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WADDELL & REED ADVISORS RETIREMENT SHARES, 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 a prospectus
("Prospectus") for the Class A, Class B, Class C and Class Y shares of Waddell &
Reed Advisors Retirement Shares, Inc. (the "Fund"), formerly, United Retirement
Shares, 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 .................... 71
Other Information ....................................... 74
Financial Statements
Appendix A .............................................. 76
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Waddell & Reed Advisors Retirement Shares, 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 3, 1971.
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:
<TABLE>
<S> <C>
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.
</TABLE>
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares were reflected,
it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of
December 31, 1999, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
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<TABLE>
<CAPTION>
With Without
Sales Load Sales Load
Deducted Deducted
<S> <C> <C>
One-year period from January 1, 1999 to
December 31, 1999: 35.39% 46.65%
Five-year period from January 1, 1995 to
December 31, 1999: 19.09% 20.51%
Ten-year period from January 1, 1990 to
December 31, 1999: 14.17% 14.85%
</TABLE>
Prior to October 7, 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 25.95%.
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 20.95%.
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 25.95%.
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 24.95%.
The average annual total return quotations for Class Y shares as of
December 31, 1999, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
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<TABLE>
<S> <C>
Period from January 1, 1999 to
December 31, 1999: 43.87%
Period from February 27, 1996* to
December 31, 1999: 19.91%
</TABLE>
*Date of inception.
The Fund may also quote unaveraged or cumulative total return for a
class which reflects the change in value of an investment in that class over a
stated period of time. Cumulative total returns will be calculated according to
the formula indicated above but without averaging the rate for the number of
years in the period.
PERFORMANCE RANKINGS 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,
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Waddell & Reed Investment Management Company ("WRIMCO"), may employ and the
types of instruments in which the Fund may invest, in pursuit of the Fund's
goal. A summary of the risks associated with these instrument types and
investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by the Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help the Fund achieve its goal. See "Investment
Restrictions 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
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profits to meet required principal and interest payments. The Fund may choose,
at its expense or in conjunction with others, to pursue litigation or otherwise
exercise its rights as a security holder to seek to protect the interests of
security holders if it determines this to be in the best interest of the Fund's
shareholders.
The Fund may invest in debt securities rated in any rating category of
the established rating services, including securities rated in the lowest
category (securities rated D by Standard & Poor's ("S&P") and C by Moody's
Investors Service, Inc. ("MIS")). Debt securities rated D by S&P or C by MIS are
in payment default or are regarded as having extremely poor prospects of ever
attaining any real investment standing. Debt securities rated at least BBB by
S&P or Baa by MIS are considered to be investment grade debt securities.
Securities rated BBB or Baa may have speculative characteristics. In addition,
the Fund will treat unrated securities judged by WRIMCO to be of equivalent
quality to a rated security as having that rating.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from time
to 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
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or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or different issuer within a particular
period of time at a specified price or formula. Convertible securities generally
have higher yields than common stocks of the same or similar issuers, but lower
yields than comparable nonconvertible securities, are less subject to
fluctuation in value than the underlying stock because they have fixed income
characteristics, and provide the potential for capital appreciation if the
market price of the underlying common stock increases.
The value of a convertible security is influenced by changes in
interest rates, with investment value declining as interest rates increase and
increasing as interest rates decline. The credit standing of the issuer and
other factors also may have an effect on the convertible security's investment
value.
The Fund may also invest in a type of convertible preferred stock that
pays a cumulative, fixed dividend that is senior to, and expected to be in
excess of, the dividends paid on the common stock of the issuer. At the
mandatory conversion date, the preferred stock is converted into not more than
one share of the issuer's common stock at the "call price" that was established
at the time the preferred stock was issued. If the price per share of the
related common stock on the mandatory conversion date is less than the call
price, the holder of the preferred stock will nonetheless receive only one share
of common stock for each share of preferred stock (plus cash in the amount of
any accrued but unpaid dividends). At any time prior to the mandatory conversion
date, the issuer may redeem the preferred stock upon issuing to the holder a
number of shares of common stock equal to the call price of the preferred stock
in effect on the date of redemption divided by the market value of the common
stock, with such market value typically determined one or two trading days prior
to the date notice of redemption is given. The issuer must also pay the holder
of the preferred stock cash in an amount equal to any accrued but unpaid
dividends on the preferred stock. This convertible preferred stock is subject to
the same market risk as the common stock of the issuer, except to the extent
that such risk is mitigated by the higher dividend paid on the preferred stock.
The opportunity for equity appreciation afforded by an investment in such
convertible preferred stock, however, is limited, because in the event the
market value of the issuer's common stock increases to or above the call price
of the preferred stock, the issuer may (and would be expected to) call the
preferred stock for redemption at the call price. This convertible preferred
stock is also subject to credit risk with regard to the ability of the issuer to
pay the dividend established upon issuance of the preferred stock. Generally,
convertible preferred stock is less volatile than the related common stock of
the issuer.
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SPECIFIC SECURITIES AND INVESTMENT PRACTICES
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities ("U.S. Government securities") are high quality debt
instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date they
are issued), Treasury Notes (which have maturities of one to ten years) and
Treasury Bonds (which generally have maturities of more than 10 years). All such
Treasury securities are backed by the full faith and credit of the United
States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (also known as the Federal National Mortgage Association), Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by 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 the 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
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this section could be adversely affected by actions of the U.S. Government to
tighten the availability of its credit.
MONEY MARKET INSTRUMENTS
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
ZERO COUPON SECURITIES
Zero coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or that specify a
future date when the securities begin to pay current interest; instead, they are
sold at a deep discount from their face value and are redeemed at face value
when they mature. Because zero coupon securities do not pay current income,
their prices can be very volatile when interest rates change and generally are
subject to greater price fluctuations in response to changing interest rates
than prices of comparable maturities that make current distributions of interest
in cash.
The Fund may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds, zero coupon bonds of corporate issuers and other
securities that are issued with original issue discount ("OID"). The Federal tax
law requires that a holder of a security with OID accrue a ratable portion of
the OID on the security as income each year, even though the holder may receive
no interest payment on the security during the year. Accordingly, although the
Fund will receive no payments on its zero coupon securities prior to their
maturity or disposition, it will have current income attributable to those
securities and includable in the dividends paid to its shareholders. Those
dividends will be paid from the Fund's cash assets or by liquidation of
portfolio securities, if necessary, at a time when the Fund otherwise might not
have done so.
A broker-dealer creates a DERIVATIVE ZERO by separating the interest
and principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this
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fashion. ORIGINAL ISSUE ZEROS are zero coupon securities originally issued by
the U.S. Government, a government agency, or a corporation in zero coupon form.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct
or indirect participations in, or are secured by and payable from, mortgage
loans secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund may
invest include mortgage-backed securities issued or guaranteed as to the payment
of principal and interest (but not as to market value) by Ginnie Mae, Fannie
Mae, or Freddie Mac. Other mortgage-backed securities are issued by private
issuers, generally originators of and investors in mortgage loans, including
savings associations, mortgage bankers, commercial banks, investment bankers and
special purpose entities. Payments of principal and interest (but not the market
value) of such private mortgage-backed securities may be supported by pools of
mortgage loans or other mortgage-backed securities that are guaranteed, directly
or indirectly, by the U.S. Government or one of its agencies or
instrumentalities, or they may be issued without any government guarantee of the
underlying mortgage assets but with some form of non-government credit
enhancement. These credit enhancements do not protect investors from changes in
market value.
The Fund may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage lenders, or other
financial institutions. Other types of mortgage-backed securities will likely be
developed in the future, and the Fund may invest in them if Waddell & Reed
Investment Management Company ("WRIMCO"), the Fund's investment manager,
determines they are consistent with the Fund's goal 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
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"interest-only" security ("IO") receives interest payments from the same
underlying security.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets securing the debt are not first lien mortgage
loans or interests therein, but include assets such as motor vehicle installment
sales contracts, other installment sale contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present. The value of asset-backed securities may also depend on the
creditworthiness of the servicing agent for the loan pool, the originator of the
loans, or the financial institution providing the credit enhancement.
SPECIAL CHARACTERISTICS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a
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premium or discount. In addition, there is normally some delay between the time
the issuer receives mortgage payments from the servicer and the time the issuer
makes the payments on the mortgage-backed securities, and this delay reduces the
effective yield to the holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed-rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Changes in the rate or "speed" of these payments can
cause the value of the mortgage backed securities to fluctuate rapidly. However,
these effects may not be present, or may differ in degree, if the mortgage loans
in the pools have adjustable interest rates or other special payment terms, such
as a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics, such
as yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
reduced. These changes can result in volatility in the market value and in some
instances reduced liquidity, of the CMO class.
VARIABLE OR FLOATING RATE INSTRUMENTS
Variable or floating rate instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and may carry
rights that permit holders to demand payment of the unpaid principal balance
plus accrued interest
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from the issuers or certain financial intermediaries on dates prior to their
stated maturities. Floating rate securities have interest rates that change
whenever there is a change in a designated base rate, while variable rate
instruments provide for a specified periodic adjustment in the interest rate.
These formulas are designed to result in a market value for the instrument that
approximates its par value.
FOREIGN SECURITIES AND CURRENCIES
The Fund may invest in the securities of foreign issuers, including
depositary receipts. In general, depositary receipts are securities convertible
into and evidencing ownership of securities of foreign corporate issuers,
although depositary receipts may not necessarily be denominated in the same
currency as the securities into which they may be converted. American depositary
receipts, in registered form, are dollar-denominated receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. International depositary receipts and European depositary receipts,
in bearer form, are foreign receipts evidencing a similar arrangement and are
designed for use by non-U.S. investors and traders in non-U.S. markets. Global
depositary receipts are designed to facilitate the trading of securities of
foreign issuers by U.S. and non-U.S. investors and traders.
WRIMCO believes that there are investment opportunities as well as
risks in investing in foreign securities. Individual foreign economies may
differ favorably or unfavorably from the U.S. economy or each other in such
matters as gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Individual foreign
companies may also differ favorably or unfavorably from domestic companies in
the same industry. Foreign currencies may be 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,
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brokerage commissions and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be greater possibility of
default by foreign governments or government-sponsored enterprises. Investments
in foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
There is no assurance that WRIMCO will be able to anticipate these potential
events or counter their effects.
The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is likely
to experience long-term gross domestic product growth above that expected to
occur in the United States, the United Kingdom, France, Germany, Italy, Japan
and Canada. Developing countries may have relatively unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities.
Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The Fund could also be adversely affected by the conversion of certain
European currencies into the euro. This conversion, which is underway, is
scheduled to be completed in 2002. However, problems with the conversion process
and delays could increase volatility in world capital markets and affect
European capital markets in particular.
The Fund may purchase and sell foreign currency and invest in foreign
currency deposits, and may enter into forward currency contracts, 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."
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LENDING SECURITIES
Securities loans may be made on a short-term or long-term basis for the
purpose of increasing the Fund's income. If the Fund lends securities, the
borrower pays the Fund an amount equal to the dividends or interest on the
securities that the Fund would have received if it had not lent the securities.
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 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
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under rules of the NYSE, which presently require the borrower to give the
securities back to the Fund within five business days after the Fund gives
notice to do so. If the Fund loses its voting rights on securities loaned, it
will have the securities returned to it in time to vote them if a material event
affecting the investment is to be voted on. The Fund may pay reasonable
finder's, administrative and custodian fees in connection with loans of
securities.
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 increases, risks of delay
in recovering the securities loaned or even loss of rights in the collateral
should the borrower of the securities fail financially.
REPURCHASE AGREEMENTS
The Fund may purchase securities subject to repurchase agreements. The
Fund will not enter into a repurchase transaction that will cause more than 10%
of its net assets to be invested in illiquid investments, which include
repurchase agreements not terminable within seven days. See "Illiquid
Investments." A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a commercial bank or
broker-dealer) agrees, at the time of purchase, that it will repurchase the
security at a specified time and price. The amount by which the resale price is
greater than the purchase price reflects an agreed-upon market interest rate
effective for the period of the agreement. The return on the securities subject
to the repurchase agreement may be more or less than the return on the
repurchase agreement.
The majority of the repurchase agreements in which the Fund will engage
are overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is that the
Fund may suffer a loss if the seller fails to pay the agreed-upon amount on the
delivery date and that amount is greater than the resale
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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.
WARRANTS AND RIGHTS
Warrants are options to purchase equity securities at a specified price
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
sharp decline in value than the underlying security might be. They are also
generally less liquid than an investment in the underlying shares.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
The Fund may purchase any securities in which it may invest on a
when-issued or delayed-delivery basis or sell them on a delayed-delivery basis.
In either case payment and delivery for the securities take place at a future
date. The securities so purchased or sold by the Fund are subject to market
fluctuation; their value may be less or more when delivered than the purchase
price paid or received. When purchasing securities on a when issued or
delayed-delivery basis, the Fund assumes the rights and risks of ownership,
including the risk of price and yield fluctuations. No interest accrues to the
Fund until delivery and payment is completed. When the Fund makes a commitment
to purchase securities on a when-issued or delayed-delivery basis, it will
record the transaction and thereafter reflect the value of the securities in
determining its net asset value per share. When the Fund sells a security on a
delayed-delivery basis, the Fund does not participate in further gains or losses
with respect to the security. When the Fund makes a commitment to sell
securities on a delayed-delivery basis, it will record the transaction and
thereafter value the securities at the sales
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price in determining the Fund's net asset value per share. If the other party to
a delayed-delivery transaction fails to deliver or pay for the securities, the
Fund could miss a favorable price or yield opportunity, or could suffer a loss.
Ordinarily the Fund purchases securities on a when-issued or
delayed-delivery basis with the intention of actually taking delivery of the
securities. However, before the securities are delivered to the Fund and before
it has paid for them (the "settlement date"), the Fund could sell the securities
if WRIMCO decided it was advisable to do so for investment reasons. The Fund
will hold aside or segregate cash or other securities, other than those
purchased on a when-issued or delayed-delivery basis, at least equal to the
amount it will have to pay on the settlement date; these other securities may,
however, be sold at or before the settlement date to pay the purchase price of
the when-issued or delayed-delivery securities.
INVESTMENT COMPANY SECURITIES
The Fund may purchase securities of closed-end investment companies. As
a shareholder in an investment company, the Fund would bear its pro rata share
of that investment company's expenses, which could result in duplication of
certain fees, including management and administrative fees.
RESTRICTED SECURITIES
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, or in a registered
public offering. Where registration is required, the Fund may be obligated to
pay all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities in
which the Fund seeks to invest need not be listed or admitted to trading on a
foreign or domestic exchange and may be less liquid than listed securities.
Certain restricted securities, e.g., Rule 144A securities, may be determined to
be liquid in accordance with guidelines adopted by the Board of Directors. See
"Illiquid Investments."
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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) non-government stripped fixed-rate mortgage-backed securities;
(vi) restricted securities not determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors; and
(vii) securities involved in swap, cap, floor and collar transactions.
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
Indexed securities are 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. 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
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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. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government agencies. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
OPTIONS AND FUTURES
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 the
Fund's 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
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potential declines in the value of one or more investments held in the Fund's
portfolio. Thus, in a short hedge the Fund takes a position in a Financial
Instrument whose price is expected to move in the opposite direction of the
price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that the Fund intends to acquire.
Thus, in a long hedge the Fund takes a position in a Financial Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Financial Instruments on indices, in
contrast, generally are used to attempt to hedge against price movements in
market sectors in which the Fund has invested or expects to invest. Financial
Instruments on debt securities may be used to hedge either individual securities
or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations
of the Securities and Exchange Commission (the "SEC"), the several exchanges
upon which they are traded and the Commodity Futures Trading Commission (the
"CFTC"). In addition, the Fund's ability to use Financial Instruments will be
limited by tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with the Fund's goal 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.
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SPECIAL RISKS. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities, currency and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Financial Instrument and price movements of the
investments being hedged. For example, if the value of a Financial Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match the Fund's current or anticipated investments exactly. The Fund
may invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options, 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
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lesser value than the securities it wishes to hedge or intends to purchase in
order to attempt to compensate for differences in volatility between the
contract and the securities, although this may not be successful in all cases.
If price changes in the Fund's options or futures positions are poorly
correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Financial Instrument. Moreover, if the price of the
Financial Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets
as "cover," maintain accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If the Fund were unable to close out
its positions in such Financial Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time.
(5) The Fund's ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction ("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.
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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 to accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon price
during the option period. A put option gives the purchaser the right to sell,
and obligates the writer to buy, the underlying investment at the agreed-upon
price during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or call options
can enable the Fund to enhance income or yield by reason of the premiums paid by
the purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security or
currency appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Fund will
be obligated to sell the security or currency at less than its market value. If
the call option is an OTC option, the securities or other assets used as cover
would be considered illiquid to the extent described under "Illiquid
Investments."
Writing put options can serve as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be obligated
to purchase the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid Investments."
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The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
A type of put that the Fund may purchase is an "optional delivery
standby commitment," which is entered into by parties selling debt securities to
the Fund. An optional delivery standby commitment gives the Fund the right to
sell the security back to the seller on specified terms. This right is provided
as an inducement to purchase the security.
RISKS OF OPTIONS ON SECURITIES. Options offer large amounts of
leverage, which will result in the Fund's net asset value being more sensitive
to changes in the value of the related instrument. The Fund may purchase or
write both exchange-traded and OTC options. Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between the Fund and its counterparty (usually a securities dealer or a bank)
with no clearing organization guarantee. Thus, when the Fund purchases an OTC
option, it relies on the counterparty from whom it purchased the option to make
or take delivery of the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating directly
with the counterparty, or by an offsetting 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
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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 an offsetting closing transaction for
an option it had purchased, it would have to exercise the option to realize any
profit. The inability to enter into an offsetting 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 STOCK INDICES. Puts and calls on indices are similar to puts
and calls on securities or futures contracts except that all settlements are in
cash and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple ("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 stock index upon which the put is
based is less than the exercise price of the put, which amount of cash is
determined by the multiplier, as described above for calls. When the Fund writes
a put on 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 STOCK INDICES. The risks of investment in options
on stock 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.
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Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as a common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size and
strike price, the terms of OTC options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Fund great flexibility to
tailor the option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded. The Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
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.
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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 or call options on futures can serve as a long hedge, and the sale of
futures or the purchase of put options on futures can serve as a short hedge.
Writing call options on futures contracts can serve as a limited short hedge,
using a strategy similar to that used for writing call options on securities or
indices. Similarly, writing put options on futures contracts can serve as a
limited long hedge. Futures contracts and options on futures contracts can also
be purchased and sold to attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average
duration of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten the
average duration of the Fund's fixed-income portfolio, the Fund may sell a debt
futures contract or a call option thereon, or purchase a put option on that
futures contract. If WRIMCO wishes to lengthen the average duration of the
Fund's fixed-income portfolio, the Fund may buy a debt futures contract or a
call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when 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
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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 in
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on
a futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option or to maintain liquid
assets in an account.
RISKS OF FUTURES CONTRACTS AND OPTIONS THEREON. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to the differences in the natures of those markets, are subject to
the following factors, which may create distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest
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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 future and movements in the price of the securities that
are the subject of the hedge increases as the composition of the Fund's
portfolio diverges from the securities included in the applicable index. The
price of the index futures may move more than or less than the price of the
securities being hedged. If the price of the index future moves less than the
price of the securities that are the subject of the hedge, the hedge will not be
fully effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of such 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.
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FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. The Fund
may use options and futures contracts on foreign currencies (including the
euro), as described above, and forward currency contracts, as described below,
to attempt to hedge against movements in the values of the foreign currencies in
which the Fund's securities are denominated or to attempt to enhance income or
yield. Currency hedges can protect against price movements in a security that
the Fund owns or intends to acquire that are attributable to changes in the
value of the currency in which it is denominated. Such hedges do not, however,
protect against price movements in the securities that are attributable to other
causes.
The Fund might seek to hedge against changes in the value of a
particular currency when no Financial Instruments on that currency are available
or such Financial Instruments are more expensive than certain other Financial
Instruments. In such cases, the Fund may seek to hedge against price movements
in that currency by entering into transactions using Financial Instruments on
another currency or a basket of currencies, the values of which WRIMCO believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Financial Instrument
will not correlate perfectly with movements in the price of the currency subject
to the hedging transaction is magnified when this strategy is used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.
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Settlement of transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time of the forward
currency contract. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
Such transactions may serve as long hedges; for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges; for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security,
dividend or interest payment denominated in a foreign currency.
The Fund may also use forward 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
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advantages in terms of cost, yield, or efficiency, but generally would not hedge
currency exposure as effectively as a simple hedge into U.S. dollars. Proxy
hedges may result in losses if the currency used to hedge does not perform
similarly to the currency in which the hedged securities are denominated.
The Fund also may use forward currency contracts to attempt to enhance
income or yield. The Fund could use forward currency contracts to increase its
exposure to foreign currencies that WRIMCO believes might rise in value relative
to the U.S. dollar, or shift its exposure to foreign currency fluctuations from
one country to another. For example, if the Fund owned securities denominated in
a foreign currency and WRIMCO believed that currency would decline relative to
another currency, it might enter into a forward currency contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second foreign currency.
The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When the Fund enters into a forward currency contract, it relies on
the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in a segregated account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent
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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 contracts, to adjust
the risk and return characteristics of its overall position. For example, the
Fund may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
TURNOVER. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate. Once
the Fund has received an exercise notice on an option it has written, it cannot
effect a closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
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SWAPS, CAPS, FLOORS AND COLLARS. The Fund may enter into swaps, caps,
floors and collars to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive cash flows, on a notional
principal amount, e.g., an exchange of floating rate payments for fixed-rate
payments. The purchase of a cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined value, to receive payments on a notional
principal amount from the party selling the cap. The purchase of a floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined value, to receive payments on a notional principal amount from the
party selling the floor. A collar combines elements of buying a cap and selling
a floor.
Swap agreements, including caps, floors and collars can be individually
negotiated and structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap agreements may
increase or decrease the overall volatility of the Fund's investments and its
share price and yield because, and to the extent, these agreements affect the
Fund's exposure to long- or short-term interest rates (in the United States or
abroad), foreign currency values, mortgage-backed security values, corporate
borrowing rates, or other factors such as security prices or inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to exchange
payments in U.S. dollars for payments in foreign currency, the swap agreement
would tend to decrease the Fund's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options.
The creditworthiness of firms with which the Fund enters into swaps,
caps or floors will be monitored by WRIMCO. If a firm's creditworthiness
declines, the value of the agreement would be likely to decline, potentially
resulting in losses. If a default occurs by the other party to such transaction,
the Fund will have contractual remedies pursuant to the agreements related to
the transaction.
The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap will be accrued on a daily basis and
an amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such account with respect to its total obligations under
any swaps that are not entered
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into on a net basis and with respect to any caps or floors that are written by
the Fund. WRIMCO and the Fund believe that such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to the Fund's borrowing restrictions. The Fund understands that
the position of the SEC is that assets involved in swap transactions are
illiquid and are, therefore, subject to the limitations on investing in illiquid
securities.
INVESTMENT RESTRICTIONS AND LIMITATIONS
Certain of the Fund's investment restrictions and other limitations are
described in this SAI. The following are the Fund's fundamental investment
limitations set forth in their entirety, which, like the Fund's goal 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;
(ii) Buy real estate nor any nonliquid interests in real estate
investment trusts which includes investments in oil, gas and
other mineral leases and real estate limited partnerships;
(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 it in a regular
transaction in the open market and then does not have more
than one tenth (i.e., 10%) of its total assets in these
shares. The Fund may also buy these shares as part of a merger
or consolidation;
(iv) Lend money or other assets, other than through certain limited
types of loans described herein; the Fund can buy debt
securities and other obligations consistent with its goal 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;
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(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,
collars, floors and other financial instruments;
(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 Investment Company Act of 1940
(the "1940 Act")), if immediately after and as a result of
such purchase, (a) the value of the holdings of the Fund in
the securities of such issuer exceeds 5% of the value of the
Fund's total assets, or (b) the Fund owns more than 10% of the
outstanding voting securities of such issuer; or buy the
securities of companies in any one industry if more than 25%
of the Fund's total assets would then be in companies in that
industry; or
(xi) Issue senior securities.
THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL AND MAY BE
CHANGED BY THE BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL:
(i) The Fund does not intend to invest in non-investment grade
debt if, as a result of such investment, more
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than 10% of its total assets would consist of such
investments.
(ii) The Fund may not invest more than 10% of its total assets in
foreign securities.
(iii) The Fund may not purchase a security if, as a result, more
than 10% of its net assets would consist of illiquid
investments.
(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 5% 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.
(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.
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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 June 30, 1999 was 149.06%, while the rate
for the remainder of the portfolio was 56.06%. The Fund's overall portfolio
turnover rates for the fiscal years ended June 30, 1999 and 1998 were 122.58%
and 53.52%, respectively. The significant increase in turnover from 1998 to 1999
is primarily due to a change in the portfolio manager. Charles Hooper, Jr. took
over the management of this Fund in April, 1999. It is anticipated that the
turnover rate will continue near the rate for the fiscal year ended June 30,
1999.
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
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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.
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.
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<PAGE>
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 to WRIMCO during the fiscal years ended June
30, 1999, 1998 and 1997 were $4,420,589, $4,229,070 and $3,578,876,
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 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.
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<PAGE>
ACCOUNTING SERVICES FEE
<TABLE>
<CAPTION>
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
Fees paid to the Agent for the fiscal years ended June 30, 1999, 1998
and 1997 were $85,000, $80,000 and $70,000, respectively.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement are
described above. Waddell & Reed. Inc. and affiliates also 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 June 30,
1999, 1998 and 1997 were $2,706,305, $3,494,973 and $2,917,026, respectively,
and the amounts retained by Waddell & Reed, Inc. for each fiscal year were
$1,136,635, $1,471,735 and $1,227,433, respectively.
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 charges ("CDSC") for Class B and Class C shares and
for certain Class A
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<PAGE>
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 charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under the Distribution and Service Plan (the "Plan") for Class A shares
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay
Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed 0.25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with, either directly or through others, the distribution
of the Class A shares, the provision of personal services to Class A
shareholders and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its financial
advisors, registered representatives and sales managers (sales force) and
through other broker-dealers, banks and other appropriate intermediaries. In
distributing shares through its sales force, Waddell & Reed, Inc. will pay
commissions and incentives to the sales force at or about the time of sale and
will incur other expenses including 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 contemplates that Waddell &
Reed, Inc. may be reimbursed for amounts it expends in compensating, training
and supporting registered financial advisors, sales managers and/or other
appropriate personnel in providing personal services to Class A shareholders of
the Fund and/or maintaining Class A shareholder accounts; increasing services
provided to Class A shareholders of the Fund by office personnel located at
field sales offices; engaging in other activities useful in providing personal
service to Class A shareholders of the Fund and/or maintenance of Class A
shareholder accounts; and in compensating broker-dealers who may regularly sell
Class A shares of the Fund, and other third parties, for providing shareholder
services and/or maintaining shareholder accounts with respect to Class A shares.
Fees paid (or accrued) as distribution fees and service fees by the Fund
43
<PAGE>
under the Class A Plan for the fiscal year ended June 30, 1999 were $164,765 and
$1,832,158, respectively.
To the extent that Waddell & Reed, Inc. incurs expenses for which
reimbursement may be made under the Plan that relate to distribution and service
activities also involving another fund in the Waddell & Reed Advisors Funds or
W&R Funds, Inc., Waddell & Reed, Inc. typically determines the amount
attributable to the Fund's expenses under the Plan on the basis of a combination
of the respective classes' relative net assets and number of shareholder
accounts.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for, either directly or through others,
providing personal services to shareholders of that class and/or maintaining
shareholder accounts for that class and a distribution fee of up to 0.75% of the
average daily net assets of the class to compensate Waddell & Reed, Inc. for,
either directly or through others, distributing the shares of that class. The
Class B Plan and the Class C Plan each permit Waddell & Reed, Inc. to receive
compensation, through the distribution and service fee, respectively, for its
distribution activities for that class, which are similar to the distribution
activities described with respect to the Class A Plan, and for its activities in
providing personal services to shareholders of that class and/or maintaining
shareholder accounts of that class, which are similar to the corresponding
activities for which is it 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 goal of
the Fund. Further, continuing sales of shares may also reduce the likelihood
that it will be necessary to liquidate portfolio securities, in amounts or at
times that may be disadvantageous to the Fund, to meet redemption demands. In
addition, the Fund anticipates that the
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<PAGE>
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 December
31, 1999, which is the most recent balance sheet included in this SAI, was as
follows:
45
<PAGE>
<TABLE>
<S> <C>
Net asset value per Class A share (Class A net assets
divided by Class A shares
outstanding) ........................................ $10.94
Add: selling commission (5.75% of offering
price) .............................................. .67
-----
Maximum offering price per Class A share
(Class A NAV divided by 94.25%)...................... $11.61
=====
</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 a Class Y share is its NAV next calculated
following acceptance of a purchase order. The number of shares you receive for
your purchase depends on the next offering price after Waddell & Reed, Inc. or
an authorized third party receives and accepts your order at its principal
business office. You will be sent a confirmation after your purchase which will
indicate how many shares you have purchased. Shares are normally issued for cash
only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the
Fund may determine to discontinue offering Fund shares for purchase.
The NAV and offering price per share are ordinarily computed once on
each day that the NYSE is open for trading as of the later of the close of the
regular session of the NYSE or 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
46
<PAGE>
cost, which approximates market. When market quotations are not readily
available, securities and other assets are valued at fair value as determined in
good faith under procedures established by, and under the general supervision
and responsibility of, the Fund's Board of Directors.
Puts, calls and futures contracts purchased and held by the Fund are
valued at the last sales price thereof on the securities or commodities
exchanges on which they are traded, or, if there are no transactions, at the
mean between bid and asked prices. Ordinarily, the close of the regular session
for options trading on national securities exchanges is 4:10 p.m. Eastern time
and the close of the regular session for 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" (that is, treated as sold for its fair market
value) to reflect the current market value of the put or call. If a call the
Fund wrote is exercised, the proceeds received on the sale of the related
investment are increased by the amount of the premium the Fund received. If the
Fund exercised a call it purchased, the amount paid to purchase the related
investment is increased by the amount of the premium paid. If a put written by
the Fund is exercised, the amount that the Fund pays to purchase the related
investment is decreased by the amount of the premium it received. If the Fund
exercises a put it purchased, the amount 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 than the cost of the closing
transaction.
Foreign currency exchange rates are generally determined prior to the
close of trading of the regular session of the NYSE. Occasionally events
affecting the value of foreign investments and such exchange rates occur between
the time at which they are determined and the close of the regular session of
trading on the NYSE, which events will not be reflected in a computation of the
Fund's NAV on that day. If events materially affecting the value of such
investments or currency exchange rates occur during such time period,
investments will be valued at their fair value as determined in good faith by or
under the direction of the Board of Directors. The foreign currency exchange
transactions of the Fund conducted on a spot (that is, cash) basis are valued at
the spot rate for purchasing or selling
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<PAGE>
currency prevailing on the foreign exchange market. This rate under normal
market conditions differs from the prevailing exchange rate in an amount
generally less than one-tenth of one percent due to the costs of converting from
one currency to another.
Optional delivery standby commitments are valued at fair value under
the general supervision and responsibility of the Fund's Board of Directors.
They are accounted for in the same manner as exchange-listed puts.
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
For Class A, Class B and Class C shares, initial investments must be at
least $500 with the exceptions described in this paragraph. A $100 minimum
initial investment pertains to certain exchanges of shares from another fund in
the Waddell & Reed Advisors Funds or W&R Funds, Inc. A $50 minimum initial
investment pertains to purchases for certain retirement plan accounts and to
accounts for which an investor has arranged, at the time of initial investment,
to make subsequent purchases for the account by having regular monthly
withdrawals of $25 or more made from a bank account. A minimum initial
investment of only $25 is applicable to purchases made through payroll deduction
by or for employees of Waddell & Reed, Inc., WRIMCO, their affiliates or certain
retirement plan accounts. Except with respect to certain exchanges and automatic
withdrawals from a bank account, a shareholder may make subsequent investments
of any amount. See "Exchanges for Shares of Other Funds in the Waddell & Reed
Advisors Funds and W&R Funds, Inc. "
For Class Y shares, investments by government entities or authorities
or by corporations must total at least $10 million within the first twelve
months after initial investment. There is no initial investment minimum for
other Class Y investors.
REDUCED SALES CHARGES (APPLICABLE TO CLASS A SHARES ONLY)
ACCOUNT GROUPING
Large purchases of Class A shares are subject to lower sales charges.
The schedule of sales charges appears in the Prospectus. For the purpose of
taking advantage of the lower sales charges available for large purchases, a
purchase in any of categories 1 through 7 listed below made by an individual or
deemed to be made by an individual may be grouped with purchases in any other of
these categories:
1. Purchases by an individual for his or her own account (includes
purchases under the Waddell & Reed Advisors Funds Revocable Trust
Form);
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<PAGE>
2. Purchases by that individual's spouse purchasing for his or her own
account (includes Waddell & Reed Advisors Funds Revocable Trust Form of
spouse);
3. Purchases by that individual or his or her spouse in their joint
account;
4. Purchases by that individual or his or her spouse for the account of
their child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in
a Uniform Transfers to Minors Act ("UTMA") or Uniform Gifts to Minors
Act ("UGMA") account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), salary reduction plan account
under Section 457 of the Internal Revenue Code of 1986, as amended (the
"Code"), tax-sheltered annuity account ("TSA") or Keogh plan account,
provided that such purchases are subject to a sales charge (see "Net
Asset Value Purchases"), 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
49
<PAGE>
beneficiaries; upon X's death, the account is transferred to R
as trustee; a purchase in the account may not be grouped with
R's individual account. (If X's spouse, Y, was successor
trustee, this purchase could be grouped with Y's individual
account.)
All purchases of Class A shares made 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.
50
<PAGE>
ONE-TIME PURCHASES
A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $75,000; at the
same time, H's parents open up three UGMA accounts for H and
W's three minor children and invest $10,000 in each child's
name; the combined purchase of $105,000 of Class A shares is
subject to a reduced sales load of 4.75% provided that Waddell
& Reed, Inc. is advised that the purchases are entitled to
grouping.
RIGHTS OF ACCUMULATION
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the 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 an LOI
form, which is available from Waddell & Reed, Inc., the purchaser indicates an
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<PAGE>
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 WRIMCO. 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.
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
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<PAGE>
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.
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.
LOIs are not available for purchases made under a 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 in 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
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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 & 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 the UGMA or
UTMA purchasing for the child or grandchild of any employee or financial advisor
may purchase Class A shares at NAV whether or not the custodian himself is an
eligible purchaser.
Until March 31, 2001, Class A shares may also be purchased at NAV by
persons who are clients of Legend Equities Corporation ("Legend") if the
purchase is made with the proceeds of the redemption of shares of a mutual fund
which is not within the Waddell & Reed Advisors Funds or W&R Funds, Inc. and the
purchase is made within 60 days of such redemption.
Purchases of Class A shares in a 401(k) plan having 100 or more
eligible employees and purchases of Class A shares in a 457 plan having 100 or
more eligible employees may be made at NAV.
Shares may also be issued at NAV in a merger, acquisition or exchange
offer made pursuant to a plan of reorganization to which the Fund is a party.
REASONS FOR DIFFERENCES IN PUBLIC OFFERING PRICE OF CLASS A SHARES
As described herein and in the Prospectus, there are a number of
instances in which the Fund's Class A shares are sold or issued on a basis other
than at the maximum public offering price, that is, the NAV plus the highest
sales charge. Some of these instances relate to lower or eliminated sales
charges for larger purchases of Class A shares,
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whether made at one time or over a period of time as under an LOI or Rights of
Accumulation. See the table of sales charges in the Prospectus. The reasons for
these quantity discounts are, in general, that (i) they are traditional and have
long been permitted in the industry and are therefore necessary to meet
competition as to sales of shares of other funds having such discounts, (ii)
certain quantity discounts are required by rules of the National Association of
Securities Dealers, Inc. (as is elimination of sales charges on the reinvestment
of dividends and distributions), and (iii) they are designed to avoid an unduly
large dollar amount of sales charge on substantial purchases in view of reduced
selling expenses. Quantity discounts are made available to certain related
persons for reasons of family unity and to provide a benefit to tax-exempt plans
and organizations.
In general, the reasons for the other instances in which there are
reduced or eliminated sales charges for Class A shares are as follows. Exchanges
at NAV are permitted because a sales charge has already been paid on the shares
exchanged. Sales of Class A shares without a sales charge are permitted to
Directors, officers and certain others due to reduced or eliminated selling
expenses and since such sales may aid in the development of a sound employee
organization, encourage responsibility and interest in the Waddell & Reed
Advisors Funds and an identification with its aims and policies. Limited
reinvestments of redemptions of Class A shares at no sales charge are permitted
to attempt to protect against mistaken or not fully informed redemption
decisions. Class A shares may be issued at no sales charge in plans of
reorganization due to reduced or eliminated sales expenses and since, in some
cases, such issuance is exempted in the 1940 Act from the otherwise applicable
restrictions as to what sales charge must be imposed. Reduced or eliminated
sales charges may also be used for certain short-term promotional activities by
Waddell & Reed, Inc. In no case in which there is a reduced or eliminated sales
charge are the interests of existing 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 the Waddell & Reed
Advisors Funds or W&R Funds, Inc. It would be a disadvantage to an investor to
make additional purchases of Class A shares while the Service is in effect
because it would result in duplication of sales charges. Class B and Class C
shares and certain Class A shares to which the CDSC
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otherwise applies that are redeemed under the Service are not subject to a CDSC.
Applicable forms to start the Service are available through Waddell & Reed
Services Company.
The maximum amount of the withdrawal for monthly, quarterly, semiannual
and annual withdrawals is 2%, 6%, 12% and 24% respectively of the value of your
account at the time the Service is established. The withdrawal proceeds are not
subject to the deferred sales charge, but only within these percentage
limitations. The minimum withdrawal is $50. The Service, and this exclusion from
the deferred sales charge, does not apply to a one-time withdrawal.
To qualify for the Service, you must have invested at least $10,000 in
Class A, Class B or Class C shares which you still own of any of the funds in
the Waddell & Reed Advisors Funds or W&R Funds, Inc.; or, you must own Class A,
Class B or Class C shares having a value of at least $10,000. The value for this
purpose is the value at the current offering price.
You can choose to have your shares redeemed to receive:
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 this 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.
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You may, at any time, change the manner in which you have chosen to
have shares redeemed to any of the other choices originally available to you.
You may, at any time, redeem part or all of the shares in your account; if you
redeem all of the shares, the Service is terminated. The Fund can also terminate
the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed
will be sent to you to assist you in completing your Federal income tax return.
EXCHANGES FOR SHARES OF OTHER FUNDS IN THE WADDELL & REED ADVISORS FUNDS AND W&R
FUNDS, INC.
CLASS A SHARE EXCHANGES
Once a sales charge has been paid on shares of a fund in the Waddell &
Reed Advisors Funds or the W&R Funds, Inc., these shares and any shares added to
them from dividends or 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 exception 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.
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Subject to the above rules regarding sales charges, you may have a
specific dollar amount of Class A shares of Waddell & Reed Advisors Cash
Management, Inc. automatically exchanged each month into Class A shares of the
Fund or any other fund in the Waddell & Reed Advisors Funds, provided you
already own Class A shares of the fund. The shares of Waddell & Reed Advisors
Cash Management, Inc. which you designate for automatic exchange must be worth
at least $100, which may be allocated among the Class A shares of different
funds in the Waddell & Reed Advisors Funds so long as each fund receives a value
of at least $25. Minimum initial investment and minimum balance requirements
apply to such automatic exchange service.
You may redeem your Class A shares of the Fund and use the proceeds to
purchase Class Y shares of the Fund if you meet the criteria for purchasing
Class Y shares.
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
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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 a 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.
CLASS Y SHARE EXCHANGES
Class Y shares of the Fund may be exchanged for Class Y shares of any
other fund in the Waddell & Reed Advisors Funds or for Class A shares of Waddell
& Reed Advisors Cash Management, Inc.
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
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taxable year, even if one spouse had no earned income. Generally, the
contributions are deductible unless the investor (or, if married, either spouse)
is an active participant in a qualified retirement plan or if, notwithstanding
that the investor or one or both spouses so participate, their adjusted gross
income does not exceed certain levels. However, a married investor who is not an
active participant, files jointly with his or her spouse and whose combined
adjusted gross income does not exceed $150,000, is not affected by the spouse's
active participant status.
An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be subject
to Federal income tax until distributed from the IRA. A direct rollover
generally applies to any distribution from an employer's plan (including a
custodial account under Section 403(b)(7) of the Code, but not an IRA) other
than certain periodic payments, required minimum distributions and other
specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a portion
of that distribution generally may be rolled over to an IRA within 60 days after
receipt of the distribution. Because mandatory Federal income tax withholding
applies to any eligible rollover distribution which is not paid in a direct
rollover, investors should consult their tax advisers or pension consultants as
to the applicable tax rules. If you already have an IRA, you may have the assets
in that IRA transferred directly to an IRA offered by Waddell & Reed, Inc.
ROTH IRAS. Investors whose adjusted gross income (or combined adjusted
gross income, if married) does not exceed certain levels may establish and
contribute up to $2,000 per tax year to a Roth IRA (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 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
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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. Generally, an employer may
contribute up to 15% of compensation, or $25,500, whichever is less, per year
for each employee.
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLANS). An employer
with 100 or fewer employees who does not sponsor another active retirement plan
may sponsor a SIMPLE plan to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an
employer can choose to match employee contributions dollar-for-dollar (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
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compensation, subject to certain annual maximums, which may be increased each
year based on cost-of-living adjustments.
More detailed information about these arrangements and applicable forms
are available from Waddell & Reed, Inc. These plans may involve complex tax
questions as to premature distributions and other matters.
Investors should consult their tax adviser or pension consultant.
REDEMPTIONS
The Prospectus gives information as to redemption procedures.
Redemption payments are made within seven days from receipt of request, unless
delayed because of emergency conditions determined by the SEC, when the NYSE is
closed other than for weekends or holidays, or when trading on the NYSE is
restricted. Payment is made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities. Payment for redemption of
shares of the Fund may be made in portfolio securities when the Fund's Board of
Directors determines that conditions exist making cash payments undesirable.
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, and the Fund must be offering Class A shares at
the time your reinvestment request is received. You can do this only once as to
Class A shares of the Fund. You do not use up this privilege by redeeming Class
A shares to invest the proceeds at NAV in a Keogh plan or an IRA.
There is also a reinvestment privilege for Class B and Class C shares
and, where applicable, certain Class A shares under which you may reinvest all
or part of any amount of the shares you redeemed and have the corresponding
amount of the deferred sales charge, if any, which you paid restored to your
account by adding the amount of that charge to the amount
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you are reinvesting in shares of the same class. If Fund shares of that class
are then being offered, you can put all or part of your redemption payment back
into such shares at the NAV next calculated after you have returned the amount.
Your written request to do this must be received within forty-five days after
your redemption request was received. You can do this only once as to Class B,
Class C and Class A shares of the Fund. For purposes of determining future
deferred sales charges, the reinvestment will be treated as a new investment.
You do not use up this privilege by redeeming shares to invest the proceeds at
NAV in a Keogh plan or an IRA.
MANDATORY REDEMPTION OF CERTAIN SMALL ACCOUNTS
The Fund has the right to compel the redemption of shares held under
any account or any plan if the aggregate NAV of such shares (taken at cost or
value as the Board of Directors may determine) is less than $500. The Board has
no intent to compel redemptions in the foreseeable future. If it should elect to
compel redemptions, shareholders who are affected will receive prior written
notice and will be permitted 60 days to bring their accounts up to the minimum
before this redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors. The majority of the
Directors are not affiliated with Waddell & Reed, Inc.
The principal occupation during 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, Target/United Funds,
Inc. and W&R 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.
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KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer and Director of Waddell & Reed Financial, Inc.; President, Chairman of
the Board of Directors, Director and Chief Executive Officer of Waddell & Reed
Financial Services, Inc.; Chairman of the Board of Directors and Director of
WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of each of the funds in the Fund Complex; formerly, Chairman of the
Board of Directors of Waddell & Reed Asset Management Company, a former
affiliate of Waddell & Reed Financial, Inc. Date of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President of JoDill Corp., an agricultural company; President and
Director of Dillingham Enterprises Inc.; formerly, Director and consultant,
McDougal Construction Company; formerly, Instructor at Central Missouri State
University; formerly, Member of the Board of Police Commissioners, Kansas City,
Missouri; formerly, Senior Vice President-Sales and Marketing of Garney
Companies, Inc., a specialty utility contractor. Date of birth:
January 9, 1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e
Eccles Foundation; Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal; formerly, President
of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, Partner, Levy and Craig, P.C., a law
firm. Date of birth: July 29, 1953.
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JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of Oklahoma;
Adjunct Professor of Law at the University of Oklahoma College of Law; Managing
Member, Harroz Investments, L.L.C.; formerly, Vice President for Executive
Affairs of the University of Oklahoma; formerly, Attorney with Crowe & Dunlevy,
a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a law
firm; formerly, President of Gilliland & Hayes, P.A.; formerly, Director of
Central Properties, Inc. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Executive Vice President, Chief Operating
Officer and Director of Waddell & Reed Financial, Inc.; Executive Vice
President, Chief Operating Officer, Director and Treasurer of Waddell & Reed
Financial Services, Inc.; Executive Vice President, Principal Financial Officer,
Director and Treasurer of WRIMCO; President, Chief Executive Officer, Principal
Financial Officer, Director and Treasurer of Waddell & Reed, Inc.; Director and
Treasurer of Waddell & Reed Services Company; Chairman of the Board of
Directors, Chief Executive Officer, President and Director of Fiduciary Trust
Company of New Hampshire, an affiliate of Waddell & Reed, Inc.; Director of
Legend Group Holdings, LLC, Legend Advisory Corporation, Legend Equities
Corporation, Advisory Services Corporation, The Legend Group, Inc. and LEC
Insurance Agency, Inc.; formerly, Vice President of each of the funds in the
Fund Complex; formerly, Director and Treasurer of Waddell & Reed Asset
Management Company; formerly, President of Waddell & Reed Services Company. Date
of birth: November 12, 1936.
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.
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GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and its subsidiaries. Date of birth: February 19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of
each of the funds in the Fund Complex then in existence. (Mr. Morgan retired as
Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company. Date of birth:
April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director and Vice President of Network Rehabilitation Services; Board
Member, Member of Executive Committee and Finance Committee of Truman Medical
Center; formerly, Employment Counselor and Director of McCue-Parker Center. Date
of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm;
Director of Columbian Bank and Trust. Date of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
Professor of Business Administration, University of Missouri-Kansas
City; formerly, Chancellor, University of Missouri-Kansas City. Date of birth:
January 1, 1937.
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
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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.
CHARLES W. HOOPER, JR.
Vice President of the Fund and Vice President of WRIMCO. Formerly,
portfolio manager with Founders Asset Management Company; formerly, Chief
Investment Officer for Owen Joseph. Date of birth: July 29, 1945.
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.
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The funds in the Waddell & Reed AdvisorsFunds, 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
per year, plus $2,500 for each meeting of the Board of Directors attended). The
fees to the Directors are divided among the funds in the Waddell & Reed Advisors
Funds, Target/United Funds, Inc. and W&R Funds, Inc. based on the funds'
relative size.
During the Fund's fiscal year ended June 30, 1999, the Fund's Directors
received the following fees for service as a director:
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
-------- ------------ ------------
<S> <C> <C>
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 2,013 58,500
John A. Dillingham 2,013 58,500
David P. Gardner 1,419 41,500
Linda K. Graves 2,013 58,500
Joseph Harroz, Jr. 1,409 41,500
John F. Hayes 2,013 58,500
Glendon E. Johnson 2,030 59,000
William T. Morgan 2,013 58,500
Ronald C. Reimer 1,402 41,500
Frank J. Ross, Jr. 2,013 58,500
Eleanor B. Schwartz 2,030 59,000
Frederick Vogel III 2,030 59,000
</TABLE>
*No pension or retirement benefits have been accrued as a part of Fund expenses.
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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>
Name and Address Shares owned
of Record or Beneficially
Beneficial Owner Class or of Record Percent
------------------- ----- ------------ -------
<S> <C> <C> <C>
Kenneburt & Co. Class Y 338,669 38.02%
P. O Box 11426
Birmingham AL 35202-1426
Compass Bank Tr Class Y 240,319 26.98%
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 69,892 7.17%
Financial, Inc.
401(k) and Thrift Plan
6300 Lamar Avenue
Overland Park KS 66201
</TABLE>
PAYMENTS TO SHAREHOLDERS
GENERAL
There are three sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is derived
from the dividends, interest and earned discount on the securities the Fund
holds less
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<PAGE>
expenses (which will vary by class). The second source is net realized capital
gains, which are derived from the proceeds received from the Fund's sale of
securities at a price higher than the Fund's tax basis (usually cost) in such
securities, less losses from sales of securities at a price lower than the
Fund's basis therein; these gains can be either long-term or short-term,
depending on how long the Fund has owned the securities before it sells them.
The third source is net realized gains from foreign currency transactions. The
payments made to shareholders from net investment income, net short-term capital
gains and net realized gains from certain foreign currency transactions are
called dividends.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may not
have such gains, depending on whether securities are sold and at what price. If
the Fund has net capital gains, it will pay distributions once each year, in the
latter part of the fourth calendar quarter, except to the extent it has
applicable net capital losses carried over from a prior year or years to offset
the gains.
CHOICES YOU HAVE ON YOUR DIVIDENDS AND DISTRIBUTIONS
On your application form, you can give instructions that (i) you want
cash for your dividends and distributions, (ii) you want your dividends and
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid, or (iii) you want cash for your dividends and want your
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid. However, a total dividend and/or distribution amount
less than five dollars will be automatically paid in shares of the Fund of the
same class as that with respect to which they were paid. You can change your
instructions at any time. If you give no instructions, your dividends and
distributions will be paid in shares of the Fund of the same class as that with
respect to which they were paid. All payments in shares are at NAV without any
sales charge. The NAV used for this purpose is that computed as of the record
date for the dividend or distribution, although this could be changed by the
Board of Directors.
Even if you receive dividends and distributions of Class A shares in
cash, you can thereafter reinvest them (or distributions only) in Class A 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.
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TAXES
GENERAL
The Fund has qualified since inception for treatment as a regulated
investment company ("RIC") under the Code, so that it is relieved of Federal
income tax on that part of its investment company taxable income (consisting
generally of net investment income, net short-term capital gains and net gains
from certain foreign currency transactions) that it distributes to its
shareholders. To continue to qualify for treatment as a RIC, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following: (1)
the Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or foreign currencies or other
income (including gains from options, futures contracts or forward contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities, securities of
other RICs and other 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.
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<PAGE>
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 may defer into the next calendar
year net capital losses incurred between November 1 and the end of the current
calendar year. It is the policy of the Fund to pay sufficient dividends and
distributions each year to avoid imposition of the Excise Tax.
INCOME FROM FOREIGN SECURITIES
Dividends and interest received, and gains realized, by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
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.
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<PAGE>
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 gains
-- 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 gains 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.
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.
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<PAGE>
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 gains. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being exercised,
the premium it received also will be a short-term capital gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale.
Certain options, futures contracts and forward currency contracts in
which the Fund may invest may be "section 1256 contracts." Section 1256
contracts held by the Fund at the end of its taxable year, other than contracts
subject to a "mixed straddle" election made by the Fund are "marked-to-market"
(that is, treated as sold at that time for their fair market value) for Federal
income tax purposes, with the result that unrealized gains or losses are treated
as though they were realized. Sixty percent of any net gains or losses
recognized on these deemed sales, and 60% of any net realized gains or losses
from any actual sales of section 1256 contracts, are treated as long-term
capital gains or losses, and the balance is treated as short-term capital gains
or losses. Section 1256 contracts also may be marked-to-market for purposes of
the Excise Tax and other purposes. The Fund may need to distribute any
mark-to-market gains to its shareholders to satisfy the Distribution Requirement
and/or avoid imposition of the Excise Tax, even though it may not have closed
the transactions and received cash to pay the distributions.
Code section 1092 (dealing with straddles) also may affect the taxation
of options and futures contracts in which the Fund may invest. That section
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes,
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<PAGE>
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 theposition, 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
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).
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
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<PAGE>
market are generally effected with dealers acting as principals or market
makers. Brokerage commissions are paid primarily for effecting transactions in
securities traded on an exchange and otherwise only if it appears likely that a
better price or execution can be obtained. The individual who manages the Fund
may manage other advisory accounts with similar investment objectives. It can be
anticipated that the manager will frequently place concurrent orders for all or
most accounts for which the manager has responsibility or WRIMCO may otherwise
combine orders for the Fund with those of other funds in the Waddell & Reed
AdvisorsFunds, Target/United Funds, Inc. and W&R Funds, Inc. or other accounts
for 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 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
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<PAGE>
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution and/or
research services and other services, including pricing or quotation services
directly or through others ("research and brokerage services") considered by
WRIMCO to be useful or desirable for its investment management of the Fund
and/or the other funds and accounts over which WRIMCO has investment discretion.
Research and brokerage services are, in general, defined by reference
to Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers, (ii) furnishing
analyses and reports, or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than the commission another qualified broker
would charge for effecting comparable transactions if a good faith determination
is made by WRIMCO that the commission is reasonable in relation to the research
or brokerage services provided. Subject to the foregoing considerations, WRIMCO
may also consider sales of shares of the Fund 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
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<PAGE>
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 June 30, 1999, 1998 and 1997, it
paid brokerage commissions of $1,529,589, $721,927 and $524,052, 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 June 30, 1999, the transactions,
other than principal transactions, which were directed to broker-dealers who
provided research services as well as execution totaled $859,769,203 on which
$1,088,542 in brokerage commissions were paid. These transactions were allocated
to these broker-dealers by the internal allocation procedures described above.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
under Rule 17j-1 of the 1940 Act that permits their respective directors,
officers and employees to invest in securities, including securities that may be
purchased or held by the Fund. The Code of Ethics subjects covered personnel to
certain restrictions that include prohibited activities, pre-clearance
requirements and reporting obligations.
OTHER INFORMATION
THE SHARES OF THE FUND
The Fund offers four classes of shares: Class A, Class B, Class C and
Class Y. Each class represents an interest in the same assets of the Fund and
differ as follows: each class of shares has exclusive voting rights on matters
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 CDSC and to ongoing distribution
and service fees; Class B shares converts to Class A shares eight years after
the month in which the shares were purchased; and Class Y shares, which are
designated for institutional investors, have no sales charge nor ongoing
distribution and/or service fee; each class may bear differing amounts of
certain class-specific expenses; and each class has a separate exchange
privilege. The Fund does not anticipate that there will be any conflicts between
the interests of holders of the different classes of shares of the Fund by
virtue of those classes. On an ongoing basis, the Board of Directors will
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<PAGE>
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 shares and Class C shares
are expected to be lower than for Class A shares, which in turn are expected to
be lower than for Class Y shares of the Fund. Each fractional share of a class
has the same rights, in proportion, as a full share of that class. Shares are
fully paid and nonassessable when purchased.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new investment
advisory agreement or a change in a fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding not
less than 25% of all shares entitled to vote at such meeting, provided certain
conditions stated in the Bylaws are met. There will normally be no meeting of
the shareholders for the purpose of electing directors until such time as less
than a majority of directors holding office have been elected by shareholders,
at 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.
79
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
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.
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC. A Standard
& Poor's ("S&P") corporate or municipal 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 small degree.
80
<PAGE>
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the 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
81
<PAGE>
bankruptcy petition has been filed, but debt service payments are continued.
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 Standard & Poor's 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
Moody's Investors Service 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.
82
<PAGE>
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be 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.
83
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS
APPAREL AND ACCESSORY STORES - 1.04%
Nordstrom, Inc. ........................................................ 300,000 $ 7,856,250
Saks Incorporated* ..................................................... 300,000 4,668,750
Total ............................................................... 12,525,000
APPAREL AND OTHER TEXTILE PRODUCTS - 0.66%
Cintas Corporation ..................................................... 150,000 7,964,062
BUILDING MATERIALS AND GARDEN SUPPLIES - 0.47%
Fastenal Company ....................................................... 125,000 5,621,094
BUSINESS SERVICES - 12.67%
America Online, Inc.* .................................................. 125,000 9,429,687
BMC Software, Inc.* .................................................... 150,000 11,985,938
Citrix Systems, Inc.* .................................................. 75,000 9,222,656
Computer Sciences Corporation* ......................................... 150,000 14,193,750
Compuware Corporation* ................................................. 200,000 7,443,750
Electronic DataSystems Corporation ..................................... 125,000 8,367,188
FleetBoston Financial Corporation ...................................... 250,000 8,703,125
Intuit Inc.* ........................................................... 200,000 11,981,250
Lycos, Inc.* ........................................................... 100,000 7,959,375
Microsoft Corporation* ................................................. 200,000 23,343,750
Oracle Corporation* .................................................... 200,000 22,406,250
Sterling Software, Inc.* ............................................... 275,000 8,662,500
SunGard Data Systems, Inc.* ............................................ 350,000 8,312,500
Total ............................................................... 152,011,719
CHEMICALS AND ALLIED PRODUCTS - 14.57%
Abbott Laboratories .................................................... 200,000 7,262,500
Alpharma Inc., Class A ................................................. 250,000 7,687,500
American Home Products Corporation ..................................... 275,000 10,845,313
Biogen, Inc.* .......................................................... 150,000 12,670,312
Bristol-Myers Squibb Company ........................................... 200,000 12,837,500
du Pont (E.I.) de Nemours and Company .................................. 150,000 9,881,250
Forest Laboratories, Inc.* ............................................. 250,000 15,359,375
Lilly (Eli) and Company ................................................ 150,000 9,975,000
Merck & Co., Inc. ...................................................... 175,000 11,735,938
Monsanto Company ....................................................... 275,000 9,796,875
Pfizer Inc. ............................................................ 200,000 6,487,500
Pharmacia & Upjohn, Inc. ............................................... 250,000 11,250,000
Pharmacyclics, Inc.* ................................................... 200,000 8,275,000
Schering-Plough Corporation ............................................ 275,000 11,601,562
Smith International, Inc.* ............................................. 175,000 8,695,312
Warner-Lambert Company ................................................. 250,000 20,484,375
Total ............................................................... 174,845,312
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
COMMUNICATION - 10.02%
AT&T Corp. - Liberty Media Group,
Class A* ............................................................ 200,000 $ 11,350,000
Cablevision Systems Corporation,
Class A* ............................................................ 100,000 7,550,000
Charter Communications, Inc.* .......................................... 500,000 10,937,500
MCI WORLDCOM, Inc.* .................................................... 262,500 13,920,703
MGC Communications, Inc.* .............................................. 200,000 10,112,500
MediaOne Group, Inc.* .................................................. 150,000 11,521,875
Sinclair Broadcast Group, Inc.* ........................................ 700,000 8,553,125
TV Guide, Inc., Class A* ............................................... 375,000 16,066,406
USA Networks, Inc.* .................................................... 300,000 16,565,625
Viacom Inc., Class B* .................................................. 225,000 13,598,438
Total ............................................................... 120,176,172
DEPOSITORY INSTITUTIONS - 2.84%
Bank of America Corporation ............................................ 225,000 11,292,187
Chase Manhattan Corporation (The) ...................................... 150,000 11,653,125
Citigroup Inc. ......................................................... 200,000 11,112,500
Total ............................................................... 34,057,812
EATING AND DRINKING PLACES - 0.43%
Wendy's International, Inc. ............................................ 250,000 5,156,250
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT - 16.62%
Amphenol Corporation, Class A* ......................................... 150,000 9,984,375
Analog Devices, Inc.* .................................................. 225,000 20,925,000
Celestica, Inc.* ....................................................... 200,000 11,100,000
DII Group, Inc. (The)* ................................................. 200,000 14,193,750
Gemstar International Group Limited* ................................... 100,000 7,118,750
General Electric Company ............................................... 100,000 15,475,000
Harman International Industries,
Incorporated ........................................................ 275,000 15,434,375
Intel Corporation ...................................................... 225,000 18,513,281
JDS Uniphase Corporation* .............................................. 120,000 19,357,500
Jabil Circuit, Inc.* ................................................... 150,000 10,950,000
Maxim Integrated Products, Inc.* ....................................... 250,000 11,789,063
Micron Technology, Inc.* ............................................... 150,000 11,662,500
Motorola, Inc. ......................................................... 80,000 11,780,000
Rambus Inc.* ........................................................... 170,000 11,459,062
Texas Instruments Incorporated ......................................... 100,000 9,687,500
Total ............................................................... 199,430,156
FABRICATED METAL PRODUCTS - 0.85%
Parker Hannifin Corporation ............................................ 200,000 10,262,500
FOOD AND KINDRED PRODUCTS - 0.84%
Seagram Company Ltd. (The) ............................................. 225,000 10,110,937
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FOOD STORES - 0.79%
Kroger Co. (The)* ...................................................... 500,000 $ 9,437,500
GENERAL MERCHANDISE STORES - 0.86%
Wal-Mart Stores, Inc. .................................................. 150,000 10,368,750
HEAVY CONSTRUCTION, EXCEPT BUILDING - 0.67%
Halliburton Company .................................................... 200,000 8,050,000
INDUSTRIAL MACHINERY AND EQUIPMENT - 8.21%
Apple Computer, Inc.* .................................................. 155,000 15,931,094
Applied Materials, Inc.* ............................................... 140,000 17,731,875
Dell Computer Corporation* ............................................. 250,000 12,742,187
EMC Corporation* ....................................................... 125,000 13,656,250
Extreme Networks, Inc.* ................................................ 175,000 14,634,375
Illinois Tool Works, Inc. .............................................. 125,000 8,445,313
Novellus Systems, Inc.* ................................................ 125,000 15,316,406
Total ............................................................... 98,457,500
INSTRUMENTS AND RELATED PRODUCTS - 1.69%
Guidant Corporation* ................................................... 150,000 7,050,000
Teradyne, Inc.* ........................................................ 200,000 13,200,000
Total ............................................................... 20,250,000
INSURANCE AGENTS, BROKERS & SERVICE - 0.99%
Hartford Financial Services Group Inc. (The) ........................... 250,000 11,843,750
INSURANCE CARRIERS - 1.07%
Lincoln National Corporation ........................................... 150,000 6,000,000
ReliaStar Financial Corp. .............................................. 175,000 6,857,813
Total ............................................................... 12,857,813
MOTION PICTURES - 0.84%
Time Warner Incorporated ............................................... 140,000 10,141,250
NONDEPOSITORY INSTITUTIONS - 0.78%
Freddie Mac ............................................................ 200,000 9,412,500
OIL AND GAS EXTRACTION - 2.99%
Apache Corporation ..................................................... 275,000 10,157,812
Burlington Resources Incorporated ...................................... 350,000 11,571,875
Schlumberger Limited ................................................... 225,000 12,656,250
Transocean Sedco Forex Inc. ............................................ 43,560 1,467,428
Total ............................................................... 35,853,365
PAPER AND ALLIED PRODUCTS - 0.82%
International Paper Company ............................................ 175,000 9,876,563
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PETROLEUM AND COAL PRODUCTS - 1.64%
Exxon Mobil Corporation ................................................ 150,000 $ 12,084,375
Royal Dutch Petroleum Company,
NY Shares ........................................................... 125,000 7,554,687
Total ............................................................... 19,639,062
SECURITY AND COMMODITY BROKERS - 2.05%
Goldman Sachs Group, Inc. (The) ........................................ 150,000 14,128,125
Merrill Lynch & Co., Inc. .............................................. 125,000 10,437,500
Total ............................................................... 24,565,625
TRANSPORTATION BY AIR - 0.97%
UAL Corporation* ....................................................... 150,000 11,634,375
TRANSPORTATION EQUIPMENT - 1.48%
Ford Motor Company ..................................................... 150,000 8,015,625
Gentex Corporation* .................................................... 350,000 9,756,250
Total ............................................................... 17,771,875
WHOLESALE TRADE -- DURABLE GOODS - 1.01%
Avnet, Inc. ............................................................ 200,000 12,100,000
WHOLESALE TRADE -- NONDURABLE GOODS - 1.10%
Cardinal Health, Inc. .................................................. 275,000 13,165,625
TOTAL COMMON STOCKS - 88.97% $1,067,586,567
(Cost: $810,872,790)
PREFERRED STOCK - 0.96%
COMMUNICATION
Cox Communications, Inc.,
7.0% (Convertible) .................................................. 170,000 $ 11,560,000
(Cost: $8,500,000)
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
<S> <C> <C>
CORPORATE DEBT SECURITIES
CHEMICALS AND ALLIED PRODUCTS- 0.82%
du Pont (E.I.) de Nemours and Company,
6.75%, 10-15-04 ..................................................... $10,000 9,868,900
COMMUNICATION - 0.39%
Bell Telephone Company of Pennsylvania (The),
8.35%, 12-15-30 ..................................................... 3,000 3,248,940
Southwestern Bell Telephone Company,
5.77%, 10-14-03 ..................................................... 1,500 1,439,100
Total ............................................................... 4,688,040
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
DEPOSITORY INSTITUTIONS - 0.19%
Wachovia Corporation,
6.25%, 8-4-08 ....................................................... $ 2,500 $ 2,301,850
ELECTRIC, GAS AND SANITARY SERVICES - 0.08%
California Infrastructure and Economic Development
Bank, Special Purpose Trust PG&E-1,
6.42%, 9-25-08 ...................................................... 1,000 967,920
FOOD AND KINDRED PRODUCTS - 0.41%
Coca-Cola Enterprises Inc.,
6.7%, 10-15-36 ...................................................... 5,000 4,939,500
HEALTH SERVICES - 0.53%
Columbia/HCA Healthcare Corporation,
6.91%, 6-15-05 ...................................................... 7,000 6,405,000
INDUSTRIAL MACHINERY AND EQUIPMENT - 0.20%
Tyco International Group S.A.,
6.375%, 6-15-05 ..................................................... 2,500 2,341,950
NONDEPOSITORY INSTITUTIONS - 2.06%
Ford Motor Credit Company,
6.7%, 7-16-04 ....................................................... 22,000 21,532,500
General Electric Capital Corporation,
8.3%, 9-20-09 ....................................................... 3,000 3,197,460
Total ............................................................... 24,729,960
TRANSPORTATION BY AIR - 0.31%
Southwest Airlines Co.,
7.875%, 9-1-07 ...................................................... 3,650 3,645,876
UNITED STATES POSTAL SERVICE - 0.18%
Postal Square Limited Partnership,
8.95%, 6-15-22 ...................................................... 1,855 2,098,095
TOTAL CORPORATE DEBT SECURITIES - 5.17% $ 61,987,091
(Cost: $62,835,957)
OTHER GOVERNMENT SECURITY - 0.25%
SUPRANATIONAL
International Bank for Reconstruction and
Development,
9.25%, 7-15-17 ...................................................... 2,500 $ 2,982,500
(Cost: $2,498,309)
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association,
6.51%, 5-6-08 ....................................................... $ 7,500 $ 7,066,425
Government National Mortgage Association,
6.5%, 8-15-28 ....................................................... 12,855 12,063,290
National Archives Facility Trust,
8.5%, 9-1-19 ........................................................ 4,122 4,514,195
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 1.97% $ 23,643,910
(Cost: $24,421,078)
TOTAL SHORT-TERM SECURITIES - 2.10% $ 25,171,192
(Cost: $25,171,192)
TOTAL INVESTMENT SECURITIES - 99.42% $1,192,931,260
(Cost: $934,299,326)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.58% 6,968,511
NET ASSETS - 100.00% $1,199,899,771
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
*No dividends were paid during the preceding 12 months.
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 RETIREMENT SHARES, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Investment securities - at value
(Notes 1 and 3) ....................................................................... $1,192,931
Cash ..................................................................................... 2
Receivables:
Investment securities sold ............................................................ 7,633
Dividends and interest ................................................................ 1,898
Fund shares sold ...................................................................... 1,552
Prepaid insurance premium................................................................. 13
----------
Total assets ........................................................................ 1,204,029
----------
LIABILITIES
Payable to Fund shareholders ............................................................. 3,690
Accrued service fee (Note 2) ............................................................. 201
Accrued transfer agency and
dividend disbursing (Note 2) .......................................................... 139
Accrued management fee (Note 2) .......................................................... 22
Accrued distribution fee (Note 2) ........................................................ 15
Accrued accounting services fee (Note 2) ................................................. 8
Accrued shareholder servicing - Class Y (Note 2) ......................................... 1
Other .................................................................................... 53
----------
Total liabilities ................................................................... 4,129
----------
Total net assets ................................................................. $1,199,900
==========
NET ASSETS
$1.00 par value capital stock:
Capital stock ......................................................................... $ 109,644
Additional paid-in capital............................................................. 742,737
Accumulated undistributed income:
Accumulated undistributed net investment income ....................................... 695
Accumulated undistributed net realized
gain on investment transactions ..................................................... 88,192
Net unrealized appreciation in value of
investments ......................................................................... 258,632
----------
Net assets applicable to outstanding
units of capital ................................................................. $1,199,900
==========
Capital shares outstanding:
Class A ............................................................................... 108,060
Class B ............................................................................... 550
Class C ............................................................................... 106
Class Y ............................................................................... 928
Capital shares authorized ................................................................... 300,000
Net asset value per share (net assets divided
by shares outstanding):
Class A ............................................................................... $10.94
Class B ............................................................................... $10.93
Class C ............................................................................... $10.93
Class Y ............................................................................... $10.94
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Income (Note 1B):
Interest and amortization ............................................................. $ 5,512
Dividends ............................................................................. 2,661
--------
Total income ........................................................................ 8,173
--------
Expenses (Note 2):
Investment management fee ............................................................. 3,428
Service fee:
Class A ............................................................................. 1,036
Class B ............................................................................. 2
Class C ............................................................................. ---
Transfer agency and dividend disbursing:
Class A ............................................................................. 679
Class B ............................................................................. 2
Class C ............................................................................. 1
Accounting services fee ............................................................... 45
Distribution fee:
Class A ............................................................................. 36
Class B ............................................................................. 5
Class C ............................................................................. 1
Custodian fees ........................................................................ 27
Audit fees ............................................................................ 9
Legal fees ............................................................................ 9
Shareholder servicing - Class Y ....................................................... 5
Other ............................................................................... 124
--------
Total expenses ...................................................................... 5,409
--------
Net investment income ............................................................ 2,764
--------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTES 1 AND 3)
Realized net gain on investments ......................................................... 158,436
Unrealized appreciation in value of investments
during the period ..................................................................... 113,450
--------
Net gain on investments ............................................................. 271,886
--------
Net increase in net assets resulting
from operations ............................................................... $274,650
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, INC.
STATEMENT OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS FISCAL YEAR
ENDED ENDED
DECEMBER 31, JUNE 30,
1999 1999
------------ -----------
<S> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income ........................................... $ 2,764 $ 16,688
Realized net gain on investments ................................ 158,436 89,889
Unrealized appreciation
(depreciation) ................................................ 113,450 (5,039)
---------- --------
Net increase in net assets
resulting from operations .................................. 274,650 101,538
---------- --------
Distributions to shareholders from (Note 1E):*
Net investment income:
Class A ....................................................... (3,662) (15,950)
Class B ....................................................... --- ---
Class C ....................................................... --- ---
Class Y ....................................................... (40) (74)
Realized gains on securities transactions:
Class A ....................................................... (157,318) (32,461)
Class B ....................................................... (576) ---
Class C ....................................................... (113) ---
Class Y ....................................................... (1,368) (138)
---------- --------
(163,077) (48,623)
---------- --------
Capital share transactions (Note 5) ................................ 194,991 12,084
---------- --------
Total increase ............................................. 306,564 64,999
NET ASSETS
Beginning of period ................................................ 893,336 828,337
---------- --------
End of period, including undistributed
net investment income of $695
and $1,633, respectively ........................................ $1,199,900 $893,336
========== ========
</TABLE>
*See "Financial Highlights" on pages - .
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, INC.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<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>
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 ....................... .03 .19 .24 .27 .26 .24
Net realized and
unrealized gain
on investments ............... 2.82 .92 .99 1.08 .94 .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
===== ===== ===== ===== ===== =====
Total return* ...................... 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%** 0.99% 0.93% 0.92% 0.89% 0.89%
Ratio of net
investment income
to average net
assets .......................... 0.56%** 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>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
**Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, 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
12/31/99
-------
<S> <C>
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
======
Total return ....................... 25.95%
Net assets, end of
period (in
millions) ....................... $6
Ratio of expenses to
average net assets .............. 2.24%**
Ratio of net investment
loss to average
net assets ...................... -0.86%**
Portfolio turnover
rate ............................ 152.04%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the six months ended December 31, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, INC.
FINANCIAL HIGHLIGHTS
CLASS C SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
10/4/99*
THROUGH
12/31/99
-------
<S> <C>
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
======
Total return ....................... 25.95%
Net assets, end of
period (in
millions) ....................... $1
Ratio of expenses to
average net assets .............. 2.29%**
Ratio of net investment
loss to average
net assets ...................... -0.92%**
Portfolio turnover
rate ............................ 152.04%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the six months ended December 31, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, INC.
FINANCIAL HIGHLIGHTS
CLASS Y SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX FOR THE FISCAL PERIOD
MONTHS YEAR ENDED JUNE 30, FROM 2/27/96*
ENDED -------------------------------- THROUGH
12/31/99 1999 1998 1997 6/30/96
-------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
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 .20 .25 .29 .10
Net realized and
unrealized gain
on investments ............... 2.80 .94 .99 1.07 .06
------ ----- ----- ----- -----
Total from investment
operations....................... 2.86 1.14 1.24 1.36 .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
====== ===== ===== ===== =====
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%** 0.75% 0.79% 0.78% 0.71%**
Ratio of net
investment income
to average net
assets........................... 0.74%** 2.32% 2.71% 3.28% 3.36%**
Portfolio
turnover rate.................... 152.04% 122.58% 53.52% 39.55% 42.05%**
</TABLE>
*Commencement of operations.
**Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
United Retirement Shares, 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 the highest long-term total
investment return as is, in the opinion of management, consistent with
reasonable safety of capital. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The policies are in conformity with generally accepted
accounting principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period
as reported by the principal securities exchange on which the issue is
traded or, if no sale is reported for a stock, the average of the
latest bid and asked prices. Bonds, other than convertible bonds, are
valued using a pricing system provided by a pricing service or dealer
in bonds. Convertible bonds are valued using this pricing system only
on days when there is no sale reported. Stocks which are traded
over-the-counter are priced using the Nasdaq Stock Market, which
provides information on bid and asked prices quoted by major dealers in
such stocks. 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. Dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. See Note 3 -- Investment
Securities Transactions.
C. Foreign currency translations -- All assets and liabilities denominated
in foreign currencies are translated into U.S. dollars daily. Purchases
and sales of investment securities and accruals of income and expenses
are translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates.
The Fund combines fluctuations from currency exchange rates and
fluctuations in market value when computing net realized and unrealized
gain or loss from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of
its taxable income and capital gains to its shareholders and otherwise
qualify as a regulated
<PAGE>
investment company under Subchapter M of the Internal Revenue Code. In
addition, the Fund intends to pay distributions as required to avoid
imposition of excise tax. Accordingly, provision has not been made for
Federal income taxes. See Note 4 -- Federal Income Tax Matters.
E. Dividends and distributions -- Dividends and distributions to
shareholders are recorded by the Fund on the business day following
record date. Net investment income dividends and capital gains
distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are due to differing treatments for items such as deferral
of wash sales and post-October losses, foreign currency transactions,
net operating losses and expiring capital loss carryovers.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- INVESTMENT MANAGEMENT AND PAYMENTS TO AFFILIATED PERSONS
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee 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 this fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of the Fund. For
these services, the Fund pays WARSCO a monthly fee of one-twelfth of the annual
fee shown in the following table.
<PAGE>
<TABLE>
<CAPTION>
ACCOUNTING SERVICES FEE
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
For Class A, 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 .15% of the
average daily net assets of the class for the preceding month. The Fund also
reimburses W&R and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross
sales commissions for Class A shares (which are not an expense of the Fund) of
$1,764,613. With respect to Class A, Class B and Class C shares, W&R paid sales
commissions of $1,140,124 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 December 31, 1999, W&R received $461 in deferred
sales charges from Class B shares. No CDSC fees were
<PAGE>
received from Class C shares.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's 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 is it entitled to
reimbursement under the Class A Plan.
The Fund paid Directors' fees of $16,008, 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 SECURITIES TRANSACTIONS
Purchases of investment securities, other than U.S. Government
obligations and short-term securities, aggregated $1,364,812,768 while proceeds
from maturities and sales aggregated $1,270,866,121. Purchases of short-term and
U.S. Government securities aggregated $1,260,914,280 and $89,450,356,
respectively. Proceeds from maturities and sales of short-term and U.S.
Government securities aggregated $1,250,459,721 and $160,501,602, respectively.
For Federal income tax purposes, cost of investments owned at December
31, 1999 was $934,422,462, resulting in net unrealized appreciation of
$258,508,798, of which $277,808,603 related to appreciated securities and
$19,299,805 related to depreciated securities.
NOTE 4 -- FEDERAL INCOME TAX MATTERS
For Federal income tax purposes, the Fund realized capital
<PAGE>
gain net income of $89,301,916 during its fiscal year ended June 30, 1999, which
has been distributed to the Fund's shareholders.
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. Dollar amounts are
in thousands.
<PAGE>
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS FISCAL YEAR
ENDED ENDED
DECEMBER 31, JUNE 30,
1999 1999
------------ ------------
<S> <C> <C>
Shares issued from sale of shares:
Class A ...................... 7,964,481 10,309,331
Class B ...................... 499,436 ---
Class C ...................... 95,492 ---
Class Y ...................... 555,448 230,169
Shares issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ...................... 15,506,922 5,446,253
Class B ...................... 56,007 ---
Class C ...................... 11,035 ---
Class Y ...................... 84,360 24,055
Shares redeemed:
Class A ...................... (5,814,698) (14,310,457)
Class B ...................... (4,948) ---
Class C ...................... (204) ---
Class Y ...................... (51,690) (242,942)
---------- ----------
Increase in
outstanding capital
shares ...................... 18,901,641 1,456,409
========== ==========
Value issued from sale of shares:
Class A ...................... $ 83,310 $ 93,629
Class B ...................... 5,391 ---
Class C ...................... 1,028 ---
Class Y ...................... 5,741 2,066
Value issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ...................... 159,378 48,028
Class B ...................... 575 ---
Class C ...................... 113 ---
Class Y ...................... 867 212
Value redeemed:
Class A ...................... (60,806) (129,651)
Class B ...................... (56) ---
Class C ...................... (2) ---
Class Y ...................... (548) (2,200)
-------- --------
Increase in outstanding
capital ...................... $194,991 $ 12,084
======== ========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Retirement Shares, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United Retirement Shares, Inc. (the "Fund") as
of December 31, 1999, and the related statement of operations for the six-month
period then ended, the statements of changes in net assets for the six-month
period then ended and the fiscal year ended June 30, 1999, and the financial
highlights for the six-month period ended December 31, 1999, and for each of the
five fiscal years in the period ended June 30, 1999. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of United
Retirement Shares, Inc. as of December 31, 1999, the results of its operations
for the six-month period then ended, the changes in its net assets for the
six-month period then ended and the fiscal year ended June 30, 1999, and the
financial highlights for the six-month period ended December 31, 1999, and for
each of the five fiscal years in the period ended June 30, 1999, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Kansas City, Missouri
February 4, 2000
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
JUNE 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS
APPAREL AND OTHER TEXTILE PRODUCTS - 1.03%
Tommy Hilfiger Corporation* ............................................ 125,000 $ 9,187,500
BUILDING MATERIALS AND GARDEN SUPPLIES - 0.95%
Lowe's Companies, Inc. ................................................. 150,000 8,503,125
BUSINESS SERVICES - 14.90%
America Online, Inc.* .................................................. 90,000 9,945,000
BMC Software, Inc.* .................................................... 150,000 8,095,313
Citrix Systems, Inc.* .................................................. 125,000 7,042,969
Computer Sciences Corporation* ......................................... 125,000 8,648,438
Compuware Corporation* ................................................. 275,000 8,739,844
Electronic Data Systems Corporation .................................... 125,000 7,070,312
Microsoft Corporation* ................................................. 200,000 18,025,000
Oracle Corporation* .................................................... 200,000 7,425,000
Parametric Technology Corporation* ..................................... 500,000 6,953,125
SunGard Data Systems, Inc.* ............................................ 200,000 6,900,000
Teradyne, Inc.* ........................................................ 150,000 10,762,500
USWeb Corporation* ..................................................... 300,000 6,665,625
Veritas Software Corp.* ................................................ 100,000 9,496,875
Wind River Systems, Inc.* .............................................. 300,000 4,809,375
Young & Rubicam Inc. ................................................... 275,000 12,495,312
Total ............................................................... 133,074,688
CHEMICALS AND ALLIED PRODUCTS - 11.28%
Abbott Laboratories .................................................... 200,000 9,100,000
Biogen, Inc.* .......................................................... 120,000 7,721,250
Forest Laboratories, Inc.* ............................................. 150,000 6,937,500
Lilly (Eli) and Company ................................................ 150,000 10,743,750
Merck & Co., Inc. ...................................................... 175,000 12,950,000
Pfizer Inc. ............................................................ 80,000 8,780,000
Pharmacia & Upjohn, Inc. ............................................... 175,000 9,942,187
Schering-Plough Corporation ............................................ 225,000 11,925,000
SmithKline Beecham plc, ADR ............................................ 160,000 11,100,000
Warner-Lambert Company ................................................. 175,000 11,560,938
Total ............................................................... 100,760,625
COMMUNICATION - 4.70%
AT&T Corporation ....................................................... 175,000 9,767,188
Comcast Corporation, Class A ........................................... 200,000 7,687,500
SBC Communications Inc. ................................................ 250,000 14,500,000
USA Networks, Inc.* .................................................... 250,000 10,023,437
Total ............................................................... 41,978,125
DEPOSITORY INSTITUTIONS - 2.29%
Bank of America Corporation ............................................ 150,000 10,996,875
Citigroup Inc. ......................................................... 200,000 9,500,000
Total ............................................................... 20,496,875
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
JUNE 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
EATING AND DRINKING PLACES - 1.72%
McDonald's Corporation ................................................. 200,000 $ 8,262,500
Wendy's International, Inc. ............................................ 250,000 7,078,125
Total ............................................................... 15,340,625
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT - 10.82%
ADC Telecommunications, Inc.* .......................................... 200,000 9,106,250
Analog Devices, Inc.* .................................................. 250,000 12,546,875
General Electric Company ............................................... 140,000 15,820,000
General Instrument Corporation* ........................................ 175,000 7,437,500
Intel Corporation ...................................................... 300,000 17,840,625
Micron Technology, Inc.* ............................................... 200,000 8,062,500
Nokia Corporation, Series A, ADR ....................................... 140,000 12,818,750
Texas Instruments Incorporated ......................................... 90,000 13,050,000
Total ............................................................... 96,682,500
FOOD AND KINDRED PRODUCTS - 3.53%
Pepsi Bottling Group, Inc. ............................................. 500,000 11,531,250
Ralston-Ralston Purina Group ........................................... 325,000 9,892,187
Seagram Company Ltd. (The) ............................................. 200,000 10,075,000
Total ............................................................... 31,498,437
GENERAL MERCHANDISE STORES - 0.94%
Wal-Mart Stores, Inc. .................................................. 175,000 8,443,750
HEAVY CONSTRUCTION, EXCEPT BUILDING - 1.01%
Halliburton Company .................................................... 200,000 9,050,000
HOLDING AND OTHER INVESTMENT OFFICES - 0.75%
Berkshire Hathaway Inc., Class B* ...................................... 3,000 6,720,000
INDUSTRIAL MACHINERY AND EQUIPMENT - 5.91%
Apple Computer, Inc.* .................................................. 225,000 10,434,375
Applied Materials, Inc.* ............................................... 200,000 14,768,750
Dell Computer Corporation* ............................................. 375,000 13,863,281
EMC Corporation* ....................................................... 250,000 13,750,000
Total ............................................................... 52,816,406
INSTRUMENTS AND RELATED PRODUCTS - 1.70%
Boston Scientific Corporation* ......................................... 200,000 8,787,500
Guidant Corporation .................................................... 125,000 6,429,688
Total ............................................................... 15,217,188
INSURANCE CARRIERS - 3.21%
Chubb Corporation (The) ................................................ 100,000 6,950,000
Equitable Companies Inc. (The) ......................................... 150,000 10,050,000
Hartford Financial Services Group
Inc. (The) .......................................................... 200,000 11,662,500
Total ............................................................... 28,662,500
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
JUNE 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MOTION PICTURES - 1.65%
AT&T Corp. - Liberty Media Group,
Class A* ............................................................ 200,000 $ 7,350,000
Time Warner Incorporated ............................................... 100,000 7,350,000
Total ............................................................... 14,700,000
NONDEPOSITORY INSTITUTIONS - 2.83%
Fannie Mae ............................................................. 200,000 13,675,000
Freddie Mac ............................................................ 200,000 11,600,000
Total ............................................................... 25,275,000
OIL AND GAS EXTRACTION - 4.32%
Apache Corporation ..................................................... 200,000 7,800,000
Basin Exploration, Inc.* ............................................... 250,000 5,039,062
Burlington Resources Incorporated ...................................... 300,000 12,975,000
Schlumberger Limited ................................................... 200,000 12,737,500
Total ............................................................... 38,551,562
PETROLEUM AND COAL PRODUCTS - 2.74%
Exxon Corporation ...................................................... 200,000 15,425,000
Royal Dutch Petroleum Company .......................................... 150,000 9,037,500
Total ............................................................... 24,462,500
PRINTING AND PUBLISHING - 0.69%
McGraw-Hill Companies, Inc. (The) ...................................... 115,000 6,202,813
SECURITY AND COMMODITY BROKERS - 2.57%
Charles Schwab Corporation (The) ....................................... 100,000 10,987,500
Merrill Lynch & Co., Inc. .............................................. 150,000 11,990,625
Total ............................................................... 22,978,125
TRANSPORTATION BY AIR - 1.89%
Northwest Airlines Corporation,
Class A* ............................................................ 200,000 6,487,500
UAL Corporation* ....................................................... 160,000 10,400,000
Total ............................................................... 16,887,500
TRANSPORTATION EQUIPMENT - 0.89%
General Motors Corporation ............................................. 120,000 7,920,000
WHOLESALE TRADE -- NONDURABLE GOODS - 1.44%
Cardinal Health, Inc. .................................................. 200,000 12,825,000
TOTAL COMMON STOCKS - 83.76% $748,234,844
(Cost: $604,001,642)
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
JUNE 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
CORPORATE DEBT SECURITIES
COMMUNICATION - 0.54%
Bell Telephone Company of Pennsylvania (The),
8.35%, 12-15-2030 ................................................... $ 3,000 $ 3,393,270
Southwestern Bell Telephone Company,
5.77%, 10-14-2003 ................................................... 1,500 1,456,320
Total ............................................................... 4,849,590
DEPOSITORY INSTITUTIONS - 0.27%
Wachovia Corporation,
6.25%, 8-4-2008 ..................................................... 2,500 2,383,875
ELECTRIC, GAS AND SANITARY SERVICES - 0.11%
California Infrastructure and Economic Development
Bank, Special Purpose Trust PG&E-1,
6.42%, 9-25-2008 .................................................... 1,000 994,480
FOOD AND KINDRED PRODUCTS - 0.56%
Coca-Cola Enterprises Inc.,
6.7%, 10-15-2036 .................................................... 5,000 5,041,550
MISCELLANEOUS MANUFACTURING INDUSTRIES - 0.27%
Tyco International Group S.A.,
6.375%, 6-15-2005 ................................................... 2,500 2,445,325
NONDEPOSITORY INSTITUTIONS - 0.38%
General Electric Capital Corporation,
8.3%, 9-20-2009 ..................................................... 3,000 3,355,620
TRANSPORTATION BY AIR - 0.43%
Southwest Airlines Co.,
7.875%, 9-1-2007 .................................................... 3,650 3,821,441
UNITED STATES POSTAL SERVICE - 0.25%
Postal Square Limited Partnership,
8.95%, 6-15-2022 .................................................... 1,868 2,226,953
TOTAL CORPORATE DEBT SECURITIES - 2.81% $ 25,118,834
(Cost: $24,581,319)
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
JUNE 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
OTHER GOVERNMENT SECURITY - 0.35%
SUPRANATIONAL
International Bank for Reconstruction and
Development,
9.25%, 7-15-2017 .................................................... $ 2,500 $ 3,143,825
(Cost: $2,498,292)
UNITED STATES GOVERNMENT SECURITIES Federal National Mortgage Association:
6.51%, 5-6-2008 ..................................................... 7,500 7,313,700
6.19%, 7-7-2008 ..................................................... 5,000 4,789,850
Government National Mortgage Association,
6.5%, 8-15-2028 ..................................................... 13,100 12,596,260
National Archives Facility Trust,
8.5%, 9-1-2019 ...................................................... 4,161 4,780,051
United States Treasury:
7.875%, 11-15-2004 .................................................. 10,000 10,937,500
6.5%, 10-15-2006 .................................................... 40,000 41,300,000
0.0%, 2-15-2019 ..................................................... 20,000 5,814,800
7.25%, 8-15-2022 .................................................... 8,000 8,957,520
TOTAL UNITED STATES GOVERNMENT SECURITIES - 10.80% $96,489,681
(Cost: $96,723,673)
TOTAL SHORT-TERM SECURITIES - 1.54% $ 13,738,000
(Cost: $13,738,000)
TOTAL INVESTMENT SECURITIES - 99.26% $886,725,184
(Cost: $741,542,926)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.74% 6,610,392
NET ASSETS - 100.00% $893,335,576
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED RETIREMENT SHARES, INC.
JUNE 30, 1999
NOTES TO SCHEDULE OF INVESTMENTS
*No dividends were paid during the preceding 12 months.
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 RETIREMENT SHARES, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Investment securities - at value
(Notes 1 and 3) ....................................................................... $886,725
Cash...................................................................................... 7
Receivables:
Investment securities sold ............................................................ 26,577
Dividends and interest ................................................................ 2,017
Fund shares sold ...................................................................... 1,007
Prepaid insurance premium................................................................. 9
--------
Total assets ........................................................................ 916,342
--------
LIABILITIES
Payable for investment securities purchased .............................................. 21,339
Payable to Fund shareholders ............................................................. 1,230
Accrued service fee (Note 2) ............................................................. 165
Accrued transfer agency and
dividend disbursing (Note 2) .......................................................... 125
Accrued distribution fee (Note 2) ........................................................ 23
Accrued management fee (Note 2) .......................................................... 17
Accrued accounting services fee (Note 2) ................................................. 7
Other .................................................................................... 100
--------
Total liabilities ................................................................... 23,006
--------
Total net assets ................................................................. $893,336
========
NET ASSETS
$1.00 par value capital stock
Capital stock ......................................................................... $ 90,743
Additional paid-in capital............................................................. 566,647
Accumulated undistributed income:
Accumulated undistributed net investment income ....................................... 1,633
Accumulated undistributed net realized
gain on investment transactions ..................................................... 89,131
Net unrealized appreciation in value of
investments ......................................................................... 145,182
--------
Net assets applicable to outstanding
units of capital ................................................................. $893,336
========
Capital shares outstanding
Class A ............................................................................... 90,403
Class Y ............................................................................... 340
Capital shares authorized ................................................................... 300,000
Net asset value per share (net assets divided
by shares outstanding)
Class A ............................................................................... $9.84
Class Y ............................................................................... $9.85
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, INC.
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
INVESTMENT INCOME
Income (Note 1B):
Interest and amortization ............................................................. $ 18,187
Dividends ............................................................................. 6,568
--------
Total income ........................................................................ 24,755
--------
Expenses (Note 2):
Investment management fee ............................................................. 4,421
Service fee - Class A.................................................................. 1,832
Transfer agency and dividend disbursing - Class A...................................... 1,226
Distribution fee - Class A............................................................. 165
Accounting services fee ............................................................... 85
Custodian fees ........................................................................ 59
Audit fees ............................................................................ 13
Legal fees ............................................................................ 12
Shareholder servicing - Class Y ....................................................... 5
Other ............................................................................... 249
--------
Total expenses ...................................................................... 8,067
--------
Net investment income ............................................................ 16,688
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTES 1 AND 3)
Realized net gain on securities .......................................................... 89,901
Realized net loss on foreign currency
transactions .......................................................................... (12)
--------
Realized net gain on investments ...................................................... 89,889
Unrealized depreciation in value of investments
during the period ..................................................................... (5,039)
--------
Net gain on investments ............................................................. 84,850
--------
Net increase in net assets resulting
from operations ............................................................... $101,538
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, INC.
STATEMENT OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
JUNE 30,
------------------------------
1999 1998
--------- --------
<S> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income ........................................... $ 16,688 $ 19,939
Realized net gain on investments ................................ 89,889 65,705
Unrealized appreciation
(depreciation) ................................................ (5,039) 18,773
-------- --------
Net increase in net assets
resulting from operations .................................. 101,538 104,417
-------- --------
Distributions to shareholders from (Note 1E):*
Net investment income:
Class A ....................................................... (15,950) (20,761)
Class Y ....................................................... (74) (88)
Realized gains on securities transactions:
Class A ....................................................... (32,461) (66,648)
Class Y ....................................................... (138) (271)
-------- --------
(48,623) (87,768)
Capital share transactions: -------- --------
Proceeds from sale of shares:
Class A (10,309,331 and 10,522,139
shares, respectively) ...................................... 93,629 96,683
Class Y (230,169 and 61,007
shares, respectively) ...................................... 2,066 570
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (5,446,253 and
9,995,667 shares, respectively) ............................ 48,028 87,119
Class Y (24,055 and 41,126
shares, respectively) ...................................... 212 359
Payments for shares redeemed:
Class A (14,310,457 and 9,861,351
shares, respectively) ...................................... (129,651) (90,559)
Class Y (242,942 and 107,103
shares, respectively) ...................................... (2,200) (990)
-------- --------
Net increase in net assets
resulting from capital
share transactions ...................................... 12,084 93,182
-------- --------
Total increase .......................................... 64,999 109,831
NET ASSETS
Beginning of period ................................................ 828,337 718,506
-------- --------
End of period, including undistributed
net investment income of $1,633
and $981, respectively .......................................... $893,336 $828,337
======== ========
</TABLE>
*See "Financial Highlights" on pages - .
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, INC.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......................... $9.28 $9.14 $8.72 $8.26 $7.64
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... .19 .24 .27 .26 .24
Net realized and
unrealized gain
on investments ............... .92 .99 1.08 .94 .86
----- ----- ----- ----- -----
Total from investment
operations ...................... 1.11 1.23 1.35 1.20 1.10
----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.18) (0.25) (0.27) (0.27) (0.22)
From capital gains............... (0.37) (0.84) (0.66) (0.47) (0.26)
----- ----- ----- ----- -----
Total distributions................. (0.55) (1.09) (0.93) (0.74) (0.48)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $9.84 $9.28 $9.14 $8.72 $8.26
===== ===== ===== ===== =====
Total return* ...................... 12.75% 14.45% 16.70% 14.93% 15.07%
Net assets, end of
period (in millions)............. $890 $825 $716 $607 $528
Ratio of expenses to
average net assets............... 0.99% 0.93% 0.92% 0.89% 0.89%
Ratio of net
investment income
to average net
assets .......................... 2.04% 2.57% 3.12% 3.01% 3.04%
Portfolio turnover
rate ............................ 122.58% 53.52% 39.55% 42.05% 48.62%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, INC.
FINANCIAL HIGHLIGHTS
CLASS Y SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE
FOR THE FISCAL PERIOD
YEAR ENDED JUNE 30, FROM 2/27/96*
-------------------------------- THROUGH
1999 1998 1997 6/30/96
------ ------ ------ --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $9.28 $9.14 $8.72 $8.68
----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... .20 .25 .29 .10
Net realized and
unrealized gain
on investments ............... .94 .99 1.07 .06
----- ----- ----- -----
Total from investment
operations....................... 1.14 1.24 1.36 .16
----- ----- ----- -----
Less distributions:
From net investment
income........................ (0.20) (0.26) (0.28) (0.12)
From capital gains............... (0.37) (0.84) (0.66) (0.00)
----- ----- ----- -----
Total distributions................. (0.57) (1.10) (0.94) (0.12)
----- ----- ----- -----
Net asset value,
end of period ................... $9.85 $9.28 $9.14 $8.72
===== ===== ===== =====
Total return ....................... 13.11% 14.62% 16.87% 1.91%
Net assets, end of
period (in
millions) ....................... $3 $3 $3 $2
Ratio of expenses
to average net
assets........................... 0.75% 0.79% 0.78% 0.71%**
Ratio of net
investment income
to average net
assets........................... 2.32% 2.71% 3.28% 3.36%**
Portfolio
turnover rate.................... 122.58% 53.52% 39.55% 42.05%**
</TABLE>
*Commencement of operations.
**Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED RETIREMENT SHARES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
United Retirement Shares, 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 the highest long-term total
investment return as is, in the opinion of management, consistent with
reasonable safety of capital. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The policies are in conformity with generally accepted
accounting principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period
as reported by the principal securities exchange on which the issue is
traded or, if no sale is reported for a stock, the average of the
latest bid and asked prices. Bonds, other than convertible bonds, are
valued using a pricing system provided by a pricing service or dealer
in bonds. Convertible bonds are valued using this pricing system only
on days when there is no sale reported. Stocks which are traded
over-the-counter are priced using the Nasdaq Stock Market, which
provides information on bid and asked prices quoted by major dealers in
such stocks. 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. Dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. See Note 3 -- Investment
Securities Transactions.
C. Foreign currency translations -- All assets and liabilities denominated
in foreign currencies are translated into U.S. dollars daily. Purchases
and sales of investment securities and accruals of income and expenses
are translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates.
The Fund combines fluctuations from currency exchange rates and
fluctuations in market value when computing net realized and unrealized
gain or loss from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of
its taxable income and capital gains to its shareholders and otherwise
qualify as a regulated
<PAGE>
investment company under Subchapter M of the Internal Revenue Code. In
addition, the Fund intends to pay distributions as required to avoid
imposition of excise tax. Accordingly, provision has not been made for
Federal income taxes. See Note 4 -- Federal Income Tax Matters.
E. Dividends and distributions -- Dividends and distributions to
shareholders are recorded by the Fund on the business day following
record date. Net investment income dividends and capital gains
distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are due to differing treatments for items such as deferral
of wash sales and post-October losses, foreign currency transactions,
net operating losses and expiring capital loss carryovers. At June 30,
1999, $12,239 was reclassified between accumulated undistributed net
investment income and accumulated undistributed net realized gain on
investment transactions. Net investment income, net realized gains and
net assets were not affected by this change.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- INVESTMENT MANAGEMENT AND PAYMENTS TO AFFILIATED PERSONS
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. Until June
30, 1999, the fee consisted of two elements: (i) a "Specific" fee computed on
net asset value as of the close of business each day at the annual rate of .15%
of net assets and (ii) a "Group" fee computed each day on the combined net asset
values of all of the funds in the United Group of mutual funds at annual rates
of .51% of the first $750 million of combined net assets, .49% on that amount
between $750 million and $1.5 billion, .47% between $1.5 billion and $2.25
billion, .45% between $2.25 billion and $3 billion, .43% between $3 billion and
$3.75 billion, .40% between $3.75 billion and $7.5 billion, .38% between $7.5
billion and $12 billion, and .36% of that amount over $12 billion. Beginning
June 30, 1999, 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 this fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily
<PAGE>
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.
<TABLE>
<CAPTION>
ACCOUNTING SERVICES FEE
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
For Class A shares, the Fund also pays WARSCO a monthly per account
charge for transfer agency and dividend disbursement services of $1.3125 for
each shareholder account which was in existence at any time during the prior
month, plus $0.30 for each account on which a dividend or distribution of cash
or shares had a record date in that month. With respect to Class Y shares, the
Fund pays WARSCO a monthly fee at an annual rate of .15% of the average daily
net assets of the class for the preceding month. The Fund also reimburses W&R
and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross
sales commissions for Class A shares (which are not an expense of the Fund) of
$2,706,305, out of which W&R paid sales commissions of $1,569,670 and all
expenses in connection with the sale of Fund shares, except for registration
fees and related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's average annual net assets. The fee is to be paid to
reimburse W&R for amounts it expends in connection with the distribution of the
Class A shares and/or provision of personal services to Fund shareholders and/or
maintenance of shareholder accounts.
The Fund paid Directors' fees of $30,133, 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 SECURITIES TRANSACTIONS
Purchases of investment securities, other than U.S. Government
obligations and short-term securities, aggregated
<PAGE>
$850,375,395 while proceeds from maturities and sales aggregated $730,709,860.
Purchases of short-term and U.S. Government securities aggregated $1,440,556,364
and $146,118,239, respectively. Proceeds from maturities and sales of short-term
and U.S. Government securities aggregated $1,529,115,090 and $203,784,741,
respectively.
For Federal income tax purposes, cost of investments owned at June 30,
1999 was $741,707,108, resulting in net unrealized appreciation of $145,018,076,
of which $151,524,368 related to appreciated securities and $6,506,292 related
to depreciated securities.
NOTE 4 -- FEDERAL INCOME TAX MATTERS
For Federal income tax purposes, the Fund realized capital gain net
income of $89,301,916 during its fiscal year ended June 30, 1999, which will be
distributed to Fund's shareholders.
NOTE 5 -- MULTICLASS OPERATIONS
On October 7, 1995, the Fund was authorized to offer investors two
classes of shares, Class A and Class Y, each of which has equal rights as to
assets and voting privileges. Class Y shares are not subject to a sales charge
on purchases; they are not subject to a Rule 12b-1 Distribution and Service Plan
and have a separate transfer agency and dividend disbursement services fee
structure. A comprehensive discussion of the terms under which shares of either
class are offered is contained in the prospectus and the Statement of Additional
Information for the Fund.
Income, non-class specific expenses and realized and unrealized gains
and losses are allocated daily to each class of shares based on the value of
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Retirement Shares, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United Retirement Shares, Inc. (the "Fund") as
of June 30, 1999, and the related statement of operations for the fiscal year
then ended, the statements of changes in net assets for each of the two fiscal
years in the period then ended, and the financial highlights for each of the
five fiscal years in the period then ended. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1999, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of United
Retirement Shares, Inc. as of June 30, 1999, the results of its operations for
the fiscal year then ended, the changes in its net assets for each of the two
fiscal years in the period then ended, and the financial highlights for each of
the five fiscal years in the period then ended in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Kansas City, Missouri
August 6, 1999
