<PAGE>
485BPOS File No. 2-36008
File No. 811-2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ______
Post-Effective Amendment No. 61
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 29
UNITED CONTINENTAL INCOME FUND, INC.
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(Exact Name as Specified in Charter)
6300 Lamar Avenue, Overland Park, Kansas 66202-4200
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
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Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective
immediately upon filing pursuant to paragraph (b)
-----
X on June 30, 2000 pursuant to paragraph (b)
-----
60 days after filing pursuant to paragraph (a)(1)
-----
on (date) pursuant to paragraph (a)(1)
-----
75 days after filing pursuant to paragraph (a)(2)
-----
on (date) pursuant to paragraph (a)(2) of Rule 485
-----
this post-effective amendment designates a new effective date
----- for a previously filed post-effective amendment
===============================================================================
DECLARATION REQUIRED BY RULE 24f-2 (a) (1)
The issuer has registered an indefinite amount of its securities under
the Securities Act of 1933 pursuant to Rule 24f-2 (a)(1). Notice for the
Registrant's fiscal year ended March 31, 1999 was filed on or about
June 26, 2000.
<PAGE>
PROSPECTUS
JUNE 30, 2000
[GRAPHIC]
WADDELL & REED ADVISORS FUNDS
EQUITY, GROWTH AND INCOME
& ASSET ALLOCATION FUNDS
Asset Strategy Fund [GRAPHIC]
Continental Income Fund
Income Fund
Retirement Shares [GRAPHIC]
Tax-Managed Equity Fund
[LOGO] WADDELL
& REED
Financial Services-Registered Trademark-
----------------------------------------
Investing with a plan.-SM-
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 OFFENSE TO STATE OTHERWISE.
<PAGE>
[GRAPHIC]
CONTENTS
3 An Overview of the Funds
3 Asset Strategy Fund
10 Continental Income Fund
16 Income Fund
22 Retirement Shares
28 Tax-Managed Equity Fund
32 The Investment Principles of the Funds
39 Your Account
62 The Management of the Funds
65 Financial Highlights
2
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
[ICON] GOAL
WADDELL & REED ADVISORS
ASSET STRATEGY FUND
(FORMERLY UNITED ASSET STRATEGY FUND) SEEKS HIGH TOTAL
RETURN OVER THE LONG TERM.
PRINCIPAL STRATEGY
Asset Strategy Fund seeks to achieve its investment goal by allocating its
assets among stocks, bonds and short-term instruments. The Fund allocates its
assets among the following classes, or types, of investments.
- The STOCK CLASS includes equity securities of all types, although Waddell &
Reed Investment Management Company ("WRIMCO"), the Fund's investment manager,
typically emphasizes a blend of value and growth potential in selecting
stocks. Value stocks are those that WRIMCO believes are currently selling
below their true worth. Growth stocks are those whose earnings WRIMCO
believes are likely to grow faster than the economy. The Fund can invest in
securities of companies of any size.
- The BOND CLASS includes all varieties of fixed-income instruments, such as
corporate or U.S. Government debt securities, with remaining maturities of
more than three years. This class may include a significant amount of junk
bonds, up to 35% of the Fund's total assets; junk bonds are rated BB and
below by Standard and Poor's ("S&P") and Ba and below by Moody's Investors
Service, Inc. ("MIS"), or unrated bonds deemed by WRIMCO to be of equivalent
quality.
- The SHORT-TERM CLASS includes all types of short-term instruments with
remaining maturities of three years or less, including high-quality money
market instruments.
- Within each of these classes, the Fund may invest in both domestic and foreign
securities.
3
<PAGE>
The Fund selects a mix which represents the way the Fund's investments will
generally be allocated over the long term as indicated in the box below. This
mix will vary over shorter time periods as WRIMCO changes the Fund's holdings
based on the current outlook for the different markets. These changes may be
based on such factors as interest rate changes, security valuation levels and a
rise in the potential for growth stocks.
PORTFOLIO MIX
[PIE CHART] - Stocks 70% (can range from 0-100%)
- Bonds 25% (can range from 0-100%)
- Short-term 5% (can range from 0-100%)
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Asset Strategy Fund owns different types of securities, a variety of
factors can affect its investment performance, such as:
- WRIMCO's skill in allocating the Fund's assets among different types of
investments;
- the mix of securities in the Fund's portfolio, particularly the relative
weightings in, and exposure to, different sectors of the economy;
- an increase in interest rates, which may cause the value of the Fund's
fixed-income securities, especially bonds with longer maturities, to decline;
- prepayment of higher-yielding bonds held by the Fund;
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds; and
- adverse stock and bond 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.
Market risk for small to medium sized companies may be greater than the market
risk for large companies. Smaller companies are more likely to have limited
financial resources and inexperienced management. As well, stock of smaller
companies may experience volatile trading and price fluctuations.
4
<PAGE>
Junk bonds in which the Fund invests are more susceptible to the risk of
non-payment or default, and their prices may be more volatile than higher-rated
bonds.
As well, the Fund may invest a significant portion of its assets in foreign
securities. Foreign securities present additional risks such as currency
fluctuations and political or economic conditions affecting the foreign
countries.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your 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
Asset allocation funds are designed for investors who want to diversify among
stocks, bonds, and short-term instruments, in one fund. If you are looking for
an investment that uses this technique in pursuit of high total return, this
Fund may be appropriate for you. You should consider whether the Fund fits your
particular investment objectives.
5
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
PERFORMANCE
ASSET STRATEGY FUND
The bar chart and performance 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 total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and shows
how performance has varied from year to year.
- The bar 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 was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and other
distributions in shares. 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 bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31, EACH YEAR (%)
<TABLE>
<CAPTION>
'96 '97 '98 '99
<S> <C> <C> <C> <C>
5.39% 12.18% 9.26% 21.85%
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 15.07% (THE
FOURTH QUARTER OF 1999) AND THE LOWEST QUARTERLY RETURN WAS -4.82% (THE FIRST
QUARTER OF 1997). THE CLASS A RETURN FOR THE YEAR THROUGH MARCH 31, 2000 WAS
15.10%.
6
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999 (%) 1 YEAR LIFE OF CLASS(1)
--------------------------------------------------------------------------------
<S> <C> <C>
CLASS A SHARES OF
ASSET STRATEGY FUND 14.84% 10.25%
--------------------------------------------------------------------------------
S&P 500 Index 21.09% 27.78%
--------------------------------------------------------------------------------
Salomon Brothers Broad Investment Grade Index -0.83% 7.05%
--------------------------------------------------------------------------------
Salomon Brothers Short-Term Index
for 1-Month Certificates of Deposit 5.32% 5.63%
--------------------------------------------------------------------------------
Lipper Flexible Portfolio Funds Universe Average 12.50% 16.44%
--------------------------------------------------------------------------------
<CAPTION>
CLASS B SHARES OF
ASSET STRATEGY FUND 8.55%
--------------------------------------------------------------------------------
<S> <C> <C>
S&P 500 Index 21.09% 8.04%
--------------------------------------------------------------------------------
Salomon Brothers Broad Investment Grade Index -0.83% -0.46%
--------------------------------------------------------------------------------
Salomon Brothers Short-Term Index
for 1-Month Certificates of Deposit 5.32% 0.99%
--------------------------------------------------------------------------------
Lipper Flexible Portfolio Funds Universe Average 12.50% 6.65%
--------------------------------------------------------------------------------
<CAPTION>
CLASS C SHARES OF
ASSET STRATEGY FUND 13.13%
--------------------------------------------------------------------------------
<S> <C> <C>
S&P 500 Index 21.09% 8.04%
--------------------------------------------------------------------------------
Salomon Brothers Broad Investment Grade Index -0.83% -0.46%
--------------------------------------------------------------------------------
Salomon Brothers Short-Term Index
for 1-Month Certificates of Deposit 5.32% 0.99%
--------------------------------------------------------------------------------
Lipper Flexible Portfolio Funds Universe Average 12.50% 6.65%
--------------------------------------------------------------------------------
<CAPTION>
CLASS Y SHARES OF
ASSET STRATEGY FUND 22.27% 11.37%
--------------------------------------------------------------------------------
<S> <C> <C>
S&P 500 Index 21.09% 26.41%
--------------------------------------------------------------------------------
Salomon Brothers Broad Investment Grade Index -0.83% 5.94%
--------------------------------------------------------------------------------
Salomon Brothers Short-Term Index
for 1-Month Certificates of Deposit 5.32% 5.57%
--------------------------------------------------------------------------------
Lipper Flexible Portfolio Funds Universe
Average 12.50% 14.92%
================================================================================
</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 GOAL OF THE FUND.
(1) SINCE MARCH 9, 1995 FOR CLASS A SHARES, OCTOBER 6, 1999 FOR CLASS B SHARES,
OCTOBER 5, 1999 FOR CLASS C SHARES AND SEPTEMBER 27, 1995 FOR CLASS Y
SHARES. BECAUSE EACH CLASS COMMENCED OPERATIONS ON A DATE OTHER THAN AT
THE END OF A MONTH, AND PARTIAL MONTH CALCULATIONS OF THE PERFORMANCE OF
THE ABOVE INDEXES (INCLUDING INCOME) ARE NOT AVAILABLE, INDEX PERFORMANCE
IS CALCULATED FROM MARCH 31, 1995, OCTOBER 31, 1999, OCTOBER 31, 1999 AND
SEPTEMBER 30, 1995, RESPECTIVELY.
7
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
FEES AND EXPENSES
ASSET STRATEGY FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
================================================================================
<CAPTION>
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(3)
--------------------------------------------------------------------------------
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.70% 0.70% 0.70% 0.70%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.25% 1.00% 1.00% None
--------------------------------------------------------------------------------
OTHER EXPENSES 0.89% 0.89% 0.89% 0.74%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.84% 2.59% 2.59% 1.44%
================================================================================
</TABLE>
(1) THE CONTINGENT DEFERRED SALES CHARGE ("CDSC"), WHICH IS IMPOSED ON THE
LESSER OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS B SHARES, DECLINES
FROM 5% FOR REDEMPTIONS MADE WITHIN THE FIRST YEAR OF PURCHASE, TO 4% FOR
REDEMPTIONS MADE WITHIN THE SECOND YEAR, TO 3% FOR REDEMPTIONS MADE
WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR REDEMPTIONS MADE WITHIN THE
FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN THE SIXTH YEAR AND TO 0%
FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR CLASS C SHARES, A 1% CDSC
APPLIES TO THE LESSER OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS C
SHARES REDEEMED WITHIN TWELVE MONTHS AFTER PURCHASE. SOLELY FOR PURPOSES
OF DETERMINING THE NUMBER OF MONTHS OR YEARS FROM THE TIME OF ANY PAYMENT
FOR THE PURCHASE OF SHARES, ALL PAYMENTS DURING A MONTH ARE TOTALED AND
DEEMED TO HAVE BEEN MADE ON THE FIRST DAY OF THE MONTH.
(2) A 1% CDSC MAY APPLY TO PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3) 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 OTHER FUND-LEVEL EXPENSES
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999, AND FOR CLASS B AND CLASS
C, THE EXPENSES ATTRIBUTABLE TO EACH CLASS THAT ARE ANTICIPATED FOR THE
CURRENT YEAR. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
8
<PAGE>
EXAMPLE
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 particular Class A,
Class B, Class C 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:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $751 $1,115 $1,501 $2,580
--------------------------------------------------------------------------------
Class B Shares $662 $1,105 $1,475 $2,731(1)
--------------------------------------------------------------------------------
Class C Shares $362 $ 805 $1,375 $2,925
--------------------------------------------------------------------------------
Class Y Shares $147 $ 450 $ 774 $1,691
--------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $751 $1,115 $1,501 $2,580
--------------------------------------------------------------------------------
Class B Shares $262 $ 805 $1,375 $2,731(1)
--------------------------------------------------------------------------------
Class C Shares $262 $ 805 $1,375 $2,925
--------------------------------------------------------------------------------
Class Y Shares $147 $ 450 $ 774 $1,691
================================================================================
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
9
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
[GRAPHIC] GOALS
WADDELL & REED ADVISORS
CONTINENTAL INCOME FUND
(FORMERLY UNITED CONTINENTAL INCOME FUND) SEEKS TO PROVIDE
CURRENT INCOME TO THE EXTENT THAT, IN THE OPINION OF WRIMCO, MARKET
AND ECONOMIC CONDITIONS PERMIT. AS A SECONDARY GOAL, THE FUND SEEKS
LONG-TERM APPRECIATION OF CAPITAL.
PRINCIPAL STRATEGIES
Continental Income 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, that 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 and higher by S&P or Baa and
higher by MIS or, if unrated, deemed by WRIMCO to be of equivalent quality). The
Fund has no limitations on the range of maturities of the debt securities in
which it may invest.
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.
In general, in determining whether to sell 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 undervalued or if the debt security continues to
maintain its minimal credit risk. WRIMCO may also sell a security if it ceases
to produce income or otherwise to take advantage of more attractive investment
opportunities or to raise cash.
10
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Continental Income Fund owns different types of securities, a variety of
factors can affect its investment performance, such as:
- 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;
- an increase in interest rates, which may cause the value of the Fund's
fixed-income securities, especially bonds with longer maturities, to decline;
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds; and
- WRIMCO's skill 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 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
Continental Income 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.
11
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
PERFORMANCE
CONTINENTAL INCOME FUND
The bar chart and performance 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 total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and shows
how performance has varied from year to year over the past ten calendar
years.
- The bar 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 was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and other
distributions in shares. 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 bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31, EACH YEAR (%)
<TABLE>
<CAPTION>
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-6.51% 26.43% 10.09% 13.10% -0.39% 24.76% 9.63% 17.39% 10.36% 11.05%
</TABLE>
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 YEAR THROUGH MARCH 31, 2000 WAS
4.98%.
12
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
CONTINENTAL INCOME FUND 4.66% 13.15% 10.57%
-------------------------------------------------------------------------------------
S&P 500 Index 21.09% 28.59% 18.23%
-------------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Corporate Index -2.03% 7.64% 7.71%
-------------------------------------------------------------------------------------
Lipper Balanced Funds
Universe Average 8.72% 16.24% 11.82%
-------------------------------------------------------------------------------------
<CAPTION>
CLASS B SHARES OF
CONTINENTAL INCOME FUND 2.79%
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500 Index 21.09% 28.59% 18.23% 8.04%
-------------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Corporate Index -2.03% 7.64% 7.71% -0.57%
-------------------------------------------------------------------------------------
Lipper Balanced Funds
Universe Average 8.72% 16.24% 11.82% 4.63%
-------------------------------------------------------------------------------------
<CAPTION>
CLASS C SHARES OF
CONTINENTAL INCOME FUND 6.93%
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500 Index 21.09% 28.59% 18.23% 8.04%
-------------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Corporate Index -2.03% 7.64% 7.71% -0.57%
-------------------------------------------------------------------------------------
Lipper Balanced Funds
Universe Average 8.72% 16.24% 11.82% 4.63%
-------------------------------------------------------------------------------------
<CAPTION>
CLASS Y SHARES OF
CONTINENTAL INCOME FUND 11.46% 12.27%
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500 Index 21.09% 28.59% 18.23% 26.45%
-------------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Corporate Index -2.03% 7.64% 7.71% 4.92%
-------------------------------------------------------------------------------------
Lipper Balanced Funds
Universe Average 8.72% 16.24% 11.82% 14.00%
=====================================================================================
</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.
(1) SINCE OCTOBER 4,1999 FOR CLASS B SHARES, OCTOBER 5,1999 FOR CLASS C SHARES
AND JANUARY 4, 1996 FOR CLASS Y SHARES. BECAUSE EACH 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, INDEX PERFORMANCE IS FROM OCTOBER 31,1999, OCTOBER 31,1999 AND
DECEMBER 31, 1995, RESPECTIVELY.
13
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
FEES AND EXPENSES
CONTINENTAL INCOME FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
--------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(3)
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.70% 0.70% 0.70% 0.70%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.25% 1.00% 1.00% None
--------------------------------------------------------------------------------
OTHER EXPENSES 0.23% 0.40% 0.50% 0.20%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.18% 2.10% 2.20% 0.90%
================================================================================
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE
FIRST YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR,
TO 3% FOR REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR
REDEMPTIONS MADE WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN
THE SIXTH YEAR AND TO 0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR
CLASS C SHARES, A 1% CDSC APPLIES TO THE LESSER OF AMOUNT INVESTED OR
REDEMPTION VALUE OF CLASS C SHARES REDEEMED WITHIN TWELVE MONTHS AFTER
PURCHASE. SOLELY FOR PURPOSES OF DETERMINING THE NUMBER OF MONTHS OR YEARS
FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF SHARES, ALL PAYMENTS DURING
A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON THE FIRST DAY OF THE
MONTH.
(2) A 1% CDSC MAY APPLY TO PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3) MANAGEMENT FEES AND TOTAL FUND OPERATING EXPENSES HAVE BEEN RESTATED TO
REFLECT THE CHANGE IN MANAGEMENT FEES EFFECTIVE JUNE 30, 1999; OTHERWISE,
EXPENSE RATIOS ARE BASED ON OTHER FUND-LEVEL EXPENSES OF THE FUND FOR THE
FISCAL YEAR ENDED MARCH 31, 2000. ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
14
<PAGE>
EXAMPLE
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 particular Class A, Class B,
Class C 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:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $688 $928 $1,187 $1,924
-----------------------------------------------------------------------------
Class B Shares $613 $957 $1,228 $2,192(1)
-----------------------------------------------------------------------------
Class C Shares $323 $689 $1,181 $2,536
-----------------------------------------------------------------------------
Class Y Shares $ 92 $287 $ 498 $1,108
-----------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $688 $928 $1,187 $1,924
-----------------------------------------------------------------------------
Class B Shares $213 $657 $1,128 $2,192(1)
-----------------------------------------------------------------------------
Class C Shares $223 $689 $1,181 $2,536
-----------------------------------------------------------------------------
Class Y Shares $ 92 $287 $ 498 $1,108
-----------------------------------------------------------------------------
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
15
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
[GRAPHIC] GOALS
WADDELL & REED ADVISORS
INCOME FUND
(FORMERLY UNITED INCOME FUND) SEEKS CAPITAL GROWTH AND INCOME.
PRINCIPAL STRATEGIES
Income Fund seeks to achieve its goal by investing in the common stocks of
large U.S. and foreign companies. In order to achieve its goal, not; the Fund
invests in securities that have the potential for capital appreciation or
that WRIMCO expects to resist market decline. Although the Fund typically
invests in large companies, it may invest in securities of any size company.
WRIMCO attempts to select securities with growth and income possibilities by
looking at many factors including the company's:
- profitability record;
- history of improving sales and profits;
- management;
- leadership position in its industry;
- stock price value; and
- dividend payment history.
In general, in determining whether to sell a stock, WRIMCO uses the same type of
analysis that it uses in buying stocks in order to determine whether the
security has ceased to offer the prospect of continued dividend payment and/or
significant growth potential. WRIMCO may also sell a security to take advantage
of more attractive investment opportunities or to raise cash.
16
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Income Fund owns different types of securities, a variety of factors can
affect its investment performance, such as:
- adverse stock and bond 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;
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds; and
- WRIMCO's skill in evaluating and selecting securities for the Fund.
Market risk for small to medium sized companies may be greater than the market
risk for large companies. Smaller companies are more likely to have limited
financial resources and inexperienced management. As well, stock of smaller
companies may experience volatile trading and price fluctuations.
An investment in foreign securities presents additional risks such as currency
fluctuations and political or economic conditions affecting the foreign
country.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. 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
Income Fund is designed for investors who seek capital growth and income.
You should consider whether the Fund fits your particular investment
objectives.
17
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
PERFORMANCE
INCOME FUND
The bar chart and performance 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 total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and shows
how performance has varied from year to year over the past ten calendar
years.
- The bar 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 was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and other
distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the future.
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31, EACH YEAR (%)
<TABLE>
<CAPTION>
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-6.85% 30.66% 11.90% 16.05% -1.82% 29.60% 20.36% 27.34% 24.02% 16.41%
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 18.72% (THE
SECOND QUARTER OF 1997) AND THE LOWEST QUARTERLY RETURN WAS -17.35% (THE THIRD
QUARTER OF 1990). THE CLASS A RETURN FOR THE YEAR THROUGH MARCH 31, 2000 WAS
11.87%.
18
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
INCOME FUND 9.72% 22.01% 15.51%
-------------------------------------------------------------------------------------
S&P 500 Index 21.09% 28.59% 18.23%
-------------------------------------------------------------------------------------
Lipper Equity Income Funds
Universe Average 4.55% 17.83% 12.55%
-------------------------------------------------------------------------------------
<CAPTION>
CLASS B SHARES OF
INCOME FUND 6.53%
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500 Index 21.09% 28.59% 18.23% 8.04%
-------------------------------------------------------------------------------------
Lipper Equity Income Funds
Universe Average 4.55% 17.83% 12.55% 1.17%
-------------------------------------------------------------------------------------
<CAPTION>
CLASS C SHARES OF
INCOME FUND 10.53%
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500 Index 21.09% 28.59% 18.23% 8.04%
-------------------------------------------------------------------------------------
Lipper Equity Income Funds
Universe Average 4.55% 17.83% 12.55% 1.17%
-------------------------------------------------------------------------------------
<CAPTION>
CLASS Y SHARES OF
INCOME FUND 16.67% 21.45%
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500 Index 21.09% 28.59% 18.23% 26.92%
-------------------------------------------------------------------------------------
Lipper Equity Income Funds
Universe Average 4.55% 17.83% 12.55% 16.41%
=====================================================================================
</TABLE>
THE INDEX SHOWN IS A BROAD-BASED, SECURITIES MARKET INDEX THAT IS UNMANAGED.
THE LIPPER AVERAGE IS A COMPOSITE OF MUTUAL FUNDS WITH GOALS SIMILAR TO THE
GOALS OF THE FUND.
(1) SINCE OCTOBER 4,1999 FOR CLASS B SHARES, OCTOBER 4, 1999 FOR CLASS C SHARES
AND JUNE 19, 1995 FOR CLASS Y SHARES. BECAUSE EACH CLASS COMMENCED
OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND PARTIAL MONTH
CALCULATIONS OF THE PERFORMANCE OF THE ABOVE INDEX ARE NOT AVAILABLE, INDEX
PERFORMANCE IS CALCULATED FROM OCTOBER 31, 1999, OCTOBER 31, 1999 AND
JUNE 30, 1995, RESPECTIVELY.
19
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
FEES AND EXPENSES
INCOME FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% None None None
------------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
====================================================================================
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(3)
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.58% 0.58% 0.58% 0.58%
------------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.24% 1.00% 1.00% None
------------------------------------------------------------------------------------
OTHER EXPENSES 0.15% 0.60% 0.66% 0.18%
------------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 0.97% 2.18% 2.24% 0.76%
====================================================================================
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE
FIRST YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR,
TO 3% FOR REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR
REDEMPTIONS MADE WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN
THE SIXTH YEAR AND TO 0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR
CLASS C SHARES, A 1% CDSC APPLIES TO THE LESSER OF AMOUNT INVESTED OR
REDEMPTION VALUE OF CLASS C SHARES REDEEMED WITHIN TWELVE MONTHS AFTER
PURCHASE. SOLELY FOR PURPOSES OF DETERMINING THE NUMBER OF MONTHS OR YEARS
FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF SHARES, ALL PAYMENTS DURING
A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON THE FIRST DAY OF THE
MONTH.
(2) A 1% CDSC MAY APPLY TO PURCHASES OF $2 MILLION OR MORE OF CLASS A SHRES THAT
ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3) 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 OTHER FUND-LEVEL EXPENSES FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
20
<PAGE>
EXAMPLE
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 particular Class A, Class B, Class C
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:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF SHARES ARE REDEEMED AT
END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $668 $866 $1,080 $1,696
--------------------------------------------------------------------------------
Class B Shares $621 $983 $1,271 $2,205(1)
--------------------------------------------------------------------------------
Class C Shares $327 $699 $1,197 $2,570
--------------------------------------------------------------------------------
Class Y Shares $ 78 $243 $ 422 $ 942
================================================================================
<CAPTION>
IF SHARES ARE NOT REDEEMED AT
END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $668 $866 $1,080 $1,696
--------------------------------------------------------------------------------
Class B Shares $221 $683 $1,171 $2,205(1)
--------------------------------------------------------------------------------
Class C Shares $227 $699 $1,197 $2,570
--------------------------------------------------------------------------------
Class Y Shares $ 78 $243 $ 422 $ 942
================================================================================
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES
WERE PURCHASED.
21
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
[GRAPHIC] GOAL
WADDELL & REED ADVISORS
RETIREMENT SHARES
(FORMERLY UNITED RETIREMENT SHARES) SEEKS TO PROVIDE THE
HIGHEST LONG-TERM TOTAL INVESTMENT RETURN THAT IS, IN THE
OPINION OF WRIMCO, CONSISTENT WITH REASONABLE SAFETY OF
CAPITAL.
PRINCIPAL STRATEGIES
Retirement Shares seeks to achieve its goal through a fully managed investment
policy. The Fund invests primarily in common stock and debt securities (of any
maturity and mostly of investment grade) of U.S. issuers. The Fund generally
owns common stock of medium to large, well-established companies while typically
emphasizing a blend of value and growth potential. Value stocks are those that
WRIMCO believes are currently selling below their true worth, and growth stocks
are those whose earnings WRIMCO believes are likely to grow faster than the
economy. Typically, the Fund's debt securities are either U.S. Government
securities or investment-grade corporate bonds.
In selecting securities for investment the Fund considers a security's potential
for:
- capital growth (equities);
- capital stability (equities and debt securities); and
- income (debt securities).
In general, in determining whether to sell a security, WRIMCO uses the same type
of analysis it uses to buy securities. If a debt security no longer provides the
desired income or an equity security ceases to offer the expected growth
potential or becomes overvalued, the Fund may sell the security. As well, WRIMCO
may sell a security to take advantage of more attractive investment
opportunities or to raise cash.
22
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Retirement Shares owns different types of securities, a variety of
factors can affect its investment performance, such as:
- adverse stock and bond 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;
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
- an increase in interest rates, which may cause the value of the Fund's
fixed-income securities, especially bonds with longer maturities, to decline;
and
- WRIMCO's skill 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 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
Retirement Shares is designed for investors seeking high total return consistent
with reasonable safety of principal through a diversified portfolio that may
include stocks, bonds and other securities. You should consider whether the Fund
fits your particular investment objectives.
23
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
PERFORMANCE
RETIREMENT SHARES
The bar chart and performance 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 total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and shows
how performance has varied from year to year over the past ten calendar
years.
- The bar 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 was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and other
distributions in shares. 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 bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31, EACH YEAR (%)
<TABLE>
<CAPTION>
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.10% 22.33% 13.25% 12.74% -0.42% 24.28% 9.80% 18.15% 9.73% 43.65%
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 28.93% (THE
FOURTH QUARTER OF 1999) AND THE LOWEST QUARTERLY RETURN WAS -8.29% (THE THIRD
QUARTER OF 1990). THE CLASS A RETURN FOR THE YEAR THROUGH MARCH 31, 2000 WAS
9.14%.
24
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
RETIREMENT SHARES 35.39% 19.09% 14.17%
------------------------------------------------------------------------------------------
S&P 500 Index 21.09% 28.59% 18.23%
------------------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Corporate Index -2.03% 7.64% 7.71%
------------------------------------------------------------------------------------------
Lipper Flexible Portfolio
Funds Universe Average 12.50% 16.82% 12.29%
------------------------------------------------------------------------------------------
<CAPTION>
CLASS B SHARES OF
RETIREMENT SHARES 20.95%
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500 Index 21.09% 28.59% 18.23% 8.04%
------------------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Corporate Index -2.03% 7.64% 7.71% -0.57%
------------------------------------------------------------------------------------------
Lipper Flexible Portfolio
Funds Universe Average 12.50% 16.82% 12.29% 6.65%
------------------------------------------------------------------------------------------
<CAPTION>
CLASS C SHARES OF
RETIREMENT SHARES 24.95%
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500 Index 21.09% 28.59% 18.23% 8.04%
------------------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Corporate Index -2.03% 7.64% 7.71% -0.57%
------------------------------------------------------------------------------------------
Lipper Flexible Portfolio
Funds Universe Average 12.50% 16.82% 12.29% 6.65%
------------------------------------------------------------------------------------------
<CAPTION>
CLASS Y SHARES OF
RETIREMENT SHARES 43.87% 19.91%
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500 Index 21.09% 28.59% 18.23% 26.27%
------------------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Corporate Index -2.03% 7.64% 7.71% 5.53%
------------------------------------------------------------------------------------------
Lipper Flexible Portfolio
Funds Universe Average 12.50% 16.82% 12.29% 14.36%
==========================================================================================
</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 GOAL OF THE FUND.
(1) SINCE OCTOBER 4, 1999 FOR CLASS B SHARES, OCTOBER 4, 1999 FOR CLASS C SHARES
AND FEBRUARY 27, 1996 FOR CLASS Y SHARES. SINCE EACH CLASS COMMENCED
OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND PARTIAL MONTH
CALCULATIONS OF THE PERFORMANCE OF THE ABOVE INDEXES (INCLUDING INCOME) ARE
NOT AVAILABLE, INDEX PERFORMANCE IS FROM OCTOBER 31, 1999, OCTOBER 31, 1999
AND FEBRUARY 29, 1996, RESPECTIVELY.
25
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
FEES AND EXPENSES
RETIREMENT SHARES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% None None None
--------------------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
============================================================================================
<CAPTION>
--------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(3)
--------------------------------------------------------------------------------------------
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.70% 0.70% 0.70% 0.70%
--------------------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.25% 1.00% 1.00% None
--------------------------------------------------------------------------------------------
OTHER EXPENSES 0.20% 0.20% 0.20% 0.21%
--------------------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.15% 1.90% 1.90% 0.91%
============================================================================================
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE
FIRST YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR,
TO 3% FOR REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR
REDEMPTIONS MADE WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN
THE SIXTH YEAR AND TO 0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR
CLASS C SHARES, A 1% CDSC APPLIES TO THE LESSER OF AMOUNT INVESTED OR
REDEMPTION VALUE OF CLASS C SHARES REDEEMED WITHIN TWELVE MONTHS AFTER
PURCHASE. SOLELY FOR PURPOSES OF DETERMINING THE NUMBER OF MONTHS OR
YEARS FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF SHARES, ALL
PAYMENTS DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON THE
FIRST DAY OF THE MONTH.
(2) A 1% CDSC MAY APPLY TO PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE
(3) 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 OTHER FUND-LEVEL EXPENSES OF THE FUND FOR THE
FISCAL YEAR ENDED JUNE 30, 1999, AND FOR CLASS B AND CLASS C, THE EXPENSES
ATTRIBUTABLE TO EACH CLASS THAT ARE ANTICIPATED FOR THE CURRENT YEAR. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
26
<PAGE>
EXAMPLE
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 particular Class A, Class B, Class C
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:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $685 $919 $1,172 $1,892
------------------------------------------------------------------------------
Class B Shares $593 $897 $1,126 $2,025(1)
------------------------------------------------------------------------------
Class C Shares $293 $597 $1,026 $2,222
------------------------------------------------------------------------------
Class Y Shares $ 93 $290 $ 504 $1,120
------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $685 $919 $1,172 $1,892
------------------------------------------------------------------------------
Class B Shares $193 $597 $1,026 $2,025(1)
------------------------------------------------------------------------------
Class C Shares $193 $597 $1,026 $2,222
------------------------------------------------------------------------------
Class Y Shares $ 93 $290 $ 504 $1,120
==============================================================================
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
27
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
[GRAPHIC] GOAL
WADDELL & REED ADVISORS
TAX-MANAGED EQUITY FUND
(FORMERLY UNITED TAX-MANAGED EQUITY FUND) SEEKS LONG-TERM
GROWTH OF CAPITAL WHILE MINIMIZING TAXABLE GAINS AND
INCOME TO SHAREHOLDERS.
PRINCIPAL STRATEGIES
Tax-Managed Equity Fund seeks to achieve its goal by investing primarily in a
diversified portfolio of common stocks of U.S. companies that WRIMCO considers
to be high in quality and attractive in their long-term investment potential.
The Fund seeks stocks that are favorably priced in relation to their fundamental
value and will likely grow over time. While the Fund typically invests in the
common stock of large to medium sized U.S. companies, it may invest in companies
of any size, any industry or any country in order to achieve its goal.
WRIMCO manages the Fund using an investment strategy that is sensitive to the
potential impact of Federal income tax on shareholders' investment returns. The
Fund's tax-sensitive investment strategy is intended to lead to lower
distributions of income and realized capital gains than funds managed without
regard to Federal income tax consequences.
In selecting companies, WRIMCO typically invests for the long term and chooses
securities that it believes offer strong opportunities for long-term growth of
capital and that are attractively valued. While WRIMCO primarily invests in
growth stocks, it may also purchase value stocks. Value stocks are those that
WRIMCO believes are currently selling below their true worth.
When deciding to sell a security, WRIMCO considers the negative tax impact of
realized capital gains and, if applicable, the positive tax impact of realizing
capital losses. However, WRIMCO may sell a security at a realized gain if it
determines that the potential tax cost is outweighed by the risk of owning the
security, or if more attractive investment opportunities are available. In
addition, redemptions by shareholders may force the Fund to sell securities at
an inappropriate time, potentially resulting in realized gains.
28
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Tax-Managed Equity Fund owns different types of securities, a variety of
factors can affect its investment performance, such as:
- WRIMCO's skill in evaluating and selecting securities for the Fund;
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
- the mix of securities in the Fund, particularly the relative weightings in,
and exposure to, different sectors and industries that may result in
performance less favorable than another investment mix might have produced;
- adverse stock and bond 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; and
- the Fund's tax-sensitive investment strategy not limiting taxable income and
realized capital gains as contemplated.
Market risk for small companies may be greater than that for medium and large
companies. Smaller companies are more likely to have limited financial resources
and inexperienced management. Stock of smaller companies, and growth stock in
general, may also experience volatile trading and price fluctuations.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your 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
Tax-Managed Equity Fund is designed for long-term taxable investors. If you are
investing for the short-term (less than one year), you may suffer negative tax
consequences. Market conditions may limit the Fund's ability to generate tax
losses or to avoid dividend income. While the Fund tries to reduce the extent to
which shareholders incur taxes on Fund distributions of income and net realized
gains, the Fund does expect to distribute taxable income and/or capital gains
from time to time. Investors may also realize capital gains when they sell their
shares. You should consider whether the Fund fits your particular investment
objectives.
29
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
PERFORMANCE
TAX-MANAGED EQUITY FUND
The Fund has not been in operation for a full calendar year; therefore, it does
not have performance information of at least one calendar year to include a bar
chart or performance table reflecting average annual total returns.
[GRAPHIC]
--------------------------------------------------------------------------------
FEES AND EXPENSES
TAX-MANAGED EQUITY FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
================================================================================
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE
FIRST YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR,
TO 3% FOR REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR
REDEMPTIONS MADE WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN
THE SIXTH YEAR AND TO 0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR
CLASS C SHARES, A 1% CDSC APPLIES TO THE LESSER OF AMOUNT INVESTED OR
REDEMPTION VALUE OF CLASS C SHARES REDEEMED WITHIN TWELVE MONTHS AFTER
PURCHASE. SOLELY FOR PURPOSES OF DETERMINING THE NUMBER OF MONTHS OR YEARS
FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF SHARES, ALL PAYMENTS
DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON THE FIRST DAY OF
THE MONTH.
(2) A 1% CDSC MAY APPLY TO PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
30
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(3)
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.65% 0.65% 0.65% 0.65%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.25% 1.00% 1.00% None
--------------------------------------------------------------------------------
OTHER EXPENSES 0.40% 0.40% 0.40% 0.20%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.30% 2.05% 2.05% 0.85%
================================================================================
</TABLE>
(3) THE EXPENSES SHOWN FOR MANAGEMENT FEES REFLECT THE MAXIMUM ANNUAL FEE
PAYABLE; HOWEVER, WRIMCO HAS VOLUNTARILY AGREED TO WAIVE ITS INVESTMENT
MANAGEMENT FEE ON ANY DAY IF THE FUND'S NET ASSETS ARE LESS THAN $25
MILLION, SUBJECT TO WRIMCO'S RIGHT TO CHANGE OR TERMINATE THIS WAIVER. THE
EXPENSE RATIOS FOR OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS FOR THE
CURRENT FISCAL YEAR. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
EXAMPLE
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 particular Class A, Class B, Class C
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:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS
--------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares $700 $963
--------------------------------------------------------------------------------
Class B Shares $608 $943
--------------------------------------------------------------------------------
Class C Shares $308 $643
--------------------------------------------------------------------------------
Class Y Shares $ 87 $271
--------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS
--------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares $700 $963
--------------------------------------------------------------------------------
Class B Shares $208 $643
--------------------------------------------------------------------------------
Class C Shares $208 $643
--------------------------------------------------------------------------------
Class Y Shares $ 87 $271
================================================================================
</TABLE>
31
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
THE INVESTMENT PRINCIPLES OF THE FUNDS
INVESTMENT GOALS, PRINCIPAL STRATEGIES AND OTHER INVESTMENTS
WADDELL & REED ADVISORS ASSET STRATEGY FUND
The Fund seeks high total return over the long term. The Fund seeks to achieve
its goal by allocating its assets among a diversified portfolio of stocks, bonds
and short-term instruments. There is no guarantee that the Fund will achieve its
goal.
Allocating assets among different types of investments allows the Fund to take
advantage of opportunities wherever they may occur, but also subjects the Fund
to the risks of a given investment type. Stock values generally fluctuate in
response to the activities of individual companies and general market and
economic conditions. The values of bonds and short-term instruments generally
fluctuate based on changes in interest rates and in the credit quality of the
issuer.
WRIMCO regularly reviews the Fund's allocation of assets and makes changes to
favor investments that it believes provide the best opportunity to achieve the
Fund's goal. Although WRIMCO uses its expertise and resources in choosing
investments and in allocating assets, WRIMCO's decisions may not always be
beneficial to the Fund.
Generally, the mix of assets in the Fund will change from time to time depending
on WRIMCO's assessment of the market for each asset class. The allowable range
and approximate percentage of the mix for each asset class are listed below.
Some types of investments, such as indexed securities, can fall into more than
one asset class.
PORTFOLIO MIX
[PIE CHART] - Stock class 70% (can range from 0-100%)
- Bond class 25% (can range from 0-100%)
- Short-term class 5% (can range from 0-100%)
32
<PAGE>
WRIMCO tries to balance the Fund's investment risks against potentially higher
total returns by reducing the stock class allocation during stock market down
cycles and increasing the stock class allocation during periods of strongly
positive market performance. Typically, WRIMCO makes asset shifts among classes
gradually over time. WRIMCO considers various aspects when it decides to sell a
security, such as an individual security's performance and/or if it is an
appropriate time to vary the Fund's mix.
As a defensive measure, the Fund may increase its holdings in the bond or
short-term classes when WRIMCO believes that there is a potential bear market,
prolonged downturn in stock prices or significant loss in stock value. WRIMCO
may also, as a temporary defensive measure, invest up to all of the Fund's
assets in:
- money market instruments rated A-1 by S&P, or Prime 1 by MIS, or unrated
securities judged by WRIMCO to be of equivalent quality; or
- precious metals.
Although WRIMCO may seek to preserve appreciation in the Fund by taking a
temporary defensive position, doing so may prevent the Fund from achieving its
investment objective.
WADDELL & REED ADVISORS CONTINENTAL INCOME FUND
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 or 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
33
<PAGE>
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.
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. By taking a temporary defensive position, the Fund may not
achieve its investment objectives.
WADDELL & REED ADVISORS INCOME FUND
The Fund's goal is to seek capital growth and income. The Fund seeks to
achieve its goals by investing, during normal market conditions, primarily in
a diversified portfolio of securities, typically the stocks of large,
high-quality U.S. and foreign companies that are well known and have been
consistently profitable. There is no guarantee that the Fund will achieve its
goals.
When WRIMCO views stocks with high yields as less attractive than other common
stocks, the Fund may hold lower-yielding common stocks because of their
prospects for appreciation. When WRIMCO believes that the return on debt
securities and preferred stocks is more attractive than the return on common
stocks, or that a temporary defensive position is desirable, the Fund may seek
to achieve its goals by investing up to all of its assets in debt securities
(typically, investment grade) and preferred stocks. However, by taking a
temporary defensive position, the Fund may not achieve its investment
objectives.
WADDELL & REED ADVISORS RETIREMENT SHARES
The goal of this Fund is to provide the highest long-term total investment
return as is, in WRIMCO's opinion, consistent with reasonable safety of capital.
The Fund seeks to achieve its goal through a diversified portfolio under a fully
managed investment policy. Under this approach, the Fund will invest
substantially all of its assets in common stock and debt securities of U.S. and
foreign issuers. The Fund may also invest in preferred stock and convertible
securities. The Fund may invest varying proportions of its assets in all of
these securities, depending on WRIMCO's analysis of what types of securities, or
what proportions, are likely to achieve the Fund's goal. There is no guarantee
that the Fund will achieve its goal.
34
<PAGE>
Since the Fund's goal is long-term total investment return, WRIMCO does not
attempt to make quick shifts between the types of securities to take advantage
of what it considers to be short-term market or economic trends, but rather
attempts to find investment opportunities based on its analysis of long-term
prospects for capital growth, capital stability and income.
The Fund may invest a limited portion of its assets (no more than 10% of its
total assets) in non-investment grade debt securities. Also, the Fund can
invest, to a limited extent, in foreign securities.
When WRIMCO believes that a temporary defensive position is desirable, the Fund
may invest up to all of its assets in cash or money market instruments. By
taking a temporary defensive position, the Fund may not achieve its investment
objective.
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND
The goal of the Fund is long-term growth of capital while minimizing taxable
gains and income to shareholders. The Fund seeks to achieve its goal by
investing primarily in a diversified portfolio of common stocks of U.S.
companies that WRIMCO considers to be high in quality and attractive in their
long-term investment potential. The Fund seeks stocks that are favorably priced
in relation to their fundamental value and will, likely, grow over time.
The Fund attempts to achieve high after-tax returns for its shareholders by
weighing investment considerations and tax considerations. The Fund seeks to
minimize income distributions and distributions of realized short-term gains
(taxed as ordinary income), as well as distributions of realized long-term
gains. The Fund seeks to achieve returns primarily in the form of price
appreciation (not subject to current tax until shares are redeemed). There is no
guarantee that the Fund will achieve its goal.
35
<PAGE>
WRIMCO ordinarily uses one or more of the following strategies in its management
of the Fund:
- a long-term, low turnover approach to investing;
- an emphasis on lower-yielding securities to require distribution of little,
if any, taxable income;
- an attempt to avoid net realized short-term gains;
- in the sale of portfolio securities, selection of the most tax-favored lots;
and
- selective tax-advantaged hedging techniques as an alternative to taxable
sales.
The Fund will, under normal market conditions, invest at least 65% of its total
assets in equity securities, primarily common stocks and securities convertible
into common stocks. The Fund emphasizes growth stocks; however, it may also
invest in value stocks. In addition to common stocks, and securities convertible
into common stocks, the Fund may invest in preferred stocks and debt securities
that are mostly of investment grade. The Fund may also buy foreign securities;
however, it may not invest more than 25% of its total assets in foreign
securities.
When WRIMCO believes that a temporary defensive position is desirable or
necessary, the Fund may invest up to all of its assets in debt securities
(including commercial paper or short-term U.S. Government securities) or
preferred stocks, or both. By taking a temporary defensive position, the Fund
may not achieve its investment objective.
ALL FUNDS
Each Fund may also invest in and use other types of instruments in seeking to
achieve its goal(s). For example, each Fund is permitted to 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.
You will find more information about each Fund's permitted investments and
strategies, as well as the restrictions that apply to them, in its Statement of
Additional Information ("SAI").
36
<PAGE>
RISK CONSIDERATIONS OF PRINCIPAL STRATEGIES AND OTHER INVESTMENTS
Risks exist in any investment. Each Fund is subject to equity risk and other
market risk, financial risk and, in some cases, prepayment risk.
- Market risk is the possibility of a change in the price of the security. The
prices of common stocks and other equity securities generally fluctuate more
than those of other investments. A Fund may lose a substantial part, or even
all, of its investment in a company's stock. Growth stocks may experience
greater price volatility than value stocks. To the extent a Fund invests in
fixed income securities the price of a fixed income security may be affected
by 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 a Fund will likely change as well.
- Financial risk is based on the financial situation of the issuer of the
security. To the extent a Fund invests in debt securities, the Fund's
financial risk depends on the credit quality of the underlying securities in
which it invests. For an equity investment, a Fund's financial risk may
depend, for example, on the earnings performance of the company issuing the
stock.
- 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.
- Notwithstanding Tax-Managed Equity Fund's use of tax management investment
strategies, this Fund may have taxable income and may realize taxable capital
gains from time to time. In addition, investors purchasing Fund shares when
the Fund has large accumulated capital gains could receive a significant part
of the purchase price of their shares back as a taxable capital gain
distribution. Over time, securities with unrealized gains may comprise a
substantial portion of the Fund's assets. As well, state or Federal tax laws
or regulations may be amended at any time which could include adverse changes
to applicable tax rates or capital gains holding periods.
Certain types of each Fund's authorized investments and strategies (such as
foreign securities, junk bonds and derivative instruments) involve special
risks. Depending on how much a Fund invests or uses these strategies, these
special risks may become significant. For example, foreign investments may
subject a Fund to restrictions on receiving the investment proceeds from a
foreign country, foreign taxes, and potential difficulties in enforcing
contractual obligations, as well as fluctuations in foreign currency values and
37
<PAGE>
other developments that may adversely affect a foreign country. Junk bonds pose
a greater risk of nonpayment of interest or principal than higher-rated bonds.
Derivative instruments may expose a Fund to greater volatility than an
investment in a more traditional stock, bond or other security.
Because each Fund owns different types of investments, its performance will be
affected by a variety of factors. The value of a 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.
38
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
YOUR ACCOUNT
CHOOSING A SHARE CLASS
Each Fund offers four classes of shares: Class A, Class B, Class C and Class Y.
Each class has its own sales charge, if any, and expense structure. The decision
as to which class of shares is best suited to your needs depends on a number of
factors that you should discuss with your financial advisor. Some factors to
consider are how much you plan to invest and how long you plan to hold your
investment. If you are investing a substantial amount and plan to hold your
shares for a long time, Class A shares may be the most appropriate for you.
Class B and Class C shares are not available for investments of $2 million or
more. If you are investing a lesser amount, you may want to consider Class B
shares (if investing for at least seven years) or Class C shares (if investing
for less than seven years). Class Y shares are designed for institutional
investors and others investing through certain intermediaries, as described
below.
Since your objectives may change over time, you may want to consider another
class when you buy additional Fund shares. All of your future investments in a
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 a future investment.
39
<PAGE>
<TABLE>
<CAPTION>
GENERAL COMPARISON OF CLASS A, CLASS B AND CLASS C SHARES
CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------------
<S> <C> <C>
Initial sales charge No initial sales charge No initial sales charge
--------------------------------------------------------------------------------------
No deferred sales charge(1) Deferred sales charge on A 1% deferred sales
shares you sell within six charge on shares you
years after purchase sell within twelve
months after purchase
--------------------------------------------------------------------------------------
Maximum distribution Maximum distribution Maximum distribution
and service (12b-1) fees and service (12b-1) fees and service (12b-1)
of 0.25% of 1.00% fees of 1.00%
--------------------------------------------------------------------------------------
For an investment of Converts to Class A Does not convert to
$2 million or more, shares 8 years after the month Class A shares, so
only Class A shares in which the shares were annual expenses do
are available purchased, thus reducing not decrease
future annual expenses
--------------------------------------------------------------------------------------
For an investment of $300,000
or more, your financial advisor
typically will recommend purchase
of Class A shares due to a reduced
sales charge and lower annual
expenses
======================================================================================
</TABLE>
(1) A 1% CDSC MAY APPLY TO PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
EACH FUND HAS ADOPTED A DISTRIBUTION AND SERVICE PLAN ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, for each of its
Class A, Class B and Class C shares. Under the Class A Plan, each 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 service to Class A shareholders and/or maintaining Class A shareholder
accounts. Under the Class B Plan and the Class C Plan, each Fund may pay Waddell
& Reed, Inc., on an annual basis, a service fee of up to 0.25% of the average
daily net assets of the class to compensate Waddell & Reed, Inc. for providing
service to shareholders of that class and/or maintaining shareholder accounts
for that class and a distribution fee of up to 0.75% of the average daily net
assets of the class to compensate Waddell & Reed, Inc. for distributing shares
of that class. Because a class's fees are paid out of the assets of that class
on an ongoing basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
40
<PAGE>
CLASS A SHARES are subject to an initial sales charge when you buy them, based
on the amount of your investment, according to the table below. 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 lower than those for Class B or Class C
shares and higher than those for Class Y shares.
<TABLE>
<CAPTION>
SIZE OF PURCHASE
SALES CHARGE REALLOWANCE
AS APPROX. TO DEALERS
SALES CHARGE PERCENT OF AS PERCENT
AS PERCENT OF AMOUNT OF OFFERING
OFFERING PRICE INVESTED PRICE
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Under $100,000 5.75% 6.10% 5.00%
--------------------------------------------------------------------------------
$100,000 to less than $200,000 4.75 4.99 4.00
--------------------------------------------------------------------------------
$200,000 to less than $300,000 3.50 3.63 2.80
--------------------------------------------------------------------------------
$300,000 to less than $500,000 2.50 2.56 2.00
--------------------------------------------------------------------------------
$500,000 to less than $1,000,000 1.50 1.52 1.20
--------------------------------------------------------------------------------
$1,000,000 to less than $2,000,000 1.00 1.01 0.75
--------------------------------------------------------------------------------
$2,000,000 and over 0.00(1) 0.00(1) 0.50
================================================================================
</TABLE>
(1) NO SALES CHARGE IS PAYABLE AT THE TIME OF PURCHASE ON INVESTMENTS OF $2
MILLION OR MORE, ALTHOUGH FOR SUCH INVESTMENTS THE FUND MAY IMPOSE A CDSC OF
1.00% ON CERTAIN REDEMPTIONS MADE WITHIN TWELVE MONTHS OF THE PURCHASE. THE
CDSC IS ASSESSED ON AN AMOUNT EQUAL TO THE LESSER OF THE THEN CURRENT MARKET
VALUE OR THE COST OF THE SHARES BEING REDEEMED. ACCORDINGLY, NO SALES CHARGE
IS IMPOSED ON INCREASES IN NET ASSET VALUE ABOVE THE INITIAL PURCHASE PRICE.
Waddell & Reed, Inc. or its affiliate(s) may pay additional compensation from
its own resources to securities dealers based upon the value of shares of the
Fund owned by the dealer for its own account or for its customers. Waddell &
Reed, Inc. may also provide compensation from its own resources to securities
dealers with respect to shares of the Funds purchased by customers of such
dealers without payment of a sales charge.
41
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
LOWER SALES CHARGES ARE AVAILABLE BY:
- Combining additional purchases of Class A shares of any of the funds in the
Waddell & Reed Advisors Funds and/or the W&R Funds, except Class A shares of
Waddell & Reed Advisors Cash Management (formerly United Cash Management) or
Class A shares of W&R Funds Money Market Fund 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 net asset value ("NAV") of
Class A shares already held ("Rights of Accumulation");
- Grouping all purchases of Class A shares, except shares of Waddell & Reed
Advisors Cash Management or W&R Funds Money Market Fund, made during a
thirteen-month period ("Letter of Intent"); and
- Grouping purchases by certain related persons.
Additional information and applicable forms are available from your financial
advisor.
WAIVERS FOR CERTAIN INVESTORS
CLASS A SHARES MAY BE PURCHASED AT NAV BY:
- The Directors and officers of the Fund or of any affiliated entity of Waddell
& Reed, Inc., employees of Waddell & Reed, Inc., employees of its affiliates,
financial advisors of Waddell & Reed, Inc. and the spouse, children, parents,
children's spouses and spouse's parents of each;
- Certain retirement plans and certain trusts for these persons; and
- Until March 31, 2001, clients of Legend Equities Corporation ("Legend") if
the purchase is made with the proceeds of the redemption of shares of a
mutual fund which is not within the Waddell & Reed Advisors Funds or W&R
Funds and the purchase is made within 60 days of such redemption.
You will find more information in the SAI about sales charge reductions and
waivers.
42
<PAGE>
CONTINGENT DEFERRED SALES CHARGE. A CDSC may be assessed against your redemption
amount of Class B or Class C shares or certain Class A shares and paid to
Waddell & Reed, Inc. (the "Distributor"), as further described below. The
purpose of the CDSC is to compensate the Distributor for the costs incurred by
it in connection with the sale of the Fund's Class B or Class C shares or with
Class A investments of $2 million or more at NAV. The CDSC will not be imposed
on shares representing payment of dividends or other distributions or on amounts
which represent an increase in the value of a shareholder's account resulting
from capital appreciation above the amount paid for the shares purchased during
the CDSC period. For Class B, the date of redemption is measured in calendar
months from the month of purchase. Solely for purposes of determining the number
of months or years from the time of any payment for the purchase of shares, all
payments during a month are totaled and deemed to have been made on the first
day of the month. The CDSC is applied to the lesser of amount invested or
redemption value.
To keep your CDSC as low as possible, each time you place a request to redeem
shares, the Fund assumes that a redemption is made first of shares not subject
to a deferred sales charge (including shares which represent appreciation on
shares held, reinvested dividends and distributions) and then of shares that
represent the lowest sales charge.
Unless instructed otherwise, a Fund, when requested to redeem a specific dollar
amount, will redeem additional shares of the applicable class that are equal in
value to the CDSC. For example, should you request a $1,000 redemption and the
applicable CDSC is $27, the Fund will redeem shares having an aggregate NAV of
$1,027, absent different instructions.
CLASS B SHARES are not subject to an initial sales charge when you buy them.
However, you may pay a CDSC if you sell your Class B shares within six years of
their purchase, based on the table below. Class B shares pay an annual 12b-1
service fee of up to 0.25% of average net assets and a distribution fee of up to
0.75% of average net assets. Over time, these fees will increase the cost of
your investment and may cost you more than if you had purchased Class A shares.
Class B shares and any dividends and distributions paid on such shares
automatically convert to Class A shares eight years after the end of the month
in which the shares were purchased. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The Class A shares have lower ongoing expenses.
43
<PAGE>
The Fund will redeem your Class B shares at their NAV next calculated after
receipt of a written request for redemption in good order, subject to the CDSC
discussed below.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
ON SHARES SOLD WITHIN YEAR AS % OF AMOUNT SUBJECT TO CHARGE
<S> <C>
1 5.0%
----------------------------------------------------------------------------
2 4.0%
----------------------------------------------------------------------------
3 3.0%
----------------------------------------------------------------------------
4 3.0%
----------------------------------------------------------------------------
5 2.0%
----------------------------------------------------------------------------
6 1.0%
----------------------------------------------------------------------------
7+ 0.0%
============================================================================
</TABLE>
In the table, a "year" is a 12-month period. In applying the CDSC, all purchases
are considered to have been made on the first day of the month in which the
purchase was made.
For example, if a shareholder opens an account on July 14, 2000, then redeems
all Class B shares on July 12, 2001, the shareholder will pay a CDSC of 4%, the
rate applicable to redemptions made within the second year of purchase. All
Class B purchases made prior to July 1, 2000 will be automatically accelerated
to the revised method of calculating the CDSC. Any purchase made in 1999 will be
deemed to have been made on December 1, 1998. Any purchase made from January 1,
2000 to June 30, 2000 will be deemed to have been made on December 1, 1999.
CLASS C SHARES are not subject to an initial sales charge when you buy them, but
if you sell your Class C shares within twelve months after purchase, you will
pay a 1% CDSC. For purposes of the CDSC, purchases of Class C shares within a
month will be considered as being purchased on the first day of the month. Class
C shares pay an annual 12b-1 service fee of up to 0.25% of average net assets
and a distribution fee of up to 0.75% of average net assets. Over time, these
fees will increase the cost of your investment and may cost you more than if you
had purchased Class A shares. Class C shares do not convert to any other class.
For Class C shares, the CDSC will be applied to the lesser of amount invested or
redemption value of shares that have been held for twelve months or less.
44
<PAGE>
THE CDSC WILL NOT APPLY IN THE FOLLOWING CIRCUMSTANCES:
- redemptions of shares requested within one year of the shareholder's death or
disability, provided the Fund is notified of the death or disability at the
time of the request and furnished proof of such event satisfactory to the
Distributor.
- redemptions of shares made to satisfy required minimum distributions after
age 70 1/2 from a qualified retirement plan, a required minimum distribution
from an individual retirement account, Keogh plan or custodial account under
section 403(b)(7) of the Internal Revenue Code of 1986, as amended ("Code"),
a tax-free return of an excess contribution, or that otherwise results from
the death or disability of the employee, as well as in connection with
redemptions by any tax-exempt employee benefit plan for which, as a result of
a subsequent law or legislation, the continuation of its investment would be
improper.
- redemptions of shares purchased by current or retired Directors of the Fund,
and Directors of affiliated companies, current or retired officers or
employees of the Fund, WRIMCO, the Distributor or their affiliated companies,
financial advisors of Waddell & Reed, Inc., and by the members of immediate
families of such persons.
- redemptions of shares made pursuant to a shareholder's participation in any
systematic withdrawal service adopted for a Fund. (The service and this
exclusion from the CDSC do not apply to a one-time withdrawal.)
- redemptions the proceeds of which are reinvested within forty-five days in
shares of the same class of the Fund as that redeemed.
- the exercise of certain exchange privileges.
- redemptions effected pursuant to each Fund's right (other than Continental
Income Fund) to liquidate a shareholder's shares if the aggregate NAV of
those shares is less than $500.
- redemptions effected by another registered investment company by virtue of a
merger or other reorganization with a Fund or by a former shareholder of such
investment company of shares of a Fund acquired pursuant to such
reorganization.
45
<PAGE>
These exceptions may be modified or eliminated by a Fund at any time without
prior notice to shareholders, except with respect to redemptions effected
pursuant to the Fund's right to liquidate a shareholder's shares, which requires
certain notice.
CLASS Y SHARES are not subject to a sales charge or annual 12b-1 fees.
Class Y shares are only available for purchase by:
- participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401 of the Code, including 401(k)
plans, when the plan has 100 or more eligible employees and holds the shares
in an omnibus account on the Fund's records;
- 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;
- government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more; and
- certain retirement plans and trusts for employees and financial advisors of
Waddell & Reed, Inc. and its affiliates.
WAYS TO SET UP YOUR ACCOUNT
The different ways to set up (register) your account are listed below.
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
46
<PAGE>
RETIREMENT PLANS
TO SHELTER YOUR RETIREMENT SAVINGS FROM INCOME TAXES
Retirement plans allow individuals to shelter investment income and capital
gains from current income taxes. In addition, contributions to these accounts
(other than Roth IRAs and Education IRAs) may be tax-deductible.
- INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) allow a certain individual under age
70 1/2, with earned income, to invest up to $2,000 per tax year. The maximum
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.
- IRA ROLLOVERS retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
- ROTH IRAS allow certain individuals to make nondeductible contributions up to
$2,000 per 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. Withdrawals of earnings may be
tax free if the account is at least five years old and certain other
requirements are met.
- EDUCATION IRAS are established for the benefit of a minor, with nondeductible
contributions, up to $500 per year, and permit tax-free withdrawals to pay
the higher education expenses of the beneficiary.
- SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAS) provide business owners or those
with self-employed income (and their eligible employees) with many of the
same advantages as a Profit Sharing Plan, but with fewer administrative
requirements.
- SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLAN) can be established
by small employers to contribute to and allow their employees to contribute a
portion of their wages pre-tax to retirement accounts. This plan-type
generally involves fewer administrative requirements than 401(k) or other
qualified plans.
- KEOGH PLANS allow self-employed individuals to make tax-deductible
contributions for themselves of up to 25% of their annual earned income, with
a maximum of $30,000 per year.
- PENSION AND PROFIT-SHARING PLANS, INCLUDING 401(K) PLANS, allow corporations
and nongovernmental tax-exempt organizations of all sizes and/or their
employees to contribute a percentage of the employees' wages or other amounts
on a tax-deferred basis. These accounts need to be established by the
administrator or trustee of the plan.
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<PAGE>
- 403(b) CUSTODIAL ACCOUNTS are available to employees of public school
systems, churches and certain types of charitable organizations.
- 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 Transfers to Minors Act ("UTMA") or the Uniform Gifts
to Minors Act ("UGMA").
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 financial advisor for
the form.
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<PAGE>
BUYING SHARES
YOU MAY BUY SHARES OF EACH OF THE FUNDS through Waddell & Reed, Inc. and its
financial advisors or through advisors of Legend. To open your account you must
complete and sign an application. Your financial advisor can help you with any
questions you might have.
TO PURCHASE ANY CLASS OF 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 800-366-2520, then mail a completed application to Waddell & Reed, Inc.,
at the above address, 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, for the account of Waddell & Reed Number
9800007978, Special Account for Exclusive Benefit of Customers FBO Customer Name
and Account Number.
You may also buy Class Y shares of a 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 regarding the purchase of
Class Y shares.
THE PRICE TO BUY A FUND SHARE is its offering price, which is calculated every
business day.
The OFFERING PRICE of a share (the price to buy one share of a particular class)
is the next NAV calculated per share of that class plus, for Class A shares, the
sales charge shown in the table.
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<PAGE>
In the calculation of a Fund's NAV:
- The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
- Bonds are generally valued according to prices quoted by an independent
pricing service.
- Short-term debt securities are valued at amortized cost, which approximates
market value.
- 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.
EACH FUND IS OPEN FOR BUSINESS each day the New York Stock Exchange (the "NYSE")
is open. The Funds normally calculate their NAVs as of the close of business of
the NYSE, normally 4 p.m. Eastern time, except that an option or futures
contract held by a Fund may be priced at the close of the regular session of any
other securities exchange on which that instrument is traded.
The Funds 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
a Fund does not price its shares and when you are not able to purchase or redeem
a 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 each Fund's Board of
Directors.
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<PAGE>
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:
- All of your purchases must be made in U.S. dollars.
- If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the Waddell & Reed Advisors Funds and/or
the W&R Funds, the payment may be delayed for up to ten days to ensure that
your previous investment has cleared.
- The Funds do not issue certificates representing Class B, Class C or Class Y
shares. Asset Strategy Fund and Tax-Managed Equity Fund do not issue
certificates representing any class of shares.
- If you purchase shares of a 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 offering price next calculated after the
order has been received in proper form by the authorized third party (or its
designee). You should consult that firm to determine the time by which it
must receive your order for you to purchase shares of a 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 Funds reserve the right to discontinue
offering Fund shares for purchase.
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<PAGE>
MINIMUM INVESTMENTS
<TABLE>
<CAPTION>
FOR CLASS A, CLASS B AND CLASS C:
<S> <C>
TO OPEN AN ACCOUNT $500 (per Fund)
------------------------------------------------------------------------------------
For certain exchanges $100 (per Fund)
------------------------------------------------------------------------------------
For certain retirement accounts and accounts
opened with Automatic Investment Service $50 (per Fund)
------------------------------------------------------------------------------------
For certain retirement accounts and accounts opened
through payroll deductions for or by employees of
WRIMCO, Waddell & Reed, Inc. and their affiliates $25 (per Fund)
------------------------------------------------------------------------------------
TO ADD TO AN ACCOUNT Any amount
------------------------------------------------------------------------------------
For certain exchanges $100 (per Fund)
------------------------------------------------------------------------------------
For Automatic Investment Service $25 (per Fund)
------------------------------------------------------------------------------------
<CAPTION>
FOR CLASS Y:
<S> <C>
TO OPEN AN ACCOUNT
------------------------------------------------------------------------------------
For a government entity or authority $10 million
or for a corporation (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 to Waddell & Reed, Inc., along with:
- the detachable form that accompanies the confirmation of a prior purchase or
your year-to-date statement; or
- a letter stating your account number, the account registration, the Fund and
the class of shares that you wish to purchase.
52
<PAGE>
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, for the account of Waddell & Reed Number 9800007978,
Special Account for Exclusive Benefit of Customers FBO Customer Name and Account
Number.
If you purchase shares of the Funds 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 of a Fund)
is the NAV per share of that Fund class, subject to any CDSC applicable to Class
A, Class B or Class C shares.
TO SELL SHARES BY WRITTEN REQUEST: Complete an Account Service Request form,
available from your financial advisor, or write a letter of instruction with:
- the name on the account registration;
- the Fund's name;
- the Fund account number;
- the dollar amount or number, and the class, of shares to be redeemed; and
- any other applicable requirements listed in the table below.
Deliver the form or your letter to your financial advisor, or mail it to:
Waddell & Reed Services Company
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed Services Company 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 888-WADDELL, or fax your
request to 913-236-1599, and give your instructions to redeem Class Y shares and
make payment by wire to your predesignated bank account or by check to you at
the address on the account.
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<PAGE>
WHEN YOU PLACE AN ORDER TO SELL SHARES, your shares will be sold at the next NAV
calculated, subject to any applicable CDSC, after receipt of a written request
for redemption in good order by Waddell & Reed Services Company at the address
listed above. Note the following:
- If more than one person owns the shares, each owner must sign the written
request.
- If you hold a certificate, it must be properly endorsed and sent to the Fund.
- If you recently purchased the shares by check, a 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.
- Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted or as permitted by the Securities and Exchange Commission.
- Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities when a Fund's Board of
Directors determines that conditions exist making cash payments undesirable.
A Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its NAV during any 90-day period for any one shareholder.
- If you purchased shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms, some
of which may charge you a fee and may have additional requirements to sell
Fund shares. The Fund will be deemed to have received your order to sell
shares when that firm (or its designee) has received your order. Your order
will receive the NAV of the applicable Class subject to any applicable CDSC
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 shares at that
day's price.
54
<PAGE>
<TABLE>
<CAPTION>
SPECIAL REQUIREMENTS FOR SELLING SHARES
ACCOUNT TYPE SPECIAL REQUIREMENTS
----------------------------------------------------------------------------------------
<S> <C>
Individual or The written instructions must be signed by all
Joint 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 Organization At least one person authorized by corporate 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>
A Fund may require a signature guarantee in certain situations such as:
- a redemption request made by a corporation, partnership or fiduciary;
- a redemption request made by someone other than the owner of record; or
- the check is made payable to someone other than the owner of record.
This requirement is 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.
EACH FUND (OTHER THAN CONTINENTAL INCOME FUND) RESERVES THE RIGHT TO REDEEM at
NAV all of your Fund shares in your account 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.
55
<PAGE>
YOU MAY REINVEST, without charge, all or part of the amount of Class A shares of
a Fund you redeemed by sending to the Fund the amount you want to reinvest. The
reinvested amounts must be received by the Fund within forty-five days after the
date of your redemption. You may do this only once with Class A shares of a
Fund.
The CDSC will not apply to the proceeds of Class A (as applicable), Class B or
Class C shares of a Fund which are redeemed and then reinvested in Class A,
Class B or Class C shares of the Fund within forty-five days after such
redemption. The Distributor will, with your reinvestment, restore an amount
equal to the deferred sales charge attributable to the amount reinvested by
adding the deferred sales charge amount to your reinvestment. For purposes of
determining future deferred sales charges, the reinvestment will be treated as a
new investment. You may do this only once as to Class A shares of a Fund, once
as to Class B shares of a Fund and once as to Class C shares of a Fund.
Payments of principal and interest on loans made pursuant to a 401(a) qualified
plan (if such loans are permitted by the plan) may be reinvested, without
payment of a sales charge, in Class A shares of any Waddell & Reed Advisors Fund
in which the plan may invest.
TELEPHONE TRANSACTIONS
The Funds and their agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. Each Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If a 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.
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<PAGE>
SHAREHOLDER SERVICES
Waddell & Reed provides a variety of services to help you manage your account.
PERSONAL SERVICE
Your local financial advisor is available to provide personal service.
Additionally, a toll-free call, 800-366-5465, connects you to a Client Services
Representative or our automated customer telephone service. During normal
business hours, our Client Services staff is available to answer your questions
or update your account records. At almost any time of the day or night, you may
access your account information from a touch-tone phone, or from our web site,
www.waddell.com, to:
- Obtain information about your accounts;
- Obtain price information about other funds in the Waddell & Reed Advisors
Funds and/or W&R Funds; or
- Request duplicate statements.
REPORTS
Statements and reports sent to you include the following:
- confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange, transfer
or redemption)
- year-to-date statements (quarterly)
- annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports of the Funds may be mailed to your household, even if you have more than
one account with a Fund. Call the telephone number listed for Client Services if
you need additional copies of annual or semiannual reports or account
information.
EXCHANGES
You may sell your shares and buy shares of the same Class of another Fund in the
Waddell & Reed Advisors Funds or in W&R Funds without the payment of an
additional sales charge if you buy Class A shares or payment of a CDSC when you
exchange Class B or Class C shares. For Class B and Class C shares or Class A
shares to which the CDSC would otherwise apply the time period for the deferred
sales charge will continue to run. In addition,
57
<PAGE>
exchanging Class Y shareholders in the Waddell & Reed Advisors Funds may buy
Class A shares of Waddell & Reed Advisors Cash Management.
You may exchange only into funds that are legally permitted for sale in your
state of residence. Note that exchanges out of a Fund may have tax consequences
for you. Before exchanging into a fund, read its prospectus.
THE FUNDS RESERVE THE RIGHT to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
AUTOMATIC TRANSACTIONS FOR CLASS A, CLASS B AND CLASS C 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, or
between fund accounts, 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 financial advisor for more information.
<TABLE>
<CAPTION>
REGULAR INVESTMENT PLANS
AUTOMATIC INVESTMENT SERVICE
TO MOVE MONEY FROM YOUR BANK ACCOUNT TO AN EXISTING FUND ACCOUNT
MINIMUM AMOUNT MINIMUM FREQUENCY
<S> <C>
$25 (per Fund) Monthly
------------------------------------------------------------------------
<CAPTION>
FUNDS PLUS SERVICE
TO MOVE MONEY FROM WADDELL & REED ADVISORS CASH MANAGEMENT TO A FUND
WHETHER IN THE SAME OR A DIFFERENT ACCOUNT IN THE SAME CLASS
MINIMUM AMOUNT MINIMUM FREQUENCY
<S> <C>
$100 (per Fund) Monthly
========================================================================
</TABLE>
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Each Fund distributes substantially all of its net investment income and net
capital gains to its shareholders each year.
Usually, a Fund distributes net investment income at the following times: Asset
Strategy Fund, Continental Income Fund, Income Fund and
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<PAGE>
Retirement Shares, quarterly in March, June, September and December; Tax-Managed
Equity Fund, annually in 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. Each Fund offers two 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. 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
five dollars. If the distribution is less than five 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 additional
shares.
TAXES
As with any investment, you should consider how your investment in a Fund will
be taxed. If your account is not a tax-deferred retirement account (or you are
not otherwise exempt from income tax), you should be aware of the following tax
implications:
TAXES ON DISTRIBUTIONS. Dividends from a Fund's investment company taxable
income (which includes net short-term gains), if any, generally are taxable to
you as ordinary income whether received in cash or paid in additional Fund
shares. Distributions of a Fund's net capital gains, when designated as such,
are taxable to you as long-term capital gains, whether received in cash or paid
in additional Fund shares and regardless of the length of time you have owned
your shares. For Federal income tax purposes, your long-term capital gains
generally are taxed at a maximum rate of 20%.
Each 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 a 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
59
<PAGE>
aggregate dividends received by a 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. Each Fund must withhold 31% of all dividends, capital gains and
other 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, capital
gains and other distributions also is required for shareholders subject to
backup withholding.
TAXES ON TRANSACTIONS. Your redemption of Fund shares will result in a 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 Waddell & Reed Advisors Funds or W&R Funds generally will have similar tax
consequences. However, special rules apply when you dispose of a Fund's Class A
shares through a redemption or exchange within ninety days after your purchase
and then reacquire Class A shares of that Fund or acquire Class A shares of
another fund in the Waddell & Reed Advisors Funds without paying a sales charge
due to the forty-five day reinvestment privilege or exchange privilege. See
"Your Account." In these cases, any gain on the disposition of the original Fund
shares will 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
shares of a Fund within thirty days before or after redeeming other shares of
the Fund (regardless of class) at a loss, part or all of that loss will not be
deductible and will increase the basis of the newly purchased shares.
60
<PAGE>
STATE AND LOCAL INCOME TAXES. The portion of the dividends paid by each Fund
attributable to interest earned on U.S. Government securities generally is not
subject to state and local income taxes, although distributions by any 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 Funds in your state and
locality.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting each Fund and its shareholders; you will find
more information in the Fund's 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.
61
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
THE MANAGEMENT OF THE FUNDS
PORTFOLIO MANAGEMENT
Each Fund is managed by WRIMCO, subject to the authority of each Fund's Board of
Directors. WRIMCO provides investment advice to each of the Funds and supervises
each Fund's investments. WRIMCO and/or its predecessors have served as
investment manager to each of the registered investment companies in the Waddell
& Reed Advisors Funds, W&R Funds and Target/United Funds since the inception of
each company. WRIMCO is located at 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
Michael L. Avery is primarily responsible for the management of the equity
portion of the Asset Strategy Fund. Mr. Avery has managed the equity portion of
the Fund since January 1997. He is Senior Vice President of WRIMCO, Vice
President of the Fund and Vice President of other investment companies for which
WRIMCO serves as investment manager. From March 1995 to March 1998, Mr. Avery
was Vice President of, and Director of Research for, Waddell & Reed Asset
Management Company, a former affiliate of WRIMCO. Mr. Avery has served as the
portfolio manager for investment companies managed by WRIMCO since February 1,
1994, has served as the Director of Research for WRIMCO and its predecessors
since August 1987, and has been an employee of such since June 1981.
Daniel J. Vrabac is primarily responsible for the management of the fixed-income
portion of the Asset Strategy Fund. Mr. Vrabac has managed the fixed-income
portion of the Fund since January 1997. He is Vice President of the Fund and
Vice President of other investment companies for which WRIMCO serves as
investment manager. From May 1994 to March 1998, Mr. Vrabac was Vice President
of, and a portfolio manager for, Waddell & Reed Asset Management Company. Mr.
Vrabac has been an employee of WRIMCO since May 1994.
Cynthia P. Prince-Fox is primarily responsible for the management of the
Continental Income Fund and the Tax-Managed Equity Fund. Ms. Prince-Fox has held
her Fund responsibilities for Continental Income Fund since February 1993, and
for Tax-Managed Equity Fund since the inception of the Fund. She is Vice
President of WRIMCO and Vice President of both Funds. From January 1993 to March
1998, Ms. Prince-Fox was Vice President of, and a portfolio manager for, Waddell
& Reed Asset Management Company. Ms. Prince-Fox is a Vice President and
Portfolio Manager for Austin,
62
<PAGE>
Calvert & Flavin, Inc., an 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 and its predecessors.
James D. Wineland is primarily responsible for the management of the Income
Fund. Mr. Wineland has held his Fund responsibilities since July 1, 1997. He is
Vice President of WRIMCO, Vice President of the Fund and Vice President of other
investment companies for which WRIMCO serves as investment manager. From March
1995 to March 1998, Mr. Wineland was Vice President of, and a portfolio manager
for, Waddell & Reed Asset Management Company. Mr. Wineland has served as the
portfolio manager for investment companies managed by WRIMCO and its
predecessors since January 1988 and has been an employee of such since November
1984.
Charles W. Hooper, Jr. is primarily responsible for the management of Retirement
Shares. Mr. Hooper has held his Fund responsibilities since April 1999. He is
Vice President of WRIMCO and Vice President of the Fund. From August 1987 to
December 1991, Mr. Hooper served as the portfolio manager for another investment
company managed by WRIMCO. From October 1984 to December 1991, Mr. Hooper was
Vice President of, and a portfolio manager for, Waddell & Reed Asset Management
Company. From December 1991 to July 1996, Mr. Hooper was a portfolio manager for
Founders Asset Management Company, and from July 1996 to April 1999, Mr. Hooper
was the Chief Investment Officer for Owen Joseph.
Other members of WRIMCO's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to a Fund's investments.
MANAGEMENT FEE
Like all mutual funds, the Funds pay fees related to their daily operations.
Expenses paid out of each Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
Each Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. Each Fund also pays other expenses, which are
explained in the SAI.
63
<PAGE>
The management fee is payable at the annual rates of:
for Asset Strategy Fund, 0.70% of net assets up to $1 billion, 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. Management fees
for the Fund as a percent of the Fund's net assets for the fiscal year ended
September 30, 1999 were 0.69%;
for Continental Income Fund, 0.70% of net assets up to $1 billion, 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. Management fees
for the Fund as a percent of the Fund's net assets for the fiscal year ended
March 31, 2000 were 0.66%;
for Income Fund, 0.70% of net assets up to $1 billion, 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, 0.55% of net assets over $3 billion and up to $6 billion, and 0.50%
of net assets over $6 billion. Management fees for the Fund as a percent of the
Fund's net assets for the fiscal year ended December 31, 1999 were 0.56%;
for Retirement Shares, 0.70% of net assets up to $1 billion, 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. Management fees for the
Fund as a percent of the Fund's net assets for the fiscal year ended June 30,
1999 were 0.54%; and
for Tax-Managed Equity Fund, 0.65% of net assets up to $1 billion, 0.60% of net
assets over $1 billion and up to $2 billion, 0.55% of net assets over $2 billion
and up to $3 billion, and 0.50% of net assets over $3 billion.
WRIMCO has voluntarily agreed to waive its management fee for any day that a
Fund's net assets are less than $25 million, subject to WRIMCO's right to change
or modify this waiver.
64
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following information is to help you understand the financial performance of
each Fund's Class A, Class B, Class C 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.
65
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
ASSET STRATEGY FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' reports, along with the Fund's financial statements for the fiscal
year ended September 30, 1999 and the six months ended March 31, 2000, are
included in the Fund's SAI, which is available upon request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE FOR THE FISCAL YEAR FOR THE
SIX MONTHS ENDED SEPTEMBER 30, PERIOD FROM
ENDED ----------------------------------- 3/9/95(2) TO
3/31/00 1999 1998 1997 1996 9/30/95
<S> <C> <C> <C> <C> <C> <C>
CLASS A PER-SHARE DATA
Net asset value,
beginning of period $5.82 $5.78 $5.99 $5.24 $5.42 $5.00
--------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income 0.01 0.09 0.15 0.16 0.15 0.07
Net realized and
unrealized gain (loss)
on investments 1.83 0.29 0.28 0.74 (0.17) 0.40
--------------------------------------------------------------------------------------------
Total from investment
operations 1.84 0.38 0.43 0.90 (0.02) 0.47
--------------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.01) (0.10) (0.17) (0.15) (0.15) (0.05)
From capital gains (0.18) (0.24) (0.47) (0.00) (0.00) (0.00)
In excess of capital gains (0.00) (0.00) (0.00) (0.00) (0.01) (0.00)
--------------------------------------------------------------------------------------------
Total distributions (0.19) (0.34) (0.64) (0.15) (0.16) (0.05)
--------------------------------------------------------------------------------------------
Net asset value,
end of period $7.47 $5.82 $5.78 $5.99 $5.24 $5.42
CLASS A RATIOS/SUPPLEMENTAL DATA
Total return(3) 32.45% 6.90% 7.89% 17.46% -0.49% 9.42%
Net assets, end of period
(in millions) $67 $48 $33 $28 $32 $22
Ratio of expenses to
average net assets 1.86%(4) 1.90% 1.62% 1.70% 1.68% 1.64%(4)
Ratio of net investment
income to average
net assets 0.31%(4) 1.55% 2.45% 2.87% 2.93% 3.71%(4)
Portfolio turnover rate 111.62% 176.63% 230.09% 173.88% 91.06% 9.32%
============================================================================================
</TABLE>
(1) ON SEPTEMBER 12, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A
SHARES.
(2) COMMENCEMENT OF OPERATIONS.
(3) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD
DEDUCTED ON AN INITIAL PURCHASE.
(4) ANNUALIZED.
66
<PAGE>
--------------------------------------------------------------------------------
ASSET STRATEGY FUND
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/6/99(1) TO
3/31/00
<S> <C>
CLASS B PER-SHARE DATA
Net asset value, beginning of period $5.89
--------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.01)
Net realized and unrealized gain on investments 1.76
--------------------------------------------------------------------------------
Total from investment operations 1.75
--------------------------------------------------------------------------------
Less distributions:
From net investment income (0.01)
From capital gains (0.18)
--------------------------------------------------------------------------------
Total distributions (0.19)
--------------------------------------------------------------------------------
Net asset value, end of period $7.45
CLASS B RATIOS/SUPPLEMENTAL DATA
Total return 30.34%
Net assets, end of period (in millions) $2
Ratio of expenses to average net assets 2.56%(2)
Ratio of net investment loss to average net assets -0.66%(2)
Portfolio turnover rate 111.62%(3)
================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
(3) FOR THE SIX MONTHS ENDED MARCH 31, 2000.
67
<PAGE>
--------------------------------------------------------------------------------
ASSET STRATEGY FUND
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/5/99(1) TO
3/31/00
<S> <C>
CLASS C PER-SHARE DATA
Net asset value, beginning of period $5.86
--------------------------------------------------------------------------------
Income from investment operations:
Net investment loss 0.00
Net realized and unrealized gain on investments 1.78
--------------------------------------------------------------------------------
Total from investment operations 1.78
--------------------------------------------------------------------------------
Less distributions:
From net investment income (0.01)
From capital gains (0.18)
--------------------------------------------------------------------------------
Total distributions (0.19)
--------------------------------------------------------------------------------
Net asset value, end of period $7.45
CLASS C RATIOS/SUPPLEMENTAL DATA
Total return 31.01%
Net assets, end of period (in millions) $1
Ratio of expenses to average net assets 2.44%(2)
Ratio of net investment loss to average net assets -0.50%(2)
Portfolio turnover rate 111.62%(3)
================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
(3) FOR THE SIX MONTHS ENDED MARCH 31, 2000.
68
<PAGE>
--------------------------------------------------------------------------------
ASSET STRATEGY FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE FISCAL YEAR FOR THE
SIX MONTHS ENDED SEPTEMBER 30, PERIOD FROM
ENDED ----------------------------------- 9/27/95(1) TO
3/31/00 1999 1998 1997 1996 9/30/95
<S> <C> <C> <C> <C> <C> <C>
CLASS Y PER-SHARE DATA
Net asset value,
beginning of period $5.83 $5.78 $5.99 $5.24 $5.42 $5.41
-----------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.02 0.12 0.16 0.17 0.16 0.00
Net realized and
unrealized gain (loss)
on investments 1.82 0.28 0.29 0.75 (0.17) 0.01
-----------------------------------------------------------------------------------------------
Total from investment
operations 1.84 0.40 0.45 0.92 (0.01) 0.01
-----------------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.02) (0.11) (0.19) (0.17) (0.16) (0.00)
From capital gains (0.18) (0.24) (0.47) (0.00) (0.00) (0.00)
In excess of capital gains (0.00) (0.00) (0.00) (0.00) (0.01) (0.00)
-----------------------------------------------------------------------------------------------
Total distributions (0.20) (0.35) (0.66) (0.17) (0.17) (0.00)
-----------------------------------------------------------------------------------------------
Net asset value, end of
period $7.47 $5.83 $5.78 $5.99 $5.24 $5.42
CLASS Y RATIOS/SUPPLEMENTAL DATA
Total return 32.48% 7.35% 8.26% 17.93% -0.21% 0.18%
Net assets, end of
period (000 omitted) $395 $284 $243 $322 $330 $3
Ratio of expenses
to average net assets 1.60%(3) 1.49% 1.37% 1.28% 1.29% 0.00%
Ratio of net investment
income to average
net assets 0.56%(3) 1.96% 2.79% 3.29% 3.43% 0.00%
Portfolio turnover rate 111.62% 176.63% 230.09% 173.88% 91.06% 9.32%(2)
===============================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) RATE IS FOR THE PERIOD FROM MARCH 9, 1995 THROUGH SEPTEMBER 30, 1995.
(3) ANNUALIZED.
69
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
CONTINENTAL INCOME FUND
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, 2000, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED MARCH 31,
-------------------------------------
2000 1999 1998 1997 1996
CLASS A PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $7.97 $8.32 $7.57 $8.00 $6.95
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.18 0.33 0.24 0.24 0.24
Net realized and unrealized gain
on investments 1.04 0.04 1.58 0.22 1.35
---------------------------------------------------------------------------------
Total from investment operations 1.22 0.37 1.82 0.46 1.59
---------------------------------------------------------------------------------
Less distributions:
From net investment income (0.18) (0.32) (0.24) (0.24) (0.23)
From capital gains (0.81) (0.40) (0.83) (0.65) (0.31)
---------------------------------------------------------------------------------
Total distributions (0.99) (0.72) (1.07) (0.89) (0.54)
---------------------------------------------------------------------------------
Net asset value, end of period $8.20 $7.97 $8.32 $7.57 $8.00
CLASS A RATIOS/SUPPLEMENTAL DATA
Total return(2) 16.36% 3.38% 25.20% 5.88% 23.29%
Net assets, end of period (in millions) $597 $581 $599 $508 $502
Ratio of expenses to average net assets 1.15% 0.99% 0.91% 0.93% 0.89%
Ratio of net investment income to
average net assets 2.22% 2.69% 2.88% 3.01% 3.06%
Portfolio turnover rate 72.40% 50.68% 55.46% 40.29% 41.34%
=================================================================================
</TABLE>
(1) ON AUGUST 29, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
PER-SHARE AMOUNTS HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT THE 200% STOCK
DIVIDEND EFFECTED JUNE 26, 1998.
(2) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
70
<PAGE>
--------------------------------------------------------------------------------
CONTINENTAL INCOME FUND
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
3/31/00
CLASS B PER-SHARE DATA
<S> <C>
Net asset value, beginning of period $8.11
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.05
Net realized and unrealized gain on investments 0.91
--------------------------------------------------------------------------------
Total from investment operations 0.96
--------------------------------------------------------------------------------
Less distributions:
From net investment income (0.06)
From capital gains (0.81)
--------------------------------------------------------------------------------
Total distributions (0.87)
--------------------------------------------------------------------------------
Net asset value, end of period $8.20
CLASS B RATIOS/SUPPLEMENTAL DATA
Total return 12.75%
Net assets, end of period (in millions) $1
Ratio of expenses to average net assets 2.08%(2)
Ratio of net investment income to average net assets 1.14%(2)
Portfolio turnover rate 72.40%(2)
================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
71
<PAGE>
--------------------------------------------------------------------------------
CONTINENTAL INCOME FUND
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
3/31/00
CLASS C PER-SHARE DATA
<S> <C>
Net asset value, beginning of period $8.09
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.05
Net realized and unrealized gain on investments 0.93
--------------------------------------------------------------------------------
Total from investment operations 0.98
--------------------------------------------------------------------------------
Less distributions:
From net investment income (0.06)
From capital gains (0.81)
--------------------------------------------------------------------------------
Total distributions (0.87)
--------------------------------------------------------------------------------
Net asset value, end of period $8.20
CLASS C RATIOS/SUPPLEMENTAL DATA
Total return 12.98%
Net assets, end of period (in thousands) $279
Ratio of expenses to average net assets 2.23%(2)
Ratio of net investment income to average net assets 1.09%(2)
Portfolio turnover rate 72.40%(2)
================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
72
<PAGE>
--------------------------------------------------------------------------------
CONTINENTAL INCOME FUND
For a Class Y share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE
FOR THE FISCAL YEAR ENDED MARCH 31, PERIOD FROM
----------------------------------- 1/4/96(2) TO
2000 1999 1998 1997 3/31/96
CLASS Y PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.97 $8.33 $7.57 $8.00 $7.78
--------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.21 0.07 0.26 0.26 0.03
Net realized and
unrealized gain
on investments 1.03 0.32 1.58 0.21 0.25
--------------------------------------------------------------------------------
Total from investment
operations 1.24 0.39 1.84 0.47 0.28
--------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.20) (0.35) (0.26) (0.26) (0.06)
From capital gains (0.81) (0.40) (0.82) (0.64) (0.00)
--------------------------------------------------------------------------------
Total distributions (1.01) (0.75) (1.08) (0.90) (0.06)
--------------------------------------------------------------------------------
Net asset value,
end of period $8.20 $7.97 $8.33 $7.57 $8.00
CLASS Y RATIOS/SUPPLEMENTAL DATA
<S> <C> <C> <C> <C> <C>
Total return 16.72% 3.58% 25.43% 6.07% 3.53%
Net assets, end of
period (in millions) $1 $1 $11 $6 $6
Ratio of expenses
to average net assets 0.86% 0.81% 0.75% 0.75% 0.80%(3)
Ratio of net
investment income
to average net
assets 2.50% 3.32% 3.01% 3.20% 3.35%(3)
Portfolio turnover rate 72.40% 50.68% 55.46% 40.29% 41.34%(3)
================================================================================
</TABLE>
(1) PER-SHARE AMOUNTS HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT THE 200% STOCK
DIVIDEND EFFECTED JUNE 26, 1998.
(2) COMMENCEMENT OF OPERATIONS.
(3) ANNUALIZED.
73
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
INCOME FUND
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 December 31, 1999, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
<TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997 1996 1995
CLASS A PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.52 $7.59 $6.58 $5.79 $4.67
--------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.08 0.20 0.06 0.07 0.07
Net realized and unrealized gain
on investments 1.13 1.66 1.73 1.10 1.30
--------------------------------------------------------------------------------
Total from investment operations 1.21 1.86 1.79 1.17 1.37
--------------------------------------------------------------------------------
Less distributions:
From net investment income (0.08) (0.19) (0.06) (0.06) (0.07)
From capital gains (0.52) (1.74) (0.72) (0.32) (0.18)
--------------------------------------------------------------------------------
Total distributions (0.60) (1.93) (0.78) (0.38) (0.25)
--------------------------------------------------------------------------------
Net asset value, end of period $8.13 $7.52 $7.59 $6.58 $5.79
CLASS A RATIOS/SUPPLEMENTAL DATA
<S> <C> <C> <C> <C> <C>
Total return(2) 16.41% 24.02% 27.34% 20.36% 29.60%
Net assets, end of
period (in millions) $8,102 $7,368 $6,196 $4,851 $3,976
Ratio of expenses to
average net assets 0.94% 0.89% 0.84% 0.86% 0.83%
Ratio of net investment
income to average net assets 0.94% 1.11% 0.74% 1.03% 1.31%
Portfolio turnover rate 53.79% 49.29% 33.59% 22.24% 17.59%
================================================================================
</TABLE>
(1) ON JUNE 17, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
PER-SHARE AMOUNTS HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT THE 400% STOCK
DIVIDEND EFFECTED JUNE 26, 1998.
(2) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
74
<PAGE>
------------------------------------------------------------------------------
INCOME FUND
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
12/31/99
<S> <C>
CLASS B PER-SHARE DATA
Net asset value, beginning of period $7.77
-----------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.00)
Net realized and unrealized gain on investments 0.88
-----------------------------------------------------------------------------
Total from investment operations 0.88
-----------------------------------------------------------------------------
Less distributions:
From net investment income (0.00)
From capital gains (0.52)
-----------------------------------------------------------------------------
Total distributions (0.52)
-----------------------------------------------------------------------------
Net asset value, end of period $8.13
CLASS B RATIOS/SUPPLEMENTAL DATA
Total return 11.53%
Net assets, end of period (in millions) $13
Ratio of expenses to average net assets 2.18%(2)
Ratio of net investment loss to average net assets -0.59%(2)
Portfolio turnover rate 53.79%(2)
=============================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
75
<PAGE>
------------------------------------------------------------------------------
INCOME FUND
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1)TO
12/31/99
<S> <C>
CLASS C PER-SHARE DATA
Net asset value, beginning of period $7.77
-----------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.00)
Net realized and unrealized gain on investments 0.88
-----------------------------------------------------------------------------
Total from investment operations 0.88
-----------------------------------------------------------------------------
Less distributions:
From net investment income (0.00)
From capital gains (0.52)
-----------------------------------------------------------------------------
Total distributions (0.52)
-----------------------------------------------------------------------------
Net asset value, end of period $8.13
CLASS C RATIOS/SUPPLEMENTAL DATA
Total return 11.53%
Net assets, end of period (in millions) $1
Ratio of expenses to average net assets 2.23%(2)
Ratio of net investment loss to average net assets -0.63%(2)
Portfolio turnover rate 53.79%(2)
=============================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
76
<PAGE>
------------------------------------------------------------------------------
INCOME FUND
For a Class Y share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE
FOR THE FISCAL YEAR ENDED DECEMBER 31, PERIOD FROM
-------------------------------------------- 6/19/95(2) TO
1999 1998 1997 1996 12/31/95
<S> <C> <C> <C> <C> <C>
CLASS Y PER-SHARE DATA
Net asset value,
beginning of period $7.52 $7.59 $6.58 $5.79 $5.55
------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.10 0.24 0.07 0.07 0.04
Net realized and
unrealized gain
on investments 1.13 1.66 1.73 1.11 0.42
------------------------------------------------------------------------------------------------
Total from investment
operations 1.23 1.90 1.80 1.18 0.46
------------------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.10) (0.23) (0.07) (0.07) (0.04)
From capital gains (0.52) (1.74) (0.72) (0.32) (0.18)
------------------------------------------------------------------------------------------------
Total distributions (0.62) (1.97) (0.79) (0.39) (0.22)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.13 $7.52 $7.59 $6.58 $5.79
CLASS Y RATIOS/SUPPLEMENTAL DATA
Total return 16.67% 24.27% 27.49% 20.53% 8.45%
Net assets, end of
period (in millions) $283 $399 $299 $151 $107
Ratio of expenses to
average net assets 0.73% 0.71% 0.72% 0.73% 0.74%(3)
Ratio of net investment
income to average
net assets 1.18% 1.29% 0.85% 1.17% 1.36%(3)
Portfolio turnover rate 53.79% 49.29% 33.59% 22.24% 17.59%(3)
================================================================================================
</TABLE>
(1) PER-SHARE AMOUNTS HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT THE 400%
STOCK DIVIDEND EFFECTED JUNE 26, 1998.
(2) COMMENCEMENT OF OPERATIONS.
(3) ANNUALIZED.
77
<PAGE>
[GRAPHIC]
------------------------------------------------------------------------------
RETIREMENT SHARES
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' reports, along with the Fund's financial statements for the fiscal
year ended June 30, 1999, and the six months ended December 31, 1999, are
included in the Fund's SAI, which is available upon request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE FISCAL YEAR ENDED JUNE 30,
ENDED ----------------------------------------------
12/31/99 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
CLASS A PER-SHARE DATA
Net asset value,
beginning of period $9.84 $9.28 $9.14 $8.72 $8.26 $7.64
----------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.03 0.19 0.24 0.27 0.26 0.24
Net realized and unrealized
gain on investments 2.82 0.92 0.99 1.08 0.94 0.86
----------------------------------------------------------------------------------------------------
Total from investment
operations 2.85 1.11 1.23 1.35 1.20 1.10
----------------------------------------------------------------------------------------------------
Less distributions:
From net investment income (0.04) (0.18) (0.25) (0.27) (0.27) (0.22)
From capital gains (1.71) (0.37) (0.84) (0.66) (0.47) (0.26)
----------------------------------------------------------------------------------------------------
Total distributions (1.75) (0.55) (1.09) (0.93) (0.74) (0.48)
----------------------------------------------------------------------------------------------------
Net asset value, end of period $10.94 $9.84 $9.28 $9.14 $8.72 $8.26
CLASS A RATIOS/SUPPLEMENTAL DATA
Total return(2) 30.10% 12.75% 14.45% 16.70% 14.93% 15.07%
Net assets, end of
period (in millions) $1,183 $890 $825 $716 $607 $528
Ratio of expenses to
average net assets 1.10%(3) 0.99% 0.93% 0.92% 0.89% 0.89%
Ratio of net investment
income to average net assets 0.56%(3) 2.04% 2.57% 3.12% 3.01% 3.04%
Portfolio turnover rate 152.04% 122.58% 53.52% 39.55% 42.05% 48.62%
====================================================================================================
</TABLE>
(1) ON OCTOBER 7, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
(2) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD
DEDUCTED ON AN INITIAL PURCHASE.
(3) ANNUALIZED.
78
<PAGE>
------------------------------------------------------------------------------
RETIREMENT SHARES
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
12/31/99
<S> <C>
CLASS B PER-SHARE DATA
Net asset value, beginning of period $10.12
-----------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.01)
Net realized and unrealized gain on investments 2.53
-----------------------------------------------------------------------------
Total from investment operations 2.52
-----------------------------------------------------------------------------
Less distributions:
From net investment income (0.00)
From capital gains (1.71)
-----------------------------------------------------------------------------
Total distributions (1.71)
-----------------------------------------------------------------------------
Net asset value, end of period $10.93
CLASS B RATIOS/SUPPLEMENTAL DATA
Total return 25.95%
Net assets, end of period (in millions) $6
Ratio of expenses to average net assets 2.24%(2)
Ratio of net investment loss to average net assets -0.86%(2)
Portfolio turnover rate 152.04%(3)
=============================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
(3) FOR THE SIX MONTHS ENDED DECEMBER 31, 1999.
79
<PAGE>
------------------------------------------------------------------------------
RETIREMENT SHARES
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
12/31/99
<S> <C>
CLASS C PER-SHARE DATA
Net asset value, beginning of period $10.12
----------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.01)
Net realized and unrealized gain on investments 2.53
----------------------------------------------------------------------------
Total from investment operations 2.52
----------------------------------------------------------------------------
Less distributions:
From net investment income (0.00)
From capital gains (1.71)
----------------------------------------------------------------------------
Total distributions (1.71)
----------------------------------------------------------------------------
Net asset value, end of period $10.93
CLASS C RATIOS/SUPPLEMENTAL DATA
Total return 25.95%
Net assets, end of period (in millions) $1
Ratio of expenses to average net assets 2.29%(2)
Ratio of net investment loss to average net assets -0.92%(2)
Portfolio turnover rate 152.04%(3)
============================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
(3) FOR THE SIX MONTHS ENDED DECEMBER 31, 1999.
80
<PAGE>
------------------------------------------------------------------------------
RETIREMENT SHARES
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE FISCAL YEAR FOR THE
SIX MONTHS ENDED JUNE 30, PERIOD FROM
ENDED ---------------------------- 2/27/96(1) TO
12/31/99 1999 1998 1997 6/30/96
<S> <C> <C> <C> <C> <C>
CLASS Y PER-SHARE DATA
Net asset value,
beginning of period $9.85 $9.28 $9.14 $8.72 $8.68
-----------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.06 0.20 0.25 0.29 0.10
Net realized and
unrealized gain
on investments 2.80 0.94 0.99 1.07 0.06
-----------------------------------------------------------------------------------------------
Total from investment
operations 2.86 1.14 1.24 1.36 0.16
-----------------------------------------------------------------------------------------------
Less distributions:
From net investment income (0.06) (0.20) (0.26) (0.28) (0.12)
From capital gains (1.71) (0.37) (0.84) (0.66) (0.00)
-----------------------------------------------------------------------------------------------
Total distributions (1.77) (0.57) (1.10) (0.94) (0.12)
-----------------------------------------------------------------------------------------------
Net asset value,
end of period $10.94 $9.85 $9.28 $9.14 $8.72
CLASS Y RATIOS/SUPPLEMENTAL DATA
Total return 30.16% 13.11% 14.62% 16.87% 1.91%
Net assets, end of period
(in millions) $10 $3 $3 $3 $2
Ratio of expenses
to average net assets 0.90%(2) 0.75% 0.79% 0.78% 0.71%(2)
Ratio of net investment
income to average
net assets 0.74%(2) 2.32% 2.71% 3.28% 3.36%(2)
Portfolio turnover rate 152.04% 122.58% 53.52% 39.55% 42.05%(2)
===============================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
81
<PAGE>
This space is intended for your notes and calculations.
82
<PAGE>
This space is intended for your notes and calculations.
83
<PAGE>
This space is intended for your notes and calculations.
84
<PAGE>
This space is intended for your notes and calculations.
85
<PAGE>
This space is intended for your notes and calculations.
86
<PAGE>
[GRAPHIC]
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WADDELL & REED ADVISORS FUNDS
CUSTODIAN
UMB Bank, n.a.
928 Grand Boulevard
Kansas City, Missouri 64141
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N. W.
Washington, D. C. 20036
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1010 Grand Boulevard
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
888-WADDELL
UNDERWRITER
Waddell & Reed, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
SHAREHOLDER SERVICING AGENT
Waddell & Reed
Services Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
ACCOUNTING SERVICES AGENT
Waddell & Reed
Services Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
87
<PAGE>
[GRAPHIC]
------------------------------------------------------------------------------
WADDELL & REED ADVISORS FUNDS
You can get more information about each Fund in its --
- STATEMENT OF ADDITIONAL INFORMATION (SAI), which contains detailed
information about the Fund, particularly the 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).
- 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 a Fund's current SAI or copies of its 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 via e-mail at
[email protected].
Information about each Fund (including the current SAI and most recent Annual
and Semiannual Reports) is available from the SEC's web site at
http://www.sec.gov and may also be obtained, after paying a duplicating fee, by
electronic request at [email protected] or 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 202-942-8090.
The Funds' SEC file numbers are as follows:
Waddell & Reed Advisors Asset Strategy Fund, Inc.: 811-7217
Waddell & Reed Advisors Continental Income Fund, Inc.: 811-2008
Waddell & Reed Advisors Funds, Inc. Income Fund: 811-2552
Waddell & Reed Advisors Retirement Shares, Inc.: 811-2263
Waddell & Reed Advisors Tax-Managed Equity Fund, Inc.: 811-9789
Waddell & Reed, Inc.
6300 Lamar Avenue P. O. Box 29217
[LOGO] WADDELL & REED Shawnee Mission, Kansas 66201-9217
FINANCIAL SERVICES-Registered Trademark- 913-236-2000
---------------------------------------- 888-WADDELL
Investing with a plan-SM-
<PAGE>
WADDELL & REED ADVISORS CONTINENTAL INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
June 30, 2000
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a
prospectus. Investors should read this SAI in conjunction with the prospectus
("Prospectus") for the Waddell & Reed Advisors Continental Income Fund, Inc.
(the "Fund"), formerly, United Continental Income Fund, Inc., dated June 30,
2000, which may be obtained from the Fund or its underwriter, Waddell & Reed,
Inc., at the address or telephone number shown above.
TABLE OF CONTENTS
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 ................................................. 60
Payments to Shareholders ............................................... 66
Taxes .................................................................. 67
Portfolio Transactions and Brokerage ................................... 72
Other Information ...................................................... 74
Appendix A.............................................................. 76
Financial Statements ................................................... 83
<PAGE>
Waddell & Reed Advisors 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
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, 2000, which is the most recent balance sheet included in this SAI, for
the periods shown were as follows:
2
<PAGE>
<TABLE>
<CAPTION>
With Without
Sales Load Sales Load
Deducted Deducted
<S> <C> <C>
One-year period from April 1, 1999 to
March 31, 2000: 9.67% 16.36%
Five-year period from April 1, 1995 to
March 31, 2000: 13.13% 14.48%
Ten-year period from April 1, 1990 to
March 31, 2000: 11.36% 12.03%
</TABLE>
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 cumulative total return quotation for Class B shares with the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was 7.75%.
The cumulative total return quotation for Class B shares without the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was 12.75%.
The cumulative total return quotation for Class C shares with the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was 11.98%.
The cumulative total return quotation for Class C shares without the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was 12.98%.
The average annual total return quotations for Class Y shares as of
March 31, 2000, which is the most recent balance sheet included in this SAI, for
the periods shown were as follows:
<TABLE>
<S> <C>
One year period from April 1, 1999 to
March 31, 2000: 16.72%
Period from January 4, 1996* to
March 31, 2000: 12.78%
</TABLE>
*Date of inception.
3
<PAGE>
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 AND OTHER INFORMATION
Waddell & Reed, Inc. or the Fund also may, from time to time, publish
in advertisements or sales material performance rankings as published by
recognized independent mutual fund statistical services such as Lipper
Analytical Services, Inc., or by publications of general interest such as
FORBES, MONEY, THE WALL STREET JOURNAL, BUSINESS WEEK, BARRON'S, FORTUNE or
MORNINGSTAR MUTUAL FUND VALUES. Each class of the Fund may also compare its
performance to that of other selected mutual funds or selected recognized market
indicators such as the Standard & Poor's 500 Composite Stock Price Index and the
Dow Jones Industrial Average. Performance information may be quoted numerically
or presented in a table, graph or other illustration. In connection with a
ranking, the Fund may provide additional information, such as the particular
category to which it related, the number of funds in the category, the criteria
upon which the ranking is based, and the effect of sales charges, fee waivers
and/or expense reimbursements.
Performance information for the Fund may be accompanied by information
about market conditions and other factors that affected the Fund's performance
for the period(s) shown.
All performance information that the Fund advertises or includes in
sales material is historical in nature and is not intended to represent or
guarantee future results. The value of 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
4
<PAGE>
instrument or uses a technique only if it believes that doing so will help
the Fund achieve its goals. See "Investment Restrictions and Limitations" for
a listing of the fundamental and non-fundamental (e.g., operating) investment
restrictions and policies of the Fund.
SECURITIES - GENERAL
The Fund may invest in securities including common stock, preferred
stock, debt securities and convertible securities. Although common stocks and
other equity securities have a history of long-term growth in value, their
prices tend to fluctuate in the short term, particularly those of smaller
companies. The Fund may invest in preferred stock rated in any rating category
of the established rating services or, if unrated, judged by WRIMCO to be of
equivalent quality. Debt securities have varying levels of sensitivity to
changes in interest rates and varying degrees of quality. As a general matter,
however, when interest rates rise, the values of fixed-rate securities fall and,
conversely, when interest rates fall, the values of fixed-rate debt securities
rise. Similarly, long-term bonds are generally more sensitive to interest rate
changes than 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 (securities rated D by Standard &
5
<PAGE>
Poor's ("S&P") and C by Moody's Investors Service, Inc. ("MIS")). Debt
securities rated D by S&P or C by MIS are in payment default or are regarded
as having extremely poor prospects of ever attaining any real investment
standing. Debt securities rated at least BBB by S&P or Baa by MIS are
considered to be investment grade debt securities. Securities rated BBB or
Baa may have speculative characteristics. In addition, the Fund will treat
unrated securities judged by WRIMCO to be of equivalent quality to a rated
security as having that rating.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from time
to time, and the Fund may retain a portfolio security whose rating has been
changed.
The Fund may purchase debt securities whose principal amount at
maturity is dependent upon the performance of a specified equity security. The
issuer of such debt securities, typically an investment banking firm, is
unaffiliated with the issuer of the equity security to whose performance the
debt security is linked. Equity-linked debt securities differ from ordinary debt
securities in that the principal amount received at maturity is not fixed, but
is based on the price of the linked equity security at the time the debt
security matures. The performance of equity-linked debt securities depends
primarily on the performance of the linked equity security and may also be
influenced by interest rate changes. In addition, although the debt securities
are typically adjusted for diluting events such as stock splits, stock dividends
and certain other events affecting the market value of the linked equity
security, the debt securities are not adjusted for subsequent issuances of the
linked equity security for cash. Such an issuance could adversely affect the
price of the debt security. In addition to the equity risk relating to the
linked equity security, such debt securities are also subject to credit risk
with regard to the issuer of the debt security. In general, however, such debt
securities are less volatile than the equity securities to which they are
linked.
The Fund may invest in convertible securities. A convertible security
is a bond, debenture, note, preferred stock or other security that may be
converted into or exchanged for a prescribed amount of common stock of the same
or different issuer within a particular period of time at a specified price or
formula. Convertible securities generally have higher yields than common stocks
of the same or similar issuers, but lower yields than comparable nonconvertible
securities, are less subject to fluctuation in value than the underlying stock
because they have fixed income characteristics, and provide the potential for
capital appreciation if the market price of the underlying common stock
increases.
6
<PAGE>
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
7
<PAGE>
more than 10 years). All such Treasury securities are backed by the full
faith and credit of the United States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (also known as the Federal National Mortgage Association), Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by 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.
8
<PAGE>
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
9
<PAGE>
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 guaranteed by the U.S. Government or considered to be of the highest
quality. Conversely, principal-only ("PO") classes are
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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
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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.
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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
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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
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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 could also be adversely affected by the conversion of certain
European currencies into the euro. This conversion, which is underway, is
scheduled to be completed in 2002. However, problems with the conversion process
and delays could increase volatility in world capital markets and affect
European capital markets in particular.
The Fund may purchase and sell foreign currency and invest in foreign
currency deposits, and may enter into forward currency contracts, 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."
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. Under the Fund's current
securities lending procedures, the Fund may lend securities only to
broker-dealers and financial institutions deemed creditworthy by WRIMCO.
Any securities loans that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). At the
time of each loan, the Fund must receive collateral equal to no less than 100%
of the market value of the securities loaned. Under the present
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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. 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.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules, which may be changed without shareholder vote, as
to (i) whom securities may be loaned, (ii) the investment of cash collateral, or
(iii) voting rights.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned goes up, risks of delay in
recovering the securities loaned or even loss of rights in the collateral should
the borrower of the securities fail financially.
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REPURCHASE AGREEMENTS
The Fund may purchase securities subject to repurchase agreements. The
Fund will not enter into a repurchase transaction that will cause more than 10%
of its net assets to be invested in illiquid investments, which include
repurchase agreements not terminable within seven days. See "Illiquid
Investments." A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a commercial bank or
broker-dealer) agrees, at the time of purchase, that it will repurchase the
security at a specified time and price. The amount by which the resale price is
greater than the purchase price reflects an agreed-upon market interest rate
effective for the period of the agreement. The return on the securities subject
to the repurchase agreement may be more or less than the return on the
repurchase agreement.
The majority of the repurchase transactions in which the Fund will
engage are overnight transactions, and the delivery pursuant to the resale
typically will occur within one to five days of the purchase. The primary risk
is that the Fund may suffer a loss if the seller fails to pay the agreed-upon
amount on the delivery date and that amount is greater than the resale price of
the underlying securities and other collateral held by the Fund. In the event of
bankruptcy or other default by the seller, there may be possible delays 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.
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,
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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, floor and collar transactions;
and
(vii) non-government stripped fixed-rate mortgage-backed securities.
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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
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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, floors, collars, indexed securities and other derivative
instruments (collectively, "Financial Instruments") to attempt to enhance income
or yield or to attempt to hedge the Fund's investments. The strategies described
below may be used in an attempt to manage the Fund's foreign currency exposure
as well as other risks of the Fund's investments that can affect fluctuation in
its net asset value.
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
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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
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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
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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 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
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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.
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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
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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
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index, it will not be able to satisfy its assignment obligations by
delivering those securities against payment of the exercise price. Instead,
it will be required to pay cash in an amount based on the closing index value
on the exercise date. By the time it learns that it has been assigned, the
index may have declined, with a corresponding decline in the value of its
portfolio. This "timing risk" is an inherent limitation on the ability of
index call writers to cover their risk exposure by holding securities
positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size and
strike price, the terms of OTC options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Fund great flexibility to
tailor the option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded. The Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies or other options, futures contracts or forward contracts,
or (2) cash and liquid assets with a value, marked-to-market daily, sufficient
to cover its potential obligations to the extent not covered as provided in (1)
above.
Generally, OTC foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
FUTURES CONTRACTS AND OPTIONS 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.
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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
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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
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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.
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
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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.
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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
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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.
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Because combined options positions involve multiple trades, they result in
higher transaction costs and may be more difficult to open and close out.
TURNOVER. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate. Once
the Fund has received an exercise notice on an option it has written, it cannot
effect a closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
SWAPS, CAPS, FLOORS AND COLLARS. The Fund may enter into swaps, caps,
floors and collars to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive cash flows on a notational
principal amount, e.g., an exchange of floating rate payments for fixed-rate
payments. The purchase of a cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined value, to receive payments on a notional
principal amount from the party selling the cap. The purchase of a floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined value, to receive payments on a notional principal amount from the
party selling the floor. A collar combines elements of buying a cap and selling
a floor.
Swap agreements, including caps, floors and collars, can be
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors. Depending on their structure,
swap agreements may increase or decrease the overall volatility of the Fund's
investments and its share price and yield because, and to the extent, these
agreements affect the Fund's exposure to long- or short-term interest rates (in
the United States or abroad), foreign currency values, mortgage-backed security
values, corporate borrowing rates or other factors such as security prices or
inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to exchange
payments in U.S. dollars for payments
34
<PAGE>
in foreign currency, the swap agreement would tend to decrease the Fund's
exposure to U.S. interest rates and increase its exposure to foreign currency
and interest rates. Caps and floors have an effect similar to buying or
writing options.
The creditworthiness of firms with which the Fund enters into swaps,
caps or floors will be monitored by WRIMCO. If a firm's creditworthiness
declines, the value of the agreement would be likely to decline, potentially
resulting in losses. If a default occurs by the other party to such transaction,
the Fund will have contractual remedies pursuant to the agreements related to
the transaction.
The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap will be accrued on a daily basis and
an amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such 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.
BORROWING
The Fund may borrow money, but only from banks and for emergency or
extraordinary purposes. If the Fund does borrow, its share price may be subject
to greater fluctuation until the borrowing is paid off.
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,
floors, collars and other financial instruments;
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<PAGE>
(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, and enter into
repurchase agreements except as indicated above (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, floors, collars and other financial
instruments, (2) the Fund may obtain such short-term credits as
are necessary for the clearance of transactions, and (3) the Fund
may make margin payments in connection with futures contracts,
options, forward contracts, swaps, caps, floors, collars and other
financial instruments;
(viii) Engage in the underwriting of securities, 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. The Fund may not pledge its assets in connection with any
permitted borrowings; however, this policy does not prevent the
Fund from pledging its assets in connection with its purchase and
sale of futures contracts, options, forward currency contracts,
swaps, caps, floors, collars and other financial instruments;
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<PAGE>
(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; or
(xii) Issue senior securities.
THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL AND MAY BE
CHANGED BY THE BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL:
(i) Purchase a security if, as a result, more than 10% of its net
assets would consist of illiquid investments;
(ii) 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.
(iii) The Fund will normally have less than 10% of its total assets
invested in foreign securities.
(iv) The Fund does not currently intend to invest more than 5% of its
total assets in the securities of other investment companies.
(v) 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.
37
<PAGE>
(vi) To the extent that the Fund enters into futures contracts, options
on futures contracts or options on foreign currencies traded on a
CFTC-regulated exchange, in each case other than for bona fide
hedging purposes (as defined by the CFTC), the aggregate initial
margin and premiums required to establish those positions
(excluding the amount by which options are "in-the-money" at the
time of purchase) will not exceed 5% of the liquidation value of
the Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any contracts the Fund has entered into.
(In general, a call option on a futures contract is "in-the-money"
if the value of the underlying futures contract exceeds the
strike, i.e., exercise, price of the call; a put option on a
futures contract is "in-the-money" if the value of the underlying
futures contract is exceeded by the strike price of the put.) This
policy does not limit to 5% the percentage of the Fund's total
assets that are at risk in futures contracts, options on futures
contracts and currency options.
An investment policy or limitation that states a maximum percentage of
the Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year and
dividing it by the monthly average of the market value of such securities during
the year, excluding certain short-term securities. The Fund's turnover rate may
vary greatly from year to year as well as within a particular year and may be
affected by cash requirements for the redemption of its shares.
The portfolio turnover rate for the common stock portion of the Fund's
portfolio for the fiscal year ended March 31, 2000, was 107.13%, while the rate
for the remainder of the portfolio was 12.64%. The Fund's overall portfolio
turnover for the fiscal years ended March 31, 2000 and 1999 was 72.40% and
50.68%, respectively.
38
<PAGE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
THE MANAGEMENT AGREEMENT
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly owned subsidiary of Waddell & Reed, Inc.
Under the Management Agreement, WRIMCO is employed to supervise the investments
of the Fund and provide investment advice to the Fund. The address of WRIMCO and
Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits WRIMCO or an affiliate of WRIMCO to
enter into a separate agreement for transfer agency services ("Shareholder
Servicing Agreement") and a separate agreement for accounting services
("Accounting Services Agreement") with the Fund. The Management Agreement
contains detailed provisions as to the matters to be considered by the Fund's
Board of Directors prior to approving any Shareholder Servicing Agreement or
Accounting Services Agreement.
WADDELL & REED FINANCIAL, INC.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company, which is a wholly owned subsidiary of Waddell & Reed
Financial, Inc., a publicly held company. The address of these companies is 6300
Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
Waddell & Reed, Inc. and its predecessors have served as investment
manager to each of the registered investment companies in the Waddell & Reed
Advisors Funds (formerly, the United Group of Mutual Funds)since 1940 or the
company's inception date, whichever was later, and to Target/United Funds, Inc.
since that fund's inception, until January 8, 1992, when it assigned its duties
as investment manager for these funds (and the related professional staff) to
WRIMCO. WRIMCO has also served as investment manager for W&R Funds, Inc.
(formerly, Waddell & Reed Funds, Inc.) since its inception in September 1992.
Waddell & Reed, Inc. serves as principal underwriter for the investment
companies in the Waddell & Reed Advisors Funds and W&R Funds, Inc. and acts as
principal underwriter and distributor for variable life insurance and variable
annuity policies for which Target/United Funds, Inc. is the underlying
investment vehicle.
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<PAGE>
SHAREHOLDER SERVICES
Under the Shareholder Servicing Agreement entered into between the Fund
and Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell &
Reed, Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
ACCOUNTING SERVICES
Under the Accounting Services Agreement entered into between the Fund
and the Agent, the Agent provides the Fund with bookkeeping and accounting
services and assistance, including maintenance of the Fund's records, pricing of
the Fund's shares, preparation of prospectuses for existing shareholders,
preparation of proxy statements and certain shareholder reports. A new
Accounting Services Agreement, or amendments to an existing one, may be approved
by the Fund's Board of Directors without shareholder approval.
PAYMENTS BY THE FUND FOR MANAGEMENT, ACCOUNTING AND SHAREHOLDER SERVICES
Under the Management Agreement, for WRIMCO's management services, the
Fund pays WRIMCO a fee as described in the Prospectus. The management fees paid
by the Fund to WRIMCO during the Fund's fiscal years ended March 31, 2000, 1999
and 1998 were $3,887,408, $3,199,679 and $3,092,587, 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,
Class B and Class C shares, the Fund pays the Agent a monthly fee of $1.3125 for
each shareholder account that was in existence at any time during the prior
month, plus $0.30 for each account on which a dividend or distribution, of cash
or shares, had a record date in that month. For Class Y shares, the Fund pays
the Agent a monthly fee equal to one-twelfth of .15 of 1% of the average daily
net assets of that class for the preceding month. The Fund also pays certain
out-of-pocket expenses of the Agent, including long distance telephone
communications costs; microfilm and storage costs for certain documents; forms;
printing and mailing costs; charges of any sub-agent used by Agent in performing
services under the Shareholder Servicing
40
<PAGE>
Agreement; 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.
<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>
Fees paid to the Agent for the fiscal years ended March 31, 2000, 1999
and 1998 were $70,000, $70,000 and $68,333, 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,
2000, 1999 and 1998 were $362,698, $1,384,658 and $1,172,629, respectively. The
amounts retained by Waddell & Reed, Inc. for each fiscal year were $51,459,
$583,957 and $496,034, respectively.
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<PAGE>
As described in the Prospectus, Waddell & Reed, Inc. reallows to
selling broker-dealers a portion of the sales charge paid for purchases of Class
A shares. A major portion of the sales charge for Class A shares and the
contingent deferred sales charge for Class B and Class C shares and for certain
Class A shares may be paid to financial advisors and managers of Waddell & Reed,
Inc. and selling broker-dealers. Waddell & Reed, Inc. may compensate its
financial advisors as to purchases for which there is no sales or deferred sales
charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under the Distribution and Service Plan (the "Plan") for Class A shares
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay
Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed .25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with, either directly or through others, the distribution
of the Class A shares, the provision of personal services to Class A
shareholders and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its financial
advisors, registered representatives and sales managers (sales force) and
through other broker-dealers, banks and other appropriate intermediaries. In
distributing shares through its sales force, Waddell & Reed, Inc. will pay
commissions and incentives to the sales force at or about the time of sale and
will incur other expenses including costs for prospectuses, sales literature,
advertisements, sales office maintenance, processing of orders and general
overhead with respect to its efforts to distribute the Fund's shares. The Class
A Plan permits Waddell & Reed, Inc. to receive reimbursement for these Class
A-related distribution activities through the distribution fee, subject to the
limit contained in the Plan. The Class A Plan also permits Waddell & Reed, Inc.
to be reimbursed for amounts it expends in compensating, training and supporting
registered financial advisors, sales managers and/or other appropriate personnel
in providing personal services to Class A shareholders of the Fund and/or
maintaining Class A shareholder accounts; increasing services provided to Class
A shareholders of the Fund by office personnel located at field sales offices;
engaging in other activities useful in providing personal service to Class A
shareholders of the Fund and/or maintenance of Class A shareholder accounts; and
in compensating broker-dealers who may regularly sell Class A shares of the
Fund, and other third
42
<PAGE>
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 under the Class A Plan for the
fiscal year ended March 31, 2000 were $104,753 and $1,381,704, respectively.
Class B - $2,546 and $865. Class C - $517 and $179. 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.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for, either directly or through others,
providing personal services to shareholders of that class and/or maintaining
shareholder accounts for that class and a distribution fee of up to 0.75% of the
average daily net assets of the class to compensate Waddell & Reed, Inc. for,
either directly or through others, distributing the shares of that class. The
Class B Plan and the Class C Plan each permit Waddell & Reed, Inc. to receive
compensation, through the distribution and service fee, respectively, for its
distribution activities for that class, which are similar to the distribution
activities described with respect to the Class A Plan, and for its activities in
providing personal services to shareholders of that class and/or maintaining
shareholder accounts of that class, which are similar to the corresponding
activities for which it is entitled to reimbursement under the Class A Plan.
The only Directors or interested persons, as defined in the 1940 Act,
of the Fund who have a direct or indirect financial interest in the operation of
a Plan are the officers and Directors who are also officers of either Waddell &
Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. Each Plan
is anticipated to benefit the Fund and its shareholders of the affected class
through Waddell & Reed, Inc.'s activities not only to distribute the shares of
the affected class but also to provide personal services to shareholders of that
class and thereby promote the maintenance of their accounts with the Fund. The
Fund anticipates that shareholders of a particular class may benefit to the
extent that Waddell & Reed's activities are successful in increasing the assets
of the Fund, through increased sales or reduced redemptions, or a combination of
these, and reducing a shareholder's share of Fund and class expenses. Increased
Fund assets may also provide greater resources with which to pursue the goals of
the Fund. Further, continuing sales of shares may also reduce the likelihood
that it will be necessary to liquidate portfolio securities, in amounts
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<PAGE>
or at times that may be disadvantageous to the Fund, to meet redemption
demands. In addition, the Fund anticipates that the revenues from the Plan
will provide Waddell & Reed, Inc. with greater resources to make the
financial commitments necessary to continue to improve the quality and level
of services to the Fund and the shareholders of the affected class. Each Plan
was approved by the Fund's Board of Directors, including the Directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the operations of the Plan or any agreement referred to
in the Plan (hereafter, the "Plan Directors"). The Class A Plan was also
approved by the affected shareholders of the Fund.
Among other things, each Plan provides that (i) Waddell & Reed, Inc.
will provide to the Directors of the Fund at least quarterly, and the Directors
will review, a report of amounts expended under the Plan and the purposes for
which such expenditures were made, (ii) the Plan will continue in effect only so
long as it is approved at least annually, and any material amendments thereto
will be effective only if approved, by the Directors including the Plan
Directors acting in person at a meeting called for that purpose, (iii) amounts
to be paid by the Fund under the Plan may not be materially increased without
the vote of the holders of a majority of the outstanding shares of the affected
class of the Fund, and (iv) while the Plan remains in effect, the selection and
nomination of the Directors who are Plan Directors will be committed to the
discretion of the Plan Directors.
CUSTODIAL AND AUDITING SERVICES
The Fund's Custodian is UMB Bank, n.a., 928 Grand Boulevard, Kansas
City, Missouri. In general, the Custodian is responsible for holding the Fund's
cash and securities. Deloitte & Touche LLP, 1010 Grand Boulevard, Kansas City,
Missouri, the Fund's independent auditors, audits the Fund's financial
statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DETERMINATION OF OFFERING PRICE
The net asset value ("NAV") of each class of the shares of the Fund is
the value of the assets of that class, less the 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 NAV plus
the sales charge described in the Prospectus. The sales charge is paid to
Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of March 31,
2000, which is the most recent balance sheet included in this SAI, was as
follows:
44
<PAGE>
<TABLE>
<S> <C>
Net asset value per Class A share (Class A
net assets divided by Class A shares
outstanding) ........................................ $8.20
Add: selling commission (5.75% of offering
price) ................................................ 0.50
------
Maximum offering price per Class A share
(Class A NAV divided by 94.25%)........................ $8.70
======
</TABLE>
The offering price of a Class A share is its NAV next calculated
following acceptance of a purchase order plus the sales charge. The offering
price of a Class B, Class C or Class Y share is its NAV next calculated
following acceptance of a purchase order. The number of shares you receive for
your purchase depends on the next offering price after Waddell & Reed, Inc. or
an authorized third party receives and accepts your order at its principal
business office. You will be sent a confirmation after your purchase which will
indicate how many shares you have purchased. Shares are normally issued for cash
only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the
Fund may determine to discontinue offering Fund shares for purchase.
The NAV and offering price per share are 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 futures contract held by the Fund is
traded. The NYSE annually announces the days on which it will not be open for
trading. The most recent announcement indicates that the NYSE will not be open
on the following days: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. However, it is possible that the NYSE may close on other
days. The NAV will change every business day, since the value of the assets and
the number of shares outstanding change every 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
45
<PAGE>
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 NAV on that day. If events materially affecting the value of such
investments or currency exchange rates occur during such time period,
investments will be valued at their fair value as determined in good faith by or
under the direction of the Board of Directors. The foreign currency exchange
transactions of the Fund conducted on a spot (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
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<PAGE>
generally less than one-tenth of one percent due to the costs of converting
from one currency to another.
Optional delivery standby commitments are valued at fair value under
the general supervision and responsibility of the Fund's Board of Directors.
They are accounted for in the same manner as exchange-listed puts.
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
For Class A, Class B and Class C shares, initial investments must be at
least $500 with the exceptions described in this paragraph. A $100 minimum
initial investment pertains to certain exchanges of shares from another fund in
theWaddell & Reed Advisors Funds or W&R Funds, Inc. A $50 minimum initial
investment pertains to purchases for certain retirement plan accounts and to
accounts for which an investor has arranged, at the time of initial investment,
to make subsequent purchases for the account by having regular monthly
withdrawals of $25 or more made from a bank account. A 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 thewaddell & Reed
Advisors Funds and W&R Funds, Inc."
For Class Y shares, investments by government entities or authorities
or by corporations must total at least $10 million within the first twelve
months after initial investment. There is no initial investment minimum for
other Class Y investors.
REDUCED SALES CHARGES (APPLICABLE TO CLASS A SHARES ONLY)
ACCOUNT GROUPING
Large purchases of Class A shares are subject to lower sales charges.
The schedule of sales charges appears in the Prospectus. For the purpose of
taking advantage of the lower sales charges available for large purchases, a
purchase in any of categories 1 through 7 listed below made by an individual or
deemed to be made by an individual may be grouped with purchases in any other of
these categories:
1. Purchases by an individual for his or her own account (includes
purchases under the Waddell & Reed Advisors Funds Revocable Trust
Form);
2. Purchases by that individual's spouse purchasing for his or her own
account (includes Waddell & Reed Advisors Funds Revocable Trust Form of
spouse);
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3. Purchases by that individual or his or her spouse in their joint
account;
4. Purchases by that individual or his or her spouse for the account of
their child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in
a Uniform Transfers to Minors Act ("UTMA") or Uniform Gift to Minors
Act ("UGMA")account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), salary reduction plan account
under section 457 of the Internal Revenue Code, as amended (the
"Code"), provided that such purchases are subject to a sales charge
(see "Net Asset Value Purchases"), tax-sheltered annuity account
("TSA") or Keogh plan account, provided that the individual and spouse
are the only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or
her spouse is the settlor (the person who establishes the trust).
For the foregoing categories, an individual's domestic partner is
treated as his or her spouse.
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother has
an account in her own name; A's father has an account in his own
name; the UGMA account may be grouped with A's father's account
but may not be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in
the trust account is eligible for grouping with an IRA account of
W, H's wife;
C. H's will provides for the establishment of a trust for the benefit
of his minor children upon H's death; his bank is named as
trustee; upon H's death, an account is established in the name of
the bank, as trustee; a purchase in the account may be grouped
with an account held by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as 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.
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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
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purchase to be grouped, the investor must advise Waddell & Reed, Inc. at the
time the purchase is made that it is eligible for grouping and identify the
accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $75,000; at the same
time, H's parents open up three UGMA accounts for H and W's three
minor children and invest $10,000 in each child's name; the combined
purchase of $105,000 of Class A shares is subject to a reduced sales
load of 4.75% provided that Waddell & Reed, Inc. is advised that the
purchases are entitled to grouping.
RIGHTS OF ACCUMULATION
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the NAV of the existing account as of
the date the new purchase is accepted by Waddell & Reed, Inc. for the purpose of
determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund three
years ago. His account has a NAV of $80,000. His wife, W, now wishes
to invest $20,000 in Class A shares of the Fund. W's purchase will be
combined with H's existing account and will be entitled to a reduced
sales charge of 4.75%. H's original purchase was subject to a full
sales charge and the reduced charge does not apply retroactively to
that purchase.
In order to be entitled to Rights of Accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account(s) with which the purchase may be combined.
LETTER OF INTENT
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Letter of Intent ("LOI"). By signing a LOI
form, which is available from Waddell & Reed, Inc., the purchaser indicates an
intention to invest, over a 13-month period, a dollar amount which is sufficient
to qualify for a reduced sales charge. The 13-month period begins on the date
the first purchase made under the LOI is accepted by Waddell & Reed, Inc. Each
purchase made from time to time under the LOI is treated as if the purchaser
were buying at one time the total amount which he or she intends to invest. The
sales charge applicable to all purchases of Class A shares made under the terms
of the LOI will be the sales charge in effect on the beginning date of the
13-month period.
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In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under an LOI, the investor's Rights of
Accumulation (see above) will be taken into account; that is, Class A shares
already held in the same account in which the purchase is being made or in any
account eligible for grouping with that account, as described above, will be
included.
Example: H signs an LOI indicating his intent to invest in his own name a
dollar amount sufficient to entitle him to purchase Class A shares at
the sales charge applicable to a purchase of $100,000. H has an IRA
account and the Class A shares held under the IRA in the Fund have a
NAV as of the date the LOI is accepted by Waddell & Reed, Inc. of
$15,000; H's wife, W, has an account in her own name invested in
another fund in the Waddell & Reed Advisors Funds which charges the
same sales load as the Fund, with a NAV as of the date of acceptance
of the LOI of $10,000; H needs to invest $75,000 in Class A shares
over the 13-month period in order to qualify for the reduced sales
load applicable to a purchase of $100,000.
A copy of the LOI signed by a purchaser will be returned to the
purchaser after it is accepted by Waddell & Reed, Inc. and will set forth the
dollar amount of Class A shares which must be purchased within the 13-month
period in order to qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under a
contractual plan, the shares held under the plan will be taken into account in
determining the amount which must be invested under the LOI only if the
contractual plan has been completed.
The minimum initial investment under an LOI is 5% of the dollar amount
which must be invested under the LOI. An amount equal to 5% of the purchase
required under the LOI will be held "in escrow." If a purchaser does not, during
the period covered by the LOI, invest the amount required to qualify for the
reduced sales charge under the terms of the LOI, he or she will be responsible
for payment of the sales charge applicable to the amount actually invested. The
additional sales charge owed on purchases of Class A shares made under an LOI
which is not completed will be collected by redeeming part of the shares
purchased under the LOI and held "in escrow" unless the purchaser makes payment
of this amount to Waddell & Reed, Inc. within 20 days of Waddell & Reed. Inc.'s
request for payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower than
that available under the LOI, the lower sales charge will apply.
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An LOI does not bind the purchaser to buy, or Waddell & Reed, Inc. to
sell, the shares covered by the LOI.
With respect to Letters of Intent for $2,000,000 or purchases otherwise
qualifying for no sales charge under the terms of the LOI, the initial
investment must be at least $200,000, and the value of any shares redeemed
during the 13-month period which were acquired under the LOI will be deducted in
computing the aggregate purchases under the LOI.
Letters of Intent are not available for purchases made under an SEP
where the employer has elected to have all purchases under the SEP grouped.
OTHER FUNDS IN THE WADDELL & REED ADVISORS FUNDS AND W&R FUNDS, INC.
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the Waddell & Reed
Advisors Funds and the W&R Funds, Inc. subject to a sales charge. A purchase of
Class A shares, or Class A shares held, in any of the funds in the Waddell &
Reed Advisors Funds and/or the W&R Funds, Inc. subject to a sales charge will be
treated as an investment in the Fund for the purposes of determining the
applicable sales charge. For these purposes, Class A shares of Waddell & Reed
Advisors Cash Management, Inc. (formerly, United Cash Management, Inc.) or W&R
Funds, Inc. Money Market Fund that were acquired by exchange of another Waddell
& Reed Advisors Fund or W&R Funds, Inc. Class A shares on which a sales charge
was paid, plus the shares paid as dividends on those acquired shares, are also
taken into account.
NET ASSET VALUE PURCHASES OF CLASS A SHARES
Class A shares of the Fund may be purchased at NAV by the Directors and
officers of the Fund or of any affiliated entity of Waddell & Reed, Inc.,
employees of Waddell & Reed, Inc. or of any of its affiliates, financial
advisors of Waddell & Reed, Inc. and the spouse, children, parents, children's
spouses and spouse's parents of each such Director, officer, employee and
financial advisor. "Child" includes stepchild; "parent" includes stepparent.
Purchases of Class A shares in an IRA sponsored by Waddell & Reed, Inc.
established for any of these eligible purchasers may also be at NAV. Purchases
in any tax-qualified retirement plan under which the eligible purchaser is the
sole participant may also be made at NAV. Trusts under which the grantor and the
trustee or a co-trustee are each an eligible purchaser are also eligible for NAV
purchases of Class A shares. "Employees" includes retired employees. A retired
employee is an individual separated from service from Waddell & Reed, Inc., or
from an affiliated company with a vested interest in any Employee Benefit Plan
sponsored by Waddell & Reed, Inc. or any of its affiliated companies.
"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 &
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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 NAV whether or not the custodian himself is an eligible purchaser.
Until March 31, 2001, Class A shares may also be purchased at NAV by
persons who are clients of Legend Equities Corporation ("Legend") if the
purchase is made with the proceeds of the redemption of shares of a mutual fund
which is not within the Waddell & Reed Advisors Funds or W&R Funds, Inc. and the
purchase is made within 60 days of such redemption.
Purchases of Class A shares in a 401(k) plan having 100 or more
eligible employees and purchases of Class A shares in a 457 plan having 100 or
more eligible employees may be made at NAV.
Holders of an uncompleted United Continental Income Investment Program
("Program") on May 30, 1996 may purchase Class A shares of the Fund at NAV, 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 NAV 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, there are a number of
instances in which the Fund's Class A shares are sold or issued on a basis other
than at the maximum public offering price, that is, the NAV plus the highest
sales charge. Some of these instances relate to lower or eliminated sales
charges for larger purchases of Class A shares, whether made at one time or over
a period of time as under an LOI or Rights of Accumulation. See the table of
sales charges in the Prospectus. The reasons for these quantity discounts are,
in general, that (i) they are traditional and have long been permitted in the
industry and are therefore necessary to meet competition as to sales of shares
of other funds having such discounts, (ii) certain quantity discounts are
required by rules of the National Association of Securities Dealers, Inc. (as is
elimination of sales charges on the reinvestment of dividends and
distributions), and (iii) they are designed to avoid an unduly large dollar
amount of sales charge on substantial purchases in view of reduced selling
expenses. Quantity discounts are made available to certain related persons for
reasons of family unity and to provide a benefit to tax-exempt plans and
organizations.
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In general, the reasons for the other instances in which there are
reduced or eliminated sales charges for Class A shares are as follows. Exchanges
at NAV are permitted because a sales charge has already been paid on the shares
exchanged. Sales of Class A shares without a sales charge are permitted to
Directors, officers and certain others due to reduced or eliminated selling
expenses and since such sales may aid in the development of a sound employee
organization, encourage responsibility and interest in the Waddell & Red
Advisors Funds and an identification with its aims and policies. Limited
reinvestments of redemptions of Class A shares at no sales charge are permitted
to attempt to protect against mistaken or not fully informed redemption
decisions. Class A shares may be issued at no sales charge in plans of
reorganization due to reduced or eliminated sales expenses and since, in some
cases, such issuance is exempted by the 1940 Act from the otherwise applicable
restrictions as to what sales charge must be imposed. Reduced or eliminated
sales charges may also be used for certain short-terms promotional activities by
Waddell & Reed, Inc. 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 NAV per share of all shares sold or
issued.
FLEXIBLE WITHDRAWAL SERVICE FOR CLASS A, CLASS B AND CLASS C SHAREHOLDERS
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service (the "Service") regular monthly, quarterly, semiannual or
annual payments by redeeming on an ongoing basis Class A, Class B or Class C
shares that you own of the Fund or of any of the funds in theWaddell & Reed
Advisors Funds or W&R Funds, Inc. It would be a disadvantage to an investor to
make additional purchases of Class A shares while the Service is in effect
because it would result in duplication of sales charges. Class B and Class C
shares and certain Class A shares to which the CDSC otherwise applies that are
redeemed under the Service are not subject to a CDSC. Applicable forms to start
the Service are available through Waddell & Reed Services Company.
The maximum amount of the withdrawal for monthly, quarterly, semiannual
and annual withdrawals is 2%, 6%, 12% and 24% respectively of the value of your
account at the time the Service is established. The withdrawal proceeds are not
subject to the deferred sales charge, but only within these percentage
limitations. The minimum withdrawal is $50. The Service, and this exclusion from
the deferred sales charge, does not apply to a one-time withdrawal.
To qualify for the Service, you must have invested at least $10,000 in
Class A, Class B or Class C shares which you still own of any of the funds in
theWaddell & Reed Advisors Funds or W&R Funds, Inc.; or, you must own Class A,
Class B or Class C shares
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having a value of at least $10,000. The value for this purpose is the value
at the current offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to
one-twelfth of a percentage of the value of the shares in the
Account (you select the percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least
five shares).
Shares are redeemed on the 20th day of the month in which the payment
is to be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
Retirement plan accounts may be subject to a fee imposed by the plan
custodian for use of the Service.
If you have a share certificate for the shares you want to make
available for the Service, you must enclose the certificate with the form
initiating the Service.
The dividends and distributions on shares of a class you have made
available for the Service are paid in additional shares of that class. All
payments under the Service are made by redeeming shares, which may involve a
gain or loss for tax purposes. To the extent that payments exceed dividends and
distributions, the number of shares you own will decrease. When all of the
shares in your account are redeemed, you will not receive any further payments.
Thus, the payments are not an annuity, an income or return on your investment.
You may, at any time, change the manner in which you have chosen to
have shares redeemed to any of the other choices originally available to you.
You may, at any time, redeem part or all of the shares in your account; if you
redeem all of the shares, the Service is terminated. The Fund can also terminate
the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed
will be sent to you to assist you in completing your Federal income tax return.
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EXCHANGES FOR SHARES OF OTHER FUNDS IN THE WADDELL & REED ADVISORS FUNDS AND W&R
FUNDS, INC.
CLASS A SHARE EXCHANGES
Once a sales charge has been paid on shares of a fund in theWaddell &
Reed Advisors Funds or the W&R Funds, Inc., 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 Waddell & Reed Advisors Funds or the W&R
Funds, Inc. The shares you exchange must be worth at least $100 or you must
already own shares of the fund in the Waddell & Reed Advisors Funds or the W&R
Funds, Inc. into which you want to exchange.
You may exchange Class A shares you own in another fund in the Waddell
& Reed Advisors Funds or the W&R Funds, Inc. for Class A shares of the Fund
without charge if (i) a sales charge was paid on these shares, or (ii) the
shares were received in exchange for shares for which a sales charge was paid,
or (iii) the shares were acquired from reinvestment of dividends and
distributions paid on such shares. There may have been one or more such
exchanges so long as a sales charge was paid on the shares originally purchased.
Also, shares acquired without a sales charge because the purchase was $2 million
or more will be treated the same as shares on which a sales charge was paid.
Shares of Waddell & Reed Advisors Municipal Bond Fund, Inc., Waddell &
Reed Advisors Government Securities Fund, Inc., Waddell & Reed Advisors
Municipal High Income Fund, Inc. (formerly, United Municipal Bond Fund, Inc.,
United Government Securities Fund, Inc. and United Municipal High Income Fund,
Inc., respectively), W&R Funds, Inc. Municipal Bond Fund and Limited-Term Bond
Fund (formerly, Waddell & Reed Funds, Inc.) are the exceptions and special rules
apply. Class A shares of these funds may be exchanged for Class A shares of the
Fund only if (i) you received those shares as a result of one or more exchanges
of shares on which a maximum sales charge was originally paid (currently,
5.75%), or (ii) the shares have been held from the date of the original purchase
for at least six months.
Subject to the above rules regarding sales charges, you may have a
specific dollar amount of Class A shares of Waddell & Reed Advisors Cash
Management, Inc. automatically exchanged each month into Class A shares of the
Fund or any other fund in the Waddell & Reed Advisors Funds, provided you
already own Class A shares of the fund. The shares of Waddell & Reed Advisors
Cash Management, Inc. which you designate for automatic exchange must be worth
at least $100, which may be allocated among the Class A shares of different
funds in the Waddell & Reed Advisors Funds so long as each fund receives a value
of at least $25. Minimum initial investment and minimum balance requirements
apply to such automatic exchange service.
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You may redeem your Class A shares of the Fund and use the proceeds to
purchase Class Y shares of the Fund if you meet the criteria for purchasing
Class Y shares.
CLASS B SHARE EXCHANGES
You may exchange Class B shares of the Fund for Class B shares of other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc. without
charge.
The redemption of the Fund's Class B shares as part of an exchange is
not subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class B shares of Waddell &
Reed Advisors Cash Management, Inc. automatically exchanged each month into
Class B shares of the Fund or any other fund in the Waddell & Reed Advisors
Funds, provided you already own Class B shares of the fund. The shares of
Waddell & Reed Advisors Cash Management, Inc. which you designate for automatic
exchange must be worth at least $100, which may be allocated among different
funds so long as each fund receives a value of at least $25. Minimum initial
investment and minimum balance requirements apply to such automatic exchange
service.
CLASS C SHARE EXCHANGES
You may exchange Class C shares of the Fund for Class C shares of other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc. without
charge.
The redemption of the Fund's Class C shares as part of an exchange is
not subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class C shares of Waddell &
Reed Advisors Cash Management, Inc. automatically exchanged each month into
Class C shares of the Fund or any other fund in the Waddell & Reed Advisors
Funds, provided you already own Class C shares of the fund. The shares of
Waddell & Reed Advisors Cash Management, Inc. which you designate for automatic
exchange must be worth at least $100, which may be allocated among different
funds so long as each fund receives a value of at least $25. Minimum initial
investment and minimum balance requirements apply to such automatic exchange
service.
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CLASS Y SHARE EXCHANGES
Class Y shares of a Fund may be exchanged for Class Y shares of any
other fund in the Waddell & Reed Advisors Funds or for Class A shares of Waddell
& Reed Advisors Cash Management, Inc.
GENERAL EXCHANGE INFORMATION
When you exchange shares, the total shares you receive will have the
same aggregate NAV as the total shares you exchange. The relative values are
those next figured after your written exchange request is received in good
order.
These exchange rights and other exchange rights concerning the other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc., can in most
instances be eliminated or modified at any time and any such exchange may not be
accepted.
RETIREMENT PLANS
Your account may be set up as a funding vehicle for a retirement plan.
For individual taxpayers meeting certain requirements, Waddell & Reed, Inc.
offers model or prototype documents for the following retirement plans. All of
these plans involve investment in shares of the Fund (or shares of certain other
funds in the Waddell & Reed Advisors Funds or W&R Funds, Inc.).
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS). Investors having earned income
may set up a plan that is commonly called an IRA. Under a traditional IRA, an
investor can contribute each year up to 100% of his or her earned income, up to
an annual maximum of $2,000 (provided the investor has not reached 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
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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 (or to any combination of
Roth and traditional IRAs). In addition, for an investor whose adjusted gross
income does not exceed $100,000 (and who is not 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 $25,500, whichever is less, per year for each
employee.
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SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLANS). An employer
with 100 or fewer employees who does not sponsor another active retirement plan
may sponsor a SIMPLE plan to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an
employer can choose to match employee contributions dollar-for-dollar (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, generally,than 401(k) or
other qualified plans.
KEOGH PLANS. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money purchase
plan or a profit-sharing plan. As a general rule, an investor under a defined
contribution Keogh plan can contribute each year up to 25% of his or her annual
earned income, with an annual maximum of $30,000.
457 PLANS. If an investor is an employee of a state or local government
or of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.
TSAS - CUSTODIAL ACCOUNTS AND TITLE I PLANS. If an investor is an
employee of a public school system or of certain types of charitable
organizations, he or she may be able to enter into a deferred compensation
arrangement through a custodian account under Section 403(b) of the Code. Some
organizations have adopted Title I plans, which are funded by employer
contributions in addition to employee deferrals.
PENSION AND PROFIT-SHARING PLANS, INCLUDING 401(K) PLANS. With a 401(k)
plan, employees can make tax-deferred contributions into a plan to which the
employer may also contribute, usually on a matching basis. An employee may defer
each year up to 25% of compensation, subject to certain annual maximums, which
may be increased each year based on cost-of-living adjustments.
More detailed information about these arrangements and applicable forms
are available from Waddell & Reed, Inc. These plans may involve complex tax
questions as to premature distributions and other matters. Investors should
consult their tax adviser or pension consultant.
REDEMPTIONS
The Prospectus gives information as to redemption procedures.
Redemption payments are made within seven days from receipt of request, unless
delayed because of emergency
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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 NAV. 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 NAV during any 90-day period
for any one shareholder.
REINVESTMENT PRIVILEGE
The Fund offers a one-time reinvestment privilege that allows you to
reinvest without charge all or part of any amount of Class A shares you redeem
from the Fund by sending to the Fund the amount you wish to reinvest. The amount
you return will be reinvested in Class A shares at the NAV next calculated after
the Fund receives the returned amount. Your written request to reinvest and the
amount to be reinvested must be received within forty-five days after your
redemption request was received. You can do this only once as to Class A shares
of the Fund, and the Fund must be offering Class A shares at the time your
reinvestment request is received. You do not use up this privilege by redeeming
Class A shares to invest the proceeds at NAV in a Keogh plan or an IRA.
There is also a reinvestment privilege for Class B and Class C shares
and, where applicable, certain Class A shares under which you may reinvest all
or part of any amount of the shares you redeemed and have the corresponding
amount of the deferred sales charge, if any, which you paid restored to your
account by adding the amount of that charge to the amount you are reinvesting in
shares of the same class. If Fund shares of that class are then being offered,
you can put all or part of your redemption payment back into such shares at the
NAV next calculated after you have returned the amount. Your written request to
do this must be received within forty-five days after your redemption request
was received. You can do this only once as to Class B, Class C and Class A
shares of the Fund. For purposes of determining future deferred sales charges,
the reinvestment will be treated as a new investment. You do not use up this
privilege by redeeming shares to invest the proceeds at NAV in a Keogh plan or
an IRA.
MANDATORY REDEMPTION OF CERTAIN SMALL ACCOUNTS
The Fund has the right to require the redemption of shares held under
any account or any plan if the aggregate NAV of such
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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 the past five years of each Director
and officer is stated below. Each of the persons listed through and including
Mr. Vogel is a member of the Fund's Board of Directors. The other persons are
officers of the Fund but are not members of the Board of Directors. For purposes
of this section, the term "Fund Complex" includes each of the registered
investment companies in the Waddell & Reed Advisors Funds, W&R Funds, Inc. and
Target/United Funds, Inc. Each of the Fund's Directors is also a Director of
each of the other funds in the Fund Complex and each of its officers is also an
officer of one or more of the funds in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer and Director of Waddell & Reed Financial, Inc.; President, Chairman of
the Board of Directors, Director and Chief Executive Officer of Waddell & Reed
Financial Services, Inc.; Chairman of the Board of Directors and Director of
WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of each of the funds in the Fund Complex; formerly, Chairman of the
Board of Directors of Waddell & Reed Asset Management Company, a former
affiliate of Waddell & Reed Financial, Inc. Date of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
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JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President of JoDill Corp., an agricultural company; President and
Director of Dillingham Enterprises Inc.; formerly, Director and consultant,
McDougal Construction Company; formerly, Instructor at Central Missouri State
University; formerly, Member of the Board of Police Commissioners, Kansas City,
Missouri; formerly, Senior Vice President-Sales and Marketing of Garney
Companies, Inc., a specialty utility contractor. Date of birth:
January 9, 1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e
Eccles Foundation; Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal; formerly, President
of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, Partner, Levy and Craig, P.C., a law
firm. Date of birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of Oklahoma;
Adjunct Professor of Law at the University of Oklahoma College of Law; Managing
Member, Harroz Investments, L.L.C.; formerly, Vice President for Executive
Affairs of the University of Oklahoma; formerly, Attorney with Crowe & Dunlevy,
a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a law
firm; formerly, President of Gilliland & Hayes, P.A.; formerly, Director of
Central Properties, Inc. Date of birth: December 11, 1919.
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ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Executive Vice President, Chief Operating
Officer and Director of Waddell & Reed Financial, Inc.; Executive Vice
President, Chief Operating Officer, Director and Treasurer of Waddell & Reed
Financial Services, Inc.; Executive Vice President, Principal Financial Officer,
Director and Treasurer of WRIMCO; President, Chief Executive Officer, Principal
Financial Officer, Director and Treasurer of Waddell & Reed, Inc.; Director and
Treasurer of Waddell & Reed Services Company; Chairman of the Board of
Directors, Chief Executive Officer, President and Director of Fiduciary Trust
Company of New Hampshire, an affiliate of Waddell & Reed, Inc.; Director of
Legend Group Holdings, LLC, Legend Advisory Corporation, Legend Equities
Corporation, Advisory Services Corporation, The Legend Group, Inc. and LEC
Insurance Agency, Inc.; formerly, Vice President of each of the funds in the
Fund Complex; formerly, Director and Treasurer of Waddell & Reed Asset
Management Company; formerly, President of Waddell & Reed Services Company. Date
of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer, and Director of Waddell & Reed
Financial, Inc.; Executive Vice President, Chief Investment Officer and Director
of Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; Chairman of the Board of Directors of Austin, Calvert & Flavin, Inc., an
affiliate of WRIMCO; formerly, President, Chief Executive Officer, Chief
Investment Officer and Director of Waddell & Reed Asset Management Company. Date
of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and its subsidiaries. Date of birth: February 19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of
each of the funds in the Fund Complex then in existence. (Mr. Morgan retired as
Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company. Date of birth:
April 27, 1928.
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RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director and Vice President of Network Rehabilitation Services; Board
Member, Member of Executive Committee and Finance Committee of Truman Medical
Center; formerly, Employment Counselor and Director of McCue-Parker Center. Date
of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm;
Director of Columbian Bank and Trust. Date of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
Professor of Business Administration, University of Missouri-Kansas
City; formerly, Chancellor, University of Missouri-Kansas City. Date of birth:
January 1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
DANIEL C. SCHULTE
Vice President, Assistant Secretary and General Counsel of the Fund and
each of the other funds in the Fund Complex; Vice President, Secretary and
General Counsel of Waddell & Reed Financial, Inc.; Senior Vice President,
Secretary and General Counsel of Waddell & Reed Financial Services Company,
Waddell & Reed, Inc., WRIMCO and Waddell & Reed Services Company; Secretary and
Director of Fiduciary Trust Company of New Hampshire, an affiliate of Waddell &
Reed, Inc.; formerly, Assistant Secretary of Waddell & Reed Financial, Inc.;
formerly, an attorney with Klenda, Mitchell, Austerman & Zuercher, L.L.C. Date
of birth: December 8, 1965.
KRISTEN A. RICHARDS
Vice President, Secretary and Associate General Counsel of the Fund and
each of the other funds in the Fund Complex; Vice President and Associate
General Counsel of WRIMCO; formerly, Assistant Secretary of the Fund and each of
the other funds in the Fund Complex; formerly, Compliance Officer of WRIMCO.
Date of birth: December 2, 1967.
THEODORE W. HOWARD
Vice President, Treasurer and Principal Accounting Officer of the Fund
and each of the other funds in the Fund Complex; Vice President of Waddell &
Reed Services Company. Date of birth: July 18, 1942.
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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, whereby an incumbent Director who has attained the age of 70 may, or
if elected on or after May 31, 1993 and has attained the age of 75 must, resign
his or her position as Director and, unless he or she elects otherwise, will
serve as Director Emeritus provided the Director has served as a Director of the
Funds for at least five years which need not have been consecutive. A Director
Emeritus receives fees in recognition of his or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but he or she
has no authority or responsibility with respect to the management of the Fund.
Messrs. Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey
and Paul S. Wise retired as Directors of the Fund and of each of the funds in
the Fund Complex, and each serves as Director Emeritus.
The funds in the Waddell & Reed Advisors Funds, Target/United Funds,
Inc. and W&R Funds, Inc. pay to each Director, effective October 1, 1999, an
annual base fee of $50,000, plus $3,000 for each meeting of the Board of
Directors attended and effective January 1, 2000, an annual base fee of $52,000
plus $3,250 for each meeting of the Board of Directors attended, plus
reimbursement of expenses for attending such meeting and $500 for each committee
meeting attended which is not in conjunction with a Board of Directors meeting,
other than Directors who are affiliates of Waddell & Red, Inc. (Prior to October
1, 1999, the funds in the Waddell & Reed Advisors Funds, Target/United Funds,
Inc. and W&R Funds, Inc. paid to each Director and annual base fee of $48,000,
plus $2,500 for each meeting of the Board of Directors attended). The fees to
the Directors are divided among the funds in theWaddell & Reed Advisors Funds,
Target/United Funds, Inc. and W&R Funds, Inc. based on the fund's relative size.
During the Fund's fiscal year ended March 31, 2000, the Fund's Directors
received the following fees for service as a director:
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<TABLE>
<CAPTION>
COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
-------- ------------ ------------
<S> <C> <C>
Robert L. Hechler $0 $0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 1,327 61,000
John A. Dillingham 1,327 61,000
David P. Gardner 1,268 58,500
Linda K. Graves 1,327 61,000
Joseph Harroz, Jr. 1,327 61,000
John F. Hayes 1,327 61,000
Glendon E. Johnson 1,327 61,000
William T. Morgan 1,327 61,000
Ronald C. Reimer 1,327 61,000
Frank J. Ross, Jr. 1,327 61,000
Eleanor B. Schwartz 1,327 61,000
Frederick Vogel III 1,327 61,000
</TABLE>
*No pension or retirement benefits have been accrued as a part of Fund expenses.
The officers are paid by WRIMCO or its affiliates.
SHAREHOLDINGS
As of May 31, 2000, all of the Fund's Directors and officers as a group
owned less than 1% of the outstanding shares of the Fund. The following table
sets forth information with respect to the Fund, as of May 31, 2000, regarding
the beneficial ownership of the classes of the Fund's shares.
<TABLE>
<CAPTION>
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
------------------- ----- ------------ -------
<S> <C> <C> <C>
Inex Ramsey Class C 4,211 6.30%
14315 Jamestown Bay Dr
Florissant MO 63034-1741
Don A. Berger (TOD) Class C 6,027 9.02%
P. O. Box 23
Yale Ok 74085-0023
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Waddell & Reed Class Y 28,920 22.68%
Financial, Inc.
401(k) and Thrift Plan
6300 Lamar Avenue
Overland Park KS 66201
Fiduciary Trust Co NH Tr Class Y 54,467 42.71%
CMPP Okanogan Cnty Hosp Dist 3
FBO Unallocated Assets
Qualified Plan
P O Box 793
Omak WA 98841-0793
Compass Bank Tr Class Y 22,671 17.78%
Profit Sharing Plan
FBO Torchmark Corp
Savings & Investment Plan
Attn: Wayne Laugevin
15 20th St S Fl 8
Birmingham AL 35233-2000
Waddell & Reed Class Y 20,943 16.42%
Investment Management
DCA Account
Attn: Mike Strohm
P. O. Box 29217
Shawnee Mission KS 66201-9217
</TABLE>
PAYMENTS TO SHAREHOLDERS
GENERAL
There are three sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is derived
from the dividends, interest and earned discount on the securities the Fund
holds, less expenses (which will vary by class). The second source is net
realized capital gains, which are derived from the proceeds received from the
Fund's sale of securities at a price higher than the Fund's tax basis (usually
cost) in such securities, less losses from 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
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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 (ii) you want your dividends and
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid, or (iii) you want cash for your dividends and want your
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid. However, a total dividend and/or distribution amount
less than five dollars will be automatically paid in shares of the Fund of the
same class as that with respect to which they were paid. You can change your
instructions at any time. If you give no instructions, your dividends and
distributions will be paid in shares of the Fund of the same class as that with
respect to which they were paid. All reinvestments are at NAV without any sales
charge. The NAV used for this purpose is that computed as of the record date for
the dividend or distribution, although this could be changed by the Board of
Directors.
Even if you receive dividends and distributions on Fund shares in cash,
you can thereafter reinvest them (or distributions only) in shares of the Fund
at NAV (i.e., no sales charge) next calculated 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 since inception for treatment as a regulated
investment company ("RIC") under the Code, so that it is relieved of Federal
income tax on that part of its investment company taxable income (consisting
generally of taxable net investment income, net short-term capital gains and net
gains from certain foreign currency transactions) that it distributes to its
shareholders. To continue to qualify for treatment as a RIC, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following: (1)
the Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or foreign currencies or other
income
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(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.
If the Fund failed to qualify for treatment as a RIC for any taxable
year, (a) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year (even if it distributed that income to its
shareholders) and (b) the shareholders would treat all distributions out of its
earnings and profits, including distributions of net capital gains, as dividends
(that is, ordinary income). In addition, the Fund could be required to recognize
unrealized gains, pay substantial taxes and interest, and make substantial
distributions before requalifying for RIC treatment.
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 a 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. For these purposes, the Fund maydefer into the next calendar year
net capital losses incurred between November 1 and the end of the current
calendar year. It is the Fund's policy to pay sufficient dividends and
distributions each year to avoid imposition of the Excise Tax.
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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 any foreign corporation (with certain
exceptions) 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 it distributes that income 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 may 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 under the election (and under regulations proposed in 1992 that
provided a similar election with respect to the stock of certain PFICs). 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.
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FOREIGN CURRENCY GAINS AND LOSSES
Gains or losses (1) from the disposition of foreign currencies
including forward currency contracts, (2) on the disposition of each debt
security denominated in a foreign currency that are attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition, and (3) that are attributable to
fluctuations in exchange rates that occur between the time the Fund accrues
interest, dividends or other receivables, or expenses or other liabilities,
denominated in a foreign currency and the time the Fund actually collects the
receivables or pays the liabilities, generally are treated as ordinary income or
loss. These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of the Fund's investment company
taxable income to be distributed to its shareholders as ordinary income, rather
than affecting the amount of its net capital gain.
INCOME FROM OPTIONS, FUTURES AND FORWARD CURRENCY CONTRACTS AND FOREIGN
CURRENCIES
The use of hedging and option income strategies, such as writing
(selling) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and losses
the Fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures contracts and forward currency contracts derived
by the Fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
Any income the Fund earns from writing options is treated as short-term
capital gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it 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
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is, treated as sold at that time for their fair market value) for Federal
income tax purposes, with the result that unrealized gains or losses are
treated as though they were realized. Sixty percent of any net gains or
losses recognized on these deemed sales, and 60% of any net realized gains or
losses from any actual sales of section 1256 contracts, are treated as
long-term capital gains or losses, and the balance is treated as short-term
capital gains or losses. Section 1256 contracts also may be marked-to-market
for purposes of the Excise Tax and 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, futures contracts and forward currency contracts
are personal property. Section 1092 generally provides that any loss from the
disposition of a position in a straddle may be deducted only to the extent the
loss exceeds the unrealized gain on the offsetting position(s) of the straddle.
In addition, these rules may postpone the recognition of loss that would
otherwise be recognized under the mark-to market rules discussed above. The
regulations under section 1092 also provide certain "wash sale" rules, which
apply to transactions where a position is sold at a loss and a new offsetting
position is acquired within a prescribed period, and "short sale" rules
applicable to straddles. If the Fund makes certain elections, the amount,
character and timing of the recognition of gains and losses from the affected
straddle positions will be determined under rules that vary according to the
elections made. Because only a few of the regulations implementing the straddle
rules have been promulgated, the tax consequences of straddle transactions to
the Fund are not entirely clear.
If the Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the position, the
Fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or futures or forward
currency contract entered into by the Fund or a related person with respect to
the same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction
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during any taxable year that otherwise would be treated as a constructive sale
if the transaction is closed within 30 days after the end of that year and the
Fund holds the appreciated financial position unhedged for 60 days after that
closing (I.E., at no time during that 60-day period is the Fund's risk of loss
regarding that position reduced by reason of certain specified transactions with
respect to substantially identical or related property, such as having an option
to sell, being contractually obligated to sell, making a short sale, or granting
an option to buy substantially identical stock or securities).
ZERO COUPON AND PAYMENT-IN-KIND SECURITIES
The Fund may acquire zero coupon or other securities issued with OID.
As the holder of those securities, the Fund must include in its income the OID
that accrues on the securities during the taxable year, even if the Fund
receives no corresponding payment on the securities during the year. Similarly,
the Fund must include in its gross income securities it receives as "interest"
on payment-in-kind securities. Because the Fund annually must distribute
substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, in order to satisfy the Distribution
Requirement and 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 effected with dealers acting as principals or
market makers. Brokerage commissions are paid primarily for effecting
transactions in securities traded on an exchange and otherwise only if it
appears likely that a better price or execution can be obtained. The individual
who manages the Fund may manage other advisory accounts with similar investment
objectives. It can be anticipated that the manager will frequently place
concurrent orders for all or most accounts for which the manager has
responsibility or WRIMCO may otherwise combine orders for the Fund with those of
other funds in theWaddell & Reed Advisors Funds, Target/United Funds, Inc. and
W&R Funds, Inc. or other accounts over which it has investment discretion,
including accounts affiliated with WRIMCO. WRIMCO, at its discretion, may
aggregate such orders. Under current written procedures, transactions effected
pursuant to such
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<PAGE>
combined orders are averaged as to price and allocated in accordance with the
purchase or sale orders actually placed for each fund or advisory account,
except where the combined order is not filled completely. In this case, for a
transaction not involving an initial public offering ("IPO"), WRIMCO will
ordinarily allocate the transaction pro rata based on the orders placed,
subject to certain variances provided for in the written procedures. For a
partially filled IPO order, subject to certain variances specified in the
written procedures, WRIMCO generally allocates the shares as follows: the IPO
shares are initially allocated pro rata among the included funds and/or
advisory accounts grouped according to investment objective, based on
relative total assets of each group; and the shares are then allocated within
each group pro rata based on relative total assets of the included funds
and/or advisory accounts, except that (a) within a group having a small
cap-related investment objective, shares are allocated on a rotational basis
after taking into account the impact of the anticipated initial gain on the
value of the included fund or advisory account and (b) within a group having
a mid-cap-related investment objective, shares are allocated based on the
portfolio manager's judgment, including but not limited to such factors as
the fund's or advisory account's investments strategies and policies, cash
availability, any minimum investment policy, liquidity, anticipated term of
the investment and current securities positions.
In all cases, WRIMCO seeks to implement its allocation procedures to
achieve a fair and equitable allocation of securities among its funds and other
advisory accounts. Sharing in large transactions could affect the price the Fund
pays or receives or the amount it buys or sells.As well, a better negotiated
commission may be available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is authorized
to engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution and/or
research services and other services, including pricing or quotation services
directly or through others ("research and brokerage services") considered by
WRIMCO to be useful or desirable for its investment management of the Fund
and/or the other funds and accounts over which WRIMCO has investment discretion.
Research and brokerage services are, in general, defined by reference
to Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of
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<PAGE>
investing in, purchasing or selling securities and the availability of
securities and purchasers or sellers, (ii) furnishing analyses and reports,
or (iii) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). "Investment
discretion" is, in general, defined as having authorization to determine what
securities shall be purchased or sold for an account, or making those
decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than the commission another qualified broker
would charge for effecting comparable transactions if a good faith determination
is made by WRIMCO that the commission is reasonable in relation to the research
or brokerage services provided. Subject to the foregoing considerations WRIMCO
may also consider 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,
2000, 1999 and 1998, it paid brokerage commissions of $861,380, $590,456 and
$616,834, 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, 2000, the transactions,
other than principal transactions, which were directed to broker-dealers who
provided research services as well as execution totaled $573,362,159 on which
$738,226 in brokerage
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commissions were paid. These transactions were allocated to these
broker-dealers by the internal allocation procedures described above.
As of March 31, 2000, the Fund owned Banc of America Corporation
securities in the aggregate amount of $8,384,966. Banc of America Corporation is
the parent of Bank of America Securities, LLC, a regular broker of the Fund.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
under Rule 17j-1 of the 1940 Act that permits their respective directors,
officers and employees to invest in securities, including securities that may be
purchased or held by the Fund. The Code of Ethics subjects covered personnel to
certain restrictions that include prohibited activities, pre-clearance
requirements and reporting obligations.
OTHER INFORMATION
THE SHARES OF THE FUND
The Fund offers four classes of shares: Class A, Class B, Class C and
Class Y. Each class represents an interest in the same assets of the Fund and
differ as follows: each class of shares has exclusive voting rights on matters
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 certain Class A shares are subject to a contingent deferred sales
charge; Class B and Class C are subject to a contingent deferred sales charge
and to ongoing distribution and service fees; Class B shares converts to Class A
shares eight years after the month in which the shares were puchased; 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 four classes, dividends and liquidation proceeds of Class B and
Class C shares are expected to be lower than for Class A shares, which in turn
are expected to be lower than for Class Y shares of the Fund. Each fractional
share of a class has the same rights, in proportion, as a full share of that
class. Shares are fully paid and nonassessable when purchased.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new investment
advisory agreement or a change in a
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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.
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APPENDIX A
The following are descriptions of some of the ratings of securities
which the Fund may use. The Fund may also use ratings provided by other
nationally recognized statistical rating organizations in determining the
securities eligible for investment.
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC. An S&P
corporate bond rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment of
creditworthiness may take into consideration obligors such as guarantors,
insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to pay
interest and repay principal is very strong, and debt rated AA differs from AAA
issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the
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adverse effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
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CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. It is used when interest payments
or principal payments are not made on a due date even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace periods. The D rating will also be used upon a filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories (AAA, AA, A, BBB, commonly known as "investment grade" ratings) are
generally regarded as eligible for bank investment. In addition, the laws of
various states governing legal investments may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
MOODY'S INVESTORS SERVICE, INC. A brief description of the applicable MIS
rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be
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of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Some bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
DESCRIPTION OF PREFERRED STOCK RATINGS
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC. An S&P
preferred stock rating is an assessment of the capacity and willingness of an
issuer to pay preferred stock dividends and any applicable sinking fund
obligations. A preferred stock rating differs from a bond rating inasmuch as it
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is assigned to an equity issue, which issue is intrinsically different from, and
subordinated to, a debt issue. Therefore, to reflect this difference, the
preferred stock rating symbol will normally not be higher than the debt rating
symbol assigned to, or that would be assigned to, the senior debt of the same
issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA -- This is the highest rating that may be assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A -- An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB -- An issue rated BBB is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB, B, CCC -- Preferred stock rated BB, B, and CCC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
preferred stock obligations. BB indicates the lowest degree of speculation and
CCC the highest degree of speculation. While such issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC -- The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
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C -- A preferred stock rated C is a non-paying issue.
D -- A preferred stock rated D is a non-paying issue with the issuer in
default on debt instruments.
NR -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-) -- To provide more detailed indications of preferred
stock quality, the rating from AA to CCC may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
A preferred stock rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information or based on other circumstances.
MOODY'S INVESTORS SERVICE, INC. Because of the fundamental differences
between preferred stocks and bonds, a variation of MIS' familiar bond rating
symbols is used in the quality ranking of preferred stock. The symbols are
designed to avoid comparison with bond quality in absolute terms. It should
always be borne in mind that preferred stock occupies a junior position to bonds
within a particular capital structure and that these securities are rated within
the universe of preferred stocks.
NOTE: MIS applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Preferred stock rating symbols and their definitions are as follows:
aaa -- An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated aa is considered a high-grade preferred stock.
This rating indicates that there is a
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reasonable assurance the earnings and asset protection will remain relatively
well-maintained in the foreseeable future.
a -- An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the aaa
and aa classification, earnings and asset protection are, nevertheless, expected
to be maintained at adequate levels.
baa -- An issue which is rated baa is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba -- An issue which is rated ba is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b -- An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated caa is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca -- An issue which is rated ca is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
c -- This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS
AMUSEMENT AND RECREATION SERVICES - 0.96%
Walt Disney Company (The) .............................................. 140,000 $ 5,792,500
BUSINESS SERVICES - 5.76%
Electronic Data Systems Corporation .................................... 75,000 4,814,063
Intuit Inc.* ........................................................... 80,000 4,347,500
Microsoft Corporation* ................................................. 82,000 8,735,562
Oracle Corporation* .................................................... 72,000 5,613,750
SAP AG, ADR ............................................................ 105,000 6,273,750
Young & Rubicam Inc. ................................................... 100,800 4,737,600
Total ............................................................... 34,522,225
CHEMICALS AND ALLIED PRODUCTS - 6.96%
Air Products and Chemicals, Inc. ....................................... 222,600 6,330,187
American Home Products Corporation ..................................... 123,800 6,638,775
Colgate-Palmolive Company .............................................. 85,000 4,791,875
Merck & Co., Inc. ...................................................... 110,000 6,833,750
Pfizer Inc. ............................................................ 168,000 6,142,500
Pharmacia & Upjohn, Inc. ............................................... 47,000 2,784,750
Smith International, Inc.* ............................................. 17,800 1,379,500
Warner-Lambert Company ................................................. 70,000 6,825,000
Total ............................................................... 41,726,337
COMMUNICATION - 4.44%
Cox Communications, Inc., Class A* ..................................... 86,000 4,171,000
Nextel Communications, Inc.* ........................................... 50,000 7,410,937
SBC Communications Inc. ................................................ 200,000 8,400,000
Vodafone Airtouch Public Limited
Company, ADR ....................................................... 120,000 6,667,500
Total ............................................................... 26,649,437
DEPOSITORY INSTITUTIONS - 1.40%
Bank of America Corporation ............................................ 159,904 8,384,966
ELECTRIC, GAS AND SANITARY SERVICES - 1.03%
Unicom Corporation ..................................................... 170,000 6,205,000
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT - 9.57%
Analog Devices, Inc.* .................................................. 114,000 9,184,125
General Electric Company ............................................... 55,700 8,643,944
Intel Corporation ...................................................... 70,000 9,226,875
Koninklijke Philips Electronics N.V.,
NY Shares ........................................................... 40,800 6,989,550
LSI Logic Corporation* ................................................. 121,400 8,816,675
Motorola, Inc. ......................................................... 34,800 4,954,650
Nokia Corporation, Series A, ADR ....................................... 25,000 5,431,250
Texas Instruments Incorporated ......................................... 25,900 4,144,000
Total ............................................................... 57,391,069
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FABRICATED METAL PRODUCTS - 1.74%
Parker Hannifin Corporation ............................................ 117,400 $ 4,850,087
Tower Automotive, Inc.* ................................................ 340,000 5,567,500
Total................................................................ 10,417,587
FOOD AND KINDRED PRODUCTS - 2.43%
Anheuser-Busch Companies, Inc. ......................................... 50,000 3,112,500
PepsiCo, Inc. .......................................................... 185,000 6,394,062
Seagram Company Ltd. (The) ............................................. 85,000 5,057,500
Total................................................................ 14,564,062
FOOD STORES - 1.03%
Kroger Co. (The)* ...................................................... 350,000 6,146,875
FURNITURE AND FIXTURES - 0.68%
Lear Corporation* ...................................................... 145,400 4,089,375
GENERAL MERCHANDISE STORES - 2.60%
BJ's Wholesale Club, Inc.* ............................................. 170,000 6,566,250
Target Corporation ..................................................... 65,000 4,858,750
Wal-Mart Stores, Inc. .................................................. 75,000 4,162,500
Total ............................................................... 15,587,500
INDUSTRIAL MACHINERY AND EQUIPMENT - 4.79%
Apple Computer, Inc.* .................................................. 57,000 7,739,531
Applied Materials, Inc.* ............................................... 51,200 4,827,200
Dell Computer Corporation* ............................................. 100,000 5,396,875
EMC Corporation* ....................................................... 59,400 7,425,000
Hewlett-Packard Company ................................................ 25,000 3,314,063
Total ............................................................... 28,702,669
INSURANCE AGENTS, BROKERS AND SERVICE - 1.35%
Hartford Financial Services
Group Inc. (The) .................................................... 154,000 8,123,500
INSURANCE CARRIERS - 1.51%
Berkshire Hathaway Inc., Class B* ...................................... 2,000 3,640,000
Lincoln National Corporation ........................................... 80,000 2,680,000
ReliaStar Financial Corp. .............................................. 80,000 2,710,000
Total ............................................................... 9,030,000
MOTION PICTURES - 1.68%
News Corporation Limited (The), ADR .................................... 90,000 5,062,500
Time Warner Incorporated ............................................... 50,000 5,000,000
Total ............................................................... 10,062,500
NONDEPOSITORY INSTITUTIONS - 1.74%
Fannie Mae ............................................................. 70,000 3,950,625
Freddie Mac ............................................................ 147,000 6,495,562
Total ............................................................... 10,446,187
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
OIL AND GAS EXTRACTION - 2.93%
Burlington Resources Incorporated ...................................... 218,600 $ 8,088,200
Schlumberger Limited ................................................... 110,000 8,415,000
Transocean Sedco Forex Inc. ............................................ 21,296 1,092,751
Total ............................................................... 17,595,951
PAPER AND ALLIED PRODUCTS - 2.14%
Consolidated Papers, Inc. .............................................. 205,000 7,879,688
International Paper Company ............................................ 116,000 4,959,000
Total ............................................................... 12,838,688
PETROLEUM AND COAL PRODUCTS - 2.66%
BP Amoco p.l.c., ADR ................................................... 88,096 4,674,594
Exxon Mobil Corporation ................................................ 83,169 6,471,588
Texaco Inc. ............................................................ 90,000 4,826,250
Total ............................................................... 15,972,432
PRIMARY METAL INDUSTRIES - 0.52%
Corus Group plc, ADR ................................................... 185,000 3,098,750
PRINTING AND PUBLISHING - 1.21%
Belo (A. H.) Corporation, Class A ...................................... 135,800 2,427,425
Meredith Corporation ................................................... 175,000 4,845,313
Total................................................................ 7,272,738
STONE, CLAY AND GLASS PRODUCTS - 0.89%
Corning Incorporated ................................................... 27,500 5,335,000
TRANSPORTATION BY AIR - 1.02%
UAL Corporation* ....................................................... 102,000 6,107,250
TRANSPORTATION EQUIPMENT - 1.76%
Boeing Company (The) ................................................... 125,000 4,742,188
General Motors Corporation ............................................. 70,000 5,796,875
Total ............................................................... 10,539,063
TOTAL COMMON STOCKS - 62.80% $376,601,661
(Cost: $287,990,690)
PREFERRED STOCK - 0.75%
COMMUNICATION
Cox Communications, Inc.,
7.0%, Convertible ................................................... 71,000 $ 4,508,500
(Cost: $3,550,000)
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES
CHEMICALS AND ALLIED PRODUCTS - 0.38%
American Home Products Corporation,
7.9%, 2-15-05 ....................................................... $ 2,250 $ 2,304,225
COMMUNICATION - 1.86%
Bell Atlantic Financial Services, Inc.,
Convertible,
5.75%, 4-1-03 (A) ................................................... 3,000 3,052,500
BellSouth Savings and Security ESOP Trust,
9.125%, 7-1-03 ...................................................... 1,887 1,942,392
Comcast Corporation, ZONES, Convertible,
2.0%, 10-15-29 ...................................................... 2,750 4,849,597
Southwestern Bell Telephone Company,
5.77%, 10-14-03 ..................................................... 1,350 1,285,632
Total ............................................................... 11,130,121
DEPOSITORY INSTITUTIONS - 0.34%
Wachovia Corporation,
6.25%, 8-4-08 ....................................................... 2,250 2,054,633
ELECTRIC, GAS AND SANITARY SERVICES - 0.28%
California Infrastructure and Economic Development
Bank, Special Purpose Trust SCE-1,
6.38%, 9-25-08 ...................................................... 1,750 1,685,460
FOOD AND KINDRED PRODUCTS - 0.73%
Coca-Cola Enterprises Inc.,
6.7%, 10-15-36 ...................................................... 4,500 4,408,110
GENERAL MERCHANDISE STORES - 0.38%
JCP Master Credit Card Trust,
9.625%, 6-15-00 ..................................................... 2,250 2,255,625
INDUSTRIAL MACHINERY AND EQUIPMENT - 0.35%
Tyco International Group S.A.,
6.375%, 6-15-05 ..................................................... 2,250 2,110,432
NONDEPOSITORY INSTITUTIONS - 1.16%
General Electric Capital Corporation,
8.3%, 9-20-09 ....................................................... 6,500 6,961,955
RUBBER AND MISCELLANEOUS PLASTICS PRODUCTS - 0.57%
Mark IV Industries, Inc., Convertible,
4.75%, 11-1-04 (A) .................................................. 4,000 3,410,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
TRANSPORTATION BY AIR - 0.56%
Southwest Airlines Co.,
7.875%, 9-1-07 ...................................................... $ 3,300 $ 3,328,644
TOTAL CORPORATE DEBT SECURITIES - 6.61% $ 39,649,205
(Cost: $38,728,053)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation,
6.625%, 9-15-09 ..................................................... 5,000 4,807,800
Federal National Mortgage Association:
6.0%, 6-25-07 ....................................................... 3,000 2,959,680
6.51%, 5-6-08 ....................................................... 6,750 6,327,045
8.25%, 6-1-08 ....................................................... 290 290,922
6.19%, 7-7-08 ....................................................... 4,500 4,125,240
6.625%, 9-15-09 ..................................................... 4,000 3,846,880
7.25%, 1-15-10 ...................................................... 5,000 5,033,600
Government National Mortgage Association:
9.0%, 7-15-16 ....................................................... 44 46,230
9.0%, 8-15-16 ....................................................... 200 208,665
9.0%, 10-15-16 ...................................................... 359 374,261
9.0%, 11-15-16 ...................................................... 107 111,130
9.0%, 1-15-17 ....................................................... 57 59,205
9.0%, 3-15-17 ....................................................... 121 126,347
9.0%, 4-15-17 ....................................................... 105 109,145
9.0%, 7-15-17 ....................................................... 72 74,375
6.5%, 8-15-28 ....................................................... 9,331 8,800,278
United States Treasury:
8.875%, 5-15-00 ..................................................... 17,000 17,053,040
8.0%, 5-15-01 ....................................................... 20,000 20,328,200
6.375%, 8-15-02 ..................................................... 12,000 11,970,000
7.5%, 2-15-05 ....................................................... 33,000 34,505,460
6.5%, 8-15-05 ....................................................... 4,000 4,023,760
7.25%, 5-15-16 ...................................................... 8,500 9,392,500
6.25%, 8-15-23 ...................................................... 30,000 30,426,600
TOTAL UNITED STATES GOVERNMENT SECURITIES - 27.52% $165,000,363
(Cost: $168,794,629)
TOTAL SHORT-TERM SECURITIES - 2.08% $ 12,463,417
(Cost: $12,463,417)
TOTAL INVESTMENT SECURITIES - 99.76% $598,223,146
(Cost: $511,526,789)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.24% 1,445,036
NET ASSETS - 100.00% $599,668,182
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED CONTINENTAL INCOME FUND, INC.
MARCH 31, 2000
NOTES TO SCHEDULE OF INVESTMENTS
*No income dividends were paid during the preceding 12 months.
(A) Security was purchased pursuant to Rule 144A under the Securities Act
of 1933 and may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At March 31, 2000, the
value of these securities amounted to $6,462,500 or 1.08% 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.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Investment securities - at value
(Notes 1 and 3) ....................................................................... $598,223
Cash ..................................................................................... 2
Receivables:
Dividends and interest ................................................................ 3,400
Fund shares sold ...................................................................... 273
Prepaid insurance premium ................................................................ 20
--------
Total assets ........................................................................ 601,918
--------
LIABILITIES
Payable to Fund shareholders ............................................................. 1,994
Accrued service fee (Note 2) ............................................................. 107
Accrued transfer agency and dividend
disbursing (Note 2) ................................................................... 106
Accrued distribution fee (Note 2) ........................................................ 17
Accrued management fee (Note 2) .......................................................... 11
Accrued accounting services fee (Note 2) ................................................. 6
Other .................................................................................... 9
--------
Total liabilities ................................................................... 2,250
--------
Total net assets ................................................................. $599,668
========
NET ASSETS
$1.00 par value capital stock
Capital stock ......................................................................... $ 73,120
Additional paid-in capital ............................................................ 401,242
Accumulated undistributed income:
Accumulated undistributed net investment income ....................................... 873
Accumulated undistributed net realized gain
on investment transactions .......................................................... 37,737
Net unrealized appreciation in value of
investments ......................................................................... 86,696
--------
Net assets applicable to outstanding
units of capital ................................................................. $599,668
========
Net asset value per share (net assets divided
by shares outstanding)
Class A ............................................................................... $8.20
Class B ............................................................................... $8.20
Class C ............................................................................... $8.20
Class Y ............................................................................... $8.20
Capital shares outstanding
Class A ............................................................................... 72,778
Class B ............................................................................... 172
Class C ............................................................................... 34
Class Y ............................................................................... 136
Capital shares authorized ................................................................... 200,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<S> <C>
INVESTMENT INCOME
Income (Note 1B):
Interest and amortization.............................................................. $14,251
Dividends ............................................................................. 5,530
-------
Total income ........................................................................ 19,781
-------
Expenses (Note 2):
Investment management fee ............................................................. 3,887
Service fee:
Class A.............................................................................. 1,382
Class B.............................................................................. 1
Class C.............................................................................. ---*
Transfer agency and dividend disbursing:
Class A.............................................................................. 1,064
Class B.............................................................................. 1
Class C.............................................................................. ---*
Distribution fee:
Class A.............................................................................. 105
Class B.............................................................................. 3
Class C.............................................................................. 1
Accounting services fee ............................................................... 70
Custodian fees ........................................................................ 30
Audit fees ............................................................................ 17
Legal fees ............................................................................ 10
Shareholder servicing - Class Y ....................................................... 2
Other ................................................................................. 156
-------
Total expenses ...................................................................... 6,729
-------
Net investment income ............................................................ 13,052
-------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTES 1 AND 3)
Realized net gain on securities .......................................................... 76,590
Unrealized depreciation in value of investments
during the period ..................................................................... (671)
-------
Net gain on investments ............................................................. 75,919
-------
Net increase in net assets resulting from
operations .................................................................... $88,971
=======
</TABLE>
*Not shown due to rounding.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
MARCH 31,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ........................................... $13,052 $ 15,903
Realized net gain on investments ................................ 76,590 36,348
Unrealized depreciation ......................................... (671) (32,734)
-------- --------
Net increase in net assets
resulting from operations .................................. 88,971 19,517
-------- --------
Distributions to shareholders from (Note 1E):*
Net investment income:
Class A ....................................................... (12,798) (15,474)
Class B ....................................................... (6) ---
Class C ....................................................... (1) ---
Class Y ....................................................... (27) (268)
Realized gains on securities transactions:
Class A ....................................................... (56,127) (28,169)
Class B ....................................................... (50) ---
Class C ....................................................... (10) ---
Class Y ....................................................... (98) (562)
-------- --------
(69,117) (44,473)
-------- --------
Capital share transactions
(Note 5) ................................................ (2,587) (2,963)
-------- --------
Total increase (decrease) ............................... 17,267 (27,919)
NET ASSETS
Beginning of period ................................................ 582,401 610,320
-------- --------
End of period, including undistributed
net investment income of $873 and
$653, respectively............................................... $599,668 $582,401
======== ========
</TABLE>
*See "Financial Highlights" on pages - .
SEE NOTES TO FINANCIAL STATEMENTS.
<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,
-----------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......................... $7.97 $8.32 $7.57 $8.00 $6.95
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.18 0.33 0.24 0.24 0.24
Net realized and
unrealized gain
on investments ............... 1.04 0.04 1.58 0.22 1.35
----- ----- ----- ----- -----
Total from investment
operations ...................... 1.22 0.37 1.82 0.46 1.59
----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.18) (0.32) (0.24) (0.24) (0.23)
From capital gains............... (0.81) (0.40) (0.83) (0.65) (0.31)
----- ----- ----- ----- -----
Total
distributions ................... (0.99) (0.72) (1.07) (0.89) (0.54)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $8.20 $7.97 $8.32 $7.57 $8.00
===== ===== ===== ===== =====
Total return** ..................... 16.36% 3.38% 25.20% 5.88% 23.29%
Net assets, end of
period (in
millions) ....................... $597 $581 $599 $508 $502
Ratio of expenses to
average net assets .............. 1.15% 0.99% 0.91% 0.93% 0.89%
Ratio of net investment
income to average net
assets .......................... 2.22% 2.69% 2.88% 3.01% 3.06%
Portfolio turnover
rate ............................ 72.40% 50.68% 55.46% 40.29% 41.34%
</TABLE>
*Per-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.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS B SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
10/4/99*
THROUGH
3/31/00
-------
<S> <C>
Net asset value,
beginning of period ............. $8.11
----
Income from investment
operations:
Net investment income ........... 0.05
Net realized and
unrealized gain
on investments ............... 0.91
----
Total from investment
operations ...................... 0.96
----
Less distributions:
From net investment
income ....................... (0.06)
From capital gains .............. (0.81)
----
Total distributions ................ (0.87)
----
Net asset value,
end of period ................... $8.20
====
Total return ....................... 12.75%
Net assets, end of
period (in
millions) ....................... $1
Ratio of expenses to
average net assets .............. 2.08%**
Ratio of net investment
income to average
net assets ...................... 1.14%**
Portfolio turnover
rate ............................ 72.40%**
</TABLE>
*Commencement of operations.
**Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS C SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
10/5/99*
THROUGH
3/31/00
-------
<S> <C>
Net asset value,
beginning of period ............. $8.09
----
Income from investment
operations:
Net investment income ........... 0.05
Net realized and
unrealized gain
on investments ............... 0.93
----
Total from investment
operations ...................... 0.98
----
Less distributions:
From net investment
income ....................... (0.06)
From capital gains .............. (0.81)
----
Total distributions ................ (0.87)
----
Net asset value,
end of period ................... $8.20
====
Total return ....................... 12.98%
Net assets, end of
period (000 omitted) ............ $279
Ratio of expenses to
average net assets .............. 2.23%**
Ratio of net investment
income to average
net assets ...................... 1.09%**
Portfolio turnover
rate ............................ 72.40%**
</TABLE>
*Commencement of operations.
**Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<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
PERIOD
FOR THE FISCAL FROM
YEAR ENDED MARCH 31, 1/4/96**
--------------------------------------------- THROUGH
2000 1999 1998 1997 3/31/96
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $7.97 $8.33 $7.57 $8.00 $7.78
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.21 0.07 0.26 0.26 0.03
Net realized and
unrealized gain
on investments ............... 1.03 0.32 1.58 0.21 0.25
----- ----- ----- ----- -----
Total from investment
operations ...................... 1.24 0.39 1.84 0.47 0.28
----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.20) (0.35) (0.26) (0.26) (0.06)
From capital gains............... (0.81) (0.40) (0.82) (0.64) (0.00)
----- ----- ----- ----- -----
Total distributions ................ (1.01) (0.75) (1.08) (0.90) (0.06)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $8.20 $7.97 $8.33 $7.57 $8.00
===== ===== ===== ===== =====
Total return ....................... 16.72% 3.58% 25.43% 6.07% 3.53%
Net assets, end of
period (in
millions) ....................... $1 $1 $11 $6 $6
Ratio of expenses
to average net
assets .......................... 0.86% 0.81% 0.75% 0.75% 0.80%***
Ratio of net
investment income
to average net
assets .......................... 2.50% 3.32% 3.01% 3.20% 3.35%***
Portfolio
turnover rate ................... 72.40% 50.68% 55.46% 40.29% 41.34%***
</TABLE>
*Per-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.
<PAGE>
UNITED CONTINENTAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
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 accounting principles generally
accepted in the United States of America.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period
as reported by the principal securities exchange on which the issue is
traded or, if no sale is reported for a stock, the average of the
latest bid and asked prices. Bonds, other than convertible bonds, are
valued using a pricing system provided by a pricing service or dealer
in bonds. Convertible bonds are valued using this pricing system only
on days when there is no sale reported. Stocks which are traded
over-the-counter are priced using the Nasdaq Stock Market, which
provides information on bid and asked prices quoted by major dealers in
such stocks. Restricted securities and securities for which market
quotations are not readily available are valued at fair value as
determined in good faith under procedures established by and under the
general supervision of the Fund's Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the
Internal Revenue Code), premiums on the purchase of bonds and post-1984
market discount are amortized for both financial and tax reporting
purposes over the remaining lives of the bonds. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. See Note 3 -- Investment Security Transactions.
C. 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.
<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 accounting principles generally accepted in the
United States of America. These differences are due to differing
treatments for items such as deferral of wash sales and post-October
losses, foreign currency transactions, net operating losses and
expiring capital loss carryovers.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
NOTE 2 -- INVESTMENT MANAGEMENT AND PAYMENTS TO AFFILIATED PERSONS
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee is
payable by the Fund at the annual rates of: 0.70% of net assets up to $1
billion, 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. The Fund accrues and pays the fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of the Fund. For
these services, the Fund pays WARSCO a monthly fee of one-twelfth of the annual
fee shown in the following table.
<PAGE>
ACCOUNTING SERVICES FEE
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 1 $ 0
From $ 10 to $ 2 $ 10,000
From $ 25 to $ 5 $ 20,000
From $ 50 to $ 10 $ 30,000
From $ 100 to $ 20 $ 40,000
From $ 200 to $ 35 $ 50,000
From $ 350 to $ 55 $ 60,000
From $ 550 to $ 75 $ 70,000
From $ 750 to $1,00 $ 85,000
$1,000 and Over $100,000
For Class A, Class B and Class C shares, the Fund pays WARSCO a monthly
per account charge for transfer agency and dividend disbursement services of
$1.3125 for each shareholder account which was in existence at any time during
the prior month, plus $0.30 for each account on which a dividend or distribution
of cash or shares had a record date in that month. With respect to Class Y
shares, the Fund pays WARSCO a monthly fee at an annual rate of 0.15% of the
average daily net assets of the class for the preceding month. The Fund also
reimburses W&R and WARSCO for certain out-of-pocket costs.
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
$362,698. With respect to Class A, Class B and Class C shares, W&R paid sales
commissions of $311,239 and all expenses in connection with the sale of Fund
shares, except for registration fees and related expenses.
A contingent deferred sales charge ("CDSC") may be assessed against
a shareholder's redemption amount of Class B and Class C shares and is paid
to W&R. The purpose of the deferred sales charge is to compensate W&R for
the costs incurred by W&R in connection with the sale of Fund shares.
With respect to Class B shares, the amount of the CDSC will be the
following percent of the total amount invested during a calendar year to acquire
the shares or the value of the shares redeemed, whichever is less. Redemption at
any time during the first calendar year of investment, 5%; the second calendar
year, 4%; the third calendar year, 3%; the fourth calendar year, 3%; the fifth
calendar year, 2%; the sixth calendar year, 1% and thereafter, 0%.
If Class C shares are sold within 12 months of buying these shares, a
1% CDSC will be imposed.
The deferred sales charge will not be imposed on shares representing
payment of dividends or distributions or on amounts which represent an increase
in the value of the shareholder's account resulting from capital appreciation
above the amount paid for shares purchased during the deferred sales charge
period. During the period ended March 31, 2000, W&R received $11 and $12 in
deferred sales charges from Class B and C shares, respectively.
<PAGE>
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed 0.25% of the Fund's average annual net assets. The fee is to be paid to
reimburse W&R for amounts it expends in connection with the distribution of the
Class A shares and/or provision of personal services to Fund shareholders and/or
maintenance of shareholder accounts.
Under the Distribution and Service Plan adopted by the Fund for Class B
and Class C shares, respectively, the Fund may pay W&R, on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate W&R for providing services to shareholders of that class and/or
maintaining shareholder accounts for that class and a distribution fee of up to
0.75% of the average daily net assets of the class to compensate W&R for
distributing the shares of that class. The Class B Plan and the Class C Plan
each permit W&R to receive compensation, through the distribution and service
fee, respectively, for its distribution activities for that class, which are
similar to the distribution activities described with respect to the Class A
Plan, and for its activities in providing personal services to shareholders of
that class and/or maintaining shareholder accounts of that class, which are
similar to the corresponding activities for which it is entitled to
reimbursement under the Class A Plan.
The Fund paid Directors' fees of $444, 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 $395,727,461 while proceeds
from maturities and sales aggregated $438,412,730. Purchases of short-term
securities and U.S Government securities aggregated $752,206,818 and
$18,026,855, respectively. Proceeds from maturities and sales of short-term
securities and U.S. Government securities aggregated $750,121,362 and
$33,935,614, respectively.
For Federal income tax purposes, cost of investments owned at March 31,
2000 was $512,606,399, resulting in net unrealized appreciation of $85,616,747,
of which $103,524,430 related to appreciated securities and $17,907,683 related
to depreciated securities.
NOTE 4 -- FEDERAL INCOME TAX MATTERS
For Federal income tax purposes, the Fund realized capital gain net
income of $77,669,478 during the year ended March 31, 2000, of which a portion
was paid to shareholders during the period ended March 31, 2000. Remaining
capital gain net income will be distributed to the Fund's shareholders.
<PAGE>
NOTE 5 -- MULTICLASS OPERATIONS
The Fund is authorized to offer four classes of shares, Class A, Class
B, Class C and Class Y, each of which have equal rights as to assets and voting
privileges. Class Y shares are not subject to a sales charge on purchases, are
not subject to a Rule 12b-1 Distribution and Service Plan and are subject to a
separate transfer agency and dividend disbursement services fee structure. A
comprehensive discussion of the terms under which shares of each class are
offered is contained in the Prospectus and the Statement of Additional
Information for the Fund.
Income, non-class specific expenses, and realized and unrealized gains
and losses are allocated daily to each class of shares based on the value of
their relative net assets as of the beginning of each day adjusted for the prior
day's capital share activity.
Transactions in capital stock are summarized below. Amounts are in thousands.
<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED MARCH 31,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Shares issued from sale of shares:
Class A .......................... 4,530 5,841
Class B .......................... 181 ---
Class C .......................... 33 ---
Class Y .......................... 25 298
Shares issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A .......................... 8,645 5,312
Class B .......................... 8 ---
Class C .......................... 1 ---
Class Y .......................... 16 105
Shares redeemed:
Class A .......................... (13,314) (10,253)
Class B .......................... (17) ---
Class C .......................... ---* ---
Class Y .......................... (41) (1,563)
------ ------
Increase (decrease) in
outstanding capital
shares .......................... 67 (260)
====== ======
Value issued from sale of shares:
Class A .......................... $36,528 $47,279
Class B .......................... 1,432 ---
Class C .......................... 259 ---
Class Y .......................... 202 2,444
Value issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A .......................... 66,193 41,926
Class B .......................... 56 ---
Class C .......................... 11 ---
Class Y .......................... 125 829
Value redeemed:
Class A .......................... (106,928) (82,940)
Class B .......................... (128) ---
Class C .......................... (2) ---
Class Y .......................... (335) (12,501)
-------- -------
Decrease in outstanding
capital .......................... $ (2,587) $(2,963)
======== =======
</TABLE>
*Not shown due to rounding.
<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, 2000, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of March 31, 2000, by correspondence with the custodian. 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, 2000, 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 accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Kansas City, Missouri
May 5, 2000
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits: United Continental Income Fund, Inc.
(a) Articles of Incorporation, as amended, filed by EDGAR on June 29,
1998 as EX-99.B1-charter to Post-Effective Amendment No. 57 to the
Registration Statement on Form N-1A*
Articles Supplementary, filed by EDGAR on June 30, 1995 as
EX-99.B1-ciartsup to Post Effective Amendment No. 54 to the
Registration Statement on Form N-1A*
Articles Supplementary attached hereto as EX-99.B(a)ciartsup
(b) By-Laws, filed by EDGAR on June 27, 1996 as EX-99.B2-cibylaw to Post
Effective Amendment No. 55 to the Registration Statement on Form
N-1A*
Amendment to Bylaws filed by EDGAR on April 30, 1999 as
EX-99.B(b)-cibylaw2 to Post-Effective Amendment No. 58 to the
Registration Statement on Form N-1A*
(c) Not applicable
(d) Investment Management Agreement, filed June 30, 1995 as
EX-99.B5-ciima to Post Effective Amendment No. 54 to the Registration
Statement on Form N-1A*
Assignment of the Investment Management Agreement, filed June 30,
1995 as EX-99.B5-ciassign to Post Effective Amendment No. 54 to the
Registration Statement on Form N-1A*
Fee Schedule to the Investment Management Agreement,
as amended, filed by EDGAR on July 2, 1999 as
EX-99.B(d)ciimafee to Post-Effective Amendment No. 60
to the Registration Statement on Form N-1A*
(e) Underwriting Agreement, filed by EDGAR on June 30, 1995 as
EX-99.B6-ciua to Post Effective Amendment No. 54 to the Registration
Statement on Form N-1A*
(f) Not applicable
(g) Custodian Agreement, as amended, filed by EDGAR on April 30, 1999 as
EX-99.B(g)-cica to Post-Effective Amendment No. 58 to the
Registration Statement on Form N-1A*
Custodian Agreement, as amended, attached hereto as EX-99.B(g)cica
(h) Shareholder Servicing Agreement, as amended, filed by EDGAR on April
30, 1999 as EX-99.B(h)-cissa to Post-Effective Amendment No. 58 to
the Registration Statement on Form N-1A*
<PAGE>
Fund Class A Application, as amended, filed by EDGAR on May 30, 1997
as EX-99.B9-ciappca to Post Effective Amendment No. 56 to the
Registration Statement on Form N-1A*
Fund Class Y Application, filed by EDGAR on by EDGAR on June 30, 1995
as EX-99.B9-ciappcy to Post Effective Amendment No. 54 to the
Registration Statement on Form N-1A*
Fund NAV Application, filed by EDGAR on June 30, 1995 as
EX-99.B9-ciappnav to Post Effective Amendment No. 54 to the
Registration Statement on Form N-1A*
Class Y Letter of Understanding, filed by EDGAR on June 27, 1996 as
EX-99.B9-cilou to Post Effective Amendment No. 55 to the Registration
Statement on Form N-1A*
Accounting Services Agreement, filed by EDGAR on June 30, 1995 as
EX-99.B9-ciasa to Post Effective Amendment No. 54 to the Registration
Statement on Form N-1A*
Service Agreement, filed by EDGAR on June 30, 1995 as EX-99.B9-cisa
to Post Effective Amendment No. 54 to the Registration Statement on
Form N-1A*
Amendment to Service Agreement filed by EDGAR on September 30, 1994
as Exhibit (b)(9) to Post-Effective Amendment No. 52 to the
Registration Statement on Form N-1A*
Amendment to Service Agreement, filed by EDGAR on June 30, 1995 as
EX-99.B9-cisaa to Post Effective Amendment No. 54 to the Registration
Statement on Form N-1A*
Compensation Table (Exhibit B) to the Shareholder Servicing
Agreement, as amended, filed by EDGAR on July 2, 1999 as
EX-99.B(h)cissacom to Post-Effective Amendment No. 60 to the
Registration Statement on Form N-1A*
Fidelity Bond Coverage (Exhibit C) to the Shareholder Servicing
Agreement, as amended, attached hereto as EX-99.B(h)cissafid
Fund Application (Non-Retirement Plan) attached hereto as
EX-99.B(h)ciappnon
Fund Application (Retirement Plan) attached hereto as
EX-99.B(h)ciappabc
Fund Application (Institutional) attached here to as
EX-99.B(h)ciappnav
Fund Application (Legend Non-Retirement) attached here to as
EX-99.B(h)ciapplegnon
Fund Application (Legend Retirement) attached here to as
EX-99.B(h)ciapplegabc
(i) Opinion and Consent of Counsel, attached hereto as EX-99.B(i)cilegopn
(j) Consent of Deloitte & Touche LLP, Independent Accountants, attached
hereto as EX-99.B(j)ciconsnt
(k) Not applicable
(l) Not applicable
(m) Service Plan, as restated, filed by EDGAR on June 30, 1995 as
EX-99.B15-cispca to Post-Effective Amendment No. 54 to the
Registration Statement on Form N-1A*
<PAGE>
Distribution and Service Plan for Class A shares filed by EDGAR on
June 29, 1998 as EX-99.B15-cidsp to Post-Effective Amendment No. 57
to the Registration Statement on Form N-1A*
(n) Not applicable
(o) Multiple Class Plan, as amended, attached hereto as EX-99.B(o)cimcp
(p) Code of Ethics attached hereto as EX-99.B(p)cicode
24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
25. INDEMNIFICATION
Reference is made to Article SEVENTH paragraph 6(b) through (f) of the
Articles of Incorporation of Registrant, as amended, filed June 30,
1995 as EX-99.B1-charter to Post-Effective Amendment No. 54 to the
Registration Statement on Form N-1A*; and to Article IV of the
Underwriting Agreement, filed June 30, 1995 as EX-99.B6-ciua to
Post-Effective Amendment No. 54 to the Registration Statement on Form
N-1A*; both of which provide indemnification. Also refer to Section
2-418 of the Maryland General Corporation Law regarding indemnification
of directors, officers, employees and agents.
Registrant undertakes to carry out all indemnification provisions of
its Articles of Incorporation, Bylaws, and the above-described
contracts in accordance with the Investment Company Act Release No.
11330 (September 4, 1980) and successor releases.
Insofar as indemnification for liability arising under the 1933 Act, as
amended, may be provided to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment of the Registrant of expenses incurred or paid by a
director, officer of controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
<PAGE>
26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER
Waddell & Reed Investment Management Company is the investment manager
of the Registrant. Under the terms of an Investment Management
Agreement between Waddell & Reed, Inc. and the Registrant, Waddell &
Reed, Inc. is to provide investment management services to the
Registrant. Waddell & Reed, Inc. assigned its investment management
duties under this agreement to Waddell & Reed Investment Management
Company on January 8, 1992. Waddell & Reed Investment Management
Company is a corporation which is not engaged in any business other
than the provision of investment management services to those
registered investment companies described in Part A and Part B of this
Post-Effective Amendment and to other investment advisory clients.
Each director and executive officer of Waddell & Reed Investment
Management Company has had as his sole business, profession, vocation
or employment during the past two years only his duties as an executive
officer and/or employee of Waddell & Reed Investment Management Company
or its predecessors, except as to persons who are directors and/or
officers of the Registrant and have served in the capacities shown in
the Statement of Additional Information of the Registrant The address
of the officers is 6300 Lamar Avenue, Shawnee Mission, Kansas
66202-4200.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to the Prospectus and SAI of this Registrant.
27. PRINCIPAL UNDERWRITER
(a) Waddell & Reed, Inc. is the principal underwriter to the Registrant.
It is also the principal underwriter to the following investment
companies:
United Asset Strategy Fund, Inc.
United Funds, Inc.
United International Growth Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Small Cap Fund, Inc.
United Tax-Managed Equity Fund, Inc.
Waddell & Reed Funds, Inc.
Advantage I
Advantage II
Advantage Plus
Advantage Gold
(b) The information contained in the underwriter's application on Form BD
as filed on June 16, 2000 SEC No. 8-27030, under the Securities
Exchange Act of 1934, is herein incorporated by reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or any
affiliated person of such affiliated person.
<PAGE>
28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant,
each of whose business address is Post Office Box 29217, Shawnee
Mission, Kansas 66201-9217.
29. MANAGEMENT SERVICES
There is no service contract other than as discussed in Part A and B of
this Post-Effective Amendment and listed in response to Items 23.(h) and
23.(m) hereof.
30. UNDERTAKINGS
Not applicable
---------------------------------
*Incorporated herein by reference
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED
ASSET STRATEGY FUND, INC., UNITED CASH MANAGEMENT, INC., UNITED CONTINENTAL
INCOME FUND, INC., UNITED FUNDS, INC., UNITED GOVERNMENT SECURITIES FUND, INC.,
UNITED HIGH INCOME FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED
INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND, INC., UNITED
MUNICIPAL HIGH INCOME FUND, INC., UNITED NEW CONCEPTS FUND, INC., UNITED
RETIREMENT SHARES, INC., UNITED SMALL CAP FUND, INC., UNITED TAX-MANAGED EQUITY
FUND, INC., UNITED VANGUARD FUND, INC., TARGET/UNITED FUNDS, INC. AND WADDELL &
REED FUNDS, INC. (each hereinafter called the "Corporation"), and certain
directors and officers for the Corporation, do hereby constitute and appoint
KEITH A. TUCKER, ROBERT L. HECHLER, DANIEL C. SCHULTE and KRISTEN A. RICHARDS,
and each of them individually, their true and lawful attorneys and agents to
take any and all action and execute any and all instruments which said attorneys
and agents may deem necessary or advisable to enable each Corporation to comply
with the Securities Act of 1933 and/or the Investment Company Act of 1940, as
amended, and any rules, regulations, orders or other requirements of the United
States Securities and Exchange Commission thereunder, in connection with the
registration under the Securities Act of 1933 and/or the Investment Company Act
of 1940, as amended, including specifically, but without limitation of the
foregoing, power and authority to sign the names of each of such directors and
officers in his/her behalf as such director or officer as indicated below
opposite his/her signature hereto, to any Registration Statement and to any
amendment or supplement to the Registration Statement filed with the Securities
and Exchange Commission under the Securities Act of 1933 and/or the Investment
Company Act of 1940, as amended, and to any instruments or documents filed or to
be filed as a part of or in connection with such Registration Statement or
amendment or supplement thereto; and each of the undersigned hereby ratifies and
confirms all that said attorneys and agents shall do or cause to be done by
virtue hereof.
<TABLE>
<S> <C>
Date: February 9, 2000 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
/s/Keith A. Tucker Chairman of the Board February 9, 2000
------------------- -----------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal February 9, 2000
-------------------- Financial Officer and -----------------
Robert L. Hechler Director
/s/Henry J. Herrmann Vice President and February 9, 2000
-------------------- Director -----------------
Henry J. Herrmann
<PAGE>
/s/Theodore W. Howard Vice President, Treasurer February 9, 2000
-------------------- and Principal Accounting -----------------
Theodore W. Howard Officer
/s/James M. Concannon Director February 9, 2000
-------------------- -----------------
James M. Concannon
/s/John A. Dillingham Director February 9, 2000
-------------------- -----------------
John A. Dillingham
/s/David P. Gardner Director February 9, 2000
------------------- -----------------
David P. Gardner
/s/Linda K. Graves Director February 9, 2000
-------------------- -----------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director February 9, 2000
-------------------- -----------------
Joseph Harroz, Jr.
/s/John F. Hayes Director February 9, 2000
-------------------- -----------------
John F. Hayes
/s/Glendon E. Johnson Director February 9, 2000
-------------------- -----------------
Glendon E. Johnson
/s/William T. Morgan Director February 9, 2000
-------------------- -----------------
William T. Morgan
<PAGE>
/s/Ronald C. Reimer Director February 9, 2000
-------------------- -----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr. Director February 9, 2000
-------------------- -----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director February 9, 2000
-------------------- -----------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director February 9, 2000
-------------------- -----------------
Frederick Vogel III
Attest:
/s/Kristen A. Richards
--------------------------------
Kristen A. Richards
Secretary
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment pursuant to
Rule 485(b) of the Securities Act of 1933, and has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Overland Park, and State of Kansas, on
the 29th day of June, 2000.
UNITED CONTINENTAL INCOME FUND, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
Signatures Title
---------- -----
/s/Keith A. Tucker* Chairman of the Board June 29, 2000
---------------------- ----------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal June 29, 2000
---------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and June 29, 2000
---------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer June 29, 2000
---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon* Director June 29, 2000
------------------ ----------------
James M. Concannon
/s/John A. Dillingham* Director June 29, 2000
------------------ ----------------
John A. Dillingham
<PAGE>
/s/David P. Gardner* Director June 29, 2000
------------------ ----------------
David P. Gardner
/s/Linda K. Graves* Director June 29, 2000
------------------ ----------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director June 29, 2000
------------------ ----------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director June 29, 2000
------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson* Director June 29, 2000
------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director June 29, 2000
------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer* Director June 29, 2000
------------------ ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director June 29, 2000
------------------ ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director June 29, 2000
------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director June 29, 2000
------------------- ----------------
Frederick Vogel III
*By /s/Kristen A. Richards
--------------------------
Kristen A. Richards
Attorney-in-Fact
ATTEST:/s/Daniel C. Schulte
---------------------------
Daniel C. Schulte
Assistant Secretary
