UNITED
SMALL CAP
FUND,
INC.
SEMIANNUAL
REPORT
-----------------
December 31, 1999
<PAGE>
This report is submitted for the general information of the shareholders of
United Small Cap Fund, Inc. It is not authorized for distribution to
prospective investors in the Fund unless accompanied with or preceded by the
United Small Cap Fund, Inc. current prospectus.
<PAGE>
PRESIDENT'S LETTER
DECEMBER 31, 1999
Dear Shareholder:
We are delighted to share with you this report on your Fund's operations for the
fiscal period ended December 31, 1999.
The second half of 1999 was another extraordinary period for equity markets in
the U.S. and, indeed, around much of the globe, as all major stock market
indices weathered some volatility and finished 1999 solidly above mid-year
levels. Leading the way was the Nasdaq Composite, which is laden with
technology-oriented companies. This index rose a stunning 51.5 percent in the
last six months of 1999 and 85.6 percent for all of 1999, as investors poured
money into stocks of these "new era" companies. The Standard & Poor's 500, the
index most often used to track the performance of the largest U.S. stocks, rose
7.84 percent for the six months ended December 31, 1999 and 21.09 percent for
the year. The Dow Jones Industrial Average, which includes 30 of the nation's
largest companies, rose 5.44 percent in the last six months of the year and
26.93 percent for all of 1999. And, finally, the Russell 2000, which tracks the
performance of small-company stocks, rose 10.99 percent for the last six months
of 1999 and 21.17 percent for the year after having significantly trailed other
indices in recent years. Clearly, smaller and mid-sized companies -- especially
those in the technology industry -- were at the center of the market's favor for
the final six months of 1999.
The domestic equity markets' performance was achieved despite conflicting
economic signals. Inflation, as defined by the Consumer Price Index, rose 2.2
percent for all of 1999, up from the prior year's 1.8 percent but still modest
by historical standards. At the same time, though, interest rates increased
considerably over the course of the year and overall economic activity remained
strong. While such factors might ordinarily have undermined a vibrant stock
market, they had no noticeably negative overall effect in 1999. This was due in
part to investors' enormous enthusiasm for technology-related stocks which,
throughout 1999 -- and especially in the last six months of the year -- seemed
impervious to the influence of economic factors. U.S. equity markets were not
alone in turning in strong performances for the second half and all of 1999.
Many foreign equity markets turned in exceptional years as well, buoyed by some
of the same factors that propelled U.S. markets, along with a faster-than-
expected recovery in certain of the Asian markets that had been in economic
crisis in the recent past.
The news from bond markets was much less favorable. Inflationary pressures,
including high levels of consumer spending and very low unemployment, caused
bond yields (which move inversely to bond prices) to rise considerably over the
course of the year. As a result, U.S. bond markets experienced a very difficult
six months and their toughest full year since 1994. The Federal Reserve, which
is committed to keeping inflation in check, raised interest rates three times
during 1999 and, as the year came to a close, the likelihood of additional rate
hikes early in 2000 appeared to be high.
We were pleased with the overall performance of the United Fund family in the
second half of 1999 and for the full year. This report provides in-depth
discussion of the performance of the fund you own. I urge you to read it with
care so you can continue to be a well-informed investor.
While these reports necessarily focus on the second half of 1999, we of course
urge all our investors to keep a long-term perspective. Just as we urge you not
to become unduly concerned if the market moves downward in the near term, we
would urge that you not become too exuberant when it moves higher in similarly
short periods. No one can predict with certainty where markets will go next,
but one thing that remains certain is that a well-thought-out investment plan is
essential. Remember, a plan that is appropriate for you is appropriate
regardless of inevitable market changes. Your Waddell & Reed financial advisor
is indispensable in helping you create an investment program comprising our
time-tested investments. And with that plan in place, you can face any market
condition with confidence.
Respectfully,
Robert L. Hechler
President
<PAGE>
SHAREHOLDER SUMMARY
- -----------------------------------------------------------------
UNITED SMALL CAP FUND, INC.
PORTFOLIO STRATEGY:
GOAL: Growth of capital.
STRATEGY: InvestS primarily in a diversified
portfolio of common stocks of domestic
companies whose market capitalizations
do not exceed $1.5 billion at the time
of purchase by the Fund. The Fund will
emphasize relatively new or unseasoned
companies in their early stages of
development or smaller companies
positioned in new or emerging industries
where there is an opportunity for rapid
growth.
FOUNDED: 1999
SCHEDULED DIVIDEND FREQUENCY: ANNUALLY (December)
<PAGE>
PERFORMANCE SUMMARY - Class A Shares
PER SHARE DATA
For the Period Ended December 31, 1999
--------------------------------------
DIVIDEND PAID $0.03
=====
CAPITAL GAINS DISTRIBUTION $0.003
======
NET ASSET VALUE ON
12/31/99 $12.32
10/4/99* 10.00
------
CHANGE PER SHARE $ 2.32
======
* Commencement of operations.
Past performance is not necessarily indicative of future results.
TOTAL RETURN HISTORY
Aggregate Total Return
---------------------------
With Without
Period Sales Load* Sales Load**
- ------ ----------- ------------
For the period from 10-4-99***
through 12-31-99 16.43% 23.53%
*Performance data quoted represents past performance and is based on
deduction of 5.75% sales load on the initial purchase.
**Performance data quoted in this column represents past performance without
taking into account the sales load deducted on an initial purchase.
***Initial public offering of the Fund.
Investment return and principal value will fluctuate and an investor's shares,
when redeemed, may be worth more or less than their original cost.
<PAGE>
PORTFOLIO HIGHLIGHTS
On December 31, 1999, United Small Cap Fund, Inc. had net assets totaling
$97,728,497 invested in a diversified portfolio of:
59.78% Cash and Cash Equivalents
40.22% Common Stocks
As a shareholder of United Small Cap Fund, Inc., for every $100 you had invested
on December 31, 1999, your Fund owned:
$59.78 Cash and Cash Equivalents
23.59 Services Stocks
10.94 Manufacturing Stocks
4.49 Transportation, Communication, Electric
and Sanitary Services Stocks
1.20 Wholesale and Retail Trade Stocks
<PAGE>
THE INVESTMENTS OF
UNITED SMALL CAP FUND, INC.
DECEMBER 31, 1999
Shares Value
COMMON STOCKS
Business Services - 18.59%
Acxiom Corporation* .................... 93,200 $ 2,239,712
Best Software, Inc.* ................... 31,400 925,319
CacheFlow Inc.* ........................ 1,000 130,656
Cerner Corporation* .................... 70,000 1,375,938
CheckFree Holdings Corporation* ........ 16,600 1,747,150
Dendrite International, Inc.* .......... 53,100 1,788,806
Digital Insight Corporation* ........... 34,200 1,251,506
Getty Images, Inc.* .................... 42,100 2,062,900
MemberWorks Incorporated* .............. 31,500 1,044,422
Primark Corporation* ................... 45,800 1,273,813
Shared Medical Systems Corporation ..... 28,700 1,461,906
Transaction Systems Architects, Inc.,
Class A* .............................. 46,700 1,309,059
USINTERNETWORKING, Inc.* ............... 22,350 1,560,309
Total ................................. 18,171,496
Chemicals and Allied Products - 1.65%
Pharmacyclics, Inc.* ................... 39,000 1,613,625
Communication - 3.49%
Illuminet Holdings, Inc.* .............. 5,300 291,334
Intermedia Communications Inc.* ........ 44,400 1,720,500
Western Wireless Corporation,
Class A* .............................. 21,000 1,400,438
Total ................................. 3,412,272
Eating and Drinking Places - 1.20%
Papa John's International, Inc.* ....... 45,000 1,174,219
Electronic and Other Electric Equipment - 3.81%
Advanced Fibre Communications, Inc.* ... 40,000 1,792,500
Rambus Inc.* ........................... 28,700 1,934,559
Total ................................. 3,727,059
Engineering and Management Services - 5.00%
Incyte Pharmaceuticals, Inc.* .......... 59,100 3,496,134
MAXIMUS, Inc.* ......................... 41,000 1,391,438
Total ................................. 4,887,572
Food and Kindred Products - 1.57%
American Italian Pasta Company, Class A* 50,000 1,537,500
Instruments and Related Products - 1.86%
VISX, Incorporated* .................... 35,000 1,812,344
Printing and Publishing - 0.08%
Martha Stewart Living Omnimedia, Inc.* . 3,300 79,200
See Notes to Schedule of Investments on page 9.
<PAGE>
THE INVESTMENTS OF
UNITED SMALL CAP FUND, INC.
DECEMBER 31, 1999
Shares Value
COMMON STOCKS (Continued)
Transportation by Air - 1.00%
Midwest Express Holdings, Inc.* ........ 30,500 $ 972,188
Transportation Equipment - 1.97%
Gentex Corporation* .................... 69,000 1,923,375
TOTAL COMMON STOCKS - 40.22% $39,310,850
(Cost: $30,634,255)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Auto Repair, Services and Parking - 3.06%
PHH Corp.,
6.75%, 1-11-00 ........................ $3,000 2,994,375
Depository Institutions - 13.53%
Deutsche Bank Financial Inc.,
6.75%, 1-6-00 ......................... 4,000 3,996,250
Dresdner U.S. Finance Inc.,
6.23%, 1-10-00 ........................ 3,000 2,995,327
UBS Finance (DE) Inc.,
5.0%, 1-4-00 .......................... 3,240 3,238,650
Westpac Capital Corp.,
5.5%, 1-10-00 ......................... 3,000 2,995,875
Total ................................. 13,226,102
Electric, Gas and Sanitary Services - 2.04%
Western Resources, Inc.,
6.6%, 1-14-00 ......................... 2,000 1,995,233
Food and Kindred Products - 7.80%
General Mills, Inc.,
6.345%, Master Note ................... 4,631 4,631,000
Ralston Purina Co.,
6.6%, 1-19-00 ......................... 3,000 2,990,100
Total ................................. 7,621,100
Instruments and Related Products - 3.06%
Snap-On Inc.,
6.375%, 1-14-00 ....................... 3,000 2,993,094
Insurance Carriers - 3.06%
Aon Corporation,
5.5%, 1-31-00 ......................... 3,000 2,986,250
See Notes to Schedule of Investments on page 9.
<PAGE>
THE INVESTMENTS OF
UNITED SMALL CAP FUND, INC.
DECEMBER 31, 1999
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Nondepository Institutions - 7.83%
Paccar Financial Corp.,
5.2757, Master Note ................... $4,652 $ 4,652,000
Textron Financial Corp.,
8.3%, 1-5-00 .......................... 3,000 2,997,233
Total ................................. 7,649,233
Paper and Allied Products - 3.32%
International Paper Company,
7.35%, 1-14-00 ........................ 3,250 3,241,374
Printing and Publishing - 3.06%
American Greetings Corp.,
6.7%, 1-11-00 ......................... 3,000 2,994,417
Transportation Equipment - 3.06%
Dana Credit Corp.,
7.07%, 1-13-00 ........................ 3,000 2,992,930
Wholesale Trade - Nondurable Goods - 3.18%
Enron Corp.,
6.0%, 1-14-00 ......................... 3,110 3,103,262
Total Commercial Paper - 53.00% 51,797,370
Commercial Paper (backed by irrevocable bank
letter of credit) - 3.58%
Nondepository Institutions
Agway Financial Corp. (Rabobank Nederland N.V.),
5.0%, 1-5-00 .......................... 3,500 3,498,056
Municipal Obligations - 1.54%
Louisiana
Industrial Development Board of the Parish
Of Calcasieu, Inc., Environmental Revenue
Bonds (CITGO Petroleum Corporation Project),
Series 1996 (Taxable), (Westdeutsche
Landesbank Girozentrale),
6.0%, 1-20-00 ......................... 1,500 1,500,000
Repurchase Agreement - 0.84%
J.P. Morgan Securities Inc., 3.25% Repurchase
Agreement dated 12-31-99, to be
repurchased at $825,223 on 1-3-00** ... 825 825,000
TOTAL SHORT-TERM SECURITIES - 58.96% $57,620,426
(Cost: $57,620,426)
See Notes to Schedule of Investments on page 9.
<PAGE>
THE INVESTMENTS OF
UNITED SMALL CAP FUND, INC.
DECEMBER 31, 1999
Value
TOTAL INVESTMENT SECURITIES - 99.18% $96,931,276
(Cost: $88,254,681)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.82% 797,221
NET ASSETS - 100.00% $97,728,497
Notes to Schedule of Investments
*No dividends were paid during the preceding 12 months.
**Collateralized by $819,000 U.S. Treasury Bonds, 6.375% due 9/30/01; market
value and accrued interest aggregate $834,314.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 4 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
UNITED SMALL CAP FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(In Thousands, Except for Per Share Amounts)
Assets
Investment securities -- at value (Notes 1 and 4) $ 96,931
Cash ........................................... 659
Receivables:
Fund shares sold ............................... 2,316
Dividends and interest ......................... 54
Prepaid registration fees ....................... 47
--------
Total assets ................................. 100,007
--------
Liabilities
Payable to Fund shareholders ............ ........ 1,144
Payable for investment securities purchased ..... 1,066
Accrued transfer agency and dividend
disbursing (Note 3) ............................ 18
Accrued distribution fee (Note 3) ............... 9
Accrued service fee (Note 3) .................... 9
Accrued accounting services fee (Note 3) ........ 3
Accrued management fee (Note 3) ................. 2
Accrued shareholder servicing - Class Y (Note 3) 1
Other ........................................... 27
--------
Total liabilities ............................ 2,279
--------
Total net assets ............................ $ 97,728
========
Net Assets
$0.001 par value capital stock
Capital stock .................................. $ 8
Additional paid-in capital ..................... 86,502
Accumulated undistributed income:
Accumulated undistributed net investment income 3
Accumulated undistributed net realized gain on
investment transactions ...................... 2,538
Net unrealized appreciation in value
of investments ............................... 8,677
--------
Net assets applicable to outstanding
units of capital ............................ $ 97,728
========
Capital shares outstanding:
Class A ......................................... 6,933
Class B .......................................... 588
Class C ......................................... 182
Class Y ......................................... 232
Capital shares authorized ......................... 1,000,000
Net asset value per share (net assets divided
by shares outstanding):
Class A ......................................... $12.32
Class B .......................................... $12.30
Class C ......................................... $12.31
Class Y ......................................... $12.32
See notes to financial statements.
<PAGE>
UNITED SMALL CAP FUND, INC.
STATEMENT OF OPERATIONS
For the Period from OCTOBER 4, 1999* through DECEMBER 31, 1999
(In Thousands)
Investment Income
Income (Note 1B):
Interest and amortization ....................... $ 394
Dividends ....................................... 6
-------
Total income .................................. 400
-------
Expenses (Note 3):
Investment management fee ....................... 93
Registration expenses ........................... 52
Transfer agency and dividend
disbursing:
Class A ...................................... 28
Class B ...................................... 6
Class C ...................................... 1
Distribution fee:
Class A ...................................... 10
Class B ...................................... 5
Class C ...................................... 2
Service fees:
Class A ...................................... 12
Class B ...................................... 2
Class C ...................................... 1
Accounting services fee ......................... 5
Registration fees ............................... 4
Custodian fees .................................. 2
Legal fees ...................................... 1
Shareholder servicing - Class Y ................. 1
-------
Total ......................................... 225
-------
Less expenses in excess of voluntary waiver of
management fee (Note 3) ...................... (10)
-------
Total expenses ............................... 215
-------
Net investment income ...................... 185
-------
Realized and Unrealized Gain on
Investments (Notes 1 and 4)
Realized net gain on investments ................. 2,559
Unrealized appreciation in value of investments
during the period................................ 8,677
-------
Net gain on investments ....................... 11,236
-------
Net increase in net assets resulting from
operations ................................. $11,421
=======
*Commencement of operations
See notes to financial statements.
<PAGE>
UNITED SMALL CAP FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period from OCTOBER 4, 1999* through DECEMBER 31, 1999
(Dollars In Thousands)
Increase in Net Assets
Operations:
Net investment income ............... $ 185
Realized net gain on investments .... 2,559
Unrealized appreciation ............. 8,677
-------
Net increase in net assets
resulting from operations ........ 11,421
-------
Distributions to shareholders from (Note 1E):**
Net investment income:
Class A ........................... (157)
Class B ........................... (8)
Class C ........................... (3)
Class Y ........................... (14)
Realized gains on securities transactions:
Class A ........................... (18)
Class B ........................... (1)
Class C ........................... (1)
Class Y ........................... (1)
-------
(203)
-------
Capital share transactions (Note 5) .. 86,410
-------
Total increase.................... 97,628
Net Assets
Beginning of period .................. 100
-------
End of period, including undistributed
net investment income of $3 ......... $97,728
=======
*Commencement of operations.
**See "Financial Highlights" on pages 13 - 16.
See notes to financial statements.
<PAGE>
UNITED SMALL CAP FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
For the
period from
10/4/99*
through
12/31/99
--------
Net asset value,
beginning of
period ........... $10.00
------
Income from investment
operations:
Net investment
income .......... 0.03
Net realized and
unrealized gain
on investments .. 2.32
------
Total from investment
operations ...... 2.35
------
Less distributions:
From net investment
income .......... (0.03)
From capital gains (0.00)**
------
Total distributions (0.03)
------
Net asset value,
end of period .... $12.32
======
Total return*** .... 23.53%
Net assets, end of
period (in
millions) ........ $86
Ratio of expenses
to average net
assets ........... 1.84%****
Ratio of net investment
income to average
net assets ....... 1.76%****
Portfolio turnover
rate ............. 21.65%
*Commencement of operations
**A capital gain of $0.0033 was paid to shareholders during this period.
***Total return calculated without taking into account the sales load deducted
on an initial purchase.
****Annualized.
See notes to financial statements.
<PAGE>
UNITED SMALL CAP FUND, INC.
FINANCIAL HIGHLIGHTS
Class B Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
For the
period
from
10/4/99*
through
12/31/99
-------
Net asset value,
beginning of period $10.00
-----
Income from investment
operations:
Net investment income 0.01
Net realized and
unrealized gain
on investments .. 2.31
-----
Total from investment
operations ....... 2.32
-----
Less distributions:
From net investment
income .......... (0.02)
From capital gains (0.00)**
-----
Total distributions (0.02)
-----
Net asset value,
end of period .... $12.30
=====
Total return ....... 23.23%
Net assets, end of
period (in
millions) ........ $7
Ratio of expenses to
average net assets 3.36%***
Ratio of net investment
income to average
net assets ....... 0.22%***
Portfolio turnover
rate ............. 21.65%
*Commencement of operations.
**A capital gain of $0.0033 was paid to shareholders during this
period.
***Annualized.
See notes to financial statements.
<PAGE>
UNITED SMALL CAP FUND, INC.
FINANCIAL HIGHLIGHTS
Class C Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
For the
period
from
10/4/99*
through
12/31/99
-------
Net asset value,
beginning of period $10.00
-----
Income from investment
operations:
Net investment income 0.01
Net realized and
unrealized gain
on investments .. 2.32
-----
Total from investment
operations ....... 2.33
-----
Less distributions:
From net investment
income .......... (0.02)
From capital gains (0.00)**
-----
Total distributions (0.02)
-----
Net asset value,
end of period .... $12.31
=====
Total return ....... 23.32%
Net assets, end of
period (in
millions) ........ $2
Ratio of expenses to
average net assets 2.89%***
Ratio of net investment
income to average
net assets ....... 0.69%***
Portfolio turnover
rate ............. 21.65%
*Commencement of operations.
**A capital gain of $0.0033 was paid to shareholders during this
period.
***Annualized.
See notes to financial statements.
<PAGE>
UNITED SMALL CAP FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
For the
period
from
10/4/99*
through
12/31/99
-------
Net asset value,
beginning of period $10.00
-----
Income from investment
operations:
Net investment income 0.05
Net realized and
unrealized gain
on investments .. 2.32
-----
Total from investment
operations ....... 2.37
-----
Less distributions:
From net investment
income .......... (0.05)
From capital gains (0.00)**
-----
Total distributions (0.05)
-----
Net asset value,
end of period .... $12.32
=====
Total return ....... 23.74%
Net assets, end of
period (in
millions) ........ $3
Ratio of expenses to
average net assets 1.37%***
Ratio of net investment
income to average
net assets ....... 2.23%***
Portfolio turnover
rate ............. 21.65%
*Commencement of operations.
**A capital gain of $0.0033 was paid to shareholders during this
period.
***Annualized.
See notes to financial statements.
<PAGE>
UNITED SMALL CAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 -- Significant Accounting Policies
United Small Cap Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
Its investment objective is to seek growth of capital. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements. The policies are in conformity
with generally accepted accounting principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a pricing service or dealer in bonds.
Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Stocks which are traded over-the-counter are
priced using the Nasdaq Stock Market, which provides information on bid and
asked prices quoted by major dealers in such stocks. Short-term debt
securities are valued at amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the Internal
Revenue Code), premiums on the purchase of bonds and post-1984 market
discount are amortized for both financial and tax reporting purposes.
Dividend income is recorded on the ex-dividend date. Interest income is
recorded on the accrual basis. See Note 4 -- Investment Securities
Transactions.
C. Foreign currency translations -- All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars daily. Purchases and
sales of investment securities and accruals of income and expenses are
translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates. The
Fund combines fluctuations from currency exchange rates and fluctuations in
market value when computing net realized and unrealized gain or loss from
investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of its
taxable income and capital gains to its shareholders and otherwise qualify
as a regulated investment company under Subchapter M of the Internal
Revenue Code. In addition, the Fund intends to pay distributions as
required to avoid imposition of excise tax. Accordingly, provision has not
been made for Federal income taxes.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the business day following record date. Net
investment income dividends and capital gains distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are due to differing
treatments for items such as deferral of wash sales and post-October
losses, foreign currency transactions, net operating losses and expiring
capital loss carryovers.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Organization
The Fund, a Maryland corporation, was organized on June 3, 1999, and was
inactive (except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and the registration
of its shares under the Securities Act of 1933) until October 4, 1999 (the date
of the initial public offering).
On September 6, 1999, Waddell & Reed, Inc. ("W&R") purchased for
investment 10,000 Class A shares of the Fund at their net asset value of $10.00
per share.
Prepaid registration expenses in the amount of $51,035 were paid by the
Fund and are being amortized over the twelve months following the initial public
offering.
NOTE 3 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee to Waddell & Reed Investment Management Company
(``WRIMCO''), the Fund's investment manager and a wholly owned subsidiary of
W&R, for investment management services. The fee is computed daily based on the
net asset value at the close of business. The fee is payable by the Fund at the
annual rates of: 0.85% of net assets up to $1 billion, 0.83% of net assets over
$1 billion and up to $2 billion, 0.80% of net assets over $2 billion and up to
$3 billion, and 0.76% of net assets over $3 billion. However, WRIMCO has agreed
to waive its management fee on any day that the Fund's net assets are less than
$25 million, subject to its right to change or modify this waiver. The Fund
accrues and pays this fee daily.
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
For Class A, Class B and Class C shares, the Fund pays WARSCO a monthly per
account charge for transfer agency and dividend disbursement services of $1.3125
for each shareholder account which was in existence at any time during the prior
month, plus $0.30 for each account on which a dividend or distribution of cash
or shares had a record date in that month. With respect to Class Y shares, the
Fund pays WARSCO a monthly fee at an annual rate of .15% of the average daily
net assets of the class for the preceding month. The Fund also reimburses W&R
and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross sales
commissions for Class A shares (which are not an expense of the Fund) of
$870,416. With respect to Class A, Class B and Class C shares, W&R paid sales
commissions of $649,466 and all expenses in connection with the sale of Fund
shares, except for registration fees and related expenses.
A contingent deferred sales charge (``CDSC'') may be assessed against a
shareholder's redemption amount of Class B and Class C shares and is paid to
W&R. The purpose of the deferred sales charge is to compensate W&R for the
costs incurred by W&R in connection with the sale of Fund shares.
With respect to Class B shares, the amount of the CDSC will be the
following percent of the total amount invested during a calendar year to acquire
the shares or the value of the shares redeemed, whichever is less. Redemption
at any time during the first calendar year of investment, 5%; the second
calendar year, 4%; the third calendar year, 3%; the fourth calendar year, 3%;
the fifth calendar year, 2%; the sixth calendar year, 1% and thereafter, 0%.
If Class C shares are sold within 12 months of buying these shares, a 1%
CDSC will be imposed.
The deferred sales charge will not be imposed on shares representing
payment of dividends or distributions or on amounts which represent an increase
in the value of the shareholder's account resulting from capital appreciation
above the amount paid for shares purchased during the deferred sales charge
period. During the period ended December 31, 1999, W&R received $750 and $412
in deferred sales charges from Class B and Class C shares, respectively.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's average annual net assets. The fee is to be paid to
reimburse W&R for amounts it expends in connection with the distribution of the
Class A shares and/or provision of personal services to Fund shareholders and/or
maintenance of shareholder accounts.
Under the Distribution and Service Plan adopted by the Fund for Class B and
Class C shares, respectively, the Fund may pay W&R, on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate W&R for providing services to shareholders of that class and/or
maintaining shareholder accounts for that class and a distribution fee of up to
0.75% of the average daily net assets of the class to compensate W&R for
distributing the shares of that class. The Class B Plan and the Class C Plan
each permit W&R to receive compensation, through the distribution and service
fee, respectively, for its distribution activities for that class, which are
similar to the distribution activities described with respect to the Class A
Plan, and for its activities in providing personal services to shareholders of
that class and/or maintaining shareholder accounts of that class, which are
similar to the corresponding activities for which it is entitled to compensation
under the Class A Plan.
The Fund paid no Directors' fees during this period.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
NOTE 4 -- Investment Securities Transactions
Purchases of investment securities, other than U.S. Government obligations
and short-term securities, aggregated $32,950,855 while proceeds from maturities
and sales aggregated $4,876,046. Purchases of short-term and U.S. Government
obligations aggregated $725,378,312 while proceeds from maturities and sales
aggregated $667,958,000.
For Federal income tax purposes, cost of investments owned at December 31,
1999 was $88,254,681, resulting in net unrealized appreciation of $8,676,595, of
which $9,440,497 related to appreciated securities and $763,902 related to
depreciated securities.
NOTE 5 -- Multiclass Operations
The Fund is authorized to offer four classes of shares, Class A, Class B,
Class C and Class Y, each of which have equal rights as to assets and voting
privileges. Class Y shares are not subject to a sales charge on purchases, are
not subject to a Rule 12b-1 Distribution and Service Plan and are subject to a
separate transfer agency and dividend disbursement services fee structure. A
comprehensive discussion of the terms under which shares of each class are
offered is contained in the Prospectus and the Statement of Additional
Information for the Fund.
Income, non-class specific expenses, and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of their
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
Transactions in capital stock are summarized below. Dollar amounts are in
thousands.
For the
period from
October 4, 1999
through
December 31,
1999
------------
Shares issued from sale
of shares:
Class A ............ 7,037,606
Class B ............. 595,492
Class C ............. 191,986
Class Y ............ 320,206
Shares issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ............ 14,912
Class B ............. 817
Class C ............. 269
Class Y ............ 1,325
Shares redeemed:
Class A ............ (129,132)
Class B ............. (8,607)
Class C ............. (9,908)
Class Y ............ (90,143)
---------
Increase in
outstanding capital
shares 7,924,823
=========
Value issued from sale
of shares:
Class A ............ $77,062
Class B ............. 6,571
Class C ............. 2,104
Class Y ............ 3,301
Value issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ............ 175
Class B ............. 9
Class C ............. 3
Class Y ............ 15
Value redeemed:
Class A ............ (1,505)
Class B ............. (100)
Class C ............. (115)
Class Y ............ (1,110)
-------
Increase in
outstanding capital $86,410
=======
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Small Cap Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United Small Cap Fund, Inc. (the "Fund"), as of
December 31, 1999, and the related statement of operations for the period
October 4, 1999 (commencement of operations) through December 31, 1999, the
statement of changes in net assets for the period October 4, 1999 through
December 31, 1999, and the financial highlights for the period October 4, 1999
through December 31, 1999. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our 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 and the financial highlights
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of United Small Cap
Fund, Inc. as of December 31, 1999, the results of its operations for the period
then ended, the changes in its net assets for the period then ended, and the
financial highlights for the period then ended, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 4, 2000
<PAGE>
To all traditional IRA Planholders:
As required by law, income tax will automatically be withheld from any
distribution or withdrawal from a traditional IRA unless you make a written
election not to have taxes withheld. The election may be made by submitting
forms provided by Waddell & Reed, Inc. which can be obtained from your Waddell &
Reed representative or by submitting Internal Revenue Service Form W-4P. Once
made, an election can be revoked by providing written notice to Waddell & Reed,
Inc. If you elect not to have tax withheld you may be required to make payments
of estimated tax. Penalties may be imposed by the IRS if withholding and
estimated tax payments are not adequate.
<PAGE>
DIRECTORS
Keith A. Tucker, Overland Park, Kansas, Chairman of the Board
James M. Concannon, Topeka, Kansas
John A. Dillingham, Kansas City, Missouri
David P. Gardner, San Mateo, California
Linda K. Graves, Topeka, Kansas
Joseph Harroz, Jr., Norman, Oklahoma
John F. Hayes, Hutchinson, Kansas
Robert L. Hechler, Overland Park, Kansas
Henry J. Herrmann, Overland Park, Kansas
Glendon E. Johnson, Miami, Florida
William T. Morgan, Coronado, California
Ronald C. Reimer, Mission Hills, Kansas
Frank J. Ross, Jr., Kansas City, Missouri
Eleanor B. Schwartz, Kansas City, Missouri
Frederick Vogel III, Milwaukee, Wisconsin
OFFICERS
Robert L. Hechler, President
Henry J. Herrmann, Vice President
Theodore W. Howard, Vice President and Treasurer
Kristen A. Richards, Vice President and Secretary
Grant P. Sarris, Vice President
Daniel C. Schulte, Vice President
Mark G. Seferovich, Vice President
<PAGE>
THE UNITED GROUP OF MUTUAL FUNDS
United Accumulative Fund
United Asset Strategy Fund, Inc.
United Bond Fund
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Government Securities Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United Income Fund
United International Growth Fund, Inc.
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United New Concepts Fund, Inc.
United Retirement Shares, Inc.
United Science and Technology Fund
United Small Cap Fund, Inc.
United Vanguard Fund, Inc.
- ------------------------------------
FOR MORE INFORMATION:
Contact your representative, or your
local office as listed on your
Account Statement, or contact:
WADDELL & REED
CUSTOMER SERVICE
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
(800) 366-5465
Our INTERNET address is:
http://www.waddell.com
NUR1018SA(12-99)
printed on recycled paper
