File No. 2-77329
File No. 811-3458
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ______
Post-Effective Amendment No. 25
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 22
UNITED GOVERNMENT SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Overland Park, Kansas City 66202-4200
- --------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
__X__ on June 30, 1999 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
================================================================================
DECLARATION REQUIRED BY RULE 24f-2 (a)(1)
<PAGE>
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 March 31, 1999 was filed on or about June 25,
1999.
<PAGE>
June 30, 1999
P R O S P E C T U S
[waddell logo]
WADDELL
& REED
Financial Services
United
Government
Securities
Fund, Inc.
This Fund seeks to provide as high a current income as is
consistent with safety of principal by investing in a portfolio of
debt securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. Neither the United States, nor any
agency of the United States, has guaranteed, sponsored or
approved the Fund or its shares.
The Securities and Exchange Commission has not approved or disapproved the
Fund's securities, or determined whether this Prospectus is accurate or
adequate. It is a criminal offense to state otherwise.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AN OVERVIEW OF THE FUND 3
- ----------------------------------------------------
PERFORMANCE 4
- ----------------------------------------------------
FEES AND EXPENSES 6
- ----------------------------------------------------
THE INVESTMENT PRINCIPLES OF THE FUND 7
- ----------------------------------------------------
Investment Goals Principal Strategies
and Other Investments 7
--------------------------------------------------
Risk Considerations of Principal
Strategies and Other Investments 8
--------------------------------------------------
Year 2000 Issue 8
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YOUR ACCOUNT 10
- ----------------------------------------------------
Choosing a Share Class 10
- ----------------------------------------------------
Sales Charge Reductions and
Waivers 11
--------------------------------------------------
Waivers for Certain Investors 11
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Ways to Set Up Your Account 12
- ----------------------------------------------------
Buying Shares 14
- ----------------------------------------------------
Minimum Investments 16
- ----------------------------------------------------
Adding to Your Account 16
- ----------------------------------------------------
Selling Shares 17
- ----------------------------------------------------
Telephone Transactions 20
- ----------------------------------------------------
Shareholder Services 20
- ----------------------------------------------------
Personal Service 20
--------------------------------------------------
Reports 21
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Exchanges 21
--------------------------------------------------
Automatic Transactions for Class A
Shareholders 21
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Distributions and Taxes 22
- ----------------------------------------------------
Distributions 22
--------------------------------------------------
Taxes 23
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THE MANAGEMENT OF THE FUND 25
- ----------------------------------------------------
Portfolio Management 25
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Management Fee 25
--------------------------------------------------
FINANCIAL HIGHLIGHTS 27
- ----------------------------------------------------
</TABLE>
<PAGE>
An
Overview
of the
Fund
[picture of column top]
Goal
United Government Securities Fund, Inc. (the "Fund") seeks as high a current
income as is consistent with safety of principal.
Principal Strategies
The Fund seeks to achieve its goal by investing primarily in debt securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government securities"). The Fund invests in a
diversified portfolio of U.S. Government securities, including treasury issues
and mortgage-backed securities. The Fund has no limitations on the range of
maturities of the debt securities in which it may invest. Not all U.S.
Government securities are backed by the full faith and credit of the United
States.
Principal Risks of Investing in the Fund
Because the Fund owns different types of fixed-income instruments, a variety of
factors can affect its investment performance, such as:
- - an increase in interest rates, which can cause the value of the Fund's
fixed-income securities to decline;
- - adverse bond and stock 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;
- - prepayment of higher-yielding bonds and mortgage-backed securities; and
- - the skill of Waddell & Reed Investment Management Company ("WRIMCO"), the
Fund's investment manager, in evaluating and selecting securities for the
Fund.
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
The Fund is designed for investors who seek current income and the relative
security of investing in U.S. Government securities. You should consider
whether the Fund fits your particular investment objectives.
3
<PAGE>
Performance
[picture of column top]
The chart and table below provide some indication of the risks of investing in
the Fund by showing changes in the Fund's performance from year to year and by
showing how the Fund's average annual returns for 1, 5 and 10 years compare with
those of a broad measure of market performance.
- - The chart presents the total annual returns for Class A and shows how
performance has varied from year to year over the past ten years.
- - The chart does not reflect any sales charge that you may be required to pay
upon purchase of the Fund's Class A shares. If the sales charge were
included, the returns would be less than those shown.
- - The table shows Class A and Class Y average annual returns and compares them
to the market indicators listed.
- - Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does
not necessarily indicate how it will perform in the future.
Note that the performance information in the chart and table is based on
calendar-year periods, while the information shown in the Financial Highlights
section of this Prospectus and in the Fund's shareholder reports is based on
the Fund's fiscal year.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
[start of bar chart]
'89 11.69%
'90 7.27%
'91 16.07%
'92 7.54%
'93 9.99%
'94 -3.88%
'95 19.30%
'96 1.77%
'97 9.16%
'98 7.49%
[end of bar chart]
In the period shown in the chart, the highest quarterly return was 6.84% (the
second quarter of 1990) and the lowest quarterly return was -3.32% (the first
quarter of 1994). The Class A return for the quarter ended March 31, 1999 was
- -0.28%.
4
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Life of Class*
<S> <C> <C> <C> <C>
Class A Shares of the
Fund 2.92% 5.57% 7.99%
Salomon Brothers
Treasury/ Government
Sponsored/ Mortgage
Bond Index 8.76% 7.20% 9.18% 8.05%
Lipper General U. S.
Government Fund
Universe Average 8.05% 6.14% 8.19% 7.12%
Class Y Shares of the
Fund 7.75% 7.64%
Salomon Brothers
Treasury/ Government
Sponsored/ Mortgage
Bond Index 8.76% 7.20% 9.18% 8.05%
Lipper General U. S.
Government Fund
Universe Average 8.05% 6.14% 8.19% 7.12%
</TABLE>
The index shown is a broad-based, securities market index that is unmanaged.
The Lipper average is a composite of mutual funds with goals similar to the
goal of the Fund.
*Since September 27, 1995 for Class Y shares. Because the Class commenced
operations on a date other than at the end of a month, and partial month
calculations of the performance of the indexes (including income) are not
available, investment in the indexes reflect performance from October 1, 1995.
5
<PAGE>
[picture of column top]
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid directly from Class A Class Y
your investment) Shares Shares
<S> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases
(as a percentage of offering price) 4.25% None
Maximum Deferred Sales Charge (Load)
(as a percentage of amount invested) None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees(1) 0.50% 0.50%
Distribution and Service (12b-1) Fees(2) 0.25% None
Other Expenses 0.32% 0.27%
Total Annual Fund Operating Expenses 1.07% 0.77%
</TABLE>
1 Management Fees and Total Annual Fund Operating Expenses have been restated
to reflect the change in management fees effective June 30, 1999; otherwise,
expense ratios are based on Fund-level expenses for the fiscal year ended
March 31, 1999. Actual expenses may be greater or lesser than those shown.
2 It is possible that long-term Class A shareholders of the Fund may bear 12b-1
distribution fees that are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc.
Example
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular Class A or Class Y shares
for each time period specified, (b) your investment has a 5% return each year,
and (c) the expenses remain the same. Although your actual costs may be higher
or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
Class A Class Y
<S> <C> <C>
1 year $ 529 $ 79
3 years $ 751 $246
5 years $ 990 $428
10 years $1,675 $954
</TABLE>
Your costs would be the same whether or not you redeemed your shares at the end
of each time period.
6
<PAGE>
The
Investment
Principles of
the Fund
[picture of column top]
Investment Goal, Principal Strategies and
Other Investments
The goal of the Fund is high current income consistent with safety of
principal. The Fund seeks to achieve its goal by investing primarily in a
diversified portfolio of U.S. Government securities. U.S. Government securities
are high-quality instruments issued or guaranteed as to principal or interest
by the U.S. Treasury or by an agency or instrumentality of the U.S. Government.
There is no guarantee that the Fund will achieve its goal.
Not all U.S. Government securities are backed by the full faith and credit of
the United States. Some are backed by the right of the issuer to borrow from
the U.S. Treasury; others are backed by discretionary authority of the U.S.
Government to purchase the agency's obligations, while others are supported
only by the credit of the instrumentality. In the case of securities not backed
by the full faith and credit of the United States, the investor must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. The Fund may invest a significant portion of its assets in
mortgage-backed securities guaranteed by the U.S. Government or one of its
agencies or instrumentalities. The Fund invests in securities of agencies or
instrumentalities only when WRIMCO is satisfied that the credit risk is
acceptable.
WRIMCO may look at a number of factors in selecting securities to buy and sell
in the Fund's portfolio. These include:
- - the security's current coupon;
- - the relative value of the security; and
- - the credit worthiness of the particular issuer (if not backed by the full
faith and credit of the U.S. Treasury).
When WRIMCO believes that a temporary defensive position is desirable, the Fund
may increase its investments in U.S. Treasury securities and/or its cash
position. Taking a defensive position may reduce the Fund's yield.
The Fund may also invest in other types of investments and use certain other
instruments in seeking to achieve
7
<PAGE>
the Fund's goal. For example, the Fund may also invest in options, futures
contracts, asset-backed securities and other derivative instruments if the
return on, or value of, the derivative is based on the return on, or value of,
U.S. Government securities. You will find more information in the Statement of
Additional Information ("SAI") about the Fund's permitted investments and
strategies, as well the restrictions that apply to them.
Risk Considerations of Principal Strategies and Other Investments
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk.
- - 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 the Fund will likely
change as well.
- - Financial risk is based on the financial situation of the issuer of the
security. The financial risk of the Fund depends on the credit quality of the
underlying securities in which it invests.
- - 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.
Because the Fund owns different types of investments, its performance will be
affected by a variety of factors. In general, the value of the 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.
Year 2000 Issue
Like other mutual funds, financial and business organizations and individuals
around the world, the 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
8
<PAGE>
to obtain assurances that comparable steps are being taken by the Fund's other,
major service providers. Although there can be no assurances, WRIMCO believes
these steps will be sufficient to avoid any adverse impact on the Fund.
Similarly, the issuers in whose securities the 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 the Fund.
9
<PAGE>
Your Account
[picture of column top]
Choosing a Share Class
This Prospectus offers two classes of shares of the Fund: Class A and Class Y.
Each class has its own sales charge, if any, and expense structure. You should
choose the class for which you are eligible and that seems best for you, which
usually depends on how much you plan to invest and how long you plan to hold
your shares. Class A shares are available for both individual and institutional
investors. Class Y shares are designed for institutional investors and others
investing through certain intermediaries, as described below. All of your
future investments in the 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 the future investment.
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 higher than those for Class Y.
For Class A shares, the Fund has adopted a Distribution and Service Plan
("Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
the Plan, the 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 services to Class A shareholders or
maintaining Class A shareholder accounts. Because the Plan fees are paid out of
the Class A assets 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.
10
<PAGE>
<TABLE>
<CAPTION>
Sales Charge as Sales Charge as
Percent of Approx. Percent of
Size of Purchase Offering Price Amount Invested
<S> <C> <C>
Under $100,000 4.25% 4.44%
$100,000 to less than
$300,000 3.25 3.36
$300,000 to less than
$500,000 2.50 2.56
$500,000 to less than
$1,000,000 1.75 1.78
$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:
- - 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 NAV of Class A
shares already held ("Rights of Accumulation");
- - Grouping all purchases of Class A shares made during a thirteen-month period
("Statement of Intention"); and
- - 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:
- - The Directors and officers of the Fund, 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;
- - Certain retirement plans and certain trusts for these persons; and
- - 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.
11
<PAGE>
Class Y shares are not subject to a sales charge or annual 12b-1 fees and thus
may cost you less than if you had bought Class A shares. Class Y shares are
only available for purchase by:
- - participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401, including 401(k) plans, of the
Internal Revenue Code of 1986, as amended (the "Code"), when the plan has 100
or more eligible employees and holds the shares in an omnibus account on the
Fund's records;
- - banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an omnibus
account on the Fund's records;
- - government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more; and
- - certain retirement plans and trusts for employees and financial advisors of
Waddell & Reed, Inc. and its affiliates.
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).
Business or Organization
For investment needs of corporations, associations, partnerships, institutions
or other groups
Retirement
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 may be
tax deductible.
- - Individual Retirement Accounts (IRAs) allow an individual under 701/2, with
earned income, to invest up to $2,000 per tax year. The maximum annual
contribution for an investor and his or her spouse is $4,000 ($2,000 for each
spouse) or, if less, the couple's combined earned income for the taxable
year.
- - Rollover IRAs retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
12
<PAGE>
- - Roth IRAs allow certain individuals to make non-deductible 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.
- - Education IRAs are established for the benefit of a minor, with
non-deductible contributions, and permit withdrawals to pay the higher
education expenses of the beneficiary.
- - 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.
- - Savings Incentive Match Plans for Employees (SIMPLE Plans) can be established
by small employers to contribute to their employees' retirement accounts and
involve fewer administrative requirements than 401(k) or other qualified
plans generally.
- - Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves up to 25% of their annual earned income, with a
maximum of $30,000 per year.
- - 401(k) Programs allow employees of corporations and non-governmental
tax-exempt organizations of all sizes to contribute a percentage of their
wages on a tax-deferred basis. These accounts need to be established by the
administrator or trustee of the plan.
- - 403(b) Custodial Accounts are available to employees of public school systems
or certain types of charitable organizations.
- - 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform 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.
13
<PAGE>
Buying Shares
You may buy shares of the Fund 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 Class A and Class Y 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 1-800-366-5465, 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. 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 the 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 to buy Class Y shares.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a share (price to buy one share of a particular class) is
the Fund's net asset value ("NAV") per share of that class, plus for Class A
shares the sales charge shown in the table above.
In the calculation of the Fund's NAV:
- - The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
- - Bonds are generally valued according to prices quoted by an independent
pricing service.
- - Short-term debt securities are valued at amortized cost, which approximates
market value.
- - Other investment assets for which market prices are unavailable are valued at
their fair value by or at the direction of the Board of Directors.
The Fund is open for business each day the New York Stock Exchange (the "NYSE")
is open. The Fund normally calculates the NAVs of its shares as of the close of
business of the NYSE,
14
<PAGE>
normally 4 p.m. Eastern time, except that an option or futures contract held by
the Fund may be priced at the close of the regular session of any other
securities or commodities exchange on which that instrument is traded.
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:
- - Orders are accepted only at the home office of Waddell & Reed, Inc.
- - All of your purchases must be made in U.S. dollars.
- - If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
- - The Fund does not issue certificates representing Class Y shares of the Fund.
- - If you purchase Class Y shares of the 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 Fund reserve the right to
discontinue offering Fund shares for purchase.
15
<PAGE>
Minimum Investments
<TABLE>
<CAPTION>
For Class A:
To Open an Account $500
<S> <C>
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
For certain exchanges $100
For Automatic Investment Service $ 25
<CAPTION>
For Class Y:
To Open an Account
<S> <C>
$10 million
For a government entity or authorit y (within first
or for a corporation: twelve months)
For other investors: Any amount
To Add to an Account Any amount
</TABLE>
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed, Inc. Mail
the check along with:
- - the detachable form that accompanies the confirmation of a prior purchase or
your year-to-date statement; or
- - a letter stating your account number, the account registration and that you
wish to purchase Class A or Class Y shares of the Fund.
Mail to Waddell & Reed, Inc. at:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
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,
16
<PAGE>
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) is the
Fund's NAV per share of that class.
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:
- - the name on the account registration;
- - the Fund's name;
- - the Fund account number;
- - the dollar amount or number, and the class, of shares to be redeemed; and
- - any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.
To sell shares by check: If you have elected this method in your application or
by subsequent authorization, the Fund will provide you with forms of checks
drawn on UMB Bank, n.a. (the "Bank"). You may make these checks payable to the
order of any payee in any amount of $250 or more.
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 pre-designated bank account or by check
to you at the address on the account.
17
<PAGE>
When you place an order to sell shares, your shares will be sold at the next
NAV calculated after receipt of a written request for redemption in good order
by Waddell & Reed, Inc. at its home office. Note the following:
- - If more than one person owns the shares, each owner must sign the written
request.
- - If you hold a certificate, it must be properly endorsed and sent to the Fund.
- - If you recently purchased the shares by check, the Fund may delay payment of
redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance that
the check has cleared and been honored. If you do not, payment of the
redemption proceeds on these shares will be delayed until the earlier of 10
days or the date the Fund can verify that your purchase check has cleared and
been honored.
- - Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the Securities and Exchange Commission.
- - Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
- - There is an initial charge of $10 for establishing the check writing
privilege, but there are no additional charges for the maintenance of the
privilege or for processing checks.
- - The check writing privilege is not available for shares represented by
certificates or for retirement plan accounts.
- - If you have elected the check writing privilege, the Bank will request that
the Fund redeem a sufficient number of full and fractional shares in your
account to cover the amount of the check when a check is presented to the
Bank for payment. You will continue to receive dividends on those shares
equaling the amount being redeemed until such time as the check is presented
to the Bank for payment. No "stop-payment" order can be placed against the
checks. Checks may be dishonored if shares were recently purchased as
discussed above or if the NAV per share has declined so that there are
insufficient shares to be redeemed to cover the amount of the check.
- - As with any redemption of shares, redemption by check writing will, for
Federal income tax purposes, result in a capital gain or loss on shares
redeemed.
18
<PAGE>
- - If you purchased Class Y shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms, some
of which may charge you a fee and may have additional requirements to sell
Fund shares. The Fund will be deemed to have received your order to sell
Class Y shares when that firm (or its designee) has received your order. Your
order will receive the Class Y NAV next calculated after the order has been
received in proper form by the authorized firm (or its designee). You should
consult that firm to determine the time by which it must receive your order
for you to sell Class Y shares at that day's price.
Special Requirements for Selling Shares
<TABLE>
<CAPTION>
Account Type Special Requirements
<S> <C>
Individual or Joint The written instructions must be signed by all
Tenant 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 Organization At least one person authorized by corporate
resolution to act on the account must sign the
written instructions.
Conservator, Guardian The written instructions must be signed by the
or Other Fiduciary person properly authorized by court order to act in
the particular fiduciary capacity.
</TABLE>
The Fund may require a signature guarantee in certain situations such as:
- - a redemption request made by a corporation, partnership or fiduciary;
- - a redemption request made by someone other than the owner of record; or
- - the check is made payable to someone other than the owner of record.
This requirement is intended 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.
19
<PAGE>
The Fund reserves the right to redeem at NAV all your Fund shares 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
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 the
Fund.
Payments of principal and interest on loans made pursuant to Waddell & Reed's
401(k) prototype 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.
Telephone Transactions
The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the 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.
Personal Service
Your local Waddell & Reed financial advisor is available to provide personal
service. Additionally, one toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or TeleWaddell, 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 TeleWaddell from a touch-tone
phone to:
- - obtain information about your accounts;
- - obtain price information about other funds in the United Group; or
20
<PAGE>
- - request duplicate statements and reorder checks.
Reports
Statements and reports sent to you include the following:
- - confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange,
transfer or redemption)
- - year-to-date statements (quarterly)
- - annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports will be mailed to your household, even if you have more than one
account with the Fund. Call the telephone number listed above for Customer
Service if you need copies of annual or semiannual reports or account
information.
Exchanges
You may sell your shares and buy shares of the same class of other funds in the
United Group. As well, exchanging Class Y shareholders may buy Class A shares
of United Cash Management, Inc.
You may exchange any Class A shares of the Fund that you have held for at least
six months and any Class A shares of the Fund acquired by reinvestment of a
dividend or distribution for Class A shares of any other fund in the United
Group. You may exchange any Class A shares of the Fund that you have held for
less than six months only for Class A shares of United Municipal Bond Fund,
Inc. or United Municipal High Income Fund, Inc.
You may exchange only into funds that are legally permitted for sale in your
state of residence. Note that exchanges out of the Fund may have tax
consequences for you. Before exchanging into a fund, read its prospectus.
The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
Automatic Transactions for Class A 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
automatically. While Regular Investment Plans do not guarantee a profit and
will not protect you against loss in a
21
<PAGE>
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.
<TABLE>
<CAPTION>
Regular Investment Plans
<S> <C>
Automatic Investment Service
To move money from your bank account to an existing Class A Fund account
Minimum Frequency
$25 Monthly
Funds Plus Service
To move money from United Cash Management, Inc. to the Fund whether in the same
or a different Class A account
Minimum Frequency
$100 Monthly
</TABLE>
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Usually the Fund distributes net
investment income monthly on the 27th day of each month or on the last business
day prior to the 27th if the 27th falls on a weekend or holiday. Dividends
declared for a particular day are paid to shareholders of record on the prior
business day. However, dividends declared for Saturday and Sunday are paid to
shareholders of record on the preceding Thursday. When shares are redeemed, any
declared but unpaid dividends on those shares will be paid with the next
regular dividend payment and not at the time of redemption. Net capital gains
usually are distributed in December.
Distribution Options. When you open an account, specify on your application how
you want to receive your distributions. The 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 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,
but you will be sent a check for each dividend distribution; however, if
the dividend distribution is
22
<PAGE>
less than ten 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 ten
dollars. If the total distribution is less than ten 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 Fund
shares.
Taxes
As with any investment, you should consider how your investment in the 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 the 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 the 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 (if you are a noncorporate shareholder of the
Fund) may be taxable at different rates depending on how long the Fund held the
assets generating the gains, but generally are taxed at a maximum rate of 20%.
The 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.
No portion of the dividends paid by the Fund will be eligible for the
dividends-received deduction allowed to corporations.
Withholding. The Fund must withhold 31% of all dividends, capital gains
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 and capital
gains distributions also is required for shareholders subject to backup
withholding.
Taxes on transactions. Your redemption of Fund shares will result in taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than what you paid for the
23
<PAGE>
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 Class A Fund 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 Class A Fund shares
would be increased, or loss decreased, by the amount of the sales charge you
paid when those shares were acquired, and that amount will increase the
adjusted basis of the shares subsequently acquired. In addition, if you
purchase Fund shares within thirty days before or after redeeming other Fund
shares (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 the Fund
attributable to interest earned on its U.S. Government securities generally is
not subject to state and local income taxes, although distributions by the 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 Fund in your state
and locality.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the 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.
24
<PAGE>
The Management
of the Fund
[picture of top of column]
Portfolio Management
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
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
inception of the company. WRIMCO is located at 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
James C. Cusser is primarily responsible for the management of the portfolio of
the Fund. Mr. Cusser has held his Fund responsibilities since January 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. Mr.
Cusser has served as the portfolio manager for investment companies managed by
WRIMCO and has been an employee of WRIMCO since August 1992.
Other members of WRIMCO's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to the Fund's investments.
Management Fee
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained in the SAI.
The management fee is payable by the Fund at the annual rates of: 0.50% of net
assets up to $500 million, 0.45% of net assets over $500 million and up to $1
billion, 0.40% of net assets over $1 billion and up to $1.5 billion, and 0.35%
of net assets over $1.5 billion.
25
<PAGE>
Prior to June 30, 1999, the management fee was determined on the basis of the
combined net asset values of all the funds in the United Group at the annual
rates shown in the following table and then allocated pro rata to the Fund
based on its relative net assets at the annual rates shown in the following
table:
<TABLE>
<CAPTION>
Group Fee Rate
Annual Group Net Asset Level
(all dollars in millions) Group Fee Rate For Each 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>
Management fees for the fiscal year ended March 31, 1999 were 0.39% of the
Fund's average net assets.
26
<PAGE>
Financial Highlights
The following information is to help you understand the financial performance of
the Fund's Class A* and Class Y shares for the fiscal periods shown. Certain
information reflects financial results for a single Fund share. "Total return"
shows how much your investment would have increased (or decreased) during each
period, assuming reinvestment of all dividends and distributions. This
information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended March 31, 1999, are included in the SAI, which is available upon request.
For a Class A share outstanding throughout each period.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MARCH 31,
1999 1998
<S> <C> <C>
Class A Per-Share Data
Net asset value,
beginning of period $ 5.46 $ 5.19
------------------------------------------------------------------------
Income from investment operations:
Net investment
income 0.32 0.33
Net realized and
unrealized gain (loss)
on investments (0.03) 0.27
------------------------------------------------------------------------
Total from investment
operations 0.29 0.60
------------------------------------------------------------------------
Less dividends
declared from net
investment income (0.32) (0.33)
------------------------------------------------------------------------
Net asset value, end
of period $ 5.43 $ 5.46
------------------------------------------------------------------------
Class A Ratios/Supplemental Data
Total return** 5.44% 11.84%
Net assets, end of
period (in millions) $ 134 $ 131
Ratio of expenses to
average net assets 0.96% 0.89%
Ratio of net
investment income to
average net assets 5.82% 6.14%
Portfolio turnover
rate 37.06% 35.18%
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Class A Per-Share Data
Net asset value,
beginning of period $ 5.32 $ 5.13 $ 5.23
----------------------------------------------------------------------------------------
Income from investment operations:
Net investment
income 0.33 0.34 0.32
Net realized and
unrealized gain (loss)
on investments (0.13) 0.19 (0.10)
----------------------------------------------------------------------------------------
Total from investment
operations 0.20 0.53 0.22
----------------------------------------------------------------------------------------
Less dividends
declared from net
investment income (0.33) (0.34) (0.32)
----------------------------------------------------------------------------------------
Net asset value, end
of period $ 5.19 $ 5.32 $ 5.13
----------------------------------------------------------------------------------------
Class A Ratios/Supplemental Data
Total return** 3.75% 10.48% 4.49%
Net assets, end of
period (in millions) $ 129 $ 146 $ 150
Ratio of expenses to
average net assets 0.91% 0.83% 0.82%
Ratio of net
investment income to
average net assets 6.17% 6.34% 6.30%
Portfolio turnover
rate 34.18% 63.05% 41.57%
</TABLE>
* On July 31, 1995, Fund shares outstanding were designated Class A shares.
** Total return calculated without taking into account the sales load deducted
on an initial purchase.
27
<PAGE>
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
For the
For the fiscal period
year ended March 31, from 9/27/95*
------------------------- through
1999 1998 1997 3/31/96
Class Y Per-Share Data
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 5.46 $ 5.19 $ 5.32 $ 5.33
----------------------------------------------------------------------
Income from
investment
operations:
Net investment
income 0.33 0.34 0.34 0.17
Net realized and
unrealized gain (loss)
on investments (0.03) 0.27 (0.13) (0.01)
----------------------------------------------------------------------
Total from
investment
operations 0.30 0.61 0.21 0.16
----------------------------------------------------------------------
Less dividends
declared from net
investment income (0.33) (0.34) (0.34) (0.17)
----------------------------------------------------------------------
Net asset value,end
of period $5.43 $5.46 $5.19 $5.32
----------------------------------------------------------------------
Class Y Ratios/Supplemental Data
Total return 5.71% 12.02% 3.99% 3.04%
Net assets, end of
period (in millions) $2 $2 $1 $1
Ratio of expenses to
average net assets 0.68% 0.66% 0.67% 0.60%**
Ratio of net
investment income
to average net assets 6.10% 6.37% 6.41% 6.40%**
Portfolio turnover
rate 37.06% 35.18% 34.18%** 63.05%**
</TABLE>
* Commencement of operations.
**Annualized.
28
<PAGE>
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<PAGE>
This page intentionally left blank.
<PAGE>
United
Government
Securities
Fund, Inc.
Custodian
UMB Bank, n.a.
Kansas City, Missouri
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts
Avenue, N.W.
Washington, D.C. 20036
Independent Auditors
Deloitte & Touche LLP
1010 Grand Avenue
Kansas City, Missouri
64106-2232
Investment Manager
Waddell & Reed Investment
Management Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Underwriter
Waddell & Reed, Inc.
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Shareholder Servicing Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Accounting Services Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
31
<PAGE>
[picture of top of column]
UNITED GOVERNMENT
SECURITIES FUND, INC.
You can get more information about the Fund in--
- - its Statement of Additional Information (SAI) dated June 30, 1999, which
contains detailed information about the Fund, particularly its investment
policies and practices. You may not be aware of important information about
the Fund unless you read both the Prospectus and the SAI. The current SAI is
on file with the Securities and Exchange Commission (SEC) and it is
incorporated into this Prospectus by reference (that is, the SAI is legally
part of the Prospectus).
- - its Annual and Semiannual Reports to Shareholders, which detail the Fund's
actual investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the year covered by the
report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the
Fund or Waddell & Reed, Inc. at the address and telephone number below. Copies
of the SAI, Annual and/or Semiannual reports may also be requested at
[email protected].
Information about the Fund (including its current SAI and most recent Annual
and Semiannual Reports) is available from the SEC's web site at
http://www.sec.gov and from the SEC's Public Reference Room in Washington, D.C.
You can find out about the operation of the Public Reference Room and
applicable copying charges by calling 1-800-SEC-0330.
The Fund's SEC file number is: 811-3458.
- --------------------------------------------------------------------------------
Waddell & Reed, Inc.
6300 Lamar Avenue, P. O. Box 29217
Shawnee Mission, Kansas, 66201-9217
(913) 236-2000, (800) 366-5465
NUP2011(6-99)
<PAGE>
UNITED GOVERNMENT SECURITIES FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
June 30, 1999
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus ("Prospectus")
for the Class A shares and the Class Y shares of United Government Securities
Fund, Inc. (the "Fund") dated June 30, 1999, which may be obtained from the Fund
or its underwriter, Waddell & Reed, Inc., at the address or telephone number
shown above.
TABLE OF CONTENTS
Performance Information ....................................... 2
Investment Strategies, Policies and Practices.................. 4
Investment Management and Other Services ...................... 25
Purchase, Redemption and Pricing of Shares .................... 30
Directors and Officers ........................................ 45
Payments to Shareholders ...................................... 50
Taxes ......................................................... 52
Portfolio Transactions and Brokerage .......................... 54
Other Information ............................................. 56
Financial Statements .......................................... 58
<PAGE>
United Government Securities Fund, Inc. is a mutual fund; an investment
that pools shareholders' money and invests it toward a specified goal. In
technical terms, the Fund is an open-end, diversified management company
organized as a Maryland corporation on March 26, 1982.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may, from time to
time, publish the Fund's total return, yield information and/or performance
rankings in advertisements and sales materials.
Total Return
The 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 4.25%. All dividends and distributions are assumed to be
reinvested in shares of the applicable class at net asset value for the class as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions on Class A shares. The formula used to
calculate the total return for a particular class of the Fund is
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
REV = Ending redeemable value of the $1,000 investment for
the periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares were reflected,
it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of March
31, 1999, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
With Without
Sales Load Sales Load
Deducted Deducted
One-year period from April 1, 1998 to
March 31, 1999: % %
Five-year period from April 1, 1994 to
March 31, 1999: % %
Ten-year period from April 1, 1989 to
March 31, 1999: % %
Prior to July 31, 1995, the Fund offered only one class of shares to the
public. Shares outstanding on that date were designated as Class A shares. Since
that date, Class Y shares of the Fund have been available to certain
institutional investors.
The average annual total return quotations for Class Y shares as of March
31, 1999, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
One year period from April 1, 1998 to
March 31, 1999 %
Period from September 27, 1995* to March 31, 1999:
*Date of inception.
The Fund may also quote unaveraged or cumulative total return for a class
which reflects the change in value of an investment in that class over a stated
period of time. Cumulative total returns will be calculated according to the
formula indicated above but without averaging the rate for the number of years
in the period.
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 the 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 the 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 Class A shares of the Fund computed according to the formula
for the 30-day or one month period ended on March 31, 1999, the date of the most
recent balance sheet included in this SAI, is %. The yield for Class Y shares of
the Fund computed according to the formula for the 30-day or one month period
ended on March 31, 1999, the date of the most recent balance sheet included in
this SAI, is %.
Changes in yields primarily reflect different interest rates received by
the 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
Waddell & Reed, Inc., or the Fund, also may, from time to time, publish in
advertisements and sales material performance rankings as published by
recognized independent mutual fund statistical services such as Lipper
Analytical Services, Inc., or by publications of general interest such as
Forbes, Money, The Wall Street Journal, Business Week, Barron's, Fortune or
Morningstar Mutual Fund Values. Each class of the Fund may also compare its
performance to that of other selected mutual funds or selected recognized market
indicators such as the Standard & Poor's 500 Composite Stock Price Index and the
Dow Jones Industrial Average. Performance information may be quoted numerically
or presented in a table, graph or other illustration. In connection with a
ranking, the Fund may provide additional information, such as the particular
category to which it related, the number of funds in the category, the criteria
upon which the ranking is based, and the effect of sales charges, fee waivers
and/or expense reimbursements.
All performance information that the Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of the Fund's shares when redeemed may be more or less
than their original cost.
INVESTMENT STRATEGIES POLICIES AND PRACTICES
This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and policies
the Fund's investment manager, Waddell & Reed Investment Management Company
("WRIMCO"), may employ and the types of instruments in which the Fund may
invest, in pursuit of the Fund's goal. A summary of the risks associated with
these instrument types and investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by the Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help the Fund achieve its goal. See "Investment
Restrictions" for a listing of the fundamental and non-fundamental (e.g.,
operating) investment restrictions and policies of the Fund.
Specific Securities and Investment Practices
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government securities") are high quality debt
instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date they
are issued), Treasury Notes (which have maturities of one to ten years) and
Treasury Bonds (which generally have maturities of more than 10 years). All such
Treasury securities are backed by the full faith and credit of the United
States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (formerly, the Federal National Mortgage Association), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by Fannie Mae, are supported only by
the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United States, the
owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment. The Fund will invest in securities of agencies and instrumentalities
only if WRIMCO is satisfied that the credit risk involved is acceptable.
Among the U.S. Government securities that the Fund may purchase are
"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 paragraph
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.
Mortgage-Backed and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund may invest
include mortgage-backed securities issued or guaranteed as to the payment of
principal and interest (but not as to market value) by Ginnie Mae, Fannie Mae,
or Freddie Mac. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities. Payments of principal and interest (but not the market value)
of such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or
indirectly, by the U.S. Government or one of its agencies or instrumentalities,
or they may be issued without any government guarantee of the underlying
mortgage assets but with some form of non-government credit enhancement. These
credit enhancements do not protect investors from changes in market value.
Other types of mortgage-backed securities will likely be developed in the
future, and the Fund may invest in them if WRIMCO determines they are consistent
with the Fund's goal and investment policies.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
are created when a U.S. Government agency or a financial institution separates
the interest and principal components of a mortgage-backed security and sells
them as individual securities. The holder of the "principal-only" security
("PO") receives the principal payments made by the underlying mortgage-backed
security, while the holder of the "interest-only" security ("IO") receives
interest payments from the same underlying security.
For example, interest-only ("IO") classes are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets underlying
an IO experience greater than anticipated principal prepayments, then the total
amount of interest allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is government guaranteed 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 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, 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.
Bank Deposits
The Fund may invest in deposits in banks (represented by certificates of
deposit or other evidence of deposit issued by such banks of varying maturities)
to the extent that the principal of such deposits is insured by the Federal
Deposit Insurance Corporation ("FDIC"); such deposits are referred to as
"Insured Deposits." Such insurance (and, accordingly, the Fund's investment) is
currently limited to $100,000 per bank; any interest above that amount is not
insured. Insured Deposits are not marketable and are treated as illiquid
investments unless such obligations are payable at principal amount plus accrued
interest on demand or within seven days after demand. See "Illiquid
Investments."
Lending Securities
Securities loans may be made on a short-term or long-term basis for the
purpose of increasing the Fund's income. If the Fund lends securities, the
borrower pays the Fund an amount equal to the dividends or interest on the
securities that the Fund would have received if it had not lent the securities.
The Fund also receives additional compensation. The Fund makes loans of its
securities only to parties deemed by WRIMCO to be creditworthy.
Any securities loans that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). 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 the loan is outstanding. If the market
value of the lent securities exceeds the value of the collateral, the borrower
must add more collateral so that it at least equals the market value of the
securities lent. If the market value of the securities decreases, the borrower
is entitled to return of the excess collateral.
There are two methods of receiving compensation for making loans. The first
is to receive a negotiated loan fee from the borrower. This method is available
for all three types of collateral. The second method, which is not available
when letters of credit are used as collateral, is for the Fund to receive
interest on the investment of the cash collateral or to receive interest on the
U.S. Government securities used as collateral. Part of the interest received in
either case may be shared with the borrower.
The letters of credit that the Fund may accept as collateral are agreements
by banks (other than the borrowers of the Fund's securities), entered into at
the request of the borrower and for its account and risk, under which the banks
are obligated to pay to the Fund, while the letter is in effect, amounts
demanded by the Fund if the demand meets the terms of the letter. The Fund's
right to make this demand secures the borrower's obligations to it. The terms of
any such letters and the creditworthiness of the banks providing them (which
might include the Fund's custodian bank) must be satisfactory to the Fund. Under
the Fund's current securities lending procedures, the Fund may lend securities
only to broker-dealers and financial institutions deemed creditworthy by WRIMCO.
The Fund will make loans only under rules of the New York Stock Exchange (the
"NYSE") which presently require the borrower to give the securities back to the
Fund within five business days after the Fund gives notice to do so. If the Fund
loses its voting rights on securities loaned, it will have the securities
returned to it in time to vote them if a material event affecting the investment
is to be voted on. The Fund may pay reasonable finder's, administrative and
custodian fees in connection with loans of securities.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned goes up, risks of delay in
recovering the securities loaned or even loss of rights in the collateral should
the borrower of the securities fail financially.
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.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. As a
fundamental policy, the Fund will not enter into a repurchase transaction that
will cause more than 10% of its net assets to be invested in illiquid
investments, which include repurchase agreements not terminable within seven
days. See "Illiquid Investments." A repurchase agreement is an instrument under
which the Fund purchases a security and the seller (normally a commercial bank
or broker-dealer) agrees, at the time of purchase, that it will repurchase the
security at a specified time and price. The amount by which the resale price is
greater than the purchase price reflects an agreed-upon market interest rate
effective for the period of the agreement. The return on the securities subject
to the repurchase agreement may be more or less than the return on the
repurchase agreement.
The majority of the repurchase agreements in which the Fund would engage
are overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is that the
Fund may suffer a loss if the seller fails to pay the agreed-upon amount on the
delivery date and that amount is greater than the resale price of the underlying
securities and other collateral held by the Fund. In the event of bankruptcy or
other default by the seller, there may be possible delays 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 Fund's repurchase agreements will
be structured so as to fully collateralize the loans. In other words, the value
of the underlying securities, which will be held by the Fund's custodian bank or
by a third party that qualifies as a custodian under Section 17(f) of the
Investment Company Act of 1940, as amended (the "1940 Act"), is and, during the
entire term of the agreement, will remain at least equal to the value of the
loan, including the accrued interest earned thereon. Repurchase agreements are
entered into only with those entities approved by WRIMCO on the basis of
criteria established by the Board of Directors.
When-Issued and Delayed-Delivery Transactions
The Fund may also purchase U.S. Government securities 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 U.S.
Government securities so purchased by the Fund are subject to market
fluctuation; their value may be less or more when delivered than the purchase
price paid or received. When purchasing securities on a when issued or
delayed-delivery basis, the Fund assumes the rights and risks of ownership,
including the risk of price and yield fluctuations. No interest accrues to the
Fund until delivery and payment is completed. When the Fund makes a commitment
to purchase securities on a when-issued or delayed-delivery basis, it will
record the transaction and thereafter reflect the value of the securities in
determining its net asset value per share. When the Fund sells a security on a
delayed-delivery basis, the Fund does not participate in further gains or losses
with respect to the security. When the Fund makes a commitment to sell
securities on a delayed-delivery basis, it will record the transaction and
thereafter value the securities at the sales price in determining the Fund's net
asset value per share. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity, or could suffer a loss.
Ordinarily the Fund purchases U.S. Government 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 liquid assets, 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 U.S. Government securities may,
however, be sold at or before the settlement date to pay the purchase price of
the when-issued or delayed-delivery securities.
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, or in a registered
public offering. Where registration is required, the Fund may be obligated to
pay all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
There are risks associated with investment in restricted securities in that
there can be no assurance of a ready market for resale. Also, the contractual
restrictions on resale might prevent the Fund from reselling the securities at a
time when such sale would be desirable. Restricted securities in which the Fund
seeks to invest need not be listed or admitted to trading on a foreign or
domestic exchange and may be less liquid than listed securities. Certain
restricted securities, e.g., Rule 144A securities, may be determined to be
liquid in accordance with guidelines adopted by the Board of Directors. See
"Illiquid Investments."
Illiquid Investments
Illiquid investments are investments that cannot be sold or otherwise
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Investments currently
considered to be illiquid include:
(i) repurchase agreements not terminable within seven days;
(ii) restricted securities not determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors;
(iii) securities for which market quotations are not readily available;
(iv) Insured Deposits, unless they are payable at principal amount plus
accrued interest on demand or within seven days after demand;
(v) securities involved in swap, cap, collar and floor transactions;
(vi) non-government stripped fixed-rate mortgage-backed securities and
(vii) over-the-counter ("OTC") options and their underlying collateral.
The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
If through a change in values, net assets, or other circumstances, the Fund
were in a position where more than 10% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
Indexed Securities
Indexed securities are securities the value of which varies in relation to
the value of other securities, securities indices or other financial indicators.
The Fund may invest in indexed securities only if they are issued or guaranteed
by the U.S. Government or its agencies or instrumentalities (subject to its
operating policy regarding derivative instruments).
Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity or coupon rate is determined by reference to a
specific instrument or statistic. The performance of indexed securities depends
to a great extent on the performance of the security to which they are indexed
and may also be influenced by interest rate changes in the United States. 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. Certain indexed securities that are not traded
on an established market may be deemed illiquid.
Options, Futures and Other Strategies
General. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), swaps, caps, collars, floors, indexed securities and
other derivative instruments (collectively, "Financial Instruments") to attempt
to enhance income or yield or to attempt to hedge the Fund's investments. The
strategies described below may be used in an attempt to manage risks of the
Fund's investments that can affect fluctuation in its net asset value.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Financial Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge, the Fund takes
a position in a Financial Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Financial Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to hedge
against price movements in one or more particular securities positions that the
Fund owns or intends to acquire. Financial Instruments on indices, in contrast,
generally are used to attempt to hedge against price movements in market sectors
in which the Fund has invested or expects to invest. Financial Instruments on
debt securities may be used to hedge either individual securities or broad debt
market sectors.
The use of Financial Instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several exchanges upon
which they are traded and the Commodity Futures Trading Commission (the "CFTC").
In addition, the Fund's ability to use Financial Instruments will be limited by
tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with the Fund's goal and permitted by the Fund's
investment limitations and applicable regulatory authorities. The Fund might not
use any of these strategies, and there can be no assurance that any strategy
used will succeed. The Fund's Prospectus or SAI will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general these
techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities and interest rate
markets, which requires different skills than predicting changes in the prices
of individual securities. There can be no assurance that any particular strategy
will succeed and use of Financial Instruments could result in a loss, regardless
of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Financial Instrument and price movements of the investments
being hedged. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match the Fund's current or anticipated investments exactly. The Fund may
invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Financial Instrument. Moreover, if the price of the
Financial Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties (i.e.,
Financial Instruments other than purchased options). If the Fund were unable to
close out its positions in such Financial Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time.
(5) The Fund's ability to close out a position in a Financial Instrument
prior to expiration or maturity depends on the existence of a liquid secondary
market or, in the absence of such a market, the ability and willingness of the
other party to the transaction (the "counterparty") to enter into a transaction
closing out the position. Therefore, there is no assurance that any position can
be closed out at a time and price that is favorable to the Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities or other options or futures 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.
The Fund will comply with SEC guidelines regarding cover for these instruments
and will, if the guidelines so require, set aside cash or liquid assets in an
account with its custodian in the prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover or to accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. A call option gives the purchaser the right to buy, and obligates
the writer to sell, the underlying investment at the agreed-upon price during
the option period. A put option gives the purchaser the right to sell, and
obligates the writer to buy, the underlying investment at the agreed-upon price
during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the purchase of
put options can serve as a short hedge. Writing put or call options can enable
the Fund to enhance income or yield by reason of the premiums paid by the
purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security 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 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 depreciates to a price
lower than the exercise price of the put option, it can be expected that the put
option will be exercised and the Fund will be obligated to purchase the security
at more than its market value. If the put option is an OTC option, the
securities or other assets used as cover would be considered illiquid to the
extent described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
A type of put that the Fund may purchase is an "optional delivery standby
commitment," which is entered into by parties selling debt securities to the
Fund. An optional delivery standby commitment gives the Fund the right to sell
the security back to the seller on specified terms. This right is provided as an
inducement to purchase the security.
Risks of Options on Securities. Options offer large amounts of leverage,
which will result in the Fund's net asset value being more sensitive to changes
in the value of the related instrument. The Fund may purchase or write both
exchange-traded and OTC options. Exchange-traded options in the United States
are issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the counterparty from whom it purchased the option to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the Fund
as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. There can be no assurance that the Fund will in fact be able to close
out an OTC option position at a favorable price prior to expiration. In the
event of insolvency of the counterparty, the Fund might be unable to close out
an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Options on Indices. Puts and calls on indices are similar to puts and calls
on securities or futures contracts except that all settlements are in cash and
gain or loss depends on changes in the index in question rather than on price
movements in individual securities or futures contracts. When the Fund writes a
call on an index, it receives a premium and agrees that, prior to the expiration
date, the purchaser of the call, upon exercise of the call, will receive from
the Fund an amount of cash if the closing level of the index upon which the call
is based is greater than the exercise price of the call. The amount of cash is
equal to the difference between the closing price of the index and the exercise
price of the call times a specified multiple ("multiplier"), which determines
the total dollar value for each point of such difference. When the Fund buys a
call on an index, it pays a premium and has the same rights as to such call as
are indicated above. When the Fund buys a put on an index, it pays a premium and
has the right, prior to the expiration date, to require the seller of the put,
upon the Fund's exercise of the put, to deliver to the Fund an amount of cash if
the closing level of the index upon which the put is based is less than the
exercise price of the put, which amount of cash is determined by the multiplier,
as described above for calls. When the Fund writes a put on an index, it
receives a premium and the purchaser of the put has the right, prior to the
expiration date, to require the Fund to deliver to it an amount of cash equal to
the difference between the closing level of the index and the exercise price
times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices. The risks of investment in options on indices
may be greater than options on securities. Because index options are settled in
cash, when the Fund writes a call on an index it cannot provide in advance for
its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of writing a call index option
by holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as underlie
the index and, as a result, bears a risk that the value of the securities held
will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows the Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
Futures Contracts and Options on Futures Contracts. The purchase of futures
or call options on such futures can serve as a long hedge, and the sale of
futures or the purchase of put options on such futures can serve as a short
hedge. Writing call options on futures contracts can serve as a limited short
hedge, using a strategy similar to that used for writing call options on
securities or indices. Similarly, writing put options on futures contracts can
serve as a limited long hedge. Futures contracts and options on futures
contracts can also be purchased and sold to attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average duration
of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten the average
duration of the Fund's fixed-income portfolio, the Fund may sell a debt futures
contract or a call option thereon, or purchase a put option on that futures
contract. If WRIMCO wishes to lengthen the average duration of the Fund's
fixed-income portfolio, the Fund may buy a debt futures contract or a call
option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or an option on a futures
contract can vary from the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price beyond the limit. Daily price
limits do not limit potential losses because prices could move to the daily
limit for several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option or to maintain cash or
liquid assets in an account.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to differences in the nature 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
future 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 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 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 futures and movements in the price of the securities that are
the subject of the hedge increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable index. The price of the
index futures may move more than or less than the price of the securities being
hedged. If the price of the index futures moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase in
the price of securities before the Fund is able to invest in them in an orderly
fashion, it is possible that the market may decline instead. If the Fund then
concludes not to invest in them at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
To the extent that the Fund enters into futures contracts or options on
futures contracts, in each case other than for bona fide hedging purposes (as
defined by the CFTC), the aggregate initial margin and premiums required to
establish those positions (excluding the amount by which options are
"in-the-money" at the time of purchase) will not exceed 5% of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any contracts the Fund has entered into. (In general, a
call option on a futures contract is "in-the-money" if the value of the
underlying futures contract exceeds the strike, i.e., exercise, price of the
call; a put option on a futures contract is "in-the-money" if the value of the
underlying futures contract is exceeded by the strike price of the put.) This
policy does not limit to 5% the percentage of the Fund's assets that are at risk
in futures contracts and options on futures contracts.
Combined Positions. The Fund may purchase and write options in combination
with each other, or in combination with futures contracts, to adjust the risk
and return characteristics of its overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Turnover. The Fund's options and futures activities may affect its turnover
rate and brokerage commission payments. The exercise of calls or puts written by
the Fund, and the sale or purchase of futures contracts, may cause it to sell or
purchase related investments, thus increasing its turnover rate. Once the Fund
has received an exercise notice on an option it has written, it cannot effect a
closing transaction in order to terminate its obligation under the option and
must deliver or receive the underlying securities at the exercise price. The
exercise of puts purchased by the Fund may also cause the sale of related
investments, also increasing turnover; although such exercise is within the
Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors 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, 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, collars and floors, can be individually
negotiated and structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap agreements may
increase or decrease the overall volatility of the Fund's investments and its
share price and yield because, and to the extent, these agreements affect the
Fund's exposure to long- or short-term interest rates, mortgage-backed security
values, corporate borrowing rates, or other factors such as security prices or
inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. Caps and floors have an effect similar to buying
or writing options.
The creditworthiness of firms with which the Fund enters into swaps, caps
or floors will be monitored by WRIMCO in accordance with procedures adopted by
the Fund's Board of Directors. If a firm's creditworthiness declines, the value
of the agreement would be likely to decline, potentially resulting in losses. If
a default occurs by the other party to such transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such account with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that are written by the Fund. WRIMCO and the Fund believe that such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions. The position of the SEC is that assets involved in swap
transactions are illiquid and are, therefore, subject to the limitations on
investing in illiquid securities.
Investment Restrictions and Limitations
Certain of the Fund's investment restrictions and other limitations are
described in this SAI. The following are the Fund's fundamental investment
limitations set forth in their entirety, which, like the Fund's goal and the
types of securities in which the Fund may invest, cannot be changed without
shareholder approval. For this purpose, shareholder approval means the approval,
at a meeting of Fund shareholders, by the lesser of (1) the holders of 67% or
more of the Fund's shares represented at the meeting, if more than 50% of the
Fund's outstanding shares are present in person or by proxy or (2) more than 50%
of the Fund's outstanding shares. The Fund may not:
(i) Purchase or sell any securities or physical commodities other than
U.S. Government securities; however, this policy shall not prevent
the Fund from purchasing and selling (a) foreign currency if a
U.S. Government Security that the Fund owns or intends to acquire
is denominated in that foreign currency and (b) futures contracts,
options, forward contracts, swaps, caps, collars, floors and other
financial instruments if the return on, or value of, the financial
instrument is based on the return on or value of U.S. Government
securities;
(ii) Buy any voting securities, any mineral related programs or leases
or any shares of other investment companies;
(iii) Buy real estate nor any nonliquid interest in real estate
investment trusts; however, the Fund may buy obligations or
instruments which it may otherwise buy even though the issuer
invests in real estate or interests in real estate;
(iv) Make loans other than certain limited types of loans as indicated
above; the Fund can buy debt securities and other obligations
consistent with its goal and other investment policies and
restrictions; it can also lend its portfolio securities to the
extent allowed, and in accordance with the requirements, under the
1940 Act and enter into repurchase agreements except as indicated
above (see "Repurchase Agreements" above);
(v) Participate on a joint, or a joint and several, basis in any
trading account in any securities;
(vi) Sell securities short (unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short) or purchase securities on margin, except that (1) this
policy does not prevent the Fund from entering into short
positions in foreign currency, futures contracts, options, forward
contracts, swaps, caps, collars, floors and other financial
instruments, (2) the Fund may obtain such short-term credits as
are necessary for the clearance of transactions, and (3) the Fund
may make margin payments in connection with futures contracts,
options, forward contracts, swaps, caps, collars, floors and other
financial instruments;
(vii) Engage in the underwriting of securities, that is, the selling of
securities for others;
(viii) Borrow to purchase securities or increase income, but only to meet
redemptions so it will not have to sell portfolio securities for
this purpose. The Fund may borrow money from banks for temporary
or emergency purposes but only up to 10% of its total assets. It
can mortgage or pledge its assets in connection with such
borrowing but only up to the lesser of the amounts borrowed or 5%
of the value of the Fund's assets. The Fund will not purchase
securities while outstanding borrowings are more than 5% of the
value of its assets. Interest on borrowing would reduce the Fund's
income; or
(ix) Issue senior securities.
The following investment restriction is not fundamental and may be changed
by the Board of Directors without shareholder approval:
(i) The Fund may not purchase a security if, as a result, more than
10% of its net assets would consist of illiquid securities.
An investment policy or limitation that states a maximum percentage of the
Fund's assets that may be so invested or describes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstance will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities for a year and dividing
it by the monthly average of the market value of such securities during the
year, excluding certain short-term securities. The Fund's turnover rate may vary
greatly from year to year as well as within a particular year and may be
affected by cash requirements for the redemption of its shares. The Fund's
portfolio turnover rate for the fiscal years ended March 31, 1999 and 1998 was %
and 35.18%, respectively.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly owned subsidiary of Waddell & Reed, Inc.
Under the Management Agreement, WRIMCO is employed to supervise the investments
of the Fund and provide investment advice to the Fund. The address of WRIMCO and
Waddell & Reed. Inc. is 6300 Lamar Avenue, P. O. Box 29217, Shawnee Mission,
Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's 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. Waddell & Reed Financial Services, Inc. is a wholly owned
subsidiary of Waddell & Reed Financial, Inc., a publicly held company. The
address of these companies is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds,
except United Asset Strategy Fund, Inc., since 1940 or the company's inception
date, whichever was later, and to Target/United Funds, Inc. since that fund's
inception, until January 8, 1992, when it assigned its duties as investment
manager for these funds (and the related professional staff) to WRIMCO. WRIMCO
has also served as investment manager for Waddell & Reed Funds, Inc. since its
inception in September 1992, and United Asset Strategy Fund, Inc. since it
commenced operations in March 1995. 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 issued by United Investors
Life Insurance Company for which Target/United Funds, Inc. is the underlying
investment vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund and
Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell & Reed,
Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Board of Directors
without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the Fund
pays WRIMCO a fee as described in the Prospectus. The management fees paid to
WRIMCO during the fiscal years ended March 31, 1999, 1998 and 1997 were $ ,
$516,182 and $559,782, respectively.
For purposes of calculating the daily fee the Fund does not include money
owed to it by Waddell & Reed, Inc. for shares which it has sold but not yet paid
the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, with respect to Class A shares,
the Fund pays the Agent a monthly fee of $1.3125 for each shareholder account
that was in existence at any time during the prior month, plus $.30 for each
account on which a dividend or distribution, of cash or shares, had a record
date in that month, and $.75 for each shareholder check it processes. For Class
Y shares, the Fund pays the Agent a monthly fee equal to one-twelfth of .15 of
1% of the average daily net assets of that class for the preceding month. The
Fund also pays certain out-of-pocket expenses of the Agent, including long
distance telephone communications costs, microfilm and storage costs for certain
documents, forms, printing and mailing costs, and costs of legal and special
services not provided by Waddell & Reed, Inc., WRIMCO or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a monthly
fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
Fees paid to the Agent for the fiscal years ended March 31, 1999, 1998 and
1997 were $ , $40,000 and $40,000, respectively.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement are
described above. Waddell & Reed, Inc. and affiliates pay the Fund's Directors
and officers who are affiliated with WRIMCO and its affiliates. The Fund pays
the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The aggregate dollar amounts of
underwriting commissions for Class A shares for the fiscal years ended March 31,
1999, 1998 and 1997 were $ , $292,989 and $274,363, respectively. The amounts
retained by Waddell & Reed, Inc. for each fiscal year were $ , $123,079 and
$116,643, respectively.
No portion of the sales charge is reallowed to dealers. A major portion of
the sales charge for Class A shares is paid to financial advisors and managers
of Waddell & Reed, Inc. Waddell & Reed, Inc. may compensate its financial
advisors as to purchases for which there is no sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under a Distribution and Service Plan for Class A shares (the "Plan")
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay
Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed 0.25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with the distribution of the Class A shares and/or the
service and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its registered
representatives and sales managers (sales force) unless it elects, which is not
currently contemplated for Class A shares, to make distribution of shares also
through other broker-dealers. In distributing shares through its sales force,
Waddell & Reed, Inc. will pay commissions and incentives to the sales force at
or about the time of sale and will incur other expenses including costs for
prospectuses, sales literature, advertisements, sales office maintenance,
processing of orders and general overhead with respect to its efforts to
distribute the Fund's shares. The 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 Plan also
permits Waddell & Reed, Inc. to be reimbursed for amounts it expends in
compensating, training and supporting registered financial advisors, sales
managers and/or other appropriate personnel in providing personal services to
Class A shareholders of the Fund and/or maintaining Class A shareholder
accounts; increasing services provided to Class A shareholders of the Fund by
office personnel located at field sales offices; engaging in other activities
useful in providing personal service to Class A shareholders of the Fund and/or
maintenance of Class A shareholder accounts; and in compensating broker-dealers
who may regularly sell Class A shares of the Fund, and other third parties, for
providing shareholder services and/or maintaining shareholder accounts with
respect to Class A shares.
Fees paid (or accrued) as distribution and service fees by the Fund with
respect to Class A shares for the fiscal year ended March 31, 1999 were $. To
the extent that Waddell & Reed, Inc. incurs expenses for which reimbursement may
be made under the Plan that relate to distribution and service activities also
involving another fund in the United Group of Funds or Waddell & Reed Funds,
Inc., Waddell & Reed, Inc. typically determines the amount attributable to the
Fund's expenses under the Plan on the basis of a combination of the respective
classes' relative net assets and number of shareholder accounts.
The only Directors or interested persons, as defined in the 1940 Act, of
the Fund who have a direct or indirect financial interest in the operation of
the 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. The Plan is
anticipated to benefit the Fund and its Class A shareholders through Waddell &
Reed, Inc.'s activities not only to distribute the Class A shares of the Fund
but also to provide personal services to Class A shareholders and thereby
promote the maintenance of their accounts with the Fund. The Fund anticipates
that Class A shareholders may benefit to the extent that Waddell & Reed's
activities are successful in increasing the assets of the Fund, through
increased sales or reduced redemptions, or a combination of these, and reducing
a Class A shareholder's share of Fund and Class A expenses. Increased Fund
assets may also provide greater resources with which to pursue the goal of the
Fund. Further, continuing sales of Class A shares may also reduce the likelihood
that it will be necessary to liquidate portfolio securities, in amounts or at
times that may be disadvantageous to the Fund, to meet redemption demands. In
addition, the Fund anticipates that the revenues from the Plan will provide
Waddell & Reed, Inc. with greater resources to make the financial commitments
necessary to continue to improve the quality and level of services to the Fund
and Class A shareholders.
The Plan was approved by the Fund's Board of Directors, including the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operations of the Plan or any agreement
referred to in the Plan (hereafter, the "Plan Directors"). The Plan was also
approved by the affected shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will be
effective only if approved, by the Directors including the Plan Directors acting
in person at a meeting called for that purpose, (iii) amounts to be paid by the
Fund under the Plan may not be materially increased without the vote of the
holders of a majority of the outstanding Class A shares of the Fund, and (iv)
while the Plan remains in effect, the selection and nomination of the Directors
who are Plan Directors will be committed to the discretion of the Plan
Directors.
Custodial and Auditing Services
The Fund's Custodian is UMB Bank, n.a., Kansas City, Missouri. In general,
the Custodian is responsible for holding the Fund's cash and securities.
Deloitte & Touche LLP, Kansas City, Missouri, the Fund's independent
accountants, audits the Fund's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each class of the shares of the Fund is the value of
the assets of that class, less the class's liabilities, divided by the total
number of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined net asset
value 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
March 31, 1999 was as follows:
Netasset value per Class A share (Class A net assets
divided by Class A shares outstanding) ............ $
Add: selling commission (4.25% of offering
price) ............................................ .
-----
Maximum offering price per Class A share
(Class A net asset value divided by 95.75%)........ $
=====
The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge. The
offering price of a Class Y share is the net asset value next determined
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 confirmation after your
purchase which will indicate how many shares you have purchased. Shares are
normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the
Fund may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily computed
once each day that the NYSE is open for trading as of the later of the close of
the regular session of the NYSE or the close of the regular session of any
domestic securities or commodities exchange on which an option or future 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 net asset value will change every business day, since
the value of the assets and the number of shares outstanding change every
business day.
The Board of Directors has decided to use the prices quoted by a dealer in
bonds which offers a pricing service to value U.S. Government securities. The
Board believes that such a service does quote their fair value. The Board,
however, may hereafter determine to use another service or use the bid price
quoted by dealers if it should determine that such service or quotes more
accurately reflect the fair value of U.S. Government securities held by the
Fund.
Short-term U.S. Government securities are valued at amortized cost, which
approximates market value. Securities or other assets which are not valued by
either of the foregoing methods and for which market quotations are not readily
available would be valued by appraisal at their fair value as determined in good
faith under procedures established by and under the general supervision and
responsibility of the Board of Directors.
Puts, calls and Government securities Futures purchased and held by the
Fund are valued at the last sales price thereof on the securities or commodities
exchanges on which they are traded, or, if there are no transactions, at the
mean between bid and asked prices. Ordinarily, the close of the regular session
of option trading on national securities exchanges is 4:10 p.m. Eastern time and
the close of the regular session of commodities exchanges is 4:15 p.m. Eastern
time. Futures contracts will be valued by reference to established futures
exchanges. The value of a futures contract purchased by the Fund will be either
the closing price of that contract or the bid price. Conversely, the value of a
futures contract sold by the Fund will be either the closing price or the asked
price.
When the Fund writes a put or call, an amount equal to the premium received
is included in the Fund's Statement of Assets and Liabilities as an asset, and
an equivalent deferred credit is included in the liability section. The deferred
credit is "marked-to-market" to reflect the current market value of the put or
call. If a call the Fund wrote is exercised, the proceeds received on the sale
of the related investment are increased by the amount of the premium the Fund
received. If the Fund exercised a call it purchased, the amount paid to purchase
the related investments is increased by the amount of the premium paid. If a put
written by the Fund is exercised, the amount the Fund pays to purchase the
related investment is decreased by the amount of the premium it received. If the
Fund exercises a put it purchased, the amount the Fund receives from the sale of
the related investment is reduced by the amount of the premium it paid. If a put
or call written by the Fund expires, it has a gain in the amount of the premium;
if it enters into a closing purchase transaction, the Fund will have a gain or
loss depending on whether the premium was more or less than the cost of the
closing transaction.
Minimum Initial and Subsequent Investments
For Class A 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 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 Gift 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"), salary reduction plan account under Section 457
of 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 an UGMA account for grandson A; Grandmother has an
account in her own name; A's father has an account in his own name;
the UGMA account may be grouped with A's father's account but may not
be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in the
trust account is eligible for grouping with an IRA account of W, H's
wife;
C. H's will provides for the establishment of a trust for the benefit of
his minor children upon H's death; his bank is named as trustee; upon
H's death, an account is established in the name of the bank, as
trustee; a purchase in the account may be grouped with an account held
by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account may
not be grouped with R's individual account. If X's spouse, Y, was
successor trustee, this purchase could be grouped with Y's individual
account.
All purchases of Class A shares made for a participant in a
multi-participant Keogh plan may be grouped only with other purchases made under
the same plan; a multi-participant Keogh plan is defined as a plan in which
there is more than one participant where one or more of the participants is
other than the spouse of the owner/employer.
Example A: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made
under the plan with any purchases in categories 1 through 7
above.
Example B: H has established a Keogh plan; his wife, W, is a participant
and they have hired one or more employees who also become
participants in the plan; H and W may not combine any purchases
made under the plan with any purchases in categories 1 through 7
above; however, all purchases made under the plan for H, W or any
other employee will be combined.
All purchases of Class A shares made under a "qualified" employee benefit
plan of an incorporated business will be grouped. A "qualified" employee benefit
plan is established pursuant to Section 401 of the Code. All qualified employee
benefit plans of any one employer or affiliated employers will also be grouped.
An affiliate is defined as an employer that directly, or indirectly, controls or
is controlled by or is under control with another employer. All qualified
employee benefit plans of an employer who is a franchisor and those of its
franchisee(s) may also be grouped.
Example: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made under
both plans will be grouped.
All purchases of Class A shares made under a simplified employee pension
plan ("SEP"), payroll deduction plan or similar arrangement adopted by an
employer or affiliated employers (as defined above) may be grouped provided that
the employer elects to have all such purchases grouped at the time the plan is
set up. If the employer does not make such an election, the purchases made by
individual employees under the plan may be grouped with the other accounts of
the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
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 $100,000; at the same
time, H's parents open up two UGMA accounts for H and W's two minor
children and invest $100,000 in each child's name; the combined
purchases of Class A shares are subject to the reduced sales load
applicable to a purchase of $300,000 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 net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund three
years ago. His account has a net asset value of $100,000. His wife,
W, now wishes to invest $15,000 in Class A shares of the Fund.
W's purchase will be combined with H's existing account and will be
entitled to the reduced sales charge applicable to a purchase of
Class A shares in excess of $100,000. 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 sales
charge and provide Waddell & Reed. Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan the shares held under such plan may be combined with the additional
purchase only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Statement of Intention. By signing a Statement
of Intention form, which is available from Waddell & Reed, Inc., the purchaser
indicates an intention to invest, over a 13-month period, a dollar amount which
is sufficient to qualify for a reduced sales charge. The 13-month period begins
on the date the first purchase made under the Statement of Intention is accepted
by Waddell & Reed, Inc. Each purchase made from time to time under the Statement
of Intention 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 Statement of Intention
will be the sales charge in effect on the beginning date of the 13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, 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 Statement of Intention 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 net asset value as of the date the Statement
of Intention is accepted by Waddell & Reed, Inc. of $15,000; H's
wife, W, has an account in her own name invested in another fund in
the United Group which charges the same sales load as the Fund, with
a net asset value as of the date of acceptance of the Statement of
Intention 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 Statement of Intention signed by a purchaser will be returned
to the purchaser after it is accepted by Waddell & Reed, Inc. and will set forth
the dollar amount of Class A shares which must be purchased within the 13-month
period in order to qualify for the reduced sales charge.
The minimum initial investment under a Statement of Intention is 5% of the
dollar amount which must be invested under the Statement of Intention. An amount
equal to 5% of the purchase required under the Statement of Intention will be
held "in escrow." If a purchaser does not, during the period covered by the
Statement of Intention, invest the amount required to qualify for the reduced
sales charge under the terms of the Statement of Intention, 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 Statement of Intention which is not completed will be collected by
redeeming part of the shares purchased under the Statement of Intention and held
"in escrow" unless the purchaser makes payment of this amount to Waddell & Reed,
Inc. within 20 days of Waddell & Reed, Inc.'s request for payment.
If the actual amount invested is higher than the amount an investor intends
to invest, and is large enough to qualify for a sales charge lower than that
available under the Statement of Intention, the lower sales charge will apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell &
Reed, Inc. to sell, the shares covered by the Statement of Intention.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement of Intention will be deducted in computing the aggregate purchases
under the Statement of Intention.
Statements of Intention are not available for purchases made under a SEP
where the employer has elected to have all purchases under the SEP grouped.
Other Funds in the 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 the 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.
Net Asset Value Purchases of Class A Shares
As stated in the Prospectus, Class A shares of the Fund may be purchased at
net asset value by the Directors and officers of the Fund, 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 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 net asset value. Purchases in any tax qualified
retirement plan under which the eligible purchaser is the sole participant may
also be made at net asset value. Trusts under which the grantor and the trustee
or a co-trustee are each an eligible purchaser are also eligible for net asset
value purchases of Class A shares. "Employees" includes retired employees. A
retired employee is an individual separated from service from Waddell & Reed,
Inc. or affiliated companies with a vested interest in any Employee Benefit Plan
sponsored by Waddell & Reed, Inc. or its affiliated companies. "Employees" also
includes individuals who, on November 6, 1998, were employees (including retired
employees) of a company that on that date was an affiliate of Waddell & Reed,
Inc. "Financial advisors" includes retired financial advisors. A "retired
financial advisor" is any financial advisor who was, at the time of separation
from service from Waddell & Reed, Inc., a Senior Financial advisor. A custodian
under UGMA or UTMA purchasing for the child or grandchild of any employee or
financial advisor may purchase Class A shares at net asset value 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 net asset value.
Shares may also be issued at NAV in a merger, acquisition or exchange offer
made pursuant to a plan of reorganization to which the Fund is a party.
Reasons for Difference in Public Offering Price of Class A Shares
As described herein and in the Prospectus for Class A shares there are a
number of instances in which the Fund's Class A shares are sold or issued on a
basis other than the maximum public offering price, that is, the net asset value
plus the highest sales charge. Some of these relate to lower or eliminated sales
charges for larger purchases of Class A shares, whether made at one time or over
a period of time as under a Statement of Intention or right of accumulation. See
the table of sales charges in the Prospectus. The reasons for these quantity
discounts are, in general, that (i) they are traditional and have long been
permitted in the industry and are therefore necessary to meet competition as to
sales of shares of other funds having such discounts, (ii) certain quantity
discounts are required by rules of the National Association of Securities
Dealers, Inc. (as are elimination of sales charges on the reinvestment of
dividends and distribution), and (iii) they are designed to avoid an unduly
large dollar amount of sales charge on substantial purchases in view of reduced
selling expenses. Quantity discounts are made available to certain related
persons for reasons of family unity and to provide a benefit to tax-exempt plans
and organizations.
The reasons for the other instances in which there are reduced or
eliminated sales charges for Class A shares are as follows. Exchanges at net
asset value are permitted because a sales charge has already been paid on the
shares exchanged. Sales of Class A shares without sales charge are permitted to
Directors, officers and certain others due to reduced or eliminated selling
expenses and since such sales may aid in the development of a sound employee
organization, encourage incentive, responsibility and interest in the United
Group and an identification with its aims and policies. Limited reinvestments of
redemptions of Class A shares at no sales charge are permitted to attempt to
protect against mistaken or not fully informed redemption decisions. Class A
shares may be issued at no sales charge in plans of reorganization due to
reduced or eliminated sales expenses and since, in some cases, such issuance is
exempted in the 1940 Act from the otherwise applicable restrictions as to what
sales charge must be imposed. 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 net asset value
per share of all shares sold or issued.
Flexible Withdrawal Service for Class A 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 shares that you own of the
Fund or of any of the funds in the United Group. It would be a disadvantage to
an investor to make additional purchases of shares while a withdrawal program is
in effect because it would result in duplication of sales charges. Applicable
forms to start the Service are available through Waddell & Reed, Inc.
To qualify for the Service, you must have invested at least $10,000 in
Class A shares which you still own of any of the funds in the United Group; or,
you must own Class A shares having a value of at least $10,000. The value for
this purpose is the value at the 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 their 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 you have made available for the
Service are paid in additional Class A shares. All payments under the Service
are made by redeeming Class A shares, which may involve a gain or loss for tax
purposes. To the extent that payments exceed dividends and distributions, the
number of Class A shares you own will decrease. When all of the shares in an
account are redeemed, you will not receive any further payments. Thus, the
payments are not an annuity or an income or return on your investment.
You may, at any time, change the manner in which you have chosen to have
shares redeemed. You can change to any one of the other choices originally
available to you. You may at any time, redeem part or all of the shares in your
account; if you redeem all of the shares, the Service is terminated. The Fund
can also terminate the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed will be
sent to you to assist you in completing your Federal income tax return.
Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
You may decide you would rather own Class A shares of one or more of the
other funds in the United Group rather than Class A shares of the Fund. You may
exchange Class A shares of the Fund if you have held the shares for at least six
months unless the exchange is for Class A shares of United Municipal Bond Fund,
Inc. or United Municipal High Income Fund, Inc. or unless the Class A shares of
the Fund were acquired by reinvestment of a dividend or distribution, in which
cases there is no holding period. You may exchange for Class A shares of another
fund without payment of an additional sales charge. You should ask for and read
the prospectus for the fund into which you are thinking of making an exchange
before doing so.
Class A shares of the Fund may be received in exchange for Class A shares
of any of the other funds in the United Group, except for shares of United Cash
Management, Inc., acquired by direct purchase or received in payment of
dividends on those shares.
Subject to the above rules, 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 the Fund or any other fund in the United Group. The shares of
United Cash Management, Inc. which you designate for automatic exchange must be
worth at least $100 or you must own 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 or shares of different funds in the United Group so long as each
fund receives a value of at least $25. Minimum initial investment and minimum
balance requirements apply to such automatic exchange service.
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 Y Share Exchanges
Class Y shares of the Fund may be exchanged for Class Y shares 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 net asset value 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
As described in the Prospectus for Class A shares, your account may be set
up as a funding vehicle for a retirement plan. For individual taxpayers meeting
certain requirements, Waddell & Reed, Inc. offers model or prototype documents
for the following retirement plans. All of these plans involve investment in
shares of the Fund (or shares of certain other funds in the 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 the 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, 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. In addition, for an investor
whose adjusted gross income does not exceed $100,000 (and who is not a married
person filing a separate return), certain distributions from traditional IRAs
may be rolled over to a Roth IRA and any of the investor's traditional IRAs may
be converted into a Roth IRA; these rollover distributions and conversions are,
however, subject to Federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in the Roth IRA, and withdrawals of earnings are not subject
to Federal income tax if the account has been held for at least five years and
the account holder has reached age 59 1/2 (or certain other conditions apply).
Education IRAs. Although not technically for retirement savings, Education
IRAs provide a vehicle for saving for a 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 $24,000, 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 to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an
employer can choose to match employee contributions dollar-for-dollar (up to 3%
of an employee's compensation) or may contribute to all eligible employees 2% of
their compensation, whether or not they defer salary to their retirement plans.
SIMPLE plans involve fewer administrative requirements than 401(k) or other
qualified plans generally.
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.
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 unless delayed because of emergency
conditions determined by the SEC, when the NYSE is closed other than for
weekends or holidays, or when trading on the NYSE is restricted. Payment is made
in cash, although under extraordinary conditions redemptions may be made in
portfolio securities. Payment for redemption of shares of the Fund may be made
in portfolio securities when the Fund's Board of Directors determines that
conditions exist making cash payments undesirable. Securities used for payment
of redemptions are valued at the value used in figuring net asset value. There
would be brokerage costs to the redeeming shareholder in selling such
securities. The Fund, however, has elected to be governed by Rule 18f-1 under
the 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 net asset value during any 90-day
period for any one shareholder.
Reinvestment Privilege
The Prospectus for Class A shares discusses the reinvestment privilege for
Class A shares under which, if you redeem your Class A shares and then decide it
was not a good idea, you may reinvest. If Class A shares of the Fund are then
being offered, you can put all or part of your redemption payment back into
Class A shares of the Fund without any sales charge at the net asset value next
determined after you have returned the amount. Your written request to do this
must be received within 30 days after your redemption request was received. You
can do this only once as to Class A shares of the Fund. You do not use up this
privilege by redeeming Class A shares to invest the proceeds at net asset value
in a Keogh plan or an IRA.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to compel the redemption of shares held under any
account or any plan if the aggregate net asset value 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.
Additional Information on Check Writing
Checks may not be presented for payment at the office of the bank upon
which the checks are drawn because under 1940 Act rules, redemptions may be
effected only at the next price determined after the redemption request is
presented to the Fund's transfer agent. This limitation does not affect checks
used for payment of bills or cashed at other banks. Shareholders may not close
their accounts through the writing of a check. If a shareholder is subject to
backup withholding described in the Prospectus, no checks will be honored. This
privilege is not available for most retirement plan accounts. Contact the
Shareholder Servicing Agent for further information.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors. The majority of the
Directors are not affiliated with Waddell & Reed, Inc.
The principal occupation during at least the past five years of each
Director and officer is given below. Each of the persons listed through and
including Mr. Vogel is a member of the Fund's Board of Directors. The other
persons are officers but 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, Waddell & Reed Funds, Inc. and
Target/United Funds, Inc. Each of the Fund's Directors is also a Director of
each of the other funds in the Fund Complex and each of its officers is also an
officer of one or more of the funds in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other funds
in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer, Principal Financial 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 the Fund and each of the other 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, 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, Garney Companies, Inc., a
specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George S. and Delores Dori
Eccles Foundation. Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal. Date of birth: March
24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Partner, Levy and Craig, P.C., a law firm. Date of
birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct Professor of Law at the
University of Oklahoma College of Law; formerly, Vice President for Executive
Affairs of the University of Oklahoma; formerly, an 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; Director of Central Properties, Inc.; Chairman of the Board of
Directors, Gilliland & Hayes, P.A., a law firm; formerly, President, Gilliland &
Hayes, P.A. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the other
funds in the Fund Complex; Executive Vice President, Chief Operating Officer and
Director of Waddell & Reed Financial, Inc.; 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.; President, Director and
Treasurer of Waddell & Reed Services Company; formerly, Vice President of the
Fund and each of the other funds in the Fund Complex; formerly, Director and
Treasurer of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. Date of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund Complex;
President, Chief Investment Officer, Treasurer 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; formerly, President, Chief Executive Officer, Chief Investment Officer
and Director of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. 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 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 the
Fund and each fund 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 of Network Rehabilitation Services; 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. Date of
birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
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.
Helge K. Lee
Vice President, Secretary and General Counsel of the Fund and each of the
other funds in the Fund Complex; Secretary and General Counsel of Waddell & Reed
Financial, Inc.; Vice President, Secretary, General Counsel and Director of
Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary and
General Counsel of WRIMCO and Waddell & Reed, Inc.; Senior Vice President,
Secretary, General Counsel and Director of Waddell & Reed Services Company;
formerly, Executive Vice President, Secretary and Chief Compliance Officer of
LGT Asset Management, Inc. and affiliates; formerly, Senior Vice President,
General Counsel and Secretary of Strong Capital Management, Inc. and affiliates.
Date of birth: March 30, 1946.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund and
each of the other funds in the Fund Complex; Vice President of Waddell & Reed
Services Company. Date of birth: July 18, 1942.
John M. Holliday
Vice President of the Fund and eight other funds in the Fund Complex;
Senior Vice President of WRIMCO; formerly, Senior Vice President of Waddell &
Reed Asset Management Company. Date of birth: June 11, 1935.
James C. Cusser
Vice President of the Fund and two other funds in the Fund Complex; Vice
President of WRIMCO. Date of birth: May 30, 1949.
The address of each person is 6300 Lamar Avenue, P. O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
The Directors who may be deemed to be "interested persons" as defined in
the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc., or of WRIMCO are
indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a Director may elect after resignation from the Board
provided the Director has attained the age of 70 and has served as a Director of
the funds in the United Group for a total of at least five years. A Director
Emeritus receives fees in recognition of his or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Messrs.
Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey and Paul
S. Wise retired as Directors of the Fund and of each of the funds in the Fund
Complex and elected a position as Director Emeritus.
The funds in the United Group, Target/United Funds, Inc. and Waddell & Reed
Funds, Inc. pay to each Director a total of $48,000 per year, plus $2,500 for
each meeting of the Board of Directors attended plus reimbursement of expenses
of 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. The fees to the Directors who receive
them are divided among the funds in the United Group, Target/United Funds, Inc.
and Waddell & Reed Funds, Inc. based on their relative size. During the Fund's
fiscal year ended March 31, 1999, the Fund's Directors received the following
fees for service as a director:
Compensation Table
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
------------ ------------
Robert L. Hechler
Henry J. Herrmann
Keith A. Tucker 0 0
James M. Concannon
John A. Dillingham
David P. Gardner
Linda K. Graves
Joseph Harroz, Jr.
John F. Hayes
Glendon E. Johnson
William T. Morgan
Ronald C. Reimer
Frank J. Ross, Jr.
Eleanor B. Schwartz
Frederick Vogel III
*No pension or retirement benefits have been accrued as a part of Fund expenses.
Mr. Gardner was elected as a Director on August 18, 1998. Messrs. Harroz,
Hechler, Herrmann and Reimer were elected as Directors on November 18, 1998. The
officers are paid by WRIMCO or its affiliates.
Shareholdings
As of May 31, 1999, all of the Fund's Directors and officers as a group
owned less than 1% of the outstanding shares of the Fund. The following table
sets forth information with respect to the Fund, as of May 31, 1999, regarding
the ownership of the Fund's shares.
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
- ------------------- ----- ------------ -------
Waddell & Reed Class Y %
Financial, Inc.
Savings & Investment Plan
6300 Lamar Avenue
Overland Park KS 66201
Torchmark Corporation Class Y
Savings & Investment Plan
2001 Third Avenue South
Birmingham AL 35202
PAYMENTS TO SHAREHOLDERS
General
There are two sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is derived
from the interest and earned discount on the securities the Fund holds, less
expenses (which will vary by class). The second source is net realized capital
gains, which are derived from the proceeds received from the Fund's sale of
securities at a price higher than the Fund's tax basis (usually cost) in such
securities, less losses from sales of securities at a price lower than the
Fund's basis therein these gains can be either long-term or short-term,
depending on how long the Fund has owned the securities before it sells them.
The payments made to shareholders from net investment income and net short-term
capital gains are called dividends.
Ordinarily, on the 27th day of each month or on the preceding business day
if the 27th falls on a Saturday, Sunday or holiday, all dividends declared since
the last dividend payment are paid. The shares whose holders are entitled to
receive each such dividend are those shares which are held on the Fund's books
at the close of business on the prior day. Therefore, dividends are ordinarily
paid on shares starting on the day after they are issued and on the day they are
redeemed. When shares are redeemed, any declared but unpaid dividends on these
shares will ordinarily be paid on the shares with the next regular dividend
payment and not at the time of redemption.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may not
have such gains, depending on whether securities are sold and at what price. If
the Fund has net realized capital gains, it will pay distributions once each
year, in the latter part of the fourth calendar quarter, except to the extent it
has applicable net capital losses carried over from a prior year or years to
offset the gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you want cash
for your dividends and distributions, however, a total dividend and/or
distribution amount less than ten dollars will be automatically paid in shares
of the Fund of the same class as that with respect to which they were paid (ii)
you want your dividends and distributions paid in shares of the Fund of the same
class as that with respect to which they were paid, or (iii) you want cash for
your dividends, however, a total dividend amount less than ten dollars will be
automatically paid in shares of the Fund of the same class as that with respect
to which it was paid and want your distributions reinvested in shares of the
Fund of the same class as that with respect to which they were paid. You can
change your instructions at any time. If you give no instructions, your
dividends and distributions will be paid in shares of the Fund of the same class
as that with respect to which they were paid. All payments in shares are at net
asset value without any sales charge. The net asset value used for this purpose
is that computed as of the payment date for the dividend or distribution,
although this could be changed by the Board of Directors.
Even if you get dividends and distributions on Class A shares in cash, you
can thereafter reinvest them (or distributions only) in Class A shares of the
Fund at net asset value (i.e., no sales charge) next determined after receipt by
Waddell & Reed, Inc. of the amount clearly identified as a reinvestment. The
reinvestment must be within 45 days after the payment.
TAXES
General
The Fund has qualified 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 taxable
net investment income and net short-term capital gains) that is distributed to
its shareholders. To continue to qualify as a RIC, the Fund must distribute to
its shareholders for each taxable year at least 90% of the sum of its investment
company taxable income ("Distribution Requirement") and must meet several
additional requirements. These requirements include the following: (1) the Fund
must derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities, or other income (including gains from options
or futures contracts) derived with respect to its business of investing in
securities ("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
("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 shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any distributions received on those shares. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or distribution, the investor will receive some portion of the
purchase price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gains net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
It is the Fund's policy to pay sufficient dividends and distributions each year
to avoid imposition of the Excise Tax. The Code permits the Fund to defer into
the next calendar year net capital losses incurred between November 1 and the
end of the current calendar year.
Income from Options and Futures Contracts
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures 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 transactions in options and futures contracts derived by the Fund
with respect to its business of investing in securities will qualify as
permissible income under the Income Requirement.
Any income the Fund earns from writing options is treated as short-term
capital gains. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being exercised,
the premium it 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 and futures in which the Fund may invest may be "section
1256 contracts." Section 1256 contracts held by the Fund at the end of its
taxable year, other than contracts subject to a "mixed straddle" election made
by the Fund are "marked-to-market" (that is, treated as sold at that time for
their fair market value) for Federal income tax purposes, with the result that
unrealized gains or losses are treated as though they were realized. Sixty
percent of any net gains or losses recognized on these deemed sales, and 60% of
any net realized gain or loss from any actual sales of section 1256 contracts,
are treated as long-term capital gains or losses, and the balance is treated as
short-term capital gains or losses. That 60% portion will qualify for the 20%
(10% for taxpayers in the 15% marginal tax bracket) maximum tax rate on net
capital gains enacted by the Taxpayer Relief Act of 1997. Section 1256 contracts
also may be marked-to-market for purposes of the Excise Tax and other purposes.
The Fund may need to distribute any mark-to-market gains to its shareholders to
satisfy the Distribution Requirement and/or avoid imposition of the Excise Tax,
even though it may not have closed the transactions and received cash to pay the
distributions.
Code section 1092 (dealing with straddles) may also affect the taxation of
options and futures contracts in which the Fund may invest. That section defines
a "straddle" as offsetting positions with respect to personal property; for
these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. The Regulations under section
1092 also provide certain "wash sale" rules that apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the Fund
makes certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions will be determined under
rules that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.
If the Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, 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 similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management Agreement
is to arrange the purchase and sale of securities for the portfolio of the Fund.
Purchases are made directly from issuers or from underwriters, dealers or banks.
Purchases from underwriters include a commission or concession paid by the
issuer to the underwriter. Purchases from dealers will include the spread
between the bid and asked prices. 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 Fund has
not effected transactions through brokers and does not anticipate doing so. The
individual who manages the Fund may manage other advisory accounts with similar
investment objectives. It can be anticipated that the manager will frequently
place concurrent orders for all or most accounts for which the manager has
responsibility or WRIMCO may otherwise combine orders for the Fund with those of
other funds in the United Group, Target/United Funds, Inc. and Waddell & Reed
Funds, Inc. or other accounts for which it has investment discretion.
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. Sharing in large transactions could affect the
price the Fund pays or receives or the amount it buys and sells. However,
sometimes a better negotiated commission is available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is authorized to
engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution and/or
research services and other services, including pricing or quotation services
directly or through others ("research and brokerage services") considered by
WRIMCO to be useful or desirable for its investment management of the Fund
and/or the other funds and accounts over which WRIMCO has investment discretion.
Research and brokerage services are, in general, defined by reference to
Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers; (ii) furnishing
analyses and reports; or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or brokerage
services may be higher than 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
instance of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of 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.
As of March 31, 1999, the Fund owned J. P. Morgan & Co. Inc. securities in
the aggregate amount of $11,390,000. J. P. Morgan & Co. Inc. is a regular broker
of the Fund.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
OTHER INFORMATION
The Shares of the Fund
The Fund offers two classes of shares: Class A and Class Y. Each class
represents interest in the same assets of the Fund and differ as follows: each
class of shares has exclusive voting rights on matters pertaining to matters
appropriately limited to that class; Class A shares are subject to an initial
sales charge and to an ongoing distribution and/or service fee and Class Y
shares, which are designated for institutional investors, have no sales charge
nor ongoing distribution and/or service fee; each class may bear differing
amounts of certain class-specific expenses; and each class has a separate
exchange privilege. The Fund does not anticipate that there will be any
conflicts between the interests of holders of the different classes of shares of
the Fund by virtue of those classes. On an ongoing basis, the Board of Directors
will consider whether any such conflict exists and, if so, take appropriate
action. Each share of the Fund is entitled to equal voting, dividend,
liquidation and redemption rights, except that due to the differing expenses
borne by the two classes, dividends of Class A shares are expected to be lower
than for Class Y shares of the Fund. Each fractional share of a class has the
same rights, in proportion, as a full share of that class. Shares are fully paid
and nonassessable when purchased.
The Fund does not hold annual meetings of shareholders; however, certain
significant corporate matters, such as the approval of a new investment advisory
agreement or a change in fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon receipt
by the Fund of a request in writing signed by shareholders holding not less than
25% of all shares entitled to vote at such meeting, provided certain conditions
stated in the bylaws are met. There will normally be no meeting of the
shareholders for the purpose of electing directors until such time as less than
a majority of directors holding office have been elected by shareholders, at
time which the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the 1940 Act
applies to the Fund, the directors are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
director when requested in writing to do so by the shareholders of record of not
less than 10% of the Fund's outstanding shares.
Each share (regardless of class) has one vote. All shares of the Fund vote
together as a single class, except as to any matter for which a separate vote of
any class is required by the 1940 Act, and except as to any matter which affects
the interests of one or more particular classes, in which case only the
shareholders of the affected classes are entitled to vote, each as a separate
class.
<PAGE>
THE INVESTMENTS OF
UNITED GOVERNMENT SECURITIES FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
11.0%, 1-1-2003 ..................................................... $ 22 $ 23,475
7.5%, 9-1-2007 ...................................................... 70 71,261
6.5%, 9-25-2018 ..................................................... 2,500 2,535,150
7.0%, 1-15-2019 ..................................................... 4,500 4,578,750
6.25%, 1-15-2021 .................................................... 3,500 3,520,755
8.0%, 2-1-2023 ...................................................... 1,500 1,560,114
6.5%, 11-1-2024 ..................................................... 1,970 1,964,835
7.0%, 12-1-2025 ..................................................... 7,022 7,126,962
Total ............................................................... 21,381,302
Federal National Mortgage Association:
8.5%, 8-1-2001 ...................................................... 3,859 3,899,518
5.98%, 6-18-2003 .................................................... 2,000 2,000,940
5.875%, 7-16-2003 ................................................... 2,000 1,995,000
7.0%, 10-25-2003 .................................................... 5,649 5,634,421
7.135%, 6-1-2007 .................................................... 5,616 5,950,830
7.15%, 6-1-2007 ..................................................... 2,278 2,416,073
8.4%, 2-25-2009 ..................................................... 4,843 5,009,399
0.0%, 2-12-2018 ..................................................... 2,500 747,975
7.0%, 9-25-2020 ..................................................... 500 508,435
11.0%, 10-1-2020 .................................................... 2,507 2,809,044
6.5%, 8-25-2021 ..................................................... 7,000 6,983,620
7.0%, 12-1-2023 ..................................................... 6,338 6,424,659
7.42%, 10-1-2025 .................................................... 6,083 6,344,850
Total ............................................................... 50,724,764
Government National Mortgage Association:
8.5%, 5-15-2023 ..................................................... 2,101 2,279,599
7.0%, 7-15-2023 ..................................................... 2,941 2,988,855
7.0%, 8-20-2027 ..................................................... 798 806,648
9.75%, 11-15-2028 ................................................... 2,919 3,196,239
7.75%, 10-15-2031 ................................................... 1,972 2,128,130
Total ............................................................... 11,399,471
United States Treasury:
6.5%, 8-15-2005 ..................................................... 2,500 2,650,775
6.5%, 10-15-2006 .................................................... 1,000 1,065,310
6.125%, 11-15-2027 .................................................. 7,500 7,783,575
Total ............................................................... 11,499,660
</TABLE>
See Notes to Schedule of Investments on page .
1
<PAGE>
THE INVESTMENTS OF
UNITED GOVERNMENT SECURITIES FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
UNITED STATES GOVERNMENT SECURITIES (Continued)
Miscellaneous United States Government
Backed Securities:
Federal Agricultural Mortgage Corporation
Guaranteed Agricultural Mortgage-Backed
Securities,
7.066%, 1-25-2012 ................................................. $ 6,853 $ 7,051,262
Tennessee Valley Authority,
5.88%, 4-1-2036 ................................................... 7,750 7,812,543
United States Department of Veterans Affairs,
Guaranteed REMIC Pass-Through Certificates,
Vendee Mortgage Trust:
1997-2 Class C,
7.5%, 8-15-2017 ................................................... 3,500 3,587,500
1998-1 Class 2-B,
7.0%, 6-15-2019 ................................................... 3,000 3,057,180
1998-3 Class B,
6.5%, 5-15-2020 ................................................... 1,500 1,510,770
1999-1 Class 2-B,
6.5%, 8-15-2020 ................................................... 3,000 3,050,550
United States Government Guaranteed Development
Company Participation Certificates,
Series 1995-20 F, Guaranteed by the U.S.
Small Business Administration (an
Independent Agency of the United States),
6.8%, 6-1-2015 .................................................... 4,173 4,256,621
Total ............................................................. 30,326,426
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 91.85% $125,331,623
(Cost: $122,952,831)
SHORT-TERM SECURITIES - 7.84%
J.P. Morgan Securities Inc., 4.8% Repurchase
Agreement dated 3-31-99, to be
repurchased at $10,696,426 on 4-1-99* ............................... 10,695 $ 10,695,000
(Cost: $10,695,000)
TOTAL INVESTMENT SECURITIES - 99.69% $136,026,623
(Cost: $133,647,831)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.31% 421,537
NET ASSETS - 100.00% $136,448,160
</TABLE>
Notes to Schedule of Investments
*Collateralized by $7,009,000 U.S. Treasury Bonds, 12.5% due 8-15-2014; market
value and accrued interest aggregate $10,767,576.
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.
2
<PAGE>
UNITED GOVERNMENT SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999
(In Thousands, Except for Per Share Amounts)
<TABLE>
<S> <C>
Assets
Investment securities - at value
(Notes 1 and 3) ....................................................................... $136,027
Cash ..................................................................................... 21
Receivables:
Interest .............................................................................. 1,263
Fund shares sold ...................................................................... 177
Investment securities sold ............................................................ 1
Prepaid insurance premium ................................................................ 11
--------
Total assets ........................................................................ 137,500
--------
Liabilities
Payable to Fund shareholders ............................................................. 927
Dividends payable ........................................................................ 49
Accrued transfer agency and dividend
disbursing (Note 2) ................................................................... 34
Accrued service fee (Note 2) ............................................................. 24
Accrued accounting services fee (Note 2) ................................................. 3
Accrued distribution fee (Note 2) ........................................................ 2
Accrued management fee (Note 2) .......................................................... 1
Other .................................................................................... 12
--------
Total liabilities ................................................................... 1,052
--------
Total net assets.................................................................. $136,448
========
Net Assets
$0.01 par value capital stock
Capital stock ......................................................................... $ 251
Additional paid-in capital ............................................................ 135,362
Accumulated undistributed income:
Accumulated undistributed net realized loss on
investment transactions ............................................................. (1,544)
Net unrealized appreciation in value of
investments ......................................................................... 2,379
--------
Net assets applicable to outstanding units
of capital ....................................................................... $136,448
========
Net asset value per share (net assets divided
by shares outstanding)
Class A ............................................................................... $5.43
Class Y ............................................................................... $5.43
Capital shares outstanding
Class A ............................................................................... 24,824
Class Y ............................................................................... 322
Capital shares authorized ................................................................... 3,000,000
</TABLE>
See notes to financial statements.
3
<PAGE>
UNITED GOVERNMENT SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended MARCH 31, 1999
(In Thousands)
<TABLE>
<S> <C>
Investment Income
Interest and amortization (Note 1B) ...................................................... $9,185
------
Expenses (Note 2):
Investment management fee ............................................................. 531
Service fee - Class A ................................................................. 317
Transfer agency and dividend disbursing - Class A...................................... 275
Accounting services fee ............................................................... 40
Distribution fee - Class A ............................................................ 17
Custodian fees ........................................................................ 11
Audit fees ............................................................................ 9
Legal fees ............................................................................ 3
Shareholder servicing - Class Y ....................................................... 3
Other ................................................................................. 87
------
Total expenses ...................................................................... 1,293
------
Net investment income ............................................................ 7,892
------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 3)
Realized net gain on investments.......................................................... 1,192
Unrealized depreciation in value of investments
during the period ..................................................................... (2,312)
------
Net loss on investments ............................................................. (1,120)
------
Net increase in net assets resulting from
operations .................................................................... $6,772
======
</TABLE>
See notes to financial statements.
4
<PAGE>
UNITED GOVERNMENT SECURITIES FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the fiscal year ended
March 31,
----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Increase in Net Assets
Operations:
Net investment income ...................................... $ 7,892 $ 7,980
Realized net gain
on investments ........................................... 1,192 1,267
Unrealized appreciation
(depreciation) ........................................... (2,312) 5,459
-------- --------
Net increase in net assets
resulting from operations ............................. 6,772 14,706
-------- --------
Dividends to shareholders from
net investment income (Note 1D):*
Class A .................................................... (7,788) (7,909)
Class Y .................................................... (104) (71)
-------- --------
(7,892) (7,980)
-------- --------
Capital share transactions:
Proceeds from sale of shares:
Class A (6,970,185 and 2,736,771
shares, respectively) ................................. 38,397 14,751
Class Y (350,988 and 357,555
shares, respectively) ................................. 1,930 1,951
Proceeds from reinvestment of
dividends:
Class A (1,302,550 and 1,331,822
shares, respectively) ................................. 7,154 7,147
Class Y (18,673 and 12,802
shares, respectively) ................................. 102 69
Payments for shares redeemed:
Class A (7,386,747 and 4,991,427
shares, respectively) ................................. (40,510) (26,766)
Class Y (520,971 and 24,157
shares, respectively) ................................. (2,854) (130)
-------- --------
Net increase (decrease) in net
assets resulting from capital
share transactions .................................... 4,219 (2,978)
-------- --------
Total increase ........................................ 3,099 3,748
Net Assets
Beginning of period ........................................... 133,349 129,601
-------- --------
End of period ................................................. $136,448 $133,349
======== ========
Undistributed net investment income..................... $--- $---
==== ====
</TABLE>
*See "Financial Highlights" on pages - .
See notes to financial statements.
5
<PAGE>
UNITED GOVERNMENT SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended March 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......................... $5.46 $5.19 $5.32 $5.13 $5.23
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.32 0.33 0.33 0.34 0.32
Net realized and
unrealized gain
(loss) on
investments .................. (0.03) 0.27 (0.13) 0.19 (0.10)
----- ----- ----- ----- -----
Total from investment
operations ...................... 0.29 0.60 0.20 0.53 0.22
----- ----- ----- ----- -----
Less dividends declared
from net investment
income .......................... (0.32) (0.33) (0.33) (0.34) (0.32)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $5.43 $5.46 $5.19 $5.32 $5.13
===== ===== ===== ===== =====
Total return* ...................... 5.44% 11.84% 3.75% 10.48% 4.49%
Net assets, end
of period (in
millions) ....................... $134 $131 $129 $146 $150
Ratio of expenses
to average net
assets .......................... 0.96% 0.89% 0.91% 0.83% 0.82%
Ratio of net investment
income to average
net assets ...................... 5.82% 6.14% 6.17% 6.34% 6.30%
Portfolio turnover
rate ............................ 37.06% 35.18% 34.18% 63.05% 41.57%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
See notes to financial statements.
6
<PAGE>
UNITED GOVERNMENT SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the
period
For the fiscal year from
ended March 31, 9/27/95*
---------------------- through
1999 1998 1997 3/31/96
------- ------ ------ --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $5.46 $5.19 $5.32 $5.33
----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.33 0.34 0.34 0.17
Net realized and
unrealized gain
(loss) on
investments .................. (0.03) 0.27 (0.13) (0.01)
----- ----- ----- -----
Total from investment
operations ...................... 0.30 0.61 0.21 0.16
----- ----- ----- -----
Less dividends declared
from net investment
income .......................... (0.33) (0.34) (0.34) (0.17)
----- ----- ----- -----
Net asset value,
end of period ................... $5.43 $5.46 $5.19 $5.32
===== ===== ===== =====
Total return ....................... 5.71% 12.02% 3.99% 3.04%
Net assets, end of
period (in
millions) ....................... $2 $2 $1 $1
Ratio of expenses
to average net
assets .......................... 0.68% 0.66% 0.67% 0.60%**
Ratio of net
investment income
to average net
assets .......................... 6.10% 6.37% 6.41% 6.40%**
Portfolio
turnover rate ................... 37.06% 35.18% 34.18% 63.05%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
7
<PAGE>
UNITED GOVERNMENT SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 -- Significant Accounting Policies
United Government Securities Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end management
investment company. Its investment objective is to provide as high a current
income as is consistent with safety of principal by investing in a portfolio of
debt securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- The Fund invests in securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities and in options
and futures contracts on those securities. Government debt securities are
valued using a pricing system provided by a pricing service or dealer in
bonds. Other securities are 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, the average of the latest bid and asked prices. 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 and post-1984 market discount on the purchase of
bonds are amortized for both financial and tax reporting purposes over the
remaining lives of the bonds. Interest income is recorded on the accrual
basis and includes differences between cost and face amount on principal
reductions of securities. See Note 3 -- Investment Security Transactions.
C. Federal income taxes -- It is the Fund's policy to distribute all of its
taxable income and capital gains to its shareholders and otherwise qualify
as a regulated investment company under Subchapter M of the Internal
Revenue Code. In addition, the Fund intends to pay distributions as
required to avoid imposition of excise tax. Accordingly, provision has not
been made for Federal income taxes. See Note 4 -- Federal Income Tax
Matters.
D. Dividends and distributions -- All of the Fund's net investment income is
declared and recorded by the Fund as dividends payable on each day to
shareholders of record as of the close of the preceding business day. Net
investment income dividends and capital gains distributions are determined
in accordance with income tax regulations which
8
<PAGE>
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, net operating losses and expiring capital loss
carryovers.
E. Repurchase Agreements -- Repurchase agreements are collateralized by the
value of the resold securities which, during the entire period of the
agreement, remains at least equal to the value of the loan, including
accrued interest thereon. The collateral for the repurchase agreement is
held by the Fund's custodian bank.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of a "Group" fee computed each day on the combined net asset values of
all of the funds in the United Group of mutual funds (approximately $21.5
billion of combined net assets at March 31, 1999) at annual rates of .51% of the
first $750 million of combined net assets, .49% on that amount between $750
million and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45%
between $2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion,
.40% between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of the Fund. For
these services, the Fund pays WARSCO a monthly fee of one-twelfth of the annual
fee shown in the following table.
9
<PAGE>
<TABLE>
<CAPTION>
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
For Class A shares, the Fund also pays WARSCO a monthly per account
charge for transfer agency and dividend disbursement services of $1.3125 for
each shareholder account which was in existence at any time during the prior
month and $0.75 for each shareholder check which was processed, plus $0.30 for
each account on which a dividend or distribution of cash or shares was paid in
that month. With respect to Class Y shares, the Fund pays WARSCO a monthly fee
at an annual rate of .15% of the average daily net assets of the class for the
preceding month. The Fund also reimburses W&R and WARSCO for certain
out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross
sales commissions for Class A shares (which are not an expense of the Fund) of
$502,515, out of which W&R paid sales commissions of $295,138 and all expenses
in connection with the sale of Fund shares, except for registration fees and
related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $4,980, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding
company, and a direct subsidiary of Waddell & Reed Financial Services, Inc., a
holding company.
NOTE 3 -- Investment Security Transactions
Purchases of U.S. Government securities aggregated $53,675,020 while
proceeds from maturities and sales aggregated $47,743,014. Purchases of
short-term securities aggregated $1,892,147,219 while proceeds from maturities
and sales aggregated $1,892,868,000.
10
<PAGE>
For Federal income tax purposes, cost of investments owned at March 31,
1999 was $133,647,831, resulting in net unrealized appreciation of $2,378,792,
of which $3,160,362 related to appreciated securities and $781,570 to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net
income of $1,096,236 during the year ended March 31, 1999. This capital gain net
income was entirely offset by utilization of capital loss carryovers. Remaining
capital loss carryovers aggregated $1,548,923 at March 31, 1999, and are
available to offset future realized capital gain net income for Federal income
tax purposes but will expire if not utilized as follows: $515,470 at March 31,
2003; $343,195 at March 31, 2004; and $690,258 at March 31, 2005.
NOTE 5 -- Multiclass Operations
On July 31, 1995, the Fund was authorized to offer two classes of
shares, Class A and Class Y, each of which has equal rights as to assets and
voting privileges. Class Y shares are not subject to a sales charge on
purchases; they are not subject to a Rule 12b-1 Distribution and Service Plan
and have a separate transfer agency and dividend disbursement services fee
structure. A comprehensive discussion of the terms under which shares of either
class are offered is contained in the Prospectus and the Statement of Additional
Information for the Fund.
Income, non-class specific expenses and realized and unrealized gains
and losses are allocated daily to each class of shares based on the value of
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Government Securities Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United Government Securities Fund, Inc. (the
"Fund") as of March 31, 1999, and the related statements of operations for the
fiscal year then ended, the statement of changes in net assets for each of the
two fiscal years in the period then ended, and the financial highlights for each
of the five fiscal years in the period then ended. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
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 position of United
Government Securities Fund, Inc. as of March 31, 1999, the results of its
operations for the fiscal year then ended, the changes in its net assets for
each of the two fiscal years in the period then ended, and the financial
highlights for each of the five fiscal years in the period then ended, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
May 7, 1999
12
<PAGE>
22. Financial Statements
--------------------
(a) Financial Statements -- United Government Securities Fund,
Inc.
Included in Part B:
-------------------
As of March 31, 1999
Statement of Assets and Liabilities
For the fiscal year ended March 31, 1999
Statement of Operations
For each of the two years in the period ended March 31, 1999
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of March 31, 1999
Report of Independent Accountants
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits:
(a) Articles of Incorporation, as amended, filed by EDGAR on June
1, 1995 as EX-99.B1-gschart to Post-Effective Amendment No. 20
to the Registration Statement on Form N-1A*
Articles Supplementary, filed by EDGAR on June 1, 1995 as
EX-99.B1-gsarsupy to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
(b) Bylaws, as amended, filed by EDGAR on June 27, 1996 as
EX-99.B2-gsbylaws to Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A*
Amendment to Bylaws filed by EDGAR on April 30, 1999 as
EX-99B(b)gsbylaw2 to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-1A*
(c) Not applicable
(d) Investment Management filed by EDGAR on June 1, 1995 as
EX-99.B5-gsima to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
Assignment of the Investment Management Agreement filed by
EDGAR on June 1, 1995 as EX-99.B5-gsassign to Post-Effective
Amendment No. 20 to the Registration Statement on Form N-1A*
Fee Schedule to the Investment Management Agreement, as
amended, attached hereto as EX-99.B(d)gsimafee
(e) Underwriting Agreement, filed by EDGAR on June 1, 1995 as
EX-99.B6-gsua to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
(f) Not applicable
(g) Custodian Agreement, as amended, filed by EDGAR on April 30,
1999 as EX-99.B(g)-gsca to Post-Effective Amendment No. 24 to
the Registration Statement on Form N-1A*
(h) Shareholder Servicing Agreement, filed by EDGAR on April 30,
1999 as EX-99.B(h)-gsssa to Post-Effective Amendment No. 24 to
the Registration Statement on Form NA-1*
<PAGE>
Fund Class A application, as amended, filed by EDGAR on May
30, 1997 as EX-99.B9-gsappca to Post-Effective Amendment No.
22 to the Registration Statement on Form N-1A*
Fund Class Y application, filed by EDGAR on June 1, 1995 as
EX-99.B9-gsappcy to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
Fund NAV application, filed by EDGAR on June 1, 1995 as
EX-99.B9-gsappnav to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
Fund Class Y Letter of Understanding, filed by EDGAR on June
27, 1996 as EX-99.B9-gslou to Post-Effective Amendment No. 21
to the Registration Statement on Form N-1A*
Accounting Services Agreement filed by EDGAR on June 1, 1995
as EX-99.B9-gsasa to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
Service Agreement filed by EDGAR on July 30, 1993 as Exhibit
(b)(15) to Post-Effective Amendment No. 15 to the Registration
Statement on Form N-1A*
Amendment to Service Agreement, filed by EDGAR on June 1, 1995
as EX-99.B9-gssaa to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
(i) Opinion and Consent of Counsel, attached heret as
EX-99.B(i)gslegopn
(j) Consent of Deloitte & Touche LLP, Independent Accountants,
attached hereto as EX-99.B(j)-gsconsnt
(k) Not applicable
(l) Not applicable
(m) Service Plan, as restated, filed by EDGAR on June 1, 1995 as
EX-99.B15-gsspca to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
Distribution and Service Plan for Class A shares filed by
EDGAR on June 29, 1998 as EX-99.B15-gsdsp to Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A*
(n) Not applicable
(o) Multiple Class Plan, filed by EDGAR on June 27, 1996 as
EX-99.B18-gsmcp to Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A*
<PAGE>
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Section (7) of Article SEVENTH of the Articles of
Incorporation of Registrant, as amended, filed June 1, 1995 as
EX-99.B1-gschart to Post-Effective Amendment No. 20 to the Registration
Statement on Form N-1A*, and to Article IV of the Underwriting Agreement,
filed June 1, 1995 as EX-99.B6-gsua to Post-Effective Amendment No. 20 to
the Registration Statement on Form N-1A*; each of which provide
indemnification. Also refer to Section 2-418 of the Maryland General
Corporation Law regarding indemnification of directors, officers and
employees and agents.
26. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the investment manager of
the Registrant. Under the terms of an Investment Management Agreement
between Waddell & Reed, Inc. and the Registrant, Waddell & Reed, Inc. is
to provide investment management services to the Registrant. Waddell &
Reed, Inc. assigned its investment management duties under this agreement
to Waddell & Reed Investment Management Company on January 8, 1992.
Waddell & Reed Investment Management Company is a corporation which is not
engaged in any business other than the provision of investment management
services to those registered investment companies described in Part A and
Part B of this Post-Effective Amendment and to other investment advisory
clients.
Each director and executive officer of Waddell & Reed Investment
Management Company has had as his sole business, profession, vocation or
employment during the past two years only his duties as an executive
officer and/or employee of Waddell & Reed Investment Management Company or
its predecessors, except as to persons who are directors and/or officers
of the Registrant and have served in the capacities shown in the Statement
of Additional Information of the Registrant. The address of the officers
is 6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to the Prospectus and SAI of this Registrant.
27. Principal Underwriter
---------------------
(a) Waddell & Reed, Inc. is the principal underwriter to the
<PAGE>
Registrant. It is also the principal underwriter to the
following investment companies:
United Funds, Inc.
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 New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
Waddell & Reed Funds, Inc.
Advantage I
Advantage II
Advantage Plus
(b) The information contained in the underwriter's application on Form
BD, under the Securities Exchange Act of 1934, is herein
incorporated by reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or any
affiliated person of such affiliated person.
28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant, each
of whose business address is Post Office Box 29217, Shawnee Mission,
Kansas 66201-9217.
29. Management Services
-------------------
There is no service contract other than as discussed in Parts A and B of
this Post-Effective Amendment and listed in response to Items 23.(h) and
23.(m) hereof.
30. Undertakings
------------
Not applicable
<PAGE>
- ---------------------------------
*Incorporated herein by reference
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment pursuant to
Rule 485(b) of the Securities Act of 1933 and the Registrant 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 28th day of June, 1999.
UNITED GOVERNMENT SECURITIES FUND, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C> <C>
/s/Keith A. Tucker* Chairman of the Board June 28, 1999
- ---------------------- -------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal June 28, 1999
- ---------------------- Financial Officer and -------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and June 28, 1999
- ---------------------- Director -------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer June 28, 1999
- ---------------------- and Principal Accounting -------------
Theodore W. Howard Officer
/s/James M. Concannon* Director June 28, 1999
- ---------------------- -------------
James M. Concannon
/s/John A. Dillingham* Director June 28, 1999
- ---------------------- -------------
John A. Dillingham
<PAGE>
/s/David P. Gardner* Director June 28, 1999
- ---------------------- -------------
David P. Gardner
/s/Linda K. Graves* Director June 28, 1999
- ---------------------- -------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director June 28, 1999
- ---------------------- -------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director June 28, 1999
- ---------------------- -------------
John F. Hayes
/s/Glendon E. Johnson* Director June 28, 1999
- ---------------------- -------------
Glendon E. Johnson
/s/William T. Morgan* Director June 28, 1999
- ---------------------- -------------
William T. Morgan
/s/Ronald C. Reimer* Director June 28, 1999
- ---------------------- -------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director June 28, 1999
- ---------------------- -------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director June 28, 1999
- ---------------------- -------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director June 28, 1999
- ----------------------- -------------
Frederick Vogel III
</TABLE>
<PAGE>
*By
Helge K. Lee
Attorney-in-Fact
ATTEST:
Kristen A. Richards
Assistant Secretary
<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.,
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, HELGE K. LEE 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: May 19, 1999 /s/Robert L. Hechler
-----------------------------
Robert L. Hechler, President
<TABLE>
<S> <C> <C>
/s/Keith A. Tucker Chairman of the Board May 19, 1999
- ---------------------- ------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal May 19, 1999
- ---------------------- Financial Officer and ------------
Robert L. Hechler Director
/s/Henry J. Herrmann Vice President and May 19, 1999
- ---------------------- Director ------------
Henry J. Herrmann
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Theodore W. Howard Vice President, Treasurer May 19, 1999
- ---------------------- and Principal Accounting ------------
Theodore W. Howard Officer
/s/James M. Concannon Director May 19, 1999
- ---------------------- ------------
James M. Concannon
/s/John A. Dillingham Director May 19, 1999
- ---------------------- ------------
John A. Dillingham
/s/David P. Gardner Director May 19, 1999
- ---------------------- ------------
David P. Gardner
/s/Linda K. Graves Director May 19, 1999
- ---------------------- ------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director May 19, 1999
- ---------------------- ------------
Joseph Harroz, Jr.
/s/John F. Hayes Director May 19, 1999
- ---------------------- ------------
John F. Hayes
/s/Glendon E. Johnson Director May 19, 1999
- ---------------------- ------------
Glendon E. Johnson
/s/William T. Morgan Director May 19, 1999
- ---------------------- ------------
William T. Morgan
/s/Ronald C. Reimer Director May 19, 1999
- ---------------------- ------------
Ronald C. Reimer
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Frank J. Ross, Jr. Director May 19, 1999
- ---------------------- ------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director May 19, 1999
- ---------------------- ------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director May 19, 1999
- ---------------------- ------------
Frederick Vogel III
</TABLE>
Attest:
/s/Kristen A. Richards
- --------------------------------
Kristen A. Richards
Assistant Secretary
EX-99.B(d)gsimafee
EXHIBIT A TO INVESTMENT MANAGEMENT AGREEMENT
UNITED GOVERNMENT SECURITIES FUND, INC.
FEE SCHEDULE
A cash fee computed each day on net asset value for the Fund at the annual rates
listed below:
<TABLE>
<CAPTION>
Net Assets Fee
- ---------- ---
<S> <C>
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 0.40% of net assets
Over $1.5 billion 0.35% of net assets
</TABLE>
As Amended and Effective June 30, 1999.
EX-99.B(i)gslegopn
June 28, 1999
United Government Securities Fund, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
RE: United Government Securities Fund, Inc.
Post-Effective Amendment No. 25
Dear Sir or Madam:
In connection with the public offering of shares of Capital Stock of United
Government Securities Fund, Inc. (the "Fund"), I have examined such corporate
records and documents and have made such further investigation and examination
as I deemed necessary for the purpose of this opinion.
It is my opinion that the indefinite number of shares of such Capital Stock
covered by the Fund's Registration Statement on Form N-1A, when issued and paid
for in accordance with the terms of the offering, as set forth in the Prospectus
and Statement of Additional Information forming a part of the Registration
Statement, will be, when such Registration shall have become effective, legally
issued, fully paid and non-assessable by the Fund.
I hereby consent to the filing of this opinion as an Exhibit to the said
Registration Statement and to the reference to me in such Statement of
Additional Information.
Yours truly,
Helge K. Lee
General Counsel
HKL/fr
EX-99.B(j)-gsconsnt
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 25 to Registration
Statement No. 2-77329 of United Government Securities Fund, Inc. on Form N-1A of
our report dated May 7, 1999 appearing in the Prospectus, which is part of such
Registration Statement, and to the reference to us under the caption "Financial
Highlights" in such Prospectus.
Deloitte & Touche LLP
Kansas City, Missouri
June 24, 1999
