United Vanguard Investment Programs
PROSPECTUS
January 15, 1995
United Vanguard Investment Programs offer you a flexible means to
indirectly accumulate shares of United Vanguard Fund, Inc. (the "Fund"). The
Fund seeks as its primary objective the long-term appreciation of your
investment.
The Programs, called Variable Investment Programs, provide for regular
monthly investment payments from $30 to $625 over a ten-year period, but also
provide flexibility by permitting payments to be made at any time you prefer and
in any multiple of the monthly payment. A minimum of at least one monthly
payment is required to start a Program. Sales charges range from 7.10% of total
payments for a $3,600 Program to 5.30% of total payments for a $75,000 Program
(7.64% and 5.60% of the net amount invested). On a $3,600 Program, a sales
charge of 50% of the payment is deducted from the first 12 payments and 2.33% is
deducted on all subsequent payments. Total deductions for sales charges and
custodian fees range from 9.61% to 5.81% of the net amount invested. In
addition there is an administrative fee. You should not undertake a Variable
Investment Program unless you intend to complete it. You would probably incur a
loss if you terminated your Program in the early years. If you terminate your
Program at the end of one year, the total charges amount to 51.67% of the amount
paid in; at the end of two years, 27.83% of the amount paid in; and at the end
of three years, 19.89% of the amount paid in. See the tables on pages 2 and 3
for deductions. Since the Programs are designed as a long-range investment, you
should take into account your financial ability to continue your Program through
periods of low price levels as well as through periods of high price levels.
You will suffer a loss if you terminate your Program when the value of the Fund
shares held under your Program is less than their cost.
You have the right to a 45-day refund of the value of your account plus
sales charges and custodian fees deducted from payments or a limited refund of
your investment for certain periods of time and under the conditions described
in more detail on page 5.
FUND SHARES ARE ALSO AVAILABLE FOR OUTRIGHT PURCHASES UNDER AN OPEN
PURCHASE ACCOUNT AT A SALES CHARGE NOT IN EXCESS OF 5.75% OF THE OFFERING PRICE
WITHOUT PENALTY FOR EARLY TERMINATION AND WITHOUT DEDUCTIONS OF CUSTODIAN AND
ADMINISTRATIVE FEES, AS SET FORTH IN THE FUND PROSPECTUS. A comparison of the
sales charges of a Variable Investment Program with an Open Purchase Account is
shown on page 4.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------------
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY
THE CURRENT PROSPECTUS OF UNITED VANGUARD FUND, INC.
Retain This Prospectus for Future Reference
<PAGE>
Payments, less authorized deductions, are applied to the purchase of Fund
shares at net asset value. Information regarding the investment portfolio,
investment research and supervision, officers and directors and other pertinent
aspects of the Fund's business is stated in the accompanying Fund Prospectus and
in the Statement of Additional Information for the Fund. The redemption value
of a Program at any time will depend upon the then net asset value of Fund
shares held in the account under the Program.
VARIABLE INVESTMENT PROGRAMS
Variable Investment Programs are designed for both those who desire to make
regular monthly payments for ten years and those who desire flexibility in
making payments to buy an interest in a professionally managed portfolio of
securities. The Program provides for regular monthly investments in shares of
United Vanguard Fund, Inc. The table below shows how monthly payments may be
fitted to your individual resources and needs. The payments range from a
minimum of $30 to a maximum of $625 per month over a ten-year period. Payments
you make under a Program, after deductions for sales and other charges described
below, are invested in Fund shares at the net asset value next determined.
Naturally, there are market risks inherent in any investment in equity
securities and your Program does not assure you of a fixed amount of capital
upon completion of the Program.
<TABLE>
ALLOCATION OF PAYMENTS BETWEEN PURCHASE OF FUND SHARES AND DEDUCTIONS
<CAPTION>
% of
Total Deductions
------------------
Sales Charge(A) To Com-
-------------- Percent Custodian Fee pletion
Com- Pay- Pay- Total of Com- ------------- Total Net Amount To Net
Pay- pletion ment ment Sales pletion Per Deduction Amount In- of Amount
ment Amount 1-12 13-120 Charge Amount Payment Total Amount(B) vested(C) Program Invested
- --------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 30 $ 3,600 $ 15.00 $ .70 $ 255.60 7.10% $ .50 $ 60.00 $ 315.60 $ 3,284.40 8.77% 9.61%
40 4,800 20.00 .90 337.20 7.03 .60 72.00 409.20 4,390.80 8.53 9.32
50 6,000 25.00 1.10 418.80 6.98 .70 84.00 502.80 5,497.20 8.38 9.15
60 7,200 30.00 1.30 500.40 6.95 .80 96.00 596.40 6,603.60 8.28 9.03
70 8,400 35.00 1.50 582.00 6.93 .90 108.00 690.00 7,710.00 8.21 8.95
80 9,600 40.00 1.70 663.60 6.91 1.00 120.00 783.60 8,816.40 8.16 8.89
90 10,800 45.00 1.90 745.20 6.90 1.10 132.00 877.20 9,922.80 8.12 8.84
100 12,000 50.00 2.10 826.80 6.89 1.20 144.00 970.80 11,029.20 8.09 8.80
125 15,000 62.50 2.10 976.80 6.51 1.20 144.00 1,120.80 13,879.20 7.47 8.08
150 18,000 75.00 2.10 1,126.80 6.26 1.20 144.00 1,270.80 16,729.20 7.06 7.60
200 24,000 100.00 2.10 1,426.80 5.95 1.20 144.00 1,570.80 22,429.20 6.55 7.00
250 30,000 125.00 2.10 1,726.80 5.76 1.20 144.00 1,870.80 28,129.20 6.24 6.65
350 42,000 175.00 2.10 2,326.80 5.54 1.20 144.00 2,470.80 39,529.20 5.88 6.25
500 60,000 250.00 2.10 3,226.80 5.38 1.20 144.00 3,370.80 56,629.20 5.62 5.95
625 75,000 312.50 2.10 3,976.80 5.30 1.20 144.00 4,120.80 70,879.20 5.49 5.81
(A) When multiple payments are made, the amounts increase in proportion to the
number of payments.
(B) The above schedule does not include an administrative fee per Program,
currently not exceeding $2.00 per year, to cover certain administrative
expenses actually incurred, which may be increased by the Sponsor to not
more than $4.00 per year should administrative costs increase in future
years. The fee is deducted annually first from dividends and then
distributions and, if these are not sufficient, by redemption of Fund
shares at the option of the Sponsor (see page 9).
(C) These figures do not include any income dividends or capital gains
distributions received on Fund shares.
</TABLE>
<TABLE>
MINIMUM VARIABLE INVESTMENT PROGRAMS ($30 MONTHLY)
ALLOCATION OF PAYMENTS AND DEDUCTIONS AT VARIOUS INTERVALS
<CAPTION>
10 Years 6 Months 1 Year 2 Years
(120 Monthly (6 Monthly (12 Monthly (24 Monthly
Program Payments) Program Payments) Program Payments) Program Payments)
------------------ ------------------ ------------------ -------------------
% of % of % of % of
Total Total Total Total
Amount Payments Amount Payments Amount Payments Amount Payments
--------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total monthly
Program
payments ...... $3,600.00 100.00% $180.00 100.00% $360.00 100.00% $720.00 100.00%
Deduct (See Note):
Sales charge .. 255.60 7.10 90.00 50.00 180.00 50.00 188.40 26.16
Custodian
fee ......... 60.00 1.67 3.00 1.67 6.00 1.67 12.00 1.67
--------- ------ ------- ------ ------- ------ ------- ------
Total
deductions .. 315.60 8.77 93.00 51.67 186.00 51.67 200.40 27.83
--------- ------ ------- ------ ------- ------ ------- ------
Net amount
invested
under the
Program ....... $3,284.40 91.23% $ 87.00 48.33% $174.00 48.33% $519.60 72.17%
========= ====== ======= ====== ======= ====== ======= ======
- ---------------
Note: Does not include an administrative fee described below. Does not include
any income dividends or capital gains distributions received on Fund
shares.
</TABLE>
No custodian or administrative fees are deducted in connection with a
direct purchase of Fund shares. Because of these fees, therefore, regardless of
any increase or decrease in the net asset value of Fund shares, if you liquidate
your Program, you would receive less than you would receive from liquidation of
a comparable Open Purchase Account.
After acceptance by Waddell & Reed, Inc., the Sponsor, of your application
for a Program, a Program Certificate registered in your name will be sent to
you.
Each subsequent payment, after authorized deductions, is applied to the
purchase of shares of the Fund at the net asset value in the manner set forth
under the caption "The Custodian." The Fund shares so acquired are credited to
the account under the Program.
A sales charge and a custodian fee are deducted from each payment in an
amount depending on the size of the payment. There is also an administrative
fee per Program of $2.00 per year to cover certain administrative expenses
actually incurred, which may be increased by the Sponsor to not more than $4.00
per year should administrative costs increase in future years. After you have
made all of your Program payments, or, if your payments have been made in
advance, after ten years from the date your Program was commenced, the Custodian
shall receive, in lieu of the deductions from each payment, an annual fee at the
rate of .2 of 1% of the completion amount of your Program, but limited to $20.00
annually. The Custodian also receives this fee on Programs on which no payments
have been made for any twelve-month period after giving credit for advance
payments. The fees are deducted annually first from dividends and then
distributions and, if these are not sufficient, by redemption of Fund shares.
It is the current policy of the Sponsor to waive collection of fees if it
requires redemption of Fund shares. This policy is subject to change at the
option of the Sponsor.
IMPORTANCE OF MAKING PAYMENTS
Under the terms of the Variable Investment Program, it is contemplated that
regular payments that can vary in amounts are to be made monthly but the
Programs also permit advance payments to be made at any time and payments to be
made in arrears if monthly payments have been missed. Convenient remittance
forms for making your next payments will be sent to you with the receipt for
your last payments and a reminder notice will be sent the first time you forget
to make a monthly payment, unless you have made payments in advance.
If 12 monthly payments remain unpaid, whether consecutive or not, the
Sponsor may terminate the Program. In computing the number of monthly payments,
credit will be given for any advance payments previously made. If the Sponsor
elects to terminate the Program, a written notice will be sent to you stating
that, unless at least one monthly payment is made within 60 days, the Program
will be deemed terminated. In the absence of such a payment, you will then have
no further rights under the Program. The Fund shares will be credited to an
account registered in your name unless you request in writing that the shares be
redeemed. Upon termination of your Program, the Custodian will deliver Fund
shares or cash to your last known address.
If the Custodian is unable to deliver the Fund shares or cash to you, it
will continue to hold them for your benefit subject to applicable state laws.
No interest is credited on any cash balance held by the Custodian after
termination.
Because a higher amount is deducted for sales charge from the first 12
payments under a Program than from payments under a comparable Open Purchase
Account and because of the deduction of certain fees (see pages 2 and 3), you
would receive less on liquidation of your Program during the early years than
from liquidation of the Open Purchase Account.
COST COMPARISON
The table shows the comparison of the cost between a Variable Investment
Program (at various payments periods) as contrasted with an Open Purchase
Account for direct purchase of Fund shares. A major portion of the entire sales
charge is deducted from the first 12 payments of a Program as contrasted to an
Open Purchase Account. A higher initial sales charge and deductions under a
Program would result in more shares being purchased during the first 12 months
under an Open Purchase Account.
<TABLE>
VARIABLE INVESTMENT PROGRAM OPEN PURCHASE
($30 Monthly) ACCOUNT**
---------------------------------------------- ---------------------------
<CAPTION>
% of Net % of Net
% of Sales Amount %of Sales Amount
Charge to Invested Total Charge to Invested
Total Sales Total Custodian Total to Total Sales Total Total
Payments Charge Payments Fee Charges* Payments Charge Payments Payments
--------- ------- ---------- --------- -------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months$ 180.00 $ 90.00 50.00% $ 3.00 $ 93.00 48.33% $ 10.35 5.75% 94.25%
One Year 360.00 180.00 50.00 6.00 186.00 48.33 20.70 5.75 94.25
Two Years 720.00 188.40 26.16 12.00 200.40 72.17 41.40 5.75 94.25
Ten Years 3,600.00 255.60 7.10 60.00 315.60 91.23 207.00 5.75 94.25
_______________
*Does not include administrative fee described on page 3.
**Initial payment of $500 is required.
</TABLE>
Except for Programs of a completion amount of $42,000 ($350 monthly) or
greater, the sales charge as a percentage of the completion amount is greater
than the sales charge on the same amount of payments under an Open Purchase
Account.
INVESTOR'S RIGHTS AND PRIVILEGES
Advance Payments
Variable Investment Programs do not limit you to monthly payments. You may
make payments in advance at any time and complete your Program at an earlier
date. Payments in advance will not result in any reduction of sales or service
charges and advance payments will not diminish risk of loss should you
discontinue your Program during the early years.
Refund
Within 15 days after your Program Certificate is mailed to you, including a
Program Certificate issued upon an exchange, a statement of the charges to be
deducted from your projected payments will be mailed to you by the Sponsor. If
within 45 days after the statement is mailed, you surrender your Program
Certificate to the Sponsor at its principal offices in Overland Park, Kansas,
you have the right to receive in cash the then value of your account together
with an amount equal to the difference between the gross payments made under the
Program and the net amount invested in Fund shares.
Moreover, you have the right to a refund of the portion of the sales
charges which exceeds 15% of the gross payments you have made plus the then net
asset value of the Fund shares accumulated in your account, provided you
surrender your Certificate so that it is received by the Sponsor at its
principal offices in Overland Park, Kansas, within 18 months of the date the
Certificate representing the Program concerned was issued. In addition, if you
miss any three payments (which need not be consecutive) among the first fifteen
payments due under your Program or any one payment thereafter, but prior to the
due date of the 19th payment, you will receive a separate written notice
informing you of (1) your right to surrender your Program Certificate, (2) the
value of your account at the time of the mailing of the notice, and (3) the
amount to which you are entitled. You will have 15 days from the date of the
notice in which to exercise your right to request a refund.
Automatic Reinvestment of Dividends and Distributions
Income dividends and capital gains distributions, if any, on Fund shares
held in your account under the Program will be automatically reinvested, after
making authorized deductions, in additional Fund shares at the net asset value
next determined without a sales charge on the record date.
Partial Withdrawals and Redeposits
If you have made 18 minimum monthly payments in your Program, you have the
privilege, without terminating your Program, of making partial withdrawals of
cash or Fund shares from your Program. Such partial withdrawals may be made
upon written request to the Sponsor in amounts not less than $250 and not in
excess of 90% of the net asset value of the Fund shares then held in the account
under the Program, provided that the balance of the Fund shares remaining in the
account has a net asset value of at least $100. A partial withdrawal may be
made only with the consent of the Sponsor if requested within six months after
you have made a payment. Only one partial withdrawal may be made in any one
calendar year. A partial withdrawal does not alter the total number of monthly
payments to be made, the due dates of such payments or the unpaid balance of
such payments under the Program.
There is a service charge of $2.50 for each partial withdrawal of cash or
Fund shares.
After 90 days from the time you make a withdrawal and before termination or
exchange of the Program, you have the right to redeposit either cash, if cash
was withdrawn, or Fund shares, if Fund shares were withdrawn. If the redeposit
is in cash, it may not exceed the amount of cash withdrawn; if it is in Fund
shares, it may not exceed the number of Fund shares withdrawn. Each cash
deposit will be applied to the purchase of Fund shares at the net asset value
next determined without a sales charge. The Fund shares so purchased and any
Fund shares deposited will be held for your account subject to all the terms of
the Program. Redeposit is not available where a Program is used to fund a Self-
Employed Retirement Plan (see page 10).
There is a service charge of $1.00 for each redeposit of cash or Fund
shares. In addition, you may authorize partial withdrawals to pay custodial
service fees and other expenses in conjunction with Self-Employed Retirement and
Individual Retirement Plans (see page 10). There is no charge for such a
withdrawal, nor shall it be subject to the general limitations on withdrawals
set forth in this section.
See "Tax Status of Programs" on page 7 concerning taxation of partial
withdrawals.
Assignment of Program
You may assign your Program Certificate to a bank or lending institution as
security for a loan; or assign your Program to another person who may either
exercise the right of complete withdrawal or make application for a Program upon
acceptance of which he will succeed to all your rights under the Program. To
make an assignment you must furnish the Sponsor with instructions with your
signature guaranteed by a national bank, a federally charted savings and loan or
a member firm of a national stock exchange or other eligible guarantors in
accordance with procedures of the Sponsor. The Program Certificate contains
information on how to make an assignment and how such an assignment may be
released.
There is a service charge of $2.50 for each assignment.
Voting Rights and Financial Information
The Custodian will vote all Fund shares held for your account in the manner
directed by you. If instructions are not received from you, the Custodian will
vote the Fund shares held for your account in the same ratio as it votes Fund
shares of other Progamholders for which instructions are received. Financial
and other reports, notices of shareholders' meetings and proxy statements
relating to the Fund shares will be sent to you.
Completion Options
You have a choice of options as to the disposition of the Fund shares held
in your account under your completed Program. You may elect:
Continued Administration. . .
Leave the Fund shares in your Program account with the Custodian subject to
all the terms, privileges and conditions of the Program Certificate, including
custodian and administrative fees, until 25 years after the commencement of the
Program, and thereafter until the Program is terminated by you or the Sponsor or
the Custodian.
To Receive Fund Shares. . .
Terminate your Program and have the Fund shares registered in your name,
after which you may enjoy any rights or privileges then available to
shareholders of the Fund.
To Receive Cash. . .
Have the Fund shares redeemed at their net asset value and the cash
proceeds paid to you by surrendering your Program Certificate and requesting
cash value of the Fund shares. If Fund shares are redeemed by the Fund by the
delivery of securities or other property, the Custodian may deliver securities
and other property to you in lieu of cash proceeds. You will incur brokerage
costs on the sale of such securities.
Termination
At any time, you may terminate your Program by surrendering your Program
Certificate to the Sponsor with a written request for termination. Thereupon
you shall have the right to receive Fund shares or cash as you may select. Upon
termination, all of your rights under the Program will cease.
Exchange
Your United Vanguard Investment Program may be exchanged for a similar
Program of United Income Investment Programs or United International Growth
Investment Programs.
To qualify for the exchange privilege, you must have owned your Program for
at least 60 days. An exchange will be made upon written request to the Sponsor
and delivery of your Program Certificate.
An exchange is accomplished by redeeming the underlying Fund shares at the
net asset value next determined and reinvesting the proceeds in the underlying
shares of the other Fund at the net asset value. There is a service charge of
$5.00. A new Program Certificate will be issued to you and you will be notified
of the number of underlying shares.
The exercise of this privilege will not in any way alter the payment or
other provisions of the Program or the remaining number of monthly payments to
complete any Variable Investment Program. The Sponsor reserves the right to
terminate this privilege at any time without further notice to you.
Before making the exchange, you should consider the difference in
investment objectives and should realize that the exchange will constitute a
taxable transaction, and any gain or loss will be computed by comparing your
adjusted basis in the Program with the proceeds received from liquidation.
Reinstatement Privilege
If you have terminated your Program, other than through the exercise of the
refund privileges as previously discussed, you may reinstate it or establish a
similar Program in United Income Investment Programs or United International
Growth Investment Programs by so requesting and returning all the proceeds
received upon termination. The request and proceeds must be received within 30
days after your request for termination was received by the Sponsor. The
proceeds will be reinvested at the net asset value next determined in shares and
held in the account under your Program. The privilege may be exercised only
once with respect to any particular Variable Investment Program currently
offered by Waddell & Reed, Inc. Reinstatement or the establishment of a similar
Program as provided above does not in any way alter the payment or other
provisions of the Program or the remaining number of monthly payments to
complete the Program.
If the shareholder realizes a gain on the redemption of the underlying
shares when the Program is terminated, the transaction is a taxable event and
reinstatement will not alter any tax liability resulting from the capital gain.
If the shareholder realizes a loss and subsequently uses the reinstatement
privilege, some or all of the loss will not be allowed as a tax deduction.
The exercise of certain of the above Rights and Privileges by an investor
who has funded a Self-Employed or Individual Retirement Plan with a Program may
result in adverse tax consequences including the loss of the tax exempt status
of the Plan (see page 10).
TAX STATUS OF PROGRAMS
The Sponsor is advised by counsel that for Federal income tax purposes an
investor is considered as if he directly owned the Fund shares credited to the
account under his Program. Dividends from the Fund's investment company taxable
income are taxable to you as ordinary income, to the extent of the Fund's
earnings and profits, whether received in cash or reinvested in additional Fund
shares. Distributions of the Fund's realized net capital gains, when designated
as such, are taxable to you as long-term gains, whether received in cash or
reinvested in additional Fund shares and regardless of the length of time you
have owned your shares. It should be noted that dividends or other
distributions on Fund shares paid shortly after making a payment, although in
effect a return of capital, are subject to such income taxes. If you make a
profit in exercising the right of partial withdrawal, or as a result of a
liquidation to pay fees, or upon termination or exchange of your Program, you
are responsible for any resulting tax liability. For additional information see
the accompanying Fund Prospectus.
You will be notified as to the amount and nature of any dividend or capital
gains distribution taxable to you for Federal income tax purposes. Other taxes,
if any, applicable against the Programs as a group, as well as any reasonable
expenses resulting from any possible tax claims, will be paid or reserves
therefor may be established by the Custodian or upon instruction of the Sponsor
and charged to the investors affected in proportion to the number of underlying
Fund shares in the accounts under their respective Programs.
You will be entitled to deduct on your Federal income tax return (for the
year in which such fees were deducted) all applicable custodian and
administrative fees only if you elect to itemize your deductions instead of
claiming the optional standard deduction and only to the extent that these fees,
when combined with certain other expenses, exceed two percent of your adjusted
gross income, subject to limitations on the total amount of itemized deductions
allowable. You should consult with your tax adviser regarding your specific
situation.
When Fund shares are credited to your account upon termination of your
Program or upon partial withdrawal of Fund shares, no gain or loss is recognized
for Federal income tax purposes.
The Fund is required to withhold 31% of all dividends, distributions and
redemption proceeds payable to you if you have not complied with the provisions
of the Internal Revenue Code relating to the furnishing of the tax
identification numbers and reporting of dividend and interest income.
Withholding at that rate from dividends and distributions also is required from
such shareholders who otherwise are subject to backup withholding.
AUTHORIZED CHANGES IN PROGRAMS
The terms of the Programs may be changed and the Custodian Agreement may be
amended by agreement between the Sponsor and the Custodian. No change can be
made which adversely affects your substantive rights without your consent. The
Sponsor may substitute a new Custodian. You will be given notice of any such
substitution.
If United Vanguard Fund, Inc. should cease (other than for a temporary
period) to offer the Fund shares for the Programs at the net asset value without
a sales charge, the Sponsor shall obtain the approval of the Securities and
Exchange Commission for any substitution of Fund shares so long as such approval
is required under the Investment Company Act of 1940. The substituted
investment generally must be shares of an open-end investment company generally
comparable in quality and investment objectives to United Vanguard Fund, Inc.
The Sponsor or the Custodian will notify you of any proposed substitution
of shares and advise you that unless you surrender your Program Certificate
within 40 days you will be deemed to have agreed to the substitution and to the
payment of your pro rata share of the actual expenses in connection therewith,
including tax liability, if any.
THE CUSTODIAN
State Street Bank and Trust Company, 53 State Street, Boston,
Massachusetts, is the Custodian of the Programs. It is a Massachusetts banking
corporation subject to the supervision of state banking authorities. The
Custodian does not perform any management, supervisory or investment functions.
It affords no protection against possible decline in the value of Fund shares.
The Custodian maintains custody of the assets of the Programs. Its duties
relate principally to receiving the investor's payments; applying them to the
purchase of the Fund shares after making authorized deductions; holding the Fund
shares in its custody and receiving the dividends and distributions thereon;
reinvesting such dividends and distributions in additional Fund shares;
terminating Programs; and maintaining the records of each account. Payments
made under Programs are invested in Fund shares at the net asset value per share
calculated, in the manner set forth in the Fund Prospectus, as of the next close
of the regular session of the New York Stock Exchange after receipt of payment.
The Custodian is responsible for mailing to investors a receipt for each
payment; statements of the number of Fund shares held under the Program;
statement of deductions; notice of right of withdrawal; periodic reports of the
Fund; notices to shareholders, including distribution and tax statements, voting
material, etc.; causing periodic audits to be made of the Programs' records;
and preparing and filing tax and other reports required by law.
The Custodian has delegated all of these duties, other than maintaining
custody of the assets of the Programs, to the Sponsor; therefore, the Sponsor
receives all of the administrative fees and service charges described in this
Prospectus. The fees paid to the Sponsor do not exceed its costs in performing
the duties delegated to it. In the event that the Sponsor should fail or refuse
to perform these delegated duties, the Custodian is responsible for performing
them itself or appointing another person to perform them.
The Custodian is obligated to perform such duties and only such duties as
are specifically set forth in the Custodian Agreement and the Program
Certificates, and no implied obligations are read into the Custodian Agreement
or the Program Certificates against the Custodian, and in the absence of bad
faith on its part, the Custodian may conclusively rely as to the truth of the
statements and the correctness of the opinions expressed therein upon any
instruments, certificates, opinions or other writing furnished to the Custodian
and conforming to the requirements of the Custodian Agreement. The Custodian is
not responsible for any statements of fact contained in the Custodian Agreement
or the Program Certificates nor for the contents of this Prospectus. The
Custodian makes no representations as to the Programs or the securities issued
in connection therewith or as to the validity, legality or enforceability of the
Programs or of the securities, and the Custodian shall incur no liability or
responsibility in respect of any such matters. The Custodian is liable only for
its willful misfeasance, bad faith, gross negligence or reckless disregard of
its duties.
The Custodian may commingle cash received from, and income received for,
the account of each investor with payments and income received from or for the
account of other investors pursuant to the Custodian Agreement and outstanding
Programs. The Custodian may deposit the funds in a general trust account or
accounts in its own bank or otherwise and is authorized to commingle Fund shares
and certificates, if any, therefor purchased for each investor with Fund shares
and certificates, if any, therefor purchased for other investors pursuant to the
Custodian Agreement and outstanding Programs and cause certificates, if any, for
such Fund shares to be registered in its name as Custodian or in the name of its
nominee or nominees.
Neither the Custodian nor the Sponsor shall bear any portion of any tax
levied or assessed against them or either of them or the custodianship with
respect to the Fund shares or with respect to any phase of the operations of the
custodianship or the income from the Fund shares or the sale or transfer
thereof.
The Custodian may not resign its custodianship unless a successor Custodian
has been designated and has accepted the custodianship, or the property held by
the Custodian for all accounts has been completely distributed or liquidated and
the proceeds of the liquidation distributed to the investors. Such successor
must be a bank or trust company having an aggregate capital, surplus and
undivided profits of at least $1,000,000.
THE SPONSOR
The Sponsor of the Programs is Waddell & Reed, Inc., 6300 Lamar Avenue, P.
O. Box 29217, Shawnee Mission, Kansas 66201-9217, a Delaware corporation. The
Sponsor is a registered broker-dealer and a member of the National Association
of Securities Dealers, Inc. The officers and employees of the Sponsor are
covered by a broker's blanket indemnity bond in the amount of $5,000,000.
The Sponsor's Directors and Officers
The following are directors and/or principal officers of the Sponsor: Keith
A. Tucker, Chairman of the Board; Robert L. Hechler, President, Chief Executive
Officer, Treasurer, Principal Financial Officer and Director; George L.
Wirkkula, Executive Vice President, National Sales Manager and Director; Henry
J. Herrmann, Director; Sharon K. Pappas, Senior Vice President, Secretary and
General Counsel; Michael D. Strohm, Senior Vice President and Controller; and
James A. Williams, Senior Vice President.
Mr. Tucker is President, Chief Executive Officer and Director of Waddell &
Reed Financial Services, Inc. ("WRFS"), of which the Sponsor is a direct
subsidiary; Chairman of the Board of Waddell & Reed Investment Management
Company ("WRIMCO"), a direct subsidiary of the Sponsor; and Chairman of the
Board of Waddell & Reed Asset Management Company ("WRAMCO") and Waddell & Reed
Services Company ("WARSCO"), affiliates of the Sponsor. He is Vice Chairman of
the Board, President and Chief Executive Officer of United Investors Management
Company ("UIMCO"), of which the Sponsor is an indirect subsidiary; and Vice
Chairman of the Board of Torchmark Corporation, of which the Sponsor is an
indirect subsidiary. He is also Chairman of the Board of Torchmark
Distributors, Inc., a direct subsidiary of the Sponsor; and President and
Director of each of the funds in the United Group, TMK/United Funds, Inc.,
Waddell & Reed Funds, Inc., Torchmark Government Securities Fund, Inc. and
Torchmark Insured Tax-Free Fund, Inc. Mr. Hechler is Vice President, Chief
Operations Officer, Treasurer and Director of WRFS; Executive Vice President,
Principal Financial Officer, Treasurer and Director of WRIMCO; Director and
Treasurer of WRAMCO; and President, Treasurer and Director of WARSCO. He is
Vice President, Treasurer and Director of Torchmark Distributors, Inc.; and Vice
President of each of the funds in the United Group, TMK/United Funds, Inc.,
Waddell & Reed Funds, Inc., Torchmark Government Securities Fund, Inc. and
Torchmark Insured Tax-Free Fund, Inc. Ms. Pappas is Vice President, Secretary
and General Counsel of WRFS; Senior Vice President, Secretary and General
Counsel of WRIMCO; Secretary, General Counsel and Director of WRAMCO; and
Director, Secretary, General Counsel and Senior Vice President of WARSCO. She
is Vice President, Secretary and General Counsel of Torchmark Distributors,
Inc.; and General Counsel, Secretary and Vice President of each of the funds in
the United Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark
Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc. Mr.
Herrmann is Vice President, Chief Investment Officer and Director of WRFS;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO and WRAMCO; Senior Vice President and Chief Investment Officer of UIMCO;
and Vice President of each of the funds in the United Group, TMK/United Funds,
Inc., Waddell & Reed Funds, Inc., Torchmark Government Securities Fund, Inc. and
Torchmark Insured Tax-Free Fund, Inc. Mr. Wirkkula is Vice President, National
Sales Manager and Director of WRFS. Mr. Strohm is Senior Vice President of
WARSCO and Vice President of Torchmark Distributors, Inc. The address of each
person listed is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas
66201-9217.
SELF-EMPLOYED RETIREMENT PLAN AND INDIVIDUAL RETIREMENT PLAN
For those self-employed individuals who wish to make payments on a Variable
Investment Program in conjunction with a retirement plan, there are available
through the Sponsor a defined contribution plan which has been approved by the
Internal Revenue Service as a prototype plan. For a defined contribution plan,
the maximum amount of contribution which may be made in any one year is $30,000
or 25% of your yearly earned income, whichever is less.
For those individuals who have earned income and wish to purchase a
Variable Investment Program in conjunction with an Individual Retirement Account
("IRA"), there is available through the Sponsor an Individual Retirement Plan
and Custody Agreement which has been approved by the Internal Revenue Service as
a prototype plan. The maximum amount you may contribute each year to your IRA
is the lesser of $2,000 or your yearly earned income. The maximum is $2,250 if
your spouse has earned income less than $250 in a taxable year. If your spouse
has at least $2,000 of earned income in a taxable year, the maximum is $4,000
($2,000 for each spouse). These 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 participates, the adjusted gross income does not exceed certain levels. More
detailed information about these arrangements is in the retirement plan forms
which are available from the Sponsor.
These plans may involve complex tax questions as to excess contributions,
premature distributions and other matters. You should consult your tax adviser
or pension consultant before establishing a Retirement Plan in conjunction with
a Program and prior to exercising the rights and privileges available under the
Program. See "Investor's Rights and Privileges."
Furthermore, the use of Programs for funding retirement benefits for a
participant who would not be able to complete the Program or have it completed
on his behalf would be undesirable since it would result in a loss of a prepaid
sales charge if the Program or the participant's interest in the Program had to
be liquidated prior to completion. Therefore, in the case of a Self-Employed
Retirement Plan, a person who does not expect to remain in the employment of the
employer during the term of the Program, or an employer who does not foresee
completion of contributions pursuant to the terms of the Program, would probably
fare better by investing or having the contributions made on his behalf under
the Retirement Plan, invested in shares of the Fund directly, rather than
through the Program.
If, after consideration of the above factors, a Program is chosen as a
funding medium for all or part of the Plan participants, particular care should
be exercised in determining the completion amount of the Program. Consideration
should be given to the participant's expected income over the period of the
Program so that the completion amount will correspond to the total contributions
that are reasonably foreseen. Also, the payments scheduled under the Program
should coincide with the amount of the yearly contribution allowable under the
Self-Employed Retirement Plan or Individual Retirement Plan which is adopted.
Persons whose income is subject to sharp downward fluctuations and who,
consequently, may not be able to meet the monthly payments called for by a
Program are advised to purchase their Fund shares on a direct basis. Direct
purchases of Fund shares will obviate any of the difficulties described above.
Under the Self-Employed Retirement Plan, it is possible for an employer to
direct that the contributions for some of the participants be invested directly
in Fund shares and the contributions for the other participants be invested in
one or more Programs. If an employer determines that contributions should be
invested on behalf of some or all of the participants in Programs, a separate
Program may be established for each participant.
To commence either Plan, you first must sign the Plan Application and
submit it with your initial investment.
GENERAL INFORMATION
The Programs were created under Missouri law by a Custodian Agreement dated
as of July 15, 1970, between the Sponsor and a former Custodian. The Programs
are registered as a unit investment trust with the Securities and Exchange
Commission under the Investment Company Act of 1940. This does not imply
supervision of management or policies by the Commission.
Programs may be purchased in all states other than Arizona, California,
Maine, Massachusetts, Montana, North Dakota, Oklahoma, Texas, Vermont,
Washington and Wisconsin.
The Prospectus omits certain of the information contained in the
registration statement on file with the Securities and Exchange Commission.
Copies of those portions of the registration statement containing the omitted
information may be obtained from the Commission's office in Washington, D. C.,
upon payment of the fee prescribed by the rules and regulations of the
Commission, or examined there without charge.
<PAGE>
ILLUSTRATION OF A VARIABLE INVESTMENT PROGRAM FOR INVESTMENTS IN
UNITED VANGUARD FUND, INC.
This illustration is in terms of an assumed investment of $30 per month
(minimum monthly payment program) for ten years, no withdrawals made during the
period, with dividends reinvested and capital gains distributions accepted in
shares.
The results shown should not be considered as a representation of the
dividend income or capital gain or loss which may be realized from an investment
made under a Program starting today. A program of the type illustrated does not
assure a profit or protection against depreciation in declining markets.
<TABLE>
Annual
Capital
Year Annual Gains Value
Ended Dividend Deductions Balance Invested Distri- of Total
Sept- Monthly Payments Income Total -------------- After Deductions butions Shares Shares
ember----------------- Rein- Cumulative Sales Custodian ----------------- Rein- Accumu- Accumu-
30, Annually Cumulative vested Cost(a) Charge Fee Annually Cumulative vested lated lated
- ---- ------- ---------- ------ --------- ------- ------ ------- --------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985 $360.00*$ 360.00 $ 3.39 $ 363.39 $180.00 $ 6.00 $177.39 $ 177.39 $ -- $ 180.67 32
1986 360.00 720.00 10.58 733.97 8.40 6.00 356.18 533.57 -- 591.04 85
1987 360.00 1,080.00 17.81 1,111.78 8.40 6.00 363.41 896.98 90.26 1,235.59 150
1988 360.00 1,440.00 33.94 1,505.72 8.40 6.00 379.54 1,276.52 223.24 1,496.42 257
1989 360.00 1,800.00 52.18 1,917.90 8.40 6.00 397.78 1,674.30 17.95 2,260.51 325
1990 360.00 2,160.00 80.72 2,358.62 8.40 6.00 426.32 2,100.62 246.13 2,269.29 438
1991 360.00 2,520.00 67.35 2,785.97 8.40 6.00 412.95 2,513.57 94.11 3,362.53 529
1992 360.00 2,880.00 47.68 3,193.65 8.40 6.00 393.28 2,906.85 110.63 3,685.39 611
1993 360.00 3,240.00 22.16 3,575.81 8.40 6.00 367.76 3,274.61 -- 4,744.03 668
1994 360.00 3,600.00 12.25 3,948.06 8.40 6.00 357.85 3,632.46 120.42 5,673.82 734
------- ------- ------ -------
$348.06 $255.60 $60.00 $902.74
======= ======= ====== =======
(a) Reflects the cumulative total of monthly payments, plus the cumulative
amount of income dividends reinvested at net asset value.
*Under the terms of this Program $15.00 is deducted as a sales charge from each
of the first 12 payments and $.70 is deducted as a sales charge from each of
the remaining payments. Additional deductions include $.50 from each payment
for custodian fees. Total deductions from the first 12 minimum payments
equal $186.00 or 51.67% of the total of the first 12 minimum payments. If
all payments are made, total sales charge and other deductions amount to
8.77% of the total agreed payments.
</TABLE>
The above schedule does not include an administrative fee, currently not
exceeding $2.00 per year, to cover certain administrative expenses actually
incurred, which may be increased by the Sponsor to not more than $4.00 per year
should administrative costs increase in future years. The fee is deducted
annually first from dividends and then from distributions and, if these are not
sufficient, by redemption of Fund shares.
No allowance has been made for any income taxes payable by Programholders on
capital gains distributions and dividends reinvested in shares for the ten-year
period.
<PAGE>
UNITED VANGUARD INVESTMENT PROGRAMS*
Statement of Assets and Liabilities
September 30, 1994
Assets
United Vanguard Fund, Inc. shares
held for Investors, at market value
(cost $91,585,472) .............................. $116,042,891
Receivable for Programs sold ..................... 147,087
------------
Total assets .................................. 116,189,978
Liabilities
Payable for Fund shares purchased ................ (147,087)
------------
Net Assets (equivalent to $7.73 per share based
on 15,012,017 shares of capital stock owned on
outstanding programs) ........................... $116,042,891
============
*See accompanying Prospectus of United Vanguard Fund, Inc.
See accompanying notes.
<PAGE>
UNITED VANGUARD INVESTMENT PROGRAMS*
Statement of Operations
For the fiscal year ended September 30, 1994
Income
Cash distributions received on shares of United
Vanguard Fund, Inc. held for Investors:
Dividends ........................... $ 282,836
Capital gains ....................... 2,781,071
-----------
3,063,907
-----------
Expenses
Custodian fees ....................... $227,994
Less portion deducted from payments made
by Investors or collected through
liquidation of Trust shares ......... (146,215)
--------
Custodian fees deducted from
distributions ..................... 81,779
Administrative fees and service
charges ............................. 53,188
Less portion collected through
liquidation of Trust shares ......... (32)
--------
Administrative fees and service charges
deducted from distributions ....... 53,156
-----------
Total expenses .................... 134,935
Taxes withheld from distributions . 7,843
-----------
Net distributions received on shares
of United Vanguard Fund, Inc. held
for Investors .................. 2,921,129
-----------
Realized and Unrealized Gain on Investments
Excess of proceeds over cost for Fund shares
liquidated........................... 3,240,761
Unrealized appreciation in United Vanguard
Fund, Inc. shares ................... 6,514,319
-----------
Net gain on investments ............. 9,755,080
-----------
Net increase in net assets resulting
from operations .................. $12,676,209
===========
*See accompanying Prospectus of United Vanguard Fund, Inc.
See accompanying notes.
<PAGE>
UNITED VANGUARD INVESTMENT PROGRAMS*
Statement of Changes in Net Assets
For the fiscal year
ended September 30,
-------------------------
1994 1993
----------- ------------
Increase in Net Assets
Net distributions received on shares
of United Vanguard Fund, Inc.
held for Investors .................$ 2,921,129 $ 504,147
Excess of proceeds over
cost for Fund shares liquidated ... 3,240,761 1,650,569
Unrealized appreciation in United
Vanguard Fund, Inc. shares ........ 6,514,319 16,035,110
------------ ------------
Net increase in net assets
resulting from operations ........ 12,676,209 18,189,826
Dividends and distributions reinvested
in shares of United Vanguard Fund,
Inc. (Note 2) ..................... (2,921,129) (504,147)
Capital share transactions (Note 2) .. (6,777,538) (9,342,273)
------------ ------------
Total increase .................... 2,977,542 8,343,406
Net Assets
Beginning of year .................... 113,065,349 104,721,943
------------ ------------
End of year ..........................$116,042,891 $113,065,349
============ ============
*See accompanying Prospectus of United Vanguard Fund, Inc.
See accompanying notes.
<PAGE>
UNITED VANGUARD INVESTMENT PROGRAMS*
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- Significant Accounting Policies
United Vanguard Investment Programs (the "Trust") is a unit investment
trust for purposes of the registration of its shares with the Securities and
Exchange Commission. The assets of the Trust represent the undivided interest
of the Investors in the outstanding shares of United Vanguard Fund, Inc., the
financial statements of which appear in the Prospectus of that Fund.
Since June 15, 1973, the Selective Investment Programs and between February
1, 1978 and May 8, 1981, the Variable Investment Programs were not offered for
sale. Programholders may add to an established account. Dividends and capital
gains distributions will continue to be reinvested at net asset value as long as
the Programs are in force.
The following significant accounting policies, which are in conformity with
generally accepted accounting principles for unit investment trusts, are
consistently used in the preparation of its financial statements.
Security valuation - Investments are valued at the net asset value of Fund
shares held.
Transaction dates - Share transactions are recorded on the trade dates.
Income and capital gains distributions are recorded on the record dates.
Federal income tax status - Under provisions of the Tax Reform Act of 1969,
the Trust is not a taxable entity; accordingly, no provision for Federal income
taxes is required.
*See accompanying Prospectus of United Vanguard Fund, Inc.
<PAGE>
NOTE 2 -- Trust Shares
As of September 30, 1994, the Trust held 15,012,017 shares of United Vanguard
Fund, Inc. Capital transactions in Trust shares were as follows:
For the fiscal year
ended September 30, 1994
-------------------------
Shares Value
---------- -----------
Investors' payments..................... $11,845,803
-----------
Less -
Sales charge ........................ 445,943
Custodian fees ...................... 146,191
Exchange fees ....................... 20
-----------
592,154
-----------
Balance invested in United Vanguard
Fund, Inc. shares .................... 1,548,229 11,253,649
Shares acquired on reinvestment of
dividends and capital gains
distributions ........................ 410,848 2,921,129
Retired in liquidation ................. (2,871,757) (20,952,316)
--------- -----------
Net decrease ......................... (912,680) $(6,777,538)
========= ===========
For the fiscal year
ended September 30, 1993
-------------------------
Shares Value
---------- -----------
Investors' payments..................... $14,615,648
-----------
Less -
Sales charge ........................ 780,145
Custodian fees ...................... 179,159
Exchange fees ....................... 135
-----------
959,439
-----------
Balance invested in United Vanguard
Fund, Inc. shares .................... 2,118,857 13,656,209
Shares acquired on reinvestment of
dividends and capital gains
distributions ........................ 77,318 504,147
Retired in liquidation ................. (3,638,301) (23,502,629)
--------- -----------
Net decrease ......................... (1,442,126) $(9,342,273)
========= ===========
NOTE 3 -- Investors' Cost of United Vanguard Fund, Inc. Shares
The investment in United Vanguard Fund, Inc. shares is carried at identified
cost, which represents the amount available for investment (including reinvested
distributions of net investment income and realized gains) in such shares after
deduction of sales charges, custodian fees and exchange fees, if applicable.
Programs Outstanding
September 30, 1994
------------------
Total payments made by investors
on programs outstanding .......................... $ 97,423,997
Reinvested distributions from:
Net investment income ............................ 7,293,425
Realized gains ................................... 18,928,610
------------
Total ........................................... 123,646,032
------------
Deductions
Sales charges .................................... 10,198,229
Custodian fees ................................... 1,189,156
Exchange fees .................................... 1,332
------------
Total deductions ................................ 11,388,717
------------
Net investment in United Vanguard
Fund, Inc. shares ................................ 112,257,315
Less: Cost of partial withdrawals ............... 20,671,843
------------
Net cost of United Vanguard
Fund, Inc. shares ................................ 91,585,472
Unrealized appreciation ............................ 24,457,419
------------
Net amount applicable to programholders ............ $116,042,891
============
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Sponsor, Waddell & Reed, Inc., and to the Programholders of United
Vanguard Investment Programs
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of the unit investment trust known
as United Vanguard Investment Programs (the "Trust") at September 30, 1994, the
results of its operations for the year then ended and the changes in its net
assets for each of the two years in the period then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
October 31, 1994
<PAGE>
WADDELL & REED, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Waddell & Reed Financial Services, Inc.)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 1994 1993
------------ ------------
(unaudited)
Current Assets:
Cash and cash equivalents (note 2) $ 24,024,000 $ 46,483,000
Short-term investments (note 2) 613,000 612,000
Other receivables:
Customers and dealers for securities
transactions 5,039,000 8,673,000
Management fees 184,000 175,000
Commissions and other, less $49,000
allowance for doubtful accounts
(1993 - $59,000) 9,240,000 5,762,000
Current income taxes receivable 1,019,000 1,660,000
Due from affiliates (note 4) 144,000 68,000
Prepaid expenses 2,216,000 2,577,000
------------ ------------
Total current assets 42,479,000 66,010,000
Investments (note 3) 20,686,000 18,520,000
Property and equipment at cost
less $10,127,000 accumulated
depreciation (1993 - $9,040,000) 26,444,000 24,093,000
Excess of cost over fair value of net assets
acquired, less $5,261,000 accumulated
amortization (1993 - $4,950,000) 11,253,000 11,564,000
Other assets 4,939,000 3,479,000
------------ ------------
Total assets $105,801,000 $123,666,000
============ ============
(See accompanying notes to consolidated financial statements.)
continued
<PAGE>
WADDELL & REED, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Waddell & Reed Financial Services, Inc.)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1993
------------ -----------
(unaudited)
Current liabilities:
Payable to investment companies, brokers
and dealers for securities bought but
not received $ 16,283,000 $ 21,090,000
Payable to customers and others 2,506,000 4,272,000
Payable to affiliates (note 4) 60,000 8,000
Accrued compensation 5,144,000 8,060,000
Other accrued liabilities 2,345,000 2,487,000
Deferred income taxes (note 5) 202,000 424,000
----------- -----------
Total current liabilities 26,540,000 36,341,000
Accrued pension contributions and post
retirement benefits 7,021,000 7,944,000
Deferred income taxes (note 5) 946,000 1,017,000
----------- -----------
Total liabilities 34,507,000 45,302,000
----------- -----------
Stockholder's equity:
Common stock, par value $1 per share:
Authorized, issued and outstanding
1,000 shares 1,000 1,000
Additional paid-in capital 58,574,000 58,574,000
Retained earnings 13,147,000 19,789,000
Unrealized loss on investments (note 3) (428,000) -
----------- -----------
Total stockholder's equity 71,294,000 78,364,000
----------- -----------
Commitments (note 6)
Total liabilities and
stockholder's equity $105,801,000 $123,666,000
=========== ===========
(See accompanying notes to consolidated financial statements.)
<PAGE>
WADDELL & REED, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Waddell & Reed Financial Services, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
Nine
Months Ended Year Ended
September 30, December 31,
1994 1993
------------ ------------
(unaudited)
Revenues:
Commissions (note 4) $ 54,350,000 $ 77,355,000
Investment management fees 48,370,000 58,483,000
Investment service fees 22,113,000 27,660,000
Other revenue, principally
interest income (note 4) 2,283,000 3,916,000
------------ ------------
127,116,000 167,414,000
------------ ------------
Expenses:
Compensation to sales representatives 39,242,000 57,118,000
Salaries and employee fringe benefits 14,761,000 21,431,000
General and administrative expenses 10,045,000 16,631,000
------------ ------------
64,048,000 95,180,000
------------ ------------
Income before provision
for income taxes and cumulative effect
of change in accounting principles 63,068,000 72,234,000
Provision for income taxes (note 5) 24,110,000 27,489,000
------------ ------------
Income before cumulative effect of
change in accounting principles 38,958,000 44,745,000
Cumulative effect at January 1, 1993
of changes in accounting for
postretirement benefits other than
pensions and income taxes (note 1) - 5,034,000
------------ ------------
Net income $ 38,958,000 $ 49,779,000
============ ============
(See accompanying notes to consolidated financial statements.)
<PAGE>
WADDELL & REED, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Waddell & Reed Financial Services, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Unrealized Total
Common stock Additional gain (loss) stock-
------------- paid-in Retained on invest- holder's
Shares Amount capital earnings ments equity
------ ------ ----------- ----------- ---------- ----------
Balance at
December 31,
1992 1,000 $1,000 $ 55,614,000 $21,210,000 $ (31,000) $ 76,794,000
Net income - - - 49,779,000 - 49,779,000
Unrealized gain
on investment in
affiliates - - - - 31,000 31,000
Dividends to
parent (note 4) - - - (51,200,000) - (51,200,000)
Capital contribu-
tions by parent
(note 5) - - 2,960,000 - - 2,960,000
------ ------ ----------- ----------- ---------- ----------
Balance at
December 31,
1993 1,000 1,000 58,574,000 19,789,000 - 78,364,000
Net income - - - 38,958,000 - 38,958,000
Unrealized loss on
investments net of
income taxes - - - - (428,000) (428,000)
Dividends to
parent - - - (45,600,000) - (45,600,000)
------ ----- ----------- ---------- --------- -----------
Balance at
September 30,
1994 1,000 $1,000 $58,574,000 $13,147,000 $(428,000) $71,294,000
(unaudited) ====== ===== =========== =========== ========= ===========
(See accompanying notes to consolidated financial statements.)
<PAGE>
WADDELL & REED, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Waddell & Reed Financial Services, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine
Months Ended Year Ended
September 30, December 31,
1994 1993
----------- -----------
Cash flows from operating activities: (unaudited)
Net income $38,958,000 $49,779,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,450,000 1,848,000
(Gain)/Loss on sale of investments 26,000 (23,000)
Loss on sale and retirement
of fixed assets 10,000 94,000
Capital gains and dividends reinvested (55,000) (49,000)
Provision for deferred income taxes (6,000) (3,427,000)
Changes in assets and liabilities:
Other receivables 711,000 2,069,000
Prepaid expenses and other assets (1,099,000) (1,426,000)
Payable to investment companies,
brokers and dealers for securities
bought but not received (4,807,000) 2,308,000
Payable to customers and others (1,766,000) 263,000
Other accrued liabilities (3,929,000) 4,857,000
----------- -----------
Net cash provided by operating activities 29,493,000 56,293,000
----------- -----------
Cash flows from investing activities:
Advances to related parties - (5,183,000)
Repayment of advances to related parties - 2,234,000
Additions to investments (9,560,000) (4,762,000)
Proceeds from sales of investments 3,214,000 -
Proceeds from maturity of investments 3,494,000 9,647,000
Capital expenditures (3,510,000) (1,981,000)
Proceeds from sale of fixed assets 10,000 15,000
----------- -----------
Net cash used in
investing activities (6,352,000) (30,000)
----------- -----------
Cash flows from financing activities:
Dividends paid (45,600,000) (35,700,000)
----------- -----------
Net cash used in financing activities (45,600,000) (35,700,000)
----------- -----------
Net increase (decrease) in cash and cash
equivalents (22,459,000) 20,563,000
Cash and cash equivalents at beginning of period 46,483,000 25,920,000
----------- -----------
Cash and cash equivalents at end of period $24,024,000 $46,483,000
=========== ===========
Cash paid for income taxes $23,753,000 $25,105,000
=========== ===========
Retirement of note receivable
from parent through the
declaration of a dividend (note 4) $ - $15,500,000
=========== ===========
Property and equipment contributed
by parent $ - $ 56,000
=========== ===========
Capital contribution -
reduction of federal income taxes $ - $ 2,904,000
=========== ===========
(See accompanying notes to consolidated financial statements.)
<PAGE>
WADDELL & REED, INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Waddell & Reed Financial Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
Ownership
Waddell & Reed, Inc. and subsidiaries (the Company) is a wholly-owned
subsidiary of Waddell & Reed Financial Services, Inc. which is a wholly-owned
subsidiary of United Investors Management Company (UIMCO). Torchmark
Corporation is the parent company of UIMCO.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Amounts in the accompanying
consolidated financial statements and notes are rounded to the nearest thousand.
Revenue Recognition
Commission revenue and expenses (and related receivables and payables)
resulting from securities transactions are recorded on the date on which the
order to buy or sell securities is executed.
Cash and Cash Equivalents
Cash and cash equivalents in the accompanying statements of cash flows
include cash on hand and short-term investments with original maturities of less
than ninety days.
Property and Equipment
Property and equipment are carried at cost. The Company provides for
depreciation using the straight-line and sum-of-the-years-digits methods at
annual rates based on the estimated useful lives of the assets. Generally, the
building is being depreciated over thirty-two years and furniture and equipment
over three to ten years.
A summary of property and equipment at September 30, 1994 (unaudited) and
December 31, 1993 is as follows:
September 30, December 31,
1994 1993
------------- ------------
(unaudited)
Land $ 6,054,000 $ 5,204,000
Building 14,818,000 12,568,000
Furniture and fixtures 5,562,000 5,296,000
Equipment and machinery 7,311,000 5,790,000
Land and building held for
development 2,826,000 4,275,000
----------- -----------
Property and equipment, at cost 36,571,000 33,133,000
Less accumulated depreciation 10,127,000 9,040,000
----------- -----------
Property and equipment, net $26,444,000 $24,093,000
=========== ===========
Excess of Cost Over Fair Value of Net Assets Acquired
The excess cost reflects the excess of the purchase price over the fair
value of the Company's net assets acquired at October 26, 1981. The excess cost
is being amortized on a straight-line basis over a period of 40 years.
Amortization charged to expense for the nine months ended September 30, 1994
(unaudited) and the year ended December 31, 1993 was $311,000 and $415,000,
respectively.
Income Taxes
The accounts of the Company and its subsidiaries are included in a
consolidated federal income tax return to be filed by the Company's parent. The
Company's provision for income taxes has been made on the same basis as if the
Company and its subsidiaries filed a separate return.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" Statement 109. The
cumulative effect of this change in accounting for income taxes of $5,855,000
was determined as of January 1, 1993 and is reported separately in the
accompanying consolidated statement of income for the year ended December 31,
1993.
Retirement Plan
The Company and its subsidiaries together with certain affiliated companies
participate in a noncontributory retirement plan which covers substantially all
employees. Benefits payable under the plan are based on employees' years of
service and compensation during the final ten years of employment.
At December 31, 1993, the assumed discount rate, the rate at which the plan
benefit obligations could be settled, was 7.25%. The estimated rate of increase
in future compensation levels used in determining the actuarial present value of
the projected benefit obligation was 4.25% for December 31, 1993. The expected
long-term rate of return on plan assets was 8.0% at December 31, 1993.
The Company's funding policy is to contribute annually the maximum amount
that can be deducted for federal income tax purposes. Contributions are
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future. Substantially all of the plan's
assets are invested in mutual funds managed by the Company.
Net pension cost includes the cost for the Company and its subsidiaries,
and Torch Energy Advisors, Inc. and subsidiary (Torch Energy), an affiliated
company, (member companies) because all plan assets are commingled and available
for distribution to all member companies' employees.
Net pension cost for the year ended December 31, 1993 included the
following components:
1993
-----------
Service cost - benefits earned during
the period $ 2,173,000
Interest cost on projected benefit
obligation 1,672,000
Actual return on plan assets (2,059,000)
Net amortization and deferral 499,000
-----------
Net periodic pension cost
of member companies $ 2,285,000
===========
Pension expense for the nine months ended September 30, 1994 (unaudited)
and the year ended December 31, 1993 was $1,072,000 and $1,178,000,
respectively, for the Company and its subsidiaries.
The following table sets forth the plan's funded status for all member
companies as of December 31, 1993:
1993
Actuarial present value of -----------
benefit obligations:
Vested benefits $14,568,000
Nonvested benefits 1,851,000
-----------
Accumulated benefit obligation 16,419,000
Increase in benefits due to future
compensation increases 7,580,000
-----------
Projected benefit obligation 23,999,000
Estimated fair market value of
plan assets 17,613,000
-----------
Projected benefit obligation in
excess of plan assets 6,386,000
Unrecognized net gain from past
experience different from that assumed
and effects of changes in assumptions 1,578,000
Unrecognized net transition obligation
being recognized over 21.57 years (295,000)
Unrecognized prior service cost
attributable to plan amendments (134,000)
-----------
Pension liability of member
companies as of December 31 $ 7,535,000
===========
Company and subsidiaries pension
liability $ 6,537,000
===========
Postretirement Benefits Other Than Pensions
The Company and its subsidiaries sponsor an unfunded defined benefit
postretirement medical plan that covers substantially all its employees. The
plan is contributory with retiree contributions adjusted annually.
Effective January 1, 1993, the Company implemented Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" SFAS No. 106. The Company elected immediate
recognition of the transition obligation which amounted to $1,244,000 and has
recorded such, net of $423,000 income tax benefit, as a cumulative effect of
change in accounting principle. Previously, expenses for postretirement
benefits other than pensions were recognized in the year claims were paid. For
the nine months ended September 30, 1994 (unaudited) and the year ended December
31, 1993, net claims paid by the Company totaled approximately $12,000 and
$15,000, respectively.
The following table sets forth the plans' funded status as of December 31,
1993:
December 31,
1993
Accumulated postretirement benefit
obligation (APBO):
Retirees $ 502,000
Fully eligible active plan
participants 143,000
Other active plan participants 449,000
-----------
1,094,000
Plan assets at fair value -0-
Unrecognized effects of
changes in assumptions 313,000
-----------
Accumulated postretirement benefit
obligation in excess of plan assets $ 1,407,000
===========
Net periodic postretirement benefit cost for the year ended December 31,
1993 included the following components:
Service cost-benefits attributed
to service during the year $ 60,000
Interest cost on accumulated
postretirement benefit obligation 103,000
-----------
Net periodic postretirement benefit cost $ 163,000
===========
The net periodic postretirement benefit cost for the nine months ended
September 30, 1994 (unaudited) was $100,000.
The significant assumptions used in computing the APBO as of December 31,
1993 are as follows:
Assumed health care cost trend rate used to measure the expected cost of
benefits covered by the plan:
December 31, 1993
Current year 13%
Thereafter Decrease annually
to 5.5% by 2018
Discount rate 7.25%
The effect of a one-percent increase each year in the assumed health care
cost trend rate on the aggregate of the Service and Interest Cost components of
Net Periodic Postretirement Benefit Cost would be an increase of approximately
$62,000 for the year ended December 31, 1993. Additionally, the effect on the
APBO as of December 31, 1993 would be an increase of approximately $266,000.
Savings and Investment Plan
The Company has a savings and investment plan covering substantially all
employees. The plan provides for a matching Company contribution of 50% of the
employee's investment in mutual fund shares and/or Torchmark Corporation stock,
not to exceed 3% of the employee's salary.
The charge to expense for this plan for the nine months ended September 30,
1994 (unaudited) and the year ended December 31, 1993 was $468,000 and $575,000,
respectively.
Investments
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," was issued by the Financial
Accounting Standards Board in May 1993 and is effective for fiscal years
beginning after December 15, 1993. SFAS No. 115 expands the use of fair value
accounting and the reporting for certain investments in debt and equity
securities. The Company adopted the provisions of SFAS No. 115 effective
January 1, 1994 and has classified its investments at September 30, 1994 as
available-for-sale. Investments at December 31, 1993 are stated at the lower of
aggregate cost or market value.
Available-for-sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholder's equity until realized.
A decline in the market value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings resulting in the
establishment of a new cost basis for the security.
Dividend and interest income are recognized when earned. Realized gains
and losses for securities classified as available-for-sale are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
NOTE 2 -- CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents at September 30, 1994 (unaudited) and December
31, 1993 includes reserves of $12,032,000 and $18,189,000, respectively, for the
benefit of customers in compliance with securities industry regulations and an
investment of $1,187,000 and $2,704,000, respectively, in a money market fund
for which the Company is principal underwriter and investment advisor.
Short-term investments at cost, which approximates market, are U. S.
Government obligations which amounted to $613,000 and $612,000 at September 30,
1994 (unaudited) and December 31, 1993, respectively, of which $499,000 and
$496,000, respectively, are reserved for the benefit of customers in compliance
with security regulations.
NOTE 3 -- INVESTMENTS
Investments at September 30, 1994 (unaudited) and December 31, 1993 are
summarized below:
September 30, December 31,
1994 1993
----------- -----------
(unaudited)
Investments in Government
National Mortgage Association
Securities $ 7,750,000 $14,217,000
Investments in Municipal Bonds 12,079,000 3,446,000
Investment in affiliates 857,000 857,000
----------- -----------
$20,686,000 $18,520,000
=========== ===========
The amortized cost, gross unrealized holding losses and fair value for
available-for-sale investments at September 30, 1994 (unaudited), were as
follows:
Unrealized
Amortized Holding
Cost Losses Fair Value
------------ --------- ------------
Available-for-sale:
GNMA $ 7,993,000 $(242,000) $ 7,751,000
Municipal bonds 12,505,000 (426,000) 12,079,000
Investments in affiliates 903,000 (47,000) 856,000
------------ --------- ------------
$21,401,000 $(715,000) $20,686,000
============ ========= ============
Investments in Government National Mortgage Association Pools consist of
investments in pools of U.S. government-backed mortgage securities, with various
maturities through August, 2022.
Investments in municipal bonds have various maturities through December,
2010.
NOTE 4 -- TRANSACTIONS WITH RELATED PARTIES
During 1993, the Company advanced monies to Pershing Lease Income Limited
Partnership (Pershing), an affiliate of the Company, for the purpose of
acquiring equipment. All notes bear interest at 6.0%. The notes were repaid in
1993.
The amounts due from affiliates at September 30, 1994 (unaudited) and
December 31, 1993 of $144,000 and $68,000, respectively, include advances to
affiliates for current operating expenses, initial organizational and offering
costs and commissions due from the sale of the affiliates' investment products.
The amounts due to affiliates at September 30, 1994 (unaudited) and
December 31, 1993 of $60,000 and $8,000, respectively, relate primarily to
amounts owed for current operating expenses.
Interest earned on notes receivable from affiliates for the year ended
December 31, 1993 aggregated $1,114,000. On December 30, 1993, the Company
retired the note totalling $15,500,000 through the declaration of a dividend to
the Company's parent. There were no advances to affiliates during the nine
month period ending September 30, 1994.
The Company maintains a general agency contract with United Investors Life
Insurance Company (UIL), a wholly-owned subsidiary of UIMCO. The contract
provides, generally, that the Company will maintain a sales force for sale and
distribution of UIL life insurance and other products, for which services the
Company will be compensated by UIL. Total general agency commissions received
from UIL for the nine months ended September 30, 1994 (unaudited) and the year
ended December 31, 1993 were $18,579,000 and $25,569,000, respectively.
The Company serves as investment advisor to various subsidiaries and
affiliates of Torchmark Corporation, including Liberty National Life, UIL, Globe
Life and Accident and United American Life. Under the terms of the advisory
agreements, the Company is compensated for its services at a specified
percentage of the market value of the assets managed. Revenues from the
affiliates for investment advisory services amounted to $137,000 and $79,000
during the nine months ended September 30, 1994 (unaudited) and the year ended
December 31, 1993, respectively.
The parent of the Company contributed 66,630,312 shares of Torchmark
Corporation stock which represents 48% of Torchmark's outstanding stock, to
Waddell & Reed Asset Management Company a wholly-owned subsidiary of Waddell &
Reed, Inc., on August 10, 1994. The stock was transferred at the parent
company's carrying value which was zero. There was no effect on the operations
of Waddell & Reed, Inc. and subsidiaries as a result of this transaction.
NOTE 5 -- PROVISION FOR INCOME TAXES
The components of the provision for income taxes are as follows:
Nine
Months Ended Year Ended
September 30, December 31,
1994 1993
----------- -----------
(unaudited)
Currently payable:
Federal $20,959,000 $23,815,000
State 3,157,000 2,977,000
----------- -----------
24,116,000 26,792,000
Deferred taxes (6,000) 697,000
----------- -----------
$24,110,000 $27,489,000
=========== ===========
The tax effect of temporary differences that give rise to significant
portions of deferred tax liabilities and deferred tax assets at September 30,
1994 (unaudited) and December 31, 1993 are as follows:
September 30, December 31,
1994 1993
---------- ----------
(unaudited)
Deferred tax liabilities:
Prepaid commissions $ (249,000) $ (390,000)
Intangible assets (3,207,000) (3,207,000)
Deferred acquisition costs (1,361,000) (804,000)
Fixed assets (184,000) (180,000)
Other (54,000) (63,000)
---------- ----------
Total gross deferred liabilities (5,055,000) (4,644,000)
---------- ----------
Deferred tax assets:
Accrued retirement and postretirement
benefits other than pension 3,517,000 3,174,000
Investments gain/loss adjustment 287,000 -
Other 103,000 29,000
---------- ----------
Total gross deferred assets 3,907,000 3,203,000
---------- ----------
Net deferred tax liability $(1,148,000) $(1,441,000)
========== ==========
A valuation allowance for deferred tax assets was not necessary at
September 30, 1994 (unaudited) or December 31, 1993.
Income tax expense amounted to $24,110,000 and $27,489,000 for the nine
months ended September 30, 1994 (unaudited) and the year ended December 31, 1993
(effective rate of 38% for both periods). The actual tax expense for the nine
months ended September 30, 1994 (unaudited) and the year ended December 31, 1993
differs from "expected" tax expense for the period (computed by applying the
U.S. federal corporate tax rate of 35% to earnings before income taxes)
primarily as a result of state income taxes.
During 1993, the parent company contributed $2,904,000 to the paid-in
capital of the Company in the form of a reduction of federal income tax payable.
NOTE 6 -- COMMITMENTS
Rental Expense and Lease Commitments
The Company rents certain of its offices and office equipment under leases
covering one year or less which are not included in the following minimum rental
commitments. Certain of the office leases contain escalation clauses under
which rents may be increased at any time based on the lessor's increased costs
for property taxes and operating costs.
Aggregate rental expense for the nine months ended September 30, 1994
(unaudited) and the year ended December 31, 1993, and the aggregate future
minimum rental commitments under noncancelable operating leases in effect at
September 30, 1994 (unaudited) are as follows:
General Sales Office Aggregate
offices offices equipment amount
------- ------- --------- ---------
(Thousands of dollars)
Period ended September 30, 1994:
Rent expense $ 38 $2,352 $ - $2,390
====== ====== ==== ======
Year ended December 31, 1993:
Rent expense $ 54 $3,072 $ - $3,126
====== ====== ==== ======
Minimum remaining rental commitments
years ended December 31:
1994 $ 10 $ 643 $ - $ 653
1995 45 1,731 - 1,776
1996 45 697 - 742
1997 45 265 - 310
1998 45 68 - 113
Thereafter 84 10 - 94
------ ------ ---- ------
$ 274 $3,414 $ - $3,688
====== ====== ==== ======
As existing leases expire, new leases are expected to be executed.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Waddell & Reed, Inc.:
We have audited the accompanying consolidated balance sheet of Waddell &
Reed, Inc., and subsidiaries, a wholly-owned subsidiary of Waddell & Reed
Financial Services, Inc. as of December 31, 1993 and the related consolidated
statements of income, stockholder's equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Waddell &
Reed, Inc. and subsidiaries as of December 31, 1993 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As described in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards Nos. 106 and 109,
"Accounting for Postretirement Benefits Other Than Pensions" and "Accounting for
Income Taxes" in 1993.
KPMG PEAT MARWICK LLP
February 4, 1994
<PAGE>
United Vanguard Investment Programs
PROSPECTUS
January 15, 1995
Sponsor
Waddell & Reed, Inc.
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
TABLE OF CONTENTS
Variable Investment Programs . . . . 2
Investor's Rights and Privileges . . 4
Tax Status of Programs . . . . . . . 7
Authorized Changes in Programs . . . 8
The Custodian. . . . . . . . . . . . 8
The Sponsor. . . . . . . . . . . . .10
Self-Employed Retirement Plan and
Individual Retirement Plan . . . .10
General Information. . . . . . . . .11
Financial Statements . . . . . . . .13
NUP1006(1-95)
printed on recycled paper
<PAGE>
UNITED VANGUARD FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
December 31, 1994
PROSPECTUS
United Vanguard Fund, Inc. (the "Fund") is a management investment company
which seeks the appreciation of your investment through a diversified holding of
securities issued primarily by companies which the Fund's Manager, Waddell &
Reed Investment Management Company (the "Manager"), believes have appreciation
possibilities and through proper timing of purchases and sales of securities.
This Prospectus contains concise information about the Fund of which you
should be aware before investing. Additional information has been filed with
the Securities and Exchange Commission and is contained in a Statement of
Additional Information (the "SAI"), dated December 31, 1994. You may obtain a
copy of the SAI free of charge by request to the Fund or its Underwriter,
Waddell & Reed, Inc., at the address or telephone number shown below. The SAI
is incorporated by reference into this Prospectus and you will not be aware of
all facts unless you read both this Prospectus and the SAI.
Retain This Prospectus For Future Reference
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This supplement is required by the Office of the Commissioner of Securities of
the State of Wisconsin
The security offered hereby may be considered to be speculative due to the
Fund's ability to engage in short-term trading which may result in a high rate
of portfolio turnover and correspondingly greater commission expenses and
transaction costs.
To be attached on the front cover of United Vanguard Fund, Inc. prospectus
NUS1005WI
<PAGE>
UNITED VANGUARD FUND, INC.
Summary of Expenses
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Load Imposed on Purchases 5.75%
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested None
Dividends (as a percentage of offering price)
Deferred Sales Load (as a percentage
of original purchase price or redemption
proceeds, as applicable) None
Redemption Fees (as a percentage
of amount redeemed, if applicable) None
Exchange Fee None
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
Management Fees 0.72%
12b-1 Fees* 0.10%
Other Expenses 0.23%
(Includes, among other expenses, transfer
agency, accounting, custodian, audit and legal fees)
Total Fund Operating Expenses 1.05%
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of each
time period: $68 $89 $112 $178
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown.
*See "Management and Services" for further information about the 12b-1 service
fees.
<PAGE>
United Vanguard Fund, Inc.
Financial Highlights
(Audited)
The following information has been audited by Price Waterhouse LLP,
independent accountants, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Price Waterhouse LLP.
For a Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended September 30,
--------------------------------------------------------
- -----------------------------
1994 1993 1992 1991 1990 1989
1988 1987 1986 1985
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Net asset value,
beginning of period $7.10 $6.03 $6.36 $5.18 $6.91 $5.82
$8.23 $6.92 $5.61 $5.35
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
Income from investment operations:
Net investment income .00 .04 .06 .14 .17 .22
.14 .16 .17 .25
Net realized and
unrealized gain
(loss) on
investments .83 1.07 (0.10) 1.39 (0.95) 1.12
(1.00) 2.28 1.34 .30
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
Total from investment
operations .83 1.11 (0.04) 1.53 (0.78) 1.34
(0.86) 2.44 1.51 .55
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
Less distributions:
Dividends from net
investment
income (0.02) (0.04) (0.09) (0.14) (0.22) (0.18)
(0.18) (0.16) (0.20) (0.29)
Distributions from
capital gains (0.18) (0.00) (0.20) (0.21) (0.73) (0.07)
(1.37) (0.97) (0.00) (0.00)
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
Total distributions (0.20) (0.04) (0.29) (0.35) (0.95) (0.25)
(1.55) (1.13) (0.20) (0.29)
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
Net asset value,
end of period $7.73 $7.10 $6.03 $6.36 $5.18 $6.91
$5.82 $8.23 $6.92 $5.61
===== ===== ===== ===== ===== =====
===== ===== ===== =====
Total return* 11.86% 18.38% -0.58% 30.88% -12.67% 23.69% -8.52%
40.12% 27.30% 10.56%
Net assets, end of
period (000
omitted) $1,014,263 $921,816 $843,978 $875,293 $679,765 $781,650
$659,184 $727,022 $493,844 $386,314
Ratio of expenses to
average net assets 1.05% 0.97% 0.96% 0.97% 0.98% 0.95%
1.00% 0.93% 0.98% 1.05%
Ratio of net investment
income to average
net assets 0.04% 0.50% 0.96% 2.28% 2.85% 3.62%
2.39% 2.30% 2.51% 4.47%
Portfolio
turnover rate** 36.70% 62.12% 84.82% 173.44% 161.54% 172.59%
128.91% 160.63% 125.52% 160.27%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
**This rate is, in general, calculated by dividing the average value of the
Fund's portfolio during the period into the lesser of its purchases or sales
in the period, excluding short-term securities. For periods ended prior to
April 1, 1985, U.S. Government Securities were excluded from the calculation.
Information regarding the performance of the Fund is contained in the
Fund's annual report to shareholders, which may be obtained without charge
by request to the Fund at the address or phone number shown on the cover of
this Prospectus.
<PAGE>
What is United Vanguard Fund, Inc.?
United Vanguard Fund, Inc. is a corporation organized under Maryland law on
February 15, 1974 as successor to a Delaware corporation which commenced
operations in 1969. It is an open-end diversified management investment company
commonly called a "mutual fund." The Fund has a Board of Directors which has
overall responsibility for the management of its affairs. For the names of the
Directors and other information about them, see the SAI. The Fund has only one
class of shares. Each share has the same rights to dividends and to vote.
Shares are fully paid and nonassessable when bought. 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 an annual or special meeting called by the Board of
Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon receipt
by the Fund of a request in writing signed by shareholders holding not less than
25% of all shares entitled to vote at such meeting, provided certain conditions
stated in the Bylaws of the Fund are met. There will normally be no meeting of
shareholders for the purpose of electing directors until such time as less than
a majority of directors holding office have been elected by shareholders, at
which time the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the Investment
Company Act of 1940, as amended, 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.
Performance Information
From time to time Waddell & Reed, Inc. or the Fund may include performance
data in advertisements or in information furnished to present or prospective
shareholders. Fund performance may be shown by presenting one or more
performance measurements, including total return and performance rankings.
The Fund's total return is its overall change in value for the period shown
including the effect of reinvesting dividends and capital gains distributions
and any change in the net asset value per share. A cumulative total return
reflects the Fund's change in value over a stated period of time. An average
annual total return reflects the hypothetical annually compounded return that
would have produced the cumulative total return for a stated period if the
Fund's performance had been constant during each year of that period. Average
annual total returns are not actual year-by-year results and investors should
realize that total returns will fluctuate.
Standardized total return figures reflect payment of the maximum sales
charge. The Fund may also provide non-standardized performance information
which does not reflect deduction of such sales charge, which is for periods
other than those required to be presented or which differs otherwise from
standardized performance information. See the SAI for further information
regarding total return and method of computation.
From time to time in advertisements and information furnished to present or
prospective shareholders the Fund may discuss its 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. The Fund may also compare its performance to
that of other selected mutual funds or selected recognized market indicators
such as the Standard & Poor's 500 Stock Index and the Dow Jones Industrial
Average. Performance information may be quoted numerically or presented in a
table, graph or other illustration.
All performance information which the Fund advertises or includes in
information provided to present or prospective shareholders is historical in
nature and is not intended to represent or guarantee future results. The value
of the Fund's shares when redeemed may be more or less than their original cost.
Goal of the Fund
The goal of the Fund is the appreciation of your investment. It tries to
achieve this goal through a diversified holding of securities, primarily issued
by companies which the Manager believes have appreciation possibilities and by
trying to achieve proper timing of purchases and sales relative to market
conditions. This goal, the type of securities the Fund may invest in, and the
proportion of its assets which may be invested in each such type are matters of
fundamental policy and may not be changed without the approval of shareholders.
There can be no assurance that the Fund will achieve its goals; some market
risks are inherent in all securities to varying degrees.
The Manager will attempt to select securities with appreciation
possibilities by looking at many factors. These include: (1) changes in
economic and political conditions; (2) the short-term and long-term outlook for
the industry being analyzed; (3) the management capability of the company being
considered; and (4) the company's market position, product line, technological
position and prospects for increased earnings. The Manager will also analyze
the demands of investors for the security relative to its price. Securities may
be chosen when the Manager anticipates a development which might have an effect
on the value of a security. There may be times when up to all of the Fund's
assets may be invested temporarily for defensive purposes in either debt
securities (including commercial paper or short-term U. S. Government
Securities) or preferred stocks or both. There are three main kinds of
securities that the Fund will own: common stocks, preferred stocks and debt
securities. These securities in which the Fund may invest include preferred
stock that converts to common stock either automatically or after a specified
period of time or at the option of the issuer, and debt securities whose
performance is linked to a specified equity security or securities index.
Investment Policies
The Fund may invest in debt securities rated in any rating category and
unrated securities judged by the Manager to be of equivalent quality; however,
as an operating (i.e., nonfundamental) policy, the Fund does not intend to
invest in non-investment grade debt securities if as a result of such investment
more than 5% of its assets would consist of such investments. See the SAI for a
discussion of the risks associated with non-investment grade debt securities.
The Fund may invest up to two percent of its net assets in warrants, which
are rights to purchase securities. For the purpose of increasing income the
Fund may also purchase securities subject to repurchase agreements (which can be
considered as collateralized loans by the Fund) but may not cause more than ten
percent of its assets to be subject to repurchase agreements with a maturity of
more than seven days. The majority of the repurchase transactions in which the
Fund would engage run from day to day, and the delivery pursuant to the resale
typically will occur within one to five days of the purchase. The Fund's risk
is limited to the ability of the vendor to pay the agreed-upon sum upon the
delivery day.
The Fund may purchase an unlimited amount of foreign securities. There are
certain risks associated with foreign securities not usually associated with U.
S. securities. An investment may be affected by changes in currency rates and
in exchange control regulations (i.e., currency blockage). The Fund may bear a
transaction charge in connection with the exchange of currency. There may be
less publicly available information about a foreign company than about a
domestic company. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Most foreign stock markets have substantially
less volume than the New York Stock Exchange and securities of some foreign
companies are less liquid and more volatile than securities of comparable
domestic companies. There is generally less government regulation of stock
exchanges, brokers and listed companies than in the United States. In addition,
with respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments which could adversely affect investments in securities
of issuers located in those countries. If it should become necessary, the Fund
would normally encounter greater difficulties in commencing a lawsuit against
the issuer of a foreign security than it would against a United States' issuer.
The Fund may buy shares of other investment companies which do not redeem
their shares, subject to the conditions stated in the SAI.
The Fund may also lend its securities on a short-term or long-term basis
for the purpose of realizing income. The Fund will not loan more than 10% of
its assets at any one time. The percentage limit and the requirement that such
loans be on a collateralized basis in accordance with certain regulatory
requirements are fundamental policies which can only be changed by shareholder
vote. 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 upon. There are certain risks associated with
lending securities in that the Fund may experience delay in recovering the
collateral or even loss of the collateral. See the SAI for further discussion
of these risks.
The Fund may write (sell) listed covered calls on securities on not more
than 10% of its assets and may purchase calls and write and purchase puts on
securities. "Covered" means that the Fund owns the securities which are subject
to the call or has the right to acquire them without additional payment. The
purchaser of a call has the right to purchase from the Fund the securities
covered by the call at a fixed price for a fixed period. The Fund has an
operating policy which provides that only options on securities which are issued
by the Options Clearing Corporation may be purchased or sold except the Fund may
write unlisted put options and purchase unlisted put and call options on
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
The Fund may write options on securities for the purpose of increasing
income in the form of premiums paid by the purchaser of the option. While
writing covered calls may increase the Fund's income, the Fund will lose the
opportunity to profit from an increase in the price of the security subject to
the call over the exercise price. When the Fund writes a put it will maintain
designated cash or readily marketable assets adequate to purchase the related
investments should the put be exercised. In writing puts, the Fund assumes the
risk of loss should the market value of the underlying security decline below
the exercise price at which the Fund is obligated to purchase the security. The
Fund will write a put only when it has determined that it would be willing to
purchase the underlying security at the exercise price.
The Fund may purchase calls to take advantage of an expected rise in the
market value of securities which the Fund does not hold in its portfolio and to
close positions in calls it has written. It may purchase puts on related
investments it owns ("protective puts") or on related investments it does not
own ("nonprotective puts"). Buying a protective put permits the Fund to protect
itself during the put period against a decline in the value of the related
investments below the exercise price by selling them through the exercise of the
put. Buying a nonprotective put permits the Fund, if the market price of the
related investments is below the put price during the put period, either to
resell the put or to buy the related investments and sell them at the exercise
price. The Fund may also purchase puts to close positions in puts it has
written. If an option purchased by the Fund is not exercised or sold it will
become worthless at its expiration date and the Fund will lose the amount of the
premium it paid.
The Fund may also, for non-speculative purposes, write and purchase listed
options on stock indexes which are not limited to stocks of any industry or
group of industries ("broadly-based stock indexes"). It will write options on
stock indexes primarily to generate income. It will purchase calls on stock
indexes to hedge against an anticipated increase in the price of securities it
wishes to acquire and will purchase puts on stock indexes to hedge against an
anticipated decline in the market value of its portfolio securities. Because
stock index options are settled in cash, the Fund cannot provide in advance for
its potential settlement obligations on a call it has written on a stock index
by holding the underlying securities. The Fund bears the risk that the value of
the securities it holds will vary from the value of the index.
Options offer large amounts of leverage which will result in the Fund's net
asset value being more sensitive to changes in the value of the related
investment. There is no assurance that a liquid secondary market will exist for
exchange-listed options. The market for options which are not listed on an
exchange may be less active than the market for exchange-listed options. If the
Fund is not able to enter into a closing transaction on an option it has written
it will be required to maintain the securities, or cash in the case of an option
on a stock index, subject to the call or the collateral underlying the put until
a closing purchase transaction can be entered into or the option expires.
Option transactions may increase the portfolio turnover rate creating greater
commission expenses, transaction costs and certain tax consequences.
The Fund may also buy and sell futures contracts on debt securities ("Debt
Futures"), futures contracts on broadly-based stock indexes ("Stock Index
Futures") and options on Debt Futures and Stock Index Futures. The Fund will
purchase or sell futures contracts only for the purpose of hedging against
changes in the market value of its portfolio securities or changes in the market
value of securities which the Manager anticipates it may wish to include in the
Fund's portfolio. At the present time, the debt securities to which Debt
Futures relate are long-term U.S. Treasury Bonds, Treasury Notes, Government
National Mortgage Association pass-through mortgage-backed securities and three-
month U.S. Treasury Bills. Since futures contracts and options thereon can
replicate movements in the cash markets for the securities in which the Fund
invests without the large cash investments required for dealing in such markets,
they may subject the Fund to greater and more volatile risks than might
otherwise be the case. The principal risks related to the use of such
instruments are (i) imperfect correlation between movements in the market price
of the portfolio investments (held or intended) being hedged and in the price of
the futures contract or option; (ii) possible lack of a liquid secondary market
for closing out futures or options positions; (iii) the need for additional
portfolio management skills and techniques; and (iv) losses due to unanticipated
market price movements. For a hedge to be completely effective, the price
change of the hedging instrument should equal the price change of the security
being hedged. Such equal price changes are not always possible because the
investment underlying the hedging instrument may not be the same investment that
is being hedged. The Manager will attempt to create a closely correlated hedge
but hedging activity may not be completely successful in eliminating market
value fluctuation. The ordinary spreads between prices in the cash and futures
markets, due to the differences in the natures of those markets, are subject to
distortion. Due to the possibility of distortion, a correct forecast of general
interest or stock market trends by the Manager may still not result in a
successful transaction. The Manager may be incorrect in its expectations as to
the extent of various interest rate movements or stock market movements or the
time span within which the movements take place. As of the date of this
Prospectus, except as to covered call writing, the Fund intends to limit
purchase and sale of options and futures contracts to buying and selling
broadly-based stock index futures contracts and options thereon for the purpose
of hedging not more than 10% of total assets.
Gains and losses on investments in options and futures contracts depend on
the Manager's ability to predict correctly the direction of stock prices,
interest rates and other economic factors. See the SAI for further information
about these instruments and their risks.
The Fund may have a high portfolio turnover. See the Financial Highlights
table for past turnover. This results in correspondingly greater commission
expenses and transaction costs and may result in certain tax consequences.
Management and Services
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the inception of the investment company, whichever was later, and
to TMK/United Funds, Inc. since its inception. On January 8, 1992, subject to
the authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned
its investment management duties (and assigned its professional staff for
investment management services) to Waddell & Reed Investment Management Company,
a wholly-owned subsidiary of Waddell & Reed, Inc. The Manager has also served
as investment manager for Waddell & Reed Funds, Inc. since its inception in
September 1992 and Torchmark Government Securities Fund, Inc. and Torchmark
Insured Tax-Free Fund, Inc. since each commenced operations in February 1993.
Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter for
each of the investment companies in the United Group of Mutual Funds, TMK/United
Funds, Inc. and Waddell & Reed Funds, Inc. Waddell & Reed, Inc. is an indirect
subsidiary of Torchmark Corporation, a holding company, and United Investors
Management Company, a holding company, and a direct subsidiary of Waddell & Reed
Financial Services, Inc., a holding company.
Subject to authority of the Fund's Board of Directors, the Manager provides
investment advice and supervises investments for which it is paid a fee,
consisting of two elements: (i) a "Specific" fee computed on the Fund's net
asset value as of the close of business each day at the annual rate of .30 of 1%
of net assets and (ii) a pro rata participation based on the relative net asset
size of the Fund in a "Group" fee computed each day on the combined net asset
values of all of the funds in the United Group at the annual rates shown in the
following table. The fee is accrued and paid daily. Prior to the above-
described assignment to the Manager on January 8, 1992, the fees were paid to
Waddell & Reed, Inc.
Group Fee Rate
Group Net Asset Level Annual Group Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 750 .51 of 1%
From $ 750 to $ 1,500 .49 of 1%
From $ 1,500 to $ 2,250 .47 of 1%
From $ 2,250 to $ 3,000 .45 of 1%
From $ 3,000 to $ 3,750 .43 of 1%
From $ 3,750 to $ 7,500 .40 of 1%
From $ 7,500 to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Waddell & Reed Services Company, a subsidiary of Waddell & Reed, Inc., acts
as transfer agent ("Shareholder Servicing Agent") for the Fund and processes the
payments of dividends. See the SAI for the fees paid for these services.
Inquiries concerning shareholder accounts should be sent to that company at the
address shown on the inside back cover of this Prospectus or to the Fund at the
address shown on the front cover of this Prospectus.
Waddell & Reed Services Company also acts as agent ("Accounting Services
Agent") in providing bookkeeping and accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services,
the Fund pays the Accounting Services Agent a monthly fee of one-twelfth of
the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to Waddell &
Reed, Inc., the principal underwriter for the Fund, in an amount not to exceed
.25% of the Fund's average annual net assets. The fee is to be paid to
reimburse Waddell & Reed, Inc. for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts. In particular, the Service Plan and a related Service
Agreement between the Fund and Waddell & Reed, Inc. contemplate that these
expenditures may include costs and expenses incurred by Waddell & Reed, Inc. and
its affiliates in compensating, training and supporting registered sales
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located at
field sales offices; engaging in other activities useful in providing personal
services to Fund shareholders and/or maintenance of shareholder accounts; and in
compensating broker-dealers, and other third parties, who may regularly sell
Fund shares for providing shareholder services and/or maintaining shareholder
accounts. See the SAI for additional information and terms of the Service Plan.
The combined net asset values of all of the funds in the United Group were
approximately $11.2 billion on September 30, 1994. Management fees for the
fiscal year ended September 30, 1994 were 0.72% of the Fund's average net
assets. The Fund's total expenses for that year were 1.05% of its average net
assets.
The Manager places transactions for the Fund's portfolio and in doing so
may consider sales of shares of the Fund and other funds it manages as a factor
in the selection of brokers to execute portfolio transactions. See the SAI for
further information.
James D. Wineland is primarily responsible for the day-to-day management of
the portfolio of the Fund. Mr. Wineland has held his Fund responsibilities
since February 1992. He is Vice President of the Manager, Vice President of the
Fund and Vice President of other investment companies for which the Manager
serves as investment manager. Mr. Wineland has served as the portfolio manager
for investment companies managed by Waddell & Reed, Inc. or the Manager since
January 1984 and has been an employee of Waddell & Reed Inc. and it's successor,
the Manager, since November 1984. Other members of the Manager's investment
management department provide input on market outlook, economic conditions,
investment research and other considerations relating to the Fund's investments.
Dividends, Distributions and Taxes
Ordinarily, dividends are paid semiannually from net investment income,
which includes dividends, accrued interest, earned discount and other income
earned on portfolio securities less expenses. The Fund also distributes
substantially all of its net capital gains (the excess of net long-term capital
gains over net short-term capital losses) and net short-term capital gains, if
any, after deducting any available capital loss carryovers, and any net realized
gains from foreign currency transactions, with its regular dividend at the end
of the calendar year. The Fund may make additional distributions if necessary
to avoid Federal income or excise taxes on certain undistributed income and
capital gains.
You have the option to receive dividends and distributions in cash, to
reinvest them in additional Fund shares without charge or to receive dividends
in cash and reinvest distributions, as you may instruct. In the absence of
instructions, dividends and distributions will be reinvested.
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986 so that it will be
relieved of Federal income tax on that part of its investment company taxable
income (consisting generally of net investment income, net short-term capital
gains and net gains from certain foreign currency transactions) and net capital
gains that is distributed to its shareholders.
Dividends from the Fund's investment company taxable income are taxable to
you as ordinary income, to the extent of the Fund's earnings and profits,
whether received in cash or reinvested in additional Fund shares. Distributions
of the Fund's realized net capital gains, when designated as such, are taxable
to you as long-term capital gains, whether received in cash or reinvested in
additional Fund shares and regardless of the length of time you have owned your
shares. The Fund notifies you after each calendar year-end as to the amounts of
dividends and distributions paid (or deemed paid) to you for that year.
A portion of the dividends paid by the Fund, whether received in cash or
reinvested in additional Fund shares, may be eligible for the dividends-received
deduction allowed to corporations. The eligible portion may not exceed the
aggregate dividends received by the Fund from U.S. corporations. However,
dividends received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the alternative minimum
tax.
The Fund is required to withhold 31% of all dividends, distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not furnish the Fund with a correct tax identification
number. Withholding at that rate from dividends and distributions also is
required for such shareholders who otherwise are subject to backup withholding.
Your redemption of Fund shares will result in taxable gain or loss to you,
depending on whether the redemption proceeds are more or less than your adjusted
basis for the redeemed shares (which normally includes any sales charge paid).
An exchange of Fund shares for shares of any other fund in the United Group
generally will have similar tax consequences. However, special rules apply when
you dispose of Fund shares through a redemption or exchange within 90 days after
your purchase thereof and subsequently reacquire Fund shares or acquire shares
of another fund in the United Group without paying a sales charge due to the
thirty-day reinvestment privilege or exchange privilege. In these cases, any
gain on the disposition of the Fund shares would be increased, or loss
decreased, by the amount of the sales charge you paid when those shares were
acquired, and that amount will increase the adjusted basis of the shares
subsequently acquired. In addition, if you purchase Fund shares within thirty
days after redeeming other Fund shares at a loss, all or part of that loss will
not be deductible and will increase the basis of the newly purchased shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for a further discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
Purchase of Shares
You may purchase shares through Waddell & Reed, Inc. and its sales
representatives. To open an account you must complete an application. Orders
are accepted only at the home office of Waddell & Reed, Inc. (see inside back
cover of this Prospectus for address) and it need not accept any orders. The
offering price of a share is its net asset value next determined following
acceptance plus the sales charge shown in the table below. This net asset value
per share is the value of the Fund's assets, less liabilities, divided by the
number of shares outstanding. Net asset value is determined once each day as of
the later of the close of the regular session of the New York Stock Exchange or
the close of the regular session of any domestic securities exchange or
commodities exchange on which an option or future held by the Fund is traded, on
each day the New York Stock Exchange is open. The Fund's portfolio securities
listed or traded on an exchange are valued using market quotations or, if not
available, at their fair value in a manner determined in good faith by the Board
of Directors. Short-term debt securities are valued at amortized cost which
approximates market value. Other assets are valued at their fair value.
Sales Charge
Sales Charge as Approximate
as Percent of Percent of
Size of Purchase Offering Price Amount Invested
Under $100,000 ...................... 5.75 6.10
$ 100,000 to less than 200,000 .. 4.75 4.99
200,000 to less than 300,000 .. 3.50 3.63
300,000 to less than 500,000 .. 2.50 2.56
500,000 to less than 1,000,000 .. 1.50 1.52
1,000,000 to less than 2,000,000 .. 1.00 1.01
2,000,000 and over ................. 0.00 0.00
Ordinarily the minimum initial investment is $500. A $50 minimum initial
investment pertains to sales in Arizona, California, Maine, Massachusetts,
Montana, North Dakota, Oklahoma, Texas, Vermont, Washington and Wisconsin and to
certain retirement plan accounts. A $50 minimum initial investment also
pertains to accounts for which an investor has arranged, at the time of initial
investment, to make subsequent purchases for the account through automatic bank
withdrawals, as described below. A $100 minimum initial investment pertains to
certain exchanges of shares from other funds in the United Group.
A shareholder may arrange with Waddell & Reed, Inc. to purchase shares by
having regular monthly withdrawals of $25 or more made from a bank account. A
shareholder may also arrange with Waddell & Reed, Inc. to purchase shares by
having regular monthly exchanges of shares with a value of $25 or more made from
United Cash Management, Inc., subject to certain conditions explained in the
SAI.
Lower sales charges are available by combining additional purchases of any
of the funds in the United Group except United Municipal Bond Fund, Inc., United
Cash Management, Inc., United Government Securities Fund, Inc. and United
Municipal High Income Fund, Inc. with net asset value of shares already held
("rights of accumulation") and by grouping all purchases made during a thirteen-
month period ("Statement of Intention"). Shares of the Fund or another fund
purchased through a "contractual plan" may not be included unless the plan has
been completed. Purchases by certain related persons may be grouped. Shares of
the Fund may be exchanged for shares of another fund in the United Group without
payment of an additional sales charge. Subject to certain conditions, automatic
monthly exchanges of shares of United Cash Management, Inc. and exchanges of
shares of certain other funds in the United Group (listed on the back cover of
this Prospectus) may be made into the Fund. These exchange privileges may be
eliminated or modified at any time, upon notice in certain instances.
Information as to rights of accumulation, Statements of Intention, grouping by
related persons, exchange privileges, Flexible Withdrawal Service, Individual
Retirement Accounts, Section 403(b) plans, Keogh, 401(k), 457 plans and other
qualified employee benefit plans is contained in the SAI. Applicable forms are
available from Waddell & Reed, Inc.'s representatives.
Fund shares may be purchased at net asset value by the Directors and
officers of the Fund, employees of Waddell & Reed, Inc., employees of their
affiliates, sales representatives of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each such
Director, officer, employee and sales representative. Purchases in certain
retirement plans and certain trusts for these persons may also be made at net
asset value. Purchases in a 401(k) plan having 100 or more eligible employees
and purchases in a 457 plan having 100 or more eligible employees may be made at
net asset value. Shares may also be issued at net asset value in a merger,
acquisition or exchange offer made pursuant to a plan of reorganization to which
the Fund is a party. See the SAI for additional information.
Redemption
You have the right to sell your shares back to the Fund (redeem) at any
time by sending a written request to the address on the front cover of this
Prospectus, stating how many shares or the amount in dollars you wish to redeem.
The written request must be in good order which requires that if more than one
person owns the shares, each owner must sign the written request. If you hold a
certificate, it must be properly endorsed and sent to the Fund. The Fund
reserves the right to require a signature guarantee by a national bank, a
federally chartered savings and loan or a member firm of a national stock
exchange or other eligible guarantor in accordance with procedures of the Fund's
transfer agent in certain situations, such as: the request for redemption is
made by a corporation, partnership or fiduciary, or the redemption request is
made by, or redemption proceeds are payable to, someone other than the owner of
record. If you recently purchased the shares by check, the payment of redemption
proceeds on these shares may be delayed. You may arrange for the bank upon
which the purchase check was drawn to provide to the Fund telephone or written
assurance, satisfactory to the Fund, that the check has cleared and been
honored. If no such assurance is given, payment of the redemption proceeds on
these shares will be delayed until the earlier of 10 days or when the Fund has
been able to verify that your purchase check has cleared and been honored.
The Fund will redeem your shares at their net asset value (which may be
more or less than what you paid) next computed after receipt of your written
request for redemption in good order at the Fund's address shown on the front
cover of this Prospectus. Payment is made within seven days, unless delayed
because of emergency conditions determined by the Securities and Exchange
Commission, when the New York Stock Exchange is closed (other than on weekends
and holidays) or when trading on the Exchange is restricted. Payment is made in
cash, although under extraordinary conditions redemptions may be made in
portfolio securities.
You may reinvest the amount you redeemed without charge by sending to the
Fund the amount you wish to reinvest. The reinvested amounts must be received
within thirty days after the date of your redemption. You may do this only once
as to Fund shares.
Under the terms of the 401(k) plan which Waddell & Reed, Inc. has
available, the plan may have the right to make a loan to a plan participant by
redeeming Fund shares held by the plan. Principal and interest payments on the
loan made in accordance with the terms of the plan may be reinvested by the
plan, without payment of a sales charge, in shares of any of the funds in the
United Group in which the plan may invest.
Information concerning the establishment of automatic payments from an
account is available from sales representatives of Waddell & Reed, Inc.
<PAGE>
THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1994
Shares Value
COMMON STOCKS AND RIGHTS
Airlines - 1.55%
Southwest Airlines Co. ................. 700,000 $ 15,750,000
Automotive - 3.68%
Ford Motor Company ..................... 600,000 16,650,000
Harley-Davidson, Inc. .................. 750,000 20,718,750
Total ................................. 37,368,750
Banks and Savings and Loans - 3.42%
HSBC Holdings plc (A) .................. 1,161,843 12,967,330
Wells Fargo & Company .................. 150,000 21,768,750
Total ................................. 34,736,080
Beverages - 2.04%
Buenos Aires Embotelladora S.A., ADR ... 200,000 7,475,000
PepsiCo, Inc. .......................... 400,000 13,250,000
Total ................................. 20,725,000
Biotechnology and Medical Services - 2.51%
Biogen, Inc.* .......................... 200,000 10,925,000
Chiron Corporation* .................... 100,000 6,675,000
Ventritex, Inc.* ....................... 400,000 7,900,000
Total ................................. 25,500,000
Building - 4.74%
Cemex, S.A., CPO Shares (A) ............. 3,037,500 27,282,825
Georgia-Pacific Corporation ............ 115,000 8,797,500
Metsa Serla Oy, Class B (A) ............ 249,800 12,022,874
Total ................................. 48,103,199
Chemicals Specialty and Miscellaneous
Technology - 0.57%
Calgon Carbon Corporation .............. 500,000 5,812,500
Computers and Office Equipment - 14.12%
Broderbund Software, Inc.* ............. 350,000 18,637,500
Cerner Corporation* .................... 300,000 12,225,000
Compaq Computer Corporation* ........... 300,000 9,787,500
First Data Corporation ................. 400,000 20,100,000
General Motors Corporation, Class E .... 500,000 19,000,000
Informix Corporation* .................. 1,000,000 27,687,000
Microsoft Corporation* ................. 100,000 5,618,700
Oracle Systems Corporation* ............ 400,000 17,250,000
Silicon Graphics, Inc.* ................ 500,000 12,875,000
Total ................................. 143,180,700
See Notes to Schedule of Investments on page 17.
<PAGE>
THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1994
Shares Value
COMMON STOCKS AND RIGHTS (Continued)
Electronics - 7.63%
AMP Incorporated ....................... 350,000 $ 27,081,250
Applied Materials, Inc.* ............... 300,000 13,950,000
cisco Systems, Inc.* ................... 800,000 21,949,600
Silicon Valley Group, Inc. ............. 300,000 4,312,500
Xilinx, Inc.* .......................... 200,000 10,050,000
Total ................................. 77,343,350
Financial - 2.33%
Federal National Mortgage Association .. 300,000 23,625,000
Hospital Management - 4.18%
United HealthCare Corporation .......... 800,000 42,400,000
Household Products - 1.40%
Gillette Company (The) ................. 200,000 14,150,000
Insurance - 2.59%
MBIA, Inc. ............................. 250,000 14,906,250
TIG Holdings, Inc. ..................... 575,000 11,356,250
Total ................................. 26,262,500
Leisure Time - 4.68%
Comcast Corporation, Class A ........... 750,000 11,437,500
Walt Disney Company (The) .............. 400,000 15,550,000
Tele-Communications, Inc., Class A* .... 650,000 14,462,500
Viacom Inc., Class A ................... 16,688 682,122
Viacom Inc., Class B ................... 126,442 5,026,070
Viacom Inc., Rights* ................... 208,600 273,683
Total ................................. 47,431,875
Machinery - 1.24%
Mannesmann AG (A) ...................... 50,000 12,557,200
Multi-Industry - 1.23%
Grupo Carso, S.A. de C. V.,
Class 1 (A)*........................... 1,100,000 12,471,800
Publishing and Advertising - 1.25%
News Corporation Limited, ADR .......... 250,000 12,656,250
Retailing - 3.81%
Cifra, S.A. de C.V., C (A) ............. 9,315,000 26,054,055
Home Depot, Inc. (The) ................. 300,000 12,600,000
Total ................................. 38,654,055
See Notes to Schedule of Investments on page 17.
<PAGE>
THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1994
Shares Value
COMMON STOCKS AND RIGHTS (Continued)
Telecommunications - 14.07%
General Instrument Corporation* ........ 600,000 $ 17,100,000
MCI Communications Corporation ......... 600,000 15,225,000
MFS Communications Company, Inc.* ...... 500,000 17,125,000
Motorola, Inc. ......................... 400,000 21,100,000
Nokia Corporation (A) .................. 250,000 29,104,250
Telefonaktiebolaget LM Ericsson, ADR,
Class B ............................... 500,000 26,812,500
Telefonos de Mexico S.A. de C.V., ADR .. 260,000 16,250,000
Total ................................. 142,716,750
TOTAL COMMON STOCKS AND RIGHTS - 77.04% $ 781,445,009
(Cost: $571,040,878)
PREFERRED STOCK - 0.17%
Telecommunications
Nokia Corporation, ADS ................. 28,900 $ 1,690,650
(Cost: $1,166,838)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Banks and Savings and Loans - 0.83%
U.S. Bancorp,
Master Note ........................... $ 8,471 8,471,000
Building - 1.56%
Weyerhaeuser Company,
4.78%, 10-21-94 ....................... 15,840 15,797,936
Chemicals Major - 0.61%
du Pont (E.I.) de Nemours
and Company,
4.74%, 10-25-94 ....................... 6,180 6,160,471
Computers and Office Equipment - 1.24%
Electronic Data Systems Corp.:
4.79%, 10-14-94 ....................... 5,800 5,789,968
4.89%, 11-15-94 ....................... 6,805 6,763,404
Total ................................. 12,553,372
See Notes to Schedule of Investments on page 17.
<PAGE>
THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Drugs and Hospital Supply - 1.19%
Warner-Lambert Company,
4.75%, 11-1-94 ........................ $12,130 $ 12,080,385
Electrical Equipment - 1.04%
Emerson Electric Co.,
4.9%, 10-26-94 ........................ 10,550 10,514,101
Financial - 5.52%
Associates Corporation of North America,
Master Note ........................... 7,535 7,535,000
International Business Machines
Credit Corp.,
4.76%, 10-5-94 ........................ 2,380 2,378,741
Merrill Lynch & Co. Inc.,
4.75%, 10-6-94 ........................ 7,420 7,415,105
PHH Corp.,
4.9%, 10-26-94 ........................ 2,950 2,939,962
Textron Financial Corp.:
4.9%, 10-26-94 ........................ 9,800 9,766,653
5.08%, 10-27-94 ....................... 5,390 5,370,225
Transamerica Financial Group,
4.8%, 10-18-94 ........................ 3,000 2,993,200
Whirlpool Financial Corp.:
4.77%, 10-3-94 ........................ 7,596 7,592,987
4.92%, 10-25-94 ....................... 10,000 9,967,200
Total ................................. 55,959,073
Food and Related - 0.36%
Sara Lee Corporation,
Master Note ........................... 3,713 3,713,000
Public Utilities - Electric - 0.73%
Public Service Electric & Gas Co.,
4.82%, 10-11-94 ....................... 7,400 7,390,092
Public Utilities - Pipelines - 0.58%
Enron Corp.,
5.1%, 10-24-94 ........................ 5,960 5,940,580
See Notes to Schedule of Investments on page 17.
<PAGE>
THE INVESTMENTS OF
UNITED VANGUARD FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Retailing - 0.50%
K Mart Corporation,
4.95%, 10-31-94 ....................... $ 5,130 $ 5,108,839
Services, Consumer and Business - 0.83%
Hertz Corp.,
4.78%, 10-12-94 ....................... 8,420 8,407,702
Telecommunications - 0.77%
BellSouth Telecommunications Inc.,
4.8%, 10-19-94 ........................ 5,410 5,397,016
Southwestern Bell Telephone Company,
4.81%, 10-14-94 ....................... 2,375 2,370,875
Total ................................. 7,767,891
TOTAL SHORT-TERM SECURITIES - 15.76% $ 159,864,442
(Cost: $159,864,442)
TOTAL INVESTMENT SECURITIES - 92.97% $ 943,000,101
(Cost: $732,072,158)
CASH AND OTHER ASSETS, NET OF
LIABILITIES - 7.03% $ 71,262,780
NET ASSETS - 100.00% $1,014,262,881
Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside the United States.
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, 1994
Assets
Investment securities -- at value
(Notes 1 and 3) ................................. $ 943,000,101
Cash ............................................ 35,997
Receivables:
Investment securities sold ...................... 71,274,560
Fund shares sold ................................ 1,307,449
Dividends and interest .......................... 939,005
Prepaid insurance premium ........................ 42,598
--------------
Total assets .................................. 1,016,599,710
--------------
Liabilities
Payable for Fund shares redeemed ................. 1,950,370
Accrued service fee .............................. 192,581
Accrued transfer agency and dividend
disbursing ...................................... 123,417
Accrued accounting services fee .................. 8,333
Other ............................................ 62,128
--------------
Total liabilities ............................. 2,336,829
--------------
Total net assets ............................. $1,014,262,881
==============
Net Assets
$1.00 par value capital stock, authorized --
400,000,000; shares outstanding -- 131,135,209
Capital stock ................................... $ 131,135,209
Additional paid-in capital ...................... 594,169,754
Accumulated undistributed income:
Accumulated undistributed net investment
income ......................................... 371,101
Accumulated undistributed net realized gain on
investment transactions and foreign
currency transactions ......................... 77,658,874
Net unrealized appreciation in value of
investments at end of period ................... 210,927,943
--------------
Net assets applicable to outstanding
units of capital ............................. $1,014,262,881
==============
Net asset value per share (net assets divided
by shares outstanding) ........................... $7.73
Sales load (offering price x 5.75%)................. .47
-----
Offering price per share (net asset value
divided by 94.25%).............................. $8.20
=====
See notes to financial statements.
On sales of $100,000 or more the sales load is reduced as set forth on
page 11.
<PAGE>
UNITED VANGUARD FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1994
Investment Income
Income:
Dividends ....................................... $ 6,190,306
Interest ........................................ 4,166,367
------------
Total income .................................. 10,356,673
------------
Expenses (Note 2):
Investment management fee ....................... 6,826,535
Transfer agency and dividend disbursing ......... 1,630,411
Service fee ..................................... 990,242
Custodian fees .................................. 249,340
Accounting services fee ......................... 86,250
Audit fees ...................................... 37,467
Legal fees ...................................... 19,030
Other ........................................... 161,094
------------
Total expenses ................................ 10,000,369
------------
Net investment income ........................ 356,304
------------
Realized and Unrealized Gain (Loss) on Investments
Realized net gain on securities .................. 78,021,451
Realized net loss on foreign currency
transactions .................................... (23,090)
------------
Realized net gain on investments ................ 77,998,361
Unrealized appreciation in value of investments
during the period ............................... 30,273,787
------------
Net gain on investments ....................... 108,272,148
------------
Net increase in net assets resulting
from operations ............................ $108,628,452
============
See notes to financial statements.
<PAGE>
UNITED VANGUARD FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year
ended September 30,
-----------------------------
1994 1993
-------------- ------------
Increase in Net Assets
Operations:
Net investment income ............ $ 356,304 $ 4,369,067
Realized net gain on
investments .................... 77,998,361 26,314,492
Unrealized appreciation........... 30,273,787 117,706,476
-------------- ------------
Net increase in net assets
resulting from operations ..... 108,628,452 148,390,035
-------------- ------------
Dividends to shareholders from:*
Net investment income ............ (2,315,396) (4,820,030)
Realized gains on securities
transactions ................... (22,767,798) ---
-------------- ------------
(25,083,194) (4,820,030)
-------------- ------------
Capital share transactions:
Proceeds from sale of shares
(11,403,314 and 10,417,512
shares, respectively) .......... 83,173,561 67,105,227
Proceeds from reinvestment of
dividends and/or capital gains
distribution (3,461,005 and
713,365 shares, respectively) .. 24,607,745 4,654,207
Payments for shares redeemed
(13,569,912 and 21,266,075 shares,
respectively) .................. (98,880,083) (137,491,017)
-------------- ------------
Net increase (decrease) in net
assets resulting from capital
share transactions ............ 8,901,223 (65,731,583)
-------------- ------------
Total increase ................ 92,446,481 77,838,422
Net Assets
Beginning of period ............... 921,816,400 843,977,978
-------------- ------------
End of period, including undistributed
net investment income of $371,101
and $2,330,193, respectively ..... $1,014,262,881 $921,816,400
============== ============
*See "Financial Highlights" on page 21.
See notes to financial statements.
<PAGE>
UNITED VANGUARD FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended September 30,
--------------------------------------------------------
- -----------------------------
1994 1993 1992 1991 1990 1989
1988 1987 1986 1985
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Net asset value,
beginning of period $7.10 $6.03 $6.36 $5.18 $6.91 $5.82
$8.23 $6.92 $5.61 $5.35
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
Income from investment operations:
Net investment income .00 .04 .06 .14 .17 .22
.14 .16 .17 .25
Net realized and
unrealized gain
(loss) on
investments .83 1.07 (0.10) 1.39 (0.95) 1.12
(1.00) 2.28 1.34 .30
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
Total from investment
operations .83 1.11 (0.04) 1.53 (0.78) 1.34
(0.86) 2.44 1.51 .55
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
Less distributions:
Dividends from net
investment
income (0.02) (0.04) (0.09) (0.14) (0.22) (0.18)
(0.18) (0.16) (0.20) (0.29)
Distributions from
capital gains (0.18) (0.00) (0.20) (0.21) (0.73) (0.07)
(1.37) (0.97) (0.00) (0.00)
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
Total distributions (0.20) (0.04) (0.29) (0.35) (0.95) (0.25)
(1.55) (1.13) (0.20) (0.29)
----- ----- ----- ----- ----- ----- ----
- - ----- ----- -----
Net asset value,
end of period $7.73 $7.10 $6.03 $6.36 $5.18 $6.91
$5.82 $8.23 $6.92 $5.61
===== ===== ===== ===== ===== =====
===== ===== ===== =====
Total return* 11.86% 18.38% -0.58% 30.88% -12.67% 23.69% -8.52%
40.12% 27.30% 10.56%
Net assets, end of
period (000
omitted) $1,014,263 $921,816 $843,978 $875,293 $679,765 $781,650
$659,184 $727,022 $493,844 $386,314
Ratio of expenses to
average net assets 1.05% 0.97% 0.96% 0.97% 0.98% 0.95%
1.00% 0.93% 0.98% 1.05%
Ratio of net investment
income to average
net assets 0.04% 0.50% 0.96% 2.28% 2.85% 3.62%
2.39% 2.30% 2.51% 4.47%
Portfolio
turnover rate** 36.70% 62.12% 84.82% 173.44% 161.54% 172.59%
128.91% 160.63% 125.52% 160.27%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
**This rate is, in general, calculated by dividing the average value of the
Fund's portfolio during the period into the lesser of its purchases or sales
in the period, excluding short-term securities. For periods ended prior to
April 1, 1985, U.S. Government Securities were excluded from the calculation.
See notes to financial statements.
<PAGE>
UNITED VANGUARD FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
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.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a major dealer in bonds. Convertible bonds are
valued using this pricing system only on days when there is no sale re-
ported. Stocks which are traded over-the-counter are priced using NASDAQ
(National Association of Securities Dealers Automated Quotations) which
provides information on bid and asked or closing prices quoted by major
dealers in such stocks. Short-term debt securities are valued at amortized
cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. See Note 3 --
Investment Security Transactions.
C. Foreign currency translations -- All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars daily. Purchases and
sales of investment securities and accruals of income and expenses are
translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates. The
Fund combines fluctuations from currency exchange rates and fluctuations in
market value when computing net realized and unrealized gain or loss from
investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of its
taxable income and capital gains to its shareholders and otherwise qualify
as a regulated investment company under the Internal Revenue Code. In
addition, the Fund intends to pay distributions as required to avoid
imposition of excise tax. Accordingly, provision has not been made for
Federal income taxes. See Note 4 -- Federal Income Tax Matters.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the record date. During the period ended
September 30, 1994, the Fund adopted Statement of Position 93-2
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies.
Accordingly, permanent book and tax basis differences relating to future
shareholder distributions have been reclassified to additional paid-in
capital. As of October 1, 1993, the cumulative effect of such differences
totaling $500 was reclassified from accumulated undistributed net realized
gain on investment transactions to additional paid-in capital. Net
investment income, net realized gains and net assets were not affected by
this change.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .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 (approximately $11.2 billion of
combined net assets at September 30, 1994) at annual rates of .51% of the first
$750 million of combined net assets, .49% on that amount between $750 million
and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between
$2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion, .40%
between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly-owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The Fund also pays WARSCO a monthly per account charge for transfer agency
and dividend disbursement services of $1.0208 for each shareholder account which
was in existence at any time during the prior month, plus $0.30 for each account
on which a dividend or distribution of cash or shares had a record date in that
month. The Fund also reimburses W&R and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received direct and
indirect gross sales commissions (which are not an expense of the Fund) of
$3,180,392, out of which W&R paid sales commissions of $1,663,016 and all
expenses in connection with the sale of Fund shares, except for registration
fees and related expenses.
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to W&R in an
amount not to exceed .25% of the Fund's average annual net assets. The fee is
to be paid to reimburse W&R for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts.
The Fund paid Directors' fees of $34,421.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and short-
term securities, aggregated $307,993,398 while proceeds from maturities and
sales aggregated $431,792,878. Purchases of short-term securities aggregated
$1,192,582,327 while proceeds from maturities and sales aggregated
$1,180,530,902. There were no transactions in U.S. Government securities during
the period.
For Federal income tax purposes, cost of investments owned at September 30,
1994 was $732,072,158, resulting in net unrealized appreciation of $210,927,943,
of which $222,440,086 related to appreciated securities and $11,512,143 related
to depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income of
$77,830,586 during its fiscal year ended September 30, 1994, of which a portion
was paid to shareholders during the period ended September 30, 1994. Remaining
net capital gains will be distributed to the Fund's shareholders.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
United Vanguard Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of United Vanguard Fund, Inc. (the
"Fund") at September 30, 1994, the results of its operations for the year then
ended and the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
September 30, 1994 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
October 31, 1994
<PAGE>
United Vanguard Fund, Inc.
Custodian Underwriter
United Missouri Bank, n. a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P.O. Box 29217
Legal Counsel Shawnee Mission, Kansas 66201-9217
Kirkpatrick & Lockhart (913) 236-2000
1800 M Street N. W.
Washington, D. C. Shareholder Servicing Agent
Waddell & Reed Services Company
Independent Accountants 6300 Lamar Avenue
Price Waterhouse LLP P.O. Box 29217
Kansas City, Missouri Shawnee Mission, Kansas 66201-9217
(913) 236-2000
Investment Manager
Waddell & Reed Investment Accounting Services Agent
Management Company Waddell & Reed Services Company
6300 Lamar Avenue 6300 Lamar Avenue
P. O. Box 29217 P.O. Box 29217
Shawnee Mission, Kansas Shawnee Mission, Kansas 66201-9217
66201-9217 (913) 236-2000
(913) 236-2000
<PAGE>
UNITED VANGUARD FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
PROSPECTUS
December 31, 1994
The United Group of Mutual Funds
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
TABLE OF CONTENTS
Summary of Expenses .......... 2
Financial Highlights ......... 3
What is United Vanguard
Fund, Inc.? ............... 4
Performance Information ...... 4
Goal of the Fund ............. 5
Investment Policies .......... 5
Management and Services ...... 7
Dividends, Distributions
and Taxes ................. 9
Purchase of Shares ...........10
Redemption ...................11
Financial Statements .........13
NUP2005(12-94)
printed on recycled paper
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UNITED VANGUARD FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
December 31, 1994
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 (the
"Prospectus") of United Vanguard Fund, Inc. (the "Fund"), dated December 31,
1994, 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 Objective and Policies................. 3
Investment Management and Other Services.......... 23
Purchase, Redemption and Pricing of Shares........ 27
Directors and Officers............................ 41
Payments to Shareholders.......................... 45
Taxes ............................................ 46
Portfolio Transactions and Brokerage.............. 49
Other Information................................. 51
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
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 from which the maximum sales load of 5.75% is deducted. All
dividends and distributions are assumed to be reinvested at net asset value as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions. The formula used to calculate the total
return 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 and it may
not reflect the sales charge. For example, the Fund may also compute total
return 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 were reflected, it would
reduce the performance quoted.
The average annual total return quotations as of September 30, 1994, which
is the most recent balance sheet included in the Prospectus, for the periods
shown were as follows:
With Without
Sales LoadSales Load
Deducted Deducted
One-year period from October 1, 1993 to
September 30, 1994: 5.43% 11.86%
Five-year period from October 1, 1989 to
September 30, 1994: 7.24% 8.51%
Ten-year period from October 1, 1984 to
September 30, 1994: 12.21% 12.88%
The Fund may also quote unaveraged or cumulative total return which reflect
the change in value of an investment 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
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. The Fund may also compare its performance to that of other selected
mutual funds or selected recognized market indicators such as the Standard &
Poor's 500 Stock Index and the Dow Jones Industrial Average. Performance
information may be quoted numerically or presented in a table, graph or other
illustration.
All performance information which 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.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are described in the
Prospectus, which refers to the following investment methods and practices.
Securities - General
The Fund may invest in securities including common stock, preferred stock,
debt securities and convertible securities, as described in the Prospectus.
These securities may include the following described securities from time to
time.
The Fund may purchase debt securities whose principal amount at maturity
is dependent upon the performance of a specified equity security. The issuer
of such debt securities, typically an investment banking firm, is unaffiliated
with the issuer of the equity security to whose performance the debt security
is linked. Equity-linked debt securities differ from ordinary debt securities
in that the principal amount received at maturity is not fixed, but is based on
the price of the linked equity security at the time the debt security matures.
The performance of equity-linked debt securities depends primarily on the
performance of the linked equity security and may also be influenced by
interest rate changes. In addition, although the debt securities are typically
adjusted for diluting events such as stock splits, stock dividends and certain
other events affecting the market value of the linked equity security, the debt
securities are not adjusted for subsequent issuances of the linked equity
security for cash. Such an issuance could adversely affect the price of the
debt security. In addition to the equity risk relating to the linked equity
security, such debt securities are also subject to credit risk with regard to
the issuer of the debt security. In general, however, such debt securities are
less volatile than the equity securities to which they are linked.
The Fund may also invest in a type of convertible preferred stock that
pays a cumulative, fixed dividend that is senior to, and expected to be in
excess of, the dividends paid on the common stock of the issuer. At the
mandatory conversion date, the preferred stock is converted into not more than
one share of the issuer's common stock at the "call price" that was established
at the time the preferred stock was issued. If the price per share of the
related common stock on the mandatory conversion date is less than the call
price, the holder of the preferred stock will nonetheless receive only one
share of common stock for each share of preferred stock (plus cash in the
amount of any accrued but unpaid dividends). At any time prior to the
mandatory conversion date, the issuer may redeem the preferred stock upon
issuing to the holder a number of shares of common stock equal to the call
price of the preferred stock in effect on the date of redemption divided by the
market value of the common stock, with such market value typically determined
one or two trading days prior to the date notice of redemption is given. The
issuer must also pay the holder of the preferred stock cash in an amount equal
to any accrued but unpaid dividends on the preferred stock. This convertible
preferred stock is subject to the same market risk as the common stock of the
issuer, except to the extent that such risk is mitigated by the higher dividend
paid on the preferred stock. The opportunity for equity appreciation afforded
by an investment in such convertible preferred stock, however, is limited,
because in the event the market value of the issuer's common stock increases to
or above the call price of the preferred stock, the issuer may (and would be
expected to) call the preferred stock for redemption at the call price. This
convertible preferred stock is also subject to credit risk with regard to the
ability of the issuer to pay the dividend established upon issuance of the
preferred stock. Generally, convertible preferred stock is less volatile than
the related common stock of the issuer.
Foreign Securities
The Fund may purchase an unlimited amount of foreign securities. However,
the Fund does not expect to invest more than 20% of its total assets in foreign
securities.
Waddell & Reed Investment Management Company ("the Manager"), the Fund's
investment manager, believes that while there are investment risks (see below)
in investing in foreign securities, there are also investment opportunities 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. The Manager believes that the Fund's ability to invest its
assets abroad may enable it to take advantage of these differences and strengths
where they are favorable.
Investment in Warrants
The Fund may not invest more than 2% of its net assets valued at the lower
of cost or market in warrants. Warrants acquired in units or attached to other
securities are not considered for purposes of computing the 2% limitation.
Warrants basically 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. Warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer.
Lending Securities
Although income is not one of the Fund's goals, the Manager believes that
it should realize income unless doing so would detract from the realization of
its goal. One of the ways in which the Fund may try to realize income is by
lending its securities. If the Fund does this, the borrower pays the Fund an
amount equal to the dividends or interest on the securities that the Fund would
have received if it had not loaned the securities. The Fund also receives
additional compensation as discussed below.
Any securities loan which the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). This
policy can only be changed by shareholder vote. Under the present Guidelines,
the collateral must consist of cash or securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities ("Government Securities")
or bank letters of credit, at least equal in value to the market value of the
securities loaned on each day that the loan is outstanding. If the market value
of the loaned securities exceeds the value of the collateral, the borrower must
add more collateral so that it at least equals the market value of the
securities loaned. If the market value of the securities decreases, the
borrower is entitled to 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
receive interest on the investment of the cash collateral or to receive interest
on the Government Securities used as collateral. Part of the interest received
in either case may be shared with the borrower.
The letters of credit which 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 Manager, subject to the direction and control of the Board of
Directors, has adopted additional rules concerning lending of securities which
may be changed without shareholder vote. At present, under these rules, the
Fund will lend securities only to creditworthy broker-dealers and financial
institutions. The Fund will make loans only under rules of the New York Stock
Exchange, which presently require the borrower to give the securities back to
the Fund within five business days after the Fund gives notice to do so. If the
Fund loses its voting rights on securities loaned, it will have the securities
returned to it in time to vote them if a material event affecting the investment
is to be voted on. The Fund may pay reasonable finder's, administrative and
custodian fees in connection with loans of securities.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules which may be changed without shareholder vote as to
(i) whom securities may be loaned; (ii) the investment of cash collateral; or
(iii) voting rights.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned goes up, risks of delay in
recovering the securities loaned or even loss of rights in the collateral should
the borrower of the securities fail financially.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. A
repurchase transaction occurs when, at the time the Fund purchases securities,
it also agrees to resell them to the vendor (normally a commercial bank or
broker-dealer), and must deliver those securities and/or securities substituted
for them under the repurchase agreement to the vendor on an agreed-upon date in
the future. In this section, such securities, including any securities so
substituted, are referred to as the "Resold Securities." The resale price is in
excess of the purchase price in that it reflects an agreed-upon market interest
rate effective for the period of time during which the Fund's money is invested
in the Resold Securities. The majority of the repurchase transactions in which
the Fund would engage run from day to day, and the delivery pursuant to the
resale typically will occur within one to five days of the purchase. The Fund's
risk is limited to the ability of the vendor to pay the agreed-upon sum upon the
delivery date. In the event of bankruptcy or other default by the vendor, there
may be possible delays or expenses in liquidating the Resold Securities, decline
in their value or loss of interest. Upon default, the Resold Securities
constitute collateral security for the repurchase obligation. The return on
such collateral may be more or less than that from the repurchase agreement.
Repurchase agreements will be structured so as to fully collateralize the loans,
i.e., the value of the Resold 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, is and, during the entire term of
the agreement, remains 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 on the basis of criteria established by the Board
of Directors.
Illiquid Investments
The Fund has an operating policy, which may be changed without shareholder
approval, which provides that due to their possible limited liquidity, the Fund
may not make certain illiquid investments if as a result more than 10% of its
net assets would consist of such investments. The investments which are
included in this 10% limit are: (i) repurchase agreements not terminable within
seven days; (ii) securities for which market quotations are not readily
available; and (iii) unlisted options and their underlying collateral.
Writing Covered Calls on Securities
The Fund may not purchase or write put options ("puts"), call options
("calls") or combinations thereof; however, calls may be written on securities
if (i) such calls are listed on a domestic securities exchange; (ii) when any
such call is written and at all times prior to a closing purchase transaction as
to such call, or its lapse or exercise, the Fund owns the securities which are
subject to the call or has the right to acquire such securities without the
payment of further consideration; and (iii) when any such call is written, not
more than 10% of the Fund's total assets would be subject to calls; calls may be
purchased to effect a closing purchase transaction as to any call written in
accordance with the foregoing.
In short, the Fund can write calls, but only listed, covered calls and only
if not more than 10% of the Fund's assets are subject to calls. "Covered" means
that the Fund must own the securities which are subject to the call (or have the
right to acquire them without additional payment). "Listed" calls are those
which are listed on a domestic securities exchange.
If the Fund writes (i.e., sells) a call, it agrees to sell to a purchaser
of a call the securities subject to the call. The price at which it must sell
is fixed by the call; this price is referred to as the exercise price. This
price may be equal to, or more or less than, the market price of the securities
covered by the call. The period during which the Fund must sell at this price
is also fixed by the call. Most calls run for periods of up to 9 months except
that calls on certain debt securities may run for periods of up to 15 months.
During the period of a call the Fund must, if the call is exercised, sell at the
exercise price no matter what happens to the market price of the securities
subject to the call.
As compensation for entering into this contract when it writes a call, the
Fund receives a premium. The Manager believes that the Fund's income can be
increased through the receipt of premiums on calls. Also should the market
price of securities on which the Fund has written calls go down during the call
period, the premium would help to offset that decline. However, if the Fund
wrote a call, it would lose the opportunity to profit from an increase in the
market price of securities which are subject to a call over the exercise price
except to the extent that the premium represents such a profit. The Fund will
write calls when it considers that the amount of the premium represents adequate
compensation for the loss of the opportunity.
Writing calls is a highly specialized activity. Personnel of the Manager
have had experience in this activity with respect to the Fund and other funds
and accounts managed by the Manager and its affiliates. Writing calls involves
investment techniques and risks different from those ordinarily associated with
investment companies. It is believed that the Fund's limitations on writing
calls will tend to reduce these risks.
The Fund may purchase calls only to close its position in a call which it
has written. To do this, it will make a "closing purchase transaction"; this
involves buying a call on the same security with the same exercise price and
call period as the call it has written. When the Fund sells a security on which
it has written a call, it will, so that the call will remain covered, effect a
closing purchase transaction. The Fund may also effect a closing purchase
transaction to avoid having to sell a security on which it has written a call if
the call is exercised. The Fund will have a profit or loss from a closing
purchase transaction, depending on whether the amount it paid to purchase the
call is less or more than the premium it received on the call which is closed
out. See "Taxes" and "Payments to Shareholders." There is no assurance that
the Fund will be able to effect a closing purchase transaction, due to the lack
of a market in the call in question; if it cannot do so, it will have to hold
the security on which the call was written until the call expires or is
exercised even though it might otherwise be desirable to sell the security. If
a call which the Fund wrote is exercised, it could deliver the securities which
it owns (or the securities which it has the right to get). It could also
deliver other securities which it purchases.
Portfolio securities will be bought and sold on the basis of attempting to
achieve the goals of the Fund. However, the fact that listed calls can be
written on a particular security may be a factor in buying or keeping it if it
is otherwise considered suitable for the Fund.
The Fund's Custodian bank (or a securities depository acting for it) will
act as the Fund's escrow agent as to securities on which the Fund has written
calls (or other securities which, under the applicable rules, are acceptable for
escrow arrangements). The securities will not be released from the escrow until
the call expires or the Fund enters into a closing purchase transaction.
The writing of calls by the Fund may affect its turnover rate and the
brokerage commissions it pays. Calls may be exercised causing the sale of
securities, thus increasing its turnover rate. The increase would be beyond the
Fund's control since it has no control over the exercise of calls written by it.
A premium received by the Fund upon writing a call will be included in its
assets; an equal amount will be included in the liability section of the
Statement of Assets and Liabilities as a deferred credit. This amount will be
subsequently adjusted to the current market value of the call. For example, if
the current market value of the call exceeds the premium received, the excess
would be an unrealized loss; if the premium exceeds the current market value,
the excess would be an unrealized gain. The current market value of a call will
be the last sales price on the principal exchange in which the call is traded
or, in the absence of transactions, the mean between the bid and asked prices.
Writing Puts on Securities
Subject to the limitations set forth under "Operating Restrictions," the
Fund may write put options on securities in which it may invest. As with
covered call writing, the Fund will write puts on securities for the purpose of
increasing income by receiving premiums from the purchaser of the option. When
the Fund writes a put, it receives a premium and agrees to purchase the related
investments from a purchaser of a put during the put period at a fixed exercise
price (which may differ from the market price of the related investments)
regardless of market price changes during the put period. If the put is
exercised, the Fund must purchase the related investments at the exercise price.
Puts are ordinarily sold when it is anticipated that during the option period
the market price of the underlying security will decline by less than the amount
of the premium, adjusted for any amount by which the market price of the
underlying security at the time of sale is greater than the strike price. In
writing puts, the Fund assumes the risk of loss should the market value of the
underlying security decline below the exercise price of the option. The Fund's
cost of purchasing the investments will be adjusted by the amount of the premium
it has received. The Fund will write a put only when it has determined that it
would be willing to purchase the underlying security at the exercise price.
To terminate its obligation on a put which it has written, the Fund may
purchase a put in a "closing purchase transaction." As discussed below, it may
also purchase puts other than as part of such closing transaction. A profit or
loss will be realized depending on the amount of option transaction costs and
whether the premium previously received is more or less than the cost of the put
purchased. A profit will also be realized if the put lapses unexercised because
the Fund retains the premium received.
When the Fund writes a put it will, until it enters into a closing purchase
transaction, maintain designated cash or readily marketable assets adequate to
purchase the related investments should the put be exercised. The Fund may hold
cash or acquire readily marketable assets for this purpose. The Fund will be
unable to utilize such cash or assets for other investment purposes until the
exercise or expiration of the put.
Purchasing Calls and Puts on Securities
Subject to the limitations set forth under "Operating Restrictions," the
Fund may purchase options.
The Fund may purchase a call in a closing purchase transaction in order to
terminate its obligation on a call it has written. In addition, the Fund may
purchase calls on securities for the purpose of taking advantage of a rise in
the market value of the underlying securities.
When a Fund buys a call, it pays a premium and has the right to buy the
related investments from a seller of a call during the call period at a fixed
exercise price. The Fund benefits only if the market price of the related
investments is above the call price during the call period and the call is
either exercised or sold at a profit. If the call is not exercised or sold
(whether or not at a profit), it will become worthless at its expiration date
and the Fund will lose the premium payment and the right to purchase the related
investments.
The Fund will purchase puts on securities to protect against major price
declines in the value of its portfolio securities. The Fund may purchase a put
on a security it owns ("protective put") or on a security it does not own
("nonprotective put"). When a Fund buys a put, it pays a premium and has the
right to sell the related investments to a seller of a put during the put period
at a fixed exercise price. Buying a protective put (as defined above) permits
the Fund to protect itself during the put period against a decline in the value
of the related investments below the exercise price by selling them through the
exercise of the put. Buying a nonprotective put (as defined above) permits the
Fund, if the market price of the related investments is below the put price
during the put period, either to resell the put or to buy the related
investments and sell them at the exercise price. If the market price of the
related investments is above the exercise price and as a result the put is not
exercised or resold (whether or not at a profit), the put will become worthless
at its expiration date.
A type of put which 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 purchasing the
security the right to sell the security back to the seller on specified terms.
This right is provided as an inducement to purchase the security.
Risks of Options on Securities
The Fund is authorized to write listed covered call options on securities
and to write put options and purchase options which are listed or unlisted. The
Fund has an operating policy, however, which provides that it will only purchase
calls or write and purchase puts which are listed with two exceptions: (1) it
may purchase calls and write and purchase puts which are not listed if the
security underlying the option is a security issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; and (2) optional delivery
standby commitments may be unlisted. Exchange-listed options are issued by the
Options Clearing Corporation ("OCC"). A position in an exchange-listed option
may be closed out only on an exchange which provides a secondary market for
options covering the same related investment having the same exercise price and
expiration date. There is no assurance that a liquid secondary market will
exist for any particular option. In investing in options on securities which
are not listed on an exchange, the Fund must rely on the creditworthiness of the
party with whom it has entered into the options transaction. The Manager will
evaluate the creditworthiness of all such parties and intends to enter into
unlisted option transactions only with major dealers in such unlisted options.
The market for these options may be less active than the market for exchange-
listed options. The Manager will evaluate the ability to enter into closing
purchase transactions on unlisted options prior to investing in them.
The Fund's put and call activities may affect its turnover rate and
brokerage commission payments. The exercise of calls or puts written by the
Fund may cause it to sell or purchase related investments, thus increasing its
turnover rate in a manner beyond its control. The exercise of puts 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 which 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 buys or sells an underlying investment in connection with the
exercise of a put or call. Such commissions may be higher than those which
would apply to direct purchases or sales. The Fund's custodian bank, or a
securities depository acting for it, will act as the Fund's escrow agent as to
the related investments on which it has written covered calls, or as to other
assets acceptable for such escrow, so that pursuant to the rules of the Option
Clearing Corporation and certain exchanges, no margin deposit will be required
of the Fund on such calls. Until the related investments or other investments
held in escrow are released from escrow, they cannot be sold by the Fund; this
release will take place on the expiration of the call or by the Fund's entering
into a closing purchase transaction. Once the Fund has received an exercise
notice on an option it has written, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option and must
deliver or receive the underlying securities at the exercise price.
Option premiums paid to control an amount of related investments are small
in relation to the market value of related investments and, consequently, put
and call options offer large amounts of leverage. The leverage offered by
trading in options will result in the Fund's net asset value being more
sensitive to changes in the value of the related investment. Markets for
options on securities and options on futures contracts are relatively new so it
is not possible to predict whether active exchange markets will continue over
time.
Options On Stock Indexes
The Fund is permitted to write and purchase options on broadly-based stock
indexes subject to the limitations set forth under "Operating Restrictions" and
"Investment Restrictions." Broadly-based stock indexes are indexes which are
not limited to stocks of any particular industry or industries. The Fund will
write options on stock indexes primarily to generate income when the Manager
anticipates that the index price will not increase or decrease by more than the
premium received by the Fund. The Fund will purchase calls on stock indexes to
hedge against anticipated increases in the price of securities it wishes to
acquire and purchase puts on stock indexes to hedge against anticipated declines
in the market value of portfolio securities. Puts and calls on stock indexes
are similar to puts and calls on securities or futures contracts except that all
settlements are in cash and gain or loss depends on changes in the broad-based
index in question (and thus on price movements in the stock market generally)
rather than on price movements in individual securities or futures contracts.
When the Fund writes a call on a stock index, it receives a premium and agrees
that during the call period a purchaser of a call, upon exercise of the call,
will receive from the Fund an amount of cash if the closing level of the stock
index upon which the call is based is greater than the exercise price of the
call. The amount of cash is equal to the difference between the closing price
of the index and the exercise price of the call times a specified multiple (the
"multiplier") which determines the total dollar value for each point of such
difference. When the Fund buys a call on a stock index it pays a premium and
has the same rights as to such call as are indicated above as the Fund's
obligation when it writes such a call. When the Fund buys a put on a stock
index, it pays a premium and has the right during the put period to require a
seller of such a put, upon the Fund's exercise of the put, to deliver to the
Fund an amount of cash if the closing level of the stock index upon which the
put is based is lesser than the exercise price of the put, which amount of cash
is determined by the multiplier, as described above for calls. When the Fund
writes a put on a stock index it receives a premium and the purchaser of such a
put has the right during the put period to require the Fund to deliver to it an
amount of cash equal to the difference between the closing level of the stock
index and the exercise price times the multiplier, if the closing level is less
than the exercise price.
When the Fund writes a call on a stock index it will, until it enters into
a closing purchase transaction as to that call, segregate and maintain cash or
readily marketable assets adequate to make the required cash delivery if the
call is exercised. When it writes a put on a stock index, it will, until it
enters into a closing purchase transaction as to that put, maintain designated
cash or readily marketable assets adequate to purchase the related investments
should the put be exercised.
Risks of Options on Stock Indexes
The risks of investment in options on stock indexes may be greater than
options on securities. Because exercises of stock index options are settled in
cash, when the Fund writes a call on a stock index it cannot provide in advance
for its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of its writing position by
holding a diversified portfolio of stocks similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same stocks as the
underlying index and, as a result, bears a risk that the value of the securities
held will vary from the value of the index. Even if the Fund could assemble a
stock portfolio that exactly reproduced the composition of the underlying index,
it still would not be fully covered from a risk standpoint because of the
"timing risk" inherent in writing index options. When an index option is
exercised, the amount of cash that the holder is entitled to receive is
determined by the difference between the exercise price and the closing index
level on the date when the option is exercised. As with other kinds of options,
the Fund as the call writer will not learn that it has been assigned until the
next business day at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security, such as a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
stocks that exactly match the composition of the underlying index, it will not
be able to satisfy its assignment obligations by delivering those stocks against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date; and by the time it
learns that it has been assigned, the index may have declined, with a
corresponding decline in the value of its stock portfolio. This "timing risk"
is an inherent limitation on the ability of index call writers to cover their
risk exposure by holding stock positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available it runs the risk that the level of
the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund exercising the option will
be required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the assigned
writer.
Futures Contracts and Options on Futures Contracts
The Fund is permitted to purchase and sell futures contracts and options on
futures contracts subject to the limitations set forth under "Operating
Restrictions" and "Investment Restrictions." When the Fund purchases a futures
contract, it incurs an obligation to take delivery of a specified amount of the
obligation underlying the contract at a specified time in the future for a
specified price. When the Fund sells a futures contract it incurs an obligation
to deliver the specified amount of the underlying obligation at a specified time
in return for an agreed upon price. In the case of futures contracts on broadly
based stock indexes ("Stock Index Futures"), the obligation underlying the
futures contract is an amount of cash equal to a specified dollar amount times
the difference between the index value at the close of the last trading day of
the futures contract and the price at which the futures contract is originally
struck. In the case of a futures contract on debt securities ("Debt Future"),
the underlying obligation is the related debt security.
When the Fund writes an option on a futures contract it becomes obligated,
in return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the term of the option. If the Fund
has written a call it becomes obligated to assume a "long" position in a futures
contract which means that it is required to take delivery of the underlying
securities. If it has written a put it is obligated to assume a "short"
position in a futures contract which means that it is required to deliver the
underlying securities. When the Fund purchases an option on a futures contract
it acquires the right in return for the premium it pays to assume a position in
a futures contract.
The Fund will not purchase or sell futures contracts and options thereon
for speculative purposes but rather only for the purpose of hedging against
changes in the market value of its portfolio securities or changes in the market
value of securities which the Manager anticipates that it may wish to include in
the portfolio of the Fund. The Fund may sell a Stock Index Future or write a
call or purchase a put on a Stock Index Future if the Manager anticipates that a
general market or market sector decline may adversely affect the market value of
any or all of the Fund's common stock holdings. The Fund may buy a Stock Index
Future or purchase a call or sell a put on a Stock Index Future if the Manager
anticipates a significant market advance in the common stock it intends to
purchase for the Fund's portfolio. The Fund may purchase a Stock Index Future
or a call option thereon as a temporary substitute for the purchase of
individual stocks which may then be purchased in a orderly fashion. In the case
of debt securities the Fund could sell a Debt Future or write a call or buy a
put on a Debt Future to attempt to protect against the risk that the value of
debt securities held by the Fund might decline. The Fund could purchase a Debt
Future or purchase a call or write a put on a Debt Future to protect against the
risk of an increase in the value of debt securities at a time when the Fund is
not invested in debt securities to the extent permitted by its investment
policies. As securities are purchased, corresponding futures positions would be
terminated by offsetting sales.
Unlike when the Fund purchases or sells securities, no price is paid or
received by it upon the purchase or sale of a futures contract. Initially, the
Fund will be required to deposit an amount of cash or U.S. Treasury Bills equal
to a varying specified percentage of the contract amount. This amount is known
as initial margin. Cash held in the margin account is not income producing.
Subsequent payments, called variation margin, to and from the broker will be
made on a daily basis as the price of the underlying index fluctuates making the
futures contract more or less valuable, a process known as marking-to-market.
If the Fund writes an option on a futures contract it will be required to
deposit initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option on a future are included in the initial margin deposit.
Changes in variation margin are recorded by the Fund as unrealized gains or
losses. Initial margin payments will be deposited in the Fund's custodian bank
in an account registered in the broker's name; access to the assets in that
account may be made by the broker only under specified conditions. At any time
prior to expiration of a futures contract or an option thereon, the Fund may
elect to close the position by taking an opposite position which will operate to
terminate its position in the futures contract or option. A final determination
of variation margin is made at that time, additional cash is required to be paid
by or released to it and it realizes a loss or gain. Although futures contracts
by their terms call for the actual delivery or acquisition of the underlying
obligation, in most cases the contractual obligation is so fulfilled without
having to make or take delivery. The Fund does not intend to make or take
delivery of the underlying obligation. All transactions in futures contracts
and options thereon are made, offset or fulfilled through a clearing house
associated with the exchange on which the contracts are traded. Although the
Fund intends to buy and sell futures contracts only on exchanges where there
appears to be an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular future at any particular time.
In such event, it may not be possible to close a futures contract position.
The Fund will deposit in a segregated account with its custodian bank high-
quality debt obligations maturing in one year or less, or cash, in an amount
equal to the fluctuating market value of long futures contracts it has purchased
less any margin deposited on its long position. It may hold cash or acquire
such debt obligations for the purpose of making these deposits.
The use of futures contracts and options thereon to attempt to protect
against the market risk of a decline in the value of portfolio securities is
referred to as having a "short futures position." The use of futures contracts
and options thereon to attempt to protect against the market risk that the Fund
might not be fully invested at a time when the value of securities in which it
invests is increasing is referred to as having a "long futures position." The
Fund must operate within certain restrictions as to long and short positions in
futures contracts and options thereon under a rule (the "CFTC Rule") adopted by
the Commodity Futures Trading Commission ("CFTC") under the Commodity Exchange
Act (the "CEA") to be eligible for the exclusion provided by the CFTC Rule from
registration by the Fund with the CFTC as a "commodity pool operator" (as
defined under the CEA), and must represent to the CFTC that it will operate
within such restrictions. Under these restrictions the Fund will not, as to any
positions, whether long, short or a combination thereof, enter into futures and
options thereon for which the aggregate initial margins and premiums exceed 5%
of the fair market value of the Fund's assets after taking into account
unrealized profits and losses on options the Fund has entered into; in the case
of an option that is "in-the-money" (as defined under the CEA) the "in-the-
money" amount may be excluded in computing such 5%. (In general a call option
on a futures contract is "in-the-money" if the value of the future 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 futures contract which is the subject of the
put is exceeded by the strike price of the put.) Under the restrictions, the
Fund also must, as to short positions, use futures contracts and options thereon
solely for bona fide hedging purposes within the meaning and intent of the
applicable provisions under the CEA. As to its long positions which are used as
part of the Fund's portfolio strategy and are incidental to the Fund's
activities in the underlying cash market, the "underlying commodity value" (see
below) of the Fund's futures contract and options thereon must not exceed the
sum of (i) cash set aside in an identifiable manner, or short-term U.S. debt
obligations or other U.S. dollar-denominated high-quality short-term money
market instruments so set aside, plus any funds deposited as margin; (ii) cash
proceeds from existing investments due in 30 days; and (iii) accrued profits
held at the futures commission merchant. (There is described above the
segregated accounts which the Fund must maintain with its custodian bank as to
its options and futures contracts activities due to Securities and Exchange
Commission ("SEC") requirements; the Fund will, as to its long positions, be
required to abide by the more restrictive of these SEC and CFTC requirements.)
The "underlying commodity value" of a futures contract is computed by
multiplying the size (dollar amount) of the futures contract by the daily
settlement price of the futures contract. For an option on a futures contract
that value is the underlying commodity value of the future underlying the
option.
Risk of Futures Contracts and Options Thereon
Since futures contracts and options thereon can replicate movements in the
cash markets for the securities in which the Fund invests without the large cash
investments required for dealing in such markets, they may subject the Fund to
greater and more volatile risks than might otherwise be the case. The principal
risks related to the use of such instruments are (i) the offsetting correlation
between movements in the market price of the portfolio investments (held or
intended) being hedged and in the price of the futures contract or option may be
imperfect; (ii) possible lack of a liquid secondary market for closing out
futures or options positions; (iii) the need for additional portfolio management
skills and techniques; and (iv) losses due to unanticipated market price
movements. For a hedge to be completely effective, the price change of the
hedging instrument should equal the price change of the security being hedged.
Such equal price changes are not always possible because the investment
underlying the hedging instrument may not be the same investment that is being
hedged. The Manager will attempt to create a closely correlated hedge but
hedging activity may not be completely successful in eliminating market value
fluctuation. (See below for additional discussion of correlation as it relates
to Stock Index Futures.) The ordinary spreads between prices in the cash and
futures markets, due to the differences in the natures of those markets, are
subject to the following factors which may create distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
could distort the normal relationship between the cash and futures markets.
Second, the liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point of
view of speculators the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of
general interest or stock market trends by the Manager may still not result in a
successful transaction. The Manager may be incorrect in its expectations as to
the extent of various interest rate movements or stock market movements or the
time span within which the movements take place.
The risk of imperfect correlation between movements in the price of a Stock
Index Future and movements in the price of the securities which are the subject
of the hedge increases as the composition of the Fund's common stock portfolio
diverges from the common stocks included in the applicable index. The price of
the Stock Index Future may move more than or less than the price of the
securities being hedged. If the price of the Stock Index Future moves less than
the price of the securities which are the subject of the hedge, the hedge will
not be fully effective but, if the price of the common stocks 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 common stocks 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 stock, the Fund will experience either a loss or a gain on the
futures contract which will not be completely offset by movements in the price
of the securities which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of the securities being hedged
and movements in the price of the Stock Index Futures, the Fund may buy or sell
Stock Index Futures in a greater dollar amount than the dollar amount of common
stocks being hedged if the historical volatility of the prices of such common
stocks being hedged is less than the historical volatility of the stock index.
It is also possible that, where the Fund has sold futures contracts to hedge its
common stocks against decline in the market, the market may advance and the
value of common stocks held in the portfolio may decline. If this occurred, the
Fund would lose money on the futures contract and also experience a decline in
value in its portfolio securities. However, while this could occur for a very
brief period or to a very small degree, over time the value of a diversified
portfolio of common stocks will tend to move in the same direction as the market
indices upon which the futures contracts are based.
Where Stock Index Futures are purchased to hedge against a possible
increase in the price of stocks before the Fund is able to invest in common
stocks in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest in common stocks 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 common stocks it had anticipated purchasing.
Operating Restrictions
The Fund is subject to certain operating restrictions pertaining to
investments in options and futures. Such operating restrictions may be revised
by the Board depending on its judgments regarding the ability of the Manager to
make use of these instruments to the benefit of the Fund and in order to conform
to rules and regulations of the CFTC, the SEC, various state securities
commissions, Federal tax law and regulations, and the rules of the exchanges on
which the investments are traded.
(i) Options on stock indexes, futures contracts and options on futures
contracts will be used only for risk management ("hedging") purposes
within the meaning of applicable regulations. The Fund will not hedge
more than 10% of its total assets.
(ii) Only options on securities which are issued by the Options Clearing
Corporation may be purchased or sold except for options on securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities and except for optional delivery standby commitments;
only options on stock indexes, options on futures contracts and futures
contracts which are listed on a national securities or commodities
exchange may be purchased or sold; to the extent option transactions
involving unlisted options are illiquid, such options and the underlying
collateral will be subject to an operating policy of the Fund which
limits investment in illiquid securities to 10% of the net assets of the
Fund.
(iii) The aggregate premiums paid for the purchase of permitted options which
are held by the Fund at any one time, adjusted for the portion of any
premium attributable to a difference between the "strike price" of the
option and the market value of the underlying security or futures
contract at the time of purchase, may not exceed 20% of the total assets
of the Fund;
(iv) The aggregate margin deposits and premiums required on all futures
contracts and options thereon held or outstanding at any one time by the
Fund may not exceed 5% of the total assets of the Fund adjusted for
unrealized gains or losses of the Fund on such options and futures
contracts;
(v) The aggregate amount of the obligations underlying the puts written by
the Fund which are outstanding at any one time may not exceed 25% of the
net assets of the Fund computed at the time of sale.
Risk Factors of High-Yield Investing
As an operating (i.e., nonfundamental) policy, the Fund does not intend to
invest in non-investment grade debt securities if as a result of such investment
more than 5% of its assets would consist of such investments. The market for
high-yield, high-risk debt securities is relatively new and much of its growth
paralleled a long economic expansion, during which this market involved a
significant increase in the use of high-yield debt securities to fund highly
leveraged corporate acquisitions and restructurings. Thereafter, this market
was affected by a relatively high percentage of defaults with respect to high-
yield securities as compared with higher rated securities. An economic downturn
or increase in interest rates is likely to have a greater negative effect on
this market and the value of high-yield debt securities, if any, in the Fund's
portfolio.
Prices of high-yield debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities. Market
prices of high-yield debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash.
Where it deems it appropriate and in the best interests of Fund shareholders,
the Fund may incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to protect the interests
of security holders of its portfolio companies.
Because the market for lower rated securities may be thinner and less
active than for higher rated securities, there may be market price volatility
for these securities and limited liquidity in the resale market. If market
quotations are not readily available for the Fund's lower rated or unrated
securities, these securities will be valued by a method that the Fund's Board of
Directors believes accurately reflects fair value. Valuation becomes more
difficult and judgment plays a greater role in valuing high-yield debt
securities than with respect to securities for which more external sources of
quotations and last sale information are available.
While credit ratings are only one factor the Manager relies on in
evaluating high-yield debt securities, certain risks are associated with using
credit ratings. Credit ratings evaluate the safety of principal and interest
payments, not market value risk. Credit ratings of individual securities may
change from time to time, and the Fund may retain a portfolio security whose
rating has been changed.
Investment Restrictions
Certain of the Fund's investment restrictions are described in the
Prospectus. The following are fundamental policies and together with certain
restrictions described in the Prospectus, cannot be changed without shareholder
approval. Under these additional restrictions, the Fund may not:
(i) Buy or sell commodities or commodity contracts, except that it may, for
non-speculative purposes, buy or sell futures contracts on futures
contracts on Stock Index Futures, Debt Futures and options on Stock
Index Futures and Debt Futures;
(ii) Buy real estate nor any nonliquid interests in real estate investment
trusts;
(iii) Buy shares of other investment companies which redeem their shares. The
Fund can buy shares of investment companies which 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; however, the Fund does not have any current intent to
invest more than 5% of its assets in such securities in the foreseeable
future nor has it done so within the past year. 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;
(iv) Lend money or other assets, other than through certain limited types of
loans; the Fund can buy debt securities which have been sold to the
public; it can buy other obligations customarily acquired by
institutional investors; it can also lend its portfolio securities (see
"Lending Securities" above) and enter into repurchase agreements (see
"Repurchase Agreements" above);
(v) Invest for the purpose of exercising control or management of other
companies;
(vi) Buy or continue to hold securities if the Fund's Directors or officers
or certain others own too much of the same securities; if any one of
these people owns more than one two-hundredths (i.e., .5 of 1%) of the
shares of a company and if the people who own that much or more own one
twentieth (i.e., 5%) of that company's shares, the Fund cannot buy that
company's shares or continue to own them;
(vii) Participate on a joint, or a joint and several, basis in any trading
account in any securities;
(viii) Sell securities short, buy securities on margin or engage in arbitrage
transactions; however, the Fund may make margin deposits in connection
with its use of any financial instruments permitted by its fundamental
policies;
(ix) Engage in the underwriting of securities, that is, the selling of
securities for others; also, the Fund does not invest in restricted
securities; restricted securities are securities which cannot freely be
sold for legal reasons;
(x) Deviate from the percentage restriction set forth above under
"Investment in Warrants,";
(xi) Purchase or write puts, calls or combinations thereof; however call
options ("calls") may be written on securities if: (i) such calls are
listed on a domestic securities exchange; (ii) when any such call is
written and at all times prior to a closing purchase transaction as to
such call, or its lapse or exercise, the Fund owns the securities which
are subject to the call or has the right to acquire such securities
without the payment of further consideration; and (iii) when any such
call is written not more than 10% of the Fund's total assets would be
subject to calls; calls may be purchased to effect a closing purchase
transaction as to any call written in accordance with the foregoing. In
addition, the Fund may purchase calls and write and purchase put options
("puts") on securities in which the Fund may invest and may, for non-
speculative purposes, write and purchase options on broadly-based stock
indexes;
(xii) Borrow money or mortgage or pledge any of its assets; but may enter into
escrow and collateral arrangements in connection with the use of options
and futures;
(xiii) Buy a security if, as a result, it would own more than ten percent of
the issuer's voting securities, or if more than five percent of its
total assets would be invested in securities of that issuer, or if more
than twenty-five percent of its assets would then be in securities of
companies in any one industry.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities for a year and dividing
it by the monthly average of the market value of such securities during the
year, excluding 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 year ended September 30, 1994 was 36.70% and 62.12%
for the fiscal year ended September 30, 1993.
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 Waddell & Reed Investment Management Company, a wholly-
owned subsidiary of Waddell & Reed, Inc. Under the Management Agreement, the
Manager is employed to supervise the investments of the Fund and provide
investment advice to the Fund. The address of the Manager and Waddell & Reed,
Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's Directors prior to approving any Shareholder Servicing
Agreement or Accounting Services Agreement.
Torchmark Corporation and United Investors Management Company
The Manager is a wholly-owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly-owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly-
owned subsidiary of United Investors Management Company. United Investors
Management Company is a wholly-owned subsidiary of Torchmark Corporation.
Torchmark Corporation is a publicly held company. The address of Torchmark
Corporation and United Investors Management Company is 2001 Third Avenue South,
Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the company's inception date, whichever was later, and to
TMK/United Funds, Inc. since that fund's inception, until January 8, 1992 when
it assigned its duties as investment manager for these funds (and the related
professional staff) to the Manager. The Manager has also served as investment
manager for Waddell & Reed Funds, Inc. since its inception in September 1992 and
Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund,
Inc. since they each commenced operations in February 1993. Waddell & Reed,
Inc. serves as principal underwriter for the investment companies in the United
Group of Mutual Funds, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between Waddell &
Reed Services Company (the "Agent"), a subsidiary of Waddell & Reed, Inc., and
the Fund, 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 Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Directors without
shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for the Manager's management services, the
Fund pays the Manager a fee as described in the Prospectus.
Prior to the above-described assignment from Waddell & Reed, Inc. to
Waddell & Reed Investment Management Company, all fees were paid to Waddell &
Reed, Inc. The management fees paid to Waddell & Reed, Inc. or the Manager, as
the case may be, during the three fiscal years ended September 30, 1994, 1993
and 1992 were $6,826,535, $6,340,220 and $6,301,535, respectively.
For purposes of calculating the daily fee, the Fund does not include money
owed to it by Waddell & Reed, Inc. for shares which it has sold but not yet paid
to the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, the Fund pays the Agent a
monthly fee of $1.0208 for each shareholder account which was in existence at
any time during the prior month, plus $0.30 for each account on which a dividend
or distribution, of cash or shares, had a record date in that month. It also
pays certain out-of-pocket expenses of the Agent, including long distance
telephone communications costs; microfilm and storage costs for certain
documents; forms, printing and mailing costs; and costs of legal and special
services not provided by Waddell & Reed, Inc., the Manager or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a fee for
accounting services as described in the Prospectus. Fees paid to the Agent for
the fiscal years ended September 30, 1994, 1993 and 1992 were $86,250, $85,000
and $85,000, respectively.
The State of California imposes limits on the amount of certain expenses
the Fund can pay and requires the Manager to reduce its fee if these expense
amounts are exceeded. The Manager must reduce the amount of such expenses to
the extent they exceed these expense limits. Not all of the Fund's expenses are
included in the limit. The excluded expenses include interest, taxes, brokerage
commissions and extraordinary expenses such as litigation that usually do not
arise in the normal operations of a mutual fund. The Fund's other expenses,
including its management fee, are included.
The Manager must, under California law, reduce the cost of any included
expenses which are over 2.5% of the Fund's first $30 million of average net
assets, 2% of the next $70 million of average net assets, and 1.5% of any
remaining average net assets during a fiscal year. The Fund will notify
shareholders of any change in the limitation.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, the Manager
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 the Manager and its affiliates.
The Fund pays the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
the Manager 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 the fiscal years ended September 30, 1994, 1993 and
1992 were $3,180,392, $3,548,594 and $4,885,481, respectively, and the amounts
retained by the Manager for each fiscal year were $1,517,376, $1,720,694 and
$2,348,016, respectively.
A major portion of the sales charge is paid to sales representatives and
managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may compensate its sales
representatives as to purchases for which there is no sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under a Service Plan (the "Plan") adopted by the Fund pursuant to Rule 12b-
1 under the Investment Company Act of 1940, 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, paid monthly, to reimburse Waddell & Reed,
Inc. for its costs and expenses in connection with the provision of personal
services to Fund shareholders and/or maintenance of shareholder accounts.
The Plan and a related Service Agreement between the Fund and Waddell &
Reed, Inc. contemplate that Waddell & Reed, Inc. may be reimbursed for amounts
it expends in compensating, training and supporting registered sales
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located at
field sales offices; engaging in other activities useful in providing personal
service to Fund shareholders and/or maintenance of shareholder accounts; and in
compensating broker-dealers, and other third parties, who may regularly sell
Fund shares for providing shareholder services and/or maintaining shareholder
accounts. Service fees in the amount of $990,242 were paid (or accrued) by the
Fund for the fiscal year ended September 30, 1994.
The Plan and the Service Agreement were approved by the Fund's Board of
Directors, including the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operations of the
Plan or any agreement referred to in the Plan (hereafter, the "Plan Directors").
The Plan was also approved by shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will be
effective only if approved, by the Directors including the Plan Directors acting
in person at a meeting called for that purpose, (iii) amounts to be paid by the
Fund under the Plan may not be materially increased without the vote of the
holders of a majority of the outstanding shares of the Fund, and (iv) while the
Plan remains in effect, the selection and nomination of the Directors who are
Plan Directors will be committed to the discretion of the Plan Directors.
Custodial and Auditing Services
The Fund's Custodian is United Missouri Bank, n.a., Kansas City, Missouri.
In general, the Custodian is responsible for holding the Fund's cash and
securities. The Fund may place and maintain foreign securities and cash with a
foreign custodian in accordance with Rule 17f-5 of the Investment Company Act of
1940. Price Waterhouse LLP, Kansas City, Missouri, the Fund's independent
accountants, audits the Fund's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each of the shares of the Fund is the value of the
Fund's assets, less what it owes, divided by the total number of shares. For
example, if on a particular day the Fund owned securities worth $100 and had
cash of $15, the total value of the assets would be $115. If it owed $5, the
net asset value would be $110 ($115 minus $5). If it had 11 shares outstanding,
the net asset value of one share would be $10 ($110 divided by 11).
Shares of the Fund are sold at their next determined net asset value plus
the sales charge described in the Prospectus. The price makeup as of September
30, 1994 was as follows:
Net asset value per share (net assets divided
by capital shares outstanding) ........... $7.73
Add: selling commission (5.75% of offering
price) ................................... .47
-----
Maximum offering price per share (net asset
value divided by 94.25%) ................. $8.20
=====
The offering price of a share is its net asset value next determined
following acceptance of a purchase order plus the sales charge. The number of
shares you receive for your purchase depends on the next offering price after
Waddell & Reed, Inc. receives and accepts your order at its principal business
office at the address shown on the cover of this SAI. You will be sent a
confirmation after your purchase which will indicate how many shares you have
purchased. Shares are normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the Fund
may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily computed
once on each day that the New York Stock Exchange is open for trading as of the
later of the close of the regular session of the New York Stock Exchange
(ordinarily, 4:00 p.m. Eastern time) or the close of the regular session of any
securities or commodities exchange on which an option or future held by the Fund
is traded. The New York Stock Exchange annually announces the days on which it
will not be open for trading. The most recent announcement indicates that the
New York Stock Exchange will not be open on the following days: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, it is possible that the New York
Stock Exchange may close on other days. The net asset value will change every
business day, since the value of the assets and the number of shares change
every business day.
The Fund's portfolio securities, except as otherwise noted, 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 which is the mean between the closing bid and
asked prices. Other securities which are traded over-the-counter are priced
using NASDAQ (National Association of Securities Dealers Automated Quotations),
which provides information on bid and asked prices quoted by major dealers in
such stocks. Bonds, other than convertible bonds, are valued using a pricing
system provided by a major dealer in bonds. Convertible bonds are valued using
this pricing system only on days when there is no sale reported. Short-term
debt securities are valued at amortized cost, which approximates market. When
market quotations are not readily available, securities and other assets are
valued at fair value as determined in good faith under procedures established by
and under the general supervision and responsibility of the Fund's Board of
Directors.
Options and futures purchased and held by the Fund are valued at the last
sales price thereof on the securities or commodities exchanges on which they are
traded, or, if there are no transactions, at the mean between the bid and asked
prices. Ordinarily, the close of option trading on national securities
exchanges is 4:10 P.M. Eastern time and the close of 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 whether the premium was more or less than the cost of
the closing transaction.
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
Initial investments must be at least $500 with the exceptions described in
this paragraph. A $50 minimum initial investment pertains to sales to certain
retirement plan accounts and to sales made in Arizona, California, Maine,
Massachusetts, Montana, North Dakota, Oklahoma, Texas, Vermont, Washington and
Wisconsin. A $50 minimum initial investment also pertains 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 the Manager,
Waddell & Reed, Inc., their affiliates, or certain retirement plan accounts. A
$100 minimum initial investment pertains to certain exchanges of shares from
another fund in the United Group. Except with respect to certain exchanges and
automatic withdrawals from a bank account, a shareholder may make subsequent
investments of any amount. See "Exchanges for Shares of Other Funds in the
United Group."
Reduced Sales Charges
Account Grouping
Large purchases 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 United Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own account
(includes United Funds Revocable Trust Form of spouse);
3. Purchases by that individual or his or her spouse in their joint account;
4. Purchases by that individual or his or her spouse for the account of their
child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in a
Uniform Gift to Minors Act ("UGMA") or Uniform Transfers to Minors Act
account;
6. Purchases by that individual or his or her spouse for his or her Individual
Retirement Account ("IRA"), Section 457 of the Internal Revenue Code of
1986, as amended (the "Code") salary reduction plan account provided that
such purchases are subject to a sales charge (see "Net Asset Value
Purchases"), tax sheltered annuity account ("T.S.A."), or Keogh plan
account provided that the individual and spouse are the only participants
in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or her
spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother has an
account in her own name; A's father has an account in his own name;
the UGMA account may be grouped with A's father's account but may not
be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in the
trust account is eligible for grouping with an IRA account of W, H's
wife;
C. H's will provides for the establishment of a trust for the benefit of
his minor children upon H's death; his bank is named as trustee; upon
H's death, an account is established in the name of the bank, as
trustee; a purchase in the account may be grouped with an account held
by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account may
not be grouped with R's individual account. If X's spouse, Y, was
successor trustee, this purchase could be grouped with Y's individual
account.
All purchases made for a participant in a multi-participant Keogh plan may
be grouped only with other purchases made under the same plan; a multi-
participant Keogh plan is defined as a plan in which there is more than one
participant where one or more of the participants is other than the spouse of
the owner/employer.
Example A: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made under
the plan with any purchases in categories 1 through 7 above.
Example B: H has established a Keogh plan; his wife, W, is a participant and
they have hired one or more employees who also become participants
in the plan; H and W may not combine any purchases made under the
plan with any purchases in categories 1 through 7 above; however,
all purchases made under the plan for H, W or any other employee
will be combined.
All purchases made under a "qualified" employee benefit plan of an
incorporated business will be grouped. A "qualified" employee benefit plan is
established pursuant to Section 401 of the Code. All qualified employee benefit
plans of any one employer or affiliated employers will also be grouped. An
affiliate is defined as an employer that directly, or indirectly, controls or is
controlled by or is under control with another employer.
Example: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made under
both plans will be grouped.
All purchases made under a simplified employee pension plan ("SEP"),
payroll deduction plan or similar arrangement adopted by an employer or
affiliated employers (as defined above) may be grouped provided that the
employer elects to have all such purchases grouped at the time the plan is set
up. If the employer does not make such an election, the purchases made by
individual employees under the plan may be grouped with the other accounts of
the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase 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 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 shares are held in any account and an additional purchase is made in
that account or in any account eligible for grouping with that account, the
additional purchase is combined with the net asset value of the existing account
as of the date the new purchase is accepted by Waddell & Reed, Inc. for the
purpose of determining the availability of a reduced sales charge.
Example: H is a current shareholder who invested in the Fund three years ago.
His account has a net asset value of $80,000. His wife, W, now wishes
to invest $20,000 in the Fund. W's purchase will be combined with H's
existing account and will be entitled to a reduced sales charge of
4.75%. H's original purchase was subject to a full sales charge and
the reduced charge does not apply retroactively to that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan the shares held under the plan may be combined with the additional purchase
only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases is also
available under a Statement of Intention. By signing a Statement of Intention
form, which is available from Waddell & Reed, Inc., the purchaser indicates an
intention to invest, over a 13-month period, a dollar amount which is sufficient
to qualify for a reduced sales charge. The 13-month period begins on the date
the first purchase made under the Statement is accepted by Waddell & Reed, Inc.
Each purchase made from time to time under the Statement is treated as if the
purchaser were buying at one time the total amount which he or she intends to
invest. The sales charge applicable to all purchases made under the terms of
the Statement will be the sales charge in effect on the beginning date of the
13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, shares already held in the same account in which the purchase is being made
or in any account eligible for grouping with that account, as described above,
will be included.
Example: H signs a Statement of Intention indicating his intent to invest in
his own name a dollar amount sufficient to entitle him to purchase
shares at the sales charge applicable to a purchase of $100,000. H
has an IRA account and the shares held under the IRA in the Fund have
a net asset value as of the date the Statement is accepted by Waddell
& Reed, Inc. of $15,000; H's wife, W, has an account in her own name
invested in another fund in the United Group which charges the same
sales load as the Fund, with a net asset value as of the date of
acceptance of the Statement of $10,000; H needs to invest $75,000 over
the 13-month period in order to qualify for the reduced sales load
applicable to a purchase of $100,000.
A copy of the Statement of Intention signed by a purchaser will be returned
to the purchaser after it is accepted by Waddell & Reed, Inc. and will set forth
the dollar amount which must be purchased within the 13-month period in order to
qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under a contractual
plan, the shares held under the plan will be taken into account in determining
the amount which must be invested under the Statement only if the contractual
plan has been completed.
The minimum initial investment under a Statement of Intention is 5% of the
dollar amount which must be invested under the Statement. An amount equal to 5%
of the purchase required under the Statement will be held "in escrow." If a
purchaser does not, during the period covered by the Statement, invest the
amount required to qualify for the reduced sales charge under the terms of the
Statement, he or she will be responsible for payment of the sales charge
applicable to the amount actually invested. The additional sales charge owed on
purchases made under a Statement which is not completed will be collected by
redeeming part of the shares purchased under the Statement and held "in escrow"
unless the purchaser makes payment of this amount to Waddell & Reed, Inc. within
20 days of Waddell & Reed, Inc.'s request for payment.
If the actual amount invested is higher than the amount an investor intends
to invest, and is large enough to qualify for a sales charge lower than that
available under the Statement of Intention, the lower sales charge will apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell &
Reed, Inc. to sell, the shares covered by the Statement.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement will be deducted in computing the aggregate purchases under the
Statement.
Statements of Intention are not available for purchases made under a
simplified employee pension plan where the employer has elected to have all
purchases under the SEP grouped.
Other Funds in the United Group
Reduced sales charges for larger purchases apply to purchases of any of the
funds in the United Group which are subject to a sales charge. A purchase of,
or shares held, in any of the funds in the United Group which are subject to the
same sales charge as the Fund will be treated as an investment in the Fund for
the purpose of determining the applicable sales charge. The following funds in
the United Group are subject to a maximum 5.75% ("full") sales charge as
described in the prospectus of each Fund: United Funds, Inc., United
International Growth Fund, Inc., United Continental Income Fund, Inc., United
Vanguard Fund, Inc., United Retirement Shares, Inc., United High Income Fund,
Inc., United New Concepts Fund, Inc., United Gold & Government Fund, Inc. and
United High Income Fund II, Inc. The following funds in the United Group are
subject to a "reduced" sales charge as described in the prospectus of each fund:
United Municipal Bond Fund, Inc., United Government Securities Fund, Inc. and
United Municipal High Income Fund, Inc. For the purposes of obtaining the lower
sales charge which applies to large purchases, purchases in a fund in the United
Group which is subject to a full sales charge may not be grouped with purchases
in a fund in the United Group which is subject to a reduced sales charge;
conversely, purchases made in a fund with a reduced sales charge may not be
grouped or combined with purchases of a fund which is subject to a full sales
charge.
United Cash Management, Inc. is not subject to a sales charge. Purchases
in that fund are not eligible for grouping with purchases in any other fund.
Net Asset Value Purchases
As stated in the Prospectus, Fund shares may be purchased at net asset
value by the Directors and officers of the Fund, employees of Waddell & Reed,
Inc., employees of their affiliates, sales representatives of Waddell & Reed,
Inc. and the spouse, children, parents, children's spouses and spouse's parents
of each such Director, officer, employee and sales representative. "Child"
includes stepchild; "parent" includes stepparent Purchases in an IRA sponsored
by Waddell & Reed, Inc. established for any of these eligible purchasers may
also be at net asset value. Purchases in any tax qualified retirement plan
under which the eligible purchaser is the sole participant may also be made at
net asset value. Trusts under which the grantor and the trustee or a co-trustee
are each an eligible purchaser are also eligible for net asset value purchases.
"Employees" includes retired employees. A retired employee is an individual
separated from service from Waddell & Reed, Inc. or affiliated companies with a
vested interest in any Employee Benefit Plan sponsored by Waddell & Reed, Inc.
or its affiliated companies. "Sales representatives" includes retired sales
representatives. A "retired sales representative" is any sales representative
who was, at the time of separation from service from Waddell & Reed, Inc., a
Senior Account Representative. A custodian under the Uniform Gifts (or
Transfers) to Minors Act purchasing for the child or grandchild of any employee
or sales representative may purchase at net asset value whether or not the
custodian himself is an eligible purchaser.
Purchases in a 401(k) plan having 100 or more eligible employees and
purchases in a 457 plan having 100 or more eligible employees may be made at net
asset value.
Reasons for Differences in Public Offering Price
As described herein and in the Prospectus, there are a number of instances
in which the Fund's shares are sold or issued on a basis other than the maximum
public offering price, that is, the net asset value plus the highest sales
charge. Some of these relate to lower or eliminated sales charges for larger
purchases, whether made at one time or over a period of time as under a
Statement of Intention or right of accumulation. See the table of sales charges
in the Prospectus. The reasons for these quantity discounts are, in general,
that (i) they are traditional and have long been permitted in the industry and
are therefore necessary to meet competition as to sales of shares of other funds
having such discounts; (ii) certain quantity discounts are required by rules of
the National Association of Securities Dealers, Inc. (as are elimination of
sales charges on the reinvestment of dividends and 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.
The reasons for the other instances in which there are reduced or
eliminated sales charges are as follows. Exchanges at net asset value are
permitted because a sales charge has already been paid on the shares exchanged.
Sales without sales charge are permitted to Directors, officers and certain
others due to reduced or eliminated selling expenses and since such sales may
aid in the development of a sound employee organization, encourage incentive,
responsibility and interest in the United Group and an identification with its
aims and policies. Limited reinvestments of redemptions at no sales charge are
permitted to attempt to protect against mistaken or not fully informed
redemption decisions. 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 Investment Company Act of 1940 from the
otherwise applicable restrictions as to what sales charge must be imposed. In
no case in which there is a reduced or eliminated sales charge are the interest
of existing shareholders adversely affected since, in each case, the Fund
receives the net asset value per share of all shares sold or issued.
Flexible Withdrawal Service
If you qualify, you may arrange to receive regular monthly, quarterly,
semiannual or annual payments; this can be done by redeeming shares on a regular
basis. This service is called Flexible Withdrawal Service (the "Service"). It
is available not only for Fund shares but also for shares of any of the funds in
the United Group. It would be a disadvantage to an investor to make additional
purchases of shares while a withdrawal program is in effect as this would result
in duplication of sales charges.
To qualify for the Service, you must have invested at least $10,000 in
shares which you still own of any of the funds in the United Group; or, you must
own shares having a value of at least $10,000. The value for this purpose is
not the net asset value but the value at the offering price, i.e., the net asset
value plus the sales charge.
To start this service, you must fill out a form (available from Waddell &
Reed, Inc.), advising Waddell & Reed, Inc. how you want your shares redeemed to
make the payments. You have three choices:
First. To get a monthly, quarterly, semiannual or annual payment of $50 or
more;
Second. To get a monthly payment, which will change each month, equal to
one-twelfth of a percentage of the value of the shares in the Account; you fix
the percentage; or
Third. To get a monthly or quarterly payment, which will change each month
or quarter, by redeeming a fixed number of shares (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.
The Fund, not Waddell & Reed, Inc., pays the costs of this Service. Having
the Service costs you nothing extra individually. There is a $2.00 fee for each
withdrawal from retirement plan accounts.
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 you have made available for this
Service are reinvested in additional shares. All payments are made by redeeming
shares, which may involve a gain or loss for tax purposes. To the extent that
payments exceed dividends and distributions, the number of shares you own will
decrease. When all of the shares in your account are redeemed, you will not
receive any payments. Thus, the payments are not an annuity or an income or
return on your investment.
You may, at any time change the manner in which you have chosen to have
shares redeemed to any of the other choices originally available to you. For
example, if you started out with a $50 monthly payment, you could change to a
$200 quarterly payment. You can at any time redeem part or all of the shares in
your account; if you redeem all of the shares, the Service is terminated. The
Fund can also terminate the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed will be
sent to you to assist you in completing your Federal income tax return.
Exchanges for Shares of Other Funds in the United Group
Once a sales charge has been paid on shares of a fund in the United Group,
these shares and any shares added to them from reinvestment of dividends or
distributions may be freely exchanged for shares of another fund in the United
Group. The shares you exchange must be worth at least $100 or you must already
own shares of the fund in the United Group into which you want to exchange.
You may exchange shares you own in another fund in the United Group for
Fund shares without charge if (i) a sales charge was paid on these shares, or
(ii) the shares were received in exchange for shares for which a sales charge
was paid, or (iii) the shares were acquired from reinvestment of dividends and
distributions paid on such shares. (There may have been one or more such
exchanges so long as a sales charge was paid on the shares originally
purchased.) Also, shares acquired without a sales charge because the purchase
was $2 million or more will be treated the same as shares on which a sales
charge was paid.
United Municipal Bond Fund, Inc., United Government Securities Fund, Inc.
and United Municipal High Income Fund, Inc. shares are the exception and special
rules apply. Shares of either of these funds may be exchanged for Fund shares
only if (i) you have received those shares as a result of one or more exchanges
of shares on which a sales charge was originally paid, or (ii) the shares have
been held from the date of original purchase for at least 6 months.
Subject to the above rules regarding sales charges, you may have a specific
dollar amount of shares of United Cash Management, Inc. automatically exchanged
each month into the Fund or any other fund in the United Group. The shares of
United Cash Management, Inc. which you designate for automatic exchange must be
worth at least $100 or you must own shares of the fund in the United Group into
which you want to exchange. The minimum value of shares which you may designate
for automatic exchange monthly is $100, which may be allocated among different
funds in the United Group so long as each fund receives a value of at least $25.
Minimum initial investment and minimum balance requirements apply to such
automatic exchange service.
When you exchange shares, the total shares you receive will have the same
aggregate net asset value as the total shares you exchange. The relative values
are those next figured after your written exchange request is received in good
order.
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any time
and any such exchange may not be accepted.
Retirement Plans
For individual taxpayers meeting certain requirements, Waddell & Reed, Inc.
offers four retirement plan arrangements which provide tax deferral and
contribute to retirement assets. All four of them involve investments in Fund
shares (or the shares of certain other funds in the United Group).
First. A self-employed person may set up a plan that is commonly called a
Keogh 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
a maximum of $30,000.
Second. Investors having earned income may set up a plan that is commonly
called an IRA. Under an IRA, an investor can contribute each year up to 100% of
his or her earned income up to a maximum of $2,000. The maximum is $2,250 if an
investor's spouse has no earned income in a taxable year. If an investor's
spouse has at least $2,000 of earned income in a taxable year, the maximum is
$4,000 ($2,000 for each spouse).
These 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 participates, the
adjusted gross income does not exceed certain levels.
An investor may also use an IRA to receive a rollover contribution which is
either (a) a direct rollover from an employer's plan or (b) a rollover of an
eligible distribution paid to the investor from an employer's plan or another
IRA. To the extent a rollover contribution is made to an IRA, the distribution
will not be subject to Federal income tax until distributed from the IRA. A
direct rollover generally applies to any distribution from an employer's plan
(including a custodial account under Section 403(b)(7) of the Code, but not an
IRA) other than certain periodic payments, required minimum distributions and
other specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a portion
of that distribution generally may be rolled over to an IRA within 60 days after
receipt of the distribution. Because mandatory Federal income tax withholding
applies to any eligible rollover distribution which is not paid in a direct
rollover, investors should consult their tax advisers or pension consultants as
to the applicable tax rules. If you already have an IRA, you may have the
assets in that IRA transferred directly to an IRA offered by Waddell & Reed,
Inc.
Third. 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 custodial account under Section
403(b) of the Code.
Fourth. 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.
Waddell & Reed, Inc. also offers to businesses prototype employee benefit
plans qualified under Section 401 of the Code. Investments may be made in the
Fund in accordance with the terms of the plans.
More detailed information about these arrangements is in the applicable
forms which 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; the emergency
or other extraordinary conditions there indicated under which payment may be
delayed beyond seven days are certain emergency conditions determined by the
Securities and Exchange Commission, when the New York Stock Exchange is closed
other than for weekends or holidays, or when trading on the Exchange is
restricted. The extraordinary conditions mentioned in the Prospectus under
which redemptions may be made in portfolio securities are that the Fund's Board
of Directors can decide that conditions exist making cash payments undesirable.
If they should, redemption payments could be made in securities. They would be
valued at the value used in figuring net asset value. There would be brokerage
costs to the redeeming shareholder in selling such securities. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, pursuant to which it is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of its net asset value during any 90-day period for any
one shareholder.
Reinvestment Privilege
The Prospectus discusses the reinvestment privilege under which, if you
redeem and then decide it was not a good idea, you may reinvest. If Fund shares
are then being offered, you can put all or part of your redemption payment back
into Fund shares without any sales charge at the net asset value next determined
after you have returned the amount. Your written request to do this must be
received within 30 days after your redemption request was received. You can do
this only once as to Fund shares. You do not use up this privilege by redeeming
shares to invest the proceeds at net asset value in a Keogh plan or an IRA.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board 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.
Each of the Fund's Directors is also a Director of each of the other funds
in the United Group, TMK/United Funds, Inc., Waddell and Reed Funds, Inc.,
Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund,
Inc. and each of its officers is also an officer of one or more of these funds.
The principal occupation of each Director and officer during at least the past
five years is given below. Each of the persons listed through and including Mr.
Wright is a member of the Fund's Board of Directors. The other persons are
officers but not Board members.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund; Chairman of the Board of
Directors of Waddell & Reed Financial Services, Inc., United Investors
Management Company and United Investors Life Insurance Company; Chairman of the
Board of Directors and Chief Executive Officer of Torchmark Corporation;
Chairman of the Board of Directors of Vesta Insurance Group, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed, Inc.
KEITH A. TUCKER*
President of the Fund; President, Chief Executive Officer and Director of
Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors of
the Manager, Waddell & Reed, Inc., Waddell & Reed Services Company, Waddell &
Reed Asset Management Company and Torchmark Distributors, Inc., an affiliate of
Waddell & Reed, Inc.; Vice Chairman of the Board of Directors, Chief Executive
Officer and President of United Investors Management Company; Vice Chairman of
the Board of Directors of Torchmark Corporation; Director of Southwestern Life
Corporation; formerly, partner in Trivest, a private investment concern;
formerly, Director of Atlantis Group, Inc., a diversified company.
HENRY L. BELLMON
Route 1
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma; prior to his current service as Director of the funds in the United
Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc., he served in
such capacity for the funds in the United Group and TMK/United Funds, Inc.
DODDS I. BUCHANAN
University of Colorado
Campus Box 419
Boulder, Colorado 80309
Advisory Director, The Hand Companies; President, Buchanan Ranch Corp.;
formerly, Senior Vice President and Director of Marketing Services, The Meyer
Group of Management Consultants; formerly, Chairman, Department of Marketing,
Transportation and Tourism, University of Colorado; formerly, Professor of
Marketing, College of Business, University of Colorado.
JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Formerly, President and Director of Kansas City Stock Yards Company;
formerly, Partner in Dillingham Farms, a farming operation.
JOHN F. HAYES*
335 N. Washington
P.O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; formerly, President of Gilliland & Hayes, P.A., a law firm.
GLENDON E. JOHNSON
7300 Corporate Center Drive
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Financial Corporation
and related subsidiaries.
WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of the
Fund, each Fund in the United Group, TMK/United Funds, Inc., Waddell & Reed
Funds, Inc., Torchmark Government Securities Fund, Inc. and Torchmark Insured
Tax-Free Fund, Inc. (Mr. Morgan retired as Chairman of the Board of Directors
and President of these Funds on April 30, 1993); formerly, President, Director
and Chief Executive Officer of the Manager and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company; formerly,
Director of Waddell & Reed Asset Management Company, United Investors Management
Company and United Investors Life Insurance Company, affiliates of Waddell &
Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management and
investment; formerly, Director of The Vendo Company, a manufacturer and
distributor of vending machines.
FREDERICK VOGEL, III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired.
PAUL S. WISE
P.O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
LESLIE S. WRIGHT
Samford University
800 Lakeshore Drive
Birmingham, Alabama 35209
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association; formerly, President of Samford University.
Robert L. Hechler
Vice President and Principal Financial Officer of the Fund; Vice President,
Chief Operations Officer, Director and Treasurer of Waddell & Reed Financial
Services, Inc.; Executive Vice President, Principal Financial Officer, Director
and Treasurer of the Manager; President, Chief Executive Officer, Principal
Financial Officer, Director and Treasurer of Waddell & Reed, Inc.; Director and
Treasurer of Waddell & Reed Asset Management Company; President, Director and
Treasurer of Waddell & Reed Services Company; Vice President, Treasurer and
Director of Torchmark Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund; 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 the Manager and Waddell & Reed Asset Management Company; Senior Vice
President and Chief Investment Officer of United Investors Management Company.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund;
Vice President of Waddell & Reed Services Company.
Sharon K. Pappas
Vice President, Secretary and General Counsel of the Fund; Vice President,
Secretary and General Counsel of Waddell & Reed Financial Services, Inc.; Senior
Vice President, Secretary and General Counsel of the Manager and Waddell & Reed,
Inc.; Director, Senior Vice President, Secretary and General Counsel of Waddell
& Reed Services Company; Director, Secretary and General Counsel of Waddell &
Reed Asset Management Company; Vice President, Secretary and General Counsel of
Torchmark Distributors, Inc.; formerly, Assistant General Counsel of the
Manager, Waddell & Reed Financial Services, Inc., Waddell & Reed, Inc., Waddell
& Reed Asset Management Company and Waddell & Reed Services Company.
Carl E. Sturgeon
Vice President of the Fund; Vice President of the Manager; formerly, Vice
President of Waddell & Reed, Inc.
James D. Wineland
Vice President of the Fund; Vice President of the Manager; formerly, Vice
President of Waddell & Reed, Inc.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
As of the date of this SAI, four of the Fund's Directors may be deemed to
be "interested persons" as defined in the Investment Company Act of 1940 of its
underwriter, Waddell & Reed, Inc. or the Manager. The Directors who may be
deemed to be "interested persons" are indicated as such by an asterisk.
The Board has created an honorary position of Director Emeritus, which
position a director may elect after resignation from the Board provided the
director has attained the age of 75 and has served as a director of the funds in
the United Group for a total of at least five years. A Director Emeritus
receives fees in recognition of his past services whether or not services are
rendered in his capacity as Director Emeritus, but has no authority or
responsibility with respect to management of the Fund. Currently, no person
serves as Director Emeritus.
The funds in the United Group, TMK/United Funds, Inc. and Waddell & Reed
Funds, Inc. pay to each Director a total of $40,000 per year, plus $500 for each
meeting of the Board of Directors attended and $500 for each committee meeting
attended which is not held in conjunction with a Board of Directors' meeting
other than Directors who are affiliates of Waddell & Reed, Inc. The fees to the
Directors who receive them are divided among the funds in the United Group,
TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. based on their relative
size. During the Fund's fiscal year ended September 30, 1994, its share was
$34,421. The officers are paid by the Manager or its affiliates.
Shareholdings
As of November 30, 1994, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. As of such date
no person owned of record or was known by the Fund to own beneficially 5% or
more of the Fund's outstanding shares.
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder, other than payments when you redeem your shares. The first source
is the Fund's net investment income, which is derived from the dividends,
interest and earned discount on the securities it holds less its expenses. The
second source is realized capital gains, which are derived from the proceeds
received from the sale of securities at a price higher than the Fund's tax basis
(usually cost) in such securities; these gains can be either long-term or short-
term, depending on how long the Fund has owned the securities before it sells
them. The third source is net realized gains from foreign currency
transactions. The payments made to shareholders from net investment income, net
short-term capital gains and net realized gains from certain foreign currency
transactions are called dividends. Payments, if any, from long-term capital
gains are called distributions.
The Fund pays distributions only if it has net realized capital gains (the
excess of net long-term capital gains over net short-term capital losses). It
may or may not have such gains, depending on whether or not securities are sold
and at what price. If the Fund has net capital gains, it will ordinarily pay
distributions once each year, in the latter part of the fourth calendar quarter.
Even if it has capital gains for a year, the Fund does not pay out the gains if
it has applicable prior year losses to offset the gains.
Choices You Have on Your Dividends and Distributions
In your application form, you can give instructions that (i) you want cash
for your dividends and distributions, (ii) you want your dividends and
distributions reinvested in Fund shares or (iii) you want cash for your
dividends and want your distributions reinvested in Fund shares. You can change
your instructions at any time. If you give no instruction, your dividends and
distributions will be reinvested in Fund shares. All reinvestments are at net
asset value without any sales charge. The net asset value used for this purpose
is that computed as of the record date for the dividend or distribution,
although this could be changed by the Directors.
Even if you get dividends and distributions in cash, you can thereafter
reinvest them (or distributions only) in Fund shares at net asset value (i.e.,
no sales charge) next determined after receipt by Waddell & Reed, Inc. of the
amount clearly identified as a reinvestment. The reinvestment must be within 45
days after the payment.
TAXES
General
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Code, the Fund must distribute to its shareholders for
each taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital gains
and net gains from certain foreign currency transactions) and must meet several
additional requirements. These requirements include the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures contracts or forward contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) the Fund must derive less than 30% of its
gross income each taxable year from the sale or other disposition of securities,
or any of the following, that were held for less than three months -- (i)
options, futures contracts or forward contracts or (ii) foreign currencies (or
options, futures contracts or forward contracts thereon) that are not directly
related to the Fund's principal business of investing in securities (or in
options and futures with respect to securities) ("Short-Short Limitation"); (3)
at the close of each quarter of the Fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
Government Securities, securities of other RICs and other securities that are
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. Government Securities or
the securities of other RICs) of any one issuer.
Dividends and distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months are deemed to have been paid by the Fund and received by you on
December 31 of that year even if they are paid by the Fund during the following
January. Accordingly, those dividends and distributions will be taxed to
shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any distributions received on those shares. Investors also should
be aware that if shares are purchased shortly before the record date for a
dividend or distribution, the purchaser will receive some portion of the
purchase price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
It is the Fund's policy to make sufficient distributions each year to avoid
imposition of the Excise Tax. The Code permits the Fund to defer into the next
calendar year net capital losses incurred between each November 1 and the end of
the current calendar year.
Income from Foreign Securities
Dividends and interest received by the Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of a 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 accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally are treated
as ordinary income or loss. These gains or losses, referred to under the Code
as "section 988" gains or losses, may increase or decrease the amount of the
Fund's investment company taxable income to be distributed to its shareholders.
Income from Options, Futures and Currencies
The use of hedging strategies, such as writing (selling) and purchasing
options and futures, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses the
Fund realizes in connection therewith. Income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in options and futures derived by the Fund with respect to its
business of investing in securities, will qualify as permissible income under
the Income Requirement. However, income from the disposition of options and
futures will be subject to the Short-Short Limitation if they are held for less
than three months. Income from the disposition of foreign currencies that are
not directly related to the Fund's principal business of investing in securities
(or options and futures with respect to securities) also will be subject to the
Short-Short Limitation if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all the Fund's hedging transactions. To the
extent this treatment is not available, the Fund may be forced to defer the
closing out of certain options and futures beyond the time when it otherwise
would be advantageous to do so, in order for the Fund to continue to qualify as
a RIC.
Any income the Fund earns from writing options is taxed as short-term
capital gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund expires without being
exercised, the premium it receives also will be a short-term gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale. The Fund will not write so many options
that it could fail to continue to qualify as a RIC.
Certain options and futures contracts in which the Fund may invest may be
"section 1256 contracts." Section 1256 contracts held by the Fund at the end of
each taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which the Fund has made an election not to have the
following rules apply, are "marked-to-market" (that is, treated as sold for
their fair market value) for federal income tax purposes, with the result that
unrealized gains or losses are treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, are
treated as long-term capital gains or losses, and the balance is treated as
short-term capital gains or losses. Section 1256 contracts also may be marked-
to-market for purposes of the Excise Tax and for other purposes.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Fund may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property.
Section 1092 generally provides that any loss from the disposition of a position
in a straddle may be deducted only to the extent the loss exceeds the unrealized
gain on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, which apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If the Fund makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences of
straddle transactions to the Fund are not entirely clear.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by the Manager pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio of
the Fund. Transactions in securities other than those for which an exchange is
the primary market are generally done with dealers acting as principals or
market makers. Brokerage commissions are paid primarily for effecting
transactions in securities traded on an exchange and otherwise only if it
appears likely that a better price or execution can be obtained. The individual
who manages the Fund may manage other advisory accounts with similar investment
objectives. It can be anticipated that the manager will frequently place
concurrent orders for all or most accounts for which the manager has
responsibility. Transactions effected pursuant to such combined orders are
averaged as to price and allocated in accordance with the purchase or sale
orders actually placed for each fund or advisory account.
To effect the portfolio transactions of the Fund, the Manager is authorized
to engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to achieve "best
execution" (prompt and reliable execution at the best price obtainable) for
reasonable and competitive commissions. The Manager need not seek competitive
commission bidding but is expected to minimize the commissions paid to the
extent consistent with the interests and policies of the Fund. Subject to
review by the Board of Directors, such policies include the selection of brokers
which provide execution and/or research services and other services, including
pricing or quotation services directly or through others ("brokerage services")
considered by the Manager to be useful or desirable for its investment
management of the Fund and/or the other funds and accounts over which the
Manager or its affiliates have investment discretion.
Brokerage services are, in general, defined by reference to Section 28(e)
of the Securities Exchange Act of 1934 as including (i) advice, either directly
or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities and the
availability of securities and purchasers or sellers; (ii) furnishing analyses
and reports; or (iii) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). "Investment
discretion" is, in general, defined as having authorization to determine what
securities shall be purchased or sold for an account, or making those decisions
even though someone else has responsibility.
The commissions paid to brokers that provide such brokerage services may be
higher than another qualified broker would charge for effecting comparable
transactions if a good faith determination is made by the Manager that the
commission is reasonable in relation to the brokerage services provided.
Subject to the foregoing considerations, the Manager may also consider the
willingness of particular brokers and dealers to sell shares of the Fund and
other funds managed by the Manager and its affiliates as a factor in its
selection. No allocation of brokerage or principal business is made to provide
any other benefits to the Manager or its affiliates.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of the Manager and its affiliates
and investment research received for the commissions of those other accounts may
be useful both to the Fund and one or more of such other accounts. To the
extent that electronic or other products provided by such brokers to assist the
Manager 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 the Manager.
Such investment research (which may be supplied by a third party at the
instance of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of the
Manager; serves to make available additional views for consideration and
comparisons; and enables the Manager to obtain market information on the price
of securities held in the Fund's portfolio or being considered for purchase.
In placing transactions for the Fund's portfolio, the Manager may consider
sales of shares of the Fund and other funds managed by the Manager and its
affiliates as a factor in the selection of brokers to execute portfolio
transactions. The Manager intends to allocate brokerage on the basis of this
factor only if the sale is $2 million or more and there is no sales charge.
This results in the consideration only of sales which by their nature would not
ordinarily be made by Waddell & Reed, Inc.'s direct sales force and is done in
order to prevent the direct sales force from being disadvantaged by the fact
that it cannot participate in Fund brokerage. As of September 30, 1994, the
Fund owned Merrill & Lynch Co. Inc., parent company of Merrill Lynch, Pierce,
Fenner & Smith, Inc., securities in the aggregate amount of $7,415,105. Merrill
Lynch, Pierce, Fenner & Smith, Inc. is a regular broker of the Fund.
During the Fund's fiscal years ended September 30, 1994, 1993 and 1992, it
paid brokerage commissions of $729,817, 1,234,475 and $1,551,891, 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 last fiscal year, the transactions, other than principal
transactions, which were directed to broker-dealers who provided research as
well as execution totaled $273,159,058 on which $424,828 in brokerage
commissions were paid. These transactions were allocated to these broker-
dealers by the internal allocation procedures described above.
Buying and Selling With Other Funds
The Fund and one or more of the other funds in the United Group, TMK/United
Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government Securities Fund,
Inc. and Torchmark Insured Tax-Free Fund, Inc. or accounts over which Waddell &
Reed Asset Management Company exercises investment discretion frequently buy or
sell the same securities at the same time. If this happens, the amount of each
purchase or sale is divided. This is done on the basis of the amount of
securities each fund or account wanted to buy or sell. Sharing in large
transactions could affect the price the Fund pays or receives or the amount it
buys or sells. However, sometimes a better negotiated commission is available.
OTHER INFORMATION
The Shares of the Fund
The Fund presently has only one kind (class) of shares. Each share has the
same rights to dividends, to vote and to receive assets if the Fund liquidates
(winds up). Each fractional share has the same rights, in proportion, as a full
share. Shares are fully paid and nonassessable when bought.
