[front cover]
June 30, 1999
P R O S P E C T U S
[logo: Waddell & Reed
Financial Services]
UNITED
CONTINENTAL
INCOME FUND, INC.
- -----------------------------------------------------------
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.
[Cover graphic: oakleaf and acorns on triangle background]
The Securities and exchange Commission has not approved or disapproved the
Fund's securities, or determined whether this Prospectus is accurate or
adequate. It is a criminal offence to state otherwise.
<PAGE>
T A B L E O F C O N T E N T S
AN OVERVIEW OF THE FUND 3
- --------------------------------------------------
PERFORMANCE 5
- --------------------------------------------------
FEES AND EXPENSES 7
- --------------------------------------------------
THE INVESTMENT PRINCIPLES OF
THE FUND 8
- --------------------------------------------------
Investment Goals, Principal Strategies
and Other Investments 8
- --------------------------------------------------
Risk Considerations of Principal
Strategies and Other Investments 9
- --------------------------------------------------
Year 2000 and Euro Issues 10
- --------------------------------------------------
YOUR ACCOUNT 11
- --------------------------------------------------
Choosing a Share Class 11
- --------------------------------------------------
Sales Charge Reductions and
Waivers 12
- --------------------------------------------------
Waivers for Certain Investors 12
- --------------------------------------------------
Ways to Set Up Your Account 13
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Buying Shares 15
- --------------------------------------------------
Minimum Investments 17
- --------------------------------------------------
Adding to Your Account 17
- --------------------------------------------------
Selling Shares 18
- --------------------------------------------------
Telephone Transactions 21
- --------------------------------------------------
Shareholder Services 21
- --------------------------------------------------
Personal Service 21
- --------------------------------------------------
Reports 21
- --------------------------------------------------
Exchanges 22
- --------------------------------------------------
Automatic Transactions for Class A
Shareholders 22
- --------------------------------------------------
Distributions and Taxes 23
- --------------------------------------------------
Distributions 23
- --------------------------------------------------
Taxes 23
- --------------------------------------------------
THE MANAGEMENT OF THE FUND 26
- --------------------------------------------------
Portfolio Management 26
- --------------------------------------------------
Management Fee 26
- --------------------------------------------------
FINANCIAL HIGHLIGHTS 28
- --------------------------------------------------
<PAGE>
An
Overview
of the
Fund
[graphic: oakleaf and acorns on triangle background]
Goals
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,
Waddell & Reed Investment Management Company ("WRIMCO"), market and economic
conditions permit. As a secondary goal, the Fund seeks long-term appreciation of
capital.
Principal Strategies
The Fund seeks to achieve its goals by investing primarily in income-producing
securities that include common stock, preferred stock and debt securities. The
Fund generally owns equity securities of medium to large, well-established
companies, which are usually dividend-producing securities. For the most part,
the Fund's debt securities are either U.S. Government securities or
investment-grade corporate bonds rated BBB & higher by Standard & Poor's ("S&P")
or Baa and higher by Moody's Investor Services ("MIS"). The Fund has no
limitation on the range of maturities of the debt securities in which it may
invest.
Principal Risks of Investing in the Fund
Because the Fund owns different types of investments, a variety of factors can
affect its investment performance, such as:
o adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
o an increase in interest rates, which can cause the value of the Fund's
fixed-income securities to decline;
o the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds; and
o the skill of WRIMCO in evaluating and selecting securities for the Fund and
in allocating the Fund's assets among different types of investments.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your
3
<PAGE>
investment. An investment in the Fund is not a bank deposit and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Who May Want to Invest
The Fund is designed for investors seeking current income with a secondary
emphasis on growth. It is suited for investors seeking a combination of income
and appreciation. You should consider whether the Fund fits your particular
investment objectives.
4
<PAGE>
Performance
[graphic: oakleaf and acorns on triangle background]
The chart and table below provide some indication of
the risks of investing in the Fund by showing changes in the Fund's performance
from year to year and by showing how the Fund's average annual returns for 1, 5
and 10 years compare with those of a broad measure of market performance.
o The chart presents the total annual returns for Class A and shows how
performance has varied from year to year over the past ten years.
o The chart does not reflect any sales charge that you may be required to pay
upon purchase of the Fund's Class A shares. If the sales charge were
included, the returns would be less than those shown.
o The table shows Class A and Class Y average annual returns and compares
them to the market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does
not necessarily indicate how it will perform in the future.
Note that the performance information in the chart and table is based on
calendar-year periods, while the information shown in the Financial Highlights
section of this Prospectus and in the Fund's shareholder reports is based on the
Fund's fiscal year.
- -----------------------------------[BAR CHART]----------------------------------
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
<TABLE>
<S> <C>
1989 24.26
1990 -6.51
1991 26.43
1992 10.09
1993 13.1
1994 -0.39
1995 24.76
1996 9.63
1997 17.39
1998 10.36
</TABLE>
- ---------------------------------[END BAR CHART]--------------------------------
In the period shown in the chart, the highest quarterly return was 10.89% (the
first quarter of 1991) and the lowest quarterly return was -10.77% (the third
quarter of 1990). The Class A return for the quarter ended March 31, 1999 was
0.18%.
5
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Life of Class*
<S> <C> <C> <C> <C>
Class A Shares of the
Fund 4.01% 10.72% 11.77%
S&P 500 Index 28.70% 24.08% 19.21% 28.30%
Salomon Brothers
Treasury/Government
Sponsored/Corporate
Index 9.45% 7.32% 9.37% 7.34%
Lipper Balanced Fund
Universe Average 13.49% 13.90% 12.95% 15.82%
Class Y Shares of the
Fund 10.62% 12.54%
S&P 500 Index 28.70% 24.08% 19.21% 28.30%
Salomon Brothers
Treasury/Government
Sponsored/Corporate
Index 9.45% 7.32% 9.37% 7.34%
Lipper Balanced Fund
Universe Average 13.49% 13.90% 12.95% 15.82%
</TABLE>
The indexes shown are broad-based, securities market indexes that are unmanaged.
The Lipper average is a composite of mutual funds with goals similar to the
goals of the Fund.
*Since January 4, 1996, for Class Y shares. Because the Class commenced
operations on a date other than at the end of a month, and partial month
calculations of the performance of the indexes (including income) are not
available, investment in the indexes reflect performance from January 1, 1996.
6
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may
pay if you buy and hold shares of the Fund.
[graphic: oakleaf and acorns on triangle background]
<TABLE>
<CAPTION>
Shareholder Fees Class A Class Y
(fees paid directly from your investment) Shares Shares
<S> <C> <C>
Maximum Sales Charge (Load) Imposed
on Purchases (as a percentage of offering
price) 5.75% None
Maximum Deferred Sales Charge (Load)
(as a percentage of amount invested) None None
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<S> <C> <C>
Management Fees(1) 0.70% 0.70%
Distribution and Service (12b-1) Fees(2) 0.25% None
Other Expenses 0.19% 0.21%
Total Annual Fund Operating Expenses 1.14% 0.91%
</TABLE>
(1) Management Fees and Total Annual Fund Operating Expenses have been restated
to reflect the change in management fees effective June 30, 1999;
otherwise, expense ratios are based on Fund-level expenses for the fiscal
year ended March 31, 1999. Actual expenses may be greater or lesser than
those shown.
(2) It is possible that long-term Class A shareholders of the Fund may bear
12b-1 distribution fees that are more than the maximum front-end sales
charge permitted under the rules of the National Association of Securities
Dealers, Inc.
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particularClass A or Class Y shares
for each time period specified, (b) your investment has a 5% return each year,
and (c) the expenses remain the same. Although your actual costs may be higher
or lower, based on these assumptions, your costs would be:
Example:
<TABLE>
<CAPTION>
Class A Class Y
<S> <C> <C>
1 year $ 685 $ 93
3 years $ 916 $ 290
5 years $1,167 $ 504
10 years $1,881 $1,120
</TABLE>
Your costs would be the same whether or not you redeemed your shares at the end
of each time period.
7
<PAGE>
The Investment Principles of the Fund
[graphic: oakleaf and acorns on triangle background]
Investment Goals, Principal Strategies and
Other Investments
The primary goal of the Fund is to provide current income to the extent that, in
WRIMCO's opinion, market and economic conditions permit. As a secondary goal,
the Fund seeks long-term appreciation of capital. The Fund seeks to achieve its
goals by investing primarily in a diversified portfolio of income-producing
securities of U.S. issuers. There is no guarantee that the Fund will achieve its
goals.
The Fund usually purchases securities because of the dividends and interest on
them and may also purchase securities because they may increase in value. In
general, the Fund invests a portion of its total assets in either debt
securities or preferred stocks, or both, in order to provide income and relative
stability of capital. The Fund owns common stocks in order to provide possible
appreciation of capital and some dividend income. The Fund may also invest in
convertible securities. Normally, the Fund invests at least 25% of its total
assets in either debt securities or preferred stocks, or both, and at least 65%
of its total assets in income-producing securities. The Fund will not ordinarily
invest more than 75% of its total assets in common stocks, although it may
invest up to all of its assets in common stocks if, in WRIMCO's judgment, this
is advisable due to unusual market or economic conditions.
WRIMCO may look at a number of factors in selecting securities for the Fund's
portfolio. For equity investments, WRIMCO typically looks for undervalued
companies whose asset value or earnings power is not reflected in the price of
their stock. In selecting debt securities for the Fund, WRIMCO seeks
high-quality securities with minimal credit risk. The Fund may not invest more
than 5% of its total assets in lower quality debt securities, commonly called
junk bonds (rated BB and below by S&P and Ba and below by MIS).
In determining whether to sell either an equity security or a debt security,
WRIMCO uses the same analysis that it uses in order to determine if the equity
security is still under-valued or if the debt security continues to maintain its
minimal credit risk. WRIMCO may also sell a security if it ceases to produce
income.
8
<PAGE>
At times, when WRIMCO believes that a temporary defensive position is desirable
or to achieve income, 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. Such investments may reduce the potential for appreciation
of the Fund's portfolio.
The Fund may also invest in other types of investments and use certain other
instruments in seeking to achieve the Fund's goals. For example, the Fund may
also invest in options, futures contracts, asset-backed securities and other
derivative instruments if it is permitted to invest in the type of asset by
which the return on, or value of, the derivative is measured. At this time, the
Fund has limited exposure to derivative instruments. The Fund may also invest,
to a limited extent, in foreign securities. You will find more information in
the Statement of Additional Information ("SAI") about the Fund's permitted
investments and strategies, as well as the restrictions that apply to them.
Risk Considerations of Principal Strategies and Other Investments
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk.
o Market risk is the possibility of a change in the price of the security
because of market factors including changes in interest rates. Bonds with
longer maturities are more interest-rate sensitive. For example, if interest
rates increase, the value of a bond with a longer maturity is more likely to
decrease. Because of market risk, the share price of the Fund will likely
change as well.
o Financial risk is based on the financial situation of the issuer of the
security. The financial risk of the Fund depends on the credit quality of the
underlying securities in which it invests.
o Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid
before its expected maturity date.
Because the Fund owns different types of investments, its performance will be
affected by a variety of factors. In general, the value of the Fund's
investments and the income it generates 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.
9
<PAGE>
Certain types of the Fund's authorized investments and strategies (such as
derivative instruments) involve special risks. Foreign securities and foreign
currencies may involve risks relating to currency fluctuations, political or
economic conditions in the foreign country, and the potentially less stringent
investor protection and disclosure standards of foreign markets. These factors
could make foreign investments, especially those in emerging markets, more
volatile.
Year 2000 and Euro Issues
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by WRIMCO and the Fund's other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
WRIMCO is taking steps that it believes are reasonably designed to address year
2000 computer-related problems with respect to the computer systems that it uses
and to obtain assurances that comparable steps are being taken by the Fund's
other major service providers. Although there can be no assurances, WRIMCO
believes these steps will be sufficient to avoid any adverse impact on the Fund.
Similarly, the companies and other issuers in which the Fund invests could be
adversely affected by year 2000 computer-related problems, and there can be no
assurance that the steps taken, if any, by these issuers will be sufficient to
avoid any adverse impact on the Fund.
Also, the Fund could be adversely affected by the conversion of certain European
currencies into the Euro. This conversion, which is underway, is scheduled to be
completed in 2002. However, problems with the conversion process and delays
could increase volatility in world capital markets and affect European capital
markets in particular.
10
<PAGE>
Your Account
[graphic: oakleaf and acorns on triangle background]
Choosing a Share Class
This Prospectus offers two classes of shares of the Fund: Class A and Class Y.
Each class has its own sales charge, if any, and expense structure. You should
choose the class for which you are eligible and that seems best for you, which
usually depends on how much you plan to invest and how long you plan to hold
your shares. Class A shares are available for both individual and institutional
investors. Class Y shares are designed for institutional investors and others
investing through certain intermediaries, as described below. All of your future
investments in the Fund will be made in the class you select when you open your
account, unless you inform the Fund otherwise, in writing, when you make the
future investment.
For Class A shares, the Fund has adopted a Distribution and Service Plan
("Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
the Plan, the Fund may pay Waddell & Reed, Inc. a fee of up to 0.25%, on an
annual basis, of the average daily net assets of the Class A shares. This fee is
to reimburse Waddell & Reed, Inc. for the amounts it spends for distributing the
Fund's Class A shares, providing services to Class A shareholders or maintaining
Class A shareholder accounts. Because the Plan fees are paid out of the Class A
assets on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Class A shares are subject to a sales charge when you buy them, based on the
amount of your investment, according to the table below. As described above,
Class A shares pay an annual 12b-1 fee of up to 0.25% of average Class A net
assets. The ongoing expenses of this class are higher than those for Class Y.
11
<PAGE>
<TABLE>
<CAPTION>
Sales Charge Sales Charge as
as Percent of Approx. Percent of
Size of Purchase Offering Price Amount Invested
<S> <C> <C>
Under $100,000 5.75% 6.10%
$100,000 to less than
$200,000 4.75 4.99
$200,000 to less than
$300,000 3.50 3.63
$300,000 to less than
$500,000 2.50 2.56
$500,000 to less than
$1,000,000 1.50 1.52
$1,000,000 to less than
$2,000,000 1.00 1.01
$2,000,000 and over 0.00 0.00
</TABLE>
Sales Charge Reductions and Waivers
Lower sales charges are available by:
o Combining additional purchases of Class A shares of any of the funds in the
United Group, except shares of United Cash Management, Inc. unless acquired
by exchange for Class A shares on which a sales charge was paid (or as a
dividend or distribution on such acquired shares), with the NAV of Class A
shares already held ("Rights of Accumulation");
o Grouping all purchases of Class A shares made during a thirteen-month
period ("Statement of Intention"); and
o Grouping purchases by certain related persons.
Additional information and applicable forms are available from Waddell & Reed
financial advisors.
Waivers for Certain Investors
Class A shares may be purchased at NAV by:
o The Directors and officers of the Fund, employees of Waddell & Reed, Inc.,
employees of their affiliates, financial advisors of Waddell & Reed, Inc.
and the spouse, children, parents, children's spouses and spouse's parents
of each;
o Certain retirement plans and certain trusts for these persons; and
o A 401(k) plan or a 457 plan having 100 or more eligible employees.
You will find more information in the SAI about sales charge reductions and
waivers.
12
<PAGE>
Class Y shares are not subject to a sales charge or annual 12b-1 fees and thus
may cost you less than if you had bought Class A shares. Class Y shares are only
available for purchase by:
o participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401, including 401(k) plans, of the
Internal Revenue Code of 1986, as amended (the "Code"), when the plan has
100 or more eligible employees and holds the shares in an omnibus account
on the Fund's records;
o banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an
omnibus account on the Fund's records;
o government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more;
and
o certain retirement plans and trusts for employees and account
representatives of Waddell & Reed, Inc. and its affiliates.
The different ways to set up (register) your account are listed below.
Ways to Set Up Your Account
Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
Business or Organization
For investment needs of corporations, associations, partnerships, institutions
or other groups
Retirement
To shelter your retirement savings from taxes
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts (other
than Roth IRAs and Education IRAs) may be tax deductible.
o Individual Retirement Accounts (IRAs) allow an individual under 70-1/2,
with earned income, to invest up to $2,000 per tax year. The maximum annual
contribution for an investor and his or her spouse is $4,000 ($2,000 for
each spouse) or, if less, the couple's combined earned income for the
taxable year.
13
<PAGE>
o Rollover IRAs retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
o Roth IRAs allow certain individuals to make non-deductible contributions up
to $2,000 per year. Withdrawals of earnings may be tax-free if the account
is at least five years old and certain other requirements are met.
o Education IRAs are established for the benefit of a minor, with
non-deductible contributions, and permit tax-free withdrawals to pay the
higher education expenses of the beneficiary.
o Simplified Employee Pension Plans (SEP--IRAs) provide small business owners
or those with self-employed income (and their eligible employees) with many
of the same advantages as a Keogh Plan, but with fewer administrative
requirements.
o Savings Incentive Match Plans for Employees (SIMPLE Plans) can be
established by small employers to contribute to their employees' retirement
accounts and involve fewer administrative requirements than 401(k) or other
qualified plans generally.
o Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves up to 25% of their annual earned income, with
a maximum of $30,000 per year.
o 401(k) Programs allow employees of corporations and non-governmental
tax-exempt organizations of all sizes to contribute a percentage of their
wages on a tax-deferred basis. These accounts need to be established by the
administrator or trustee of the plan.
o 403(b) Custodial Accounts are available to employees of public school
systems or certain types of charitable organizations.
o 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA").
14
<PAGE>
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its financial
advisors. To open your account you must complete and sign an application. Your
Waddell & Reed financial advisor can help you with any questions you might have.
To purchase Class A and Class Y shares by check, make your check payable to
Waddell & Reed, Inc. Mail the check, along with your completed application, to
Waddell & Reed, Inc., P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
To purchase Class Y shares by wire, you must first obtain an account number by
calling 1-800-366-5465, then mail a completed application to Waddell & Reed,
Inc., P. O. Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to
913-236-5044. Instruct your bank to wire the amount you wish to invest, along
with the account number and registration, to UMB Bank, n.a., ABA Number
101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and Account
Number.
You may also buy Class Y shares of the Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements to buy Class Y shares.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a share (price to buy one share of a particular class) is
the net asset value ("NAV") per share of that class, plus for Class A shares the
sales charge shown in the table above.
In the calculation of the Fund's NAV:
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
15
<PAGE>
o Other investment assets for which market prices are unavailable are valued
at their fair value by or at the direction of the Board of Directors.
The Fund is open for business each day the New York Stock Exchange (the "NYSE")
is open. The Fund normally calculates the NAVs of its shares as of the close of
business of the NYSE, normally 4 p.m. Eastern time, except that an option or
futures contract held by the Fund may be priced at the close of the regular
session of any other securities or commodities exchange on which that instrument
is traded.
The Fund may invest in securities listed on foreign exchanges which may trade on
Saturdays or on U.S. national business holidays when the NYSE is closed.
Consequently, the NAV of Fund shares may be significantly affected on days when
the Fund does not price its shares and when you are not able to purchase or
redeem the Fund's shares. Similarly, if an event materially affecting the value
of foreign investments or foreign currency exchange rates occurs prior to the
close of business of the NYSE but after the time their values are otherwise
determined, such investments or exchange rates may be valued at their fair value
as determined in good faith by or under the direction of the Board of Directors.
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
o The Fund does not issue certificates representing Class Y shares of the
Fund.
o If you purchase Class Y shares of the Fund from certain broker-dealers,
banks or other authorized third parties, the Fund will be deemed to have
received your purchase order when that third party (or its designee) has
received your order. Your order will receive the Class Y offering price
next calculated after the order has been received in proper form by the
authorized third party (or its designee). You should consult that firm
16
<PAGE>
to determine the time by which it must receive your order for you to
purchase shares of the Fund at that day's price.
When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Minimum Investments
For Class A:
<TABLE>
<S> <C>
To Open an Account $500
For certain exchanges $100
For certain retirement accounts and accounts opene d
with Automatic Investment Service $ 50
For certain retirement accounts and accounts opene d
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
</TABLE>
For Class Y:
<TABLE>
<S> <C>
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
To Add to An Account: Any amount
</TABLE>
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed, Inc. Mail the
check along with:
o the detachable form that accompanies the confirmation of a prior purchase
or your year-to-date statement; or
o a letter stating your account number, the account registration and that you
wish to purchase Class A or Class Y shares of the Fund.
17
<PAGE>
Mail to Waddell & Reed, Inc. at:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
To add to your Class Y account by wire: Instruct your bank to wire the amount
you wish to invest, along with the account number and registration, to UMB Bank,
n.a., ABA Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer
Name and Account Number.
If you purchase Class Y shares from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
Selling Shares
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The redemption price (price to sell one share of a particular class) is the NAV
per share of that class.
To sell shares by written request: Complete an Account Service Request form,
available from your Waddell & Reed financial advisor, or write a letter of
instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number, and the class, of shares to be redeemed; and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.
To sell Class Y shares by telephone or fax: If you have elected this method in
your application or by subsequent authorization, call 1-800-366-5465, or fax
your request to 913-236-5044, and give
18
<PAGE>
your instructions to redeem Class Y shares and make payment by wire to your
pre-designated bank account or by check to you at the address on the account.
When you place an order to sell shares, your shares will be sold at the next NAV
calculated after receipt of a written request for redemption in good order by
Waddell & Reed, Inc. at its home office. Note the following:
o If more than one person owns the shares, each owner must sign the written
request.
o If you hold a certificate, it must be properly endorsed and sent to the
Fund.
o If you recently purchased the shares by check, the Fund may delay payment
of redemption proceeds. You may arrange for the bank upon which the
purchase check was drawn to provide to the Fund telephone or written
assurance that the check has cleared and been honored. If you do not,
payment of the redemption proceeds on these shares will be delayed until
the earlier of 10 days or the date the Fund can verify that your purchase
check has cleared and been honored.
o Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE
is restricted, or as permitted by the Securities and Exchange Commission.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
o If you purchased Class Y shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms,
some of which may charge you a fee and may have additional requirements to
sell Fund shares. The Fund will be deemed to have received your order to
sell Class Y shares when that firm (or its designee) has received your
order. Your order will receive the Class Y NAV next calculated after the
order has been received in proper form by the authorized firm (or its
designee). You should consult that firm to determine the time by which it
must receive your order for you to sell Class Y shares at that day's price.
19
<PAGE>
Special Requirements for Selling Shares
<TABLE>
<CAPTION>
Account Type Special Requirements
<S> <C>
Individual or Joint The written instructions must be signed by all
Tenant persons required to sign for transactions, exactly as
their names appear on the account.
Sole Proprietorship The written instructions must be signed by the
individual owner of the business.
UGMA, UTMA The custodian must sign the written instructions
indicating capacity as custodian.
Retirement Account The written instructions must be signed by a
properly authorized person.
Trust The trustee must sign the written instructions
indicating capacity as trustee.If the trustee's name is
not in the account registration, provide a currently
certified copy of the trust document.
Business or At least one person authorized by corporate
Organization resolution to act on the account must sign the
written instructions.
Conservator, Guardian The written instructions must be signed by the
or Other Fiduciary person properly authorized by court order to act in
the particular fiduciary capacity.
</TABLE>
The Fund may require a signature guarantee in certain situations such as:
o a redemption request made by a corporation, partnership or fiduciary;
o a redemption request made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
This requirement is intended to protect you and Waddell & Reed from fraud. You
can obtain a signature guarantee from most banks and securities dealers, but not
from a notary public.
The Fund reserves the right to redeem at NAV all your Fund shares if their
aggregate NAV is less than $500. The Fund will give you notice and a 60-day
opportunity to purchase a sufficient number of additional shares to bring the
aggregate NAV of your shares to $500.
You may reinvest, without charge, all or part of the amount of Class A shares
you redeemed by sending to the Fund the amount you want to reinvest. The
reinvested amounts must be received by the Fund within thirty days after the
date of your redemption. You may do this only once with Class A shares of the
Fund.
20
<PAGE>
Payments of principal and interest on loans made pursuant to Waddell & Reed's
401(k) prototype plan may be reinvested, without payment of a sales charge, in
Class A shares of any United Group fund in which the plan may invest.
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 financial advisor is available to provide personal
service. Additionally, one toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or TeleWaddell, our automated customer telephone
service. During normal business hours, our Customer Service staff is available
to answer your questions or update your account records. At almost any time of
the day or night, you may access TeleWaddell from a touch-tone phone to:
o obtain information about your accounts;
o obtain price information about other funds in the United Group; or
o request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange, transfer
or redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports to shareholders (every six months)
21
<PAGE>
To reduce expenses, only one copy of the most recent annual and semiannual
reports will be mailed to your household, even if you have more than one account
with the Fund. Call the telephone number listed above for Customer Service if
you need copies of annual or semiannual reports or account information.
Exchanges
You may sell your shares and buy shares of the same class of other funds in the
United Group. As well, exchanging Class Y shareholders may buy Class A shares of
United Cash Management, Inc. You may exchange only into funds that are legally
permitted for sale in your state of residence. Note that exchanges out of the
Fund may have tax consequences for you. Before exchanging into a fund, read its
prospectus.
The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
Automatic Transactions for Class A Shareholders
Flexible withdrawal service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund account
automatically. While Regular Investment Plans do not guarantee a profit and will
not protect you against loss in a declining market, they can be an excellent way
to invest for retirement, a home, educational expenses and other long-term
financial goals.
Certain restrictions and fees imposed by the plan custodian may also apply for
retirement accounts. Speak with your Waddell & Reed financial advisor for more
information.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Class A 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 Class A account
Minimum Frequency
$100 Monthly
22
<PAGE>
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Usually the Fund distributes net
investment income quarterly in March, June, September and December. Net capital
gains (and any net gains from foreign currency transactions) usually are
distributed in December.
Distribution Options. When you open an account, specify on your application how
you want to receive your distributions. The Fund offers three options:
1. Share Payment Option. Your dividends, capital gains and other distributions
with respect to a class will be automatically paid in additional shares of
the same class of the Fund. If you do not indicate a choice on your
application, you will be assigned this option.
2. Income-Earned Option. Your capital gains and other distributions with
respect to a class will be automatically paid in shares of the same class,
but you will be sent a check for each dividend distribution, however, if the
dividend distribution is less than ten dollars, the distribution will be
automatically paid in additional shares of the same class of the Fund.
3. Cash Option. You will be sent a check for your dividends, capital gains and
other distributions if the total distribution is equal to or greater than
ten dollars. If the distribution is less than ten dollars, it will be
automatically paid in additional shares of the same class of the Fund.
For retirement accounts, all distributions are automatically paid in Fund
shares.
Taxes
As with any investment, you should consider how your investment in the Fund will
be taxed. If your account is not a tax-deferred retirement account, you should
be aware of the following tax implications:
Taxes on distributions. Dividends from the Fund's investment company taxable
income generally are taxable to you as ordinary income whether received in cash
or paid in additional Fund shares. Distributions of the Fund's net capital
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or paid in additional Fund shares and regardless of the
23
<PAGE>
length of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains (if you are a noncorporate shareholder of the Fund) may
be taxable at different rates depending on how long the Fund held the assets
generating the gains, but generally are taxed at a maximum rate of 20%.
The Fund notifies you after each calendar year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that year.
A portion of the dividends paid by the Fund, whether received in cash or paid in
additional Fund shares, may be eligible for the dividends-received deduction
allowed to corporations. The eligible portion may not exceed the aggregate
dividends received by the Fund from U.S. corporations. However, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the Federal alternative
minimum tax.
Withholding. The Fund must withhold 31% of all dividends, capital gains
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate from dividends and capital gains
distributions also is required for shareholders subject to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than what you paid for the redeemed shares (which normally includes any
sales charge paid). An exchange of Fund shares for shares of any other fund in
the United Group generally will have similar tax consequences. However, special
rules apply when you dispose of Class A Fund shares through a redemption or
exchange within ninety days after your purchase and then reacquire Class A Fund
shares or acquire Class A shares of another fund in the United Group without
paying a sales charge due to the thirty-day reinvestment privilege or exchange
privilege. See "Your Account." In these cases, any gain on the disposition of
the original Class A Fund shares would be increased, or loss decreased, by the
amount of the sales charge you paid when those shares were acquired, and that
amount will increase the adjusted basis of the shares subsequently acquired. In
addition, if you purchase Fund shares within thirty days before or after
redeeming other Fund shares (regardless of class) at a loss, part
24
<PAGE>
or all of that loss will not be deductible and will increase the basis of the
newly purchased shares.
State and local income taxes. The portion of the dividends paid by the Fund
attributable to interest earned on its U.S. Government securities generally is
not subject to state and local income taxes, although distributions by the Fund
to its shareholders of net realized gains on the sale of those securities are
fully subject to those taxes. You should consult your tax adviser to determine
the taxability of dividends and other distributions by the Fund in your state
and locality.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; you will find
more information in the SAI. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
25
<PAGE>
The Management of the Fund
[graphic: oakleaf and acorns on triangle background]
Portfolio Management
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. WRIMCO and its predecessors have served as investment
manager to each of the registered investment companies in the United Group of
Mutual Funds, Waddell & Reed Funds, Inc. and Target/United Funds, Inc. since the
inception of the company. WRIMCO is located at 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
Cynthia P. Prince-Fox is primarily responsible for the management of the
portfolio of the Fund. Ms. Prince-Fox has held her Fund responsibilities since
February 1993. She is Vice President of WRIMCO, Vice President of the Fund and
Vice President of another investment company for which WRIMCO serves as
investment manager. From January 1993 to March 1998, Ms. Prince-Fox was Vice
President of, and a portfolio manager for, Waddell & Reed Asset Management
Company, a former affiliate of WRIMCO. Ms. Prince-Fox has served as the
portfolio manager for investment companies managed by WRIMCO since January 1993.
From 1983 to January, 1993 Ms. Prince-Fox served as an investment analyst for
WRIMCO.
Other members of WRIMCO's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to the Fund's investments.
Management Fee
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained in the SAI.
The management fee is payable by the Fund at the annual rates of: 0.70% of net
assets up to $1 billion,
26
<PAGE>
0.65% of net assets over $1 billion and up to $2 billion, 0.60% of net assets
over $2 billion and up to $3 billion, and 0.55% of net assets over $3 billion.
Prior to June 30, 1999 the management fee of the Fund was calculated by adding a
group fee to a specific fee. It was accrued and paid to WRIMCO daily. The
specific fee was computed on the Fund's net asset value as of the close of
business each day at the annual rate of .15 of 1% of its net assets. The group
fee was determined on the basis of the combined net asset values of all the
funds in the United Group and then allocated pro rata to the Fund based on its
relative net assets at the annual rates shown in the following table:
<TABLE>
<CAPTION>
Group Fee Rate
Group Net Asset Level Annual Group Fee Rate
(all dollars in millions) For Each Level
<S> <C>
From $0 to $750 .51 of 1%
From $750 to $1,500 .49 of 1%
From $1,500 to $2,250 .47 of 1%
From $2,250 to $3,000 .45 of 1%
From $3,000 to $3,750 .43 of 1%
From $3,750 to $7,500 .40 of 1%
From $7,500 to $12,000 .38 of 1%
Over $12,000 .36 of 1%
</TABLE>
Management fees for the fiscal year ended March 31, 1999 were 0.54% of the
Fund's average net assets.
27
<PAGE>
Financial Highlights
[graphic: oakleaf and acorns on triangle background]
The following information is to help you understand the financial performance of
the Fund's Class A* and Class Y shares for the fiscal periods shown. Certain
information reflects financial results for a single Fund share. "Total return"
shows how much your investment would have increased (or decreased) during each
period, assuming reinvestment of all dividends and distributions. This
information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended March 31, 1999, are included in the SAI, which is available upon request.
For a Class A share outstanding throughout each period.*
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MARCH 31,
Class A Per-Share Data
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 8.32 $ 7.57 $ 8.00 $ 6.95 6.89
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment
income 0.33 0.24 0.24 0.24 0.23
Net realized and
unrealized gain
on investments 0.04 1.58 0.22 1.35 0.20
---------------------------------------------------------------------------------------
Total from investment
operations 0.37 1.82 0.46 1.59 0.43
---------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.32) (0.24) (0.24) (0.23) (0.23)
From capital gains (0.40) (0.83) (0.65) (0.31) (0.14)
---------------------------------------------------------------------------------------
Total distributions (0.72) (1.07) (0.89) (0.54) (0.37)
---------------------------------------------------------------------------------------
Net asset value,
end of period $ 7.97 $ 8.32 $ 7.57 $ 8.00 $ 6.95
---------------------------------------------------------------------------------------
Class A Ratios/Supplemental Data
Total return** 3.38% 25.20% 5.88% 23.29% 6.39%
Net assets, end of
period (in millions)* $ 581 $ 599 $ 508 $ 502 $ 433
Ratio of expenses to
average net assets 0.99% 0.91% 0.93% 0.89% 0.89%
Ratio of net
investment income to
average net assets 2.68% 2.88% 3.01% 3.06% 3.37%
Portfolio turnover rate 50.68% 55.46% 40.29% 41.34% 41.30%
</TABLE>
*On August 29, 1995, Fund shares outstanding were designated Class A shares.
Per-share and share amounts have been adjusted retroactively to reflect the
200% stock dividend effected June 26, 1998.
**Total return calculated without taking into account the sales load deducted on
an initial purchase.
28
<PAGE>
For a Class Y share outstanding throughout each period.*
<TABLE>
<CAPTION>
Class Y Per-share Data
For the
For the fiscal year period
ended March 31, from 1/4/96**
---------------------------------- through
1999 1998 1997 3/31/96
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 8.33 $ 7.57 $ 8.00 $ 7.78
--------------------------------------
Income from investment operations:
Net investment
income 0.07 0.26 0.26 0.03
Net realized and
unrealized gain
on investments 0.32 1.58 0.21 0.25
--------------------------------------
Total from
investment
operations 0.39 1.84 0.47 0.28
--------------------------------------
Less Distributions:
From net
investment income (0.35) (0.26) (0.26) (0.06)
From capital gains (0.40) (0.82) (0.64) (0.00)
--------------------------------------
Total Distributions (0.75) (1.08) (0.90) (0.06)
--------------------------------------
Net asset value, end
of period $ 7.97 $ 8.33 $7.57 $ 8.00
--------------------------------------
Class Y Ratios/Supplemental Data
Total return 3.58% 25.43% 6.07% 3.53%
Net assets, end of
period (in millions) $ 1 $ 1.1 $ 6 $ 6
Ratio of expenses to
average net assets 0.81% 0.75% 0.75% 0.80%***
Ratio of net
investment income
to average net assets 3.32% 3.01% 3.20% 3.35%***
Portfolio turnover
rate 50.68% 55.46% 40.29% 41.34%***
</TABLE>
*Per-share and share amounts have been adjusted retroactively to reflect the
200%
stock dividend effected June 26, 1999.
*Commencement of operations.
***Annualized.
29
<PAGE>
This page intentionally left blank.
<PAGE>
United
Continental
Income Fund,
Inc.
[graphic: oakleaf and acorns on triangle background]
Custodian
UMB Bank, n.a.
Kansas City, Missouri
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts
Avenue, N. W.
Washington, D. C. 20036
Independent Auditors
Deloitte & Touche LLP
1010 Grand Avenue
Kansas City, Missouri
64106-2232
Investment Manager
Waddell & Reed
Investment
Management Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Underwriter
Waddell & Reed, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Shareholder Servicing Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Accounting Services Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
31
<PAGE>
[graphic: oakleaf and acorns on triangle background]
UNITED CONTINENTAL
INCOME FUND, INC.
You can get more information about the Fund in--
o its Statement of Additional Information (SAI) dated June 30, 1999, which
contains detailed information about the Fund, particularly its investment
policies and practices. You may not be aware of important information about
the Fund unless you read both the Prospectus and the SAI. The current SAI is
on file with the Securities and Exchange Commission (SEC) and it is
incorporated into this Prospectus by reference (that is, the SAI is legally
part of the Prospectus).
o its Annual and Semiannual Reports to Shareholders, which detail the Fund's
actual investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the year covered by the
report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the Fund
or Waddell & Reed, Inc. at the address and telephone number below. Copies of the
SAI, Annual and/or Semiannual reports may also be requested at
[email protected].
Information about the Fund (including its current SAI and most recent Annual and
Semiannual Reports) is available from the SEC's web site at http://www.sec.gov
and from the SEC's Public Reference Room in Washington, D.C. You can find out
about the operation of the Public Reference Room and applicable copying charges
by calling 1-800-SEC-0330.
The Fund's SEC file number is: 811-2008.
- --------------------------------------------------------------------------------
[logo: Waddell & Reed WADDELL & REED, INC.
Financial Services] 6300 Lamar Avenue, P. O. Box 29217
Shawnee Mission, Kansas, 66201-9217
(913) 236-2000, (800) 366-5465
NUP1004(6-99)
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
June 30, 1999
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a
prospectus. Investors should read this SAI in conjunction with the prospectus
("Prospectus") for the Class A shares and the Class Y shares of United
Continental Income Fund, Inc. (the "Fund") dated June 30, 1999, which may be
obtained from the Fund or its underwriter, Waddell & Reed, Inc., at the address
or telephone number shown above.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Performance Information .................................................................... 2
Investment Strategies, Policies and Practices............................................... 4
Investment Management and Other Services ................................................... 38
Purchase, Redemption and Pricing of Shares ................................................. 43
Directors and Officers ..................................................................... 59
Payments to Shareholders ................................................................... 64
Taxes ...................................................................................... 65
Portfolio Transactions and Brokerage ....................................................... 70
Other Information .......................................................................... 72
Financial Statements ....................................................................... 74
</TABLE>
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, diversified management company
organized as a Maryland corporation on December 18, 1969.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may, from
time to time, publish the Fund's total return information and/or performance
rankings in advertisements and sales materials.
Total Return
The total return is the overall change in the value of an investment
over a given period of time. An average annual total return quotation is
computed by finding the average annual compounded rates of return over the one-,
five-, and ten-year periods that would equate the initial amount invested to the
ending redeemable value. Standardized total return information is calculated by
assuming an initial $1,000 investment and, for Class A shares, deducting the
maximum sales load of 5.75%. All dividends and distributions are assumed to be
reinvested in shares of the applicable Class at net asset value for the class as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions on Class A shares. The formula used to
calculate the total return for a particular class of the Fund is
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for
the periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares 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, 1999, which is the most recent balance sheet included in this SAI, for
the periods shown were as follows:
With Without
Sales Load Sales Load
Deducted Deducted
One-year period from April 1, 1998 to
March 31, 1999: -2.57% 3.38%
Five-year period from April 1, 1994 to
March 31, 1999: 11.13% 12.45%
Ten-year period from April 1, 1989 to
March 31, 1999: 11.32% 11.98%
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 average annual total return quotations for Class Y shares as of
March 31, 1999, which is the most recent balance sheet included in this SAI, for
the periods shown were as follows:
One year period from April 1, 1998 to
March 31, 1999 3.58%
Period from January 4, 1996* to
March 31, 1999: 11.60%
*Date of inception.
The Fund may also quote unaveraged or cumulative total return for a
class which reflects the change in value of an investment in that class over a
stated period of time. Cumulative total 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 Composite Stock Price Index and the
Dow Jones Industrial Average. Performance information may be quoted numerically
or presented in a table, graph or other illustration. In connection with a
ranking, the Fund may provide additional information, such as the particular
category to which it related, the number of funds in the category, the criteria
upon which the ranking is based, and the effect of sales charges, fee waivers
and/or expense reimbursements.
All performance information that the Fund advertises or includes in
sales material is historical in nature and is not intended to represent or
guarantee future results. The value of the Fund's shares when redeemed may be
more or less than their original cost.
INVESTMENT STRATEGIES, POLICIES AND PRACTICES
This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and policies
the Fund's investment manager, Waddell & Reed Investment Management Company
("WRIMCO"), may employ and the types of instruments in which the Fund may
invest, in pursuit of the Fund's goals. A summary of the risks associated with
these instrument types and investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by the Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help the Fund achieve its goals. See "Investment
Restrictions and Limitations" for a listing of the fundamental and
non-fundamental (e.g., operating) investment restrictions and policies of the
Fund.
Securities - General
The Fund may invest in securities including common stock, preferred
stock, debt securities and convertible securities. Although common stocks and
other equity securities have a history of long-term growth in value, their
prices tend to fluctuate in the short term, particularly those of smaller
companies. The Fund may invest in preferred stock that is rated by an
established rating service or, if unrated, judged by WRIMCO to be of equivalent
quality. Debt securities have varying levels of sensitivity to changes in
interest rates and varying degrees of quality. As a general matter, however,
when interest rates rise, the values of fixed-rate securities fall and,
conversely, when interest rates fall, the values of fixed-rate securities rise.
Similarly, long-term bonds are generally more sensitive to interest rate changes
than shorter-term bonds.
Lower quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than high-quality securities and may decline
significantly in periods of general economic difficulty. The market for
lower-rated debt securities may be thinner and less active than that for
higher-rated debt securities, which can adversely affect the prices at which the
former are sold. Adverse publicity and changing investor perceptions may
decrease the values and liquidity of lower-rated debt securities, especially in
a thinly traded market. Valuation becomes more difficult and judgment plays a
greater role in valuing lower-rated debt securities than with respect to
securities for which more external sources of quotations and last sale
information are available. Since the risk of default is higher for lower-rated
debt securities, WRIMCO's research and credit analysis are an especially
important part of managing securities of this type held by the Fund. WRIMCO
continuously monitors the issuers of lower-rated debt securities in the Fund's
portfolio in an attempt to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments. The Fund may
choose, at its expense or in conjunction with others, to pursue litigation or
otherwise exercise its rights as a security holder to seek to protect the
interests of security holders if it determines this to be in the best interest
of the Fund's shareholders.
The Fund may invest in debt securities rated in any rating category of
the established rating services, including securities rated in the lowest
category (such as those rated D by Standard & Poor's ("S&P") and C by Moody's
Investor Services, Inc. ("MIS")). Debt securities rated D by S&P or C by MIS are
in payment default or are regarded as having extremely poor prospects of ever
attaining any real investment standing. Debt securities rated at least BBB by
S&P or Baa by MIS are considered to be investment grade debt securities.
Securities rated BBB or Baa may have speculative characteristics. In addition,
the Fund will treat unrated securities judged by WRIMCO to be of equivalent
quality to a rated security having that rating.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from time
to time, and the Fund may retain a portfolio security whose rating has been
changed.
The Fund may purchase debt securities whose principal amount at
maturity is dependent upon the performance of a specified equity security. The
issuer of such debt securities, typically an investment banking firm, is
unaffiliated with the issuer of the equity security to whose performance the
debt security is linked. Equity-linked debt securities differ from ordinary debt
securities in that the principal amount received at maturity is not fixed, but
is based on the price of the linked equity security at the time the debt
security matures. The performance of equity-linked debt securities depends
primarily on the performance of the linked equity security and may also be
influenced by interest rate changes. In addition, although the debt securities
are typically adjusted for diluting events such as stock splits, stock dividends
and certain other events affecting the market value of the linked equity
security, the debt securities are not adjusted for subsequent issuances of the
linked equity security for cash. Such an issuance could adversely affect the
price of the debt security. In addition to the equity risk relating to the
linked equity security, such debt securities are also subject to credit risk
with regard to the issuer of the debt security. In general, however, such debt
securities are less volatile than the equity securities to which they are
linked.
The Fund may invest in convertible securities. A convertible security
is a bond, debenture, note, preferred stock or other security that may be
converted into or exchanged for a prescribed amount of common stock of the same
or different issuer within a particular period of time at a specified price or
formula. Convertible securities generally have higher yields than common stocks
of the same or similar issuers, but lower yields than comparable nonconvertible
securities, are less subject to fluctuation in the value that the underlying
stock because they have fixed income characteristics, and provide the potential
for capital appreciation if the market price of the underlying common stock
increases.
The value of a convertible security is influenced by changes in
interest rates, with investment value declining as interest rates increase and
increasing as interest rates decline. The credit standing of the issuer and
other factors also may have an effect on the convertible security's investment
value.
The Fund may also invest in a type of convertible preferred stock that
pays a cumulative, fixed dividend that is senior to, and expected to be in
excess of, the dividends paid on the common stock of the issuer. At the
mandatory conversion date, the preferred stock is converted into not more than
one share of the issuer's common stock at the "call price" that was established
at the time the preferred stock was issued. If the price per share of the
related common stock on the mandatory conversion date is less than the call
price, the holder of the preferred stock will nonetheless receive only one share
of common stock for each share of preferred stock (plus cash in the amount of
any accrued but unpaid dividends). At any time prior to the mandatory conversion
date, the issuer may redeem the preferred stock upon issuing to the holder a
number of shares of common stock equal to the call price of the preferred stock
in effect on the date of redemption divided by the market value of the common
stock, with such market value typically determined one or two trading days prior
to the date notice of redemption is given. The issuer must also pay the holder
of the preferred stock cash in an amount equal to any accrued but unpaid
dividends on the preferred stock. This convertible preferred stock is subject to
the same market risk as the common stock of the issuer, except to the extent
that such risk is mitigated by the higher dividend paid on the preferred stock.
The opportunity for equity appreciation afforded by an investment in such
convertible preferred stock, however, is limited, because in the event the
market value of the issuer's common stock increases to or above the call price
of the preferred stock, the issuer may (and would be expected to) call the
preferred stock for redemption at the call price. This convertible preferred
stock is also subject to credit risk with regard to the ability of the issuer to
pay the dividend established upon issuance of the preferred stock. Generally,
convertible preferred stock is less volatile than the related common stock of
the issuer.
Specific Securities and Investment Practices
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities ("U.S. Government securities") are high quality debt
instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date they
are issued), Treasury Notes (which have maturities of one to ten years) and
Treasury Bonds (which generally have maturities of more than 10 years). All such
Treasury securities are backed by the full faith and credit of the United
States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (formerly, the Federal National Mortgage Association), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by Fannie Mae, are supported only by
the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United States, the
owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment.
U.S. Government securities may include mortgage-backed securities
issued by U.S. Government agencies or instrumentalities including, but not
limited to, Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed
securities include pass-through securities, participation certificates and
collateralized mortgage obligations. See "Mortgage-Backed and Asset-Backed
Securities." Timely payment of principal and interest on Ginnie Mae
pass-throughs is guaranteed by the full faith and credit of the United States.
Freddie Mac and Fannie Mae are both instrumentalities of the U.S. Government,
but their obligations are not backed by the full faith and credit of the United
States. It is possible that the availability and the marketability (i.e.,
liquidity) of the securities discussed in this section could be adversely
affected by actions of the U.S. Government to tighten the availability of its
credit.
Money Market Instruments
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government Securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
Zero Coupon Securities
Zero coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or that specify a
future date when the securities begin to pay current interest; instead, they are
sold at a deep discount from their face value and are redeemed at face value
when they mature. Because zero coupon securities do not pay current income,
their prices can be very volatile when interest rates change and generally are
subject to greater price fluctuations in response to changing interest rates
than prices of comparable maturities that make current distributions of interest
in cash.
The Fund may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds, zero coupon bonds of corporate issuers and other
securities that are issued with original issue discount ("OID"). The Federal tax
law requires that a holder of a security with OID accrue a ratable portion of
the OID on the security as income each year, even though the holder may receive
no interest payment on the security during the year. Accordingly, although the
Fund will receive no payments on its zero coupon securities prior to their
maturity or disposition, it will have current income attributable to those
securities and includable in the dividends paid to its shareholders. Those
dividends will be paid from the Fund's cash assets or by liquidation of
portfolio securities, if necessary, at a time when the Fund otherwise might not
have done so.
A broker-dealer creates a derivative zero by separating the interest
and principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating 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 and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent direct
or indirect participations in, or are secured by and payable from, mortgage
loans secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund may
invest include mortgage-backed securities issued or guaranteed as to the payment
of principal and interest (but not as to market value) by Ginnie Mae, Fannie Mae
or Freddie Mac. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities. Payments of principal and interest (but not the market value)
of such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or
indirectly, by the U.S. Government or one of its agencies or instrumentalities,
or they may be issued without any government guarantee of the underlying
mortgage assets but with some form of non-government credit enhancement. These
credit enhancements do not protect investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage lenders or other
financial institutions. Other types of mortgage-backed securities will likely be
developed in the future, and the Fund may invest in them if WRIMCO determines
they are consistent with the Fund's goals and investment policies.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities are created when a U.S. Government agency or a financial institution
separates the interest and principal components of a mortgage-backed security
and sells them as individual securities. The holder of the "principal-only"
security ("PO") receives the principal payments made by the underlying
mortgage-backed security, while the holder of the "interest-only" security
("IO") receives interest payments from the same underlying security.
For example, interest-only ("IO") classes are entitled to receive all
or a portion of the interest, but none (or only a nominal amount) of the
principal payments, from the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, then
the total amount of interest allocable to the IO class, and therefore the yield
to investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is government guaranteed or considered to be of the highest quality.
Conversely, principal-only ("PO") classes are entitled to receive all or a
portion of the principal payments, but none of the interest, from the underlying
mortgage assets. PO classes are purchased at substantial discounts from par, and
the yield to investors will be reduced if principal payments are slower than
expected. IOs, POs and other CMOs involve special risks, and evaluating them
requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans or the financial
institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Changes in the rate or "speed" of these payments can
cause the value of the mortgage backed securities to fluctuate rapidly. However,
these effects may not be present, or may differ in degree, if the mortgage loans
in the pools have adjustable interest rates or other special payment terms, such
as a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics, such
as yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
reduced. These changes can result in volatility in the market value and in some
instances reduced liquidity, of the CMO class.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and may carry
rights that permit holders to demand payment of the unpaid principal balance
plus accrued interest from the issuers or certain financial intermediaries on
dates prior to their stated maturities. Floating rate securities have interest
rates that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market value for the
instrument that approximates its par value.
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual restrictions or resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, or in a registered
public offering. Where registration is required, the Fund may be obligated to
pay all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities in
which the Fund seeks to invest need not be listed or admitted to trading on a
foreign or domestic exchange and may be less liquid than listed securities.
Certain restricted securities, e.g., Rule 144A securities may be determined to
be liquid in accordance with guidelines adopted by the Board of Directors. See
"Illiquid Investments."
Foreign Securities and Currencies
The Fund may invest in the securities of foreign issuers, including
depositary receipts. In general, depositary receipts are securities convertible
into and evidencing ownership of securities of foreign corporate issuers,
although depositary receipts may not necessarily be denominated in the same
currency as the securities into which they may be converted. American depositary
receipts, in registered form, are dollar-denominated receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. International depositary receipts and European depositary receipts,
in bearer form, are foreign receipts evidencing a similar arrangement and are
designed for use by non-U.S. investors and traders in non-U.S. markets. Global
depositary receipts are designed to facilitate the trading of securities of
foreign issuers by U.S. and non-U.S. investors and traders.
WRIMCO believes that there are investment opportunities as well as
risks in investing in foreign securities. Individual foreign economies may
differ favorably or unfavorably from the U.S. economy or each other in such
matters as gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Individual foreign
companies may also differ favorably or unfavorably from domestic companies in
the same industry. Foreign currencies may be stronger or weaker than the U.S.
dollar or than each other. Thus, the value of securities denominated in or
indexed to foreign currencies, and of dividends and interest from such
securities, can change significantly when foreign currencies strengthen or
weaken relative to the U.S. dollar. WRIMCO believes that the Fund's ability to
invest its assets abroad might enable it to take advantage of these differences
and strengths where they are favorable.
However, foreign securities and foreign currencies involve additional
significant risks, apart from the risks inherent in U.S. investments. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial conditions and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be greater possibility of
default by foreign governments or government-sponsored enterprises. Investments
in foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
These is no assurance that WRIMCO will be able to anticipate these potential
events or counter their effects.
The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is likely
to experience long-term gross domestic product growth above that expected to
occur in the United States, the United Kingdom, France, Germany, Italy, Japan
and Canada. Developing countries may have relatively unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities.
Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The Fund may purchase and sell foreign currency and invest in foreign
currency deposits, and may enter into forward currency contracts, as described
in the Prospectus and this SAI. The Fund may incur a transaction charge in
connection with the exchange of currency. Currency conversion involves dealer
spreads and other costs, although commissions are not usually charged. See
"Options, Futures and Other Strategies - Forward Currency Contracts" below.
Lending Securities
Securities loans may be made on a short-term or long-term basis for the
purpose of increasing the Fund's income. If the Fund lends securities, the
borrower pays the Fund an amount equal to the dividends or interest on the
securities that the Fund would have received if it had not lent the securities.
The Fund also receives additional compensation. The Fund makes loans of its
securities only to parties deemed by WRIMCO to be creditworthy.
Any securities loans that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). Under the
present Guidelines, the collateral must consist of cash, U.S. Government
securities or bank letters of credit, at least equal in value to the market
value of the securities lent on each day that the loan is outstanding. If the
market value of the lent securities exceeds the value of the collateral, the
borrower must add more collateral so that it at least equals the market value of
the securities lent. If the market value of the securities decreases, the
borrower is entitled to return of the excess collateral.
There are two methods of receiving compensation for making loans. The
first is to receive a negotiated loan fee from the borrower. This method is
available for all three types of collateral. The second method, which is not
available when letters of credit are used as collateral, is for the Fund to
receive interest on the investment of the cash collateral or to receive interest
on the U.S. Government securities used as collateral. Part of the interest
received in either case may be shared with the borrower.
The letters of credit that the Fund may accept as collateral are
agreements by banks (other than the borrowers of the Fund's securities), entered
into at the request of the borrower and for its account and risk, under which
the banks are obligated to pay to the Fund, while the letter is in effect,
amounts demanded by the Fund if the demand meets the terms of the letter. The
Fund's 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 New York Stock
Exchange ("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. As a
fundamental policy, the Fund will not enter into a repurchase transaction that
will cause more than 10% of its net assets to be invested in illiquid
investments, which include repurchase agreements not terminable within seven
days. See "Illiquid Investments." A repurchase agreement is an instrument under
which the Fund purchases a security and the seller (normally a commercial bank
or broker-dealer) agrees, at the time of purchase, that it will repurchase the
security at a specified time and price. The amount by which the resale price is
greater than the purchase price reflects an agreed-upon market interest rate
effective for the period of the agreement. The return on the securities subject
to the repurchase agreement may be more or less than the return on the
repurchase agreement.
The majority of the repurchase transactions 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. In other
words, the value of the underlying securities, which will be held by the Fund's
custodian bank or by a third party that qualifies as a custodian under Section
17(f) of the Investment Company Act of 1940, as amended (the "1940 Act"), is
and, during the entire term of the agreement, will remain at least equal to the
value of the loan, including the accrued interest earned thereon. Repurchase
agreements are entered into only with those entities approved by WRIMCO on the
basis of criteria established by the Board of Directors.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase any securities in which it may invest on a
when-issued or delayed-delivery basis or sell them on a delayed-delivery basis.
In either case payment and delivery for the securities take place at a future
date. The securities so purchased or sold by the Fund are subject to market
fluctuation; their value may be less or more when delivered than the purchase
price paid or received. When purchasing securities on a when issued or
delayed-delivery basis, the Fund assumes the rights and risks of ownership,
including the risk of price and yield fluctuations. No interest accrues to the
Fund until delivery and payment is completed. When the Fund makes a commitment
to purchase securities on a when-issued or delayed-delivery basis, it will
record the transaction and thereafter reflect the value of the securities in
determining its net asset value per share. When the Fund sells a security on a
delayed-delivery basis, the Fund does not participate in further gains or losses
with respect to the security. When the Fund makes a commitment to sell
securities on a delayed-delivery basis, it will record the transaction and
thereafter value the securities at the sales price in determining the Fund's net
asset value per share. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity, or could suffer a loss.
Ordinarily the Fund purchases securities on a when-issued or
delayed-delivery basis with the intention of actually taking delivery of the
securities. However, before the securities are delivered to the Fund and before
it has paid for them (the "settlement date"), the Fund could sell the securities
if WRIMCO decided it was advisable to do so for investment reasons. The Fund
will hold aside or segregate cash or liquid assets, other than those purchased
on a when-issued or delayed-delivery basis, at least equal to the amount it will
have to pay on the settlement date; these other securities may, however, be sold
at or before the settlement date to pay the purchase price of the when-issued or
delayed-delivery securities.
Investment Company Securities
The Fund may purchase securities of closed-end investment companies. As
a shareholder in an investment company, the Fund would bear its pro rata share
of that investment company's expenses, which could result in duplication of
certain fees, including management and administrative fees.
Illiquid Investments
Illiquid investments are investments that cannot be sold or otherwise
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Investments currently
considered to be illiquid include:
(i) repurchase agreements not terminable within seven days;
(ii) securities for which market quotations are not readily available;
(iii) over-the-counter ("OTC") options and their underlying collateral;
(iv) bank deposits, unless they are payable at principal plus accrued
interest on demand or within seven days after demand; (v) restricted
securities not determined to be liquid pursuant to guidelines
established by the Fund's Board of Directors;
(vi) securities involved in swap, cap, collar and floor transactions; and
(vii) non-government stripped fixed-rate mortgage-backed securities.
The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
If through a change in values, net assets, or other circumstances, the
Fund were in a position where more than 10% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
Indexed Securities
The Fund may purchase securities the value of which varies in relation
to the value of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators, subject to its
operating policy regarding derivative instruments. Indexed securities typically,
but not always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or statistic.
The performance of indexed securities depends to a great extent on the
performance of the security, currency or other instrument to which they are
indexed and may also be influenced by interest rate changes in the United States
and abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security and their values may decline
substantially if the issuer's creditworthiness deteriorates. Indexed securities
may be more volatile than the underlying investments.
Currency-indexed securities, for example, typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government agencies. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
Warrants and Rights
Warrants are options to purchase equity securities at specific prices
valid for a specific period of time. Their prices do not necessarily move
parallel to the prices of the underlying securities. Rights are similar to
warrants, but normally have a short duration and are distributed directly by the
issuer to its shareholders. Rights and warrants have no voting rights, receive
no dividends and have no rights with respect to the assets of the issuer.
Warrants and rights are highly volatile and, therefore, more susceptible to a
sharp decline in value than the underlying security might be. They are also
generally less liquid than an investment in the underlying shares.
Options, Futures and Other Strategies
General. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, forward currency
contracts, swaps, caps, collars, floors, indexed securities and other derivative
instruments (collectively, "Financial Instruments") to attempt to enhance income
or yield or to attempt to hedge the Fund's investments. The strategies described
below may be used in an attempt to manage the Fund's foreign currency exposure
as well as other risks of the Fund's investments that can affect fluctuation in
its net asset value.
Generally, the Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, the Fund will only purchase or sell
a particular Financial Instrument if the Fund is authorized to invest in the
type of asset by which the return on, or value of, the Financial Instrument is
primarily measured. Since the Fund is authorized to invest in foreign
securities, it may purchase and sell foreign currency derivatives.
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential declines in the value of one or
more investments held in the Fund's portfolio. Thus, in a short hedge, the Fund
takes a position in a Financial Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that the Fund intends to acquire.
Thus, in a long hedge, the Fund takes a position in a Financial Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Financial Instruments on indices, in
contrast, generally are used to attempt to hedge against price movements in
market sectors in which the Fund has invested or expects to invest. Financial
Instruments on debt securities may be used to hedge either individual securities
or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations
of the Securities and Exchange Commission (the "SEC"), the several exchanges
upon which they are traded and the Commodity Futures Trading Commission (the
"CFTC"). In addition, the Fund's ability to use Financial Instruments will be
limited by tax considerations.
See "Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with the Fund's goals and permitted by the
Fund's investment limitations and applicable regulatory authorities. The Fund
might not use any of these strategies, and there can be no assurance that any
strategy used will succeed. The Fund's Prospectus or SAI will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general these
techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities, currency and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy will succeed and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Financial Instrument and price movements of the
investments being hedged. For example, if the value of a Financial Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements 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 accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If the Fund were unable to close out
its positions in such Financial Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time.
(5) The Fund's ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction (the "counterparty") to enter
into a transaction closing out the position. Therefore, there is no assurance
that any position can be closed out at a time and price that is favorable to the
Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies or other options, futures
contracts or forward contracts, or (2) cash and liquid assets with a value,
marked-to-market daily, sufficient to cover its potential obligations to the
extent not covered as provided in (1) above. The Fund will comply with SEC
guidelines regarding cover for these instruments and will, if the guidelines so
require, set aside cash or liquid assets in an account with its custodian in the
prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover or accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon price
during the option period. A put option gives the purchaser the right to sell,
and obligates the writer to buy, the underlying investment at the agreed-upon
price during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or call options
can enable the Fund to enhance income or yield by reason of the premiums paid by
the purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security or
currency appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Fund will
be obligated to sell the security or currency at less than its market value. If
the call option is an OTC option, the securities or other assets used as cover
would be considered illiquid to the extent described under "Illiquid
Investments."
Writing put options can serve as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be obligated
to purchase the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
A type of put that the Fund may purchase is an "optional delivery
standby commitment," which is entered into by parties selling debt securities to
the Fund. An optional delivery standby commitment gives the Fund the right to
sell the security back to the seller on specified terms. This right is provided
as an inducement to purchase the security.
Risks of Options on Securities. Options offer large amounts of
leverage, which will result in the Fund's net asset value being more sensitive
to changes in the value of the related instrument. The Fund may purchase or
write both exchange-traded and OTC options. Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between the Fund and its counterparty (usually a securities dealer or a bank)
with no clearing organization guarantee. Thus, when the Fund purchases an OTC
option, it relies on the counterparty from whom it purchased the option to make
or take delivery of the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating directly
with the counterparty, or by a transaction in the secondary market if any such
market exists. There can be no assurance that the Fund will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, the Fund might be unable to close
out an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
Options On Indices. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple (the
"multiplier"), which determines the total dollar value for each point of such
difference. When the Fund buys a call on an index, it pays a premium and has the
same rights as to such call as are indicated above. When the Fund buys a put on
an index, it pays a premium and has the right, prior to the expiration date, to
require the seller of the put, upon the Fund's exercise of the put, to deliver
to the Fund an amount of cash if the closing level of the index upon which the
put is based is less than the exercise price of the put, which amount of cash is
determined by the multiplier, as described above for calls. When the Fund writes
a put on an index, it receives a premium and the purchaser of the put has the
right, prior to the expiration date, to require the Fund to deliver to it an
amount of cash equal to the difference between the closing level of the index
and the exercise price times the multiplier if the closing level is less than
the exercise price.
Risks of Options on Indices. The risks of investment in options on
indices may be greater than options on securities. Because index options are
settled in cash, when the Fund writes a call on an index it cannot provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. The Fund can offset some of the risk of writing a call
index option by holding a diversified portfolio of securities similar to those
on which the underlying index is based. However, the Fund cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same securities as
underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as 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 securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size and
strike price, the terms of OTC options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Fund great flexibility to
tailor the option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
Generally, OTC foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
Futures Contracts and Options on Futures Contracts. The purchase of
futures contracts or call options on futures contracts can serve as a long
hedge, and the sale of futures or the purchase of put options on futures can
serve as a short hedge. Writing call options on futures contracts can serve as a
limited short hedge, using a strategy similar to that used for writing call
options on securities or indices. Similarly, writing put options on futures
contracts can serve as a limited long hedge.
Futures contracts and options on futures contracts can also be purchased and
sold to attempt to enhance income or yield.
In addition, futures contract strategies can be used to manage the
average duration of the Fund's fixed-income portfolio. If WRIMCO wishes to
shorten the average duration of the Fund's fixed-income portfolio, the Fund may
sell a debt futures contract or a call option thereon, or purchase a put option
on that futures contract. If WRIMCO wishes to lengthen the average duration of
the Fund's fixed-income portfolio, the Fund may buy a debt futures contract or a
call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on
a futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option or to maintain cash or
liquid assets in an account.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to differences in the natures of those markets, are subject to the
following factors which may create distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal 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 rate, currency exchange rate or stock market trends by WRIMCO may still
not result in a successful transaction. WRIMCO may be incorrect in its
expectations as to the extent of various interest rate, currency exchange rate
or stock market movements or the time span within which the movements take
place.
Index Futures. The risk of imperfect correlation between movements in
the price of an index futures and movements in the price of the securities that
are the subject of the hedge increases as the composition of the Fund's
portfolio diverges from the securities included in the applicable index. The
price of the index futures may move more than or less than the price of the
securities being hedged. If the price of the index futures moves less than the
price of the securities that are the subject of the hedge, the hedge will not be
fully effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of the securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase
in the price of securities before the Fund is able to invest in them in an
orderly fashion, it is possible that the market may decline instead. If the Fund
then concludes not to invest in them at that time because of concern as to
possible further market decline or for other reasons, it will realize a loss on
the futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case other than for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums required to establish those
positions (excluding the amount by which options are "in-the-money" at the time
of purchase) will not exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and unrealized losses on
any contracts the Fund has entered into. (In general, a call option on a futures
contract is "in-the-money" if the value of the underlying futures contract
exceeds the strike, i.e., exercise, price of the call; a put option on a futures
contract is "in-the-money" if the value of the underlying futures contract is
exceeded by the strike price of the put.) This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
Foreign Currency Hedging Strategies -- Special Considerations. The Fund
may use options and futures contracts on foreign currencies (including the
Euro), as described above, and forward currency contracts, as described below,
to attempt to hedge against movements in the values of the foreign currencies in
which the Fund's securities are denominated or to attempt to enhance income or
yield. Currency hedges can protect against price movements in a security that
the Fund owns or intends to acquire that are attributable to changes in the
value of the currency in which it is denominated. Such hedges do not, however,
protect against price movements in the securities that are attributable to other
causes.
The Fund might seek to hedge against changes in the value of a
particular currency when no Financial Instruments on that currency are available
or such Financial Instruments are more expensive than certain other Financial
Instruments. In such cases, the Fund may seek to hedge against price movements
in that currency by entering into transactions using Financial Instruments on
another currency or a basket of currencies, the values of which WRIMCO believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Financial Instrument
will not correlate perfectly with movements in the price of the currency subject
to the hedging transaction is magnified when this strategy is used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.
Settlement of transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
Forward Currency Contracts. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time of the forward
currency contract. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
Such transactions may serve as long hedges; for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges; for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security,
dividend or interest payment denominated in a foreign currency.
The Fund may also use forward currency contracts to hedge against a
decline in the value of existing investments denominated in foreign currency.
For example, if the Fund owned securities denominated in Euros, it could enter
into a forward currency contract to sell Euros in return for U.S. dollars to
hedge against possible declines in the Euro's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the Euro. This type of hedge,
sometimes referred to as a "proxy hedge," could offer advantages in terms of
cost, yield or efficiency, but generally would not hedge currency exposure as
effectively as a simple hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.
The Fund also may use forward currency contracts to attempt to enhance
income or yield. The Fund could use forward currency contracts to increase its
exposure to foreign currencies that WRIMCO believes might rise in value relative
to the U.S. dollar, or shift its exposure to foreign currency fluctuations from
one country to another. For example, if the Fund owned securities denominated in
a foreign currency and WRIMCO believed that currency would decline relative to
another currency, it might enter into a forward currency contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second foreign currency.
The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When the Fund enters into a forward currency contract, it relies on
the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in an account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the flexibility to enter into such forward currency contracts
when it determines that the best interests of the Fund will be served.
Successful use of forward currency contracts depends on WRIMCO's skill
in analyzing and predicting currency values. Forward currency contracts may
substantially change the Fund's exposure to changes in currency exchange rates
and could result in losses to the Fund if currencies do not perform as WRIMCO
anticipates. There is no assurance that WRIMCO's use of forward currency
contracts will be advantageous to the Fund or that WRIMCO will hedge at an
appropriate time.
Combined Positions. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Turnover. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate. Once
the Fund has received an exercise notice on an option it has written, it cannot
effect a closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed-rate payments. The purchase of a cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
value, to receive payments on a notional principal amount from the party selling
the cap. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling the floor. A collar combines
elements of buying a cap and selling a floor.
Swap agreements, including caps, collars and floors, can be
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors. Depending on their structure,
swap agreements may increase or decrease the overall volatility of the Fund's
investments and its share price and yield because, and to the extent, these
agreements affect the Fund's exposure to long- or short-term interest rates (in
the United States or abroad), foreign currency values, mortgage-backed security
values, corporate borrowing rates or other factors such as security prices or
inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to exchange
payments in U.S. dollars for payments in foreign currency, the swap agreement
would tend to decrease the Fund's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options.
The creditworthiness of firms with which the Fund enters into swaps,
caps or floors will be monitored by WRIMCO in accordance with procedures adopted
by the Fund's Board of Directors. If a firm's creditworthiness declines, the
value of the agreement would be likely to decline, potentially resulting in
losses. If a default occurs by the other party to such transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction.
The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap will be accrued on a daily basis and
an amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such account with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that are written by the Fund. WRIMCO and the Fund believe that such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions. The Fund understands that the position of the SEC is that assets
involved in swap transactions are illiquid and are, therefore, subject to the
limitations on investing in illiquid securities.
Investment Restrictions and Limitations
Certain of the Fund's investment restrictions and other limitations are
described in this SAI. The following are the Fund's fundamental investment
limitations set forth in their entirety, which, like the Fund's goals and the
types of securities in which the Fund may invest, cannot be changed without
shareholder approval. For this purpose, shareholder approval means the approval,
at a meeting of Fund shareholders, by the lesser of (1) the holders of 67% or
more of the Fund's shares represented at the meeting, if more than 50% of the
Fund's outstanding shares are present in person or by proxy or (2) more than 50%
of the Fund's outstanding shares. The Fund may not:
(i) Purchase or sell physical commodities; however, this policy
shall not prevent the Fund from purchasing and selling foreign
currency, futures contracts, options, forward contracts,
swaps, caps, collars, floors and other financial instruments;
(ii) Buy real estate nor any nonliquid interests in real estate
investment trusts;
(iii) Buy shares of other investment companies that redeem their
shares; the Fund can buy shares of investment companies that
do not redeem their shares if it does so in a regular
transaction in the open market and then does not have more
than one tenth (i.e., 10%) of its total assets in these
shares. The Fund may also buy 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
and other obligations consistent with its goals and its other
investment policies and restrictions; it can also lend its
portfolio securities to the extent allowed, and in accordance
with the requirements under the 1940 Act, or enter into
repurchase agreements (see "Repurchase Agreements" above);
(v) Invest for the purpose of exercising control or management of
other companies;
(vi) Participate on a joint, or a joint and several, basis in any
trading account in any securities;
(vii) Sell securities short (unless it owns or has the right to
obtain securities equivalent in kind and amount to the
securities sold short) or purchase securities on margin,
except that (1) this policy does not prevent the Fund from
entering into short positions in foreign currency, futures
contracts, options, forward contracts, swaps, caps, collars,
floors and other financial instruments, (2) the Fund may
obtain such short-term credits as are necessary for the
clearance of transactions, and (3) the Fund may make margin
payments in connection with futures contracts, options,
forward contracts, swaps, caps, collars, floors and other
financial instruments;
(viii) Engage in the underwriting of securities, that is, the selling
of securities for others;
(ix) Borrow for investment purposes, that is, to purchase
securities. The Fund may borrow money from banks as a
temporary measure or for extraordinary or emergency purposes
but only up to 5% of its total assets;
(x) With respect to 75% of its total assets, purchase securities
of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act), if immediately after
and as a result of such purchase (a) the value of the holdings
of the Fund in the securities of such issuer exceeds 5% of the
value of the Fund's total assets, or (b) the Fund owns more
than 10% of the outstanding voting securities of such issuer;
(xi) 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;
(xii) Issue senior securities;
(xiii) Purchase a security if, as a result, more than 10% of its net
assets would consist of illiquid investments; or
(xiv) Buy real estate not any nonliquid interest in real estate
investment trusts.
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval:
(i) The Fund does not intend to invest in non-investment grade
debt if, as a result of such investment, more than 5% of its
total assets would consist of such investments.
(ii) The Fund will normally have less that 10% of its total assets
invested in foreign securities.
(iii) The Fund does not currently intend to invest more than 5% of
its assets in the securities of other investment companies.
(iv) The Fund does not currently intend to purchase the securities
of any issuer (other than securities issued or guaranteed by
domestic or foreign governments or political subdivisions
thereof) if, as a result, more than 15% of its total assets
would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three
years of continuous operation. This restriction does not apply
to any obligations issued or guaranteed by the U.S. government
or a state or local government authority, or their respective
instrumentalities, or to collateralized mortgage obligations,
other mortgage-related securities, asset-backed securities,
indexed securities or OTC derivative instruments.
An investment policy or limitation that states a maximum percentage of
the Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year and
dividing it by the monthly average of the market value of such securities during
the year, excluding certain short-term securities. The Fund's turnover rate may
vary greatly from year to year as well as within a particular year and may be
affected by cash requirements for the redemption of its shares.
The portfolio turnover rate for the common stock portion of the Fund's
portfolio for the fiscal year ended March 31, 1999, was 53.96%, while the rate
for the remainder of the portfolio was 9.27%. The Fund's overall portfolio
turnover for the fiscal years ended March 31, 1999 and 1998 was 50.68% and
55.46%, 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.
Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly
owned subsidiary of Waddell & Reed Financial, Inc., a publicly held company. The
address of these companies is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
Waddell & Reed, Inc. and its predecessors served as investment manager
to each of the registered investment companies in the United Group of Mutual
Funds, except United Asset Strategy Fund, Inc., since 1940 or the company's
inception date, whichever was later, and to Target/United Funds, Inc. since that
fund's inception, until January 8, 1992, when it assigned its duties as
investment manager for these funds (and the related professional staff) to
WRIMCO. WRIMCO has also served as investment manager for Waddell & Reed Funds,
Inc. since its inception in September 1992 and United Asset Strategy Fund, Inc.
since it commenced operations in March 1995. Waddell & Reed, Inc. serves as
principal underwriter for the investment companies in the United Group of Mutual
Funds and Waddell & Reed Funds, Inc. and acts as principal underwriter and
distributor for variable life insurance and variable annuity policies issued by
United Investors Life Insurance Company for which Target/United Funds, Inc. is
the underlying investment vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund
and Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell &
Reed, Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund
and the Agent, the Agent provides the Fund with bookkeeping and accounting
services and assistance, including maintenance of the Fund's records, pricing of
the Fund's shares, and preparation of prospectuses for existing shareholders,
proxy statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Board of Directors
without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the
Fund pays WRIMCO a fee as described in the Prospectus. The management fees paid
by the Fund to WRIMCO during the Fund's fiscal years ended March 31, 1999, 1998
and 1997 were $3,199,679, $3,092,587 and $2,843,556, respectively.
For purposes of calculating the daily fee, the Fund does not include
money owed to it by Waddell & Reed, Inc. for shares which it has sold but not
yet paid to the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, with respect to Class A
shares, the Fund pays the Agent a monthly fee of $1.3125 for each shareholder
account that was in existence at any time during the prior month, plus $0.30 for
each account on which a dividend or distribution, of cash or shares, had a
record date in that month. For Class Y shares, the Fund pays the Agent a monthly
fee equal to one-twelfth of .15 of 1% of the average daily net assets of that
class for the preceding month. The Fund also pays certain out-of-pocket expenses
of the Agent, including long distance telephone communications costs, microfilm
and storage costs for certain documents, forms, printing and mailing costs, and
costs of legal and special services not provided by Waddell & Reed, Inc., WRIMCO
or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a
monthly fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each 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, 1999, 1998
and 1997 were $70,000, $68,333 and $60,000, respectively.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement are
described above. Waddell & Reed, Inc. and affiliates pay the Fund's Directors
and officers who are affiliated with WRIMCO and its affiliates. The Fund pays
the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The aggregate dollar amounts of
underwriting commissions for Class A shares for the fiscal years ended March 31,
1999, 1998 and 1997 were $1,384,658, $1,172,629 and $1,174,128, respectively.
The amounts retained by Waddell & Reed, Inc. for each fiscal year were $583,957,
$496,034 and $503,864, respectively.
No portion of the sales charge is reallowed to dealers. A major portion
of the sales charge for Class A shares is paid to financial advisors and
managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may compensate its
financial advisors as to purchases for which there is no sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under a Distribution and Service Plan for Class A shares (the "Plan")
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay
Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed .25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with the distribution of the Class A shares, the service
and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its registered
representatives and sales managers (sales force) unless it elects, which is not
currently contemplated for Class A shares, to make distribution of shares also
through other broker-dealers. In distributing shares through its sales force,
Waddell & Reed, Inc. will pay commissions and incentives to the sales force at
or about the time of sale and will incur other expenses including costs for
prospectuses, sales literature, advertisements, sales office maintenance,
processing of orders and general overhead with respect to its efforts to
distribute the Fund's shares. The Plan permits Waddell & Reed, Inc. to receive
reimbursement for these Class A-related distribution activities through the
distribution fee, subject to the limit contained in the Plan. The Plan permits
Waddell & Reed, Inc. to be reimbursed for amounts it expends in compensating,
training and supporting registered financial advisors, sales managers and/or
other appropriate personnel in providing personal services to Class A
shareholders of the Fund and/or maintaining Class A shareholder accounts;
increasing services provided to Class A shareholders of the Fund by office
personnel located at field sales offices; engaging in other activities useful in
providing personal service to Class A shareholders of the Fund and/or
maintenance of Class A shareholder accounts; and in compensating broker-dealers
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 distribution and service
fees by the Fund with respect to Class A shares for the fiscal year ended March
31, 1999 were $67,689 and 1,394,736, respectively. To the extent that Waddell &
Reed, Inc. incurs expenses for which reimbursement may be made under the Plan
that relate to distribution and service activities also involving another fund
in the United Group of Funds or Waddell & Reed Funds, Inc., Waddell & Reed, Inc.
typically determines the amount attributable to the Fund's expenses under the
Plan on the basis of a combination of the respective classes' relative net
assets and number of shareholder accounts.
The only Directors or interested persons, as defined in the 1940 Act,
of the Fund who have a direct or indirect financial interest in the operation of
the Plan are the officers and Directors who are also officers of either Waddell
& Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. The Plan is
anticipated to benefit the Fund and its Class A shareholders through Waddell &
Reed, Inc.'s activities not only to distribute the Class A shares of the Fund
but also to provide personal services to Class A shareholders and thereby
promote the maintenance of their accounts with the Fund. The Fund anticipates
that Class A shareholders may benefit to the extent that Waddell & Reed's
activities are successful in increasing the assets of the Fund, through
increased sales or reduced redemptions, or a combination of these, and reducing
a Class A shareholder's share of Fund and Class A expenses. Increased Fund
assets may also provide greater resources with which to pursue the goal of the
Fund. Further, continuing sales of Class A shares may also reduce the likelihood
that it will be necessary to liquidate portfolio securities, in amounts or at
times that may be disadvantageous to the Fund, to meet redemption demands. In
addition, the Fund anticipates that the revenues from the Plan will provide
Waddell & Reed, Inc. with greater resources to make the financial commitments
necessary to continue to improve the quality and level of services to the Fund
and Class A shareholders. The Plan was approved by the Fund's Board of
Directors, including the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operations of the
Plan or any agreement referred to in the Plan (hereafter, the "Plan Directors").
The Plan was also approved by the affected shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc.
will provide to the Directors of the Fund at least quarterly, and the Directors
will review, a report of amounts expended under the Plan and the purposes for
which such expenditures were made, (ii) the Plan will continue in effect only so
long as it is approved at least annually, and any material amendments thereto
will be effective only if approved, by the Directors including the Plan
Directors acting in person at a meeting called for that purpose, (iii) amounts
to be paid by the Fund under the Plan may not be materially increased without
the vote of the holders of a majority of the outstanding Class A shares of the
Fund, and (iv) while the Plan remains in effect, the selection and nomination of
the Directors who are Plan Directors will be committed to the discretion of the
Plan Directors.
Custodial and Auditing Services
The Fund's Custodian is UMB Bank, n.a., Kansas City, Missouri. In
general, the Custodian is responsible for holding the Fund's cash and
securities. Deloitte & Touche LLP, Kansas City, Missouri, the Fund's independent
auditors, audits the Fund's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each class of the shares of the Fund is the
value of the assets of that class, less the class's liabilities, divided by the
total number of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined net asset
value plus the sales charge described in the Prospectus. The sales charge is
paid to Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of
March 31, 1999 was as follows:
<TABLE>
<S> <C>
Net asset value per Class A share (Class A net assets divided by Class
A shares outstanding) .............................................. $7.97
Add: selling commission (5.75% of offering
price) ............................................................. 0.49
------
Maximum offering price per Class A share
(Class A net asset value divided by 94.25%)......................... $8.46
======
</TABLE>
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 computed once on
each day that the NYSE is open for trading as of the later of the close of the
regular session of the NYSE or the close of the regular session of any domestic
securities or commodities exchange on which an option or future held by the Fund
is traded. The NYSE annually announces the days on which it will not be open for
trading. The most recent announcement indicates that the NYSE will not be open
on the following days: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. However, it is possible that the NYSE may close on other
days. The net asset value will change every business day, since the value of the
assets and the number of shares outstanding change every 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 the Nasdaq Stock Market, which provides
information on bid and asked prices quoted by major dealers in such stocks.
Bonds, other than convertible bonds, are valued using a third-party pricing
system. Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Short-term debt securities 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 contracts purchased and held by the Fund are
valued at the last sales price thereof on the securities or commodities
exchanges on which they are traded, or, if there are no transactions, at the
mean between bid and asked prices. Ordinarily, the close of the regular session
for options trading on national securities exchanges is 4:10 p.m. Eastern time
and the close of the regular session 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 by or for 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 ("UTMA") account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), salary reduction plan account
under section 457 of the Internal Revenue Code, as amended (the
"Code"), provided that such purchases are subject to a sales charge
(see "Net Asset Value Purchases"), tax sheltered annuity account
("TSA") or Keogh plan account, provided that the individual and spouse
are the only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or
her spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother
has an account in her own name; A's father has an account in
his own name; the UGMA account may be grouped with A's
father's account but may not be grouped with Grandmother's
account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase
made in the trust account is eligible for grouping with an IRA
account of W, H's wife;
C. H's will provides for the establishment of a trust for the
benefit of his minor children upon H's death; his bank is
named as trustee; upon H's death, an account is established in
the name of the bank, as trustee; a purchase in the account
may be grouped with an account held by H's wife in her own
name.
D. X establishes a trust naming herself as trustee and R, her
son, as successor trustee and R and S as beneficiaries; upon
X's death, the account is transferred to R as trustee; a
purchase in the account may not be grouped with R's individual
account. If X's spouse, Y, was successor trustee, this
purchase could be grouped with Y's individual account.
All purchases of Class A shares made for a participant in a
multi-participant Keogh plan may be grouped only with other purchases made under
the same plan; a multi-participant Keogh plan is defined as a plan in which
there is more than one participant where one or more of the participants is
other than the spouse of the owner/employer.
Example A: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made
under the plan with any purchases in categories 1 through 7
above.
Example B: H has established a Keogh plan; his wife, W, is a
participant and they have hired one or more employees who also
become participants in the plan; H and W may not combine any
purchases made under the plan with any purchases in categories
1 through 7 above; however, all purchases made under the plan
for H, W or any other employee will be combined.
All purchases of Class A shares made under a "qualified" employee
benefit plan of an incorporated business will be grouped. A "qualified" employee
benefit plan is established pursuant to Section 401 of the Code. All qualified
employee benefit plans of any one employer or affiliated employers will also be
grouped. An affiliate is defined as an employer that directly, or indirectly,
controls or is controlled by or is under control with another employer. All
qualified employee benefit plans of an employer who is a franchisor and those of
its franchisee(s) may also be grouped.
Example: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made
under both plans will be grouped.
All purchases of Class A shares made under a simplified employee
pension plan ("SEP"), payroll deduction plan or similar arrangement adopted by
an employer or affiliated employers (as defined above) may be grouped provided
that the employer elects to have all such purchases grouped at the time the plan
is set up. If the employer does not make such an election, the purchases made by
individual employees under the plan may be grouped with the other accounts of
the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $75,000; at the
same time, H's parents open up three UGMA accounts for H and
W's three minor children and invest $10,000 in each child's
name; the combined purchase of $105,000 of Class A shares is
subject to a reduced sales load of 4.75% provided that Waddell
& Reed, Inc. is advised that the purchases are entitled to
grouping.
Rights of Accumulation
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund
three years ago. His account has a net asset value of $80,000.
His wife, W, now wishes to invest $20,000 in Class A shares of
the Fund. W's purchase will be combined with H's existing
account and will be entitled to a reduced sales charge of
4.75%. H's original purchase was subject to a full sales
charge and the reduced charge does not apply retroactively to
that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a
contractual plan, the shares held under such plan may be combined with the
additional purchase only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Statement of Intention. By signing a Statement
of Intention form, which is available from Waddell & Reed, Inc., the purchaser
indicates an 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 of Intention is accepted
by Waddell & Reed, Inc. Each purchase made from time to time under the Statement
of Intention is treated as if the purchaser were buying at one time the total
amount which he or she intends to invest. The sales charge applicable to all
purchases of Class A shares made under the terms of the Statement of Intention
will be the sales charge in effect on the beginning date of the 13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, Class A shares already held in the same account in which the purchase is
being made or in any account eligible for grouping with that account, as
described above, will be included.
Example: H signs a Statement of Intention indicating his intent to
invest in his own name a dollar amount sufficient to entitle
him to purchase Class A shares at the sales charge applicable
to a purchase of $100,000. H has an IRA account and the Class
A shares held under the IRA in the Fund have a net asset value
as of the date the Statement of Intention is accepted by
Waddell & Reed, Inc. of $15,000; H's wife, W, has an account
in her own name invested in another fund in the United Group
which charges the same sales load as the Fund, with a net
asset value as of the date of acceptance of the Statement of
Intention of $10,000; H needs to invest $75,000 in Class A
shares over the 13-month period in order to qualify for the
reduced sales load applicable to a purchase of $100,000.
A copy of the Statement of Intention signed by a purchaser will be
returned to the purchaser after it is accepted by Waddell & Reed, Inc. and will
set forth the dollar amount of Class A shares which must be purchased within the
13-month period in order to qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under a
contractual plan, the shares held under the plan will be taken into account in
determining the amount which must be invested under the Statement of Intention
only if the contractual plan has been completed.
The minimum initial investment under a Statement of Intention is 5% of
the dollar amount which must be invested under the Statement of Intention. An
amount equal to 5% of the purchase required under the Statement of Intention
will be held "in escrow." If a purchaser does not, during the period covered by
the Statement of Intention, invest the amount required to qualify for the
reduced sales charge under the terms of the Statement of Intention, he or she
will be responsible for payment of the sales charge applicable to the amount
actually invested. The additional sales charge owed on purchases of Class A
shares made under a Statement of Intention which is not completed will be
collected by redeeming part of the shares purchased under the Statement of
Intention and held "in escrow" unless the purchaser makes payment of this amount
to Waddell & Reed, Inc. within 20 days of Waddell & Reed. Inc.'s request for
payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower than
that available under the Statement of Intention, the lower sales charge will
apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell
& Reed, Inc. to sell, the shares covered by the Statement of Intention.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement of Intention will be deducted in computing the aggregate purchases
under the Statement of Intention.
Statements of Intention are not available for purchases made under an
SEP where the employer has elected to have all purchases under the SEP grouped.
Other Funds in the United Group
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the United Group
subject to a sales charge. A purchase of Class A shares, or Class A shares held,
in any of the funds in the United Group subject to a sales charge will be
treated as an investment in the Fund for the purposes of determining the
applicable sales charge. For these purposes, Class A shares of United Cash
Management, Inc. that were acquired by exchange of another United Group fund's
Class A shares on which a sales charge was paid, plus the shares paid as
dividends on those acquired shares, are also taken into account.
Net Asset Value Purchases of Class A Shares
As stated in the Prospectus, Class A shares of the Fund may be
purchased at net asset value by the Directors and officers of the Fund,
employees of Waddell & Reed, Inc., employees of their affiliates, financial
advisors of Waddell & Reed, Inc. and the spouse, children, parents, children's
spouses and spouse's parents of each such Director, officer, employee and
financial advisor. "Child" includes stepchild; "parent" includes stepparent.
Purchases of Class A shares in an IRA sponsored by Waddell & Reed, Inc.
established for any of these eligible purchasers may also be at net asset value.
Purchases 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. "Employees" also includes individuals who, on
November 6, 1998, were employees (including retired employees) of a company that
on that date was an affiliate of Waddell & Reed, Inc. "Financial advisors"
includes retired financial advisors. A "retired financial advisor" is any
financial advisor who was, at the time of separation from service from Waddell &
Reed, Inc., a Senior Financial Advisor. A custodian under UGMA or UTMA
purchasing for the child or grandchild of any employee or financial advisor may
purchase Class A shares at net asset value whether or not the custodian himself
is an eligible purchaser.
Purchases of Class A shares in a 401(k) plan having 100 or more
eligible employees and purchases of Class A shares in a 457 plan having 100 or
more eligible employees may be made at net asset value.
Holders of an uncompleted United Continental Income Investment Program
("Program") on May 30, 1996 may purchase Class A shares of the Fund at net asset
value, up to the amount representing the unpaid balance of the Program, if the
purchase order is so designated. In addition, any person who was a Program
holder on May 30, 1996 may purchase Class A shares of the Fund at net asset
value up to the amount representing partial Program withdrawals outstanding on
May 30, 1996, provided the purchase is so designated.
Shares may also be issued at NAV in a merger, acquisition or exchange
offer made pursuant to a plan of reorganization to which the Fund is a party.
Reasons for Differences in Public Offering Price of Class A Shares
As described herein and in the Prospectus for Class A shares, there are
a number of instances in which the Fund's Class A shares are sold or issued on a
basis other than the maximum public offering price, that is, the net asset value
plus the highest sales charge. Some of these relate to lower or eliminated sales
charges for larger purchases of Class A shares, whether made at one time or over
a period of time as under a 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 through the Flexible
Withdrawal Service (the "Service") regular monthly, quarterly, semiannual or
annual payments by redeeming on an ongoing basis Class A shares that you own of
the Fund or of any of the funds in the United Group. It would be a disadvantage
to an investor to make additional purchases of shares while a withdrawal program
is in effect because it would result in duplication of sales charges. Applicable
forms to start the Service are available through Waddell & Reed, Inc.
To qualify for the Service, you must have invested at least $10,000 in
Class A shares which you still own of any of the funds in the United Group; or,
you must own Class A shares having a value of at least $10,000. The value for
this purpose is the value at the offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or
more;
2. a monthly payment, which will change each month, equal to
one-twelfth of a percentage of the value of the shares in the
Account (you select the percentage); or
3. a monthly or quarterly payment, which will change each month
or quarter, by redeeming a number of shares fixed by you (at
least five shares).
Shares are redeemed on the 20th day of the month in which the payment
is to be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
Retirement plan accounts may be subject to a fee imposed by the plan
custodian for use of their service.
If you have a share certificate for the shares you want to make
available for the Service, you must enclose the certificate with the form
initiating the Service.
The dividends and distributions on shares you have made available for
the Service are paid in additional Class A shares. All payments under the
Service are made by redeeming Class A 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 your account are redeemed, you will not receive any further
payments. Thus, the payments are not an annuity or an income or return on your
investment.
You may, at any time, change the manner in which you have chosen to
have shares redeemed to any of the other choices originally available to you.
You may, at any time, redeem part or all of the shares in your account; if you
redeem all of the shares, the Service is terminated. The Fund can also terminate
the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed
will be sent to you to assist you in completing your Federal income tax return.
Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
Once a sales charge has been paid on shares of a fund in the United
Group, these shares and any shares added to them from dividends or distributions
paid in shares may be freely exchanged for Class A shares of another fund in the
United Group. The shares you exchange must be worth at least $100 or you must
already own shares of the fund in the United Group into which you want to
exchange.
You may exchange Class A shares you own in another fund in the United
Group for Class A shares of the Fund without charge if (i) a sales charge was
paid on these shares, or (ii) the shares were received in exchange for shares
for which a sales charge was paid, or (iii) the shares were acquired from
reinvestment of dividends and distributions paid on such shares. There may have
been one or more such exchanges so long as a sales charge was paid on the shares
originally purchased. Also, shares acquired without a sales charge because the
purchase was $2 million or more will be treated the same as shares on which a
sales charge was paid.
United Municipal Bond Fund, Inc., United Government Securities Fund,
Inc. and United Municipal High Income Fund, Inc. shares are the exceptions and
special rules apply. Class A shares of these funds may be exchanged for Class A
shares of the Fund only if (i) you received those shares as a result of one or
more exchanges of shares on which a sales charge was originally paid, or (ii)
the shares have been held from the date of the original purchase for at least
six months.
Subject to the above rules regarding sales charges, you may have a
specific dollar amount of Class A shares of United Cash Management, Inc.
automatically exchanged each month into Class A shares of the Fund or any other
fund in the United Group. The shares of United Cash Management, Inc. which you
designate for automatic exchange must be worth at least $100 or you must own
Class A shares of the fund in the United Group into which you want to exchange.
The minimum value of shares which you may designate for automatic exchange
monthly is $100, which may be allocated among the Class A shares of different
funds in the United Group so long as each fund receives a value of at least $25.
Minimum initial investment and minimum balance requirements apply to such
automatic exchange service.
You may redeem your Class A shares of 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 or for Class A shares of United Cash Management,
Inc.
General Exchange Information
When you exchange shares, the total shares you receive will have the
same aggregate net asset value as the total shares you exchange. The relative
values are those next figured after your written exchange request is received in
good order.
These exchange rights and other exchange rights concerning the other
funds in the United Group can in most instances be eliminated or modified at any
time and any such exchange may not be accepted.
Retirement Plans
As described in the Prospectus for Class A shares, your account may be
set up as a funding vehicle for a retirement plan. For individual taxpayers
meeting certain requirements, Waddell & Reed, Inc. offers model or prototype
documents for the following retirement plans. All of these plans involve
investment in shares of the Fund (or shares of certain other funds in the United
Group).
Individual Retirement Accounts (IRAs). Investors having earned income
may set up a plan that is commonly called an IRA. Under a traditional IRA, an
investor can contribute each year up to 100% of his or her earned income, up to
an annual maximum of $2,000 (provided the investor has not reached age 70 1/2).
For a married couple, the annual maximum is $4,000 ($2,000 for each spouse) or,
if less, the couple's combined earned income for the taxable year even if one
spouse had no earned income. Generally, the contributions are deductible unless
the investor (or, if married, either spouse) is an active participant in a
qualified retirement plan or if, notwithstanding that the investor or one or
both spouses so participate, their adjusted gross income does not exceed certain
levels. However, a married investor who is not an active participant, files
jointly with his or her spouse and whose combined adjusted gross income does not
exceed $150,000, is not affected by the spouse's active participant status.
An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be subject
to Federal income tax until distributed from the IRA. A direct rollover
generally applies to any distribution from an employer's plan (including a
custodial account under Section 403(b)(7) of the Code, but not an IRA) other
than certain periodic payments, required minimum distributions and other
specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a portion
of that distribution generally may be rolled over to an IRA within 60 days after
receipt of the distribution. Because mandatory Federal income tax withholding
applies to any eligible rollover distribution which is not paid in a direct
rollover, investors should consult their tax advisers or pension consultants as
to the applicable tax rules. If you already have an IRA, you may have the assets
in that IRA transferred directly to an IRA offered by Waddell & Reed, Inc.
Roth IRAs. Investors whose adjusted gross income (or combined adjusted
gross income, if married) does not exceed certain levels may establish and
contribute up to $2,000 per tax year to a Roth IRA. In addition, for an investor
whose adjusted gross income does not exceed $100,000 (and who is not a married
person filing a separate return), certain distributions from traditional IRAs
may be rolled over to a Roth IRA and any of the investor's traditional IRAs may
be converted into a Roth IRA; these rollover distributions and conversions are,
however, subject to Federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in the Roth IRA, and withdrawals of earnings are not subject
to Federal income tax if the account has been held for at least five years (or
in the case of earnings attributable to rollover contributions or conversions of
a traditional IRA, the rollover or conversion occurred more than five years
prior to the withdrawal) and the account holder has reached age 59-1/2 (or
certain other conditions apply).
Education IRAs. Although not technically for retirement savings,
Education IRAs provide a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute up to
$500 to an Education IRA (or to each of multiple Education IRAs), provided that
no more than $500 may be contributed for any year to Education IRAs for the same
beneficiary. Contributions are not deductible and may not be made after the
beneficiary reaches age 18; however, earnings accumulate tax-free, and
withdrawals are not subject to tax if used to pay the qualified higher education
expenses of the beneficiary (or a member of his or her family).
Simplified Employee Pension (SEP) plans. Employers can make
contributions to SEP-IRAs established for employees. An employer may contribute
up to 15% of compensation or $24,000, whichever is less, per year for each
employee.
Savings Incentive Match Plans for Employees (SIMPLE Plans). An employer
with 100 or fewer employees who does not sponsor another active retirement plan
may sponsor a SIMPLE to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an
employer can choose to match employee contributions dollar-for-dollar (up to 3%
of an employee's compensation) or may contribute to all eligible employees 2% of
their compensation, whether or not they defer salary to their retirement plans.
SIMPLE plans involve fewer administrative requirements than 401(k) or other
qualified plans generally.
Keogh Plans. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money purchase
plan or a profit-sharing plan. As a general rule, an investor under a defined
contribution Keogh plan can contribute each year up to 25% of his or her annual
earned income, with an annual maximum of $30,000.
457 Plans. If an investor is an employee of a state or local government
or of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is an
employee of a public school system or of certain types of charitable
organizations, he or she may be able to enter into a deferred compensation
arrangement through a custodian account under Section 403(b) of the Code. Some
organizations have 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.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to require the redemption of shares held under
any account or any plan if the aggregate net asset value of such shares (taken
at cost or value as the Board of Directors may determine) is less than $500. The
Board has no intent to require redemptions in the foreseeable future. If it
should elect to require redemptions, shareholders who are affected will receive
prior written notice and will be permitted 60 days to bring their accounts up to
the minimum before this redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors. The majority of the
Directors is not affiliated with Waddell & Reed, Inc.
The principal occupation during at least the past five years of each
Director and officer is given below. Each of the persons listed through and
including Mr. Vogel is a member of the Fund's Board of Directors. The other
persons are officers but not members of the Board of Directors. For purposes of
this section, the term "Fund Complex" includes each of the registered investment
companies in the United Group of Mutual Funds, Waddell & Reed Funds, Inc. and
Target/United Funds, Inc. Each of the Fund's Directors is also a Director of
each of the other funds in the Fund Complex and each of its officers is also an
officer of one or more of the funds in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer, Principal Financial Officer and Director of Waddell & Reed Financial,
Inc.; President, Chairman of the Board of Directors and Chief Executive Officer
of Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
of WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of the Fund and each of the other funds in the Fund Complex; formerly,
Chairman of the Board of Directors of Waddell & Reed Asset Management Company, a
former affiliate of Waddell & Reed Financial, Inc. Date of birth: February 11,
1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President, JoDill Corp., an agricultural company; President and
Director of Dillingham Enterprises Inc.; formerly, Director and consultant,
McDougal Construction Company; formerly, Instructor at Central Missouri State
University; formerly, Member of the Board of Police Commissioners, Kansas City,
Missouri; formerly, Senior Vice President-Sales and Marketing, Garney Companies,
Inc., a specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George S. and Delores
Dori Eccles Foundation. Director of First Security Corp., a bank holding
company, and Director of Fluor Corp., a company with interests in coal. Date of
birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Partner, Levy and Craig, P.C., a law firm. Date
of birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct Professor of Law at
the University of Oklahoma College of Law; formerly, Vice President for
Executive Affairs of the University of Oklahoma; formerly, an Attorney with
Crowe & Dunlevy, a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman of the Board of
Directors, Gilliland & Hayes, P.A., a law firm; formerly, President, Gilliland &
Hayes, P.A. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Executive Vice President, Chief Operating
Officer and Director of Waddell & Reed Financial, Inc.; Vice President, Chief
Operating Officer, Director and Treasurer of Waddell & Reed Financial Services,
Inc.; Executive Vice President, Principal Financial Officer, Director and
Treasurer of WRIMCO; President, Chief Executive Officer, Principal Financial
Officer, Director and Treasurer of Waddell & Reed, Inc.; President, Director and
Treasurer of Waddell & Reed Services Company; formerly, Vice President of the
Fund and each of the other funds in the Fund Complex; formerly, Director and
Treasurer of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. Date of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer, Treasurer and Director of Waddell
& Reed Financial, Inc.; Vice President, Chief Investment Officer and Director of
Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; formerly, President, Chief Executive Officer, Chief Investment Officer
and Director of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. Date of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and subsidiaries. Date of birth: February 19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of
the Fund and each fund in the Fund Complex then in existence. (Mr. Morgan
retired as Chairman of the Board of Directors and President of the funds in the
Fund Complex then in existence on April 30, 1993); formerly, President, Director
and Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company. Date of
birth: April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director of Network Rehabilitation Services; formerly, Employment
Counselor and Director of McCue-Parker Center. Date of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm. Date of
birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Professor of Business Administration, University of Missouri-Kansas
City; formerly, Chancellor, University of Missouri-Kansas City. Date of birth:
January 1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
Helge K. Lee
Vice President, Secretary and General Counsel of the Fund and each of
the other funds in the Fund Complex; Secretary and General Counsel of Waddell &
Reed Financial, Inc.; Vice President, Secretary, General Counsel and Director of
Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary and
General Counsel of WRIMCO and Waddell & Reed, Inc.; Senior Vice President,
Secretary, General Counsel and Director of Waddell & Reed Services Company;
formerly, Executive Vice President, Secretary and Chief Compliance Officer of
LGT Asset Management, Inc. and affiliates; formerly, Senior Vice President,
General Counsel and Secretary of Strong Capital Management, Inc. and affiliates.
Date of birth: March 30, 1946.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund
and each of the other funds in the Fund Complex; Vice President of Waddell &
Reed Services Company. Date of birth: July 18, 1942.
Cynthia P. Prince-Fox
Vice President of the Fund and one other fund in the Fund Complex; Vice
President of WRIMCO; formerly, Vice President of Waddell & Reed Asset Management
Company. Date of birth: January 11, 1959.
The address of each person is 6300 Lamar Avenue, P. O. Box 29217,
Shawnee Mission, Kansas 66201-9217 unless a different address is given.
The Directors who may be deemed to be "interested persons" as defined
in the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc. or WRIMCO are
indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a Director may elect after resignation from the Board
provided the Director has attained the age of 70 and has served as a Director of
the funds in the United Group for a total of at least five years. A Director
Emeritus receives fees in recognition of his or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Messrs.
Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey and Paul
S. Wise retired as Directors of the Fund and of each of the funds in the Fund
Complex and elected a position as Director Emeritus.
The funds in the United Group, Target/United Funds, Inc. and Waddell &
Reed Funds, Inc. pay to each Director a total of $48,000 per year, plus $2,500
for each meeting of the Board of Directors attended plus reimbursement of
expenses of attending such meeting and $500 for each committee meeting attended
which is not in conjunction with a Board of Directors meeting, other than
Directors who are affiliates of Waddell & Reed, Inc. The fees to the Directors
who receive them are divided among the funds in the United Group, Target/United
Funds, Inc. and Waddell & Reed Funds, Inc. based on their relative size. During
the Fund's fiscal year ended March 31, 1999, the Fund's Directors received the
following fees for service as a director:
COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
Robert L. Hechler $0 $0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 1,510 58,000
John A. Dillingham 1,510 58,000
David P. Gardner 736 29,000
Linda K. Graves 1,510 58,000
Joseph Harroz, Jr. 669 26,500
John F. Hayes 1,510 58,000
Glendon E. Johnson 1,523 58,500
William T. Morgan 1,510 58,000
Ronald C. Reimer 357 14,500
Frank J. Ross, Jr. 1,510 58,000
Eleanor B. Schwartz 1,523 58,500
Frederick Vogel III 1,523 58,500
*No pension or retirement benefits have been accrued as a part of Fund expenses.
Mr. Gardner was elected as a Director on August 19, 1998. Messrs.
Harroz, Hechler, Herrmann and Reimer were elected as Directors on November 18,
1998. The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of May 31, 1999, all of the Fund's Directors and officers as a group
owned less than 1% of the outstanding shares of the Fund. The following table
sets forth information with respect to the Fund, as of May 31, 1999, regarding
the beneficial ownership of the classes of the Fund's shares.
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
- ------------------- ----- ------------ -------
US Bank of Idaho Trustee Class Y %
Idaho Power Company
Employee Savings Plan
180 E Fifth Street
St Paul MN 55164
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is derived
from the dividends, interest and earned discount on the securities the Fund
holds, less expenses (which will vary by class). The second source is net
realized capital gains, which are derived from the proceeds received from the
Fund's sale of securities at a price higher than the Fund's tax basis (usually
cost) in such securities, less losses from sales of securities at a price lower
than the Fund's basis therein. These gains can be either long-term or
short-term, depending on how long the Fund has owned the securities before it
sells them. The third source is net realized gains from foreign currency
transactions. The payments made to shareholders from net investment income, net
short-term capital gains and net realized gains from certain foreign currency
transactions are called dividends.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may not
have such gains, depending on whether securities are sold and at what price. If
the Fund has net capital gains, it will pay distributions once each year, in the
latter part of the fourth calendar quarter, except to the extent it has net
capital losses carried over from a prior year or years to offset the gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you want
cash for your dividends and distributions, however, a total dividend and/or
distribution amount less than ten dollars will be automatically paid in shares
of the Fund of the same class as that with respect to which they were paid (ii)
you want your dividends and distributions paid in shares of the Fund of the same
class as that with respect to which they were paid, or (iii) you want cash for
your dividends, however, a total dividend amount less than ten dollars will be
automatically paid in shares of the Fund of the same class as that with respect
to which it was paid and want your distributions paid in shares of the Fund of
the same class as that with respect to which they were paid. You can change your
instructions at any time. If you give no instructions, your dividends and
distributions will be paid in shares of the Fund of the same class as that with
respect to 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
The Fund has qualified for treatment as a regulated investment company
("RIC") under the Code, so that it is relieved of Federal income tax on that
part of its investment company taxable income (consisting generally of taxable
net investment income, net short-term capital gains and net gains from certain
foreign currency transactions) that is distributed to its shareholders. To
continue to qualify as a RIC, the Fund must distribute to its shareholders for
each taxable year at least 90% of the sum of its investment company taxable
income ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the Fund must derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures contracts or forward contracts) derived with respect
to its business of investing in securities or those currencies ("Income
Requirement"); (2) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government securities, securities of other RICs and other securities
that are limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund's total assets and that does not represent
more than 10% of the issuer's outstanding voting securities (50% Diversification
Requirement"); and (3) at the close of each quarter of the Fund's taxable year,
not more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of any
one issuer.
Dividends and distributions declared by the Fund in October, November
or December of any year and payable to its shareholders of record on a date in
any of those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if they are paid by the Fund during the
following January. Accordingly, those dividends and distributions will be taxed
to the shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any distributions received on those shares. Investors should
also be aware that if shares are purchased shortly before the record date for a
dividend or distribution, the investor will receive some portion of the purchase
price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. It is the Fund's policy to pay sufficient dividends and
distributions each year to avoid imposition of the Excise Tax. The Code permits
the Fund to defer into the next calendar year net capital losses incurred
between November 1 and the end of the current calendar year.
Income from Foreign Securities
Dividends and interest received, and gains realized, by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation other than a "controlled
foreign corporation" (i.e., a foreign corporation in which, on any day during
its taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which the Fund is a U.S. shareholder that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to Federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on disposition of the stock (collectively
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain --
which probably would have to be distributed by the Fund to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax -- even if those
earnings and gain were not distributed to the Fund by the QEF. In most instances
it will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
The Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years. The Fund's adjusted basis in each PFIC's stock with respect
to which it makes this election will be adjusted to reflect the amounts of
income included and deductions taken under the election. Regulations proposed in
1992 provide a similar election with respect to the stock of certain PFICs.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2)
from the disposition of debt securities denominated in a foreign currency that
are attributable to fluctuations in the value of the foreign currency between
the date of acquisition of the security and the date of disposition, and (3)
that are attributable to fluctuations in exchange rates that occur between the
time the Fund accrues interest, dividends or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects the receivables or pays the liabilities, generally are
treated as ordinary income or loss. These gains or losses, referred to under the
Code as "section 988" gains or losses, may increase or decrease the amount of
the Fund's investment company taxable income to be distributed to its
shareholders.
Income from Options, Futures and Forward Currency Contracts and Foreign
Currencies
The use of hedging and option income strategies, such as writing
(selling) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and losses
the Fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures contracts and forward currency contracts derived
by the Fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
Any income the Fund earns from writing options is treated as short-term
capital gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being exercised,
the premium it receives also will be a short-term capital gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale.
Certain options, futures contracts and forward currency contracts in
which the Fund may invest may be "section 1256 contracts." Section 1256
contracts held by the Fund at the end of its taxable year, other than contracts
subject to a "mixed straddle" election made by the Fund, are "marked-to-market"
(that is, treated as sold at that time for their fair market value) for Federal
income tax purposes, with the result that unrealized gains or losses are treated
as though they were realized. Sixty percent of any net gains or losses
recognized on these deemed sales, and 60% of any net realized gains or losses
from any actual sales of section 1256 contracts, are treated as long-term
capital gains or losses, and the balance is treated as short-term capital gains
or losses. That 60% portion will qualify for the 20% (10% for taxpayers in the
15% marginal tax bracket) maximum tax rate on net capital gains enacted by the
Taxpayer Relief Act of 1997. Section 1256 contracts also may be marked-to-market
for purposes of the Excise Tax and for other purposes. The Fund may need to
distribute any mark-to-market gains to its shareholders to satisfy the
Distribution Requirement and/or avoid imposition of the Excise Tax, even though
it may not have closed the transactions and received cash to pay the
distributions.
Code section 1092 (dealing with straddles) may also affect the taxation
of options and futures contracts in which the Fund may invest. That section
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. The regulations under section
1092 also provide certain "wash sale" rules, that apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the Fund
makes certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions will be determined under
rules that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.
If the Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward currency contract entered into by the
Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.
Zero Coupon and Payment-in-Kind Securities
The Fund may acquire zero coupon or other securities issued with
original issue discount. As the holder of those securities, the Fund must
include in its income the original issue discount that accrues on the securities
during the taxable year, even if the Fund receives no corresponding payment on
the securities during the year. Similarly, the Fund must include in its gross
income securities it receives as "interest" on payment-in-kind securities.
Because the Fund annually must distribute substantially all of its investment
company taxable income, including any accrued original issue discount and other
non-cash income, in order to satisfy the Distribution Requirement and to avoid
imposition of the Excise Tax, it may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from the Fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. The
Fund may realize capital gains or losses from those sales, which would increase
or decrease its investment company taxable income and/or net capital gain.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio of
the Fund. Transactions in securities other than those for which an exchange is
the primary market are generally done with dealers acting as principals or
market makers. Brokerage commissions are paid primarily for effecting
transactions in securities traded on an exchange and otherwise only if it
appears likely that a better price or execution can be obtained. The individual
who manages the Fund may manage other advisory accounts with similar investment
objectives. It can be anticipated that the manager will frequently place
concurrent orders for all or most accounts for which the manager has
responsibility or WRIMCO may otherwise combine orders for the Fund with those of
other funds in the United Group, Target/United Funds, Inc. and Waddell & Reed
Funds, Inc. or other accounts over which it has investment discretion.
Transactions effected pursuant to such combined orders are averaged as to price
and allocated in accordance with the purchase or sale orders actually placed for
each fund or advisory account, except where the combined order is not filled
completely. In this case, WRIMCO will ordinarily allocate the transaction pro
rata based on the orders placed. Sharing in large transactions could affect the
price the Fund pays or receives or the amount it buys or sells. However,
sometimes a better negotiated commission is available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is authorized
to engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution and/or
research services and other services, including pricing or quotation services
directly or through others ("research and brokerage services") considered by
WRIMCO to be useful or desirable for its investment management of the Fund
and/or the other funds and accounts over which WRIMCO has investment discretion.
Research and brokerage services are, in general, defined by reference
to Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers, (ii) furnishing
analyses and reports, or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than another qualified broker would charge for
effecting comparable transactions if a good faith determination is made by
WRIMCO that the commission is reasonable in relation to the research or
brokerage services provided. Subject to the foregoing considerations WRIMCO may
also consider sale of Fund shares as a factor in the selection of broker-dealers
to execute portfolio transactions. No allocation of brokerage or principal
business is made to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful
only to one or more of the other advisory accounts of WRIMCO, and investment
research received for the commissions of those other accounts may be useful both
to the Fund and one or more of such other accounts. To the extent that
electronic or other products provided by such brokers to assist WRIMCO in making
investment management decisions are used for administration or other
non-research purposes, a reasonable allocation of the cost of the product
attributable to its non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party at the
request of a broker) includes information on particular companies and industries
as well as market, economic or institutional activity areas. It serves to
broaden the scope and supplement the research activities of WRIMCO; serves to
make available additional views for consideration and comparisons; and enables
WRIMCO to obtain market information on the price of securities held in the
Fund's portfolio or being considered for purchase.
The Fund may also use its brokerage to pay for pricing or quotation
services to value securities. During the Fund's fiscal years ended March 31,
1999, 1998 and 1997, it paid brokerage commissions of $590,456, $616,834 and
$480,749, 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, 1999, the transactions,
other than principal transactions, which were directed to broker-dealers who
provided research as well as execution totaled $323,018,317 on which $434,719 in
brokerage commissions were paid. These transactions were allocated to these
broker-dealers by the internal allocation procedures described above.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
OTHER INFORMATION
The Shares of the Fund
The Fund offers two classes of shares: Class A and Class Y. Each class
represents an interest in the same assets of the Fund and differ as follows:
each class of shares has exclusive voting rights on matters pertaining to
matters appropriately limited to that class; Class A shares are subject to an
initial sales charge and to an ongoing distribution and/or service fee and Class
Y shares, which are designated for institutional investors, have no sales charge
nor ongoing distribution and/or service fee; each class may bear differing
amounts of certain class-specific expenses; and each class has a separate
exchange privilege. The Fund does not anticipate that there will be any
conflicts between the interests of holders of the different classes of shares of
the Fund by virtue of those classes. On an ongoing basis, the Board of Directors
will consider whether any such conflict exists and, if so, take appropriate
action. Each share of the Fund is entitled to equal voting, dividend,
liquidation and redemption rights, except that due to the differing expenses
borne by the two classes, dividends and liquidation proceeds of Class A shares
are expected to be lower than for Class Y shares of the Fund. Each fractional
share of a class has the same rights, in proportion, as a full share of that
class. Shares are fully paid and nonassessable when purchased.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new investment
advisory agreement or a change in fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding not
less than 25% of all shares entitled to vote at such meeting, provided certain
conditions stated in the bylaws are met. There will normally be no meeting of
the shareholders for the purpose of electing directors until such time as less
than a majority of directors holding office have been elected by shareholders,
at time which the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the 1940 Act
applies to the Fund, the directors are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
director when requested in writing to do so by the shareholders of record of not
less than 10% of the Fund's outstanding shares.
Each share (regardless of class) has one vote. All shares of the Fund
vote together as a single class, except as to any matter for which a separate
vote of any class is required by the 1940 Act, and except as to any matter which
affects the interests of one or more particular classes, in which case only the
shareholders of the affected classes are entitled to vote, each as a separate
class.
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS
Business Services - %0.98
Teradyne, Inc.* ................................. 105,000 $ 5,729,062
Chemicals and Allied Products - %5.09
Lilly (Eli) and Company ......................... 100,000 8,487,500
Pfizer Inc. ..................................... 103,000 14,291,250
Procter & Gamble Company (The) .................. 70,000 6,855,625
Total ......................................... 29,634,375
Communication - 6.55%
AT&T Corporation ................................ 200,000 15,962,500
Cox Communications, Inc., Class A* .............. 100,000 7,562,500
SBC Communications Inc. ......................... 310,000 14,608,750
Total ......................................... 38,133,750
Depository Institutions - 1.94%
BankAmerica Corporation ......................... 71,904 5,078,220
Comerica Incorporated ........................... 100,000 6,243,750
Total ......................................... 11,321,970
Eating and Drinking Places - 1.46%
Wendy's International, Inc. ..................... 300,000 8,531,250
Electric, Gas and Sanitary Services - 2.14%
Reliant Energy .................................. 240,000 6,255,000
Unicom Corporation .............................. 170,000 6,215,625
Total ......................................... 12,470,625
Electronic and Other Electric Equipment - 3.59%
Analog Devices, Inc.* ........................... 175,000 5,206,250
General Electric Company ........................ 70,000 7,743,750
Texas Instruments Incorporated .................. 80,000 7,940,000
Total ......................................... 20,890,000
Fabricated Metal Products - 0.06%
Wyman-Gordon Company* ........................... 35,700 330,225
Food and Kindred Products - 1.05%
Ralston-Ralston Purina Group .................... 230,000 6,138,125
General Merchandise Stores - 3.07%
Penney (J.C.) Company, Inc. ..................... 100,000 4,050,000
Wal-Mart Stores, Inc. ........................... 150,000 13,828,125
Total ......................................... 17,878,125
</TABLE>
See Notes to Schedule of Investments on page 79.
1
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Holding and Other Investment Offices - 1.81%
Berkshire Hathaway Inc., Class B* ............... 3,000 $ 7,053,000
LTC Properties, Inc. ............................ 47,800 585,550
National Health Investors, Inc. ................. 133,930 2,879,495
Total ......................................... 10,518,045
Industrial Machinery and Equipment - 5.24%
Applied Materials, Inc.* ........................ 125,000 7,714,844
Case Corporation ................................ 233,100 5,914,912
EMC Corporation* ................................ 132,000 16,863,000
Total ......................................... 30,492,756
Instruments and Related Products - 2.14%
Medtronic, Inc. ................................. 100,000 7,175,000
Raytheon Company, Class B ....................... 90,000 5,276,250
Total ......................................... 12,451,250
Insurance Carriers - 2.84%
Chubb Corporation (The) ......................... 65,000 3,806,563
Hartford Financial Services
Group Inc. (The) .............................. 224,000 12,726,000
Total ......................................... 16,532,563
Miscellaneous Retail - 2.36%
Costco Companies, Inc.* ......................... 150,000 13,739,063
Motion Pictures - 1.01%
Walt Disney Company (The) ....................... 190,000 5,913,750
Nondepository Institutions - 1.18%
Freddie Mac ..................................... 120,000 6,855,000
Oil and Gas Extraction - 1.66%
Burlington Resources Incorporated ............... 241,600 9,648,900
Petroleum and Coal Products - 2.78%
BP Amoco p.l.c. ................................. 54,048 5,455,470
Mobil Corporation ............................... 63,000 5,544,000
Royal Dutch Petroleum Company ................... 100,000 5,200,000
Total ......................................... 16,199,470
Primary Metal Industries - 1.83%
Bethlehem Steel Corporation* .................... 400,000 3,300,000
British Steel plc, ADR .......................... 185,000 3,734,688
USX Corporation - U.S. Steel Group .............. 155,000 3,642,500
Total ......................................... 10,677,188
Printing and Publishing - 1.53%
McGraw-Hill Companies, Inc. (The) .............. 164,000 8,938,000
</TABLE>
See Notes to Schedule of Investments on page 79.
2
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Rubber and Miscellaneous Plastics Products - 1.89%
A. Schulman, Inc. ............................... 165,000 $ 2,242,969
Goodyear Tire & Rubber Company (The) ............ 60,000 2,988,750
NIKE, Inc., Class B ............................. 100,000 5,768,750
Total ......................................... 11,000,469
Transportation by Air - 1.78%
FDX Corporation* ................................ 45,000 4,176,562
UAL Corporation* ................................ 80,000 6,220,000
Total ......................................... 10,396,562
Transportation Equipment - 1.12%
General Motors Corporation ...................... 75,000 6,515,625
Trucking and Warehousing - 1.53%
CNF Transportation Inc. ......................... 235,000 8,885,937
Wholesale Trade - Durable Goods - 0.69%
Motorola, Inc. .................................. 55,000 4,028,750
TOTAL COMMON STOCKS - 57.32% $333,850,835
(Cost: $246,843,211)
<CAPTION>
Principal
Amount in
Thousands
<S> <C> <C>
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 0.42%
American Home Products Corporation,
7.9%, 2-15-2005 ............................... $2,250 2,474,415
Communication - 1.21%
Bell Atlantic Financial Services, Inc.,
Convertible,
5.75%, 4-1-2003 (A) ........................... 3,000 3,172,500
BellSouth Savings and Security ESOP Trust,
9.125%, 7-1-2003 .............................. 2,351 2,533,227
Southwestern Bell Telephone Company,
5.77%, 10-14-2003 ............................. 1,350 1,351,647
Total ......................................... 7,057,374
Depository Institutions - 0.39%
Wachovia Corporation,
6.25%, 8-4-2008 ............................... 2,250 2,244,150
Electric, Gas and Sanitary Services - 0.30%
California Infrastructure and Economic Development
Bank, Special Purpose Trust SCE-1,
6.38%, 9-25-2008 .............................. 1,750 1,776,793
</TABLE>
See Notes to Schedule of Investments on page 79.
3
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Fabricated Metal Products - 0.56%
Mark IV Industries, Inc., Convertible,
4.75%, 11-1-2004, (A) ......................... $4,000 $ 3,265,000
Food and Kindred Products - 0.80%
Coca-Cola Enterprises Inc.,
6.7%, 10-15-2036 .............................. 4,500 4,656,420
General Merchandise Stores - 0.40%
JCP Master Credit Card Trust,
9.625%, 6-15-2000 ............................. 2,250 2,314,687
Health Services - 0.19%
ARV Assisted Living, Inc., Convertible,
6.75%, 4-1-2006 (A) ........................... 3,000 1,121,250
Miscellaneous Manufacturing Industries - 0.39%
Tyco International Group S.A.,
6.375%, 6-15-2005 ............................. 2,250 2,263,635
Nondepository Institutions - 2.39%
Ford Motor Credit Company,
8.875%, 6-15-99 ............................... 3,000 3,021,420
General Electric Capital Corporation,
8.3%, 9-20-2009 ............................... 6,500 7,634,120
General Motors Acceptance Corporation,
8.4%, 10-15-99 ................................ 3,000 3,051,150
Merrill Lynch Mortgage Investors, Inc.,
8.3%, 4-15-2012 ............................... 196 196,281
Total ......................................... 13,902,971
Transportation by Air - 0.62%
Southwest Airlines Co.,
7.875%, 9-1-2007 .............................. 3,300 3,602,841
TOTAL CORPORATE DEBT SECURITIES - 7.67% $44,679,536
(Cost: $45,695,273)
</TABLE>
See Notes to Schedule of Investments on page 79.
4
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
UNITED STATES GOVERNMENT SECURITIES Federal
National Mortgage Association:
6.0%, 6-25-2007 ............................... $3,000 $ 3,005,610
6.51%, 5-6-2008 ............................... 6,750 6,807,983
8.25%, 6-1-2008 ............................... 357 371,007
6.19%, 7-7-2008 ............................... 4,500 4,469,760
Government National Mortgage Association:
9.0%, 7-15-2016 ............................... 64 68,703
9.0%, 8-15-2016 ............................... 265 283,309
9.0%, 10-15-2016 .............................. 557 596,461
9.0%, 11-15-2016 .............................. 146 156,206
9.0%, 1-15-2017 ............................... 61 65,199
9.0%, 3-15-2017 ............................... 199 213,162
9.0%, 4-15-2017 ............................... 126 134,224
9.0%, 7-15-2017 ............................... 114 121,990
6.5%, 8-15-2028 ............................... 9,902 9,858,616
United States Treasury:
7.125%, 2-29-2000 ............................. 6,000 6,118,140
8.875%, 5-15-2000 ............................. 17,000 17,719,780
8.0%, 5-15-2001 ............................... 23,000 24,354,930
6.375%, 8-15-2002 ............................. 12,000 12,440,640
7.5%, 2-15-2005 ............................... 33,000 36,583,470
7.25%, 5-15-2016 .............................. 8,500 9,745,760
7.25%, 8-15-2022 .............................. 20,000 23,340,600
6.25%, 8-15-2023 .............................. 30,000 31,350,000
TOTAL UNITED STATES GOVERNMENT SECURITIES - 32.25% $187,805,550
(Cost: $186,430,031)
TOTAL SHORT-TERM SECURITIES - 1.72% $9,986,251
(Cost: $9,986,251)
TOTAL INVESTMENT SECURITIES - 98.96% $576,322,172
(Cost: $488,954,766)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.04% 6,079,156
NET ASSETS - 100.00% $582,401,328
</TABLE>
See Notes to Schedule of Investments on page 79.
5
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 1999
Notes To Schedule of Investments
*No income dividends were paid during the preceding 12 months.
(A) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be resold in transactions exempt from registration, normally
to qualified institutional buyers. At March 31, 1999, the value of these
securities amounted to $7,558,750 or 1.30% of net assets.
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.
6
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999
(In Thousands, Except for Per Share Amounts)
<TABLE>
Assets
Investment securities - at value
<S> <C>
(Notes 1 and 3) ........................................... $576,322
Cash ...................................................... 4
Receivables:
Dividends and interest .................................... 4,057
Investment securities sold ................................ 3,528
Fund shares sold .......................................... 463
Prepaid insurance premium ................................... 20
--------
Total assets ............................................ 584,394
--------
Liabilities
Payable to Fund shareholders ................................ 1,746
Accrued transfer agency and dividend
disbursing (Note 2) ....................................... 116
Accrued service fee (Note 2) ................................ 100
Accrued distribution fee (Note 2) ........................... 9
Accrued management fee (Note 2) ............................. 9
Accrued accounting services fee (Note 2) .................... 6
Other ...................................................... 7
--------
Total liabilities ....................................... 1,993
--------
Total net assets ...................................... $582,401
========
Net Assets
$1.00 par value capital stock
Capital stock ............................................. $ 73,053
Additional paid-in capital ................................ 403,896
Accumulated undistributed income:
Accumulated undistributed net investment income ........... 653
Accumulated undistributed net realized gain
on investment transactions .............................. 17,432
Net unrealized appreciation in value of
investments ............................................. 87,367
--------
Net assets applicable to outstanding
units of capital ...................................... $582,401
========
Net asset value per share (net assets divided
by shares outstanding)
Class A ..................................................... $7.97
Class Y ..................................................... $7.97
Capital shares outstanding
Class A ..................................................... 72,917
Class Y ..................................................... 136
Capital shares authorized ..................................... 200,000
</TABLE>
See notes to financial statements.
7
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended MARCH 31, 1999
(In Thousands)
<TABLE>
<S> <C>
Investment Income
Income (Note 1B):
Interest and amortization.................................. $15,936
Dividends ................................................. 5,772
--------
Total income ............................................ 21,708
--------
Expenses (Note 2):
Investment management fee ................................. 3,200
Service fee - Class A ..................................... 1,395
Transfer agency and dividend
disbursing - Class A .................................... 876
Accounting services fee ................................... 70
Distribution fee - Class A ................................ 68
Custodian fees ............................................ 32
Audit fees ................................................ 16
Shareholder servicing - Class Y ........................... 13
Legal fees ................................................ 9
Other ..................................................... 126
--------
Total expenses .......................................... 5,805
--------
Net investment income ................................. 15,903
--------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 3)
Realized net gain on securities ............................. 36,376
Realized net loss on foreign
currency transactions ..................................... (28)
--------
Realized net gain on investments .......................... 36,348
Unrealized depreciation in value of investments
during the period ......................................... (32,734)
--------
Net gain on investments ................................. 3,614
--------
Net increase in net assets resulting from
operations ........................................... $19,517
========
</TABLE>
See notes to financial statements.
8
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the fiscal year ended
March 31,
------------------------
1999 1998
Increase (Decrease) in Net Assets --------- --------
<S> <C> <C>
Operations:
Net investment income ...................... $15,903 $ 16,284
Realized net gain on investments ........... 36,348 49,742
Unrealized appreciation (depreciation) (32,734) 60,305
-------- --------
Net increase in net assets
resulting from operations .............. 19,517 126,331
-------- --------
Distributions to shareholders from (Note 1E):*
Net investment income:
Class A .................................. (15,474) (16,306)
Class Y .................................. (268) (256)
Realized gains on securities transactions:
Class A .................................. (28,169) (53,686)
Class Y .................................. (562) (827)
-------- --------
(44,473) (71,075)
-------- --------
Capital share transactions:
Proceeds from sale of shares:
Class A (5,841,111 and 1,395,794
shares, respectively) .................. 47,279 34,176
Class Y (298,026 and 148,864
shares, respectively) .................. 2,444 3,659
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (5,312,018 and 2,894,602
shares, respectively) .................. 41,926 67,675
Class Y (105,222 and 46,351
shares, respectively) .................. 829 1,084
Payments for shares redeemed:
Class A (10,252,942 and 2,618,993
shares, respectively)................... (82,940) (64,317)
Class Y (1,563,122 and 39,543
shares, respectively) .................. (12,501) (967)
-------- --------
Net increase (decrease) in net
assets resulting from capital
share transactions..................... (2,963) 41,310
-------- --------
Total increase (decrease) ............. (27,919) 96,566
Net Assets
Beginning of period .......................... 610,320 513,754
-------- --------
End of period, including undistributed
net investment income of $653 and
$520, respectively.......................... $582,401 $610,320
======== ========
</TABLE>
*See "Financial Highlights" on pages 83-84.
See notes to financial statements.
9
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:*
<TABLE>
<CAPTION>
For the fiscal year ended March 31,
-----------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ............... $8.32 $7.57 $8.00 $6.95 $6.89
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ............. 0.33 0.24 0.24 0.24 0.23
Net realized and
unrealized gain
on investments ..... 0.04 1.58 0.22 1.35 0.20
----- ----- ----- ----- -----
Total from investment
operations ........... 0.37 1.82 0.46 1.59 0.43
----- ----- ----- ----- -----
Less distributions:
From net investment
income ............. (0.32) (0.24) (0.24) (0.23) (0.23)
From capital gains.... (0.40) (0.83) (0.65) (0.31) (0.14)
----- ----- ----- ----- -----
Total
distributions ........ (0.72) (1.07) (0.89) (0.54) (0.37)
----- ----- ----- ----- -----
Net asset value,
end of period ........ $7.97 $8.32 $7.57 $8.00 $6.95
===== ===== ===== ===== =====
Total return** ......... 3.38% 25.20% 5.88% 23.29% 6.39%
Net assets, end of
period (in
millions) ............ $581 $599 $508 $502 $433
Ratio of expenses to
average net assets ... 0.99% 0.91% 0.93% 0.89% 0.89%
Ratio of net investment
income to average net
assets ............... 2.69% 2.88% 3.01% 3.06% 3.37%
Portfolio turnover
rate ................. 50.68% 55.46% 40.29% 41.34% 41.30%
</TABLE>
*Per-share and share amounts have been adjusted retroactively to reflect the
200% stock dividend effected June 26, 1998.
**Total return calculated without taking into account the sales load deducted on
an initial purchase.
See notes to financial statements.
10
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:*
<TABLE>
<CAPTION>
For the
For the fiscal period
year ended from
March 31, 1/4/96**
------------------- through
1999 1998 1997 3/31/96
------- ------ ------ -------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period... $8.33 $7.57 $8.00 $7.78
----- ----- ----- -----
Income from investment
operations:
Net investment
income ............. 0.07 0.26 0.26 0.03
Net realized and
unrealized gain
on investments ..... 0.32 1.58 0.21 0.25
----- ----- ----- -----
Total from investment
operations ........... 0.39 1.84 0.47 0.28
----- ----- ----- -----
Less distributions:
From net investment
income ............. (0.35) (0.26) (0.26) (0.06)
From capital gains.... (0.40) (0.82) (0.64) (0.00)
----- ----- ----- -----
Total distributions .... (0.75) (1.08) (0.90) (0.06)
----- ----- ----- -----
Net asset value,
end of period ........ $7.97 $8.33 $7.57 $8.00
===== ===== ===== =====
Total return ........... 3.58% 25.43% 6.07% 3.53%
Net assets, end of
period (in
millions) ............ $1 $11 $6 $6
Ratio of expenses
to average net
assets ............... 0.81% 0.75% 0.75% 0.80%***
Ratio of net
investment income
to average net
assets ............... 3.32% 3.01% 3.20% 3.35%***
Portfolio
turnover rate ........ 50.68% 55.46% 40.29% 41.34%***
</TABLE>
*Per-share and share amounts have been adjusted retroactively to reflect the
200% stock dividend effected June 26, 1998.
**Commencement of operations.
***Annualized.
See notes to financial statements.
11
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
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. Its investment objective is 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. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a pricing service or dealer in bonds.
Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Stocks which are traded over-the-counter are
priced using the Nasdaq Stock Market, which provides information on bid
and asked prices quoted by major dealers in such stocks. Restricted
securities and securities for which market quotations are not readily
available are valued at fair value as determined in good faith under
procedures established by and under the general supervision of the Fund's
Board of Directors. Short-term debt securities are valued at amortized
cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the Internal
Revenue Code), premiums on the purchase of bonds and post-1984 market
discount are amortized for both financial and tax reporting purposes over
the remaining lives of the bonds. Dividend income is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. See
Note 3 -- Investment Security Transactions.
C. 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.
12
<PAGE>
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 Subchapter M of the Internal
Revenue Code. In addition, the Fund intends to pay distributions as
required to avoid imposition of excise tax. Accordingly, provision has not
been made for Federal income taxes. See Note 4 -- Federal Income Tax
Matters.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the business day following record date. Net
investment income dividends and capital gains distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are due to differing
treatments for items such as deferral of wash sales and post-October
losses, foreign currency transactions, net operating losses and expiring
capital loss carryovers. At March 31, 1999, $28,218 was reclassified
between accumulated undistributed net investment income and accumulated
undistributed net realized gain on investment transactions.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .15% of net assets and (ii)
a "Group" fee computed each day on the combined net asset values of all of the
funds in the United Group of mutual funds (approximately $21.5 billion of
combined net assets at March 31, 1999) 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.
13
<PAGE>
<TABLE>
<CAPTION>
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
For Class A shares, the Fund also pays WARSCO a monthly per account charge
for transfer agency and dividend disbursement services of $1.3125 for each
shareholder account which was in existence at any time during the prior month,
plus $0.30 for each account on which a dividend or distribution of cash or
shares had a record date in that month. With respect to Class Y shares, the Fund
pays WARSCO a monthly fee at an annual rate of .15% of the average daily net
assets of the class for the preceding month. The Fund also reimburses W&R and
WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross sales
commissions for Class A shares (which are not an expense of the Fund) of
$1,384,658, out of which W&R paid sales commissions of $800,701 and all expenses
in connection with the sale of Fund shares, except for registration fees and
related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $21,767, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government obligations
and short-term securities, aggregated $201,132,920 while proceeds from
maturities and sales aggregated $298,757,994. Purchases of short-term securities
and U.S Government securities aggregated $753,438,873 and $79,221,856,
respectively. Proceeds from maturities and sales of short-term securities and
U.S. Government securities aggregated $761,232,226 and $10,463,360,
respectively.
14
<PAGE>
For Federal income tax purposes, cost of investments owned at March 31,
1999 was $488,954,766, resulting in net unrealized appreciation of $87,367,406,
of which $102,568,730 related to appreciated securities and $15,201,324 related
to depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $36,374,960 during the year ended March 31, 1999, of which a portion was paid
to shareholders during the period ended March 31, 1999. Remaining capital gain
net income will be distributed to the Fund's shareholders.
NOTE 5 -- Multiclass Operations
On August 29, 1995, the Fund was authorized to offer two classes of
shares, Class A and Class Y, each of which has equal rights as to assets and
voting privileges. Class Y shares are not subject to a sales charge on
purchases; they are not subject to a Rule 12b-1 Distribution and Service Plan
and have a separate transfer agency and dividend disbursement services fee
structure. A comprehensive discussion of the terms under which shares of either
class are offered is contained in the prospectus and the Statement of Additional
Information for the Fund.
Income, non-class specific expenses and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
NOTE 6 -- Stock Dividend
The Fund's Board of Directors approved on February 11, 1998 a stock
dividend of 200% effected on June 26, 1998. Authorized shares of the Fund were
accordingly increased by 100,000,000 shares.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Continental Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United Continental Income Fund, Inc. (the
"Fund") as of March 31, 1999, and the related statement of operations for the
fiscal year then ended, the statements of changes in net assets for each of the
two fiscal years in the period then ended, and the financial highlights for each
of the five fiscal years in the period then ended. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1999, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of United
Continental Income Fund, Inc. as of March 31, 1999, the results of its
operations for the fiscal year then ended, the changes in its net assets for
each of the two fiscal years in the period then ended, and the financial
highlights for each of the five fiscal years in the period then ended, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
May 7, 1999
16
