<PAGE>
485BPOS
File No. 2-31618
File No. 811-1806
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ____
Post-Effective Amendment No. 61
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 31
UNITED VANGUARD FUND, INC.
---------------------------------------------------------------------------
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
---------------------------------------------------------------------------
Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
---------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
__X__ on June 30, 2000 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment
==================================================================
DECLARATION REQUIRED BY RULE 24f-2 (a) (1)
The issuer has registered an indefinite amount of its securities under
the Securities Act of 1933 pursuant to Rule 24f-2(a)(1). The Notice for the
Registrant's fiscal year ending September 30, 1999 was filed on December 16,
1999.
<PAGE>
[GRAPHIC]
PROSPECTUS
JUNE 30, 2000
Waddell & Reed Advisors Funds
EQUITY FUNDS [GRAPHIC]
Accumulative Fund
International Growth Fund
New Concepts Fund
Science and Technology Fund
Small Cap Fund
Vanguard Fund
THE SECURITIES AND EXCHANGE COMMISSION [LOGO] WADDELL & REED
HAS NOT APPROVED OR DISAPPROVED THE FINANCIAL SERVICES-Registered Trademark-
FUND'S SECURITIES, OR DETERMINED ----------------------------------------
WHETHER THIS PROSPECTUS IS ACCURATE INVESTING. WITH A PLAN.-SM-
OR ADEQUATE. IT IS A CRIMINAL OFFENSE
TO STATE OTHERWISE.
<PAGE>
CONTENTS
3 An Overview of the Funds
3 Accumulative Fund
9 International Growth Fund
15 New Concepts Fund
21 Science and Technology Fund
27 Small Cap Fund
31 Vanguard Fund
37 The Investment Principles of the Funds
43 Your Account
64 The Management of the Funds
68 Financial Highlights
2
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
[GRAPHIC]
WADDELL & REED ADVISORS
ACCUMULATIVE FUND
(FORMERLY UNITED ACCUMULATIVE FUND)
SEEKS CAPITAL GROWTH, WITH CURRENT
INCOME AS A SECONDARY GOAL.
PRINCIPAL STRATEGIES
Accumulative Fund invests primarily in common stocks of largely capitalized U.S.
and foreign companies. The Fund may invest in companies of any size and of any
industry in order to achieve its primary goal of growth.
Waddell & Reed Investment Management Company ("WRIMCO"), the Fund's investment
manager, attempts to select securities with appreciation possibilities by
looking at many factors, including:
- stability and predictability of earnings growth;
- acceleration of earnings and/or revenue;
- improvement in profitability; and
- potential turnaround opportunities.
The Fund may periodically emphasize a blend of value and growth potential in
selecting stocks. Value stocks are those that WRIMCO believes are currently
selling below their true worth. A stock has growth potential if, in WRIMCO's
opinion, the earnings of the company are likely to grow faster than the economy.
In general, in determining whether to sell a stock, WRIMCO uses the same type of
analysis that it uses in buying stocks in order to determine whether the
security has ceased to offer significant growth potential. WRIMCO may also sell
a security to take advantage of more attractive investment opportunities or to
raise cash.
3
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Accumulative Fund owns different types of securities, a variety of
factors can affect its investment performance, such as:
- the mix of securities in the Fund's portfolio, particularly the relative
weightings in, and exposure to, different sectors of the economy;
- adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings to
fall as part of a broad market decline;
- the earnings performance, credit quality and other conditions of the companies
whose securities the Fund holds; and
- WRIMCO's skill in evaluating and selecting securities for the Fund.
Market risk for small to medium sized companies may be greater than the market
risk for large companies. Smaller companies are more likely to have limited
financial resources and inexperienced management. As well, stock of smaller
companies may experience volatile trading and price fluctuations.
An investment in foreign securities presents additional risks such as currency
fluctuations and political or economic conditions affecting the foreign country.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST
Accumulative Fund is designed for investors seeking long-term investment growth
not by seeking to maximize the upside potential of the market but rather by
seeking to reduce potential risk in a declining market. You should consider
whether the Fund fits your particular investment objectives.
4
<PAGE>
[GRAPHIC]
---------------------------------------
PERFORMANCE
ACCUMULATIVE FUND
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and shows
how performance has varied from year to year over the past ten calendar years.
- The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and other
distributions in shares. As with all mutual funds, the Fund's past performance
does not necessarily indicate how it will perform in the future.
[CHART]
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31 EACH YEAR (%)
<TABLE>
<CAPTION>
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-11.05% 24.72% 14.04% 9.06% 0.04% 34.21% 12.18% 29.58% 22.62% 25.72%
========================================================================================
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 24.90% (THE
FOURTH QUARTER OF 1999) AND THE LOWEST QUARTERLY RETURN WAS -13.59% (THE THIRD
QUARTER OF 1990). THE CLASS A RETURN FOR THE YEAR THROUGH MARCH 31, 2000 WAS
11.71%.
5
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
ACCUMULATIVE FUND 18.49% 23.17% 14.65%
--------------------------------------------------------------------------------------
S&P 500 Index 21.09% 28.59% 18.23%
--------------------------------------------------------------------------------------
Lipper Growth Funds
Universe Average 29.27% 25.04% 16.52%
--------------------------------------------------------------------------------------
CLASS B SHARES OF
ACCUMULATIVE FUND 17.89%
--------------------------------------------------------------------------------------
S&P 500 Index 21.09% 28.59% 18.23% 8.04%
--------------------------------------------------------------------------------------
Lipper Growth Funds
Universe Average 29.27% 25.04% 16.52% 14.43%
--------------------------------------------------------------------------------------
CLASS C SHARES OF
ACCUMULATIVE FUND 20.45%
--------------------------------------------------------------------------------------
S&P 500 Index 21.09% 28.59% 18.23% 8.04%
--------------------------------------------------------------------------------------
Lipper Growth Funds
Universe Average 29.27% 25.04% 16.52% 14.43%
--------------------------------------------------------------------------------------
CLASS Y SHARES OF
ACCUMULATIVE FUND 25.95% 22.93%
--------------------------------------------------------------------------------------
S&P 500 Index 21.09% 28.59% 18.23% 26.56%
--------------------------------------------------------------------------------------
Lipper Growth Funds
Universe Average 29.27% 25.04% 16.52% 22.49%
======================================================================================
</TABLE>
THE INDEX SHOWN IS A BROAD-BASED, SECURITIES MARKET INDEX THAT IS UNMANAGED.
THE LIPPER AVERAGE IS A COMPOSITE OF MUTUAL FUNDS WITH GOALS SIMILAR TO THE
GOALS OF THE FUND.
(1)SINCE OCTOBER 4, 1999 FOR CLASS B SHARES, OCTOBER 6, 1999 FOR CLASS C SHARES
AND JULY 11, 1995 FOR CLASS Y SHARES. BECAUSE EACH CLASS COMMENCED
OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND PARTIAL MONTH
CALCULATIONS OF THE PERFORMANCE OF THE ABOVE INDEX ARE NOT AVAILABLE, INDEX
PERFORMANCE IS CALCULATED FROM OCTOBER 31, 1999, OCTOBER 31, 1999 AND
JULY 31, 1995, RESPECTIVELY.
6
<PAGE>
[GRAPHIC]
---------------------------------------
FEES AND EXPENSES
ACCUMULATIVE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% NONE NONE NONE
--------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) NONE(2) 5% 1% NONE
================================================================================
ANNUAL FUND OPERATING EXPENSES(3)
<CAPTION>
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.68% 0.68% 0.68% 0.68%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.23% 1.00% 1.00% NONE
--------------------------------------------------------------------------------
OTHER EXPENSES 0.14% 0.63% 0.67% 0.19%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.05% 2.31% 2.35% 0.87%
================================================================================
</TABLE>
(1)THE CONTINGENT DEFERRED SALES CHARGE ("CDSC"), WHICH IS IMPOSED ON THE LESSER
OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS B SHARES, DECLINES FROM 5%
FOR REDEMPTIONS MADE WITHIN THE FIRST YEAR OF PURCHASE, TO 4% FOR
REDEMPTIONS MADE WITHIN THE SECOND YEAR, TO 3% FOR REDEMPTIONS MADE WITHIN
THE THIRD AND FOURTH YEARS, TO 2% FOR REDEMPTIONS MADE WITHIN THE FIFTH
YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN THE SIXTH YEAR AND TO 0% FOR
REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR CLASS C SHARES, A 1% CDSC
APPLIES TO THE LESSER OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS C
SHARES REDEEMED WITHIN TWELVE MONTHS AFTER PURCHASE. SOLELY FOR PURPOSES OF
DETERMINING THE NUMBER OF MONTHS OR YEARS FROM THE TIME OF ANY PAYMENT FOR
THE PURCHASE OF SHARES, ALL PAYMENTS DURING A MONTH ARE TOTALED AND DEEMED
TO HAVE BEEN MADE ON THE FIRST DAY OF THE MONTH.
(2)A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3)MANAGEMENT FEES AND TOTAL ANNUAL FUND OPERATING EXPENSES HAVE BEEN RESTATED
TO REFLECT THE CHANGE IN MANAGEMENT FEES EFFECTIVE JUNE 30, 1999; OTHERWISE
EXPENSE RATIOS ARE BASED ON OTHER FUND-LEVEL EXPENSES FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
7
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular Class A, Class B, Class C
or Class Y shares for each time period specified, (b) your investment has a 5%
return each year, and (c) the expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $676 $ 890 $1,121 $1,784
-------------------------------------------------------------------------------
Class B Shares $634 $1,020 $1,333 $2,323(1)
-------------------------------------------------------------------------------
Class C Shares $338 $ 732 $1,254 $2,683
-------------------------------------------------------------------------------
Class Y Shares $ 89 $ 278 $ 482 $1,073
-------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $676 $ 890 $1,121 $1,784
-------------------------------------------------------------------------------
Class B Shares $234 $ 720 $1,233 $2,323(1)
-------------------------------------------------------------------------------
Class C Shares $238 $ 732 $1,254 $2,683
-------------------------------------------------------------------------------
Class Y Shares $ 89 $ 278 $ 482 $1,073
===============================================================================
</TABLE>
(1)REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
8
<PAGE>
[GRAPHIC]
---------------------------------------
AN OVERVIEW OF THE FUND
WADDELL & REED ADVISORS
INTERNATIONAL GROWTH FUND
(FORMERLY UNITED INTERNATIONAL GROWTH FUND) SEEKS, AS A
PRIMARY GOAL, LONG-TERM APPRECIATION OF CAPITAL. AS A
SECONDARY GOAL, THE FUND SEEKS CURRENT INCOME.
PRINCIPAL STRATEGIES
International Growth Fund seeks to achieve its goals by investing primarily in
common stocks of foreign companies that WRIMCO believes have the potential for
long-term growth represented by economic expansion within a country or region
and by the restructuring and/or privatization of particular industries. The Fund
emphasizes growth stocks, which are securities of companies whose earnings
WRIMCO believes are likely to grow faster than the economy. The Fund primarily
invests in issuers of developed countries. The Fund may invest in companies of
any size.
WRIMCO may look at a number of factors in selecting securities for the Fund's
portfolio. These include the issuer's:
- growth potential;
- earnings potential;
- management;
- industry position; and
- applicable economic and market conditions.
In general, in determining whether to sell a security, WRIMCO uses the same type
of analysis that it uses in buying securities of that type. For example, WRIMCO
may sell a security if it believes the security no longer offers significant
growth potential. As well, WRIMCO may sell a security to take advantage of more
attractive investment opportunities or to raise cash.
9
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because International Growth Fund owns different types of securities, a variety
of factors can affect its investment performance, such as:
- changes in foreign exchange rates, which may affect the value of the
securities the Fund holds;
- adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
- WRIMCO's skill in evaluating and selecting securities for the Fund.
Investing in foreign securities presents additional risks, such as currency
fluctuations and political or economic conditions affecting the foreign country.
Accounting and disclosure standards also differ from country to country, which
makes obtaining reliable research information more difficult. There is the
possibility that, under unusual international monetary or political conditions,
the Fund's assets might be more volatile than would be the case with other
investments.
Market risk for small or medium sized companies may be greater than that for
large companies. For example, smaller companies may have limited financial
resources, limited product lines or inexperienced management.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST
International Growth Fund is designed for investors seeking long-term
appreciation of capital by investing primarily in securities issued by foreign
companies. You should consider whether the Fund fits your particular investment
objectives.
10
<PAGE>
[GRAPHIC]
---------------------------------------
PERFORMANCE
INTERNATIONAL GROWTH FUND
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year over the past ten
calendar years.
- The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
[CHART]
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31 EACH YEAR (%)
<TABLE>
<CAPTION>
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-13.20% 19.27% -0.67% 46.56% 1.81% 8.09% 18.23% 17.38% 21.41% 57.04%
===========================================================================================
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 46.67% (THE
FOURTH QUARTER OF 1999) AND THE LOWEST QUARTERLY RETURN WAS -17.43% (THE THIRD
QUARTER OF 1990). THE CLASS A RETURN FOR THE YEAR THROUGH MARCH 31, 2000 WAS
1.16%.
11
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
INTERNATIONAL GROWTH FUND 48.01% 21.94% 15.12%
--------------------------------------------------------------------------------------------
Morgan Stanley Capital
International E.A.FE. Index 26.96% 12.83% 7.01%
--------------------------------------------------------------------------------------------
Lipper International
Funds Universe Average 40.80% 15.05% 10.22%
--------------------------------------------------------------------------------------------
CLASS B SHARES OF
INTERNATIONAL GROWTH FUND 37.70%
--------------------------------------------------------------------------------------------
Morgan Stanley Capital
International E.A.FE. Index 26.96% 12.83% 7.01% 12.76%
--------------------------------------------------------------------------------------------
Lipper International
Funds Universe Average 40.80% 15.05% 10.22% 20.88%
--------------------------------------------------------------------------------------------
CLASS C SHARES OF
INTERNATIONAL GROWTH FUND 41.94%
--------------------------------------------------------------------------------------------
Morgan Stanley Capital
International E.A.FE. Index 26.96% 12.83% 7.01% 12.76%
--------------------------------------------------------------------------------------------
Lipper International
Funds Universe Average 40.80% 15.05% 10.22% 20.88%
--------------------------------------------------------------------------------------------
CLASS Y SHARES OF
INTERNATIONAL GROWTH FUND 57.50% 24.95%
--------------------------------------------------------------------------------------------
Morgan Stanley Capital
International E.A.FE. Index 26.96% 12.83% 7.01% 13.47%
--------------------------------------------------------------------------------------------
Lipper International
Funds Universe Average 40.80% 15.05% 10.22% 16.00%
============================================================================================
</TABLE>
THE INDEX SHOWN IS A BROAD-BASED, SECURITIES MARKET INDEX THAT IS
UNMANAGED. THE LIPPER AVERAGE IS A COMPOSITE OF MUTUAL FUNDS WITH GOALS
SIMILAR TO THE GOALS OF THE FUND.
(1) SINCE OCTOBER 4, 1999 FOR CLASS B SHARES, OCTOBER 5, 1999 FOR CLASS C
SHARES AND SEPTEMBER 27, 1995 FOR CLASS Y SHARES. BECAUSE EACH CLASS
COMMENCED OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND
PARTIAL MONTH CALCULATIONS OF THE PERFORMANCE OF THE INDEX ARE NOT
AVAILABLE, INDEX PERFORMANCE IS FROM OCTOBER 31, 1999, OCTOBER 31, 1999 AND
SEPTEMBER 30, 1995, RESPECTIVELY.
12
<PAGE>
[GRAPHIC]
---------------------------------------
FEES AND EXPENSES
INTERNATIONAL GROWTH FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% None None None
-------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
===============================================================================
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(3)
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.85% 0.85% 0.85% 0.85%
-------------------------------------------------------------------------------
DISTRIBUTION AND
SERVICE (12b-1) FEES 0.25% 1.00% 1.00% None
-------------------------------------------------------------------------------
OTHER EXPENSES 0.36% 0.36% 0.36% 0.30%
-------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.46% 2.21% 2.21% 1.15%
================================================================================
</TABLE>
(1)THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE
FIRST YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR,
TO 3% FOR REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR
REDEMPTIONS MADE WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN
THE SIXTH YEAR AND TO 0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR
CLASS C SHARES, A 1% CDSC APPLIES TO THE LESSER OF AMOUNT INVESTED OR
REDEMPTION VALUE OF CLASS C SHARES REDEEMED WITHIN TWELVE MONTHS AFTER
PURCHASE. SOLELY FOR PURPOSES OF DETERMINING THE NUMBER OF MONTHS OR YEARS
FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF SHARES, ALL PAYMENTS
DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON THE FIRST DAY OF
THE MONTH.
(2)A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3)MANAGEMENT FEES AND TOTAL ANNUAL FUND OPERATING EXPENSES HAVE BEEN RESTATED
TO REFLECT THE CHANGE IN MANAGEMENT FEES EFFECTIVE JUNE 30, 1999;
OTHERWISE, EXPENSE RATIOS ARE BASED ON OTHER FUND-LEVEL EXPENSES OF THE
FUND FOR THE FISCAL YEAR ENDED JUNE 30, 1999, AND FOR CLASS B AND CLASS C,
THE EXPENSES ATTRIBUTABLE TO EACH CLASS THAT ARE ANTICIPATED FOR THE
CURRENT YEAR. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
13
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular Class A, Class B, Class C
or Class Y shares for each time period specified, (b) your investment has a 5%
return each year, and (c) the expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $715 $1,010 $1,327 $2,221
-----------------------------------------------------------------------------
Class B Shares $624 $ 991 $1,285 $2,353(1)
-----------------------------------------------------------------------------
Class C Shares $324 $ 691 $1,185 $2,544
-----------------------------------------------------------------------------
Class Y Shares $117 $ 365 $ 633 $1,398
-----------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------------
Class A Shares $715 $1,010 $1,327 $2,221
-----------------------------------------------------------------------------
Class B Shares $224 $ 691 $1,185 $2,353(1)
-----------------------------------------------------------------------------
Class C Shares $224 $ 691 $1,185 $2,544
-----------------------------------------------------------------------------
Class Y Shares $117 $ 365 $ 633 $1,398
=============================================================================
</TABLE>
(1)REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
14
<PAGE>
[GRAPHIC]
---------------------------------------
AN OVERVIEW OF THE FUND
WADDELL & REED ADVISORS
NEW CONCEPTS FUND
(FORMERLY UNITED NEW CONCEPTS FUND) SEEKS THE GROWTH OF
YOUR INVESTMENT.
PRINCIPAL STRATEGIES
New Concepts Fund seeks to achieve its goal by investing primarily in common
stocks of U.S. and foreign companies whose market capitalizations are within
the range of capitalizations of companies comprising the Russell Mid-Cap Growth
Index ("Russell Mid-Cap") and that WRIMCO believes offer above-average growth
potential.
In selecting companies, WRIMCO may look at a number of factors, such as:
- new or innovative products or services;
- adaptive or creative management;
- strong financial and operational capabilities to sustain growth;
- market potential; and
- profit potential.
In general, in determining whether to sell a stock, WRIMCO uses the same type of
analysis that it uses when buying stocks. For example, WRIMCO may sell a holding
if the company no longer meets the desired capitalization range or if the
company position weakens in the industry or market. WRIMCO may also sell a
security to take advantage of more attractive investment opportunities or to
raise cash.
15
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because New Concepts Fund owns different types of securities, a variety of
factors can affect its investment performance, such as:
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
- adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
- the mix of securities in the Fund, particularly the relative weightings in,
and exposure to, different sectors and industries; and
- WRIMCO's skill in evaluating and selecting securities for the Fund.
Market risk for medium sized companies may be greater than that for large
companies. Medium sized companies may have limited financial resources and less
experienced management compared to large companies. Stocks of medium sized
companies may experience volatile trading and price fluctuations.
An investment in foreign securities presents additional risks such as currency
fluctuations and political or economic conditions affecting the foreign country.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST
New Concepts Fund is designed for investors who are willing to accept greater
risks than are present with many other mutual funds. The Fund is not intended
for investors who desire assured income and conservation of capital. You should
consider whether the Fund fits your particular investment objectives.
16
<PAGE>
[GRAPHIC]
---------------------------------------
PERFORMANCE
NEW CONCEPTS FUND
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance.
- The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year over the past ten
calendar years.
- The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
[CHART]
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31 EACH YEAR (%)
<TABLE>
<CAPTION>
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.39 89.72% 5.47% 10.75% 11.30% 33.94% 4.57% 16.74% 38.70% 63.42%(1)
======================================================================================
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 46.17%
(THE FOURTH QUARTER OF 1999) AND THE LOWEST QUARTERLY RETURN WAS -18.14%
(THE THIRD QUARTER OF 1990). THE CLASS A RETURN FOR THE YEAR THROUGH MARCH
31, 2000 WAS 7.18%.
(1)A SUBSTANTIAL PORTION OF THE FUND'S RETURNS DURING RECENT PERIODS IS
ATTRIBUTABLE TO INVESTMENTS IN INITIAL PUBLIC OFFERINGS (IPOS). NO
ASSURANCE CAN BE GIVEN THAT THE FUND WILL CONTINUE TO BE ABLE TO INVEST IN
IPOS TO THE SAME EXTENT AS IT HAS IN THE PAST OR THAT FUTURE IPOS IN WHICH
THE FUND INVESTS WILL HAVE AS EQUALLY BENEFICAL IMPACT ON PERFORMANCE.
17
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
NEW CONCEPTS FUND 54.02% 28.42% 24.06%
----------------------------------------------------------------------------------------
Nasdaq Industrials Index 71.67% 24.33% 17.46%
----------------------------------------------------------------------------------------
Russell Mid-Cap
Growth Index 51.31% 28.04% 18.96%
----------------------------------------------------------------------------------------
CLASS B SHARES OF
NEW CONCEPTS FUND 39.70%
----------------------------------------------------------------------------------------
Nasdaq Industrials Index 71.67% 24.33% 17.46% 33.69%
----------------------------------------------------------------------------------------
Russell Mid-Cap
Growth Index 51.31% 28.04% 18.96% 29.50%
----------------------------------------------------------------------------------------
CLASS C SHARES OF
NEW CONCEPTS FUND 43.70%
----------------------------------------------------------------------------------------
Nasdaq Industrials Index 71.67% 24.33% 17.46% 33.69%
----------------------------------------------------------------------------------------
Russell Mid-Cap
Growth Index 51.31% 28.04% 18.96% 29.50%
----------------------------------------------------------------------------------------
CLASS Y SHARES OF
NEW CONCEPTS FUND 63.89% 27.36%
----------------------------------------------------------------------------------------
Nasdaq Industrials Index 71.67% 24.33% 17.46% 21.56%
----------------------------------------------------------------------------------------
Russell Mid-Cap
Growth Index 51.31% 28.04% 18.96% 25.49%
========================================================================================
</TABLE>
THE INDEXES SHOWN ARE BROAD-BASED, SECURITIES MARKET INDEXES THAT ARE
UNMANAGED. THE RUSSELL MID-CAP GROWTH INDEX WILL REPLACE THE NASDAQ
INDUSTRIALS INDEX. WRIMCO BELIEVES THAT THE RUSSELL MID-CAP GROWTH INDEX
PROVIDES A MORE ACCURATE BASIS FOR COMPARING THE FUND'S PERFORMANCE TO THE
TYPES OF SECURITIES IN WHICH THE FUND INVESTS. BOTH INDEXES ARE PRESENTED
FOR COMPARISON PURPOSES. AS OF JANUARY 2000, THE COMPANIES IN WHICH THE
FUND INVESTS ARE PRIMARILY COMPANIES WHOSE MARKET CAPITALIZATIONS ARE
WITHIN THOSE OF COMPANIES COMPRISING THE RUSSELL MID-CAP GROWTH INDEX.
(1)SINCE OCTOBER 4, 1999 FOR CLASS B SHARES, OCTOBER 4, 1999 FOR CLASS C SHARES
AND SEPTEMBER 6, 1995 FOR CLASS Y SHARES. BECAUSE EACH CLASS COMMENCED
OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND PARTIAL MONTH
CALCULATIONS OF THE PERFORMANCE OF THE INDEXES (INCLUDING INCOME) ARE NOT
AVAILABLE, PERFORMANCE OF THE INDEXES IS FROM OCTOBER 31, 1999, OCTOBER 31,
1999, AND AUGUST 31, 1995, RESPECTIVELY.
18
<PAGE>
[GRAPHIC]
---------------------------------------
FEES AND EXPENSES
NEW CONCEPTS FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% None None None
-------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
===============================================================================
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(3)
-------------------------------------------------------------------------------
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.84% 0.84% 0.84% 0.84%
-------------------------------------------------------------------------------
DISTRIBUTION AND
SERVICE (12B-1) FEES 0.24% 1.00% 1.00% None
-------------------------------------------------------------------------------
OTHER EXPENSES 0.26% 0.56% 0.47% 0.20%
-------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.34% 2.40% 2.31% 1.04%
===============================================================================
</TABLE>
(1)THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE
FIRST YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR,
TO 3% FOR REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR
REDEMPTIONS MADE WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN
THE SIXTH YEAR AND TO 0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR
CLASS C SHARES, A 1% CDSC APPLIES TO THE LESSER OF AMOUNT INVESTED OR
REDEMPTION VALUE OF CLASS C SHARES REDEEMED WITHIN TWELVE MONTHS AFTER
PURCHASE. SOLELY FOR PURPOSES OF DETERMINING THE NUMBER OF MONTHS OR YEARS
FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF SHARES, ALL PAYMENTS
DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON THE FIRST DAY OF
THE MONTH.
(2)A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3)MANAGEMENT FEES AND TOTAL FUND OPERATING EXPENSES HAVE BEEN RESTATED TO
REFLECT THE CHANGE IN MANAGEMENT FEES EFFECTIVE JUNE 30, 1999; OTHERWISE,
EXPENSE RATIOS ARE BASED ON OTHER FUND-LEVEL EXPENSES OF THE FUND FOR THE
FISCAL YEAR ENDED MARCH 31, 2000. ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
19
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular Class A, Class B, Class C
or Class Y shares for each time period specified, (b) your investment has a 5%
return each year, and (c) the expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $704 $ 976 $1,269 $2,099
-------------------------------------------------------------------------------
Class B Shares $644 $ 1,050 $1,383 $2,474(1)
-------------------------------------------------------------------------------
Class C Shares $335 $ 723 $1,237 $2,650
-------------------------------------------------------------------------------
Class Y Shares $106 $ 332 $ 576 $1,276
-------------------------------------------------------------------------------
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $704 $ 976 $1,269 $2,099
-------------------------------------------------------------------------------
Class B Shares $244 $ 750 $1,283 $2,474(1)
-------------------------------------------------------------------------------
Class C Shares $235 $ 723 $1,237 $2,650
-------------------------------------------------------------------------------
Class Y Shares $106 $ 332 $ 576 $1,276
-------------------------------------------------------------------------------
</TABLE>
(1)REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
20
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
[GRAPHIC]
WADDELL & REED ADVISORS
SCIENCE AND TECHNOLOGY FUND
(FORMERLY UNITED SCIENCE AND TECHNOLOGY FUND) SEEKS LONG-TERM CAPITAL GROWTH.
PRINCIPAL STRATEGIES
Science and Technology Fund seeks to achieve its goal of growth by concentrating
its investments primarily in the equity securities of U.S. and foreign science
and technology companies. Science and technology companies are companies whose
products, processes or services, in the opinion of WRIMCO are being or are
expected to be significantly benefited by the use or commercial application of
scientific or technological developments or discoveries. The Fund may invest in
companies of any size.
WRIMCO typically emphasizes growth potential in selecting stocks; that is,
WRIMCO seeks companies in which earnings are likely to grow faster than the
economy. WRIMCO may look at a number of factors in selecting securities for the
Fund's portfolio. These include the issuer's:
- growth potential;
- earnings potential;
- management;
- industry position; and
- applicable economic and market conditions.
Generally, in determining whether to sell a stock, WRIMCO uses the same type of
analysis that it uses in buying stocks in order to determine whether the
security has ceased to offer significant growth potential. WRIMCO may also sell
a security to take advantage of more attractive investment opportunities or to
raise cash.
21
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Science and Technology Fund owns different types of securities, a
variety of factors can affect its investment performance, such as:
- the mix of securities in the Fund, particularly the relative weightings in,
and exposure to, different sectors of the science and technology
industries;
- rapid obsolescence of products or processes of companies in which the Fund
invests;
- government regulation in the science and technology industry;
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
- adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline; and
- WRIMCO's skill in evaluating and selecting securities for the Fund.
Market risk for small to medium sized companies may be greater than the market
risk for large companies. Smaller companies are more likely to have limited
financial resources and inexperienced management. As well, stock of smaller
companies may experience volatile trading and price fluctuations.
An investment in foreign securities presents additional risks such as currency
fluctuations and political or economic conditions affecting the foreign country.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST
Science and Technology Fund is designed for investors who seek long-term capital
growth by investing in an actively managed Fund concentrating in securities of
science and technology companies. This Fund is not suitable for all investors.
You should consider whether the Fund fits your particular investment objectives.
22
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
PERFORMANCE
SCIENCE AND TECHNOLOGY FUND
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year over the past ten
calendar years.
- The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
[CHART]
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31 EACH YEAR (%)
<TABLE>
<CAPTION>
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-4.57% 60.66% -4.03% 8.51% 9.78% 55.37% 8.35% 7.22% 59.31% 102.93%
===============================================================================================
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 61.66% (THE
FOURTH QUARTER OF 1999) AND THE LOWEST QUARTERLY RETURN WAS -15.89% (THE THIRD
QUARTER OF 1990). THE CLASS A RETURN FOR THE YEAR THROUGH MARCH 31, 2000 WAS
18.56%.
23
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999(%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF SCIENCE
AND TECHNOLOGY FUND 91.27% 40.63% 25.46%
-----------------------------------------------------------------------------------
S&P 400 Industrials Index 26.05% 29.77% 19.06%
-----------------------------------------------------------------------------------
Lipper Science and Technology
Funds Universe Average 134.77% 40.91% 29.91%
-----------------------------------------------------------------------------------
CLASS B SHARES OF SCIENCE
AND TECHNOLOGY FUND 53.62%
-----------------------------------------------------------------------------------
S&P 400 Industrials Index 26.05% 29.77% 19.06% 11.50%
-----------------------------------------------------------------------------------
Lipper Science and Technology
Funds Universe Average 134.77% 40.91% 29.91% 48.17%
-----------------------------------------------------------------------------------
CLASS C SHARES OF SCIENCE
AND TECHNOLOGY FUND 57.70%
-----------------------------------------------------------------------------------
S&P 400 Industrials Index 26.05% 29.77% 19.06% 11.50%
-----------------------------------------------------------------------------------
Lipper Science and Technology
Funds Universe Average 134.77% 40.91% 29.91% 48.17%
-----------------------------------------------------------------------------------
CLASS Y SHARES OF SCIENCE
AND TECHNOLOGY FUND 103.72% 39.63%
-----------------------------------------------------------------------------------
S&P 400 Industrials Index 26.05% 29.77% 19.06% 28.40%
-----------------------------------------------------------------------------------
Lipper Science and Technology
Funds Universe Average 134.77% 40.91% 29.91% 42.64%
===================================================================================
</TABLE>
THE INDEX SHOWN IS A BROAD-BASED, SECURITIES MARKET INDEX THAT IS UNMANAGED. THE
LIPPER AVERAGE IS A COMPOSITE OF MUTUAL FUNDS WITH GOALS SIMILAR TO THE GOAL OF
THE FUND.
(1) SINCE OCTOBER 4, 1999 FOR CLASS B SHARES, OCTOBER 4, 1999 FOR CLASS C SHARES
AND FEBRUARY 27, 1996 FOR CLASS Y SHARES. BECAUSE EACH CLASS COMMENCED
OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND PARTIAL MONTH
CALCULATIONS OF THE PERFORMANCE OF THE ABOVE INDEX ARE NOT AVAILABLE, INDEX
PERFORMANCE IS CALCULATED FROM OCTOBER 31, 1999, OCTOBER 31, 1999 AND
FEBRUARY 29, 1996, RESPECTIVELY.
24
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
FEES AND EXPENSES
SCIENCE AND TECHNOLOGY FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge
(Load) Imposed on
Purchases (as a percentage
of offering price) 5.75% None None None
--------------------------------------------------------------------------------
Maximum Deferred
Sales Charge (Load)(1)
(as a percentage of lesser
of amount invested or
redemption value) None(2) 5% 1% None
--------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(3)
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees 0.84% 0.84% 0.84% 0.84%
--------------------------------------------------------------------------------
Distribution and Service
(12b-1) Fees 0.23% 1.00% 1.00% None
--------------------------------------------------------------------------------
Other Expenses 0.19% 0.79% 0.61% 0.22%
--------------------------------------------------------------------------------
Total Annual Fund
Operating Expenses 1.26% 2.63% 2.45% 1.06%
================================================================================
</TABLE>
(1)THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
FIRST VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN
THE YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR, TO
3% FOR REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR
REDEMPTIONS MADE WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN
THE SIXTH YEAR AND TO 0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR
CLASS C SHARES, A 1% CDSC APPLIES TO THE LESSER OF AMOUNT INVESTED OR
REDEMPTION VALUE OF CLASS C SHARES REDEEMED WITHIN TWELVE MONTHS AFTER
PURCHASE. SOLELY FOR PURPOSES OF DETERMINING THE NUMBER OF MONTHS OR YEARS
FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF SHARES, ALL PAYMENTS DURING
A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON THE FIRST DAY OF THE
MONTH.
(2)A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3)MANAGEMENT FEES AND TOTAL ANNUAL FUND OPERATING EXPENSES HAVE BEEN RESTATED
TO REFLECT THE CHANGE IN MANAGEMENT FEES EFFECTIVE JUNE 30, 1999; OTHERWISE
EXPENSE RATIOS ARE BASED ON OTHER FUND-LEVEL EXPENSES FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
25
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular Class A, Class B, Class C
or Class Y shares for each time period specified, (b) your investment has a 5%
return each year, and (c) the expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $696 $ 952 $1,227 $2,010
--------------------------------------------------------------------------------
Class B Shares $666 $1,118 $1,496 $2,627(1)
--------------------------------------------------------------------------------
Class C Shares $348 $ 762 $1,303 $2,781
--------------------------------------------------------------------------------
Class Y Shares $108 $ 337 $ 585 $1,294
--------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $696 $952 $1,227 $2,010
--------------------------------------------------------------------------------
Class B Shares $266 $818 $1,396 $2,627(1)
--------------------------------------------------------------------------------
Class C Shares $248 $762 $1,303 $2,781
--------------------------------------------------------------------------------
Class Y Shares $108 $337 $ 585 $1,294
================================================================================
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
26
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
[GRAPHIC]
WADDELL & REED ADVISORS
SMALL CAP FUND
(FORMERLY UNITED SMALL CAP FUND) SEEKS GROWTH OF CAPITAL.
PRINCIPAL STRATEGIES
Small Cap Fund seeks to achieve its goal by investing primarily in common stocks
of domestic and foreign companies whose market capitalizations are within the
range of capitalizations of companies included in the Lipper, Inc. Small Cap
Category ("small cap stocks"). The Fund emphasizes relatively new or unseasoned
companies in their early stages of development or smaller companies positioned
in new or emerging industries where there is opportunity for rapid growth.
In selecting companies, WRIMCO seeks companies whose earnings, it believes, are
likely to grow faster than the economy. WRIMCO may look at a number of factors
relating to a company, such as:
- aggressive or creative management;
- technological or specialized expertise;
- new or unique products or services; and
- entry into new or emerging industries.
In general, WRIMCO may sell a security if it determines that the stock no longer
offers significant growth potential, which may be due to a change in the
business or management of the company or a change in the industry of the
company. As well, WRIMCO may sell a security to take advantage of more
attractive investment opportunities or to raise cash.
27
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Small Cap Fund owns different types of securities, a variety of factors
can affect its investment performance, such as:
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
- the mix of securities in the Fund, particularly the relative weightings in,
and exposure to, different sectors and industries;
- adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline; and
- WRIMCO's skill in evaluating and selecting securities for the Fund.
Market risk for small to medium sized companies may be greater than the market
risk for large companies. Smaller companies are more likely to have limited
financial resources and inexperienced management. As well, stock of smaller
companies may experience volatile trading and price fluctuations.
Due to the nature of the Fund's permitted investments, primarily the small cap
stocks of new and/or unseasoned companies, companies in their early stages of
development or smaller companies in new or emerging industries, the Fund may be
subject to the following additional risks:
- products offered may fail to sell as anticipated;
- a period of unprofitability may be experienced before a company develops
the expertise and clientele to succeed in an industry;
- the company may never achieve profitability; and
- economic, market and technological factors may cause the new industry
itself to lose favor with the public.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST
Small Cap Fund is designed for investors willing to accept greater risks than
are present with many other mutual funds. It is not intended for those investors
who desire assured income and conservation of capital. You should consider
whether the Fund fits your particular investment objectives.
28
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
PERFORMANCE
SMALL CAP FUND
The Fund has not been in operation for a full calendar year, therefore no
performance information (the bar chart and performance table) is included in
this prospectus.
[GRAPHIC]
--------------------------------------------------------------------------------
FEES AND EXPENSES
SMALL CAP FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from Class A Class B Class C Class Y
your investment) Shares Shares Shares Shares
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge
(Load) Imposed on
Purchases (as a percentage
of offering price) 5.75% None None None
--------------------------------------------------------------------------------
Maximum Deferred
Sales Charge (Load)(1)
(as a percentage of lesser
of amount invested or
redemption value) None(2) 5% 1% None
================================================================================
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE
FIRST YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR,
TO 3% FOR REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR
REDEMPTIONS MADE WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN
THE SIXTH YEAR AND TO 0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR
CLASS C SHARES, A 1% CDSC APPLIES TO THE LESSER OF AMOUNT INVESTED OR
REDEMPTION VALUE OF CLASS C SHARES REDEEMED WITHIN TWELVE MONTHS AFTER
PURCHASE. SOLELY FOR PURPOSES OF DETERMINING THE NUMBER OF MONTHS OR YEARS
FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF SHARES, ALL PAYMENTS
DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON THE FIRST DAY
OF THE MONTH.
(2) A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A
SHARES THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
29
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(3)
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.85% 0.85% 0.85% 0.85%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.25% 1.00% 1.00% None
--------------------------------------------------------------------------------
OTHER EXPENSES 0.40% 0.40% 0.40% 0.20%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.50% 2.25% 2.25% 1.05%
================================================================================
</TABLE>
(3)UNTIL NOVEMBER 1, 1999, WRIMCO VOLUNTARILY WAIVED ITS INVESTMENT MANAGEMENT
FEE. THE EXPENSES SHOWN FOR MANAGEMENT FEES REFLECT THE MAXIMUM ANNUAL FEE
PAYABLE. THE EXPENSE RATIOS FOR OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS
FOR THE CURRENT FISCAL YEAR. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
EXAMPLE
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular Class A, Class B, Class C
or Class Y shares for each time period specified, (b) your investment has a 5%
return each year, and (c) the expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS
--------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares $719 $1,022
--------------------------------------------------------------------------------
Class B Shares $628 $1,003
--------------------------------------------------------------------------------
Class C Shares $328 $ 703
--------------------------------------------------------------------------------
Class Y Shares $107 $ 334
--------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS
--------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares $719 $1,022
--------------------------------------------------------------------------------
Class B Shares $228 $ 703
--------------------------------------------------------------------------------
Class C Shares $228 $ 703
--------------------------------------------------------------------------------
Class Y Shares $107 $ 334
================================================================================
</TABLE>
30
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
[GRAPHIC]
WADDELL & REED ADVISORS
VANGUARD FUND
(FORMERLY UNITED VANGUARD FUND) SEEKS THE APPRECIATION OF YOUR INVESTMENT.
PRINCIPAL STRATEGY
Vanguard Fund seeks to achieve its goal by investing primarily in a diversified
portfolio of common stock issued by large to medium sized U.S. and foreign
companies that WRIMCO believes have appreciation possibilities. WRIMCO typically
emphasizes growth stocks, but also includes value stocks in the Fund's portfolio
to provide a blend of value and growth potential. Value stocks are those that
WRIMCO believes are currently selling below their true worth. Growth stocks are
those whose earnings WRIMCO believes are likely to grow faster than the economy.
The Fund may invest in companies of any size.
WRIMCO attempts to select securities with appreciation possibilities by looking
at many factors. These include:
- changes in economic and political conditions;
- the short-term and long-term outlook for the industry being analyzed;
- the management capability of the company being considered; and
- the company's market position, product line, technological position and
prospects for increased earnings.
WRIMCO may also analyze the demands of investors for the security relative to
its price. Securities may be chosen when WRIMCO anticipates a development that
might have an effect on the value of a security.
In general, WRIMCO will sell a security if it determines that the security no
longer presents sufficient appreciation potential. As well, WRIMCO may sell a
security to take advantage of more attractive investment opportunities or to
raise cash.
31
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Vanguard Fund owns different types of securities, a variety of factors
can affect its investment performance, such as:
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
- the mix of securities in the Fund, particularly the relative weightings in,
and exposure to, different sectors and industries;
- adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline; and
- WRIMCO's skill in evaluating and selecting securities for the Fund.
Market risk for medium sized companies may be greater than the market risk for
large companies. Such companies are more likely to have limited financial
resources and inexperienced management. As well, stock of these companies may
experience volatile trading and price fluctuations.
As well, the Fund may invest a significant portion of its assets in foreign
securities. Foreign securities present additional risks such as currency
fluctuations and political or economic conditions affecting the foreign
countries.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST
Vanguard Fund is designed for investors seeking long-term investment growth. You
should consider whether the Fund fits your particular investment objectives.
32
<PAGE>
[GRAPHIC]
-------------------------------------------------------------------------------
PERFORMANCE
VANGUARD FUND
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year over the past ten
calendar years.
- The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
[CHART]
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31 EACH YEAR (%)
<TABLE>
<CAPTION>
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-4.88% 28.14% 2.61% 14.25% 6.16% 24.73% 7.54% 19.77% 31.21% 43.91%
===============================================================================================
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 31.10% (THE
FOURTH QUARTER OF 1999) AND THE LOWEST QUARTERLY RETURN WAS -16.18% (THE THIRD
QUARTER OF 1990). THE CLASS A RETURN FOR THE YEAR THROUGH MARCH 31, 2000 WAS
18.20%.
33
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
VANGUARD FUND 35.63% 23.38% 15.99%
--------------------------------------------------------------------------------
S&P 500 Index 21.09% 28.59% 18.23%
--------------------------------------------------------------------------------
Lipper Growth Funds
Universe Average 29.27% 25.04% 16.52%
--------------------------------------------------------------------------------
CLASS B SHARES OF
VANGUARD FUND 21.68%
--------------------------------------------------------------------------------
S&P 500 Index 21.09% 28.59% 18.23% 8.04%
--------------------------------------------------------------------------------
Lipper Growth Funds
Universe Average 29.27% 25.04% 16.52% 14.43%
--------------------------------------------------------------------------------
CLASS C SHARES OF
VANGUARD FUND 25.68%
--------------------------------------------------------------------------------
S&P 500 Index 21.09% 28.59% 18.23% 8.04%
--------------------------------------------------------------------------------
Lipper Growth Funds
Universe Average 29.27% 25.04% 16.52% 14.43%
--------------------------------------------------------------------------------
CLASS Y SHARES OF
VANGUARD FUND 44.22% 22.26%
--------------------------------------------------------------------------------
S&P 500 Index 21.09% 28.59% 18.23% 26.41%
--------------------------------------------------------------------------------
Lipper Growth Funds
Universe Average 29.27% 25.04% 16.52% 22.44%
================================================================================
</TABLE>
THE INDEX SHOWN IS A BROAD-BASED, SECURITIES MARKET INDEX THAT IS
UNMANAGED. THE LIPPER AVERAGE IS A COMPOSITE OF MUTUAL FUNDS WITH
GOALS SIMILAR TO THE GOAL OF THE FUND.
(1)SINCE OCTOBER 4, 1999 FOR CLASS B SHARES, OCTOBER 4, 1999 FOR CLASS
C SHARES AND SEPTEMBER 8, 1995 FOR CLASS Y SHARES. BECAUSE EACH CLASS
COMMENCED OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND
PARTIAL MONTH CALCULATIONS OF THE PERFORMANCE OF THE ABOVE INDEX
(INCLUDING INCOME) ARE NOT AVAILABLE, INDEX PERFORMANCE IS CALCULATED
FROM OCTOBER 31, 1999, OCTOBER 31, 1999 AND SEPTEMBER 30, 1995,
RESPECTIVELY.
34
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
FEES AND EXPENSES
VANGUARD FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
--------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(3)
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.68% 0.68% 0.68% 0.68%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.25% 1.00% 1.00% None
--------------------------------------------------------------------------------
OTHER EXPENSES 0.18% 0.18% 0.18% 0.18%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.11% 1.86% 1.86% 0.86%
--------------------------------------------------------------------------------
</TABLE>
(1)THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE
FIRST YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR,
TO 3% FOR REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR
REDEMPTIONS MADE WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN
THE SIXTH YEAR AND TO 0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR
CLASS C SHARES, A 1% CDSC APPLIES TO THE LESSER OF AMOUNT INVESTED OR
REDEMPTION VALUE OF CLASS C SHARES REDEEMED WITHIN TWELVE MONTHS AFTER
PURCHASE. SOLELY FOR PURPOSES OF DETERMINING THE NUMBER OF MONTHS OR YEARS
FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF SHARES, ALL PAYMENTS
DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON THE FIRST DAY
OF THE MONTH.
(2)A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3)MANAGEMENT FEES AND TOTAL ANNUAL FUND OPERATING EXPENSES HAVE BEEN RESTATED
TO REFLECT THE CHANGE IN MANAGEMENT FEES EFFECTIVE JUNE 30, 1999; OTHERWISE,
EXPENSE RATIOS ARE BASED ON OTHER FUND-LEVEL EXPENSES FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 1999, AND FOR CLASS B AND CLASS C, THE EXPENSES
ATTRIBUTABLE TO EACH CLASS THAT ARE ANTICIPATED FOR THE CURRENT YEAR. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
35
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular Class A, Class B, Class C
or Class Y shares for each time period specified, (b) your investment has a 5%
return each year, and (c) the expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $682 $908 $1,151 $1,849
--------------------------------------------------------------------------------
Class B Shares $589 $885 $1,106 $1,982(1)
--------------------------------------------------------------------------------
Class C Shares $289 $585 $1,006 $2,180
--------------------------------------------------------------------------------
Class Y Shares $ 88 $274 $ 477 $1,061
--------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $682 $908 $1,151 $1,849
--------------------------------------------------------------------------------
Class B Shares $189 $585 $1,006 $1,982(1)
--------------------------------------------------------------------------------
Class C Shares $189 $585 $1,006 $2,180
--------------------------------------------------------------------------------
Class Y Shares $ 88 $274 $ 477 $1,061
--------------------------------------------------------------------------------
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
36
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
THE INVESTMENT PRINCIPLES OF THE FUNDS
INVESTMENT GOALS, PRINCIPAL STRATEGIES AND OTHER INVESTMENTS
WADDELL & REED ADVISORS ACCUMULATIVE FUND
The primary goal of the Fund is capital growth. As a secondary goal, the Fund
seeks current income. The Fund seeks to achieve these goals by investing
primarily in a diversified portfolio of common stocks, or securities convertible
into common stocks, of U.S. and foreign companies, the risks of which are, in
WRIMCO's opinion, consistent with the Fund's goals. Generally, the Fund invests
in stocks with large market capitalization that, in WRIMCO's opinion, have
slightly higher market volatility and slightly higher growth rates than other
stocks. There is no guarantee that the Fund will achieve its goals.
As a temporary defensive measure, at times when WRIMCO believes that common
stocks do not offer a good investment opportunity, the Fund may hold up to all
of its assets in cash, debt securities, typically, of investment grade (rated
BBB or higher by Standard & Poor's (OS&PO) or Baa or higher by Moody's Investors
Service (OMISO) or, if unrated, deemed by WRIMCO to be of comparable quality),
preferred stock, or common stocks that WRIMCO chooses because the securities are
less volatile rather than for their growth potential. By taking a temporary
defensive position in any of these ways, the Fund may not achieve its investment
objectives.
WADDELL & REED ADVISORS INTERNATIONAL GROWTH FUND
The primary goal of the Fund is long-term capital appreciation, with current
income as a secondary goal. The Fund seeks to achieve these goals by investing
primarily in a diversified portfolio of common stocks of foreign issuers. There
is no guarantee that the Fund will achieve its goals.
The Fund may also invest, to a lesser extent, in preferred stocks and debt
securities. The debt securities may be of any maturity and will typically be
investment grade.
Under normal conditions, the Fund invests at least 80% of its total assets in
foreign securities and at least 65% of its total assets in issuers of at least
three foreign countries. The Fund generally limits its holdings so that no more
than 75% of its total assets are invested in issuers of a single foreign
country. As well, the Fund will invest at least 65% of its total assets in
growth securities (usually common stock) during normal market conditions. Growth
securities
37
<PAGE>
are those whose earnings, WRIMCO believes, are likely to have strong growth over
several years.
When WRIMCO believes that a temporary defensive position is desirable, WRIMCO
may take certain steps with respect to up to all of the Fund's assets by
investing in debt securities (including commercial paper or short-term U.S.
Government securities) or preferred stocks, or both. By taking a temporary
defensive position, the Fund may not achieve its investment objectives.
WADDELL & REED ADVISORS NEW CONCEPTS FUND
The goal of the Fund is the growth of your investment. The Fund seeks to achieve
its goal by investing primarily in a diversified portfolio of common stocks of
U.S. companies whose market capitalizations are within the range of
capitalizations of companies comprising the Russell Mid-Cap and that WRIMCO
believes offer above-average growth potential. For this purpose, the Fund
considers a company's capitalization at the time the Fund acquires the company's
securities, and the company need not be listed in the Russell Mid-Cap. Companies
whose capitalization falls outside the range of the Russell Mid-Cap after
purchase continue to be considered medium capitalization companies for purpose
of the Fund's investment policy. There is no guarantee that the Fund will
achieve its goal.
In addition to common stocks, the Fund may invest in convertible securities,
preferred stocks and debt securities of any maturity and mostly of investment
grade. The Fund may also invest up to 10% of its total assets in foreign
securities, but only those that are exchange-traded or quoted on an automatic
quotations system; represented by U.S.-traded American Depositary Receipts; or
issued or guaranteed by a foreign government (or any of its subdivisions,
agencies or instrumentalities).
When WRIMCO believes that a temporary defensive position is desirable, the Fund
may invest up to all of its assets in debt securities (including commercial
paper, short-term securities issued by the U.S. Government or its agencies or
instrumentalities and other money market instruments) and/or preferred stocks.
The Fund may also use options and futures contracts for defensive purposes. By
taking a defensive position the Fund may not achieve its investment objective.
38
<PAGE>
WADDELL & REED ADVISORS SCIENCE AND TECHNOLOGY FUND
The goal of the Fund is long-term capital growth. The Fund seeks to achieve this
goal by investing primarily in science and technology companies. Science and
technology companies are companies whose products, processes or services, in
WRIMCO's opinion, are being or are expected to be significantly benefited by the
use or commercial application of scientific or technological discoveries. There
is no guarantee that the Fund will achieve its goal.
The Fund invests in such areas as:
- aerospace and defense electronics;
- biotechnology;
- business machines;
- cable and broadband access;
- communications and electronic equipment;
- computer software and services;
- computer systems;
- electronics;
- electronic media;
- internet and internet-related services;
- medical devices and drugs;
- medical and hospital supplies and services; and
- office equipment and supplies.
The Fund primarily owns common stock; however, it may invest, to a lesser
extent, in preferred stock, debt securities and convertible securities. The Fund
may invest a limited amount of its assets in foreign securities.
Under normal economic and market conditions, the Fund will not invest more than
20% of its total assets in securities other than those of science or technology
companies. When WRIMCO believes that a temporary defensive position is
desirable, the Fund may invest up to all of its assets in U.S. Government
securities or other debt securities, mostly of investment grade. By taking a
temporary defensive position the Fund may not achieve its investment objective.
39
<PAGE>
WADDELL & REED ADVISORS SMALL CAP FUND
The goal of the Fund is growth of capital. The Fund seeks to achieve its goal by
investing primarily in small cap common stocks of companies that are relatively
new or unseasoned, companies in their early stages of development, or smaller
companies positioned in new or emerging industries where there is an opportunity
for rapid growth. The Fund considers a company's capitalization at the time the
Fund acquires the company's common stock. Common stock of a company whose
capitalization exceeds the range of the Lipper, Inc. Small Cap Category after
purchase will not be sold solely because of its increased capitalization. There
is no guarantee that the Fund will achieve its goal.
The Fund will, under normal market conditions, invest at least 65% of its total
assets in small cap stocks. In addition to common stocks, the Fund may also
invest in securities convertible into common stocks, preferred stocks and debt
securities that are mostly of investment grade. The Fund may also buy foreign
securities, however, it may not invest more than 10% of its total assets in
foreign securities.
When WRIMCO believes that a temporary defensive position is desirable, the Fund
may invest up to all of its assets in debt securities (including commercial
paper or short-term U.S. Government securities) or preferred stocks, or both. By
taking a temporary defensive position, the Fund may not achieve its investment
objective.
WADDELL &REED ADVISORS VANGUARD FUND
The goal of the Fund is the appreciation of your investment. The Fund seeks to
achieve this goal through a diversified holding of securities, primarily those
issued by large to medium sized U.S. and foreign companies that WRIMCO believes
have appreciation possibilities. There is no guarantee that the Fund will
achieve its goal.
The Fund invests primarily in common stock but may also own, to a limited
extent, preferred stock and debt securities, typically of investment grade and
of any maturity. The Fund may also own convertible securities. As well, the Fund
may invest, to a lesser extent, in foreign securities.
At times, as a temporary defensive measure, the Fund may invest up to all of its
assets in either debt securities (which may include money market instruments
held as cash reserves) or preferred stocks or both. By taking a temporary
defensive position in either or both of these ways the Fund may not achieve its
investment objective.
40
<PAGE>
ALL FUNDS
Each Fund may also invest in and use other types of instruments in seeking to
achieve its goal(s). For example, each Fund is permitted to invest in options,
futures contracts, asset-backed securities and other derivative instruments if
it is permitted to invest in the type of asset by which the return on, or value
of, the derivative is measured.
You will find more information about each Fund's permitted investments and
strategies, as well as the restrictions that apply to them, in its Statement of
Additional Information ("SAI").
RISK CONSIDERATIONS OF PRINCIPAL STRATEGIES AND OTHER INVESTMENTS
Risks exist in any investment. Each Fund is subject to equity risk and other
market risk, financial risk and, in some cases, prepayment risk.
- Market risk is the possibility of a change in the price of the security. The
prices of common stocks and other equity securities generally fluctuate more
than those of other investments. A Fund may lose a substantial part, or even
all, of its investment in a company's stock. Growth stocks may experience
greater price volatility than value stocks. To the extent a Fund invests in
fixed income securities, the price of a fixed income security may be affected
by changes in interest rates. Bonds with longer maturities are more
interest-rate sensitive. For example, if interest rates increase, the value of
a bond with a longer maturity is more likely to decrease. Because of market
risk, the share price of a Fund will likely change as well.
- Financial risk is based on the financial situation of the issuer of the
security. To the extent a Fund invests in debt securities, the Fund's
financial risk depends on the credit quality of the underlying securities in
which it invests. For an equity investment, a Fund's financial risk may
depend, for example, on the earnings performance of the company issuing the
stock.
- Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid before
its expected maturity date.
Certain types of each Fund's authorized investments and strategies (such as
foreign securities, junk bonds and derivative instruments) involve special
risks. Depending on how much a Fund invests or uses these strategies, these
special risks may become significant. For example, foreign investments may
subject a Fund to restrictions on receiving the investment proceeds from a
foreign country, foreign taxes, and potential difficulties in enforcing
41
<PAGE>
contractual obligations, as well as fluctuations in foreign currency values and
other developments that may adversely affect a foreign country. Junk bonds pose
a greater risk of nonpayment of interest or principal than higher-rated bonds.
Derivative instruments may expose a Fund to greater volatility than an
investment in a more traditional stock, bond or other security.
Because each Fund owns different types of investments, its performance will be
affected by a variety of factors. The value of a Fund's investments and the
income it generates will vary from day to day, generally reflecting changes in
interest rates, market conditions and other company and economic news.
Performance will also depend on WRIMCO's skill in selecting investments.
Accumulative Fund, International Growth Fund and New Concepts Fund may actively
trade securities in seeking to achieve their goal. Doing so may increase
transaction costs (which may reduce performance) and increase distributions paid
by the Fund, which may increase your taxable income.
42
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
YOUR ACCOUNT
CHOOSING A SHARE CLASS
Each Fund offers four classes of shares: Class A, Class B, Class C and Class Y.
Each class has its own sales charge, if any, and expense structure. The decision
as to which class of shares is best suited to your needs depends on a number of
factors that you should discuss with your financial advisor. Some factors to
consider are how much you plan to invest and how long you plan to hold your
investment. If you are investing a substantial amount and plan to hold your
shares for a long time, Class A shares may be the most appropriate for you.
Class B and Class C shares are not available for investments of $2 million or
more. If you are investing a lesser amount, you may want to consider Class B
shares (if investing for at least seven years) or Class C shares (if investing
for less than seven years). Class Y shares are designed for institutional
investors and others investing through certain intermediaries, as described
below.
Since your objectives may change over time, you may want to consider another
class when you buy additional Fund shares. All of your future investments in a
Fund will be made in the class you select when you open your account, unless you
inform the Fund otherwise, in writing, when you make a future investment.
43
<PAGE>
<TABLE>
<CAPTION>
GENERAL COMPARISON OF CLASS A, CLASS B AND CLASS C SHARES
CLASS A CLASS B CLASS C
------------------------------------------------------------------------------------------------
<S> <C> <C>
Initial sales charge No initial sales charge No initial sales charge
------------------------------------------------------------------------------------------------
No deferred sales charge(1) Deferred sales charge on A 1% deferred sales
shares you sell within six charge on shares you
years after purchase sell within twelve
months after purchase
------------------------------------------------------------------------------------------------
Maximum distribution Maximum distribution Maximum distribution
and service (12b-1) fees and service (12b-1) fees and service (12b-1) fees
of 0.25% of 1.00% of 1.00%
------------------------------------------------------------------------------------------------
For an investment of Converts to Class A Does not convert to
$2 million or more, shares 8 years after the Class A shares, so
only Class A shares month in which the annual expenses do
are available shares were purchased, not decrease
thus reducing future
annual expenses
------------------------------------------------------------------------------------------------
For an investment of $300,000
or more, your financial advisor
typically will recommend
purchase of Class A shares due
to a reduced sales charge and
lower annual expenses
================================================================================================
</TABLE>
(1) A 1% CDSC MAY APPLY TO PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
EACH FUND HAS ADOPTED A DISTRIBUTION AND SERVICE PLAN ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, for each of its
Class A, Class B and Class C shares. Under the Class A Plan, each Fund may pay
Waddell & Reed, Inc. a fee of up to 0.25%, on an annual basis, of the average
daily net assets of the Class A shares. This fee is to reimburse Waddell & Reed,
Inc. for the amounts it spends for distributing the Fund's Class A shares,
providing service to Class A shareholders and/or maintaining Class A shareholder
accounts. Under the Class B Plan and the Class C Plan, each Fund may pay Waddell
& Reed, Inc., on an annual basis, a service fee of up to 0.25% of the average
daily net assets of the class to compensate Waddell & Reed, Inc. for providing
service to shareholders of that class and/or maintaining shareholder accounts
for that class and a distribution fee of up to 0.75% of the average daily net
assets of the class to compensate Waddell & Reed, Inc. for distributing shares
of that class. Because a class's fees are paid out of the assets of that class
on an ongoing basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
44
<PAGE>
CLASS A SHARES are subject to an initial sales charge when you buy them, based
on the amount of your investment, according to the table below. Class A shares
pay an annual 12b-1 fee of up to 0.25% of average Class A net assets. The
ongoing expenses of this class are lower than those for Class B or Class C
shares and higher than those for Class Y shares.
<TABLE>
<CAPTION>
SIZE OF PURCHASE
SALES CHARGE REALLOWANCE
AS APPROX. TO DEALERS
SALES CHARGE PERCENT OF AS PERCENT
AS PERCENT OF AMOUNT OF OFFERING
OFFERING PRICE INVESTED PRICE
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Under $100,000 5.75% 6.10% 5.00%
--------------------------------------------------------------------------------
$100,000 to less than $200,000 4.75 4.99 4.00
--------------------------------------------------------------------------------
$200,000 to less than $300,000 3.50 3.63 2.80
--------------------------------------------------------------------------------
$300,000 to less than $500,000 2.50 2.56 2.00
--------------------------------------------------------------------------------
$500,000 to less than $1,000,000 1.50 1.52 1.20
--------------------------------------------------------------------------------
$1,000,000 to less than $2,000,000 1.00 1.01 0.75
--------------------------------------------------------------------------------
$2,000,000 and over 0.00(1) 0.00(1) 0.50
================================================================================
</TABLE>
(1) NO SALES CHARGE IS PAYABLE AT THE TIME OF PURCHASE ON INVESTMENTS OF $2
MILLION OR MORE, ALTHOUGH FOR SUCH INVESTMENTS A FUND MAY IMPOSE A CDSC OF
1.00% ON REDEMPTIONS MADE WITHIN TWELVE MONTHS OF THE PURCHASE. THE CDSC IS
ASSESSED ON AN AMOUNT EQUAL TO THE LESSER OF THE THEN CURRENT MARKET VALUE
OR THE COST OF THE SHARES BEING REDEEMED. ACCORDINGLY, NO SALES CHARGE IS
IMPOSED ON INCREASES IN NET ASSET VALUE ABOVE THE INITIAL PURCHASE PRICE.
Waddell & Reed, Inc. or its affiliate(s) may pay additional compensation from
its own resources to securities dealers based upon the value of shares of a Fund
owned by the dealer for its own account or for its customers. Waddell & Reed,
Inc. may also provide compensation from its own resources to securities dealers
with respect to shares of the Funds purchased by customers of such dealers
without payment of a sales charge.
45
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
LOWER SALES CHARGES ARE AVAILABLE BY:
- Combining additional purchases of Class A shares of any of the funds in the
Waddell & Reed Advisors Funds, and/or the W&R Funds except Class A shares of
Waddell & Reed Advisors Cash Management (formerly known as United Cash
Management) or Class A shares of W&R Funds Money Market Fund unless acquired
by exchange for Class A shares on which a sales charge was paid (or as a
dividend or distribution on such acquired shares), with the net asset value
("NAV") of Class A shares already held ("Rights of Accumulation");
- Grouping all purchases of Class A shares, except shares of Waddell & Reed
Advisors Cash Management or W&R Funds Money Market Fund, made during a
thirteen-month period ("Letter of Intent"); and
- Grouping purchases by certain related persons.
Additional information and applicable forms are available from your financial
advisor.
WAIVERS FOR CERTAIN INVESTORS
CLASS A SHARES MAY BE PURCHASED AT NAV BY:
- The Directors and officers of the Fund or of any affiliated entity of Waddell
& Reed, Inc., employees of Waddell & Reed, Inc., employees of its affiliates,
financial advisors of Waddell & Reed, Inc. and the spouse, children, parents,
children's spouses and spouse's parents of each;
- Certain retirement plans and certain trusts for these persons; and
- Until March 31, 2001, clients of Legend Equities Corporation ("Legend") if the
purchase is made with the proceeds of the redemption of shares of a mutual
fund which is not within the Waddell & Reed Advisors Funds or W&R Funds and
the purchase is made within 60 days of such redemption.
You will find more information in the SAI about sales charge reductions and
waivers.
CONTINGENT DEFERRED SALES CHARGE. A CDSC may be assessed against your redemption
amount of Class B or Class C shares or certain Class A shares and paid to
Waddell & Reed, Inc. (the "Distributor"), as further described below. The
purpose of the CDSC is to compensate the Distributor for the costs incurred by
it in connection with the sale of the Fund's Class B or Class C shares or with
Class A investments of $2 million or more at NAV. The CDSC
46
<PAGE>
will not be imposed on shares representing payment of dividends or other
distributions or on amounts which represent an increase in the value of a
shareholder's account resulting from capital appreciation above the amount paid
for the shares purchased during the CDSC period. For Class B, the date of
redemption is measured in calendar months from the month of purchase. Solely for
purposes of determining the number of months or years from the time of any
payment for the purchase of shares, all payments during a month are totaled and
deemed to have been made on the first day of the month. The CDSC is applied to
the lesser of amount invested or redemption value.
To keep your CDSC as low as possible, each time you place a request to redeem
shares, the Fund assumes that a redemption is made first of shares not subject
to a deferred sales charge (including shares which represent appreciation on
shares held, reinvested dividends and distributions), and then of shares that
represent the lowest sales charge.
Unless instructed otherwise, a Fund, when requested to redeem a specific dollar
amount, will redeem additional shares of the applicable class that are equal in
value to the CDSC. For example, should you request a $1,000 redemption and the
applicable CDSC is $27, the Fund will redeem shares having an aggregate NAV of
$1,027, absent different instructions.
CLASS B SHARES are not subject to an initial sales charge when you buy them.
However, you may pay a CDSC if you sell your Class B shares within six years of
their purchase, based on the table below. Class B shares pay an annual 12b-1
service fee of up to 0.25% of average net assets and a distribution fee of up to
0.75% of average net assets. Over time, these fees will increase the cost of
your investment and may cost you more than if you had purchased Class A shares.
Class B shares and any dividends and distributions paid on such shares
automatically convert to Class A shares eight years after the end of the month
in which the shares were purchased. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The Class A shares have lower ongoing expenses.
The Fund will redeem your Class B shares at their NAV next calculated after
receipt of a written request for redemption in good order, subject to the CDSC
discussed below.
47
<PAGE>
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
ON SHARES SOLD WITHIN YEAR AS A % OF AMOUNT SUBJECT TO CHARGE
<S> <C>
1 5.0%
--------------------------------------------------------------------------------
2 4.0%
--------------------------------------------------------------------------------
3 3.0%
--------------------------------------------------------------------------------
4 3.0%
--------------------------------------------------------------------------------
5 2.0%
--------------------------------------------------------------------------------
6 1.0%
--------------------------------------------------------------------------------
7+ 0.0%
================================================================================
</TABLE>
In the table, a "year" is a 12-month period. In applying the CDSC, all purchases
are considered to have been made on the first day of the month in which the
purchase was made.
For example, if a shareholder opens an account on July 14, 2000, then redeems
all Class B shares on July 12, 2001, the shareholder will pay a CDSC of 4%, the
rate applicable to redemptions made within the second year of purchase. All
Class B purchases made prior to July 1, 2000 will be automatically accelerated
to the revised method of calculating the CDSC. Any purchase made in 1999 will be
deemed to have been made on December 1, 1998. Any purchase made from January 1,
2000 to June 30, 2000 will be deemed to have been made on December 1, 1999.
CLASS C SHARES are not subject to an initial sales charge when you buy them, but
if you sell your Class C shares within twelve months after purchase, you will
pay a 1% CDSC. For purposes of the CDSC, purchases of Class C shares within a
month will be considered as being purchased on the first day of the month. Class
C shares pay an annual 12b-1 service fee of up to 0.25% of average net assets
and a distribution fee of up to 0.75% of average net assets. Over time, these
fees will increase the cost of your investment and may cost you more than if you
had purchased Class A shares. Class C shares do not convert to any other class.
For Class C shares, the CDSC will be applied to the lesser of amount invested or
redemption value of shares that have been held for twelve months or less.
48
<PAGE>
THE CDSC WILL NOT APPLY IN THE FOLLOWING CIRCUMSTANCES:
- redemptions of shares requested within one year of the shareholder's death or
disability, provided the Fund is notified of the death or disability at the
time of the request and furnished proof of such event satisfactory to the
Distributor.
- redemptions of shares made to satisfy required minimum distributions after age
70 1/2 from a qualified retirement plan, a required minimum distribution from
an individual retirement account, Keogh plan or custodial account under
section 403(b)(7) of the Internal Revenue Code of 1986, as amended ("Code"), a
tax-free return of an excess contribution, or that otherwise results from the
death or disability of the employee, as well as in connection with redemptions
by any tax-exempt employee benefit plan for which, as a result of a subsequent
law or legislation, the continuation of its investment would be improper.
- redemptions of shares purchased by current or retired Directors of the Fund,
and Directors of affiliated companies, current or retired officers or
employees of the Fund, WRIMCO, the Distributor or their affiliated companies,
financial advisors of Waddell & Reed, Inc., and by the members of immediate
families of such persons.
- redemptions of shares made pursuant to a shareholder's participation in any
systematic withdrawal service adopted for a Fund. (The service and this
exclusion from the CDSC do not apply to a one-time withdrawal.)
- redemptions the proceeds of which are reinvested within forty-five days in
shares of the same class of the Fund as that redeemed.
- the exercise of certain exchange privileges.
- redemptions effected pursuant to each Fund's right ("other than Vanguard Fund)
to liquidate a shareholder's shares if the aggregate NAV of those shares is
less than $500.
- redemptions effected by another registered investment company by virtue of a
merger or other reorganization with a Fund or by a former shareholder of such
investment company of shares of a Fund acquired pursuant to such
reorganization.
These exceptions may be modified or eliminated by a Fund at any time without
prior notice to shareholders, except with respect to redemptions effected
pursuant to the Fund's right to liquidate a shareholder's shares, which requires
certain notice.
49
<PAGE>
CLASS Y SHARES are not subject to a sales charge or annual 12b-1 fees.
Class Y shares are only available for purchase by:
- participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401 of the Code, including 401(k)
plans, when the plan has 100 or more eligible employees and holds the shares
in an omnibus account on the Fund's records;
- banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an omnibus
account on the Fund's records;
- government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more; and
- certain retirement plans and trusts for employees and financial advisors of
Waddell & Reed, Inc. and its affiliates.
WAYS TO SET UP YOUR ACCOUNT
The different ways to set up (register) your account are listed below.
INDIVIDUAL OR JOINT TENANTS
FOR YOUR GENERAL INVESTMENT NEEDS
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
BUSINESS OR ORGANIZATION
FOR INVESTMENT NEEDS OF CORPORATIONS, ASSOCIATIONS, PARTNERSHIPS, INSTITUTIONS
OR OTHER GROUPS
RETIREMENT PLANS
TO SHELTER YOUR RETIREMENT SAVINGS FROM INCOME TAXES
Retirement plans allow individuals to shelter investment income and capital
gains from current income taxes. In addition, contributions to these accounts
("other than Roth IRAs and Education IRAs) may be tax-deductible.
- INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) allow a certain individual under age
70 1/2, with earned income, to invest up to $2,000 per tax year. The maximum
for an investor and his or her spouse is $4,000 ($2,000 for each spouse) or,
if less, the couple's combined earned income for the taxable year.
- IRA ROLLOVERS retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
- ROTH IRAS allow certain individuals to make nondeductible contributions up to
$2,000 per year. The maximum annual contribution for an investor and his or
her spouse is $4,000 ($2,000 for each spouse) or, if less, the
50
<PAGE>
couple's combined earned income for the taxable year. Withdrawals of earnings
may be tax free if the account is at least five years old and certain other
requirements are met.
- EDUCATION IRAS are established for the benefit of a minor, with nondeductible
contributions, up to $500 per year, and permit tax-free withdrawals to pay the
higher education expenses of the beneficiary.
- SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAS) provide business owners or those
with self-employed income (and their eligible employees) with many of the same
advantages as a Profit Sharing Plan, but with fewer administrative
requirements.
- SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLANS) can be established
by small employers to contribute to and allow their employees to contribute a
portion of their wages pre-tax to retirement accounts. This plan-type
generally involves fewer administrative requirements than 401(k) or other
qualified plans.
- KEOGH PLANS allow self-employed individuals to make tax-deductible
contributions for themselves of up to 25% of their annual earned income, with
a maximum of $30,000 per year.
- PENSION AND PROFIT-SHARING PLANS, INCLUDING 401(K) PLANS, allow corporations
and nongovernmental tax-exempt organizations of all sizes and/or their
employees to contribute a percentage of the employees' wages or other amounts
on a tax-deferred basis. These accounts need to be established by the
administrator or trustee of the plan.
- 403(b) CUSTODIAL ACCOUNTS are available to employees of public school systems,
churches and certain types of charitable organizations.
- 457 ACCOUNTS allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.
GIFTS OR TRANSFERS TO A MINOR
TO INVEST FOR A CHILD'S EDUCATION OR OTHER FUTURE NEEDS
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Transfers to Minors Act ("UTMA") or the Uniform Gifts
to Minors Act ("UGMA").
TRUST
FOR MONEY BEING INVESTED BY A TRUST
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.
51
<PAGE>
BUYING SHARES
YOU MAY BUY SHARES OF EACH OF THE FUNDS through Waddell & Reed, Inc. and its
financial advisors or through advisors of Legend. To open your account you must
complete and sign an application. Your financial advisor can help you with any
questions you might have.
TO PURCHASE ANY CLASS OF SHARES BY CHECK, make your check payable to Waddell &
Reed, Inc. Mail the check, along with your completed application, to:
Waddell & Reed, Inc.
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
TO PURCHASE CLASS Y SHARES BY WIRE, you must first obtain an account number by
calling 800-366-2520, then mail a completed application to Waddell & Reed, Inc.,
at the above address, or fax it to 913-236-5044. Instruct your bank to wire the
amount you wish to invest, along with the account number and registration, to
UMB Bank, n.a., ABA Number 101000695, for the account of Waddell & Reed Number
9800007978, Special Account for Exclusive Benefit of Customers FBO Customer Name
and Account Number.
You may also buy Class Y shares of a Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements regarding the purchase of
Class Y shares.
THE PRICE TO BUY A FUND SHARE is its offering price, which is calculated every
business day.
The OFFERING PRICE of a share (the price to buy one share of a particular class)
is the next NAV calculated per share of that class plus, for Class A shares, the
sales charge shown in the table.
In the calculation of a Fund's NAV:
- The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
- Bonds are generally valued according to prices quoted by an independent
pricing service.
52
<PAGE>
- Short-term debt securities are valued at amortized cost, which approximates
market value.
- Other investment assets for which market prices are unavailable are valued at
their fair value by or at the direction of the Board of Directors.
EACH FUND IS OPEN FOR BUSINESS each day the New York Stock Exchange (the "NYSE")
is open. The Funds normally calculate their NAVs as of the close of business of
the NYSE, normally 4 p.m. Eastern time, except that an option or futures
contract held by a Fund may be priced at the close of the regular session of any
other securities exchange on which that instrument is traded.
The Funds may invest in securities listed on foreign exchanges which may trade
on Saturdays or on U.S. national business holidays when the NYSE is closed.
Consequently, the NAV of Fund shares may be significantly affected on days when
a Fund does not price its shares and when you are not able to purchase or redeem
a Fund's shares. Similarly, if an event materially affecting the value of
foreign investments or foreign currency exchange rates occurs prior to the close
of business of the NYSE but after the time their values are otherwise
determined, such investments or exchange rates may be valued at their fair value
as determined in good faith by or under the direction of each Fund's Board of
Directors.
WHEN YOU PLACE AN ORDER TO BUY SHARES, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
- All of your purchases must be made in U.S. dollars.
- If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the Waddell & Reed Advisors Funds and/or
W&R Funds, the payment may be delayed for up to ten days to ensure that your
previous investment has cleared.
- The Funds do not issue certificates representing Class B, Class C or Class Y
shares. Small Cap Fund does not issue certificates representing any class of
shares.
- If you purchase shares of a Fund from certain broker-dealers, banks or other
authorized third parties, the Fund will be deemed to have received your
purchase order when that third party (or its designee) has received your
order. Your order will receive the offering price next calculated after the
order has been received in proper form by the authorized third party (or its
designee). You should consult that firm to determine the time by
53
<PAGE>
which it must receive your order for you to purchase shares of a Fund at that
day's price.
When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders, including
purchases by exchange, and it and the Funds reserve the right to discontinue
offering Fund shares for purchase.
MINIMUM INVESTMENTS
<TABLE>
FOR CLASS A, CLASS B AND CLASS C:
<S> <C>
TO OPEN AN ACCOUNT $500 (per Fund)
------------------------------------------------------------------------------------
For certain exchanges $100 (per Fund)
------------------------------------------------------------------------------------
For certain retirement accounts and accounts
opened with Automatic Investment Service $50 (per Fund)
------------------------------------------------------------------------------------
For certain retirement accounts and accounts opened
through payroll deductions for or by employees of
WRIMCO, Waddell & Reed, Inc. and their affiliates $25 (per Fund)
------------------------------------------------------------------------------------
TO ADD TO AN ACCOUNT Any amount
------------------------------------------------------------------------------------
For certain exchanges $100 (per Fund)
------------------------------------------------------------------------------------
For Automatic Investment Service $25 (per Fund)
FOR CLASS Y:
TO OPEN AN ACCOUNT
------------------------------------------------------------------------------------
For a government entity or authority $10 million
or for a corporation (within first twelve months)
------------------------------------------------------------------------------------
For other investors Any amount
------------------------------------------------------------------------------------
TO ADD TO AN ACCOUNT Any amount
====================================================================================
</TABLE>
ADDING TO YOUR ACCOUNT
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
TO ADD TO YOUR ACCOUNT, make your check payable to Waddell & Reed, Inc. Mail the
check to Waddell & Reed, Inc., along with:
54
<PAGE>
- the detachable form that accompanies the confirmation of a prior purchase or
your year-to-date statement; or
- a letter stating your account number, the account registration, the Fund and
the class of shares that you wish to purchase.
TO ADD TO YOUR CLASS Y ACCOUNT BY WIRE: Instruct your bank to wire the amount
you wish to invest, along with the account number and registration, to UMB Bank,
n.a., ABA Number 101000695, for the account of Waddell & Reed Number 9800007978,
Special Account for Exclusive Benefit of Customers FBO Customer Name and Account
Number.
If you purchase shares of the Funds from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
SELLING SHARES
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The REDEMPTION PRICE (price to sell one share of a particular class of a Fund)
is the NAV per share of that Fund class, subject to any CDSC applicable to Class
A, Class B or Class C shares.
TO SELL SHARES BY WRITTEN REQUEST: Complete an Account Service Request form,
available from your financial advisor, or write a letter of instruction with:
- the name on the account registration;
- the Fund's name;
- the Fund account number;
- the dollar amount or number, and the class, of shares to be redeemed; and
- any other applicable requirements listed in the table below.
55
<PAGE>
Deliver the form or your letter to your financial advisor, or mail it to:
Waddell & Reed Services Company
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed Services Company will send a check
to the address on the account.
TO SELL CLASS Y SHARES BY TELEPHONE OR FAX: If you have elected this method in
your application or by subsequent authorization, call 888-WADDELL, or fax your
request to 913-236-1599, and give your instructions to redeem Class Y shares and
make payment by wire to your predesignated bank account or by check to you at
the address on the account.
WHEN YOU PLACE AN ORDER TO SELL SHARES, your shares will be sold at the next NAV
calculated, subject to any applicable CDSC, after receipt of a written request
for redemption in good order by Waddell & Reed Services Company at the address
listed above. Note the following:
- If more than one person owns the shares, each owner must sign the written
request.
- If you hold a certificate, it must be properly endorsed and sent to the Fund.
- If you recently purchased the shares by check, the Fund may delay payment of
redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance that the
check has cleared and been honored. If you do not, payment of the redemption
proceeds on these shares will be delayed until the earlier of 10 days or the
date the Fund can verify that your purchase check has cleared and been
honored.
- Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted or as permitted by the Securities and Exchange Commission.
- Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities when a Fund's Board of
Directors determines that conditions exist making cash payments undesirable. A
Fund is obligated to redeem shares solely in cash up to the lesser of $250,000
or 1% of its NAV during any 90-day period for any one shareholder.
56
<PAGE>
- If you purchased shares from certain broker-dealers, banks or other authorized
third parties, you may sell those shares through those firms, some of which
may charge you a fee and may have additional requirements to sell Fund shares.
The Fund will be deemed to have received your order to sell shares when that
firm (or its designee) has received your order. Your order will receive the
NAV of the applicable class subject to any applicable CDSC next calculated
after the order has been received in proper form by the authorized firm (or
its designee). You should consult that firm to determine the time by which it
must receive your order for you to sell shares at that day's price.
<TABLE>
<CAPTION>
SPECIAL REQUIREMENTS FOR SELLING SHARES
ACCOUNT TYPE SPECIAL REQUIREMENTS
-----------------------------------------------------------------------------------
<S> <C>
Individual or The written instructions must be signed by all persons
Joint Tenant required to sign for transactions, exactly as their
names appear on the account.
-----------------------------------------------------------------------------------
Sole Proprietorship The written instructions must be signed by the
individual owner of the business.
-----------------------------------------------------------------------------------
UGMA, UTMA The custodian must sign the written instructions
indicating capacity as custodian.
-----------------------------------------------------------------------------------
Retirement Account The written instructions must be signed by a properly
authorized person.
-----------------------------------------------------------------------------------
Trust The trustee must sign the written instructions
indicating capacity as trustee. If the trustee's name
is not in the account registration, provide a
currently certified copy of the trust document.
-----------------------------------------------------------------------------------
Business or Organization At least one person authorized by corporate resolution
to act on the account must sign the written
instructions.
-----------------------------------------------------------------------------------
Conservator, Guardian The written instructions must be signed by the person
or Other Fiduciary properly authorized by court order to act in the
particular fiduciary capacity.
===================================================================================
</TABLE>
A Fund may require a signature guarantee in certain situations such as:
- a redemption request made by a corporation, partnership or fiduciary;
- a redemption request made by someone other than the owner of record; or
- the check is made payable to someone other than the owner of record.
57
<PAGE>
This requirement is to protect you and Waddell & Reed from fraud. You can obtain
a signature guarantee from most banks and securities dealers, but not from a
notary public.
EACH FUND (OTHER THAN VANGUARD FUND) RESERVES THE RIGHT TO REDEEM at NAV all of
your Fund shares in your account if their aggregate NAV is less than $500. The
Fund will give you notice and a 60-day opportunity to purchase a sufficient
number of additional shares to bring the aggregate NAV of your shares to $500.
YOU MAY REINVEST, without charge, all or part of the amount of Class A shares of
a Fund you redeemed by sending to the Fund the amount you want to reinvest. The
reinvested amounts must be received by the Fund within forty-five days after the
date of your redemption. You may do this only once with Class A shares of a
Fund.
The CDSC will not apply to the proceeds of Class A (as applicable), Class B or
Class C shares of a Fund which are redeemed and then reinvested in Class A,
Class B or Class C shares of the Fund within forty-five days after such
redemption. The Distributor will, with your reinvestment, restore an amount
equal to the deferred sales charge attributable to the amount reinvested by
adding the deferred sales charge amount to your reinvestment. For purposes of
determining future deferred sales charges, the reinvestment will be treated as a
new investment. You may do this only once as to Class A shares of a Fund, once
as to Class B shares of a Fund and once as to Class C shares of a Fund.
Payments of principal and interest on loans made pursuant to a 401(a) qualified
plan (if such loans are permitted by the plan) may be reinvested, without
payment of a sales charge, in Class A shares of any Waddell & Reed Advisors Fund
in which the plan may invest.
TELEPHONE TRANSACTIONS
The Funds and their agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. Each Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If a Fund fails to do so, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. Current procedures
relating to instructions communicated by telephone include tape recording
instructions, requiring personal identification and providing written
confirmations of transactions effected pursuant to such instructions.
58
<PAGE>
SHAREHOLDER SERVICES
Waddell & Reed provides a variety of services to help you manage your account.
PERSONAL SERVICE
Your local financial advisor is available to provide personal service.
Additionally, a toll-free call, 800-366-5465, connects you to a Client Services
Representative or our automated customer telephone service. During normal
business hours, our Client Services staff is available to answer your questions
or update your account records. At almost any time of the day or night, you may
access your account information from a touch-tone phone, or from our web site,
www.waddell.com, to:
- Obtain information about your accounts;
- Obtain price information about other funds in the Waddell & Reed Advisors
Funds and/or W&R Funds; or
- Request duplicate statements.
REPORTS
Statements and reports sent to you include the following:
- confirmation statements (after every purchase, other than those purchases made
through Automatic Investment Service, and after every exchange, transfer or
redemption)
- year-to-date statements (quarterly)
- annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports of the Funds may be mailed to your household, even if you have more than
one account with a Fund. Call the telephone number listed for Client Services if
you need additional copies of annual or semiannual reports or account
information.
59
<PAGE>
EXCHANGES
You may sell your shares and buy shares of the same Class of another Fund in the
Waddell & Reed Advisors Funds or in W&R Funds without the payment of an
additional sales charge if you buy Class A shares or payment of a CDSC when you
exchange Class B or Class C shares. For Class B and Class C shares or Class A
shares to which the CDSC would otherwise apply, the time period for the deferred
sales charge will continue to run. In addition, exchanging Class Y shareholders
in the Waddell & Reed Advisors Funds may buy Class A shares of Waddell & Reed
Advisors Cash Management.
You may exchange only into funds that are legally permitted for sale in your
state of residence. Note that exchanges out of a Fund may have tax consequences
for you. Before exchanging into a fund, read its prospectus.
THE FUNDS RESERVE THE RIGHT to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
AUTOMATIC TRANSACTIONS FOR CLASS A, CLASS B AND CLASS C SHAREHOLDERS
Flexible Withdrawal Service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund account, or
between fund accounts, automatically. While Regular Investment Plans do not
guarantee a profit and will not protect you against loss in a declining market,
they can be an excellent way to invest for retirement, a home, educational
expenses and other long-term financial goals.
Certain restrictions and fees imposed by the plan custodian may also apply for
retirement accounts. Speak with your financial advisor for more information.
REGULAR INVESTMENT PLANS
<TABLE>
<CAPTION>
<S> <C>
AUTOMATIC INVESTMENT SERVICE
TO MOVE MONEY FROM YOUR BANK ACCOUNT TO AN EXISTING FUND ACCOUNT
MINIMUM AMOUNT MINIMUM FREQUENCY
$25 (per Fund) Monthly
--------------------------------------------------------------------------------
FUNDS PLUS SERVICE
TO MOVE MONEY FROM WADDELL & REED ADVISORS CASH MANAGEMENT TO A FUND WHETHER
IN THE SAME OR A DIFFERENT ACCOUNT IN THE SAME CLASS
MINIMUM AMOUNT MINIMUM FREQUENCY
$100 (per Fund) Monthly
================================================================================
</TABLE>
60
<PAGE>
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Each Fund distributes substantially all of its net investment income and net
capital gains to its shareholders each year.
Usually, a Fund distributes net investment income at the following times:
Accumulative Fund, International Growth Fund, Science and Technology Fund and
Vanguard Fund, semiannually in June and December; and New Concepts Fund and
Small Cap Fund, annually in December. Net capital gains (and any net gains from
foreign currency transactions) usually are distributed in December.
DISTRIBUTION OPTIONS. When you open an account, specify on your application how
you want to receive your distributions. Each Fund offers two options:
1. SHARE PAYMENT OPTION. Your dividends, capital gains and other distributions
with respect to a class will be automatically paid in additional shares of
the same class of the Fund. If you do not indicate a choice on your
application, you will be assigned this option.
2. CASH OPTION. You will be sent a check for your dividends, capital gains and
other distributions if the total distribution is equal to or greater than
five dollars. If the distribution is less than five dollars, it will be
automatically paid in additional shares of the same class of the Fund.
For retirement accounts, all distributions are automatically paid in additional
shares.
TAXES
As with any investment, you should consider how your investment in a Fund will
be taxed. If your account is not a tax-deferred retirement account (or you are
not otherwise exempt from income tax), you should be aware of the following tax
implications:
61
<PAGE>
TAXES ON DISTRIBUTIONS. Dividends from a Fund's investment company taxable
income (which includes net short-term gains), if any, generally are taxable to
you as ordinary income whether received in cash or paid in additional Fund
shares. Distributions of a Fund's net capital gains, when designated as such,
are taxable to you as long-term capital gains, whether received in cash or paid
in additional Fund shares and regardless of the length of time you have owned
your shares. For Federal income tax purposes, your long-term capital gains
generally are taxed at a maximum rate of 20%.
Each Fund notifies you after each calendar year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that year.
A portion of the dividends paid by a Fund, whether received in cash or paid in
additional Fund shares, may be eligible for the dividends received deduction
allowed to corporations. The eligible portion may not exceed the aggregate
dividends received by a Fund from U.S. corporations. However, dividends received
by a corporate shareholder and deducted by it pursuant to the dividends received
deduction are subject indirectly to the Federal alternative minimum tax.
WITHHOLDING. Each Fund must withhold 31% of all dividends, capital gains and
other distributions and redemption proceeds payable to individuals and certain
other noncorporate shareholders who do not furnish the Fund with a correct
taxpayer identification number. Withholding at that rate from dividends, capital
gains and other distributions also is required for shareholders subject to
backup withholding.
TAXES ON TRANSACTIONS. Your redemption of Fund shares will result in a taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than what you paid for the redeemed shares (which normally includes any
sales charge paid). An exchange of Fund shares for shares of any other fund in
the Waddell & Reed Advisors Funds or W&R Funds generally will have similar tax
consequences. However, special rules apply when you dispose of a Fund's Class A
shares through a redemption or exchange within ninety days after your purchase
and then reacquire Class A shares of that Fund or acquire Class A shares of
another fund in the Waddell & Reed Advisors Funds without paying a sales charge
due to the forty-five day reinvestment privilege or exchange privilege. See
"Your Account." In these cases, any gain on the disposition of the original Fund
shares will be increased, or loss decreased, by the amount of the sales charge
you paid when those shares were acquired, and
62
<PAGE>
that amount will increase the adjusted basis of the shares subsequently
acquired. In addition, if you purchase shares of a Fund within thirty days
before or after redeeming other shares of the Fund (regardless of class) at a
loss, part or all of that loss will not be deductible and will increase the
basis of the newly purchased shares.
STATE AND LOCAL INCOME TAXES. The portion of the dividends paid by each Fund
attributable to interest earned on U.S. Government securities generally is not
subject to state and local income taxes, although distributions by any Fund to
its shareholders of net realized gains on the sale of those securities are fully
subject to those taxes. You should consult your tax adviser to determine the
taxability of dividends and other distributions by the Funds in your state and
locality.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting each Fund and its shareholders; you will find
more information in the Fund's SAI. There may be other Federal, state or local
tax considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
63
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
THE MANAGEMENT OF THE FUNDS
PORTFOLIO MANAGEMENT
Each Fund is managed by WRIMCO, subject to the authority of each Fund's Board of
Directors. WRIMCO provides investment advice to each of the Funds and supervises
each Fund's investments. WRIMCO and/or its predecessors have served as
investment manager to each of the registered investment companies in the Waddell
& Reed Advisors Funds, W&R Funds and Target/United Funds since the inception of
each company. WRIMCO is located at 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
Antonio Intagliata is primarily responsible for the management of the
Accumulative Fund. Mr. Intagliata has held his Fund responsibilities since
November 1979. He is Senior Vice President of WRIMCO and Vice President of the
Fund. Mr. Intagliata has served as the portfolio manager for investment
companies managed by WRIMCO and its predecessors since February 1979 and has
been an employee of such since June 1973.
Thomas A. Mengel is primarily responsible for the management of the
International Growth Fund. Mr. Mengel has held his Fund responsibilities since
May 1996. He is Vice President of WRIMCO, Vice President of the Fund and Vice
President of other investment companies for which WRIMCO serves as investment
manager. From 1993 to 1996, Mr. Mengel was the President of Sal. Oppenheim jr. &
Cie. Securities, Inc.
Zachary H. Shafran is primarily responsible for the management of the New
Concepts Fund. Mr. Shafran has held his responsibilities since February 1999. He
is Vice President of WRIMCO and Vice President of the Fund. Mr. Shafran served
as the portfolio manager for another investment company managed by WRIMCO from
January 1996 to February 1999. Mr. Shafran served as an investment analyst with
WRIMCO from June 1990 to January 1996.
Henry J. Herrmann is primarily responsible for the management of the Science and
Technology Fund. Mr. Herrmann has held his Fund responsibilities since April 17,
2000. He is Vice President and Director of each of the Funds in the Waddell &
Reed Advisors Funds, W&R Funds and Target/United Funds; President, Chief
Investment Officer, and Director of Waddell & Reed Financial, Inc.; Vice
President, Chief Investment Officer and
64
<PAGE>
Director of Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed,
Inc.; President, Chief Executive Officer, Chief Investment Officer and Director
of WRIMCO; and Vice President of each of the other investment companies for
which WRIMCO serves as investment manager. Mr. Herrmann has been an employee of
Waddell & Reed, Inc. and its successor, WRIMCO, since March 15, 1971.
Mark G. Seferovich and Grant P. Sarris are primarily responsible for the
management of the Small Cap Fund. Mr. Seferovich has held his Fund
responsibilities since the inception of the Fund. He is Senior Vice President of
WRIMCO, Vice President of the Fund and Vice President of other investment
companies for which WRIMCO serves as investment manager. Mr. Seferovich has
served as the portfolio manager of investment companies managed by WRIMCO and
its predecessor since February 1989. From March 1996 to March 1998, Mr.
Seferovich was Vice President of, and a portfolio manager for, Waddell & Reed
Asset Management Company, a former affiliate of WRIMCO.
Mr. Sarris has held his Fund responsibilities since the inception of the Fund.
He is Vice President of WRIMCO, Vice President of the Fund and Vice President of
other investment companies for which WRIMCO serves as investment manager. Mr.
Sarris served as an investment analyst with WRIMCO and its predecessor from
October 1, 1991 to January 1, 1996. From January 1996 to May 1998, Mr. Sarris
served as an assistant portfolio manager for WRIMCO, and since May 1998, he has
served as a portfolio manager. Mr. Sarris has been an employee of WRIMCO since
October 1, 1991.
Daniel P. Becker is primarily responsible for the management of the Vanguard
Fund. Mr. Becker has held his Fund responsibilities since July 1, 1997. He is
Vice President of WRIMCO and Vice President of the Fund. From January 1995 to
March 1998, Mr. Becker was Vice President of, and a portfolio manager for,
Waddell & Reed Asset Management Company. Mr. Becker has been an employee of
WRIMCO and its predecessor since October 1989, initially serving as an
investment analyst, and has served as a portfolio manager for WRIMCO since
January 1997.
Other members of WRIMCO's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to a Fund's investments.
65
<PAGE>
MANAGEMENT FEE
Like all mutual funds, the Funds pay fees related to their daily operations.
Expenses paid out of each Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
Each Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. Each Fund also pays other expenses, which are
explained in the SAI.
The management fee is payable at the annual rates of:
for Accumulative Fund, 0.70% of net assets up to $1 billion, 0.65% of net assets
over $1 billion and up to $2 billion, 0.60% of net assets over $2 billion and up
to $3 billion, and 0.55% of net assets over $3 billion. Management fees for the
Fund as a percent of the Fund's net assets for the fiscal year ended December
31, 1999 were 0.61%;
for International Growth Fund, 0.85% of net assets up to $1 billion, 0.83% of
net assets over $1 billion and up to $2 billion, 0.80% of net assets over $2
billion and up to $3 billion, and 0.76% of net assets over $3 billion.
Management fees for the Fund as a percent of the Fund's net assets for the
fiscal year ended June 30, 1999 were 0.69%;
for New Concepts Fund, 0.85% of net assets up to $1 billion; 0.83% of net assets
over $1 billion and up to $2 billion; 0.80% of net assets over $2 billion and up
to $3 billion; and 0.76% of net assets over $3 billion. Management fees for the
Fund as a percent of the Fund's net assets for the fiscal year ended March 31,
2000 were 0.82%;
for Science and Technology Fund, 0.85% of net assets up to $1 billion, 0.83% of
net assets over $1 billion and up to $2 billion, 0.80% of net assets over $2
billion and up to $3 billion, and 0.76% of net assets over $3 billion.
Management fees for the Fund as a percent of the Fund's net assets for the
fiscal year ended December 31, 1999 were 0.73%;
for Small Cap Fund, 0.85% of net assets up to $1 billion, 0.83% of net assets
over $1 billion and up to $2 billion, 0.80% of net assets over $2 billion and up
to $3 billion, and 0.76% of net assets over $3 billion. Until November 1, 1999,
WRIMCO voluntarily waived its investment management fee;
66
<PAGE>
for Vanguard Fund, 0.70% of net assets up to $1 billion, 0.65% of net assets
over $1 billion and up to $2 billion, 0.60% of net assets over $2 billion and up
to $3 billion, and 0.55% of net assets over $3 billion. Management fees for the
Fund as a percent of the Fund's net assets for the fiscal year ended September
30, 1999 were 0.69%.
WRIMCO has voluntarily agreed to waive its management fee for any day that a
Fund's net assets are less than $25 million, subject to WRIMCO's right to change
or modify this waiver.
67
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following information is to help you understand the financial performance of
each Fund's Class A, Class B, Class C and Class Y shares for the fiscal periods
shown. Certain information reflects financial results for a single Fund share.
"Total return" shows how much your investment would have increased (or
decreased) during each period, assuming reinvestment of all dividends and
distributions.
68
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
ACCUMULATIVE FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended December 31, 1999, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
CLASS A PER-SHARE DATA
Net asset value,
beginning of period $8.28 $7.77 $7.75 $7.78 $6.58
---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.03 0.10 0.10 0.11 0.11
Net realized and
unrealized gain
on investments 2.01 1.60 2.14 0.82 2.12
---------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 2.04 1.70 2.24 0.93 2.23
---------------------------------------------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.03) (0.11) (0.09) (0.11) (0.11)
From capital gains (1.15) (1.08) (2.13) (0.85) (0.92)
---------------------------------------------------------------------------------------------------------------------------
Total distributions (1.18) (1.19) (2.22) (0.96) (1.03)
---------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.14 $8.28 $7.77 $7.75 $7.78
CLASS A RATIOS/SUPPLEMENTAL DATA
Total return(2) 25.72% 22.62% 29.58% 12.18% 34.21%
Net assets, end of
period (in millions) $2,247 $1,864 $1,595 $1,285 $1,206
Ratio of expenses to
average net assets 0.98% 0.88% 0.82% 0.83% 0.80%
Ratio of net investment
income to average
net assets 0.30% 1.12% 1.16% 1.34% 1.42%
Portfolio turnover rate 372.35% 373.78% 313.99% 240.37% 229.03%
===========================================================================================================================
</TABLE>
(1) ON JUNE 17, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
(2) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
69
<PAGE>
--------------------------------------------------------------------------------
ACCUMULATIVE FUND
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
12/31/99
<S> <C>
CLASS B PER-SHARE DATA
Net asset value, beginning of period $8.43
----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.01)
Net realized and unrealized gain on investments 1.85
----------------------------------------------------------------------------------------------
Total from investment operations 1.84
----------------------------------------------------------------------------------------------
Less distributions:
From net investment income (0.00)
From capital gains (1.15)
----------------------------------------------------------------------------------------------
Total distributions (1.15)
----------------------------------------------------------------------------------------------
Net asset value, end of period $9.12
CLASS B RATIOS/SUPPLEMENTAL DATA
Total return 22.89%
Net assets, end of period (in millions) $3
Ratio of expenses to average net assets 2.24%(2)
Ratio of net investment loss to average net assets -1.40%(2)
Portfolio turnover rate 372.35%(2)
==============================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
70
<PAGE>
--------------------------------------------------------------------------------
ACCUMULATIVE FUND
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/6/99(1) TO
12/31/99
<S> <C>
CLASS C PER-SHARE DATA
Net asset value, beginning of period $8.53
----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.01)
Net realized and unrealized gain on investments 1.75
----------------------------------------------------------------------------------------------
Total from investment operations 1.74
----------------------------------------------------------------------------------------------
Less distributions:
From net investment income (0.00)
From capital gains (1.15)
----------------------------------------------------------------------------------------------
Total distributions (1.15)
----------------------------------------------------------------------------------------------
Net asset value, end of period $9.12
CLASS C RATIOS/SUPPLEMENTAL DATA
Total return 21.45%
Net assets, end of period (in thousands) $347
Ratio of expenses to average net assets 2.28%(2)
Ratio of net investment loss to average net assets -1.35%(2)
Portfolio turnover rate 372.35%(2)
==============================================================================================
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)ANNUALIZED.
71
<PAGE>
--------------------------------------------------------------------------------
ACCUMULATIVE FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
FOR THE FISCAL YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------------------ 7/11/95(1) TO
1999 1998 1997 1996 12/31/95
<S> <C> <C> <C> <C> <C>
CLASS Y PER-SHARE DATA
Net asset value,
beginning of period $8.28 $7.77 $7.75 $7.78 $7.84
------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.04 0.12 0.11 0.12 0.05
Net realized and
unrealized gain
on investments 2.01 1.59 2.14 0.82 0.87
------------------------------------------------------------------------------------------------------
Total from investment
operations 2.05 1.71 2.25 0.94 0.92
------------------------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.04) (0.12) (0.10) (0.12) (0.06)
From capital gains (1.15) (1.08) (2.13) (0.85) (0.92)
------------------------------------------------------------------------------------------------------
Total distributions (1.19) (1.20) (2.23) (0.97) (0.98)
------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.14 $8.28 $7.77 $7.75 $7.78
CLASS Y RATIOS/SUPPLEMENTAL DATA
Total return 25.95% 22.79% 29.67% 12.27% 11.92%
Net assets, end of
period (in millions) $5 $4 $4 $3 $1
Ratio of expenses to
average net assets 0.80% 0.75% 0.75% 0.74% 0.76%(2)
Ratio of net investment
income to average
net assets 0.49% 1.21% 1.22% 1.45% 1.24%(2)
Portfolio turnover rate 372.35% 373.78% 313.99% 240.37% 229.03%(2)
========================================================================================================
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)ANNUALIZED.
72
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' reports, along with the Fund's financial statements for the fiscal
year ended June 30, 1999 and the six months ended December 31, 1999, are
included in the Fund's SAI, which is available upon request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE SIX FOR THE FISCAL YEAR ENDED JUNE 30,
MONTHS ENDED ---------------------------------------------------------
12/31/99 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
CLASS A PER-SHARE DATA
Net asset value,
beginning of period $9.97 $11.85 $10.61 $8.95 $8.68 $8.98
----------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income (loss) (0.04) 0.05 0.07 0.07 0.08 0.07
Net realized and
unrealized gain
(loss) on investments 5.34 (0.74) 3.01 1.94 0.86 0.60
----------------------------------------------------------------------------------------------------------------------
Total from investment
operations 5.30 (0.69) 3.08 2.01 0.94 0.67
----------------------------------------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.02) (0.04) (0.06) (0.09) (0.07) (0.04)
From capital gains (1.44) (1.15) (1.78) (0.26) (0.60) (0.93)
----------------------------------------------------------------------------------------------------------------------
Total distributions (1.46) (1.19) (1.84) (0.35) (0.67) (0.97)
----------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.81 $9.97 $11.85 $10.61 $8.95 $8.68
CLASS A RATIOS/SUPPLEMENTAL DATA
Total return(2) 54.91% -5.40% 34.49% 23.03% 11.70% 7.98%
Net assets, end of
period (in millions) $1,863 $1,252 $1,331 $978 $771 $679
Ratio of expenses to
average net assets 1.42%(3) 1.30% 1.23% 1.28% 1.25% 1.25%
Ratio of net investment
income (loss) to average
net assets -0.80%(3) 0.52% 0.67% 0.78% 0.89% 0.86%
Portfolio turnover rate 50.93% 149.45% 114.34% 109.71% 58.64% 57.45%
======================================================================================================================
</TABLE>
(1)ON JULY 4, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
(2)TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
(3)ANNUALIZED.
73
<PAGE>
--------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
12/31/99
<S> <C>
CLASS B PER-SHARE DATA
Net asset value, beginning of period $10.79
----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.03)
Net realized and unrealized gain on investments 4.47
----------------------------------------------------------------------------------------------
Total from investment operations 4.44
----------------------------------------------------------------------------------------------
Less distributions:
From net investment income (0.00)
From capital gains (1.44)
----------------------------------------------------------------------------------------------
Total distributions (1.44)
----------------------------------------------------------------------------------------------
Net asset value, end of period $13.79
CLASS B RATIOS/SUPPLEMENTAL DATA
Total return 42.70%
Net assets, end of period (in millions) $4
Ratio of expenses to average net assets 3.15%(2)
Ratio of net investment loss to average net assets -2.76%(2)
Portfolio turnover rate 50.93%(3)
==============================================================================================
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)ANNUALIZED.
(3)FOR THE SIX MONTHS ENDED DECEMBER 31, 1999.
74
<PAGE>
--------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/5/99(1) TO
12/31/99
<S> <C>
CLASS C PER-SHARE DATA
Net asset value, beginning of period $10.78
----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.03)
Net realized and unrealized gain on investments 4.49
----------------------------------------------------------------------------------------------
Total from investment operations 4.46
----------------------------------------------------------------------------------------------
Less distributions:
From net investment income (0.00)
From capital gains (1.44)
----------------------------------------------------------------------------------------------
Total distributions (1.44)
----------------------------------------------------------------------------------------------
Net asset value, end of period $13.80
CLASS C RATIOS/SUPPLEMENTAL DATA
Total return 42.94%
Net assets, end of period (in millions) $1
Ratio of expenses to average net assets 2.71%(2)
Ratio of net investment loss to average net assets -2.32%(2)
Portfolio turnover rate 50.93%(3)
==============================================================================================
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)ANNUALIZED.
(3)FOR THE SIX MONTHS ENDED DECEMBER 31, 1999.
75
<PAGE>
--------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE FISCAL YEAR FOR THE
SIX MONTHS ENDED JUNE 30, PERIOD FROM
ENDED ------------------------------------------ 9/27/95(1) TO
12/31/99 1999 1998 1997 6/30/96
<S> <C> <C> <C> <C> <C>
CLASS Y PER-SHARE DATA
Net asset value,
beginning of period $9.97 $11.85 $10.62 $8.95 $9.21
---------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income (loss) (0.03) 0.09 0.10 0.09 0.12
Net realized and
unrealized gain (loss)
on investments 5.36 (0.74) 3.00 1.95 0.30
---------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 5.33 (0.65) 3.10 2.04 0.42
---------------------------------------------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.04) (0.08) (0.09) (0.11) (0.08)
From capital gains (1.44) (1.15) (1.78) (0.26) (0.60)
---------------------------------------------------------------------------------------------------------------------------
Total distributions (1.48) (1.23) (1.87) (0.37) (0.68)
---------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.82 $9.97 $11.85 $10.62 $8.95
CLASS Y RATIOS/SUPPLEMENTAL DATA
Total return 55.24% -5.06% 34.71% 23.45% 5.44%
Net assets, end of
period (in millions) $18 $9 $9 $7 $5
Ratio of expenses
to average net
assets 1.11%(2) 0.99% 0.97% 1.04% 0.98%(2)
Ratio of net
investment income (loss)
to average net assets -0.52%(2) 0.85% 0.93% 1.02% 2.60%(2)
Portfolio turnover rate 50.93% 149.45% 114.34% 109.71% 58.64%(2)
===========================================================================================================================
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)ANNUALIZED.
76
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
NEW CONCEPTS FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended March 31, 2000, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MARCH 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
CLASS A PER-SHARE DATA
Net asset value,
beginning of period $9.52 $9.24 $6.80 $7.73 $6.13
----------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income (loss) (0.09) (0.00) 0.01 0.03 0.02
Net realized and
unrealized gain
(loss) on investments 6.96 1.54 3.29 (0.64) 1.81
----------------------------------------------------------------------------------------------------
Total from investment
operations 6.87 1.54 3.30 (0.61) 1.83
----------------------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.00) (0.01) (0.01) (0.03) (0.02)
From capital gains (1.32) (1.25) (0.85) (0.29) (0.21)
----------------------------------------------------------------------------------------------------
Total distributions (1.32) (1.26) (0.86) (0.32) (0.23)
----------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.07 $9.52 $9.24 $6.80 $7.73
CLASS A RATIOS/SUPPLEMENTAL DATA
Total return(2) 74.61% 17.83% 51.44% -8.38% 30.18%
Net assets, end
of period (in millions) $1,984 $972 $779 $501 $492
Ratio of expenses to
average net assets 1.32% 1.29% 1.25% 1.27% 1.19%
Ratio of net investment
income (loss) to average
net assets -0.66% -0.04% 0.06% 0.39% 0.29%
Portfolio turnover rate 127.31% 48.95% 38.51% 38.82% 27.75%
====================================================================================================
</TABLE>
(1)ON JULY 18, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
PER-SHARE AMOUNTS HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT THE 100% STOCK
DIVIDEND EFFECTED JUNE 26, 1998.
(2)TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
77
<PAGE>
--------------------------------------------------------------------------------
NEW CONCEPTS FUND
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
3/31/00
<S> <C>
CLASS B PER-SHARE DATA
Net asset value, beginning of period $10.69
--------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.01
Net realized and unrealized gain on investments 5.60
--------------------------------------------------------------------------------------------------
Total from investment operations 5.61
Less distributions:
From net investment income (0.00)
From capital gains (1.32)
--------------------------------------------------------------------------------------------------
Total distributions (1.32)
--------------------------------------------------------------------------------------------------
Net asset value, end of period $14.98
CLASS B RATIOS/SUPPLEMENTAL DATA
Total return 54.60%
Net assets, end of period (in millions) $28
Ratio of expenses to average net assets 2.40%(2)
Ratio of net investment loss to average net assets -1.73%(2)
Portfolio turnover rate 127.31%(2)
==================================================================================================
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)ANNUALIZED.
78
<PAGE>
--------------------------------------------------------------------------------
NEW CONCEPTS FUND
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
3/31/00
<S> <C>
CLASS C PER-SHARE DATA
Net asset value, beginning of period $10.69
--------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.02
Net realized and unrealized gain on investments 5.60
--------------------------------------------------------------------------------------------------
Total from investment operations 5.62
--------------------------------------------------------------------------------------------------
Less distributions:
From net investment income (0.00)
From capital gains (1.32)
--------------------------------------------------------------------------------------------------
Total distributions (1.32)
--------------------------------------------------------------------------------------------------
Net asset value, end of period $14.99
CLASS C RATIOS/SUPPLEMENTAL DATA
Total return 54.71%
Net assets, end of period (in millions) $5
Ratio of expenses to average net assets 2.30%(2)
Ratio of net investment loss to average net assets -1.62%(2)
Portfolio turnover rate 127.31%(2)
==================================================================================================
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)ANNUALIZED.
79
<PAGE>
--------------------------------------------------------------------------------
NEW CONCEPTS FUND
For a Class Y share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE
FOR THE FISCAL YEAR ENDED MARCH 31, PERIOD FROM
------------------------------------------ 9/6/95(2) TO
2000 1999 1998 1997 3/31/96
<S> <C> <C> <C> <C> <C>
CLASS Y PER-SHARE DATA
Net asset value,
beginning of period $9.53 $9.25 $6.80 $7.74 $7.57
--------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income (loss) (0.05) 0.03 0.03 0.05 0.02
Net realized and
unrealized gain
(loss) on investments 6.98 1.54 3.30 (0.65) 0.38
--------------------------------------------------------------------------------------------------------
Total from investment
operations 6.93 1.57 3.33 (0.60) 0.40
--------------------------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.00) (0.04) (0.03) (0.05) (0.02)
From capital gains (1.32) (1.25) (0.85) (0.29) (0.21)
--------------------------------------------------------------------------------------------------------
Total distributions (1.32) (1.29) (0.88) (0.34) (0.23)
--------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.14 $9.53 $9.25 $6.80 $7.74
CLASS Y RATIOS/SUPPLEMENTAL DATA
Total return 75.17% 18.29% 51.83% -8.12% 5.44%
Net assets, end of
period (in millions) $22 $12 $11 $8 $7
Ratio of expenses
to average net
assets 1.02% 0.95% 0.96% 0.97% 0.96%(3)
Ratio of net
investment income (loss)
to average net
assets -0.36% 0.29% 0.35% 0.69% 0.54%(3)
Portfolio turnover rate 127.31% 48.95% 38.51% 38.82% 27.75%(3)
========================================================================================================
</TABLE>
(1)PER-SHARE AMOUNTS HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT THE 100%
STOCK DIVIDEND EFFECTED JUNE 26, 1998.
(2)COMMENCEMENT OF OPERATIONS.
(3)ANNUALIZED.
80
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended December 31, 1999, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
CLASS A PER-SHARE DATA
Net asset value,
beginning of period $9.91 $6.71 $7.78 $7.63 $5.07
-------------------------------------------------------------------------------------
Income from investment
operations:
Net investment loss (0.09) (0.03) (0.01) (0.02) (0.00)
Net realized and
unrealized gain
on investments 10.12 3.93 0.46 0.66 2.80
-------------------------------------------------------------------------------------
Total from investment
operations 10.03 3.90 0.45 0.64 2.80
-------------------------------------------------------------------------------------
Less distributions from
capital gains (1.51) (0.70) (1.52) (0.49) (0.24)
-------------------------------------------------------------------------------------
Net asset value,
end of period $18.43 $9.91 $6.71 $7.78 $7.63
CLASS A RATIOS/SUPPLEMENTAL DATA
Total return(2) 102.93% 59.31% 7.22% 8.35% 55.37%
Net assets, end of
period (in millions) $3,744 $1,668 $1,063 $981 $821
Ratio of expenses to
average net assets 1.16% 1.05% 1.02% 0.98% 0.93%
Ratio of net investment
loss to average
net assets -0.79% -0.37% -0.18% -0.33% -0.07%
Portfolio turnover rate 40.35% 55.70% 87.68% 33.90% 32.89%
======================================================================================
</TABLE>
(1) ON JUNE 17, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
PER-SHARE AMOUNTS HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT THE 200% STOCK
DIVIDEND EFFECTED JUNE 26, 1998.
(2) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
81
<PAGE>
--------------------------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
12/31/99
<S> <C>
CLASS B PER-SHARE DATA
Net asset value, beginning of period $12.64
--------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.04)
Net realized and unrealized gain on investments 7.28
--------------------------------------------------------------------------------
Total from investment operations 7.24
--------------------------------------------------------------------------------
Less distributions from capital gains (1.51)
--------------------------------------------------------------------------------
Net asset value, end of period $18.37
CLASS B RATIOS/SUPPLEMENTAL DATA
Total return 58.62%
Net assets, end of period (in millions) $17
Ratio of expenses to average net assets 2.64%(2)
Ratio of net investment loss to average net assets -2.35%(2)
Portfolio turnover rate 40.35%(2)
================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
82
<PAGE>
-------------------------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
12/31/99
<S> <C>
CLASS C PER-SHARE DATA
Net asset value, beginning of period $12.64
--------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.04)
Net realized and unrealized gain on investments 7.29
--------------------------------------------------------------------------------
Total from investment operations 7.25
--------------------------------------------------------------------------------
Less distributions from capital gains (1.51)
--------------------------------------------------------------------------------
Net asset value, end of period $18.38
CLASS C RATIOS/SUPPLEMENTAL DATA
Total return 58.70%
Net assets, end of period (in millions) $3
Ratio of expenses to average net assets 2.42%(2)
Ratio of net investment loss to average net assets -2.19%(2)
Portfolio turnover rate 40.35%(2)
================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
83
<PAGE>
--------------------------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND
For a Class Y share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR FOR THE
ENDED DECEMBER 31, PERIOD FROM
----------------------- 2/27/96(2) TO
1999 1998 1997 12/31/96
<S> <C> <C> <C> <C>
CLASS Y PER-SHARE DATA
Net asset value, beginning of period $9.98 $6.74 $7.79 $8.02
----------------------------------------------------------------------------------
Income from investment
operations:
Net investment
loss (0.04) (0.01) (0.00) (0.01)
Net realized and
unrealized gain
on investments 10.22 3.95 0.47 0.27
----------------------------------------------------------------------------------
Total from investment
operations 10.18 3.94 0.47 0.26
----------------------------------------------------------------------------------
Less distributions from
capital gains (1.51) (0.70) (1.52) (0.49)
----------------------------------------------------------------------------------
Net asset value,
end of period $18.65 $9.98 $6.74 $7.79
CLASS Y RATIOS/SUPPLEMENTAL DATA
Total return 103.72% 59.71% 7.43% 3.25%
Net assets, end of
period (in millions) $31 $6 $4 $3
Ratio of expenses to
average net assets 0.95% 0.79% 0.85% 0.80%(3)
Ratio of net investment
loss to average
net assets -0.59% -0.12% -0.01% -0.12%(3)
Portfolio turnover rate 40.35% 55.70% 87.68% 33.90%(3)
==================================================================================
</TABLE>
(1) PER-SHARE AMOUNTS HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT THE 200% STOCK
DIVIDEND EFFECTED JUNE 26, 1998.
(2) COMMENCEMENT OF OPERATIONS.
(3) ANNUALIZED.
84
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
SMALL CAP FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the period
ended December 31, 1999, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
12/31/99
<S> <C>
CLASS A PER-SHARE DATA
Net asset value, beginning of period $10.00
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.03
Net realized and unrealized gain on investments 2.32
--------------------------------------------------------------------------------
Total from investment operations 2.35
--------------------------------------------------------------------------------
Less distributions:
From net investment income (0.03)
From capital gains (0.00)(2)
--------------------------------------------------------------------------------
Total distributions (0.03)
--------------------------------------------------------------------------------
Net asset value, end of period $12.32
CLASS A RATIOS/SUPPLEMENTAL DATA
Total return(3) 23.53%
Net assets, end of period (in millions) $86
Ratio of expenses to average net assets 1.84%(4)
Ratio of net investment income to average net assets 1.76%(4)
Portfolio turnover rate 21.65%
================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) A CAPITAL GAIN OF $0.0033 WAS PAID TO SHAREHOLDERS DURING THIS PERIOD.
(3) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
(4) ANNUALIZED.
85
<PAGE>
--------------------------------------------------------------------------------
SMALL CAP FUND
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
12/31/99
<S> <C>
CLASS B PER-SHARE DATA
Net asset value, beginning of period $10.00
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.01
Net realized and unrealized gain on investments 2.31
--------------------------------------------------------------------------------
Total from investment operations 2.32
--------------------------------------------------------------------------------
Less distributions:
From net investment income (0.02)
From capital gains (0.00)(2)
--------------------------------------------------------------------------------
Total distributions (0.02)
--------------------------------------------------------------------------------
Net asset value, end of period $12.30
CLASS B RATIOS/SUPPLEMENTAL DATA
Total return 23.23%
Net assets, end of period (in millions) $7
Ratio of expenses to average net assets 3.36%(3)
Ratio of net investment income to average net assets 0.22%(3)
Portfolio turnover rate 21.65%
================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) A CAPITAL GAIN OF $0.0033 WAS PAID TO SHAREHOLDERS DURING THIS PERIOD.
(3) ANNUALIZED.
86
<PAGE>
--------------------------------------------------------------------------------
SMALL CAP FUND
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
12/31/99
<S> <C>
CLASS C PER-SHARE DATA
Net asset value, beginning of period $10.00
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.01
Net realized and unrealized gain on investments 2.32
--------------------------------------------------------------------------------
Total from investment operations 2.33
--------------------------------------------------------------------------------
Less distributions:
From net investment income (0.02)
From capital gains (0.00)(2)
--------------------------------------------------------------------------------
Total distributions (0.02)
--------------------------------------------------------------------------------
Net asset value, end of period $12.31
CLASS C RATIOS/SUPPLEMENTAL DATA
Total return 23.32%
Net assets, end of period (in millions) $2
Ratio of expenses to average net assets 2.89%(3)
Ratio of net investment income to average net assets 0.69%(3)
Portfolio turnover rate 21.65%
================================================================================
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) A CAPITAL GAIN OF $0.0033 WAS PAID TO SHAREHOLDERS DURING THIS PERIOD.
(3) ANNUALIZED.
87
<PAGE>
-------------------------------------------------------------------------------
SMALL CAP FUND
For a Class Y share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
12/31/99
<S> <C>
CLASS Y PER-SHARE DATA
Net asset value, beginning of period $10.00
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.05
Net realized and unrealized gain on investments 2.32
--------------------------------------------------------------------------------
Total from investment operations 2.37
--------------------------------------------------------------------------------
Less distributions:
From net investment income (0.05)
From capital gains (0.00)(2)
--------------------------------------------------------------------------------
Total distributions (0.05)
--------------------------------------------------------------------------------
Net asset value, end of period $12.32
CLASS Y RATIOS/SUPPLEMENTAL DATA
Total return 23.74%
Net assets, end of period (in millions) $3
Ratio of expenses to average net assets 1.37%(3)
Ratio of net investment income to average net assets 2.23%(3)
Portfolio turnover rate 21.65%
================================================================================
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)A CAPITAL GAIN OF $0.0033 WAS PAID TO SHAREHOLDERS DURING THIS PERIOD.
(3)ANNUALIZED.
88
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
VANGUARD FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' reports, along with the Fund's financial statements for the fiscal
year ended September 30, 1999, and the six months ended March 31, 2000 are
included in the Fund's SAI, which is available upon request.
<TABLE>
<CAPTION>
For a Class A share outstanding throughout each period(1):
FOR THE SIX FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
MONTHS ENDED --------------------------------------------------
3/31/00 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
CLASS A PER-SHARE DATA
Net asset value,
beginning of period $10.11 $7.50 $9.11 $8.77 $8.97 $7.73
-------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income (loss) (0.04) (0.02) 0.01 0.07 0.03 0.07
Net realized and
unrealized gain
on investments 5.35 2.75 0.19 1.69 0.26 1.82
-------------------------------------------------------------------------------------------------
Total from investment
operations 5.31 2.73 0.20 1.76 0.29 1.89
-------------------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.00) (0.01) (0.04) (0.06) (0.04) (0.03)
From capital gains (0.87) (0.11) (1.77) (1.36) (0.45) (0.62)
-------------------------------------------------------------------------------------------------
Total distributions (0.87) (0.12) (1.81) (1.42) (0.49) (0.65)
-------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.55 $10.11 $7.50 $9.11 $8.77 $8.97
CLASS A RATIOS/SUPPLEMENTAL DATA
Total return(2) 54.95% 36.74% 3.76% 23.60% 3.59% 26.82%
Net assets, end of
period (in millions) $3,013 $1,924 $1,426 $1,478 $1,291 $1,285
Ratio of expenses
to average net assets 1.06%(3) 1.13% 1.10% 1.09% 1.09% 1.05%
Ratio of net
investment income
(loss) to average
net assets -0.66%(3) -0.22% 0.13% 0.86% 0.36% 0.87%
Portfolio turnover rate 29.04% 83.67% 90.51% 139.14% 57.10% 30.01%
=================================================================================================
</TABLE>
(1)ON AUGUST 15, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
(2)TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
(3)ANNUALIZED.
89
<PAGE>
--------------------------------------------------------------------------------
VANGUARD FUND
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
3/31/00
<S> <C>
CLASS B PER-SHARE DATA
Net asset value, beginning of period $10.43
--------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.05)
Net realized and unrealized gain on investments 4.96
--------------------------------------------------------------------------------
Total from investment operations 4.91
--------------------------------------------------------------------------------
Less distributions:
From net investment income (0.00)
From capital gains (0.87)
--------------------------------------------------------------------------------
Total distributions (0.87)
--------------------------------------------------------------------------------
Net asset value, end of period $14.47
CLASS B RATIOS/SUPPLEMENTAL DATA
Total return 49.39%
Net assets, end of period (in millions) $19
Ratio of expenses to average net assets 2.18%(2)
Ratio of net investment loss to average net assets -1.78%(2)
Portfolio turnover rate 29.04%(3)
================================================================================
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)ANNUALIZED.
(3)FOR THE SIX MONTHS ENDED MARCH 31, 2000.
90
<PAGE>
--------------------------------------------------------------------------------
VANGUARD FUND
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/4/99(1) TO
3/31/00
<S> <C>
CLASS C PER-SHARE DATA
Net asset value, beginning of period $10.43
--------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.05)
Net realized and unrealized gain on investments 4.96
--------------------------------------------------------------------------------
Total from investment operations 4.91
--------------------------------------------------------------------------------
Less distributions:
From net investment income (0.00)
From capital gains (0.87)
--------------------------------------------------------------------------------
Total distributions (0.87)
--------------------------------------------------------------------------------
Net asset value, end of period $14.47
CLASS C RATIOS/SUPPLEMENTAL DATA
Total return 49.39%
Net assets, end of period (in millions) $3
Ratio of expenses to average net assets 2.17%(2)
Ratio of net investment loss to average net assets -1.76%(2)
Portfolio turnover rate 29.04%(3)
================================================================================
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)ANNUALIZED.
(3)FOR THE SIX MONTHS ENDED MARCH 31, 2000.
91
<PAGE>
-------------------------------------------------------------------------------
VANGUARD FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
FOR THE SIX FOR THE FISCAL YEAR ENDED SEPTEMBER 30, PERIOD FROM
MONTHS ENDED --------------------------------------- 9/8/95(1) TO
3/31/00 1999 1998 1997 1996 9/30/95
<S> <C> <C> <C> <C> <C> <C>
CLASS Y PER-SHARE DATA
Net asset value,
beginning of period $10.13 $7.52 $9.12 $8.78 $8.97 $9.05
--------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income (loss) (0.03) (0.00) 0.03 0.09 0.07 0.00
Net realized and
unrealized gain
(loss) on investments 5.37 2.75 0.19 1.69 0.24 (0.08)
--------------------------------------------------------------------------------------------------------
Total from investment
operations 5.34 2.75 0.22 1.78 0.31 (0.08)
--------------------------------------------------------------------------------------------------------
Less distributions:
From net investment
income (0.00) (0.03) (0.05) (0.08) (0.05) (0.00)
From capital gains (0.87) (0.11) (1.77) (1.36) (0.45) (0.00)
--------------------------------------------------------------------------------------------------------
Total distributions (0.87) (0.14) (1.82) (1.44) (0.50) (0.00)
--------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.60 $10.13 $7.52 $9.12 $8.78 $8.97
CLASS Y RATIOS/SUPPLEMENTAL DATA
Total return 55.14% 36.94% 4.02% 23.87% 3.80% -0.88%
Net assets, end of
period (in millions) $20 $12 $5 $5 $4 $2
Ratio of expenses
to average
net assets 0.82%(2) 0.90% 0.91% 0.90% 0.91% 0.00%
Ratio of net investment
income (loss) to average
net assets -0.42%(2) -0.02% 0.33% 1.05% 0.69% 0.00%
Portfolio turnover rate 29.04% 83.67% 90.51% 139.14% 57.10% 30.01%(2)
===========================================================================================================================
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)ANNUALIZED.
92
<PAGE>
This space is intended for your notes and calculations.
93
<PAGE>
This space is intended for your notes and calculations.
94
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
WADDELL & REED ADVISORS FUNDS
CUSTODIAN
UMB Bank, n.a.
928 Grand Boulevard
Kansas City, Missouri 64141
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N. W.
Washington, D.C. 20036
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1010 Grand Boulevard
Kansas City, Missouri
64106-2232
INVESTMENT MANAGER
Waddell & Reed Investment
Management Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
UNDERWRITER
Waddell & Reed, Inc.
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
SHAREHOLDER SERVICING AGENT
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
ACCOUNTING SERVICES AGENT
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
95
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
WADDELL & REED ADVISORS FUNDS
You can get more information about each Fund in its --
- STATEMENT OF ADDITIONAL INFORMATION (SAI), which contains detailed
information about the Fund, particularly the investment policies and
practices. You may not be aware of important information about the Fund
unless you read both the Prospectus and the SAI. The current SAI is on file
with the Securities and Exchange Commission (SEC) and it is incorporated into
this Prospectus by reference (that is, the SAI is legally part of the
Prospectus).
- ANNUAL AND SEMIANNUAL REPORTS TO SHAREHOLDERS, which detail the Fund's actual
investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the year covered by the
report.
To request a copy of a Fund's current SAI or copies of its most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the Fund
or Waddell & Reed, Inc. at the address and telephone number below. Copies of the
SAI, Annual and/or Semiannual reports may also be requested via e-mail at
[email protected].
Information about each Fund (including the current SAI and most recent Annual
and Semiannual Reports) is available from the SEC's web site at
http://www.sec.gov and may also be obtained, after paying a duplicating fee, by
electronic request at [email protected] or from the SEC's Public Reference Room
in Washington, D.C. You can find out about the operation of the Public Reference
Room and applicable copying charges by calling 202-942-8090.
The Funds' SEC file numbers are as follows:
Waddell & Reed Advisors Funds, Inc. Accumulative Fund: 811-2552
Waddell & Reed Advisors International Growth Fund, Inc.: 811-2004
Waddell & Reed Advisors New Concepts Fund, Inc.: 811-3695
Waddell & Reed Advisors Funds, Inc. Science and Technology Fund: 811-2552
Waddell & Reed Advisors Small Cap Fund, Inc.: 811-09435
Waddell & Reed Advisors Vanguard Fund, Inc.: 811-1806
<TABLE>
<S><C>
[LOGO] WADDELL & REED Waddell & Reed, Inc.
FINANCIAL SERVICES-Registered Trademark- 6300 Lamar Avenue, P. O. Box 29217
------------------------- Shawnee Mission, Kansas 66201-9217
INVESTING. WITH A PLAN-SM- 913-236-2000
888-WADDELL
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WADDELL & REED ADVISORS VANGUARD FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
June 30, 2000
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a
prospectus. Investors should read this SAI in conjunction with the prospectus
("Prospectus") for the Class A, Class B, Class C and Class Y shares of
Waddell & Reed Advisors Vanguard Fund, Inc. (the "Fund"), formerly, United
Vanguard Fund, Inc., dated June 30, 2000, which may be obtained from the Fund
or its underwriter, Waddell & Reed, Inc., at the address or telephone number
shown above.
TABLE OF CONTENTS
Performance Information ........................................ 2
Investment Strategies, Policies and Practices................... 4
Investment Management and Other Services ....................... 37
Purchase, Redemption and Pricing of Shares ..................... 42
Directors and Officers ......................................... 59
Payments to Shareholders ....................................... 65
Taxes .......................................................... 66
Portfolio Transactions and Brokerage ........................... 71
Other Information .............................................. 73
Financial Statements ........................................... 75
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Waddell & Reed Advisors Vanguard Fund, Inc. is a mutual fund; an
investment that pools shareholders' money and invests it toward a specified
goal. In technical terms, the Fund is an open-end, diversified management
company organized as a Maryland corporation on October 7, 1968.
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
information in advertisements and sales materials.
TOTAL RETURN
Total return is the overall change in the value of an investment
over a given period of time. An average annual total return quotation is
computed by finding the average annual compounded rates of return over the
one- five-, and ten-year periods that would equate the initial amount
invested to the ending redeemable value. Standardized total return
information is calculated by assuming an initial $1,000 investment and, for
Class A shares, deducting the maximum sales load of 5.75%. All dividends and
distributions are assumed to be reinvested in shares of the applicable class
at net asset value for the class as of the day the dividend or distribution
is paid. No sales load is charged on reinvested dividends or distributions on
Class A shares. The formula used to calculate the total return for a
particular class of the Fund is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000
investment for the periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares
without deduction of the sales load in which case the same formula noted
above will be used but the entire amount of the $1,000 initial payment will
be assumed to have been invested. If the sales charge applicable to Class A
shares were reflected, it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of
March 31, 2000, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
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<CAPTION>
With Without
Sales Load Sales Load
Deducted Deducted
<S> <C> <C>
One-year period from April 1, 1999 to
March 31, 2000: 46.77% 55.72%
Five-year period from April 1, 1995 to
March 31, 2000: 26.87% 28.38%
Ten-year period from April 1, 1990 to
March 31, 2000: 17.92% 18.62%
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Prior to August 15, 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 44.39%.
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 49.39%.
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 48.39%.
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 49.39%.
The average annual total return quotations for Class Y shares as of
March 31, 2000, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
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<S> <C>
One year period from April 1, 1999 to
March 31, 2000: 56.06%
Period from September 8, 1995* to
March 31, 2000: 25.46%
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*Commencement of operations.
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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 return 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 Fund shares when redeemed may be more
or less than their original cost.
INVESTMENT STRATEGIES, POLICIES AND PRACTICES
This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and
policies the Fund's investment manager, Waddell & Reed Investment Management
Company ("WRIMCO"), may employ and the types of instruments in which the Fund
may invest, in pursuit of the Fund's 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
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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 short-term bonds.
Lower quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than high-quality securities and may
decline significantly in periods of general economic difficulty. The market
for lower-rated debt securities may be thinner and less active than that for
higher-rated debt securities, which can adversely affect the prices at which
the former are sold. Adverse publicity and changing investor perceptions may
decrease the values and liquidity of lower-rated debt securities, especially
in a thinly traded market. Valuation becomes more difficult and judgment
plays a greater role in valuing lower-rated debt securities than with respect
to securities for which more external sources of quotations and last sale
information are available. Since the risk of default is higher for
lower-rated debt securities, WRIMCO's research and credit analysis are an
especially important part of managing securities of this type held by the
Fund. WRIMCO continuously monitors the issuers of lower-rated debt securities
in the Fund's portfolio in an attempt to determine if the issuers will have
sufficient cash flow and profits to meet required principal and interest
payments. The Fund may choose, at its expense or in conjunction with others,
to pursue litigation or otherwise exercise its rights as a security holder to
seek to protect the interests of security holders if it determines this to be
in the best interest of the Fund's shareholders.
The Fund may invest in debt securities rated in any rating category
of the established rating services, including securities rated in the lowest
category (securities rated D by Standard & Poor's ("S&P") and C by Moody's
Investors Service, Inc. ("MIS")). Debt securities rated D by S&P or C by MIS
are in payment default
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or are regarded as having extremely poor prospects of ever attaining any real
investment standing. Debt securities rated at least BBB by S&P or Baa by MIS
are considered to be investment grade debt securities. Securities rated BBB
or Baa may have speculative characteristics. In addition, the Fund will treat
unrated securities judged by WRIMCO to be of equivalent quality to a rated
security as having that rating.
While credit ratings are only one factor WRIMCO relies on in
evaluating high-yield debt securities, certain risks are associated with
credit ratings. Credit ratings evaluate the safety of principal and interest
payments, not market value risk. Credit ratings for individual securities may
change from time to time, and the Fund may retain a portfolio security whose
rating has been changed.
The Fund may purchase debt securities whose principal amount at
maturity is dependent upon the performance of a specified equity security.
The issuer of such debt securities, typically an investment banking firm, is
unaffiliated with the issuer of the equity security to whose performance the
debt security is linked. Equity-linked debt securities differ from ordinary
debt securities in that the principal amount received at maturity is not
fixed, but is based on the price of the linked equity security at the time
the debt security matures. The performance of equity-linked debt securities
depends primarily on the performance of the linked equity security and may
also be influenced by interest rate changes. In addition, although the debt
securities are typically adjusted for diluting events such as stock splits,
stock dividends and certain other events affecting the market value of the
linked equity security, the debt securities are not adjusted for subsequent
issuances of the linked equity security for cash. Such an issuance could
adversely affect the price of the debt security. In addition to the equity
risk relating to the linked equity security, such debt securities are also
subject to credit risk with regard to the issuer of the debt security. In
general, however, such debt securities are less volatile than the equity
securities to which they are linked.
The Fund may invest in convertible securities. A convertible
security is a bond, debenture, note, preferred stock or other security that
may be converted into or exchanged for a prescribed amount of common stock of
the same or different issuer within a particular period of time at a
specified price or formula. Convertible securities generally have higher
yields than common stocks of the same or similar issuers, but lower yields
than comparable nonconvertible securities, are less subject to fluctuation in
value than the underlying stock because they have fixed income
characteristics, and provide the potential for capital appreciation if the
market price of the underlying common stock increases.
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The value of a convertible security is influenced by changes in
interest rates, with investment value declining as interest rates increase
and increasing as interest rates decline. The credit standing of the issuer
and other factors also may have an effect on the convertible security's
investment value.
The Fund may also invest in a type of convertible preferred stock
that pays a cumulative, fixed dividend that is senior to, and expected to be
in excess of, the dividends paid on the common stock of the issuer. At the
mandatory conversion date, the preferred stock is converted into not more
than one share of the issuer's common stock at the "call price" that was
established at the time the preferred stock was issued. If the price per
share of the related common stock on the mandatory conversion date is less
than the call price, the holder of the preferred stock will nonetheless
receive only one share of common stock for each share of preferred stock
(plus cash in the amount of any accrued but unpaid dividends). At any time
prior to the mandatory conversion date, the issuer may redeem the preferred
stock upon issuing to the holder a number of shares of common stock equal to
the call price of the preferred stock in effect on the date of redemption
divided by the market value of the common stock, with such market value
typically determined one or two trading days prior to the date notice of
redemption is given. The issuer must also pay the holder of the preferred
stock cash in an amount equal to any accrued but unpaid dividends on the
preferred stock. This convertible preferred stock is subject to the same
market risk as the common stock of the issuer, except to the extent that such
risk is mitigated by the higher dividend paid on the preferred stock. The
opportunity for equity appreciation afforded by an investment in such
convertible preferred stock, however, is limited, because in the event the
market value of the issuer's common stock increases to or above the call
price of the preferred stock, the issuer may (and would be expected to) call
the preferred stock for redemption at the call price. This convertible
preferred stock is also subject to credit risk with regard to the ability of
the issuer to pay the dividend established upon issuance of the preferred
stock. Generally, convertible preferred stock is less volatile than the
related common stock of the issuer.
SPECIFIC SECURITIES AND INVESTMENT PRACTICES
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities ("U.S. Government securities") are high quality
debt instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date
they are issued), Treasury Notes (which have maturities of one to ten years)
and Treasury Bonds (which generally have maturities of
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more than 10 years). All such Treasury securities are backed by the full
faith and credit of the United States.
U.S. Government agencies and instrumentalities that issue or
guarantee securities include, but are not limited to, the Federal Housing
Administration, Fannie Mae (also known as the Federal National Mortgage
Association), Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage
Association ("Ginnie Mae"), General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
("Freddie Mac"), Farm Credit Banks, Maritime Administration, the Tennessee
Valley Authority, the Resolution Funding Corporation and the Student Loan
Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of
the United States. Some, such as securities issued by the Federal Home Loan
Banks, are backed by the right of the agency or instrumentality to borrow
from the Treasury. Others, such as securities issued by Fannie Mae, are
supported only by the credit of the instrumentality and by a pool of mortgage
assets. If the securities are not backed by the full faith and credit of the
United States, the owner of the securities must look principally to the
agency issuing the obligation for repayment and may not be able to assert a
claim against the United States in the event that the agency or
instrumentality does not meet its commitment.
U.S. Government securities may include mortgage-backed securities
issued by U.S. Government agencies or instrumentalities including, but not
limited to, the Ginnie Mae, the Freddie Mac and the Fannie Mae. These
mortgage-backed securities include "pass-through" securities, "participation
certificates" and collateralized mortgage obligations. See "Mortgage-Backed
and Asset-Backed Securities." Timely payment of principal and interest on
Ginnie Mae pass-throughs is guaranteed by the full faith and credit of the
United States. Freddie Mac and Fannie Mae are both instrumentalities of the
U.S. Government, but their obligations are not backed by the full faith and
credit of the United States. It is possible that the availability and the
marketability (i.e., liquidity) of the securities discussed in this section
could be adversely affected by actions of the U.S. Government to tighten the
availability of its credit.
MONEY MARKET INSTRUMENTS
Money market instruments are high-quality, short-term debt
instruments that present minimal credit risk. They may include U.S.
Government securities, commercial paper and other short-term corporate
obligations, and certificates of deposit and other financial institution
obligations. These instruments may carry fixed or variable interest rates.
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ZERO COUPON SECURITIES
Zero coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or that specify
a future date when the securities begin to pay current interest; instead,
they are sold at a deep discount from their face value and are redeemed at
face value when they mature. Because zero coupon securities do not pay
current income, their prices can be very volatile when interest rates change
and generally are subject to greater price fluctuations in response to
changing interest rates than prices of comparable maturities that make
current distributions of interest in cash.
The Fund may invest in zero coupon securities that are "stripped"
U.S. Treasury notes and bonds, zero coupon bonds of corporate issuers and
other securities that are issued with original issue discount ("OID"). The
Federal tax law requires that a holder of a security with OID accrue a
ratable portion of the OID on the security as income each year, even though
the holder may receive no interest payment on the security during the year.
Accordingly, although the Fund will receive no payments on its zero coupon
securities prior to their maturity or disposition, it will have current
income attributable to those securities and includable in the dividends paid
to its shareholders. Those dividends will be paid from the Fund's cash assets
or by liquidation of portfolio securities, if necessary, at a time when the
Fund otherwise might not have done so.
A broker-dealer creates a derivative zero by separating the interest
and principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of
Registered Interest and Principal of Securities) by separating the interest
and principal components of an outstanding U.S. Treasury bond and selling
them as individual securities. Bonds issued by the Resolution Funding
Corporation (REFCORP) and the Financing Corporation (FICO) can also be
separated in this fashion. Original issue zeros are zero coupon securities
originally issued by the U.S. Government, a government agency, or a
corporation in zero coupon form.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent
direct or indirect participations in, or are secured by and payable from,
mortgage loans secured by real property and include single- and multi-class
pass-through securities and collateralized mortgage obligations. Multi-class
pass-through
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securities and collateralized mortgage obligations are collectively referred
to in this SAI as "CMOs." Some CMOs are directly supported by other CMOs,
which in turn are supported by mortgage pools. Investors typically receive
payments out of the interest and principal on the underlying mortgages. The
portions of the payments that investors receive, as well as the priority of
their rights to receive payments, are determined by the specific terms of the
CMO class.
The U.S. Government mortgage-backed securities in which the Fund may
invest include mortgage-backed securities issued or guaranteed as to the
payment of principal and interest (but not as to market value) by Ginnie Mae,
Fannie Mae or Freddie Mac. Other mortgage-backed securities are issued by
private issuers, generally originators of and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks,
investment bankers and special purpose entities. Payments of principal and
interest (but not the market value) of such private mortgage-backed
securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by
the U.S. Government or one of its agencies or instrumentalities, or they may
be issued without any government guarantee of the underlying mortgage assets
but with some form of non-government credit enhancement. These credit
enhancements do not protect investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage lenders, or
other financial institutions. Other types of mortgage-backed securities will
likely be developed in the future, and the Fund may invest in them if WRIMCO
determines they are consistent with the Fund's 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
"interest-only" security ("IO") receives interest payments from the same
underlying security.
For example, interest-only ("IO") classes are entitled to receive
all or a portion of the interest, but none (or only a nominal amount) of the
principal payments, from the underlying mortgage assets. If the mortgage
assets underlying an IO experience greater than anticipated principal
prepayments, then the total amount of interest allocable to the IO class, and
therefore the yield to investors, generally will be reduced. In some
instances, an investor in an IO may fail to recoup all of the investor's
initial investment, even if the security is guaranteed by the U.S. Government
or considered to be of the
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highest quality. Conversely, principal-only ("PO") classes are entitled to
receive all or a portion of the principal payments, but none of the interest,
from the underlying mortgage assets. PO classes are purchased at substantial
discounts from par, and the yield to investors will be reduced if principal
payments are slower than expected. IOs, POs and other CMOs involve special
risks, and evaluating them requires special knowledge.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets 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
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the mortgage pool for passing through monthly payments to certificateholders
and to any guarantor, and due to any yield retained by the issuer. Actual
yield to the holder may vary from the coupon rate, even if adjustable, if the
mortgage-backed securities are purchased or traded in the secondary market at
a premium or discount. In addition, there is normally some delay between the
time the issuer receives mortgage payments from the servicer and the time the
issuer makes the payments on the mortgage-backed securities, and this delay
reduces the effective yield to the holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and
the associated average life assumption. The average life of pass-through
pools varies with the maturities of the underlying mortgage loans. A pool's
term may be shortened by unscheduled or early payments of principal on the
underlying mortgages. Because prepayment rates of individual pools vary
widely, it is not possible to predict accurately the average life of a
particular pool. In the past, a common industry practice has been to assume
that prepayments on pools of fixed-rate 30-year mortgages would result in a
12-year average life for the pool. At present, mortgage pools, particularly
those with loans with other maturities or different characteristics, are
priced on an assumption of average life determined for each pool. In periods
of declining interest rates, the rate of prepayment tends to increase,
thereby shortening the actual average life of a pool of mortgage-related
securities. Conversely, in periods of rising interest rates, the rate of
prepayment tends to decrease, thereby lengthening the actual average life of
the pool. Changes in the rate or "speed" of these payments can cause the
value of the mortgage-backed securities to fluctuate rapidly. However, these
effects may not be present, or may differ in degree, if the mortgage loans in
the pools have adjustable interest rates or other special payment terms, such
as a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics,
such as yield, effective maturity and interest rate sensitivity. As market
conditions change, however, and especially during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of some
CMO classes and the ability of the structure to provide the anticipated
investment characteristics may be reduced. These changes can result in
volatility in the market value and, in some instances reduced liquidity, of
the CMO class.
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VARIABLE OR FLOATING RATE INSTRUMENTS
Variable or floating rate instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and may carry
rights that permit holders to demand payment of the unpaid principal balance
plus accrued interest from the issuers or certain financial intermediaries on
dates prior to their stated maturities. Floating rate securities have
interest rates that change whenever there is a change in a designated base
rate while variable rate instruments provide for a specified periodic
adjustment in the interest rate. These formulas are designed to result in a
market value for the instrument that approximates its par value.
INDEXED SECURITIES
The Fund may purchase securities the value of which varies in
relation to the value of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators, subject
to its operating policy regarding derivative instruments. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument
or statistic. The performance of indexed securities depends to a great extent
on the performance of the security, currency or other instrument to which
they are indexed and may also be influenced by interest rate changes in the
United States and abroad. At the same time, indexed securities are subject to
the credit risks associated with the issuer of the security and their values
may decline substantially if the issuer's creditworthiness deteriorates.
Indexed securities may be more volatile than the underlying investments.
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. WRIMCO will use its
judgment in determining whether indexed securities should
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be treated as short-term instruments, bonds, stocks or as a separate asset
class for purposes of the Fund's investment allocations, depending on the
individual characteristics of the securities. Certain indexed securities that
are not traded on an established market may be deemed illiquid.
FOREIGN SECURITIES AND CURRENCIES
The Fund may invest in the securities of foreign issuers, including
depositary receipts. In general, depositary receipts are securities
convertible into and evidencing ownership of securities of foreign corporate
issuers, although depositary receipts may not necessarily be denominated in
the same currency as the securities into which they may be converted.
American depositary receipts, in registered form, are dollar-denominated
receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities. International depositary receipts and
European depositary receipts, in bearer form, are foreign receipts evidencing
a similar arrangement and are designed for use by non-U.S. investors and
traders in non-U.S. markets. Global depositary receipts are designed to
facilitate the trading of securities of foreign issuers by U.S. and non-U.S.
investors and traders.
WRIMCO believes that there are investment opportunities as well as
risks in investing in foreign securities. Individual foreign economies may
differ favorably or unfavorably from the U.S. economy or each other in such
matters as gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Individual
foreign companies may also differ favorably or unfavorably from domestic
companies in the same industry. Foreign currencies may be stronger or weaker
than the U.S. dollar or than each other. Thus, the value of securities
denominated in or indexed to foreign currencies, and of dividends and
interest from such securities, can change significantly when foreign
currencies strengthen or weaken relative to the U.S. dollar. WRIMCO believes
that the Fund's ability to invest its assets abroad might enable it to take
advantage of these differences and strengths where they are favorable.
However, foreign securities and foreign currencies involve
additional significant risks, apart from the risks inherent in U.S.
investments. Foreign securities markets generally have less trading volume
and less liquidity than U.S. markets, and prices on some foreign markets can
be highly volatile. Many foreign countries lack uniform accounting and
disclosure standards comparable to those applicable to U.S. companies, and it
may be more difficult to obtain reliable information regarding an issuer's
financial conditions and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions and custodial
costs, are generally higher than for U.S. investments.
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Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers and securities markets may be subject to
less government supervision. Foreign security trading practices, including
those involving the release of assets in advance of payment, may involve
increased risks in the event of a failed trade or the insolvency of a
broker-dealer, and may involve substantial delays. It may also be difficult
to enforce legal rights in foreign countries.
Investing abroad also involves different political and economic
risks. Foreign investments may be affected by actions of foreign governments
adverse to the interests of U.S. investors, including the possibility of
expropriation or nationalization of assets, confiscatory taxation,
restrictions on U.S. investment or on the ability to repatriate assets or
convert currency into U.S. dollars, or other government intervention. There
may be greater possibility of default by foreign governments or
government-sponsored enterprises. Investments in foreign countries also
involve a risk of local political, economic, or social instability, military
action or unrest, or adverse diplomatic developments. There is no assurance
that WRIMCO will be able to anticipate these potential events or counter
their effects.
The considerations noted above generally are intensified in
developing countries. A developing country is a nation that, in WRIMCO's
opinion, is likely to experience long-term gross domestic product growth
above that expected to occur in the United States, the United Kingdom,
France, Germany, Italy, Japan and Canada. Developing countries may have
relatively unstable governments, economies based on only a few industries and
securities markets that trade a small number of securities.
Certain foreign securities impose restrictions on transfer within
the United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The Fund could also be adversely affected by the conversion of
certain European currencies into the euro. This conversion, which is
underway, is scheduled to be completed in 2002. However, problems with the
conversion process and delays could increase volatility in world capital
markets and affect European capital markets in particular.
The Fund may purchase and sell foreign currency and invest in
foreign currency deposits, and may enter into forward currency contracts. The
Fund may incur a transaction charge in connection with the exchange of
currency. Currency conversion involves dealer spreads and other costs,
although commissions are not usually charged. See "Options and Futures -
Forward Currency Contracts."
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WARRANTS AND RIGHTS
Warrants are options to purchase equity securities at specific
prices valid for a specific period of time. The prices do not necessarily
move parallel to the prices of the underlying securities. Rights are similar
to warrants, but normally have a short duration and are distributed directly
by the issuer to its shareholders. Rights and warrants have no voting rights,
receive no dividends and have no rights with respect to the assets of the
issuer. Warrants and rights are highly volatile and, therefore, more
susceptible to a sharp decline in value than the underlying security might
be. They are also generally less liquid than an investment in the underlying
shares.
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.
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 loan that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). At the
time of each loan, the Fund must receive collateral equal to no less than
100% of the market value of the securities loaned. Under the present
Guidelines, the collateral must consist of cash, U.S. Government securities
or bank letters of credit, at least equal in value to the market value of the
securities lent on each day that the loan is outstanding. If the market value
of the 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 a 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
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receive interest on the investment of the cash collateral or to receive
interest on the U.S. Government securities used as collateral. Part of the
interest received in either case may be shared with the borrower.
The letters of credit that the Fund may accept as collateral are
agreements by banks (other than the borrowers of the Fund's securities),
entered into at the request of the borrower and for its account and risk,
under which the banks are obligated to pay to the Fund, while the letter is
in effect, amounts demanded by the Fund if the demand meets the terms of the
letter. The Fund's right to make this demand secures the borrower's
obligations to it. The terms of any such letters and the creditworthiness of
the banks providing them (which might include the Fund's custodian bank) must
be satisfactory to the Fund. The Fund will make loans only under rules of the
NYSE, which presently require the borrower to give the securities back to the
Fund within five business days after the Fund gives notice to do so. If the
Fund loses its voting rights on securities loaned, it will have the
securities returned to it in time to vote them if a material event affecting
the investment is to be voted on. The Fund may 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,
however, 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, as well
as risks of delay in recovering the securities loaned or even loss of rights
in the collateral should the borrower of the securities fail financially.
REPURCHASE AGREEMENTS
The Fund may purchase securities subject to repurchase agreements.
The Fund will not enter into a repurchase transaction that will cause more
than 10% of its net assets to be invested in illiquid investments, which
include repurchase agreements not terminable within seven days. See "Illiquid
Investments." A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a commercial bank or
broker-dealer) agrees, at the time of purchase, that it will repurchase the
security at a specified time and price. The amount by which the resale price
is greater than the purchase price reflects an agreed-upon market interest
rate effective for the period of the agreement. The return on
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the securities subject to the repurchase agreement may be more or less than
the return on the repurchase agreement.
The majority of the repurchase agreements in which the Fund will
engage are overnight transactions, and the delivery pursuant to the resale
typically will occur within one to five days of the purchase. The primary
risk is that the Fund may suffer a loss if the seller fails to pay the
agreed-upon amount on the delivery date and that amount is greater than the
resale price of the underlying securities and other collateral held by the
Fund. In the event of bankruptcy or other default by the seller, there may be
possible delays 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.
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 might 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 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) restricted securities not determined to be liquid pursuant to
guidelines established by the Board of Directors;
(iv) bank deposits, unless they are payable at principal plus
accrued interest on demand or within seven days after demand;
(v) securities involved in swap, cap, floor and collar
transactions;
(vi) non-government stripped fixed-rate mortgage-backed securities;
and
(vii) over-the-counter ("OTC") options and their underlying
collateral.
The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum
price to be calculated by a formula set forth in the option agreement. The
cover for an OTC option written subject to this procedure would be considered
illiquid only to the extent that the maximum repurchase price under the
formula exceeds the intrinsic value of the option.
If through a change in values, net assets, or other circumstances,
the Fund were in a position where more than 10% of its net assets were
invested in illiquid securities, it would seek to take appropriate steps to
protect liquidity.
OPTIONS, FUTURES AND OTHER STRATEGIES
GENERAL. WRIMCO may use certain options, futures contracts
(sometimes referred to as "futures"), options on futures contracts, forward
currency contracts, swaps, caps, floors, collars, indexed securities and
other derivative instruments (collectively, "Financial Instruments") to
attempt to enhance income or yield or to attempt to hedge the Fund's
investments. The strategies described below may be used in an attempt to
manage the Fund's foreign currency exposure as well as other
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risks of the Fund's investments that can affect fluctuation in its net asset
value.
Generally, the Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, the Fund will only purchase or
sell a particular Financial Instrument if the Fund is authorized to invest in
the type of asset by which the return on, or value of, the Financial
Instrument is primarily measured. Since the Fund is authorized to invest in
foreign securities, it may purchase and sell foreign currency derivatives.
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential declines in the value of one
or more investments held in the Fund's portfolio. Thus, in a short hedge, the
Fund takes a position in a Financial Instrument whose price is expected to
move in the opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that the Fund intends to acquire.
Thus, in a long hedge, the Fund takes a position in a Financial Instrument
whose price is expected to move in the same direction as the price of the
prospective investment being hedged. A long hedge is sometimes referred to as
an anticipatory hedge. In an anticipatory hedge transaction, the Fund does
not own a corresponding security and, therefore, the transaction does not
relate to a security the Fund owns. Rather, it relates to a security that the
Fund intends to acquire. If the Fund does not complete the hedge by
purchasing the security it anticipated purchasing, the effect on the Fund's
portfolio is the same as if the transaction were entered into for speculative
purposes.
Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Financial Instruments on indices,
in contrast, generally are used to attempt to hedge against price movements
in market sectors in which the Fund has invested or expects to invest.
Financial Instruments on debt securities may be used to hedge either
individual securities or broad debt market sectors.
The use of Financial Instruments is subject to applicable
regulations of the Securities and Exchange Commission (the "SEC"), the
several exchanges upon which they are traded and the Commodity Futures
Trading Commission (the "CFTC"). In addition, the Fund's ability to use
Financial Instruments will be limited by tax considerations. See "Taxes."
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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.
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
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that the options or futures position will not track the performance of the
Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options
and futures markets and the securities markets, from structural differences
in how options and futures and securities are traded, or from imposition of
daily price fluctuation limits or trading halts. The Fund may purchase or
sell options and futures contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to attempt to
compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price
changes in the Fund's options or futures positions are poorly correlated with
its other investments, the positions may fail to produce anticipated gains or
result in losses that are not offset by gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable
price movements. However, such strategies can also reduce opportunity for
gain by offsetting the positive effect of favorable price movements. For
example, if the Fund entered into a short hedge because WRIMCO projected a
decline in the price of a security in the Fund's portfolio, and the price of
that security increased instead, the gain from that increase might be wholly
or partially offset by a decline in the price of the Financial Instrument.
Moreover, if the price of the Financial Instrument declined by more than the
increase in the price of the security, the Fund could suffer a loss. In
either such case, the Fund would have been in a better position had it not
attempted to hedge at all.
(4) As described below, the Fund might be required to maintain
assets as "cover," maintain accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties
(i.e., Financial Instruments other than purchased options). If the Fund were
unable to close out its positions in such Financial Instruments, it might be
required to continue to maintain such assets or accounts or make such
payments until the position expired or matured. These requirements might
impair the Fund's ability to sell a portfolio security or make an investment
at a time when it would otherwise be favorable to do so, or require that the
Fund sell a portfolio security at a disadvantageous time.
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(5) The Fund's ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction (the "counterparty") to
enter into a transaction closing out the position. Therefore, there is no
assurance that any position can be closed out at a time and price that is
favorable to the Fund.
COVER. Transactions using Financial Instruments, other than
purchased options, expose the Fund to an obligation to another party. The
Fund will comply with SEC guidelines regarding cover for these instruments
and will, if the guidelines so require, set aside cash or liquid assets in an
account with its custodian in the prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a
large portion of the Fund's assets to cover or accounts could impede
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
OPTIONS. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon
price during the option period. A put option gives the purchaser the right to
sell, and obligates the writer 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."
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Writing put options can serve as a limited long hedge because
increases in the value of the hedged investment would be offset to the extent
of the premium received for writing the option. However, if the security or
currency depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised and the Fund
will be obligated to purchase the security or currency at more than its
market value. If the put option is an OTC option, the securities or other
assets used as cover would be considered illiquid to the extent described
under "Illiquid Investments."
The value of an option position will reflect, among other things,
the current market value of the underlying investment, the time remaining
until expiration, the relationship of the exercise price to the market price
of the underlying investment, the historical price volatility of the
underlying investment and general market conditions. Options that expire
unexercised have no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, the Fund may terminate a position in a put
or call option it had purchased by writing an identical put or call option;
this is known as a closing sale transaction. Closing transactions permit the
Fund to realize profits or limit losses on an option position prior to its
exercise or expiration.
A type of put that the Fund may purchase is an "optional delivery
standby commitment," which is entered into by parties selling debt securities
to the Fund. An optional delivery standby commitment gives the Fund the right
to sell the security back to the seller on specified terms. This right is
provided as an inducement to purchase the security.
RISKS OF OPTIONS ON SECURITIES. Options offer large amounts of
leverage, which will result in the Fund's net asset value being more
sensitive to changes in the value of the related instrument. The Fund may
purchase or write both exchange-traded and OTC options. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between the Fund and its counterparty (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus,
when the Fund purchases an OTC option, it relies on the counterparty from
whom it purchased the option to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counterparty to do so
would result in the loss of any premium paid by the Fund as well as the loss
of any expected benefit of the transaction.
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The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular
time. Closing transactions can be made for OTC options only by negotiating
directly with the counterparty, or by a transaction in the secondary market
if any such market exists. There can be no assurance that the Fund will in
fact be able to close out an OTC option position at a favorable price prior
to expiration. In the event of insolvency of the counterparty, the Fund might
be unable to close out an OTC option position at any time prior to its
expiration.
If the Fund were unable to effect a closing transaction for an
option it had purchased, it would have to exercise the option to realize any
profit. The inability to enter into a closing purchase transaction for a
covered call option written by the Fund could cause material losses because
the Fund would be unable to sell the investment used as cover for the written
option until the option expires or is exercised.
OPTIONS ON INDICES. Puts and calls on indices are similar to puts
and calls on securities or futures contracts except that all settlements are
in cash and gain or loss depends on changes in the index in question rather
than on price movements in individual securities or futures contracts. When
the Fund writes a call on an index, it receives a premium and agrees that,
prior to the expiration date, the purchaser of the call, upon exercise of the
call, will receive from the Fund an amount of cash if the closing level of
the index upon which the call is based is greater than the exercise price of
the call. The amount of cash is equal to the difference between the closing
price of the index and the exercise price of the call times a specified
multiple (the "multiplier"), which determines the total dollar value for each
point of such difference. When the Fund buys a call on an index, it pays a
premium and has the same rights as to such call as are indicated above. When
the Fund buys a put on an index, it pays a premium and has the right, prior
to the expiration date, to require the seller of the put, upon the Fund's
exercise of the put, to deliver to the Fund an amount of cash if the closing
level of the index upon which the put is based is less than the exercise
price of the put, which amount of cash is determined by the multiplier, as
described above for calls. When the Fund writes a put on an index, it
receives a premium and the purchaser of the put has the right, prior to the
expiration date, to require the Fund to deliver to it an amount of cash equal
to the difference between the closing level of the index and the exercise
price times the multiplier if the closing level is less than the exercise
price.
RISKS OF OPTIONS ON INDICES. The risks of investment in options on
indices may be greater than options on securities. Because index options are
settled in cash, when the Fund writes a call on an index it cannot provide in
advance for its potential
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settlement obligations by acquiring and holding the underlying securities.
The Fund can offset some of the risk of writing a call index option by
holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as
underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced
the composition of the underlying index, it still would not be fully covered
from a risk standpoint because of the "timing risk" inherent in writing index
options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund as the call writer will
not learn that the Fund has been assigned until the next business day at the
earliest. The time lag between exercise and notice of assignment poses no
risk for the writer of a covered call on a specific underlying security, such
as a common stock, because there the writer's obligation is to deliver the
underlying security, not to pay its value as of a fixed time in the past. So
long as the writer already owns the underlying security, it can satisfy its
settlement obligations by simply delivering it, and the risk that its value
may have declined since the exercise date is borne by the exercising holder.
In contrast, even if the writer of an index call holds securities that
exactly match the composition of the underlying index, it will not be able to
satisfy its assignment obligations by delivering those securities against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date. By the time it
learns that it has been assigned, the index may have declined, with a
corresponding decline in the value of its portfolio. This "timing risk" is an
inherent limitation on the ability of index call writers to cover their risk
exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before
the closing index value for that day is available, it runs the risk that the
level of the underlying index may subsequently change. If such a change
causes the exercised option to fall out-of-the-money, the Fund will be
required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the
assigned writer.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size and
strike price, the terms of OTC options (options not traded on exchanges)
generally are established through negotiation with the other party to the
option contract. While this type of arrangement allows the Fund great
flexibility to tailor the option to its needs, OTC options
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generally involve greater risk than exchange-traded options, which are
guaranteed by the clearing organization of the exchanges where they are
traded. The Fund will not enter into any such transactions unless it owns
either (1) an offsetting ("covered") position in securities, currencies or
other options, futures contracts or forward contracts, or (2) cash and liquid
assets with a value, marked-to-market daily, sufficient to cover its
potential obligations to the extent not covered as provided in (1) above.
Generally, OTC foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of
the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The purchase of
futures 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.
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Subsequent "variation margin" payments are made to and from the
futures broker daily as the value of the futures position varies, a process
known as "marking-to-market." Variation margin does not involve borrowing,
but rather represents a daily settlement of the Fund's obligations to or from
a futures broker. When the Fund purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when the
Fund purchases or sells a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Fund has
insufficient cash to meet daily variation margin requirements, it might need
to sell securities at a time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures
can enter into offsetting closing transactions, similar to closing
transactions on options, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Positions in
futures and options on futures may be closed only on an exchange or board of
trade that provides a secondary market. However, there can be no assurance
that a liquid secondary market will exist for a particular contract at a
particular time. In such event, it may not be possible to close a futures
contract or options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading,
thereby preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option
on a futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the futures contract or option or to
maintain cash or liquid assets in an account.
RISKS OF FUTURES CONTRACTS AND OPTIONS THEREON. The ordinary spreads
between prices in the cash and futures market (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
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relationship between the cash and futures markets. Second, the liquidity of
the futures market depends on participants entering into offsetting
transactions, rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of
general interest rate, currency 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 future 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 the securities being hedged if the historical volatility of the prices of
such securities being hedged is more than the historical volatility of the
prices of the securities included in the index. It is also possible that,
where the Fund has sold index futures contracts to hedge 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.
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Where index futures are purchased to hedge against a possible
increase in the price of securities before the Fund is able to invest in them
in an orderly fashion, it is possible that the market may decline instead. If
the Fund then concludes not to invest in them at that time because of concern
as to possible further market decline or for other reasons, it will realize a
loss on the futures contract that is not offset by a reduction in the price
of the securities it had anticipated purchasing.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. The
Fund may use options and futures contracts on foreign currencies (including
the euro), as described above, and foreign currency forward 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
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where rates might be less favorable. The interbank market in foreign
currencies is a global, round-the-clock market. To the extent the U.S.
options or futures markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements might take place
in the underlying markets that cannot be reflected in the markets for the
Financial Instruments until they reopen.
Settlement of transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, the Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might
be required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time of the
forward currency contract. These forward currency contracts are traded
directly between currency traders (usually large commercial banks) and their
customers.
Such transactions may serve as long hedges; for example, the Fund
may purchase a forward currency contract to lock in the U.S. dollar price of
a security denominated in a foreign currency that the Fund intends to
acquire. Forward currency contract transactions may also serve as short
hedges; for example, the Fund may sell a forward currency contract to lock in
the U.S. dollar equivalent of the proceeds from the anticipated sale of a
security, dividend or interest payment denominated in a foreign currency.
The Fund may also use forward contracts to hedge against a decline
in the value of existing investments denominated in foreign currency. For
example, if the Fund owned securities denominated in euros, it could enter
into a forward currency contract to sell euros in return for U.S. dollars to
hedge against possible declines in the euro's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security
values caused by other factors. The Fund could also hedge the position by
selling another currency expected to perform similarly to the euro. This type
of hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield or efficiency, but generally would not hedge currency
exposure as effectively as a simple hedge into U.S. dollars. Proxy hedges may
result in losses if the currency
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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 such foreign currencies are not covered by forward currency contracts.
The projection of short-term currency market
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movements is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will
be incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the flexibility to enter into such forward currency
contracts when it determines that the best interests of the Fund will be
served.
Successful use of forward currency contracts depends on WRIMCO's
skill in analyzing and predicting currency values. Forward currency contracts
may substantially change the Fund's exposure to changes in currency exchange
rates and could result in losses to the Fund if currencies do not perform as
WRIMCO anticipates. There is no assurance that WRIMCO's use of forward
currency contracts will be advantageous to the Fund or that WRIMCO will hedge
at an appropriate time.
COMBINED POSITIONS. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a
futures contract. Another possible combined position would involve writing a
call option at one strike price and buying a call option at a lower price, in
order to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
TURNOVER. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or
puts written by the Fund, and the sale or purchase of futures contracts, may
cause it to sell or purchase related investments, thus increasing its
turnover rate. Once the Fund has received an exercise notice on an option it
has written, it cannot effect a closing transaction in order to terminate its
obligation under the option and must deliver or receive the underlying
securities at the exercise price. The exercise of puts purchased by the Fund
may also cause the sale of related investments, also increasing turnover;
although such exercise is within the Fund's control, holding a protective put
might cause it to sell the related investments for reasons that would not
exist in the absence of the put. The Fund will pay a brokerage commission
each time it buys or sells a put or call or purchases or sells a futures
contract. Such commissions may be higher than those that would apply to
direct purchases or sales.
SWAPS, CAPS, FLOORS AND COLLARS. The Fund may enter into swaps,
caps, floors and collars to preserve a return or a spread
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on a particular investment or portion of its portfolio, to protect against
any increase in the price of securities the Fund anticipates purchasing at a
later date or to attempt to enhance yield. Swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
cash flows, e.g., an exchange of floating rate payments for fixed-rate
payments. The purchase of a cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined value, to receive payments on a
notional principal amount from the party selling the cap. The purchase of a
floor entitles the purchaser, to the extent that a specified index falls
below a predetermined value, to receive payments on a notional principal
amount from the party selling the floor. A collar combines elements of buying
a cap and selling a floor.
Swap agreements, including caps, 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
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Act. The Fund will also establish and maintain such account with respect to
its total obligations under any swaps that are not entered into on a net
basis and with respect to any caps or floors that are written by the Fund.
WRIMCO and the Fund believes 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 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;
(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;
(iv) Lend money or other assets, other than through certain limited
types of loans; 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;
(v) Invest for the purpose of exercising control or management of
other companies;
(vi) Participate on a joint, or a joint and several, basis in any
trading account in any securities;
(vii) Sell securities short (unless it owns or has the right to
obtain securities equivalent in kind and amount to the
securities sold short) or purchase securities on
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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 money; however, this policy shall not prevent the Fund
from pledging its assets in connection with its purchase and
sale of futures contracts, options, forward contracts, swaps,
caps, floors, collars and other financial instruments;
(x) With respect to 75% of its total assets, purchase securities
of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act), if immediately after
and as a result of such purchase, (a) the value of the
holdings of the Fund in the securities of such issuer exceeds
5% of the value of the Fund's total assets, or (b) the Fund
owns more than 10% of the outstanding voting securities of
such issuer;
(xi) Buy a security if, as a result, more than 25% of its total
assets would then be in securities of companies in any one
industry; or
(xii) Issue senior securities.
THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL AND MAY BE
CHANGED BY THE BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL:
(i) The Fund does not intend to invest in non-investment grade
debt securities if, as a result of such investment, more than
5% of its total assets would consist of such investments.
(ii) The Fund does not intend to invest more than 20% 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 investment companies
that do not redeem their shares.
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(v) The Fund does not currently intend to purchase the securities
of any issuer (other than securities issued or guaranteed by
domestic 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 over-the-counter derivative instruments.
(vi) The Fund does not intend to purchase any interests in oil and
gas or other mineral exploration or development programs if,
as a result, more than 10% of its total assets would be
invested in such interests.
(vii) To the extent that the Fund enters into futures contracts,
options on futures contracts or options on foreign currencies
traded on a CFTC-regulated exchange, in each case other than
for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish
those positions (excluding the amount by which options are
"in-the-money" at the time of purchase) will not exceed 5% of
the liquidation value of the Fund's portfolio, after taking
into account unrealized profits and unrealized losses on any
contracts the Fund has entered into. (In general, a call
option on a futures contract is "in-the-money" if the value of
the underlying futures contract exceeds the strike, i.e.,
exercise, price of the call; a put option on a futures
contract is "in-the-money" if the value of the underlying
futures contract is exceeded by the strike price of the put.)
This policy does not limit to 5% the percentage of the Fund's
total assets that are at risk in futures contracts, options on
futures contracts and currency options.
An investment policy or limitation that states a maximum percentage
of the Fund's assets that may be so invested or prescribes quality standards
is typically applied immediately after, and based on, the Fund's acquisition
of an asset. Accordingly, a subsequent change in the asset's value, net
assets, or other circumstances will not be considered when determining
whether the investment complies with the Fund's investment policies and
limitations.
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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 U.S. Government securities with maturities of less
than 12 months and certain short-term securities. The Fund's turnover rate
may vary greatly from year to year as well as within a particular year and
may be affected by cash requirements for the redemption of its shares. The
Fund's turnover rate for the fiscal years ended September 30, 1999 and 1998
was 83.67% and 90.51%, respectively.
INVESTMENT MANAGEMENT AND OTHER SERVICES
THE MANAGEMENT AGREEMENT
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and
related professional staff) to WRIMCO, a wholly owned subsidiary of Waddell &
Reed, Inc. Under the Management Agreement, WRIMCO is employed to supervise
the investments of the Fund and provide investment advice to the Fund. The
address of WRIMCO and Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's
underwriter.
The Management Agreement permits WRIMCO, or an affiliate of WRIMCO,
to enter into a separate agreement for transfer agency services ("Shareholder
Servicing Agreement") and a separate agreement for accounting services
("Accounting Services Agreement") with the Fund. The Management Agreement
contains detailed provisions as to the matters to be considered by the Fund's
Board of Directors prior to approving any Shareholder Servicing Agreement or
Accounting Services Agreement.
WADDELL & REED FINANCIAL, INC.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell
& Reed, Inc. is a wholly owned subsidiary of Waddell & Reed Financial
Services, Inc., a holding company which is a wholly owned subsidiary of
Waddell & Reed Financial, Inc., a publicly held company. The address of these
companies is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas
66201-9217.
Waddell & Reed, Inc. and its predecessors have served as investment
manager to each of the registered investment companies in the Waddell & Reed
Advisors Funds (formerly, the United Group
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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.
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 Fund's fiscal years ended September 30, 1999,
1998 and 1997 were $12,333,709, $10,495,461 and $9,591,674, respectively.
For purposes of calculating the daily fee, the Fund does not include
money owed to it by Waddell & Reed, Inc. for shares which it has sold but not
yet paid the Fund. The Fund accrues and pays this fee daily.
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<PAGE>
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.
ACCOUNTING SERVICES FEE
<TABLE>
<CAPTION>
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
Fees paid to the Agent for accounting services for the fiscal years
ended September 30, 1999, 1998 and 1997 were $100,000 for each of the three
years.
Since the Fund pays a management fee for investment supervision and
an accounting services fee for accounting services as discussed above, WRIMCO
and the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement
are described above. Waddell & Reed, Inc. and affiliates pay the Fund's
Directors and officers who are affiliated with WRIMCO and its affiliates. The
Fund pays the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the
Management Agreement, Shareholder Servicing Agreement and
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<PAGE>
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 September 30, 1999, 1998 and 1997 were
$4,419,165, $2,616,408, and $2,397,522, respectively, and the amounts
retained by Waddell & Reed, Inc. for each fiscal year were $1,841,965,
$1,122,228 and $1,047,001, 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 charge ("CDSC") for Class B and Class C shares
and for certain Class A shares may be paid to financial advisors and managers
of Waddell & Reed, Inc. and selling broker-dealers. Waddell & Reed, Inc. may
compensate its financial advisors as to purchases for which there is no sales
or deferred sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes,
brokerage commissions, interest, insurance premiums, custodian fees, fees
payable by the Fund under Federal or other securities laws and to the
Investment Company Institute and nonrecurring and extraordinary expenses,
including litigation and indemnification relating to litigation.
Under the Distribution and Service Plan (the "Plan") for Class A
shares adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the
Fund may pay Waddell & Reed, Inc., the principal underwriter for the Fund, a
fee not to exceed .25% of the Fund's average annual net assets attributable
to Class A shares, paid monthly, to reimburse Waddell & Reed, Inc. for its
costs and expenses in connection with, either directly or through others, the
distribution of the Class A shares, the provision of personal services to
Class A shareholders and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its financial
advisors, registered representatives and sales managers ("sales force") and
through other broker-dealers, banks and other appropriate intermediaries. In
distributing shares through its sales force, Waddell & Reed, Inc. will pay
commissions and incentives to the sales force at or about the time of sale
and will incur other expenses including costs for prospectuses, sales
literature, advertisements, sales office maintenance, processing of orders
and general overhead with respect to its efforts to distribute the Fund's
shares. The Class A Plan permits Waddell & Reed, Inc. to receive
reimbursement for these Class A-related
41
<PAGE>
distribution activities through the distribution fee, subject to the limit
contained in the Plan. The Class A Plan also permits Waddell & Reed, Inc. to
be reimbursed for amounts it expends in compensating, training and supporting
registered financial advisors, sales managers and/or other appropriate
personnel in providing personal services to Class A shareholders of the Fund
and/or maintaining Class A shareholder accounts; increasing services provided
to Class A shareholders of the Fund by office personnel located at field
sales offices; engaging in other activities useful in providing personal
service to Class A shareholders of the Fund and/or maintenance of Class A
shareholder accounts; and in compensating broker-dealers who may regularly
sell Class A shares of the Fund, and other third parties, for providing
shareholder services and/or maintaining shareholder accounts with respect to
Class A shares. Fees paid (or accrued) as service and distribution fees by
the Fund under the Class A Plan for the fiscal year ended September 30, 1999
were $4,022,952 and $368,801, respectively.
To the extent that Waddell & Reed, Inc. incurs expenses for which
reimbursement may be made under the Plan that relate to distribution
activities also involving another fund in the Waddell & Reed Advisors Funds
or W&R Funds, Inc., Waddell & Reed, Inc. typically determines the amount
attributable to the Fund's expenses under the Plan on the basis of a
combination of the respective classes' relative net assets and number of
shareholder accounts.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for, either directly or through others,
providing personal services to shareholders of that class and/or maintaining
shareholder accounts for that class and a distribution fee of up to 0.75% of
the average daily net assets of the class to compensate Waddell & Reed, Inc.
for, either directly or through others, distributing the shares of that
class. The Class B Plan and the Class C Plan each permit Waddell & Reed, Inc.
to receive compensation, through the distribution and service fee,
respectively, for its distribution activities for that class, which are
similar to the distribution activities described with respect to the Class A
Plan, and for its activities in providing personal services to shareholders
of that class and/or maintaining shareholder accounts of that class, which
are similar to the corresponding activities for which it is entitled to
reimbursement under the Class A Plan.
The only Directors or interested persons, as defined in the 1940
Act, of the Fund who have a direct or indirect financial interest in the
operation of a Plan are the officers and Directors who are also officers of
either Waddell & Reed, Inc. or its affiliate(s) or who are shareholders of
Waddell & Reed Financial, Inc., the indirect parent company of Waddell &
Reed,
42
<PAGE>
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 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.
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<PAGE>
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
September 30, 1999, which is the most recent balance sheet included in this
SAI, was as follows:
<TABLE>
<S> <C>
NAV per Class A share (Class A
net assets divided by Class A shares
outstanding) .................................... $14.55
Add: selling commission (5.75% of offering
price) .......................................... .89
------
Maximum offering price per Class A share
(Class A NAV divided by 94.25%) ................. $15.44
======
</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
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
44
<PAGE>
on other days. The NAV will change every business day, since the value of the
assets and the number of shares outstanding change every business day.
The securities in the portfolio of the Fund, except as otherwise
noted, that are listed or traded on a stock exchange, are valued on the basis
of the last sale on that day or, lacking any sales, at a price that is the
mean between the closing bid and asked prices. Other securities that are
traded over-the-counter are priced using the Nasdaq stock market, which
provides information on bid and asked prices quoted by major dealers in such
stocks. Bonds, other than convertible bonds, are valued using a third-party
pricing system. Convertible bonds are valued using this pricing system only
on days when there is no sale reported. Short-term debt securities are valued
at amortized cost, which approximates market. When market quotations are not
readily available, securities and other assets are valued at fair value as
determined in good faith under procedures established by, and under the
general supervision and responsibility of, the Fund's Board of Directors.
Options and futures contracts purchased and held by the Fund are
valued at the last sales price on the securities or commodities exchanges on
which they are traded, or, if there are no transactions, at the mean between
the bid and asked prices. Ordinarily, the close of the regular session for
options trading on national securities exchanges is 4:10 p.m. Eastern time
and the close of the regular session for commodities exchanges is 4:15 p.m.
Eastern time. Futures contracts will be valued by reference to established
futures exchanges. The value of a futures contract purchased by the Fund will
be either the closing purchase price of the contract or the bid price.
Conversely, the value of a futures contract sold by the Fund will be either
the closing price or the asked price.
When the Fund writes a put or call, an amount equal to the premium
received is included in the Fund's Statement of Assets and Liabilities as an
asset, and an equivalent deferred credit is included in the liability
section. The deferred credit is "marked-to-market" to reflect the current
market value of the put or call. If a call the Fund wrote is exercised, the
proceeds received on the sale of the related investment are increased by the
amount of the premium the Fund received. If the Fund exercised a call it
purchased, the amount paid to purchase the related investment is increased by
the amount of the premium paid. If a put written by the Fund is exercised,
the amount that the Fund pays to purchase the related investment is decreased
by the amount of the premium it received. If the Fund exercises a put it
purchased, the amount received from the sale of the related investment is
reduced by the amount of the premium it paid. If a put or call written by the
Fund expires, it has a gain in the amount of the premium; if it enters into a
closing purchase transaction, it will have a gain or loss depending on
45
<PAGE>
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 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 theWaddell & Reed Advisors Funds or W&R Funds, Inc. A $50 minimum initial
investment pertains to purchases for certain retirement plan accounts and to
accounts for which an investor has arranged, at the time of initial
investment, to make subsequent purchases for the account by having regular
monthly withdrawals of $25 or more made from a bank account. A minimum
initial investment of $25 is applicable to purchases made through payroll
deduction for or by employees of WRIMCO, Waddell & Reed, Inc., their
affiliates, or certain retirement plan accounts. Except with respect to
certain exchanges and automatic withdrawals from a bank account, a
shareholder may make subsequent investments of any amount. See "Exchanges for
Shares of Other Funds in the Waddell & Reed Advisors Funds and W&R Funds,
Inc."
For Class Y shares, investments by government entities or
authorities or by corporations must total at least $10 million within the
first twelve months after initial investment. There is no initial investment
minimum for other Class Y investors.
46
<PAGE>
REDUCED SALES CHARGES (APPLICABLE TO CLASS A SHARES ONLY)
ACCOUNT GROUPING
Large purchases of Class A shares are subject to lower sales
charges. The schedule of sales charges appears in the Prospectus. For the
purpose of taking advantage of the lower sales charges available for large
purchases, a purchase in any of categories 1 through 7 listed below made by
an individual or deemed to be made by an individual may be grouped with
purchases in any other of these categories:
1. Purchases by an individual for his or her own account (includes
purchases under the Waddell & Reed Advisors Funds Revocable Trust
Form);
2. Purchases by that individual's spouse purchasing for his or her own
account (includes Waddell & Reed Advisors Funds Revocable Trust Form of
spouse);
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"), or salary reduction plan account
under Section 457 of the Internal Revenue Code of 1986, as amended (the
"Code"), provided that such purchases are subject to a sales charge
(see "Net Asset Value Purchases"), tax-sheltered annuity account
("TSA"), or Keogh plan account provided that the individual and spouse
are the only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or
her spouse is the settlor (the person who establishes the trust).
For the foregoing categories, an individual's domestic partner is
treated as his or her spouse.
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother
has an account in her own name; A's father has an account in
his own name; the UGMA account may be grouped with A's
father's account but may not be grouped with Grandmother's
account;
47
<PAGE>
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase
made in the trust account is eligible for grouping with an IRA
account of W, H's wife;
C. H's will provides for the establishment of a trust for the
benefit of his minor children upon H's death; his bank is
named as trustee; upon H's death, an account is established in
the name of the bank, as trustee; a purchase in the account
may be grouped with an account held by H's wife in her own
name.
D. X establishes a trust naming herself as trustee and R, her
son, as successor trustee and R and S as beneficiaries; upon
X's death, the account is transferred to R as trustee; a
purchase in the account may not be grouped with R's individual
account. If X's spouse, Y, was successor trustee, this
purchase could be grouped with Y's individual account.
All purchases of Class A shares made under a "qualified" plan --
either an employee benefit plan of an incorporated business or, for an
unincorporated business, a Keogh plan in which there is more than one
participant where one or more of the participants is other than the spouse of
the owner/employer will be grouped. A "qualified" plan is established
pursuant to Section 401 of the Code. All qualified plans of any one employer
or affiliated employers will also be grouped. An affiliate is defined as an
employer that directly, or indirectly, controls or is controlled by or is
under control with another employer. All qualified employee benefit plans of
an employer who is a franchisor and those of its franchisee(s) may also be
grouped.
Example A: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made
under both plans will be grouped.
Example B: H has established a Keogh plan; he and his wife W are the
only participants in the plan; they may group their purchases
made under the plan with any purchases in categories 1 through
7 above.
Example C: H has established a Keogh plan; his wife, W, is a participant
and they have hired one or more employees who also become
participants in the plan; H and W may not combine any
purchases made under the plan with any purchases in categories
1 through 7 above; however, all purchases made under the plan
for H, W or any other employee will be combined.
All purchases of Class A shares made under a simplified employee
pension plan ("SEP"), payroll deduction plan or similar arrangement adopted
by an employer or affiliated employers (as
48
<PAGE>
defined above) may be grouped provided that the employer elects to have all
such purchases grouped at the time the plan is set up. If the employer does
not make such an election, the purchases made by individual employees under
the plan may be grouped with the other accounts of the individual employees
described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
ONE-TIME PURCHASES
A one-time purchase of Class A shares in accounts eligible for
grouping may be combined for purposes of determining the availability of a
reduced sales charge. In order for an eligible purchase to be grouped, the
investor must advise Waddell & Reed, Inc. at the time the purchase is made
that it is eligible for grouping and identify the accounts with which it may
be grouped.
Example: H and W open an account in the Fund and invest $75,000; at the
same time, H's parents open up three UGMA accounts for H and
W's three minor children and invest $10,000 in each child's
name; the combined purchase of $105,000 of Class A shares is
subject to a reduced sales load of 4.75% provided that Waddell
& Reed, Inc. is advised that the purchases are entitled to
grouping.
RIGHTS OF ACCUMULATION
If Class A shares are held in any account and an additional purchase
is made in that account or in any account eligible for grouping with that
account, the additional purchase is combined with the 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.
If a purchaser holds shares which have been purchased under a
contractual plan, the shares held under such plan may be
49
<PAGE>
combined with the additional purchase only if the contractual plan has been
completed.
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 intention to invest, over a 13-month period, a dollar amount
which is sufficient to qualify for a reduced sales charge. The 13-month
period begins on the date the first purchase made under the LOI is accepted
by Waddell & Reed, Inc. Each purchase made from time to time under the LOI is
treated as if the purchaser were buying at one time the total amount which he
or she intends to invest. The sales charge applicable to all purchases of
Class A shares made under the terms of the LOI will be the sales charge in
effect on the beginning date of the 13-month period.
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.
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<PAGE>
The minimum initial investment under an LOI is 5% of the dollar
amount which must be invested under the LOI. An amount equal to 5% of the
purchase required under the LOI will be held "in escrow." If a purchaser does
not, during the period covered by the LOI, invest the amount required to
qualify for the reduced sales charge under the terms of the LOI, he or she
will be responsible for payment of the sales charge applicable to the amount
actually invested. The additional sales charge owed on purchases of Class A
shares made under an LOI which is not completed will be collected by
redeeming part of the shares purchased under the LOI and held "in escrow"
unless the purchaser makes payment of this amount to Waddell & Reed, Inc.
within 20 days of Waddell & Reed, Inc.'s request for payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower
than that available under the LOI, the lower sales charge will apply.
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.
The value of any shares redeemed during the 13-month period which
were acquired under the LOI will be deducted in computing the aggregate
purchases under the LOI.
Letters of Intent are not available for purchases made under an SEP
where the employer has elected to have all purchases under the SEP grouped.
OTHER FUNDS IN THE WADDELL & REED ADVISORS FUNDS AND W&R FUNDS, INC.
Reduced sales charges for larger purchases of Class A shares apply
to purchases of any of the Class A shares of any of the funds in the Waddell
& Reed Advisors Funds and W&R Funds, Inc. subject to a sales charge. A
purchase of Class A shares, or Class A shares held, in any of the funds in
the Waddell & Reed Advisors Funds and/or the W&R Funds, Inc. subject to a
sales charge will be treated as an investment in the Fund for the purposes of
determining the applicable sales charge. For these purposes, Class A shares
of Waddell & Reed Advisors Cash Management, Inc. (formerly, United Cash
Management, Inc.) or W&R Funds, Inc. Money Market Fund that were acquired by
exchange of another Waddell & Reed Advisors Fund or W&R Funds, Inc. Class A
shares on which a sales charge was paid, plus the shares paid as dividends on
those acquired shares, are also taken into account.
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Holders of an uncompleted United Vanguard Investment Program
("Program") on May 30, 1996, with a face amount of less than $12,000, may
purchase Class A shares of the Fund at NAV, up to the amount representing the
unpaid balance of the Program, if the purchase order is so designated. In
addition, any person who was a Program holder on May 30, 1996 may purchase
Class A shares of the Fund at NAV up to the amount representing partial
Program withdrawals outstanding on May 30, 1996, provided the purchase is so
designated.
NET ASSET VALUE PURCHASES OF CLASS A SHARES
Class A shares of the Fund may be purchased at NAV by the Directors
and officers of the Fund or of any affiliated entity of Waddell & Reed, Inc.,
employees of Waddell & Reed, Inc.or of any of its affiliates, financial
advisors of Waddell & Reed, Inc. and the spouse, children, parents,
children's spouses and spouse's parents of each such Director, officer,
employee and financial advisor. "Child" includes stepchild; "parent" includes
stepparent Purchases of Class A shares in an IRA sponsored by Waddell & Reed,
Inc. established for any of these eligible purchasers may also be at NAV.
Purchases of Class A shares in any tax-qualified retirement plan under which
the eligible purchaser is the sole participant may also be made at NAV.
Trusts under which the grantor and the trustee or a co-trustee are each an
eligible purchaser are also eligible for NAV purchases of Class A shares.
"Employees" include retired employees. A "retired employee" is an individual
separated from service from Waddell & Reed, Inc., or from an affiliated
company, with a vested interest in any Employee Benefit Plan sponsored by
Waddell & Reed, Inc. or any of its affiliated companies. "Employees" also
include individuals who, on November 6, 1998, were employees (including
retired employees) of a company that on that date was an affiliate of Waddell
& Reed, Inc. "Financial advisors" include retired financial advisors. A
"retired financial advisor" is any financial advisor who was, at the time of
separation from service from Waddell & Reed, Inc., a Senior Financial
Advisor. A custodian under UGMA or UTMA purchasing for the child or
grandchild of any employee or financial advisor may purchase Class A shares
at NAV whether or not the custodian himself is an eligible purchaser.
Until March 31, 2001, Class A shares may also be purchased at NAV by
persons who are clients of Legend Equities Corporation ("Legend") if the
purchase is made with the proceeds of the redemption of shares of a mutual
fund which is not within the Waddell & Reed Advisors Funds or W&R Funds, Inc.
and the purchase is made within 60 days of such redemption.
Purchases of Class A shares in a 401(k) plan having 100 or more
eligible employees and purchases of Class A shares in a 457 plan having 100
or more eligible employees, and the shares are held in individual participant
accounts on the Fund's records, may be made at NAV.
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Shares may also be issued at NAV in a merger, acquisition or exchange
offer made pursuant to a plan of reorganization to which the Fund is a party.
REASONS FOR DIFFERENCES IN PUBLIC OFFERING PRICE OF CLASS A SHARES
As described herein and in the Prospectus, there are a number of
instances in which the Fund's Class A shares are sold or issued on a basis
other than at the maximum public offering price, that is, the NAV plus the
highest sales charge. Some of these instances relate to lower or eliminated
sales charges for larger purchases of Class A shares, whether made at one
time or over a period of time as under an LOI or Rights of Accumulation. See
the table of sales charges in the Prospectus. The reasons for these quantity
discounts are, in general, that (i) they are traditional and have long been
permitted in the industry and are therefore necessary to meet competition as
to sales of shares of other funds having such discounts, (ii) certain
quantity discounts are required by rules of the National Association of
Securities Dealers, Inc. (as is elimination of sales charges on the
reinvestment of dividends and distribution), 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 by the 1940 Act from the
otherwise applicable restrictions as to what sales charge must be imposed.
Reduced or eliminated sales charges may also be used for certain short-term
promotional activities by Waddell & Reed, Inc. In no case in which there is a
reduced or eliminated sales charge are the interest of existing Class A
shareholders adversely affected since, in each case, the Fund receives the
NAV per share of all shares sold or issued.
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FLEXIBLE WITHDRAWAL SERVICE FOR CLASS A, CLASS B AND CLASS C SHAREHOLDERS
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service (the "Service") regular monthly, quarterly, semiannual or
annual payments by redeeming on an ongoing basis Class A, Class B or Class C
shares that you own of the Fund or of any of the funds in theWaddell & Reed
Advisors Funds or W&R Funds, Inc. It would be a disadvantage to an investor
to make additional purchases of Class A shares while the Service is in effect
because it would result in duplication of sales charges. Class B and Class C
shares and certain Class A shares to which the CDSC otherwise applies that
are redeemed under the Service are not subject to a CDSC. Applicable forms to
start the Service are available through Waddell & Reed Services Company.
The maximum amount of the withdrawal for monthly, quarterly,
semiannual and annual withdrawals is 2%, 6%, 12% and 24% respectively of the
value of your account at the time the Service is established. The withdrawal
proceeds are not subject to the deferred sales charge, but only within these
percentage limitations. The minimum withdrawal is $50. The Service, and this
exclusion from the deferred sales charge, does not apply to a one-time
withdrawal.
To qualify for the Service, you must have invested at least $10,000
in Class A, Class B or Class C shares which you still own of any of the funds
in 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.
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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.
You may, at any time, change the manner in which you have chosen to
have shares redeemed to any of the other choices originally available to you.
You may, at any time, redeem part or all of the shares in your account; if
you redeem all of the shares, the Service is terminated. The Fund can also
terminate the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed
will be sent to you to assist you in completing your Federal income tax
return.
EXCHANGES FOR SHARES OF OTHER FUNDS IN THE WADDELL & REED ADVISORS FUNDS AND
W&R FUNDS, INC.
CLASS A SHARE EXCHANGES
Once a sales charge has been paid on Class A shares of a fund in
theWaddell & Reed Advisors Funds or the W&R Funds, Inc., these shares and any
shares added to them from dividends or distributions paid in shares may be
freely exchanged for Class A shares of another fund in the Waddell & Reed
Advisors Funds or 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.
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Shares of Waddell & Reed Advisors Municipal Bond Fund, Inc., Waddell
& Reed Advisors Government Securities Fund, Inc. and 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 original purchase for at least 6 months.
Subject to the above rules regarding sales charges, you may have a
specific dollar amount of Class A shares of Waddell & Reed Advisors Cash
Management, Inc. automatically exchanged each month into Class A shares of
the Fund or any other fund in theWaddell & 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 theWaddell & Reed Advisors
Funds, provided you already own Class B shares of a fund. The shares of
Waddell & Reed Adviors Cash Management, Inc. which you designate for exchange
must be worth at least $100, which may be allocated among different funds so
long as each fund receives a value of at least $25. Minimum initial
investment and minimum balance requirements apply to such automatic exchange
service.
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CLASS C SHARE EXCHANGES
You may exchange Class C shares of the Fund for Class C shares of
other funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc.
without charge.
The redemption of the Fund's Class C shares as part of an exchange
is not subject to the deferred sales charge. For purposes of computing the
deferred sales charge, if any, applicable to the redemption of the shares
acquired in the exchange, those acquired shares are treated as having been
purchased when the original redeemed shares were purchased.
You may have a specific dollar amount of Class C shares of Waddell &
Reed Advisors Cash Management, Inc. automatically exchanged each month into
Class C shares of the Fund or any other fund in theWaddell & Reed Advisors
Funds, provided you already own Class C shares of a fund. The shares of
Waddell & Reed Advisors Cash Management, Inc. which you designate for
automatic exchange must be worth at least $100, which may be allocated among
different funds so long as each fund receives a value of at least $25.
Minimum initial investment and minimum balance requirements apply to such
automatic exchange service.
CLASS Y SHARE EXCHANGES
Class Y shares of the Fund may be exchanged for Class Y shares of
any other fund in the Waddell & Reed Advisors Funds or for Class A shares of
Waddell & Reed Advisors Cash Management, Inc.
GENERAL EXCHANGE INFORMATION
When you exchange shares, the total shares you receive will have the
same aggregate NAV as the total shares you exchange. The relative values are
those next figured after your exchange request is received in good order.
These exchange rights and other exchange rights concerning the other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc., can, in
most instances, be eliminated or modified at any time and any such exchange
may not be accepted.
RETIREMENT PLANS
Your account may be set up as a funding vehicle for a retirement
plan. For individual taxpayers meeting certain requirements, Waddell & Reed,
Inc. offers model or prototype documents for the following retirement plans.
All of these plans involve investment in shares of the Fund (or shares of
certain other funds in the Waddell & Reed Advisors Funds or W&R Funds, Inc.).
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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. For a married couple, the annual
maximum is $4,000 ($2,000 for each spouse) or, if less, the couple's combined
earned income for the taxable year, even if one spouse has 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.
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Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in the Roth IRA, and withdrawals of earnings are not
subject to Federal income tax if the account has been held for at least five
years and the account holder has reached age 59 1/2 (or certain other
conditions apply).
EDUCATION IRAS. Although not technically for retirement savings,
Education IRAs provide a vehicle for saving for a child's higher education.
An Education IRA may be established for the benefit of any minor, and any
person whose adjusted gross income does not exceed certain levels may
contribute to an Education IRA, provided that no more than $500 may be
contributed for any year to Education IRAs for the same beneficiary.
Contributions are not deductible and may not be made after the beneficiary
reaches age 18; however, earnings accumulate tax-free, and withdrawals are
not subject to tax if used to pay the qualified higher education expenses of
the beneficiary (or a member of his or her family).
SIMPLIFIED EMPLOYEE PENSION (SEP) PLANS. Employers can make
contributions to SEP-IRAs established for employees. An employer may
contribute up to 15% of compensation or $25,500, whichever is less, per year
for each employee.
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLANS). An
employer with 100 or fewer employees who does not sponsor another active
retirement plan may sponsor a SIMPLE plan to contribute to its employees'
retirement accounts. A SIMPLE plan can be funded by either an IRA or a 401(k)
plan. In general, an employer can choose to match employee contributions
dollar-for-dollar (generally, up to 3% of the employee's compensation) or may
contribute to all eligible employees 2% of their compensation, whether or not
they defer salary to their SIMPLE plans. SIMPLE plans involve fewer
administrative requirements, generally, than 401(k) or other qualified plans.
KEOGH PLANS. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money
purchase plan or a profit-sharing plan. As a general rule, an investor under
a defined contribution Keogh plan can contribute each year up to 25% of his
or her annual earned income, with an annual maximum of $30,000.
457 PLANS. If an investor is an employee of a state or local
government or of certain types of charitable organizations, he or she may be
able to enter into a deferred compensation arrangement in accordance with
Section 457 of the Code.
TSAS - CUSTODIAL ACCOUNTS AND TITLE I PLANS. If an investor is an
employee of a public school system or of certain types of charitable
organizations, he or she may be able to enter into a deferred compensation
arrangement through a custodian account under Section 403(b) of the Code.
Some organizations have
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adopted Title I plans, which are funded by employer contributions in addition
to employee deferrals.
PENSION AND PROFIT-SHARING PLANS, INCLUDING 401(k) PLANS. With a
401(k) plan, employees can make tax-deferred contributions into a plan to
which the employer may also contribute, usually on a matching basis. An
employee may defer each year up to 25% of compensation, subject to certain
annual maximums, which may be increased each year based on cost-of-living
adjustments.
More detailed information about these arrangements and applicable
forms are available from Waddell & Reed, Inc. These plans may involve complex
tax questions as to premature distributions and other matters. Investors
should consult their tax adviser or pension consultant.
REDEMPTIONS
The Prospectus gives information as to redemption procedures.
Redemption payments are made within seven days from receipt of request,
unless delayed because of emergency conditions determined by the SEC, when
the NYSE is closed other than for weekends or holidays, or when trading on
the NYSE is restricted. Payment is made in cash, although under extraordinary
conditions redemptions may be made in portfolio securities. Payment for
redemption of shares of the Fund may be made in portfolio securities when the
Fund's Board of Directors determines that conditions exist making cash
payments undesirable. Securities used for payment of redemptions are valued
at the value used in determining 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 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
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you redeemed and have the corresponding amount of the deferred sales charge,
if any, which you paid restored to your account by adding the amount of that
charge to the amount you are reinvesting in shares of the same class. If Fund
shares of that class are then being offered, you can put all or part of your
redemption payment back into such shares at the NAV next calculated after you
have returned the amount. Your written request to do this must be received
within forty-five days after your redemption request was received. You can do
this only once as to Class B, Class C and Class A shares of the Fund. For
purposes of determining future deferred sales charges, the reinvestment will
be treated as a new investment. You do not use up this privilege by redeeming
shares to invest the proceeds at NAV in a Keogh plan or an IRA.
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 Board members. For purposes of this section,
the term "Fund Complex" includes each of the registered investment companies
in the Waddell & Reed Advisors Funds, W&R Funds, Inc. and Target/United
Funds, Inc. Each of the Fund's Directors is also a Director of each of the
other funds in the Fund Complex, and each of its officers is also an officer
of one or more of the funds in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors, Chief
Executive Officer and Director of Waddell & Reed Financial, Inc.; President,
Chairman of the Board of Directors, Director and Chief Executive Officer of
Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
and Director of WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services
Company; formerly, President of each of the funds in the Fund Complex;
formerly, Chairman of the Board of Directors of Waddell & Reed Asset
Management Company, a former affiliate of Waddell & Reed Financial, Inc. Date
of birth: February 11, 1945.
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JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law;
Director, AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President of JoDill Corp., an agricultural company; President and
Director of Dillingham Enterprises Inc.; formerly, Director and consultant,
McDougal Construction Company; formerly, Instructor at Central Missouri State
University; formerly, Member of the Board of Police Commissioners, Kansas
City, Missouri; formerly, Senior Vice President-Sales and Marketing of Garney
Companies, Inc., a specialty utility contractor. Date of birth: January 9,
1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e
Eccles Foundation; Director of First Security Corp., a bank holding company,
and Director of Fluor Corp., a company with interests in coal; formerly,
President of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, Partner, Levy and Craig, P.C., a law
firm. Date of birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of
Oklahoma; Adjunct Professor of Law at the University of Oklahoma College of
Law; Managing Member, Harroz Investments, L.L.C.; formerly, Vice President
for Executive Affairs of the University of Oklahoma; formerly, Attorney with
Crowe & Dunlevy, a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a
law firm; formerly, President of Gilliland & Hayes, P.A.; formerly, Director
of Central Properties, Inc. Date of birth: December 11, 1919.
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ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of
the other funds in the Fund Complex; Executive Vice President, Chief
Operating Officer and Director of Waddell & Reed Financial, Inc.; Executive
Vice President, Chief Operating Officer, Director and Treasurer of Waddell &
Reed Financial Services, Inc.; Executive Vice President, Principal Financial
Officer, Director and Treasurer of WRIMCO; President, Chief Executive
Officer, Principal Financial Officer, Director and Treasurer of Waddell &
Reed, Inc.; Director and Treasurer of Waddell & Reed Services Company;
Chairman of the Board of Directors, Chief Executive Officer, President and
Director of Fiduciary Trust Company of New Hampshire, an affiliate of Waddell
& Reed, Inc.; Director of Legend Group Holdings, LLC, Legend Advisory
Corporation, Legend Equities Corporation, Advisory Services Corporation, The
Legend Group, Inc. and LEC Insurance Agency, Inc.; formerly, Vice President
of each of the funds in the Fund Complex; formerly, Director and Treasurer of
Waddell & Reed Asset Management Company; formerly, President of Waddell &
Reed Services Company. Date of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer, and Director of Waddell & Reed
Financial, Inc.; Executive Vice President, Chief Investment Officer and
Director of Waddell & Reed Financial Services, Inc.; Director of Waddell &
Reed, Inc.; President, Chief Executive Officer, Chief Investment Officer and
Director of WRIMCO; Chairman of the Board of Directors of Austin, Calvert &
Flavin, Inc., an affiliate of WRIMCO; formerly, President, Chief Executive
Officer, Chief Investment Officer and Director of Waddell & Reed Asset
Management Company. Date of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John
Alden Financial Corporation and its subsidiaries. Date of birth: February
19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President
of each of the funds in the Fund Complex then in existence. (Mr. Morgan
retired as Chairman of the Board of Directors and President of the funds in
the Fund Complex then in existence on April 30, 1993); formerly, President,
Director and Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.;
formerly, Chairman of the Board of Directors of Waddell & Reed Services
Company. Date of birth: April 27, 1928.
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RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of
Kansas City; Director and Vice President of Network Rehabilitation Services;
Board Member, Member of Executive Committee and Finance Committee of Truman
Medical Center; formerly, Employment Counselor and Director of McCue-Parker
Center. Date of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm;
Director of Columbian Bank and Trust. Date of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
Professor of Business Administration, University of Missouri-Kansas
City; formerly, Chancellor, University of Missouri-Kansas City. Date of
birth: January 1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
DANIEL C. SCHULTE
Vice President, Assistant Secretary and General Counsel of the Fund
and each of the other funds in the Fund Complex; Vice President, Secretary
and General Counsel of Waddell & Reed Financial, Inc.; Senior Vice President,
Secretary and General Counsel of Waddell & Reed Financial Services Company,
Waddell & Reed, Inc., WRIMCO and Waddell & Reed Services Company; Secretary
and Director of Fiduciary Trust Company of New Hampshire, an affiliate of
Waddell & Reed, Inc.; formerly, Assistant Secretary of Waddell & Reed
Financial, Inc.; formerly, an attorney with Klenda, Mitchell, Austerman &
Zuercher, L.L.C. Date of birth: December 8, 1965.
KRISTEN A. RICHARDS
Vice President, Secretary and Associate General Counsel of the Fund
and each of the other funds in the Fund Complex; Vice President and Associate
General Counsel of WRIMCO; formerly, Assistant Secretary of the Fund and each
of the other funds in the Fund Complex; formerly, Compliance Officer of
WRIMCO. Date of birth: December 2, 1967.
THEODORE W. HOWARD
Vice President, Treasurer and Principal Accounting Officer of the
Fund and each of the other funds in the Fund Complex; Vice President of
Waddell & Reed Services Company. Date of birth: July 18, 1942.
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DANIEL P. BECKER
Vice President of the Fund; Vice President of WRIMCO. Date of
birth: November 27, 1964.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217,
Shawnee Mission, Kansas 66201-9217 unless a different address is given.
The Directors who may be deemed to be "interested persons" as
defined in the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc., or
of WRIMCO are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, whereby an incumbent Director who has attained the age of 70 may,
or if elected on or after May 31, 1993 and has attained the age of 75 must,
resign his or her position as Director and, unless he or she elects
otherwise, will serve as Director Emeritus provided the Director has served
as a Director of the Funds for at least five years which need not have been
consecutive. A Director Emeritus receives fees in recognition of his or her
past services whether or not services are rendered in his or her capacity as
Director Emeritus, but he or she has no authority or responsibility with
respect to the management of the Fund. Messrs. Henry L. Bellmon, Jay B.
Dillingham, Doyle Patterson, Ronald K. Richey and Paul S. Wise retired as
Directors of the Fund and of each of the funds in the Fund Complex and each
serves as Director Emeritus.
The funds in theWaddell & Reed Advisors Funds, Target/United Funds,
Inc. and W&R Funds, Inc. pay to each Director, effective October 1, 1999, an
annual base fee of $50,000, plus $3,000 for each meeting of the Board of
Directors attended and effective January 1, 2000, an annual base fee of
$52,000 plus $3,250 for each meeting of the Board of Directors attended, plus
reimbursement of expenses for attending such meeting and $500 for each
committee meeting attended which is not in conjunction with a Board of
Directors meeting, other than Directors who are affiliates of Waddell & Reed,
Inc. (prior to October 1, 1999, the funds in theWaddell & Reed Advisors
Funds, Target/United Funds, Inc. and W&R Funds, Inc. paid to each Director an
annual base fee of $48,000 plus $2,500 for each meeting of the Board of
Directors attended). The fees to the Directors are divided among the funds in
theWaddell & Reed Advisors Funds, Target/United Funds, Inc. and W&R Funds,
Inc. based on the fund's relative size.
During the Fund's fiscal year ended September 30, 1999, the Fund's
Directors received the following fees for service as a director:
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<TABLE>
<CAPTION>
COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
-------- ------------ ------------
<S> <C> <C>
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 4,147 59,000
John A. Dillingham 4,147 59,000
David P. Gardner 3,960 56,500
Linda K. Graves 4,147 59,000
Joseph Harroz, Jr. 4,004 56,500
John F. Hayes 4,147 59,000
Glendon E. Johnson 4,182 59,500
William T. Morgan 4,147 59,000
Ronald C. Reimer 4,041 56,500
Frank J. Ross, Jr. 4,147 59,000
Eleanor B. Schwartz 4,182 59,500
Frederick Vogel III 4,182 59,500
</TABLE>
*No pension or retirement benefits have been accrued as a part of Fund expenses.
The officers are paid by WRIMCO or its affiliates.
SHAREHOLDINGS
As of May 31, 2000, all of the Fund's Directors and officers as a group
owned less than 1% of the outstanding shares of the Fund. The following table
sets forth information with respect to the Fund, as of May 31, 2000, regarding
the beneficial ownership of the classes of the Fund's shares.
<TABLE>
<CAPTION>
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
------------------- ----- ------------ -------
<S> <C> <C> <C>
Compass Bank Tr Class Y 367,766 27.65%
Profit Sharing Plan
FBO Torchmark Corp
Savings & Investment Plan
Attn: Wayne Laugevin
15 20th St S Fl 8
Birmingham AL 35233-2000
Kenneburt & Co Class Y 457,987 34.43%
P. O. Box 11426
Birmingham AL 3522-1426
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Waddell & Reed Class Y 229,287 17.24%
Financial, Inc.
401(k) and Thrift Plan
6300 Lamar Avenue
Overland Park KS 66201
</TABLE>
PAYMENTS TO SHAREHOLDERS
GENERAL
There are three sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is
derived from the dividends, interest and earned discount on the securities
the Fund holds less expenses (which will vary by class). The second source is
net realized capital gains, which are derived from the proceeds received from
the Fund's sale of securities at a price higher than the Fund's tax basis
(usually cost) in such securities, less losses from sales of securities at a
price lower than the Fund's basis therein; these gains can be either
long-term or short-term, depending on how long the Fund has owned the
securities before it sells them. The third source is net realized gains from
foreign currency transactions. The payments made to shareholders from net
investment income, net short-term capital gains and net realized gains from
certain foreign currency transactions are called dividends.
The Fund pays distributions from net capital gains (the excess of
net long-term capital gains over net short-term capital losses). It may or
may not have such gains, depending on whether securities are sold and at what
price. If the Fund has net capital gains, it will pay distributions once each
year, in the latter part of the fourth calendar quarter, except to the extent
it has net capital losses carried over from a prior year or years to offset
the gains.
CHOICES YOU HAVE ON YOUR DIVIDENDS AND DISTRIBUTIONS
On your application form, you can give instructions that (i) you
want cash for your dividends and distributions, (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
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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 on Fund shares in
cash, you can thereafter reinvest them (or distributions only) in shares of
the Fund at NAV (i.e., with no sales charge) next calculated after receipt by
Waddell & Reed, Inc. of the amount clearly identified as a reinvestment. The
reinvestment must be within forty-five days after the payment.
TAXES
GENERAL
The Fund has qualified since inception for treatment as a regulated
investment company ("RIC") under the Code, so that it is relieved of Federal
income tax on that part of its investment company taxable income (consisting
generally of net investment income, net short-term capital gains and net
gains from certain foreign currency transactions) that it distributes to its
shareholders. To continue to qualify for treatment as a RIC, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following:
(1) the Fund must derive at least 90% of its gross income each taxable year
from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of securities or foreign currencies
or other income (including gains from options, futures contracts or forward
contracts) derived with respect to its business of investing in securities or
those currencies ("Income Requirement"); (2) at the close of each quarter of
the Fund's taxable year, at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities
of other RICs and other 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
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<PAGE>
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before qualifying for RIC
treatment.
Dividends and distributions declared by the Fund in December of any
year and payable to its shareholders of record on a date in that month are
deemed to have been paid by the Fund and received by the shareholders on
December 31 of that year if they are paid by the Fund during the following
January. Accordingly, those dividends and distributions will be taxed to the
shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of short-term, capital
loss to the extent of any distributions received on those shares. Investors
also should be aware that if shares are purchased shortly before the record
date for a dividend or distribution, the investor will receive some portion
of the purchase price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute, by the end of any calendar year,
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus
certain other amounts. For these purposes, the Fund may defer into the next
calendar year net capital losses incurred between November 1 and the end of
the current calendar year. It is the Fund's policy 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
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the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent it distributes that income to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital
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 gain. If the Fund enters into a closing purchase
transaction, it will have a short-term capital gain or loss based on the
difference between the premium it received for the option it wrote and the
premium it pays for the option it buys. If an option written by the Fund
lapses without being exercised, the premium it received also will be a
short-term capital gain. If such an option is exercised and the Fund thus
sells the securities subject to the option, the premium the Fund received
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) may also affect the
taxation of options and futures contracts in which the Fund may invest. That
section defines a "straddle" as offsetting positions with respect to personal
property; for these purposes, options, futures contracts and forward currency
contracts are personal property. Section 1092 generally provides that any
loss
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<PAGE>
from the disposition of a position in a straddle may be deducted only to the
extent the loss exceeds the unrealized gain on the offsetting position(s) of
the straddle. In addition, these rules may postpone the recognition of loss
that would otherwise be recognized under the mark-to-market rules discussed
above. The regulations under section 1092 also provide certain "wash sale"
rules, which apply to transactions where a position is sold at a loss and a
new offsetting position is acquired within a prescribed period, and "short
sale" rules applicable to straddles. If the Fund makes certain elections, the
amount, character and timing of the recognition of gains and losses from the
affected straddle positions will be determined under rules that vary
according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences
of straddle transactions to the Fund are not entirely clear.
If the Fund has an appreciated financial position -- generally, an
interest (including an interest through an option, futures or forward
currency contract or short sale) with respect to any stock, debt instrument
(other than "straight debt") or partnership interest the fair market value of
which exceeds its adjusted basis -- and enters into a "constructive sale" of
the position, the Fund will be treated as having made an actual sale thereof,
with the result that gain will be recognized at that time. A constructive
sale generally consists of a short sale, an offsetting notional principal
contract or futures or forward currency contract entered into by the Fund or
a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a
short sale or such a contract, acquisition of the underlying property or
substantially identical property will be deemed a constructive sale. The
foregoing will not apply, however, to any transaction during any taxable year
that otherwise would be treated as a constructive sale if the transaction is
closed within 30 days after the end of that year and the Fund holds the
appreciated financial position unhedged for 60 days after that closing (I.E.,
at no time during that 60-day period is the Fund's risk of loss regarding
that position reduced by reason of certain specified transactions with
respect to substantially identical or related property, such as having an
option to sell, being contractually obligated to sell, making a short sale,
or granting an option to buy substantially identical stock or securities).
ZERO COUPON AND PAYMENT-IN-KIND SECURITIES
The Fund may acquire zero coupon or other securities issued with
OID. As the holder of those securities, the Fund must include in its income
the OID that accrues on the securities during the taxable year, even if the
Fund receives no corresponding payment on the securities during the year.
Similarly, the Fund must include in its gross income securities it receives
as "interest" on payment-in-kind securities. Because the Fund annually must
distribute substantially all of its
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<PAGE>
investment company taxable income, including any accrued OID and other
non-cash income, in order to satisfy the Distribution Requirement and to
avoid imposition of the Excise Tax, it may be required in a particular year
to distribute as a dividend an amount that is greater than the total amount
of cash it actually receives. Those distributions will be made from the
Fund's cash assets or from the proceeds of sales of portfolio securities, if
necessary. The Fund may realize capital gains or losses from those sales,
which would increase or decrease its investment company taxable income and/or
net capital gain.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio
of the Fund. Transactions in securities other than those for which an
exchange is the primary market are generally effected with dealers acting as
principals or market makers. Brokerage commissions are paid primarily for
effecting transactions in securities traded on an exchange and otherwise only
if it appears likely that a better price or execution can be obtained. The
individual who manages the Fund may manage other advisory accounts with
similar investment objectives. It can be anticipated that the manager will
frequently place concurrent orders for all or most accounts for which the
manager has responsibility or WRIMCO may otherwise combine orders for the
Fund with those of other funds in theWaddell & Reed Advisors Funds,
Target/United Funds, Inc. and W&R Funds, Inc. or other accounts 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
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<PAGE>
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 beavailable through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is
authorized to engage broker-dealers ("brokers") which, in its best judgment
based on all relevant factors, will implement the policy of the Fund to seek
"best execution" (prompt and reliable execution at the best price obtainable)
for reasonable and competitive commissions. WRIMCO need not seek competitive
commission bidding but is expected to minimize the commissions paid to the
extent consistent with the interests and policies of the Fund. Subject to
review by the Board of Directors, such policies include the selection of
brokers which provide execution and/or research services and other services,
including pricing or quotation services directly or through others ("research
and brokerage services") considered by WRIMCO to be useful or desirable for
its investment management of the Fund and/or the other funds and accounts
over which WRIMCO has investment discretion.
Research and brokerage services are, in general, defined by
reference to Section 28(e) of the Securities Exchange Act of 1934 as
including (i) advice, either directly or through publications or writings, as
to the value of securities, the advisability of investing in, purchasing or
selling securities and the availability of securities and purchasers or
sellers; (ii) furnishing analyses and reports; or (iii) effecting securities
transactions and performing functions incidental thereto (such as clearance,
settlement and custody). "Investment discretion" is, in general, defined as
having authorization to determine what securities shall be purchased or sold
for an account, or making those decisions even though someone else has
responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than the commission another qualified broker
would charge for effecting comparable transactions if a good faith
determination is made by WRIMCO that the commission is reasonable in relation
to the research or brokerage services provided. Subject to the foregoing
considerations, WRIMCO may also consider sale of Fund shares as a factor in
the selection of broker-dealers to execute portfolio transactions. No
allocation of brokerage or principal business is made to provide any other
benefits to WRIMCO.
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<PAGE>
The investment research provided by a particular broker may be
useful only to one or more of the other advisory accounts of WRIMCO and
investment research received for the commissions of those other accounts may
be useful both to the Fund and one or more of such other accounts. To the
extent that electronic or other products provided by such brokers to assist
WRIMCO in making investment management decisions are used for administration
or other non-research purposes, a reasonable allocation of the cost of the
product attributable to its non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party at
the request of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of WRIMCO;
serves to make available additional views for consideration and comparisons;
and enables WRIMCO to obtain market information on the price of securities
held in the Fund's portfolio or being considered for purchase. The Fund may
also use its brokerage to pay for pricing or quotation services to value
securities.
During the Fund's fiscal years ended September 30, 1999, 1998 and
1997, it paid brokerage commissions of $2,277,142, $2,644,391 and $3,597,326,
respectively. These figures do not include principal transactions or spreads
or concessions on principal transactions, i.e., those in which the Fund sells
securities to a broker-dealer firm or buys from a broker-dealer firm
securities owned by it.
During the Fund's fiscal year ended September 30, 1999, the
transactions, other than principal transactions, which were directed to
broker-dealers who provided research services as well as execution totaled
$2,088,322,730 on which $2,085,742 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
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shares has exclusive voting rights on matters appropriately limited to that
class; Class A shares are subject to an initial sales charge and to an
ongoing distribution and/or service fee and certain Class A shares are
subject to a contingent deferred sales charge; Class B and Class C are
subject to a CDSC and to ongoing distribution and service fees; Class B
shares converts to Class A shares eight years after the month in which the
shares were purchased; and Class Y shares, which are designated for
institutional investors, have no sales charge nor ongoing distribution and/or
service fee. Each class may bear differing amounts of certain class-specific
expenses and each class has a separate exchange privilege. The Fund does not
anticipate that there will be any conflicts between the interests of holders
of the different classes of shares of the Fund by virtue of those classes. On
an ongoing basis, the Board of Directors will consider whether any such
conflict exists and, if so, take appropriate action. Each share of the Fund
is entitled to equal voting, dividend, liquidation and redemption rights,
except that due to the differing expenses borne by the classes, dividends and
liquidation proceeds of Class B shares and Class C shares are expected to be
lower than for Class A shares, which in turn are expected to be lower than
for Class Y shares of the Fund. Each fractional share of a class has the same
rights, in proportion, as a full share of that class. Shares are fully paid
and nonassessable when purchased.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new
investment advisory agreement or a change in a fundamental investment policy,
which require shareholder approval will be presented to shareholders at a
meeting called by the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding
not less than 25% of all shares entitled to vote at such meeting, provided
certain conditions stated in the Bylaws are met. There will normally be no
meeting of the shareholders for the purpose of electing directors until such
time as less than a majority of directors holding office have been elected by
shareholders, at which time the directors then in office will call a
shareholders' meeting for the election of directors. To the extent that
Section 16(c) of the 1940 Act applies to the Fund, the directors are required
to call a meeting of shareholders for the purpose of voting upon the question
of removal of any director when requested in writing to do so by the
shareholders of record of not less than 10% of the Fund's outstanding shares.
Each share (regardless of class) has one vote. All shares of the
Fund vote together as a single class, except as to any matter for which a
separate vote of any class is required by the 1940 Act, and except as to any
matter which affects the interests of one or more particular classes, in
which case only the
76
<PAGE>
shareholders of the affected classes are entitled to vote, each as a separate
class.
77
<PAGE>
THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS
BUILDING MATERIALS AND GARDEN SUPPLIES - 1.72%
Home Depot, Inc. (The) ................................................. 815,000 $ 52,567,500
BUSINESS SERVICES - 18.34%
BMC Software, Inc.* .................................................... 175,000 8,635,156
Brocade Communications Systems, Inc.* .................................. 200,000 35,806,250
CheckFree Holdings Corporation* ........................................ 550,000 38,826,563
Citrix Systems, Inc.* .................................................. 698,400 46,247,175
Clear Channel Communications, Inc.* .................................... 300,300 20,739,469
Edwards (J. D.) & Company* ............................................. 100,000 3,278,125
Intuit Inc.* ........................................................... 500,000 27,171,875
Microsoft Corporation* ................................................. 960,000 102,270,000
Oracle Corporation* .................................................... 2,640,000 205,837,500
SAP AG, ADR ............................................................ 1,100,000 65,725,000
Siebel Systems, Inc.* .................................................. 5,000 597,031
VeriSign, Inc.* ........................................................ 10,000 1,494,375
Veritas Software Corp.* ................................................ 15,000 1,940,156
Vignette Corporation* .................................................. 10,000 1,602,813
Total ............................................................... 560,171,488
CHEMICALS AND ALLIED PRODUCTS - 13.49%
Bristol-Myers Squibb Company ........................................... 597,300 34,494,075
Forest Laboratories, Inc.* ............................................. 700,000 59,150,000
Pfizer Inc. ............................................................ 2,449,800 89,570,813
Schering-Plough Corporation ............................................ 1,265,600 46,510,800
Smith International, Inc.* ............................................. 1,133,900 87,877,250
Warner-Lambert Company ................................................. 968,300 94,409,250
Total ............................................................... 412,012,188
COMMUNICATION - 1.83%
Nextel Communications, Inc.* ........................................... 376,500 55,804,359
DEPOSITORY INSTITUTIONS - 0.22%
Firstar Corporation .................................................... 300,000 6,881,250
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT - 20.98%
ADC Telecommunications, Inc.* .......................................... 854,600 46,068,281
Intel Corporation ...................................................... 503,400 66,354,413
JDS Uniphase Corporation* .............................................. 361,200 43,535,887
Nokia Corporation, Series A, ADR ....................................... 700,000 152,075,000
Nortel Networks Corporation ............................................ 240,000 30,240,000
Rambus Inc.* ........................................................... 88,700 26,041,766
STMicroelectronics N.V., NY Shares ..................................... 268,750 50,306,641
Texas Instruments Incorporated ......................................... 324,400 51,904,000
Xilinx, Inc.* .......................................................... 2,103,600 174,138,637
Total ............................................................... 640,664,625
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
MARCH 31, 2000
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FABRICATED METAL PRODUCTS - 1.79%
Parker Hannifin Corporation ............................................ 1,325,000 $ 54,739,063
GENERAL MERCHANDISE STORES - 3.49%
Kohl's Corporation* .................................................... 827,000 84,767,500
Wal-Mart Stores, Inc. .................................................. 394,000 21,867,000
Total ............................................................... 106,634,500
INDUSTRIAL MACHINERY AND EQUIPMENT - 18.92%
Applied Materials, Inc.* ............................................... 1,621,800 152,905,331
Cisco Systems, Inc.* ................................................... 2,052,800 158,707,100
Cooper Cameron Corporation* ............................................ 936,000 62,595,000
EMC Corporation* ....................................................... 1,623,000 202,875,000
Sun Microsystems, Inc.* ................................................ 10,000 937,187
Total ............................................................... 578,019,618
INSTRUMENTS AND RELATED PRODUCTS - 2.19%
Guidant Corporation* ................................................... 424,900 24,989,431
Medtronic, Inc. ........................................................ 811,800 41,756,963
Total ............................................................... 66,746,394
MOTION PICTURES - 1.53%
Time Warner Incorporated ............................................... 468,300 46,830,000
NONDEPOSITORY INSTITUTIONS - 1.88%
Fannie Mae ............................................................. 535,300 30,210,994
Freddie Mac ............................................................ 618,300 27,321,131
Total ............................................................... 57,532,125
OIL AND GAS EXTRACTION - 3.18%
BJ Services Company* ................................................... 350,000 25,856,250
Schlumberger Limited ................................................... 930,000 71,145,000
Total ............................................................... 97,001,250
RADIO AND TELEVISION COMMUNICATIONS EQUIPMENT - 6.09%
Koninklijke Philips Electronics N.V.,
NY Shares ........................................................... 670,912 114,935,612
Motorola, Inc. ......................................................... 500,000 71,187,500
Total ............................................................... 186,123,112
RAILROAD TRANSPORTATION - 0.28%
Kansas City Southern Industries, Inc. .................................. 100,000 8,593,750
TRANSPORTATION EQUIPMENT - 3.27%
Harley-Davidson, Inc. .................................................. 1,257,700 99,829,937
TOTAL COMMON STOCKS - 99.20% $3,030,151,159
(Cost: $1,432,329,262)
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
MARCH 31, 2000
<CAPTION>
VALUE
<S> <C>
TOTAL SHORT-TERM SECURITIES - 0.89% $ 27,144,433
(Cost: $27,144,433)
TOTAL INVESTMENT SECURITIES - 100.09% $3,057,295,592
(Cost: $1,459,473,695)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.09%) (2,598,171)
NET ASSETS - 100.00% $3,054,697,421
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
*No income 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 VANGUARD FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment securities -- at value
(Notes 1 and 3) ....................................................................... $3,057,296
Cash ..................................................................................... 1
Receivables:
Fund shares sold ...................................................................... 3,419
Dividends and interest ................................................................ 748
Prepaid insurance premium ................................................................ 33
----------
Total assets ........................................................................ 3,061,497
----------
LIABILITIES
Payable to Fund shareholders ............................................................. 5,709
Accrued service fee (Note 2) ............................................................. 585
Accrued transfer agency and dividend
disbursing (Note 2) ................................................................... 344
Accrued distribution fee (Note 2) ........................................................ 57
Accrued management fee (Note 2) .......................................................... 55
Accrued accounting services fee (Note 2) ................................................. 8
Other .................................................................................... 42
----------
Total liabilities ................................................................... 6,800
----------
Total net assets ................................................................. $3,054,697
==========
NET ASSETS
$1.00 par value capital stock
Capital stock ......................................................................... $ 209,917
Additional paid-in capital ............................................................ 1,140,983
Accumulated undistributed income (loss):
Accumulated undistributed net investment loss.......................................... (8,201)
Accumulated undistributed net realized gain on
investment transactions ............................................................. 114,176
Net unrealized appreciation in value of
investments ......................................................................... 1,597,822
----------
Net assets applicable to outstanding
units of capital ................................................................. $3,054,697
==========
Net asset value per share (net assets divided
by shares outstanding)
Class A ......................................................................... $14.55
Class B ......................................................................... $14.47
Class C ......................................................................... $14.47
Class Y ......................................................................... $14.60
Capital shares outstanding
Class A ......................................................................... 207,031
Class B ......................................................................... 1,298
Class C ......................................................................... 244
Class Y ......................................................................... 1,344
Capital shares authorized ............................................................. 600,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT LOSS
Income (Note 1B):
Dividends (net of foreign withholding
taxes of $1) ........................................................................ $ 3,429
Interest and amortization ............................................................. 1,596
----------
Total income ........................................................................ 5,025
----------
Expenses (Note 2):
Investment management fee ............................................................. 8,216
Service fee:
Class A.............................................................................. 2,722
Class B.............................................................................. 10
Class C.............................................................................. 2
Transfer agency and dividend disbursing:
Class A.............................................................................. 1,711
Class B.............................................................................. 18
Class C.............................................................................. 3
Distribution fee:
Class A.............................................................................. 165
Class B.............................................................................. 28
Class C.............................................................................. 5
Accounting services fee ............................................................... 50
Custodian fees ........................................................................ 50
Legal fees ............................................................................ 14
Audit fees ............................................................................ 12
Shareholder servicing - Class Y ....................................................... 12
Other ................................................................................. 206
----------
Total expenses ...................................................................... 13,224
----------
Net investment loss .............................................................. (8,199)
----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTES 1 AND 3)
Realized net gain on securities .......................................................... 119,564
Unrealized appreciation in value of investments
during the period ..................................................................... 962,792
----------
Net gain on investments ............................................................. 1,082,356
----------
Net increase in net assets resulting
from operations ............................................................... $1,074,157
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE FISCAL
MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
2000 1999
<S> <C> <C>
INCREASE IN NET ASSETS ---------- ----------
Operations:
Net investment loss ........................................ $ (8,199) $ (4,023)
Realized net gain on investments ........................... 119,564 168,569
Unrealized appreciation .................................... 962,792 354,100
---------- ----------
Net increase in net assets
resulting from operations ............................. 1,074,157 518,646
---------- ----------
Distributions to shareholders from (Note 1E):*
Net investment income:
Class A .................................................. --- (1,908)
Class B .................................................. --- ---
Class C .................................................. --- ---
Class Y .................................................. --- (19)
Realized gains on securities transactions:
Class A .................................................. (166,701) (21,925)
Class B .................................................. (343) ---
Class C .................................................. (57) ---
Class Y .................................................. (1,037) (73)
---------- ----------
(168,138) (23,925)
Capital share transactions ---------- ----------
(Note 5) ................................................... 213,156 9,703
---------- ----------
Total increase ........................................ 1,119,175 504,424
NET ASSETS
Beginning of period ........................................... 1,935,522 1,431,098
---------- ----------
End of period.................................................. $3,054,697 $1,935,522
========== ==========
Undistributed net investment loss .......................... $(8,201) $---
======= ====
</TABLE>
*See "Financial Highlights" on pages - .
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE
SIX FOR THE FISCAL YEAR ENDED
MONTHS SEPTEMBER 30,
ENDED -----------------------------------------------------------
3/31/00 1999 1998 1997 1996 1995
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $10.11 $ 7.50 $9.11 $8.77 $8.97 $7.73
------ ------ ----- ----- ----- -----
Income from investment
operations:
Net investment
income (loss)................. (0.04) (0.02) 0.01 0.07 0.03 0.07
Net realized and
unrealized gain
on investments ............... 5.35 2.75 0.19 1.69 0.26 1.82
------ ------ ----- ----- ----- -----
Total from investment
operations ...................... 5.31 2.73 0.20 1.76 0.29 1.89
------ ------ ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.00) (0.01) (0.04) (0.06) (0.04) (0.03)
From capital gains .............. (0.87) (0.11) (1.77) (1.36) (0.45) (0.62)
------ ------ ----- ----- ----- -----
Total distributions ................ (0.87) (0.12) (1.81) (1.42) (0.49) (0.65)
------ ------ ----- ----- ----- -----
Net asset value,
end of period ................... $14.55 $10.11 $7.50 $9.11 $8.77 $8.97
====== ====== ===== ===== ===== =====
Total return* ...................... 54.95% 36.74% 3.76% 23.60% 3.59% 26.82%
Net assets, end of
period (in
millions) ....................... $3,013 $1,924 $1,426 $1,478 $1,291 $1,285
Ratio of expenses
to average net
assets .......................... 1.06%** 1.13% 1.10% 1.09% 1.09% 1.05%
Ratio of net
investment income (loss)
to average net
assets .......................... -0.66%** -0.22% 0.13% 0.86% 0.36% 0.87%
Portfolio
turnover rate ................... 29.04% 83.67% 90.51% 139.14% 57.10% 30.01%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
**Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS B SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
10/4/99*
THROUGH
3/31/00
-------
<S> <C>
Net asset value,
beginning of period ............. $10.43
-----
Income from investment
operations:
Net investment loss ............. (0.05)
Net realized and
unrealized gain
on investments................ 4.96
-----
Total from investment
operations ...................... 4.91
-----
Less distributions:
From net investment
income ....................... (0.00)
From capital gains .............. (0.87)
-----
Total distributions ................ (0.87)
-----
Net asset value,
end of period ................... $14.47
=====
Total return ....................... 49.39%
Net assets, end of
period (in
millions) ....................... $19
Ratio of expenses to
average net assets .............. 2.18%**
Ratio of net investment
loss to average
net assets ...................... -1.78%**
Portfolio turnover
rate ............................ 29.04%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the six months ended March 31, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, 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
3/31/00
-------
<S> <C>
Net asset value,
beginning of period ............. $10.43
-----
Income from investment
operations:
Net investment loss ............. (0.05)
Net realized and
unrealized gain
on investments ............... 4.96
-----
Total from investment
operations ...................... 4.91
-----
Less distributions:
From net investment
income ....................... (0.00)
From capital gains .............. (0.87)
-----
Total distributions ................ (0.87)
-----
Net asset value,
end of period ................... $14.47
=====
Total return ....................... 49.39%
Net assets, end of
period (in
millions) ....................... $3
Ratio of expenses to
average net assets .............. 2.17%**
Ratio of net investment
loss to average
net assets ...................... -1.76%**
Portfolio turnover
rate ............................ 29.04%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the six months ended March 31, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, 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 YEAR ENDED PERIOD FROM
MONTHS SEPTEMBER 30, 9/8/95*
ENDED ---------------------------------------------- THROUGH
3/31/00 1999 1998 1997 1996 9/30/95
------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $10.13 $ 7.52 $9.12 $8.78 $8.97 $9.05
------ ------ ----- ----- ----- -----
Income from investment
operations:
Net investment
income (loss) ................ (0.03) (0.00) 0.03 0.09 0.07 0.00
Net realized and
unrealized gain
(loss) on
investments................... 5.37 2.75 0.19 1.69 0.24 (0.08)
------ ------ ----- ----- ----- -----
Total from investment
operations....................... 5.34 2.75 0.22 1.78 0.31 (0.08)
------ ------ ----- ----- ----- -----
Less distributions:
From net investment
income........................ (0.00) (0.03) (0.05) (0.08) (0.05) (0.00)
From capital gains............... (0.87) (0.11) (1.77) (1.36) (0.45) (0.00)
------ ------ ----- ----- ----- -----
Total distributions................. (0.87) (0.14) (1.82) (1.44) (0.50) (0.00)
------ ------ ----- ----- ----- -----
Net asset value,
end of period.................... $14.60 $10.13 $7.52 $9.12 $8.78 $8.97
====== ====== ===== ===== ===== =====
Total return ....................... 55.14% 36.94% 4.02% 23.87% 3.80% -0.88%
Net assets, end of
period (in
millions) ....................... $20 $12 $5 $5 $4 $2
Ratio of expenses
to average
net assets ...................... 0.82%** 0.90% 0.91% 0.90% 0.91% 0.00%
Ratio of net investment
income (loss) to average
net assets....................... -0.42%** -0.02% 0.33% 1.05% 0.69% 0.00%
Portfolio
turnover rate.................... 29.04% 83.67% 90.51% 139.14% 57.10% 30.01%**
</TABLE>
*Commencement of operations.
**Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
United Vanguard Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Its investment objective is to seek appreciation. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements. The policies are in conformity with
accounting principles generally accepted in the United States of America.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period
as reported by the principal securities exchange on which the issue is
traded or, if no sale is reported for a stock, the average of the
latest bid and asked prices. Bonds, other than convertible bonds, are
valued using a pricing system provided by a pricing service or dealer
in bonds. Convertible bonds are valued using this pricing system only
on days when there is no sale reported. Stocks which are traded
over-the-counter are priced using the Nasdaq Stock Market, which
provides information on bid and asked prices quoted by major dealers in
such stocks. 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. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. See Note 3 --
Investment Security Transactions.
C. Foreign currency translations -- All assets and liabilities denominated
in foreign currencies are translated into U.S. dollars daily. Purchases
and sales of investment securities and accruals of income and expenses
are translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates.
The Fund combines fluctuations from currency exchange rates and
fluctuations in market value when computing net realized and unrealized
gain or loss from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of
its taxable income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under 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
<PAGE>
income tax regulations which may differ from accounting principles
generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash
sales and post-October losses, foreign currency transactions, net
operating losses and expiring capital loss carryovers.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
NOTE 2 -- INVESTMENT MANAGEMENT AND PAYMENTS TO AFFILIATED PERSONS
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee is
payable by the Fund at the annual rates of .70% of net assets up to $1 billion,
.65% of net assets over $1 billion up to $2 billion, .60% of net assets over $2
billion up to $3 billion and .55% over $3 billion. The Fund accrues and pays the
fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of the Fund. For
these services, the Fund pays WARSCO a monthly fee of one-twelfth of the annual
fee shown in the following table.
<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 0.15% of the
average daily net assets of the class for the preceding month. The Fund also
reimburses W&R and WARSCO for certain out-of-pocket costs.
<PAGE>
As principal underwriter for the Fund's shares, W&R received gross
sales commissions for Class A shares (which are not an expense of the Fund) of
$2,339,943. With respect to Class A, Class B and Class C shares, W&R paid sales
commissions of $1,676,637 and all expenses in connection with the sale of Fund
shares, except for registration fees and related expenses.
A contingent deferred sales charge ("CDSC") may be assessed against a
shareholder's redemption amount of Class B and Class C shares and is paid to
W&R. The purpose of the deferred sales charge is to compensate W&R for the costs
incurred by W&R in connection with the sale of Fund shares.
With respect to Class B shares, the amount of the CDSC will be the
following percent of the total amount invested during a calendar year to acquire
the shares or the value of the shares redeemed, whichever is less. Redemption at
any time during the first calendar year of investment, 5%; the second calendar
year, 4%; the third calendar year, 3%; the fourth calendar year, 3%; the fifth
calendar year, 2%; the sixth calendar year, 1% and thereafter, 0%.
If Class C shares are sold within 12 months of buying these shares, a
1% CDSC will be imposed.
The deferred sales charge will not be imposed on shares representing
payment of dividends or distributions or on amounts which represent an increase
in the value of the shareholder's account resulting from capital appreciation
above the amount paid for shares purchased during the deferred sales charge
period. During the period ended March 31, 2000, W&R received $2,520 and $472 in
deferred sales charges from Class B shares and Class C shares, respectively.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed 0.25% of the Fund's average annual net assets. The fee is to be paid to
reimburse W&R for amounts it expends in connection with the distribution of the
Class A shares and/or provision of personal services to Fund shareholders and/or
maintenance of shareholder accounts.
Under the Distribution and Service Plan adopted by the Fund for Class B
and Class C shares, respectively, the Fund may pay W&R, on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate W&R for providing services to shareholders of that class and/or
maintaining shareholder accounts for that class and a distribution fee of up to
0.75% of the average daily net assets of the class to compensate W&R for
distributing the shares of that class. The Class B Plan and the Class C Plan
each permit W&R to receive compensation, through the distribution and service
fee, respectively, for its distribution activities for that class, which are
similar to the distribution activities described with respect to the Class A
Plan, and for its activities in providing personal services to shareholders of
that class and/or maintaining shareholder accounts of that class, which are
similar to the corresponding activities for which is it entitled to
reimbursement under the Class A Plan.
<PAGE>
The Fund paid Directors' fees of $37,548, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding
company, and a direct subsidiary of Waddell & Reed Financial Services, Inc., a
holding company.
NOTE 3 -- INVESTMENT SECURITY TRANSACTIONS
Purchases of investment securities, other than U.S. Government and
short-term securities, aggregated $785,873,814 while proceeds from maturities
and sales aggregated $700,286,447. Purchases of short-term securities aggregated
$1,121,159,375, while proceeds from maturities and sales aggregated
$1,169,439,688. No U.S. Government securities were purchased or sold during the
period.
For Federal income tax purposes, cost of investments owned at March 31,
2000 was $1,462,758,342, resulting in net unrealized appreciation of
$1,594,537,250, of which $1,610,571,988 related to appreciated securities and
$16,034,738 related to depreciated securities.
NOTE 4 -- FEDERAL INCOME TAX MATTERS
For Federal income tax purposes, the Fund realized capital gain net
income of $166,242,219 during its fiscal year ended September 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. Amounts are in
thousands.
<PAGE>
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS FISCAL YEAR
ENDED ENDED
MARCH 31, SEPTEMBER 30,
2000 1999
------------ ------------
<S> <C> <C>
Shares issued from sale of shares:
Class A ...................... 19,234 44,094
Class B ...................... 1,299 ---
Class C ...................... 246 ---
Class Y ...................... 466 886
Shares issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ...................... 14,266 2,675
Class B ...................... 30 ---
Class C ...................... 5 ---
Class Y ...................... 59 11
Shares redeemed:
Class A ...................... (16,725) (46,621)
Class B ...................... (31) ---
Class C ...................... (7) ---
Class Y ...................... (303) (402)
------ ------
Increase in
outstanding capital
shares ...................... 18,539 643
====== ======
Value issued from sale of shares:
Class A ...................... $235,717 $423,994
Class B ...................... 16,122 ---
Class C ...................... 3,093 ---
Class Y ...................... 5,860 8,651
Value issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ...................... 162,063 23,248
Class B ...................... 343 ---
Class C ...................... 57 ---
Class Y ...................... 673 92
Value redeemed:
Class A ...................... (206,390) (442,540)
Class B ...................... (402) ---
Class C ...................... (90) ---
Class Y ...................... (3,890) (3,742)
-------- --------
Increase in outstanding
capital ...................... $213,156 $ 9,703
======== ========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Vanguard Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United Vanguard Fund, Inc. (the "Fund") as of
March 31, 2000, and the related statement of operations for the six-month period
then ended, the statements of changes in net assets for the six-month period
then ended and the fiscal year ended September 30, 1999, and the financial
highlights for the six-month period ended March 31, 2000, and for each of the
five fiscal years in the period ended September 30, 1999. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of March 31, 2000, by correspondence with the custodian. 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
Vanguard Fund, Inc. as of March 31, 2000, the results of its operations for the
six-month period then ended, the changes in its net assets for the six-month
period then ended and the fiscal year ended September 30, 1999, and the
financial highlights for the six-month period ended March 31, 2000, and for each
of the five fiscal years in the period ended September 30, 1999, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Kansas City, Missouri
May 5, 2000
<PAGE>
THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS
APPAREL AND ACCESSORY STORES - 2.64%
Abercrombie & Fitch Co., Class A* ...................................... 1,497,400 $ 51,005,188
BUILDING MATERIALS AND GARDEN SUPPLIES - 2.52%
Home Depot, Inc. (The) ................................................. 710,000 48,723,750
BUSINESS SERVICES - 13.66%
Adobe Systems Incorporated ............................................. 100,000 11,346,875
BMC Software, Inc.* .................................................... 875,000 62,589,844
Citrix Systems, Inc.* .................................................. 100,000 6,190,625
Clear Channel Communications, Inc.* .................................... 300,300 23,986,462
Compuware Corporation* ................................................. 1,200,000 31,237,500
Microsoft Corporation* ................................................. 860,000 77,910,625
Oracle Corporation* .................................................... 1,125,000 51,222,656
Total ............................................................... 264,484,587
CHEMICALS AND ALLIED PRODUCTS - 10.61%
Bristol-Myers Squibb Company ........................................... 741,400 50,044,500
Pfizer Inc. ............................................................ 649,800 23,352,188
Praxair, Inc. .......................................................... 950,000 43,700,000
Schering-Plough Corporation ............................................ 965,600 42,124,300
Smith International, Inc.* ............................................. 533,900 21,622,950
Warner-Lambert Company ................................................. 368,300 24,445,912
Total ............................................................... 205,289,850
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT - 23.90%
ADC Telecommunications, Inc.* .......................................... 327,300 13,715,916
Eaton Corporation ...................................................... 150,000 12,946,875
Intel Corporation ...................................................... 528,400 39,283,238
Koninklijke Philips Electronics N.V.,
NY Shares ........................................................... 670,912 67,762,112
Motorola, Inc. ......................................................... 540,000 47,520,000
Nokia Corporation, Series A, ADR ....................................... 700,000 62,584,375
STMicroelectronics N.V., NY Shares ..................................... 268,750 19,887,500
Tellabs* ............................................................... 1,021,200 58,176,487
Texas Instruments Incorporated ......................................... 674,400 55,469,400
Xilinx, Inc.* .......................................................... 1,301,800 85,308,581
Total ............................................................... 462,654,484
FABRICATED METAL PRODUCTS - 2.20%
Parker Hannifin Corporation ............................................ 950,000 42,571,875
GENERAL MERCHANDISE STORES - 5.93%
Dollar General Corporation ............................................. 1,307,500 40,369,062
Kohl's Corporation* .................................................... 727,000 48,072,875
Wal-Mart Stores, Inc. .................................................. 554,000 26,349,625
Total ............................................................... 114,791,562
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1999
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INDUSTRIAL MACHINERY AND EQUIPMENT - 16.94%
Applied Materials, Inc.* ............................................... 1,160,900 $ 90,151,141
Cisco Systems, Inc.* ................................................... 1,026,400 70,340,475
Cooper Cameron Corporation* ............................................ 336,000 12,684,000
Dell Computer Corporation* ............................................. 620,000 25,923,750
EMC Corporation* ....................................................... 1,633,000 116,657,437
International Business Machines
Corporation ......................................................... 100,000 12,137,500
Total ............................................................... 327,894,303
INSTRUMENTS AND RELATED PRODUCTS - 2.30%
Guidant Corporation .................................................... 424,900 22,785,263
Medtronic, Inc. ........................................................ 611,800 21,718,900
Total ............................................................... 44,504,163
MOTION PICTURES - 2.57%
Time Warner Incorporated ............................................... 818,300 49,711,725
NONDEPOSITORY INSTITUTIONS - 3.39%
Fannie Mae ............................................................. 535,300 33,556,619
Freddie Mac ............................................................ 618,300 32,151,600
Total ............................................................... 65,708,219
OIL AND GAS EXTRACTION - 1.71%
Schlumberger Limited ................................................... 530,000 33,025,625
RUBBER AND MISCELLANEOUS PLASTICS PRODUCTS - 1.62%
NIKE, Inc., Class B .................................................... 550,000 31,281,250
TRANSPORTATION EQUIPMENT - 3.25%
Harley-Davidson, Inc. .................................................. 1,257,700 62,963,606
WATER TRANSPORTATION - 2.42%
Carnival Corporation, Class A .......................................... 871,900 37,927,650
Royal Caribbean Cruises Ltd. ........................................... 197,500 8,887,500
Total ............................................................... 46,815,150
WHOLESALE TRADE - NONDURABLE GOODS - 0.56%
Cardinal Health, Inc. .................................................. 200,000 10,900,000
TOTAL COMMON STOCKS - 96.22% $1,862,325,337
(Cost: $1,227,295,500)
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1999
<CAPTION>
SHARES VALUE
<S> <C> <C>
TOTAL SHORT-TERM SECURITIES - 3.82% $ 73,959,297
(Cost: $73,959,297)
TOTAL INVESTMENT SECURITIES - 100.04% $1,936,284,634
(Cost: $1,301,254,797)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.04%) (762,763)
NET ASSETS - 100.00% $1,935,521,871
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
*No income 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 VANGUARD FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment securities -- at value
(Notes 1 and 3) ....................................................................... $1,936,285
Cash...................................................................................... 3
Receivables:..............................................................................
Fund shares sold ...................................................................... 2,314
Dividends and interest ................................................................ 446
Prepaid insurance premium ................................................................ 40
----------
Total assets ........................................................................ 1,939,088
----------
LIABILITIES
Payable to Fund shareholders ............................................................. 2,768
Accrued service fee (Note 2) ............................................................. 367
Accrued transfer agency and dividend
disbursing (Note 2) ................................................................... 326
Accrued management fee (Note 2) .......................................................... 36
Accrued distribution fee (Note 2) ........................................................ 27
Accrued accounting services fee (Note 2) ................................................. 8
Other..................................................................................... 34
----------
Total liabilities ................................................................... 3,566
----------
Total net assets ................................................................. $1,935,522
==========
NET ASSETS
$1.00 par value capital stock
Capital stock ......................................................................... $ 191,378
Additional paid-in capital ............................................................ 946,366
Accumulated undistributed income:
Accumulated undistributed net realized gain on
investment transactions ............................................................. 162,748
Net unrealized appreciation in value of
investments ......................................................................... 635,030
----------
Net assets applicable to outstanding
units of capital ................................................................. $1,935,522
==========
Net asset value per share (net assets divided
by shares outstanding)
Class A ............................................................................... $10.11
Class Y ............................................................................... $10.13
Capital shares outstanding
Class A ............................................................................... 190,256
Class Y ............................................................................... 1,122
Capital shares authorized ................................................................... 600,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, INC.
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME (LOSS)
Income (Note 1B):
Dividends ............................................................................. $ 12,085
Interest and amortization ............................................................. 4,091
--------
Total income ........................................................................ 16,176
--------
Expenses (Note 2):
Investment management fee ............................................................. 12,334
Service fee - Class A ................................................................. 4,023
Transfer agency and dividend disbursing - Class A...................................... 2,937
Distribution fee - Class A ............................................................ 369
Accounting services fee ............................................................... 100
Custodian fees ........................................................................ 82
Legal fees ............................................................................ 31
Audit fees ............................................................................ 17
Shareholder servicing - Class Y ....................................................... 11
Other ................................................................................. 295
--------
Total expenses ...................................................................... 20,199
--------
Net investment loss .............................................................. (4,023)
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTES 1 AND 3)
Realized net gain on securities .......................................................... 168,572
Realized net loss on foreign
currency transactions.................................................................. (3)
--------
Realized net gain on investments....................................................... 168,569
Unrealized appreciation in value of investments
during the period ..................................................................... 354,100
--------
Net gain on investments ............................................................. 522,669
--------
Net increase in net assets resulting
from operations ............................................................... $518,646
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED SEPTEMBER 30,
----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss)................................ $ (4,023) $ 1,920
Realized net gain on investments ........................... 168,569 24,680
Unrealized appreciation .................................... 354,100 32,486
---------- ----------
Net increase in net assets
resulting from operations ............................. 518,646 59,086
---------- ----------
Distributions to shareholders from (Note 1E):* Net investment income:
Class A .................................................. (1,908) (6,595)
Class Y .................................................. (19) (29)
Realized gains on securities transactions:
Class A .................................................. (21,925) (284,084)
Class Y .................................................. (73) (1,024)
---------- -----------
(23,925) (291,732)
Capital share transactions: ---------- ----------
Proceeds from sale of shares:
Class A (44,093,984 and 40,123,616
shares, respectively) ................................. 423,994 321,631
Class Y (886,393 and 122,262
shares, respectively) ................................. 8,651 996
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (2,675,283 and
41,192,909 shares, respectively) ...................... 23,248 285,879
Class Y (10,622 and 151,657
shares, respectively) ................................. 92 1,052
Payments for shares redeemed:
Class A (46,621,433 and 53,303,525
shares, respectively) ................................. (442,540) (426,626)
Class Y (401,501 and 224,280
shares, respectively) ................................. (3,742) (1,798)
---------- ----------
Net increase in net assets
resulting from capital
share transactions ................................. 9,703 181,134
---------- ----------
Total increase (decrease) .......................... 504,424 (51,512)
NET ASSETS
Beginning of period ........................................... 1,431,098 1,482,610
---------- ----------
End of period, including undistributed
net investment income of $0
and $1,776, respectively ................................... $1,935,522 $1,431,098
========== ==========
</TABLE>
*See "Financial Highlights" on pages - .
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $ 7.50 $9.11 $8.77 $8.97 $7.73
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income (loss)................. (0.02) 0.01 0.07 0.03 0.07
Net realized and
unrealized gain
on investments ............... 2.75 0.19 1.69 0.26 1.82
------ ----- ----- ----- -----
Total from investment
operations ...................... 2.73 0.20 1.76 0.29 1.89
------ ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.01) (0.04) (0.06) (0.04) (0.03)
From capital gains .............. (0.11) (1.77) (1.36) (0.45) (0.62)
------ ----- ----- ----- -----
Total distributions ................ (0.12) (1.81) (1.42) (0.49) (0.65)
------ ----- ----- ----- -----
Net asset value,
end of period ................... $10.11 $7.50 $9.11 $8.77 $8.97
====== ===== ===== ===== =====
Total return* ...................... 36.74% 3.76% 23.60% 3.59% 26.82%
Net assets, end of
period (in
millions) ....................... $1,924 $1,426 $1,478 $1,291 $1,285
Ratio of expenses
to average net
assets .......................... 1.13% 1.10% 1.09% 1.09% 1.05%
Ratio of net
investment income (loss)
to average net
assets .......................... -0.22% 0.13% 0.86% 0.36% 0.87%
Portfolio
turnover rate ................... 83.67% 90.51% 139.14% 57.10% 30.01%
</TABLE>
* Total return calculated without taking into account the sales load deducted on
an initial purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS Y SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE
FOR THE FISCAL YEAR ENDED PERIOD FROM
SEPTEMBER 30, 9/8/95*
---------------------------------------------- THROUGH
1999 1998 1997 1996 9/30/95
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $ 7.52 $9.12 $8.78 $8.97 $9.05
------ ----- ----- ----- -----
Income from investment
operations:
Net investment
income (loss) ................ (0.00) 0.03 0.09 0.07 0.00
Net realized and
unrealized gain
(loss) on
investments................... 2.75 0.19 1.69 0.24 (0.08)
------ ----- ----- ----- -----
Total from investment
operations....................... 2.75 0.22 1.78 0.31 (0.08)
------ ----- ----- ----- -----
Less distributions:
From net investment
income........................ (0.03) (0.05) (0.08) (0.05) (0.00)
From capital gains............... (0.11) (1.77) (1.36) (0.45) (0.00)
------ ----- ----- ----- -----
Total distributions................. (0.14) (1.82) (1.44) (0.50) (0.00)
------ ----- ----- ----- -----
Net asset value,
end of period.................... $10.13 $7.52 $9.12 $8.78 $8.97
====== ===== ===== ===== =====
Total return ....................... 36.94% 4.02% 23.87% 3.80% -0.88%
Net assets, end of
period (in
millions) ....................... $12 $5 $5 $4 $2
Ratio of expenses
to average
net assets ...................... 0.90% 0.91% 0.90% 0.91% 0.00%
Ratio of net investment
income (loss) to average
net assets....................... -0.02% 0.33% 1.05% 0.69% 0.00%
Portfolio
turnover rate.................... 83.67% 90.51% 139.14% 57.10% 30.01%**
</TABLE>
* Commencement of operations.
** Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED VANGUARD FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
United Vanguard Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Its investment objective is to seek appreciation. 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. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. See Note 3 --
Investment Security Transactions.
C. Foreign currency translations -- All assets and liabilities denominated
in foreign currencies are translated into U.S. dollars daily. Purchases
and sales of investment securities and accruals of income and expenses
are translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates.
The Fund combines fluctuations from currency exchange rates and
fluctuations in market value when computing net realized and unrealized
gain or loss from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of
its taxable income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under 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
<PAGE>
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 September 30, 1999, $ 4,174,410
was reclassified between accumulated undistributed net investment
income and accumulated undistributed net realized gain on investment
transactions. Reported net investment loss, net realized gains and net
assets were not affected by this reclassification.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- INVESTMENT MANAGEMENT AND PAYMENTS TO AFFILIATED PERSONS
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. As of June
30, 1999, the fee is payable by the Fund at the annual rates of .70% of net
assets up to $1 billion, .65% of net assets over $1 billion up to $2 billion,
.60% of net assets over $2 billion up to $3 billion and .55% over $3 billion.
Prior to June 30, 1999, the fee consisted of two elements: (i) a "Specific" fee
computed on net asset value as of the close of business each day at the annual
rate of .30% of net assets and (ii) a "Group" fee computed each day on the
combined net asset values of all of the funds in the United Group of mutual
funds at annual rates of .51% of the first $750 million of combined net assets,
.49% on that amount between $750 million and $1.5 billion, .47% between $1.5
billion and $2.25 billion, .45% between $2.25 billion and $3 billion, .43%
between $3 billion and $3.75 billion, .40% between $3.75 billion and $7.5
billion, .38% between $7.5 billion and $12 billion, and .36% of that amount over
$12 billion. The Fund accrues and pays the fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of the Fund. For
these services, the Fund pays WARSCO a monthly fee of one-twelfth of the annual
fee shown in the following table.
<PAGE>
<TABLE>
<CAPTION>
ACCOUNTING SERVICES FEE
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
For Class A shares, the Fund also pays WARSCO a monthly per account
charge for transfer agency and dividend disbursement services of $1.3125 for
each shareholder account which was in existence at any time during the prior
month, plus $0.30 for each account on which a dividend or distribution of cash
or shares had a record date in that month. With respect to Class Y shares, the
Fund pays WARSCO a monthly fee at an annual rate of .15% of the average daily
net assets of the class for the preceding month. The Fund also reimburses W&R
and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross
sales commissions for Class A shares (which are not an expense of the Fund) of
$4,419,165, out of which W&R paid sales commissions of $2,577,200 and all
expenses in connection with the sale of Fund shares, except for registration
fees and related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $65,245, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding
company, and a direct subsidiary of Waddell & Reed Financial Services, Inc., a
holding company.
NOTE 3 -- INVESTMENT SECURITY TRANSACTIONS
Purchases of investment securities, other than U.S. Government and
short-term securities, aggregated $1,439,027,834 while proceeds from maturities
and sales aggregated $1,358,376,329. Purchases of short-term securities and U.S.
Government securities aggregated $2,153,298,780 and $97,257,000. Proceeds from
maturities and sales aggregated $2,264,164,277 and $90,455,650, respectively.
For Federal income tax purposes, cost of investments owned at September
30, 1999 was $1,304,539,444, resulting in net unrealized appreciation of
$631,745,190, of which $652,903,694 related to
<PAGE>
appreciated securities and $21,158,504 related to depreciated securities.
NOTE 4 -- FEDERAL INCOME TAX MATTERS
For Federal income tax purposes, the Fund realized capital gain net
income of $166,242,219 during the year ended September 30, 1998, of which a
portion was paid to the Fund's shareholders during the period ended September
30, 1999. Remaining capital gain net income will be 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. Only Class A and Class Y shares were issued during the fiscal year
ended September 30, 1999. Class Y shares are not subject to a sales charge on
purchases, are not subject to a Rule 12b-1 Distribution and Service Plan and are
subject to a separate transfer agency and dividend disbursement services fee
structure. A comprehensive discussion of the terms under which shares of either
class are offered is contained in the Prospectus and 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 the day adjusted for the prior day's
capital share activity.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Vanguard Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United Vanguard Fund, Inc. (the "Fund") as of
September 30, 1999, and the related statement of operations for the fiscal year
then ended, the statements of changes in net assets for each of the two fiscal
years in the period then ended, and the financial highlights for each of the
five fiscal years in the period then ended. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1999, by correspondence with the custodian. 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
Vanguard Fund, Inc. as of September 30, 1999, the results of its operations for
the fiscal year then ended, the changes in its net assets for each of the two
fiscal years in the period then ended, and the financial highlights for each of
the five fiscal years in the period then ended in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Kansas City, Missouri
November 5, 1999
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits: United Vanguard Fund, Inc.
--------
(a) Articles of Incorporation filed by EDGAR on June 16, 1995 as
EX-99.B1-charter to Post-Effective Amendment No. 53 to the
Registration Statement on Form N-1A*
Articles Supplementary filed by EDGAR on June 16, 1995 as
EX-99.B1-vfarsupa to Post-Effective Amendment No. 53 to the
Registration Statement on Form N-1A*
Articles Supplementary filed by EDGAR on June 16, 1995 as
EX-99.B1-vfarsupy to Post-Effective Amendment No. 53 to the
Registration Statement on Form N-1A*
Articles Supplementary filed by EDGAR on July 2, 1999 as
EX-99.B(a)vfartsup to Post-Effective Amendment No. 59 to the
Registration Statement on Form N-1A*
Articles Supplementary attached hereto as EX-99.B(a)vfartsup1
Articles Supplementary attached hereto as EX-99.B(a)vfartsup2
(b) Bylaws as amended, filed by EDGAR on December 27, 1996 as
EX-99.B2-vfbylaw to Post-Effective Amendment No. 55 to the
Registration Statement on Form N-1A*
Amendment to Bylaws filed by EDGAR on July 2, 1999 as
EX-99.B(b)vfbylaw2 to Post-Effective Amendment No. 59 to the
Registration Statement on Form N-1A*
(c) Not applicable
(d) Investment Management Agreement filed by EDGAR on June 16, 1995 as
EX-99.B5-vfima to Post-Effective Amendment No. 53 to the Registration
Statement on Form N-1A*
Fee schedule (Exhibit A) to the Investment Management Agreement, as
amended, filed by EDGAR on July 2, 1999 as EX-99.B(d)vfimafee to
Post-Effective Amendment No. 59 to the Registration Statement on Form
N-1A*
Assignment of the Investment Management Agreement filed by EDGAR on
June 16, 1995 as EX-99.B5-vfassign to Post-Effective Amendment No. 53
to the Registration Statement on Form N-1A*
(e) Underwriting Agreement filed by EDGAR on June 16, 1995 as
EX-99.B6-vfua to Post-Effective Amendment No. 53 to the Registration
Statement on Form N-1A*
<PAGE>
(f) Not applicable
(g) Custodian Agreement, as amended, filed by EDGAR on December 29, 1999
as EX-99.B(g)vfca to Post-Effective Amendment No. 60 to the
Registration Statement on Form N-1A*
(h) Shareholder Servicing Agreement filed by EDGAR on December 1, 1998 as
EX-99.B9-vfssa to Post-Effective Amendment No. 58 to the Registration
Statement on Form N-1A*
Compensation table (Exhibit B) to the Shareholder Servicing Agreement,
as amended, filed by EDGAR on July 2, 1999 as EX-99.B(h)vfssacom to
Post-Effective Amendment No. 59 to the Registration Statement on Form
N-1A*
Fund Class A application, as amended, filed by EDGAR on May 30, 1997
as EX-99.B9-vfappca to Post-Effective Amendment No. 56 to the
Registration Statement on Form N-1A*
Fund Class Y application filed by EDGAR on June 16, 1995 as
EX-99.B9-vfappcy to Post-Effective Amendment No. 53 to the
Registration Statement on Form N-1A*
Fund NAV application filed by EDGAR on June 16, 1995 as
EX-99.B9-vfappnav to Post-Effective Amendment No. 53 to the
Registration Statement on Form N-1A*
Accounting Services Agreement filed by EDGAR on June 16, 1995 as
EX-99.B9-vfasa to Post-Effective Amendment No. 53 to the Registration
Statement on Form N-1A*
Service Agreement filed by EDGAR on July 30, 1993 as Exhibit (b)(15)
to Post-Effective Amendment No. 50 to the Registration Statement on
Form N-1A*
Amendment to Service Agreement filed by EDGAR on December 29, 1994 as
Exhibit (b)(9) to Post-Effective Amendment No. 52 to the Registration
Statement on Form N-1A*
Amendment to Service Agreement filed by EDGAR on June 16, 1995 as
EX-99.B9-vfsaa to Post-Effective Amendment No. 53 to the Registration
Statement on Form N-1A*
Class Y letter of understanding filed by EDGAR on December 27, 1996 as
EX-99.B9-vflou to Post-Effective Amendment No. 55 to the Registration
Statement on Form N-1A*
Fidelity Bond Coverage (Exhibit C) to the Shareholder Servicing
Agreement, as amended, filed by EDGAR on December 29, 199 as
EX-99.B(h)vfssafid to Post-Effective Amendment No. 60 to the
Registration Statement on Form N-1A*
Fund Application (Non-Retirement Plan) attached hereto as
EX-99.B(h)vfappnon
<PAGE>
Fund Application (Retirement Plan) attached hereto as
EX-99.B(h)vfappabc
Fund Application (Institutional) attached hereto as
EX-99.B(h)vfappnav
Fund Application (Legend Non-Retirement) attached hereto as
EX-99.B(h)vfapplegnon
Fund Application (Legend Retirement) attached hereto as
EX-99.B(h)vfapplegabc
(i) Opinion and Consent of Counsel attached hereto as EX-99.B(i)vflegopn
(j) Consent of Deloitte & Touche LLP, Independent Accountants, attached
hereto as EX-99.B(j)vfconsnt
(k) Not applicable
(l) Not applicable
(m) Service Plan filed by EDGAR on June 16, 1995 as EX-99.B15-vfsp to
Post-Effective Amendment No. 53 to the Registration Statement on Form
N-1A*
Distribution and Service Plan for Class A shares filed by EDGAR on
December 29, 1997 as EX-99.B15-vfdsp to Post-Effective Amendment No.
57 to the Registration Statement on Form N1-A*
Distribution and Service Plan for Class B shares filed by EDGAR on
July 2, 1999 as EX-99.B(m)vfdspb to Post-Effective Amendment No. 59 to
the Registration Statement on Form N-1A*
Distribution and Service Plan for Class C shares filed by EDGAR on
July 2, 1999 as EX-99.B(m)vfdspc to Post-Effective Amendment No. 59 to
the Registration Statement on Form N-1A*
(n) Not applicable
(o) Multiple Class Plan, as amended, attached hereto as EX-99.B(o)vfmcp
(p) Code of Ethics attached hereto as EX-99.B(p)vfcode
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Article SEVENTH paragraph 6(b) through 6(f) of the
Articles of Incorporation, filed by EDGAR on December 1, 1998 as
EX-99.B1-charter to Post-Effective Amendment No. 58 to the Registration
Statement on Form N-1A*; and to Article IV of the Underwriting Agreement,
filed by EDGAR on June 16, 1995 as EX-99.B6-vfua to Post-Effective
Amendment No. 53 to the Registration Statement on Form N-1A*, both of which
provide indemnification. Also refer to Section 2-418 of the Maryland
General Corporation Law regarding indemnification of directors, officers
and employees and agents.
Registrant undertakes to carry out all indemnification provisions of its
Articles of Incorporation, Bylaws, and the above-described
<PAGE>
contracts in accordance with the Investment Company Act Release No. 11330
(September 4, 1980) and successor releases.
Insofar as indemnification for liability arising under the 1933 Act, as
amended, may be provided to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
of the Registrant of expenses incurred or paid by a director, officer of
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
26. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the investment manager of
the Registrant. Under the terms of an Investment Management Agreement
between Waddell & Reed, Inc. and the Registrant, Waddell & Reed, Inc. is to
provide investment management services to the Registrant. Waddell & Reed,
Inc. assigned its investment management duties under this agreement to
Waddell & Reed Investment Management Company on January 8, 1992. Waddell &
Reed Investment Management Company is a corporation which is not engaged in
any business other than the provision of investment management services to
those registered investment companies described in Part A and Part B of
this Post-Effective Amendment and to other investment advisory clients.
Each director and executive officer of Waddell & Reed Investment Management
Company has had as his sole business, profession, vocation or employment
during the past two years only his duties as an executive officer and/or
employee of Waddell & Reed Investment Management Company or its
predecessors, except as to persons who are directors and/or officers of the
Registrant and have served in the capacities shown in the Statement of
Additional Information of the Registrant. The address of the officers is
6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to the Prospectus and SAI of this Registrant.
27. Principal Underwriter
---------------------
(a) Waddell & Reed, Inc. is the principal underwriter to the Registrant.
It is also the principal underwriter to the following investment
companies:
<PAGE>
United Funds, Inc.
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United New Concepts Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
United Small Cap Fund, Inc.
United Tax-Managed Equity Fund, Inc.
Waddell & Reed Funds, Inc.
Advantage I
Advantage II
Advantage Plus
Advantage Gold
(b) The information contained in the underwriter's application on Form BD
as filed on June 16, 2000 SEC No. 8-27030, under the Securities
Exchange Act of 1934, is herein incorporated by reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or any
affiliated person of such affiliated person.
28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant,
each of whose business address is Post Office Box 29217, Shawnee
Mission, Kansas 66201-9217.
29. Management Services
-------------------
There is no service contract other than as discussed in Parts A and B
of this Post-Effective Amendment and listed in response to Items
23.(h) and 23.(m) hereof.
30. Undertakings
------------
Not applicable
---------------------------------
*Incorporated herein by reference
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED
ASSET STRATEGY FUND, INC., UNITED CASH MANAGEMENT, INC., UNITED CONTINENTAL
INCOME FUND, INC., UNITED FUNDS, INC., UNITED GOVERNMENT SECURITIES FUND,
INC., UNITED HIGH INCOME FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED
INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND, INC., UNITED
MUNICIPAL HIGH INCOME FUND, INC., UNITED NEW CONCEPTS FUND, INC., UNITED
RETIREMENT SHARES, INC., UNITED SMALL CAP FUND, INC., UNITED TAX-MANAGED
EQUITY FUND, INC., UNITED VANGUARD FUND, INC., TARGET/UNITED FUNDS, INC. AND
WADDELL & REED FUNDS, INC. (each hereinafter called the "Corporation"), and
certain directors and officers for the Corporation, do hereby constitute and
appoint KEITH A. TUCKER, ROBERT L. HECHLER, DANIEL C. SCHULTE and KRISTEN A.
RICHARDS, and each of them individually, their true and lawful attorneys and
agents to take any and all action and execute any and all instruments which
said attorneys and agents may deem necessary or advisable to enable each
Corporation to comply with the Securities Act of 1933 and/or the Investment
Company Act of 1940, as amended, and any rules, regulations, orders or other
requirements of the United States Securities and Exchange Commission
thereunder, in connection with the registration under the Securities Act of
1933 and/or the Investment Company Act of 1940, as amended, including
specifically, but without limitation of the foregoing, power and authority to
sign the names of each of such directors and officers in his/her behalf as
such director or officer as indicated below opposite his/her signature
hereto, to any Registration Statement and to any amendment or supplement to
the Registration Statement filed with the Securities and Exchange Commission
under the Securities Act of 1933 and/or the Investment Company Act of 1940,
as amended, and to any instruments or documents filed or to be filed as a
part of or in connection with such Registration Statement or amendment or
supplement thereto; and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents shall do or cause to be done by virtue
hereof.
<TABLE>
<CAPTION>
<S> <C>
Date: February 9, 2000 /s/ Robert L. Hechler
----------------------------
Robert L. Hechler, President
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Keith A. Tucker Chairman of the Board February 9, 2000
----------------------- -----------------
Keith A. Tucker
/s/ Robert L. Hechler President, Principal February 9, 2000
----------------------- Financial Officer and -----------------
Robert L. Hechler Director
/s/ Henry J. Herrmann Vice President and February 9, 2000
----------------------- Director -----------------
Henry J. Herrmann
<PAGE>
/s/ Theodore W. Howard Vice President, Treasurer February 9, 2000
----------------------- and Principal Accounting -----------------
Theodore W. Howard Officer
/s/ James M. Concannon Director February 9, 2000
----------------------- -----------------
James M. Concannon
/s/ John A. Dillingham Director February 9, 2000
----------------------- -----------------
John A. Dillingham
/s/ David P. Gardner Director February 9, 2000
----------------------- -----------------
David P. Gardner
/s/ Linda K. Graves Director February 9, 2000
----------------------- -----------------
Linda K. Graves
/s/ Joseph Harroz, Jr. Director February 9, 2000
----------------------- -----------------
Joseph Harroz, Jr.
/s/ John F. Hayes Director February 9, 2000
----------------------- -----------------
John F. Hayes
/s/ Glendon E. Johnson Director February 9, 2000
----------------------- -----------------
Glendon E. Johnson
/s/ William T. Morgan Director February 9, 2000
----------------------- -----------------
William T. Morgan
<PAGE>
/s/ Ronald C. Reimer Director February 9, 2000
----------------------- -----------------
Ronald C. Reimer
/s/ Frank J. Ross, Jr. Director February 9, 2000
----------------------- -----------------
Frank J. Ross, Jr.
/s/ Eleanor B. Schwartz Director February 9, 2000
----------------------- -----------------
Eleanor B. Schwartz
/s/ Frederick Vogel III Director February 9, 2000
----------------------- -----------------
Frederick Vogel III
</TABLE>
Attest:
/s/ Kristen A. Richards
-----------------------
Kristen A. Richards
Secretary
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment pursuant to
Rule 485(b) of the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Overland Park, and State of Kansas,
on the 29th day of June, 2000.
UNITED VANGUARD FUND, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C> <C>
/s/ Keith A. Tucker* Chairman of the Board June 29, 2000
----------------------------- -------------
Keith A. Tucker
/s/ Robert L. Hechler* President, Principal June 29, 2000
----------------------------- Financial Officer and -------------
Robert L. Hechler Director
/s/ Henry J. Herrmann* Vice President and June 29, 2000
----------------------------- Director -------------
Henry J. Herrmann
/s/ Theodore W. Howard* Vice President, Treasurer June 29, 2000
----------------------------- and Principal Accounting -------------
Theodore W. Howard Officer
/s/ James M. Concannon* Director June 29, 2000
----------------------------- -------------
James M. Concannon
/s/ John A. Dillingham* Director June 29, 2000
----------------------------- -------------
John A. Dillingham
<PAGE>
/s/ David P. Gardner* Director June 29, 2000
----------------------------- -------------
David P. Gardner
/s/ Linda K. Graves* Director June 29, 2000
----------------------------- -------------
Linda K. Graves
/s/ Joseph Harroz, Jr.* Director June 29, 2000
----------------------------- -------------
Joseph Harroz, Jr.
/s/ John F. Hayes* Director June 29, 2000
----------------------------- -------------
John F. Hayes
/s/ Glendon E. Johnson* Director June 29, 2000
----------------------------- -------------
Glendon E. Johnson
/s/ William T. Morgan* Director June 29, 2000
----------------------------- -------------
William T. Morgan
/s/ Ronald C. Reimer* Director June 29, 2000
----------------------------- -------------
Ronald C. Reimer
/s/ Frank J. Ross, Jr.* Director June 29, 2000
----------------------------- -------------
Frank J. Ross, Jr.
/s/ Eleanor B Schwartz* Director June 29, 2000
----------------------------- -------------
Eleanor B. Schwartz
/s/ Frederick Vogel III* Director June 29, 2000
----------------------------- -------------
Frederick Vogel III
</TABLE>
*By /s/ Kristen A. Richards
-----------------------------
Kristen A. Richards
Attorney-in-Fact
<PAGE>
ATTEST: /s/ Daniel C. Schulte
-----------------------------
Daniel C. Schulte
Assistant Secretary
