK Communications, Inc.,
10.75%, 6-1-09 .................................................. 1,000 960,000
Nuevo Grupo Iusacell, S.A. de C.V.,.................................
14.25%, 12-1-06 (A) ............................................. 2,000 2,170,000
ONO Finance Plc,
13.0%, 5-1-09 ................................................... 2,500 2,600,000
OnePoint Communications Corp.,
14.5%, 6-1-08 ................................................... 2,000 1,300,000
Primus Telecommunications Group, Incorporated:
11.75%, 8-1-04 .................................................. 2,000 1,930,000
12.75%, 10-15-09 ................................................ 1,000 975,000
RSL Communications, Ltd.,
10.5%, 11-15-08 ................................................. 4,000 3,420,000
Rhythms NetConnections Inc.:
12.75%, 4-15-09 ................................................. 2,000 1,700,000
14.0%, 2-15-10 (A) .............................................. 2,000 1,740,000
SpectraSite Holdings, Inc.,
0.0%, 3-15-10 (A)(B) ............................................ 4,000 1,980,000
Time Warner Telecom LLC and Time Warner
Telecom Inc.,
9.75%, 7-15-08 .................................................. 1,750 1,715,000
VersaTel Telecom B.V.,
11.875%, 7-15-09 ................................................ 1,250 1,228,125
VersaTel Telecom International N.V.,
13.25%, 5-15-08 ................................................. 1,500 1,533,750
Viatel, Inc.,
11.5%, 3-15-09 .................................................. 1,250 1,125,000
WinStar Communications, Inc.:
0.0%, 10-15-05 (B) .............................................. 2,250 2,317,500
12.75%, 4-15-10 (A) ............................................. 690 727,500
Total ........................................................... 68,437,575
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
DEPOSITORY INSTITUTIONS - 0.15%
Sovereign Bancorp, Inc.,
10.25%, 5-15-04 ................................................. $ 500 $ 503,115
EATING AND DRINKING PLACES - 1.64%
Domino's, Inc.,
10.375%, 1-15-09 ................................................ 2,000 1,830,000
Foodmaker, Inc.,
8.375%, 4-15-08 ................................................. 3,000 2,748,750
NE Restaurant Company, Inc.,
10.75%, 7-15-08 ................................................. 1,000 861,250
Total ........................................................... 5,440,000
ELECTRIC, GAS AND SANITARY SERVICES - 1.29%
El Paso Electric Company:
8.9%, 2-1-06 .................................................... 2,000 2,094,000
9.4%, 5-1-11 .................................................... 2,000 2,185,440
Total ........................................................... 4,279,440
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT - 1.83%
Covad Communications Group, Inc.,
12%, 2-15-10 (A) ................................................ 1,500 1,335,000
Elgar Holdings, Inc.,
9.875%, 2-1-08 .................................................. 1,250 612,500
Level 3 Communications, Inc.:
11.0%, 3-15-08 (A) .............................................. 1,750 1,680,000
9.125%, 5-1-08 .................................................. 500 430,000
0.0%, 12-1-08 (B) ............................................... 2,500 1,443,750
Metricom, Inc.,
13%, 2-15-10 .................................................... 750 585,000
Total ........................................................... 6,086,250
FABRICATED METAL PRODUCTS - 0.31%
AXIA Incorporated,
10.75%, 7-15-08 ................................................. 750 577,500
Neenah Corporation,
11.125%, 5-1-07 ................................................. 500 446,250
Total ........................................................... 1,023,750
FOOD AND KINDRED PRODUCTS - 0.48%
B & G Foods, Inc.,
9.625%, 8-1-07 .................................................. 2,000 1,610,000
FOOD STORES - 0.41%
Big V Supermarkets, Inc.,
11.0%, 2-15-04 .................................................. 1,500 1,365,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
FURNITURE AND FIXTURES - 0.42%
Sealy Mattress Company,
0.0%, 12-15-07 (B) .............................................. $ 2,000 $ 1,415,000
FURNITURE AND HOME FURNISHINGS STORES - 0.10%
MTS, INCORPORATED,
9.375%, 5-1-05 .................................................. 750 324,375
HEALTH SERVICES - 2.23%
Abbey Healthcare Group Incorporated,
9.5%, 11-1-02 ................................................... 3,250 3,128,125
Columbia/HCA Healthcare Corporation,
7.25%, 5-20-08 .................................................. 750 665,625
IASIS Healthcare Corporation,
13.0%, 10-15-09 (A) ............................................. 1,750 1,736,875
Tenet Healthcare Corporation,
8.625%, 1-15-07 ................................................. 2,000 1,885,000
Total ........................................................... 7,415,625
HOTELS AND OTHER LODGING PLACES - 3.03%
CapStar Hotel Company,
8.75%, 8-15-07 .................................................. 1,000 870,000
Coast Hotels and Casinos, Inc.,
9.5%, 4-1-09 .................................................... 1,250 1,150,000
HMH Properties, Inc.,
7.875%, 8-1-08 .................................................. 3,000 2,505,000
Lodgian Financing Corp.,
12.25%, 7-15-09 ................................................. 3,000 2,647,500
Prime Hospitality Corp.:
9.25%, 1-15-06 .................................................. 2,000 1,940,000
9.75%, 4-1-07 ................................................... 1,000 952,500
Total ........................................................... 10,065,000
INDUSTRIAL MACHINERY AND EQUIPMENT - 1.26%
American Standard Inc.,
9.25%, 12-1-16 .................................................. 825 810,562
Anchor Lamina Inc. and
Anchor Lamina America, Inc.,
9.875%, 2-1-08 .................................................. 1,000 748,750
Terex Corporation,
8.875%, 4-1-08 .................................................. 3,000 2,610,000
Total ........................................................... 4,169,312
INSURANCE CARRIERS - 0.30%
LifePoint Hospitals Holdings, Inc.,
10.75%, 5-15-09 ................................................. 1,000 1,005,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
MISCELLANEOUS RETAIL - 1.28%
Frank's Nursery & Crafts, Inc.,
10.25%, 3-1-08 .................................................. $ 2,000 $ 600,000
Michaels Stores, Inc.,
10.875%, 6-15-06 ................................................ 3,500 3,635,625
Total ........................................................... 4,235,625
MOTION PICTURES - 0.45%
AMC Entertainment Inc.,
9.5%, 3-15-09 ................................................... 750 382,500
Regal Cinemas, Inc.,
9.5%, 6-1-08 .................................................... 2,500 1,112,500
Total ........................................................... 1,495,000
OIL AND GAS EXTRACTION - 0.28%
Canadian Forest Oil Co. Ltd.,
8.75%, 9-15-07 .................................................. 1,000 920,000
PAPER AND ALLIED PRODUCTS - 2.04%
Container Corporation of America,
10.75%, 5-1-02 .................................................. 2,000 2,020,000
Fonda Group, Inc. (The),
9.5%, 3-1-07 .................................................... 2,000 1,670,000
Mail-Well I Corporation,
8.75%, 12-15-08 ................................................. 2,000 1,750,000
SF Holdings Group, Inc.,
0.0%, 3-15-08 (B) ............................................... 2,500 1,343,750
Total ........................................................... 6,783,750
PETROLEUM AND COAL PRODUCTS - 0.37%
Building Materials Corporation of America,
8.0%, 12-1-08 ................................................... 1,400 1,230,250
PRIMARY METAL INDUSTRIES - 2.20%
Algoma Steel Inc.,
12.375%, 7-15-05 ................................................ 1,000 975,000
Commonwealth Aluminum Corporation,
10.75%, 10-1-06 ................................................. 2,000 1,990,000
ISG Resources, Inc.,
10.0%, 4-15-08 .................................................. 1,750 1,570,625
WCI Steel, Inc.,
10.0%, 12-1-04 .................................................. 1,000 985,000
Wheeling-Pittsburgh Corporation,
9.25%, 11-15-07 ................................................. 2,000 1,790,000
Total ........................................................... 7,310,625
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
PRINTING AND PUBLISHING - 0.81%
Perry-Judd's Incorporated,
10.625%, 12-15-07 ............................................... $ 750 $ 594,375
World Color Press, Inc.,
8.375%, 11-15-08 ................................................ 2,250 2,100,623
Total ........................................................... 2,694,998
RADIO AND TELEVISION BROADCASTING STATIONS - 5.14%
Allbritton Communications Company,
9.75%, 11-30-07 ................................................. 2,000 1,880,000
American Radio Systems Corporation,
9.0%, 2-1-06 .................................................... 1,000 1,018,750
Chancellor Media Corporation of Los Angeles:
10.5%, 1-15-07 .................................................. 2,000 2,150,000
8.0%, 11-1-08 ................................................... 3,350 3,299,750
LIN Holdings Corp.,
0.0%, 3-1-08 (B) ................................................ 3,500 2,161,250
Rogers Communications Inc.,
9.125%, 1-15-06 ................................................. 3,000 2,985,000
Salem Communications Corporation,
9.5%, 10-1-07 ................................................... 1,000 930,000
Spanish Broadcasting System, Inc.,
9.625%, 11-1-09 ................................................. 1,750 1,688,750
Susquehanna Media Co.,
8.5%, 5-15-09 ................................................... 1,000 955,000
Total ........................................................... 17,068,500
RADIO TELEPHONE COMMUNICATIONS - 8.39%
GT Group Telecom, Inc., Units,
0.0%, 2-1-10 (A)(B)(E) .......................................... 2,250 1,260,000
Intercel, Inc.,
0.0%, 2-1-06 (B) ................................................ 1,750 1,588,125
Microcell Telecommunications Inc.,
0.0%, 6-1-06 (B) ................................................ 5,900 5,221,500
Nextel Communications, Inc.:
0.0%, 9-15-07 (B) ............................................... 1,500 1,095,000
0.0%, 2-15-08 (B) ............................................... 2,500 1,687,500
Nextel International, Inc.,
0.0%, 4-15-08 (B) ............................................... 5,125 3,177,500
Nextel Partners, Inc.,
0.0%, 2-1-09 (B) ................................................ 5,500 3,520,000
Sprint Spectrum L.P.,
0.0%, 8-15-06 (B) ............................................... 5,100 4,881,159
Tritel PCS, Inc.,
0.0%, 5-15-09 (B) .............................................. 2,000 1,240,000
Triton PCS, Inc.,
0.0%, 5-1-08 (B) ................................................ 2,000 1,375,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
RADIO TELEPHONE COMMUNICATIONS (CONTINUED)
US Unwired Inc.,
0.0%, 11-1-09 (A) (B) ........................................... $ 2,500 $ 1,337,500
VoiceStream Wireless Corporation,
10.375%, 11-15-09 (A) ........................................... 1,500 1,492,500
Total ........................................................... 27,875,784
RAILROAD TRANSPORTATION - 0.22%
TFM, S.A. de C.V.,
0.0%, 6-15-09 (B) ............................................... 1,000 730,000
RUBBER AND MISCELLANEOUS PLASTICS PRODUCTS - 1.65%
Globe Manufacturing Corp.,
10.0%, 8-1-08 ................................................... 1,250 500,000
Graham Packaging Company and
GPC Capital Corp. I,
8.75%, 1-15-08 .................................................. 1,500 1,215,000
Home Products International, Inc.,
9.625%, 5-15-08 ................................................. 2,500 2,275,000
LDM Technologies, Inc.,
10.75%, 1-15-07 ................................................. 2,000 1,500,000
Total ........................................................... 5,490,000
TEXTILE MILL PRODUCTS - 0.93%
Anvil Knitwear, Inc.,
10.875%, 3-15-07 ................................................ 1,500 1,245,000
Consoltex Group Inc.,
11.0%, 10-1-03 .................................................. 2,000 1,820,000
Glenoit Corporation,
11.0%, 4-15-07 .................................................. 125 28,750
Total ........................................................... 3,093,750
TRANSPORTATION BY AIR - 1.28%
Atlas Air, Inc.,
9.375%, 11-15-06 ................................................ 4,500 4,241,250
TRANSPORTATION EQUIPMENT - 2.01%
Delco Remy International, Inc.,
8.625%, 12-15-07 ................................................ 1,650 1,518,000
Federal-Mogul Corporation:
7.75%, 7-1-06 ................................................... 2,000 1,646,880
7.875%, 7-1-10 .................................................. 2,500 2,036,250
Westinghouse Air Brake Company (The),
9.375%, 6-15-05 ................................................. 1,500 1,473,750
Total ........................................................... 6,674,880
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
TRANSPORTATION SERVICES - 0.50%
Railworks Corporation,
11.5%, 4-15-09 .................................................. $ 1,750 $ 1,653,750
TRUCKING AND WAREHOUSING - 0.86%
Iron Mountain Incorporated,
10.125%, 10-1-06 ................................................ 1,000 975,000
Pierce Leahy Corp.,
9.125%, 7-15-07 ................................................. 2,000 1,875,000
Total ........................................................... 2,850,000
WHOLESALE TRADE - DURABLE GOODS - 1.00%
AAi.Fostergrant, Inc.,
10.75%, 7-15-06 ................................................. 500 152,500
Federal Data Corporation,
10.125%, 8-1-05 ................................................. 1,000 680,000
Heafner (J.H.) Company, Inc. (The),
10.0%, 5-15-08 .................................................. 2,500 2,037,500
WESCO Distribution, Inc.,
9.125%, 6-1-08 .................................................. 500 435,000
Total ........................................................... 3,305,000
WHOLESALE TRADE - NONDURABLE GOODS - 0.33%
Core-Mark International, Inc.,
11.375%, 9-15-03 ................................................ 1,200 1,119,000
TOTAL CORPORATE DEBT SECURITIES - 81.90% $272,008,534
(Cost: $292,936,859)
OTHER GOVERNMENT SECURITY - 1.17%
MEXICO
United Mexican States,
9.75%, 4-6-05 .................................................... 3,750 $ 3,890,625
(Cost: $3,748,704)
<CAPTION>
FACE
AMOUNT IN
THOUSANDS
<S> <C> <C>
UNREALIZED GAIN ON OPEN
FORWARD CURRENCY CONTRACTS - 0.01%
Euro Dollar, 5-30-00 (C) ............................................... EUR1,268 $ 47,915
TOTAL SHORT-TERM SECURITIES - 2.62% $ 8,691,778
(Cost: $8,691,778)
TOTAL INVESTMENT SECURITIES - 95.49% $317,137,599
(Cost: $330,119,930)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 4.51% 14,978,531
NET ASSETS - 100.00% $332,116,130
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
MARCH 31, 2000
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 March 31, 2000, the
value of these securities amounted to $26,855,808 or 8.09% of net
assets.
(B) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(C) Traded in a foreign currency.
(D) Each unit of Leap Wireless International, Inc. consists of one 12.5%
senior note due 2010 and one warrant to purchase common stock.
(E) Each unit of GT Group Telecom, Inc. consists of $1,000 principal amount
of 13.25% senior discount notes due 2010 and one warrant to purchase
4.9106 Class B non-voting shares.
See Note 1 to financial statements for security valuation and other
significant accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment securities -- at value (Notes 1 and 3) ........................................ $317,138
Cash .................................................................................... 1
Receivables:
Investment securities sold ............................................................ 13,462
Interest and dividends ................................................................ 6,726
Fund shares sold ...................................................................... 135
Prepaid insurance premium ................................................................ 13
--------
Total assets ........................................................................ 337,475
--------
LIABILITIES
Investment securities purchased........................................................... 3,190
Payable to Fund shareholders.............................................................. 1,738
Dividends payable ........................................................................ 275
Accrued transfer agency and dividend
disbursing (Note 2).................................................................... 78
Accrued service fee (Note 2) ............................................................. 63
Accrued management fee (Note 2) .......................................................... 6
Accrued distribution fee (Note 2) ........................................................ 5
Accrued accounting services fee (Note 2) ................................................. 4
--------
Total liabilities ................................................................... 5,359
--------
Total net assets ................................................................. $332,116
========
NET ASSETS
$1.00 par value capital stock
Capital stock ......................................................................... $ 88,635
Additional paid-in capital ............................................................ 306,784
Accumulated undistributed loss:
Accumulated undistributed net realized
loss on investment transactions ..................................................... (50,316)
Net unrealized depreciation in value of
investments ......................................................................... (12,987)
--------
Net assets applicable to outstanding
units of capital ................................................................. $332,116
========
Net asset value per share (net assets divided
by shares outstanding)
Class A ............................................................................... $3.75
Class B ............................................................................... $3.75
Class C ............................................................................... $3.75
Class Y ............................................................................... $3.75
Capital shares outstanding
Class A ............................................................................... 87,604
Class B ............................................................................... 298
Class C ............................................................................... 52
Class Y ............................................................................... 681
Capital shares authorized ................................................................... 400,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Income (Note 1B):
Interest and amortization ............................................................. $17,321
Dividends ............................................................................. 447
-------
Total income ........................................................................ 17,768
-------
Expenses (Note 2):
Investment management fee ............................................................. 1,126
Service fee:
Class A.............................................................................. 430
Class B.............................................................................. 1
Class C.............................................................................. ---*
Transfer agency and dividend disbursing:
Class A.............................................................................. 389
Class B.............................................................................. 1
Class C.............................................................................. ---*
Accounting services fee ............................................................... 28
Distribution fee:
Class A.............................................................................. 12
Class B.............................................................................. 2
Class C.............................................................................. 1
Audit fees ............................................................................ 11
Custodian fees ........................................................................ 6
Legal fees ............................................................................ 4
Shareholder servicing - Class Y........................................................ 2
Other ................................................................................. 95
-------
Total expenses ...................................................................... 2,108
-------
Net investment income ............................................................ 15,660
-------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTES 1 AND 3)
Realized net loss on securities .......................................................... (12,493)
Realized net gain on foreign currency transactions ....................................... 24
-------
Realized net loss on investments ...................................................... (12,469)
-------
Unrealized appreciation in value of securities ........................................... 761
Unrealized appreciation in value of forward
currency contracts .................................................................... 48
-------
Unrealized appreciation in value of investments
during the period ................................................................... 809
-------
Net loss on investments ............................................................. (11,660)
-------
Net increase in net assets resulting
from operations ............................................................... $4,000
=======
</TABLE>
*Not shown due to rounding.
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE FISCAL
MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
2000 1999
------------ --------------
<S> <C> <C>
DECREASE IN NET ASSETS
Operations:
Net investment income ........................................... 15,660 $34,440
Realized net loss on
investments .................................................. (12,469) (21,144)
Unrealized appreciation
(depreciation) ................................................ 809 (2,844)
-------- --------
Net increase in net assets
resulting from operations .................................. 4,000 10,452
-------- --------
Dividends to shareholders from
net investment income (Note 1D):*
Class A ......................................................... (15,540) (34,192)
Class B ......................................................... (21) ---
Class C ......................................................... (4) ---
Class Y ......................................................... (119) (248)
-------- --------
(15,684) (34,440)
-------- --------
Capital share transactions
(Note 5) ........................................................ (29,899) (20,658)
-------- --------
Total decrease .......................................... (41,583) (44,646)
NET ASSETS
Beginning of period ................................................ 373,699 418,345
-------- --------
End of period ...................................................... 332,116 $373,699
======== ========
Undistributed net investment
income ........................................................ $--- $---
==== ====
</TABLE>
*See "Financial Highlights" on pages - .
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE
SIX FOR THE FISCAL YEAR ENDED
MONTHS SEPTEMBER 30,
ENDED -----------------------------------------------------------
3/31/00 1999 1998 1997 1996 1995
-------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period........................... $3.88 $4.12 $4.42 $4.14 $4.03 $3.96
----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.17 0.35 0.37 0.36 0.35 0.35
Net realized and
unrealized gain
(loss) on
investments .................. (0.13) (0.24) (0.30) 0.28 0.11 0.07
----- ----- ----- ----- ----- -----
Total from investment
operations ...................... 0.04 0.11 0.07 0.64 0.46 0.42
----- ----- ----- ----- ----- -----
Less dividends declared
from net investment
income........................... (0.17) (0.35) (0.37) (0.36) (0.35) (0.35)
----- ----- ----- ----- ----- -----
Net asset value,
end of period ................... $3.75 $3.88 $4.12 $4.42 $4.14 $4.03
===== ===== ===== ===== ===== =====
Total return* ...................... 0.94% 2.66% 1.22% 16.20% 11.90% 11.25%
Net assets, end of
period (in
millions) ....................... $328 $371 $416 $407 $368 $368
Ratio of expenses to
average net assets............... 1.17%** 1.06% 0.96% 0.93% 0.95% 0.89%
Ratio of net investment
income to average
net assets ...................... 8.70%** 8.60% 8.26% 8.54% 8.60% 8.93%
Portfolio turnover
rate ............................ 27.31% 46.17% 58.85% 64.38% 55.64% 26.82%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
**Annualized
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
CLASS B SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
10/6/99*
THROUGH
3/31/00
-------
<S> <C>
Net asset value,
beginning of period ............. $3.88
----
Income from investment
operations:
Net investment income ........... 0.15
Net realized and
unrealized loss
on investments ............... (0.13)
----
Total from investment
operations ...................... 0.02
----
Less dividends declared
from net investment
income (0.15)
----
Net asset value,
end of period ................... $3.75
====
Total return ....................... 0.31%
Net assets, end of
period (in
millions) ....................... $1
Ratio of expenses to
average net assets .............. 2.06%**
Ratio of net investment
income to average
net assets ...................... 7.77%**
Portfolio turnover
rate ............................ 27.31%***
</TABLE>
* Commencement of operations.
** Annualized.
*** For the six months ended March 31, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
CLASS C SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
10/6/99*
THROUGH
3/31/00
-------
<S> <C>
Net asset value,
beginning of period ............. $3.88
----
Income from investment
operations:
Net investment income ........... 0.15
Net realized and
unrealized loss
on investments ............... (0.13)
----
Total from investment
operations ...................... 0.02
----
Less dividends declared
from net investment
income .......................... (0.15)
----
Net asset value,
end of period ................... $3.75
====
Total return ....................... 0.28%
Net assets, end of
period (000
omitted) ........................ $195
Ratio of expenses to
average net assets .............. 2.11%**
Ratio of net investment
income to average
net assets ...................... 7.73%**
Portfolio turnover
rate ............................ 27.31%***
</TABLE>
* Commencement of operations.
** Annualized.
*** For the six months ended March 31, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
CLASS Y SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD
SIX FOR THE FISCAL YEAR FROM
MONTHS ENDED SEPTEMBER 30, 2/27/96*
ENDED -------------------------------- THROUGH
3/31/00 1999 1998 1997 9/30/96
------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $3.88 $4.12 $4.42 $4.14 $4.15
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.18 0.36 0.37 0.37 0.21
Net realized and
unrealized gain (loss)
on investments................ (0.13) (0.24) (0.30) 0.28 (0.01)
----- ----- ----- ----- -----
Total from investment
operations....................... 0.05 0.12 0.07 0.65 0.20
----- ----- ----- ----- -----
Less dividends declared
from net investment
income........................... (0.18) (0.36) (0.37) (0.37) (0.21)
----- ----- ----- ----- -----
Net asset value,
end of period.................... $3.75 $3.88 $4.12 $4.42 $4.14
===== ===== ===== ===== =====
Total return ....................... 1.10% 2.95% 1.38% 16.38% 5.00%
Net assets, end of
period (in
millions) ....................... $3 $3 $2 $2 $2
Ratio of expenses
to average net
assets........................... 0.84%** 0.77% 0.79% 0.77% 0.77%**
Ratio of net
investment income
to average net
assets........................... 8.98%** 8.89% 8.43% 8.69% 8.83%**
Portfolio
turnover rate.................... 27.31% 46.17% 58.85% 64.38% 55.64%**
</TABLE>
* Commencement of operations.
** Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
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,
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 accounting principles generally
accepted in the United States of America.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period
as reported by the principal securities exchange on which the issue is
traded or, if no sale is reported for a stock, the average of the
latest bid and asked prices. Bonds, other than convertible bonds, are
valued using a pricing system provided by a pricing service or dealer
in bonds. Convertible bonds are valued using this pricing system only
on days when there is no sale reported. Stocks which are traded
over-the-counter are priced using the Nasdaq Stock Market, which
provides information on bid and asked prices quoted by major dealers in
such stocks. Restricted securities and securities for which market
quotations are not readily available are valued at fair value as
determined in good faith under procedures established by and under the
general supervision of the Fund's Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the
Internal Revenue Code), premiums on the purchase of bonds and post-1984
market discount are amortized for both financial and tax reporting
purposes over the remaining lives of the bonds. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. See Note 3 -- Investment Security Transactions.
C. Federal income taxes -- The Fund intends to distribute all of its net
investment income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code. In addition, the Fund intends to pay
distributions as required to avoid imposition of excise tax.
Accordingly, provision has not been made for Federal income taxes. See
Note 4 -- Federal Income Tax Matters.
D. Dividends and distributions -- All of the Fund's net investment income
is declared and recorded by the Fund as dividends payable on each day
to shareholders of record as of the close of the preceding business
day. Net investment income dividends and capital gains distributions
are determined in accordance with income tax regulations which may
differ from accounting principles generally accepted in the United
States of America.
<PAGE>
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 accounting
principles generally accepted in the United States of America 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 is
payable by the Fund at the annual rate of 0.625% of net assets up to $500
million, 0.60% of net assets over $500 million and up to $1 billion, 0.55% of
net assets over $1 billion and up to $1.5 billion, and 0.50% of net assets over
$1.5 billion. The Fund accrues and pays the fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of the Fund. For
these services, the Fund pays WARSCO a monthly fee of one-twelfth of the annual
fee shown in the following table.
ACCOUNTING SERVICES FEE
<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>
For Class A, Class B and Class C shares, the Fund 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 0.15% 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.
<PAGE>
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
$182,009. With respect to Class A, Class B and Class C shares, W&R paid sales
commissions of $126,210 and all expenses in connection with the sale of Fund
shares, except for registration fees and related expenses.
A contingent deferred sales charge ("CDSC") may be assessed against a
shareholder's redemption amount of Class B and Class C shares and is paid to
W&R. The purpose of the deferred sales charge is to compensate W&R for the costs
incurred by W&R in connection with the sale of Fund shares.
With respect to Class B shares, the amount of the CDSC will be the
following percent of the total amount invested during a calendar year to acquire
the shares or the value of the shares redeemed, whichever is less. Redemption at
any time during the first calendar year of investment, 5%; the second calendar
year, 4%; the third calendar year, 3%; the fourth calendar year, 3%; the fifth
calendar year, 2%; the sixth calendar year, 1% and thereafter, 0%.
If Class C shares are sold within 12 months of buying these shares, a
1% CDSC will be imposed.
The deferred sales charge will not be imposed on shares representing
payment of dividends or distributions or on amounts which represent an increase
in the value of the shareholder's account resulting from capital appreciation
above the amount paid for shares purchased during the deferred sales charge
period. During the period ended March 31, 2000, W&R received $630 and $83 in
deferred sales charges from Class B shares and Class C shares, respectively.
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 0.25% of the Fund's average annual net assets. The fee is to be paid to
reimburse W&R for amounts it expends in connection with the distribution of the
Class A shares and/or provision of personal services to Fund shareholders and/or
maintenance of shareholder accounts.
Under the Distribution and Service Plan adopted by the Fund for Class B
and Class C shares, respectively, the Fund may pay W&R, on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate W&R for providing services to shareholders of that class and/or
maintaining shareholder accounts for that class and a distribution fee of up to
0.75% of the average daily net assets of the class to compensate W&R for
distributing the shares of that class. The Class B Plan and the Class C Plan
each permit W&R to receive compensation, through the distribution and service
fee, respectively, for its distribution activities for that class, which are
similar to the distribution activities described with respect to the Class A
Plan, and for its activities in providing personal services to shareholders of
that class and/or maintaining shareholder accounts of that class, which are
similar to the corresponding activities for which it is entitled to
reimbursement under the Class A Plan.
<PAGE>
The Fund paid Directors' fees of $6,408 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 $90,729,400 while proceeds from maturities and
sales aggregated $123,765,522. Purchases of short-term securities aggregated
$1,433,211,826 while proceeds from maturities and sales aggregated
$1,443,389,861. No U.S. Government Securities were bought or sold during the
period ended March 31, 2000.
For Federal income tax purposes, cost of investments owned at March 31,
2000 was $330,119,930, resulting in net unrealized depreciation of $13,030,246,
of which $12,872,276 related to appreciated securities and $25,902,522 related
to depreciated securities.
NOTE 4 -- FEDERAL INCOME TAX MATTERS
For Federal income tax purposes, the Fund realized capital losses of
$1,199,357 during its fiscal year ended September 30, 1999, which included the
effect of certain losses deferred into the next fiscal year (see discussion
below). Capital loss carryovers aggregated $17,602,416 at September 30, 1999,
and are available to offset future realized capital gain net income for Federal
income tax purposes but will expire if not utilized as follows: $8,229,670 at
September 30, 2000; $390,079 at September 30, 2003; $7,783,310 at September 30,
2004; and $1,199,357 at September 30, 2007.
Internal Revenue Code regulations permit the Fund to defer into its
next fiscal year net capital losses or net long-term capital losses incurred
between each November 1 and the end of its fiscal year ("post-October losses").
From November 1, 1998 through September 30, 1999, the Fund incurred net capital
losses of $19,944,947, which have been deferred to the fiscal year ending
September 30, 2000.
NOTE 5 -- MULTICLASS OPERATIONS
The Fund is authorized to offer four classes of shares, Class A, Class
B, Class C and Class Y, each of which have equal rights as to assets and voting
privileges. Class Y shares are not subject to a sales charge on purchases, are
not subject to a Rule 12b-1 Distribution and Service Plan and are subject to a
separate transfer agency and dividend disbursement services fee structure. A
comprehensive discussion of the terms under which shares of each class are
offered is contained in the Prospectus and the Statement of Additional
Information for the Fund.
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
their relative net assets as of the beginning of each day adjusted for the prior
day's capital share activity.
Transactions in capital stock are summarized below. Amounts are in
thousands.
<PAGE>
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS FISCAL YEAR
ENDED ENDED
MARCH 31, SEPTEMBER 30,
2000 1999
------------ ------------
Shares issued from sale of shares:
<S> <C> <C>
Class A............................... 3,523 10,626
Class B .............................. 315 ---
Class C .............................. 53 ---
Class Y............................... 4 655
Shares issued from
reinvestment of dividends:
Class A............................... 3,653 7,683
Class B .............................. 5 ---
Class C .............................. 1 ---
Class Y .............................. 31 60
Shares redeemed:
Class A .............................. (15,250) (23,492)
Class B .............................. (22) ---
Class C .............................. (2) ---
Class Y .............................. (44) (648)
-------- --------
Decrease in
outstanding capital
shares (7,733) (5,116)
========= =========
Value issued from sale of shares:
Class A .............................. $ 13,620 $ 43,551
Class B .............................. 1,215 ---
Class C .............................. 205 ---
Class Y .............................. 14 2,741
Value issued from
reinvestment of dividends:
Class A .............................. 14,088 31,283
Class B .............................. 21 ---
Class C .............................. 4 ---
Class Y .............................. 118 246
Value redeemed:
Class A .............................. (58,921) (95,780)
Class B .............................. (86) ---
Class C .............................. (8) ---
Class Y .............................. (169) (2,699)
-------- --------
Decrease in outstanding
capital .............................. $(29,899) $(20,658)
========== ==========
</TABLE>
<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 March 31, 2000, and the related statement of operations for the six-month
period then ended, the statements of changes in net assets for the six-month
period then ended and the fiscal year ended September 30, 1999, and the
financial highlights for the six-month period ended March 31, 2000, and for each
of the five fiscal years in the period ended September 30, 1999. 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 auditing standards generally accepted
in the United States of America. 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 as of March 31, 2000, by correspondence with the custodian and
brokers. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of United
High Income Fund II, Inc. as of March 31, 2000, the results of its operations
for the six-month period then ended, the changes in its net assets for the
six-month period then ended and the fiscal year ended September 30, 1999, and
the financial highlights for the six-month period ended March 31, 2000, and for
each of the five fiscal years in the period ended September 30, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Kansas City, Missouri
May 5, 2000
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON AND PREFERRED STOCKS
AND WARRANTS
BUSINESS SERVICES - 0.62%
Clear Channel Communications, Inc.* ................................ 28,932 $ 2,310,944
CABLE AND OTHER PAY TELEVISION SERVICES - 0.60%
Adelphia Communications Corporation,
13.0% Preferred ................................................. 5,000 565,000
Cox Communications, Inc., Class A* ................................. 40,000 1,670,000
Total ........................................................... 2,235,000
COMMUNICATION - 1.46%
Allegiance Telecom, Inc., Warrants (A)*............................. 2,500 200,000
Crown Castle International Corp.* .................................. 30,000 561,563
IXC Communications, Inc.,
12.5% Preferred* ................................................ 307 322,350
IntelCom Group Inc., Warrants (A)* ................................. 7,425 57,544
Intermedia Communications Inc.,
13.5% Preferred* ................................................ 3,511 3,203,560
Iridium LLC, Warrants (A)* ......................................... 3,000 3
MetroNet Communications Corp.,
Warrants (A)* ................................................... 1,000 75,000
Microcell Telecommunications Inc.,
Warrants (A)* ................................................... 20,000 555,540
OnePoint Communications Corp.,
Warrants (A)* ................................................... 2,000 2,000
Powertel, Inc., Warrants* .......................................... 5,600 235,200
Primus Telecommunications Group,
Incorporated, Warrants* ......................................... 2,000 40,000
VersaTel Telecom International N.V.,
Warrants (A)* ................................................... 1,500 187,500
Total ........................................................... 5,440,260
ELECTRIC, GAS AND SANITARY SERVICES - 0.00%
Consolidated Hydro, Inc.,
Class B Warrants* ............................................... 7,578 477
Consolidated Hydro, Inc.,
Class C Warrants* ............................................... 4,919 615
Total ........................................................... 1,092
FOOD AND KINDRED PRODUCTS - 0.46%
Keebler Foods Company* ............................................. 57,500 1,717,812
FOOD STORES - 0.65%
Kroger Co. (The)* .................................................. 110,000 2,426,875
NONDEPOSITORY INSTITUTIONS - 0.24%
California Federal Preferred Capital
Corporation, 9.125% Preferred ................................... 37,500 885,938
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND
WARRANTS (CONTINUED)
PAPER AND ALLIED PRODUCTS - 0.09%
SF Holdings Group, Inc., Class C (A)*............................... 8,700 $ 87
SF Holdings Group, Inc., 13.75%
Preferred* ...................................................... 100 285,000
SF Holdings Group, Inc., 13.75%
Preferred (A)* .................................................. 22 62,224
Total ........................................................... 347,311
PRINTING AND PUBLISHING - 0.27%
PRIMEDIA Inc., 10.0% Preferred ..................................... 10,000 1,015,000
RADIO AND TELEVISION BROADCASTING STATIONS - 0.63%
Infinity Broadcasting Corporation,
Class A* ........................................................ 80,500 2,359,656
WHOLESALE TRADE -- NONDURABLE GOODS - 0.19%
U.S. Foodservice* .................................................. 40,000 720,000
TOTAL COMMON AND PREFERRED STOCKS
AND WARRANTS - 5.21% $ 19,459,888
(Cost: $17,604,589)
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
<S> <C> <C>
CORPORATE DEBT SECURITIES
AGRICULTURAL PRODUCTION - CROPS - 0.37%
Hines Horticulture, Inc.,
11.75%, 10-15-2005 .............................................. $1,301 1,387,191
Total ...........................................................
AMUSEMENT AND RECREATION SERVICES - 4.93%
Empress Entertainment, Inc.,
8.125%, 7-1-2006 ................................................ 1,500 1,485,000
Hollywood Park, Inc.,
9.25%, 2-15-2007 ................................................ 1,750 1,680,000
Isle of Capri Casinos, Inc.,
8.75%, 4-15-2009 ................................................ 2,000 1,830,000
MGM Grand, Inc.,
6.875%, 2-6-2008 ................................................ 2,000 1,809,320
Mohegan Tribal Gaming Authority,
8.75%, 1-1-2009 ................................................. 1,000 980,000
Premier Parks Inc.:
9.25%, 4-1-2006 ................................................. 2,000 1,880,000
9.75%, 6-15-2007 ................................................ 2,500 2,375,000
Station Casinos, Inc.:
10.125%, 3-15-2006 .............................................. 1,000 1,025,000
8.875%, 12-1-2008 ............................................... 4,750 4,619,375
Trump Hotels & Casino Resorts
Holdings, L.P.,
15.5%, 6-15-2005 ................................................ 750 742,500
Total ........................................................... 18,426,195
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
APPAREL AND ACCESSORY STORES - 0.27%
Wilsons The Leather Experts Inc.,
11.25%, 8-15-2004 ............................................... $1,000 $ 1,022,500
APPAREL AND OTHER TEXTILE PRODUCTS - 0.54%
Consoltex Group Inc.,
11.0%, 10-1-2003 ................................................ 2,000 2,020,000
AUTO REPAIR, SERVICES AND PARKING - 0.55%
Avis Rent A Car, Inc.,
11.0%, 5-1-2009 (A) ............................................. 2,000 2,050,000
AUTOMOTIVE DEALERS AND SERVICE STATIONS - 0.26%
TravelCenters of America, Inc.,
10.25%, 4-1-2007 ................................................ 1,000 990,000
BUILDING MATERIALS AND GARDEN SUPPLIES - 0.27%
Central Tractor Farm & Country, Inc.,
10.625%, 4-1-2007 ............................................... 1,000 1,000,000
BUSINESS SERVICES - 4.87%
Adams Outdoor Advertising Limited Partnership,
10.75%, 3-15-2006 ............................................... 1,750 1,802,500
Coinmach Corporation,
11.75%, 11-15-2005 .............................................. 3,000 3,232,500
Cybernet Internet Services International,
Inc., Units,
14.0%, 7-1-2009 (A)(B) .......................................... 1,000 995,000
Lamar Advertising Company:
9.625%, 12-1-2006 ............................................... 2,000 2,035,000
8.625%, 9-15-2007 ............................................... 1,250 1,212,500
National Equipment Services, Inc.,
10.0%, 11-30-2004 ............................................... 3,750 3,675,000
PSINet Inc.,
10.0%, 2-15-2005 ................................................ 4,000 3,825,000
Protect One,
6.75%, 9-15-2003 (Convertible)................................... 2,000 1,440,000
Total ........................................................... 18,217,500
CABLE AND OTHER PAY TELEVISION SERVICES - 7.04%
Adelphia Communications Corporation:
10.25%, 7-15-2000 ............................................... 1,250 1,265,625
9.25%, 10-1-2002 ................................................ 2,450 2,462,250
10.5%, 7-15-2004 ................................................ 1,500 1,548,750
9.875%, 3-1-2007 ................................................ 2,500 2,525,000
Bresnan Communications Group LLC and
Bresnan Capital Corporation:
0.0%, 2-1-2009 (C) .............................................. 250 163,750
8.0%, 2-1-2009 .................................................. 1,000 986,250
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
CABLE AND OTHER PAY TELEVISION SERVICES (CONTINUED)
CSC Holdings, Inc.,
8.125%, 8-15-2009 ............................................... $ 2,000 $ 2,017,700
Classic Cable, Inc.,
9.375%, 8-1-2009 (A) ............................................ 1,750 1,684,375
Comcast Corporation,
9.5%, 1-15-2008 ................................................. 1,750 1,818,233
Comcast UK Cable Partners Limited,
0.0%, 11-15-2007 (C) ............................................ 4,000 3,620,000
Diamond Cable Communications Plc,
0.0%, 12-15-2005 (C) ............................................ 2,000 1,795,000
Diamond Holdings plc,
9.125%, 2-1-2008 ................................................ 1,500 1,455,000
Renaissance Media Group LLC,
0.0%, 4-15-2008 (C) ............................................. 1,750 1,211,875
Rifkin Acquisition Partners, L.L.L.P.,
11.125%, 1-15-2006 .............................................. 1,500 1,650,000
Telewest Communications plc,
0.0%, 4-15-2009 (A)(C) .......................................... 1,000 607,500
United International Holdings, Inc.,
0.0%, 2-15-2008 (C) ............................................. 2,500 1,512,500
Total ........................................................... 26,323,808
CHEMICALS AND ALLIED PRODUCTS - 2.75%
Chattem, Inc.,
8.875%, 4-1-2008 ................................................ 2,000 1,890,000
Dade International Inc.,
11.125%, 5-1-2006 ............................................... 1,000 1,037,500
Outsourcing Services Group, Inc.,
10.875%, 3-1-2006 ............................................... 1,500 1,410,000
UCC Investors Holding, Inc.,
10.5%, 5-1-2002 ................................................. 5,500 5,926,250
Total ........................................................... 10,263,750
COMMUNICATION - 21.57%
Alestra, S.A. de C.V.,
12.625%, 5-15-2009 (A) .......................................... 2,250 2,137,500
Allegiance Telecom, Inc.,
0.0%, 2-15-2008 (C) ............................................. 3,250 2,112,500
CenCall Communications Corp.,
10.125%, 1-15-2004 .............................................. 2,500 2,506,250
Charter Communications Holdings, LLC and
Charter Communications Holdings
Capital Corporation:
8.625%, 4-1-2009 (A) ............................................ 6,000 5,580,000
0.0%, 4-1-2011 (A)(C) ........................................... 1,000 590,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
COMMUNICATION (CONTINUED)
Concentric Network Corporation,
12.75%, 12-15-2007 .............................................. $ 1,000 $ 1,007,500
Crown Castle International Corp.:
0.0%, 5-15-2011 (C) ............................................. 5,000 2,875,000
9.0%, 5-15-2011 ................................................. 1,000 937,500
EchoStar DBS Corporation,
9.375%, 2-1-2009 ................................................ 6,500 6,402,500
GST Telecommunications,
0.0%, 11-15-2007 (C) ............................................ 2,500 2,643,750
Hyperion Telecommunications, Inc.:
0.0%, 4-15-2003 (C) ............................................. 4,000 3,360,000
12.0%, 11-1-2007 ................................................ 1,750 1,758,750
ICG Holdings, Inc.,
0.0%, 9-15-2005 (C) ............................................. 2,250 1,957,500
ICG Services, Inc.,
0.0%, 5-1-2008 (C) .............................................. 2,500 1,387,500
ITC /\ DeltaCom, Inc.:
8.875%, 3-1-2008 ................................................ 1,000 950,000
9.75%, 11-15-2008 ............................................... 1,500 1,496,250
Intercel, Inc.,
0.0%, 2-1-2006 (C) .............................................. 1,750 1,518,125
Intermedia Communications of Florida, Inc.,
0.0%, 5-15-2006 (C) ............................................. 1,250 1,012,500
MetroNet Communications Corp.,
0.0%, 6-15-2008 (C) ............................................. 2,500 1,928,550
Microcell Telecommunications Inc.,
0.0%, 6-1-2006 (C) .............................................. 5,900 4,926,500
Nextel Communications, Inc.:
9.75%, 8-15-2004 ............................................... 4,275 4,307,062
0.0%, 9-15-2007 (C) ............................................. 1,500 1,106,250
0.0%, 2-15-2008 (C) ............................................. 2,500 1,743,750
Nextel Partners, Inc.,
0.0%, 2-1-2009 (C) .............................................. 5,500 3,203,750
NEXTLINK Communications, Inc.,
10.75%, 6-1-2009 ................................................ 1,000 1,005,000
ONO Finance Plc, Units,
13.0%, 5-1-2009 (A)(D) .......................................... 2,500 2,615,625
OnePoint Communications Corp.,
14.5%, 6-1-2008 (A).............................................. 2,000 1,310,000
Primus Telecommunications Group, Incorporated,
11.75%, 8-1-2004 ................................................ 2,000 1,965,000
Rhythms NetConnections Inc.,
12.75%, 4-15-2009 (A) ........................................... 2,000 1,800,000
Sprint Spectrum L.P.,
0.0%, 8-15-2006 (C) ............................................. 5,100 4,723,110
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
COMMUNICATION (CONTINUED)
Time Warner Telecom LLC and Time Warner
Telecom Inc.,
9.75%, 7-15-2008 ................................................ $ 1,750 $ 1,763,125
Tritel PCS, Inc.,
0.0%, 5-15-2009 (A)(C) ......................................... 2,000 1,120,000
Triton PCS, Inc.,
0.0%, 5-1-2008 (C) .............................................. 2,000 1,340,000
VersaTel Telecom B.V.,
11.875%, 7-15-2009 .............................................. 1,250 1,184,375
VersaTel Telecom International N.V.,
13.25%, 5-15-2008 ............................................... 1,500 1,485,000
Viatel Inc.,
11.5%, 3-15-2009 ................................................ 1,250 1,181,250
WinStar Communications, Inc.,
10.0%, 3-15-2008 ................................................ 2,000 1,660,000
Total ........................................................... 80,601,472
EATING AND DRINKING PLACES - 1.53%
Domino's, Inc.,
10.375%, 1-15-2009 .............................................. 2,000 1,900,000
Foodmaker, Inc.,
8.375%, 4-15-2008 ............................................... 3,000 2,895,000
NE Restaurant Company, Inc.,
10.75%, 7-15-2008 ............................................... 1,000 910,000
Total ........................................................... 5,705,000
ELECTRIC, GAS AND SANITARY SERVICES - 3.43%
Allied Waste North America, Inc.:
7.875%, 1-1-2009 ................................................ 4,000 3,525,000
10.0%, 8-1-2009 (A) ............................................. 4,000 3,730,000
Browning Ferris Industries Inc.,
6.375%, 1-15-2008 ............................................... 1,500 1,200,000
El Paso Electric Company:
8.9%, 2-1-2006 .................................................. 2,000 2,153,880
9.4%, 5-1-2011 .................................................. 2,000 2,199,120
Total ........................................................... 12,808,000
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT - 2.23%
Communications & Power Industries, Inc.,
12.0%, 8-1-2005 ................................................. 2,000 1,720,000
Elgar Holdings, Inc.,
9.875%, 2-1-2008 ................................................ 1,250 900,000
Exide Corporation,
10.0%, 4-15-2005 ................................................ 510 507,450
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT (CONTINUED)
Juno Lighting, Inc.,
11.875%, 7-1-2009 (A) ........................................... $ 1,500 $ 1,488,750
Level 3 Communications, Inc.:
9.125%, 5-1-2008 ................................................ 1,000 905,000
0.0%, 12-1-2008 (C) ............................................. 5,000 2,800,000
Total ........................................................... 8,321,200
FABRICATED METAL PRODUCTS - 1.52%
AXIA Incorporated,
10.75%, 7-15-2008 ............................................... 750 708,750
Falcon Building Products, Inc.,
0.0%, 6-15-2007 (C) ............................................. 3,000 2,130,000
Neenah Corporation,
11.125%, 5-1-2007 ............................................... 3,000 2,835,000
Total ........................................................... 5,673,750
FOOD AND KINDRED PRODUCTS - 0.95%
B & G Foods, Inc.,
9.625%, 8-1-2007 ................................................ 2,000 1,855,000
Fresh Foods, Inc.,
10.75%, 6-1-2006 ................................................ 650 624,000
Southern Foods Group, L.P. and SFG Capital
Corporation,
9.875%, 9-1-2007 ................................................ 1,000 1,072,500
Total ........................................................... 3,551,500
FOOD STORES - 1.03%
Big V Supermarkets, Inc.,
11.0%, 2-15-2004 ................................................ 1,500 1,518,750
Pueblo Xtra International, Inc.,
9.5%, 8-1-2003 .................................................. 2,750 2,337,500
Total ........................................................... 3,856,250
FURNITURE AND FIXTURES - 0.36%
Sealy Mattress Company,
0.0%, 12-15-2007 (C) ............................................ 2,000 1,335,000
FURNITURE AND HOME FURNISHINGS STORES - 0.34%
MTS, INCORPORATED,
9.375%, 5-1-2005 ................................................ 750 555,000
Mattress Discounters, Inc., Units,
12.625%, 7-15-2007 (A)(E) ....................................... 750 725,625
Total ........................................................... 1,280,625
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
HOLDING AND OTHER INVESTMENT OFFICES - 0.19%
LTC Properties, Inc.,
8.5%, 1-1-2001 (Convertible) .................................... $ 1,000 $ 697,500
HOTELS AND OTHER LODGING PLACES - 3.33%
CapStar Hotel Company,
8.75%, 8-15-2007 ................................................ 1,000 910,000
Coast Hotels and Casinos, Inc.,
9.5%, 4-1-2009 .................................................. 1,250 1,181,250
HMH Properties, Inc.,
7.875%, 8-1-2008 ................................................ 5,000 4,462,500
Lodgian Financing Corp.,
12.25%, 7-15-2009 (A) ........................................... 3,000 2,940,000
Prime Hospitality Corp.:
9.25%, 1-15-2006 ................................................ 2,000 2,012,500
9.75%, 4-1-2007 ................................................. 1,000 960,000
Total ........................................................... 12,466,250
INDUSTRIAL MACHINERY AND EQUIPMENT - 1.28%
American Standard Inc.,
9.25%, 12-1-2016 ................................................ 1,050 1,055,250
Anchor Lamina Inc. and
Anchor Lamina America, Inc.,
9.875%, 2-1-2008 ................................................ 1,000 880,000
Terex Corporation,
8.875%, 4-1-2008 ................................................ 3,000 2,835,000
Total ........................................................... 4,770,250
INSTRUMENTS AND RELATED PRODUCTS - 0.99%
Maxxim Medical, Inc.,
10.5%, 8-1-2006 ................................................. 3,500 3,710,000
INSURANCE CARRIERS - 0.27%
LifePoint Hospitals, Inc.,
10.75%, 5-15-2009 (A) ........................................... 1,000 997,500
MISCELLANEOUS MANUFACTURING INDUSTRIES - 0.23%
Hedstrom Corporation,
10.0%, 6-1-2007 ................................................. 1,000 860,000
MISCELLANEOUS RETAIL - 1.50%
Frank's Nursery & Crafts, Inc.,
10.25%, 3-1-2008 ................................................ 2,000 1,900,000
Michaels Stores, Inc.,
10.875%, 6-15-2006 .............................................. 3,500 3,692,500
Total ........................................................... 5,592,500
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
MOTION PICTURES - 1.20%
AMC Entertainment Inc.,
9.5%, 3-15-2009 ................................................. $ 750 $ 626,250
Loews Cineplex Entertainment Corporation,
8.875%, 8-1-2008 ................................................ 2,000 1,810,000
Regal Cinemas, Inc.,
9.5%, 6-1-2008 .................................................. 3,000 2,040,000
Total ........................................................... 4,476,250
OIL AND GAS EXTRACTION - 0.26%
Canadian Forest Oil Co. Ltd.,
8.75%, 9-15-2007 ................................................ 1,000 965,000
PAPER AND ALLIED PRODUCTS - 1.83%
Container Corporation of America,
10.75%, 5-1-2002 ................................................ 2,000 2,065,000
Fonda Group, Inc. (The),
9.5%, 3-1-2007 .................................................. 2,000 1,750,000
Mail-Well I Corporation,
8.75%, 12-15-2008 ............................................... 2,000 1,920,000
SF Holdings Group, Inc.,
0.0%, 3-15-2008 (C) ............................................. 2,500 1,118,750
Total ........................................................... 6,853,750
PETROLEUM AND COAL PRODUCTS - 0.49%
Building Materials Corporation of America,
8.0%, 12-1-2008 ................................................. 2,000 1,850,000
PRIMARY METAL INDUSTRIES - 1.75%
Commonwealth Aluminum Corporation,
10.75%, 10-1-2006 ............................................... 2,000 2,045,000
ISG Resources, Inc.,
10.0%, 4-15-2008 ................................................ 1,750 1,697,500
SIMCALA, Inc.,
9.625%, 4-15-2006 ............................................... 1,500 881,250
Wheeling-Pittsburgh Corporation,
9.25%, 11-15-2007 ............................................... 2,000 1,920,000
Total ........................................................... 6,543,750
PRINTING AND PUBLISHING - 2.67%
Big Flower Press Holdings, Inc.,
8.625%, 12-1-2008 ............................................... 2,250 2,160,000
K-III Communications Corporation,
8.5%, 2-1-2006 .................................................. 1,000 970,000
Perry-Judd's Incorporated,
10.625%, 12-15-2007 ............................................. 4,000 3,650,000
TransWestern Publishing Company LLC and
TWP Capital Corp. II,
9.625%, 11-15-2007 .............................................. 1,000 975,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
PRINTING AND PUBLISHING (CONTINUED)
World Color Press, Inc.,
8.375%, 11-15-2008 .............................................. $ 2,250 $ 2,221,875
Total ........................................................... 9,976,875
RAILROAD TRANSPORTATION - 0.15%
TFM, S.A. de C.V.,
0.0%, 6-15-2009 (C) ............................................. 1,000 550,000
RADIO AND TELEVISION BROADCASTING STATIONS - 4.86%
Allbritton Communications Company,
9.75%, 11-30-2007 ............................................... 2,000 1,990,000
American Radio Systems Corporation,
9.0%, 2-1-2006 .................................................. 1,000 1,045,000
Chancellor Media Corporation of Los Angeles:
10.5%, 1-15-2007 ................................................ 2,000 2,150,000
8.0%, 11-1-2008 ................................................. 2,000 1,940,000
JCAC, Inc.,
10.125%, 6-15-2006 .............................................. 1,000 1,080,000
LIN Holdings Corp.,
0.0%, 3-1-2008 (C) .............................................. 3,500 2,371,250
SFX Broadcasting, Inc.,
10.75%, 5-15-2006 ............................................... 986 1,094,460
Salem Communications Corporation,
9.5%, 10-1-2007 ................................................. 1,000 1,000,000
Sinclair Broadcast Group, Inc.,
9.0%, 7-15-2007 ................................................. 1,500 1,417,500
Susquehanna Media Co.,
8.5%, 5-15-2009 (A) ............................................. 1,000 985,000
Rogers Communications Inc.,
9.125%, 1-15-2006 ............................................... 3,000 3,082,500
Total ........................................................... 18,155,710
RUBBER AND MISCELLANEOUS PLASTICS PRODUCTS - 2.71%
Furon Company,
8.125%, 3-1-2008 ................................................ 1,000 942,500
Globe Manufacturing Corp.,
10.0%, 8-1-2008 ................................................. 1,250 812,500
Graham Packaging Company and
GPC Capital Corp. I,
8.75%, 1-15-2008 ................................................ 3,000 2,820,000
Home Products International, Inc.,
9.625%, 5-15-2008 ............................................... 2,500 2,225,000
LDM Technologies, Inc.,
10.75%, 1-15-2007 ............................................... 2,000 1,720,000
Moll Industries, Inc.,
10.5%, 7-1-2008 ................................................. 2,000 1,600,000
Total ........................................................... 10,120,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
TEXTILE MILL PRODUCTS - 0.81%
Anvil Knitwear, Inc.,
10.875%, 3-15-2007 .............................................. $1,500 $ 960,000
Collins & Aikman Products Co.,
11.5%, 4-15-2006 ................................................ 1,500 1,417,500
Glenoit Corporation,
11.0%, 4-15-2007 ................................................ 1,000 662,500
Total ........................................................... 3,040,000
TRANSPORTATION BY AIR - 2.69%
Atlas Air, Inc.,
9.375%, 11-15-2006 .............................................. 4,500 4,365,000
RSL Communications, Ltd.,
10.5%, 11-15-2008 ............................................... 6,250 5,687,500
Total ........................................................... 10,052,500
TRANSPORTATION EQUIPMENT - 2.34%
Delco Remy International, Inc.,
8.625%, 12-15-2007 .............................................. 1,400 1,298,500
Federal-Mogul Corporation:
7.75%, 7-1-2006 ................................................. 2,000 1,882,380
7.875%, 7-1-2010 ................................................ 2,500 2,277,825
Safety Components International, Inc.,
10.125%, 7-15-2007 .............................................. 2,250 1,822,500
Westinghouse Air Brake Company (The),
9.375%, 6-15-2005 ............................................... 1,500 1,485,000
Total ........................................................... 8,766,205
TRANSPORTATION SERVICES - 0.46%
Railworks Corporation,
11.5%, 4-15-2009 (A) ............................................ 1,750 1,715,000
TRUCKING AND WAREHOUSING - 0.80%
Iron Mountain Incorporated,
10.125%, 10-1-2006 .............................................. 1,000 1,035,000
Pierce Leahy Corp.,
9.125%, 7-15-2007 ............................................... 2,000 1,950,000
Total ........................................................... 2,985,000
WHOLESALE TRADE - DURABLE GOODS - 1.33%
AAi.Fostergrant, Inc.,
10.75%, 7-15-2006 ............................................... 500 205,000
Federal Data Corporation,
10.125%, 8-1-2005 ............................................... 1,000 915,000
Heafner (J.H.) Company, Inc. (The),
10.0%, 5-15-2008 ................................................ 2,500 2,425,000
WESCO Distribution, Inc.,
9.125%, 6-1-2008 ................................................ 1,500 1,413,750
Total ........................................................... 4,958,750
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
WHOLESALE TRADE - NONDURABLE GOODS - 0.31%
Core-Mark International, Inc.,
11.375%, 9-15-2003 .............................................. $1,200 $ 1,153,500
TOTAL CORPORATE DEBT SECURITIES - 87.26% $326,090,031
(Cost: $341,789,497)
OTHER GOVERNMENT SECURITY - 1.01%
MEXICO
United Mexican States,
9.75%, 4-6-2005 .................................................. 3,750 $ 3,796,875
(Cost: $3,748,615)
TOTAL SHORT-TERM SECURITIES - 4.91% $ 18,340,000
(Cost: $18,340,000)
TOTAL INVESTMENT SECURITIES - 98.39% $367,686,794
(Cost: $381,482,701)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.61% 6,012,021
NET ASSETS - 100.00% $373,698,815
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1999
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, 1999, the value of
these securities amounted to $34,211,773 or 9.15% of net assets.
(B) Each unit of Cybernet Internet Services International, Inc. consists of
$1,000 principal amount of 14.0% senior notes due 2009 and one warrant to
purchase 30.2310693 shares of common stock.
(C) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(D) Each unit of ONO Finance Plc consists of $1,000 principal amount of 13.0%
Dollar Notes and one Dollar Equity Value Certificate evidencing the right
to receive the cash value of 0.002299657 of one ordinary share of
Cableuropa in dollars.
(E) Each unit of Mattress Discounters, Inc. consists of $1,000 principal amount
of 12.625% senior notes due 2007 and one warrant to purchase 4.85 shares of
Class A common stock and 0.539 shares of Class L common stock at an
exercise price of $0.01 per share.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Investment securities -- at value (Notes 1 and 3) ........................................ $367,687
Cash ..................................................................................... 3
Receivables:
Interest and dividends ................................................................ 7,767
Investment securities sold ............................................................ 476
Fund shares sold ...................................................................... 395
Prepaid insurance premium ................................................................ 15
--------
Total assets ........................................................................ 376,343
--------
LIABILITIES
Payable to Fund shareholders.............................................................. 1,387
Investment securities purchased........................................................... 825
Dividends payable ........................................................................ 249
Accrued transfer agency and dividend
disbursing (Note 2).................................................................... 78
Accrued service fee (Note 2) ............................................................. 62
Accrued distribution fee (Note 2) ........................................................ 15
Accrued management fee (Note 2) .......................................................... 6
Accrued accounting services fee (Note 2) ................................................. 5
Other .................................................................................... 17
--------
Total liabilities ................................................................... 2,644
--------
Total net assets ................................................................. $373,699
========
NET ASSETS
$1.00 par value capital stock
Capital stock ......................................................................... $96,368
Additional paid-in capital ............................................................ 328,950
Accumulated undistributed loss:
Accumulated undistributed net realized
loss on investment transactions ..................................................... (37,823)
Net unrealized depreciation in value of
investments ......................................................................... (13,796)
--------
Net assets applicable to outstanding
units of capital ................................................................. $373,699
========
Net asset value per share (net assets divided
by shares outstanding)
Class A ............................................................................... $3.88
Class Y ............................................................................... $3.88
Capital shares outstanding
Class A ............................................................................... 95,678
Class Y ............................................................................... 690
Capital shares authorized ................................................................... 400,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
INVESTMENT INCOME
Income (Note 1B):
Interest and amortization ............................................................. $37,656
Dividends ............................................................................. 1,026
-------
Total income ........................................................................ 38,682
-------
Expenses (Note 2):
Investment management fee ............................................................. 2,248
Service fee - Class A ................................................................. 897
Transfer agency and dividend disbursing - Class A...................................... 750
Distribution fee - Class A ............................................................ 89
Accounting services fee ............................................................... 60
Custodian fees ........................................................................ 19
Audit fees ............................................................................ 18
Legal fees ............................................................................ 11
Shareholder servicing - Class Y........................................................ 4
Other ................................................................................. 146
-------
Total expenses ...................................................................... 4,242
-------
Net investment income ............................................................ 34,440
-------
REALIZED AND UNREALIZED LOSS ON
INVESTMENTS (NOTES 1 AND 3)
Realized net loss on investments ......................................................... (21,144)
Unrealized depreciation in value of investments
during the period ..................................................................... (2,844)
-------
Net loss on investments ............................................................... (23,988)
-------
Net increase in net assets resulting
from operations .................................................................. $10,452
=======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<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,
-------------------------
1999 1998
INCREASE (DECREASE) IN NET ASSETS ------------ ------------
<S> <C> <C>
Operations:
Net investment income ........................................... $34,440 $ 34,971
Realized net gain (loss) on
investments .................................................. (21,144) 4,820
Unrealized depreciation ......................................... (2,844) (34,757)
-------- --------
Net increase in net assets
resulting from operations .................................. 10,452 5,034
-------- --------
Dividends to shareholders from
net investment income (Note 1D):*
Class A ......................................................... (34,192) (34,790)
Class Y ......................................................... (248) (181)
-------- --------
(34,440) (34,971)
-------- --------
Capital share transactions:
Proceeds from sale of shares:
Class A (10,626,459 and 17,927,324
shares, respectively) ...................................... 43,551 77,845
Class Y (655,027 and 279,221
shares, respectively) ...................................... 2,741 1,264
Proceeds from reinvestment of
dividends:
Class A (7,682,689 and 7,125,552
shares, respectively) ...................................... 31,283 31,452
Class Y (60,446 and 40,487
shares, respectively) ...................................... 246 178
Payments for shares redeemed:
Class A (23,492,323 and 16,161,757
shares, respectively) ...................................... (95,780) (70,753)
Class Y (648,366 and 58,442
shares, respectively) ...................................... (2,699) (261)
-------- --------
Net increase (decrease) in net assets
resulting from capital
share transactions ...................................... (20,658) 39,725
-------- --------
Total increase (decrease) .............................. (44,646) 9,788
NET ASSETS
Beginning of period ................................................ 418,345 408,557
-------- --------
End of period ...................................................... $373,699 $418,345
======== ========
Undistributed net investment
income ........................................................ $--- $---
==== ====
</TABLE>
*See "Financial Highlights" on pages - .
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period........................... $4.12 $4.42 $4.14 $4.03 $3.96
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.35 0.37 0.36 0.35 0.35
Net realized and
unrealized gain
(loss) on
investments .................. (0.24) (0.30) 0.28 0.11 0.07
----- ----- ----- ----- -----
Total from investment
operations ...................... 0.11 0.07 0.64 0.46 0.42
----- ----- ----- ----- -----
Less dividends declared
from net investment
income........................... (0.35) (0.37) (0.36) (0.35) (0.35)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $3.88 $4.12 $4.42 $4.14 $4.03
===== ===== ===== ===== =====
Total return* ...................... 2.66% 1.22% 16.20% 11.90% 11.25%
Net assets, end of
period (in
millions) ....................... $371 $416 $407 $368 $368
Ratio of expenses to
average net assets............... 1.06% 0.96% 0.93% 0.95% 0.89%
Ratio of net investment
income to average
net assets ...................... 8.60% 8.26% 8.54% 8.60% 8.93%
Portfolio turnover
rate ............................ 46.17% 58.85% 64.38% 55.64% 26.82%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
CLASS Y SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE
FOR THE FISCAL YEAR PERIOD
ENDED SEPTEMBER 30, FROM 2/27/96*
-------------------------------- THROUGH
1999 1998 1997 9/30/96
------ ------ ------ --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $4.12 $4.42 $4.14 $4.15
----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.36 0.37 0.37 0.21
Net realized and
unrealized gain (loss)
on investments................ (0.24) (0.30) 0.28 (0.01)
----- ----- ----- -----
Total from investment
operations....................... 0.12 0.07 0.65 0.20
----- ----- ----- -----
Less dividends declared
from net investment
income........................... (0.36) (0.37) (0.37) (0.21)
----- ----- ----- -----
Net asset value,
end of period.................... $3.88 $4.12 $4.42 $4.14
===== ===== ===== =====
Total return ....................... 2.95% 1.38% 16.38% 5.00%
Net assets, end of
period (in
millions) ....................... $3 $2 $2 $2
Ratio of expenses
to average net
assets........................... 0.77% 0.79% 0.77% 0.77%**
Ratio of net
investment income
to average net
assets........................... 8.89% 8.43% 8.69% 8.83%**
Portfolio
turnover rate.................... 46.17% 58.85% 64.38% 55.64%**
</TABLE>
*Commencement of operations.
**Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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,
with a secondary objective of capital growth when consistent with the primary
objective. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a pricing service or dealer in bonds.
Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Stocks which are traded over-the-counter are
priced using the Nasdaq Stock Market, which provides information on bid and
asked prices quoted by major dealers in such stocks. Restricted securities
and securities for which market quotations are not readily available are
valued at fair value as determined in good faith under procedures
established by and under the general supervision of the Fund's Board of
Directors. Short-term debt securities are valued at amortized cost, which
approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the Internal
Revenue Code), premiums on the purchase of bonds and post-1984 market
discount are amortized for both financial and tax reporting purposes over
the remaining lives of the bonds. Dividend income is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. See
Note 3 -- Investment Security Transactions.
C. Federal income taxes -- The Fund intends to distribute all of its net
investment income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code. In addition, the Fund intends to pay distributions
as required to avoid imposition of excise tax. Accordingly, provision has
not been made for Federal income taxes. See Note 4 -- Federal Income Tax
Matters.
D. Dividends and distributions -- All of the Fund's net investment income is
declared and recorded by the Fund as dividends payable on each day to
shareholders of record as of the close of the preceding business day. Net
investment income dividends and capital gains distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are due to differing
treatments for items such as deferral of wash sales and post-
<PAGE>
October losses, foreign currency transactions, net operating losses and
expiring capital loss carryovers. At September 30, 1999, the Fund
reclassified $19,801,215 between additional paid-in-capital and accumulated
undistributed net realized losses. Reported net investment income, net
realized gains and net assets were not affected by this change.
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. As of June 30,
1999, the fee is payable by the Fund at the annual rate of 0.625% of net assets
up to $500 million, 0.60% of net assets over $500 million and up to $1 billion,
0.55% of net assets over $1 billion and up to $1.5 billion, and 0.50% of net
assets over $1.5 billion. Prior to June 30, 1999, the fee consisted 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 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 the 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.
<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
$1,114,812, out of which W&R paid sales commissions of $644,716 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 $15,521 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 $175,517,588 while proceeds from maturities
and sales aggregated $170,723,810 Purchases of short-term securities aggregated
$2,446,300,707 while proceeds from maturities and sales aggregated
$2,479,499,146. No U.S. Government Securities were bought or sold during the
period ended September 30, 1999.
For Federal income tax purposes, cost of investments owned at September 30,
1999 was $381,482,701, resulting in net unrealized
<PAGE>
depreciation of $13,795,907, of which $7,547,531 related to appreciated
securities and $21,343,438 related to depreciated securities.
NOTE 4 -- FEDERAL INCOME TAX MATTERS
For Federal income tax purposes, the Fund realized capital losses of
$1,199,357 during its fiscal year ended September 30, 1999, which included the
effect of certain losses deferred into the next fiscal year (see discussion
below). Capital loss carryovers aggregated $17,602,416 at September 30, 1999,
and are available to offset future realized capital gain net income for Federal
income tax purposes but will expire if not utilized as follows: $8,229,670 at
September 30, 2000; $390,079 at September 30, 2003; $7,783,310 at September 30,
2004; and $1,199,357 at September 30, 2007.
Internal Revenue Code regulations permits the Fund to defer into its next
fiscal year net capital losses or net long-term capital losses incurred between
each November 1 and the end of its fiscal year ("post-October losses"). From
November 1, 1998 through September 30, 1999, the Fund incurred net capital
losses of $19,944,947, which have been deferred to the fiscal year ending
September 30, 2000.
NOTE 5 -- MULTICLASS OPERATIONS
The Fund is authorized to offer four classes of shares, Class A, Class B,
Class C and Class Y, each of which have equal rights as to assets and voting
privileges. Only Class A and Class Y shares were issued during the fiscal year
ended September 30, 1999. Class Y shares are not subject to a sales charge on
purchases, are not subject to a Rule 12b-1 Distribution and Service Plan and are
subject to 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.
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 their
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United High Income Fund II, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United High Income Fund II, Inc. (the "Fund") as
of September 30, 1999, and the related statement of operations for the fiscal
year then ended, the statements of changes in net assets for each of the two
fiscal years in the period then ended, and the financial highlights for each of
the five fiscal years in the 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 as of
September 30, 1999, by correspondence with the custodian and brokers. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of United
High Income Fund II, Inc. as of September 30, 1999, the results of its
operations for the fiscal year then ended, the changes in its net assets for
each of the two fiscal years in the period then ended, and the financial
highlights for each of the five fiscal years in the period then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Kansas City, Missouri
November 5, 1999
