<PAGE>
Please read this Prospectus before investing, and keep it on file for future
reference. It sets forth concisely the information about the Fund that you
ought to know before investing.
Additional information has been filed with the Securities and Exchange
Commission and is contained in a Statement of Additional Information ("SAI")
dated August 29, 1995. The SAI is available free upon request to the Fund or
Waddell & Reed, Inc., the Fund's underwriter, at the address or telephone
number below. The SAI is incorporated by reference into this Prospectus and
you will not be aware of all facts unless you read both this Prospectus and the
SAI.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
United Continental Income Fund, Inc.
Class A Shares
This Fund seeks to provide current income to the extent that, in the opinion of
the Fund's investment manager, market and economic conditions permit. As a
secondary goal, this Fund seeks long-term appreciation of capital.
This Prospectus describes one class of shares of the Fund -- Class A Shares.
Prospectus
August 29, 1995
UNITED CONTINENTAL INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
<PAGE>
Table of Contents
AN OVERVIEW OF THE FUND.........................3
EXPENSES........................................5
FINANCIAL HIGHLIGHTS............................6
PERFORMANCE.....................................8
Explanation of Terms ..........................8
ABOUT WADDELL & REED............................9
ABOUT THE INVESTMENT PRINCIPLES OF THE FUND....10
Investment Goals and Principles ..............10
Risk Considerations ........................10
Securities and Investment Practices ........11
ABOUT YOUR ACCOUNT.............................21
Ways to Set Up Your Account ..................21
Buying Shares ................................22
Minimum Investments ..........................24
Adding to Your Account .......................24
Selling Shares ...............................25
Shareholder Services .........................27
Personal Service ...........................27
Reports ....................................27
Exchanges ..................................27
Automatic Transactions .....................27
Dividends, Distributions and Taxes ...........28
Distributions ..............................28
Taxes ......................................29
ABOUT THE MANAGEMENT AND EXPENSES OF THE FUND..31
WRIMCO and Its Affiliates ....................32
Breakdown of Expenses ........................33
Management Fee .............................33
Other Expenses .............................34
<PAGE>
An Overview of the Fund
The Fund: This Prospectus describes the Class A shares of United Continental
Income Fund, Inc., an open-end, diversified management investment company.
Goals and Strategies: United Continental Income Fund, Inc. (the "Fund") seeks
to provide current income to the extent that, in the opinion of the Fund's
investment manager, market and economic conditions permit. As a secondary
goal, the Fund seeks long-term appreciation of capital. The Fund seeks to
achieve these goals by investing in different kinds of securities. See "About
the Investment Principles of the Fund" for further information.
Management: Waddell & Reed Investment Management Company ("WRIMCO") provides
investment advice to the Fund and manages the Fund's investments. WRIMCO is a
wholly-owned subsidiary of Waddell & Reed, Inc. WRIMCO, Waddell & Reed, Inc.
and its predecessors have provided investment management services to registered
investment companies since 1940. See "About the Management and Expenses of the
Fund" for further information about management fees.
Distributor: Waddell & Reed, Inc. acts as principal underwriter and
distributor of the shares of the Fund.
Purchases: You may buy Class A shares of the Fund through Waddell & Reed, Inc.
and its account representatives. The price to buy a Class A share of the Fund
is the net asset value of a Class A share plus a sales charge. See "About Your
Account" for information on how to purchase Class A shares.
Redemptions: You may redeem your shares at net asset value. When you sell
your shares, they may be worth more or less than what you paid for them. See
"About Your Account" for a description of redemption and reinvestment
procedures.
Risk Considerations: Because the Fund owns different types of investments, its
performance will be affected by a variety of factors. The value of the Fund's
investments and the income generated will vary from day to day, generally
reflecting changes in interest rates, market conditions, and other company and
economic news. Performance will also depend on WRIMCO's skill in selecting
investments. See "About the Investment Principles of the Fund" for information
about the risks associated with the Fund's investments.
<PAGE>
Expenses
Shareholder transaction expenses are charges you pay when you buy or sell
shares of a fund.
Maximum sales load
on purchases 5.75%
(as a percentage of
offering price)
Maximum sales load
on reinvested
dividends None
Deferred
sales load None
Redemption fees None
Exchange fee None
Annual Fund operating expenses (as a percentage of average net assets).
Management fees1 0.57%
12b-1 fees 0.11%
Other expenses 0.24%
Total Fund operating
expenses2 0.92%
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return3 and (2) redemption at the end of each time period:
1 year $ 66
3 years $ 85
5 years $105
10 years $164
The purpose of this table is to assist you in understanding the various costs
and expenses that a shareholder of the Class A shares of the Fund will bear
directly or indirectly. The example should not be considered a representation
of past or future expenses; actual expenses may be greater or lesser than those
shown. For a more complete discussion of certain expenses and fees, see
"Breakdown of Expenses."
1Expense information has been restated to reflect the current management fees
which became effective December 1, 1994.
2Retirement plan accounts may be subject to a $2 fee imposed by the plan
custodian for use of the Flexible Withdrawal Service.
3Use of an assumed annual return of 5% is for illustration purposes only and is
not a representation of the Fund's future performance, which may be greater or
lesser.
<PAGE>
Financial Highlights
(Audited)
The following information has been audited by Price Waterhouse LLP, independent
accountants, and should be read in conjunction with the financial statements
and
notes thereto, together with the report of Price Waterhouse LLP, included in
the
SAI.
For a Class A share outstanding throughout each period.*
<TABLE>
<CAPTION>
For the fiscal year ended March 31,
------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......... $20.67 $20.45 $18.70 $16.93 $16.72 $15.27 $14.89 $21.27 $20.74 $15.26
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income ........ .70 .70 .83 .73 .84 .91 .93 .82 .85 .85
Net realized and
unrealized gain (loss)
on investments .58 .61 1.75 1.76 .20 1.50 .40 (3.16) 1.97 5.58
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ...... 1.28 1.31 2.58 2.49 1.04 2.41 1.33 (2.34) 2.82 6.43
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income (0.70) (0.70) (0.83) (0.72) (0.83) (0.96) (0.95) (0.87) (0.77) (0.95)
Distribution from
capital gains (0.41) (0.39) 0.00 0.00 0.00 0.00 0.00 (3.17) (1.52) 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (1.11) (1.09) (0.83) (0.72) (0.83) (0.96) (0.95) (4.04) (2.29) (0.95)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period .. $20.84 $20.67 $20.45 $18.70 $16.93 $16.72 $15.27 $14.89 $21.27 $20.74
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return** ... 6.39% 6.40% 14.08% 14.98% 6.61% 15.90% 9.26% -11.64% 14.62% 43.58%
Net assets, end of
period (000
omitted) ....... $432,997 $412,843 $387,381 $339,540 $311,173 $312,984 $293,016 $323,160 $360,722 $166,203
Ratio of expenses to
average net assets 0.89% 0.81% 0.77% 0.80% 0.85% 0.81% 0.85% 0.84% 0.79% 0.83%
Ratio of net investment
income to average net
assets ......... 3.37% 3.29% 4.24% 4.03% 5.15% 5.38% 6.05% 4.74% 4.68% 5.27%
Portfolio turnover
rate ........... 41.30% 41.01% 111.36% 181.82% 207.62% 231.04% 161.24% 192.19% 239.71% 211.50%
*On August 29, 1995, the Fund began offering Class Y shares to the public. Fund shares outstanding prior to that date
were designated Class A shares.
**Total return calculated without taking into account the sales load deducted on an initial purchase.
</TABLE>
<PAGE>
Performance
Mutual fund performance is commonly measured as total return. The Fund may
also advertise its performance by showing performance rankings. Performance
information is calculated and presented separately for each class of Fund
shares.
Explanation of Terms
Total Return is the overall change in value of an investment in the Fund over a
given period, assuming reinvestment of any dividends and distributions. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period. Average annual total
returns smooth out variations in performance; they are not the same as actual
year-by-year results. Non-standardized total return may not reflect deduction
of the applicable sales charge or may be for periods other than those required
to be presented or may otherwise differ from standardized total return. Total
return quotations that do not reflect the applicable sales charge will reflect
a higher rate of return.
Performance Rankings are comparisons of the Fund's performance to the
performance of other selected mutual funds, selected recognized market
indicators such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average, or non-market indices or averages of mutual fund industry
groups. The Fund may quote its performance rankings and/or other information
as published by recognized independent mutual fund statistical services or by
publications of general interest. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
relates, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of sales charges, fee waivers and/or expense
reimbursements.
All performance information that the Fund advertises or includes in information
provided to present or prospective shareholders is historical in nature and is
not intended to represent or guarantee future results. The value of the Fund's
shares when redeemed may be more or less than their original cost.
The Fund's recent performance and holdings will be detailed twice a year in the
Fund's annual and semiannual reports, which are sent to all Fund shareholders.
<PAGE>
About Waddell & Reed
Since 1937, Waddell & Reed has been helping people make the most of their
financial future by helping them take advantage of various financial services.
Today, Waddell & Reed has over 2500 account representatives located throughout
the United States. Your primary contact in your dealings with Waddell & Reed
will be your local account representative. However, the Waddell & Reed
shareholder services department, which is part of the Waddell & Reed
headquarters operations in Overland Park, Kansas, is available to assist you
and your Waddell & Reed account representative. You may speak with a customer
service representative by calling 913-236-2000.
<PAGE>
About the Investment Principles of the Fund
Investment Goals and Principles
The goal of the Fund is to provide current income to the extent that, in
WRIMCO's opinion, market and economic conditions permit. Secondarily, the Fund
seeks long-term appreciation of capital. There is no assurance that the Fund
will achieve its goals.
There are three main kinds of securities that the Fund owns: common stock,
preferred stock and debt securities. The Fund may also own convertible
securities.
Normally, at least one quarter of the Fund's total assets will be invested in
either debt securities or preferred stocks, or both, in order to provide income
and relative stability of capital. Normally, not more than three quarters of
the Fund's total assets will be invested in common stocks although the Fund may
have up to all of its assets in common stocks if, in WRIMCO's judgment, this is
advisable due to unusual market or economic conditions. During normal market
conditions, at least 65% of the Fund's total assets will be invested in income-
producing securities.
The Fund usually will purchase securities because of the dividends and interest
paid on them and may also purchase securities because they may increase in
value. Normally, a portion of the Fund's total assets will be invested in
either debt securities or preferred stocks or both in order to provide income
and relative stability of capital. The Fund will own common stocks in order to
provide possible appreciation of capital and some dividend income.
At times, to achieve income or defend against possible market declines, the
Fund may invest up to all of its assets in debt securities that may be
considered equivalent to owning cash because of their safety and liquidity.
Risk Considerations
There are risks inherent in any investment. The Fund is subject to varying
degrees of market risk, financial risk and, in some cases, prepayment risk.
Market risk is the potential for fluctuations in the price of the security
because of market factors. Because of market risks, you should anticipate that
the share price of the Fund will fluctuate. Financial risk is based on the
financial situation of the issuer. The financial risk of the Fund depends on
the credit quality of the underlying securities. Prepayment risk is the
possibility that, during periods of falling interest rates, a debt security
with a high stated interest rate will be prepaid prior to its expected maturity
date.
The Fund may also invest in certain derivative instruments, including options,
futures contracts, options on futures contracts, indexed securities, stripped
securities and mortgage-backed securities. The use of derivative instruments
involves special risks. See "Risks of Derivative Instruments" for further
information on the risks of investing in these instruments.
Securities and Investment Practices
The following pages contain more detailed information about types of
instruments in which the Fund may invest, and strategies WRIMCO may employ in
pursuit of the Fund's investment goals. A summary of 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 to
the full extent permitted by the Fund's investment policies and restrictions
unless it believes that doing so will help the Fund achieve its goals. As a
shareholder, you will receive annual and semiannual reports detailing the
Fund's holdings.
Certain of the investment policies and restrictions of the Fund are also stated
below. A fundamental policy of the Fund may not be changed without the
approval of the shareholders of the Fund. Operating policies may be changed by
the Board of Directors without the approval of the affected shareholders. The
goals of the Fund and the types of securities in which the Fund may invest are
fundamental policies. Unless otherwise indicated, the types of other assets in
which the Fund may invest and other policies are operating policies.
Policies and limitations are typically considered at the time of purchase; the
sale of instruments is usually not required in the event of a subsequent change
in circumstances.
Please see the SAI for further information concerning the following instruments
and associated risks and the Fund's investment policies and restrictions.
Equity Securities. Equity securities represent an ownership interest in an
issuer. This ownership interest often gives an investor the right to vote on
measures affecting the issuer's organization and operations. 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 equity securities in which the Fund invests may include
preferred stock that converts to common stock either automatically or after a
specified period of time or at the option of the issuer.
Debt Securities. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest, and must repay the amount borrowed at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values. The debt securities in which
the Fund invests may include debt securities whose performance is linked to a
specified equity security or securities index.
Debt securities have varying levels of sensitivity to changes in interest rates
and varying degrees of quality. As a general matter, however, when interest
rates rise, the values of fixed-rate debt securities fall and, conversely, when
interest rates fall, the values of fixed-rate debt securities rise. The values
of floating and adjustable-rate debt securities are not as sensitive to changes
in interest rates as the values of fixed-rate debt securities. Longer-term
bonds are generally more sensitive to interest rate changes than shorter-term
bonds.
U.S. Government Securities are high-quality instruments issued or guaranteed as
to principal or interest by the U.S. Treasury or by an agency or
instrumentality of the U.S. Government. Not all U.S. Government Securities are
backed by the full faith and credit of the United States. Some are backed by
the right of the issuer to borrow from the U.S. Treasury; others are backed by
discretionary authority of the U.S. government to purchase the agencies'
obligations; while others are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment.
Subject to its investment restrictions, the Fund may invest in debt securities
rated in any rating category of the established rating services, including
securities rated in the lowest rating category (such as those rated D by
Standard & Poor's Ratings Services ("S&P") or C by Moody's Investors Service,
Inc. ("MIS")). In addition, the Fund will treat unrated securities judged by
WRIMCO to be of equivalent quality to a rated security to be equivalent to
securities having that rating. 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. Credit ratings for
individual securities may change from time to time, and the Fund may retain a
portfolio security whose rating has been changed. The Fund may invest in
securities in default, although it has no current intent to do so.
Preferred Stock. The Fund may invest in preferred stock rated in any rating
category by an established rating service and unrated preferred stock judged by
WRIMCO to be of equivalent quality.
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 a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities have unique
investment characteristics in that they generally have higher yields than those
of 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.
Policies and Restrictions: The Fund does not intend to invest in non-
investment grade debt securities if, as a result of such investment, more than
5% of the Fund's assets would consist of such investments.
Foreign Securities and foreign currencies can involve significant risks in
addition to the risks inherent in U.S. investments. 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. 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 condition 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
governmental 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 a greater possibility
of default by foreign governments or foreign 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.
Certain foreign securities impose restrictions on transfer within the U.S. 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.
Policies and Restrictions: The Fund may purchase an unlimited amount of
foreign securities. Normally, however, less than 10% of its total assets will
consist of foreign securities.
Options, Futures and Other Strategies. The Fund may use certain options to
attempt to enhance income or yield or may attempt to reduce the overall risk of
its investments by using certain options, futures contracts and certain other
strategies described herein. The strategies described below may be used in an
attempt to manage certain risks of the Fund's investments that can affect
fluctuation in its net asset value.
Except as to covered call writing, the Fund intends to limit purchase and sale
of options and futures contracts to buying and selling futures contracts on
broadly-based stock indices ("Stock Index Futures") and options thereon for the
purposes of hedging not more than 10% of its total assets.
The Fund's ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations. The Fund might not use any of these
strategies, and there can be no assurance that any strategy that is used will
succeed. The risks associated with such strategies are described below. Also
see the SAI for more information on these instruments and strategies and their
risk considerations.
Options. The Fund may engage in certain strategies involving options to
attempt to enhance the Fund's income or yield or to attempt to reduce the
overall risk of its investments. A call option gives the purchaser the right
to buy, and obligates the writer to sell, the underlying investment at the
agreed upon exercise 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 exercise 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.
Options offer large amounts of leverage, which will result in the Fund's net
asset value being more sensitive to changes in the value of the related
investment. There is no assurance that a liquid secondary market will exist
for exchange-listed options. The market for options that are not listed on an
exchange may be less active than the market for exchange-listed options. The
Fund will be able to close a position in an option it has written only if there
is a market for the put or call. If the Fund is not able to enter into a
closing transaction on an option it has written, it will be required to
maintain the securities, or cash in the case of an option on an index, subject
to the call or the collateral underlying the put until a closing purchase
transaction can be entered into or the option expires. Because index options
are settled in cash, the Fund cannot provide in advance for its potential
settlement obligations on a call it has written on an index by holding the
underlying securities. The Fund bears the risk that the value of the
securities it holds will vary from the value of the index.
Policies and Restrictions: As a fundamental policy, the Fund may write calls
on securities only if the calls are listed and covered (i.e., the Fund owns the
securities that are subject to the call or has the right to acquire them
without the payment of further consideration) on not more than 25% of its total
assets and may purchase calls and write and purchase puts on securities in
which the Fund may invest.
The Fund will write a put only when it has determined that it would be willing
to purchase the underlying security at the exercise price.
The Fund may purchase and write only options on securities that are issued by
the Options Clearing Corporation except that the Fund may write unlisted put
options and purchase unlisted put and call options on U.S. Government
Securities and may purchase optional delivery standby commitments.
As a fundamental policy, the Fund may, for non-speculative purposes, write and
purchase options on stock indices that are not limited to stocks of any
industry or group of industries ("broadly-based stock indices").
The Fund may write and purchase only listed options on broadly-based stock
indices.
Futures Contracts and Options on Futures Contracts. When the Fund purchases a
futures contract, it incurs an obligation to take delivery of a specified
amount of the obligation underlying the contract at a specified time in the
future for a specified price. When the Fund sells a futures contract, it
incurs an obligation to deliver the specified amount of the underlying
obligation at a specified time in return for an agreed upon price.
When the Fund writes an option on a futures contract, it becomes obligated, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the term of the option. If the
Fund has written a call, it assumes a short futures position. If it has
written a put, it assumes a long futures position. When the Fund purchases an
option on a futures contract, it acquires a right in return for the premium it
pays to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put).
Policies and Restrictions: As a fundamental policy, the Fund may, for non-
speculative purposes, buy and sell futures contracts on debt securities ("Debt
Futures") and Stock Index Futures, and options on Debt Futures and Stock Index
Futures.
The Fund may buy and sell only those futures contracts and options on futures
contracts which are listed.
Indexed Securities. The Fund may purchase and sell indexed securities, which
are securities whose prices are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. The performance of indexed
securities depends to a great extent on the performance of the security,
currency, or other instrument to which they are indexed, and may also be
influenced by interest rate changes in the United States and abroad. At the
same time, indexed securities are subject to the credit risks associated with
the issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Indexed securities may be more
volatile than the underlying instruments.
Mortgage-Backed Securities may include pools of mortgages, such as
collateralized mortgage-backed securities and stripped mortgage-backed
securities. The value of these securities may be significantly affected by
changes in interest rates, the market's perception of the issuers, and the
creditworthiness of the parties involved.
The yield characteristics of mortgage-backed securities differ from those of
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently on mortgage-backed securities and
that principal may be prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. As a result, if the Fund purchases these
securities at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Conversely, if
the Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce,
yield to maturity. Accelerated prepayments on securities purchased by the Fund
at a premium also impose a risk of loss of principal because the premium may
not have been fully amortized at the time the principal is repaid in full.
Timely payment of principal and interest on pass-through securities of the
Government National Mortgage Association (but not the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association) is
guaranteed by the full faith and credit of the United States. This is not a
guarantee against market decline of the value of these securities or shares of
the Fund. It is possible that the availability and marketability (i.e.,
liquidity) of these securities could be adversely affected by actions of the
U.S. Government to tighten the availability of its credit. The Fund does not
intend to invest more than 25% of its total assets in mortgage-backed
securities.
Stripped Securities are the separate income or principal components of a debt
instrument. These involve risks that are similar to those of other debt
securities, although they may be more volatile. The prices of stripped
mortgage-backed securities may be particularly affected by changes in interest
rates.
Risks of Derivative Instruments. The use of options, futures contracts and
options on futures contracts, and the investment in indexed securities,
stripped securities and mortgage-backed securities involve special risks,
including (i) possible imperfect or no correlation between price movements of
the portfolio investments (held or intended to be purchased) involved in the
transaction and price movements of the instruments involved in the transaction;
(ii) possible lack of a liquid secondary market for any particular instrument
at a particular time; (iii) the need for additional portfolio management skills
and techniques; (iv) losses due to unanticipated market price movements; (v)
the fact that, while such strategies can reduce the risk of loss, they can also
reduce the opportunity for gain, or even result in losses, by offsetting
favorable price movements in investments involved in the transaction; (vi)
incorrect forecasts by WRIMCO concerning interest or currency exchange rates or
direction of price fluctuations of the investment involved in the transaction,
which may result in the strategy being ineffective; (vii) loss of premiums paid
by the Fund on options it purchases; and (viii) the possible inability of the
Fund to purchase or sell a portfolio security at a time when it would otherwise
be favorable for it to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate securities in connection with such
transactions and the possible inability of the Fund to close out or liquidate
its position.
For a hedging strategy to be completely effective, the price change of the
hedging instrument must equal the price change of the investment being hedged.
The risk of imperfect correlation of these price changes increases as the
composition of the Fund's portfolio diverges from instruments underlying a
hedging instrument. Such equal price changes are not always possible because
the investment underlying the hedging instruments may not be the same
investment that is being hedged. WRIMCO will attempt to create a closely
correlated hedge but hedging activity may not be completely successful in
eliminating market value fluctuation.
WRIMCO may use derivative instruments, including securities with embedded
derivatives, for hedging purposes to adjust the risk characteristics of the
Fund's portfolio of investments and may use some of these instruments to adjust
the return characteristics of the Fund's portfolio of investments. An embedded
derivative is a derivative that is part of another financial instrument.
Embedded derivatives typically, but not always, are debt securities whose
return of principal or interest, in part, is determined by reference to
something that is not intrinsic to the security itself. The use of derivative
techniques for speculative purposes can increase investment risk. If WRIMCO
judges market conditions incorrectly or employs a strategy that does not
correlate well with the Fund's investments, these techniques could result in a
loss, regardless of whether the intent was to reduce risk or increase return.
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. In
addition, these techniques could result in a loss if the counterparty to the
transaction does not perform as promised or if there is not a liquid secondary
market to close out a position that the Fund has entered into.
The ordinary spreads between prices in the cash and futures markets, due to the
differences in the natures of those markets, are subject to distortion. Due to
the possibility of distortion, a correct forecast of general interest 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 movements or stock market movements or the time span within which
the movements take place.
Options and futures transactions may increase portfolio turnover rates, which
results in correspondingly greater commission expenses and transactions costs
and may result in certain tax consequences.
New financial products and risk management techniques continue to be developed.
The Fund may use these instruments and techniques to the extent consistent with
its investment goals and regulatory requirements applicable to investment
companies.
When-Issued and Delayed-Delivery Transactions are trading practices in which
payment and delivery for the securities take place at a future date. The
market value of a security could change during this period, which could affect
the Fund's yield.
When purchasing securities on a delayed-delivery basis, the Fund assumes the
rights and risks of ownership, including the risk of price and yield
fluctuations. When the Fund has sold a security on a delayed-delivery basis,
the Fund does not participate in further gains or losses with respect to the
security. 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. 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.
Repurchase Agreements. In a repurchase agreement, the Fund buys a security at
one price and simultaneously agrees to sell it back at a higher price. Delays
or losses could result if the other party to the agreement defaults or becomes
insolvent.
Restricted and Illiquid Securities. Restricted securities are securities that
are subject to legal or contractual restrictions on resale. Restricted
securities may be illiquid due to restrictions on their resale. Certain
restricted securities may be determined to be liquid in accordance with
guidelines adopted by the Fund's Board of Directors.
Illiquid investments may be difficult to sell promptly at an acceptable price.
Difficulty in selling securities may result in a loss or may be costly to the
Fund.
Policies and Restrictions: The Fund may not purchase a security if, as a
result, more than 10% of its net assets would consist of illiquid investments.
Diversification. Diversifying the Fund's investment portfolio can reduce the
risks of investing. This may include limiting the amount of money invested in
any one issuer or, on a broader scale, in any one industry.
Policies and Restrictions: As a fundamental policy, the Fund may not buy a
security if, as a result, it would own more than 10% of the voting securities
or of any class of securities of an issuer, or if more than 5% of the Fund's
total assets would be invested in securities of that issuer.
As a fundamental policy, the Fund may not buy a security if, as a result, more
than 25% of the Fund's total assets would then be invested in securities of
companies in any one industry.
Borrowing. If the Fund borrows money, its share price may be subject to
greater fluctuation until the borrowing is paid off.
If the Fund makes additional investments while borrowings are outstanding, this
may be considered a form of leverage.
Policies and Restrictions: As a fundamental policy, the Fund may borrow money
only from banks, only as a temporary measure or for extraordinary or emergency
purposes, and only up to 5% of its total assets.
Lending. Securities loans may be made on a short-term or long-term basis for
the purpose of increasing the Fund's income. This practice could result in a
loss or a delay in recovering the Fund's securities. Loans will be made only
to parties deemed by WRIMCO to be creditworthy.
Policies and Restrictions: As a fundamental policy, the Fund will not lend
more than 10% of its assets at any one time and such loans must be on a
collateralized basis in accordance with applicable regulatory requirements.
Other Instruments may include 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.
Policies and Restrictions: As a fundamental policy, the Fund may buy shares of
other investment companies that do not redeem their shares only if it does so
in a regular transaction in the open market and only if not more than 10% of
the Fund's total assets would be invested in these shares, subject to the
conditions stated in the SAI. The Fund does not currently intend to invest
more than 5% of its assets in such securities.
<PAGE>
About Your Account
The different ways to set up (register) your account are listed below.
Ways to Set Up Your Account
- -------------------------------------------------
Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
- -------------------------------------------------
Business or Organization
For investment needs of corporations, associations, partnerships, institutions,
or other groups
- -------------------------------------------------
Retirement
To shelter your retirement savings from taxes
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts may be
tax deductible.
o Individual Retirement Accounts (IRAs) allow anyone of legal age and under
70 1/2 with earned income to invest up to $2,000 per tax year. The maximum is
$2,250 if the investor's spouse has less than $250 of earned income in the
taxable year.
o Rollover IRAs retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
o Simplified Employee Pension Plans (SEP - IRAs) provide small business
owners or those with self-employed income (and their eligible employees) with
many of the same advantages as a Keogh, but with fewer administrative
requirements.
o Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves up to 25% of their annual earned income, with a
maximum of $30,000 per year.
o 401(k) Programs allow employees of corporations of all sizes to contribute
a percentage of their wages on a tax-deferred basis. These accounts need to be
established by the administrator or trustee of the plan.
o 403(b) Custodial Accounts are available to employees of public school
systems or certain types of charitable organizations.
o 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.
- -------------------------------------------------
Gifts or Transfers to a Minor (UGMA, UTMA)
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child without paying
Federal gift tax. Depending on state laws, you can set up a custodial
accountunder the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to
Minors
Act (UTMA).
- -------------------------------------------------
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
account representative for the form.
- -------------------------------------------------
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its account
representatives. To open your account you must complete and sign an
application. Your Waddell & Reed account representative can help you with any
questions you might have.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a Class A share (price to buy one Class A share) is the
Fund's Class A net asset value ("NAV") plus the sales charge shown in the table
below.
Sales
Sales Charge
Charge as
as Approx.
PercentPercent
of of
Size of Offering Amount
Purchase Price Invested
- -----------------------
Under
$100,000 5.75% 6.10%
$100,000
to less
than
$200,000 4.75 4.99
$200,000
to less
than
$300,000 3.50 3.63
$300,000
to less
than
$500,000 2.50 2.56
$500,000
to less
than
$1,000,0001.50 1.52
$1,000,000
to less
than
$2,000,0001.00 1.01
$2,000,000
and over 0.00 0.00
The Fund's Class A NAV is the value of a single share. The Class A NAV is
computed by adding with respect to that Class the value of the Fund's
investments, cash, and other assets, subtracting its liabilities, and then
dividing the result by the number of Class A shares outstanding.
The securities in the Fund's portfolio that are listed or traded on an exchange
are valued primarily using market quotations or, if market quotations are not
available, at their fair value in a manner determined in good faith by or at
the direction of the Board of Directors. Bonds are generally valued according
to prices quoted by a dealer in bonds that offers a pricing service. Short-
term debt securities are valued at amortized cost, which approximates market
value. Other assets are valued at their fair value by or at the direction of
the Board of Directors.
The Fund is open for business each day the New York Stock Exchange ("NYSE") is
open. The Fund normally calculates the net asset values of its shares as of
the later of the close of business of the NYSE, normally 4 p.m. Eastern time,
or the close of the regular session of any other securities or commodities
exchange on which an option held by the Fund is traded.
The Fund may invest in securities listed on foreign exchanges which may trade
on Saturdays or on customary U.S. national business holidays when the NYSE is
closed. Consequently, the NAV of Fund shares may be significantly affected on
days when the Fund does not price its shares and when you have no access to the
Fund.
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has cleared.
When you sign your account application, you will be asked to certify that your
Social Security or taxpayer identification number is correct and whether you
are subject to backup withholding for failing to report income to the IRS.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Lower sales charges are available by combining additional purchases of shares
of a corresponding class of any of the funds in the United Group, to the extent
otherwise permitted, except United Municipal Bond Fund, Inc., United Cash
Management, Inc., United Government Securities Fund, Inc. and United Municipal
High Income Fund, Inc., with the net asset value of Class A shares already held
("rights of accumulation") and by grouping all purchases of Class A shares made
during a thirteen-month period ("Statement of Intention"). Shares of a
corresponding class of this Fund or another fund purchased through a
contractual plan may not be included unless the plan has been completed.
Purchases by certain related persons may be grouped. Additional information
and applicable forms are available from Waddell & Reed account representatives.
Class A shares may be purchased at net asset value by the Directors and
officers of the Fund, employees of Waddell & Reed, Inc., employees of their
affiliates, account representatives of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each such
Director, officer, employee and account representative. Purchases of Class A
shares in certain retirement plans and certain trusts for these persons may
also be made at net asset value. Purchases of Class A shares in a 401(k) plan
having 100 or more eligible employees and purchases of Class A shares in a 457
plan having 100 or more eligible employees may be made at net asset value.
Shares may also be issued at net asset value in a merger, acquisition or
exchange offer made pursuant to a plan of reorganization to which the Fund is a
party.
Minimum Investments
To Open an Account $500
For certain exchanges $100
For certain retirement accounts and accounts opened with Automatic Investment
Service $50
For certain retirement accounts and accounts opened through payroll deductions
for
or by employees of WRIMCO, Waddell & Reed, Inc. and their affiliates $25
To Add to an Account
For certain exchanges $100
For Automatic Investment Service $25
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed, Inc. Mail
the check along with:
o the detachable form that accompanies the confirmation of a prior purchase
by you or your year-to-date statement, or
o a letter showing your account number, the account registration and stating
the fund whose shares you wish to purchase.
Mail to Waddell & Reed, Inc. at the address printed on your confirmation or
year-to-date statement.
Selling Shares
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The redemption price (price to sell one Class A share) is the Fund's Class A
NAV.
To sell shares, your request must be made in writing.
Complete an Account Service Request form, available from your Waddell & Reed
account representative, or write a letter of instruction with:
o the name on the account registration,
o the Fund's name,
o the Fund account number,
o the dollar amount or number of shares to be redeemed, and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed account representative,
or mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.
Special Requirements for Selling Shares
Account Type Special Requirements
Individual or The written instructions must
Joint Tenant be signed by all persons
required to sign for
transactions, exactly as their
names appear on the account.
Sole The written instructions must
Proprietorship be signed by the individual
owner of the business.
UGMA, UTMA The custodian must sign the
written instructions
indicating capacity as
custodian.
Retirement The written instructions must
Account be signed by a properly
authorized person.
Trust The trustee must sign the
written instructions
indicating capacity as
trustee. If the trustee's
name is not in the account
registration, provide a
currently certified copy of
the trust document.
Business or At least one person authorized
Organization by corporate resolution to act
on the account must sign the
written instructions.
Conservator, The written instructions must
Guardian or be signed by the person
Other Fiduciary properly authorized by court
order to act in the particular
fiduciary capacity.
When you place an order to sell shares, your shares will be sold at the next
NAV calculated after your request is received and accepted by Waddell & Reed,
Inc. at its home office. Note the following:
Written requests for redemption must be in good order, which requires that
if more than one person owns the shares, each owner must sign the written
request.
If you hold a certificate, it must be properly endorsed and sent to the
Fund.
If you recently purchased the shares by check, the Fund may delay payment
of redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance,
satisfactory to the Fund, that the check has cleared and been honored. If no
such assurance is given, payment of the redemption proceeds on these shares
will be delayed until the earlier of 10 days or the date the Fund is able to
verify that your purchase check has cleared and been honored.
Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the Securities and Exchange Commission.
Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
The Fund reserves the right to require a signature guarantee on certain
redemption requests. This requirement is designed to protect you and Waddell &
Reed from fraud. The Fund may require a signature guarantee in certain
situations such as:
o the request for redemption is made by a corporation, partnership or
fiduciary,
o the request for redemption is made by someone other than the owner of
record, or
o the check is being made payable to someone other than the owner of record.
The Fund will accept a signature guarantee from a national bank, a federally
chartered savings and loan or a member firm of a national stock exchange or
other eligible guarantor in accordance with procedures of the Fund's transfer
agent. A notary public cannot provide a signature guarantee.
You may reinvest without charge all or part of the amount you redeemed by
sending to the Fund the amount you want to reinvest. The reinvested amounts
must be received by the Fund within thirty days after the date of your
redemption. You may do this only once as to Class A shares of the Fund.
Under the terms of the 401(k) prototype plan which Waddell & Reed, Inc. has
available, the plan may have the right to make a loan to a plan participant by
redeeming Fund shares held by the plan. Principal and interest payments on the
loan made in accordance with the terms of the plan may be reinvested by the
plan, without payment of a sales charge, in shares of a corresponding class of
any of the funds in the United Group in which the plan may invest.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your account.
Personal Service
Your local Waddell & Reed account representative is available to provide
personal service. Additionally, the Waddell & Reed Customer Services staff is
available to respond promptly to your inquiries and requests.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, exchange, transfer or
redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports (every six months)
To reduce expenses, only one copy of most annual and semiannual reports will be
mailed to your household, even if you have more than one account with the Fund.
Call 913-236-2000 if you need copies of annual or semiannual reports or
historical account information.
Exchanges
You may sell your Class A shares and buy corresponding shares of other funds in
the United Group. You may exchange only into funds that are legally registered
for sale in your state of residence. Note that exchanges out of the Fund may
have tax consequences for you. Before exchanging into a fund, read its
prospectus.
The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
Automatic Transactions
Flexible withdrawal service lets you set up monthly, quarterly, semiannual or
annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund account
automatically. While regular investment plans do not guarantee a profit and
will not protect you against loss in a declining market, they can be an
excellent way to invest for retirement, a home, educational expenses, and other
long-term financial goals.
Certain restrictions and fees imposed by the plan custodian may also apply for
retirement accounts. Speak with your Waddell & Reed account representative for
more information.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Fund account
Minimum Frequency
$25 Monthly
Funds Plus Service
To move money from United Cash Management, Inc. to the Fund whether in the same
or a different account
Minimum Frequency
$100 Monthly
Dividends, Distributions and Taxes
Distributions
The Fund distributes substantially all of its net income and capital gains to
shareholders each year. Ordinarily, dividends are distributed from the Fund's
net investment income, which includes accrued interest, earned discount,
dividends and other income earned on portfolio assets less expenses, quarterly
in March, June, September and December. Net capital gains (and any net
realized gains from foreign currency transactions) ordinarily are distributed
in December. The Fund may make additional distributions if necessary to avoid
Federal income or excise taxes on undistributed income and capital gains.
Distribution Options. When you open an account, specify on your application
how you want to receive your distributions. The Fund offers three options:
1. Share Payment Option. Your dividend and capital gains distributions will
be automatically paid in additional Class A shares of the Fund. If you do not
indicate a choice on your application, you will be assigned this option.
2. Income-Earned Option. Your capital gains distributions will be
automatically paid in Class A shares, but you will be sent a check for each
dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital gains
distributions.
For retirement accounts, all distributions are automatically paid in Class A
shares.
Taxes
The Fund has qualified and intends to continue to qualify for treatment as a
regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"), so that it will be relieved of Federal income tax on that
part of its investment company taxable income (consisting generally of net
investment income, net short-term capital gains and net gains from certain
foreign currency transactions) and net capital gains (the excess of net long-
term capital gain over net short-term capital loss) that are distributed to its
shareholders.
There are tax requirements that the Fund must follow in order to avoid Federal
taxation. In its effort to adhere to these requirements, the Fund may have to
limit its investment activity in some types of instruments.
As with any investment, you should consider how your investment in the Fund
will be taxed. If your account is not a tax-deferred retirement account, you
should be aware of the following tax implications:
Taxes on distributions. Dividends from the Fund's investment company taxable
income are taxable to you as ordinary income whether received in cash or paid
in additional Fund shares. Distributions of the Fund's realized net capital
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or reinvested in additional Fund shares and regardless
of the length of time you have owned your shares. The Fund notifies you after
each calendar year-end as to the amounts of dividends and distributions paid
(or deemed paid) to you for that year. Under certain circumstances, the Fund
may elect to permit shareholders to take a credit or deduction for foreign
income taxes paid by the Fund. The Fund will notify you of any such election.
A portion of the dividends paid by the Fund, whether received in cash or paid
in additional Fund shares, may be eligible for the dividends-received deduction
allowed to corporations. The eligible portion may not exceed the aggregate
dividends received by the Fund from U.S. corporations. However, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the alternative minimum
tax.
Withholding. The Fund is required to withhold 31% of all dividends,
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate from dividends and
distributions also is required for such shareholders who otherwise are subject
to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than your adjusted basis for the redeemed shares (which normally includes
any sales charge paid). An exchange of Fund shares for shares of any other
fund in the United Group generally will have similar tax consequences.
However, special rules apply when you dispose of Fund shares through a
redemption or exchange within ninety days after your purchase thereof and
subsequently reacquire Fund shares or acquire shares of another fund in the
United Group without paying a sales charge due to the thirty-day reinvestment
privilege or exchange privilege. See "About Your Account." In these cases,
any gain on the disposition of the Fund shares would be increased, or loss
decreased, by the amount of the sales charge you paid when those shares were
acquired, and that amount will increase the adjusted basis of the shares
subsequently acquired. In addition, if you purchase Class A shares of the Fund
within thirty days before or after redeeming other Class A shares of the Fund
at a loss, part or all of that loss will not be deductible and will increase
the basis of the newly purchased shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders. There may be
other Federal, state or local tax considerations applicable to a particular
investor. You are urged to consult your own tax adviser.
<PAGE>
About the Management and Expenses of the Fund
United Continental Income Fund, Inc. is a mutual fund: an investment that
pools shareholders' money and invests it toward a specified goal. In technical
terms, the Fund is an open-end management investment company organized as a
corporation under Maryland law on November 15, 1974, as successor to a Delaware
corporation which commenced operations in 1970.
The Fund is governed by a Board of Directors, which has overall responsibility
for the management of its affairs. The majority of directors are not
affiliated with Waddell & Reed, Inc.
The Fund has two classes of shares. Prior to August 29, 1995, the Fund offered
only one class of shares to the public. Shares outstanding on that date were
designated as Class A shares, which are offered by this Prospectus. In
addition, the Fund offers Class Y shares through a separate Prospectus. Class
Y shares are designed for institutional investors. Class Y shares are not
subject to a sales charge on purchases and are not subject to redemption fees.
Class Y shares are not subject to a Rule 12b-1 fee. Additional information
about Class Y shares may be obtained by calling 913-236-2000 or by writing to
Waddell & Reed, Inc. at the address on the inside back cover of the Prospectus.
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 of the Fund 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
Investment Company Act of 1940, as amended ("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. Shares are fully paid and nonassessable when purchased.
WRIMCO and Its Affiliates
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. Waddell & Reed, Inc. and its predecessors served as
investment manager to each of the registered investment companies in the United
Group of Mutual Funds, except United Asset Strategy Fund, Inc., since 1940 or
the inception of the company, whichever was later, and to TMK/United Funds,
Inc. since that fund's inception, until January 8, 1992, when it assigned its
duties as investment manager and assigned its professional staff for investment
management services to WRIMCO. WRIMCO has also served as investment manager
for Waddell & Reed Funds, Inc. since its inception in September 1992, Torchmark
Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc.
since each commenced operations in February 1993 and United Asset Strategy
Fund, Inc. since it commenced operations in March 1995.
Cynthia P. Prince-Fox is primarily responsible for the day-to-day management of
the Fund. Ms. Prince-Fox has held her Fund responsibilities since February
1993. She is Vice President of WRIMCO and Vice President of Waddell & Reed
Asset Management Company, an affiliate of WRIMCO. She is Vice President of the
Fund, and Vice President of other investment companies for which WRIMCO serves
as investment manager. Ms. Prince-Fox has served as the portfolio manager for
investment companies managed by WRIMCO since January 1993 and, prior to
assuming her Fund responsibilities, was an investment analyst with Waddell &
Reed, Inc. and its successor, WRIMCO, since February 1983. Other members of
WRIMCO's investment management department provide input on market outlook,
economic conditions, investment research and other considerations relating to
the Fund's investments.
Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter for
each of the other funds in the United Group of Mutual Funds and Waddell & Reed
Funds, Inc., and serves as the distributor for TMK/United Funds, Inc.
Waddell & Reed Services Company acts as transfer agent ("Shareholder Servicing
Agent") for the Fund and processes the payments of dividends. Waddell & Reed
Services Company also acts as agent ("Accounting Services Agent") in providing
bookkeeping and accounting services and assistance to the Fund and pricing
daily the value of its shares.
WRIMCO and Waddell & Reed Services Company are subsidiaries of Waddell & Reed,
Inc. Waddell & Reed, Inc. is a direct subsidiary of Waddell & Reed Financial
Services, Inc., a holding company, and an indirect subsidiary of United
Investors Management Company, a holding company, and Torchmark Corporation, a
holding company.
WRIMCO places transactions for the portfolio of the Fund and in doing so may
consider sales of shares of the Fund and other funds it manages as a factor in
the selection of brokers to execute portfolio transactions.
Breakdown of Expenses
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained below.
Management Fee
The management fee of the Fund is calculated by adding a group fee to a
specific fee. It is accrued and paid to WRIMCO daily.
The specific fee is computed on the Fund's net asset value as of the close of
business each day at the annual rate of .15 of 1% of its net assets. The group
fee is a pro rata participation based on the relative net asset size of the
Fund in the group fee computed each day on the combined net asset values of all
the funds in the United Group at the annual rates shown in the following table:
Group Fee Rate
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Growth in assets of the United Group assures a lower group fee rate.
The combined net asset values of all of the funds in the United Group were
approximately $11.5 billion as of March 31, 1995. Management fees for the
fiscal year ended March 31, 1995 were 0.53% of the Fund's average net assets.
Prior to December 1, 1994, the Fund's specific fee was computed at the annual
rate of .10 of 1% of the Fund's net assets.
Other Expenses
While the management fee is a significant component of the Fund's annual
operating costs, the Fund has other expenses as well.
The Fund pays the Accounting Services Agent a monthly fee based on the average
net assets of the Fund for accounting services. With respect to its Class A
shares, the Fund pays the Shareholder Servicing Agent a monthly fee for each
Class A shareholder account that was in existence at any time during the month,
and a fee for each account on which a dividend or distribution had a record
date during the month.
The Fund has adopted a Service Plan pursuant to Rule 12b-1 of the 1940 Act with
respect to its Class A shares. Under the Plan, the Fund may pay monthly a fee
to Waddell & Reed, Inc. in an amount not to exceed .25% of the Fund's average
annual net assets of its Class A shares. The fee is to be paid to reimburse
Waddell & Reed, Inc. for amounts it expends in connection with the provision of
personal services to Class A shareholders and/or maintenance of Class A
shareholder accounts. In particular, the Service Plan and a related Service
Agreement between the Fund and Waddell & Reed, Inc. contemplate that these
expenditures may include costs and expenses incurred by Waddell & Reed, Inc.
and its affiliates in compensating, training and supporting registered account
representatives, sales managers and/or other appropriate personnel in providing
personal services to Class A shareholders and/or maintaining Class A
shareholder accounts; increasing services provided to Class A shareholders
byoffice personnel located at field sales offices; engaging in other activities
useful in providing personal services to Class A shareholders and/or the
maintenance of Class A shareholder accounts; and in compensating broker-dealers
who may regularly sell Class A shares, and other third parties, for providing
Class A shareholder services and/or maintaining Class A shareholder accounts.
The total expenses for the fiscal year ended March 31, 1995 for the Fund's
Class A shares were 0.89% of the average net assets of the Fund's Class A
shares.
The Fund cannot precisely predict what its portfolio turnover rate will be, but
the Fund may have a high portfolio turnover. A higher turnover will increase
transaction and commission costs and could generate taxable income or loss.
<PAGE>
United Continental Income Fund, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 M Street, N. W. (913) 236-2000
Washington, D. C. 20036
Shareholder Servicing Agent
Independent Accountants Waddell & Reed
Price Waterhouse LLP Services Company
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Investment Manager Shawnee Mission, Kansas
Waddell & Reed Investment 66201-9217
Management Company (913) 236-1579
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
<PAGE>
United Continental Income Fund, Inc.
Class A Shares
PROSPECTUS
August 29, 1995
The United Group of Mutual Funds
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United Gold & Government Fund, Inc.
United Government Securities Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United International Growth Fund, Inc.
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United New Concepts Fund, Inc.
United Retirement Shares, Inc.
United Vanguard Fund, Inc.
NUP1004(8-95)
printed on recycled paper
<PAGE>
Please read this Prospectus before investing, and keep it on file for future
reference. It sets forth concisely the information about the Fund that you
ought to know before investing.
Additional information has been filed with the Securities and Exchange
Commission and is contained in a Statement of Additional Information ("SAI")
dated August 29, 1995. The SAI is available free upon request to the Fund or
Waddell & Reed, Inc., the Fund's underwriter, at the address or telephone
number below. The SAI is incorporated by reference into this Prospectus and
you will not be aware of all facts unless you read both this Prospectus and the
SAI.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
United Continental Income Fund, Inc. Class Y Shares
This Fund seeks to provide current income to the extent that, in the opinion of
the Fund's investment manager, market and economic conditions permit. As a
secondary goal, this Fund seeks long-term appreciation of capital.
This Prospectus describes one class of shares of the Fund -- Class Y Shares.
Prospectus
August 29, 1995
UNITED CONTINENTAL INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
<PAGE>
Table of Contents
AN OVERVIEW OF THE FUND........................35
EXPENSES.......................................36
FINANCIAL HIGHLIGHTS...........................37
PERFORMANCE................................ 38
Explanation of Terms .........................38
ABOUT WADDELL & REED...........................39
ABOUT THE INVESTMENT PRINCIPLES OF THE FUND 40
Investment Goals and Principles ..............40
Risk Considerations ........................40
Securities and Investment Practices ..........40
ABOUT YOUR ACCOUNT.............................49
Buying Shares ................................49
Minimum Investments ..........................50
Adding to Your Account .......................50
Selling Shares ...............................51
Telephone Transactions .......................53
Shareholder Services .........................53
Personal Service ...........................53
Reports ....................................54
Exchanges ..................................54
Dividends, Distributions, and Taxes ..........54
Distributions ..............................54
Taxes ......................................54
ABOUT THE MANAGEMENT AND EXPENSES OF THE FUND 56
WRIMCO and Its Affiliates ....................56
Breakdown of Expenses ........................57
Management Fee .............................57
Other Expenses .............................58
<PAGE>
An Overview of the Fund
The Fund: This Prospectus describes the Class Y shares of United Continental
Income Fund, Inc., an open-end, diversified management investment company.
Goals and Strategies: United Continental Income Fund, Inc. (the "Fund") seeks
to provide current income to the extent that, in the opinion of the Fund's
investment manager, market and economic conditions permit. As a secondary
goal, the Fund seeks long-term appreciation of capital. The Fund seeks to
achieve these goals by investing in different kinds of securities. See "About
the Investment Principles of the Fund" for further information.
Management: Waddell & Reed Investment Management Company ("WRIMCO") provides
investment advice to the Fund and manages the Fund's investments. WRIMCO is a
wholly-owned subsidiary of Waddell & Reed, Inc. WRIMCO, Waddell & Reed, Inc.
and its predecessors have provided investment management services to registered
investment companies since 1940. See "About the Management and Expenses of the
Fund" for further information about management fees.
Distributor: Waddell & Reed, Inc. acts as principal underwriter and
distributor of the shares of the Fund.
Purchases: You may buy Class Y shares of the Fund through Waddell & Reed, Inc.
and its account representatives. The price to buy a Class Y share of the Fund
is the net asset value of a Class Y share. There is no sales charge incurred
upon purchase of Class Y shares of the Fund. See "About Your Account" for
information on how to purchase Class Y shares.
Redemptions: You may redeem your shares at net asset value. When you sell
your shares, they may be worth more or less than what you paid for them. See
"About Your Account" for a description of redemption procedures.
Risk Considerations: Because the Fund owns different types of investments, its
performance will be affected by a variety of factors. The value of the Fund's
investments and the income generated will vary from day to day, generally
reflecting changes in interest rates, market conditions, and other company and
economic news. Performance will also depend on WRIMCO's skill in selecting
investments. See "About the Investment Principles of the Fund" for information
about the risks associated with the Fund's investments.
<PAGE>
Expenses
Shareholder transaction expenses are charges you pay when you buy or sell
shares of a fund.
Maximum sales load
on purchases None
Maximum sales load
on reinvested
dividends None
Deferred
sales load None
Redemption
fees None
Exchange fee None
Annual Fund operating expenses (as a percentage of average net assets). 4
Management fees 0.57%
12b-1 fees None
Other expenses 0.21%
Total Fund operating
expenses 0.78%
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return5 and (2) redemption at the end of each time period:
1 year $ 8
3 years $25
The purpose of this table is to assist you in understanding the various costs
and expenses that a shareholder of the Class Y shares of the Fund will bear
directly or indirectly. The example should not be considered a representation
of past or future expenses; actual expenses may be greater or lesser than those
shown. For a more complete discussion of certain expenses and fees, see
"Breakdown of Expenses."
4Expense ratios are based on the management fees and other Fund-level expenses
of the Fund for the fiscal year ended March 31, 1995, and the expenses
attributable to the Class Y shares that are anticipated for the current year.
Actual expenses may be greater or lesser than those shown.
Use of an assumed annual return of 5% is for illustration purposes only and
is5
not a representation of the Fund's future performance, which may be greater or
lesser.
<PAGE>
Financial Highlights
Financial Highlights for Class Y shares are not included because the Fund did
not offer Class Y shares during the fiscal year ended March 31, 1995.
<PAGE>
Performance
Mutual fund performance is commonly measured as total return. The Fund may
also advertise its performance by showing performance rankings. Performance
information is calculated and presented separately for each class of Fund
shares.
Explanation of Terms
Total Return is the overall change in value of an investment in the Fund over a
given period, assuming reinvestment of any dividends and distributions. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period. Average annual total
returns smooth out variations in performance; they are not the same as actual
year-by-year results. Non-standardized total return may be for periods other
than those required to be presented or may otherwise differ from standardized
total return.
Performance Rankings are comparisons of the Fund's performance to the
performance of other selected mutual funds, selected recognized market
indicators such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average, or non-market indices or averages of mutual fund industry
groups. The Fund may quote its performance rankings and/or other information
as published by recognized independent mutual fund statistical services or by
publications of general interest. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
relates, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of sales charges, fee waivers and/or expense
reimbursements.
All performance information that the Fund advertises or includes in information
provided to present or prospective shareholders is historical in nature and is
not intended to represent or guarantee future results. The value of the Fund's
shares when redeemed may be more or less than their original cost.
The Fund's recent performance and holdings will be detailed twice a year in the
Fund's annual and semiannual reports, which are sent to all Fund shareholders.
<PAGE>
About Waddell & Reed
Since 1937, Waddell & Reed has been helping people make the most of their
financial future by helping them take advantage of various financial services.
Today, Waddell & Reed has over 2500 account representatives located throughout
the United States. Your primary contact in your dealings with Waddell & Reed
will be your local account representative. However, the Waddell & Reed
shareholder services department, which is part of the Waddell & Reed
headquarters operations in Overland Park, Kansas, is available to assist you
and your Waddell & Reed account representative. You may speak with a customer
service representative by calling 913-236-2000.
<PAGE>
About the Investment Principles of the Fund
Investment Goals and Principles
The goal of the Fund is to provide current income to the extent that, in
WRIMCO's opinion, market and economic conditions permit. Secondarily, the Fund
seeks long-term appreciation of capital. There is no assurance that the Fund
will achieve its goals.
There are three main kinds of securities that the Fund owns: common stock,
preferred stock and debt securities. The Fund may also own convertible
securities.
Normally, at least one quarter of the Fund's total assets will be invested in
either debt securities or preferred stocks, or both, in order to provide income
and relative stability of capital. Normally, not more than three quarters of
the Fund's total assets will be invested in common stocks although the Fund may
have up to all of its assets in common stocks if, in WRIMCO's judgment, this is
advisable due to unusual market or economic conditions. During normal market
conditions, at least 65% of the Fund's total assets will be invested in income-
producing securities.
The Fund usually will purchase securities because of the dividends and interest
paid on them and may also purchase securities because they may increase in
value. Normally, a portion of the Fund's total assets will be invested in
either debt securities or preferred stocks or both in order to provide income
and relative stability of capital. The Fund will own common stocks in order to
provide possible appreciation of capital and some dividend income.
At times, to achieve income or defend against possible market declines, the
Fund may invest up to all of its assets in debt securities that may be
considered equivalent to owning cash because of their safety and liquidity.
Risk Considerations
There are risks inherent in any investment. The Fund is subject to varying
degrees of market risk, financial risk and, in some cases, prepayment risk.
Market risk is the potential for fluctuations in the price of the security
because of market factors. Because of market risks, you should anticipate that
the share price of the Fund will fluctuate. Financial risk is based on the
financial situation of the issuer. The financial risk of the Fund depends on
the credit quality of the underlying securities. Prepayment risk is the
possibility that, during periods of falling interest rates, a debt security
with a high stated interest rate will be prepaid prior to its expected maturity
date.
The Fund may also invest in certain derivative instruments, including options,
futures contracts, options on futures contracts, indexed securities, stripped
securities and mortgage-backed securities. The use of derivative instruments
involves special risks. See "Risks of Derivative Instruments" for further
information on the risks of investing in these instruments.
Securities and Investment Practices
The following pages contain more detailed information about types of
instruments in which the Fund may invest, and strategies WRIMCO may employ in
pursuit of the Fund's investment goals. A summary of 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 to
the full extent permitted by the Fund's investment policies and restrictions
unless it believes that doing so will help the Fund achieve its goals. As a
shareholder, you will receive annual and semiannual reports detailing the
Fund's holdings.
Certain of the investment policies and restrictions of the Fund are also stated
below. A fundamental policy of the Fund may not be changed without the
approval of the shareholders of the Fund. Operating policies may be changed by
the Board of Directors without the approval of the affected shareholders. The
goals of the Fund and the types of securities in which the Fund may invest are
fundamental policies. Unless otherwise indicated, the types of other assets in
which the Fund may invest and other policies are operating policies.
Policies and limitations are typically considered at the time of purchase; the
sale of instruments is usually not required in the event of a subsequent change
in circumstances.
Please see the SAI for further information concerning the following instruments
and associated risks and the Fund's investment policies and restrictions.
Equity Securities. Equity securities represent an ownership interest in an
issuer. This ownership interest often gives an investor the right to vote on
measures affecting the issuer's organization and operations. 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 equity securities in which the Fund invests may include
preferred stock that converts to common stock either automatically or after a
specified period of time or at the option of the issuer.
Debt Securities. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest, and must repay the amount borrowed at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values. The debt securities in which
the Fund invests may include debt securities whose performance is linked to a
specified equity security or securities index.
Debt securities have varying levels of sensitivity to changes in interest rates
and varying degrees of quality. As a general matter, however, when interest
rates rise, the values of fixed-rate debt securities fall and, conversely, when
interest rates fall, the values of fixed-rate debt securities rise. The values
of floating and adjustable-rate debt securities are not as sensitive to changes
in interest rates as the values of fixed-rate debt securities. Longer-term
bonds are generally more sensitive to interest rate changes than shorter-term
bonds.
U.S. Government Securities are high-quality instruments issued or guaranteed as
to principal or interest by the U.S. Treasury or by an agency or
instrumentality of the U.S. Government. Not all U.S. Government Securities are
backed by the full faith and credit of the United States. Some are backed by
the right of the issuer to borrow from the U.S. Treasury; others are backed by
discretionary authority of the U.S. government to purchase the agencies'
obligations; while others are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment.
Subject to its investment restrictions, the Fund may invest in debt securities
rated in any rating category of the established rating services, including
securities rated in the lowest rating category (such as those rated D by
Standard & Poor's Ratings Services ("S&P") or C by Moody's Investors Service,
Inc. ("MIS")). In addition, the Fund will treat unrated securities judged by
WRIMCO to be of equivalent quality to a rated security to be equivalent to
securities having that rating. 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. Credit ratings for
individual securities may change from time to time, and the Fund may retain a
portfolio security whose rating has been changed. The Fund may invest in
securities in default, although it has no current intent to do so.
Preferred Stock. The Fund may invest in preferred stock rated in any rating
category by an established rating service and unrated preferred stock judged by
WRIMCO to be of equivalent quality.
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 a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities have unique
investment characteristics in that they generally have higher yields than those
of 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.
Policies and Restrictions: The Fund does not intend to invest in non-
investment grade debt securities if, as a result of such investment, more than
5% of the Fund's assets would consist of such investments.
Foreign Securities and foreign currencies can involve significant risks in
addition to the risks inherent in U.S. investments. 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. 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 condition 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
governmental 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 a greater possibility
of default by foreign governments or foreign 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.
Certain foreign securities impose restrictions on transfer within the U.S. 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.
Policies and Restrictions: The Fund may purchase an unlimited amount of
foreign securities. Normally, however, less than 10% of its total assets will
consist of foreign securities.
Options, Futures and Other Strategies. The Fund may use certain options to
attempt to enhance income or yield or may attempt to reduce the overall risk of
its investments by using certain options, futures contracts and certain other
strategies described herein. The strategies described below may be used in an
attempt to manage certain risks of the Fund's investments that can affect
fluctuation in its net asset value.
Except as to covered call writing, the Fund intends to limit purchase and sale
of options and futures contracts to buying and selling futures contracts on
broadly-based stock indices ("Stock Index Futures") and options thereon for the
purposes of hedging not more than 10% of its total assets.
The Fund's ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations. The Fund might not use any of these
strategies, and there can be no assurance that any strategy that is used will
succeed. The risks associated with such strategies are described below. Also
see the SAI for more information on these instruments and strategies and their
risk considerations.
Options. The Fund may engage in certain strategies involving options to
attempt to enhance the Fund's income or yield or to attempt to reduce the
overall risk of its investments. A call option gives the purchaser the right
to buy, and obligates the writer to sell, the underlying investment at the
agreed upon exercise 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 exercise 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.
Options offer large amounts of leverage, which will result in the Fund's net
asset value being more sensitive to changes in the value of the related
investment. There is no assurance that a liquid secondary market will exist
for exchange-listed options. The market for options that are not listed on an
exchange may be less active than the market for exchange-listed options. The
Fund will be able to close a position in an option it has written only if there
is a market for the put or call. If the Fund is not able to enter into a
closing transaction on an option it has written, it will be required to
maintain the securities, or cash in the case of an option on an index, subject
to the call or the collateral underlying the put until a closing purchase
transaction can be entered into or the option expires. Because index options
are settled in cash, the Fund cannot provide in advance for its potential
settlement obligations on a call it has written on an index by holding the
underlying securities. The Fund bears the risk that the value of the
securities it holds will vary from the value of the index.
Policies and Restrictions: As a fundamental policy, the Fund may write calls
on securities only if the calls are listed and covered (i.e., the Fund owns the
securities that are subject to the call or has the right to acquire them
without the payment of further consideration) on not more than 25% of its total
assets and may purchase calls and write and purchase puts on securities in
which the Fund may invest.
The Fund will write a put only when it has determined that it would be willing
to purchase the underlying security at the exercise price.
The Fund may purchase and write only options on securities that are issued by
the Options Clearing Corporation except that the Fund may write unlisted put
options and purchase unlisted put and call options on U.S. Government
Securities and may purchase optional delivery standby commitments.
As a fundamental policy, the Fund may, for non-speculative purposes, write and
purchase options on stock indices that are not limited to stocks of any
industry or group of industries ("broadly-based stock indices").
The Fund may write and purchase only listed options on broadly-based stock
indices.
Futures Contracts and Options on Futures Contracts. When the Fund purchases a
futures contract, it incurs an obligation to take delivery of a specified
amount of the obligation underlying the contract at a specified time in the
future for a specified price. When the Fund sells a futures contract, it
incurs an obligation to deliver the specified amount of the underlying
obligation at a specified time in return for an agreed upon price.
When the Fund writes an option on a futures contract, it becomes obligated, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the term of the option. If the
Fund has written a call, it assumes a short futures position. If it has
written a put, it assumes a long futures position. When the Fund purchases an
option on a futures contract, it acquires a right in return for the premium it
pays to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put).
Policies and Restrictions: As a fundamental policy, the Fund may, for non-
speculative purposes, buy and sell futures contracts on debt securities ("Debt
Futures") and Stock Index Futures, and options on Debt Futures and Stock Index
Futures.
The Fund may buy and sell only those futures contracts and options on futures
contracts which are listed.
Indexed Securities. The Fund may purchase and sell indexed securities, which
are securities whose prices are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. The performance of indexed
securities depends to a great extent on the performance of the security,
currency, or other instrument to which they are indexed, and may also be
influenced by interest rate changes in the United States and abroad. At the
same time, indexed securities are subject to the credit risks associated with
the issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Indexed securities may be more
volatile than the underlying instruments.
Mortgage-Backed Securities may include pools of mortgages, such as
collateralized mortgage-backed securities and stripped mortgage-backed
securities. The value of these securities may be significantly affected by
changes in interest rates, the market's perception of the issuers, and the
creditworthiness of the parties involved.
The yield characteristics of mortgage-backed securities differ from those of
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently on mortgage-backed securities and
that principal may be prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. As a result, if the Fund purchases these
securities at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Conversely, if
the Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce,
yield to maturity. Accelerated prepayments on securities purchased by the Fund
at a premium also impose a risk of loss of principal because the premium may
not have been fully amortized at the time the principal is repaid in full.
Timely payment of principal and interest on pass-through securities of the
Government National Mortgage Association (but not the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association) is
guaranteed by the full faith and credit of the United States. This is not a
guarantee against market decline of the value of these securities or shares of
the Fund. It is possible that the availability and marketability (i.e.,
liquidity) of these securities could be adversely affected by actions of the
U.S. Government to tighten the availability of its credit. The Fund does not
intend to invest more than 25% of its total assets in mortgage-backed
securities.
Stripped Securities are the separate income or principal components of a debt
instrument. These involve risks that are similar to those of other debt
securities, although they may be more volatile. The prices of stripped
mortgage-backed securities may be particularly affected by changes in interest
rates.
Risks of Derivative Instruments. The use of options, futures contracts and
options on futures contracts, and the investment in indexed securities,
stripped securities and mortgage-backed securities involve special risks,
including (i) possible imperfect or no correlation between price movements of
the portfolio investments (held or intended to be purchased) involved in the
transaction and price movements of the instruments involved in the transaction;
(ii) possible lack of a liquid secondary market for any particular instrument
at a particular time; (iii) the need for additional portfolio management skills
and techniques; (iv) losses due to unanticipated market price movements; (v)
the fact that, while such strategies can reduce the risk of loss, they can also
reduce the opportunity for gain, or even result in losses, by offsetting
favorable price movements in investments involved in the transaction; (vi)
incorrect forecasts by WRIMCO concerning interest or currency exchange rates or
direction of price fluctuations of the investment involved in the transaction,
which may result in the strategy being ineffective; (vii) loss of premiums paid
by the Fund on options it purchases; and (viii) the possible inability of the
Fund to purchase or sell a portfolio security at a time when it would otherwise
be favorable for it to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate securities in connection with such
transactions and the possible inability of the Fund to close out or liquidate
its position.
For a hedging strategy to be completely effective, the price change of the
hedging instrument must equal the price change of the investment being hedged.
The risk of imperfect correlation of these price changes increases as the
composition of the Fund's portfolio diverges from instruments underlying a
hedging instrument. Such equal price changes are not always possible because
the investment underlying the hedging instruments may not be the same
investment that is being hedged. WRIMCO will attempt to create a closely
correlated hedge but hedging activity may not be completely successful in
eliminating market value fluctuation.
WRIMCO may use derivative instruments, including securities with embedded
derivatives, for hedging purposes to adjust the risk characteristics of the
Fund's portfolio of investments and may use some of these instruments to adjust
the return characteristics of the Fund's portfolio of investments. An embedded
derivative is a derivative that is part of another financial instrument.
Embedded derivatives typically, but not always, are debt securities whose
return of principal or interest, in part, is determined by reference to
something that is not intrinsic to the security itself. The use of derivative
techniques for speculative purposes can increase investment risk. If WRIMCO
judges market conditions incorrectly or employs a strategy that does not
correlate well with the Fund's investments, these techniques could result in a
loss, regardless of whether the intent was to reduce risk or increase return.
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. In
addition, these techniques could result in a loss if the counterparty to the
transaction does not perform as promised or if there is not a liquid secondary
market to close out a position that the Fund has entered into.
The ordinary spreads between prices in the cash and futures markets, due to the
differences in the natures of those markets, are subject to distortion. Due to
the possibility of distortion, a correct forecast of general interest 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 movements or stock market movements or the time span within which
the movements take place.
Options and futures transactions may increase portfolio turnover rates, which
results in correspondingly greater commission expenses and transactions costs
and may result in certain tax consequences.
New financial products and risk management techniques continue to be developed.
The Fund may use these instruments and techniques to the extent consistent with
its investment goals and regulatory requirements applicable to investment
companies.
When-Issued and Delayed-Delivery Transactions are trading practices in which
payment and delivery for the securities take place at a future date. The
market value of a security could change during this period, which could affect
the Fund's yield.
When purchasing securities on a delayed-delivery basis, the Fund assumes the
rights and risks of ownership, including the risk of price and yield
fluctuations. When the Fund has sold a security on a delayed-delivery basis,
the Fund does not participate in further gains or losses with respect to the
security. 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. 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.
Repurchase Agreements. In a repurchase agreement, the Fund buys a security at
one price and simultaneously agrees to sell it back at a higher price. Delays
or losses could result if the other party to the agreement defaults or becomes
insolvent.
Restricted and Illiquid Securities. Restricted securities are securities that
are subject to legal or contractual restrictions on resale. Restricted
securities may be illiquid due to restrictions on their resale. Certain
restricted securities may be determined to be liquid in accordance with
guidelines adopted by the Fund's Board of Directors.
Illiquid investments may be difficult to sell promptly at an acceptable price.
Difficulty in selling securities may result in a loss or may be costly to the
Fund.
Policies and Restrictions: The Fund may not purchase a security if, as a
result, more than 10% of its net assets would consist of illiquid investments.
Diversification. Diversifying the Fund's investment portfolio can reduce the
risks of investing. This may include limiting the amount of money invested in
any one issuer or, on a broader scale, in any one industry.
Policies and Restrictions: As a fundamental policy, the Fund may not buy a
security if, as a result, it would own more than 10% of the voting securities
or of any class of securities of an issuer, or if more than 5% of the Fund's
total assets would be invested in securities of that issuer.
As a fundamental policy, the Fund may not buy a security if, as a result, more
than 25% of the Fund's total assets would then be invested in securities of
companies in any one industry.
Borrowing. If the Fund borrows money, its share price may be subject to
greater fluctuation until the borrowing is paid off.
If the Fund makes additional investments while borrowings are outstanding, this
may be considered a form of leverage.
Policies and Restrictions: As a fundamental policy, the Fund may borrow money
only from banks, only as a temporary measure or for extraordinary or emergency
purposes, and only up to 5% of its total assets.
Lending. Securities loans may be made on a short-term or long-term basis for
the purpose of increasing the Fund's income. This practice could result in a
loss or a delay in recovering the Fund's securities. Loans will be made only
to parties deemed by WRIMCO to be creditworthy.
Policies and Restrictions: As a fundamental policy, the Fund will not lend
more than 10% of its assets at any one time and such loans must be on a
collateralized basis in accordance with applicable regulatory requirements.
Other Instruments may include 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.
Policies and Restrictions: As a fundamental policy, the Fund may buy shares of
other investment companies that do not redeem their shares only if it does so
in a regular transaction in the open market and only if not more than 10% of
the Fund's total assets would be invested in these shares, subject to the
conditions stated in the SAI. The Fund does not currently intend to invest
more than 5% of its assets in such securities.
<PAGE>
About Your Account
Class Y shares are designed for institutional investors. Class Y shares are
available for purchase by:
o participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401, including 401(k) plans, of the
Internal Revenue Code of 1986, as amended (the "Code"), when the plan has 100
or more eligible employees and holds the shares in an omnibus account on the
Fund's records;
o banks, trust institutions and investment fund administrators investing for
their own accounts or for the accounts of their customers where such
investments for customer accounts are held in an omnibus account on the Fund's
records;
o government entities or authorities and corporations whose investment
within the first twelve months after initial investment is $10 million or more;
and
o certain retirement plans and trusts for employees and account
representatives of Waddell & Reed, Inc. and its affiliates.
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its account
representatives. To open your account you must complete and sign an
application. Your Waddell & Reed account representative can help you with any
questions you might have.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a Class Y share (price to buy one Class Y share) is the
Fund's Class Y net asset value ("NAV"). The Fund's Class Y shares are sold
without a sales charge.
To purchase by wire, you must first obtain an account number by calling 1-800-
366-2520, then fax or mail a completed application to Waddell & Reed, Inc.,
P.O. Box 29217, Shawnee Mission, Kansas 66201-9217, 913-236-5044. Instruct
your bank to wire the amount you wish to invest to UMB Bank, n.a., ABA Number
101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and
Account Number.
To purchase by check, make your check payable to Waddell & Reed, Inc. Mail the
check, along with your completed application, to Waddell & Reed, Inc., P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
The Fund's Class Y NAV is the value of a single share. The Class Y NAV is
computed by adding with respect to that Class the value of the Fund's
investments, cash, and other assets, subtracting its liabilities, and then
dividing the result by the number of Class Y shares outstanding.
The securities in the Fund's portfolio that are listed or traded on an exchange
are valued primarily using market quotations or, if market quotations are not
available, at their fair value in a manner determined in good faith by or at
the direction of the Board of Directors. Bonds are generally valued according
to prices quoted by a dealer in bonds that offers a pricing service. Short-
term debt securities are valued at amortized cost, which approximates market
value. Other assets are valued at their fair value by or at the direction of
the Board of Directors.
The Fund is open for business each day the New York Stock Exchange ("NYSE") is
open. The Fund normally calculates the net asset values of its shares as of
the later of the close of business of the NYSE, normally 4 p.m. Eastern time,
or the close of the regular session of any other securities or commodities
exchange on which an option held by the Fund is traded.
The Fund may invest in securities listed on foreign exchanges which may trade
on Saturdays or on customary U.S. national business holidays when the NYSE is
closed. Consequently, the NAV of Fund shares may be significantly affected on
days when the Fund does not price its shares and when you have no access to the
Fund.
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has cleared.
o The Fund does not issue certificates representing Class Y shares of the
Fund.
When you sign your account application, you will be asked to certify that your
Social Security or taxpayer identification number is correct and whether you
are subject to backup withholding for failing to report income to the IRS.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Minimum Investments
To Open an Account
For a government entity or authority or for a corporation: $10 million
(within
first
twelve
months)
For other
investors: Any amount
Adding to Your Account
You can make additional investments of any amount at any time.
To add to your account by wire: Instruct your bank to wire the amount you wish
to invest, along with the account number and registration, to UMB Bank, n.a.,
ABA Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer Name
and Account Number.
To add to your account by mail: Make your check payable to Waddell & Reed,
Inc. Mail the check along with a letter showing your account number, the
account registration and stating the fund whose shares you wish to purchase to:
Waddell & Reed, Inc.
P.O. Box 29217
Shawnee Mission, Kansas 66201-9217
Selling Shares
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The redemption price (price to sell one Class Y share) is the Fund's Class Y
NAV.
To sell shares by telephone or fax: If you have elected this method in your
application or by subsequent authorization, call 1-800-366-5465 or fax your
request to 913-236-5044 and give your instructions to redeem shares and make
payment by wire to your pre-designated bank account or by check to you at the
address on the account.
To sell shares by written request: Complete an Account Service Request form,
available from your Waddell & Reed account representative, or write a letter of
instruction with:
o the name on the account registration,
o the Fund's name,
o the Fund account number,
o the dollar amount or number of shares to be redeemed, and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed account representative,
or mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.
Special Requirements for Selling Shares
Account Type Special Requirements
Retirement The written instructions must
Account be signed by a properly
authorized person.
Trust The trustee must sign the
written instructions
indicating capacity as
trustee. If the trustee's
name is not in the account
registration, provide a
currently certified copy of
the trust document.
Business or At least one person authorized
Organization by corporate resolution to act
on the account must sign the
written instructions.
When you place an order to sell shares, your shares will be sold at the next
NAV calculated after your request is received and accepted by Waddell & Reed,
Inc. at its home office. Note the following:
o Written requests for redemption must be in good order, which requires that
if more than one person owns the shares, each owner must sign the written
request.
o If you recently purchased the shares by check, the Fund may delay payment
of redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance,
satisfactory to the Fund, that the check has cleared and been honored. If no
such assurance is given, payment of the redemption proceeds on these shares
will be delayed until the earlier of 10 days or the date the Fund is able to
verify that your purchase check has cleared and been honored.
o Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the Securities and Exchange Commission.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
The Fund reserves the right to require a signature guarantee on certain
redemption requests. This requirement is designed to protect you and Waddell &
Reed from fraud. The Fund may require a signature guarantee in certain
situations such as:
o the request for redemption is made by a corporation, partnership or
fiduciary,
o the request for redemption is made by someone other than the owner of
record, or
o the check is being made payable to someone other than the owner of
record.
The Fund will accept a signature guarantee from a national bank, a federally
chartered savings and loan or a member firm of a national stock exchange or
other eligible guarantor in accordance with procedures of the Fund's transfer
agent. A notary public cannot provide a signature guarantee.
Telephone Transactions
The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Fund fails to do so, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. Current procedures
relating to instructions communicated by telephone include tape recording
instructions, requiring personal identification and providing written
confirmations of transactions effected pursuant to such instructions.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your account.
Personal Service
Your local Waddell & Reed account representative is available to provide
personal service. Additionally, the Waddell & Reed Customer Services staff is
available to respond promptly to your inquiries and requests.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, exchange, transfer or
redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports (every six months)
To reduce expenses, only one copy of most annual and semiannual reports will be
mailed to your household, even if you have more than one account with the Fund.
Call 913-236-2000 if you need copies of annual or semiannual reports or
historical account information.
Exchanges
You may sell your Class Y shares and buy Class Y shares of other funds in the
United Group. You may exchange only into funds that are legally registered for
sale in your state of residence. Note that exchanges out of the Fund may have
tax consequences for you. Before exchanging into a fund, read its prospectus.
The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
Dividends, Distributions and Taxes
Distributions
The Fund distributes substantially all of its net income and capital gains to
shareholders each year. Ordinarily, dividends are distributed from the Fund's
net investment income, which includes accrued interest, earned discount,
dividends and other income earned on portfolio assets less expenses, quarterly
in March, June, September and December. Net capital gains (and any net
realized gains from foreign currency transactions) ordinarily are distributed
in December. The Fund may make additional distributions if necessary to avoid
Federal income or excise taxes on undistributed income and capital gains.
Distribution Options.
When you open an account, specify on your application how you want to receive
your distributions. The Fund offers three options:
1. Share Payment Option. Your dividend and capital gains distributions will
be automatically paid in additional Class Y shares of the Fund. If you do not
indicate a choice on your application, you will be assigned this option.
2. Income-Earned Option. Your capital gains distributions will be
automatically paid in Class Y shares, but you will be sent a check for each
dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital gains
distributions.
For retirement accounts, all distributions are automatically paid in Class Y
shares.
Taxes
The Fund has qualified and intends to continue to qualify for treatment as a
regulated investment company under the Code so that it will be relieved of
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net short-term capital gains
and net gains from certain foreign currency transactions) and net capital gains
(the excess of net long-term capital gain over net short-term capital loss)
that are distributed to its shareholders.
There are tax requirements that the Fund must follow in order to avoid Federal
taxation. In its effort to adhere to these requirements, the Fund may have to
limit its investment activity in some types of instruments.
As with any investment, you should consider how your investment in the Fund
will be taxed. If your account is not a tax-deferred retirement account, you
should be aware of the following tax implications:
Taxes on distributions. Dividends from the Fund's investment company taxable
income are taxable to you as ordinary income whether received in cash or paid
in additional Fund shares. Distributions of the Fund's realized net capital
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or reinvested in additional Fund shares and regardless
of the length of time you have owned your shares. The Fund notifies you after
each calendar year-end as to the amounts of dividends and distributions paid
(or deemed paid) to you for that year. Under certain circumstances, the Fund
may elect to permit shareholders to take a credit or deduction for foreign
income taxes paid by the Fund. The Fund will notify you of any such election.
A portion of the dividends paid by the Fund, whether received in cash or paid
in additional Fund shares, may be eligible for the dividends-received deduction
allowed to corporations. The eligible portion may not exceed the aggregate
dividends received by the Fund from U.S. corporations. However, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the alternative minimum
tax.
Withholding. The Fund is required to withhold 31% of all dividends,
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate from dividends and
distributions also is required for such shareholders who otherwise are subject
to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than your adjusted basis for the redeemed shares (which normally includes
any sales charge paid). An exchange of Fund shares for shares of any other
fund in the United Group generally will have similar tax consequences. In
addition, if you purchase Class Y shares of the Fund within thirty days before
or after redeeming other Class Y shares of the Fund at a loss, part or all of
that loss will not be deductible and will increase the basis of the newly
purchased shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders. There may be
other Federal, state or local tax considerations applicable to a particular
investor. You are urged to consult your own tax adviser.
<PAGE>
About the Management and Expenses of the Fund
United Continental Income Fund, Inc. is a mutual fund: an investment that
pools shareholders' money and invests it toward a specified goal. In technical
terms, the Fund is an open-end management investment company organized as a
corporation under Maryland law on November 15, 1974, as successor to a Delaware
corporation which commenced operations in 1970.
The Fund is governed by a Board of Directors, which has overall responsibility
for the management of its affairs. The majority of directors are not
affiliated with Waddell & Reed, Inc.
The Fund has two classes of shares. In addition to the Class Y shares offered
by this Prospectus, the Fund has issued and outstanding Class A shares which
are offered by Waddell & Reed, Inc. through a separate Prospectus. Prior to
August 29, 1995, the Fund offered only one class of shares to the public.
Shares outstanding on that date were designated as Class A shares. Class A
shares are subject to a sales charge on purchases but are not subject to
redemption fees. Class A shares are subject to a Rule 12b-1 fee at an annual
rate of up to 0.25% of the Fund's average net assets attributable to Class A
shares. Additional information about Class A shares may be obtained by calling
913-236-2000 or by writing to Waddell & Reed, Inc. at the address on the inside
back cover of the Prospectus.
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 of the Fund 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
Investment Company Act of 1940, as amended ("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. Shares are fully paid and nonassessable when purchased.
WRIMCO and Its Affiliates
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. Waddell & Reed, Inc. and its predecessors served as
investment manager to each of the registered investment companies in the United
Group of Mutual Funds, except United Asset Strategy Fund, Inc., since 1940 or
the inception of the company, whichever was later, and to TMK/United Funds,
Inc. since that fund's inception, until January 8, 1992, when it assigned its
duties as investment manager and assigned its professional staff for investment
management services to WRIMCO. WRIMCO has also served as investment manager
for Waddell & Reed Funds, Inc. since its inception in September 1992, Torchmark
Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc.
since each commenced operations in February 1993 and United Asset Strategy
Fund, Inc. since it commenced operations in March 1995.
Cynthia P. Prince-Fox is primarily responsible for the day-to-day management of
the Fund. Ms. Prince-Fox has held her Fund responsibilities since February
1993. She is Vice President of WRIMCO and Vice President of Waddell & Reed
Asset Management Company, an affiliate of WRIMCO. She is Vice President of the
Fund, and Vice President of other investment companies for which WRIMCO serves
as investment manager. Ms. Prince-Fox has served as the portfolio manager for
investment companies managed by WRIMCO since January 1993 and, prior to
assuming her Fund responsibilities, was an investment analyst with Waddell &
Reed, Inc. and its successor, WRIMCO, since February 1983. Other members of
WRIMCO's investment management department provide input on market outlook,
economic conditions, investment research and other considerations relating to
the Fund's investments.
Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter for
each of the other funds in the United Group of Mutual Funds and Waddell & Reed
Funds, Inc., and serves as the distributor for TMK/United Funds, Inc.
Waddell & Reed Services Company acts as transfer agent ("Shareholder Servicing
Agent") for the Fund and processes the payments of dividends. Waddell & Reed
Services Company also acts as agent ("Accounting Services Agent") in providing
bookkeeping and accounting services and assistance to the Fund and pricing
daily the value of its shares.
WRIMCO and Waddell & Reed Services Company are subsidiaries of Waddell & Reed,
Inc. Waddell & Reed, Inc. is a direct subsidiary of Waddell & Reed Financial
Services, Inc., a holding company, and an indirect subsidiary of United
Investors Management Company, a holding company, and Torchmark Corporation, a
holding company.
WRIMCO places transactions for the portfolio of the Fund and in doing so may
consider sales of shares of the Fund and other funds it manages as a factor in
the selection of brokers to execute portfolio transactions.
Breakdown of Expenses
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained below.
Management Fee
The management fee of the Fund is calculated by adding a group fee to a
specific fee. It is accrued and paid to WRIMCO daily.
The specific fee is computed on the Fund's net asset value as of the close of
business each day at the annual rate of .15 of 1% of its net assets. The group
fee is a pro rata participation based on the relative net asset size of the
Fund in the group fee computed each day on the combined net asset values of all
the funds in the United Group at the annual rates shown in the following table:
Group Fee Rate
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Growth in assets of the United Group assures a lower group fee rate.
The combined net asset values of all of the funds in the United Group were
approximately $11.5 billion as of March 31, 1995. Management fees for the
fiscal year ended March 31, 1995 were 0.53% of the Fund's average net assets,
which during that period consisted only of the Fund's Class A shares. Prior to
December 1, 1994, the Fund's specific fee was computed at the annual rate of
.10 of 1% of the Fund's net assets.
Other Expenses
While the management fee is a significant component of the Fund's annual
operating costs, the Fund has other expenses as well.
The Fund pays the Accounting Services Agent a monthly fee based on the average
net assets of the Fund for accounting services. With respect to its Class Y
shares, the Fund pays the Shareholder Servicing Agent a monthly fee based on
the average daily net assets of the Class for the preceding month.
The Fund also pays other expenses, such as fees and expenses of certain
directors, audit and outside legal fees, costs of materials sent to
shareholders, 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 extraordinary expenses including
litigation and indemnification relative to litigation.
The Fund cannot precisely predict what its portfolio turnover rate will be, but
the Fund may have a high portfolio turnover. A higher turnover will increase
transaction and commission costs and could generate taxable income or loss.
<PAGE>
United Continental Income Fund, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 M Street, N. W. (913) 236-2000
Washington, D. C. 20036
Shareholder Servicing Agent
Independent Accountants Waddell & Reed
Price Waterhouse LLP Services Company
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Investment Manager Shawnee Mission, Kansas
Waddell & Reed Investment 66201-9217
Management Company (913) 236-1579
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
<PAGE>
United Continental Income Fund, Inc.
Class Y Shares
PROSPECTUS
August 29, 1995
The United Group of Mutual Funds
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United Gold & Government Fund, Inc.
United Government Securities Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United International Growth Fund, Inc.
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United New Concepts Fund, Inc.
United Retirement Shares, Inc.
United Vanguard Fund, Inc.
NUP1004-Y(8-95)
printed on recycled paper
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
August 29, 1995
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with a prospectus ("Prospectus")
for the Class A shares or the Class Y shares, as applicable, of United
Continental Income Fund, Inc. (the "Fund") dated August 29, 1995, which may be
obtained from the Fund or its underwriter, Waddell & Reed, Inc., at the address
or telephone number shown above.
TABLE OF CONTENTS
Performance Information ............................ 2
Goals and Investment Policies ...................... 3
Investment Management and Other Services ........... 28
Purchase, Redemption and Pricing of Shares ......... 32
Directors and Officers ............................. 47
Payments to Shareholders ........................... 52
Taxes .............................................. 53
Portfolio Transactions and Brokerage ............... 57
Other Information ................................ 59
<PAGE>
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may from time to
time publish the Fund's total return information and/or performance rankings in
advertisements and sales materials.
Total Return
An average annual total return quotation is computed by finding the
average annual compounded rates of return over the one-, five-, and ten-year
periods that would equate the initial amount invested to the ending redeemable
value. Standardized total return information is calculated by assuming an
initial $1,000 investment and, for Class A shares, from which the maximum sales
load of 5.75% is deducted. All dividends and distributions are assumed to be
reinvested in shares of the applicable Class at net asset value for the Class
as of the day the dividend or distribution is paid. No sales load is charged
on reinvested dividends or distributions on Class A shares. The formula used
to calculate the total return for a particular Class of the Fund is
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for the
periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to
have been invested. If the sales charge applicable to Class A shares was
reflected, it would reduce the performance quoted for that Class.
The average annual total return quotations for Class A shares as of March
31, 1995, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
With Without
Sales LoadSales Load
Deducted Deducted
One-year period from April 1, 1994 to
March 31, 1995: 0.27% 6.39%
Five-year period from April 1, 1990 to
March 31, 1995: 8.33% 9.62%
Ten-year period from April 1, 1985 to
March 31, 1995: 10.63% 11.29%
Prior to August 29, 1995, the Fund offered only one class of shares to the
public. Shares outstanding on that date were designated as Class A shares.
Since that date, Class Y shares of the Fund have been available to certain
institutional investors.
The Fund may also quote unaveraged or cumulative total return for a Class
which reflects the change in value of an investment in that Class over a stated
period of time. Cumulative total returns will be calculated according to the
formula indicated above but without averaging the rate for the number of years
in the period.
Performance Rankings
Waddell & Reed, Inc. or the Fund also may from time to time publish in
advertisements or sales material performance rankings as published by
recognized independent mutual fund statistical services such as Lipper
Analytical Services, Inc., or by publications of general interest such as
Forbes, Money, The Wall Street Journal, Business Week, Barron's, Fortune or
Morningstar Mutual Fund Values. Each Class of the Fund may also compare its
performance to that of other selected mutual funds or selected recognized
market indicators such as the Standard & Poor's 500 Stock Index and the Dow
Jones Industrial Average. Performance information may be quoted numerically or
presented in a table, graph or other illustration.
All performance information that the Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of the Fund's shares when redeemed may be more or
less than their original cost.
GOALS AND INVESTMENT POLICIES
The goals and investment policies of the Fund are described in the
Prospectus, which refers to the following investment methods and practices.
Securities - General
The Fund may invest in securities including common stock, preferred stock
and debt securities, as described in the Prospectus. These securities may
include the following described securities from time to time.
The Fund may purchase debt securities whose principal amount at maturity
is dependent upon the performance of a specified equity security. The issuer
of such debt securities, typically an investment banking firm, is unaffiliated
with the issuer of the equity security to whose performance the debt security
is linked. Equity-linked debt securities differ from ordinary debt securities
in that the principal amount received at maturity is not fixed, but is based on
the price of the linked equity security at the time the debt security matures.
The performance of equity-linked debt securities depends primarily on the
performance of the linked equity security and may also be influenced by
interest rate changes. In addition, although the debt securities are typically
adjusted for diluting events such as stock splits, stock dividends and certain
other events affecting the market value of the linked equity security, the debt
securities are not adjusted for subsequent issuances of the linked equity
security for cash. Such an issuance could adversely affect the price of the
debt security. In addition to the equity risk relating to the linked equity
security, such debt securities are also subject to credit risk with regard to
the issuer of the debt security. In general, however, such debt securities are
less volatile than the equity securities to which they are linked.
The Fund may also invest in a type of convertible preferred stock that
pays a cumulative, fixed dividend that is senior to, and expected to be in
excess of, the dividends paid on the common stock of the issuer. At the
mandatory conversion date, the preferred stock is converted into not more than
one share of the issuer's common stock at the "call price" that was established
at the time the preferred stock was issued. If the price per share of the
related common stock on the mandatory conversion date is less than the call
price, the holder of the preferred stock will nonetheless receive only one
share of common stock for each share of preferred stock (plus cash in the
amount of any accrued but unpaid dividends). At any time prior to the
mandatory conversion date, the issuer may redeem the preferred stock upon
issuing to the holder a number of shares of common stock equal to the call
price of the preferred stock in effect on the date of redemption divided by the
market value of the common stock, with such market value typically determined
one or two trading days prior to the date notice of redemption is given. The
issuer must also pay the holder of the preferred stock cash in an amount equal
to any accrued but unpaid dividends on the preferred stock. This convertible
preferred stock is subject to the same market risk as the common stock of the
issuer, except to the extent that such risk is mitigated by the higher dividend
paid on the preferred stock. The opportunity for equity appreciation afforded
by an investment in such convertible preferred stock, however, is limited,
because in the event the market value of the issuer's common stock increases to
or above the call price of the preferred stock, the issuer may (and would be
expected to) call the preferred stock for redemption at the call price. This
convertible preferred stock is also subject to credit risk with regard to the
ability of the issuer to pay the dividend established upon issuance of the
preferred stock. Generally, convertible preferred stock is less volatile than
the related common stock of the issuer.
Debt Securities
As an operating (i.e., nonfundamental) policy, the Fund does not intend to
invest in non-investment grade debt securities if as a result of such
investment, more than 5% of its assets would consist of such investments.
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.
While the market for high-yield, high-risk corporate debt securities has
been in existence for many years and has weathered previous economic downturns,
the 1980s brought a dramatic increase in the use of such securities to fund
highly leveraged corporate acquisitions and restructurings. Past experience
may not provide an accurate indication of the future performance of the high-
yield, high-risk bond market, especially during periods of economic recession.
The market for lower-rated debt securities may be thinner and less active than
that for higher-rated debt securities, which can adversely affect the prices at
which the former are sold. Adverse publicity and changing investor perceptions
may decrease the values and liquidity of lower-rated debt securities,
especially in a thinly-traded market.
Valuation becomes more difficult and judgment plays a greater role in
valuing lower-rated debt securities than with respect to securities for which
more external sources of quotations and last sale information are available.
Since the risk of default is higher for lower-rated debt securities, the
research and credit analysis of Waddell & Reed Investment Management Company
("WRIMCO"), the Fund's investment manager 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 its portfolio in an
attempt to determine if the issuers will have sufficient cash flow and profits
to meet required principal and interest payments.
The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder to
seek to protect the interests of security holders if it determines this to be
in the best interest of the Fund's shareholders.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with using credit
ratings. Credit ratings evaluate the safety of principal and interest
payments, not market value risk.
Zero Coupon Bonds
Zero coupon bonds do not make interest payments; instead, they are sold at
a deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can
be very volatile when interest rates change. In calculating its dividends, the
Fund takes into account as income a portion of the difference between a zero
coupon bond's purchase price and its face value.
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 (Certificate of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond 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 Securities
A mortgage-backed security may be an obligation of the issuer backed by a
mortgage or pool of mortgages or a direct interest in an underlying pool of
mortgages. Mortgage-backed securities are based on different types of
mortgages including those on commercial real estate or residential properties.
Some mortgage-backed securities, such as collateralized mortgage obligations,
make payments of both principal and interest at a variety of intervals; others
make semiannual interest payments at a predetermined rate and repay principal
at maturity (like a typical bond). Pass-through securities and participation
certificates represent pools of mortgages that are assembled, with interests
sold in the pool; the assembly is made by an "issuer," such as a mortgage
banker, commercial bank or savings and loan association, which assembles the
mortgages in the pool and passes through payments of principal and interest for
a fee payable to it. Payments of principal and interest by individual
mortgagors are passed through to the holders of the interest in the pool.
Monthly or other regular payments on pass-through securities and participation
certificates include payments of principal (including prepayments on mortgages
in the pool) rather than only interest payments.
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 investment goals and policies.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns. The Fund does not intend to invest more
than 25% of its total assets in these types of securities.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are created when a U.S. Government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security ("PO") receives the
principal payments made by the underlying mortgage-backed security, while the
holder of the "interest-only" security ("IO") receives interest payments from
the same underlying security.
The prices of stripped mortgage-backed securities may be particularly
affected by changes in interest rates. As interest rates fall, prepayment
rates tend to increase, which tends to reduce prices of IOs and increase prices
of POs. Rising interest rates can have the opposite effect.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased directly
from issuers) bear variable or floating interest rates and carry rights that
permit holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries. 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.
Restricted Securities
Restricted securities are subject to legal or contractual restrictions on
resale because they are not registered under the Securities Act of 1933, as
amended ("1933 Act").
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act, or
in a registered public offering. Where registration is required, the Fund may
be obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the time
the Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, the Fund might obtain a less favorable price than prevailed when it
decided to seek registration of the security.
There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities
in which the Fund seeks to invest need not be listed or admitted to trading on
an exchange and may be less liquid than listed securities. See "Illiquid
Investments" below.
Foreign Securities
The Fund may purchase an unlimited amount of foreign securities.
Normally, however, less than 10% of the Fund's total assets will consist of
foreign securities. The Fund will not invest more than 25% of its total assets
in securities issued by the government of any one foreign country. WRIMCO
believes that there are investment opportunities as well as risks in investing
in foreign securities. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy or each other in such matters as gross
national product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position. Individual foreign companies may
also differ favorably or unfavorably from domestic companies in the same
industry. Foreign currencies may be stronger or weaker than the U.S. dollar or
than each other. WRIMCO believes that the Fund's ability to invest its assets
abroad might enable it to take advantage of these differences and strengths
where they are favorable.
Further, an investment in foreign securities may be affected by changes in
currency rates and in exchange control regulations (i.e., currency blockage).
The Fund may bear a transaction charge in connection with the exchange of
currency. There may be less publicly available information about a foreign
company than about a domestic company. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. Most foreign stock
markets have substantially less volume than the New York Stock Exchange
("NYSE") and securities of some foreign companies are less liquid and more
volatile than securities of comparable domestic companies. There is generally
less government regulation of stock exchanges, brokers and listed companies
than in the United States. In addition, with respect to certain foreign
countries, there is a possibility of expropriation or confiscatory taxation,
political or social instability or diplomatic developments that could adversely
affect investments in securities of issuers allocated in those countries. If
it should become necessary, the Fund would normally encounter greater
difficulties in commencing a lawsuit against the issuer of a foreign security
than it would against a U.S. issuer.
Lending Securities
One of the ways the Fund may try to realize income is by lending its
securities. If the Fund does this, the borrower pays the Fund an amount equal
to the dividends or interest on the securities that the Fund would have
received if it had not loaned the securities. The Fund also receives
additional compensation.
Any securities loans that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). This
policy can only be changed by shareholder vote. Under the present Guidelines,
the collateral must consist of cash or securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities ("U.S. Government
Securities") or bank letters of credit, at least equal in value to the market
value of the securities loaned on each day that the loan is outstanding. If
the market value of the loaned securities exceeds the value of the collateral,
the borrower must add more collateral so that it at least equals the market
value of the securities loaned. If the market value of the securities
decreases, the borrower is entitled to return of the excess collateral.
There are two methods of receiving compensation for making loans. The
first is to receive a negotiated loan fee from the borrower. This method is
available for all three types of collateral. The second method, which is not
available when letters of credit are used as collateral, is for the Fund to
receive interest on the investment of the cash collateral or to receive
interest on the U.S. Government Securities used as collateral. Part of the
interest received in either case may be shared with the borrower.
The letters of credit that the Fund may accept as collateral are
agreements by banks (other than the borrowers of the Fund's securities),
entered into at the request of the borrower and for its account and risk, under
which the banks are obligated to pay to the Fund, while the letter is in
effect, amounts demanded by the Fund if the demand meets the terms of the
letter. The Fund's right to make this demand secures the borrower's
obligations to it. The terms of any such letters and the creditworthiness of
the banks providing them (which might include the Fund's custodian bank) must
be satisfactory to the Fund. Under the Fund's current securities lending
procedures, the Fund may lend securities only to broker-dealers and financial
institutions deemed creditworthy by WRIMCO. The Fund will make loans only
under rules of the NYSE, which presently require the borrower to give the
securities back to the Fund within five business days after the Fund gives
notice to do so. If the Fund loses its voting rights on securities loaned, it
will have the securities returned to it in time to vote them if a material
event affecting the investment is to be voted on. The Fund may pay reasonable
finder's, administrative and custodian fees in connection with loans of
securities.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned goes up, risks of delay
in recovering the securities loaned or even loss of rights in the collateral
should the borrower of the securities fail financially.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules, which may be changed without shareholder vote, as
to: (i) whom securities may be loaned; (ii) the investment of cash collateral;
or (iii) voting rights.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. The
Fund will not enter into a repurchase transaction that will cause more than 10%
of its net assets to be invested in illiquid securities, which include
repurchase agreements not terminable within seven days. See "Illiquid
Investments". A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a commercial bank or broker-
dealer) agrees, at the time of purchase, that it will repurchase the security
at a specified time and price. The amount by which the resale price is greater
than the purchase price reflects an agreed-upon market interest rate effective
for the period of the agreement. The return on the securities subject to the
repurchase agreement may be more or less than the return on the repurchase
agreement.
The majority of the repurchase agreements in which the Fund would engage
are overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is that
the Fund may suffer a loss if the seller fails to pay the agreed-upon amount on
the delivery date and that amount is greater than the resale price of the
underlying securities and other collateral held by the Fund. In the event of
bankruptcy or other default by the seller, there may be possible delays or
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, i.e., the
value of the underlying securities subject to the repurchase agreement, 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 ("1940 Act"), is and, during the entire term of the agreement, will
remain at least equal to the value of the loan, including the accrued interest
earned thereon. Repurchase agreements are entered into only with those
entities approved by WRIMCO on the basis of criteria established by the Board
of Directors.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase any securities in which it may invest on a when-
issued or delayed-delivery basis or sell them on a delayed-delivery basis. 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. For example, delivery to the Fund and payment by the Fund in the
case of a purchase by it, or delivery by the Fund and payment to it in the case
of a sale by the Fund, may take place a month or more after the date of the
transaction. The purchase or sale price is fixed on the transaction date. The
Fund will enter into when-issued or delayed-delivery transactions in order to
secure what is considered to be an advantageous price and yield at the time of
entering into the transaction. 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. The securities so sold by the Fund on a
delayed-delivery basis are also subject to market fluctuation; their value when
the Fund delivers them may be more than the purchase price the Fund receives.
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.
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.
Illiquid Investments
The Fund has an operating policy, which may be changed without shareholder
approval, which provides that the Fund may not invest more than 10% of its net
assets in illiquid investments. The investments currently considered to be
illiquid include: (i) repurchase agreements not terminable within seven days;
(ii) securities for which market quotations are not readily available; (iii)
over-the-counter ("OTC") options and their underlying collateral; and (iv)
restricted securities not determined to be liquid pursuant to guidelines
established by the Fund's Board of Directors. The assets used as cover for OTC
options written by the Fund will be considered illiquid unless the OTC options
are sold to qualified dealers who agree that the Fund may repurchase any OTC
option it writes at a maximum price to be calculated by a formula set forth in
the option agreement. The cover for an OTC option written subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Indexed Securities
The Fund may purchase securities whose prices are indexed to the prices of
other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at maturity or coupon
rate is determined by reference to a specific instrument or statistic. 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. The Fund does not
intend to invest more than 25% of its total assets in indexed securities.
Options and Futures
As discussed in the Prospectus, WRIMCO may use certain options to attempt
to enhance income or yield or may attempt to reduce overall risk of its
investments by using certain options and futures contracts (sometimes referred
to as "futures"). Options and futures are sometimes referred to collectively
as "Financial Instruments." The Fund's ability to use a particular Financial
Instrument may be limited by its investment limitations or operating policies.
See "Operating Restrictions" and "Investment Restrictions."
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 ("SEC"), the several exchanges upon
which they are traded, the Commodity Futures Trading Commission ("CFTC") and
various state regulatory authorities. 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 and
in the Prospectus, WRIMCO expects to discover additional opportunities in
connection with options, futures contracts, options on futures contracts and
other similar or related techniques. These new opportunities may become
available as WRIMCO develops new techniques, as regulatory authorities broaden
the range of permitted transactions and as new options, futures contracts,
options on futures contracts or other techniques are developed. WRIMCO may
utilize these opportunities to the extent that they are consistent with the
Fund's investment goals and permitted by the Fund's investment limitations and
applicable regulatory authorities. 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. 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.
(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. The Fund's ability to close out
a position in a Financial Instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of the other party to the transaction
("counterparty") to enter into a transaction closing out the position.
Therefore, there is no assurance that any position can be closed out at a time
and price that is favorable to the Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities or other options or futures contracts, or
(2) cash, receivables and short-term debt securities, with a value sufficient
at all times to cover its potential obligations to the extent not covered as
provided in (1) above. The Fund will comply with SEC guidelines regarding
cover for these instruments and will, if the guidelines so require, set aside
cash, U.S. Government Securities or other liquid, high-grade debt securities in
a segregated account with its custodian in the prescribed amount as determined
daily on a mark-to-market basis.
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. As a fundamental policy, the Fund may write call options on
securities only if: (i) such calls are listed on a domestic securities
exchange; (ii) when any such call is written and at all times prior to a
closing purchase transaction as to such call, or its lapse or exercise, the
Fund owns the securities that are subject to the call or has the right to
acquire such securities without the payment of further consideration; and
(iii) when any such call is written, not more than 25% of the Fund's total
assets would be subject to calls. Calls may be purchased to effect a closing
purchase transaction as to any call written in accordance with the foregoing.
In addition, as a fundamental policy, the Fund may purchase calls and write and
purchase put options on securities in which the Fund may invest and may, for
non-speculative purposes, write and purchase options on broadly-based stock
indices.
The purchase of call options serves as a long hedge, and the purchase of
put options serves 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 on the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can also 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
appreciates to a price higher than the exercise price of the call option, it
can be expected that the option will be exercised and the Fund will be
obligated to sell the security at less than its market value. The Fund will
write calls when it considers that the amount of the premium represents
adequate compensation for the loss of the opportunity.
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 depreciates to a
price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Fund will be obligated to purchase the
security at more than its market value. The Fund will write a put only when it
has determined that it would be willing to purchase the underlying security at
the exercise price. 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. The Fund is authorized to write listed
covered call options on securities and to write put options and purchase
options that are listed or unlisted. The Fund has an operating policy,
however, which provides that it will only purchase calls or write and purchase
puts that are listed with two exceptions: (1) it may purchase calls and write
and purchase puts that are not listed if the security underlying the option is
a U.S. Government Security; and (2) optional delivery standby commitments may
be unlisted. The Fund may only purchase or sell options on stock indices that
are listed on a national securities exchange. See "Operating Restrictions"
below.
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 made for OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. Although the Fund will enter into OTC options only with major dealers
in unlisted options, there is no assurance that the Fund will in fact be able
to close out an OTC option position at a favorable price prior to expiration.
WRIMCO will evaluate the ability to enter into closing purchase transactions on
unlisted options prior to writing them. 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.
Option premiums paid to control an amount of related investments are small
in relation to the market value of related investments and, consequently, put
and call options offer large amounts of leverage. The leverage offered by
trading in options will result in the Fund's net asset value being more
sensitive to changes in the value of the related investment.
Options On Stock Indices. The Fund is permitted to write and purchase
options on broadly-based stock indices subject to the limitations set forth
under "Operating Restrictions" and "Investment Restrictions." Broadly-based
stock indices are indices that are not limited to stocks of any particular
industry or industries. The Fund may purchase calls on stock indices to hedge
against anticipated increases in the price of securities it wishes to acquire
and purchase puts on stock indices to hedge against anticipated declines in the
market value of portfolio securities. Puts and calls on stock 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 broad-based
index in question rather than on price movements in individual securities or
futures contracts. When the Fund writes a call on a stock index, it receives a
premium and agrees that, 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 stock 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 a
stock 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 a stock 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 stock 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 a
stock index, it receives a premium and the purchaser 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 stock index and the
exercise price times the multiplier if the closing level is less than the
exercise price.
Risks of Options on Stock Indexes. The risks of investment in options on
stock indexes may be greater than options on securities. Because stock index
options are settled in cash, when the Fund writes a call on a stock 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 stocks
similar to those on which the underlying index is based. However, the Fund
cannot, as a practical matter, acquire and hold a portfolio containing exactly
the same stocks 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 stock 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 it
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 a 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 stocks that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those stocks 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 stock
portfolio. This "timing risk" is an inherent limitation on the ability of
index call writers to cover their risk exposure by holding stock 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.
Futures Contracts and Options on Futures Contracts. The Fund is permitted
to purchase and sell futures contracts and options on futures contracts subject
to the limitations set forth under "Operating Restrictions" and "Investment
Restrictions."
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 strategies also 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 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 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" consisting of cash or U.S. Government Securities in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in
the nature of a performance bond or good-faith deposit that is returned to the
Fund at the termination of the transaction if all contractual obligations have
been satisfied. Under certain circumstances, such as periods of high
volatility, the Fund may be required by an exchange to increase the level of
its initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
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. The Fund intends to enter into futures and options on futures only on
exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a 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 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 or options on 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 future or option or to maintain cash or securities in a
segregated account.
As an operating policy, to the extent that the Fund enters into futures
contracts or options on futures contracts, 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 and options on futures
contracts.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on
futures market), due to 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 futures contracts through offsetting
transactions, which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of general interest or stock market trends by
WRIMCO may still not result in a successful transaction. WRIMCO may be
incorrect in its expectations as to the extent of various interest rate
movements or stock market movements or the time span within which the movements
take place.
Stock Index Futures. The Fund may purchase and sell futures contracts on
broadly-based stock indices ("Stock Index Futures") and options thereon. A
stock index is broadly-based if it is not limited to stocks of any industry or
group of industries.
The risk of imperfect correlation between movements in the price of a
Stock Index Future and movements in the price of the securities that are the
subject of the hedge increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable index. The price of
the Stock Index Future may move more than or less than the price of the
securities being hedged. If the price of the Stock Index Future moves less
than the price of the securities 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 Stock Index Futures, the Fund may buy
or sell Stock 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 Stock Index Futures to hedge against decline in the
market, the market may advance and the value of securities held in the
portfolio may decline. If this occurred, the Fund would lose money on the
futures contract and also experience a decline in value in its portfolio
securities. However, while this could occur for a very brief period or to a
very small degree, over time the value of a diversified portfolio of securities
will tend to move in the same direction as the market indices upon which the
futures contracts are based.
Where Stock Index Futures are purchased to hedge against a possible
increase in the price of securities before the Fund is able to invest in them
in an orderly fashion, it is possible that the market may decline instead. If
the Fund then concludes not to invest in them at that time because of concern
as to possible further market decline or for other reasons, it will realize a
loss on the futures contract that is not offset by a reduction in the price of
the securities it had anticipated purchasing.
Combined Positions. The Fund may purchase and write options in
combination with each other, or in combination with futures 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.
Operating Restrictions
The Fund is subject to certain operating restrictions pertaining to
investments in options and futures. Such operating restrictions may be revised
by the Board depending on its judgments regarding the ability of WRIMCO to make
use of these instruments to the benefit of the Fund and in order to conform to
rules and regulations of the CFTC, the SEC, various state securities
commissions, Federal tax law and regulations, and the rules on which the
investments are traded.
Options on stock indexes, futures contracts and options on futures (i)
contracts will be used only for risk management ("hedging") purposes
within the meaning of applicable regulations. The Fund will not hedge
more than 10% of its total assets.
(ii) Only options on securities that are issued by the Options Clearing
Corporation may be purchased or sold except that the Fund may write
unlisted put options and purchase unlisted put and call options on U.S.
Government Securities and except for optional delivery standby
commitments; only options on stock indexes, options on futures
contracts and futures contracts that are listed on a national
securities or commodities exchange may be purchased or sold; to the
extent option transactions involving unlisted options are illiquid,
such options and the underlying collateral will be subject to an
operating policy of the Fund that limits investment in illiquid
securities to 10% of its net assets.
(iii) The aggregate premiums paid for the purchase of permitted options that
are held by the Fund at any one time, adjusted for the portion of any
premium attributable to a difference between the "strike price" of the
option and the market value of the underlying security or futures
contract at the time of purchase, may not exceed 20% of the total
assets of the Fund.
(iv) The aggregate margin deposits and premiums required on all futures (iv)
contracts and options thereon held or outstanding at any one time by
the Fund may not exceed 5% of its total assets adjusted for unrealized
gains or losses of the Fund on such options and futures contracts.
(v) The aggregate amount of the obligations underlying the puts written by
the Fund that are outstanding at any one time may not exceed 25% of its
net assets computed at the time of sale.
Securities of Other Investment Companies
As a fundamental policy, the Fund may not buy shares of other investment
companies that redeem their shares, but 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 if, as a result of such purchase, not more
than one tenth (i.e., 10%) of the total assets of the four Funds are invested
in these shares. However, the Fund does not currently intend to invest more
than 5% of its assets in such securities.
In order to comply with regulations of the State of Ohio, for so long as
such regulations are in effect and applicable to the Fund, the Fund will not
invest in securities of other investment companies, except by purchase in the
open market where no commission or profit to a sponsor or dealer results from
the purchase other than the customary broker's commission, or except when the
purchase is part of a plan of merger, consolidation, reorganization or
acquisition.
Unseasoned Issuers
The Fund does not intend to invest in companies, including predecessors,
with less than three years continuous operation if, as a result of such
investment, such securities, together with restricted securities, represent
more than 15% of the Fund's total assets. This restriction does not include
securities issued or guaranteed by the U.S. Government or any of its agencies
or instrumentalities, collateralized mortgage obligations or other mortgage-
backed securities, asset-backed securities or indexed securities. See
"Restricted Securities."
Investment Restrictions
Certain of the Fund's investment restrictions are described in the
Prospectus. The following are fundamental policies and, together with certain
restrictions described in the Prospectus, cannot be changed without shareholder
approval. Under these additional restrictions, the Fund may not:
(i) Buy or sell commodities or commodity contracts except that it may, for
non-speculative purposes, buy or sell futures contracts on broadly-
based stock indexes ("Stock Index Futures"), futures contracts on debt
securities ("Debt Futures") and options on Stock Index Futures and Debt
Futures;
(ii) Buy real estate nor any nonliquid interests in real estate investment
trusts;
(iii) Buy shares of other investment companies which redeem their shares; the
Fund can buy shares of investment companies that do not redeem their
shares if it does it in a regular transaction in the open market and
then does not have more than one tenth (i.e., 10%) of its total assets
in these shares. The Fund may also buy shares as part of a merger or
consolidation;
(iv) Lend money or other assets, other than certain limited types of loans
described herein; the Fund can buy debt securities that have been sold
to the public; it can buy other obligations customarily acquired by
institutional investors; it can also lend its portfolio securities (see
"Lending Securities" above) or, except as provided above, enter into
repurchase agreements (see "Repurchase Agreements" above);
(v) Invest for the purpose of exercising control or management of other
companies;
(vi) Buy or continue to hold securities if the Fund's Directors or officers
or certain others own too much of the same securities; if any one of
these people owns more than one two-hundredths (i.e., .5 of 1%) of the
shares of a company and if the people who own that much or more own one
twentieth (i.e., 5%) of that company's shares, the Fund cannot buy that
company's shares or continue to own them;
(vii) Participate on a joint, or a joint and several, basis in any trading
account in any securities;
(viii) Sell securities short, buy securities on margin or engage in arbitrage
transactions; however, the Fund may make margin deposits in connection
with its use of any financial instruments permitted by its fundamental
policies;
(ix) Engage in the underwriting of securities, that is, the selling of
securities for others;
(x) Purchase warrants, which are rights to buy securities;
(xi) Purchase or write puts, calls or combinations thereof; however call
options may be written on securities if: (i) such calls are listed on a
domestic securities exchange; (ii) when any such call is written and at
all times prior to a closing purchase transaction as to such call, or
its lapse or exercise, the Fund owns the securities that are subject to
the call or has the right to acquire such securities without the
payment of further consideration; and (iii) when any such call is
written, not more than 25% of the Fund's total assets would be subject
to calls; calls may be purchased to effect a closing purchase
transaction as to any call written in accordance with the foregoing.
In addition, the Fund may purchase calls and write and purchase put
options on securities in which the Fund may invest and may, for non-
speculative purposes, write and purchase options on broadly-based stock
indexes;
(xii) Borrow for investment purposes, that is, to purchase securities or
mortgage or pledge any of its assets but may enter into escrow and
collateral arrangements in connection with the use of options and
futures. The Fund may borrow money from banks as a temporary measure
or for extraordinary or emergency purposes but only up to 5% of its
total assets; or
(xiii) Buy the securities of any company if it would then own more than 10% of
its voting securities or any class of its securities; or buy the
securities of any company if more than 5% of the Fund's total assets
(valued at market value) would then be invested in that company; or buy
the securities of companies in any one industry if more than 25% of the
Fund's total assets would then be in companies in that industry.
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 portfolio turnover rate for the common stock portion of the Fund's
portfolio for the fiscal year ended March 31, 1995, was 62.17%, while the rate
for the remainder of the portfolio was 2.70%. The Fund's overall portfolio
turnover for the fiscal years ended March 31, 1995 and 1994 was, 41.30% and
41.01%, respectively.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly-owned subsidiary of Waddell & Reed,
Inc. Under the Management Agreement, WRIMCO is employed to supervise the
investments of the Fund and provide investment advice to the Fund. The address
of WRIMCO and Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217,
Shawnee Mission, Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's
underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's Board of Directors prior to approving any Shareholder
Servicing Agreement or Accounting Services Agreement.
Torchmark Corporation and United Investors Management Company
WRIMCO is a wholly-owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly-owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly-
owned subsidiary of United Investors Management Company. United Investors
Management Company is a wholly-owned subsidiary of Torchmark Corporation.
Torchmark Corporation is a publicly held company. The address of Torchmark
Corporation and United Investors Management Company is 2001 Third Avenue South,
Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual
Funds, except United Asset Strategy Fund, Inc., since 1940 or the company's
inception date, whichever was later, and to TMK/United Funds, Inc. since that
fund's inception, until January 8, 1992 when it assigned its duties as
investment manager for these funds (and the related professional staff) to
WRIMCO. WRIMCO has also served as investment manager for Waddell & Reed Funds,
Inc. since its inception in September 1992, Torchmark Government Securities
Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc. since they each commenced
operations in February 1993 and United Asset Strategy Fund, Inc. since it
commenced operations in March 1995. Waddell & Reed, Inc. serves as principal
underwriter for the investment companies in the United Group of Mutual Funds
and Waddell & Reed Funds, Inc. and serves as distributor for TMK/United Funds,
Inc.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund
and Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell &
Reed, Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Board of Directors
without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the Fund
pays WRIMCO a fee as described in the Prospectus. The management fees paid by
the Fund to WRIMCO, during the Fund's fiscal years ended March 31, 1995, 1994
and 1993 were $2,250,314, $2,128,295 and $1,884,565, respectively.
For purposes of calculating the daily fee the Fund does not include money
owed to it by Waddell & Reed, Inc. for shares which it has sold but not yet
paid the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, with respect to Class A shares
the Fund pays the agent a monthly fee of $1.0208 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 of certain documents; forms, printing and mailing costs; and legal
and special services not provided by Waddell & Reed, Inc., WRIMCO or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a monthly
fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
Fees paid to the Agent for the fiscal years ended March 31, 1995, 1994 and
1993 were $60,000, $60,000 and $58,333, respectively.
The state of California imposes limits on the amount of certain expenses
the Fund can pay by requiring WRIMCO to reduce its fee to the extent any
included expenses exceed 2.5% of the Fund's first $30 million of average net
assets, 2% of the next $70 million of average net assets and 1.5% of any
remaining average net assets during a fiscal year. The limit does not include
interest, taxes, brokerage commissions and extraordinary expenses such as
litigation that usually do not arise in the normal operations of a mutual fund.
The Fund's other expenses, including its management fee, are included.
The Fund will notify shareholders of any change in the limitation.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement
are described above. Waddell & Reed, Inc. and affiliates pay the Fund's
Directors and officers who are affiliated with WRIMCO and its affiliates. The
Fund pays the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The aggregate dollar amounts of
underwriting commissions for Class A shares for the fiscal years ended March
31, 1995, 1994 and 1993 were $1,332,061, $1,660,985 and $1,677,190,
respectively. The amounts retained by Waddell & Reed, Inc. for each fiscal
year were $567,696, $724,106 and $733,771, respectively.
A major portion of the sales charge for Class A shares is paid to account
representatives and managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may
compensate its account representatives as to purchases for which there is no
sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under a Service Plan for Class A shares (the "Plan") adopted by the Fund
pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay Waddell & Reed,
Inc., the principal underwriter for the Fund, a fee not to exceed .25% of the
Fund's average annual net assets attributable to Class A shares, paid monthly,
to reimburse Waddell & Reed, Inc. for its costs and expenses in connection with
the provision of personal services to Class A shareholders of the Fund and/or
maintenance of Class A shareholder accounts.
The Plan and a related Service Agreement between the Fund and Waddell &
Reed, Inc. contemplate that Waddell & Reed, Inc. may be reimbursed for amounts
it expends in compensating, training and supporting registered account
representatives, sales managers and/or other appropriate personnel in providing
personal services to Class A shareholders of the Fund and/or maintaining Class
A shareholder accounts; increasing services provided to Class A shareholders of
the Fund by office personnel located at field sales offices; engaging in other
activities useful in providing personal service to Class A shareholders of the
Fund and/or maintenance of Class A shareholder accounts; and in compensating
broker-dealers who may regularly sell Class A shares of the Fund, and other
third parties, for providing shareholder services and/or maintaining
shareholder accounts with respect to Class A shares.
Fees paid (or accrued) as service fees by the Fund with respect to Class A
shares for the fiscal year ended March 31, 1995 were $479,351.
The Plan and the Service Agreement were approved by the Fund's Board of
Directors, including the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operations of the
Plan or any agreement referred to in the Plan (hereafter, the "Plan
Directors"). The Plan was also approved by the affected shareholders of the
Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will
be effective only if approved, by the Directors including the Plan Directors
acting in person at a meeting called for that purpose, (iii) amounts to be paid
by the Fund under the Plan may not be materially increased without the vote of
the holders of a majority of the outstanding Class A shares of the Fund, and
(iv) while the Plan remains in effect, the selection and nomination of the
Directors who are Plan Directors will be committed to the discretion of the
Plan Directors.
Custodial and Auditing Services
The Fund's Custodian is UMB Bank, n.a., Kansas City, Missouri. In
general, the Custodian is responsible for holding the Fund's cash and
securities. If Fund assets are held in foreign countries, the Fund will comply
with Rule 17f-5 under the 1940 Act. Price Waterhouse LLP, Kansas City,
Missouri, the Fund's independent accountants, audits the Fund's financial
statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each Class of the shares of the Fund is the value
of the assets of that Class, less the Class's liabilities, divided by the total
number of outstanding shares of that Class.
Class A shares of the Fund are sold at their next determined net asset
value plus the sales charge described in the Prospectus. The price makeup as
of March 31, 1995 was as follows:
Net asset value per Class A share (Class A
net assets divided by Class A shares
outstanding) ............................. $20.84
Add: selling commission (5.75% of offering
price) ................................... 1.27
------
Maximum offering price per Class A share
(Class A net asset value divided by
94.25%) .................................. $22.11
======
The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge. The
offering price of a Class Y share is its net asset value next determined
following acceptance of a purchase order. The number of shares you receive for
your purchase depends on the next offering price after Waddell & Reed, Inc.
receives and accepts your order at its principal business office at the address
shown on the cover of this SAI. You will be sent a confirmation after your
purchase which will indicate how many shares you have purchased. Shares are
normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the
Fund may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily computed
once on each day that the NYSE is open for trading as of the later of the close
of the regular session of the NYSE (ordinarily, 4:00 P.M. Eastern time) or the
close of the regular session of any domestic securities or commodities exchange
on which an option or future held by the Fund is traded. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. However, it is possible that the NYSE
may close on other days. The net asset value will change every business day,
since the value of the assets and the number of shares outstanding change every
business day.
The securities in the portfolio of the Fund, except as otherwise noted,
that are listed or traded on a stock exchange, are valued on the basis of the
last sale on that day or, lacking any sales, at a price that is the mean
between the closing bid and asked prices. Other securities that are traded
over-the-counter are priced using National Association of Securities Dealers
Automated Quotations (NASDAQ), which provides information on bid and asked
prices quoted by major dealers in such stocks. Bonds, other than convertible
bonds, are valued using a pricing system provided by a major dealer in bonds.
Convertible bonds are valued using this pricing system only on days when there
is no sale reported. Short-term debt securities are valued at amortized cost,
which approximates market. When market quotations are not readily available,
securities and other assets are valued at fair value as determined in good
faith under procedures established by and under the general supervision and
responsibility of the Fund's Board of Directors.
Puts, calls and futures purchased and held by the Fund are valued at the
last sales price thereof on the securities or commodities exchanges on which
they are traded, or, if there are no transactions, at the mean between bid and
asked prices. Ordinarily, the close of the regular session of option trading
on national securities exchanges is 4:10 P.M. Eastern time and the close of the
regular session of commodities exchanges is 4:15 P.M. Eastern time. Futures
contracts will be valued with reference to established futures exchanges. The
value of a futures contract purchased by the Fund will be either the closing
price of that 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 Statement of Assets and Liabilities as an asset,
and an equivalent deferred credit is included in the liability section. The
deferred credit is "marked-to-market" to reflect the current market value of
the put or call. If a call the Fund wrote is exercised, the proceeds received
on the sale of the related investment are increased by the amount of the
premium the Fund received. If the Fund exercised a call it purchased, the
amount paid to purchase the related investment is increased by the amount of
the premium paid. If a put written by the Fund is exercised, the amount that
the Fund pays to purchase the related investment is decreased by the amount of
the premium it received. If the Fund exercises a put it purchased, the amount
the Fund receives 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 that the cost of the closing transaction.
Foreign currency exchange rates are generally determined prior to the
close of trading of the regular session of the NYSE. Occasionally events
affecting the value of foreign investments and such exchange rates occur
between the time at which they are determined and the close of the regular
session of trading on the NYSE, which events will not be reflected in a
computation of the Fund's net asset value on that day. If events materially
affecting the value of such investments or currency exchange rates occur during
such time period, investments will be valued at their fair value as determined
in good faith by or under the direction of the Board of Directors. The foreign
currency exchange transactions of the Fund conducted on a spot (that is, cash)
basis are valued at the spot rate for purchasing or selling currency prevailing
on the foreign exchange market. This rate under normal market conditions
differs from the prevailing exchange rate in an amount generally less than one-
tenth of one percent due to the costs of converting from one currency to
another.
Optional delivery standby commitments are valued at fair value under the
general supervision and responsibility of the Fund's Board of Directors. They
are accounted for in the same manner as exchange-listed puts.
Minimum Initial and Subsequent Investments
For Class A shares, initial investments must be at least $500 with the
exceptions described in this paragraph. A $100 minimum initial investment
pertains to certain exchanges of shares from another fund in the United Group.
A $50 minimum initial investment pertains to purchases for certain retirement
plan accounts and to accounts for which an investor has arranged, at the time
of initial investment, to make subsequent purchases for the account by having
regular monthly withdrawals of $25 or more made from a bank account. A minimum
initial investment of $25 is applicable to purchases made through payroll
deduction for or by employees of WRIMCO, Waddell & Reed, Inc., their
affiliates, or certain retirement plan accounts. Except with respect to
certain exchanges and automatic withdrawals from a bank account, a shareholder
may make subsequent investments of any amount. See "Exchanges for Shares of
Other Funds in the United Group."
For Class Y shares, investments by government entities or authorities or
by corporations must total at least $10 million within the first twelve months
after initial investment. There is no initial investment minimum for other
Class Y investors.
Reduced Sales Charges (Applicable to Class A Shares Only)
Account Grouping
Large purchases of Class A shares are subject to lower sales charges. The
schedule of sales charges appears in the Prospectus for Class A shares. For
the purpose of taking advantage of the lower sales charges available for large
purchases, a purchase in any of categories 1 through 7 listed below made by an
individual or deemed to be made by an individual may be grouped with purchases
in any other of these categories.
1. Purchases by an individual for his or her own account (includes purchases
under the United Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own
account (includes United Funds Revocable Trust Form of spouse);
3. Purchases by that individual or his or her spouse in their joint account;
4. Purchases by that individual or his or her spouse for the account of their
child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in a
Uniform Gift to Minors Act ("UGMA") or Uniform Transfers to Minors Act
account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), Section 457 of the Internal Revenue
code, as amended (the "Code") salary reduction plan account provided that
such purchases are subject to a sales charge (see "Net Asset Value
Purchases"), tax sheltered annuity account ("TSA") or Keogh plan account,
provided that the individual and spouse are the only participants in the
Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or her
spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens a UGMA account for grandson A; Grandmother has an
account in her own name; A's father has an account in his own name;
the UGMA account may be grouped with A's father's account but may not
be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in
the trust account is eligible for grouping with an IRA account of W,
H's wife;
C. H's will provides for the establishment of a trust for the benefit of
his minor children upon H's death; his bank is named as trustee; upon
H's death, an account is established in the name of the bank, as
trustee; a purchase in the account may be grouped with an account
held by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account may
not be grouped with R's individual account. If X's spouse, Y, was
successor trustee, this purchase could be grouped with Y's individual
account.
All purchases of Class A shares made for a participant in a multi-
participant Keogh plan may be grouped only with other purchases made under the
same plan; a multi-participant Keogh plan is defined as a plan in which there
is more than one participant where one or more of the participants is other
than the spouse of the owner/employer.
Example A: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made under
the plan with any purchases in categories 1 through 7 above.
Example B: H has established a Keogh plan; his wife, W, is a participant and
they have hired one or more employees who also become participants
in the plan; H and W may not combine any purchases made under the
plan with any purchases in categories 1 through 7 above; however,
all purchases made under the plan for H, W or any other employee
will be combined.
All purchases of Class A shares made under a "qualified" employee benefit
plan of an incorporated business will be grouped. A "qualified" employee
benefit plan is established pursuant to Section 401 of the Code. All qualified
employee benefit plans of any one employer or affiliated employers will also be
grouped. An affiliate is defined as an employer that directly, or indirectly,
controls or is controlled by or is under control with another employer.
Example: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made under
both plans will be grouped.
All purchases of Class A shares made under a simplified employee pension
plan ("SEP"), payroll deduction plan or similar arrangement adopted by an
employer or affiliated employers (as defined above) may be grouped provided
that the employer elects to have all such purchases grouped at the time the
plan is set up. If the employer does not make such an election, the purchases
made by individual employees under the plan may be grouped with the other
accounts of the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is
eligible for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $75,000; at the same
time, H's parents open up three UGMA accounts for H and W's three
minor children and invest $10,000 in each child's name; the combined
purchase of $105,000 of Class A shares is subject to a reduced sales
load of 4.75% provided that Waddell & Reed, Inc. is advised that the
purchases are entitled to grouping.
Rights of Accumulation
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund three
years ago. His account has a net asset value of $80,000. His wife,
W, now wishes to invest $20,000 in Class A shares of the Fund. W's
purchase will be combined with H's existing account and will be
entitled to a reduced sales charge of 4.75%. H's original purchase
was subject to a full sales charge and the reduced charge does not
apply retroactively to that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan the shares held under the plan may be combined with the additional
purchase only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Statement of Intention. By signing a
Statement of Intention form, which is available from Waddell & Reed, Inc., the
purchaser indicates an intention to invest, over a 13-month period, a dollar
amount which is sufficient to qualify for a reduced sales charge. The 13-month
period begins on the date the first purchase made under the Statement is
accepted by Waddell & Reed, Inc. Each purchase made from time to time under
the Statement is treated as if the purchaser were buying at one time the total
amount which he or she intends to invest. The sales charge applicable to all
purchases of Class A shares made under the terms of the statement will be the
sales charge in effect on the beginning date of the 13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, Class A shares already held in the same account in which the purchase is
being made or in any account eligible for grouping with that account, as
described above, will be included.
Example: H signs a Statement of Intention indicating his intent to invest in
his own name a dollar amount sufficient to entitle him to purchase
Class A shares at the sales charge applicable to a purchase of
$100,000. H has an IRA account and the Class A shares held under the
IRA in the Fund have a net asset value as of the date the Statement
is accepted by Waddell & Reed, Inc. of $15,000; H's wife, W, has an
account in her own name invested in another fund in the United Group
which charges the same sales load as the Fund, with a net asset value
as of the date of acceptance of the Statement of $10,000; H needs to
invest $75,000 in Class A shares over the 13-month period in order to
qualify for the reduced sales load applicable to a purchase of
$100,000.
A copy of the Statement of Intention signed by a purchaser will be
returned to the purchaser after it is accepted by Waddell & Reed, Inc. and will
set forth the dollar amount of Class A shares which must be purchased within
the 13-month period in order to qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under a contractual
plan, the shares held under the plan will be taken into account in determining
the amount which must be invested under the Statement only if the contractual
plan has been completed.
The minimum initial investment under a Statement of Intention is 5% of the
dollar amount which must be invested under the Statement. An amount equal to
5% of the purchase required under the Statement will be held "in escrow." If a
purchaser does not, during the period covered by the Statement, invest the
amount required to qualify for the reduced sales charge under the terms of the
Statement, he or she will be responsible for payment of the sales charge
applicable to the amount actually invested. The additional sales charge owed
on purchases of Class A shares made under a Statement which is not completed
will be collected by redeeming part of the shares purchased under the Statement
and held "in escrow" unless the purchaser makes payment of this amount to
Waddell & Reed, Inc. within 20 days of Waddell & Reed. Inc.'s request for
payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower than
that available under the Statement of Intention, the lower sales charge will
apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell &
Reed, Inc. to sell, the shares covered by the Statement.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement will be deducted in computing the aggregate purchases under the
Statement.
Statements of Intention are not available for purchases made under a
simplified employee pension plan where the employer has elected to have all
purchases under the SEP grouped.
Other Funds in the United Group
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the funds in the United Group which are subject to a sales
charge. A purchase of, or shares held, in any of the funds in the United Group
which are subject to the same sales charge as the Fund will be treated as an
investment in the Fund for the purpose of determining the applicable sales
charge. The following funds in the United Group have shares that are subject
to a maximum 5.75% ("full") sales charge as described in the prospectus of each
Fund: United Funds, Inc., United International Growth Fund, Inc., United
Continental Income Fund, Inc., United Vanguard Fund, Inc., United Retirement
Shares, Inc., United High Income Fund, Inc., United New Concepts Fund, Inc.,
United Gold & Government Fund, Inc., United High Income Fund II, Inc. and
United Asset Strategy Fund, Inc. The following funds in the United Group have
shares that are subject to a "reduced" sales charge as described in the
prospectus of each fund: United Municipal Bond Fund, Inc., United Government
Securities Fund, Inc. and United Municipal High Income Fund, Inc. For the
purposes of obtaining the lower sales charge which applies to large purchases,
purchases in a fund in the United Group of shares that are subject to a full
sales charge may not be grouped with purchases of shares in a fund in the
United Group that are subject to a reduced sales charge; conversely, purchases
of shares in a fund with a reduced sales charge may not be grouped or combined
with purchases of shares of a fund that are subject to a full sales charge.
United Cash Management, Inc. is not subject to a sales charge. Purchases
in that fund are not eligible for grouping with purchases in any other fund.
Net Asset Value Purchases of Class A Shares
As stated in the Prospectus, Class A shares of the Fund may be purchased
at net asset value by the Directors and officers of the Fund, employees of
Waddell & Reed, Inc., employees of their affiliates, account representatives of
Waddell & Reed, Inc. and the spouse, children, parents, children's spouses and
spouse's parents of each such Director, officer, employee and account
representative. "Child" includes stepchild; "parent" includes stepparent.
Purchases of Class A shares in an IRA sponsored by Waddell & Reed, Inc.
established for any of these eligible purchasers may also be at net asset
value. Purchases in any tax qualified retirement plan under which the eligible
purchaser is the sole participant may also be made at net asset value. Trusts
under which the grantor and the trustee or a co-trustee are each an eligible
purchaser are also eligible for net asset value purchases of Class A shares.
"Employees" includes retired employees. A retired employee is an individual
separated from service from Waddell & Reed, Inc. or affiliated companies with a
vested interest in any Employee Benefit Plan sponsored by Waddell & Reed, Inc.
or its affiliated companies. "Account representatives" includes retired
account representatives. A "retired account representative" is any sales
representative who was, at the time of separation from service from Waddell &
Reed, Inc., a Senior Account Representative. A custodian under the Uniform
Gifts (or Transfers) to Minors Act purchasing for the child or grandchild of
any employee or account representative may purchase Class A shares at net asset
value whether or not the custodian himself is an eligible purchaser.
Purchases of Class A shares in a 401(k) plan having 100 or more eligible
employees and purchases of Class A shares in a 457 plan having 100 or more
eligible employees may be made at net asset value.
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 the
maximum public offering price, that is, the net asset value plus the highest
sales charge. Some of these relate to lower or eliminated sales charges for
larger purchases of Class A shares, whether made at one time or over a period
of time as under a Statement of Intention or right of accumulation. See the
table of sales charges in the Prospectus. The reasons for these quantity
discounts are, in general, that (i) they are traditional and have long been
permitted in the industry and are therefore necessary to meet competition as to
sales of shares of other funds having such discounts; (ii) certain quantity
discounts are required by rules of the National Association of Securities
Dealers, Inc. (as are elimination of sales charges on the reinvestment of
dividends and distributions); and (iii) they are designed to avoid an unduly
large dollar amount of sales charge on substantial purchases in view of reduced
selling expenses. Quantity discounts are made available to certain related
persons for reasons of family unity and to provide a benefit to tax-exempt
plans and organizations.
The reasons for the other instances in which there are reduced or
eliminated sales charges for Class A shares are as follows. Exchanges at net
asset value are permitted because a sales charge has already been paid on the
shares exchanged. Sales of Class A shares without sales charge are permitted
to Directors, officers and certain others due to reduced or eliminated selling
expenses and since such sales may aid in the development of a sound employee
organization, encourage incentive, responsibility and interest in the United
Group and an identification with its aims and policies. Limited reinvestments
of redemptions of Class A shares at no sales charge are permitted to attempt to
protect against mistaken or not fully informed redemption decisions. Class A
shares may be issued at no sales charge in plans of reorganization due to
reduced or eliminated sales expenses and since, in some cases, such issuance is
exempted by the 1940 Act from the otherwise applicable restrictions as to what
sales charge must be imposed. In no case in which there is a reduced or
eliminated sales charge are the interests of existing Class A shareholders
adversely affected since, in each case, the Fund receives the net asset value
per share of all shares sold or issued.
Flexible Withdrawal Service for Class A Shareholders
If you qualify, you may arrange to receive regular monthly, quarterly,
semiannual or annual payments by redeeming Class A shares on a regular basis
through the Flexible Withdrawal Service (the "Service"). The Service is
available not only for Class A shares of the Fund but also for corresponding
shares of any of the funds in the United Group. It would be a disadvantage to
an investor to make additional purchases of Class A shares while a withdrawal
program is in effect as this would result in duplication of sales charges.
To qualify for the Service, you must have invested at least $10,000 in
Class A or corresponding shares which you still own of any of the funds in the
United Group; or, you must own Class A or corresponding shares having a value
of at least $10,000. The value for this purpose is not the net asset value but
the value at the offering price, i.e., the net asset value plus the sales
charge.
To start the Service, you must fill out a form (available from Waddell &
Reed, Inc.), advising Waddell & Reed, Inc. how you want your shares redeemed to
make the payments. You have three choices:
First. To get a monthly, quarterly, semiannual or annual payment of $50
or more;
Second. To get a monthly payment, which will change each month, equal to
one-twelfth of a percentage of the value of the shares in the Account; you fix
the percentage; or
Third. To get a monthly or quarterly payment, which will change each
month or quarter, by redeeming a number of shares fixed by you (at least five
shares).
Shares are redeemed on the 20th day of the month in which the payment is
to be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
Retirement plan accounts may be subject to a fee imposed by the plan
custodian for use of their service.
If you have a share certificate for the shares you want to make available
for the Service, you must enclose the certificate with the form initiating the
Service.
The dividends and distributions on shares you have made available for the
Service is reinvested in additional Class A shares. All payments are made by
redeeming shares, which may involve a gain or loss for tax purposes. To the
extent that payments exceed dividends and distributions, the number of Class A
shares you own will decrease. When all of the shares in an account are
redeemed, you will not receive any further payments. Thus, the payments are
not an annuity or an income or return on your investment.
You may, at any time, change the manner in which you have chosen to have
shares redeemed. You can change to any one of the other choices originally
available to you. For example, if you started out with a $50 monthly payment,
you could change to a $200 quarterly payment. You can at any time redeem part
or all of the shares in your account; if you redeem all of the shares, the
Service is terminated. The Fund can also terminate the Service by notifying
you in writing.
After the end of each calendar year, information on shares redeemed will
be sent to you to assist you in completing your Federal income tax return.
Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
Once a sales charge has been paid on shares of a fund in the United Group,
these shares and any shares added to them from reinvestment of dividends or
distributions may be freely exchanged for corresponding shares of another fund
in the United Group. The shares you exchange must be worth at least $100 or
you must already own shares of the fund in the United Group into which you want
to exchange.
You may exchange corresponding shares you own in another fund in the
United Group for Class A shares of the Fund without charge if (i) a sales
charge was paid on these shares, or (ii) the shares were received in exchange
for shares for which a sales charge was paid, or (iii) the shares were acquired
from reinvestment of dividends and distributions paid on such shares. There
may have been one or more such exchanges so long as a sales charge was paid on
the shares originally purchased. Also, shares acquired without a sales charge
because the purchase was $2 million or more will be treated the same as shares
on which a sales charge was paid.
United Municipal Bond Fund, Inc., United Government Securities Fund, Inc.
and United Municipal High Income Fund, Inc. shares are the exceptions and
special rules apply. Corresponding shares of these funds may be exchanged for
Class A shares of the Fund only if (i) you have received those shares as a
result of one or more exchanges of shares on which a sales charge was
originally paid, or (ii) the shares have been held from the date of original
purchase for at least six months.
Subject to the above rules regarding sales charges, you may have a
specific dollar amount of corresponding shares of United Cash Management, Inc.
automatically exchanged each month into Class A shares of the Fund or any other
fund in the United Group. The shares of United Cash Management, Inc. which you
designate for automatic exchange must be worth at least $100 or you must own
Class A shares of the fund in the United Group into which you want to exchange.
The minimum value of shares which you may designate for automatic exchange is
$100, which may be allocated among the Class A or corresponding shares of
different funds in the United Group so long as each fund receives a value of at
least $25. Minimum initial investment and minimum balance requirements apply
to such automatic exchange service.
You may redeem your Class A shares of a Fund and use the proceeds to
purchase Class Y shares of that Fund if you meet the criteria for purchasing
Class Y shares.
Class Y Share Exchanges
Class Y shares of a Fund may be exchanged for Class Y shares of any other
fund in the United Group.
General Exchange Information
When you exchange shares, the total shares you receive will have the same
aggregate net asset value as the total shares you exchange. The relative
values are those next figured after your exchange request is received in good
order.
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any time
and any such exchange may not be accepted.
Retirement Plans
As described in the Prospectus for Class A shares, your account may be set
up as a funding vehicle for a retirement plan. For individual taxpayers
meeting certain requirements, Waddell & Reed, Inc. offers prototype documents
for the following retirement plans. All of these plans involve investment in
shares of the Fund (or shares of certain other funds in the United Group).
Individual Retirement Accounts (IRAs). Investors having earned income may
set up a plan that is commonly called an IRA. Under an IRA, an investor can
contribute each year up to 100% of his or her earned income, up to an annual
maximum of $2,000. The annual maximum is $2,250 if an investor's spouse has
earned income of $250 or less in a taxable year. If an investor's spouse has
at least $2,000 of earned income in a taxable year, the annual maximum is
$4,000 ($2,000 for each spouse). 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.
An investor may also use an IRA to receive a rollover contribution which
is either (a) a direct rollover from an employer's plan or (b) a rollover of an
eligible distribution paid to the investor from an employer's plan or another
IRA. To the extent a rollover contribution is made to an IRA, the distribution
will not be subject to Federal income tax until distributed from the IRA. A
direct rollover generally applies to any distribution from an employer's plan
(including a custodial account under Section 403(b)(7) of the Code, but not an
IRA) other than certain periodic payments, required minimum distributions and
other specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a
portion of that distribution generally may be rolled over to an IRA within 60
days after receipt of the distribution. Because mandatory Federal income tax
withholding applies to any eligible rollover distribution which is not paid in
a direct rollover, investors should consult their tax advisers or pension
consultants as to the applicable tax rules. If you already have an IRA, you
may have the assets in that IRA transferred directly to an IRA offered by
Waddell & Reed, Inc.
Simplified Employee Pension (SEP) plans and Salary Reduction SEP (SARSEP)
plans. Employers can make contributions to SEP-IRAs established for employees.
An employer may contribute up to 15% of compensation, not to exceed $22,500,
per year for each employee.
Keogh Plans. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money purchase
plan or a profit sharing plan. As a general rule, an investor under a defined
contribution Keogh plan can contribute each year up to 25% of his or her annual
earned income, with an annual maximum of $30,000.
457 Plans. If an investor is an employee of a state or local government
or of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is an
employee of a public school system or of certain types of charitable
organizations, he or she may be able to enter into a deferred compensation
arrangement through a custodian account under Section 403(b) of the Code. Some
organizations have adopted Title I plans, which are funded by employer
contributions in addition to employee deferrals.
401(k) Plans. With a 401(k) plan, employees can make tax-deferred
contributions into a plan to which the employer may also contribute, usually on
a matching basis. An employee may defer each year up to 25% of compensation,
subject to certain annual maximums, which may be increased each year based on
cost-of-living adjustments.
More detailed information about these arrangements and applicable forms are
available from Waddell & Reed, Inc. These plans may involve complex tax
questions as to premature distributions and other matters. Investors should
consult their tax adviser or pension consultant.
Redemptions
The Prospectus gives information as to redemption procedures. Redemption
payments are made within seven days unless delayed because of emergency
conditions determined by the SEC, when the NYSE is closed other than for
weekends or holidays, or when trading on the NYSE is restricted. Payment is
made in cash, although under extraordinary conditions redemptions may be made
in portfolio securities. Payment for redemption of shares of the Fund may be
made in portfolio securities when the Fund's Board of Directors determines that
conditions exist making cash payments undesirable. Securities used for payment
of redemptions are valued at the value used in figuring net asset value. There
would be brokerage costs to the redeeming shareholder in selling such
securities. The Fund, however, has elected to be governed by Rule 18f-1 under
the 1940 Act, pursuant to which it is obligated to redeem shares solely in cash
up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder.
Reinvestment Privilege
The Prospectus for Class A shares discusses the reinvestment privilege for
Class A shares under which, if you redeem your Class A shares and then decide
it was not a good idea, you may reinvest. If Class A shares of the Fund are
then being offered, you can put all or part of your redemption payment back
into Class A shares of the Fund without any sales charge at the net asset value
next determined after you have returned the amount. Your written request to do
this must be received within 30 days after your redemption request was
received. You can do this only once as to Class A shares of the Fund. You do
not use up this privilege by redeeming Class A shares to invest the proceeds at
net asset value in a Keogh plan or an IRA.
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 principal occupation during at least the past five years of each
Director and officer is given below. Each of the persons listed through and
including Mr. Wright is a member of the Fund's Board of Directors. The other
persons are officers but not Board members. For purposes of this section, the
term "Fund Complex" includes each of the registered investment companies in the
United Group of Mutual Funds, Waddell & Reed Funds, Inc., TMK/United Funds,
Inc., Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free
Fund, 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.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
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 of Waddell & Reed
Financial Services, Inc., United Investors Management Company and United
Investors Life Insurance Company; Chairman of the Board of Directors and Chief
Executive Officer of Torchmark Corporation; Chairman of the Board of Directors
of Vesta Insurance Group, Inc.; formerly, Chairman of the Board of Directors of
Waddell & Reed, Inc. Father of Linda Graves, Director of the Fund and each of
the other funds in the Fund Complex.
KEITH A. TUCKER*
President of the Fund and each of the other funds in the Fund Complex;
President, Chief Executive Officer and Director of Waddell & Reed Financial
Services, Inc.; Chairman of the Board of Directors of WRIMCO, Waddell & Reed,
Inc., Waddell & Reed Services Company, Waddell & Reed Asset Management Company
and Torchmark Distributors, Inc., an affiliate of Waddell & Reed, Inc.; Vice
Chairman of the Board of Directors, Chief Executive Officer and President of
United Investors Management Company; Vice Chairman of the Board of Directors of
Torchmark Corporation; Director of Southwestern Life Corporation; formerly,
partner in Trivest, a private investment concern; formerly, Director of
Atlantis Group, Inc., a diversified company.
HENRY L. BELLMON
Route 1
P. O. Box 26
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma; prior to his current service as Director of the funds in the United
Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc., he served in
such capacity for the funds in the United Group and TMK/United Funds, Inc.
DODDS I. BUCHANAN
905 13th Street
Boulder, Colorado 80302
Advisory Director, The Hand Companies; President, Buchanan Ranch Corp.;
formerly, Senior Vice President and Director of Marketing Services, The Meyer
Group of Management Consultants; formerly, Chairman, Department of Marketing,
Transportation and Tourism, University of Colorado; formerly, Professor of
Marketing, College of Business, University of Colorado.
JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Formerly, President and Director of Kansas City Stock Yards Company;
formerly, Partner in Dillingham Farms, a farming operation.
LINDA GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, partner, Levy and Craig, P.C., a law firm.
Daughter of Ronald K. Richey, Chairman of the Board of the Fund.
JOHN F. HAYES*
335 N. Washington
Suite 260
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; formerly, President of Gilliland & Hayes, P.A., a law firm.
GLENDON E. JOHNSON
7300 Corporate Center Drive
P. O. Box 020270
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Financial Corporation
and subsidiaries.
JAMES B. JUDD
No. 1 Ward Parkway
Suite 138
Kansas City, Missouri 64112
Retired; formerly, partner, KPMG Peat Marwick. A petition relating to Mr.
Judd's property was filed under the Federal bankruptcy laws and is now final.
WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of the
Fund and each fund in the Fund Complex then in existence (Mr. Morgan retired
as Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company; formerly,
Director of Waddell & Reed Asset Management Company, United Investors
Management Company and United Investors Life Insurance Company, affiliates of
Waddell & Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management
and investment; formerly, Director of The Vendo Company, a manufacturer and
distributor of vending machines.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64110
Chancellor, University of Missouri-Kansas City; formerly, Interim
Chancellor, University of Missouri-Kansas City; formerly, Vice Chancellor for
Academic Affairs, University of Missouri-Kansas City.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired.
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
LESLIE S. WRIGHT
2302 Brookshire Place
Birmingham, Alabama 35213
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association; formerly, President of Samford University.
Robert L. Hechler
Vice President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Vice President, Chief Operations 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
Asset Management Company; President, Director and Treasurer of Waddell & Reed
Services Company; Vice President, Treasurer and Director of Torchmark
Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund and each of the other funds in the Fund
Complex; 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 and
Waddell & Reed Asset Management Company; Senior Vice President and Chief
Investment Officer of United Investors Management Company.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund and
each of the other funds in the Fund Complex; Vice President of Waddell & Reed
Services Company.
Sharon K. Pappas
Vice President, 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 Services, Inc.; Senior Vice President, Secretary
and General Counsel of WRIMCO and Waddell & Reed, Inc.; Director, Senior Vice
President, Secretary and General Counsel of Waddell & Reed Services Company;
Director, Secretary and General Counsel of Waddell & Reed Asset Management
Company; Vice President, Secretary and General Counsel of Torchmark
Distributors, Inc.; formerly, Assistant General Counsel of WRIMCO, Waddell &
Reed Financial Services, Inc., Waddell & Reed, Inc., Waddell & Reed Asset
Management Company and Waddell & Reed Services Company.
Cynthia P. Prince-Fox
Vice President of the Fund and one other fund in the Fund Complex; Vice
President of WRIMCO; Vice President of Waddell & Reed Asset Management Company.
Carl E. Sturgeon
Vice President of the Fund and eleven other funds in the Fund Complex;
Vice President of WRIMCO; formerly, Vice President of Waddell & Reed, Inc.
The address of each person is 6300 Lamar Avenue, P. O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
As of the date of this SAI, five of the Fund's Directors may be deemed to
be "interested persons" as defined in the 1940 Act of its underwriter, Waddell
& Reed, Inc., or of WRIMCO. The Directors who may be deemed to be "interested
persons" are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a director may elect after resignation from the Board
provided the director has attained the age of 75 and has served as a director
of the funds in the United Group for a total of at least five years. A
Director Emeritus receives fees in recognition of his past services whether or
not services are rendered in his capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Currently,
no person serves as Director Emeritus.
The funds in the United Group (with the exception of United Asset Strategy
Fund, Inc.), TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. pay to each
Director a total of $40,000 per year, plus $1,000 for each meeting of the Board
of Directors attended (prior to January 1, 1995, the fee was $500 for each
meeting of the Board of Directors attended) and $500 for each committee meeting
attended which is not in conjunction with a Board of Directors meeting, other
than Directors who are affiliates of Waddell & Reed, Inc. The fees to the
Directors who receive them are divided among the funds in the United Group
(with the exception of United Asset Strategy Fund, Inc.), TMK/United Funds,
Inc. and Waddell & Reed Funds, Inc. based on their relative size. During the
Fund's fiscal year ended March 31, 1995, the Fund's Directors received the
following fees for service as a director:
COMPENSATION TABLE
Pension
or Retirement Total
Aggregate Benefits Compensation
Compensation Accrued As From Fund
From Part of Fund and Fund
Director Fund Expenses Complex
- -------- ------------ -------------- ------------
Ronald K. Richey $ 0 $0 $ 0
Keith A Tucker 0 0 0
Henry L. Bellmon 1,532 0 43,000
Dodds I. Buchanan 1,532 0 43,000
Jay B. Dillingham 1,532 0 43,000
John F. Hayes 1,532 0 43,000
Glendon E. Johnson 1,532 0 43,000
William T. Morgan 1,532 0 43,000
Doyle Patterson 1,532 0 43,000
Frederick Vogel III 1,532 0 43,000
Paul S. Wise 1,532 0 43,000
Leslie S. Wright 1,479 0 41,500
The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of July 31, 1995, all of the Fund's Directors and officers as a group
owned less than 1% of the outstanding shares of the Fund. As of such date no
person owned of record or was known by the Fund to own beneficially 5% or more
of the Fund's outstanding shares.
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder of a Class of shares of the Fund, other than payments when you
redeem your shares. The first source is the Fund's net investment income,
which is derived from the dividends, interest and earned discount on the
securities it holds, less expenses (which will vary by Class). The second
source is realized capital gains, which are derived from the proceeds received
from the sale of securities at a price higher than the Fund's tax basis
(usually cost) in such securities; these gains can be either long-term or
short-term, depending on how long the Fund has owned the securities before it
sells them. The third source is net realized gains from foreign currency
transactions. The payments made to shareholders from net investment income,
net short-term capital gains and net realized gains from certain foreign
currency transactions are called dividends. Payments, if any, from long-term
capital gains are called distributions.
The Fund pays distributions only if it has net realized 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 realized capital gains, it will ordinarily pay
distributions once each year, in the latter part of the fourth calendar
quarter. Even if the Fund has net capital gains for a year, the Fund does not
pay the gains out if it has applicable prior year losses 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 reinvested 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 reinvested 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 reinvested in shares of the Fund of the same Class as that with respect to
which they were paid. All reinvestments are at net asset value without any
sales charge. The net asset value used for this purpose is that computed as of
the record date for the dividend or distribution, although this could be
changed by the Board of Directors.
Even if you get dividends and distributions on Class A shares in cash, you
can thereafter reinvest them (or distributions only) in Class A shares of the
Fund at net asset value (i.e., no sales charge) next determined after receipt
by Waddell & Reed, Inc. of the amount clearly identified as a reinvestment.
The reinvestment must be within 45 days after the payment.
TAXES
General
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Code, the Fund must distribute to its shareholders
for each taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital gains
and net gains from certain foreign currency transactions) and must meet several
additional requirements. These requirements include the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures contracts or forward contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) the Fund must derive less than 30% of
its gross income each taxable year from the sale or other disposition of
securities, or any of the following, that were held for less than three months
- -- (i) options, (ii)futures contracts or forward contracts, or (iii) foreign
currencies (or options, futures contracts or forward contracts thereon) that
are not directly related to the Fund's principal business of investing in
securities (or in options and futures with respect to securities) ("Short-Short
Limitation"); (3) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government Securities, securities of other RICs and other
securities that are limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the outstanding voting securities of the issuer; and
at the close of each quarter of the Fund's taxable year, not more than 25%(4)
of the value of its total assets may be invested in securities (other than U.S.
Government Securities or the securities of other RICs) of any one issuer.
Dividends and distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in those
months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year even if they are paid by the Fund
during the following January. Accordingly, those dividends and distributions
will be taxed to shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any distributions received on those shares. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or distribution, the purchaser will receive some portion of the
purchase price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. It is the Fund's policy to make sufficient distributions each
year to avoid imposition of the Excise Tax. The Code permits the Fund to defer
into the next calendar year net capital losses incurred between each November 1
and the end of the current calendar year.
Income from Foreign Securities
Dividends and interest received by the Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of debt securities denominated in foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest, dividends or other receivables or accrues expenses
or other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally are
treated as ordinary income or loss. These gains or losses, referred to under
the Code as "section 988" gains or losses, may increase or decrease the amount
of the Fund's investment company taxable income to be distributed to its
shareholders.
Income from Options, Futures and Currencies
The use of hedging strategies, such as writing (selling) and purchasing
options for hedging purposes and writing and purchasing futures contracts and
options thereon, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses the
Fund realizes in connection therewith. Income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in options and futures derived by the Fund with respect to
its business of investing in securities or foreign currencies, will qualify as
permissible income under the Income Requirement. However, income from the
disposition of options and futures will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and forward contracts thereon, that are not
directly related to the Fund's principal business of investing in securities
(or options and futures with respect to securities) also will be subject to the
Short-Short Limitation if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gains (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all of the Fund's hedging transactions. To the
extent this treatment is not available, the Fund may be forced to defer the
closing out of options, futures and certain forward contracts beyond the time
when it otherwise would be advantageous to do so, in order for the Fund to
continue to qualify as a RIC.
Any income the Fund earns from writing options is taxed as short-term
capital gains. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund expires without being
exercised, the premium it receives also will be a short-term gain. If such an
option is exercised and thus the Fund sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale. The Fund will not write so many
options that it could fail to continue to qualify as a RIC.
Certain options and futures contracts in which the Fund may invest may be
"section 1256 contracts." Section 1256 contracts held by the Fund at the end
of each taxable year, other than section 1256 contracts that are part of a
"mixed straddle" with respect to which the Fund has made an election not to
have the following rules apply, are "marked-to-market" (that is, treated as
sold for their fair market value) for Federal income tax purposes, with the
result that unrealized gains or losses are treated as though they were
realized. Sixty percent of any net 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 for
other purposes.
Code section 1092 (dealing with straddles) may also affect the taxation of
options and futures contracts in which the Fund may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property.
Section 1092 generally provides that any loss from the disposition of a
position in a straddle may be deducted only to the extent the loss exceeds the
unrealized gain on the offsetting position(s) of the straddle. Section 1092
also provides certain "wash sale" rules, which apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the Fund
makes certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions will be determined under
rules that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio
of the Fund. Transactions in securities other than those for which an exchange
is the primary market are generally done with dealers acting as principals or
market makers. Brokerage commissions are paid primarily for effecting
transactions in securities traded on an exchange and otherwise only if it
appears likely that a better price or execution can be obtained. The
individual who manages the Fund may manage other advisory accounts with similar
investment objectives. It can be anticipated that the manager will frequently
place concurrent orders for all or most accounts for which the manager has
responsibility. Transactions effected pursuant to such combined orders are
averaged as to price and allocated in accordance with the purchase or sale
orders actually placed for each fund or advisory account.
To effect the portfolio transactions of the Fund, 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 achieve "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 ("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 or
its affiliates have investment discretion.
Brokerage services are, in general, defined by reference to Section 28(e)
of the Securities Exchange Act of 1934 as including (i) advice, either directly
or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities and the
availability of securities and purchasers or sellers; (ii) furnishing analyses
and reports; or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such brokerage services may
be higher than another qualified broker would charge for effecting comparable
transactions if a good faith determination is made by WRIMCO that the
commission is reasonable in relation to the brokerage services provided.
Subject to the foregoing considerations WRIMCO may also consider the
willingness of particular brokers and dealers to sell shares of the Fund and
other funds managed by WRIMCO and its affiliates as a factor in their
selection. No allocation of brokerage or principal business is made to provide
any other benefits to WRIMCO or its affiliates.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of WRIMCO and its affiliates and
investment research received for the commissions of those other accounts may be
useful both to the Fund and one or more of such other accounts. To the extent
that electronic or other products provided by such brokers to assist 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
instance of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of 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.
In placing transactions for the Fund's portfolio, WRIMCO may consider
sales of shares of the Fund and other funds managed by WRIMCO and its
affiliates as a factor in the selection of brokers to execute portfolio
transactions. WRIMCO intends to allocate brokerage on the basis of this factor
only if the sale is $2 million or more and there is no sales charge. This
results in the consideration only of sales which by their nature would not
ordinarily be made by Waddell & Reed, Inc.'s direct sales force and is done in
order to prevent the direct sales force from being disadvantaged by the fact
that it cannot participate in Fund brokerage.
During the Fund's fiscal years ended March 31, 1995, 1994 and 1993, it
paid brokerage commissions of $465,745, $324,152 and $851,761, 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 March 31, 1995, the transactions,
other than principal transactions, which were directed to broker-dealers who
provided research as well as execution totaled $225,271,752 on which $381,261
in brokerage commissions were paid. These transactions were allocated to these
broker-dealers by the internal allocation procedures described above.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
Buying and Selling With Other Funds
The Fund and one or more of the other funds in the United Group, Waddell &
Reed Funds, Inc., TMK/United Funds, Inc., Torchmark Insured Tax-Free Fund, Inc.
and Torchmark Government Securities Fund, Inc. or accounts over which Waddell &
Reed Asset Management Company exercises investment discretion frequently buy or
sell the same securities at the same time. If this happens, the amount of each
purchase or sale is divided. This is done on the basis of the amount of
securities each fund or account wanted to buy or sell. Sharing in large
transactions could affect the price the Fund pays or receives or the amount it
buys or sells. However, sometimes a better negotiated commission is available.
OTHER INFORMATION
The Shares of the Fund
The Fund offers two Classes of shares: Class A and Class Y. Prior to
August 29, 1995, the Fund offered only one Class of shares to the public.
Shares outstanding on that date were designated as Class A shares. Each Class
represents interest in the same assets of the Fund and differ as follows: each
Class of shares has exclusive voting rights on matters pertaining to matters
appropriately limited to that Class; Class A shares are subject to an initial
sales charge and to an ongoing 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 two Classes, dividends and liquidation proceeds of Class
A shares are expected to be lower than for Class Y shares of the Fund. Each
fractional share of a Class has the same rights, in proportion, as a full share
of that Class.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1995
Shares Value
COMMON STOCKS
Automotive - 1.75%
Eaton Corporation ...................... 140,000 $ 7,595,000
Banks and Savings and Loans - 1.46%
Norwest Corporation .................... 250,000 6,343,750
Biotechnology and Medical Services - 1.49%
St. Jude Medical, Inc. ................. 150,000 6,450,000
Building - 2.60%
Temple-Inland Inc. ..................... 120,000 5,385,000
York International Corporation ......... 150,000 5,887,500
Total ................................. 11,272,500
Chemicals Major - 2.07%
du Pont (E.I.) de Nemours and Company 75,000 4,537,500
Rohm & Haas Company .................... 75,000 4,425,000
Total ................................. 8,962,500
Chemicals Specialty and Miscellaneous Technology - 1.80%
IMC Global, Inc. ....................... 100,000 4,887,500
Minnesota Mining and
Manufacturing Company ................. 50,000 2,906,250
Total ................................. 7,793,750
Domestic Oil - 2.73%
Amoco Corporation ...................... 100,000 6,362,500
Apache Corporation ..................... 200,000 5,450,000
Total ................................. 11,812,500
Drugs and Hospital Supply - 2.40%
American Home Products Corporation ..... 90,000 6,412,500
Astra AB, Class A (A) .................. 150,000 3,986,100
Total ................................. 10,398,600
Electrical Equipment - 2.00%
Emerson Electric Co. ................... 130,000 8,645,000
Electronics - 1.50%
AMP Incorporated ....................... 180,000 6,480,000
Engineering and Construction - 0.59%
Foster Wheeler Corporation ............. 75,000 2,540,625
See Notes to Schedule of Investments on page 64.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1995
Shares Value
COMMON STOCKS (Continued)
Financial - 2.45%
Federal National Mortgage Association .. 50,000 $ 4,068,750
Household International, Inc. .......... 150,000 6,525,000
Total ................................. 10,593,750
Food and Related - 2.69%
ConAgra, Inc. .......................... 170,000 5,631,250
Sara Lee Corporation ................... 230,000 6,008,750
Total ................................. 11,640,000
Hospital Management - 3.83%
Assisted Living Concepts, Inc.* ........ 100,000 850,000
LTC Properties, Inc. ................... 370,000 4,902,500
National Medical Enterprises, Inc. ..... 400,000 6,350,000
United HealthCare Corporation .......... 96,000 4,488,000
Total ................................. 16,590,500
Insurance - 3.15%
SAFECO Corporation ..................... 75,000 4,096,875
St. Paul Companies, Inc. (The) ......... 100,000 5,000,000
UNUM Corporation ....................... 100,000 4,525,000
Total ................................. 13,621,875
Leisure Time - 2.66%
Walt Disney Company (The) .............. 110,000 5,871,250
Time Warner Incorporated ............... 150,000 5,662,500
Total ................................. 11,533,750
Machinery - 2.63%
Deere & Company ........................ 80,000 6,500,000
Timken Company (The) ................... 77,000 2,733,500
TRAUB AG (A)* .......................... 18,000 2,157,318
Total ................................. 11,390,818
Metals and Mining - 0.15%
Phelps Dodge Corporation ............... 11,200 637,000
Multi-Industry - 2.13%
ITT Corporation ........................ 90,000 9,236,250
Oil Services - 1.37%
Schlumberger Limited ................... 100,000 5,962,500
Paper - 2.16%
Union Camp Corporation ................. 100,000 5,187,500
Westvaco Corporation ................... 100,000 4,150,000
Total ................................. 9,337,500
See Notes to Schedule of Investments on page 64.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1995
Shares Value
COMMON STOCKS (Continued)
Public Utilities - Electric - 0.42%
VEBA AG (A) ............................ 5,000 $ 1,806,855
Publishing and Advertising - 2.75%
American Greetings Corporation,
Class A ............................... 200,000 5,962,400
McGraw-Hill, Inc. ...................... 83,000 5,955,250
Total ................................. 11,917,650
Railroads - 2.45%
Conrail Inc. ........................... 70,000 3,928,750
Norfolk Southern Corporation ........... 100,000 6,687,500
Total ................................. 10,616,250
Retailing - 5.11%
May Department Stores Company (The) .... 140,000 5,180,000
Mercantile Stores Company, Inc. ........ 100,000 4,462,500
Penney (J.C.) Company, Inc. ............ 155,000 6,955,625
Tommy Hilfiger Corporation* ............ 251,400 5,530,800
Total ................................. 22,128,925
Telecommunications - 5.88%
AT&T Corporation ....................... 114,600 5,930,550
BellSouth Corporation .................. 110,000 6,545,000
GTE Corporation ........................ 150,000 4,987,500
MCI Communications Corporation ......... 250,000 5,140,500
Telefonos de Mexico S.A. de C.V., ADR 100,000 2,850,000
Total ................................. 25,453,550
TOTAL COMMON STOCKS - 60.22% $260,761,398
(Cost: $239,967,936)
PREFERRED STOCKS
Airlines - 1.11%
Delta Air Lines, Incorporated, Convertible
Depository Shares ..................... 90,000 4,792,500
Automotive - 1.02%
Ford Motor Company, Convertible
Depository Shares ..................... 50,000 4,412,500
Banks and Savings and Loans - 1.76%
BankAmerica Corporation, Convertible ... 76,400 4,116,050
Citicorp, Convertible Depository Shares 180,000 3,487,500
Total ................................. 7,603,550
See Notes to Schedule of Investments on page 64.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1995
Shares Value
PREFERRED STOCKS (Continued)
Computers and Office Equipment - 3.32%
General Motors Corporation, Class E,
Convertible Depository Shares ......... 250,000 $ 14,375,000
Hospital Management - 0.55%
National Health Investors,
Convertible ........................... 106,000 2,398,250
TOTAL PREFERRED STOCKS - 7.76% $ 33,581,800
(Cost: $29,391,314)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Domestic Oil - 0.91%
BP America Inc.,
10.0%, 7-1-2018 ....................... $ 3,500 3,926,930
Electrical Equipment - 1.61%
General Electric Capital Corporation,
8.3%, 9-20-2009 ....................... 6,500 6,983,275
Financial - 2.71%
Ford Motor Credit Company,
8.875%, 6-15-99 ....................... 3,000 3,132,690
General Motors Acceptance Corporation,
8.4%, 10-15-99 ........................ 3,000 3,067,530
JCP Master Credit Card Trust,
9.625%, 6-15-2000 ..................... 2,250 2,410,313
Merrill Lynch Mortgage Investors, Inc.,
8.3%, 4-15-2012 ....................... 3,100 3,131,000
Total ................................. 11,741,533
Multi-Industry - 1.12%
Mark IV Industries, Inc.,
8.75%, 4-1-2003 ....................... 5,000 4,850,000
Railroad Equipment - 0.04%
Union Tank Car Co.,
9.5%, 12-15-95 ........................ 177 180,007
Telecommunications - 0.93%
BellSouth Savings and Security ESOP Trust,
9.125%, 7-1-2003 ...................... 3,812 4,014,854
TOTAL CORPORATE DEBT SECURITIES - 7.32% $ 31,696,599
(Cost: $30,043,768)
See Notes to Schedule of Investments on page 64.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1995
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association:
7.5%, 4-25-2002 ....................... $ 3,000 $ 2,941,860
6.0%, 6-25-2007 ....................... 3,000 2,731,860
8.25%, 6-1-2008 ....................... 723 716,180
Government National Mortgage Association:
9.0%, 7-15-2016 ....................... 180 188,728
9.0%, 8-15-2016 ....................... 287 300,368
9.0%, 10-15-2016 ...................... 1,494 1,560,774
9.0%, 11-15-2016 ...................... 424 442,395
9.0%, 1-15-2017 ....................... 153 159,370
9.0%, 3-15-2017 ....................... 365 381,208
9.0%, 4-15-2017 ....................... 362 378,608
9.0%, 7-15-2017 ....................... 277 289,098
United States Treasury:
7.125%, 2-29-2000 ..................... 6,000 6,008,460
8.875%, 5-15-2000 ..................... 17,000 18,301,520
8.0%, 5-15-2001 ....................... 23,000 23,973,820
6.375%, 8-15-2002 ..................... 12,000 11,439,360
7.5%, 2-15-2005 ....................... 6,000 6,121,860
7.25%, 5-15-2016 ...................... 8,500 8,218,395
TOTAL UNITED STATES GOVERNMENT SECURITIES - 19.44% $ 84,153,864
(Cost: $85,084,285)
TOTAL SHORT-TERM SECURITIES - 4.85% $ 21,009,283
(Cost: $21,009,283)
TOTAL INVESTMENT SECURITIES - 99.59% $431,202,944
(Cost: $405,496,586)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.41% 1,794,317
NET ASSETS - 100.00% $432,997,261
Notes To Schedule of Investments
*No income dividends were paid during the preceding 12 months.
Listed on an exchange outside the United States.(A)
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 CONTINENTAL INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1995
Assets
Investment securities - at value
(Notes 1 and 3) ................................ $431,202,944
Cash ............................................. 7,749
Receivables:
Investment securities sold ...................... 5,656,326
Dividends and interest .......................... 3,253,511
Fund shares sold ................................ 337,785
Prepaid insurance premium ........................ 20,100
------------
Total assets ................................ 440,478,415
------------
Liabilities
Payable for investment securities purchased ...... 6,354,656
Payable for Fund shares redeemed ................. 945,416
Accrued service fee .............................. 91,344
Accrued transfer agency and dividend disbursing 65,234
Accrued accounting services fee .................. 5,000
Other ............................................. 19,504
------------
Total liabilities ............................. 7,481,154
------------
Total net assets ............................. $432,997,261
============
Net Assets
$1.00 par value capital stock, authorized --
40,000,000; shares outstanding -- 20,777,054
Capital stock ................................... $ 20,777,054
Additional paid-in capital ...................... 376,636,350
Accumulated undistributed income:
Accumulated undistributed net investment income . 304,556
Accumulated undistributed net realized gain
on investment transactions .................... 9,572,943
Net unrealized appreciation in value of
investments at end of period .................. 25,706,358
------------
Net assets applicable to outstanding
units of capital ............................. $432,997,261
============
Net asset value per share (net assets divided by
shares outstanding) .............................. $20.84
Sales load (offering price x 5.75%) ................ 1.27
------
Offering price per share (net asset value
divided by 94.25%) ............................... $22.11
======
On sales of $100,000 or more the sales load
is reduced as set forth in the Prospectus.
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended MARCH 31, 1995
Investment Income
Income:
Interest ........................................ $ 9,697,140
Dividends ....................................... 8,278,298
-----------
Total income ................................ 17,975,438
-----------
Expenses (Note 2):
Investment management fee ....................... 2,250,314
Transfer agency and dividend disbursing ......... 750,528
Service fee ..................................... 479,351
Accounting services fee ......................... 60,000
Custodian fees ................................ 31,295
Audit fees ...................................... 26,373
Legal fees ...................................... 13,023
Other ........................................... 134,558
-----------
Total expenses ................................ 3,745,442
-----------
Net investment income ........................ 14,229,996
-----------
Realized and Unrealized Gain (Loss) on Investments
Realized net gain on securities .................. 15,652,134
Realized net loss on foreign
currency transactions ........................... (5,222)
-----------
Realized net gain on investments ................ 15,646,912
Unrealized depreciation in value of investments
during the period ............................... (3,730,876)
-----------
Net gain on investments ....................... 11,916,036
-----------
Net increase in net assets resulting from
operations ................................. $26,146,032
===========
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended
March 31,
------------------------
1995 1994
------------ ------------
Increase in Net Assets
Operations:
Net investment income ...............$ 14,229,996 $ 13,527,122
Realized net gain on investments .... 15,646,912 8,098,843
Unrealized appreciation
(depreciation) .................... (3,730,876) 3,398,722
------------ ------------
Net increase in net assets
resulting from operations ........ 26,146,032 25,024,687
------------ ------------
Dividends to shareholders from:*
Net investment income ............... (14,116,118) (13,543,155)
Realized gains on securities
transactions ...................... (8,337,171) (7,540,828)
------------ ------------
(22,453,289) (21,083,983)
------------ ------------
Capital share transactions:
Proceeds from sale of shares
(1,792,943 and 1,875,493
shares, respectively) ............. 37,123,344 39,716,188
Proceeds from reinvestment of
dividends and/or capital gains
distribution (1,055,139 and 955,113
shares, respectively) ............. 21,493,991 20,076,172
Payments for shares redeemed
(2,039,852 and 1,805,773 shares,
respectively) ...................... (42,156,015) (38,270,420)
------------ ------------
Net increase in net assets
resulting from capital share
transactions ..................... 16,461,320 21,521,940
------------ ------------
Total increase.................... 20,154,063 25,462,644
Net Assets
Beginning of period .................. 412,843,198 387,380,554
------------ ------------
End of period, including undistributed
net investment income of $304,556
and $195,900, respectively ..........$432,997,261 $412,843,198
============ ============
*See "Financial Highlights" on page 68.
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the fiscal year ended March 31,
--------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Net asset value,
beginning of
period ................... $20.67 $20.45 $18.70 $16.72 $16.93
------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income .................. .70 .70 .83 .73 .84
Net realized and
unrealized gain
on investments .......... .58 .61 1.75 1.76 .20
------ ------ ------ ------ ------
Total from investment
operations ............... 1.31 1.28 2.58 2.49 1.04
------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment
income .................. (0.70) (0.70) (0.83) (0.72) (0.83)
Distribution from
capital gains ........... (0.39) (0.41) 0.00 0.00 0.00
------ ------ ------ ------ ------
Total distributions ....... (1.09) (1.11) (0.83) (0.72) (0.83)
------ ------ ------ ------ ------
Net asset value,
end of period ............ $20.84 $20.67 $20.45 $16.93 $18.70
====== ====== ====== ====== ======
Total return* ............. 6.40% 6.39% 14.08% 14.98% 6.61%
Net assets, end of
period (000
omitted) .................$432,997$412,843$387,381$339,540$311,173
Ratio of expenses to
average net assets ....... 0.89% 0.81% 0.77% 0.80% 0.85%
Ratio of net investment
income to average net
assets ................... 3.37% 3.29% 4.24% 4.03% 5.15%
Portfolio turnover
rate ..................... 41.01% 41.30% 111.36% 181.82% 207.62%
*Total return calculated without taking into account the sales load
deducted on an initial purchase.
See notes to financial statements.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 1 -- Significant Accounting Policies
United Continental Income Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a major dealer in bonds. Convertible bonds are
valued using this pricing system only on days when there is no sale
reported. Stocks which are traded over-the-counter are priced using
NASDAQ (National Association of Securities Dealers Automated Quotations)
which provides information on bid and asked or closing prices quoted by
major dealers in such stocks. 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. Foreign currency translations -- All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars daily. Purchases and
sales of investment securities and accruals of income and expenses are
translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates. The
Fund combines fluctuations from currency exchange rates and fluctuations
in market value when computing net realized and unrealized gain or loss
from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of its
taxable income and capital gains to its shareholders and otherwise qualify
as a regulated investment company under the Internal Revenue Code. In
addition, the Fund intends to pay distributions as required to avoid
imposition of excise tax. Accordingly, provision has not been made for
Federal income taxes. See Note 4 -- Federal Income Tax Matters.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the record date. Net investment income
distributions and capital gains distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are due to differing treatments
for items such as deferral of wash sales and post-October losses, foreign
currency transactions, net operating losses and expiring capital loss
carryforwards. At March 31, 1995, $5,222 was reclassified between
accumulated undistributed net investment income and accumulated
undistributed net realized gain on investment transactions.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as
of the close of business each day at the annual rate of .10% of net assets and
(ii) a "Group" fee computed each day on the combined net asset values of all of
the funds in the United Group of mutual funds (approximately $11.5 billion of
combined net assets at March 31, 1995) at annual rates of .51% of the first
$750 million of combined net assets, .49% on that amount between $750 million
and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between
$2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion, .40%
between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly-owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services,
the Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in
the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The Fund also pays WARSCO a monthly per account charge for transfer agency
and dividend disbursement services of $1.0208 for each shareholder account
which was in existence at any time during the prior month plus $0.30 for each
account on which a dividend or distribution of cash or shares had a record date
in that month. The Fund also reimburses W&R and WARSCO for certain out-of-
pocket costs.
As principal underwriter for the Fund's shares, W&R received direct and
indirect gross sales commissions (which are not an expense of the Fund) of
$1,332,061, out of which W&R paid sales commissions of $764,365 and all
expenses in connection with the sale of Fund shares, except for registration
fees and related expenses.
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to W&R in an
amount not to exceed .25% of the Fund's average annual net assets. The fee is
to be paid to reimburse W&R for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts.
The Fund paid Directors' fees of $15,268.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government obligations
and short-term securities, aggregated $168,119,049 while proceeds from
maturities and sales aggregated $156,067,002. Purchases of short-term
securities and U.S. Government securities aggregated $521,576,762 and
$23,577,188, respectively. Proceeds from maturities and sales of short-term
securities and U.S. Government securities aggregated $551,901,708 and $591,630,
respectively.
For Federal income tax purposes, cost of investments owned at March 31,
1995 was $405,526,512, resulting in net unrealized appreciation of $25,676,432,
of which $34,803,014 related to appreciated securities and $9,126,582 related
to depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $15,621,276 during the year ended March 31, 1995, a portion of which was
paid to shareholders during the period ended March 31, 1995. Remaining capital
gain net income will be distributed to the Fund's shareholders. These net
gains include the effect of $60,783 of capital losses deferred from the year
ended March 31, 1994. Federal tax law permits the Fund to defer, to its next
fiscal year, net capital losses incurred from November 1 to the end of its
fiscal year ("post-October losses").
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
United Continental Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of United Continental Income Fund,
Inc. (the "Fund") at March 31, 1995, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at March 31, 1995 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Kansas City, Missouri
May 5, 1995
