File No. 811-2552
File No. 2-21867
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 32
UNITED FUNDS, INC.
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(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
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Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
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(Name and Address of Agent for Service)
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DECLARATION REQUIRED BY RULE 24f-2 (a) (1)
The issuer has registered an indefinite amount of its securities under the
Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for the Registrant's
fiscal year ended December 31, 1999 was filed on March 28, 2000.
<PAGE>
An Overview of the Funds
United Accumulative Fund
Goals
United Accumulative Fund seeks capital growth, with current income a secondary
goal.
Principal Strategies
United Accumulative Fund invests primarily in common stocks of largely
capitalized U.S. and foreign companies. The Fund may invest in companies of any
size and of any industry in order to achieve its primary goal of growth.
WRIMCO attempts to select securities with appreciation possibilities by looking
at many factors, including:
o stability and predictability of earnings growth;
o acceleration of earnings and/or revenue;
o improvement in profitability; and
o potential turnaround opportunities.
In general, in determining whether to sell a stock, WRIMCO will use the same
type of analysis that it uses in buying stocks in order to determine whether the
security no longer offers significant growth potential. WRIMCO may also sell a
security to take advantage of more attractive investment opportunities or to
raise cash.
Principal Risks of Investing in the Fund
Because United Accumulative Fund owns different types of investments, a variety
of factors can affect its investment performance, such as:
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
o the mix of securities in the Fund's portfolio, particularly the
relative weightings in, and exposure to, different sectors of the
economy;
o the earnings performance, credit quality and other conditions of
the companies whose securities the Fund holds;
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o the skill of Waddell & Reed Investment Management Company ("WRIMCO"), the
Fund's investment manager, in evaluating and selecting securities for the
Fund.
Market risk for small to medium sized companies may be greater than the market
risk for large companies. Smaller companies are more likely to have limited
financial resources and inexperienced management. As well, stock of smaller
companies may experience volatile trading and price fluctuations. An investment
in foreign securities presents additional risks such as currency fluctuations
and political or economic conditions affecting the foreign country.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
United Accumulative Fund is designed for investors seeking long-term investment
growth not by seeking to maximize the upside potential of the market but rather
by seeking to reduce potential market risk in a declining market. You should
consider whether the Fund fits your particular investment objectives.
3
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United Bond Fund
Goal
United Bond Fund seeks a reasonable return with more emphasis on preservation of
capital.
Principal Strategies
United Bond Fund seeks to achieve its goal by investing primarily in domestic
debt securities usually of investment grade (rated BBB and higher by Standard &
Poor's ("S&P") and Baa and higher by Moody's Investors Service, Inc. ("MIS")).
The Fund has no limitations regarding the maturity duration or dollar weighted
average of its holdings. In selecting the debt securities for the Fund's
portfolio, WRIMCO considers yield and relative safety and, in the case of
convertible securities, the possibility of capital growth. The Fund can invest
in securities of companies of any size.
In selecting debt securities for the Fund, WRIMCO may look at many factors.
These include the issuer's past, present and estimated future:
o financial strength;
o cash flow;
o management;
o borrowing requirements; and
o responsiveness to changes in interest rates and business
conditions.
As well, WRIMCO will consider the maturity of the obligation and the size or
nature of the bond issue.
In general, in determining whether to sell a security, WRIMCO will use the same
type of analysis that it uses in buying securities. For example, WRIMCO may sell
a holding if the issuer's financial strength weakens and/or the yield and
relative safety of the security declines. WRIMCO may also sell a security to
take advantage of more attractive investment opportunities or to raise cash.
Principal Risks of Investing in the Fund
Because United Bond Fund primarily owns different types of debt securities, a
variety of factors can affect its investment performance, such as:
o an increase in interest rates, which may cause the value of the Fund's
fixed-income securities, especially bonds with longer maturities, to decline;
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o prepayment of higher-yielding bonds held by the Fund;
o the credit quality, earnings performance and other conditions of
the companies whose securities the Fund holds;
o changes in the maturities of bonds owned by the Fund;
o adverse bond and stock market conditions sometimes in response to general
economic and industry news that may cause the Fund's holdings to fall as
part of a broad market decline;
o WRIMCO's skill in evaluating and managing the interest rate and credit risks
of the Fund's portfolio.
As well, market risk for small or medium sized companies may be greater than the
market risk for large companies. Smaller companies are more likely to have
limited financial resources and inexperienced management. As well, stock of
smaller companies may experience volatile trading and price fluctuations.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
United Bond Fund is designed for investors who primarily seek current income
while also seeking to preserve investment principal. You should consider whether
the Fund fits your particular investment objectives.
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United Income Fund
Goals
United Income Fund seeks, as a primary goal, the maintenance of current income,
subject to market conditions. As a secondary goal, the Fund seeks capital
growth.
Principal Strategies
United Income Fund seeks to achieve its primary goal by investing in the common
stocks of large U.S. and foreign companies. WRIMCO looks for securities that
have a record of paying regular dividends on common stock. In order to achieve
its secondary goal of growth, the Fund invests in securities that have the
potential for capital appreciation or that WRIMCO expects to resist market
decline. The Fund may invest in securities of any size company.
WRIMCO attempts to select securities with income and growth possibilities by
looking at many factors including the company's:
o dividend payment history;
o profitability record;
o history of improving sales and profits;
o management;
o leadership position in its industry; and
o stock price value.
In general, in determining whether to sell a stock, WRIMCO will use the same
type of analysis that it uses in buying stocks in order to determine whether the
security no longer offers significant growth potential. WRIMCO may also sell a
security to take advantage of more attractive investment opportunities or to
raise cash.
Principal Risks of Investing in the Fund
Because United Income Fund owns different types of investments, a variety of
factors can affect its investment performance, such as:
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
o the earnings performance, credit quality and other conditions of
the companies whose securities the Fund holds; and
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o WRIMCO's skill in evaluating and selecting securities for the Fund.
Market risk for small- or medium-sized companies may be greater than the market
risk for large companies. Smaller companies are more likely to have limited
financial resources and inexperienced management. As well, stock of smaller
companies may experience volatile trading and price fluctuations.
Also, investments in foreign securities present additional risks such as
currency fluctuations and political or economic conditions affecting the foreign
country.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
United Income Fund is designed for investors who seek dividend income with
potential for capital growth. You should consider whether the Fund fits your
investment objectives.
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United Science and Technology Fund
Goal
United Science and Technology Fund seeks long-term capital growth.
Principal Strategies
United Science and Technology Fund seeks to achieve its goal of growth by
concentrating its investments primarily in the common stock of science and
technology securities of U.S. and foreign companies. Science and technology
securities are securities of companies whose products, processes or services, in
WRIMCO's opinion, are being or are expected to be significantly benefited by the
use or commercial application of scientific or technological developments or
discoveries. The Fund may invest in companies of any size.
WRIMCO typically emphasizes growth potential in selecting stocks. A stock has
growth potential if, in WRIMCO's opinion, the earnings of the company are likely
to grow faster than the economy.
In general, in determining whether to sell a stock, WRIMCO will use the same
type of analysis that it uses in buying stocks in order to determine whether the
security no longer offers significant growth potential. WRIMCO may also sell a
security to take advantage of more attractive investment opportunities or to
raise cash.
Principal Risks of Investing in the Fund
Because United Science and Technology Fund owns different types of investments,
a variety of factors can affect its investment performance, such as:
o the mix of securities in the Fund's portfolio, particularly the relative
weightings in, and exposure to, different sectors of the science and
technology industries;
o rapid obsolescence of products or processes of companies in which the Fund
invests;
o government regulation in the science and technology industry;
o the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline; and
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o WRIMCO's skill in evaluating and selecting securities for the Fund.
Market risk for small to medium sized companies may be greater than that for
large companies. Smaller companies are more likely to have limited financial
resources and inexperienced management. As well, stock of smaller companies may
experience volatile trading and price fluctuations.
Investments in foreign securities presents additional risks such as currency
fluctuations and political or economic conditions affecting the foreign country.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
United Science and Technology Fund is designed for investors who seek long-term
capital growth by investing in an actively managed portfolio concentrating in
science and technology securities. This Fund is not suitable for all investors.
You should consider whether the Fund fits your investment objectives.
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The Investment Principles of the Funds
Investment Goals, Principal Strategies and Other Investments
United Accumulative Fund
The primary goal of United Accumulative Fund is capital growth. As a secondary
goal, the Fund seeks current income. The Fund seeks to achieve these goals by
investing primarily in a diversified portfolio of common stocks, or securities
convertible into common stocks, of U.S. and foreign companies, the risks of
which are, in WRIMCO's opinion, consistent with the Fund's goals. Generally, the
Fund invests in stocks with large market capitalization that, in WRIMCO's
opinion, have a slightly higher market volatility and slightly higher growth
rates than other stocks. There is no guarantee that the Fund will achieve its
goals.
As a temporary defensive measure, at times when WRIMCO believes that common
stocks do not offer a good investment opportunity, the Fund may hold up to all
of its assets in cash, debt securities (typically, of investment grade),
preferred stock, or common stocks that WRIMCO chooses because the securities are
less volatile rather than for their growth potential. By taking a temporary
defensive position in any of these ways, the Fund may not achieve its investment
objectives.
United Bond Fund
The goal of United Bond Fund is a reasonable return with more emphasis on
preservation of capital. The Fund seeks to achieve this goal by investing
primarily in a diversified portfolio of debt securities of any quality, and to a
lesser extent, in non-investment grade securities, convertible securities and
debt securities with warrants attached. There is no guarantee that the Fund will
achieve its goal.
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The Fund limits its acquisition of securities so that at least 90% of its total
assets will consist of debt securities. These debt securities primarily include
corporate bonds, mostly of investment grade, and securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities.
The Fund may invest in junk bonds (rated below BBB by S&P or below Baa by MIS),
which are more susceptible to the risk of non-payment or default, and their
prices may be more volatile than higher-rated bonds.
Also, the Fund can invest in foreign securities, which present additional risks
such as currency fluctuations and political or economic conditions affecting the
foreign country.
When WRIMCO believes that a defensive position is desirable, due to present or
anticipated market or economic conditions, WRIMCO may take a number of actions.
The Fund may:
o sell longer-term bonds and buy shorter-term bonds or money market
instruments with the sales proceeds;
o buy bonds with put options or exercise put options on bonds held;
and
o buy money market instruments.
By taking a temporary defensive position, the Fund may not achieve its
investment objective.
United Income Fund
United Income Fund's primary goal is to maintain current income subject to
market conditions. As a secondary goal, the Fund seeks capital growth. The Fund
seeks to achieve its goals by
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investing, during normal market conditions, primarily in a diversified portfolio
of income-producing securities, typically the stocks of large, high-quality U.S.
companies that are well known and have been consistently profitable. There is no
guarantee that the Fund will achieve its goals.
When WRIMCO views stocks with high yields as less attractive than other common
stocks, the Fund may hold lower-yielding common stocks because of their
prospects for appreciation. When WRIMCO believes that the return on debt
securities and preferred stocks is more attractive than the return on common
stocks, or that a temporary defensive position is desirable, the Fund may seek
to achieve its goals by investing up to all of its assets in debt securities
(typically, investment grade) and preferred stocks. However, by taking a
temporary defensive position, the Fund may not achieve its investment
objectives.
United Science and Technology Fund
The goal of United Science and Technology Fund is long-term capital growth. The
Fund seeks to achieve this goal by investing primarily in science and technology
securities. Science and technology securities are securities of companies whose
products, processes or services, in WRIMCO's opinion, are being or are expected
to be significantly benefited by the use or commercial application of scientific
or technological discoveries. There is no guarantee that the Fund will achieve
its goal.
The Fund invests in such areas as:
o aerospace and defense electronics;
o biotechnology;
o business machines;
o cable and broadband access;
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o communications and electronic equipment;
o computer software and services;
o computer systems;
o electronics;
o electronic media;
o internet and internet-related services;
o medical devices and drugs;
o medical and hospital supplies and services; and
o office equipment and supplies.
The Fund primarily owns common stock, however, it may also invest to a lesser
extent in preferred stock, debt securities and convertible securities.
The Fund may invest a limited amount of its assets in foreign securities.
Investments in foreign securities present additional risks such as currency
fluctuations and political or economic conditions affecting the foreign country.
Under normal economic and market conditions, the Fund will not invest more than
20% of its total assets in securities other than science or technology
securities. At times, as a temporary defensive measure, the Fund may invest up
to all of its assets in U.S. Government securities or other debt securities,
mostly of investment grade. By taking a temporary defensive position, the Fund
may not achieve its investment objective.
All Funds
Each Fund may also invest in and use other types of instruments in seeking to
achieve its goal(s). For example, each Fund is permitted to invest in options,
futures contracts, asset-backed securities and other derivative instruments if
it is permitted to invest in the type of asset by which the return on, or value
of,
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the derivative is measured. At this time, each Fund has limited exposure to
derivative investments. You will find more information about each Fund's
permitted investments and strategies, as well as the restrictions that apply to
them, in the Statement of Additional Information ("SAI").
Risk Considerations of Principal Strategies
and Other Investments
Risks exist in any investment. Each Fund is subject to market risk, financial
risk and, for United Bond Fund, prepayment risk.
o Market risk is the possibility of a change in the price of the security
because of market factors, including changes in interest rates. Bonds with
longer maturities are more interest-rate sensitive. For example, if interest
rates increase, the value of a bond with a longer maturity is more likely to
decrease. Because of market risk, the share price of each Fund will likely
change as well.
o Financial risk is based on the financial situation of the issuer of the
security. To the extent a Fund invests in debt securities, the Fund's
financial risk depends on the credit quality of the underlying securities in
which it invests. For an equity investment, a Fund's financial risk may
depend, for example, on the earnings performance of the company issuing the
stock.
o Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid
before its expected maturity date.
Certain types of each Fund's authorized investments and strategies (such as
foreign securities, junk bonds and derivative instruments) involve special
risks. Depending on how much a Fund invests or uses these strategies, these
special risks may become significant. For example, foreign investments may
subject a Fund to restrictions on receiving the investment proceeds from a
foreign country, foreign taxes, and potential difficulties in enforcing
contractual obligations, as well as fluctuations in foreign currency values and
other developments that may adversely affect a foreign country. Junk bonds pose
a greater risk of nonpayment of interest or principal than higher-rated bonds.
Derivative instruments may expose a Fund to greater volatility
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than an investment in a more traditional stock, bond or other security.
Because each Fund owns different types of investments, its performance will be
affected by a variety of factors. The value of a Fund's investments and the
income it generates will vary from day to day, generally reflecting changes in
interest rates, market conditions and other company and economic news.
Performance will also depend on WRIMCO's skill in selecting investments.
United Accumulative Fund may actively trade securities in seeking to achieve its
goal. Doing so may increase transaction costs (which may reduce performance) and
increase distributions paid by the Fund, which may increase your taxable income.
Year 2000 and Euro Issues
Like other mutual funds, financial institutions and business organizations and
individuals around the world, each Fund could be adversely affected if the
computer systems used by WRIMCO and the Fund's other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. WRIMCO is taking steps that it believes are reasonably designed
to address Year 2000 computer-related problems with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by a Fund's other major service providers. Although there can be no
assurances, WRIMCO believes that these steps will be sufficient to avoid any
adverse impact on any of the Funds. Similarly, the companies and other issuers
in which a Fund invests could be adversely affected by Year 2000
computer-related problems, and there can be no assurance that the steps taken,
if any, by these issuers will be sufficient to avoid any adverse impact on a
Fund.
Each Fund could also be adversely affected by the conversion of certain European
currencies into the Euro. This
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conversion, which is under way, is scheduled to be completed in 2002. However,
problems with the conversion process and delays could increase volatility in
world capital markets and affect European capital markets in particular.
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Your Account
Choosing a Share Class
This Prospectus offers four classes of shares for each Fund: Class A, Class B,
Class C and Class Y. Each class has its own sales charge, if any, and expense
structure. The decision as to which class of shares is best suited to your needs
depends on a number of factors that you should discuss with your financial
advisor. Some factors to consider are how much you plan to invest and how long
you plan to hold your investment. For example, if you are investing a
substantial amount and plan to hold your shares for a long time, Class A shares
may be the most appropriate for you. If you are investing a lesser amount, you
may want to consider Class B shares (if investing for at least seven calendar
years) or Class C shares (if investing for less than seven calendar years).
Class Y shares are designed for institutional investors and others investing
through certain intermediaries, as described below. Since your objectives may
change over time, you may want to consider another class when you buy additional
Fund shares. All of your future investments in a Fund will be made in the class
you select when you open your account, unless you inform the Fund otherwise, in
writing, when you make a future investment.
General Comparison of Class A, Class B and Class C Shares
Class A Class B Class C
o Initial sales charge o No initial sales o No initial sales
charge charge
o No deferred sales o Deferred sales charge o A 1% deferred sales
charge on shares you sell charge on shares
within six calendar you sell within
years twelve months
o Maximum distribution o Maximum distribution o Maximum distribution
and service (12b-1) and service (12b-1) and service (12b-1)
fees of 0.25% fees of 1.00% fees of 1.00%
o For an investment o Converts to Class A o Does not convert to
of $2,000,000 or shares at the end of Class A shares, so
more, Waddell & Reed the seventh calendar annual expenses do
financial advisors year following the not decrease
will recommend year of purchase,
purchase of Class A thus reducing future
shares due to no annual expenses
sales charge and
lower annual expenses
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o For an investment of
$300,000 or more, Waddell
& Reed financial advisors
often may recommend purchase
of Class A shares due to a
reduced sales charge and
lower annual expenses
Each Fund has adopted a Distribution and Service Plan ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, for each of its
Class A, Class B and Class C shares. Under the Class A Plan, each Fund may pay
Waddell & Reed, Inc. a fee of up to 0.25%, on an annual basis, of the average
daily net assets of the Class A shares. This fee is to reimburse Waddell & Reed,
Inc. for the amounts it spends for distributing the Fund's Class A shares,
providing service to Class A shareholders and/or maintaining Class A shareholder
accounts. Under the Class B Plan and the Class C Plan, each Fund may pay Waddell
& Reed, Inc., on an annual basis, a service fee of up to 0.25% of the average
daily net assets of the class to compensate Waddell & Reed, Inc. for providing
service to shareholders of that class and/or maintaining shareholder accounts
for that class and a distribution fee of up to 0.75% of the average daily net
assets of the class to compensate Waddell & Reed, Inc. for distributing shares
of that class. Because a class's fees are paid out of the assets of that class
on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Class A shares are subject to a sales charge when you buy them, based on the
amount of your investment, according to the table below. Class A shares pay an
annual 12b-1 fee of up to 0.25% of average Class A net assets. The ongoing
expenses of this class are lower than those for Class B or Class C shares and
higher than those for Class Y shares.
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<TABLE>
<CAPTION>
Sales
Sales Charge
Charge as
as Approx.
Percent Percent
of of
Size of Offering Amount
Purchase Price Invested
- -------- -------- -------
<S> <C> <C>
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
</TABLE>
Sales Charge Reductions and Waivers
Lower sales charges are available by:
o Combining additional purchases of Class A shares of any of the funds in the
United Group, except shares of United Cash Management, Inc., unless acquired
by exchange for Class A shares on which a sales charge was paid (or as a
dividend or distribution on such acquired shares), with the net asset value
("NAV") of Class A shares already held ("Rights of Accumulation");
o Grouping all purchases of Class A shares, except shares of United Cash
Management, Inc., made during a thirteen-month
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period ("Letter of Intent"); and
o Grouping purchases by certain related persons.
Additional information and applicable forms are available from Waddell & Reed
financial advisors.
Waivers for Certain Investors
Class A shares may be purchased at NAV by:
o The Directors and officers of the Corporation, employees of Waddell & Reed,
Inc., employees of their affiliates, financial advisors of Waddell & Reed,
Inc. and the spouse, children, parents, children's spouses and spouse's
parents of each;
o Certain retirement plans and certain trusts for these persons; and
o A 401(k) plan or a 457 plan having 100 or more eligible employees.
You will find more information in the SAI about sales charge reductions and
waivers.
Contingent Deferred Sales Charge. A contingent deferred sales charge ("CDSC")
may be assessed against your redemption amount of Class B or Class C shares and
paid to Waddell & Reed, Inc. (the "Distributor"), as further described below.
The purpose of the CDSC is to compensate the Distributor for the costs incurred
by it in connection with the sale of the Fund's Class B or Class C shares. The
CDSC will not be imposed on Class B or Class C shares representing payment of
dividends or distributions or on amounts which represent an increase in the
value of a shareholder's account resulting from capital appreciation above the
amount paid for Class B or Class C shares purchased during the CDSC period. The
date of redemption is measured, in calendar years, from the first calendar year
of purchase. For example, if a shareholder opens an account on November 1, 1999,
then redeems all shares on March 1, 2000, the shareholder would pay a CDSC of
4%, the rate applicable to redemptions made within the second calendar year of
purchase. Please note that the CDSC is not based on the length of time that
shares are held. Instead, the CDSC is based on the calendar year of purchase and
the calendar year of redemption. The CDSC is applied to the lesser of amount
invested or redemption value.
To keep your CDSC as low as possible, each time you place a
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request to redeem shares, the Fund assumes that a redemption is made first of
shares not subject to a deferred sales charge (including shares which represent
appreciation on shares held, reinvested dividends and distributions), and then
of shares that represent the lowest sales charge.
Unless instructed otherwise, a Fund, when requested to redeem a specific dollar
amount, will redeem additional Class B or Class C shares equal in value to the
CDSC. For example, should you request a $1,000 redemption and the applicable
CDSC is $27, the Fund will redeem shares having an aggregate NAV of $1,027,
absent different instructions.
Class B shares are not subject to a sales charge when you buy them. However, you
may pay a CDSC if you sell your Class B shares within six calendar years of
their purchase, based on the table below. Class B shares pay an annual 12b-1
service fee of up to 0.25% of average net assets and a distribution fee of up to
0.75% of average net assets. Over time, these fees will increase the cost of
your investment and may cost you more than if you had bought Class A shares.
Class B shares of a Fund will automatically convert to Class A shares at the end
of the seventh calendar year following the year of purchase. The Class A shares
have lower on going expenses.
The Fund will redeem your Class B shares at their NAV next calculated after
receipt of a written request for redemption in good order, subject to the CDSC
discussed below.
<TABLE>
<CAPTION>
Deferred
Date of Sales
Redemption Charge
<S> <C>
anytime within 1st calendar year 5%
anytime within 2nd calendar year 4%
anytime within 3rd calendar year 3%
anytime within 4th calendar year 3%
anytime within 5th calendar year 2%
anytime within 6th calendar year 1%
after 6th calendar year 0%
</TABLE>
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All Class B investments made in a Fund during a calendar year are deemed a
single investment during that calendar year for purposes of calculating the
CDSC.
Class C shares are not subject to a sales charge when you buy them, but if you
sell your Class C shares within twelve months of buying them, you will pay a 1%
CDSC. For purposes of the CDSC, purchases of Class C shares within a month will
be considered as being purchased on the first day of the month. Class C shares
pay an annual 12b-1 service fee of up to 0.25% of average net assets and a
distribution fee of up to 0.75% of average net assets. Over time, these fees
will increase the cost of your investment and may cost you more than if you had
bought Class A shares. Class C shares do not convert to any other class.
For Class C shares, the CDSC will be applied to the lesser of amount invested or
redemption value of shares that have been held for twelve months or less.
The CDSC will not apply in the following circumstances:
o redemptions of Class B or Class C shares requested within one year of the
shareholder's death or disability, provided the Fund is notified of the death
or disability at the time of the request and furnished proof of such event
satisfactory to the Distributor.
o redemptions of Class B or Class C shares made to satisfy required
minimum distributions after age 70 1/2 from a qualified retirement
plan, a required minimum distribution from an individual retirement
account, Keogh plan or custodial account under section 403(b)(7) of
the Internal Revenue Code of 1986, as amended ("Code"), a tax-free
return of an excess contribution, or that otherwise results from the
death or disability of the employee, as well as in connection with
redemptions by any tax-exempt employee benefit plan for which, as a
result of a subsequent law or legislation, the continuation of its
investment would be improper.
o redemptions of Class B or Class C shares made pursuant to a shareholder's
participation in any systematic withdrawal service adopted for a Fund. (The
service and this exclusion from the CDSC do not apply to a one-time
withdrawal.)
o redemptions of which the proceeds are reinvested in Class B or Class C shares
(must be reinvested in the same class as that which was redeemed) of a Fund
within thirty days after such redemption.
22
<PAGE>
o the exercise of certain exchange privileges.
o redemptions effected pursuant to a Fund's right to liquidate a shareholder's
Class B or Class C shares if the aggregate NAV of those shares is less than
$500.
o redemptions effected by another registered investment company by virtue of a
merger or other reorganization with a Fund or by a former shareholder of such
investment company of Class B or Class C shares of a Fund acquired pursuant
to such reorganization.
These exceptions may be modified or eliminated by a Fund at any time without
prior notice to shareholders, except with respect to redemptions effected
pursuant to the Fund's right to liquidate a shareholder's shares, which requires
certain notices.
Class Y shares are not subject to a sales charge or annual 12b-1 fees.
Class Y shares are only available for purchase by:
o participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401 of the Code, including 401(k)
plans, when the plan has 100 or more eligible employees and holds the shares
in an omnibus account on the Fund's records;
o banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an omnibus
account on the Fund's records;
o government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more; and
o certain retirement plans and trusts for employees and financial
advisors of Waddell & Reed, Inc. and its affiliates.
23
<PAGE>
The different ways to set up (register) your account are listed below.
Ways to Set Up Your Account
- -------------------------------------------------
Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
- -------------------------------------------------
24
<PAGE>
Business or Organization
For investment needs of corporations, associations, partnerships,
institutions or other groups
- -------------------------------------------------
Retirement Plans
To shelter your retirement savings from taxes
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts (other
than Roth IRAs and Education IRAs) may be tax-deductible.
o Individual Retirement Accounts (IRAs) allow an individual under age 70
1/2, with earned income, to invest up to $2,000 per tax year. The maximum for
an investor and his or her spouse is $4,000 ($2,000 for each spouse) or, if
less, the couple's combined earned income for the taxable year.
o IRA Rollovers retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
o Roth IRAs allow certain individuals to make nondeductible contributions up to
$2,000 per year. Withdrawals of earnings may be tax free if the account is at
least five years old and certain other requirements are met.
o Education IRAs are established for the benefit of a minor, with nondeductible
contributions, and permit tax-free withdrawals to pay the higher education
expenses of the beneficiary.
o Simplified Employee Pension Plans (SEP-IRAs) provide small business owners or
those with self-employed income (and their eligible employees) with many of
the same advantages as a Keogh Plan, but with fewer administrative
requirements.
o Savings Incentive Match Plans for Employees (SIMPLE Plans) can be established
by small employers to contribute to their employees' retirement accounts and
generally involve fewer administrative requirements than 401(k) or other
qualified plans.
o Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves of up to 25% of their annual earned income, with
a maximum of $30,000 per year.
o Pension and Profit-Sharing Plans, including 401(k) Plans, allow corporations
and nongovernmental tax-exempt organizations of all sizes and/or their
employees to contribute a percentage of the employees'
25
<PAGE>
wages or other amounts on a tax-deferred basis. These accounts need to be
established by the administrator or trustee of the plan.
o 403(b) Custodial Accounts are available to employees of public school systems
or certain types of charitable organizations.
o 457 Accounts allow employees of state and local governments and
certain charitable organizations to contribute a portion of their
compensation on a tax-deferred basis.
- -------------------------------------------------
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA").
- -------------------------------------------------
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.
- -------------------------------------------------
Buying Shares
You may buy shares of each of the Funds through Waddell & Reed, Inc. and its
financial advisors. To open your account you must complete and sign an
application. Your Waddell & Reed financial advisor can help you with any
questions you might have.
To purchase any class of shares by check, make your check payable to Waddell &
Reed, Inc. Mail the check, along with your completed application, to:
Waddell & Reed, Inc.
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
To purchase Class Y shares by wire, you must first obtain an account number by
calling 1-800-366-2520, then mail a completed application to Waddell & Reed,
Inc., P.O. Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to
913-236-5044.
26
<PAGE>
Instruct your bank to wire the amount you wish to invest, along
with the account number and registration, to UMB Bank, n.a., ABA Number
101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and Account
Number.
You may also buy Class Y shares of a Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements regarding the purchase of
Class Y shares.
The price to buy a Fund share is its offering price, which is calculated every
business day.
The offering price of a share (the price to buy one share of a particular class)
is the next NAV calculated per share of that class plus, for Class A shares, the
sales charge shown in the table above.
In the calculation of a Fund's NAV:
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
o Other investment assets for which market prices are unavailable are valued at
their fair value by or at the direction of the Board of Directors.
Each Fund is open for business each day the New York Stock Exchange (the "NYSE")
is open. The Funds normally calculate their NAVs as of the close of business of
the NYSE, normally 4 p.m. Eastern time, except that an option or futures
contract held by a Fund may be priced at the close of the regular session of any
other securities exchange on which that instrument is traded.
The Funds may invest in securities listed on foreign exchanges which may trade
on Saturdays or on U.S. national business holidays when the NYSE is closed.
Consequently, the NAV of Fund shares may be significantly affected on days when
a Fund does not price its shares and when you are not able to purchase or redeem
a Fund's shares. Similarly, if an event materially affecting the value of
foreign investments or foreign currency exchange rates occurs prior to the close
of business of the NYSE but after the time their values are otherwise
determined, such investments or exchange rates may be valued at their fair value
as determined in good faith by or under the direction of the Board of Directors.
27
<PAGE>
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
o The Funds do not issue certificates representing Class B, Class C or Class Y
shares.
o If you purchase Class Y shares of a Fund from certain
broker-dealers, banks or other authorized third parties, the Fund
will be deemed to have received your purchase order when that third
party (or its designee) has received your order. Your order will
receive the Class Y offering price next calculated after the order
has been received in proper form by the authorized third party (or
its designee). You should consult that firm to determine the time
by which it must receive your order for you to purchase shares of
the Fund at that day's price.
When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Funds reserve the right
to discontinue offering Fund shares for purchase.
28
<PAGE>
Minimum Investments
For Class A, Class B and Class C:
To Open an Account $500
For certain exchanges $100
For certain retirement accounts and accounts opened with Automatic Investment
Service $50
For certain retirement accounts and accounts opened through payroll
deductions for or by employees of WRIMCO, Waddell & Reed, Inc. and their
affiliates $25
To Add to an Account Any amount
For certain exchanges $100
For Automatic Investment Service $25
For Class Y:
To Open an Account
For a government entity or authority or for a corporation: $10 million
(within
first
twelve
months)
For other investors: Any amount
To Add to an Account Any amount
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed, Inc. Mail the
check to Waddell & Reed, Inc., along with:
o the detachable form that accompanies the confirmation of a prior
purchase or your year-to-date statement; or
29
<PAGE>
o a letter stating your account number, the account registration, the Fund and
the class of shares that you wish to purchase.
To add to your Class Y account by wire: Instruct your bank to wire the amount
you wish to invest, along with the account number and registration, to UMB Bank,
n.a., ABA Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer
Name and Account Number.
If you purchase Class Y shares from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
Selling Shares
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The redemption price (price to sell one share of a particular class of a Fund)
is the NAV per share of that Fund class, subject to any CDSC applicable to Class
B or Class C shares.
To sell shares by written request: Complete an Account Service Request form,
available from your Waddell & Reed financial advisor, or write a letter of
instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number, and the class, of shares to be
redeemed; and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:
Waddell & Reed Services Company
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed Services Company will send a check
to the address on the account.
30
<PAGE>
To sell Class Y shares by telephone or fax: If you have elected this method in
your application or by subsequent authorization, call 1-800-366-5465, or fax
your request to 913-236-5044, and give your instructions to redeem Class Y
shares and make payment by wire to your predesignated bank account or by check
to you at the address on the account.
When you place an order to sell shares, your shares will be sold at the next NAV
calculated, subject to any applicable CDSC, after receipt of a written request
for redemption in good order by Waddell & Reed Services Company at the address
listed above. Note the following:
o If more than one person owns the shares, each owner must sign the written
request.
31
<PAGE>
o If you hold a certificate, it must be properly endorsed and sent to the
Corporation.
o If you recently purchased the shares by check, a Fund may delay payment of
redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance that
the check has cleared and been honored. If you do not, payment of the
redemption proceeds on these shares will be delayed until the earlier of 10
days or the date the Fund can verify that your purchase check has cleared
and been honored.
o Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE
is restricted or as permitted by the Securities and Exchange Commission.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
32
<PAGE>
Special Requirements for Selling Shares
<TABLE>
<CAPTION>
Account Type Special Requirements
<S> <C>
Individual or Joint The written instructions must be
Tenant signed by all persons required to
sign for transactions, exactly as
their names appear on the account.
Sole Proprietorship The written instructions must be
signed by the individual owner of
the business.
UGMA, UTMA The custodian must sign the written
instructions indicating capacity as
custodian.
Retirement Account The written instructions must be
signed by a properly authorized
person.
Trust The trustee must sign the written
instructions indicating capacity as
trustee. If the trustee's name is
not in the account registration,
provide a currently certified copy
of the trust document.
Business or At least one person authorized by
Organization corporate resolution to act on the
account must sign the written
instructions.
Conservator, The written instructions must be
Guardian or Other signed by the person properly
Fiduciary authorized by court order to act in
the particular fiduciary capacity.
</TABLE>
A Fund may require a signature guarantee in certain situations such as:
o a redemption request made by a corporation, partnership or
fiduciary;
o a redemption request made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of
record.
This requirement is to protect you and Waddell & Reed from fraud. You can obtain
a signature guarantee from most banks and securities dealers, but not from a
notary public.
33
<PAGE>
Each Fund reserves the right to redeem at NAV all of your Fund shares in your
account if their aggregate NAV is less than $500. The Fund will give you notice
and a 60-day opportunity to purchase a sufficient number of additional shares to
bring the aggregate NAV of your shares to $500.
You may reinvest, without charge, all or part of the amount of Class A shares of
a Fund you redeemed by sending to the Fund the amount you want to reinvest. The
reinvested amounts must be received by the Fund within thirty days after the
date of your redemption. You may do this only once with Class A shares of a
Fund.
The deferred sales charge will not apply to the proceeds of Class B or Class C
shares of a Fund which are redeemed and then reinvested in Class B or Class C
shares of the Fund within thirty days after such redemption. The Distributor
will, with your reinvestment, restore an amount equal to the deferred sales
charge attributable to the amount reinvested by adding the deferred sales charge
amount to your reinvestment. For purposes of determining future deferred sales
charges, the reinvestment will be treated as a new investment. You may do this
only once as to Class B shares of a Fund and only once as to Class C shares of a
Fund.
Payments of principal and interest on loans made pursuant to Waddell & Reed's
401(k) prototype plan (if such loans are permitted by the plan) may be
reinvested, without payment of a sales charge, in Class A shares of any United
Group fund in which the plan may invest.
34
<PAGE>
Telephone Transactions
The Funds and their agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. Each Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If a Fund fails to do so, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. Current procedures
relating to instructions communicated by telephone include tape recording
instructions, requiring personal identification and providing written
confirmations of transactions effected pursuant to such instructions.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your account.
35
<PAGE>
Personal Service
Your local Waddell & Reed financial advisor is available to provide personal
service. Additionally, a toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or our automated customer telephone service.
During normal business hours, our Customer Service staff is available to answer
your questions or update your account records. At almost any time of the day or
night, you may access your account information from a touch-tone phone, or from
our web site, www.waddell.com, to:
o Obtain information about your accounts;
o Obtain price information about other funds in the United Group; or
o Request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange,
transfer or redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports of each Fund will be mailed to your household, even if you have more
than one account with a Fund. Call the telephone number listed above for
Customer Service if you need additional copies of annual or semiannual reports
or account information.
Exchanges
You may sell your shares and buy shares of the same Class of another Fund or of
other funds in the United Group without the payment of an additional sales
charge if you buy Class A shares or payment of a CDSC when you exchange the
Class B or Class C shares. For Class B and C shares, the time period for the
deferred sales charge will continue to run. In addition, exchanging Class Y
shareholders may buy Class A shares of United Cash Management, Inc.
36
<PAGE>
You may exchange only into funds that are legally permitted for sale in your
state of residence. Note that exchanges out of a Fund may have tax consequences
for you. Before exchanging into a fund, read its prospectus.
The Funds reserve the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
Automatic Transactions for Class A, Class B and Class C Shareholders
Flexible withdrawal service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund account, or
between fund accounts, automatically. While Regular Investment Plans do not
guarantee a profit and will not protect you against loss in a declining market,
they can be an excellent way to invest for retirement, a home, educational
expenses and other long-term financial goals.
Certain restrictions and fees imposed by the plan custodian may also apply for
retirement accounts. Speak with your Waddell & Reed financial advisor for more
information.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Fund account
<TABLE>
<CAPTION>
Minimum Amount Minimum Frequency
<S> <C>
$25 Monthly
</TABLE>
Funds Plus Service
To move money from United Cash Management, Inc. to a Fund whether in the same or
a different account in the same class
<TABLE>
<CAPTION>
Minimum Amount Minimum Frequency
<S> <C>
$100 Monthly
</TABLE>
Distributions and Taxes
Distributions
Each Fund distributes substantially all of its net investment income and net
capital gains to its shareholders each year. Usually, a Fund distributes net
investment income at the following times: United Accumulative Fund and United
Science and Technology Fund, semiannually in June and December; United Income
Fund, quarterly in March, June, September and December; and United Bond Fund,
monthly. Net capital gains (and any net gains from foreign currency
transactions) usually are distributed in December.
37
<PAGE>
Distribution Options. When you open an account, specify on your application how
you want to receive your distributions. Each Fund offers three options:
1. Share Payment Option. Your dividends, capital gains and other distributions
with respect to a class will be automatically paid in additional shares of
the same class of the Fund. If you do not indicate a choice on your
application, you will be assigned this option.
2. Income-Earned Option. Your capital gains and other distributions with
respect to a class will be automatically paid in shares of the same class
of the Fund, but you will be sent a check for each dividend distribution.
However, if the dividend distribution is less than five dollars, the
distribution will be automatically paid in additional shares of the same
class of the Fund.
3. Cash Option. You will be sent a check for your dividends, capital gains and
other distributions if the total distribution is equal to or greater than
five dollars. If the distribution is less than five dollars, it will be
automatically paid in additional shares of the same class of the Fund.
For retirement accounts, all distributions are automatically paid in
additional shares.
Taxes
As with any investment, you should consider how your investment in a Fund will
be taxed. If your account is not a tax-deferred retirement account, you should
be aware of the following tax implications:
Taxes on distributions. Dividends from a Fund's investment company taxable
income generally are taxable to you as ordinary income whether received in cash
or paid in additional Fund shares. Distributions of a Fund's net capital gains,
when designated as such, are taxable to you as long-term capital gains, whether
received in cash or paid in additional Fund shares and regardless of the length
of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains generally are taxed at a maximum rate of 20%.
Each Fund notifies you after each calendar year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that year.
A portion of the dividends paid by a Fund, whether received in cash or paid in
additional Fund shares, may be eligible for the
38
<PAGE>
dividends received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by a Fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends received deduction are subject indirectly to the
Federal alternative minimum tax.
Withholding. Each Fund must withhold 31% of all dividends, capital gains and
other distributions and redemption proceeds payable to individuals and certain
other noncorporate shareholders who do not furnish the Fund with a correct
taxpayer identification number. Withholding at that rate from dividends, capital
gains and other distributions also is required for shareholders subject to
backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in a taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than what you paid for the redeemed shares (which normally includes any
sales charge paid). An exchange of Fund shares for shares of any other fund in
the United Group generally will have similar tax consequences. However, special
rules apply when you dispose of Class A Fund shares through a redemption or
exchange within ninety days after your purchase and then reacquire Fund Class A
shares or acquire Class A shares of another fund in the United Group without
paying a sales charge due to the thirty-day reinvestment privilege or exchange
privilege. See "Your Account." In these cases, any gain on the disposition of
the original 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 shares of a Fund within thirty days before or after redeeming other
shares of a Fund (regardless of class) at a loss, part or all of that loss will
not be deductible and will increase the basis of the newly purchased shares.
State and local income taxes. The portion of the dividends paid by United Bond
Fund and United Income Fund (and, to a lesser extent, the other Funds)
attributable to interest earned on its U.S. Government securities generally is
not subject to state and local income taxes, although distributions by any Fund
to its shareholders of net realized gains on the sale of those securities are
fully subject to those taxes. You should consult your tax adviser to determine
the taxability of dividends and other distributions by the Funds in your state
and locality.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting each Fund and its shareholders; you will find
more information in the SAI. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
39
<PAGE>
The Management of the Funds
Portfolio Management
The Funds are managed by WRIMCO, subject to the authority of the Corporation's
Board of Directors. WRIMCO provides investment advice to each of the Funds and
supervises each Fund's investments. WRIMCO and its predecessors have served as
investment manager to each of the registered investment companies in the United
Group of Mutual Funds, Waddell & Reed Funds, Inc. and Target/United Funds, Inc.
since the inception of the company. WRIMCO is located at 6300 Lamar Avenue, P.O.
Box 29217, Shawnee Mission, Kansas 66201-9217.
Antonio Intagliata is primarily responsible for the management of the portfolio
of United Accumulative Fund. Mr. Intagliata has held his Fund responsibilities
since November 1979. He is Senior Vice President of WRIMCO and Vice President of
the Fund. Mr. Intagliata has served as the portfolio manager for investment
companies managed by WRIMCO and its predecessors since February 1979 and has
been an employee of such since June 1973.
James C. Cusser is primarily responsible for the management of the portfolio of
United Bond Fund. Mr. Cusser has held his Fund responsibilities since September
1992. He is Vice President of WRIMCO, Vice President of the Fund and Vice
President of other investment companies for which WRIMCO serves as investment
manager. Mr. Cusser has served as the portfolio manager for the Fund and other
investment companies managed by WRIMCO and has been an employee of WRIMCO since
August 1992.
James D. Wineland is primarily responsible for the management of the portfolio
of United Income Fund. Mr. Wineland has held his Fund responsibilities since
July 1, 1997. He is Vice President of WRIMCO, Vice President of the Fund and
Vice President of other investment companies for which WRIMCO serves as
investment manager. From March 1995 to March 1998, Mr. Wineland was Vice
President of, and a portfolio manager for, Waddell & Reed Asset Management
Company, a former affiliate of WRIMCO. Mr. Wineland has served as the portfolio
manager for investment companies managed by WRIMCO and its predecessors since
January 1988 and has been an employee of such since November 1984.
40
<PAGE>
Abel Garcia is primarily responsible for the management of the portfolio of
United Science and Technology Fund. Mr. Garcia has held his Fund
responsibilities since January 1984. He is Vice President of WRIMCO, Vice
President of the Fund and Vice President of other investment companies for which
WRIMCO serves as investment manager. From May 1988 to March 1998, Mr. Garcia was
Vice President of, and a portfolio manager for, Waddell & Reed Asset Management
Company. Mr. Garcia has been an employee of WRIMCO and its predecessors since
August 1983.
Other members of WRIMCO's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to a Fund's investments.
Management Fee
Like all mutual funds, the Funds pay fees related to their daily operations.
Expenses paid out of each Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
Each Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. Each Fund also pays other expenses, which are
explained in the SAI.
The management fee is payable at the annual rates of:
for United Accumulative Fund, 0.70% of net assets up to $1 billion, 0.65% of net
assets over $1 billion and up to $2 billion, 0.60% of net assets over $2 billion
and up to $3 billion, and 0.55% of net assets over $3 billion;
for United Bond Fund, 0.525% of net assets up to $500 million, 0.50% of net
assets over $500 million and up to $1 billion, 0.45% of net assets over $1
billion and up to $1.5 billion, and 0.40% of net assets over $1.5 billion;
for United Income Fund, 0.70% of net assets up to $1 billion, 0.65% of net
assets over $1 billion and up to $2 billion, 0.60% of net assets over $2 billion
and up to $3 billion, 0.55% of net assets over $3 billion and up to $6 billion,
and 0.50% of net assets over $6 billion; and
for United Science and Technology Fund, 0.85% of net assets up to $1 billion,
0.83% of net assets over $1 billion and up to $2 billion, 0.80% of net assets
over $2 billion and up to $3 billion, and 0.76% of net assets over $3 billion.
41
<PAGE>
Prior to June 30, 1999, the management fee of a Fund was calculated by adding a
group fee to a specific fee. The specific fee was computed on the Fund's net
asset value as of the close of business each day at the annual rate of .15 of 1%
of the net assets of United Accumulative Fund, .03 of 1% of the net assets of
United Bond Fund, .15 of 1% of the net assets of United Income Fund and .20 of
1% of the net assets of United Science and Technology Fund. The group fee was
determined on the basis of the combined net asset values of all the funds in the
United Group and then allocated pro rata to the Fund based on its relative net
assets at the annual rates shown in the following table:
Group Fee Rate
<TABLE>
<CAPTION>
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
<S> <C>
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%
</TABLE>
42
<PAGE>
Management fees for each Fund as a percent of each Fund's net assets for the
fiscal year ended December 31, 1998 were as follows: United Bond Fund 0.52%,
United Income Fund 0.54%, United Accumulative Fund 0.54%, United Science and
Technology Fund 0.59%.
43
<PAGE>
UNITED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
April 30, 2000
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with a prospectus ("Prospectus")
for the United Funds, Inc. (the "Corporation") dated September 20, 1999, which
may be obtained from the Corporation or its underwriter, Waddell & Reed, Inc.,
at the address or telephone number shown above.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Performance Information ......................................... 2
Investment Strategies, Policies and Practices.................... 6
Investment Management and Other Services ........................ 41
Purchase, Redemption and Pricing of Shares ...................... 47
Directors and Officers .......................................... 65
Payments to Shareholders ........................................ 70
Taxes ........................................................... 72
Portfolio Transactions and Brokerage ............................ 77
Other Information ............................................... 80
Financial Statements ............................................ 82
</TABLE>
<PAGE>
United Funds, Inc. is a mutual fund; an investment that pools
shareholders' money and invests it toward a specified goal. In technical terms,
the Corporation is an open-end, diversified management company organized as a
Maryland corporation on February 21, 1974, as a successor to a Delaware
corporation which commenced operations in 1940.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Corporation's underwriter, or the Corporation
may, from time to time, publish for one or more of the four Funds' total return
information, yield information and/or performance rankings in advertisements and
sales materials.
Total Return
Total return is the overall change in the value of an investment over a
given period of time. An average annual total return quotation is computed by
finding the average annual compounded rates of return over the one-, five-, and
ten-year periods that would equate the initial amount invested to the ending
redeemable value. Standardized total return information is calculated by
assuming an initial $1,000 investment and, for Class A shares, deducting the
maximum sales load of 5.75%. All dividends and distributions are assumed to be
paid in shares of the applicable class at net asset value ("NAV") for the class
as of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions on Class A shares. The formula used to
calculate the total return for a particular class of a Fund is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000
investment for the periods shown.
Non-standardized performance information may also be presented. For
example, a Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares were reflected,
it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares with
sales load deducted as of December 31, 1999, which is the most recent balance
sheet included in this SAI, for the periods shown were as follows:
2
<PAGE>
<TABLE>
<CAPTION>
One-year Five-year Ten-year
period from period from period from
1-1-99 to 1-1-95 to 1-1-90 to
12-31-99 12-31-99 12-31-99
----------- ----------- -----------
<S> <C> <C> <C>
United Accumulative Fund 18.49% 23.17% 14.65%
United Bond Fund -6.77% 6.42% 6.84%
United Income Fund 9.72% 22.01% 15.51%
United Science and
Technology Fund 91.27% 40.63% 25.46%
</TABLE>
The average annual total return quotations for Class A shares without
sales load deducted as of December 31, 1999, which is the most recent balance
sheet included in this SAI, for the periods shown were as follows:
<TABLE>
<CAPTION>
One-year Five-year Ten-year
period from period from period from
1-1-99 to 1-1-95 to 1-1-90 to
12-31-99 12-31-99 12-31-99
----------- ----------- -----------
<S> <C> <C> <C>
United Accumulative Fund 25.72% 24.64% 15.33%
United Bond Fund -1.08% 7.69% 7.48%
United Income Fund 16.41% 23.46% 16.19%
United Science and
Technology Fund 102.93% 42.30% 26.21%
</TABLE>
Prior to October 1, 1993, United Science and Technology Fund was named
United Science and Energy Fund, and its investment policies related to
investments in science and energy securities rather than science and technology
securities.
Prior to June 17, 1995, each Fund offered only one class of shares to
the public. Shares outstanding on that date were designated as Class A shares.
The cumulative total return quotations for Class B shares of each Fund
with the maximum deferred sales charge deducted as of December 31, 1999, which
is the most recent balance sheet included in this SAI, for the period shown were
as follows:
<TABLE>
<CAPTION>
Period from
class inception* to
December 31, 1999
--------------
<S> <C>
United Accumulative Fund 17.89%
United Bond Fund -4.64%
United Income Fund 6.53%
United Science and
Technology Fund 53.62%
</TABLE>
* For United Bond Fund, September 9, 1999; and for United Accumulative Fund,
United Income Fund and United Science and Technology Fund, October 4, 1999.
3
<PAGE>
The cumulative total return quotations for the Class B shares of each
fund without the maximum deferred sales charge deducted as of December 31, 1999,
which is the most recent balance sheet included in this SAI, for the periods
shown were as follows:
<TABLE>
<CAPTION>
Period from
class inception* to
December 31, 1999
--------------
<S> <C>
United Accumulative Fund 22.89%
United Bond Fund 0.30%
United Income Fund 11.53%
United Science and
Technology Fund 58.62%
</TABLE>
* For United Bond Fund, September 9, 1999; and for United Accumulative Fund,
United Income Fund and United Science and Technology Fund, October 4, 1999.
The cumulative total return quotations for Class C shares of each Fund
with the maximum deferred sales charge deducted as of December 31, 1999, which
is the most recent balance sheet included in this SAI, for the periods shown
were as follows:
<TABLE>
<CAPTION>
Period from
class inception* to
December 31, 1999
--------------
<S> <C>
United Accumulative Fund 20.45%
United Bond Fund -0.86%
United Income Fund 10.53%
United Science and
Technology Fund 57.70%
</TABLE>
* For United Bond Fund, September 9, 1999; for United Income Fund and United
Science and Technology Fund, October 4, 1999; and for United Accumulative
Fund, October 6, 1999.
The cumulative total return quotations for the Class C shares of each
fund without the maximum deferred sales charge deducted as of December 31, 1999,
which is the most recent balance sheet included in this SAI, for the periods
shown were as follows:
<TABLE>
<CAPTION>
Period from
class inception* to
December 31, 1999
--------------
<S> <C>
United Accumulative Fund 21.45%
United Bond Fund 0.13%
United Income Fund 11.53%
United Science and
Technology Fund 58.70%
</TABLE>
* For United Bond Fund, September 9, 1999; for United Income Fund and United
Science and Technology Fund, October 4, 1999; and for United Accumulative
Fund, October 6, 1999.
The total return quotations for Class Y shares as of December 31, 1999,
which is the most recent balance sheet included in this SAI, for the periods
shown were as follows:
4
<PAGE>
<TABLE>
<CAPTION>
One year
period Period from class
ended inception* to
December 31, 1999 December 31, 1999
-------------- --------------
<S> <C> <C>
United Accumulative Fund 25.95% 22.93%
United Bond Fund -0.81% 5.93%
United Income Fund 16.67% 21.45%
United Science and
Technology Fund 103.72% 39.63%
</TABLE>
* For United Income Fund and United Bond Fund, June 19, 1995; for United
Accumulative Fund, July 11, 1995; and for United Science and Technology Fund
February 27, 1996.
No total return information is provided for Class B or Class C since neither had
a full year of commenced operations as of December 31, 1999.
A Fund may also quote unaveraged or cumulative total return for a class
which reflects the change in value of an investment in that class over a stated
period of time. Cumulative total returns will be calculated according to the
formula indicated above but without averaging the rate for the number of years
in the period.
Yield
Yield refers to the income generated by an investment in the Fund over
a given period of time. A yield quoted for a class of a Fund is computed by
dividing the net investment income per share of that class earned during the
period for which the yield is shown by the maximum offering price per share of
that class on the last day of that period according to the following formula:
6
Yield = 2((((a - b)/cd)+1) -1)
Where, with respect to a particular class of a Fund:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares of the class outstanding
during the period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last
day of the period.
The yield for United Bond Fund Class A shares computed according to the
formula for the 30-day period ended on December 31, 1999, the date of the most
recent balance sheet included in this SAI, is 5.78%. The yield for United Bond
Fund Class B shares computed according to the formula for the 30-day period
ended on December 31, 1999, the date of the most recent balance sheet included
in this SAI, is 5.46%. The yield for United Bond Fund Class C shares computed
according to the formula for the 30-day period ended on December 31, 1999, the
date of the most recent balance sheet included in this SAI, is 5.86%. The yield
for United Bond Fund Class Y shares computed according to the formula for the
5
<PAGE>
30-day period ended on December 31, 1999, the date of the most recent balance
sheet included in this SAI, is 6.48%.
Change in yields primarily reflect different interest rates received by
a Fund as its portfolio securities change. Yield is also affected by portfolio
quality, portfolio maturity, type of securities held and operating expenses of
the applicable class.
Performance Rankings and Other Information
Waddell & Reed, Inc. or the Corporation also may, from time to time,
publish in advertisements or sales material performance rankings as published by
recognized independent mutual fund statistical services such as Lipper
Analytical Services, Inc., or by publications of general interest such as
Forbes, Money, The Wall Street Journal, Business Week, Barron's, Fortune or
Morningstar Mutual Fund Values. Each class of a Fund may also compare its
performance to that of other selected mutual funds or selected recognized market
indicators such as the Standard & Poor's 500 Composite Stock Price Index and the
Dow Jones Industrial Average. Performance information may be quoted numerically
or presented in a table, graph or other illustration. In connection with a
ranking, the Fund may provide additional information, such as the particular
category to which it related, the number of funds in the category, the criteria
upon which the ranking is based, and the effect of sales charges, fee waivers
and/or expense reimbursements.
Performance information for a Fund may be accompanied by information
about market conditions and other factors that affected the Fund's performance
for the period(s) shown.
All performance information that a Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of a Fund's shares when redeemed may be more or less
than their original cost.
INVESTMENT STRATEGIES, POLICIES AND PRACTICES
This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and policies
the Funds' investment manager, Waddell & Reed Investment Management Company
("WRIMCO"), may employ and the types of instruments in which a Fund may invest,
in pursuit of the Fund's goal(s). A summary of the risks associated with these
instrument types and investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by a Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help a Fund achieve its goal(s). See "Investment
Restrictions
6
<PAGE>
and Limitations" for a listing of the fundamental and non-fundamental (e.g.,
operating) investment restrictions and policies of the Funds.
United Science and Technology Fund
As described in the Prospectus, the portfolio of United Science and
Technology Fund emphasizes science and technology securities. Science and
technology securities are securities of companies whose products, processes or
services, in the opinion of WRIMCO, are being or are expected to be
significantly benefited by the utilization or commercial application of
scientific or technological discoveries or developments in such areas as
aerospace, communications and electronic equipment, computer systems, computer
software and services, electronics, electronic media, business machines, office
equipment and supplies, biotechnology, medical and hospital supplies and
services, medical devices and drugs.
United Bond Fund
In selecting debt securities for the portfolio of this Fund,
consideration will be given to their yield; this yield would include the yield
to maturity in the case of debt securities purchased at a discount.
Consideration will also be given to the relative safety of debt securities
purchased and, in the case of convertible debt securities, the possibility of
capital growth.
Among the other debt securities in which the Fund may invest are
deposits in banks (represented by certificates of deposit or other evidence of
deposit issued by such banks) of varying maturities. The Federal Deposit
Insurance Corporation insures the principal of certain such deposits ("Insured
Deposits"), currently to the extent of $100,000 per bank. Insured Deposits are
not marketable, and the Fund will invest in them only within the 10% limit
mentioned below under "Illiquid Investments" unless such obligations are payable
at principal amount plus accrued interest on demand or within seven days after
demand.
A debt security may not be purchased if, at the time of purchase, it is
in default in the payment of interest or if there is less than $1,000,000
principal amount outstanding.
Securities - General
The main types of securities in which the Funds may invest include
common stock, preferred stock, debt securities and convertible securities.
Although common stocks and other equity securities have a history of long-term
growth in value, their prices tend to fluctuate in the short term, particularly
those of smaller companies. A Fund may invest in preferred stock rated in any
rating category of the established rating services or, if unrated, judged by
WRIMCO to be of equivalent quality. Debt securities have varying
7
<PAGE>
levels of sensitivity to changes in interest rates and varying degrees of
quality. As a general matter, however, when interest rates rise, the values of
fixed-rate securities fall and, conversely, when interest rates fall, the values
of fixed-rate debt securities rise. Similarly, long-term bonds are generally
more sensitive to interest rate changes than short-term bonds.
Lower quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than high-quality securities and may decline
significantly in periods of general economic difficulty. The market for
lower-rated debt securities may be thinner and less active than that for
higher-rated debt securities, which can adversely affect the prices at which the
former are sold. Adverse publicity and changing investor perceptions may
decrease the values and liquidity of lower-rated debt securities, especially in
a thinly traded market. Valuation becomes more difficult and judgment plays a
greater role in valuing lower-rated debt securities than with respect to
securities for which more external sources of quotations and last sale
information are available. Since the risk of default is higher for lower-rated
debt securities, WRIMCO's research and credit analysis are an especially
important part of managing securities of this type held by a Fund. WRIMCO
continuously monitors the issuers of lower-rated debt securities in a Fund's
portfolio in an attempt to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments. A Fund may
choose, at its expense or in conjunction with others, to pursue litigation or
otherwise exercise its rights as a security holder to seek to protect the
interests of security holders if it determines this to be in the best interest
of the Fund's shareholders.
Each of the Funds may invest in debt securities rated in any rating
category of the established rating services, including securities rated in the
lowest category (securities rated D by Standard & Poor's ("S&P") and C by
Moody's Investors Service, Inc. ("MIS")). Debt securities rated D by S&P or C by
MIS are in payment default or are regarded as having extremely poor prospects of
ever attaining any real investment standing. Debt securities rated at least BBB
by S&P or Baa by MIS are considered to be investment grade debt securities.
Securities rated BBB or Baa may have speculative characteristics. In addition, a
Fund will treat unrated securities judged by WRIMCO to be of equivalent quality
to a rated security as having that rating.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from time
to time, and the Fund may retain a portfolio security whose rating has been
changed.
8
<PAGE>
Each of the Funds 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.
Each of the Funds may invest in convertible securities. A convertible
security is a bond, debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of common stock of the
same or different issuer within a particular period of time at a specified price
or formula. Convertible securities generally have higher yields than common
stocks of the same or similar issuers, but lower yields than comparable
nonconvertible securities, are less subject to fluctuation in value than the
underlying stock because they have fixed income characteristics, and provide the
potential for capital appreciation if the market price of the underlying common
stock increases.
The value of a convertible security is influenced by changes in
interest rates, with investment value declining as interest rates increase and
increasing as interest rates decline. The credit standing of the issuer and
other factors also may have an effect on the convertible security's investment
value.
Each of the Funds 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
9
<PAGE>
number of shares of common stock equal to the call price of the preferred stock
in effect on the date of redemption divided by the market value of the common
stock, with such market value typically determined one or two trading days prior
to the date notice of redemption is given. The issuer must also pay the holder
of the preferred stock cash in an amount equal to any accrued but unpaid
dividends on the preferred stock. This convertible preferred stock is subject to
the same market risk as the common stock of the issuer, except to the extent
that such risk is mitigated by the higher dividend paid on the preferred stock.
The opportunity for equity appreciation afforded by an investment in such
convertible preferred stock, however, is limited, because in the event the
market value of the issuer's common stock increases to or above the call price
of the preferred stock, the issuer may (and would be expected to) call the
preferred stock for redemption at the call price. This convertible preferred
stock is also subject to credit risk with regard to the ability of the issuer to
pay the dividend established upon issuance of the preferred stock. Generally,
convertible preferred stock is less volatile than the related common stock of
the issuer.
Specific Securities and Investment Practices
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities ("U.S. Government securities") are high quality debt
instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date they
are issued), Treasury Notes (which have maturities of one to ten years) and
Treasury Bonds (which generally have maturities of more than ten years). All
such Treasury securities are backed by the full faith and credit of the United
States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (also known as the Federal National Mortgage Association), Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as
10
<PAGE>
securities issued by Fannie Mae, are supported only by the credit of the
instrumentality and by a pool of mortgage assets. If the securities are not
backed by the full faith and credit of the United States, the owner of the
securities must look principally to the agency issuing the obligation for
repayment and may not be able to assert a claim against the United States in the
event that the agency or instrumentality does not meet its commitment. United
Bond Fund will invest in securities of agencies and instrumentalities only if
WRIMCO is satisfied that the credit risk involved is acceptable.
U.S. Government securities may include mortgage-backed securities
issued by U.S. Government agencies or instrumentalities including, but not
limited to, Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed
securities include pass-through securities, participation certificates and
collateralized mortgage obligations. See "Mortgage-Backed and Asset-Backed
Securities." Timely payment of principal and interest on Ginnie Mae
pass-throughs is guaranteed by the full faith and credit of the United States.
Freddie Mac and Fannie Mae are both instrumentalities of the U.S. Government,
but their obligations are not backed by the full faith and credit of the United
States. It is possible that the availability and the marketability (i.e.,
liquidity) of the securities discussed in this section could be adversely
affected by actions of the U.S. Government to tighten the availability of its
credit.
Money Market Instruments
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
Zero Coupon Securities
Zero coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or that specify a
future date when the securities begin to pay current interest; instead, they are
sold at a deep discount from their face value and are redeemed at face value
when they mature. Because zero coupon securities do not pay current income,
their prices can be very volatile when interest rates change and generally are
subject to greater price fluctuations in response to changing interest rates
than prices of comparable maturities that make current distributions of interest
in cash.
Each of the Funds may invest in zero coupon securities that are
"stripped" U.S. Treasury notes and bonds, zero coupon bonds of corporate issuers
and other securities that are issued with original issue discount ("OID"). The
Federal tax law requires that a holder
11
<PAGE>
of a security with OID accrue a ratable portion of the OID on the security as
income each year, even though the holder may receive no interest payment on the
security during the year. Accordingly, although a Fund will receive no payments
on its zero coupon securities prior to their maturity or disposition, it will
have current income attributable to those securities and includable in the
dividends paid to its shareholders. Those dividends will be paid from a Fund's
cash assets or by liquidation of portfolio securities, if necessary, at a time
when a Fund otherwise might not have done so.
A broker-dealer creates a derivative zero by separating the interest
and principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. Original
issue zeros are zero coupon securities originally issued by the U.S. Government,
a government agency, or a corporation in zero coupon form.
Mortgage-Backed and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent direct
or indirect participations in, or are secured by and payable from, mortgage
loans secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which a Fund may
invest include mortgage-backed securities issued or guaranteed as to the payment
of principal and interest (but not as to market value) by Ginnie Mae, Fannie
Mae, or Freddie Mac. Other mortgage-backed securities are issued by private
issuers, generally originators of and investors in mortgage loans, including
savings associations, mortgage bankers, commercial banks, investment bankers and
special purpose entities. Payments of principal and interest (but not the market
value) of such private mortgage-backed
12
<PAGE>
securities may be supported by pools of mortgage loans or other mortgage-backed
securities that are guaranteed, directly or indirectly, by the U.S. Government
or one of its agencies or instrumentalities, or they may be issued without any
government guarantee of the underlying mortgage assets but with some form of
non-government credit enhancement. These credit enhancements do not protect
investors from changes in market value.
Each Fund may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage lenders, or other
financial institutions. Other types of mortgage-backed securities will likely be
developed in the future, and a Fund may invest in them if WRIMCO determines they
are consistent with the Fund's goal(s) and investment policies.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities are created when a U.S. Government agency or a financial institution
separates the interest and principal components of a mortgage-backed security
and sells them as individual securities. The holder of the "principal-only"
security ("PO") receives the principal payments made by the underlying
mortgage-backed security, while the holder of the "interest-only" security
("IO") receives interest payments from the same underlying security.
For example, interest-only ("IO") classes are entitled to receive all
or a portion of the interest, but none (or only a nominal amount) of the
principal payments, from the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, then
the total amount of interest allocable to the IO class, and therefore the yield
to investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is guaranteed by the government or considered to be of the highest
quality. Conversely, principal-only ("PO") classes are entitled to receive all
or a portion of the principal payments, but none of the interest, from the
underlying mortgage assets. PO classes are purchased at substantial discounts
from par, and the yield to investors will be reduced if principal payments are
slower than expected. IOs, POs and other CMOs involve special risks, and
evaluating them requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with
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the issuer, or other credit enhancements may be present. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed-rate 30-year mortgages would result in a 12-year average life for the
pool. At present,
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mortgage pools, particularly those with loans with other maturities or different
characteristics, are priced on an assumption of average life determined for each
pool. In periods of declining interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of a pool of
mortgage-related securities. Conversely, in periods of rising interest rates,
the rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. Changes in the rate or "speed" of these payments can cause the
value of the mortgage backed securities to fluctuate rapidly. However, these
effects may not be present, or may differ in degree, if the mortgage loans in
the pools have adjustable interest rates or other special payment terms, such as
a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics, such
as yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
reduced. These changes can result in volatility in the market value and in some
instances reduced liquidity, of the CMO class.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and may carry
rights that permit holders to demand payment of the unpaid principal balance
plus accrued interest from the issuers or certain financial intermediaries on
dates prior to their stated maturities. Floating rate securities have interest
rates that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market value for the
instrument that approximates its par value.
Indexed Securities
Each Fund may purchase securities the value of which varies in relation
to the value of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators, subject to its
operating policy regarding derivative instruments. Indexed securities typically,
but not always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or statistic.
The performance of indexed securities depends to a great extent on the
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performance of the security, currency or other instrument to which they are
indexed and may also be influenced by interest rate changes in the United States
and abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security and their values may decline
substantially if the issuer's creditworthiness deteriorates. Indexed securities
may be more volatile than the underlying investments.
Gold-indexed securities, for example, typically provide for a maturity
value that depends on the price of gold, resulting in a security whose price
tends to rise and fall together with gold prices. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
Recent issuers of indexed securities have included banks, corporations
and certain U.S. Government agencies. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
Foreign Securities and Currencies
Each of the Funds may invest in the securities of foreign issuers,
including depository receipts. In general, depository receipts are securities
convertible into and evidencing ownership of securities of foreign corporate
issuers, although depository receipts may not necessarily be denominated in the
same currency as the securities into which they may be converted. American
depository receipts, in registered form, are dollar-denominated receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying securities. International depository receipts and European depository
receipts, in bearer form, are foreign receipts evidencing a similar arrangement
and are designed for use by non-U.S. investors and traders in non-U.S. markets.
Global depository receipts are designed to facilitate the trading of securities
of foreign issuers by U.S. and non-U.S. investors and traders.
WRIMCO believes that there are investment opportunities as well as
risks in investing in foreign securities. Individual foreign economies may
differ favorably or unfavorably from the U.S. economy or each other in such
matters as gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and
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balance of payments position. Individual foreign companies may also differ
favorably or unfavorably from domestic companies in the same industry. Foreign
currencies may be stronger or weaker than the U.S. dollar or than each other.
Thus, the value of securities denominated in or indexed to foreign currencies,
and of dividends and interest from such securities, can change significantly
when foreign currencies strengthen or weaken relative to the U.S. dollar. WRIMCO
believes that a Fund's ability to invest assets abroad might enable it to take
advantage of these differences and strengths where they are favorable.
However, foreign securities and foreign currencies involve additional
significant risks, apart from the risks inherent in U.S. investments. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial conditions and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be greater possibility of
default by foreign governments or government-sponsored enterprises. Investments
in foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
There is no assurance that WRIMCO will be able to anticipate these potential
events or counter their effects.
The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is likely
to experience long-term gross domestic product growth above that expected to
occur in the United States, the United Kingdom, France, Germany, Italy, Japan
and Canada. Developing countries may have relatively unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities.
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Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
Certain of the Funds could also be adversely affected by the conversion
of certain European currencies into the euro. This conversion, which is
underway, is scheduled to be completed in 2002. However, problems with the
conversion process and delays could increase volatility in world capital markets
and affect European capital markets in particular.
Currency conversion involves dealer spreads and other costs, although
commissions are not usually charged. See "Options,
Futures and Other Strategies - Forward Currency Contracts."
Restricted Securities
Each of the Funds may purchase restricted securities. Restricted
securities are securities that are subject to legal or contractual restrictions
on resale. However, restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act of 1933, as amended, or in a registered public offering. Where
registration is required, a Fund may be obligated to pay all or part of the
registration expense and a considerable period may elapse between the time it
decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Fund might obtain a less favorable
price than prevailed when it decided to seek registration of the security.
There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent a Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities in
which a Fund seeks to invest need not be listed or admitted to trading on an
exchange and may be less liquid than listed securities. Certain restricted
securities, e.g. 144A securities, may be determined to be liquid in accordance
with guidelines adopted by the Board of Directors. See "Illiquid Investments."
Investment Company Securities
Each Fund may purchase securities of closed-end investment companies.
As a shareholder in an investment company, a Fund would bear its pro rata share
of that investment company's expenses, which could result in duplication of
certain fees, including management and administrative fees.
Lending Securities
Securities loans may be made on a short-term or long-term basis for the
purpose of increasing a Fund's income. If a Fund lends securities, the borrower
pays the Fund an amount equal to the dividends or interest on the securities
that the Fund would have received if it had not lent the securities. The Fund
also receives
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additional compensation. Under the Fund's current securities lending procedures,
each Fund may lend securities only to broker-dealers and financial institutions
deemed creditworthy by WRIMCO.
Any securities loan that a Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). At the
time of each loan, the Fund must receive collateral equal to no less than 100%
of the market value of the securities loaned. Under the present Guidelines, the
collateral must consist of cash, U.S. Government securities or bank letters of
credit, at least equal in value to the market value of the securities lent on
each day that the loan is outstanding. If the market value of the lent
securities exceeds the value of the collateral, the borrower must add more
collateral so that it at least equals the market value of the securities lent.
If the market value of the securities decreases, the borrower is entitled to
return of the excess collateral.
There are two methods of receiving compensation for making loans. The
first is to receive a negotiated loan fee from the borrower. This method is
available for all three types of collateral. The second method, which is not
available when letters of credit are used as collateral, is for a Fund to
receive interest on the investment of the cash collateral or to receive interest
on the U.S. Government securities used as collateral. Part of the interest
received in either case may be shared with the borrower.
The letters of credit that a 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. Each Fund will make loans only under rules of the NYSE, which presently
require the borrower to give the securities back to the Fund within five
business days after the Fund gives notice to do so. If a 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. A
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.
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There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned increases, as well as
risks of delay in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially.
Repurchase Agreements
Each of the Funds may purchase securities subject to repurchase
agreements. The Fund will not enter into a repurchase transaction that will
cause more than 10% of its net assets to be invested in illiquid investments,
which include repurchase agreements not terminable within seven days. See
"Illiquid Investments." A repurchase agreement is an instrument under which a
Fund purchases a security and the seller (normally a commercial bank or
broker-dealer) agrees, at the time of purchase, that it will repurchase the
security at a specified time and price. The amount by which the resale price is
greater than the purchase price reflects an agreed-upon market interest rate
effective for the period of the agreement. The return on the securities subject
to the repurchase agreement may be more or less than the return on the
repurchase agreement.
The majority of the repurchase agreements in which a Fund will engage
are overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is that a
Fund may suffer a loss if the seller fails to pay the agreed-upon amount on the
delivery date and that amount is greater than the resale price of the underlying
securities and other collateral held by the Fund. In the event of bankruptcy or
other default by the seller, there may be possible delays and expenses in
liquidating the underlying securities or other collateral, decline in their
value and loss of interest. The return on such collateral may be more or less
than that from the repurchase agreement. The Funds' repurchase agreements will
be structured so as to fully collateralize the loans. In other words, the value
of the underlying securities, which will be held by the Funds' custodian bank or
by a third party that qualifies as a custodian under Section 17(f) of the
Investment Company Act of 1940, as amended (the "1940 Act"), is and, during the
entire term of the agreement, will remain at least equal to the value of the
loan, including the accrued interest earned thereon. Repurchase agreements are
entered into only with those entities approved by WRIMCO.
When-Issued and Delayed-Delivery Transactions
Each Fund may purchase any securities in which it may invest on a
when-issued or delayed-delivery basis or sell them on a delayed-delivery basis.
In either case, payment and delivery for the securities take place at a future
date. The securities so purchased or sold by a Fund are subject to market
fluctuation; their value may be less or more when delivered than the purchase
price paid or received. When purchasing securities on a when issued or
delayed-
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delivery basis, a Fund assumes the rights and risks of ownership, including the
risk of price and yield fluctuations. No interest accrues to a Fund until
delivery and payment is completed. When a Fund makes a commitment to purchase
securities on a when-issued or delayed-delivery basis, it will record the
transaction and thereafter reflect the value of the securities in determining
its NAV per share. When a Fund sells a security on a delayed-delivery basis, the
Fund does not participate in further gains or losses with respect to the
security. When a Fund makes a commitment to sell securities on a delayed basis,
it will record the transaction and thereafter value the securities at the sales
price in determining the Fund's NAV per share. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, a Fund
could miss a favorable price or yield opportunity, or could suffer a loss.
Ordinarily a Fund purchases securities on a when-issued or
delayed-delivery basis with the intention of actually taking delivery of the
securities. However, before the securities are delivered to the Fund and before
it has paid for them (the "settlement date"), the Fund could sell the securities
if WRIMCO decided it was advisable to do so for investment reasons. The Fund
will hold aside or segregate cash or other securities, other than those
purchased on a when-issued or delayed-delivery basis, at least equal to the
amount it will have to pay on the settlement date; these other securities may,
however, be sold at or before the settlement date to pay the purchase price of
the when-issued or delayed-delivery securities.
Warrants and Rights
Warrants are options to purchase equity securities at specific prices
valid for a specific period of time. Their prices do not necessarily move
parallel to the prices of the underlying securities. Rights are similar to
warrants but normally have a short duration and are distributed directly by the
issuer to its shareholders. Rights and warrants have no voting rights, receive
no dividends and have no rights with respect to the assets of the issuer.
Warrants and rights are highly volatile and, therefore, more susceptible to a
sharp decline in value than the underlying security might be. They are also
generally less liquid than an investment in the underlying shares.
Illiquid Investments
Illiquid investments are investments that cannot be sold or disposed of
in the ordinary course of business within seven days at approximately the price
at which they are valued. Investments currently considered to be illiquid
include:
(i) repurchase agreements not terminable within seven days;
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(ii) securities for which market quotations are not readily available;
(iii) over-the-counter ("OTC") options and their underlying collateral;
(iv) bank deposits unless they are payable at principal plus accrued
interest on demand or within seven days after demand;
(v) restricted securities not determined to be liquid pursuant to
guidelines established by the Corporation's Board of Directors;
(vi) non-government stripped fixed-rate mortgage-backed securities;
and
(vii) securities involved in swap, cap, floor and collar transactions.
The assets used as cover for OTC options written by a Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure will be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
If through a change in values, net assets, or other circumstances, the
Fund were in a position where more than 10% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
Options, Futures and Other Strategies
General. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, forward currency
contracts, swaps, caps, floors, collars, indexed securities and other derivative
instruments (collectively, "Financial Instruments") to attempt to enhance income
or yield or to attempt to hedge a Fund's investments. The strategies described
below may be used in an attempt to manage a Fund's foreign currency exposure as
well as other risks of a Fund's investments that can affect fluctuation in its
NAV.
Generally, a Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, a Fund will only purchase or sell a
particular Financial Instrument if the Fund is authorized to invest in the type
of asset by which the return on, or value of, the Financial Instrument is
primarily measured. Since each Fund is authorized to invest in foreign
securities it may purchase and sell foreign currency derivatives.
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Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential declines in the value of one or
more investments held in a Fund's portfolio. Thus, in a short hedge a Fund takes
a position in a Financial Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that a Fund intends to acquire.
Thus, in a long hedge, a Fund takes a position in a Financial Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, a Fund does not own a
corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If a Fund does not complete the hedge by purchasing the security it
anticipated purchasing, the effect on the Fund's portfolio is the same as if the
transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that a Fund owns or intends to acquire. Financial Instruments on indices, in
contrast, generally are used to attempt to hedge against price movements in
market sectors in which a Fund has invested or expects to invest. Financial
Instruments on debt securities may be used to hedge either individual securities
or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations
of the Securities and Exchange Commission (the "SEC"), the several exchanges
upon which they are traded and the Commodity Futures Trading Commission (the
"CFTC"). In addition, a Fund's ability to use Financial Instruments will be
limited by tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with the Funds' goal(s) and permitted by the
Funds' investment limitations and applicable regulatory authorities. The Funds
might not use any of these strategies, and there can be no assurance that any
strategy used will succeed. The Funds' Prospectus or SAI will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in the Prospectus.
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Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of a Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities, currency and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Financial Instrument and price movements of the
investments being hedged. For example, if the value of a Financial Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match a Fund's current or anticipated investments exactly. A Fund may
invest in options and futures contracts based on securities with different
issuers, maturities or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. A Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes
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in a Fund's options or futures positions are poorly correlated with its other
investments, the positions may fail to produce anticipated gains or result in
losses that are not offset by gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if a
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Financial Instrument. Moreover, if the price of the
Financial Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not attempted to hedge at all.
(4) As described below, a Fund might be required to maintain assets as
"cover," maintain accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If a Fund were unable to close out
its positions in such Financial Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair a Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that a Fund sell a portfolio security at a
disadvantageous time.
(5) A Fund's ability to close out a position in a Financial Instrument
prior to expiration or maturity depends on the existence of a liquid secondary
market or, in the absence of such a market, the ability and willingness of the
other party to the transaction ("counterparty") to enter into a transaction
closing out the position. Therefore, there is no assurance that any position can
be closed out at a time and price that is favorable to the Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. A Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies or other options, futures
contracts or forward contracts, or (2) cash and liquid assets with a value
marked-to-market daily, sufficient to cover its potential obligations to the
extent not covered as provided in (1) above. Each Fund will comply with SEC
guidelines regarding cover for these instruments and will, if the guidelines so
require, set aside cash or liquid assets in an account with its custodian in the
prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a
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result, the commitment of a large portion of a Fund's assets to cover or to
accounts could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
Options. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon price
during the option period. A put option gives the purchaser the right to sell,
and obligates the writer to buy, the underlying investment at the agreed-upon
price during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or call options
can enable a Fund to enhance income or yield by reason of the premiums paid by
the purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price on the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security or
currency appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Fund will
be obligated to sell the security or currency at less than its market value. If
the call option is an OTC option, the securities or other assets used as cover
would be considered illiquid to the extent described under "Illiquid
Investments."
Writing put options can serve as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and a Fund will be obligated
to purchase the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is
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known as a closing purchase transaction. Conversely, a Fund may terminate a
position in a put or call option it had purchased by writing an identical put or
call option; this is known as a closing sale transaction. Closing transactions
permit a Fund to realize profits or limit losses on an option position prior to
its exercise or expiration.
A type of put which the Funds may purchase is an "optional delivery
standby commitment" which is entered into by parties selling debt securities to
a Fund. An optional delivery standby commitment gives a 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. Options offer large amounts of
leverage, which will result in a Fund's NAV being more sensitive to changes in
the value of the related instrument. Each of the Funds may purchase or write
both exchange-traded and OTC options. Exchange-traded options in the United
States are issued by a clearing organization affiliated with the exchange on
which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between a Fund and its counterparty (usually a securities dealer or a bank) with
no clearing organization guarantee. Thus, when a Fund purchases an OTC option,
it relies on the counterparty from whom it purchased the option to make or take
delivery of the underlying investment upon exercise of the option. Failure by
the counterparty to do so would result in the loss of any premium paid by the
Fund as well as the loss of any expected benefit of the transaction.
A Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating directly
with the counterparty, or by a transaction in the secondary market if any such
market exists. There can be no assurance that a Fund will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, a Fund might be unable to close out
an OTC option position at any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Options on Indices. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the
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index in question rather than on price movements in individual securities or
futures contracts. When a Fund writes a call on an index, it receives a premium
and agrees that, prior to the expiration date, the purchaser of the call, upon
exercise of the call, will receive from the Fund an amount of cash if the
closing level of the index upon which the call is based is greater than the
exercise price of the call. The amount of cash is equal to the difference
between the closing price of the index and the exercise price of the call times
a specified multiple (the "multiplier"), which determines the total dollar value
for each point of such difference. When a Fund buys a call on an index, it pays
a premium and has the same rights as to such call as are indicated above. When a
Fund buys a put on a stock index, it pays a premium and has the right, prior to
the expiration date, to require the seller of the put, upon the Fund's exercise
of the put, to deliver to the Fund an amount of cash if the closing level of the
index upon which the put is based is less than the exercise price of the put,
which amount of cash is determined by the multiplier, as described above for
calls. When a Fund writes a put on an index, it receives a premium and the
purchaser of the put has the right, prior to the expiration date, to require the
Fund to deliver to it an amount of cash equal to the difference between the
closing level of the index and the exercise price times the multiplier is the
closing level is less than the exercise price.
Risks of Options on Indices. The risks of investment in options on
indices may be greater than options on securities. Because index options are
settled in cash, when a Fund writes a call on an index it cannot provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. A Fund can offset some of the risk of its writing a call
index option by holding a diversified portfolio of securities similar to those
on which the underlying index is based. However, a Fund cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same securities as
underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if a Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, a Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as a common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that
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its value may have declined since the exercise date is borne by the exercising
holder. In contrast, even if the writer of an index call holds securities that
exactly match the composition of the underlying index, it will not be able to
satisfy its assignment obligations by delivering those securities against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date. By the time it
learns that it has been assigned, the index may have declined, with a
corresponding decline in the value of its portfolio. This "timing risk" is an
inherent limitation on the ability of index call writers to cover their risk
exposure by holding securities positions.
If a Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size and
strike price, the terms of OTC options (options not traded on exchanges)
generally are established through negotiation with the other party to the
option contract. While this type of arrangement allows a Fund great flexibility
to tailor the option to its needs, OTC options generally involve greater risk
than exchange-traded options, which are guaranteed by the clearing organization
of the exchanges where they are traded.
Generally, OTC foreign currency options used by a Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
Futures Contracts and Options on Futures Contracts. The purchase of
futures or call options on futures can serve as a long hedge, and the sale of
futures or the purchase of put options on futures can serve as a short hedge.
Writing call options on futures contracts can serve as a limited short hedge,
using a strategy similar to that used for writing call options on securities or
indices. Similarly, writing put options on futures contracts can serve as a
limited long hedge. Futures contracts and options on futures contracts can also
be purchased and sold to attempt to enhance income or yield.
In addition, futures strategies also can be used to manage the average
duration of a Fund's fixed-income portfolio. If WRIMCO wishes to shorten the
average duration of a Fund's fixed-income portfolio, the Fund may sell a debt
futures contract or a call option thereon, or purchase a put option on that
futures contract. If WRIMCO wishes to lengthen the average duration of a Fund's
fixed-
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income portfolio, the Fund may buy a debt futures contract or a call option
thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When a Fund purchases an option on a futures contract, the premium paid
plus transaction costs is all that is at risk. In contrast, when a Fund
purchases or sells a futures contract or writes a call or put option thereon, it
is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If the Fund has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures
contracts can enter into offsetting closing transactions, similar to closing
transactions on options, by selling or purchasing, respectively, an instrument
identical to the instrument purchased or sold. Positions in futures contracts
and options on futures contracts may be closed only on an exchange or board of
trade that provides a secondary market. However, there can be no assurance that
a liquid secondary market will exist for a particular contract at a particular
time. In such event, it may not be possible to close a futures contract or
option position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid
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secondary market or the imposition of price limits, it could incur substantial
losses. The Fund would continue to be subject to market risk with respect to the
position. In addition, except in the case of purchased options, the Fund would
continue to be required to make daily variation margin payments and might be
required to maintain the position being hedged by the futures contract or option
or to maintain liquid assets in an account.
Risk of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to differences in the natures of those markets, are subject to the
following factors, which may create distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate, currency exchange rate or stock market trends by WRIMCO may still
not result in a successful transaction. WRIMCO may be incorrect in its
expectations as to the extent of various interest rate, currency exchange rate
or stock market movements or the time span within which the movements take
place.
Index Futures. The risk of imperfect correlation between movements in
the price of an index future and movements in the price of the securities that
are the subject of the hedge increases as the composition of a Fund's portfolio
diverges from the securities included in the applicable index. The price of the
index future may move more than or less than the price of the securities being
hedged. If the price of the index future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, a Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged
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if the historical volatility of the prices of such securities being hedged is
more than the historical volatility of the prices of the securities included in
the index. It is also possible that, where a Fund has sold index futures
contracts to hedge against decline in the market, the market may advance and the
value of the securities held in the portfolio may decline. If this occurred, a
Fund would lose money on the futures contract and also experience a decline in
value of its portfolio securities. However, while this could occur for a very
brief period or to a very small degree, over time the value of a diversified
portfolio of securities will tend to move in the same direction as the market
indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase
in the price of securities before a Fund is able to invest in them in an orderly
fashion, it is possible that the market may decline instead. If the Fund then
concludes not to invest in them at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
Foreign Currency Hedging Strategies--Special Considerations. Each Fund
may use options and futures contracts on foreign currencies (including the
euro), as described above, and forward currency contracts, as described below,
to attempt to hedge against movements in the values of the foreign currencies in
which the Fund's securities are denominated or to attempt to enhance income or
yield. Currency hedges can protect against price movements in a security that a
Fund owns or intends to acquire that are attributable to changes in the value of
the currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other causes.
Each Fund might seek to hedge against changes in the value of a
particular currency when no Financial Instruments on that currency
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are available or such Financial Instruments are more expensive than certain
other Financial Instruments. In such cases, a Fund may seek to hedge against
price movements in that currency by entering into transactions using Financial
Instruments on another currency or a basket of currencies, the values of which
WRIMCO believes will have a high degree of positive correlation to the value of
the currency being hedged. The risk that movements in the price of the Financial
Instrument will not correlate perfectly with movements in the price of the
currency subject to the hedging transaction is magnified when this strategy is
used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, a Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.
Settlement of transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
a Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
Forward Currency Contracts. Each Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time of the forward
currency contract. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
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Such transactions may serve as long hedges; for example, a Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that a Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges; for
example, a Fund may sell a forward currency contract to lock in the U.S. dollar
equivalent of the proceeds from the anticipated sale of a security, dividend or
interest payment denominated in a foreign currency.
Each Fund may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if a Fund owned securities denominated in euros, it could enter into a forward
currency contract to sell euros in return for U.S. dollars to hedge against
possible declines in the euro's value. Such a hedge, sometimes referred to as a
"position hedge," would tend to offset both positive and negative currency
fluctuations, but would not offset changes in security values caused by other
factors. Each Fund could also hedge the position by selling another currency
expected to perform similarly to the euro. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost, yield,
or efficiency, but generally would not hedge currency exposure as effectively as
a simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
Each Fund also may use forward currency contracts to attempt to enhance
income or yield. A Fund could use forward currency contracts to increase its
exposure to foreign currencies that WRIMCO believes might rise in value relative
to the U.S. dollar, or shift its exposure to foreign currency fluctuations from
one country to another. For example, if a Fund owned securities denominated in a
foreign currency and WRIMCO believed that currency would decline relative to
another currency, it might enter into a forward currency contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second foreign currency.
The cost to a Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When a Fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
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contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that a Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, a Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in an account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, a Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the flexibility to enter into such forward currency contracts
when it determines that the best interests of a Fund will be served.
Successful use of forward currency contracts depends on WRIMCO's skill
in analyzing and predicting currency values. Forward currency contracts may
substantially change a Fund's exposure to changes in currency exchange rates and
could result in losses to a Fund if currencies do not perform as WRIMCO
anticipates. There is no assurance that WRIMCO's use of forward currency
contracts will be advantageous to a Fund or that WRIMCO will hedge at an
appropriate time.
Combined Positions. A Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its overall
position. For example, a Fund may purchase a put option and write a call option
on the same underlying instrument, in order to construct a combined position
whose risk and return characteristics are similar to selling a futures contract.
Another possible combined position would involve writing a call option at one
strike price and buying a call option at a lower price, in order to reduce the
risk of the written call option in the event of a substantial price increase.
Because combined options positions involve multiple trades, they result in
higher transaction costs and may be more difficult to open and close out.
Turnover. A Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise
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of calls or puts written by a Fund, and the sale or purchase of futures
contracts, may cause it to sell or purchase related investments, thus increasing
its turnover rate. Once a Fund has received an exercise notice on an option it
has written, it cannot effect a closing transaction in order to terminate its
obligation under the option and must deliver or receive the underlying
securities at the exercise price. The exercise of puts purchased by a Fund may
also cause the sale of related investments, also increasing turnover; although
such exercise is within the Fund's control, holding a protective put might cause
it to sell the related investments for reasons that would not exist in the
absence of the put. A Fund will pay a brokerage commission each time it buys or
sells a put or call or purchases or sells a futures contract. Such commissions
may be higher than those that would apply to direct purchases or sales.
Swaps, Caps, Floors and Collars. Each of the Funds may enter into
swaps, caps, floors and collars to preserve a return or a spread on a particular
investment or portion of its portfolio, to protect against any increase in the
price of securities the Fund anticipates purchasing at a later date or to
attempt to enhance yield. Swaps involve the exchange by the Fund with another
party of their respective commitments to pay or receive cash flows on a notional
principal amount, e.g., an exchange of floating rate payments for fixed-rate
payments. The purchase of a cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined value, to receive payments on a notional
principal amount from the party selling the cap. The purchase of a floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined value, to receive payments on a notional principal amount from the
party selling the floor. A collar combines elements of buying a cap and selling
a floor.
Swap agreements, including caps, floors and collars, can be
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors. Depending on their structure,
swap agreements may increase or decrease the overall volatility of a Fund's
investments and its share price and yield because, and to the extent, these
agreements affect a Fund's exposure to long- or short-term interest rates (in
the United States or abroad), foreign currency values, mortgage-backed security
values, corporate borrowing rates or other factors such as security prices or
inflation rates.
Swap agreements will tend to shift a Fund's investment exposure from
one type of investment to another. For example, if a Fund agrees to exchange
payments in U.S. dollars for payments in foreign currency, the swap agreement
would tend to decrease the Fund's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options.
The creditworthiness of firms with which a Fund enters into swaps, caps
or floors will be monitored by WRIMCO. If a firm's
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creditworthiness declines, the value of the agreement would be likely to
decline, potentially resulting in losses. If a default occurs by the other party
to such transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction.
The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate NAV at least equal to the
accrued excess will be maintained in an account with the Fund's custodian that
satisfies the requirements of the 1940 Act. Each Fund will also establish and
maintain such account with respect to its total obligations under any swaps that
are not entered into on a net basis and with respect to any caps or floors that
are written by the Fund. WRIMCO and the Funds believe that such obligations do
not constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to a Fund's borrowing restrictions. The position of
the SEC is that assets involved in swap transactions are illiquid and are,
therefore, subject to the limitations on investing in illiquid securities.
Investment Restrictions and Limitations
Certain of the Funds' investment restrictions and other limitations are
described in this SAI. The following are each Fund's fundamental investment
limitations set forth in their entirety, which, like the Fund's goal(s) and the
types of securities in which the Fund may invest, cannot be changed without
shareholder approval. For this purpose, shareholder approval means the approval,
at a meeting of Fund shareholders, by the lesser of (1) the holders of 67% or
more of the Fund's shares represented at the meeting, if more than 50% of the
Fund's outstanding shares are present in person or by proxy or (2) more than 50%
of the Fund's outstanding shares. A Fund may not:
(i) Buy real estate nor any nonliquid interests in real estate
investment trusts;
(ii) Buy shares of other investment companies that redeem their
shares. A Fund can buy shares of investment companies that do
not redeem their shares if it does so in a regular transaction
in the open market and then does not have more than one-tenth
(i.e., 10%) of the total assets of the four Funds in these
shares;
(iii) Lend money or other assets, other than through certain limited
types of loans; the Funds may buy debt securities and other
obligations consistent with their respective goals and their
other investment policies and restrictions; they may also lend
their portfolio securities to the extent allowed, and in
accordance with
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the requirements, under the 1940 Act and enter into repurchase
agreements (see "Repurchase Agreements" above);
(iv) Invest for the purpose of exercising control or management of
other companies;
(v) Participate on a joint, or a joint and several, basis in any
trading account in any securities;
(vi) Sell securities short (unless a Fund owns or has the right to
obtain securities equivalent in kind and amount to the
securities sold short), or purchase securities on margin, except
that (1) this policy does not prevent a Fund from entering into
short positions in foreign currency, futures contracts, options,
forward contracts, swaps, caps, floors, collars and other
financial instruments, (2) a Fund may obtain such short-term
credits as are necessary for the clearance of transactions, and
(3) a Fund may make margin payments in connection with futures
contracts, options, forward contracts, swaps, caps, floors,
collars and other financial instruments;
(vii) Engage in the underwriting of securities, that is, the selling
of securities for others;
(viii) With respect to 75% of its total assets, purchase securities of
any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act, if immediately after and
as a result of such purchase, (a) the value of the holdings of a
Fund in the securities of such issuer exceeds 5% of the value of
a Fund's total assets, or (b) a Fund owns more than 10% of the
outstanding voting securities of such issuer; United Income
Fund, United Accumulative Fund and United Bond Fund may not buy
securities of companies in any one industry if more than 25% of
that Fund's total assets would then be invested in companies in
that industry;
(ix) Purchase or sell physical commodities; however, this policy
shall not prevent a Fund from purchasing and selling foreign
currency, futures contracts, options, forward contracts, swaps,
caps, floors, collars and other financial instruments;
(x) Invest more than 5% of the Corporation's total assets in
securities issued by foreign governments;
(xi) Borrow money; however, this policy shall not prevent a Fund from
pledging its assets in connection with its purchase and sale of
futures contracts, options, forward contracts, swaps, caps,
floors, collars and other financial instruments; or
(xii) Issue senior securities.
38
<PAGE>
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval:
(i) At least 65% of United Bond Fund's total assets will be invested
during normal market conditions in bonds. United Bond Fund may
not purchase any securities other than debt securities if, as a
result, more than 10% of the value of the Fund's total assets
would consist of such other securities. This 10% limit does not
include (1) any securities required to be sold as promptly as
practicable after conversion of convertible debt securities or
exercise of warrants, as set forth below, or (2) premiums paid
or received by the Fund as to those put and call options that
this Fund is permitted to use, the value of any put or call
options or futures contracts held by it or the amount of initial
or variation margin deposits as to those puts, calls or futures
contracts that it is permitted to use. The Fund may convert
convertible debt securities and exercise warrants provided that,
if as a result of conversion or exercise and/or as a result of
warrants becoming separately salable more than 10% of the Fund's
total assets consists of non-debt securities, sufficient
non-debt securities will be sold as promptly as practicable to
reduce the percentage of such non-debt securities held by the
Fund to 10% or less of its total assets, less the amounts set
forth in (2) above.
(ii) Under normal market conditions, United Income Fund will invest
at least 65% of its total assets in income-producing securities.
(iii) United Accumulative Fund, United Income Fund and United Science
and Technology Fund do not intend to invest in non-investment
grade debt securities if, as a result of such investment, more
than 5% of its total assets would consist of such investments.
United Bond Fund does not intend to invest in non-investment
grade debt securities if, as a result of such investment, more
than 20% of its total assets would consist of such investments.
(iv) Each Fund may not invest more than 20% of its net assets in
foreign securities.
(v) Each Fund may not purchase a security if, as a result, more than
10% of its net assets would consist of illiquid investments.
(vi) Each Fund does not currently intend to invest more than 5% of
its total assets in the securities of other investment
companies.
39
<PAGE>
(vii) Each Fund, other than United Science and Technology Fund, does
not currently intend to purchase the securities of any issuer
(other than securities issued or guaranteed by domestic or
foreign governments or political subdivisions thereof) if, as a
result, more than 5% of its total assets would be invested in
the securities of business enterprises that, including
predecessors, have a record of less than three years of
continuous operation. This restriction does not apply to any
obligations issued or guaranteed by the U.S. government or a
state or local government authority, or their respective
instrumentalities, or to collateralized mortgage obligations,
other mortgage-related securities, asset-backed securities,
indexed securities or OTC derivative instruments.
(viii) To the extent that a Fund enters into futures contracts, options
on futures contracts or options on foreign currencies traded on
a CFTC-regulated exchange, in each case other than for bona fide
hedging purposes (as defined by the CFTC), the aggregate initial
margin and premiums required to establish those positions
(excluding the amount by which options are "in-the-money" at the
time of purchase) will not exceed 5% of the liquidation value of
the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any contracts the Fund has
entered into. (In general, a call option on a futures contract
is "in-the-money" if the value of the underlying futures
contract exceeds the strike, i.e., exercise, price of the call;
a put option on a futures contract is "in-the-money" if the
value of the underlying futures contract is exceeded by the
strike price of the put.) This policy does not limit to 5% the
percentage of a Fund's total assets that are at risk in futures
contracts, options on futures contracts and currency options.
An investment policy or limitation that states a maximum percentage of
a Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, a Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstances will not be considered when determining whether the
investment complies with a Fund's investment policies and limitations.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year and
dividing it by the monthly average of the market value of such securities during
the year, excluding certain short-term securities. A Fund's turnover rate may
vary greatly from year to year as well as within a particular year and may be
affected by cash requirements for the redemption of its shares.
The portfolio turnover rates for each of the Funds for the fiscal years
ended December 31, 1999 and December 31, 1998 were as follows:
40
<PAGE>
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
United Accumulative Fund ................................. 372.35% 373.78%
United Bond Fund ......................................... 34.12 33.87%
United Income Fund ....................................... 53.79 49.29%
United Science and
Technology Fund ..................................... 40.35 55.70%
</TABLE>
A high turnover rate will increase transaction costs and commission
costs that will be borne by the Fund and could generate taxable income or loss.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Corporation has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Corporation's Board of Directors, Waddell & Reed, Inc. assigned
the Management Agreement and all related investment management duties (and
related professional staff) to WRIMCO, a wholly owned subsidiary of Waddell &
Reed, Inc. Under the Management Agreement, WRIMCO is employed to supervise the
investments of the Funds and provide investment advice to the Funds. The address
of WRIMCO and Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217. Waddell & Reed, Inc. is the Corporation's
underwriter.
The Management Agreement permits WRIMCO, or an affiliate of WRIMCO, to
enter into a separate agreement for transfer agency services ("Shareholder
Servicing Agreement") and a separate agreement for accounting services
("Accounting Services Agreement") with the Corporation. The Management Agreement
contains detailed provisions as to the matters to be considered by the
Corporation's Board of Directors prior to approving any Shareholder Servicing
Agreement or Accounting Services Agreement.
Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company, which is a wholly owned subsidiary of Waddell & Reed
Financial, Inc., a publicly held company. The address of these companies is 6300
Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
WRIMCO and/or its predecessors have served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds,
Waddell & Reed Funds, Inc., and Target/United Funds, Inc. since 1940 or the
company's inception.
41
<PAGE>
Waddell & Reed, Inc. serves as principal underwriter for the investment
companies in the United Group of Mutual Funds and Waddell & Reed Funds, Inc. and
acts as principal underwriter and distributor for variable life insurance and
variable annuity policies for which Target/United Funds, Inc. is the underlying
investment vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the
Corporation and Waddell & Reed Services Company (the "Agent"), a subsidiary of
Waddell & Reed, Inc., the Agent performs shareholder servicing functions,
including the maintenance of shareholder accounts, the issuance, transfer and
redemption of shares, distribution of dividends and payment of redemptions, the
furnishing of related information to the Corporation and handling of shareholder
inquiries. A new Shareholder Servicing Agreement, or amendments to the existing
one, may be approved by the Corporation's Board of Directors without shareholder
approval.
Accounting Services
Under the Accounting Services Agreement entered into between the
Corporation and the Agent, the Agent provides each Fund with bookkeeping and
accounting services and assistance, including maintenance of the Corporation's
records, pricing of the Corporation's shares, preparation of prospectuses for
existing shareholders, preparation of proxy statements and certain shareholder
reports. A new Accounting Services Agreement, or amendments to an existing one,
may be approved by the Corporation's Board of Directors without shareholder
approval.
Payments by the Corporation for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the
Corporation pays WRIMCO a fee as described in the Prospectus.
The management fees paid to WRIMCO for each Fund during the last three
fiscal years were as follows:
42
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United Accumulative Fund ................... $11,969,745 $ 9,490,941 $ 8,111,304
United Bond Fund ........................... 2,525,129 2,284,751 2,221,667
United Income Fund ......................... 44,402,694 39,808,311 32,837,940
United Science and Technology
Fund .................................. 16,101,855 7,557,688 5,997,091
----------- ---------- -----------
Total ................................. $74,999,423 $59,141,691 $49,168,002
=========== =========== ==========
</TABLE>
For purposes of calculating the daily fee the Corporation does not
include money owed to it by Waddell & Reed, Inc. for shares which it has sold
but not yet paid the Corporation. The Corporation accrues and pays this fee
daily.
Under the Shareholder Servicing Agreement, with respect to Class A,
Class B and Class C shares, each Fund pays the Agent a monthly fee of $1.3125
for each shareholder account that was in existence at any time during the prior
month, plus $0.30 for each account on which a dividend or distribution, of cash
or shares, had a record date in that month. For Class Y shares, each Fund pays
the Agent a monthly fee equal to one-twelfth of .15 of 1% of the average daily
net assets of that class for the preceding month. The Corporation also pays
certain out-of-pocket expenses of the Agent, including long distance telephone
communications costs; microfilm and storage costs for certain documents; forms,
printing and mailing costs; charges of any sub-agent used by Agent in performing
services under the Shareholder Servicing Agreement; and costs of legal and
special services not provided by Waddell & Reed, Inc., WRIMCO or the Agent.
Under the Accounting Services Agreement, each Fund pays the Agent a
monthly fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
<TABLE>
<CAPTION>
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Fund
------------------------ ------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
43
<PAGE>
Fees paid to the Agent for the fiscal years ended December 31, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United Accumulative Fund ................... $100,000 $100,000 $100,000
United Bond Fund ........................... 60,833 61,667 60,000
United Income Fund ......................... 100,000 100,000 100,000
United Science and
Technology Fund ....................... 100,000 100,000 93,750
</TABLE>
Since the Corporation pays a management fee for investment supervision
and an accounting services fee for accounting services as discussed above,
WRIMCO and the Agent, respectively, pay all of their own expenses in providing
these services. Amounts paid by the Corporation under the Shareholder Servicing
Agreement are described above. Waddell & Reed, Inc. and affiliates pay the
Corporation's Directors and officers who are affiliated with WRIMCO and its
affiliates. The Corporation pays the fees and expenses of the Corporation's
other Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Corporation'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 sells shares only for purchase orders received. Under this
agreement, Waddell & Reed, Inc. pays the costs of sales literature, including
the costs of shareholder reports used as sales literature, and the costs of
printing the prospectus furnished to it by the Corporation. The aggregate dollar
amounts of underwriting commissions for Class A shares for the fiscal years
ended December 31, 1999, 1998 and 1997 were $35,273,006, $33,372,169 and
$28,736,826, respectively, and the amounts retained by Waddell & Reed, Inc. were
$14,082,052, $13,986,977 and $12,109,175, respectively.
A major portion of the sales charge for Class A shares and the
contingent deferred sales charges for Class B and Class C shares may be paid to
financial advisors and managers of Waddell & Reed, Inc. Waddell & Reed, Inc.
will re-allow to selling broker-dealers a portion of the sales charge for Class
A shares. Waddell & Reed, Inc. may compensate its financial advisors and selling
broker-dealers as to purchases for which there is no sales charge or deferred
charge.
The Corporation 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 Corporation under Federal or other securities laws and to the
Investment Company Institute and nonrecurring and extraordinary expenses,
including litigation and indemnification relating to litigation.
Under the Distribution and Service Plan (the "Class A Plan") for Class
A shares adopted by the Corporation pursuant to Rule 12b-1 under the 1940 Act,
each Fund may pay Waddell & Reed, Inc., the
44
<PAGE>
principal underwriter for the Corporation, a fee not to exceed .25% of a Fund's
average annual net assets attributable to Class A shares, paid monthly, to
reimburse Waddell & Reed, Inc. for its costs and expenses in connection with,
either directly or through others, the distribution of the Class A shares and/or
the provision of personal services to Class A shareholders and/or maintenance of
Class A shareholder accounts.
Waddell & Reed, Inc. offers each Fund's shares through its financial
advisors, registered representatives and sales managers (sales force) unless it
elects, which is not currently contemplated for Class A, Class B and Class C
shares, to make distribution of shares also through other broker-dealers, banks
and other appropriate intermediaries. In distributing shares through its sales
force, Waddell & Reed, Inc. will pay commissions and incentives to the sales
force at or about the time of sale and will incur other expenses including cost
for prospectuses, sales literature, advertisements, sales office maintenance,
processing of orders and general overhead with respect to its efforts to
distribute the Fund's shares. The Class A Plan permits Waddell & Reed, Inc. to
receive reimbursement for these Class A-related distribution activities through
the distribution fee, subject to the limit contained in the Plan. The Class A
Plan also permits Waddell & Reed, Inc. to be reimbursed for amounts it expends
in compensating, training and supporting registered account representatives,
sales managers and/or other appropriate personnel in providing personal services
to Class A shareholders of each Fund and/or maintaining Class A shareholder
accounts; increasing services provided to Class A shareholders of each Fund by
office personnel located at field sales offices; engaging in other activities
useful in providing personal service to Class A shareholders of each Fund and/or
maintenance of Class A shareholder accounts; and in compensating broker-dealers
who may regularly sell Class A shares of each Fund, and other third parties, for
providing shareholder services and/or maintaining shareholder accounts with
respect to
45
<PAGE>
Class A shares. For its fiscal year ended December 31, 1999, service and
distribution fees paid (or accrued) under the Class A Plan were as follows:
<TABLE>
<CAPTION>
Service Distribution
Fee Fee
------- ------------
<S> <C> <C>
United Accumulative Fund $ 4,352,839 $241,034
United Bond Fund 1,245,968 75,758
United Income Fund 16,986,294 947,361
United Science and Technology
Fund 4,574,420 424,232
</TABLE>
To the extent that Waddell & Reed, Inc. incurs expenses for which
reimbursement may be made under the Plan that relate to distribution activities
also involving another fund in the United Group of Funds or Waddell & Reed
Funds, Inc., Waddell & Reed, Inc. typically determines the amount attributable
to each Fund's expenses under the Plan on the basis of a combination of the
respective classes' relative net assets and number of shareholder accounts.
Under the Plans adopted by the Corporation for Class B shares and Class
C shares, respectively, each Fund may pay Waddell & Reed, Inc. a service fee not
to exceed 0.25% of the Fund's average annual net assets attributable to that
class, paid monthly, to compensate Waddell & Reed, Inc. for its services, either
directly or through others,in connection with the provision of personal services
to shareholders of that class and/or the maintenance of shareholder accounts of
that class and a distribution fee not to exceed 0.75% of the Fund's average
annual net assets attributable to that class, paid monthly, to compensate
Waddell & Reed, Inc. for its services, either directly or through others,in
connection with the distribution of shares of that class. The Class B Plan and
the Class C Plan each permit Waddell & Reed, Inc. to receive compensation,
through the distribution fee and service fee, respectively, for its distribution
activities for that class, which are similar to the distribution activities
described with respect to the Class A Plan, and for its activities in providing
personal services to shareholders of that class and/or maintaining shareholder
accounts of that class, which are similar to the corresponding activities for
which it is entitled to reimbursement under the Class A Plan.
The only Directors or interested persons, as defined in the 1940 Act,
of the Corporation who have a direct or indirect financial interest in the
operation of a Plan are the officers and Directors who are also officers of
either Waddell & Reed, Inc. or its affiliate(s) or who are shareholders of
Waddell & Reed Financial, Inc., the indirect parent company of Waddell & Reed,
Inc. Each Plan is anticipated to benefit a Fund and its shareholders of the
affected class through Waddell & Reed, Inc.'s activities not only to distribute
the shares of the affected class but also to provide personal services to
shareholders of that class and thereby, promote the maintenance of their
accounts with the Fund. The Corporation anticipates that shareholders of a
particular class may benefit to the extent that Waddell & Reed's activities are
successful in increasing the assets of a Fund, through increased sales or
reduced redemptions, or a combination of these, and reducing the Fund and class
expenses of a shareholder's share of Fund and class expenses. Increased Fund
assets may also provide greater resources with which to pursue the goal(s) of
the Fund. Further, continuing sales of Fund shares may also reduce the
likelihood that it will be necessary to liquidate portfolio securities, in
amounts or at times that may be disadvantageous to the Fund, to meet redemption
demands. In addition, the Corporation anticipates that the revenues from the
Plan will provide Waddell & Reed, Inc. with greater resources to make the
financial commitments necessary to continue to improve the quality and level of
services to a Fund and the shareholders of the affected class. Each Plan was
approved by the Corporation's Board of Directors, including the Directors who
are not interested persons of the Corporation and who have no direct or indirect
financial interest in the operations of each Plan or any agreement referred to
in each Plan (hereafter, the "Plan Directors"). Each Class A Plan was also
approved by the affected shareholders of the Fund.
46
<PAGE>
Among other things, each Plan provides that (i) Waddell & Reed, Inc.
will provide to the Directors of the Corporation 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 a Fund under the Plan may not be materially
increased without the vote of the holders of a majority of the outstanding
shares of the affected class of that 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 custodian for each Fund is UMB Bank, n.a., 928 Grand Boulevard,
Kansas City, Missouri. In general, the custodian is responsible for holding each
Fund's cash and securities. Deloitte & Touche LLP, 1010 Grand Boulevard, Kansas
City, Missouri, the Corporation's independent auditors, audits each Fund's
financial statements.
49
<PAGE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The NAV of each class of the shares of a Fund is the value of the
assets of that class, less the class's liabilities, divided by the total number
of outstanding shares of that class.
Class A shares of the Funds are sold at their next determined NAV plus
the sales charge described in the Prospectus. The sales charge is paid to
Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of December
31, 1999, which is the most recent balance sheet included in this SAI, was as
follows:
<TABLE>
<S> <C>
United Accumulative Fund
NAV per Class A share (Class A
net assets divided by Class A shares
outstanding) ............................................................. $9.14
Add: selling commission (5.75% of offering
price) ................................................................... .56
-----
Maximum offering price per Class A share
(Class A NAV divided by 94.25%) .......................................... $9.70
=====
</TABLE>
47
<PAGE>
<TABLE>
<S> <C>
United Bond Fund
NAV per Class A share (Class A
net assets divided by Class A shares
outstanding) ............................................................. $5.97
Add: selling commission (5.75% of offering
price) ................................................................... .36
-----
Maximum offering price per Class A share
(Class A NAV divided by 94.25%) .......................................... $6.33
=====
United Income Fund
NAV per Class A share (Class A
net assets divided by Class A shares
outstanding) ............................................................. $8.13
Add: selling commission (5.75% of offering
price) ................................................................... .50
------
Maximum offering price per Class A share
(Class A NAV divided by 94.25%) .......................................... $8.63
======
United Science and Technology Fund
NAV per Class A share (Class A
net assets divided by Class A shares
outstanding) ............................................................. $18.43
Add: selling commission (5.75% of offering
price) ................................................................... 1.12
------
Maximum offering price per Class A share
(Class A NAV divided by 94.25%) .......................................... $19.55
======
</TABLE>
The offering price of a Class A share is its NAV next calculated
following acceptance of a purchase order plus the sales charge. The offering
price of a Class B, Class C or a Class Y share is its NAV next calculated
following acceptance of a purchase order.
The number of shares you receive for your purchase depends on the next
offering price after Waddell & Reed, Inc. 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 document called 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
Corporation may determine to discontinue offering Corporation shares for
purchase.
48
<PAGE>
The NAV and offering price per share are ordinarily computed once on
each day that the NYSE is open for trading, as of the later of the close of the
regular session of the NYSE or the close of the regular session of any other
securities or commodities exchange on which an option or futures contract held
by the Fund is traded. The NYSE annually announces the days on which it will not
be open for trading. The most recent announcement indicates that it will not be
open on the following days: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, it is possible that the NYSE may
close on other days. The NAV will change every business day, since the value of
the assets and the number of shares outstanding change every business day.
The securities in the portfolio of each Fund, except as otherwise
noted, that are listed or traded on a stock exchange, are valued on the basis of
the last sale on that day or, lacking any sales, at a price which is the mean
between the closing bid and asked prices. Other securities 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.
Bonds, other than convertible bonds, are valued using a third-party pricing
system. Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Short-term debt securities are valued at amortized
cost, which approximates market. When market quotations are not readily
available, securities and other assets are valued at fair value as determined in
good faith under the procedures established by, and under the general
supervision and responsibility of, the Fund's Board of Directors.
Options and futures contracts purchased and held by a Fund are valued
at the last sales price on the securities or commodities exchanges on which they
are traded, or, if there are no transactions, at the mean between bid and asked
prices. Ordinarily, the close of the regular session for options trading on
national securities exchanges is 4:10 p.m. Eastern time and the close of the
regular session for commodities exchanges is 4:15 p.m. Eastern time. Futures
contracts will be valued by reference to established futures exchanges. The
value of a futures contract purchased by a Fund will be either the closing price
of that contract or the bid price. Conversely, the value of a futures contract
sold by a Fund will be either the closing price or the asked price.
When a Fund writes a put or call, an amount equal to the premium
received is included in that 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 a Fund wrote is exercised, the proceeds received on
the sale of the related investment are increased by the amount of the premium
that the Fund received. If a Fund exercises 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 a Fund is exercised, the amount that Fund pays to
purchase the related
49
<PAGE>
investment is decreased by the amount of the premium it received. If a Fund
exercises a put it purchased, the amount that Fund receives from the sale of the
related investment is reduced by the amount of the premium it paid. If a put or
call written by a Fund expires, it has a gain in the amount of the premium; if
it enters into a closing purchase transaction, it will have a gain or loss
depending on whether the premium was more or less than the cost of the closing
transaction.
Foreign currency exchange rates are generally determined prior to the
close of trading of the regular session of the NYSE. Occasionally events
affecting the value of foreign investments and such exchange rates occur between
the time at which they are determined and the close of the regular session of
trading on the NYSE, which events will not be reflected in a computation of a
Fund's NAV on that day. If events materially affecting the value of such
investments or currency exchange rates occur during such time period,
investments will be valued at their fair value as determined in good faith by or
under the direction of the Board of Directors. The foreign currency exchange
transactions of a Fund conducted on a spot (that is, cash) basis are valued at
the spot rate for purchasing or selling currency prevailing on the foreign
exchange market. This rate under normal market conditions differs from the
prevailing exchange rate in an amount generally less than one-tenth of one
percent due to the costs of converting from one currency to another.
Optional delivery standby commitments are valued at fair value under
the general supervision and responsibility of the Corporation's Board of
Directors. They are accounted for in the same manner as exchange-listed puts.
Minimum Initial and Subsequent Investments
For Class A, Class B and Class C shares, initial investments must be at
least $500 with the exceptions described in this paragraph. A $100 minimum
initial investment pertains to certain exchanges of shares from another fund in
the United Group. A $50 minimum initial investment pertains to purchases for
certain retirement plan accounts and to accounts for which an investor has
arranged, at the time of initial investment, to make subsequent purchases for
the account by having regular monthly withdrawals of $25 or more made from a
bank account. A minimum initial investment of $25 is applicable to purchases
made through payroll deduction for or by employees of WRIMCO, Waddell & Reed,
Inc., their affiliates or certain retirement plan accounts. Except with respect
to certain exchanges and automatic withdrawals from a bank account, a
shareholder may make subsequent investments of any amount. See "Exchanges for
Shares of Other Funds in the United Group."
For Class Y shares, investments by government entities or authorities
or by corporations must total at least $10 million
50
<PAGE>
within the first twelve months after initial investment. There is no initial
investment minimum for other Class Y investors.
Reduced Sales Charges (Applicable to Class A Shares only)
Account Grouping
Large purchases of Class A shares are subject to lower sales charges.
The schedule of sales charges appears in the Prospectus for Class A shares. 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 Gifts to Minors Act ("UGMA") or Uniform Transfers to Minors
Act ("UTMA") account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), or salary reduction plan account
under Section 457 of the Internal Revenue Code of 1986, as amended (the
"Code"), provided that such purchases are subject to a sales charge
(see "Net Asset Value Purchases"), tax-sheltered annuity account
("TSA") or Keogh Plan account, provided that the individual and spouse
are the only participants in the Keogh Plan; and
7. Purchases by a trustee under a trust where that individual or his or
her spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens a 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;
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B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase
made in the trust account is eligible for grouping with an IRA
account of W, H's wife;
C. H's will provides for the establishment of a trust for the
benefit of his minor children upon H's death; his bank is
named as trustee; upon H's death, an account is established in
the name of the bank, as trustee; a purchase in the account
may be grouped with an account held by H's wife in her own
name.
D. X establishes a trust naming herself as trustee and R, her
son, as successor trustee and R and S as beneficiaries; upon
X's death, the account is transferred to R as trustee; a
purchase in the account may not be grouped with R's individual
account. If X's spouse, Y, was successor trustee, this
purchase could be grouped with Y's individual account.
All purchases of Class A shares made for a participant in a
multi-participant Keogh plan may be grouped only with other purchases made under
the same plan; a multi-participant Keogh plan is defined as a plan in which
there is more than one participant where one or more of the participants is
other than the spouse of the owner/employer.
Example A: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made under
the plan with any purchases in categories 1 through 7 above.
Example B: H has established a Keogh Plan; his wife, W, is a participant and
they have hired one or more employees who also become participants
in the plan; H and W may not combine any purchases made under the
plan with any purchases in categories 1 through 7 above; however,
all purchases made under the plan for H, W or any other employee
will be combined.
All purchases of Class A shares made under a "qualified" employee
benefit plan of an incorporated business will be grouped. A "qualified" employee
benefit plan is established pursuant to Section 401 of the Code. All qualified
employee benefit plans of any one employer or affiliated employers will also be
grouped. An affiliate is defined as an employer that directly, or indirectly,
controls or is controlled by or is under control with another employer. All
qualified employee benefit plans of an employer who is a franchisor and those of
its franchisee(s) may also be grouped.
Example: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made under
both plans will be grouped.
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All purchases of Class A shares made under a simplified employee
pension plan ("SEP"), payroll deduction plan or similar arrangement adopted by
an employer or affiliated employers (as defined above) may be grouped provided
that the employer elects to have all such purchases grouped at the time the plan
is set up. If the employer does not make such an election, the purchases made by
individual employees under the plan may be grouped with the other accounts of
the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $75,000; at the same
time, H's parents open up three UGMA accounts for H and W's three
minor children and invest $10,000 in each child's name; the combined
purchase of $105,000 of Class A shares is subject to a reduced sales
load of 4.75% provided that Waddell & Reed, Inc. is advised that the
purchases are entitled to grouping.
Rights of Accumulation
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the NAV of the existing account as of
the date the new purchase is accepted by Waddell & Reed, Inc. for the purpose of
determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund three
years ago. His account has a NAV of $80,000. His wife, W, now wishes
to invest $20,000 in Class A shares of the Fund. W's purchase will
be combined with H's existing account and will be entitled to a
reduced sales charge of 4.75%. H's original purchase was subject to
a full sales charge and the reduced charge does not apply
retroactively to that purchase.
In order to be entitled to Rights of Accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account(s) with which the purchase may be combined.
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If a purchaser holds shares which have been purchased under a
contractual plan, the shares held under such plan may be combined with the
additional purchase only if the contractual plan has been completed.
Letter of Intent
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Letter of Intent ("LOI"). By signing a LOI
form, which is available from Waddell & Reed, Inc., the purchaser indicates an
intention to invest, over a 13-month period, a dollar amount which is sufficient
to qualify for a reduced sales charge. The 13-month period begins on the date
the first purchase made under the LOI is accepted by Waddell & Reed, Inc. Each
purchase made from time to time under the LOI is treated as if the purchaser
were buying at one time the total amount which he or she intends to invest. The
sales charge applicable to all purchases of Class A shares made under the terms
of the LOI will be the sales charge in effect on the beginning date of the
13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a LOI, the investor's Rights of
Accumulation (see above) will be taken into account; that is, Class A shares
already held in the same account in which the purchase is being made or in any
account eligible for grouping with that account, as described above, will be
included.
Example: H signs a LOI indicating his intent to invest in his own name a
dollar amount sufficient to entitle him to purchase Class A shares
at the sales charge applicable to a purchase of $100,000. H has an
IRA account and the Class A shares held under the IRA in the Fund
have a NAV as of the date the LOI is accepted by Waddell & Reed,
Inc. of $15,000; H's wife, W, has an account in her own name
invested in another fund in the United Group which charges the same
sales load as the Fund, with a NAV as of the date of acceptance of
the LOI of $10,000; H needs to invest $75,000 in Class A shares over
the 13-month period in order to qualify for the reduced sales load
applicable to a purchase of $100,000.
A copy of the LOI signed by a purchaser will be returned to the
purchaser after it is accepted by Waddell & Reed, Inc. and will set forth the
dollar amount of Class A shares which must be purchased within the 13-month
period in order to qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under a
contractual plan, the shares held under the plan will be taken into account in
determining the amount which must be invested under the LOI only if the
contractual plan has been completed.
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The minimum initial investment under a LOI is 5% of the dollar amount
which must be invested under the LOI. An amount equal to 5% of the purchase
required under the LOI will be held "in escrow." If a purchaser does not, during
the period covered by the LOI, invest the amount required to qualify for the
reduced sales charge under the terms of the LOI, he or she will be responsible
for payment of the sales charge applicable to the amount actually invested. The
additional sales charge owed on purchases of Class A shares made under a LOI
which is not completed will be collected by redeeming part of the shares
purchased under the LOI and held "in escrow" unless the purchaser makes payment
of this amount to Waddell & Reed, Inc. within 20 days of Waddell & Reed, Inc.'s
request for payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower than
that available under the LOI, the lower sales charge will apply.
A LOI does not bind the purchaser to buy, or Waddell & Reed, Inc. to
sell, the shares covered by the LOI.
With respect to LOIs for $2,000,000 or purchases otherwise qualifying
for no sales charge under the terms of the LOI, the initial investment must be
at least $200,000.
The value of any shares redeemed during the 13-month period which were
acquired under the LOI will be deducted in computing the aggregate purchases
under the LOI.
LOIs are not available for purchases made under an SEP where the
employer has elected to have all purchases under the SEP grouped.
Other Funds in the United Group
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the United Group
subject to a sales charge. A purchase of Class A shares, or Class A shares held,
in any of the funds in the United Group subject to a sales charge will be
treated as an investment in a Fund in determining the applicable sales charge.
For these purposes, Class A shares of United Cash Management, Inc. that were
acquired by exchange of another United Group fund's Class A shares on which a
sales charge was paid, plus the shares paid as dividends on those acquired
shares, are also taken into account. Holders of an uncompleted (i) United Income
Investment Program, (ii) United Periodic Investment Plan to Acquire United
Accumulative Fund Shares of United Funds, Inc., or (iii) United Periodic
Investment Plan to Acquire United Science Fund Shares of United Funds, Inc.
(each a "Plan") on May 30, 1996, with a face amount of less that $12,000, may
purchase Class A shares of the Fund corresponding to such Plan (i.e., United
Income Fund, United Accumulative Fund, or United Science and Technology Fund,
respectively) at NAV, up to the amount
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representing the unpaid balance of such Plan, if the purchase order is so
designated.
Net Asset Value Purchases of Class A Shares
Class A shares of a Fund may be purchased at NAV by the Directors and
officers of the Fund or of any affiliated entity of Waddell & Reed, Inc.,
employees of Waddell & Reed, Inc. or of any of its affiliates, financial
advisors of Waddell & Reed, Inc. and the spouse, children, parents, children's
spouses and spouse's parents of each such Director, officer, employee and
financial advisor. "Child" includes stepchild; "parent" includes stepparent.
Purchases of Class A shares in an IRA sponsored by Waddell & Reed, Inc.
established for any of these eligible purchasers may also be at NAV. Purchases
of Class A shares in any tax-qualified retirement plan under which the eligible
purchaser is the sole participant may also be made at NAV. Trusts under which
the grantor and the trustee or a co-trustee are each an eligible purchaser are
also eligible for NAV purchases of Class A shares. "Employees" include retired
employees. A "retired employee" is an individual separated from service from
Waddell & Reed, Inc., or from an affiliated company with a vested interest in
any Employee Benefit Plan sponsored by Waddell & Reed, Inc. or any of its
affiliated companies. "Employees" also include individuals who, on November 6,
1998, were employees (including retired employees) of a company that on that
date was an affiliate of Waddell & Reed, Inc. "Financial advisors" include
retired financial advisors. A "retired financial advisor" is any financial
advisor who was, at the time of separation from service from Waddell & Reed,
Inc., a Senior Financial Advisor. A custodian under UGMA or UTMA purchasing for
the child or grandchild of any employee or financial advisor may purchase Class
A shares at NAV whether or not the custodian himself is an eligible purchaser.
Purchases of Class A shares in a 401(k) plan having 100 or more
eligible employees and purchases of Class A shares in a 457 plan having 100 or
more eligible employees may be made at NAV.
Any holder of an uncompleted Plan on May 30, 1996, may purchase Class A
shares of the Fund corresponding to such Plan at NAV, up to the amount
representing the unpaid balance of the Plan, if the purchase order is so
designated. In addition, any person who was a holder of a Plan on May 30, 1996
may purchase Class A shares of the Fund corresponding to such Plan at NAV up to
the amount representing partial Plan withdrawals outstanding on May 30, 1996,
provided the purchase order is so designated.
Shares may also be issued at NAV in a merger, acquisition or exchange
offer made pursuant to a plan of reorganization to which the Fund is a party.
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Reasons for Differences in Public Offering Price of Class A Shares
As described herein and in the Prospectus for the Class A shares, there
are a number of instances in which a Fund's Class A shares are sold or issued on
a basis other than at the maximum public offering price, that is, NAV plus the
highest sales charge. Some of these instances relate to lower or eliminated
sales charges for larger purchases of Class A shares, whether made at one time
or over a period of time as under a LOI or Rights of Accumulation. See the table
of sales charges in the Prospectus. The reasons for these quantity discounts
are, in general, that (i) they are traditional and have long been permitted in
the industry and are therefore necessary to meet competition as to sales of
shares of other funds having such discounts, (ii) certain quantity discounts are
required by rules of the National Association of Securities Dealers, Inc. (as is
elimination of sales charges on the reinvestment of dividends and
distributions), and (iii) they are designed to avoid an unduly large dollar
amount of sales charges 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 for Class A shares are as follows. Exchanges at NAV are
permitted because a sales charge has already been paid on the shares exchanged.
Sales of Class A shares without a sales charge are permitted to Directors,
officers and certain others due to reduced or eliminated selling expenses and
since such sales may aid in the development of a sound employee organization,
encourage responsibility and interest in the United Group and an identification
with its aims and policies. Limited reinvestments of redemptions of Class A
shares at no sales charge are permitted to attempt to protect against mistaken
or not fully informed redemption decisions. Class A shares may be issued at no
sales charge in plans of reorganization due to reduced or eliminated sales
expenses and since, in some cases, such issuance is exempted by the 1940 Act
from the otherwise applicable restrictions as to what charge must be imposed. In
no case in which there is a reduced or eliminated sales charge are the interests
of existing Class A shareholders adversely affected since, in each case, the
Fund receives the NAV per share of all shares sold or issued.
Flexible Withdrawal Service for Class A, Class B and Class C Shareholders
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service (the "Service") regular monthly, quarterly, semiannual or
annual payments by redeeming on an ongoing basis Class A, Class B or Class C
shares that you own of a Fund or of any of the funds in the United Group. It
would be a disadvantage to an investor to make additional purchases of Class A
shares while the Service is in effect because it would result in duplication of
sales charges. Class B and Class C shares redeemed under the Service are
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not subject to a CDSC. Applicable forms to start the Service are available
through Waddell & Reed Services Company.
The maximum amount of the withdrawal for monthly, quarterly, semiannual
and annual withdrawals is 2%, 6%, 12% and 24% respectively of the value of your
account at the time the Service is established. The withdrawal proceeds are not
subject to the deferred sales charge, but only within these percentage
limitations. The minimum withdrawal is $50. The Service, and this exclusion from
the deferred sales charge, does not apply to a one-time withdrawal.
To qualify for the Service, you must have invested at least $10,000 in
Class A, Class B or Class C shares which you still own of any of the funds in
the United Group; or, you must own Class A, Class B or Class C shares having a
value of at least $10,000. The value for this purpose is the value at the
current offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to
one-twelfth of a percentage of the value of the shares in the Account (you
select the percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least five shares).
Shares are redeemed on the 20th day of the month in which the payment
is to be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
Retirement plan accounts may be subject to a fee imposed by the plan
custodian for use of the Service.
If you have a share certificate for the shares you want to make
available for the Service, you must enclose the certificate with the form
initiating the Service.
The dividends and distributions on shares of a class you have made
available for the Service are paid in additional shares of that class. All
payments under the Service are made by redeeming shares, which may involve a
gain or loss for tax purposes. To the extent that payments exceed dividends and
distributions, the number of shares you own will decrease. When all of the
shares in your account are redeemed, you will not receive any further payments.
Thus, the payments are not an annuity, 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
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originally available to you. You may at any time redeem part or all of the
shares in your account; if you redeem all of the shares, the Service is
terminated. The Corporation 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
Class A Share Exchanges
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 dividends or distributions
paid in shares may be freely exchanged for Class A 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 Class A shares you own in another fund in the United
Group for Class A shares of a Fund without charge if (i) a sales charge was paid
on these shares, or (ii) the shares were received in exchange for shares for
which a sales charge was paid, or (iii) the shares were acquired from
reinvestment of dividends and distributions paid on such shares. There may have
been one or more such exchanges so long as a sales charge was paid on the shares
originally purchased. Also, shares acquired without a sales charge because the
purchase was $2 million or more will be treated the same as shares on which a
sales charge was paid.
United Municipal Bond Fund, Inc., United Government Securities Fund,
Inc. and United Municipal High Income Fund, Inc. shares are the exceptions and
special rules apply. Class A shares of any of these funds may be exchanged for
Class A shares of the Funds only if (i) you received those shares as a result of
one or more exchanges of shares on which a maximum sales charge was originally
paid (currently, 5.75%), or (ii) the shares have been held from the date of the
original purchase for at least six months.
Subject to the above rules regarding sales charges, you may have a
specific dollar amount of Class A shares of United Cash Management, Inc.
automatically exchanged each month into Class A shares of a Fund or any other
fund in the United Group. The Class A shares of United Cash Management, Inc.
which you designate for automatic exchange must be worth at least $100 or you
must own Class A 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 the Class A shares of
different funds in the United Group so long as each fund receives a value of at
least $25. Minimum initial
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investment and minimum balance requirements apply to such automatic exchange
service.
You may redeem your Class A shares of a Fund and use the proceeds to
purchase Class Y shares of that Fund if you meet the criteria for purchasing
Class Y shares.
Class B Share Exchanges
You may exchange Class B shares of one Fund of the Corporation for
Class B shares of another Fund of the Corporation, or for Class B shares of
other funds in the United Group, without charge.
The redemption of a Fund's Class B shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class B shares of United Cash
Management, Inc. automatically exchanged each month into Class B shares of a
Fund or any other fund in the United Group, provided you already own Class B
shares of a fund. The shares of United Cash Management, Inc. which you designate
for automatic exchange must be worth at least $100, which may be allocated among
different Funds so long as each Fund receives a value of at least $25. Minimum
initial investment and minimum balance requirements apply to such automatic
exchange service.
Class C Share Exchanges
You may exchange Class C shares of one Fund of the Corporation for
Class C shares of another Fund of the Corporation, or for Class C shares of
other funds in the United Group, without charge.
The redemption of a Fund's Class C shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class C shares of United Cash
Management, Inc. automatically exchanged each month into Class C shares of a
Fund or any other fund in the United Group, provided you already own Class C
shares of a fund. The shares of United Cash Management, Inc. which you designate
for automatic exchange must be worth at least $100, which may be allocated among
different Funds so long as each Fund receives a value of at least $25. Minimum
initial investment and minimum balance requirements apply to such automatic
exchange service.
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Class Y Share Exchanges
Class Y shares of a Fund may be exchanged for Class Y shares of another
Fund or of any other fund in the United Group or for Class A shares of United
Cash Management, Inc.
General Exchange Information
When you exchange shares, the total shares you receive will have the
same aggregate NAV as the total shares you exchange. The relative values are
those next figured after your exchange request is received in good order.
These exchange rights and other exchange rights concerning the other
funds in the United Group, can in most instances, be eliminated or modified at
any time and any such exchange may not be accepted.
Retirement Plans
Your account may be set up as a funding vehicle for a retirement plan.
For individual taxpayers meeting certain requirements, Waddell & Reed, Inc.
offers model or prototype documents for the following retirement plans. All of
these plans involve investment in shares of a Fund (or shares of certain other
funds in the United Group).
Individual Retirement Accounts (IRAs). Investors having earned income
may set up a plan that is commonly called an IRA. Under a traditional IRA, an
investor can contribute each year up to 100% of his or her earned income, up to
an annual maximum of $2,000 (provided the investor has not reached age 70-1/2).
For a married couple, the annual maximum is $4,000 ($2,000 for each spouse) or,
if less, the couple's combined earned income for the taxable year, even if one
spouse had no earned income. Generally, the contributions are deductible unless
the investor (or, if married, either spouse) is an active participant in a
qualified retirement plan or if, notwithstanding that the investor or one or
both spouses so participate, their adjusted gross income does not exceed certain
levels. However, a married investor who is not an active participant, files
jointly with his or her spouse and whose combined adjusted gross income does not
exceed $150,000, is not affected by the spouse's active participant status.
An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be subject
to Federal income tax until distributed from the IRA. A direct rollover
generally applies to any distribution from an employer's plan (including a
custodial account under Section 403(b)(7) of the Code,
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but not an IRA) other than certain periodic payments, required minimum
distributions and other specified distributions. In a direct rollover, the
eligible rollover distribution is paid directly to the IRA, not to the investor.
If, instead, an investor receives payment of an eligible rollover distribution,
all or a portion of that distribution generally may be rolled over to an IRA
within 60 days after receipt of the distribution. Because mandatory Federal
income tax withholding applies to any eligible rollover distribution which is
not paid in a direct rollover, investors should consult their tax advisers or
pension consultants as to the applicable tax rules. If you already have an IRA,
you may have the assets in that IRA transferred directly to an IRA offered by
Waddell & Reed, Inc.
Roth IRAs. Investors whose adjusted gross income (or combined adjusted
gross income, if married) does not exceed certain levels may establish and
contribute up to $2,000 per tax year to a Roth IRA (or to any combination of
Roth and traditional IRAs). In addition, for an investor whose adjusted gross
income does not exceed $100,000 (and who is not married filing a separate
return), certain distributions from traditional IRAs may be rolled over to a
Roth IRA and any of the investor's traditional IRAs may be converted into a Roth
IRA; these rollover distributions and conversions are, however, subject to
Federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in the Roth IRA, and withdrawals of earnings are not subject
to Federal income tax if the account has been held for at least five years and
the account holder has reached age 59 1/2 (or certain other conditions apply).
Education IRAs. Although not technically for retirement savings,
Education IRAs provide a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute up to
$500 to an Education IRA (or to each of multiple Education IRAs), provided that
no more than $500 may be contributed for any year to Education IRAs for the same
beneficiary. Contributions are not deductible and may not be made after the
beneficiary reaches age 18; however, earnings accumulate tax-free, and
withdrawals are not subject to tax if used to pay the qualified higher education
expenses of the beneficiary (or a member of his or her family).
Simplified Employee Pension (SEP) plans. Employers can make
contributions to SEP-IRAs established for employees. An employer may contribute
up to 15% of compensation or $25,500, whichever is less, per year for each
employee.
Savings Incentive Match Plans for Employees (SIMPLE Plans). An employer
with 100 or fewer employees who does not sponsor another active retirement plan
may sponsor a SIMPLE plan to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an
employer can choose
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to match employee contributions dollar-for-dollar (up to 3% of an employee's
compensation) or may contribute to all eligible employees 2% of their
compensation, whether or not they defer salary to their retirement plans. SIMPLE
plans involve fewer administrative requirements, generally, than 401(k) or other
qualified plans.
Keogh Plans. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money purchase
plan or a profit-sharing plan. As a general rule, an investor under a defined
contribution Keogh plan can contribute each year up to 25% of his or her annual
earned income, with an annual maximum of $30,000.
457 Plans. If an investor is an employee of a state or local government
or of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is an
employee of a public school system or of certain types of charitable
organizations, he or she may be able to enter into a deferred compensation
arrangement through a custodian account under Section 403(b) of the Code. Some
organizations have adopted Title I plans, which are funded by employer
contributions in addition to employee deferrals.
Pension and Profit-Sharing Plans, including 401(k) Plans. With a 401(k)
plan, employees can make tax-deferred contributions into a plan to which the
employer may also contribute, usually on a matching basis. An employee may defer
each year up to 25% of compensation, subject to certain annual maximums, which
may be increased each year based on cost-of-living adjustments.
More detailed information about these arrangements and applicable forms
are available from Waddell & Reed, Inc. These plans may involve complex tax
questions as to premature distributions and other matters. Investors should
consult their tax adviser or pension consultant.
Redemptions
The Prospectus gives information as to redemption procedures.
Redemption payments are made within seven days from receipt of request, unless
delayed because of emergency conditions determined by the SEC, when the NYSE is
closed other than for weekends or holidays, or when trading on the NYSE is
restricted. Payment is made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities. Payment for redemptions of
shares of the Corporation may be made in portfolio securities when the
Corporation's Board of Directors determines that conditions exist making cash
payments undesirable. Securities used for payment of redemptions are valued at
the value used in figuring NAV. There would be brokerage costs to the redeeming
shareholder in selling
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<PAGE>
such securities. The Corporation, however, has elected to be governed by Rule
18f-1 under the 1940 Act, pursuant to which it is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of its NAV during any 90-day
period for any one shareholder.
Reinvestment Privilege
Each Fund offers a one-time reinvestment privilege that allows you to
reinvest without charge all or part of any amount of Class A shares you redeem
from the Fund by sending any one or more of the Funds the amount you wish to
reinvest. The amount you return will be reinvested in Class A shares of the Fund
at the NAV next calculated after the Fund receives the returned amount. Your
written request to reinvest and the amount to be reinvested must be received
within forty-five days after your redemption request was received. You can do
this only once as to Class A shares of a Fund, and the Fund must be offering
Class A shares at the time your reinvestment request is received. You do not use
up this privilege by redeeming Class A shares to invest the proceeds at NAV in a
Keogh plan or an IRA.
There is also a reinvestment privilege for Class B and Class C shares
under which you may reinvest in any one or more of the Funds all or part of any
amount of Class B or Class C shares you redeemed and have the corresponding
amount of the deferred sales charge, if any, which you paid restored to your
account by adding the amount of that charge to the amount you are reinvesting.
If Class B or Class C shares of a Fund are then being offered, you can put all
or part of your redemption payment back into the Class B or Class C shares of
that Fund at the NAV next calculated after you have returned the amount. Your
written request to do this must be received within forty-five days after your
redemption request was received. You can do this only once as to Class B shares
of a Fund and only once as to Class C shares of a Fund. For purposes of
determining future deferred sales charges, the reinvestment will be treated as a
new investment. You do not use up this privilege by redeeming Class B or Class C
shares to invest the proceeds at NAV in a Keogh plan or an IRA.
Mandatory Redemption of Certain Small Accounts
Each Fund has the right to compel the redemption of shares held under
any account or any plan if the aggregate NAV of such shares (taken at cost or
value as the Board of Directors may determine) is less than $500. The Board has
no intent to compel redemptions in the foreseeable future. If it should elect to
compel redemptions, shareholders who are affected will receive prior written
notice and will be permitted 60 days to bring their accounts up to the minimum
before this redemption is processed.
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DIRECTORS AND OFFICERS
The day-to-day affairs of the Corporation are handled by outside
organizations selected by the Board of Directors. The Board of Directors has
responsibility for establishing broad corporate policies for the Corporation and
for overseeing overall performance of the selected experts. It has the benefit
of advice and reports from independent counsel and independent auditors. The
majority of the Directors are not affiliated with Waddell & Reed, Inc.
The principal occupation during the past five years of each Director
and officer is stated below. Each of the persons listed through and including
Mr. Vogel is a member of the Corporation's Board of Directors. The other persons
are officers of the Fund but are not members of the Board of Directors. For
purposes of this section, the term "Fund Complex" includes each of the
registered investment companies in the United Group of Mutual Funds,
Target/United Funds, Inc. and Waddell & Reed Funds, Inc. Each of the
Corporation's Directors is also a Director of each of the other funds in the
Fund Complex and each of its officers is also an officer of one or more of the
funds in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Corporation and each of the
other funds in the Fund Complex; Chairman of the Board of Directors, Chief
Executive Officer and Director of Waddell & Reed Financial, Inc.; President,
Chairman of the Board of Directors and Chief Executive Officer of Waddell & Reed
Financial Services, Inc.; Chairman of the Board of Directors of WRIMCO, Waddell
& Reed, Inc. and Waddell & Reed Services Company; formerly, President of each of
the funds in the Fund Complex; formerly, Chairman of the Board of Directors of
Waddell & Reed Asset Management Company, a former affiliate of Waddell & Reed
Financial, Inc. Date of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President of JoDill Corp., an agricultural company; President and
Director of Dillingham Enterprises Inc.; formerly, Director and consultant,
McDougal Construction Company; formerly, Instructor at Central Missouri State
University; formerly, Member of the Board of Police Commissioners, Kansas City,
Missouri; formerly, Senior Vice President-Sales and Marketing of Garney
Companies, Inc., a specialty utility contractor. Date of birth: January 9, 1939.
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<PAGE>
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e
Eccles Foundation; Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal; formerly, President
of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, Partner of Levy and Craig, P.C., a law
firm. Date of birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of Oklahoma;
Adjunct Professor of Law at the University of Oklahoma College of Law; Managing
Member, Harroz Investments, L.L.C.; formerly, Vice President for Executive
Affairs of the University of Oklahoma; formerly, Attorney with Crowe & Dunlevy,
a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a law
firm; formerly, President of Gilliland & Hayes, P.A.; formerly, Director of
Central Properties, Inc. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Corporation and each
of the other funds in the Fund Complex; Executive Vice President, Chief
Operating Officer and Director of Waddell & Reed Financial, Inc.; Vice
President, Chief Operating Officer, Director and Treasurer of Waddell & Reed
Financial Services, Inc.; Executive Vice President, Principal Financial Officer,
Director and Treasurer of WRIMCO; President, Chief Executive Officer, Principal
Financial Officer, Director and Treasurer of Waddell & Reed, Inc.; Director and
Treasurer of Waddell & Reed Services Company; Chairman, Chief Executive Officer,
President and Director of Fiduciary Trust Company of New Hampshire, an affiliate
of Waddell & Reed, Inc.; formerly, Vice President of each of the funds in the
Fund Complex; formerly, Director and Treasurer of Waddell & Reed Asset
Management Company; formerly, President of Waddell & Reed Services Company. Date
of birth: November 12, 1936.
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<PAGE>
HENRY J. HERRMANN*
Vice President of the Corporation and each of the other funds in the
Fund Complex; President, Chief Investment Officer, and Director of Waddell &
Reed Financial, Inc.; Vice President, Chief Investment Officer and Director of
Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; Chairman of the Board of Directors of Austin, Calvert & Flavin, Inc., an
affiliate of WRIMCO; formerly, President, Chief Executive Officer, Chief
Investment Officer and Director of Waddell & Reed Asset Management Company. Date
of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and its subsidiaries. Date of birth: February 19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of
each of the funds in the Fund Complex then in existence. (Mr. Morgan retired as
Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company. Date of birth:
April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director and Vice President of Network Rehabilitation Services; Board
Member, Member of Executive Committee and Finance Committee of Truman Medical
Center; formerly, Employment Counselor and Director of McCue-Parker Center. Date
of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm;
Director of Columbian Bank and Trust. Date of birth: April 9, 1953.
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<PAGE>
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
Professor of Business Administration, University of Missouri-Kansas
City; formerly, Chancellor, University of Missouri-Kansas City. Date of birth:
January 1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
Daniel C. Schulte
Vice President, Assistant Secretary and General Counsel of the
Corporation and each of the other funds in the Fund Complex; Vice President,
Secretary and General Counsel of Waddell & Reed Financial, Inc., Waddell & Reed
Financial Services Company, Waddell & Reed, Inc., WRIMCO and Waddell & Reed
Services Company; formerly, Assistant Secretary of Waddell & Reed Financial,
Inc.; formerly, an attorney with Klenda, Mitchell, Austerman & Zuercher, L.L.C.
Date of birth: December 8, 1965.
Kristen A. Richards
Vice President, Secretary and Associate General Counsel of the
Corporation and each of the other funds in the Fund Complex; Vice President and
Associate General Counsel of WRIMCO; formerly, Assistant Secretary of the Fund
and each of the other funds in the Fund Complex; formerly, Compliance Officer of
WRIMCO. Date of birth: December 2, 1967.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the
Corporation and each of the other funds in the Fund Complex; Vice President of
Waddell & Reed Services Company. Date of birth: July 18, 1942.
James C. Cusser
Vice President of the Corporation and two other funds in the Fund
Complex; Vice President of WRIMCO. Date of birth: May 30, 1949.
John M. Holliday
Vice President of the Corporation and nine other funds in the Fund
Complex; Senior Vice President of WRIMCO; formerly, Senior Vice President of
Waddell & Reed Asset Management Company; formerly, Senior Vice President of
Waddell & Reed, Inc. Date of birth: June 11, 1935.
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Antonio Intagliata
Vice President of the Corporation; Senior Vice President of WRIMCO;
formerly, Senior Vice President of Waddell & Reed, Inc. Date of birth: February
7, 1938.
James D. Wineland
Vice President of the Corporation and two other funds in the Fund
Complex; Vice President of WRIMCO; formerly, Vice President of Waddell & Reed
Asset Management Company; formerly, Vice President of Waddell & Reed, Inc. Date
of birth: September 25, 1951.
The address of each person is 6300 Lamar Avenue, P. O. Box 29217,
Shawnee Mission, Kansas 66201-9217 unless a different address is given.
The Directors who may be deemed to be "interested persons" as defined
in the 1940 Act of the Corporation's underwriter, Waddell & Reed, Inc., or of
WRIMCO are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, whereby an incumbent Director who has attained the age of 70 may, or
if elected on or after May 31, 1993 and has attained the age of 75 must, resign
his or her position as Director and, unless he or she elects otherwise, will
serve as Director Emeritus provided the Director has served as a Director of the
Corporation for at least five years which need not have been consecutive. A
Director Emeritus receives fees in recognition of his or her past services
whether or not services are rendered in his or her capacity as Director
Emeritus, but he or she has no authority or responsibility with respect to the
management of the Corporation. Messrs. Henry L. Bellmon, Jay B. Dillingham,
Doyle Patterson, Ronald K. Richey and Paul S. Wise retired as Directors of the
Corporation and of each of the funds in the Fund Complex, and each serves as
Director Emeritus.
The funds in the United Group, Target/United Funds, Inc. and Waddell &
Reed Funds, Inc. pay to each Director, effective October 1, 1999, an annual base
fee of $50,000, plus $3,000 for each meeting of the Board of Directors attended
and effective January 1, 2000, an annual base fee of $52,000 plus $3,250 for
each meeting of the Board of Directors attended, plus reimbursement of expenses
for attending such meeting and $500 for each committee meeting attended which is
not in conjunction with a Board of Directors meeting, other than Directors who
are affiliates of Waddell & Reed, Inc. (Prior to October 1, 1999, the funds in
the United Group, Target/United Funds, Inc. and Waddell & Reed Funds, Inc. paid
to each Director an annual base fee of $48,000 plus $2,500 for each meeting of
the Board of Directors attended.) The fees to the Directors are divided among
the funds in the United Group , Target/United Funds, Inc. and Waddell & Reed
Funds, Inc. based on the funds' relative size.
During the Corporation's fiscal year ended December 31, 1999, the
Corporation's Directors received the following fees for service as a director:
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<PAGE>
Compensation Table
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From Corporation
From and Fund
Director Corporation Complex*
- -------- ------------ ------------
<S> <C> <C>
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 28,491 59,500
John A. Dillingham 28,491 59,500
David P. Gardner 27,281 57,000
Linda K. Graves 28,491 59,500
Joseph Harroz, Jr. 28,491 59,500
John F. Hayes 28,491 59,500
Glendon E. Johnson 28,733 60,000
William T. Morgan 28,491 59,500
Ronald C. Reimer 28,474 59,500
Frank J. Ross, Jr. 28,491 59,500
Eleanor B. Schwartz 28,733 60,000
Frederick Vogel III 28,733 60,000
</TABLE>
*No pension or retirement benefits have been accrued as a part of Fund expenses.
The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of March 31, 2000, all of the Corporation's Directors and
officers as a group owned less than 1% of the outstanding shares of the
Corporation. The following table sets forth information with respect to the
Corporation, as of March 31, 2000, regarding the beneficial ownership of the
series, and classes thereof, of the Corporation's shares.
<TABLE>
<CAPTION>
Shares owned
Name and Address Series and Beneficially
of Beneficial Owner Class or of Record Percent
- ------------------- ---------- ------------ -------
<S> <C> <C> <C>
Duane Margaret Kropp Bond Fund
(TOD) Class B 29,310 5.21%
3516 NE 98th Ave
Vancouver WA 98662-7528
Fiduciary TR Co NH Cust Bond Fund
IRA Rollover Class C 8,461 8.96%
FBO Melvin E. Argent
1612 Drury Ln
Vista CA 92084-4706
Robert A. Pershing & Science and Technology Fund
Heather M. Pershing Class C 20,671 5.43%
Jtn Ros
2260 Oak Hills Drive
Colorado Springs CO 80919-3472
James H. Brennan & Accumulative Fund
Helen P. Brennan Jtn Ros Class C 12,821 12.66%
13 Hilltop Rd
Ewing NJ 08638-1404
Walter Rast Jr (TOD) Bond Fund
1201 Laurel Glen Blvd Class C 11,045 11.70%
Leander TX 78641-2922
Bents Fort Water Company Bond Fund
P. O. Box 305 Class C 5,086 5.39%
La Junta CO 81050-0305
Fiduciary Trust Co Bond Fund
NH Cust Class C 5,938 6.29%
IRA Rollover
FBO Barbara J Bayduk
3214 Mt Vernon Court
Midland MI 48642-6606
Gary Clayhold Bond Fund
2932 162nd Ave SE Class C 5,095 5.40%
Bellevue WA 98008-5616
Joyce E. Skaufel Bond Fund
12802 E Semro Ave Class C 4,842 5.13%
Spokane WA 99216-0364
The Northern Trust Income Fund
Company Ttee Class Y 14,101,969 46.90%
FBO USX Corporation
Savings Plan
P. O. Box 92956
Chicago IL 60675-2956
UMBSC & Co Income Fund
FBO Interstate Brands Class Y 3,567,866 11.87%
Unit Elec
PO Box 419260
Kansas City MO 64141-6260
Mac & Co Income Fund
Mutual Funds Operations Class Y 5,836,233 19.41%
PO Box 3198
Pittsburgh PA 15230-3198
Waddell & Reed Science and Technology Fund
Financial, Inc. Class Y 461,964 25.86%
401(k) and Thrift Plan
6300 Lamar Avenue Accumulative Fund
Overland Park KS 66201 Class Y 228,936 44.38%
Bond Fund
Class Y 76,895 17.53%
Compass Bank TR Science and Technology Fund
Profit Sharing Plan Class Y 519,411 29.07%
FBO Torchmark Corp
Savings & Investment Accumulative Fund
Plan Class Y 139,721 27.08%
Attn: Wayne Laugevin
15 20th St S Fl 8
Birmingham AL 35233-2000
Fiduciary Trust Co NH TR Accumulative Fund
Corporate Money Pension Class Y 31,442 6.09%
Plan
Okanogan County Hospital Bond Fund
District 3 Class Y 67,246 15.33%
FBO Unallocated Assets
Qualified Plan 1329481
P. O. Box 793
Omak WA 98841-0793
Kenneburt & Co. Science and Technology Fund
P. O. Box 11426 Class Y 540,411 30.25%
Birmingham AL 35202-1426
Bond Fund
Class Y 54,119 12.34%
William L Madison Accumulative Fund
Trustee Class Y 30,383 5.89%
CPSP Johnson Madison
Lmb Co Bond Fund
FBO Unallocated Assets Class Y 29,380 6.70%
Qualified Profit Sharing Plan
2813 5th Ave S
Great Falls MT 59405-3142
Waddell & Reed Accumulative Fund
Investment Management Class Y 69,714 13.51%
DCA Acct
Attn: Mike Strohm Bond Fund
P. O. Box 29217 Class Y 54,065 12.32%
Shawnee Mission KS 66201-9217
John L. Green & Bond Fund
Edward F. Brennan Tr Class Y 51,167 11.66%
Midwestern Teamsters
Pension Plan
2160 S Foster Ave
Wheeling IL 60090-6507
</TABLE>
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments a Fund makes to you as a
shareholder of a class of shares of that Fund, other than payments
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<PAGE>
when you redeem your shares. The first source is net investment income, which is
derived from the dividends, interest and earned discount on the securities a
Fund holds, less expenses (which will vary by class). The second source is net
realized capital gains, which are derived from proceeds received from a Fund's
sale of securities at a price higher than the Fund's basis (usually cost) in
such securities, less losses from sales of securities at a price lower than the
Fund's basis therein; these gains can be either long-term or short-term,
depending on how long the Fund has owned the securities before it sells them.
The third source is net realized gains from foreign currency transactions.
The payments made to shareholders from net investment income, net
short-term capital gains and net realized gains from certain foreign currency
transactions are called dividends. Payments, if any, from net long-term capital
gains and the remaining foreign currency gains are called distributions.
Each Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital loss). A Fund may or may not
have such gains, depending on whether securities are sold and at what price. If
a Fund has net capital gains, it will pay distributions once each year, in the
latter part of the fourth calendar quarter, except to the extent it has net
capital losses from a prior year or years to offset the gains. It is the policy
of each Fund to make annual capital gains distributions to the extent that net
capital gains are realized in excess of available capital loss carryovers.
Income and expenses are earned and incurred separately by each Fund,
and gains and losses on portfolio transactions of each Fund are attributable
only to that Fund. For example, capital losses realized by one Fund would not
affect capital gains realized by another Fund.
Choices you have on your Dividends and Distributions
On your application form, you can give instructions that (i) you want
cash for your dividends and distributions, (ii) you want your dividends and
distributions paid in shares of a Fund of the same class as that with respect to
which they were paid, or (iii) you want cash for your dividends and want your
distributions paid in shares of a Fund of the same class as that with respect to
which they were paid. However, a total dividend and/or distribution amount less
than five dollars will be automatically paid in shares of the Fund of the same
class as that with respect to which it was paid You can change your instructions
at any time. If you give no instructions, your dividends and distributions will
be paid in shares of the Fund of the same class as that with respect to which
they were paid. All payments in shares are at NAV without any sales charge. The
NAV used for this purpose is that computed as of the record date for the
dividend or distribution, although this could be changed by the Directors. The
record date is the date used to
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<PAGE>
determine which shareholders are entitled to receive a dividend or distribution;
investors who own shares on that date are so entitled.
Even if you receive dividends and distributions on Class A shares in
cash, you can thereafter reinvest them (or distributions only) in Class A shares
of that Fund at NAV (i.e., no sales charge) next calculated after receipt by
Waddell & Reed, Inc. of the amount clearly identified as a reinvestment. The
reinvestment must be within 45 days after the payment.
TAXES
General
Each Fund (which is treated as a separate entity for these purposes)
has qualified since inception for treatment as a regulated investment company
("RIC") under the Code, so that it is relieved of Federal income tax on that
part of its investment company taxable income (consisting generally of net
investment income, net short-term capital gains and net gains from certain
foreign currency transactions) that it distributes to its shareholders. To
continue to qualify for treatment as a RIC, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income ("Distribution Requirement") and must meet several additional
requirements. With respect to each Fund, these requirements include the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of securities or foreign
currencies or other income (including gains from options, futures contracts or
forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities that are limited, in respect of
any one issuer, to an amount that does not exceed 5% of the value of the Fund's
total assets and that does not represent more than 10% of the issuer's
outstanding voting securities ("50% Diversification Requirement"); and (3) at
the close of each quarter of the Fund's taxable year, not more than 25% of the
value of its total assets may be invested in securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer.
If a Fund failed to qualify for treatment as a RIC for any taxable
year, (a) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year (even if it distributed that income to its
shareholders) and (b) the shareholders would treat all distributions out of its
earnings and profits, including distributions of net capital gains, as dividends
(that is, ordinary income). In addition, the Fund could be required to recognize
unrealized gains, pay substantial taxes and interest
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<PAGE>
and make substantial distributions before qualifying for RIC treatment.
Dividends and distributions declared by a Fund in December of any year
and payable to its shareholders of record on a date in that month are deemed to
have been paid by the Fund and received by the shareholders on December 31 of
that year if they are paid by the Fund during the following January.
Accordingly, those dividends and distributions will be taxed to the shareholders
for the year in which that December 31 falls.
If shares of a Fund are sold at a loss after being held for six months
or less, the loss will be treated as a long-term, instead of short-term, capital
loss to the extent of any distributions received on those shares. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or distribution, the investor will receive some portion of the
purchase price back as a taxable dividend or distribution.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute, by the end of any calendar year,
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. For these purposes, each Fund may defer into the next calendar
year net capital losses incurred between November 1 and the end of the current
calendar year. It is the policy of each Fund to pay sufficient dividends and
distributions each year to avoid imposition of the Excise Tax.
Income from Foreign Securities
Dividends and interest received, and gains realized, by a Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
Each of the Funds may invest in the stock of "passive foreign
investment companies" ("PFICs"). A PFIC is any foreign corporation (with certain
exceptions) that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, a Fund will be subject to Federal income tax on a portion of any
"excess distribution" received on the stock of a PFIC or of any gain on
disposition of the stock (collectively "PFIC income"), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable
73
<PAGE>
income and, accordingly, will not be taxable to it to the extent it distributes
that income to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gains
- -- which probably would have to be distributed by the Fund to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax -- even if those
earnings and gains were not distributed to the Fund by the QEF. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
A Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also may deduct (as an ordinary, not capital, loss) the
excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net
mark-to-market gains with respect to that stock included by the Fund for prior
taxable years under the election (and under regulations proposed in 1992 that
provided a similar election with respect to the stock of certain PFICs). The
Fund's adjusted basis in each PFIC's stock with respect to which it makes this
election will be adjusted to reflect the amounts of income included and
deductions taken under the election.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies,
including forward currency contracts, (2) on the disposition of each debt
security denominated in a foreign currency that are attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition, and (3) that are attributable to
fluctuations in exchange rates that occur between the time the Fund accrues
interest, dividends or other receivables, or expenses or other liabilities,
denominated in a foreign currency and the time the Fund actually collects the
receivables or pays the liabilities, generally are treated as ordinary income or
loss. These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of a Fund's investment company
taxable income to be distributed to its shareholders as ordinary income, rather
than affecting the amount of its net capital gain.
74
<PAGE>
Income from Options, Futures and Forward Currency Contracts and Foreign
Currencies
The use of hedging and option income strategies, such as writing
(selling) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and losses
the Fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures contracts and forward currency contracts derived
by a Fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
Any income a Fund earns from writing options is treated as short-term
capital gains. If a Fund enters into a closing purchase transaction, it will
have 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 a Fund lapses without being exercised, the premium
it receives also will be a short-term capital gain. If such an option is
exercised and the Fund thus sells the securities subject to the option, the
premium the Fund receives will be added to the exercise price to determine the
gain or loss on the sale.
Certain options, futures contracts and forward currency contracts in
which the Funds may invest may be "section 1256 contracts." Section 1256
contracts held by a Fund at the end of its taxable year, other than contracts
subject to a "mixed straddle" election made by the Fund, are "marked-to-market"
(that is, treated as sold at that time for their fair market value) for Federal
income tax purposes, with the result that unrealized gains or losses are treated
as though they were realized. Sixty percent of any net gains or losses
recognized on these deemed sales, and 60% of any net realized gains or losses
from any actual sales of section 1256 contracts, are treated as long-term
capital gains or losses, and the balance is treated as short-term capital gains
or losses. Section 1256 contracts also may be marked-to-market for purposes of
the Excise Tax and other purposes. The Fund may need to distribute any
mark-to-market gains to its shareholders to satisfy the Distribution Requirement
and/or avoid imposition of the Excise Tax, even though it may not have closed
the transactions and received cash to pay the distributions.
Code Section 1092 (dealing with straddles) may also affect the taxation
of options and futures contracts in which the Funds may invest. That section
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options, futures contracts and forward currency contracts
are personal property. Section 1092 generally provides that any loss from the
disposition of a position in a straddle may be deducted only to the extent the
loss exceeds the unrealized gain on the offsetting
75
<PAGE>
position(s) of the straddle. In addition, these rules may postpone the
recognition of loss that would otherwise be recognized under the mark-to-market
rules discussed above. The regulations under section 1092 also provide certain
"wash sale" rules which apply to transactions where a position is sold at a loss
and a new offsetting position is acquired within a prescribed period and "short
sale" rules applicable to straddles. If a 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 Funds are not entirely clear.
If a Fund has an appreciated financial position -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the position, the
Fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or futures or forward
currency contract entered into by the Fund or a related person with respect to
the same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction
during any taxable year that otherwise would be treated as a constructive sale
if the transaction is closed within 30 days after the end of that year and the
Fund holds the appreciated financial position unhedged for 60 days after that
closing (i.e., at no time during that 60-day period is the Fund's risk of loss
regarding that position reduced by reason of certain specified transactions with
respect to substantially identical or related property, such as having an option
to sell, being contractually obligated to sell, making a short sale, or granting
an option to buy substantially identical stock or securities).
Zero Coupon and Payment-in-Kind Securities
Certain Funds may acquire zero coupon or other securities issued with
OID. As the holder of those securities, a Fund must include in its income the
OID that accrues on the securities during the taxable year, even if the Fund
receives no corresponding payment on the securities during the year. Similarly,
a Fund must include in its gross income securities it receives as "interest" on
payment-in-kind securities. Because each Fund annually must distribute
substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, in order to satisfy the Distribution
Requirement and to avoid imposition of the Excise Tax, a Fund may be required in
a particular year to
76
<PAGE>
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from a Fund's cash assets
or from the proceeds of sales of portfolio securities, if necessary. A Fund may
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gains.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio of
each Fund. Transactions in securities other than those for which an exchange is
the primary market are generally effected with dealers acting as principals or
market makers. Brokerage commissions are paid primarily for effecting
transactions in securities traded on an exchange and otherwise only if it
appears likely that a better price or execution can be obtained. The individual
who manages a Fund may manage other advisory accounts with similar investment
objectives. It can be anticipated that the manager will frequently, yet not
always, place concurrent orders for all or most accounts for which the manager
has responsibility or WRIMCO may otherwise combine orders for a Fund with those
of other funds in the United Group, Target/United Funds, Inc. and Waddell & Reed
Funds, Inc. or other accounts for which it has investment discretion, including
accounts affiliated with WRIMCO. Under current written procedures, transactions
effected pursuant to such combined orders are averaged as to price and allocated
in accordance with the purchase or sale orders actually placed for each fund or
advisory account, except where the combined order is not filled completely. In
this case, WRIMCO will ordinarily allocate the transaction pro rata based on the
orders placed, subject to certain variances provided for in the written
procedures. Sharing in large transactions could affect the price a Fund pays or
receives or the amount it buys or sells. As well, a better negotiated commission
may be available through combined orders.
To effect the portfolio transactions of a Fund, WRIMCO is authorized to
engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution and
research services and other services, including pricing or quotation services
directly or through others ("research and brokerage services") considered by
WRIMCO to be useful or desirable for its investment management of the Fund
and/or the other funds and accounts over which WRIMCO has investment discretion.
77
<PAGE>
Research and brokerage services are, in general, defined by reference
to Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers; (ii) furnishing
analyses and reports; or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than the commission another qualified broker
would charge for effecting comparable transactions if a good faith determination
is made by WRIMCO that the commission is reasonable in relation to the research
or brokerage services provided. Subject to the foregoing considerations WRIMCO
may also consider sales of Fund shares as a factor in the selection of
broker-dealers to execute portfolio transactions. No allocation of brokerage or
principal business is made to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful
only to one or more of the other advisory accounts of WRIMCO, and investment
research received for the commissions of those other accounts may be useful both
to the Fund and one or more of such other accounts. To the extent that
electronic or other products provided by such brokers to assist WRIMCO in making
investment management decisions are used for administration or other
non-research purposes, a reasonable allocation of the cost of the product
attributable to its non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party at the
request of a broker) includes information on particular companies and industries
as well as market, economic or institutional activity areas. It serves to
broaden the scope and supplement the research activities of WRIMCO; serves to
make available additional views for consideration and comparisons; and enables
WRIMCO to obtain market information on the price of securities held in the
Fund's portfolio or being considered for purchase.
The Corporation may also use its brokerage to pay for pricing or
quotation services to value securities. The table below sets forth the brokerage
commissions paid by each of the Funds during the fiscal years ended December 31,
1999, 1998 and 1997. These figures do not include principal transactions or
spreads or concessions on principal transactions, i.e., those in which a Fund
sells securities to a broker-dealer firm or buys from a broker-dealer firm
securities owned by it.
78
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
United Accumulative Fund ............... $12,704,046 $10,437,061 $ 8,215,119
United Bond Fund ....................... 0 0 0
United Income Fund ..................... 6,743,644 5,534,850 4,447,377
United Science and Technology Fund ..... 935,732 777,363 968,118
----------- ----------- -----------
Total .................................. $20,383,422 $16,749,274 $13,630,614
=========== =========== ===========
</TABLE>
The next table shows for each of the Funds' last fiscal year the
transactions, other than principal transactions, which were directed to
broker-dealers who provided research services as well as execution and the
brokerage commissions paid. These transactions were allocated to these
broker-dealers by the internal allocation procedures described above.
<TABLE>
<CAPTION>
Amount of Brokerage
Transactions Commissions
-------------- ----------
<S> <C> <C>
United Accumulative Fund ........................................ $ 9,309,404,676 $10,805,068
United Bond Fund ................................................ --- ---
United Income Fund .............................................. 4,662,650,474 5,077,031
United Science and Technology Fund .............................. 796, 709,920 744,798
--------------- -----------
Total ...................................................... $14,768,765,070 $16,626,897
=============== ===========
</TABLE>
As of December 31, 1999, United Accumulative Fund owned securities of
Citigroup Inc. in the amount of $55,562,500. Citigroup Inc. is a regular broker
of the Fund. As of December 31, 1999, United Bond Fund owned securities of
Salomon Inc. in the amount of $5,162,700. Salomon Inc. is a regular broker of
the Fund. As of December 31, 1999, United Income Fund owned securities of
Citigroup Inc. in the amount of $127,099,219. Citigroup Inc. is a regular broker
of the Fund.
The Corporation, WRIMCO and Waddell & Reed, Inc. have adopted a Code of
Ethics under Rule 17j-1 of the 1940 Act that permits their respective directors,
officers and employees to invest in securities, including securities that may be
purchased or held by a Fund. The Code of Ethics subjects covered personnel to
certain restrictions that include prohibited activities, pre-clearance
requirements and reporting obligations.
79
<PAGE>
OTHER INFORMATION
The Shares of the Four Funds
The shares of each of the four Funds represents an interest in that
Fund's securities and other assets and in its profits or losses. Each fractional
share of a class has the same rights, in proportion, as a full share of that
class.
Each Fund offers four classes of its shares: Class A, Class B, Class C
and Class Y. Each class of a Fund represents an interest in the same assets of
the Fund and differ as follows: each class of shares has exclusive voting rights
on matters pertaining to matters appropriately limited to that class; Class A
shares are subject to an initial sales charge and to an ongoing distribution
and/or service fee; Class B and Class C are subject to a contingent deferred
sales charge and to ongoing distribution and service fees; Class B shares
convert at the end of the seventh calendar year following the first year of
purchase to Class A shares; and Class Y shares, which are designated for
institutional investors, have no sales charge nor ongoing distribution and/or
service fee. Each class may bear differing amounts of certain class-specific
expenses and each class has a separate exchange privilege. The Funds do not
anticipate that there will be any conflicts between the interests of holders of
the different classes of shares of the same Fund by virtue of those classes. On
an ongoing basis, the Board of Directors will consider whether any such conflict
exists and, if so, take appropriate action. Each share of a Fund is entitled to
equal voting, dividend, liquidation and redemption rights, except that due to
the differing expenses borne by the four classes, dividends and liquidation
proceeds of Class B shares and Class C shares are expected to be lower than for
Class A shares of the same Fund, which in turn are expected to be lower than for
Class Y shares of that Fund. Shares are fully paid and nonassessable when
purchased.
The Corporation does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new investment
advisory agreement or a change in a fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding not
less than 25% of all shares entitled to vote at such meeting, provided certain
conditions stated in the Bylaws are met. There will normally be no meeting of
the shareholders for the purpose of electing directors until such time as less
than a majority of directors holding office have been elected by shareholders,
at which time the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the 1940 Act
applies to the Fund, the directors are required to call a meeting of
shareholders for the
80
<PAGE>
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 a Fund's
outstanding shares.
Each share (regardless of class) has one vote. All shares of each of
the Funds vote together as a single class, except as to any matter for which a
separate vote of any class is required by the 1940 Act, and except as to any
matter which affects the interests of one or more particular classes, in which
case only the shareholders of the affected classes are entitled to vote, each as
a separate class.
Each share of each Fund (regardless of class) is entitled to one vote.
On certain matters such as the election of Directors, all shares of all of the
four Funds vote together as a single class. On other matters affecting a
particular Fund, the shares of that Fund vote together as a separate class, such
as with respect to a change in an investment restriction of a particular Fund,
except that as to matters for which a separate vote of a class is required by
the 1940 Act or which affects the interests of one or more particular classes,
the affected shareholders vote as a separate class. In voting on a Management
Agreement, approval by the shareholders of a Fund is effective as to that Fund
whether or not enough votes are received from the shareholders of the other
Funds to approve the Management Agreement for the other Funds.
81
<PAGE>
THE INVESTMENTS OF UNITED ACCUMULATIVE FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS
Business Services - 9.96%
Alcatel (A) ............................................................ 120,000 $ 27,559,728
America Online, Inc.* .................................................. 125,000 9,429,687
BroadVision, Inc.* ..................................................... 125,000 21,257,812
Citrix Systems, Inc.* .................................................. 300,000 36,890,625
Clear Channel Communications, Inc.* .................................... 350,000 31,237,500
Getty Images, Inc.* .................................................... 250,000 12,250,000
Intuit Inc.* ........................................................... 700,000 41,934,375
Netopia, Inc.* ......................................................... 200,000 10,918,750
Phone.com, Inc.* ....................................................... 100,000 11,618,750
Veritas Software Corp.* ................................................ 150,000 21,464,063
Total ............................................................... 224,561,290
Chemicals and Allied Products - 9.44%
American Home Products Corporation ..................................... 1,200,000 47,325,000
Forest Laboratories, Inc.* ............................................. 1,100,000 67,581,250
Pharmacia & Upjohn, Inc. ............................................... 1,100,000 49,500,000
Schering-Plough Corporation ............................................ 1,000,000 42,187,500
Warner-Lambert Company ................................................. 75,000 6,145,313
Total ............................................................... 212,739,063
Communication - 16.74%
AT&T Corp. - Liberty Media Group,
Class A* ............................................................ 700,000 39,725,000
CBS Corporation* ....................................................... 150,000 9,590,625
Deutsche Telekom AG, ADR ............................................... 300,000 21,300,000
EchoStar Communications Corporation,
Class A* ............................................................ 475,000 46,253,125
General Motors Corporation, Class H* ................................... 250,000 24,000,000
MediaOne Group, Inc.* .................................................. 1,000,000 76,812,500
Nextel Communications, Inc.* ........................................... 300,000 30,928,125
Nippon Telegraph and Telephone
Corporation, ADR .................................................... 200,000 17,225,000
Telefonaktiebolaget LM Ericsson, ADR,
Class B ............................................................. 400,000 26,262,500
VoiceStream Wireless Corporation (B)* .................................. 600,000 85,256,250
Total ............................................................... 377,353,125
Depository Institutions - 2.46%
Citigroup Inc. ......................................................... 1,000,000 55,562,500
Electric, Gas and Sanitary Services - 0.49%
Columbia Gas Systems, Inc. ............................................. 175,000 11,068,750
</TABLE>
See Notes to Schedules of Investments on page .
1
<PAGE>
THE INVESTMENTS OF UNITED ACCUMULATIVE FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Electronic and Other Electric Equipment - 17.62%
Broadcom Corporation, Class A* ......................................... 150,000 $ 40,851,563
Intel Corporation ...................................................... 500,000 41,140,625
JDS Uniphase Corporation* .............................................. 900,000 145,181,250
Maxim Integrated Products, Inc.* ....................................... 500,000 23,578,125
Nokia Corporation, Series A, ADR ....................................... 300,000 57,000,000
Nortel Networks Corporation ............................................ 500,000 50,500,000
Rambus Inc. (B)* ....................................................... 250,000 16,851,562
Scientific-Atlanta, Inc. ............................................... 400,000 22,250,000
Total................................................................ 397,353,125
Health Services - 3.93%
Columbia/HCA Healthcare Corporation .................................... 2,000,000 58,625,000
StanCorp Financial Group, Inc. ......................................... 252,700 6,364,881
Tenet Healthcare Corporation* .......................................... 1,000,000 23,500,000
Total ............................................................... 88,489,881
Industrial Machinery and Equipment - 9.60%
Cisco Systems, Inc.* ................................................... 700,000 74,965,625
Juniper Networks, Inc.* ................................................ 70,000 23,775,938
Mannesmann AG, Registered Shares (A) ................................... 200,000 48,249,670
Novellus Systems, Inc.* ................................................ 250,000 30,632,812
Sun Microsystems, Inc.* ................................................ 500,000 38,703,125
Total ............................................................... 216,327,170
Insurance Carriers - 11.60%
Allmerica Financial Corporation ........................................ 400,000 22,250,000
American General Corporation ........................................... 500,000 37,937,500
Aon Corporation ........................................................ 550,000 22,000,000
Chubb Corporation (The) ................................................ 500,000 28,156,250
Everest Reinsurance Holdings, Inc. ..................................... 500,000 11,156,250
Liberty Corporation (The) .............................................. 350,000 14,765,625
Lincoln National Corporation ........................................... 700,000 28,000,000
Nationwide Financial Services, Class A ................................. 375,000 10,476,563
Oxford Health Plans Inc.* .............................................. 700,000 8,903,125
ReliaStar Financial Corp. .............................................. 700,000 27,431,250
SAFECO Corporation* .................................................... 500,000 12,421,875
St. Paul Companies, Inc. (The) ......................................... 700,000 23,581,250
Torchmark Corporation .................................................. 500,000 14,531,250
Total ............................................................... 261,610,938
Motion Pictures - 0.96%
Time Warner Incorporated ............................................... 300,000 21,731,250
Nondepository Institutions - 1.41%
CIT Group, Inc. (The), Class A ......................................... 1,500,000 31,687,500
</TABLE>
See Notes to Schedules of Investments on page .
2
<PAGE>
THE INVESTMENTS OF UNITED ACCUMULATIVE FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Oil and Gas Extraction - 4.27%
Anadarko Petroleum Corporation ......................................... 900,000 $ 30,712,500
Burlington Resources Incorporated ...................................... 400,000 13,225,000
USX Corporation - Marathon Group ....................................... 900,000 22,218,750
Unocal Corporation ..................................................... 900,000 30,206,250
Total ............................................................... 96,362,500
Paper and Allied Products - 0.99%
Consolidated Papers, Inc. .............................................. 700,000 22,268,750
Petroleum and Coal Products - 2.57%
Exxon Mobil Corporation ................................................ 500,000 40,281,250
Texaco Inc. ............................................................ 325,000 17,651,563
Total ............................................................... 57,932,813
Printing and Publishing - 0.08%
Viacom Inc., Class A* .................................................. 30,000 1,813,125
Wholesale Trade -- Nondurable Goods - 1.02%
U.S. Foodservice* ...................................................... 1,374,300 23,019,525
TOTAL COMMON STOCKS - 93.14% $2,099,881,305
(Cost: $1,705,049,585)
<CAPTION>
Principal
Amount in
Thousands
<S> <C> <C>
SHORT-TERM SECURITIES
Commercial Paper
Auto Repair, Services and Parking - 1.06%
PHH Corp.,
7.1%, 1-11-00 ....................................................... $24,000 23,952,667
Depository Institutions - 1.68%
Deutsche Bank Financial Inc.,
6.75%, 1-6-00 ....................................................... 20,000 19,981,250
Toronto-Dominion Holdings USA Inc.,
6.9%, 1-10-00 ....................................................... 10,000 9,982,750
UBS Finance (DE) Inc.,
4.4%, 1-5-00 ........................................................ 8,000 7,996,089
Total ............................................................... 37,960,089
Electric, Gas and Sanitary Services - 0.67%
Michigan Consolidated Gas Co.,
5.0%, 1-6-00 ........................................................ 10,000 9,993,055
Questar Corp.,
6.5%, 1-13-00 ....................................................... 5,000 4,989,167
Total ............................................................... 14,982,222
</TABLE>
See Notes to Schedules of Investments on page .
3
<PAGE>
THE INVESTMENTS OF UNITED ACCUMULATIVE FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Electronic and Other Electric Equipment - 1.29%
Motorola, Inc.,
5.0%, 1-5-00 ........................................................ $15,000 $ 14,991,667
Sony Capital Corp.,
6.4%, 1-13-00 ....................................................... 14,000 13,970,133
Total ............................................................... 28,961,800
Fabricated Metal Products - 0.10%
Danaher Corporation,
6.49%, Master Note .................................................. 2,123 2,123,000
Food and Kindred Products - 0.16%
General Mills, Inc.,
6.345%, Master Note ................................................. 1,638 1,638,000
Ralston Purina Co.,
6.62%, 1-24-00 ...................................................... 2,000 1,991,541
Total ............................................................... 3,629,541
Nondepository Institutions - 0.40%
PACCAR Financial Corp.,
5.2757%, Master Note ................................................ 5,499 5,499,000
Textron Financial Corp.,
8.3%, 1-5-00 ........................................................ 3,500 3,496,772
Total ............................................................... 8,995,772
Printing and Publishing - 0.97%
American Greetings Corp.,
6.7%, 1-10-00 ....................................................... 22,000 21,963,150
Wholesale Trade - Nondurable Goods - 0.66%
Enron Corp.,
6.0%, 1-14-00 ....................................................... 15,000 14,967,500
Total Commercial Paper - 6.99% 157,535,741
Commercial Paper (backed by irrevocable bank letter of credit) - 0.33% Electric,
Gas and Sanitary Services AES Hawaii Inc. (Bank of America NT & SA),
6.2%, 1-21-00 ....................................................... 7,500 7,474,167
TOTAL SHORT-TERM SECURITIES - 7.32% $ 165,009,908
(Cost: $165,009,908)
TOTAL INVESTMENT SECURITIES - 100.46% $2,264,891,213
(Cost: $1,870,059,493)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.46%) (10,282,419)
NET ASSETS - 100.00% $2,254,608,794
</TABLE>
See Notes to Schedules of Investments on page .
4
<PAGE>
THE INVESTMENTS OF UNITED BOND FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 2.12%
Procter & Gamble Company (The),
8.0%, 9-1-24 ........................................................ $10,000 $ 10,740,800
Communication - 3.14% BellSouth Telecommunications, Inc.,
5.85%, 11-15-45 ..................................................... 3,000 2,982,750
Cox Trust II,
7.0%, 8-16-04 ....................................................... 2,500 2,430,525
Jones Intercable, Inc.,
9.625%, 3-15-02 ..................................................... 2,500 2,598,200
Tele-Communications, Inc.,
8.35%, 2-15-05 ...................................................... 7,500 7,880,550
Total ............................................................... 15,892,025
Depository Institutions - 10.65%
AmSouth Bancorporation,
6.75%, 11-1-25 ...................................................... 6,500 6,216,275
Chevy Chase Savings Bank, F.S.B.,
9.25%, 12-1-05 ...................................................... 1,500 1,432,500
First Union Corporation:
6.824%, 8-1-26 ...................................................... 7,500 7,365,225
6.55%, 10-15-35 ..................................................... 4,500 4,303,440
Kansallis-Osake-Pankki,
10.0%, 5-1-02 ....................................................... 6,000 6,335,460
National Westminster Bank plc,
7.375%, 10-1-09 ..................................................... 4,250 4,153,227
NationsBank Corporation,
8.57%, 11-15-24 ..................................................... 5,000 5,363,800
SouthTrust Bank of Alabama, National Association:
5.58%, 2-6-06 ....................................................... 7,800 7,704,060
7.69%, 5-15-25 ...................................................... 5,000 5,004,600
Sovereign Bancorp, Inc.,
8.0%, 3-15-03 ....................................................... 2,000 1,900,000
Wachovia Corporation,
6.605%, 10-1-25 ..................................................... 4,250 4,069,035
Total ............................................................... 53,847,622
Electric, Gas and Sanitary Services - 6.27%
California Infrastructure and Economic Development
Bank, Special Purpose Trust:
PG&E-1,
6.42%, 9-25-08 ...................................................... 5,000 4,839,600
SCE-1,
6.38%, 9-25-08 ...................................................... 5,000 4,820,300
Cleveland Electric Illuminating Co. (The),
9.5%, 5-15-05 ....................................................... 4,000 4,165,120
</TABLE>
See Notes to Schedules of Investments on page .
5
<PAGE>
THE INVESTMENTS OF UNITED BOND FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Electric, Gas and Sanitary Services (Continued)
Entergy Arkansas, Inc.,
7.5%, 8-1-07 ........................................................ $ 3,750 $ 3,800,887
Korea Electric Power Corporation,
6.375%, 12-1-03 ..................................................... 2,500 2,370,975
Niagara Mohawk Power Corporation:
9.5%, 6-1-00 ........................................................ 1,000 1,011,110
7.375%, 7-1-03 ...................................................... 4,159 4,140,406
TXU Eastern Funding Company,
6.45%, 5-15-05 ...................................................... 3,250 3,063,125
Union Electric Co.,
8.25%, 10-15-22 ..................................................... 3,500 3,501,435
Total ............................................................... 31,712,958
Electronic and Other Electric Equipment - 1.80%
Motorola, Inc.,
8.4%, 8-15-31 ....................................................... 8,500 9,100,780
Food and Kindred Products - 3.60%
Anheuser-Busch Companies, Inc.,
7.0%, 9-1-05 ........................................................ 3,000 2,948,580
Coca-Cola Enterprises Inc.:
0.0%, 6-20-20 ....................................................... 36,000 7,315,200
6.7%, 10-15-36 ...................................................... 5,500 5,433,450
Coca-Cola FEMSA, S.A. de C.V.,
8.95%, 11-1-06 ...................................................... 2,500 2,500,000
Total ............................................................... 18,197,230
General Merchandise Stores - 1.12%
Fred Meyer, Inc.:
7.15%, 3-1-03 ....................................................... 3,750 3,702,375
7.45%, 3-1-08 ....................................................... 2,000 1,947,600
Total ............................................................... 5,649,975
Health Services - 0.96%
Tenet Healthcare Corporation,
7.875%, 1-15-03 ..................................................... 5,000 4,850,000
Holding and Other Investment Offices - 2.40%
Bay Apartment Communities, Inc.,
6.5%, 1-15-05 ....................................................... 3,000 2,775,120
GRUMA, S.A. de C.V.,
7.625%, 10-15-07..................................................... 3,500 3,053,750
NBD Bank, National Association,
8.25%, 11-1-24 ...................................................... 6,000 6,310,980
Total ............................................................... 12,139,850
</TABLE>
See Notes to Schedules of Investments on page .
6
<PAGE>
THE INVESTMENTS OF UNITED BOND FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Industrial Machinery and Equipment - 0.48%
Coltec Industries Inc.,
7.5%, 4-15-08 ....................................................... $ 2,500 $ 2,413,375
Insurance Carriers - 0.36%
Reliance Group Holdings, Inc.,
9.0%, 11-15-00 ...................................................... 2,000 1,800,000
Nondepository Institutions - 7.99%
Asset Securitization Corporation,
7.49%, 4-14-29 ...................................................... 6,000 5,972,220
CHYPS CBO 1997-1 Ltd.,
6.72%, 1-15-10 (C) .................................................. 8,500 7,820,000
Equicon Loan Trust,
7.3%, 2-18-13 ....................................................... 4,571 4,510,087
General Motors Acceptance Corporation,
8.875%, 6-1-10 ...................................................... 5,500 6,022,720
IMC Home Equity Loan Trust,
6.9%, 1-20-22 ....................................................... 4,500 4,445,145
Norse CBO, Ltd. and Norse CBO, Inc.,
6.515%, 8-13-10 (C) ................................................. 3,750 3,503,925
Residential Asset Securities Corporation,
Mortgage Pass-Through Certificates,
8.0%, 10-25-24 ...................................................... 3,263 3,283,600
Westinghouse Electric Corporation,
8.875%, 6-14-14 ..................................................... 4,500 4,837,635
Total ............................................................... 40,395,332
Oil and Gas Extraction - 2.22%
Anadarko Petroleum Corporation,
7.25%, 3-15-25 ...................................................... 5,000 5,000,900
Mitchell Energy & Development Corp.,
9.25%, 1-15-02 ...................................................... 165 168,820
Oryx Energy Company,
10.0%, 4-1-01 ....................................................... 3,500 3,607,205
Pemex Finance Ltd.,
5.72%, 11-15-03 ..................................................... 2,500 2,431,250
Total ............................................................... 11,208,175
Paper and Allied Products - 2.05%
Canadian Pacific Forest Products Ltd.,
9.25%, 6-15-02 ...................................................... 4,500 4,639,185
Champion International Corporation,
6.4%, 2-15-26 ....................................................... 6,100 5,706,611
Total ............................................................... 10,345,796
</TABLE>
See Notes to Schedules of Investments on page .
7
<PAGE>
THE INVESTMENTS OF UNITED BOND FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Petroleum and Coal Products - 1.35%
Conoco Inc.,
5.9%, 4-15-04 ....................................................... $ 3,000 $ 2,864,010
YPF Sociedad Anoima,
8.0%, 2-15-04 ....................................................... 4,000 3,960,480
Total ............................................................... 6,824,490
Printing and Publishing - 1.20%
Quebecor Printing Capital Corporation,
6.5%, 8-1-27 ........................................................ 6,500 6,051,500
Railroad Transportation - 0.98%
CSX Corporation,
6.95%, 5-1-27 ....................................................... 5,000 4,965,700
Security and Commodity Brokers - 1.02%
Salomon Inc.,
3.65%, 2-14-02 ...................................................... 5,000 5,161,700
Stone, Clay and Glass Products - 1.71%
Cemex, S.A. de C.V.,
9.5%, 9-20-01 ....................................................... 3,500 3,578,750
Owens-Illinois, Inc.,
7.15%, 5-15-05....................................................... 3,250 3,004,918
USG Corporation,
9.25%, 9-15-01 ...................................................... 2,000 2,046,400
Total ............................................................... 8,630,068
Transportation Equipment - 0.18%
Federal-Mogul Corporation,
7.75%, 7-1-06 ....................................................... 1,000 925,930
United States Postal Service - 0.30%
Postal Square Limited Partnership,
6.5%, 6-15-22 ....................................................... 1,684 1,519,232
TOTAL CORPORATE DEBT SECURITIES - 51.90% $262,372,538
(Cost: $271,134,086)
OTHER GOVERNMENT SECURITIES
Canada - 5.96%
Hydro-Quebec:
8.05%, 7-7-24 ....................................................... 10,000 10,561,400
7.4%, 3-28-25 ....................................................... 5,150 5,539,495
Province de Quebec:
5.67%, 2-27-26 ...................................................... 9,200 9,102,940
6.29%, 3-6-26 ....................................................... 5,000 4,896,150
Total ............................................................... 30,099,985
</TABLE>
See Notes to Schedules of Investments on page .
8
<PAGE>
THE INVESTMENTS OF UNITED BOND FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
OTHER GOVERNMENT SECURITIES (Continued)
Korea - 0.50%
Korea Development Bank (The),
7.9%, 2-1-02 ........................................................ $ 2,500 $ 2,505,200
Supranational - 1.07%
Inter-American Development Bank,
8.4%, 9-1-09 ........................................................ 5,000 5,430,950
TOTAL OTHER GOVERNMENT SECURITIES - 7.53% $ 38,036,135
(Cost: $37,513,853)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
7.5%, 2-15-07 ....................................................... 5,041 5,067,420
6.5%, 9-25-18 ....................................................... 2,000 1,921,240
7.0%, 1-15-19 ....................................................... 2,000 1,966,860
7.5%, 4-15-19 ....................................................... 13,408 13,454,283
6.25%, 1-15-21 ...................................................... 12,000 11,632,440
Federal National Mortgage Association:
7.0%, 7-25-06 ....................................................... 8,888 8,871,405
6.09%, 4-1-09 ....................................................... 4,461 4,074,693
0.0%, 2-12-18 ....................................................... 4,500 1,228,410
7.0%, 9-25-20 ....................................................... 2,000 1,973,120
6.5%, 8-25-21 ....................................................... 2,500 2,411,700
7.0%, 8-25-21 ....................................................... 10,000 9,850,000
7.0%, 6-1-24 ........................................................ 5,989 5,790,134
6.0%, 12-1-28 ....................................................... 6,655 6,087,498
Government National Mortgage Association:
7.5%, 7-15-23 ....................................................... 2,830 2,812,399
7.5%, 12-15-23 ...................................................... 3,211 3,191,381
8.0%, 9-15-25 ....................................................... 4,252 4,320,404
7.0%, 7-20-27 ....................................................... 249 239,344
7.0%, 9-20-27 ....................................................... 4,049 3,890,543
7.5%, 7-15-29 ....................................................... 4,588 4,536,174
7.75%, 10-15-31 ..................................................... 1,962 1,965,497
Tennessee Valley Authority,
5.88%, 4-1-36 ....................................................... 3,750 3,513,862
United States Department of Veterans Affairs,
Guaranteed Remic Pass-Through Certificates,
Vendee Mortgage Trust:
1997-2 Class C,
7.5%, 8-15-17 ....................................................... 4,000 4,011,240
1998-1 Class 2-B,
7.0%, 6-15-19 ....................................................... 750 744,135
1999-2 Class 1-B,
6.5%, 7-15-19 ....................................................... 5,500 5,343,580
1999-2 Class 3-B,
6.5%, 2-15-20 ....................................................... 4,000 3,806,240
</TABLE>
See Notes to Schedules of Investments on page .
9
<PAGE>
THE INVESTMENTS OF UNITED BOND FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
UNITED STATES GOVERNMENT SECURITIES (Continued) United States Treasury:
5.75%, 10-31-00 ..................................................... $ 3,000 $ 2,991,570
6.625%, 3-31-02 ..................................................... 12,000 12,082,440
5.5%, 3-31-03 ....................................................... 5,500 5,363,380
7.5%, 2-15-05 ....................................................... 7,500 7,822,275
6.5%, 8-15-05 ....................................................... 5,750 5,750,000
6.5%, 10-15-06 ...................................................... 14,000 13,962,760
11.25%, 2-15-15 ..................................................... 2,500 3,533,975
6.125%, 11-15-27 .................................................... 20,000 18,612,400
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 36.17% $182,822,802
(Cost: $187,419,092)
TOTAL SHORT-TERM SECURITIES - 3.46% $ 17,490,257
(Cost: $17,490,257)
TOTAL INVESTMENT SECURITIES - 99.06% $500,721,732
(Cost: $513,557,288)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.94% 4,772,185
NET ASSETS - 100.00% $505,493,917
</TABLE>
See Notes to Schedules of Investments on page .
10
<PAGE>
THE INVESTMENTS OF UNITED INCOME FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS
Amusement and Recreation Services - 1.43%
Walt Disney Company (The) .............................................. 4,105,000 $ 120,071,250
Building Materials and Garden Supplies - 0.73%
Home Depot, Inc. (The) ................................................. 891,300 61,109,756
Business Services - 6.49%
America Online, Inc.* .................................................. 1,007,000 75,965,562
Clear Channel Communications, Inc.* .................................... 1,420,000 126,735,000
Microsoft Corporation* ................................................. 2,006,400 234,184,500
Oracle Corporation* .................................................... 963,000 107,886,094
Total ............................................................... 544,771,156
Chemicals and Allied Products - 16.37%
Air Products and Chemicals, Inc. ....................................... 2,051,700 68,860,181
American Home Products Corporation ..................................... 1,937,900 76,425,931
Biogen, Inc.* .......................................................... 500,000 42,234,375
Bristol-Myers Squibb Company ........................................... 494,400 31,734,300
Dow Chemical Company (The) ............................................. 680,000 90,865,000
du Pont (E.I.) de Nemours and Company .................................. 2,300,000 151,512,500
Forest Laboratories, Inc.* ............................................. 723,400 44,443,888
Johnson & Johnson ...................................................... 944,600 87,965,875
Lilly (Eli) and Company ................................................ 1,637,700 108,907,050
Merck & Co., Inc. ...................................................... 1,723,100 115,555,394
Monsanto Company ....................................................... 2,900,000 103,312,500
Pfizer Inc. ............................................................ 1,802,000 58,452,375
Pharmacia & Upjohn, Inc. ............................................... 943,900 42,475,500
Procter & Gamble Company (The) ......................................... 509,100 55,778,269
Schering-Plough Corporation ............................................ 1,727,000 72,857,812
Warner-Lambert Company ................................................. 2,733,900 224,008,931
Total ............................................................... 1,375,389,881
Communication - 9.43%
Cox Communications, Inc., Class A* ..................................... 3,001,800 154,592,700
General Motors Corporation, Class H* ................................... 759,700 72,931,200
MCI WORLDCOM, Inc.* .................................................... 1,555,500 82,490,109
Nippon Telegraph and Telephone
Corporation (A) ..................................................... 4,250 72,823,852
SBC Communications Inc. ................................................ 1,500,000 73,125,000
Telefonaktiebolaget LM Ericsson, ADR,
Class B ............................................................. 3,419,000 224,478,719
Vodafone Airtouch Public Limited
Company, ADR ........................................................ 2,250,000 111,375,000
Total ............................................................... 791,816,580
Depository Institutions - 3.33%
Bank of America Corporation ............................................ 1,412,000 70,864,750
Chase Manhattan Corporation (The) ...................................... 1,050,000 81,571,875
Citigroup Inc. ......................................................... 2,287,500 127,099,219
Total ............................................................... 279,535,844
</TABLE>
See Notes to Schedules of Investments on page .
11
<PAGE>
THE INVESTMENTS OF UNITED INCOME FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Electric, Gas and Sanitary Services - 0.76%
Duke Energy Corp. ...................................................... 1,275,000 $ 63,909,375
Electronic and Other Electric Equipment - 11.00%
Analog Devices, Inc.* .................................................. 1,575,000 146,475,000
General Electric Company ............................................... 1,657,800 256,544,550
Intel Corporation ...................................................... 2,804,000 230,716,625
Nokia, AB (A) .......................................................... 1,370,000 248,400,181
Rambus Inc.* ........................................................... 623,500 42,027,797
Total ............................................................... 924,164,153
Fabricated Metal Products - 0.77%
Gillette Company (The) ................................................. 1,569,900 64,660,256
Food and Kindred Products - 0.53%
PepsiCo, Inc. .......................................................... 1,268,300 44,707,575
Food Stores - 1.42%
Kroger Co. (The)* ...................................................... 6,339,000 119,648,625
Furniture and Home Furnishings Stores - 1.55%
Circuit City Stores, Inc. - Circuit
City Group .......................................................... 2,883,000 129,915,188
General Merchandise Stores - 2.38%
Dayton Hudson Corporation .............................................. 882,600 64,815,938
Wal-Mart Stores, Inc. .................................................. 1,950,000 134,793,750
Total ............................................................... 199,609,688
Holding and Other Investment Offices - 1.58%
ABB Ltd. [Switzerland] (A)* ............................................ 1,086,070 132,767,643
Industrial Machinery and Equipment - 8.04%
Baker Hughes Incorporated .............................................. 1,858,000 39,134,125
Cisco Systems, Inc.* ................................................... 1,629,000 174,455,719
Deere & Company ........................................................ 1,116,000 48,406,500
Dell Computer Corporation* ............................................. 1,969,000 100,357,469
EMC Corporation* ....................................................... 1,404,000 153,387,000
International Business Machines
Corporation ......................................................... 1,200,000 129,600,000
Sun Microsystems, Inc.* ................................................ 389,000 30,111,031
Total ............................................................... 675,451,844
</TABLE>
See Notes to Schedules of Investments on page .
12
<PAGE>
THE INVESTMENTS OF UNITED INCOME FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Instruments and Related Products - 2.70%
Guidant Corporation* ................................................... 2,400,000 $ 112,800,000
Medtronic, Inc. ........................................................ 1,944,000 70,834,500
Raytheon Company, Class A .............................................. 1,747,181 43,351,929
Total ............................................................... 226,986,429
Insurance Carriers - 3.15%
American International Group, Inc. ..................................... 1,146,187 123,931,469
Aon Corporation ........................................................ 1,065,000 42,600,000
Chubb Corporation (The) ................................................ 1,742,600 98,130,163
Total ............................................................... 264,661,632
Motion Pictures - 1.48%
Time Warner Incorporated ............................................... 1,711,900 124,005,756
Nondepository Institutions - 4.02%
Associates First Capital Corporation,
Class A ............................................................. 3,365,870 92,351,058
Fannie Mae ............................................................. 2,304,000 143,856,000
Freddie Mac ............................................................ 2,154,800 101,410,275
Total ............................................................... 337,617,333
Oil and Gas Extraction - 4.06%
Anadarko Petroleum Corporation ......................................... 1,333,000 45,488,625
Burlington Resources Incorporated ...................................... 3,700,000 122,331,250
Schlumberger Limited ................................................... 2,256,000 126,900,000
Transocean Sedco Forex Inc. ............................................ 436,762 14,713,406
USX Corporation - Marathon Group ....................................... 1,290,000 31,846,875
Total ............................................................... 341,280,156
Petroleum and Coal Products - 3.18%
Chevron Corporation .................................................... 450,000 38,981,250
Exxon Mobil Corporation ................................................ 1,672,720 134,758,505
Royal Dutch Petroleum Company, NY Shares ............................... 1,544,000 93,315,500
Total ............................................................... 267,055,255
Primary Metal Industries - 0.80%
Alcoa Incorporated ..................................................... 806,200 66,914,600
Security and Commodity Brokers - 0.43%
Charles Schwab Corporation (The) ....................................... 943,000 36,187,625
Transportation by Air - 0.64%
AMR Corporation* ....................................................... 800,000 53,600,000
</TABLE>
See Notes to Schedules of Investments on page .
13
<PAGE>
THE INVESTMENTS OF UNITED INCOME FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Transportation Equipment - 3.44%
Boeing Company (The) ................................................... 892,500 $ 37,094,531
DaimlerChrysler AG ..................................................... 713,907 55,863,223
Ford Motor Company ..................................................... 2,784,100 148,775,344
Lockheed Martin Corporation ............................................ 2,151,100 47,055,312
Total ............................................................... 288,788,410
Trucking and Warehousing - 0.25%
United Parcel Service, Inc. ............................................ 304,400 21,003,600
Wholesale Trade - Nondurable Goods - 3.37%
Cardinal Health, Inc. .................................................. 2,450,600 117,322,475
Enron Corp. ............................................................ 1,081,000 47,969,375
Safeway Inc.* .......................................................... 3,310,000 117,711,875
Total ............................................................... 283,003,725
TOTAL COMMON STOCKS - 93.33% $7,838,633,335
(Cost: $4,607,214,767)
PREFERRED STOCK - 0.41%
Communication
Cox Communications, Inc., 7.0% Convertible.............................. 505,800 $ 34,394,400
(Cost: $25,290,000)
<CAPTION>
Principal
Amount in
Thousands
<S> <C> <C>
UNITED STATES GOVERNMENT SECURITY - 0.44%
United States Treasury,
6.75%, 4-30-00 ...................................................... $37,000 $ 37,115,440
(Cost: $37,061,401)
SHORT-TERM SECURITIES
Commercial Paper
Auto Repair, Services and Parking - 0.12%
Hertz Corporation (The),
5.675%, 1-10-00 ..................................................... 10,000 9,985,813
Chemicals and Allied Products - 0.53%
Air Products and Chemicals, Inc.:
6.7%, 1-14-00 ....................................................... 20,000 19,951,611
6.8%, 1-19-00 ....................................................... 25,000 24,915,000
Total ............................................................... 44,866,611
Communication - 0.36%
Dominion Resources Inc.:
6.36%, 1-20-00 ......................................................... 10,000 9,966,433
6.75%, 1-20-00 ......................................................... 20,000 19,928,751
Total .................................................................. 29,895,184
</TABLE>
See Notes to Schedules of Investments on page 41.
14
<PAGE>
THE INVESTMENTS OF UNITED INCOME FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Depository Institutions - 0.66%
UBS Finance (DE) Inc.,
4.4%, 1-5-00 ........................................................ $ 7,500 $ 7,496,333
Wells Fargo & Company,
6.32%, 1-20-00 ...................................................... 47,900 47,740,227
Total ............................................................... 55,236,560
Electric, Gas and Sanitary Services - 1.04%
Carolina Power & Light Co.,
6.5%, 1-20-00 ....................................................... 39,142 39,007,721
Detroit Edison Co.,
6.75%, 1-13-00 ...................................................... 15,000 14,966,250
Public Service Electric & Gas Co.,
6.75%, 1-13-00 ...................................................... 2,000 1,995,500
Tampa Electric Co.,
6.5%, 1-19-00 ....................................................... 10,700 10,665,225
Western Resources, Inc.,
6.85%, 1-27-00 ...................................................... 20,850 20,746,851
Total ............................................................... 87,381,547
Electronic and Other Electric Equipment - 0.13%
Sony Capital Corp.,
6.4%, 1-13-00 ....................................................... 11,000 10,976,533
Fabricated Metal Products - 0.00%
Danaher Corporation,
6.49%, Master Note .................................................. 336 336,000
Food and Kindred Products - 0.14%
Conagra Inc.,
6.05%, 1-7-00 ....................................................... 6,725 6,718,219
General Mills, Inc.,
6.345%, Master Note ................................................. 147 147,000
Ralston Purina Co.,
6.62%, 1-24-00 ...................................................... 5,000 4,978,853
Total ............................................................... 11,844,072
Food Stores - 0.12%
Albertson's Inc.,
5.94%, 1-19-00 ...................................................... 10,000 9,970,300
Industrial Machinery and Equipment - 0.41%
Deere & Company:
6.41%, 1-25-00 ...................................................... 25,000 24,893,167
6.34%, 1-27-00 ...................................................... 10,000 9,954,211
Total ............................................................... 34,847,378
</TABLE>
See Notes to Schedules of Investments on page .
15
<PAGE>
THE INVESTMENTS OF UNITED INCOME FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Instruments and Related Products - 0.44%
Snap-On Inc.,
6.375%, 1-14-00 ..................................................... $37,000 $ 36,914,823
Insurance Carriers - 0.42%
SAFECO Credit Co. Inc.:
6.8%, 1-11-00 ....................................................... 12,000 11,977,333
6.9%, 1-11-00 ....................................................... 12,975 12,950,132
6.53%, 1-13-00 ...................................................... 9,991 9,969,253
Total ............................................................... 34,896,718
Nondepository Institutions - 0.16%
Associates First Capital B.V. (Associates
First Capital Corporation):
5.95%, 1-10-00 ...................................................... 6,000 5,991,075
6.0%, 1-10-00 ....................................................... 2,500 2,496,250
Paccar Financial Corp.,
5.2757%, Master Note ................................................ 1,909 1,909,000
Textron Financial Corp.,
8.3%, 1-5-00 ........................................................ 3,500 3,496,772
Total ............................................................... 13,893,097
Paper and Allied Products - 0.18%
Westvaco Corp.,
6.3%, 1-27-00 ....................................................... 15,000 14,931,750
Personal Services - 0.18%
Block Financial Corp.,
6.18%, 1-31-00 ...................................................... 15,000 14,922,750
Petroleum and Coal Products - 0.36%
Kerr-McGee Credit LLC,
6.85%, 1-27-00 ...................................................... 30,000 29,851,583
Total Commercial Paper - 5.25% 440,750,719
Commercial Paper (backed by irrevocable bank letter of credit)
Electric, Gas and Sanitary Services - 0.09%
AES Hawaii Inc. (Bank of America NT & SA), 6.2%, 1-21-00 .................. 7,500 7,474,167
Foreign Government - 0.19%
United Mexican States (Barclays Bank PLC),
6.08%, 2-1-00 ....................................................... 16,000 15,916,231
</TABLE>
See Notes to Schedules of Investments on page .
16
<PAGE>
THE INVESTMENTS OF UNITED INCOME FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
SHORT-TERM SECURITIES (Continued)
Commercial Paper (backed by irrevocable bank
letter of credit) (Continued)
Oil and Gas Extraction - 0.17%
Louis Dreyfus Corp. (Dresdner Bank AG),
6.5%, 1-18-00 ....................................................... $15,000 $ 14,953,958
Total Commercial Paper (backed by irrevocable bank
letter of credit) - 0.45% 38,344,356
Municipal Obligations
California - 0.31%
California Pollution Control Financing
Authority, Environmental Improvement
Revenue Bonds (Shell Martinez Refining
Company Project), Series 1996 (Taxable),
6.55%, 1-20-00 ...................................................... 26,450 26,450,000
Louisiana - 0.10%
Industrial District No. 3 of the Parish of West
Baton Rouge, State of Louisiana, Variable Rate
Demand Revenue Bonds, Series 1995 (Taxable),
(The Dow Chemical Company Project),
6.25%, 1-26-00 ...................................................... 8,000 8,000,000
Total Municipal Obligations - 0.41% 34,450,000
TOTAL SHORT-TERM SECURITIES - 6.11% $ 513,545,075
(Cost: $513,545,075)
TOTAL INVESTMENT SECURITIES - 100.29% $8,423,688,250
(Cost: $5,183,111,243)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.29%) (24,553,768)
NET ASSETS - 100.00% $8,399,134,482
</TABLE>
See Notes to Schedules of Investments on page .
17
<PAGE>
THE INVESTMENTS OF UNITED SCIENCE AND TECHNOLOGY FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS
Building Materials and Garden Supplies - 0.95%
Home Depot, Inc. (The) ................................................. 525,000 $ 35,995,313
Business Services - 44.40%
Acxiom Corporation* .................................................... 600,000 14,418,750
America Online, Inc.* .................................................. 1,600,000 120,700,000
BroadVision, Inc.* ..................................................... 375,000 63,773,438
Citrix Systems, Inc.* .................................................. 1,000,000 122,968,750
Clarent Corporation* ................................................... 200,000 15,537,500
Clear Channel Communications, Inc.* .................................... 547,300 48,846,525
DoubleClick Inc.* ...................................................... 373,800 94,676,531
eBay Inc.* ............................................................. 300,000 37,565,625
Getty Images, Inc.* .................................................... 648,200 31,761,800
HNC Software Inc.* ..................................................... 600,000 63,581,250
Inktomi Corporation* ................................................... 940,000 83,366,250
Intuit Inc.* ........................................................... 1,526,400 91,440,900
Microsoft Corporation* ................................................. 700,000 81,703,125
Netopia, Inc.* ......................................................... 500,000 27,296,875
Oracle Corporation* .................................................... 500,000 56,015,625
Phone.com, Inc.* ....................................................... 400,000 46,475,000
Sapient Corporation* ................................................... 105,000 14,795,156
TMP Worldwide Inc.* .................................................... 500,000 70,843,750
Transaction Systems Architects, Inc.,
Class A* ............................................................ 600,000 16,818,750
USWeb Corporation* ..................................................... 600,000 26,681,250
Veritas Software Corp.* ................................................ 1,500,000 214,640,625
Vignette Corporation* .................................................. 500,000 81,484,375
Yahoo! Inc.* ........................................................... 600,000 259,631,250
Total ............................................................... 1,685,023,100
Chemicals and Allied Products - 5.67%
Biogen, Inc.* .......................................................... 700,000 59,128,125
Bristol-Myers Squibb Company ........................................... 400,000 25,675,000
Johnson & Johnson ...................................................... 400,000 37,250,000
Pfizer Inc. ............................................................ 700,000 22,706,250
Schering-Plough Corporation ............................................ 600,000 25,312,500
Warner-Lambert Company ................................................. 550,000 45,065,625
Total ............................................................... 215,137,500
Communication - 9.68%
AT&T Corp. - Liberty Media Group,
Class A* ............................................................ 700,000 39,725,000
COLT Telecom Group plc, ADR* ........................................... 400,000 81,600,000
Cox Communications, Inc., Class A* ..................................... 820,000 42,230,000
EchoStar Communications Corporation,
Class A* ............................................................ 1,200,000 116,850,000
Global TeleSystems Group, Inc.* ........................................ 434,000 15,027,250
Nextel Communications, Inc.* ........................................... 456,500 47,062,297
Vodafone Airtouch Public Limited
Company, ADR ........................................................ 500,000 24,750,000
Total ............................................................... 367,244,547
</TABLE>
See Notes to Schedules of Investments on page .
18
<PAGE>
THE INVESTMENTS OF UNITED SCIENCE AND TECHNOLOGY FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Depository Institutions - 0.91%
Concord EFS, Inc.* ..................................................... 1,350,000 $ 34,720,313
Electronic and Other Electric Equipment - 18.41%
Analog Devices, Inc.* .................................................. 1,000,000 93,000,000
Broadcom Corporation, Class A* ......................................... 450,000 122,554,687
Gemstar International Group Limited* ................................... 1,400,000 99,662,500
General Electric Company ............................................... 325,000 50,293,750
Intel Corporation ...................................................... 785,000 64,590,781
JDS Uniphase Corporation* .............................................. 413,000 66,622,062
Level 3 Communications, Inc.* .......................................... 300,000 24,543,750
Nokia Corporation, Series A, ADR ....................................... 380,000 72,200,000
Nortel Networks Corporation ............................................ 360,000 36,360,000
Rambus Inc.* ........................................................... 500,000 33,703,125
STMicroelectronics N.V., NY Shares ..................................... 232,500 35,209,219
Total ............................................................... 698,739,874
Engineering and Management Services - 2.81%
Incyte Pharmaceuticals, Inc.* .......................................... 998,400 59,061,600
Paychex, Inc. .......................................................... 900,000 35,971,875
Quintiles Transnational Corp.* ......................................... 626,000 11,678,813
Total ............................................................... 106,712,288
General Merchandise Stores - 0.64%
Dayton Hudson Corporation .............................................. 330,000 24,234,375
Industrial Machinery and Equipment - 8.81%
Apple Computer, Inc.* .................................................. 617,000 63,416,031
Applied Materials, Inc.* ............................................... 400,000 50,662,500
Cisco Systems, Inc.* ................................................... 1,289,100 138,054,553
Extreme Networks, Inc.* ................................................ 300,000 25,087,500
Sun Microsystems, Inc.* ................................................ 500,000 38,703,125
VA Linux Systems, Inc.* ................................................ 90,000 18,624,375
Total ............................................................... 334,548,084
Instruments and Related Products - 2.25%
Medtronic, Inc. ........................................................ 800,000 29,150,000
Teradyne, Inc.* ........................................................ 850,000 56,100,000
Total ............................................................... 85,250,000
Miscellaneous Retail - 1.20%
Amazon.com, Inc.* ...................................................... 600,000 45,693,750
Motion Pictures - 0.76%
Time Warner Incorporated ............................................... 400,000 28,975,000
TOTAL COMMON STOCKS - 96.49% $3,662,274,144
(Cost: $1,261,015,901)
</TABLE>
See Notes to Schedules of Investments on page .
19
<PAGE>
THE INVESTMENTS OF UNITED SCIENCE AND TECHNOLOGY FUND
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Value
<S> <C>
TOTAL SHORT-TERM SECURITIES - 3.65% $ 138,331,307
(Cost: $138,331,307)
TOTAL INVESTMENT SECURITIES - 100.14% $3,800,605,451
(Cost: $1,399,347,208)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.14%) (5,151,237)
NET ASSETS - 100.00% $3,795,454,214
</TABLE>
Notes to Schedules of Investments
*No dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside the United States.
(B) See Note 7 to financial statements.
(C) Security was purchased pursuant to Rule 144A under the Securities Act
of 1933 and may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, the
value of these securities amounted to $11,323,925 or 2.24% of net
assets for United Bond Fund.
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.
20
<PAGE>
UNITED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(In Thousands, Except
for Per Share Amounts)
<TABLE>
<CAPTION>
United
United United United Science and
Accumulative Bond Income Technology
Fund Fund Fund Fund
------------ -------------- -------------- ------------
<S> <C> <C> <C> <C>
Assets
Investment securities --
at value (Notes 1 and 3) $2,264,891 $500,722 $8,423,688 $3,800,605
Cash ............................... 25 --- --- 13
Receivables:
Investment securities sold ...... --- --- 17,114 ---
Dividends and interest .......... 1,090 7,446 6,565 300
Fund shares sold ................ 1,292 403 5,251 5,971
Prepaid insurance
premium ......................... 36 15 65 17
---------- -------- ---------- ----------
Total assets .................. 2,267,334 508,586 8,452,683 3,806,906
Liabilities ---------- -------- ---------- ----------
Payable for investment
securities purchased ............ --- --- --- 204
Payable to Fund
shareholders .................... 11,932 2,792 50,197 10,074
Accrued service fee (Note 2) ....... 390 101 1,467 459
Accrued transfer agency ............
and dividend disbursing (Note 2). 237 81 983 435
Accrued distribution fee (Note 2) .. 35 5 100 100
Due to custodian ................... --- 55 283 ---
Accrued management fee (Note 2)..... 41 7 130 83
Accrued shareholder servicing --
Class Y (Note 2) ................ 1 --- 43 4
Accrued accounting
services fee (Note 2) ........... 8 5 8 8
Other .............................. 81 46 338 85
---------- -------- ---------- ----------
Total liabilities ............. 12,725 3,092 53,549 11,452
---------- -------- ---------- ----------
Total net assets ........... $2,254,609 $505,494 $8,399,134 $3,795,454
Net Assets ========== ======== ========== ==========
$1.00 par value capital stock:
Capital stock ................... $ 246,577 $ 84,710 $1,033,049 $ 205,880
Additional paid-in
capital ....................... 1,531,351 452,467 3,761,018 1,156,099
Accumulated undistributed
income (loss):
Accumulated undistributed
net investment
income ........................ 2,558 237 4,374 ---
Accumulated undistributed net
realized gain (loss) on
investment
transactions .................. 79,304 (19,084) 360,167 32,223
Net unrealized appreciation
(depreciation) of
investments ................... 394,819 (12,836) 3,240,526 2,401,252
---------- -------- ---------- ----------
Net assets applicable to
outstanding units
of capital ................. $2,254,609 $505,494 $8,399,134 $3,795,454
========== ======== ========== ==========
Capital shares outstanding:
Class A ........................... 245,724 83,921 996,484 203,116
Class B ........................... 288 290 1,612 944
Class C ........................... 38 48 169 155
Class Y ........................... 527 451 34,784 1,665
Capital shares authorized ............. 500,000 300,000 2,000,000 400,000
Net asset value per share
(net assets divided by
shares outstanding):
Class A ........................... $9.14 $5.97 $8.13 $18.43
Class B ........................... $9.12 $5.97 $8.13 $18.37
Class C ........................... $9.12 $5.96 $8.13 $18.38
Class Y ........................... $9.14 $5.97 $8.13 $18.65
</TABLE>
See notes to financial statements.
21
<PAGE>
UNITED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1999
(In Thousands)
<TABLE>
<CAPTION>
United
United United United Science and
Accumulative Bond Income Technology
Fund Fund Fund Fund
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Investment Income (Loss)
Income (Note 1B):
Interest and
amortization ....................... $ 4,861 $35,757 $ 80,752 $ 4,290
Dividends ............................ 20,388 --- 69,751 3,730
-------- ------- ---------- ----------
Total income ....................... 25,249 35,757 150,503 8,020
-------- ------- ---------- ----------
Expenses (Note 2):
Investment
management fee...................... 11,970 2,525 44,403 16,102
Service fees:
Class A ............................ 4,353 1,246 16,986 4,574
Class B ............................ 1 1 4 5
Class C ............................ --- --- --- 1
Transfer agency and
dividend disbursing:
Class A ............................ 2,242 1,008 9,910 3,770
Class B ............................ 2 1 8 13
Class C ............................ --- --- 1 2
Distribution fees:
Class A ............................ 241 76 947 424
Class B ............................ 2 2 11 11
Class C ............................ --- --- 1 2
Custodian fees ....................... 66 17 576 70
Shareholder servicing
-- Class Y.......................... 7 4 528 21
Accounting services fee............... 100 61 100 100
Legal fees ........................... 20 5 74 18
Audit fees ........................... 18 16 27 19
Other .............................. 251 131 915 367
-------- ------- ---------- ----------
Total expenses ..................... 19,273 5,093 74,491 25,499
-------- ------- ---------- ----------
Net investment
income (loss) ................ 5,976 30,664 76,012 (17,479)
-------- ------- ---------- ----------
Realized and Unrealized
Gain (Loss) on Investments (Notes 1 and 3)
Realized net gain (loss)
on securities ........................ 265,505 (593) 836,278 288,499
Realized net gain (loss) on foreign
currency transactions ................ (98) --- (336) 36
-------- ------- ---------- ----------
Realized net gain (loss)
on investments ..................... 265,407 (593) 835,942 288,535
Unrealized appreciation (depreciation)
in value of investments
during the period..................... 201,521 (36,307) 317,336 1,604,183
-------- ------- ---------- ----------
Net gain (loss) on
investments ..................... 466,928 (36,900) 1,153,278 1,892,718
-------- ------- ---------- ----------
Net increase (decrease) in net
assets resulting from
operations.................... $472,904 $(6,236) $1,229,290 $1,875,239
======== ======= ========== ==========
</TABLE>
See notes to financial statements.
22
<PAGE>
UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1999
(In Thousands)
<TABLE>
<CAPTION>
United
United United United Science and
Accumulative Bond Income Technology
Fund Fund Fund Fund
------------ -------------- -------------- ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment
income (loss) ................. $ 5,976 $ 30,664 $ 76,012 $ (17,479)
Realized net gain (loss)
on investments ................ 265,407 (593) 835,942 288,535
Unrealized appreciation
(depreciation) ................ 201,521 (36,307) 317,336 1,604,183
---------- -------- ---------- ----------
Net increase (decrease) in net
assets resulting
from operations............. 472,904 (6,236) 1,229,290 1,875,239
---------- -------- ---------- ----------
Distributions to shareholders
from (Note 1E):*
Net investment income:
Class A ....................... (5,519) (30,472) (77,099) ---
Class B ....................... --- (9) --- ---
Class C ....................... --- (1) --- ---
Class Y ....................... (20) (148) (4,135) ---
Realized net gains on
investment transactions:
Class A ....................... (250,533) --- (486,908) (280,167)
Class B ....................... (223) --- (607) (988)
Class C ....................... (34) --- (66) (171)
Class Y ....................... (530) --- (16,884) (2,276)
---------- -------- ---------- ----------
(256,859) (30,630) (585,699) (283,602)
---------- -------- ---------- ----------
Capital share
transactions (Note 5) ........... 170,527 (14,788) (11,758) 529,334
---------- -------- ---------- ----------
Total increase (decrease)........ 386,572 (51,654) 631,833 2,120,971
Net Assets
Beginning of period ................ 1,868,037 557,148 7,767,301 1,674,483
---------- -------- ---------- ----------
End of period $2,254,609 $505,494 $8,399,134 $3,795,454
========== ======== ========== ==========
Undistributed
net investment
income ........................ $2,558 $237 $4,374 $---
====== ==== ====== ====
</TABLE>
*See "Financial Highlights" on pages - .
See notes to financial statements.
23
<PAGE>
UNITED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
United
United United United Science and
Accumulative Bond Income Technology
Fund Fund Fund Fund
------------ -------------- -------------- ------------
<S> <C> <C> <C> <C>
Increase in Net Assets
Operations:
Net investment
income (loss) ................. $ 19,519 $ 31,745 $ 82,228 $ (4,737)
Realized net gain
on investments ................ 259,891 4,756 1,363,007 139,225
Unrealized
appreciation .................. 75,732 1,500 102,526 492,528
-------- ---------- ---------- ----------
Net increase in net
assets resulting
from operations............. 355,142 38,001 1,547,761 627,016
-------- ---------- ---------- ----------
Distributions to shareholders
from (Note 1E):*
Net investment income:
Class A ....................... (20,979) (31,553) (69,402) ---
Class Y ....................... (50) (359) (4,557) ---
Realized net gains on
investment transactions:
Class A ....................... (214,379) --- (1,392,072) (108,718)
Class Y ....................... (421) --- (76,922) (380)
-------- ---------- ---------- ----------
(235,829) (31,912) (1,542,953) (109,098)
-------- ---------- ---------- ----------
Capital share
transactions (Note 5)............ 149,682 22,363 1,267,504 89,771
-------- ---------- ---------- ----------
Total increase .................. 268,995 28,452 1,272,312 607,689
Net Assets
Beginning of period ................ 1,599,042 528,696 6,494,989 1,066,794
---------- -------- ---------- ----------
End of period ...................... $1,868,037 $557,148 $7,767,301 $1,674,483
========== ======== ========== ==========
Undistributed
net investment
income ........................ $2,219 $203 $9,932 $---
====== ==== ====== ====
</TABLE>
*See "Financial Highlights" on pages - .
See notes to financial statements.
24
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED ACCUMULATIVE FUND
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............. $8.28 $7.77 $7.75 $7.78 $6.58
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.03 0.10 0.10 0.11 0.11
Net realized and
unrealized gain on
investments .................. 2.01 1.60 2.14 0.82 2.12
----- ----- ----- ----- -----
Total from investment
operations ...................... 2.04 1.70 2.24 0.93 2.23
----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.03) (0.11) (0.09) (0.11) (0.11)
From capital gains .............. (1.15) (1.08) (2.13) (0.85) (0.92)
----- ----- ----- ----- -----
Total distributions ................ (1.18) (1.19) (2.22) (0.96) (1.03)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $9.14 $8.28 $7.77 $7.75 $7.78
===== ===== ===== ===== =====
Total return* ...................... 25.72% 22.62% 29.58% 12.18% 34.21%
Net assets, end of
period (in
millions) ....................... $2,247 $1,864 $1,595 $1,285 $1,206
Ratio of expenses to
average net assets .............. 0.98% 0.88% 0.82% 0.83% 0.80%
Ratio of net investment
income to average
net assets ...................... 0.30% 1.12% 1.16% 1.34% 1.42%
Portfolio turnover
rate ............................ 372.35% 373.78% 313.99% 240.37% 229.03%
</TABLE>
* Total return calculated without taking into account the sales load deducted
on an initial purchase.
See notes to financial statements.
25
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED ACCUMULATIVE FUND
Class B Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
<TABLE>
<CAPTION>
For the
period
from
10/4/99*
through
12/31/99
--------
<S> <C>
Net asset value,
beginning of period ............. $8.43
-----
Income from investment
operations:
Net investment loss ............. (0.01)
Net realized and
unrealized gain
on investments ............... 1.85
-----
Total from investment
operations ...................... 1.84
-----
Less distributions:
From net investment
income ....................... (0.00)
From capital gains .............. (1.15)
-----
Total distributions ................ (1.15)
-----
Net asset value,
end of period ................... $9.12
=====
Total return ....................... 22.89%
Net assets, end of
period (in
millions) ....................... $3
Ratio of expenses to
average net assets .............. 2.24%**
Ratio of net investment
loss to average
net assets ...................... -1.40%**
Portfolio turnover
rate ............................ 372.35%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
26
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED ACCUMULATIVE FUND
Class C Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
<TABLE>
<CAPTION>
For the
period
from
10/6/99*
through
12/31/99
--------
<S> <C>
Net asset value,
beginning of period ............. $8.53
-----
Income from investment
operations:
Net investment loss ............. (0.01)
Net realized and
unrealized gain
on investments ............... 1.75
-----
Total from investment
operations ...................... 1.74
-----
Less distributions:
From net investment
income ....................... (0.00)
From capital gains .............. (1.15)
-----
Total distributions ................ (1.15)
-----
Net asset value,
end of period ................... $9.12
=====
Total return ....................... 21.45%
Net assets, end of
period (in
thousands) ...................... $347
Ratio of expenses to
average net assets .............. 2.28%**
Ratio of net investment
loss to average
net assets ...................... -1.35%**
Portfolio turnover
rate ............................ 372.35%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
27
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED ACCUMULATIVE FUND
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the
For the fiscal year period
ended December 31, from
-------------------------------------------- 7/11/95* to
1999 1998 1997 1996 12/31/95
----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............. $8.28 $7.77 $7.75 $7.78 $7.84
----- ----- ----- ----- -----
Income from investment
operations:
Net investment income ........... 0.04 0.12 0.11 0.12 0.05
Net realized and
unrealized gain
on investments ............... 2.01 1.59 2.14 0.82 0.87
----- ----- ----- ----- -----
Total from investment
operations ...................... 2.05 1.71 2.25 0.94 0.92
----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.04) (0.12) (0.10) (0.12) (0.06)
From capital gains .............. (1.15) (1.08) (2.13) (0.85) (0.92)
----- ----- ----- ----- -----
Total distributions ................ (1.19) (1.20) (2.23) (0.97) (0.98)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $9.14 $8.28 $7.77 $7.75 $7.78
===== ===== ===== ===== =====
Total return ....................... 25.95% 22.79% 29.67% 12.27% 11.92%
Net assets, end of
period (in
millions) ....................... $5 $4 $4 $3 $1
Ratio of expenses to
average net assets .............. 0.80% 0.75% 0.75% 0.74% 0.76%**
Ratio of net investment
income to average
net assets ...................... 0.49% 1.21% 1.22% 1.45% 1.24%**
Portfolio turnover
rate ............................ 372.35% 373.78% 313.99% 240.37% 229.03%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
28
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED BOND FUND
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $6.39 $6.32 $6.14 $6.34 $5.62
----- ----- ----- ----- -----
Income from investment
operations:
Net investment income ........... 0.35 0.38 0.39 0.39 0.40
Net realized and
unrealized gain
(loss) on
investments .................. (0.42) 0.07 0.19 (0.20) 0.72
----- ----- ----- ----- -----
Total from investment
operations ...................... (0.07) 0.45 0.58 0.19 1.12
----- ----- ----- ----- -----
Less distributions from
net investment income ........... (0.35) (0.38) (0.40) (0.39) (0.40)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $5.97 $6.39 $6.32 $6.14 $6.34
===== ===== ===== ===== =====
Total return* ...................... -1.08% 7.27% 9.77% 3.20% 20.50%
Net assets, end of
period (in
millions) ....................... $501 $551 $524 $519 $563
Ratio of expenses to
average net assets .............. 0.95% 0.84% 0.77% 0.77% 0.74%
Ratio of net investment
income to average
net assets ...................... 5.72% 5.88% 6.34% 6.34% 6.54%
Portfolio turnover
rate ............................ 34.12% 33.87% 35.08% 55.74% 66.38%
</TABLE>
* Total return calculated without taking into account the sales load deducted
on an initial purchase.
See notes to financial statements.
29
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED BOND FUND
Class B Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
<TABLE>
<CAPTION>
For the
period
from
9/9/99*
through
12/31/99
--------
<S> <C>
Net asset value,
beginning of period ............. $6.05
-----
Income from investment
operations:
Net investment income ........... 0.10
Net realized and
unrealized loss
on investments ............... (0.08)
-----
Total from investment
operations ...................... 0.02
-----
Less distributions from
net investment income ........... (0.10)
From capital gains .............. (0.00)
-----
Total distributions ................ (0.10)
-----
Net asset value,
end of period ................... $5.97
=====
Total return ....................... 0.30%
Net assets, end of
period (in
millions) ....................... $2
Ratio of expenses to
average net assets .............. 1.91%**
Ratio of net investment
income to average
net assets ...................... 4.93%**
Portfolio turnover
rate ............................ 34.12%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
30
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED BOND FUND
Class C Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
<TABLE>
<CAPTION>
For the
period
from
9/9/99*
through
12/31/99
--------
<S> <C>
Net asset value,
beginning of period ............. $6.05
-----
Income from investment
operations:
Net investment income ........... 0.10
Net realized and
unrealized loss
on investments ............... (0.09)
-----
Total from investment
operations ...................... 0.01
-----
Less distributions from
net investment income ........... (0.10)
-----
Net asset value,
end of period ................... $5.96
=====
Total return ....................... 0.13%
Net assets, end of
period (in
thousands) ...................... $289
Ratio of expenses to
average net assets .............. 1.98%**
Ratio of net investment
income to average
net assets ...................... 4.87%**
Portfolio turnover
rate ............................ 34.12%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
31
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED BOND FUND
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year For the
ended December 31, period from
-------------------------------------------- 6/19/95* to
1999 1998 1997 1996 12/31/95
----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $6.39 $6.32 $6.14 $6.34 $6.11
----- ----- ----- ----- -----
Income from investment
operations:
Net investment income ........... 0.40 0.39 0.42 0.40 0.21
Net realized and
unrealized gain (loss)
on investments ............... (0.45) 0.07 0.17 (0.20) 0.22
----- ----- ----- ----- -----
Total from investment
operations ...................... (0.05) 0.46 0.59 0.20 0.43
----- ----- ----- ----- -----
Less distributions from
net investment income ........... (0.37) (0.39) (0.41) (0.40) (0.20)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $5.97 $6.39 $6.32 $6.14 $6.34
===== ===== ===== ===== =====
Total return ....................... -0.81% 7.54% 9.91% 3.35% 7.20%
Net assets, end of
period (in
millions) ....................... $2 $6 $5 $12 $3
Ratio of expenses to
average net assets .............. 0.69% 0.61% 0.64% 0.62% 0.63%**
Ratio of net investment
income to average
net assets ...................... 6.00% 6.10% 6.48% 6.52% 6.41%**
Portfolio turnover
rate ............................ 34.12% 33.87% 35.08% 55.74% 66.38%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
32
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED INCOME FUND
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:*
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $7.52 $7.59 $6.58 $5.79 $4.67
----- ----- ----- ----- -----
Income from investment
operations:
Net investment income ........... 0.08 0.20 0.06 0.07 0.07
Net realized and
unrealized gain on
investments .................. 1.13 1.66 1.73 1.10 1.30
----- ----- ----- ----- -----
Total from investment
operations ...................... 1.21 1.86 1.79 1.17 1.37
----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.08) (0.19) (0.06) (0.06) (0.07)
From capital gains .............. (0.52) (1.74) (0.72) (0.32) (0.18)
----- ----- ----- ----- -----
Total distributions ................ (0.60) (1.93) (0.78) (0.38) (0.25)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $8.13 $7.52 $7.59 $6.58 $5.79
===== ===== ===== ===== =====
Total return** ..................... 16.41% 24.02% 27.34% 20.36% 29.60%
Net assets, end of
period (in
millions) ....................... $8,102 $7,368 $6,196 $4,851 $3,976
Ratio of expenses to
average net assets .............. 0.94% 0.89% 0.84% 0.86% 0.83%
Ratio of net investment
income to average
net assets ...................... 0.94% 1.11% 0.74% 1.03% 1.31%
Portfolio turnover
rate ............................ 53.79% 49.29% 33.59% 22.24% 17.59%
</TABLE>
*Per-share amounts have been adjusted retroactively to reflect the 400% stock
dividend effected June 26, 1998.
**Total return calculated without taking into account the sales load deducted
on an initial purchase.
See notes to financial statements.
33
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED INCOME FUND
Class B Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
<TABLE>
<CAPTION>
For the
period
from
10/4/99*
through
12/31/99
--------
<S> <C>
Net asset value,
beginning of period ............. $7.77
-----
Income from investment
operations:
Net investment loss ............. (0.00)
Net realized and
unrealized gain
on investments ............... 0.88
-----
Total from investment
operations ...................... 0.88
-----
Less distributions:
From net investment
income ....................... (0.00)
From capital gains .............. (0.52)
-----
Total distributions ................ (0.52)
-----
Net asset value,
end of period ................... $8.13
=====
Total return ....................... 11.53%
Net assets, end of
period (in
millions) ....................... $13
Ratio of expenses to
average net assets .............. 2.18%**
Ratio of net investment
loss to average
net assets ...................... -0.59**
Portfolio turnover
rate ............................ 53.79%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
34
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED INCOME FUND
Class C Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
<TABLE>
<CAPTION>
For the
period
from
10/4/99*
through
12/31/99
--------
<S> <C>
Net asset value,
beginning of period ............. $7.77
-----
Income from investment
operations:
Net investment loss ............. (0.00)
Net realized and
unrealized gain
on investments ............... 0.88
-----
Total from investment
operations ...................... 0.88
-----
Less distributions:
From net investment
income ....................... (0.00)
From capital gains .............. (0.52)
-----
Total distributions ................ (0.52)
-----
Net asset value,
end of period ................... $8.13
=====
Total return ....................... 11.53%
Net assets, end of
period (in
millions) ....................... $1
Ratio of expenses to
average net assets .............. 2.23%**
Ratio of net investment
loss to average
net assets ...................... -0.63%**
Portfolio turnover
rate ............................ 53.79%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
35
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED INCOME FUND
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:*
<TABLE>
<CAPTION>
For the fiscal year For the
ended December 31, period from
-------------------------------------------- 6/19/95** to
1999 1998 1997 1996 12/31/95
----- ----- ----- ----- -----------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............. $7.52 $7.59 $6.58 $5.79 $5.55
----- ----- ----- ----- -----
Income from investment
operations:
Net investment income ........... 0.10 0.24 0.07 0.07 0.04
Net realized and
unrealized gain
on investments ............... 1.13 1.66 1.73 1.11 0.42
----- ----- ----- ----- -----
Total from investment
operations ...................... 1.23 1.90 1.80 1.18 0.46
----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.10) (0.23) (0.07) (0.07) (0.04)
From capital gains .............. (0.52) (1.74) (0.72) (0.32) (0.18)
----- ----- ----- ----- -----
Total distributions ................ (0.62) (1.97) (0.79) (0.39) (0.22)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $8.13 $7.52 $7.59 $6.58 $5.79
===== ===== ===== ===== =====
Total return ....................... 16.67% 24.27% 27.49% 20.53% 8.45%
Net assets, end of
period (in
millions) ....................... $283 $399 $299 $151 $107
Ratio of expenses to
average net assets .............. 0.73% 0.71% 0.72% 0.73% 0.74%***
Ratio of net investment
income to average
net assets ...................... 1.18% 1.29% 0.85% 1.17% 1.36%***
Portfolio turnover
rate ............................ 53.79% 49.29% 33.59% 22.24% 17.59%***
</TABLE>
*Per-share amounts have been adjusted retroactively to reflect the 400% stock
dividend effected June 26, 1998.
**Commencement of operations.
***Annualized.
See notes to financial statements.
36
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED SCIENCE AND TECHNOLOGY FUND
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:*
<TABLE>
<CAPTION>
For the fiscal year ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $ 9.91 $6.71 $7.78 $7.63 $5.07
------ ----- ----- ----- -----
Income from investment
operations:
Net investment loss ............. (0.09) (0.03) (0.01) (0.02) (0.00)
Net realized and
unrealized gain on
investments .................. 10.12 3.93 0.46 0.66 2.80
------ ----- ----- ----- -----
Total from investment
operations ...................... 10.03 3.90 0.45 0.64 2.80
------ ----- ----- ----- -----
Less distributions from
capital gains ................... (1.51) (0.70) (1.52) (0.49) (0.24)
------ ----- ----- ----- -----
Net asset value,
end of period ................... $18.43 $9.91 $6.71 $7.78 $7.63
====== ===== ===== ===== =====
Total return** ..................... 102.93% 59.31% 7.22% 8.35% 55.37%
Net assets, end of
period (in
millions) ....................... $3,744 $1,668 $1,063 $981 $821
Ratio of expenses to
average net assets .............. 1.16% 1.05% 1.02% 0.98% 0.93%
Ratio of net investment
loss to average
net assets ...................... -0.79% -0.37% -0.18% -0.33% -0.07%
Portfolio turnover
rate ............................ 40.35% 55.70% 87.68% 33.90% 32.89%
</TABLE>
*Per-share amounts have been adjusted retroactively to reflect the 200% stock
dividend effected June 26, 1998.
**Total return calculated without taking into account the sales load deducted
on an initial purchase.
See notes to financial statements.
37
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED SCIENCE AND TECHNOLOGY FUND
Class B Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
<TABLE>
<CAPTION>
For the
period
from
10/4/99*
through
12/31/99
--------
<S> <C>
Net asset value,
beginning of period ............. $12.64
------
Income from investment
operations:
Net investment loss ............. (0.04)
Net realized and
unrealized gain
on investments ............... 7.28
------
Total from investment
operations ...................... 7.24
------
Less distributions from
capital gains ................... (1.51)
------
Net asset value,
end of period ................... $18.37
======
Total return ....................... 58.62%
Net assets, end of
period (in
millions) ....................... $17
Ratio of expenses to
average net assets .............. 2.64%**
Ratio of net investment
loss to average
net assets ...................... -2.35%**
Portfolio turnover
rate ............................ 40.35%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
38
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED SCIENCE AND TECHNOLOGY FUND
Class C Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
<TABLE>
<CAPTION>
For the
period
from
10/4/99*
through
12/31/99
--------
<S> <C>
Net asset value,
beginning of period ............. $12.64
------
Income from investment
operations:
Net investment loss ............. (0.04)
Net realized and
unrealized gain
on investments ............... 7.29
------
Total from investment
operations ...................... 7.25
------
Less distributions from
from capital gains .............. (1.51)
------
Net asset value,
end of period ................... $18.38
======
Total return ....................... 58.70%
Net assets, end of
period (in
millions) ....................... $3
Ratio of expenses to
average net assets .............. 2.42%**
Ratio of net investment
loss to average
net assets ...................... -2.19%**
Portfolio turnover
rate ............................ 40.35%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
39
<PAGE>
FINANCIAL HIGHLIGHTS OF
UNITED SCIENCE AND TECHNOLOGY FUND
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:*
<TABLE>
<CAPTION>
For the fiscal year For the
ended December 31, period from
-------------------------------- 2/27/96** to
1999 1998 1997 12/31/96
------ ----- ----- ----------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period ............. $ 9.98 $6.74 $7.79 $8.02
------ ----- ----- -----
Income from investment
operations:
Net investment
loss ......................... (0.04) (0.01) (0.00) (0.01)
Net realized and
unrealized gain
on investments ............... 10.22 3.95 0.47 0.27
------ ----- ----- -----
Total from investment
operations ...................... 10.18 3.94 0.47 0.26
------ ----- ----- -----
Less distributions from
capital gains ................... (1.51) (0.70) (1.52) (0.49)
------ ----- ----- -----
Net asset value,
end of period ................... $18.65 $9.98 $6.74 $7.79
====== ===== ===== =====
Total return ....................... 103.72% 59.71% 7.43% 3.25%
Net assets, end of
period (in
millions) ....................... $31 $6 $4 $3
Ratio of expenses to
average net assets .............. 0.95% 0.79% 0.85% 0.80%***
Ratio of net investment
loss to average
net assets ...................... -0.59% -0.12% -0.01% -0.12%***
Portfolio turnover
rate ............................ 40.35% 55.70% 87.68% 33.90%***
</TABLE>
*Per-share amounts have been adjusted retroactively to reflect the 200% stock
dividend effected June 26, 1998.
**Commencement of operations.
***Annualized.
See notes to financial statements.
40
<PAGE>
UNITED FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 -- Significant Accounting Policies
United Funds, Inc. (the "Corporation") is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The Corporation issues four series of capital shares; each series represents
ownership of a separate mutual fund. The assets belonging to each Fund are held
separately by the Custodian. The capital shares of each Fund represent a pro
rata beneficial interest in the principal, net income (loss) and realized and
unrealized capital gains or losses of its respective investments and other
assets. The following is a summary of significant accounting policies
consistently followed by the Corporation 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. Securities for
which quotations are not readily available are valued as determined in
good faith in accordance with procedures established by and under the
general supervision of the Corporation's Board of Directors. Short-term
debt securities are valued at amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the Internal
Revenue Code), premiums on the purchase of bonds and post-1984 market
discount are amortized for both financial and tax reporting purposes.
Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the Corporation
is informed of the ex-dividend date. Interest income is recorded on the
accrual basis. See Note 3 -- Investment Securities Transactions.
C. Foreign currency translations -- All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars daily. Purchases and
sales of investment securities and accruals of income and expenses are
translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates. The
Corporation 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 Corporation's policy to distribute all
of its taxable income and capital gains to its shareholders and
41
<PAGE>
otherwise qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code. In addition, the Corporation 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 each Fund on the business day following record date. Net
investment income distributions and capital gains distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are due to
differing treatments for items such as deferral of wash sales and
post-October losses, foreign currency transactions, net operating losses
and expiring capital loss carryovers. At December 31, 1999, United Science
and Technology Fund reclassified $17,443,356 between accumulated
undistributed net investment income and accumulated undistributed net
realized gain on investment transactions. Net investment income, net
realized gains and net assets were not affected by this change.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management And Payments To Affiliated Persons
The Corporation pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee is
payable by each Fund at the following annual rates:
<TABLE>
<CAPTION>
Annual
Fund Net Asset Breakpoints Rate
-----------------------------------------------------------------------------------
<S> <C> <C>
United Accumulative Fund Up to $1 Billion .700%
Over $1 Billion up to $2 Billion .650%
Over $2 Billion up to $3 Billion .600%
Over $3 Billion .550%
United Bond Fund Up to $500 Million .525%
Over $500 Million up to $1 Billion .500%
Over $1 Billion up to $1.5 Billion .450%
Over $1.5 Billion .400%
United Income Fund Up to $1 Billion .700%
Over $1 Billion up to $2 Billion .650%
Over $2 Billion up to $3 Billion .600%
Over $3 Billion up to $6 Billion .550%
Over $6 Billion .500%
United Science and
Technology Fund Up to $1 Billion .850%
Over $1 Billion up to $2 Billion .830%
Over $2 Billion up to $3 Billion .800%
Over $3 Billion .760%
</TABLE>
Prior to June 30, 1999, the fee consisted of two elements: (i) a "Specific" fee
computed on net asset value as of the close of business each day at the
42
<PAGE>
annual rate of .15% of net assets for United Accumulative Fund and United Income
Fund, .03% of net assets for United Bond Fund, and .20% for United Science and
Technology Fund; and (ii) a "Group" fee computed each day on the combined net
asset values of all of the funds in the United Group of mutual funds at annual
rates of .51% of the first $750 million of combined net assets, .49% on that
amount between $750 million and $1.5 billion, .47% between $1.5 billion and
$2.25 billion, .45% between $2.25 billion and $3 billion, .43% between $3
billion and $3.75 billion, .40% between $3.75 billion and $7.5 billion, .38%
between $7.5 billion and $12 billion, and .36% of that amount over $12 billion.
The Corporation accrues and pays this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Corporation and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment
Management Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the
Corporation's investment manager.
The Corporation 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 Corporation and pricing daily the value of shares of the
Corporation. For these services, each of the four Funds pays WARSCO a monthly
fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
<TABLE>
<CAPTION>
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Fund
------------------------- ------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
For Class A, Class B and Class C shares, the Corporation pays WARSCO a 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
Corporation 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 Corporation also
reimburses W&R and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Corporation's shares, W&R received gross
sales commissions for Class A shares (which are not an expense of the
Corporation) of $35,273,006. With respect to Class A, Class B and Class C
shares, W&R paid sales commissions of $21,190,954 and all expenses in connection
with the sale of the Corporation's shares, except for registration fees and
related expenses.
A contingent deferred sales charge ("CDSC") may be assessed against a
43
<PAGE>
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 a fund's 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 the following amounts in deferred sales
charges from Class B and Class C shares.
<TABLE>
<CAPTION>
Class B Class C
<S> <C> <C>
United Accumulative Fund $ 96 $---
United Bond Fund 1 65
United Income Fund 437 58
United Science and
Technology Fund 391 32
</TABLE>
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 Corporation for
Class B shares and Class C shares, respectively, each Fund may pay Waddell &
Reed, Inc. a service fee not to exceed .25% and a distribution fee not to exceed
.75% of a Fund's average annual net assets attributable to that class, paid
monthly, to compensate Waddell & Reed, Inc. for its services in connection with
the distribution of shares of that class and/or the service and/or maintenance
of shareholder accounts of that class. The Class B Plan and the Class C Plan
each permit Waddell & Reed, Inc. to receive compensation, through the
distribution fee and service fee, respectively, for its distribution activities
for that class, which are similar to the distribution activities described with
respect to the Class A Plan, and for its activities in providing personal
services to shareholders of that class and/or maintaining shareholder accounts
of that class, which are similar to the corresponding activities for which it is
entitled to reimbursement under the Class A Plan.
The Corporation paid Directors' fees of $459,244, which are included in
other expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
44
<PAGE>
NOTE 3 -- Investment Securities Transactions
Investment securities transactions for the period ended December 31, 1999
are summarized as follows:
<TABLE>
<CAPTION>
United
United United United Science and
Accumulative Bond Income Technology
Fund Fund Fund Fund
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Purchases of investment
securities, excluding
short-term and U.S.
Government securities $7,056,318,925 $73,318,852 $3,544,216,574 $1,091,254,903
Purchases of U.S. Government
obligations --- 100,085,983 560,658,182 ---
Purchases of short-term
securities 4,497,576,410 1,193,555,386 7,816,842,397 3,065,336,811
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 7,025,010,786 110,107,548 3,050,312,467 867,068,931
Proceeds from maturities and
sales of U.S. Government
obligations 199,577,344 82,351,376 1,602,793,476 ---
Proceeds from maturities and sales
of short-term securities 4,408,528,474 1,189,229,929 7,842,462,287 3,054,306,348
</TABLE>
For Federal income tax purposes, cost of investments owned at December 31,
1999 and the related appreciation (depreciation) were as follows:
<TABLE>
<CAPTION>
Aggregate
Appreciation
Cost Appreciation Depreciation (Depreciation)
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
United Accumulative
Fund $1,873,721,507 $ 468,359,591 $(77,189,885) $391,169,706
United Bond Fund 513,653,172 2,903,670 (15,835,110) (12,931,440)
United Income Fund 5,183,111,243 3,500,668,908 (260,091,901) 3,240,577,007
United Science and
Technology Fund 1,399,347,723 2,435,883,110 (34,625,382) 2,401,257,728
</TABLE>
NOTE 4 -- Federal Income Tax Matters
The Corporation's income and expenses attributed to each Fund and the
gains and losses on security transactions of each Fund have been attributed to
that Fund for Federal income tax purposes as well as for accounting purposes.
For Federal income tax purposes, United Accumulative Fund, United Income Fund
and United Science and Technology Fund realized capital gain net income of
$268,545,845, $836,278,477 and $271,055,351, respectively, during the year ended
December 31, 1999, a portion of which was paid to shareholders during the period
ended December 31, 1999. Remaining capital gain net income will be distributed
to each Fund's shareholders. For Federal income tax purposes, United Bond Fund
realized capital gain net income of $159,085 during the year ended December 31,
1999, which included the effect of certain losses deferred into the next fiscal
year (see discussion below). This capital gain net income was entirely offset by
utilization of capital loss
45
<PAGE>
carryovers. Remaining capital loss carryovers of United Bond Fund aggregated
$18,314,931 as of December 31, 1999, and are available to offset future realized
capital gain net income for Federal income tax purposes but, if not utilized,
will expire as follows: $18,234,028 at December 31, 2002 and $80,903 at December
31, 2003.
Internal Revenue Code regulations permits each Fund to defer into its next
fiscal year net capital losses or net long-term capital losses incurred between
each November 1 and the end of its fiscal year ("post-October losses"). From
November 1, 1999 through December 31, 1999, United Bond Fund incurred net
capital losses of $655,692, which have been deferred to the fiscal year ending
December 31, 2000.
NOTE 5 -- Multiclass Operations
Each 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 for the period ended December 31, 1999 are
summarized below. Dollar amounts are in thousands.
46
<PAGE>
<TABLE>
<CAPTION>
United
United United United Science and
Accumulative Bond Income Technology
Fund Fund Fund Fund
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares issued from sale of shares:
Class A ....................... 20,269,569 74,230,647 95,817,631 70,704,260
Class B ....................... 274,559 332,561 1,568,086 888,155
Class C ....................... 33,975 61,935 161,689 145,074
Class Y ....................... 304,162 356,828 6,514,737 1,483,445
Shares issued from
reinvestment of dividends and/or
capital gains distribution:
Class A ....................... 28,018,888 4,401,669 67,006,166 16,066,243
Class B ....................... 26,403 1,572 77,440 59,765
Class C ....................... 4,051 195 8,454 10,356
Class Y ....................... 65,137 23,012 2,656,148 94,104
Shares redeemed:.....................
Class A ....................... (27,718,702) (80,926,223) (146,623,896) (52,059,525)
Class B ....................... (12,853) (44,450) (33,784) (4,204)
Class C ....................... (5) (13,625) (938) (556)
Class Y ....................... (291,514) (917,224) (27,430,321) (504,503)
---------- ----------- ---------- ----------
Increase (decrease) in
outstanding capital
shares ....................... 20,973,670 (2,493,103) (278,588) 36,882,614
========== =========== ========== ==========
Value issued from sale of shares:
Class A ....................... $176,177 $455,677 $ 746,043 $884,275
Class B ....................... 2,464 2,000 12,526 13,812
Class C ....................... 309 372 1,289 2,282
Class Y ....................... 2,560 2,207 50,345 18,437
Value issued from
reinvestment of dividends and/or
capital gains distribution:
Class A ....................... 236,622 27,368 524,162 266,218
Class B ....................... 223 9 606 988
Class C ....................... 34 1 66 171
Class Y ....................... 550 141 20,760 1,577
Value redeemed:
Class A ....................... (245,823) (496,408) (1,151,669) (652,677)
Class B ....................... (122) (266) (277) (72)
Class C ....................... (---)* (81) (8) (10)
Class Y ....................... (2,467) (5,808) (215,601) (5,667)
-------- -------- --------- --------
Increase (decrease) in
outstanding capital .............. $170,527 $(14,788) $ (11,758) $529,334
======== ======== ========= ========
</TABLE>
*Amount not shown due to rounding.
47
<PAGE>
Transactions in capital stock for the fiscal year ended December 31, 1998
are summarized below. Dollar amounts are in thousands.
<TABLE>
<CAPTION>
United
United United United Science and
Accumulative Bond Income Technology
Fund Fund Fund* Fund*
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares issued from sale of shares:
Class A ......................... 15,967,129 31,835,303 100,626,223 77,529,963
Class Y ......................... 103,049 216,958 10,384,489 130,439
Shares issued from
reinvestment of dividends
and/or capital gains distribution:
Class A ......................... 27,472,978 4,341,736 185,178,374 11,704,260
Class Y ......................... 59,740 56,607 11,152,791 42,644
Shares redeemed:
Class A ......................... (23,654,895) (32,844,203) (121,882,974) (79,203,331)
Class Y ......................... (175,077) (95,711) (7,947,287) (223,072)
---------- ----------- ------------ -----------
Increase in
outstanding capital
shares ......................... 19,772,924 3,510,690 177,511,616 9,980,903
========== =========== ============ ===========
Value issued from sale of shares:
Class A ......................... $136,894 $202,677 $ 849,389 $618,721
Class Y ......................... 876 1,379 85,082 1,031
Value issued from
reinvestment of dividends
and/or capital gains distribution:
Class A ......................... 216,773 27,530 1,351,806 103,357
Class Y ......................... 472 359 81,473 379
Value redeemed:
Class A ......................... (203,897) (208,970) (1,035,016) (631,968)
Class Y ......................... (1,436) (612) (65,230) (1,749)
---------- ----------- ------------ -----------
Increase in
outstanding capital ................ $149,682 $ 22,363 $1,267,504 $ 89,771
========== =========== ============ ===========
</TABLE>
* Share transactions prior to June 27, 1998 have been adjusted to effect the
stock dividend of June 26, 1998.
Note 6 -- Stock Dividend
The Corporation's Board of Directors approved on February 11, 1998 a stock
dividend of 400% on United Income Fund and 200% on United Science and Technology
Fund effected on June 26, 1998. Authorized shares of United Income Fund were
accordingly increased by 1,400,000,000 and United Accumulative Fund and United
Bond Fund each reallocated 100,000,000 shares to United Science and Technology
Fund.
Note 7 -- Securities Loaned
On December 31, 1999, securities with a market value of $64,899,219 (which
are included in the accompanying schedule of investments) had been loaned under
agreements whereby the Accumulative Fund held as collateral securities with a
market value of $64,408,907 and had required additional collateral of
$1,880,000, in accordance with the agreement. The additional collateral was
received on January 3, 2000. The Fund derives income from its securities lending
activities. These agreements may be terminated by the borrower or the Fund upon
proper notice. In the event the borrower fails to deliver the securities within
five business days, the Fund has the right to
48
<PAGE>
use the collateral to purchase similar or other securities. During the period
ended December 31, 1999, Accumulative Fund and United Income Fund derived
approximately $83,573 and $888,184, respectively, of income, net of related
expenses, from its securities lending activities.
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Funds, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of United Accumulative Fund, United Bond Fund,
United Income Fund, and United Science and Technology Fund (collectively the
"Funds") comprising United Funds, Inc. as of December 31, 1999, and the related
statements of operations for the fiscal year then ended, the statements of
changes in net assets for each of the two fiscal years in the period then ended,
and the financial highlights for each of the five fiscal years in the period
then ended. These financial statements and the financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of each
of the respective Funds comprising United Funds, Inc. as of December 31, 1999,
the results of their operations for the fiscal year then ended, the changes in
their net assets for each of the two fiscal years in the period then ended, and
the financial highlights for each of the five fiscal years in the period then
ended, in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Kansas City, Missouri
February 4, 2000
50
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits: United Funds, Inc.
(a) Articles of Incorporation, as amended, filed by EDGAR on April 18,
1995 as EX-99.B1-charter to the Post-Effective Amendment No. 117
to the Registration Statement on Form N-1A*
Articles Supplementary as proposed, filed by EDGAR on April 18,
1995 as EX-99.B1-ufartsup to the Post-Effective Amendment No. 117
to the Registration Statement on Form N-1A*
Articles Supplementary filed by EDGAR on September 16, 1999 as
EX-99.B(a)ufartsup to the Post-Effective Amendment No. 124 to the
Registration Statement on Form N-1A*
Articles Supplementary attached hereto as EX-99.B(a)ufartsup
(b) Bylaws, as amended, filed by EDGAR on March 26, 1997 as
EX-99.B2-ufbylaw to Post-Effective Amendment No. 119 to the
Registration Statement on Form N-1A*
Amendment to Bylaws filed by EDGAR on April 1, 1999 as
EX-99.B2-ufamend to Post-Effective Amendment No. 123 to the
Registration Statement on Form N-1A*
(c) Not applicable
(d) Investment Management Agreement filed by EDGAR on September 30,
1994 as EX-99.B5-UFIMA to Post-Effective Amendment No. 116 to the
Registration Statement on Form N-1A*
Assignment of the Investment Management Agreements filed by EDGAR
on March 28, 1996 as EX-99.B5-ufassign to the Post-Effective
Amendment No. 118 to the Registration Statement on Form N-1A*
Fee Schedule (Exhibit A) to the Investment Management Agreement,
as amended, filed by EDGAR on September 16, 1999 as
EX-99.B(d)ufimafee to the Post-Effective Amendment No. 124 to the
Registration Statement on Form N-1A*
(e) Not applicable
(f) Not applicable
(g) Custodian Agreement, as amended, filed by EDGAR on January 29,
1999 as EX-99.B8-ufca to Post-Effective Amendment No. 122 to the
Registration Statement on Form N-1A*
Custodian Agreement, as amended, attached hereto as EX-99.B(h)ufca
<PAGE>
(h) Shareholder Servicing Agreement, filed by EDGAR on January 29,
1999 as EX-99.B9-ufssa to Post-Effective Amendment No. 122 to the
Registration Statement on Form N-1A*
Fund Class A application, as amended, filed by EDGAR on May 30,
1997 as EX-99.B9-ufappca to Post-Effective Amendment No. 120 to
the Registration Statement on Form N-1A*
Fund Class Y application filed by EDGAR on April 18, 1995 as
EX-99.B9-ufappcy to the Post-Effective Amendment No. 117 to the
Registration Statement on Form N-1A*
Fund NAV application filed by EDGAR on April 18, 1995 as
EX-99.B9-ufappnav to the Post-Effective Amendment No. 117 to the
Registration Statement on Form N-1A*
Accounting Services Agreement filed by EDGAR on April 18, 1995 as
EX-99.B9-ufasa to the Post-Effective Amendment No. 117 to the
Registration Statement on Form N-1A*
Service Agreement filed by EDGAR on August 11, 1993 as Exhibit
(b)(15) to Post-Effective Amendment No. 114 to the Registration
Statement on Form N-1A*
Amendment to Service Agreement filed by EDGAR on April 18, 1995 as
EX-99.B9-ufsaa to the Post-Effective Amendment No. 117 to the
Registration Statement on Form N-1A*
Class Y Letter of Understanding filed by EDGAR on March 28, 1996
as EX-99.B9-uflou to the Post-Effective Amendment No. 118 to the
Registration Statement on Form N-1A*
Compensation Table (Exhibit B) to the Shareholder Servicing
Agreement, as amended, filed by EDGAR on September 16, 1999 as
EX-99.B(h)ufssacom to the Post-Effective Amendment No. 124 to the
Registration Statement on Form N-1A*
Fidelity Bond Coverage (Exhibit C) to the Shareholder Servicing
Agreement, as amended, filed by EDGAR on September 16, 1999 as
EX-99.B(h)ufssafid to the Post-Effective Amendment No. 124 to the
Registration Statement on Form N-1A*
Fund Class A, B and C application (Non-Retirement Plan), as
amended, filed by EDGAR on September 16, 1999 as
EX-99.B(h)ufappnon to the Post-Effective Amendment No. 124 to the
Registration Statement on Form N-1A*
Fund Class A, B and C application (Retirement Plan), as amended,
filed by EDGAR on September 16, 1999 as EX-99.B(h)ufappabc to the
Post-Effective Amendment No. 124 to the Registration Statement on
Form N-1A*
<PAGE>
(i) Not applicable
(j) Not applicable
(k) Not applicable
(l) Not applicable
(m) Distribution and Service Plan, as amended, filed by EDGAR on
January 29, 1999 as EX-99.B15-ufd&spca to Post-Effective Amendment
No. 122 to the Registration Statement on Form N-1A*
Distribution and Service Plan for Class B shares filed by EDGAR on
September 16, 1999 as EX-99.B(m)ufdspb to the Post-Effective
Amendment No. 124 to the Registration Statement on Form N-1A*
Distribution and Service Plan for Class C shares filed by EDGAR on
September 16, 1999 as EX-99.B(m)ufdspc to the Post-Effective
Amendment No. 124 to the Registration Statement on Form N-1A*
(n) Not applicable
(o) Multiple Class Plan, as amended, filed by EDGAR on September 16,
1999 as EX-99.B(o)-ufmcp to the Post-Effective Amendment No. 124
to the Registration Statement on Form N-1A*
(p) Code of Ethics attached hereto as EX-99.B(p)ufcode
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Article SEVENTH paragraph 6(b) through 6(f) of the
Articles of Incorporation, as amended, filed April 18, 1995 as
EX-99.B1-charter to the Post-Effective Amendment No. 117 to the
Registration Statement on Form N-1A*; and to Article IV of the
Underwriting Agreement filed April 18, 1995 as EX-99.B6-ufua to
Post-Effective Amendment No. 117 to the Registration Statement on Form
N-1A*, both of which provide indemnification. Also refer to Section
2-418 of the Maryland General Corporation Law regarding indemnification
of directors, officers, employees and agents.
Registrant undertakes to carry out all indemnification provisions of
its Articles of Incorporation, Bylaws, and the above-described
contracts in accordance with the Investment Company Act Release No.
11330 (September 4, 1980) and successor releases.
Insofar as indemnification for liability arising under the 1933 Act, as
amended, may be provided to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment of the Registrant of expenses incurred or paid by a
director, officer of controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
26. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the investment manager
of the Registrant. Under the terms of an Investment Management
Agreement between Waddell & Reed, Inc. and the Registrant, Waddell &
Reed, Inc. is to provide investment management services to
<PAGE>
the Registrant. Waddell & Reed, Inc. assigned its investment management
duties under this agreement to Waddell & Reed Investment Management
Company on January 8, 1992. Waddell & Reed Investment Management
Company is not engaged in any business other than the provision of
investment management services to those registered investment companies
described in Part A and Part B of this Post-Effective Amendment and to
other investment advisory clients.
Each director and executive officer of Waddell & Reed Investment
Management Company has had as his sole business, profession, vocation
or employment during the past two years only his duties as an executive
officer and/or employee of Waddell & Reed Investment Management Company
or its predecessors, except as to persons who are directors and/or
officers of the Registrant and have served in the capacities shown in
the Statement of Additional Information of the Registrant. The address
of the officers is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to the Prospectus and SAI of this
Registrant.
27. Principal Underwriter
---------------------
(a) Waddell & Reed, Inc. is the principal underwriter of the
Registrant. It is also the principal underwriter to the following
investment companies:
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 Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
United Small Cap Fund, Inc.
United Tax-Managed Equity Fund, Inc.
Advantage I
Advantage II
Advantage Plus
Advantage Gold
Waddell & Reed Funds, Inc.
(b) The information contained in the underwriter's application on Form
BD, as filed on April 24, 2000 SEC NO. 8-27030 under the
Securities Exchange Act of 1934, is herein incorporated by
reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or
any affiliated person of such affiliated person.
28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
<PAGE>
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant,
each of whose business address is Post Office Box 29217, Shawnee
Mission, Kansas 66201-9217.
29. Management Services
-------------------
There is no service contract other than as discussed in Part A and B of
this Post-Effective Amendment and as listed in response to Items 23(h)
and Item 23(m) hereof.
30. Undertaking
-----------
Not applicable
- ---------------------------------
*Incorporated herein by reference
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED
FUNDS, INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND,
INC., UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC., UNITED
SMALL CAP FUND, INC., UNITED TAX-MANAGED EQUITY FUND, INC., TARGET/UNITED FUNDS,
INC. AND WADDELL & REED FUNDS, INC. (each hereinafter called the "Corporation"),
and certain directors and officers for the Corporation, do hereby constitute and
appoint KEITH A. TUCKER, ROBERT L. HECHLER, DANIEL C. SCHULTE and KRISTEN A.
RICHARDS, and each of them individually, their true and lawful attorneys and
agents to take any and all action and execute any and all instruments which said
attorneys and agents may deem necessary or advisable to enable each Corporation
to comply with the Securities Act of 1933 and/or the Investment Company Act of
1940, as amended, and any rules, regulations, orders or other requirements of
the United States Securities and Exchange Commission thereunder, in connection
with the registration under the Securities Act of 1933 and/or the Investment
Company Act of 1940, as amended, including specifically, but without limitation
of the foregoing, power and authority to sign the names of each of such
directors and officers in his/her behalf as such director or officer as
indicated below opposite his/her signature hereto, to any Registration Statement
and to any amendment or supplement to the Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 and/or the
Investment Company Act of 1940, as amended, and to any instruments or documents
filed or to be filed as a part of or in connection with such Registration
Statement or amendment or supplement thereto; and each of the undersigned hereby
ratifies and confirms all that said attorneys and agents shall do or cause to be
done by virtue hereof.
Date: February 9, 2000 /s/Robert L. Hechler
----------------------------
Robert L. Hechler, President
<TABLE>
<S> <C> <C>
/s/Keith A. Tucker Chairman of the Board February 9, 2000
- ------------------- ----------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal February 9, 2000
- -------------------- Financial Officer and ----------------
Robert L. Hechler Director
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Henry J. Herrmann Vice President and February 9, 2000
- -------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard Vice President, Treasurer February 9, 2000
- -------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon Director February 9, 2000
- -------------------- ----------------
James M. Concannon
/s/John A. Dillingham Director February 9, 2000
- -------------------- ----------------
John A. Dillingham
/s/David P. Gardner Director February 9, 2000
- ------------------- ----------------
David P. Gardner
/s/Linda K. Graves Director February 9, 2000
- -------------------- ----------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director February 9, 2000
- -------------------- ----------------
Joseph Harroz, Jr.
/s/John F. Hayes Director February 9, 2000
- -------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson Director February 9, 2000
- -------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan Director February 9, 2000
- -------------------- ----------------
William T. Morgan
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Ronald C. Reimer Director February 9, 2000
- -------------------- ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr. Director February 9, 2000
- -------------------- ----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director February 9, 2000
- -------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director February 9, 2000
- -------------------- ----------------
Frederick Vogel III
</TABLE>
Attest:
/s/Kristen A. Richards
- --------------------------------
Kristen A. Richards
Vice President and Secretary
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant certifies that it meets all of the requirements for effectiveness of
this Post-Effective Amendment, and has duly caused this Post-Effective Amendment
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Overland Park, and State of Kansas, on the day of April 27, 2000.
UNITED FUNDS, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Investment Company Act of 1940,
this Post-Effective Amendment has been signed below by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C> <C>
/s/Keith A. Tucker* Chairman of the Board April 27, 2000
- ---------------------- ------------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal April 27, 2000
- ---------------------- Financial Officer and ------------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and Aril 27, 2000
- ---------------------- Director ------------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer April 27, 2000
- ---------------------- and Principal Accounting ------------------
Theodore W. Howard Officer
/s/James M. Concannon* Director April 27, 2000
- ------------------ ------------------
James M. Concannon
/s/John A. Dillingham* Director April 27, 2000
- ------------------ ------------------
John A. Dillingham
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/David P. Gardner* Director April 27, 2000
- ------------------ ------------------
David P. Gardner
/s/Linda K. Graves* Director April 27, 2000
- ------------------ ------------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director April 27, 2000
- ------------------ ------------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director April 27, 2000
- ------------------- ------------------
John F. Hayes
/s/Glendon E. Johnson* Director April 27, 2000
- ------------------- ------------------
Glendon E. Johnson
/s/William T. Morgan* Director April 27, 2000
- ------------------- ------------------
William T. Morgan
/s/Ronald C. Reimer* Director April 27, 2000
- ------------------ ------------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director April 27, 2000
- ------------------ ------------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director April 27, 2000
- ------------------- ------------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director April 27, 2000
- ------------------- ------------------
Frederick Vogel III
</TABLE>
<PAGE>
*By
Kristen A. Richards
Attorney-in-Fact
ATTEST:
Daniel C. Schulte
Assistant Secretary
EX-99.B(a)ufartsup
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
UNITED FUNDS, INC.
United Funds, Inc. (the "Corporation"), a Maryland corporation, having
its principal office in Baltimore City, Maryland, hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: That the Board of Directors of the Corporation, at a meeting
held on February 9, 2000, adopted resolutions authorizing the reallocation of
shares of the capital stock of the Corporation.
SECOND: The capital stock of the Corporation is divided into series and
classes and there are no changes in the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption as shares of capital stock as set forth
in the Corporation's Articles of Incorporation and Articles Supplementary.
THIRD: Pursuant to the authority vested in the Board of Directors of
the Corporation by Article FIFTH of the Articles of Incorporation of the
Corporation, the Board of Directors has heretofore duly designated, in
accordance with Maryland General Corporation Law, the aggregate number of shares
of capital stock which the Corporation is authorized to issue at Three Billion
Two Hundred Million (3,200,000,000) shares of capital stock, (par value $1.00
per share), amounting in the aggregate to a par value of Three Billion Two
Hundred Million Dollars ($3,200,000,000.00). Such shares have heretofore been
classified by the Board of Directors among the series of the Corporation as
follows:
<TABLE>
<S> <C>
United Accumulative Fund, Class A 350,000,000 shares
United Accumulative Fund, Class B 50,000,000 shares
United Accumulative Fund, Class C 50,000,000 shares
United Accumulative Fund, Class Y 50,000,000 shares
United Bond Fund, Class A 150,000,000 shares
United Bond Fund, Class B 50,000,000 shares
United Bond Fund, Class C 50,000,000 shares
United Bond Fund, Class Y 50,000,000 shares
United Income Fund, Class A 1,500,000,000 shares
United Income Fund, Class B 100,000,000 shares
United Income Fund, Class C 100,000,000 shares
</TABLE>
<PAGE>
<TABLE>
<S> <C>
United Income Fund, Class Y 300,000,000 shares
United Science and Technology Fund, Class A 250,000,000 shares
United Science and Technology Fund, Class B 50,000,000 shares
United Science and Technology Fund, Class C 50,000,000 shares
United Science and Technology Fund, Class Y 50,000,000 shares
</TABLE>
FOURTH: Pursuant to the authority vested in the Board of Directors of
the Corporation by Article FIFTH of the Articles of Incorporation of the
Corporation, the Board of Directors, in accordance with Maryland General
Corporation Law, now duly redesignates and reclassifies the capital stock of the
Corporation among the series of the Corporation and classes thereof as follows:
<TABLE>
<S> <C>
United Accumulative Fund, Class A 380,000,000 shares
United Accumulative Fund, Class B 40,000,000 shares
United Accumulative Fund, Class C 40,000,000 shares
United Accumulative Fund, Class Y 40,000,000 shares
United Bond Fund, Class A 150,000,000 shares
United Bond Fund, Class B 30,000,000 shares
United Bond Fund, Class C 30,000,000 shares
United Bond Fund, Class Y 30,000,000 shares
United Income Fund, Class A 1,500,000,000 shares
United Income Fund, Class B 100,000,000 shares
United Income Fund, Class C 100,000,000 shares
United Income Fund, Class Y 250,000,000 shares
United Science and Technology Fund, Class A 360,000,000 shares
United Science and Technology Fund, Class B 50,000,000 shares
United Science and Technology Fund, Class C 50,000,000 shares
United Science and Technology Fund, Class Y 50,000,000 shares
</TABLE>
The aggregate number of shares of all classes of stock of the
Corporation remains at Three Billion Two Hundred Million (3,200,000,000) shares
of capital stock, the par value remains $1.00 per share, and the aggregate value
of all authorized stock remains Three Billion Two Hundred Million Dollars
($3,200,000,000.00).
FIFTH: The Corporation is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended.
IN WITNESS WHEREOF, the undersigned Vice President of the Corporation
hereby executes these Articles Supplementary on behalf of the Corporation this
18th day of February, 2000.
/s/Kristen A. Richards
----------------------
2
<PAGE>
Kristen A. Richards, Vice President
Attest: /s/Daniel C. Schulte
--------------------
Daniel C. Schulte, Assistant Secretary
The undersigned, Vice President of United Funds, Inc. who executed on behalf of
said Corporation the foregoing Articles Supplementary, of which this certificate
is made a part, hereby acknowledges, in the name and on behalf of said
Corporation, the foregoing Articles Supplementary to be the act of said
Corporation and further certifies that, to the best of her knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
UNITED FUNDS, INC.
By: /s/Kristen A. Richards
----------------------
Kristen A. Richards, Vice President
3
EX-99.B(h)ufca
CUSTODIAN AGREEMENT
Dated as of November 26, 1991
Amended and Restated as of May 13, 1998
Between
UMB BANK, n.a.
and
UNITED FUNDS, INC. UNITED SCIENCE AND TECHNOLOGY FUND
<PAGE>
Table of Contents
ARTICLE
I. Appointment of Custodian
II. Powers and Duties of Custodian
2.01 Safekeeping
2.02 Manner of Holding Securities
2.03 Purchase of Assets
2.04 Exchanges of Securities
2.05 Sales of Securities
2.06 Depositary Receipts
2.07 Exercise of Rights, Tender Offers, Etc.
2.08 Stock Dividends, Rights, Etc.
2.09 Options
2.10 Futures Contracts
2.11 Borrowing
2.12 Interest Bearing Deposits
2.13 Foreign Exchange Transactions
2.14 Securities Loans
2.15 Collections
2.16 Dividends, Distributions and Redemptions
2.17 Proceeds from Shares Sold
2.18 Proxies, Notices, Etc.
2.19 Bills and Other Disbursements
2.20 Nondiscretionary Functions
2.21 Bank Accounts
2.22 Deposit of Fund Assets in Securities System
2.23 Other Transfers
2.24 Establishment of Segregated Account
2.25 Custodian's Books and Records
2.26 Opinion of Fund's Independent
Certified Public Accountants
2.27 Reports by Independent Certified Public Accountants
2.28 Overdraft Facility
III. Proper Instructions, Special Instructions
and Related Matters
3.01 Proper Instruction and Special Instructions
3.02 Authorized Persons
3.03 Persons Having Access to Assets of the Portfolios
3.04 Actions of Custodian Based on Proper
Instructions and Special Instructions
<PAGE>
IV. Subcustodians
4.01 Domestic Subcustodians
4.02 Foreign Sub-Subcustodians and
Interim Sub-Subcustodians
4.03 Special Subcustodians
4.04 Termination of a Subcustodian
4.05 Certification Regarding Foreign Sub-Subcustodians
V. Standard of Care, Indemnification
5.01 Standard of Care
5.02 Liability of the Custodian for Actions
of Other Persons
5.03 Indemnification by Fund
5.04 Investment Limitations
5.05 Fund's Right to Proceed
5.06 Indemnification by Custodian
5.07 Custodian's Right to Proceed
VI. Compensation
VII. Termination
VIII. Defined Terms
IX. Miscellaneous
9.01 Execution of Documents, Etc.
9.02 Representations and Warranties
9.03 Entire Agreement
9.04 Waivers and Amendments
9.05 Interpretation
9.06 Captions
9.07 Governing Law
9.08 Notices
9.09 Assignment
9.10 Counterparts
9.11 Confidentiality; Survival of Obligations
Appendix "A"
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of the 26th day of November, 1991 between United
Funds, Inc. United Science and Technology Fund (the "Fund") and UMB bank, n.a.,
formerly, United Missouri Bank, n.a. (the "Custodian") and as amended and
restated as of May 13, 1998.
WITNESSETH
WHEREAS, the Fund desires to appoint the Custodian as custodian on
behalf of the Fund in accordance with the provisions of the Investment Company
Act of 1940, as amended (the "1940 Act") and the rules and regulations
thereunder, under the terms and conditions set forth in this Agreement, and the
Custodian has agreed so to act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
Subject to the terms and provisions of this Agreement, the Fund hereby
employs and appoints the Custodian as a custodian of the cash, securities and
other assets owned by the Fund and deposited from time to time with the
Custodian ("Assets"). The Fund shall deliver to the Custodian, or shall cause to
be delivered to the Custodian, Assets during the term of this Agreement. The
Custodian is authorized to act under the terms and conditions of this Agreement
as the Fund's agent and shall be representing the Fund when acting within the
scope of this Agreement. The Custodian hereby accepts such appointment as
custodian and shall perform the duties and responsibilities set forth herein on
the terms and conditions set forth herein.
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
As custodian, the Custodian shall have and perform the powers and
duties set forth in this Article II. Pursuant to and in accordance with Article
IV hereof, the Custodian may appoint one or more Subcustodians (as hereinafter
defined) to exercise the powers and perform the duties of the Custodian set
forth in this Article II and references to the Custodian in this Article II
shall include any Subcustodian so appointed.
Section 2.01. Safekeeping. The Custodian shall accept delivery of and
keep safely the Assets in accordance with the terms and conditions hereof on
behalf of the Fund.
Section 2.02. Manner of Holding Securities.
(a) The Custodian shall at all times hold securities of the Fund
either: (i) by physical possession of the share certificates or other
<PAGE>
instruments representing such securities in registered or bearer form; or (ii)
in book-entry form by a Securities System (as hereinafter defined) in accordance
with the provisions of Section 2.22 below.
(b) The Custodian may at all times hold registered securities of the
Fund in the name of the Fund or the Fund's nominee, or in the nominee name of
the Custodian unless specifically directed by Proper Instructions (as
hereinafter defined) to hold such registered securities in so-called street
name; provided that, in any event, all Assets shall be held in an account of the
Custodian containing only assets of the Fund. Notwithstanding the foregoing,
unless it receives Proper Instructions to the contrary, the Custodian shall
register all securities in the name of the Custodian's nominee as authorized by
the Fund. All securities held directly or indirectly by the Custodian hereunder
shall at all times be identifiable on the records of the Custodian. Except as
otherwise provided herein, the Custodian shall keep the Assets physically
segregated from those of other persons or entities. The Custodian shall execute
and deliver all certificates and documents in connection with registration of
securities as may be required by the applicable provisions of the Internal
Revenue Code, the laws of any State or territory of the United States and the
laws of any jurisdiction in which the securities are held.
Section 2.03. Purchase of Assets.
(a) Security Purchases. Upon receipt of Proper Instructions, the
Custodian shall pay for and receive securities purchased for the account of the
Fund, provided that payment shall be made by Custodian only upon receipt of the
securities: (a) by the Custodian; (b) by a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) by a Securities
System. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i)
in the case of a repurchase agreement, the Custodian may release funds to a
Securities System prior to the receipt of advice from the Securities System that
the securities underlying such repurchase agreement have been transferred by
book-entry into the Account (as hereinafter defined) maintained with such
Securities System by the Custodian, provided that the Custodian's instructions
to the Securities System require that the Securities System may make payment of
such funds to the other party to the repurchase agreement only upon transfer by
book-entry of the securities underlying the repurchase agreement into the
Account; (ii) in the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures contracts or
options, pursuant to Sections 2.09, 2.10, 2.12 and 2.13 hereof, the Custodian
may make payment therefor before receipt of an advice or transaction; and (iii)
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make payment therefor
and receive delivery of such securities in accordance with local custom and
practice generally accepted by Institutional Clients (as hereinafter defined) in
the country in which the settlement occurs, but in all events subject to the
standard of care set forth in Article V hereof. For purposes of this Agreement,
an "Institutional Client" shall mean a major commercial bank, corporation,
insurance company, or substantially similar institution, which, as a substantial
part of its
<PAGE>
business operations, purchases or sells securities and makes use of custodial
services.
(b) Other Asset Purchases. Upon receipt of Proper Instructions and
except as otherwise provided herein, the Custodian shall pay for and receive
other Assets for the account of the Fund as provided in Proper Instructions.
Section 2.04. Exchanges of Securities. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of the Fund for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event relating to the securities or the issuer of such securities, and shall
deposit any such securities in accordance with the terms of any reorganization
or protective plan. The Custodian shall, without receiving Proper Instructions:
surrender securities for transfer into the name of the Fund, the Fund's nominee
or the nominee name of the Custodian as permitted by Section 2.02(b); and
surrender securities for a different number of certificates or instruments
representing the same number of shares or same principal amount of indebtedness,
provided that the securities to be issued will be delivered to the Custodian.
Section 2.05. Sales of Securities. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor in the form of: (a) cash,
certified check, bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) credit to the
Account of the Custodian with a Securities System, in accordance with the
provisions of Section 2.22 hereof. Notwithstanding the foregoing: (i) in the
case of the sale of securities, the settlement of which occurs outside of the
United States of America, such securities shall be delivered and paid for in
accordance with local custom and practice generally accepted by Institutional
Clients in the country in which the settlement occurs, but in all events subject
to the standard of care set forth in Article V hereof; and (ii) in the case of
securities held in physical form, such securities shall be delivered and paid
for in accordance with "street delivery custom" to a broker or its clearing
agent, against delivery to the Custodian of a receipt for such securities,
provided that the Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such securities by the broker or
its clearing agent, and provided further that, subject to the standard of care
set forth in Article V hereof, the Custodian shall not be responsible for the
selection of or the failure or inability to perform of such broker or its
clearing agent.
Section 2.06. Depositary Receipts. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used for such
securities by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter referred to, collectively , as "ADRs"), against
a written receipt therefor adequately describing such securities and written
evidence satisfactory to the Custodian that the
<PAGE>
depositary has acknowledged receipt of instructions to issue ADRs with respect
to such securities in the name of the Custodian or a nominee of the Custodian,
for delivery to the Custodian at such place as the Custodian may from time to
time designate. Upon receipt of Proper Instructions, the Custodian shall
surrender ADRs to the issuer thereof, against a written receipt therefor
adequately describing the ADRs surrendered and written evidence satisfactory to
the Custodian that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depository to deliver the securities underlying such
ADRs to the Custodian.
Section 2.07. Exercise of Rights, Tender Offers, Etc. Upon receipt of
Proper Instructions, the Custodian shall: (a) deliver warrants, puts, calls,
rights or similar securities to the issuer or trustee thereof (or to the agent
of such issuer or trustee) for the purpose of exercise or sale, provided that
the new securities, cash or other Assets, if any, acquired as a result of such
actions are to be delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the consideration for such
securities is to be paid or delivered to the Custodian, or the tendered
securities are to be returned to the Custodian. Notwithstanding any provision of
this Agreement to the contrary, the Custodian shall promptly notify the Fund in
writing of (i) any default in payment of funds on securities; (ii) any
securities that have matured, been called or redeemed; and (iii) to the extent
the Custodian has notice which is contained in services to which it normally
subscribes for such purposes, or actual knowledge if not contained in such
services, any other default involving securities; and all announcements of
defaults, bankruptcies, reorganizations, mergers, consolidations,
recapitalizations or rights or privileges to subscribe, convert, exchange, put,
redeem or tender securities held subject to this Agreement. The Custodian shall,
following receipt or knowledge, convey such information to the Fund in a timely
manner based upon the circumstances of each particular case. Whenever any such
rights or privileges exist, the Fund will, in a timely manner based upon the
circumstances of each particular case, provide the Custodian with Proper
Instructions. Absent the Custodian's timely receipt of Proper Instructions, the
Custodian shall not be liable for not taking any action or not exercising such
rights prior to their expiration unless such failure is due to Custodian's
failure to give timely notice to the Fund in accordance with this Section 2.07.
Section 2.08. Stock Dividends, Rights, Etc. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and, upon
receipt of Proper Instructions, take action with respect to the same as directed
in such Proper Instructions.
Section 2.09. Options. Upon receipt of Proper Instructions and in
accordance with the provisions of any agreement between the Custodian, any
registered broker-dealer and, if necessary, the Fund relating to compliance with
the rules of the Options Clearing Corporation (the "OCC") or of any registered
national securities exchange or similar organization(s), the Custodian shall:
(a) receive and retain confirmations or other documents, if any, evidencing the
purchase or writing of an option by the Fund; (b) deposit
<PAGE>
and maintain in a segregated account, securities (either physically or by
book-entry in a Securities System), cash or other Assets; and (c) pay, release
and/or transfer such securities, cash or other Assets in accordance with any
such agreement and with notices or other communications evidencing the
expiration, termination or exercise of such options furnished by the OCC, the
securities or options exchange on which such options are traded or such other
organization as may be responsible for handling such option transactions. The
Fund and the broker-dealer shall be responsible for determining the sufficiency
of assets held in any segregated account established in compliance with
applicable margin maintenance requirements and the performance of other terms of
any option contract; provided, however, that the Custodian shall be liable for
performance of its duties under this Agreement and in accordance with Proper
Instructions, and shall be liable for performance of its duties under any other
agreement between the Custodian, any registered broker-dealer and, if necessary,
the Fund. Notwithstanding anything herein to the contrary, if the Fund issues
Proper Instructions to sell a naked option (including stock index options), then
as part of the transaction, the Custodian, the Fund and the broker-dealer shall
have entered into a tri-party agreement, as described above.
Section 2.10. Futures Contracts. Upon receipt of Proper Instructions,
or pursuant to the provisions of any futures margin procedural agreement among
the Fund, the Custodian and any futures commission merchant (a "Procedural
Agreement"), the Custodian shall: (a) receive and retain confirmations, if any
evidencing the purchase of or sale of a futures contract or an option on a
futures contract by the Fund; (b) deposit and maintain in a segregated account
cash, securities and other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written by the Fund, in accordance with the provisions of the
Commodity Futures Trading Commission and/or any commodity exchange or contract
market (such as the Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release assets from and/or transfer
assets into such margin accounts only in accordance with any such Procedural
Agreements. The Fund and such futures commission merchant shall be responsible
for determining the sufficiency of assets held in the segregated account in
compliance with applicable margin maintenance requirements and the performance
of any futures contract or option on a futures contract in accordance with its
terms; provided, however, that the Custodian shall be liable for performance of
its duties under this Agreement and in accordance with Proper Instructions, and
shall be liable for performance of its duties under any Procedural Agreement.
Section 2.11. Borrowing. Upon receipt of Proper Instructions, the
Custodian shall deliver securities of the Fund to lenders or their agents, or
otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for borrowings effected by the Fund, provided that such
borrowed money is payable by the lender (a) to or upon the Custodian's order, as
Custodian for the Fund, and (b) concurrently with delivery of such securities.
<PAGE>
Section 2.12. Interest Bearing Deposits. Upon receipt of Proper
Instructions directing the Custodian to purchase interest bearing fixed term and
call deposits (hereinafter referred to collectively, as "Interest Bearing
Deposits") for the account of the Fund, the Custodian shall purchase such
Interest Bearing Deposits in the name of the Fund with such banks or trust
companies (including the Custodian, any Subcustodian or any subsidiary or
affiliate of the Custodian) (hereinafter referred to as "Banking Institutions")
and in such amounts as the Fund may direct pursuant to Proper Instructions. Such
Interest Bearing Deposits may be denominated in U.S. Dollars or other
currencies, as the Fund may determine and direct pursuant to Proper
Instructions. The Custodian shall include in its records with respect to the
Assets of the Fund appropriate notation as to the amount and currency of each
such Interest Bearing Deposit, the accepting Banking Institution and all other
appropriate details, and shall retain such forms of advice or receipt evidencing
such account, if any, as may be forwarded to the Custodian by the Banking
Institution. The responsibilities of the Custodian to the Fund for Interest
Bearing Deposits accepted on the Custodian's books in the United States shall be
that of a U.S. bank for a similar deposit. With respect to Interest Bearing
Deposits other than those accepted on the Custodian's books, (a) the Custodian
shall be responsible for the collection of income as set forth in Section 2.15
and the transmission of cash and instructions to and from such accounts; and (b)
the Custodian shall have no duty with respect to the selection of the Banking
Institution or, so long as the Custodian acts in accordance with Proper
Instructions and the terms and conditions of this Agreement, for the failure of
such Banking Institution to pay upon demand. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable actions as the Fund deems
necessary or appropriate to cause each such Interest Bearing Deposit account to
be insured to the maximum extent possible by all applicable deposit insurers
including, without limitation, the Federal Deposit Insurance Corporation.
Section 2.13. Foreign Exchange Transactions.
(a) Foreign Exchange Transactions Other than as Principal. Upon receipt
of Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may determine and direct pursuant to Proper
Instructions. The Fund accepts full responsibility for its use of third party
foreign exchange brokers (any dealer other than the Foreign Subcustodian) (as
hereinafter defined) and for execution of said foreign exchange contracts and
understands that the Fund shall be responsible for any and all costs and
interest charges which may be incurred as a result of the failure or delay of
its third party broker to deliver foreign exchange unless such loss, damage, or
expense is caused by, or results from the negligence, misfeasance or misconduct
of the Custodian. Notwithstanding the foregoing, the Custodian shall be
responsible for the transmission of cash and instructions to and from the
currency broker or Banking Institution with which the contract or option is
made, the safekeeping of all certificates and other documents and agreements
evidencing or relating to such foreign exchange transactions and the maintenance
of proper records as set forth in
<PAGE>
Section 2.25. The Custodian shall have no duty with respect to the selection of
the currency brokers or Banking Institutions with which the Fund deals or, so
long as the Custodian acts in accordance with Proper Instructions, for the
failure of such brokers or Banking Institutions to comply with the terms of any
contract or option.
(b) Foreign Exchange Contracts as Principal. The Custodian shall not be
obligated to enter into foreign exchange transactions as principal. However, if
the Custodian has made available to the Fund its services as a principal in
foreign exchange transactions, upon receipt of Proper Instructions, the
Custodian shall enter into foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with the Custodian as principal. The
Custodian shall be responsible for the selection of the currency brokers or
Banking Institutions and the failure of such currency brokers or Banking
Institutions to comply with the terms of any contract or option.
(c) Payments. Notwithstanding anything to the contrary contained
herein, upon receipt of Proper Instructions the Custodian may, in connection
with a foreign exchange contract, make free outgoing payments of cash in the
form of U.S. Dollars or foreign currency prior to receipt of confirmation of
such foreign exchange contract or confirmation that the countervalue currency
completing such contract has been delivered or received.
Section 2.14. Securities Loans. Upon receipt of Proper Instructions,
the Custodian shall, in connection with loans of securities by the Fund, deliver
securities of the Fund to the borrower thereof and may, except as otherwise
provided below, deliver such securities prior to receipt of the collateral, if
any, for such borrowing; provided that, in cases of loans of securities secured
by cash collateral, the Custodian's instructions to the Securities System shall
require that the Securities System deliver the securities of the Fund to the
borrower thereof only upon receipt of the collateral for such borrowing. The
Custodian shall retain on the Fund's behalf the right to any dividends, interest
or distribution on such loaned securities and any other rights specified in
Proper Instructions. Upon receipt of Proper Instructions and the loaned
securities, the Custodian will release the collateral to the borrower.
Section 2.15. Collections. The Custodian shall: (a) collect amounts due
and payable to the Fund with respect to portfolio securities and other Assets;
(b) promptly credit to the account of the Fund all income and other payments
relating to portfolio securities and other Assets held by the Custodian
hereunder upon Custodian's receipt of such income or payments or as otherwise
agreed in writing by the Custodian and the Fund; (c) promptly endorse and
deliver any instruments required to effect such collection; and (d) promptly
execute ownership and other certificates and affidavits for all federal, state,
local and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio securities and other Assets, or in connection
with the transfer of such securities or other Assets; provided, however, that
with respect to portfolio securities registered in so-called street name, or
physical securities with variable
<PAGE>
interest rates, the Custodian shall use its best efforts to collect amounts due
and payable to the Fund. The Custodian shall promptly notify the Fund in writing
by facsimile transmission or in such other manner as the Fund and Custodian may
agree in writing if any amount payable with respect to portfolio securities or
other Assets is not received by the Custodian when due. The Custodian shall not
be responsible for the collection of amounts due and payable with respect to
portfolio securities or other Assets that are in default.
Section 2.16. Dividends, Distributions and Redemptions. To enable the
Fund to pay dividends or other distributions to shareholders of the Fund and to
make payment to shareholders who have requested repurchase or redemption of
their shares of the Fund (collectively, the "Shares"), the Custodian shall
promptly release cash or securities (a) in the case of cash, upon receipt of
Proper Instructions, to one or more Distribution Accounts (as hereinafter
defined) designated by the Fund in such Proper Instructions; or (b) in the case
of securities, upon the receipt of Special Instructions (as hereinafter defined)
to such entity or account designated by the Fund in such Special Instructions.
For purposes of this Agreement, a "Distribution Account" shall mean an account
established at a Banking Institution designated by the Fund in Special
Instructions.
Section 2.17. Proceeds from Shares Sold. The Custodian shall receive
funds representing cash payments received for Shares issued or sold from time to
time by the Fund, and shall promptly credit such funds to the account of the
Fund. The Custodian shall promptly notify the Fund of Custodian's receipt of
cash in payment for Shares issued by the Fund by facsimile transmission or in
such other manner as the Fund and Custodian may agree in writing. Upon receipt
of Proper Instructions, the Custodian shall: (a) deliver all federal funds
received by the Custodian in payment for Shares in payment for such investments
as may be set forth in such Proper Instructions and at a time agreed upon
between the Custodian and the Fund; and (b) make federal funds available to the
Fund as of specified times agreed upon from time to time by the Fund and the
Custodian, in the amount of checks received in payment for Shares which are
deposited to the accounts of the Fund.
Section 2.18. Proxies, Notices, Etc. The Custodian shall deliver or
cause to be delivered to the Fund, in the most expeditious manner practicable,
all forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Proper Instructions, the Custodian shall execute and
deliver, or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as directed pursuant
to Proper Instructions, neither the Custodian nor any Subcustodian or nominee
shall vote upon any such securities, or execute any proxy to vote thereon, or
give any consent or take any other action with respect thereto. The Custodian
will not release the identity of the Fund to an issuer which requests such
information pursuant to the Shareholder Communications Act of 1985, for the
specific purpose of direct communications
<PAGE>
between such issuer and the Fund unless the Fund directs the Custodian otherwise
in writing.
Section 2.19. Bills and Other Disbursements. Upon receipt of Proper
Instructions, the Custodian shall pay or cause to be paid, all bills,
statements, or other obligations of the Fund.
Section 2.20. Nondiscretionary Functions. The Custodian shall attend to
all nondiscretionary details not specifically covered by this Agreement in
accordance with industry standards in connection with the sale, exchange,
substitution, purchase, transfer or other dealings with securities or other
Assets held by the Custodian, except as otherwise directed from time to time
pursuant to Proper Instructions.
Section 2.21. Bank Accounts.
(a) Accounts with the Custodian. The Custodian shall open and operate a
bank account or accounts (hereinafter referred to collectively, as "Bank
Accounts") on the books of the Custodian; provided that such Bank Account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
the Fund, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
(b) Deposit Insurance. Upon receipt of Proper Instructions, the
Custodian shall take such action as the Fund deems necessary or appropriate to
cause each deposit account established by the Custodian pursuant to this Section
2.21 to be insured to the maximum extent possible by all applicable deposit
insurers, including, without limitation, the Federal Deposit Insurance
Corporation.
Section 2.22. Deposit of Fund Assets in Securities Systems. The
Custodian may deposit and/or maintain domestic securities owned by the Fund in:
(a) The Depository Trust Company; (b) the Participants Trust Company; (c) any
book-entry system as provided in (i) Subpart O of Treasury Circular No. 300, 31
CFR 306.115 (ii) Subpart B of Treasury Circular Public Debt Series No. 27-76, 31
CFR 350.2, or (iii) the book-entry regulations of federal agencies substantially
in the form of 31 CFR 306.115; or (d) any other domestic clearing agency
registered with the Securities and Exchange Commission ("SEC") under Section 17A
of the Securities Exchange Act of 1934 (or as may otherwise be authorized by the
Securities and Exchange Commission to serve in the capacity of depository or
clearing agent for the securities or other assets of investment companies) which
acts as a securities depository; provided, however, that no such deposit or
maintenance of securities may be made except with respect to those agencies and
entities the use of which the Fund has previously approved by Special
Instructions (each of the foregoing being referred to in this Agreement as a
"Securities System"). Use of a Securities System shall be in accordance with
applicable Federal Reserve Board and SEC rules and regulations, if any, and
subject to the following provisions:
<PAGE>
(A) The Custodian or any Subcustodian may deposit and/or maintain
securities held hereunder in a Securities System, provided that such securities
are represented in an account ("Account") of the Custodian in the Securities
System which Account shall not contain any assets of the Custodian other than
assets held as fiduciary, custodian or otherwise for customers.
(B) The books and records of the Custodian shall at all times identify
those securities belonging to the Fund which are maintained in a Securities
System.
(C) The Custodian shall pay for securities purchased for the account of
the Fund only upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account of the Custodian, and (ii) the
making of an entry on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund only upon (iii) receipt of advice from the
Securities System that payment for such securities has been transferred to the
Account of the Custodian, and (iv) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System relating to transfers of
securities for the account of the Fund shall identify the Fund, and shall be
maintained for the Fund by the Custodian. The Custodian shall deliver to the
Fund on the next succeeding business day daily transaction reports which shall
include each day's transactions in the Securities System for the account of the
Fund. Such transaction reports shall be delivered to the Fund or any agent
designated by the Fund pursuant to Proper Instructions, by computer or in such
other manner as the Fund and Custodian may agree in writing.
(D) The Custodian shall, if requested by the Fund pursuant to Proper
Instructions, provide the Fund with all reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Securities System.
(E) Upon receipt of Special Instructions, the Custodian shall terminate
the use of any Securities System (except the federal book-entry system) on
behalf of the Fund as promptly as practicable and shall take all actions
reasonably practicable to safeguard the securities of the Fund maintained with
such Securities System.
Section 2.23. Other Transfers. Upon receipt of Special Instructions,
the Custodian shall make such other dispositions of securities, funds, or other
Assets of the Fund in a manner or for purposes other than as expressly set forth
in this Agreement, provided that the Special Instructions relating to such
disposition shall include a statement of the purposes for which the delivery is
to be made, the amount of funds, Assets and/or securities to be delivered and
the name of the person or persons to whom delivery is to be made, and shall
otherwise comply with the provisions of Sections 3.01 and 3.03 hereof.
<PAGE>
Section 2.24. Establishment of Segregated Account. Upon receipt of
Proper Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other Assets of the
Fund, including securities maintained by the Custodian in a Securities System
pursuant to Section 2.22 hereof, said account or accounts to be maintained: (a)
for the purposes set forth in Section 2.09, 2.10 and 2.11 hereof; (b) for the
purposes of compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as may be set forth, from time to
time, in Special Instructions. The Custodian shall not be responsible for the
determination of the type or amount of Assets to be held in any segregated
account referred to in this Section 2.24.
Section 2.25. Custodian's Books and Records. The Custodian shall
provide any assistance reasonably requested by the Fund in the preparation of
reports to Fund shareholders and others, audits of accounts, and other
ministerial matters of like nature. The Custodian shall maintain complete and
accurate records with respect to securities and other Assets held for the
accounts of the Fund as required by the rules and regulations of the SEC
applicable to investment companies registered under the 1940 Act, including, but
not limited to: (a) journals or other records of original entry containing a
detailed and itemized daily record of all receipts and deliveries of securities
(including certificate and transaction identification numbers, if any), and all
receipts and disbursements of cash; (b) ledgers or other records reflecting (i)
securities in transfer, (ii) securities in physical possession, (iii) securities
borrowed, loaned or collateralizing obligations of the Fund, (iv) monies
borrowed and monies loaned (together with a record of the collateral therefor
and substitutions of such collateral), and (v) dividends and interest received;
and (c) cancelled checks and bank records relating thereto. The Custodian shall
keep such other books and records of the Fund as the Fund shall reasonably
request. All such books and records maintained by the Custodian shall be
maintained in a form acceptable to the Fund and in compliance with the rules and
regulations of the SEC, including, but not limited to, books and records
required to be maintained by Section 31(a) of the 1940 Act and the rules and
regulations from time to time adopted thereunder. All books and records
maintained by the Custodian pursuant to this Agreement shall at all times be the
property of the Fund and shall be available during normal business hours for
inspection and use by the Fund and its agents, including without limitation, its
independent certified public accountants. Notwithstanding the preceding
sentence, the Funds shall not take any actions or cause the Custodian to take
any actions which would knowingly cause, either directly or indirectly, the
Custodian to violate any applicable laws, regulations or orders. Notwithstanding
the provisions of this Section 2.25, in the event the Fund purchases cash,
securities and other Assets requiring the use of a Domestic Subcustodian or
Foreign Sub-Subcustodian, the Custodian shall be entitled to rely upon and use
the books, records and accountings of the Domestic Subcustodian as its means of
accounting to the Fund for all cash,
<PAGE>
securities and other Assets deposited with such entities; provided however, that
such books, records and accountings on which the Bank may rely must be
maintained in the United States by such Domestic Subcustodian and, provided
further, that any agreement between the Custodian and such Domestic Subcustodian
must state that the Domestic Subcustodian agrees to make any records available
upon request and preserve, for the periods described in Rule 31a-2 of the 1940
Act, the records required to be maintained by Rule 31a-1 of the 1940 Act. In no
event shall the Custodian be entitled to rely upon and use books, records and
accountings which are maintained outside of the United States.
Section 2.26. Opinion of Fund's Independent Certified Public
Accountants. The Custodian shall take all reasonable action as the Fund may
request to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to the Custodian's
activities hereunder in connection with the preparation of the Fund's Form N-1A
and the Fund's Form N-SAR or other periodic reports to the SEC and with respect
to any other requirements of the SEC.
Section 2.27. Reports by Independent Certified Public Accountants. At
the request of the Fund, the Custodian shall deliver to the Fund a written
report prepared by the Custodian's independent certified public accountants with
respect to the services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
assets, including cash, securities and other assets deposited and/or maintained
in a Securities System or with a Subcustodian. Such report shall be of
sufficient scope and in sufficient detail as may reasonably be required by the
Fund and as may reasonably be obtained by the Custodian.
Section 2.28. Overdraft Facility. Notwithstanding any Proper or Special
Instructions, the Custodian shall not make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of such Fund.
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
Section 3.01. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used herein, the term "Proper Instructions"
shall mean: (i) a tested telex, a written (including, without limitation,
facsimile transmission) request, direction, instruction or certification signed
or initialed by or on behalf of the Fund by two or more Authorized Persons (as
hereinafter defined); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) by or on behalf of the Fund by one or more Authorized
Persons; provided, however, that communications of
<PAGE>
the types described in clauses (ii) and (iii) above purporting to be given by an
Authorized Person shall be considered Proper Instructions only if the Custodian
reasonably believes such communications to have been given by an Authorized
Person with respect to the transaction involved. Proper Instructions in the form
of oral communications shall be confirmed by the Fund by tested telex or in
writing in the manner set forth in clause (i) above, but the lack of such
confirmation shall in no way affect any action taken by the Custodian in
reliance upon such oral instructions prior to the Custodian's receipt of such
confirmation. The Fund and the Custodian are hereby authorized to record any and
all telephonic or other oral instructions communicated to the Custodian. Proper
Instructions may relate to specific transactions or to types or classes of
transactions, and may be in the form of standing instructions.
(b) Special Instructions. As used herein, the term "Special
Instructions" shall mean Proper Instructions countersigned or confirmed in
writing by the Treasurer or any Assistant Treasurer of the Fund or any other
person designated by the Treasurer of the Fund in writing, which
countersignature or confirmation shall be (i) included on the same instrument
containing the Proper Instructions or on a separate instrument relating thereto,
and (ii) delivered by hand, by facsimile transmission or in such other manner as
the Fund and the Custodian agree in writing.
(c) Address for Proper Instructions and Special Instructions. Proper
Instructions and Special Instructions shall be delivered to the Custodian at the
address and/or telephone, telecopy or telex number agreed upon from time to time
by the Custodian and the Fund.
Section 3.02. Authorized Persons. Concurrently with the execution of
this Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian, duly certified as appropriate by a Treasurer or
Assistant Treasurer of the Fund, a certificate setting forth: (a) the names,
titles, signatures, and scope of authority of all persons authorized to give
Proper Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of the Fund (collectively, the "Authorized
Persons" and individually, an "Authorized Person"); and (b) the names, titles
and signatures of those persons authorized to issue Special Instructions. Such
certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and shall be considered to be in full
force and effect until delivery to the Custodian of a similar certificate to the
contrary. Upon delivery of a certificate which deletes or does not include the
name(s) of a person previously authorized to give Proper Instructions or to
issue Special Instructions, such persons shall no longer be considered an
Authorized Person or authorized to issue Special Instructions.
Section 3.03. Persons Having Access to Assets of the Portfolios.
Notwithstanding anything to the contrary contained in this Agreement, no
Authorized Person, Director, officer, employee or agent of the Fund shall have
physical access to the Assets of the Fund held by the Custodian nor shall the
Custodian deliver any Assets of the Fund to an account of such
<PAGE>
person; provided, however, that nothing in this Section 3.03 shall prohibit (a)
any Authorized Person from giving Proper Instructions, or any person authorized
to issue Special Instructions from issuing Special Instructions, so long as such
action does not result in delivery of or access to Assets of the Fund prohibited
by this Section 3.03; or (b) the Fund's independent certified public accountants
from examining or reviewing the Assets of the Fund held by the Custodian. The
Fund will deliver from time to time a written certificate executed by two
Authorized Persons identifying such Authorized Persons, Directors, officers,
employees and agents of the Fund. Notwithstanding the foregoing, to the extent
that the person acting on behalf of the Custodian in making such delivery has
actual knowledge that any person is an Authorized Person, Director, officer,
employee or agent of the Fund, the Custodian will comply with this Section 3.03
as if the name of such Authorized Person, Director, officer, employee or agent
had been contained in a written certificate provided pursuant to this Section
3.03.
Section 3.04. Actions of Custodian Based on Proper Instructions and
Special Instructions. So long as and to the extent that the Custodian acts in
accordance with (a) Proper Instructions or Special Instructions, as the case may
be, and (b) the terms of this Agreement, the Custodian shall not be responsible
for the title, validity or genuineness of any property, or evidence of title
thereof, received by it or delivered by it pursuant to this Agreement.
ARTICLE IV
SUBCUSTODIANS
From time to time, in accordance with the relevant provisions of this
Agreement, (i) the Custodian may appoint one or more Domestic Subcustodians and
Special Subcustodians (each, as hereinafter defined) to act on behalf of the
Fund; and (ii) any Domestic Subcustodian so appointed and which has been
designated as a Foreign Custody Manager (as such term is defined in Rule 17f-5
of the 1940 Act) by the Custodian and approved by the Fund's board ("Approved
Foreign Custody Manager") may appoint a Foreign Sub-Subcustodian or Interim
Sub-Subcustodian (as each are hereinafter defined) in accordance with this
Article IV; provided that the Fund's board also has approved the agreement
between the Custodian and the Foreign Custody Manager specifying the Foreign
Custody Manager's duties ("Delegation Agreement"). For purposes of this
Agreement, all Domestic Subcustodians, Special Subcustodians, Foreign
Sub-Subcustodians and Interim Sub-Subcustodians shall be referred to
collectively as "Subcustodians".
Section 4.01. Domestic Subcustodians. The Custodian may, at any time
and from time to time, appoint any bank as defined in Section 2(a)(5) of the
1940 Act or any trust company or other entity any of which meet requirements of
a custodian under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act as agent for the Custodian on behalf of the Fund as a
subcustodian for purposes of holding cash, securities and other Assets of the
Fund and performing other functions of the Custodian within the United States (a
"Domestic Subcustodian"); provided, that, the Custodian shall notify the Fund in
writing of the identity and qualifications of any
<PAGE>
proposed Domestic Subcustodian at least sixty (60) days prior to the desired
appointment of such Domestic Subcustodian, and the Fund will notify the
Custodian, in writing signed by two or more Authorized Persons, of approval or
disapproval of the appointment of the proposed Domestic Subcustodian; and
provided, further, that the Custodian may not appoint any such Domestic
Subcustodian without such prior written approval of the Fund by such Authorized
Persons. Each such duly approved Domestic Subcustodian and the countries where,
Foreign Sub-Subcustodians and the securities depositories and clearing agencies
through which they may hold securities and other Assets of the Fund shall be as
agreed upon by the parties hereto in writing, from time to time, in accordance
with the provisions of Section 9.04 hereof (the "Subcustodian List").
Section 4.02. Foreign Sub-Subcustodians and Interim
Sub-Subcustodians.
(a) Foreign Sub-Subcustodians. A Domestic Subcustodian which is an
Approved Foreign Custody Manager, or the Domestic Subcustodian, may appoint any
(1)(a) "Qualified Foreign Bank" (as such term is defined in Rule 17f-5) meeting
the requirements of an "Eligible Foreign Custodian" (as such term is defined in
Rule 17f-5) or by SEC order exempt therefrom; (b) majority-owned direct or
indirect subsidiary of a "U.S. bank" (as such term is defined in Rule 17f-5) or
bank holding company meeting the requirements of an Eligible Foreign Custodian
or exempt by SEC order therefrom; or (c) any bank (as such term is defined in
Section 2(a)(5) of the 1940 Act) meeting the requirements of a custodian under
Section 17(f) of the 1940 Act and the rules and regulations thereunder (each a
"Foreign Sub-Subcustodian") or (2) any "Securities Depository" (as such term is
defined in Rule 17f-5) or clearing agency meeting the requirements of an
Eligible Foreign Custodian or exempt by SEC order therefrom ("Securities
Depositories and Clearing Agencies"), provided that the Foreign Custody
Manager's appointments of such Eligible Foreign Custodians shall at all times be
governed by the Delegation Agreement, except that the Fund's investment adviser,
Waddell & Reed Investment Management Company, shall be responsible for the
appointment of a compulsory depository, as applicable.
(b) Interim Sub-Subcustodians. Notwithstanding the foregoing, in the
event that the Fund shall invest in a security or other Asset to be held in a
country in which tje Foreign Custody Manager has not appointed an Eligible
Foreign Custodian, the Custodian shall, or shall cause the Domestic Subcustodian
to, promptly notify the Fund in writing by facsimile transmission or in such
other manner as the Fund and Custodian shall agree in writing of the
unavailability of an approved Foreign Sub-Subcustodian in such country; and upon
the receipt of Special Instructions, the Custodian shall, or shall cause the
Domestic Subcustodian to, appoint or approve any Person (as hereinafter defined)
designated by the Fund in such Special Instructions, to hold such security or
other Asset. (Any Person appointed or approved as a sub-subcustodian pursuant to
this Section 4.02(b) is hereinafter referred to as an "Interim
Sub-Subcustodian.")
<PAGE>
Section 4.03. Special Subcustodians. Upon receipt of Special
Instructions, the Custodian shall, on behalf of the Fund, appoint one or more
banks, trust companies or other entities designated in such Special Instructions
to act as a subcustodian for the purpose of (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities, (ii) providing
depository and clearing agency services with respect to certain variable rate
demand note securities; and (iii) effecting any other transactions designated by
the Fund in Special Instructions. (Each such designated subcustodian is
hereinafter referred to as a "Special Subcustodian.") Each such duly appointed
Special Subcustodian shall be listed on the Subcustodian List. In connection
with the appointment of any Special Subcustodian, the Custodian shall enter into
a subcustodian agreement with the Special Subcustodian in form and substance
approved by the Fund, provided that such agreement shall in all events comply
with the provisions of the 1940 Act and the rules and regulations thereunder and
the terms and provisions of this Agreement. The Custodian shall not amend any
subcustodian agreement entered into with a Special Subcustodian, or agree to
change or permit any changes thereunder, or waive any rights under such
agreement, except upon prior approval pursuant to Special Instructions.
Section 4.04. Termination of a Subcustodian. The Custodian shall (i)
cause each Domestic Subcustodian to, and (ii) use its best efforts to cause each
Interim Sub-Subcustodian and Special Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Domestic Subcustodian and Special
Subcustodian or between the Domestic Subcustodian and an Interim
Sub-Subcustodian. In the event that the Custodian is unable to cause such
subcustodian or sub-subcustodian to fully perform its obligations thereunder,
the Custodian shall promptly notify the Fund in writing and forthwith, upon the
receipt of Special Instructions, terminate or cause the termination of such
Subcustodian or Sub-Subcustodian with respect to the Fund and, if necessary or
desirable, appoint or cause the appointment of a replacement Subcustodian or
Sub-Subcustodian in accordance with the provisions of this Article IV. In
addition to the foregoing, the Custodian (A) may, at any time in its discretion,
upon written notification to the Fund, terminate any Domestic Subcustodian which
is not an approved Foreign Custody Manager, and (B) shall, upon receipt of
Special Instructions, terminate any Special Subcustodian or Domestic
Subcustodian which is an Approved Foreign Custody Manager with respect to the
Fund, in accordance with the termination provisions under the applicable
subcustodian agreement, and (C) shall, upon receipt of Special Instructions,
cause the Domestic Subcustodian to terminate any Foreign Sub-Subcustodian or
Interim Sub-Subcustodian as to its use of such entities with respect to the
Fund, in accordance with the termination provisions under the applicable
sub-subcustodian agreement.
Section 4.05. Certification Regarding Foreign Sub-Subcustodians. Upon
request of the Fund, the Custodian shall deliver, or cause any Domestic
Subcustodian that has been approved as a Foreign Custody Manager to deliver, to
the Fund a certificate stating: (i) the identity of each Foreign
Sub-Subcustodian then acting on behalf of the Custodian; (ii) the countries in
which and the Securities Depositories and Clearing Agents through which each
<PAGE>
such Foreign Sub-Subcustodian is then holding cash, securities and other Assets
of the Fund; and (iii) such other information as may be requested by the Fund to
ensure compliance with rules and regulations under the 1940 Act.
Upon request of the Fund, the Custodian also shall deliver, or cause
any Domestic Subcustodian that has been approved as a Foreign Custody Manager to
deliver, to the Fund: (i) legal opinions relating to whether local law restricts
with respect to U.S.-registered mutual funds (a) access of a fund's independent
public accountants to books and records of a Foreign Sub-Subcustodian, foreign
Securities Depository or foreign Clearing Agent, (b) a fund's ability to recover
in the event of bankruptcy or insolvency of a Foreign Sub-Subcustodian, foreign
Securities Depository or foreign Clearing Agent, (c) a fund's ability to recover
in the event of a loss by a Foreign Sub-Subcustodian, foreign Securities
Depository or foreign Clearing Agent, and (d) the ability of a foreign investor
(such as a fund) to convert cash and cash equivalents to U.S. dollars; (ii) a
summary of information regarding foreign Securities Depositories and foreign
Clearing Agents; and (iii) country profile information containing market
practice for (a) delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership limits and (f) unique
market arrangements.
ARTICLE V
STANDARD OF CARE: INDEMNIFICATION
Section 5.01. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise reasonable
care and diligence in carrying out all of its duties and obligations under this
Agreement, and shall be liable to the Fund for all loss, damage and expense
suffered or incurred by the Fund resulting from the failure of the Custodian to
exercise such reasonable care and diligence.
(b) Actions Prohibited by Applicable Law, Etc. In no event shall the
Custodian incur liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities Depository or Clearing Agency
utilized by any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement provides
shall be performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United States of
America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction (and the Custodian
nor any other Person shall not be obligated to take any action contrary
thereto); (ii) any act of God or war or other similar circumstance beyond the
control of the Custodian unless in each case, such delay or nonperformance is
caused by the negligence, misfeasance or misconduct of the Custodian; or (iii)
any "Sovereign Risk", which for the purpose of this Agreement shall mean
nationalization, expropriation, devaluation, revaluation, confiscation, seizure,
cancellation, destruction or similar action by any governmental authority, de
facto or de jure, or enactment, promulgation, imposition or enforcement by any
such governmental
<PAGE>
authority of currency restrictions, exchange controls, taxes, levies or other
charges affecting the Fund's property; or acts of war, terrorism, insurrection
or revolution, civil commotion, nuclear fission or fusion or radioactivity.
(c) Mitigation by Custodian. Upon the occurrence of any event which
causes or may cause any loss, damage or expense to the Fund, (i) the Custodian
shall, (ii) the Custodian shall cause any applicable Domestic Subcustodian or
Foreign Sub-Subcustodian to, and (iii) the Custodian shall use its best efforts
to cause any applicable Interim Sub-Subcustodian or Special Subcustodian to, use
all commercially reasonable efforts and take all reasonable steps under the
circumstances to mitigate the effects of such event and to avoid continuing harm
to the Fund.
(d) Advice of Counsel. The Custodian shall be without liability for any
action reasonably taken or omitted in good faith pursuant to the written advise
of (i) counsel for the Fund, or (ii) at the expense of the Custodian, such other
counsel as the Fund and the Custodian may agree upon in writing; provided,
however, with respect to the performance of any action or omission of any action
upon such advice, the Custodian shall be required to conform to the standard of
care set forth in Section 5.01 (a).
(e) Expenses of the Fund. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all expenses
incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim; provided however, that the Fund has
recovered from the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no liability
in respect of any loss, damage or expense suffered by the Fund, insofar as such
loss, damage or expense arises from the performance of the Custodian in reliance
upon records that were maintained for the Fund by entities other than the
Custodian prior to the Custodian's employment hereunder which the Custodian has
no reason to believe are inaccurate or incomplete after reasonable inquiry.
Section 5.02. Liability of the Custodian for Actions of
Other Persons.
(a) Domestic Subcustodian and Foreign Sub-Subcustodian. The Custodian
shall be liable for the actions or omissions of any Domestic Subcustodian or
Foreign Sub-Subcustodian (excluding any Securities Depository or Clearing Agency
appointed by them) to the same extent as if such actions or omissions were
performed by the Custodian itself. In the event of any loss, damage or expense
suffered or incurred by the Fund caused by or resulting from the actions or
omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian for which the
Custodian would otherwise be liable, the Custodian shall
<PAGE>
promptly reimburse the Fund in the amount of any such loss, damage or expense.
(b) Special Subcustodians, Interim Sub-Subcustodians, Security Systems,
Securities Depositories and Clearing Agencies. The Custodian shall not be liable
to the Fund for any loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of a Special Subcustodian, Interim
Sub-Subcustodian, Securities System, Securities Depository or Clearing Agency
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, in
the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against such Special
Subcustodian, Interim Sub-Subcustodian, Security System, Securities Depository
or Clearing Agency to protect the interest of the Fund.
(c) Reimbursement of Expenses. The Fund agrees to reimburse the
Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under Section 5.01(c) as it
relates to Interim Sub-Subcustodians and Special Subcustodians and 5.02(b);
provided however, that such reimbursement shall not apply to expenses occasioned
by or resulting from the negligence, misfeasance or misconduct of the Custodian.
Section 5.03. Indemnification by Fund.
(a) Indemnification Obligations of Fund. Subject to the limitations set
forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Custodian or its nominee
caused by or arising from actions taken by the Custodian, its employees or
agents in the performance of its duties and obligations under this Agreement;
provided, however, that such indemnity shall not apply to loss, damage and
expense occasioned by or resulting from the negligence, misfeasance or
misconduct of the Custodian or its nominee. In addition, the Fund agrees to
indemnify any Person against liability incurred by reason of taxes assessed to
such Person resulting from the fact that securities and other property of the
Fund are registered in the name of such Person in accordance with the provisions
of this Agreement; provided, however, that in no event shall such
indemnification be applicable to income, franchise or similar taxes which may be
imposed or assessed against any Person. It is also understood that the Fund
agrees to indemnify and hold harmless the Custodian and its nominee for any loss
arising from a foreign currency transaction or contract, where the loss results
from a Sovereign Risk (defined in Section 5.01(b)) or where any Person
maintaining securities, currencies, deposits or other Assets of the Fund in
connection with any such transactions has exercised reasonable care maintaining
such property or in connection with any such transaction involving such Assets.
A "Sovereign Risk" shall mean nationalization, expropriation, devaluation,
revaluation, confiscation, seizure, cancellation, destruction or similar action
by any governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
<PAGE>
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution.
(b) Notice of Litigation. Right to Prosecute, Etc. The Fund shall not
be liable for indemnification under this Section 5.03 unless a Person shall have
promptly notified the Fund in writing of the commencement of any litigation or
proceeding brought against the Custodian or other Person in respect of which
indemnity may be sought under this Section 5.03. With respect to claims in such
litigation or proceedings for which indemnity by the Fund may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Fund shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Fund may be subject to an indemnification obligation;
provided, however, a Person shall be entitled to participate in (but not
control) at its own cost and expense, the defense of any such litigation or
proceeding if the Fund has not acknowledged in writing it obligation to
indemnify the Person with respect to such litigation or proceeding. If the Fund
is not permitted to participate or control such litigation or proceeding under
applicable law or by a ruling of a court of competent jurisdiction, or if the
Fund chooses not to so participate, the Custodian or other Person shall not
consent to the entry of any judgment or enter into any settlement in any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment, and without the Fund's prior written consent which
consent shall not be unreasonably withheld or delayed. All Persons shall submit
written evidence to the Fund with respect to any cost or expense for which they
are seeking indemnification in such form and detail as the Fund may reasonably
request.
Section 5.04. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its duty
generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund and the Fund agrees to indemnify the Custodian and its
nominees, for any loss, damage or expense suffered or incurred by the Custodian
and its nominees arising out of any violation of any investment or other
limitation to which the Fund is subject except for violations of which the
Custodian has actual knowledge. For purposes of this Section 5.04 the term
"actual knowledge" shall mean knowledge gained by the Custodian by means other
than from any prospectus published by the Fund or contained in any filing by the
Fund with the SEC.
Section 5.05. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Fund by such Subcustodian, Securities System or other Person, which
the Custodian may have as a consequence of any such loss, damage or expense, if
and to the extent that the Fund has not been made whole for any such loss,
expense or damage. If the Custodian makes the Fund whole
<PAGE>
for any such loss, expense or damage, the Custodian shall retain the ability to
enforce its rights directly against such Subcustodian, Securities System or
other Person. Upon the Fund's election to enforce any rights of the Custodian
under this Section 5.05, the Fund shall reasonably prosecute all actions and
proceedings directly relating to the rights of the Custodian in respect of the
loss, damage or expense incurred by the Fund; provided that, so long as the Fund
has acknowledged in writing its obligation to indemnify the Custodian under
Section 5.03 hereof with respect to such claim, the Fund shall retain the right
to settle, compromise and/or terminate any action or proceeding in respect of
the loss, damage or expense incurred by the Fund without the Custodian's consent
and provided further, that if the Fund has not made an acknowledgement of its
obligation to indemnify, the Fund shall not settle, compromise or terminate any
such action or proceeding without the written consent of the Custodian, which
consent shall not be unreasonably withheld or delayed. The Custodian agrees to
cooperate with the Fund and take all actions reasonably requested by the Fund in
connection with the Fund's enforcement of any rights of the Custodian. Nothing
contained in this Section 5.05 shall be construed as an obligation of the Fund
to enforce the Custodian's rights. The Fund agrees to reimburse the Custodian
for out-of-pocket expenses incurred by it in connection with the fulfillment of
its obligations under this Section 5.05; provided, however, that such
reimbursement shall not apply to expenses occasioned by or resulting from the
negligence, misfeasance or misconduct of the Custodian.
Section 5.06. Indemnification by Custodian.
(a) Indemnification Obligations of Custodian. Subject to the
limitations set forth in this Agreement and in addition to the reimbursement
obligations provided in Section 5.02(a), the Custodian agrees to indemnify and
hold harmless the Fund and its nominees from all loss, damage and expense
(including reasonable attorneys' fees) suffered or incurred by the Fund or its
nominee caused by or arising from the failure of the Custodian, its nominee,
employees or agents to comply with the terms or conditions of this Agreement or
arising out of the negligence, misfeasance or misconduct of the Custodian or its
nominee.
(b) Notice of Litigation, Right to Prosecute, Etc. The Custodian shall
not be liable for indemnification under this Section 5.06 unless the Fund shall
have promptly notified the Custodian in writing of the commencement of any
litigation or proceeding brought against the Fund in respect of which indemnity
may be sought under this Section 5.06. With respect to claims in such litigation
or proceedings for which indemnity by the Custodian may be sought and subject to
applicable law and the ruling of any court of competent jurisdiction, the
Custodian shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Custodian may be subject to an indemnification
obligation; provided, however, the Fund shall be entitled to participate in (but
not control) at its own cost and expense, the defense of any such litigation or
proceeding if the Custodian has not acknowledged in writing its obligation to
indemnify the Fund with respect to such litigation or proceeding. If the
Custodian is not
<PAGE>
permitted to participate or control such litigation or proceeding under
applicable law or by a ruling of a court of competent jurisdiction, or if the
Custodian chooses not to so participate, the Fund shall not consent to the entry
of any judgement or enter into any settlement in any such litigation or
proceeding without providing the Custodian with adequate notice of any such
settlement or judgement, and without the Custodian's prior written consent which
consent shall not be unreasonably withheld or delayed. The Fund shall submit
written evidence to the Custodian with respect to any cost or expense for which
it is seeking indemnification in such form and detail as the Custodian may
reasonably request.
Section 5.07. Custodian's Right to Proceed. Notwithstanding anything to
the contrary contained herein, the Custodian shall have, at its election upon
reasonable notice to the Fund, the right to enforce, to the extent permitted by
any applicable agreement and applicable law, the Fund's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Custodian by such Subcustodian, Securities System or other Person,
which the Fund may have as a consequence of any such loss, damage or expense, if
and to the extent that the Custodian has not been made whole for any such loss,
expense or damage. If the Fund makes the Custodian whole for any such loss,
expense or damage, the Fund shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Custodian's election to enforce any rights of the Fund under this Section 5.07,
the Custodian shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Fund in respect of the loss, damage and expense
incurred by the Custodian; provided that, so long as the Custodian has
acknowledged in writing its obligation to indemnify the Fund under Section 5.06
hereof with respect to such claim, the Custodian shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Custodian without the Fund's consent and
provided further, that if the Custodian has not made an acknowledgement of its
obligation to indemnify, the Custodian shall not settle, compromise or terminate
any such action or proceeding without the written consent of the Fund, which
consent shall not be unreasonably withheld or delayed. The Fund agrees to
cooperate with the Custodian and take all actions reasonably requested by the
Custodian in connection with the Custodian's enforcement of any rights of the
Fund. Nothing contained in this Section 5.07 shall be construed as an obligation
of the Custodian to enforce the Fund's rights. The Custodian agrees to reimburse
the Fund for out-of-pocket expenses incurred by it in connection with the
fulfillment of its obligations under this Section 5.07; provided, however, that
such reimbursement shall not apply to expenses occasioned by or resulting from
the negligence, misfeasance or misconduct of the Fund.
ARTICLE VI
COMPENSATION
For the initial three year period beginning on the effective date of
this Agreement, the Fund shall compensate the Custodian in the amount and at the
times specified in Appendix "A" attached hereto. Thereafter, the Fund
<PAGE>
shall compensate the Custodian in the amount, and at times, as may be agreed
upon in writing, from time to time, by the Custodian and the Fund.
ARTICLE VII
TERMINATION
This Agreement shall continue in full force and effect until the first
to occur of: (a) termination by the Custodian by an instrument in writing
delivered or mailed (certified mail, return receipt requested) to the Fund, such
termination to take effect not sooner than ninety (90) days after the date of
such delivery or receipt; (b) termination by the Fund by an instrument in
writing delivered or mailed (certified mail, return receipt requested) to the
Custodian, such termination to take effect not sooner than ninety (90) days
after the date of such delivery or receipt; or (c) termination by the Fund by an
instrument in writing delivered to the Custodian, based upon the Fund's
determination that there is reasonable basis to conclude that the Custodian is
insolvent or that the financial condition of the Custodian is deteriorating in
any material respect, in which case termination shall take effect upon the
Custodian's receipt of such notice or at such later time as the Fund shall
designate. In the event of termination pursuant to this Article VII, the Fund
shall make payment of all accrued fees and unreimbursed expenses within a
reasonable time following termination and delivery of a statement to the Fund
setting forth such fees and expenses. The Fund shall identify in any notice of
termination a successor custodian to which the cash, securities and other Assets
of the Fund shall, upon termination of this Agreement, be delivered. In the
event that securities and other Assets remain in the possession of the Custodian
after the date of termination hereof owing to failure of the Fund to appoint a
successor custodian, the Custodian shall be entitled to compensation for its
services in accordance with the fee schedule most recently in effect, for such
period as the Custodian retains possession of such securities and other Assets,
and the provisions of this Agreement relating to the duties and obligations of
the Custodian and the Fund shall remain in full force and effect for such
period. In the event of the appointment of a successor custodian, the cash,
securities and other Assets owned by the Fund and held by the Custodian, any
Subcustodian or nominee shall be delivered, at the terminating party's expense,
to the successor custodian; and the Custodian agrees to cooperate with the Fund
in the execution of documents and performance of other actions necessary or
desirable in order to substitute the successor custodian for the Custodian under
this Agreement.
ARTICLE VIII
DEFINED TERMS
The following terms are defined in the following sections:
<TABLE>
<CAPTION>
Term Section
<S> <C>
Account 2.22(A)
ADRs 2.06
Approved Foreign Custody Manager Article IV
Assets Article I
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Authorized Person 3.02
Banking Institution 2.12
Bank Accounts 2.21
Delegation Agreement Article IV
Distribution Account 2.16
Domestic Subcustodian 4.01
Eligible Foreign Custodian 4.02(a)
Foreign Sub-Subcustodian 4.02(a)
Institutional Client 2.03
Interest Bearing Deposit 2.12
Interim Sub-Subcustodian 4.02(b)
OCC 2.09
Overdraft 2.28
Overdraft Notice 2.28
Person 5.01(b)
Procedural Agreement 2.10
Proper Instructions 3.01(a)
SEC 2.22
Securities Depositories and Clearing Agencies 4.02(a)
Securities System 2.22
Shares 2.16
Sovereign Risk 5.01(b)
Special Instructions 3.01(b)
Special Subcustodian 4.03
Subcustodian Article IV
1940 Act Preamble
</TABLE>
ARTICLE IX
MISCELLANEOUS
Section 9.01. Execution of Documents, Etc.
(a) Actions by the Fund. Upon request, the Fund shall execute and
deliver to the Custodian such proxies, powers of attorney or other instruments
as may be reasonable and necessary or desirable in connection with the
performance by the Custodian or any Subcustodian of their respective obligations
under this Agreement or any applicable subcustodian agreement, provided that the
exercise by the Custodian or any Subcustodian of any such rights shall in all
events be in compliance with the terms of this Agreement.
(b) Actions by Custodian. Upon receipt of Proper Instructions, the
Custodian shall execute and deliver to the Fund or to such other parties as the
Fund may designate in such Proper Instructions, all such documents, instruments
or agreements as may be reasonable and necessary or desirable in order to
effectuate any of the transactions contemplated hereby and designated therein.
Section 9.02. Representations and Warranties.
(a) Representations and Warranties of the Fund. The Fund hereby
represents and warrants that each of the following shall be true, correct and
<PAGE>
complete as of the date of execution of this Agreement and, unless notice to the
contrary is provided by the Fund to the Custodian, at all times during the term
of this Agreement: (i) the Fund is duly organized under the laws of its
jurisdiction of organization and is registered as an open-end management
investment company under the 1940 Act or is a series of portfolio of such
entity; and (ii) the execution, delivery and performance by the Fund of this
Agreement are (w) within its power, (x) have been duly authorized by all
necessary action, and (y) will not (A) contribute to or result in a breach of or
default under or conflict with any existing law, order, regulation or ruling of
any governmental or regulatory agency or authority, or (B) violate any provision
of the Fund's corporate charter or other organizational document, or bylaws, or
any amendment thereof or any provision of its most recent Prospectus or
Statement of Additional Information.
(b) Representations and Warranties of the Custodian. The Custodian
hereby represents and warrants that each of the following shall be true, correct
and complete as of the date of execution of this Agreement and, unless notice to
the contrary is provided by the Custodian to the Fund, at all times during the
term of this Agreement: (i) the Custodian is duly organized under the laws of
its jurisdiction of organization and qualifies to serve as a custodian to
open-end management investment companies under the provisions of the 1940 Act;
and (ii) the execution, delivery and performance by the Custodian of this
Agreement are (w) within its power (x) have been duly authorized by all
necessary action, and (y) will not (A) contribute to or result in a breach of or
default under or conflict with any existing law, order, regulation or ruling of
any governmental or regulatory agency or authority, or (B) violate any provision
of the Custodian's corporate charter, or other organizational document, or
bylaws, or any amendment thereof. The Custodian acknowledges receipt of a copy
of the Fund's most recent Prospectus and Statement of Additional Information.
Section 9.03. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and accordingly, supersedes as of the effective date of this
Agreement any custodian agreement heretofore in effect between the Fund and the
Custodian.
Section 9.04. Waivers and Amendments. No provisions of this Agreement
may be waived, amended or deleted except by a statement in writing signed by the
party against which enforcement of such waiver, amendment or deletion is sought.
Section 9.05. Interpretation. In connection with the operation of this
Agreement, the Custodian and the Fund may agree in writing from time to time on
such provisions interpretative of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general tenor of
this Agreement. No interpretative or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
<PAGE>
Section 9.06. Captions. Headings contained in this Agreement, which are
included as convenient references only, shall have no bearing upon the
interpretation of the terms of the Agreement or the obligations of the parties
hereto.
Section 9.07. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Missouri, in each case
without giving effect to principles of conflicts of law.
Section 9.08. Notices. Except in the case of Proper Instructions or
Special Instructions, and as otherwise provided in this Agreement, notices and
other writings contemplated by this Agreement shall be delivered by hand or by
facsimile transmission or as otherwise agreed to by the Fund and the Custodian
in writing (provided that in the case of delivery by facsimile transmission,
notice shall also be mailed postage prepaid) to the parties at the following
addresses:
(a) If to the Fund:
United Funds, Inc. United Science and Technology Fund
6300 Lamar Avenue
Overland Park, Kansas 66202
Attn: Fund Treasurer
Telephone: 913-236-2000
Telefax: 913-236-1595
(b) If to the Custodian:
UMB Bank, n.a.
928 Grand Avenue, 10th Floor
Kansas City, Missouri 64106
Attn: Securities Administration
Telephone: 816-860-7764
Telefax: 816-860-4869
or such other address as either party may have designated in writing to the
other party hereto.
Section 9.09. Assignment. This Agreement shall be binding on and shall
inure to the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that, subject to the provisions of Section 7.01
hereof, neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
Section 9.10. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original. This
Agreement shall become effective when one or more counterparts have been signed
and delivered by each of the parties.
<PAGE>
Section 9.11. Confidentiality; Survival of Obligations. The parties
hereto agree that each shall treat confidentially the terms and conditions of
this Agreement and all information provided by each party to the other regarding
its business and operations. All confidential information provided by a party
hereto shall be used by any other party hereto solely for the purpose of
rendering services pursuant to this Agreement and, except as may be required in
carrying out this Agreement, shall not be disclosed to any third party without
the prior consent of such providing party. The foregoing shall not be applicable
to any information that is publicly available when provided or thereafter
becomes publicly available other than through a breach of this Agreement, or
that is required to be disclosed by any bank examiner of the Custodian or any
Subcustodians, any auditor or examiner of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation. The
provisions of this Section 9.11 and Section 9.01, 9.07, Section 2.28, Section
3.04, Section 4.05, Section 7.01, Article V and Article VI hereof and any other
rights or obligations incurred or accrued by any party hereto prior to
termination of this Agreement shall survive any termination of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
UNITED FUNDS, INC. UMB BANK, n.a.
UNITED SCIENCE AND TECHNOLOGY FUND
By: /s/Kristen A. Richards By: /s/Ralph Santoro
---------------------- ----------------
Name: Kristen A. Richards Name: Ralph Santoro
Title: Vice President Title: Senior Vice President
<PAGE>
APPENDIX "A"
TO
CUSTODIAN AGREEMENT
BETWEEN
UNITED FUNDS, INC. UNITED SCIENCE AND TECHNOLOGY FUND
AND
UMB BANK, N.A.
Dated as of May 13, 1998
The Fund shall be responsible for providing the Custodian the net asset
levels the Custodian requires to calculate the net asset portion of the
Custodian's fees. Such determinations shall be based upon the average monthly
assets of each Fund and shall specify the level of domestic assets and foreign
assets by country, as appropriate. Domestic assets shall include all assets held
in the United States including but not limited to American Depositary Receipts.
Foreign assets shall include all assets held outside the United States including
but not limited to securities which clear through Euroclear or CEDEL. The
Custodian will provide as soon as practicable after receiving the information
provided by the Fund with respect to the net asset level numbers, a bill for the
Fund, including such reasonable detail in support of each bill as may be
reasonably requested by the Fund. As used in this Appendix "A", "United Funds"
shall mean all funds in the United Group of Funds, TMK/United Funds, Inc. and
Waddell & Reed Funds, Inc.
DOMESTIC CUSTODY FEE SCHEDULE
A. Annual Fee (combining all domestic assets):
------------------------------------------
An annual fee to be computed as of month end and payable each month of
the Fund's fiscal year (after receipt of the bill issued to each Fund
based upon its portion of domestic assets), at the annual rate of:
.00005 for the first $5,000,000,000 of the net assets of all the United
Funds, plus .00004 for any net assets exceeding $5,000,000,000 of the
assets of all the United Funds.
B. Portfolio Transaction Fees (billed to each Fund):
------------------------------------------------
<TABLE>
<S> <C>
(a) For each portfolio transaction* processed through a
Depository (DTC, PTC or Fed) $ 7.00
(b) For each portfolio transaction* processed through
the New York office (physical settlement) $20.00
(c) For each futures/option contract written $25.00
(d) For each principal/interest paydown $ 6.00
(e) For each interfund note transaction $ 5.00
</TABLE>
* A portfolio transaction includes a receive, delivery, maturity, free
security movement and corporate action.
C. Earnings Credits:
----------------
Positive earnings credits will be applied on all collected custody and
cash management balances of each Fund at the Custodian to earn the
Custodian's daily repurchase agreement rate less reserve requirements
and FDIC premiums. Negative earnings credits will be charged on all
uncollected custody and cash management balances of each Fund at the
Custodian's prime rate less 150 basis points on each day a negative
balance occurs. Positive and/or negative earnings credits will be
monitored daily for each Fund and the net positive or negative amount
for each Fund will be included in the monthly statements. Excess
positive credits for each Fund will be carried forward indefinitely.
D. Out-of-Pocket Expenses (passed directly from Special Subcustodians):
--------------------------------------------------------------------
Includes all charges by any Special Subcustodian to the Custodian as
Custodian for any Assets held at the Special Subcustodian.
<PAGE>
GLOBAL CUSTODY FEE SCHEDULE
A. Global Fee Schedule:
-------------------
<TABLE>
<CAPTION>
Market: Annual Asset Fees Transaction Fees
------ ----------------- ----------------
<S> <C> <C>
Argentina .0037 $85
Australia .0009 $85
Austria .0011 $70
Belgium .0011 $60
Brazil .0035 $60
Canada .0008 $35
Chile .0045 $85
China .0045 $75
Czech Republic .0055 $135
Denmark .0011 $60
Finland .0011 $85
France .0011 $85
Germany .0008 $60
Hong Kong .0009 $85
Hungary .0065 $210
India .0055 $135
Indonesia .0009 $85
Ireland .0011 $60
Israel .0035 $160
Italy .0011 $70
Japan .0008 $40
Korea .0035 $60
Malaysia .0009 $85
Mexico .0016 $60
Netherlands .0011 $35
New Zealand .0009 $85
Norway .0011 $85
Peru .0070 $160
Philippines .0035 $95
Poland .0060 $110
Portugal .0035 $145
Singapore .0009 $85
Spain .0009 $85
Sweden .0011 $70
Switzerland .0009 $85
Taiwan .0035 $85
Thailand .0009 $85
Turkey .0045 $110
U.K. .0011 $60
</TABLE>
Segregated Account Fee: $175 monthly charge per fund holding foreign
assets.
Note: Fee Schedule eliminates sub-custodian asset and transaction-based
out-of-pocket expenses. Other sub-custodian out-of-pocket expenses
(i.e. Scrip fees, stamp duties, certificate fees, etc.)
B. Out-of-Pocket Expenses (passed directly from Brown Brothers Harriman &
Co.):
-----------------------------------------------------------------------
Includes, but is not limited to telex, legal, telephones, postage, and
direct expenses including but not limited to tax reclaim, customized
systems programming, certificate fees, duties, and registration fees.
<PAGE>
C. Short-term Dollar Denominated Global Assets
-------------------------------------------
Eurodollar CDs, Time Deposits:
------------------------------
(1) An annual fee to be computed as of month end and payable each
month of the Fund's fiscal year (after receipt of the bill issued
to the Fund based upon its portion of short-term dollar
denominated assets), at the annual rate of:
.0004 on all short-term dollar denominated assets of the United
Funds.
(2) Portfolio Transaction Fees:
First Chicago Clearing Centre-Trades with Members $136.00
First Chicago Clearing Centre-Trades with Non-members $153.00
First Chicago Clearing Centre-Income Collection $ 64.00
D. Euroclear Eligible Issues:
-------------------------
(1) An annual fee to be computed as of month end and payable each
month of the Fund's fiscal year (after receipt of the bill issued
to the Fund based upon its portion of Euroclear issues), at the
annual rate of:
2.5 basis points on all United Funds Euroclear assets held in
account at UMB Bank, n.a.
(2) Portfolio Transaction Fees:
Euroclear $60.00
<PAGE>
SUBCUSTODIAN LIST
PURSUANT TO CUSTODIAN AGREEMENT
BETWEEN
UNITED FUNDS, INC. UNITED SCIENCE AND TECHNOLOGY FUND
AND
UMB BANK, n.a.
Dated as of February 25, 2000
This Subcustodian List relates to the Custodian Agreements between UMB
Bank, n.a. and each of the following funds dated the date specified by the
fund's name, as subsequently amended and restated:
<TABLE>
<CAPTION>
Fund Date
<S> <C>
United Asset Strategy Fund, Inc. February 22, 1995
United Cash Management, Inc. November 26, 1991
United Continental Income Fund, Inc. November 26, 1991
United Gold & Government Fund, Inc. November 26, 1991
United Government Securities Fund, Inc. November 26, 1991
United High Income Fund, Inc. November 26, 1991
United High Income Fund II, Inc. November 26, 1991
United International Growth Fund, Inc. November 26, 1991
United Municipal Bond Fund, Inc. November 26, 1991
United Municipal High Income Fund, Inc. November 26, 1991
United New Concepts Fund, Inc. November 26, 1991
United Retirement Shares, Inc. November 26, 1991
United Vanguard Fund, Inc. November 26, 1991
United Funds, Inc.
United Bond Fund November 26, 1991
United Income Fund November 26, 1991
United Accumulative Fund November 26, 1991
United Science and Technology Fund November 26, 1991
United Small Cap Fund, Inc. August 18, 1999
United Tax-Managed Equity Fund, Inc. February 25, 2000
Target/United Funds, Inc.*
High Income Portfolio November 26, 1991
Money Market Portfolio November 26, 1991
Bond Portfolio November 26, 1991
Income Portfolio November 26, 1991
Growth Portfolio November 26, 1991
Balanced Portfolio April 29, 1994
International Portfolio April 29, 1994
Limited-Term Bond Portfolio April 29, 1994
Small Cap Portfolio April 29, 1994
Asset Strategy Portfolio May 1, 1995
Science and Technology Portfolio April 4, 1997
Waddell & Reed Funds, Inc.
Total Return Fund April 24, 1992
Municipal Bond Fund April 24, 1992
Limited-Term Bond Fund April 24, 1992
International Growth Fund April 24, 1992
Growth Fund April 24, 1992
Asset Strategy Fund April 20, 1995
High Income Fund July 31, 1997
Science and Technology Fund July 31, 1997
</TABLE>
*Formerly, TMK/United Funds, Inc.
The following is a list of Domestic Subcustodians, Foreign Subcustodian and
Special Subcustodians under the Custodian Agreement as amended:
<PAGE>
A. Domestic Custodians:
-------------------
Brown Brothers Harriman & Co.
United Missouri Trust Company of New York
B. Foreign Sub-Custodians
----------------------
<TABLE>
<CAPTION>
Country Sub-Custodian Depository
<S> <C> <C>
Argentina Citibank, n.a. CDV; CRYL
Australia National Australia Bank Ltd. AUSTRACLEAR, RITs
Austria Creditanstalt Bankverein KONTROLLBANK (OEKB)
Belgium Banque Bruxelles Lambert CIK, BNB
Brazil First National Bank of Boston, BOVESPA, CLC
Brazil
Canada Canadian Imperial Bank of Commerce CDS; The Bank of Canada
Chile Citibank, n.a. None
China Standard Chartered Bank SSCCRC; SSCC
Czech Republic Ceskoslovenska Obchodni CNB; SCP
Banka A.S.
Denmark Den Danske Bank VP
Finland Merita Securities Association; Finnish Central
Securities Depository Ltd.
France Banque Indosuez SICOVAM; Banque de France
Germany Deutsche Bank KASSENVEREIN
Hungary Citibank, N.A. KELER Ltd.
Hong Kong HongKong & Shanghai Banking Corp. HongKong Securities Clearing Company
India Citibank, N.A., Mumbai National Securities Depository Limited
Indonesia Citibank, n.a. None
Ireland Allied Irish Banks PLC Gilt Settlement Office
Israel Bank Hapoalim B.M. TASE Clearinghouse Ltd.
Italy Banca Commerciale Italiana MONTE TITOLI, Banca D'Italia
Japan The Bank of Tokyo, Ltd. JASDEC, Bank of Japan
Korea Citibank, n.a. Korean Securities Depository
Corporation (KSD)
Malaysia Hong Kong Bank Malaysia Berhad MCD; Bank Negara Malaysia
Mexico Citibank Mexico, s.a. INDEVAL; Banco De Mexico
Netherlands ABN - Amro Bank NECIGER; De Nederlandsche Bank
Norway Christiana Bank VPS
Peru Citibank, n.a. Caja De Valores (CAVAL)
Philippines Citibank, n.a. Phillipines Central Depository, Inc.
Poland Bank Polska Kasa Opieki S.A. NPB
Portugal Banco Espirito Santo E Comercial Interbolsa
De Lisboa
Singapore HongKong & Shanghai Banking Corp. CDP
Spain Banco Santander SCLV; Banco De Espana
Sweden Skandinaviska Enskilda Banken VPC
Switzerland Union Bank of Switzerland SEGA
Taiwan Standard Chartered Bank, Taipei TSCD
Thailand HongKong & Shanghai Banking Corp. Share Depository Center (SDC)
Turkey Citibank, n.a. TvS, Central Bank of Turkey
United Kingdom Midland Securities PLC CMO; CGO; CrestCo
</TABLE>
C. Special Subcustodians:
---------------------
Republic National Bank of New York
The Bank of New York, n.a.
EX-99.B(p)ufcode
CODE OF ETHICS
--------------
Waddell & Reed Financial, Inc.
Waddell & Reed, Inc.
Waddell & Reed Investment Management Company
Austin, Calvert & Flavin, Inc.
Fiduciary Trust Company of New Hampshire
United Group of Mutual Funds
Waddell & Reed Funds, Inc.
Target/United Funds, Inc.
As Revised: February 9, 2000
<PAGE>
1. Preface
-------
Rule 17j-1 of the Investment Company Act of 1940 (the "Act") requires
registered investment companies and their investment advisers and principal
underwriters to adopt codes of ethics and certain other requirements to
prevent fraudulent, deceptive and manipulative practices. Each investment
company in the United Group of Mutual Funds, Waddell & Reed Funds, Inc. and
Target/United Funds, Inc. (each a "Fund," and collectively the "Funds") is
registered as an open-end management investment company under the Act.
Waddell & Reed, Inc. ("W&R") is the principal underwriter of each of the
Funds. Waddell & Reed Investment Management Company ("WRIMCO") is the
investment adviser of the Funds and may also serve as investment adviser to
institutional clients other than the Funds. Austin, Calvert & Flavin, Inc.
("ACF") is a subsidiary of WRIMCO and serves as investment adviser to
individuals and institutional clients other than the Funds. Fiduciary Trust
Company of New Hampshire ("FTC"), is a trust company and a subsidiary of
W&R, Waddell & Reed Financial, Inc. ("WDR") is the public holding company.
Except as otherwise specified herein, this Code applies to all employees,
officers and directors of W&R, WRIMCO, ACF and the Funds, (collectively,
the "Companies").
This Code of Ethics (the "Code") is based on the principle that the
officers, directors and employees of the Companies have a fiduciary duty to
place the interests of their respective advisory clients first, to conduct
all personal securities transactions consistently with this Code and in
such a manner as to avoid any actual or potential conflict of interest or
any abuse of their position of trust and responsibility, and to conduct
their personal securities transactions in a manner which does not interfere
with the portfolio transactions of any advisory client or otherwise take
unfair advantage of their relationship to any advisory client. Persons
covered by this Code must adhere to this general principle as well as
comply with the specific provisions of this Code. Technical compliance with
this Code will not insulate from scrutiny trades which indicate an abuse of
an individual's fiduciary duties to any advisory client.
This Code has been approved, and any material change to it must be
approved, by each Fund's board of directors, including a majority of the
Fund's Disinterested directors.
2
<PAGE>
2. Definitions
-----------
"Access Person" means (i) any employee, director, officer or general
partner of a Fund, WRIMCO or ACF, (ii) any director or officer of W&R, FTC
or WDR or any employee of any company in a control relationship to the
Companies who, in the ordinary course of his or her business, makes,
participates in or obtains information regarding the purchase or sale of
securities for an advisory client or whose principal function or duties
relate to the making of any recommendation to an advisory client regarding
the purchase or sale of securities and (iii) any natural person in a
control relationship to the Companies who obtains information concerning
recommendations made to an advisory client with regard to the purchase or
sale of a security. A natural person in a control relationship or an
employee of a company in a control relationship does not become an "Access
Person" simply by virtue of the following: normally assisting in the
preparation of public reports, but not receiving information about current
recommendations or trading; or a single instance of obtaining knowledge of
current recommendations or trading activity, or infrequently and
inadvertently obtaining such knowledge. The Legal Department, in
cooperation with department heads, is responsible for determining who are
Access Persons.
"Advisory Client" means any client (including both investment companies and
managed accounts) for which WRIMCO or ACF serves as an investment adviser,
renders investment advice or makes investment decisions.
A security is "being considered for purchase or sale" when the order to
purchase or sell such security has been given to the trading room, or prior
thereto when, in the opinion of the portfolio manager or division head, a
decision, whether or not conditional, has been made (even though not yet
implemented) to make the purchase or sale, or when the decision-making
process has reached a point where such a decision is imminent.
"Beneficial Ownership" shall be interpreted in the same manner as it would
be under Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 in
determining whether a person is the beneficial owner of a security for
purposes of Section 16 of the Securities Exchange Act of 1934. (See
Appendix A for a more complete description.)
"Control" shall have the same meaning as that set forth in Section 2(a)(9)
of the Act.
3
<PAGE>
"De Minimis Transaction" is equal to or less than 300 shares, or is a
fixed-income security (or an equivalent security) which is equal to or less
than $15,000 principal amount. Purchases and sales, as the case may be, in
the same security or an equivalent security within 30 days will be
aggregated for purposes of determining if the transaction meets the
definition of a De Minimis Transaction.
"Disinterested Director" means a director who is not an "interested person"
within the meaning of Section 2(a)(19) of the Act.
"Equivalent Security" means any security issued by the same entity as the
issuer of a subject security, including options, rights, warrants,
preferred stock, restricted stock, phantom stock, bonds and other
obligations of that company, or security convertible into another security.
"Immediate Family" of an individual means any of the following persons who
reside in the same household as the individual:
<TABLE>
<S> <C> <C>
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
</TABLE>
Immediate Family includes adoptive relationships and any other relationship
(whether or not recognized by law) which the Legal Department determines
could lead to possible conflicts of interest, diversions of corporate
opportunity, or appearances of impropriety which this Code is intended to
prevent.
"Investment Personnel" means those employees who provide information and
advice to a portfolio manager or who help execute the portfolio manager's
decisions.
"Large Cap Transaction" means a purchase or sale of securities issued by
(or equivalent securities with respect to) companies with market
capitalization of at least $2.5 billion.
4
<PAGE>
"Non-Affiliated Director" is a Director that is not an affiliated person of
W&R.
"Portfolio Manager" means those employees entrusted with the direct
responsibility and authority to make investment decisions affecting an
Advisory Client.
"Purchase or sale of a security" includes, without limitation, the writing,
purchase or exercise of an option to purchase or sell a security,
conversions of convertible securities and short sales.
"Security" shall have the meaning set forth in Section 2(a)(36) of the Act,
except that it shall not include shares of registered open-end investment
companies, securities issued by the Government of the United States,
short-term debt securities which are "government securities" within the
meaning of Section 2(a)(16) of the Act, bankers' acceptances, bank
certificates of deposit, commercial paper, high quality short-term debt
instruments, including repurchase agreements, and such other money market
instruments as are designated by the boards of directors of the Companies.
Security does not include futures contracts or options on futures contracts
(provided these instruments are not used to indirectly acquire an interest
which would be prohibited under this Code), but the purchase and sale of
such instruments are nevertheless subject to the reporting requirements of
this Code.
"Security held or to be acquired" by an Advisory Client means (a) any
security which, within the most recent 15 days, (i) is or has been held by
an Advisory Client or (ii) is being or has been considered for purchase by
an Advisory Client, and (b) any option to purchase or sell, and any
security convertible into or exchangeable into, a security described in the
preceding clause (a).
3. Pre-Clearance Requirements
--------------------------
Except as otherwise specified in this Code, all Access Persons, except a
Non-Affiliated Director or a member of his or her Immediate Family, shall
clear in advance through the Legal Department any purchase or sale, direct
or indirect, of any Security in which such Access Person has, or by reason
of such transaction acquires, any direct or indirect Beneficial Ownership;
provided, however, that an Access Person shall not be required to clear
transactions effected for or securities held in any account over which such
Access
5
<PAGE>
Person does not have any direct or indirect influence or control. The Legal
Department shall retain written records of such clearance requests. For
accounts affiliated with Waddell & Reed, Inc. or any of its affiliates or
related companies ("affiliated accounts"), WRIMCO must clear in advance
purchases of equity securities in initial public offerings only.
Except as otherwise provided in Section 5, the Legal Department will not
grant clearance for any purchase by an Access Person if the Security is
currently being considered for purchase or being purchased by any Advisory
Client or for sale by an Access Person if currently being considered for
sale or being sold by any Advisory Client. If the Security proposed to be
purchased or sold by the Access Person is an option, clearance will not be
granted if the securities subject to the option are being considered for
purchase or sale as indicated above. If the Security proposed to be
purchased or sold is a convertible security, clearance will not be granted
if either that security or the securities into which it is convertible are
being considered for purchase or sale as indicated above. The Legal
Department will not grant clearance for any purchase by an affiliated
account of any security in an initial public offering if an Advisory Client
is considering the purchase or has submitted an indication of interest in
purchasing shares in such initial public offering. For all other purchases
and sales of securities for affiliated accounts, no clearance is necessary,
but such transactions are subject to WRIMCO's Procedures for Aggregation of
Orders for Advisory Clients, as amended from time to time.
The Legal Department may refuse to preclear a transaction if it deems the
transaction to involve a conflict of interest, possible diversion of
corporate opportunity, or an appearance of impropriety.
Clearance is effective, unless earlier revoked, until the earlier of (1)
the close of business on the fifth trading day, beginning on and including
the day on which such clearance was granted, or (2) such time as the Access
Person learns that the information provided to the Legal Department in such
Access Person's request for clearance is not accurate. If an Access Person
places an order for a transaction within the five trading days but such
order is not executed within the five trading days (e.g., a limit order),
clearance need not be reobtained unless the person who placed the original
order amends such order in any way. Clearance may be revoked at any time
and is deemed revoked if, subsequent to receipt of clearance, the Access
Person has knowledge that a Security to which the clearance relates is
being considered for purchase or sale by an Advisory Client.
6
<PAGE>
4. Exempted Transactions
---------------------
The pre-clearance requirements in Section 3 and the prohibited actions and
transactions in Section 5 of this Code shall not apply to:
(a) Purchases or sales which are non-volitional on the part of either the
Access Person or the Advisory Client.
(b) Purchases which are part of an automatic dividend reinvestment plan.
(c) Purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of its securities, to the extent such
rights were acquired from such issuer, and sales of such
rights so acquired.
(d) Transactions in securities of WDR; however, individuals subject to the
Insider Trading Policy remain subject to such policy. (See Appendix
B).
(e) Purchases or sales by a Non-Affiliated Director or a member of his or
her Immediate Family.
5. Prohibited Actions and Transactions
-----------------------------------
Clearance will not be granted under Section 3 hereof with respect to the
following prohibited actions and transactions. Engaging in any such actions
or transactions by Access Persons will result in sanctions, including, but
not limited to, the sanctions expressly provided for in this Section.
(a) Except with respect to Large Cap Transactions, Investment Personnel
and Portfolio Managers shall not acquire any security for any account
in which such Investment Personnel or Portfolio Manager has a
beneficial interest, excluding the Funds, in an initial public
offering of that security.
(b) Except with respect to Large Cap Transactions, Access Persons shall
not execute a securities transaction on a day during which an Advisory
Client has a pending buy or sell order in that same security or an
equivalent security until that order is
7
<PAGE>
executed or withdrawn. An Access Person shall disgorge any profits
realized on trades within such period.
(c) Except for De Minimis Transactions and Large Cap Transactions, a
Portfolio Manager shall not buy or sell a Security within seven (7)
trading days before or after an Advisory Client that the Portfolio
Manager manages trades in that Security or an equivalent security. A
Portfolio Manager shall disgorge any profits realized on such trades
within such period.
(d) Except for De Minimis Transactions and Large Cap Transactions,
Investment Personnel and Portfolio Managers shall not profit in the
purchase or sale, or sale and purchase, of the same (or equivalent)
securities within sixty (60) calendar days. The Legal Department will
review all such short-term trading by Investment Personnel and
Portfolio Managers and may, in its sole discretion, allow exceptions
when it has determined that an exception would be equitable and that
no abuse is involved. Investment Personnel and Portfolio Managers
profiting from a transaction shall disgorge any profits realized on
such transaction. This section shall not apply to options on
securities used for hedging purposes for securities held longer than
sixty (60) days.
(e) Investment Personnel and Portfolio Managers shall not accept from any
person or entity that does or proposes to do business with or on
behalf of an Advisory Client a gift or other thing of more than de
minimis value or any other form of advantage. The solicitation or
giving of such gifts by Investment Personnel and Portfolio Managers is
also prohibited. For purposes of this subparagraph, "de minimis" means
$75 or less if received in the ordinary course of business.
(f) Investment Personnel and Portfolio Managers shall not serve on the
board of directors of publicly traded companies, absent prior
authorization from the Legal Department. The Legal Department will
grant authorization only if it is determined that the board service
would be consistent with the interests of any Advisory Client. In the
event board service is authorized, such individuals serving as
directors shall be isolated from those making investment decisions
through procedures designed to safeguard against potential conflicts
of interest, such as a Chinese Wall policy or investment restrictions.
8
<PAGE>
(g) Except with respect to Large Cap Transactions, Investment Personnel
and Portfolio Managers shall not acquire a security in a private
placement, absent prior authorization from the Legal Department. The
Legal Department will not grant clearance for the acquisition of a
security in a private placement if it is determined that the
investment opportunity should be reserved for an Advisory Client or
that the opportunity to acquire the security is being offered to the
individual requesting clearance by virtue of such individual's
position with the Companies. An individual who has been granted
clearance to acquire securities in a private placement shall disclose
such investment when participating in an Advisory Client's subsequent
consideration of an investment in the issuer. A subsequent decision by
an Advisory Client to purchase such a security shall be subject to
independent review by Investment Personnel with no personal interest
in the issuer.
(h) An Access Person shall not execute a securities transaction while in
possession of material non-public information regarding the security
or its issuer.
(i) An Access Person shall not execute a securities transaction which is
intended to result in market manipulation, including but not limited
to, a transaction intended to raise, lower, or maintain the price of
any security or to create a false appearance(s) of active trading.
(j) Except with respect to Large Cap Transactions, an Access Person shall
not execute a securities transaction involving the purchase or sale of
a security at a time when such Access Person intends, or knows of
another's intention, to purchase or sell that security (or an
equivalent security) on behalf of an Advisory Client. This prohibition
would apply whether the transaction is in the same (e.g., two
purchases) or the opposite (a purchase and sale) direction as the
transaction of the Advisory Client.
(k) An Access Person shall not cause or attempt to cause any Advisory
Client to purchase, sell, or hold any security in a manner calculated
to create any personal benefit to such Access Person or his or her
Immediate Family. If an Access Person or his or her Immediate Family
stands to materially benefit from an investment decision for an
Advisory Client that the Access Person is recommending or in which the
Access Person is participating, the Access Person
9
<PAGE>
shall disclose to the persons with authority to make investment
decisions for the Advisory Client, any beneficial interest that the
Access Person or his or her Immediate Family has in such security or
an equivalent security, or in the issuer thereof, where the decision
could create a material benefit to the Access Person or his or her
Immediate Family or result in the appearance of impropriety.
6. Reporting by Access Persons
---------------------------
(a) Each Access Person, except a Non-Affiliated Director or a member of
his or her Immediate Family, shall require a broker-dealer or bank
effecting a transaction in any security in which such Access Person
has, or by reason of such transaction acquires, any direct or indirect
Beneficial Ownership in the security to timely send duplicate copies
of each confirmation for each securities transaction and periodic
account statement for each brokerage account in which such Access
Person has a beneficial interest to Waddell & Reed, Inc., Attention:
Legal Department.
(b) Each Access Person, except a Non-Affiliated Director or a member of
his or her Immediate Family, shall report to the Legal Department no
later than 10 days after the end of each calendar quarter the
information described below with respect to transactions during the
quarter in any security in which such Access Person has, or by reason
of such transaction acquired, any direct or indirect Beneficial
Ownership in the security and with respect to any account established
by the Access Person in which securities were held during the quarter
for the direct or indirect benefit of the Access Person; provided,
however, that an Access Person shall not be required to make a report
with respect to transactions effected for or securities held in any
account over which such Access Person does not have any direct or
indirect influence or control:
(i) The date of the transaction, the name, the interest rate and
maturity date (if applicable), the number of shares and the
principal amount of the security;
(ii) The nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
(iii) The price at which the transaction was effected;
10
<PAGE>
(iv) The name of the broker, dealer or bank with or through whom the
transaction was effected and, with respect to an account
described above in this paragraph, with whom the Access Person
established the account;
(v) The date the account was established; and
(vi) The date the report is submitted.
(c) Upon commencement of employment, or, if later, at the time he or she
becomes an Access Person each such Access Person, except a
Non-Affiliated Director or a member of his or her Immediate Family,
shall provide the Legal Department with a report that discloses:
(i) The name, number of shares and principal amount of each security
in which the Access Person had any direct or indirect Beneficial
Ownership when he or she became an Access Person;
(ii) The name of any broker, dealer or bank with which the Access
Person maintained an account in which securities were held for
the direct or indirect benefit of the Access Person as of the
date he or she became an Access Person; and
(iii) The date of the report.
Annually thereafter, each Access Person, except a Non-Affiliated
Director or a member of his or her Immediate Family, shall provide the
Legal Department with a report that discloses the following
information (current as of a date no more than 30 days before the
report is submitted):
(i) The name, number of shares and principal amount of each security
in which the Access Person had any direct or indirect Beneficial
Ownership;
(ii) The name of any broker, dealer or bank with which the Access
Person maintains an account in which securities were held for the
direct or indirect benefit of the Access Person; and
11
<PAGE>
(iii) The date the report is submitted.
However, an Access Person shall not be required to make a report with
respect to securities held in any account over which such Access
Person does not have any direct or indirect influence or control.
In addition, each Access Person, except a Non-Affiliated Director or a
member of his or her Immediate Family, shall annually certify in
writing that all transactions in any security in which such Access
Person has, or by reason of such transaction has acquired, any direct
or indirect Beneficial Ownership have been reported to the Legal
Department. If an Access Person had no transactions during the year,
such Access Person shall so advise the Legal Department.
(d) A Non-Affiliated Director or a member of his or her Immediate Family
need only report a transaction in a security if such director, at the
time of that transaction, knew or, in the ordinary course of
fulfilling his or her official duties as a director, should have known
that, during the 15-day period immediately preceding the date of the
transaction by the director, such security was purchased or sold by an
Advisory Client or was being considered for purchase or sale by an
Advisory Client.
(e) In connection with a report, recommendation or decision of an Access
Person to purchase or sell a security, the Companies may, in their
discretion, require such Access Person to disclose his or her direct
or indirect Beneficial Ownership of such security. Any such report may
contain a statement that the report shall not be construed as an
admission by the person making such report that he or she has any
direct or indirect Beneficial Ownership in the security to which the
report relates.
(f) The Legal Department shall identify all Access Persons who are
required to make reports under this section and shall notify those
persons of their reporting obligations hereunder. The Legal Department
shall review, or determine other appropriate personnel to review, the
reports submitted under this section.
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7. Reports to Board
----------------
At least annually, each Fund, WRIMCO and W&R shall provide the Fund's board
of directors, and the board of directors shall consider, a written report
that:
(a) Describes any issues arising under this Code or the related procedures
instituted to prevent violation of this Code since the last report to
the board of directors, including, but not limited to, information
about material violations of this Code or such procedures and
sanctions imposed in response to such violations; and
(b) Certifies that the Fund, WRIMCO and W&R, as applicable, has adopted
procedures reasonably necessary to prevent Access Persons from
violating this Code.
In addition to the written report otherwise required by this section,
all material violations of this Code and any sanctions imposed with
respect thereto shall be periodically reported to the board of
directors of the Fund with respect to whose securities the violation
occurred.
8. Confidentiality of Transactions and Information
-----------------------------------------------
Every Access Person shall treat as confidential information the fact that a
security is being considered for purchase or sale by an Advisory Client,
the contents of any research report, recommendation or decision, whether at
the preliminary or final level, and the holdings of an Advisory Client and
shall not disclose any such confidential information without prior consent
from the Legal Department. Notwithstanding the foregoing, with respect to a
Fund, the holdings of the Fund shall not be considered confidential after
such holdings by the Fund have been disclosed in a public report to
shareholders or to the Securities and Exchange Commission.
Access Persons shall not disclose any such confidential information to any
person except those employees and directors who need such information to
carry out the duties of their position with the Companies.
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9. Sanctions
---------
Upon discovering a violation of this Code, the Companies may impose such
sanctions as it deems appropriate, including, without limitation, a letter
of censure or suspension or termination of the employment of the violator.
10. Certification of Compliance
---------------------------
Each Access Person, except a Non-Affiliated Director and members of his or
her Immediate Family, shall annually certify that he or she has read and
understands this Code and recognizes that he or she is subject hereto.
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Appendix A to the Code of Ethics
"Beneficial Ownership"
For purposes of this Code, "Beneficial Ownership" is interpreted in the same
manner as it would be under Rule 16a-1(a)(2) of the Securities Exchange Act of
1934 in determining whether a person is the beneficial owner of a security for
purposes of Section 16 of the Securities Exchange Act of 1934. In general, a
"beneficial owner" of a security is any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise, has
or shares any direct or indirect pecuniary interest in the security. The
Companies will interpret Beneficial Ownership in a broad sense.
The existence of Beneficial Ownership is clear in certain situations, such as:
securities held in street name by brokers for an Access Person's account, bearer
securities held by an Access Person, securities held by custodians, pledged
securities, and securities held by relatives or others for an Access Person. An
Access Person is also considered the beneficial owner of securities held by
certain family members. The SEC has indicated that an individual is considered
the beneficial owner of securities owned by such individual's Immediate Family.
The relative's ownership of the securities may be direct (i.e., in the name of
the relative) or indirect.
An Access Person is deemed to have Beneficial Ownership of securities owned by a
trust of which the Access Person is the settlor, trustee or beneficiary,
securities owned by an estate of which the Access Person is the executor or
administrator, legatee or beneficiary, securities owned by a partnership of
which the Access Person is a partner, and securities of a corporation of which
the Access Person is a director, officer or shareholder.
An Access Person must comply with the provisions of this Code with respect to
all securities in which such Access Person has a Beneficial Ownership. If an
Access Person is in doubt as to whether she or he has a Beneficial Ownership
interest in a security, the Access Person should report the ownership interest
to the Legal Department. An Access Person may disclaim Beneficial Ownership as
to any security on required reports.
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APPENDIX B
POLICY STATEMENT ON INSIDER TRADING
December 8, 1994
I. Prohibition on Insider Trading
------------------------------
All employees, officers, directors and other persons associated with
the Companies as a term of their employment or association are forbidden to
misuse in violation of Federal securities laws or other applicable laws material
nonpublic information.
This prohibition covers transactions for one's own benefit and also for
the benefit of or on behalf of others, including the investment
companies in the United Group of Mutual Funds, Waddell & Reed Funds,
Inc. and Target/United Funds, Inc. (the "Funds") or other
investment Advisory Clients. The prohibition also covers the unlawful
dissemination of such information to others. Such conduct is frequently
referred to as "insider trading". The policy of the Companies applies
to every officer, director, employee and associated person of the
Companies and extends to activities within and outside their duties at
the Companies. The prohibition is in addition to the other policies and
requirements under the Companies' Code of Ethics and other policies
issued from time to time. It applies to transactions in any securities,
including publicly traded securities of affiliated companies (e.g.,
Waddell & Reed Financial, Inc.(1))
This Policy Statement is intended to inform personnel of the issues so
as to enable them to avoid taking action that may be unlawful or to
seek clearance and guidance from the Legal Department when in doubt. It
is not the purpose of this Policy Statement to give precise and
definitive rules which will relate to every situation, but rather to
furnish enough information so that subject persons may avoid
unintentional violations and seek guidance when necessary.
- --------
(1)Reporting transactions in affiliated corporation securities is in addition to
and does not replace the obligation of certain senior officers to file reports
with the Securities and Exchange Commission.
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All employees, officers and directors of the Companies will be
furnished with or have access to a copy of this Policy Statement. Any
questions regarding the policies or procedures described herein should
be referred to the Legal Department. To the extent that inquiry of
employees reveals that this Policy Statement is not self-explanatory or
is likely to be substantively misunderstood, appropriate personnel will
conduct individual or group meetings from time to time to assure that
policies and procedures described herein are understood.
The term "insider trading" is not defined in the Federal securities
laws, but generally is used to refer to the use of material nonpublic
information to trade in securities (whether or not one is an "insider")
or to communications of material nonpublic information to others. In
addition, there is no definitive and precise law as to what constitutes
material nonpublic information or its unlawful use. The law in these
areas has been developed through court decisions primarily interpreting
basic anti-fraud provisions of the Federal securities laws. There is no
statutory definition, only statutory sanctions and procedural
requirements.
While the law concerning insider trading is not static, it is generally
understood that the law is as follows:
(a) It is unlawful for any person, directly or indirectly, to
purchase, sell or cause the purchase or sale of any security,
either personally or on behalf of or for the benefit of others,
while in the possession of material, nonpublic information
relating thereto, if such person knows or recklessly disregards
that such information has been obtained wrongfully, or that such
purchase or sale would constitute a wrongful use of such
information. The law relates to trading by an insider while in
possession of material nonpublic information or trading by a
non-insider while in possession of material nonpublic
information, where the information either was disclosed to the
non-insider in violation of an insider's duty to keep it
confidential or was misappropriated.
(b) It is unlawful for any person involved in any transaction which
would violate the foregoing to communicate material nonpublic
information to others (or initiate a chain of communication to
others) who purchase or sell the subject security if such sale or
purchase is reasonably foreseeable.
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The major elements of insider trading and the penalties for such
unlawful conduct are discussed below. If, after reviewing this Policy
Statement, you have any questions, you should consult the Legal
Department.
1. Who is an Insider? The concept of "insider" is broad. It includes
officers, directors and employees of the company in possession of
nonpublic information. In addition, a person can be a "temporary
insider" if he or she enters into a special confidential
relationship in the conduct of the company's affairs and as a
result is given access to information solely for the company's
purposes. A temporary insider can include, among others, a
company's attorneys, accountants, consultants, bank lending
officers, and certain of the employees of such organizations. In
addition, the Companies may become a temporary insider of a
company it advises or for which it performs services.
2. What is Material Information? Trading on inside information is
not a basis for liability unless the information is material.
"Material information" includes information that a reasonable
investor would be likely to consider important in making an
investment decision, information that is reasonably certain to
have a substantial effect on the price of a company's securities
if publicly known, or information which would significantly alter
the total mix of information available to shareholders of a
company. Information that one may consider material includes
information regarding dividends, earnings, estimates of earnings,
changes in previously released earnings estimates, merger or
acquisition proposals or agreements, major litigation,
liquidation problems, new products or discoveries and
extraordinary management developments. Material information is
not just information that emanates from the issuer of the
security, but includes market information such as the intent of
someone to commence a tender offer for the securities, a
favorable or critical article in an important financial
publication or information relating to a Fund's buying program.
3. What is Nonpublic Information? Information is nonpublic until it
has been effectively communicated to the marketplace and is
available to investors generally. One must be able to point to
some fact to show that the
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information is generally public. For example, information found
in a report filed with the SEC, or appearing in The Wall Street
Journal or other publications of general circulation would be
considered public.
4. When is a Person in Possession of Information? Once a person has
possession of material nonpublic information, he or she may not
buy or sell the subject security, even though the person is
prompted by entirely different reasons to make the transaction,
if such person knows or recklessly disregards that such
information was wrongfully obtained or will be wrongfully used.
Advisory personnel's normal analytical conclusions, no matter how
thorough and convincing, can temporarily be of no use if the
analyst has material nonpublic information, which he knows or
recklessly disregards is information which was wrongfully
obtained or would be wrongfully used.
5. When Is Information Wrongfully Obtained or Wrongfully Used?
Wrongfully obtained connotes the idea of gaining the information
from some unlawful activity such as theft, bribery or industrial
espionage. It is not necessary that the subject person gained the
information through his or her own actions. Wrongfully obtained
includes information gained from another person with knowledge
that the information was so obtained or with reckless disregard
that the information was so obtained. Wrongful use of information
concerns circumstances where the person gained the information
properly, often to be used properly, but instead using it in
violation of some express or implied duty of confidentiality. An
example would be the personal use of information concerning
Funds' trades. The employee may need to know a Fund's pending
transaction and may even have directed it, but it would be
unlawful to use this information in his or her own transaction or
to reveal it to someone he or she believes may personally use it.
6. When Is Communicating Information (Tipping) Unlawful? It is
unlawful for a person who, although not trading himself or
herself, communicates material nonpublic information to those who
make an unlawful transaction if the transaction is reasonably
foreseeable. The reason for tipping the information is not
relevant. The tipper's motivation is not of concern, but
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it is relevant whether the tipper knew the information was
unlawfully obtained or was being unlawfully used. For example, if
an employee tips a friend about a large pending trade of a Fund,
why he or she did so is not relevant, but it is relevant that he
or she had a duty not to communicate such information. It is
unlawful for a tippee to trade while in possession of material
nonpublic information if he or she knew or recklessly ignored
that the information was wrongfully obtained or wrongfully
communicated to him or her directly or through a chain of
communicators.
II. Penalties for Insider Trading
-----------------------------
Penalties for unlawful trading or communication of material nonpublic
information are severe, both for individuals involved in such unlawful
conduct and their employers. A person can be subject to some or all the
penalties below even if he or she does not personally benefit from the
violation. Penalties include civil injunctions, treble damages,
disgorgement of profits, jail sentences, fines for the person who
committed the violation and fines for the employer or other controlling
person. In addition, any violation of this Policy Statement can be
expected to result in serious sanctions by any or all of the Companies,
including, but not limited to, dismissal of the persons involved.
III. Monitoring of Insider Trading
-----------------------------
The following are some of the procedures which have been established to
aid the officers, directors and employees of the Companies in avoiding
insider trading, and to aid the Companies in preventing, detecting and
imposing sanctions against insider trading. Every officer, director and
employee of the Companies must follow these procedures or risk serious
sanctions, including dismissal, substantial liability and criminal
penalties. If you have any questions about these procedures, you should
consult the Legal Department.
A. Identifying Inside Information
------------------------------
Before trading for yourself or others in the securities of a
company about which you may have potential inside information,
ask yourself the following questions:
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(1) Is the information material? Is this information that an
investor would consider important in making his or her
investment decisions? Is this information that would
substantially affect the market price of securities if
generally disclosed?
(2) Is the information nonpublic? To whom has this information
been provided? Has the information been effectively
communicated to the marketplace by being published in a
publication of general circulation?
(3) Do you know or have any reason to believe the information
was wrongfully obtained or may be wrongfully used?
If after consideration of the above, you believe that the
information is material and nonpublic and may have been
wrongfully obtained or may be wrongfully used, or if you have
questions as to whether the information is material or nonpublic
or may have been wrongfully obtained or may be wrongfully used,
you should take the following steps:
(1) Report the matter immediately to the Legal Department.
(2) Do not purchase or sell the securities on behalf of
yourself or others.
As Revised September 1, 1999, and
As Revised February 9, 2000
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