UNITED NEW CONCEPTS FUND, INC.
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
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June 30, 1994
PROSPECTUS
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United New Concepts Fund, Inc. (the "Fund") is a management investment
company which seeks the growth of your investment through a diversified holding
of securities issued primarily by new or unseasoned companies which are in their
early stages of development or smaller companies positioned in new and emerging
industries where the opportunity for rapid growth is above average.
This Prospectus contains concise information about the Fund of which you
should be aware before investing. Additional information has been filed with
the Securities and Exchange Commission and is contained in a Statement of
Additional Information (the "SAI"), dated June 30, 1994. You may obtain a copy
of the SAI free of charge by request to the Fund or its Underwriter, Waddell &
Reed, Inc., at the address or telephone number shown below. The SAI is
incorporated by reference into this Prospectus and you will not be aware of all
facts unless you read both this Prospectus and the SAI.
Retain This Prospectus For Future Reference
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
These are speculative securities as defined by the Arizona Securities Division
Rule R14-4-118.
To be attached to front cover page of United New Concepts Fund, Inc. prospectus
distributed in the state of Arizona.
NUS1012AZ
This supplement is required by the Division of Securities of the State of
Missouri
The security offered hereby may be considered speculative due to the Fund's
intention to borrow money for investment in securities. In addition, if and to
the extent the Fund's investment activity results in a high rate of portfolio
turnover, it will incur correspondingly greater commission expenses and
transaction costs.
To be attached on the front cover page of United New Concepts Fund, Inc.
prospectus
NUS:1012MO
This supplement is required by the Office of Commissioner of Securities of the
State of Wisconsin
The security offered hereby may be considered speculative due to the Fund's
intention to borrow money for investment in securities. In addition, if and to
the extent the Fund's investment activity results in a high rate of portfolio
turnover, it will incur correspondingly greater commission expenses and
transaction costs.
To be attached on the front cover page of United New Concepts Fund, Inc.
prospectus
NUS1012WI
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
Summary of Expenses
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Load Imposed on Purchases 5.75%
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested None
Dividends (as a percentage of offering price)
Deferred Sales Load (as a percentage
of original purchase price or redemption
proceeds, as applicable) None
Redemption Fees (as a percentage
of amount redeemed, if applicable) None
Exchange Fee None
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
Management Fees 0.77%
12b-1 Fees* 0.25%
Other Expenses 0.37%
(Includes, among other expenses, transfer
agency, accounting, custodian, audit and legal fees)
Total Fund Operating Expenses** 1.39%
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of each
time period: $71 $99 $129 $215
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown.
*Expense information reflects the 12b-1 service fee which became effective
October 1, 1993, which fee will not exceed .25% of the Fund's average annual
net assets. It is possible that long-term shareholders of the Fund may bear
12b-1 fees which are more than the economic equivalent of the maximum front-
end sales charge permitted under the rules of the National Association of
Securities Dealers, Inc. See "Management and Services" for further
information about the 12b-1 service fees.
**Expense information has been restated to reflect the current maximum 12b-1
service fee which became effective October 1, 1993.
<PAGE>
United New Concepts Fund, Inc.
FINANCIAL HIGHLIGHTS
(Audited)
The following information has been audited by Price Waterhouse, independent
accountants, and should be read in conjunction with the financial statements and
notes thereto, together with the report of Price Waterhouse.
For A Share of Capital Stock Outstanding Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended March 31,
----------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .. $ 9.70 $9.41 $6.84 $5.21 $5.06 $5.30 $7.55 $6.63 $4.74 $4.79
----------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income .. (0.01) .01 .02 .07 .14 .16 .08 .03 .08 .18
Net realized and
unrealized gain
(loss) on
investments 1.48 .29 2.57 1.65 .19 (0.29) (1.09) 1.22 1.99 (0.08)
----------------------------------------------------------------------------------------------
Total from investment
operations 1.47 .30 2.59 1.72 .33 (0.13) (1.01) 1.25 2.07 .10
----------------------------------------------------------------------------------------------
Less distributions:
Dividends from net
investment
income (0.00) (0.01) (0.02) (0.09) (0.18) (0.11) (0.09) (0.07) (0.18) (0.15)
Distribution from
capital gains(0.23) 0.00 0.00 0.00 0.00 0.00 (1.15) (0.26) 0.00 0.00
----------------------------------------------------------------------------------------------
Total
distributions (0.23) (0.01) (0.02) (0.09) (0.18) (0.11) (1.24) (0.33) (0.18) (0.15)
----------------------------------------------------------------------------------------------
Net asset value,
end of period $10.94 $9.70 $9.41 $6.84 $5.21 $5.06 $5.30 $7.55 $6.63 $4.74
==============================================================================================
Total Return* 15.21% 3.19% 37.83% 33.62% 6.59% -2.36% -15.07% 19.36% 45.22% 2.13%
Net assets, end
of period (000
omitted) . $221,053 $179,959 $152,426 $78,274 $68,111 $79,307 $91,416 $95,230 $43,206 $29,136
Ratio of expenses
to average net
assets.... 1.19% 1.18% 1.16% 1.36% 1.27% 1.21% 1.19% 1.19% 1.47% 1.48%
Ratio of net investment
income to average
net assets -0.11% 0.15% 0.22% 1.12% 2.39% 2.72% 1.45% 0.75% 1.64% 3.87%
Portfolio turnover
rate** .. 55.23% 57.10% 71.56% 89.64% 130.41% 81.56% 135.23% 182.74% 272.99% 222.64%
</TABLE>
*Total return calculated without taking into account the sales load
deducted on an initial purchase.
**This rate is, in general, calculated by dividing the average value of
the Fund's portfolio during the period into the lesser of its purchases or
sales in the period, excluding short-term securities. For periods ended
prior to April 1, 1985, U.S. Government Securities were excluded from the
calculation.
Information regarding the performance of the Fund is contained in the
Fund's annual report to shareholders which may be obtained without charge by
request to the Fund at the address or phone number shown on the cover of this
Prospectus.
<PAGE>
The Fund
United New Concepts Fund, Inc. is a corporation organized under Maryland
law on March 3, 1983. It is an open-end diversified management investment
company commonly called a "mutual fund." The Fund has a Board of Directors
which has overall responsibility for the management of its affairs. For the
names of the Directors and other information about them, see the SAI. The Fund
has only one class of shares. Each share has the same rights to dividends and
to vote. Shares are fully paid and nonassessable when bought. The Fund does
not hold annual meetings of shareholders; however, certain significant corporate
matters, such as the approval of a new investment advisory agreement or a change
in a fundamental investment policy, which require shareholder approval will be
presented to shareholders at an annual or special meeting called by the Board of
Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon receipt
by the Fund of a request in writing signed by shareholders holding not less than
25% of all shares entitled to vote at such meeting, provided certain conditions
stated in the Bylaws of the Fund are met. There will normally be no meeting of
shareholders for the purpose of electing directors until such time as less than
a majority of directors holding office have been elected by shareholders, at
which time the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the Investment
Company Act of 1940, as amended, applies to the Fund, the directors are required
to call a meeting of shareholders for the purpose of voting upon the question of
removal of any director when requested in writing to do so by the shareholders
of record of not less than 10% of the Fund's outstanding shares.
Performance Information
From time to time the Fund or Waddell & Reed, Inc. may include performance
data in advertisements or in information furnished to present or prospective
shareholders. Fund performance may be shown by presenting one or more
performance measurements, including total return and performance rankings.
The Fund's total return is its overall change in value for the period shown
including the effect of reinvesting dividends and distributions and any change
in the net asset value per share. A cumulative total return reflects the Fund's
change in value over a stated period of time. An average annual total return
reflects the hypothetical annually compounded return that would have produced
the cumulative total return for a stated period if the Fund's performance had
been constant during each year of that period. Average annual total returns are
not actual year-by-year results and investors should realize that total returns
will fluctuate.
Standardized total return figures reflect payment of the maximum sales
charge. The Fund may also provide non-standardized performance information
which does not reflect deduction of such sales charge or which is for periods
other than those required to be presented or which differs otherwise from
standardized performance information. See the SAI for total return and method
of computation.
From time to time in advertisements and information furnished to present or
prospective shareholders the Fund may discuss its performance rankings as
published by recognized independent mutual fund statistical services such as
Lipper Analytical Services, Inc., or by publications of general interest such as
Forbes, Money, The Wall Street Journal, Business Week, Barron's, Fortune or
Morningstar Mutual Fund Values. The Fund may also compare its performance to
that of other selected mutual funds or selected recognized market indicators
such as the Standard & Poor's 500 Stock Index and the Dow Jones Industrial
Average. Performance information may be quoted numerically or presented in a
table, graph or other illustration.
All performance information which the Fund advertises or includes in
information provided to present or prospective shareholders is historical in
nature and is not intended to represent or guarantee future results. The value
of the Fund's shares when redeemed may be more or less than their original cost.
Goal of the Fund
The goal of the Fund is to seek the growth of your investment. This goal
is a fundamental policy and may not be changed without the approval of
shareholders. The Fund tries to achieve this goal through a diversified holding
of securities, primarily in the common stocks of, or securities convertible into
the common stocks of, relatively new or unseasoned companies, companies which
are in their early stages of development or smaller companies positioned in new
and emerging industries where the opportunity for rapid growth is above average.
However, the Fund may occasionally invest in securities of larger companies
which are being fundamentally changed and revitalized or have a position which
is considered strong relative to the market as a whole or which Waddell & Reed
Investment Management Company (the "Manager"), the Fund's Manager, believes
offer unusual opportunities for above average growth. There may be times when
up to all of the Fund's assets may be invested as a temporary measure for
defensive purposes in either debt securities (including commercial paper or
short-term U.S. Government Securities) or preferred stocks or both.
There can be no assurance that the Fund will achieve its goal; some market
risks are inherent in all securities to varying degrees. The Fund is designed
for investors who are willing to accept greater risks than are present with many
other mutual funds. It is not intended for those investors who desire assured
income and conservation of capital. The Fund ordinarily invests in securities
whose market price often is subject to rapid and wide fluctuation. In selecting
companies the Manager may look for such characteristics as aggressive or
creative management, technological or specialized expertise, new or unique
products or services, entry into new or emerging industries, and special
situations arising out of governmental priorities and programs.
Investment Policies
There are three main kinds of securities that the Fund will own: common
stocks, preferred stocks and debt securities. These securities in which the
Fund may invest include preferred stock that converts to common stock either
automatically or after a specified period of time or at the option of the
issuer, and debt securities whose performance is linked to a specified equity
security or securities index. As an operating (i.e., nonfundamental) policy,
the Fund does not intend to invest in non-investment grade debt securities if as
a result of such investment more than 5% of its assets would consist of such
investments. See the SAI for a discussion of the risks associated with non-
investment grade debt securities. The Fund may purchase warrants (which are
rights to purchase securities) and may buy shares of other investment companies
which do not redeem their shares, subject to the conditions stated in the SAI.
The Fund may borrow money in order to purchase securities which increases
both investment opportunity and risk. Since substantially all of the Fund's
assets fluctuate in value, but borrowing obligations are fixed, net asset value
per share will tend to correspondingly increase or decrease more when the
portfolio assets increase or decrease in value, a factor known as leveraging.
The Fund may also lend its securities for the purpose of realizing income.
The Fund will not loan more than 10% of its assets at any one time. The
percentage limit and the requirement that such loans be on a collateralized
basis in accordance with certain regulatory requirements are fundamental
policies which can only be changed by shareholder vote. There are certain risks
associated with lending securities in that the Fund may experience delay in
recovering the collateral or even loss of the collateral. See the SAI for
further discussion of these risks.
The Fund may purchase securities subject to repurchase agreements (which
can be considered as collateralized loans by the Fund) but may not cause more
than 10% of its net assets to be invested in illiquid securities which include
repurchase agreements not terminable within seven days. The majority of the
repurchase transactions in which the Fund would engage run from day to day, and
the delivery pursuant to the resale typically will occur within one to five days
of the purchase. The Fund's risk is limited to the ability of the vendor to pay
the agreed-upon sum upon the delivery date.
The Fund may invest up to 10% of its assets in foreign securities and may
enter into forward currency exchange contracts in connection with the purchase
or sale of a security denominated in a foreign currency. There are certain
risks associated with foreign securities not usually associated with U.S.
securities including absence of uniform accounting, auditing and financial
standards, less government regulation, changes in currency rates and in exchange
regulations, and political instability. See the SAI for a discussion of these
risks.
The Fund will not invest more than 5% of its assets, taken at market value
at the time of investment, in companies, including predecessors, with less than
three years continuous operation. The SAI gives details as to these investment
methods, all of which are fundamental policies of the Fund which cannot be
changed without shareholder approval unless otherwise indicated, and also gives
details as to other investment restrictions.
The Fund may write (sell) listed covered calls on securities on not more
than 25% of its assets and may purchase calls and write and purchase puts on
securities. "Covered" means that the Fund owns the securities which are subject
to the call or has the right to acquire them without additional payment. The
purchaser of a call has the right to purchase from the Fund the securities
covered by the call at a fixed price for a fixed period. The Fund has an
operating policy which provides that only options on securities which are issued
by the Options Clearing Corporation may be purchased or sold except the Fund may
write unlisted put options and purchase unlisted put and call options on
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
The Fund may write options on securities for the purpose of increasing
income in the form of premiums paid by the purchaser of the option. While
writing covered calls may result in realization of income, the Fund will lose
the opportunity to profit from an increase in the price of the security subject
to the call over the exercise price. When the Fund writes a put it will
maintain designated cash or readily marketable assets adequate to purchase the
related investments should the put be exercised. In writing puts, the Fund
assumes the risk of loss should the market value of the underlying security
decline below the exercise price at which the Fund is obligated to purchase the
security. The Fund will write a put only when it has determined that it would
be willing to purchase the underlying security at the exercise price.
The Fund may purchase calls to take advantage of an expected rise in the
market value of securities which the Fund does not hold in its portfolio and to
close positions in calls it has written. It may purchase puts on related
investments it owns ("protective puts") or on related investments it does not
own ("nonprotective puts"). Buying a protective put permits the Fund to protect
itself during the put period against a decline in the value of the related
investments below the exercise price by selling them through the exercise of the
put. Buying a nonprotective put permits the Fund, if the market price of the
related investments is below the put price during the put period, either to
resell the put or to buy the related investments and sell them at the exercise
price. The Fund may also purchase puts to close positions in puts it has
written. If an option purchased by the Fund is not exercised or sold it will
become worthless at its expiration date and the Fund will lose the amount of the
premium it paid.
The Fund may also, for non-speculative purposes, write and purchase listed
options on stock indexes which are not limited to stocks of any industry or
group of industries ("broadly-based stock indexes"). It will write options on
stock indexes primarily to generate income. It will purchase calls on stock
indexes to hedge against an anticipated increase in the price of securities it
wishes to acquire and will purchase puts on stock indexes to hedge against an
anticipated decline in the market value of its portfolio securities. Because
stock index options are settled in cash, the Fund cannot provide in advance for
its potential settlement obligations on a call it has written on a stock index
by holding the underlying securities. The Fund bears the risk that the value of
the securities it holds will vary from the value of the index.
Options offer large amounts of leverage which will result in the Fund's net
asset value being more sensitive to changes in the value of the related
investment. There is no assurance that a liquid secondary market will exist for
exchange-listed options. The market for options which are not listed on an
exchange may be less active than the market for exchange-listed options. If the
Fund is not able to enter into a closing transaction on an option it has written
it will be required to maintain the securities, or cash in the case of an option
on a broadly-based stock index, subject to the call or the collateral underlying
the put until a closing purchase transaction can be entered into or the option
expires. Option transactions may increase the portfolio turnover rate creating
greater commission expenses, transaction costs and tax consequences.
The Fund may also buy and sell futures contracts on debt securities ("Debt
Futures"), futures contracts on broadly-based stock indexes ("Stock Index
Futures") and options on Debt Futures and Stock Index Futures. The Fund will
purchase or sell futures contracts only for the purpose of hedging against
changes in the market value of its portfolio securities or changes in the market
value of securities which the Manager anticipates it may wish to include in the
Fund's portfolio. At the present time, the debt securities to which Debt
Futures relate are long-term U.S. Treasury Bonds, Treasury Notes, Government
National Mortgage Association pass-through mortgage-backed securities and three-
month U.S. Treasury Bills. Since futures contracts and options thereon can
replicate movements in the cash markets for the securities in which the Fund
invests without the large cash investments required for dealing in such markets,
they may subject the Fund to greater and more volatile risks than might
otherwise be the case. The principal risks related to the use of such
instruments are (i) imperfect correlation between movements in the market price
of the portfolio investments (held or intended) being hedged and in the price of
the futures contract or option; (ii) possible lack of a liquid secondary market
for closing out futures or options positions; (iii) the need for additional
portfolio management skills and techniques; and (iv) losses due to unanticipated
market price movements. For a hedge to be completely effective, the price
change of the hedging instrument should equal the price change of the security
being hedged. Such equal price changes are not always possible because the
investment underlying the hedging instrument may not be the same investment that
is being hedged. The Manager will attempt to create a closely correlated hedge
but hedging activity may not be completely successful in eliminating market
value fluctuation. The ordinary spreads between prices in the cash and futures
markets, due to the differences in the natures of those markets, are subject to
distortion. Due to the possibility of distortion, a correct forecast of general
interest or stock market trends by the Manager may still not result in a
successful transaction. The Manager may be incorrect in its expectations as to
the extent of various interest rate movements or stock market movements or the
time span within which the movements take place. As of the date of this
Prospectus, except as to covered call writing, the Fund intends to limit
purchase and sale of options and futures contracts to buying and selling
broadly-based stock index futures contracts and options thereon for the purpose
of hedging not more than 10% of total assets.
The Fund may engage in short-term trading and have a high portfolio
turnover. See the Financial Highlights table for past turnover. This results
in greater commission costs and may result in certain tax consequences.
Management and Services
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the inception of the investment company, whichever was later, and
to TMK/United Funds, Inc. since its inception. On January 8, 1992, subject to
the authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned
its investment management duties (and assigned its professional staff for
investment management services) to Waddell & Reed Investment Management Company,
a wholly-owned subsidiary of Waddell & Reed, Inc. The Manager has also served
as investment manager for Waddell & Reed Funds, Inc. since its inception in
September 1992 and Torchmark Government Securities Fund, Inc. and Torchmark
Insured Tax-Free Fund, Inc. since each commenced operations in February 1993.
Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter for
each of the investment companies in the United Group of Mutual Funds, TMK/United
Funds, Inc. and Waddell & Reed Funds, Inc. Waddell & Reed, Inc. is an indirect
subsidiary of Torchmark Corporation, a holding company, and United Investors
Management Company, a holding company, and a direct subsidiary of Waddell &
Reed Financial Services, Inc., a holding company.
Subject to authority of the Fund's Board of Directors, the Manager provides
investment advice and supervises investments for which it is paid a fee,
consisting of two elements: (i) a "Specific" fee computed on the Fund's net
asset value as of the close of business each day at the annual rate of .35 of 1%
of net assets and (ii) a pro rata participation based on the relative net asset
size of the Fund in a "Group" fee computed each day on the combined net asset
values of all of the funds in the United Group at the annual rates shown in the
following table. The fee is accrued and paid daily. Prior to the above-
described assignment to the Manager on January 8, 1992, the fees were paid to
Waddell & Reed, Inc.
Group Fee Rate
Group Net Asset Level Annual Group
(all dollars in millions) Fee Rate for Each Level
------------------------- -----------------------
From $ 0 to $ 750 .51 of 1%
From $ 750 to $ 1,500 .49 of 1%
From $ 1,500 to $ 2,250 .47 of 1%
From $ 2,250 to $ 3,000 .45 of 1%
From $ 3,000 to $ 3,750 .43 of 1%
From $ 3,750 to $ 7,500 .40 of 1%
From $ 7,500 to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Waddell & Reed Services Company, a subsidiary of Waddell & Reed, Inc., acts
as transfer agent ("Shareholder Servicing Agent") for the Fund and processes the
payments of dividends. See the SAI for the fees paid for these services.
Inquiries concerning shareholder accounts should be sent to that company at the
address shown on the inside back cover of this Prospectus or to the Fund at the
address shown on the front cover of this Prospectus.
Waddell & Reed Services Company also acts as agent ("Accounting Services
Agent") in providing bookkeeping and accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services,
the Fund will pay the Accounting Services Agent a monthly fee of one-twelfth
of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to Waddell &
Reed, Inc., the principal underwriter for the Fund, in an amount not to exceed
.25% of the Fund's average annual net assets. The fee is to be paid to
reimburse Waddell & Reed, Inc. for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts. In particular, the Service Plan and a related Service
Agreement between the Fund and Waddell & Reed, Inc. contemplate that these
expenditures may include costs and expenses incurred by Waddell & Reed, Inc. and
its affiliates in compensating, training and supporting registered sales
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located at
field sales offices; engaging in other activities useful in providing personal
services to Fund shareholders and/or maintenance of shareholder accounts; and in
compensating broker-dealers who may regularly sell Fund shares for providing
shareholder services and/or maintaining shareholder accounts. See the SAI for
additional information and terms of the Service Plan.
The combined net asset values of all the funds in the United Group were
approximately $10.9 billion on March 31, 1994. Management fees for the fiscal
year ended March 31, 1994 were 0.77 percent of the Fund's average net assets.
The Fund's total expenses for that year were 1.19 percent of its average net
assets.
The Manager places transactions for the Fund's portfolio and in doing so
may consider sales of shares of the Fund and other funds it manages as a factor
in the selection of brokers to execute portfolio transactions. See the SAI for
further information.
Mark G. Seferovich is primarily responsible for the day-to-day management
of the portfolio of the Fund. Mr. Seferovich is Vice President of the Manager
and Vice President of the Fund. He is also Vice President of other investment
companies for which the Manager serves as investment manager. Mr. Seferovich
has held his Fund responsibilities since March 1989 and has been an employee of
Waddell & Reed, Inc. and its successor, the Manager, since February 1989. He
has served as the portfolio manager for other investment companies managed by
Waddell & Reed, Inc. and the Manager since February 1989 and has served as
portfolio manager for a brokerage firm. Other members of the Manager's
investment management department provide input on market outlook, economic
conditions, investment research and other considerations relating to the Fund's
investments.
Dividends, Distributions and Taxes
Ordinarily, dividends are paid annually from net investment income, which
includes accrued interest, earned discount, dividends and other income earned on
portfolio securities less expenses. The Fund also distributes substantially all
of its net capital gains (the excess of net long-term capital gains over net
short-term capital losses) and net short-term capital gains, if any, after
deducting any available capital loss carryovers, and any net realized gains from
foreign currency transactions, with its regular dividend at the end of the
calendar year. The Fund may make additional distributions if necessary to avoid
Federal income or excise taxes on certain undistributed income and capital
gains.
You have the option to receive dividends and distributions in cash, to
reinvest them without charge or to receive dividends in cash and reinvest
distributions, as you may instruct. In the absence of instructions, dividends
and distributions will be reinvested.
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986 so that it will be
relieved of Federal income tax on that part of its investment company taxable
income (consisting generally of net investment income, net short-term capital
gains and net gains from certain foreign currency transactions) and net capital
gains that are distributed to its shareholders.
Dividends from the Fund's investment company taxable income are taxable to
you as ordinary income, to the extent of the Fund's earnings and profits,
whether received in cash or reinvested in additional Fund shares. Distributions
of the Fund's realized net capital gains, when designated as such, are taxable
to you as long-term capital gains, whether received in cash or reinvested in
additional Fund shares and regardless of the length of time you have owned your
shares. The Fund notifies you after each calendar year-end as to the amounts of
dividends and distributions paid (or deemed paid) to you for that year.
A portion of the dividends paid by the Fund, whether received in cash or
reinvested in additional Fund shares, may be eligible for the dividends-received
deduction allowed to corporations. The eligible portion may not exceed the
aggregate dividends received by the Fund from U.S. corporations. However,
dividends received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the alternative minimum
tax.
The Fund is required to withhold 31% of all dividends, distributions and
redemption proceeds payable to individuals and certain other noncorporate
shareholders who do not furnish the Fund with a correct taxpayer identification
number. Withholding at that rate from dividends and distributions also is
required for such shareholders who otherwise are subject to backup withholding.
Redemption of Fund shares will result in taxable gain or loss to you,
depending on whether the redemption proceeds are more or less than your adjusted
basis for the redeemed shares (which normally includes any sales charge paid).
An exchange of Fund shares for shares of any other fund in the United Group
generally will have similar tax consequences. However, special rules apply when
you redeem or exchange Fund shares within 90 days after your purchase thereof
and subsequently reacquire Fund shares or acquire shares of another fund in the
United Group without paying a sales charge due to the thirty-day reinvestment
privilege or exchange privilege. In these cases, any gain on the disposition of
the Fund shares would be increased, or loss decreased, by the amount of the
sales charge you paid when those shares were acquired, and that amount will
increase the adjusted basis of the shares subsequently acquired. In addition,
if you purchase Fund shares within thirty days before or after redeeming other
Fund shares at a loss, part or all of that loss will not be deductible and will
increase the basis of the newly purchased shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for a further discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax advisor.
Purchase of Shares
You may purchase shares through Waddell & Reed, Inc. and its sales
representatives. To open an account you must complete an application. Orders
are accepted only at the home office of Waddell & Reed, Inc. (see inside back
cover of this Prospectus for address), and it need not accept any orders. The
offering price of a share is its net asset value next determined following
acceptance plus the sales charge shown in the table below. This net asset value
per share is the value of the Fund's assets, less liabilities, divided by the
number of shares outstanding. Net asset value is determined once each day as of
the later of the close of the regular session of the New York Stock Exchange or
the close of the regular session of any domestic securities exchange or
commodities exchange on which an option or future held by the Fund is traded on
each day the New York Stock Exchange is open. The Fund's portfolio securities
listed or traded on an exchange are valued using market quotations or, if not
available, at their fair value in a manner determined in good faith by the Board
of Directors. Short-term debt securities are valued at amortized cost which
approximates market value. Other assets are valued at their fair value.
Sales Charge
Sales Charge as Approximate
as Percent of Percent of
Size of Purchase Offering Price Amount Invested
Under $100,000 ...................... 5.75% 6.10%
$ 100,000 to less than 200,000 .. 4.75 4.99
200,000 to less than 300,000 .. 3.50 3.63
300,000 to less than 500,000 .. 2.50 2.56
500,000 to less than 1,000,000 .. 1.50 1.52
1,000,000 to less than 2,000,000 .. 1.00 1.01
2,000,000 and over ................. 0.00 0.00
Ordinarily, the minimum initial investment is $500. A $50 minimum initial
investment pertains to certain retirement plan accounts. A $100 minimum initial
investment pertains to certain exchanges of shares from other funds in the
United Group.
A shareholder may arrange with Waddell & Reed, Inc. to purchase shares by
having regular monthly withdrawals of $25 or more made from a checking account
or by having regular monthly exchanges of shares with a value of $25 or more
made from United Cash Management, Inc., subject to certain conditions explained
in the SAI.
Lower sales charges are available by combining additional purchases of any
of the funds in the United Group except United Municipal Bond Fund, Inc., United
Cash Management, Inc., United Government Securities Fund, Inc. and United
Municipal High Income Fund, Inc. with the net asset value of shares already held
("rights of accumulation") and by grouping all purchases made during a thirteen-
month period ("Statement of Intention"). Shares of another fund purchased
through a "contractual plan" may not be included unless the plan has been
completed. Purchases by certain related persons may be grouped. Shares of this
Fund may be exchanged for shares of another fund in the United Group without
payment of an additional sales charge. Subject to certain conditions, automatic
monthly exchanges of shares of United Cash Management, Inc. and exchanges of
shares of certain other funds in the United Group (listed on the back cover of
this Prospectus) may be made into the Fund. These exchange privileges may be
eliminated or modified at any time, upon notice in certain instances.
Information as to rights of accumulation, Statements of Intention, grouping by
related persons, exchange privileges, Flexible Withdrawal Service, Individual
Retirement Accounts, Section 403(b) plans, Keogh, 401(k), 457 plans and other
qualified employee benefit plans is contained in the SAI. Applicable forms are
available from Waddell & Reed, Inc.'s sales representatives.
Fund shares may be purchased at net asset value by the Directors and
officers of the Fund, employees of Waddell & Reed, Inc., employees of their
affiliates, sales representatives of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each such
Director, officer, employee and sales representative. Purchases in certain
retirement plans and certain trusts for these persons may also be made at net
asset value. Purchases in a 401(k) plan having 100 or more eligible employees
may be made at net asset value. Shares may also be issued at net asset value in
a merger, acquisition or exchange offer made pursuant to a plan of
reorganization to which the Fund is a party. See the SAI for additional
information.
Redemption
You have the right to sell your shares back to the Fund (redeem) at any
time by sending a written request to the address on the front cover of this
Prospectus, stating how many shares or the amount in dollars you wish to redeem.
The written request must be in good order which requires that if more than one
person owns the shares, each owner must sign the written request. If you hold a
certificate, it must be properly endorsed and sent to the Fund. The Fund
reserves the right to require a signature guarantee by a national bank, a
federally chartered savings and loan or a member firm of a national stock
exchange or other eligible guarantor in accordance with procedures of the Fund's
transfer agent if the request for redemption is made by a corporation,
partnership or fiduciary, or if the redemption request is made by, or if
redemption proceeds are payable to, someone other than the owner of record. If
you recently purchased the shares by check, the payment of redemption proceeds
on these shares may be delayed. You may arrange for the bank upon which the
purchase check was drawn to provide to the Fund telephone or written assurance,
satisfactory to the Fund, that the check has cleared and been honored. If no
such assurance is given, payment of the redemption proceeds on these shares will
be delayed until the earlier of 10 days or when the Fund has been able to verify
that your purchase check has cleared and been honored.
The Fund will redeem your shares at their net asset value (which may be
more or less than what you paid) next computed after receipt of your written
request for redemption in good order at the Fund's address shown on the front
cover of this Prospectus. Payment is made within seven days, unless delayed
because of emergency conditions determined by the Securities and Exchange
Commission, when the New York Stock Exchange is closed (other than on weekends
and holidays) or when trading on the Exchange is restricted. Payment is made in
cash, although under extraordinary conditions redemptions may be made in
portfolio securities.
You may reinvest in the Fund all or part of the amount you redeemed without
charge by sending to the Fund the amount you wish to reinvest. The reinvested
amounts must be received within thirty days after the date of your redemption.
You may do this only once as to Fund shares.
The Fund reserves the right to redeem at net asset value all shares owned
by a particular shareholder in the Fund having an aggregate net asset value less
than $500. The Fund will give the shareholder notice of intention to redeem and
a 60-day opportunity to purchase a sufficient number of additional shares to
bring the net asset value of his or her shares in the Fund to $500. See the SAI
for further information.
Under the terms of the 401(k) plan which Waddell & Reed, Inc. has
available, the plan may have the right to make a loan to a plan participant by
redeeming Fund shares held by the plan. Principal and interest payments on the
loan made in accordance with the terms of the plan may be reinvested by the
plan, without payment of a sales charge, in shares of any of the funds in the
United Group in which the plan may invest.
Information concerning the establishment of automatic payments from an
account is available from representatives of Waddell & Reed, Inc.
<PAGE>
THE INVESTMENTS OF
UNITED NEW CONCEPTS FUND, INC.
MARCH 31, 1994
Shares Value
COMMON STOCKS
Automotive - 6.34%
Automotive Industries Holding, Inc.* ... 112,500 $ 3,375,000
Gentex Corporation* .................... 60,000 1,357,500
Harley-Davidson, Inc. .................. 130,000 5,931,250
O'Reilly Automotive, Inc.* ............. 45,000 1,254,375
Superior Industries International,
Inc. .................................. 60,000 2,092,500
Total ................................. 14,010,625
Biotechnology and Medical Services - 5.00%
American Healthcorp, Inc.* ............. 125,500 1,757,000
Pyxis Corporation* .................... 85,000 2,231,250
Target Therapeutics, Inc.* ............. 60,000 1,470,000
Tecnol Medical Products, Inc.* ......... 110,550 1,450,969
Ventritex, Inc.* ....................... 100,000 2,100,000
Zoll Medical Corporation* .............. 70,000 2,056,250
Total ................................. 11,065,469
Building - 0.74%
NCI Building Systems, Inc.* ............ 100,000 1,637,500
Computers and Office Equipment - 18.36%
America Online, Inc.* .................. 70,000 5,013,750
BMC Software* .......................... 65,000 4,005,625
Broderbund Software, Inc.* ............. 70,000 2,861,250
Cerner Corporation* .................... 29,000 1,203,500
Concord EFS, Inc.* ...................... 75,000 1,659,375
DSP Group, Inc.* ...................... 50,000 806,250
Digi International Inc.* ............... 120,000 2,100,000
Health Management Systems, Inc.* ....... 71,000 1,615,250
Information Resources, Inc.* ........... 80,000 1,370,000
Integrated Silicon Systems, Inc.* ..... 40,000 940,000
MEDSTAT Group (The)* ................... 150,000 2,306,250
Microchip Technology Incorporated* ..... 6,600 253,275
Microsoft Corporation* ................. 35,000 2,975,000
Parametric Technology Corporation* ..... 100,000 2,737,500
Pinnacle Micro, Inc.* .................. 85,000 1,338,750
QuickResponse Services, Inc.* .......... 100,000 2,137,500
Spectrum HoloByte* .................... 100,000 912,500
Synopsys, Inc.* ........................ 50,000 2,206,250
Wall Data Incorporated* ................ 50,000 2,225,000
Wonderware Corporation* ............... 110,000 1,925,000
Total ................................. 40,592,025
See Notes to Schedule of Investments on page 17.
<PAGE>
THE INVESTMENTS OF
UNITED NEW CONCEPTS FUND, INC.
MARCH 31, 1994
Shares Value
COMMON STOCKS (Continued)
Drugs and Hospital Supply - 3.62%
Circa Pharmaceuticals* ................. 100,000 $ 1,175,000
Copley Pharmaceutical, Inc.* ........... 70,000 1,671,250
Forest Laboratories Inc.* .............. 80,000 3,430,000
Pharmaceutical Marketing Services, Inc.* 66,000 965,250
Watson Pharmaceuticals, Inc.* .......... 50,000 750,000
Total ................................. 7,991,500
Electronics - 12.86%
Advanced Technology Materials, Inc.* ... 82,500 484,688
Applied Materials, Inc.* ............... 80,000 3,570,000
Atmel Corporation* ..................... 70,000 2,970,590
cisco Systems, Inc.* ................... 250,000 8,531,250
Lam Research* .......................... 50,000 1,562,500
Megatest Corporation* .................. 30,000 543,750
Micron Technology, Inc. ............... 80,000 6,680,000
Summa Four, Inc.* ...................... 25,100 847,125
TriQuint Semiconductor, Inc.* ......... 30,000 487,500
Xilinx, Inc.* ......................... 55,000 2,743,125
Total ................................. 28,420,528
Financial - 2.04%
Mercury Finance Company ................ 266,666 4,499,989
Hospital Management - 10.19%
Intergroup Healthcare Corporation* ..... 75,000 3,393,750
Physician Corporation of America* ..... 50,000 1,325,000
ReLife, Inc.* .......................... 60,000 1,147,500
Sierra Health Services, Inc.* ......... 60,000 1,522,500
United HealthCare Corporation .......... 260,000 11,115,000
Vencor Incorporated* ................... 120,100 4,023,350
Total ................................. 22,527,100
Household Products - 0.52%
Valence Technology, Inc.* ............. 80,000 1,140,000
Leisure Time - 0.43%
Iwerks Entertainment, Inc.* ............ 45,100 947,100
Machinery - 0.93%
Cognex Corporation* .................... 100,000 2,062,500
Retailing - 4.29%
Books-A-Million, Inc.* ................. 90,000 1,845,000
Fastenal Company ....................... 100,000 3,262,500
Leslie's Poolmart* .................... 48,000 540,000
Starbucks Corporation* ................. 60,000 1,462,500
Williams-Sonoma, Inc.* ................ 75,000 2,381,250
Total ................................. 9,491,250
See Notes to Schedule of Investments on page 17.
<PAGE>
THE INVESTMENTS OF
UNITED NEW CONCEPTS FUND, INC.
MARCH 31, 1994
Shares Value
COMMON STOCKS (Continued)
Services, Consumer and Business - 5.34%
CUC International Inc.* ................ 222,750 $ 7,016,625
Stewart Enterprises, Inc., Class A ..... 110,000 2,626,250
Thomas Group, Inc.* ................... 40,000 640,000
Varsity Spirit Corporation* ............ 95,000 1,531,875
Total ................................. 11,814,750
Steel - 0.28%
Webco Industries, Inc.* ............... 37,000 624,375
Telecommunications - 3.41%
A+ Communications Inc.* ................ 50,000 506,250
Applied Digital Access, Inc.* ......... 60,000 960,000
Glenayre Technologies, Inc.* ........... 80,000 2,910,000
MFS Communications Company, Inc.* ...... 60,000 1,732,500
Mobile Telecommunications Technologies
Corp.* ................................ 80,000 1,424,960
Total ................................. 7,533,710
TOTAL COMMON STOCKS - 74.35% $164,358,421
(Cost: $109,555,535)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Banks and Savings and Loans - 2.38%
U.S. Bancorp,
Master Note ........................... $5,256 5,256,000
Beverages - 1.05%
PepsiCo, Inc.,
3.6%, 4-12-94.......................... 2,330 2,327,437
Chemicals Major - 1.27%
Air Products & Chemicals Inc.,
3.53%, 4-18-94......................... 2,820 2,815,299
Financial - 6.18%
Associates Corporation of North America,
Master Note ........................... 3,293 3,293,000
B.A.T. Capital Corp.,
3.52%, 4-4-94.......................... 1,500 1,499,560
BHP Finance (U.S.A.) Inc.,
3.57%, 4-18-94 ........................ 1,500 1,497,471
See Notes to Schedule of Investments on page 17.
<PAGE>
THE INVESTMENTS OF
UNITED NEW CONCEPTS FUND, INC.
MARCH 31, 1994
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Financial (Continued)
Merrill Lynch & Co. Inc.:
3.42%, 4-8-94.......................... $4,400 $ 4,397,074
3.55%, 4-18-94......................... 550 549,078
PHH Corp.,
3.52%, 4-13-94......................... 2,425 2,422,155
Total ................................. 13,658,338
Food and Related - 2.33%
Golden Peanut Co.,
3.55%, 4-4-94 ......................... 300 299,911
Sara Lee Corporation,
Master Note ........................... 4,846 4,846,000
Total ................................. 5,145,911
Household Products - 1.11%
Procter & Gamble Company (The),
3.52%, 4-18-94......................... 2,450 2,445,928
Paper - 1.01%
Champion International Corporation,
3.7%, 4-7-94........................... 2,230 2,228,626
Publishing and Advertising - 2.42%
Times Mirror Company (The),
3.45%, 4-5-94.......................... 5,350 5,347,949
Retailing - 3.92%
K Mart Corporation,
3.87%, 5-2-94 ......................... 8,700 8,671,007
Telecommunications - 0.36%
Siemens Corp.,
3.5%, 4-15-94 ......................... 800 798,911
Tobacco - 4.43%
Philip Morris Cos. Inc.,
3.4%, 4-13-94.......................... 9,800 9,788,893
TOTAL SHORT-TERM SECURITIES - 26.46% $ 58,484,299
(Cost: $58,484,299)
TOTAL INVESTMENT SECURITIES - 100.81% $222,842,720
(Cost: $168,039,834)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.81%) (1,790,134)
NET ASSETS - 100.00% $221,052,586
See Notes to Schedule of Investments on page 17.
<PAGE>
THE INVESTMENTS OF
UNITED NEW CONCEPTS FUND, INC.
MARCH 31, 1994
Notes To Schedule of Investments
*No income dividends were paid during the preceding 12 months.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1994
Assets
Investment securities - at value
(Notes 1 and 3) ................................. $222,842,720
Cash ............................................ 38,388
Receivables:
Fund shares sold ................................ 1,041,128
Dividends and interest .......................... 34,823
Prepaid insurance premium ........................ 8,280
------------
Total assets .................................. 223,965,339
------------
Liabilities
Payable for investment securities purchased ...... 2,244,991
Payable for Fund shares redeemed ................. 557,017
Accrued transfer agency and dividend disbursing .. 46,488
Accrued service fee .............................. 43,378
Accrued accounting services fee .................. 4,167
Other ............................................ 16,712
------------
Total liabilities ............................. 2,912,753
------------
Total net assets ............................. $221,052,586
============
Net Assets
$1.00 par value capital stock, authorized --
100,000,000; shares outstanding -- 20,201,157
Capital stock ................................... $ 20,201,157
Additional paid-in capital ...................... 136,420,866
Accumulated undistributed income:
Accumulated undistributed net realized gain
on investment transactions .................... 9,627,677
Net unrealized appreciation in value of
investments at end of period .................. 54,802,886
------------
Net assets applicable to outstanding units
of capital ................................... $221,052,586
============
Net asset value per share (net assets divided by
shares outstanding) .............................. $10.94
Sales load (offering price x 5.75%) ................ .67
------
Offering price per share (net asset value
divided by 94.25%) ............................... $11.61
======
On sales of $100,000 or more the sales load
is reduced as set forth on page 11.
See notes to financial statements.
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended MARCH 31, 1994
Investment Income
Income:
Interest (Note 5) ............................... $ 2,087,582
Dividends ....................................... 147,850
-----------
Total income .................................. 2,235,432
-----------
Expenses (Note 2):
Investment management fee ....................... 1,577,044
Transfer agency and dividend disbursing.......... 572,140
Service fee ..................................... 120,619
Accounting services fee ......................... 46,667
Custodian fees .................................. 19,909
Audit fees ...................................... 19,487
Legal fees ...................................... 3,590
Other ........................................... 95,167
-----------
Total expenses ................................ 2,454,623
-----------
Net investment loss .......................... (219,191)
-----------
Realized and Unrealized Gain on Investments
Realized net gain on investments ................. 12,880,184
Unrealized appreciation in value of investments
during the period ............................... 14,982,107
-----------
Net gain on investments ......................... 27,862,291
-----------
Net increase in net assets resulting from
operations ................................... $27,643,100
===========
See notes to financial statements.
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year
ended March 31,
------------------------
1994 1993
------------ ------------
Increase in Net Assets
Operations:
Net investment income (loss) ........$ (219,191) $ 244,449
Realized net gain on investments .... 12,880,184 4,475,529
Unrealized appreciation ............. 14,982,107 479,580
------------ ------------
Net increase in net assets
resulting from operations ........ 27,643,100 5,199,558
------------ ------------
Dividends to shareholders from:*
Net investment income ............... --- (195,168)
Realized gains on securities
transactions ...................... (4,451,708) ---
------------ ------------
(4,451,708) (195,168)
------------ ------------
Capital share transactions:
Proceeds from sale of shares
(3,653,867 and 4,309,400
shares, respectively) ............. 39,432,809 40,649,228
Proceeds from reinvestment of
dividends and/or capital gains
distribution (410,178 and 19,176
shares, respectively) ............. 4,417,621 193,098
Payments for shares redeemed
(2,419,485 and 1,964,530
shares, respectively) ............. (25,948,382) (18,313,945)
------------ ------------
Net increase in net assets
resulting from capital share
transactions ..................... 17,902,048 22,528,381
------------ ------------
Total increase ................... 41,093,440 27,532,771
Net Assets
Beginning of period ............ ...... 179,959,146 152,426,375
------------ ------------
End of period ........................$221,052,586 $179,959,146
============ ============
Undistributed net
investment income .................. $--- $135,600
==== ========
*See "Financial Highlights" on page 21.
See notes to financial statements.
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended March 31,
----------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .. $ 9.70 $9.41 $6.84 $5.21 $5.06 $5.30 $7.55 $6.63 $4.74 $4.79
----------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income .. (0.01) .01 .02 .07 .14 .16 .08 .03 .08 .18
Net realized and
unrealized gain
(loss) on
investments 1.48 .29 2.57 1.65 .19 (0.29) (1.09) 1.22 1.99 (0.08)
----------------------------------------------------------------------------------------------
Total from investment
operations 1.47 .30 2.59 1.72 .33 (0.13) (1.01) 1.25 2.07 .10
----------------------------------------------------------------------------------------------
Less distributions:
Dividends from net
investment
income (0.00) (0.01) (0.02) (0.09) (0.18) (0.11) (0.09) (0.07) (0.18) (0.15)
Distribution from
capital gains(0.23) 0.00 0.00 0.00 0.00 0.00 (1.15) (0.26) 0.00 0.00
----------------------------------------------------------------------------------------------
Total
distributions (0.23) (0.01) (0.02) (0.09) (0.18) (0.11) (1.24) (0.33) (0.18) (0.15)
----------------------------------------------------------------------------------------------
Net asset value,
end of period $10.94 $9.70 $9.41 $6.84 $5.21 $5.06 $5.30 $7.55 $6.63 $4.74
==============================================================================================
Total Return* 15.21% 3.19% 37.83% 33.62% 6.59% -2.36% -15.07% 19.36% 45.22% 2.13%
Net assets, end
of period (000
omitted) . $221,053 $179,959 $152,426 $78,274 $68,111 $79,307 $91,416 $95,230 $43,206 $29,136
Ratio of expenses
to average net
assets.... 1.19% 1.18% 1.16% 1.36% 1.27% 1.21% 1.19% 1.19% 1.47% 1.48%
Ratio of net investment
income to average
net assets -0.11% 0.15% 0.22% 1.12% 2.39% 2.72% 1.45% 0.75% 1.64% 3.87%
Portfolio turnover
rate** .. 55.23% 57.10% 71.56% 89.64% 130.41% 81.56% 135.23% 182.74% 272.99% 222.64%
</TABLE>
*Total return calculated without taking into account the sales load
deducted on an initial purchase.
**This rate is, in general, calculated by dividing the average value of
the Fund's portfolio during the period into the lesser of its purchases or
sales in the period, excluding short-term securities. For periods ended
prior to April 1, 1985, U.S. Government Securities were excluded from the
calculation.
See notes to financial statements.
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1994
NOTE 1 -- Significant Accounting Policies
United New Concepts Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a major dealer in bonds. Convertible bonds are
valued using this pricing system only on days when there is no sale
reported. Stocks which are traded over-the-counter are priced using NASDAQ
(National Association of Securities Dealers Automated Quotations) which
provides information on bid and asked or closing prices quoted by major
dealers in such stocks. Short-term debt securities are valued at amortized
cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. See Note 3 --
Investment Security Transactions.
C. Federal income taxes -- It is the Fund's policy to distribute all of its
taxable income and capital gains to its shareholders and otherwise qualify
as a regulated investment company under the Internal Revenue Code. In
addition, the Fund intends to pay distributions as required to avoid
imposition of excise tax. Accordingly, provision has not been made for
Federal income taxes. See Note 4 -- Federal Income Tax Matters.
D. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the record date. During the period ended March
31, 1994, the Fund adopted Statement of Position 93-2 Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain,
and Return of Capital Distributions by Investment Companies. Accordingly,
permanent book and tax basis differences relating to future shareholder
distributions have been reclassified to additional paid-in capital. As of
April 1, 1993, the cumulative effect of such differences totaling $300 was
reclassified from accumulated undistributed net realized gain on investment
transactions to additional paid-in capital. In addition, at March 31, 1994
$83,591 was reclassified from accumulated undistributed net investment
income to accumulated undistributed net realized gain on investment
transactions to more appropriately conform book and tax treatment of
dividend distributions paid to shareholders. Net investment income, net
realized gains and net assets were not affected by this change.
NOTE 2 -- Investment Management And Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .35% of net assets and (ii)
a "Group" fee computed each day on the combined net asset values of all of the
funds in the United Group of mutual funds (approximately $10.9 billion of
combined net assets at March 31, 1994) at annual rates of .51% of the first $750
million of combined net assets, .49% on that amount between $750 million and
$1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between $2.25
billion and $3 billion, .43% between $3 billion and $3.75 billion, .40% between
$3.75 billion and $7.5 billion, .38% between $7.5 billion and $12 billion, and
.36% of that amount over $12 billion. The Fund accrues and pays this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly-owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
Presently, the Fund operates under state expense requirements which limit
the amount of aggregate annual expenses, adjusted for certain excess custodian
fees, that the Fund may incur during its fiscal year. The Manager will
reimburse the Fund for any expenses in excess of the limitation. No such
reimbursement is required for the period ended March 31, 1994.
The Fund also pays WARSCO a monthly per account charge for transfer agency
and dividend disbursement services of $1.0208 for each shareholder account which
was in existence at any time during the prior month, plus $0.30 for each account
on which a dividend or distribution of cash or shares had a record date in that
month. The Fund also reimburses W&R and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received direct and
indirect gross sales commissions (which are not an expense of the Fund) of
$1,435,848, out of which W&R paid sales commissions of $810,854 and all expenses
in connection with the sale of Fund shares, except for registration fees and
related expenses.
On September 28, 1993, shareholders of the Fund approved the adoption of a
12b-1 Service Plan with a maximum fee of .25%. The Plan went into effect
October 1, 1993.
The Fund paid Directors' fees of $7,534.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and short-
term securities, aggregated $100,040,077 while proceeds from maturities and
sales aggregated $77,752,519. Purchases of short-term securities aggregated
$524,273,131 while proceeds from maturities and sales aggregated $536,661,319.
There was no gain or loss on the sale of short-term securities. No U.S.
Government securities were bought or sold during the period ended March 31,
1994.
For Federal income tax purposes, cost of investments owned at March 31,
1994 was $168,260,686, resulting in net unrealized appreciation of $54,582,034,
of which $60,725,426 related to appreciated securities and $6,143,392 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $13,051,036 during the year ended March 31, 1994, of which a portion was paid
to shareholders during the period ended March 31, 1994. Remaining capital gain
net income will be distributed to the Fund's shareholders.
NOTE 5 -- Securities Loaned
It is the Fund's policy to make loans of portfolio securities under
agreements which must be continuously secured by collateral at 100% of the
market value of the securities loaned. The Fund derives income from its
securities lending activities. These agreements may be terminated by the
borrower or the Fund upon proper notice. In the event the borrower fails to
deliver the securities within five business days, the Fund has the right to use
the collateral to purchase similar or other securities. During the period ended
March 31, 1994, the Fund derived approximately $7,500 of income, net of related
expenses, from its securities lending activities.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
United New Concepts Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of United New Concepts Fund, Inc. (the
"Fund") at March 31, 1994, the results of its operations for the year then ended
and the changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at March
31, 1994 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Kansas City, Missouri
April 29, 1994
<PAGE>
United New Concepts Fund, Inc.
Custodian Underwriter
United Missouri Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P.O. Box 29217
Legal Counsel Shawnee Mission, Kansas 66201-9217
Kirkpatrick & Lockhart (913) 236-2000
1800 M Street, N. W.
Washington, D. C. Shareholder Servicing Agent
Waddell & Reed Services Company
Independent Accountants 6300 Lamar Avenue
Price Waterhouse P. O. Box 29217
Kansas City, Missouri Shawnee Mission, Kansas 66201-9217
(913) 236-2000
Investment Manager
Waddell & Reed Investment Accounting Services Agent
Management Company Waddell & Reed Services Company
6300 Lamar Avenue 6300 Lamar Avenue
P. O. Box 29217 P.O. Box 29217
Shawnee Mission, Kansas 66201-9217 Shawnee Mission, Kansas 66201-9217
(913) 236-2000 (913) 236-2000
<PAGE>
United New Concepts Fund, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
PROSPECTUS
June 30, 1994
The United Group of Mutual Funds
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
TABLE OF CONTENTS
Summary of Expenses .. 2
Financial Highlights.. 3
The Fund ............. 4
Performance Information 4
Goal of the Fund ..... 5
Investment Policies .. 5
Management and Services 8
Dividends, Distributions
and Taxes ........... 10
Purchase of Shares ... 11
Redemption ........... 12
Financial Statements . 14
NUP2012(6-94)
printed on recycled paper
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
June 30, 1994
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus (the
"Prospectus") of United New Concepts Fund, Inc. (the "Fund") dated June 30,
1994, which may be obtained from the Fund or its Underwriter, Waddell & Reed,
Inc., at the address or telephone number shown above.
TABLE OF CONTENTS
Performance Information ............................ 2
Investment Objective and Policies .................. 3
Investment Management and Other Services ........... 24
Purchase, Redemption and Pricing of Shares ......... 29
Directors and Officers ............................. 42
Payments to Shareholders ........................... 46
Taxes .............................................. 47
Portfolio Transactions and Brokerage ............... 50
Other Information .................................. 53
<PAGE>
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may from time to
time publish the Fund's total return information and/or performance rankings in
advertisements and sales materials.
Total Return
An average annual total return quotation is computed by finding the average
annual compounded rates of return over the one-, five-, and ten-year periods
that would equate the initial amount invested to the ending redeemable value.
Standardized total return information is calculated by assuming an initial
$1,000 investment from which the maximum sales load of 5.75% is deducted. All
dividends and distributions are assumed to be reinvested at net asset value as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions. The formula used to calculate the total
return is
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for the
periods shown.
Non-standardized performance information may also be presented and it may
not reflect the sales charge. For example, the Fund may also compute total
return without deduction of the sales load in which case the same formula noted
above will be used but the entire amount of the $1,000 initial payment will be
assumed to have been invested. If the sales charge were reflected, it would
reduce the performance quoted.
The average annual total return quotations as of March 31, 1994, which is
the most recent balance sheet included in the Prospectus, for the periods shown
were as follows:
With Without
Sales LoadSales Load
Deducted Deducted
One year period from April 1, 1993 to
March 31, 1994: 8.59% 15.21%
Five year period from April 1, 1989 to
March 31, 1994: 17.08% 18.47%
Ten year period from April 1, 1984 to
March 31, 1994: 12.44% 13.10%
The Fund may also quote unaveraged or cumulative total returns which
reflect the change in value of an investment 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.
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. The Fund may also compare its performance to
that of other selected mutual funds or selected recognized market indicators
such as the Standard & Poor's 500 Stock Index and the Dow Jones Industrial
Average. Performance information may be quoted numerically or presented in a
table, graph or other illustration.
All performance information which the Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of the Fund's shares when redeemed may be more or
less than their original cost.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are described in the
Prospectus, which refers to the following investment methods and practices.
Securities -- General
The Fund may invest in securities including common stock, preferred stock,
debt securities and convertible securities, as described in the Prospectus.
These securities may include the following described securities from time to
time.
The Fund may purchase debt securities whose principal amount at maturity is
dependent upon the performance of a specified equity security. The issuer of
such debt securities, typically an investment banking firm, is unaffiliated with
the issuer of the equity security to whose performance the debt security is
linked. Equity-linked debt securities differ from ordinary debt securities in
that the principal amount received at maturity is not fixed, but is based on the
price of the linked equity security at the time the debt security matures. The
performance of equity-linked debt securities depends primarily on the
performance of the linked equity security and may also be influenced by interest
rate changes. In addition, although the debt securities are typically adjusted
for diluting events such as stock splits, stock dividends and certain other
events affecting the market value of the linked equity security, the debt
securities are not adjusted for subsequent issuances of the linked equity
security for cash. Such an issuance could adversely affect the price of the
debt security. In addition to the equity risk relating to the linked equity
security, such debt securities are also subject to credit risk with regard to
the issuer of the debt security. In general, however, such debt securities are
less volatile than the equity securities to which they are linked.
The Fund may also invest in a type of convertible preferred stock that pays
a cumulative, fixed dividend that is senior to, and expected to be in excess of,
the dividends paid on the common stock of the issuer. At the mandatory
conversion date, the preferred stock is converted into not more than one share
of the issuer's common stock at the "call price" that was established at the
time the preferred stock was issued. If the price per share of the related
common stock on the mandatory conversion date is less than the call price, the
holder of the preferred stock will nonetheless receive only one share of common
stock for each share of preferred stock (plus cash in the amount of any accrued
but unpaid dividends). At any time prior to the mandatory conversion date, the
issuer may redeem the preferred stock upon issuing to the holder a number of
shares of common stock equal to the call price of the preferred stock in effect
on the date of redemption divided by the market value of the common stock, with
such market value typically determined one or two trading days prior to the date
notice of redemption is given. The issuer must also pay the holder of the
preferred stock cash in an amount equal to any accrued but unpaid dividends on
the preferred stock. This convertible preferred stock is subject to the same
market risk as the common stock of the issuer, except to the extent that such
risk is mitigated by the higher dividend paid on the preferred stock. The
opportunity for equity appreciation afforded by an investment in such
convertible preferred stock, however, is limited, because in the event the
market value of the issuer's common stock increases to or above the call price
of the preferred stock, the issuer may (and would be expected to) call the
preferred stock for redemption at the call price. This convertible preferred
stock is also subject to credit risk with regard to the ability of the issuer to
pay the dividend established upon issuance of the preferred stock. Generally,
convertible preferred stock is less volatile than the related common stock of
the issuer.
Foreign Securities
The Fund may purchase securities of foreign issuers only if immediately
after any such purchase not more than 10% of the Fund's assets (including the
foreign currency exchange contracts described below) are in foreign securities
and only if they (i) are listed or admitted to trading on a domestic or foreign
securities exchange, or (ii) are represented by American depository receipts
(dollar denominated receipts issued against securities of foreign issuers
deposited or to be deposited with an American depository) so listed or admitted
on a domestic securities exchange or traded in the United States over-the-
counter market, or (iii) are issued or guaranteed by any foreign government or
any subdivision, agency or instrumentality thereof.
The Fund may not hold foreign currency except in connection with the
purchase or sale of such foreign securities and may enter into forward foreign
currency exchange contracts solely in connection with the purchase or sale of a
security denominated in a foreign currency when it is desirable to "lock-in" the
U.S. dollar price of the security. By entering into a contract for the purchase
or sale, for a fixed amount of dollars, of the amount of the foreign currency
involved in the underlying security transactions, the Fund will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or sold and the date on which
payment is to be made or received. These contracts are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. Neither the Fund nor Waddell & Reed Investment
Management Company (the "Manager"), the Fund's investment manager, believes that
it is speculating by entering into these contracts, since they may be entered
into only in connection with the purchase or sale of a security and not in
connection with a foreseen decline in a particular currency against the U.S.
dollar.
The Manager believes that while there are investment risks (see below) in
investing in securities of foreign issuers, there are also investment
opportunities in foreign securities. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy or each other in such matters as
gross national product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position. Individual foreign companies may
also differ favorably or unfavorably from domestic companies in the same
industry. Foreign currencies may be stronger or weaker than the U.S. dollar or
than each other. The Manager believes that the Fund's ability to invest its
assets abroad might enable it to take advantage of these differences and
strengths where they are favorable.
Further, an investment may be affected by changes in currency rates and in
exchange control regulations (i.e., currency blockage). The Fund may bear a
transaction charge in connection with the exchange of currency. There may be
less publicly available information about a foreign company than about a
domestic company. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Most foreign stock markets have substantially
less volume than the New York Stock Exchange and securities of some foreign
companies are less liquid and more volatile than securities of comparable
domestic companies. There is generally less government regulation of stock
exchanges, brokers and listed companies than in the United States. In addition,
with respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments which could adversely affect investments in securities
of issuers located in those countries. If it should become necessary, the Fund
would normally encounter greater difficulties in commencing a lawsuit against
the issuer of a foreign security than it would against a United States' issuer.
Borrowing
From time to time the Fund may increase its ownership of securities by
borrowing on an unsecured basis at fixed rates of interest and investing the
borrowed funds. Any such borrowing will be made only from banks and only to the
extent that the value of its assets, less its liabilities other than borrowings,
is equal to at least 300% of all borrowings including the proposed borrowing.
This 300% limit is contained in the Investment Company Act of 1940. If the
value of the Fund's assets so computed should fail to meet the 300% asset
coverage requirement, it is required within three days to reduce its bank debt
to the extent necessary to meet that requirement and may have to sell a portion
of its investments at a time when independent investment judgment would not
dictate such sale.
Interest on money borrowed is an expense the Fund would not otherwise
incur, so that it may have little or no net investment income during periods of
substantial borrowings. Borrowing for investment increases both investment
opportunity and risk. Since substantially all of the Fund's assets fluctuate in
value, but borrowing obligations are fixed, the net asset value per share
correspondingly will tend to increase and decrease more when the portfolio
assets increase or decrease in value than would otherwise be the case. This
factor is known as "leverage."
Investment in Warrants
The Fund may not invest more than 5% of its assets (at the time of
investment) in warrants (other than those that have been acquired in units or
attached to other securities). Of such 5%, no more than 2% of its assets (at
the time of investment) may be invested in warrants that are not listed on the
New York or the American Stock Exchanges. Warrants basically are options to
purchase equity securities at specific prices valid for a specific period of
time. The prices do not necessarily move parallel to the prices of the
underlying securities. Warrants have no voting rights, receive no dividends and
have no rights with respect to the assets of the issuer.
Lending Securities
Although income is not one of the Fund's goals, its management believes
that it should realize income unless doing so would detract from the realization
of its goal. One of the ways in which the Fund may try to realize income is by
lending its securities. If the Fund does this, the borrower pays the Fund an
amount equal to the dividends or interest on the securities that the Fund would
have received if it had not loaned the securities. The Fund also receives
additional compensation as discussed below.
Any securities loans which the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). This
policy can only be changed by shareholder vote. Under the present Guidelines,
the collateral must consist of cash or securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities ("Government securities").
The collateral may also consist of bank letters of credit at least equal in
value to the market value of the securities loaned on each day that the loan is
outstanding. If the market value of the loaned securities exceeds the value of
the collateral, the borrower must add more collateral so that it at least equals
the market value of the securities loaned. If the market value of the
securities decreases, the borrower is entitled to return of the excess
collateral.
There are two methods of receiving compensation for making loans. The
first is to receive a negotiated loan fee from the borrower. This method is
available for all three types of collateral. The second method, which is not
available when letters of credit are used as collateral, is for the Fund to
receive interest on the investment of the cash collateral or to receive interest
on the Government securities used as collateral. Part of the interest received
in either case may be shared with the borrower.
The letters of credit which the Fund may accept as collateral are
agreements by banks (other than the borrowers of the Fund's securities), entered
into at the request of the borrower and for its account and risk, under which
the banks are obligated to pay to the Fund, while the letter is in effect,
amounts demanded by the Fund if the demand meets the terms of the letter. The
Fund's right to make this demand secures the borrower's obligations to it. The
terms of any such letters and the creditworthiness of the banks providing them
(which might include the Fund's custodian bank) must be satisfactory to the
Fund.
The Manager, subject to the direction and control of the Board of
Directors, has adopted additional rules concerning lending of securities which
may be changed without shareholder vote. At present, under these rules, the
Fund will lend securities only to creditworthy broker-dealers and financial
institutions. The Fund will make loans only under rules of the New York Stock
Exchange, which presently require the borrower to give the securities back to
the Fund within five business days after the Fund gives notice to do so. If the
Fund loses its voting rights on securities loaned, it will have the securities
returned to it in time to vote them if a material event affecting the investment
is to be voted on. The Fund may pay reasonable finder's, administrative and
custodian fees in connection with loans of securities.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules which may be changed without shareholder vote as to
(i) whom securities may be loaned; (ii) the investment of cash collateral; or
(iii) voting rights.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned or even loss of rights in
the collateral should the borrower of the securities fail financially.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. The
Fund will not enter into a repurchase transaction which will cause more than 10%
of its net assets to be invested in illiquid securities, which include
repurchase agreements not terminable within seven days. A repurchase
transaction occurs when, at the time the Fund purchases securities, it also
agrees to resell them to the vendor (normally a commercial bank or broker-
dealer), and must deliver those securities and/or securities substituted for
them under the repurchase agreement to the vendor on an agreed-upon date in the
future. In this section, such securities, including any securities so
substituted, are referred to as the "Resold Securities." The resale price is in
excess of the purchase price in that it reflects an agreed-upon market interest
rate effective for the period of time during which the Fund's money is invested
in the Resold Securities. The majority of the repurchase transactions in which
the Fund would engage run from day to day, and the delivery pursuant to the
resale typically will occur within one to five days of the purchase. The Fund's
risk is limited to the ability of the vendor to pay the agreed-upon sum upon the
delivery date. In the event of bankruptcy or other default by the vendor, there
may be possible delays or expenses in liquidating the Resold Securities, decline
in their value or loss of interest. Upon default, the Resold Securities
constitute collateral security for the repurchase obligation. The return on
such collateral may be more or less than that from the repurchase agreement.
The Fund's repurchase agreements will be structured so as to fully collateralize
the loans, i.e., the value of the Resold Securities, which will be held by the
Fund's Custodian bank or by a third party that qualifies as a custodian under
Section 17(f) of the Investment Company Act of 1940, is and, during the entire
term of the agreement, remains at least equal to the value of the loan,
including the accrued interest earned thereon. Repurchase Agreements are
entered into only with those entities approved on the basis of criteria
established by the Board of Directors.
Illiquid Investments
The Fund has an operating policy, which may be changed without shareholder
approval, which provides that due to their possible limited liquidity, the Fund
may not make certain illiquid investments if as a result more than 10% of its
net assets would consist of such investments. The investments which are
included in this 10% limit are: (i) repurchase agreements not terminable within
seven days; (ii) securities for which market quotations are not readily
available; and (iii) unlisted options and their underlying collateral.
Writing Covered Calls on Securities
If the Fund writes a call, it agrees to sell to a purchaser of a call the
securities subject to the call at a fixed price; this price is referred to as
the exercise price. This price may be equal to, or more or less than, the
market price of the securities covered by the call. The period during which the
Fund must sell at this price is also fixed in the call. Most calls run for
periods of up to 9 months except that calls on certain debt securities may run
for periods of up to 15 months. During the period of a call the Fund must, if
the call is exercised, sell at the exercise price no matter what happens to the
market price of the securities subject to the call.
As compensation for entering into this contract when it writes a call, the
Fund receives a premium. Should the market price of securities on which the
Fund has written calls go down during the call period, the premium would help to
offset that decline. However, if the Fund wrote a call, it would lose the
opportunity to profit from an increase in the market price of securities which
are subject to a call over the exercise price except to the extent that the
premium represents such a profit. The Fund will write calls when it considers
that the amount of the premium represents adequate compensation for the loss of
the opportunity.
Writing calls is a highly specialized activity. The personnel engaging in
this activity have had experience in this activity with respect to the Fund and
other funds and accounts managed by the Manager and its affiliates. Writing
calls involves investment techniques and risks different from those ordinarily
associated with investment companies. It is believed that the Fund's
limitations on writing calls will tend to reduce these risks.
The Fund may purchase calls to close its position in a call which it has
written. To do this, it will make a "closing purchase transaction;" this
involves buying a call on the same security with the same exercise price and
call period as the call it has written. When the Fund sells a security on which
it has written a call, it will, so that the call will remain covered, effect a
closing purchase transaction. The Fund may also effect a closing purchase
transaction to avoid having to sell a security on which it has written a call if
the call is exercised. The Fund will have a profit or loss from a closing
purchase transaction, depending on whether the amount it paid to purchase the
call is less or more than the premium it received on the call which is closed
out. There is no assurance that the Fund will be able to effect a closing
purchase transaction if there is no market for the call in question; if it
cannot do so, it will have to hold the security on which the call was written
until the call expires or is exercised even though it might otherwise be
desirable to sell the security. If a call which the Fund wrote is exercised, it
could deliver the securities which it owns (or the securities which it has the
right to get). It could also deliver other securities which it purchases.
Fund securities will be bought and sold on the basis of attempting to
achieve the goals of the Fund. However, the fact that listed calls can be
written on a particular security may be a factor in buying or keeping it if it
is otherwise considered suitable for the Fund.
The Fund's Custodian bank (or a securities depository acting for it) will
act as the Fund's escrow agent as to securities on which the Fund has written
calls (or other securities which, under the applicable rules, are acceptable for
escrow arrangements). The securities will not be released from the escrow until
the call expires or the Fund enters into a closing purchase transaction.
The writing of calls by the Fund may affect its turnover rate and the
brokerage commissions it pays. Calls may be exercised causing the sale of
securities, thus increasing its turnover rate. The increase would be beyond the
Fund's control, since it has no control over the exercise of calls written by
it.
A premium received by the Fund upon writing a call will be included in its
assets; an equal amount will be included in the liability section of the
Statement of Assets and Liabilities as a deferred credit. This amount will be
subsequently adjusted to the current market value of the call. For example, if
the current market value of the call exceeds the premium received, the excess
would be an unrealized loss; if the premium exceeds the current market value,
the excess would be an unrealized gain. The current market value of a call will
be the last sales price on the principal exchange in which the call is traded
or, in the absence of transactions, the mean between the bid and asked prices.
Writing Puts on Securities
Subject to the limitations set forth under "Operating Restrictions," the
Fund may write put options on securities in which it may invest. As with
covered call writing, the Fund will write puts on securities for the purpose of
increasing income by receiving premiums from the purchaser of the option. When
the Fund writes a put, it receives a premium and agrees to purchase the related
investments from a purchaser of a put during the put period at a fixed exercise
price (which may differ from the market price of the related investments)
regardless of market price changes during the put period. If the put is
exercised, the Fund must purchase the related investments at the exercise price.
Puts are ordinarily sold when it is anticipated that during the option period
the market price of the underlying security will decline by less than the amount
of the premium, adjusted for any amount by which the market price of the
underlying security at the time of sale is greater than the strike price. In
writing puts, the Fund assumes the risk of loss should the market value of the
underlying security decline below the exercise price of the option. The Fund's
cost of purchasing the investments will be adjusted by the amount of the premium
it has received. The Fund will write a put only when it has determined that it
would be willing to purchase the underlying security at the exercise price.
To terminate its obligation on a put which it has written, the Fund may
purchase a put in a "closing purchase transaction." As discussed below, it may
also purchase puts other than as part of such closing transaction. A profit or
loss may be realized depending on the amount of option transaction costs and
whether the premium previously received is more or less than the cost of the put
purchased. A profit will also be realized if the put lapses unexercised because
the Fund retains the premium received.
When the Fund writes a put it will, until it enters into a closing purchase
transaction, maintain designated cash or readily marketable assets adequate to
purchase the related investments should the put be exercised. The Fund may hold
cash or acquire readily marketable assets for this purpose. The Fund will be
unable to utilize such cash or assets for other investment purposes until the
exercise or expiration of the put.
Purchasing Calls and Puts on Securities
Subject to the limitations set forth under "Operating Restrictions," the
Fund may purchase options.
The Fund may purchase a call in a closing purchase transaction in order to
terminate its obligation on a call it has written. In addition, the Fund may
purchase calls on securities for the purpose of taking advantage of a rise in
the market value of the underlying securities.
When a Fund buys a call, it pays a premium and has the right to buy the
related investments from a seller of a call during the call period at a fixed
exercise price. The Fund benefits only if the market price of the related
investments is above the call price during the call period and the call is
either exercised or sold at a profit. If the call is not exercised or sold
(whether or not at a profit), it will become worthless at its expiration date
and the Fund will lose the premium payment and the right to purchase the related
investments.
The Fund may purchase puts on securities to protect against major price
declines in the value of its portfolio securities. The Fund may purchase a put
on a security it owns ("protective put") or on a security it does not own
("nonprotective put"). When a Fund buys a put, it pays a premium and has the
right to sell the related investments to a seller of a put during the put period
at a fixed exercise price. Buying a protective put (as defined above) permits
the Fund to protect itself during the put period against a decline in the value
of the related investments below the exercise price by selling them through the
exercise of the put. Buying a nonprotective put (as defined above) permits the
Fund, if the market price of the related investments is below the put price
during the put period, either to resell the put or to buy the related
investments and sell them at the exercise price. If the market price of the
related investments is above the exercise price and as a result the put is not
exercised or resold (whether or not at a profit), the put will become worthless
at its expiration date.
A type of put which the Fund may purchase is an "optional delivery standby
commitment" which is entered into by parties selling debt securities to the
Fund. An optional delivery standby commitment gives the Fund purchasing the
security the right to sell the security back to the seller on specified terms.
This right is provided as an inducement to purchase the security.
Risks of Options on Securities
The Fund is authorized to write listed covered call options on securities
and to write put options and purchase options which are listed or unlisted. The
Fund has an operating policy, however, which provides that it will only purchase
calls or write and purchase puts which are listed, with two exceptions: (1) it
may purchase calls and write and purchase puts which are not listed if the
security underlying the option is a security issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; and (2) optional delivery
standby commitments may be unlisted. Exchange-listed options are issued by the
Options Clearing Corporation ("OCC"). A position in an exchange-listed option
may be closed out only on an exchange which provides a secondary market for
options covering the same related investment having the same exercise price and
expiration date. There is no assurance that a liquid secondary market will
exist for any particular option. In investing in options on securities which
are not listed on an exchange, the Fund must rely on the creditworthiness of the
party with whom it has entered into the options transaction. The Manager will
evaluate the creditworthiness of all such parties and intends to enter into
unlisted option transactions only with major dealers in such unlisted options.
The market for these options may be less active than the market for exchange-
listed options. The Manager will evaluate the ability to enter into closing
purchase transactions on unlisted options prior to investing in them.
The Fund's put and call activities may affect its turnover rate and
brokerage commission payments. The exercise of calls or puts written by the
Fund may cause it to sell or purchase related investments, thus increasing its
turnover rate in a manner beyond its control. The exercise of puts may also
cause the sale of related investments, also increasing turnover; although such
exercise is within the Fund's control, holding a protective put might cause it
to sell the related investments for reasons which would not exist in the absence
of the put. The Fund will pay a brokerage commission each time it buys or sells
a put or call or buys or sells an underlying investment in connection with the
exercise of a put or call. Such commissions may be higher than those which
would apply to direct purchases or sales. The Fund's custodian bank, or a
securities depository acting for it, will act as the Fund's escrow agent as to
the related investments on which it has written covered calls, or as to other
assets acceptable for such escrow, so that pursuant to the rules of the Option
Clearing Corporation and certain exchanges, no margin deposit will be required
of the Fund on such calls. Until the related investments or other investments
held in escrow are released from escrow, they cannot be sold by the Fund; this
release will take place on the expiration of the call or by the Fund's entering
into a closing purchase transaction. Once the Fund has received an exercise
notice on an option it has written, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option and must
deliver or receive the underlying securities at the exercise price.
Option premiums paid to control an amount of related investments are small
in relation to the market value of related investments and, consequently, put
and call options offer large amounts of leverage. The leverage offered by
trading in options will result in the Fund's net asset value being more
sensitive to changes in the value of the related investment. Markets for
options on securities and options on futures contracts are relatively new so it
is not possible to predict whether active exchange markets will continue over
time.
Options On Stock Indexes
The Fund is permitted to write and purchase options on broadly-based stock
indexes subject to the limitations set forth under "Operating Restrictions" and
"Investment Restrictions." Broadly-based stock indexes are indexes which are
not limited to stocks of any particular industry or industries. The Fund will
write options on broadly-based stock indexes primarily to generate income when
the Manager anticipates that the index price will not increase or decrease by
more than the premium received by the Fund. The Fund will purchase calls on
broadly-based stock indexes to hedge against anticipated increases in the price
of securities it wishes to acquire and purchase puts on broadly-based stock
indexes to hedge against anticipated declines in the market value of portfolio
securities. Puts and calls on broadly-based stock indexes are similar to puts
and calls on securities or futures contracts except that all settlements are in
cash and gain or loss depends on changes in the broad-based index in question
(and thus on price movements in the stock market generally) rather than on price
movements in individual securities or futures contracts. When the Fund writes a
call on a stock index, it receives a premium and agrees that during the call
period a purchaser of a call, upon exercise of the call, will receive from the
Fund an amount of cash if the closing level of the stock index upon which the
call is based is greater than the exercise price of the call. The amount of
cash is equal to the difference between the closing price of the index and the
exercise price of the call times a specified multiple (the "multiplier") which
determines the total dollar value for each point of such difference. When the
Fund buys a call on a stock index it pays a premium and has the same rights as
to such call as are indicated above as the Fund's obligation when it writes such
a call. When the Fund buys a put on a stock index, it pays a premium and has
the right during the put period to require a seller of such a put, upon the
Fund's exercise of the put, to deliver to the Fund an amount of cash if the
closing level of the stock index upon which the put is based is lesser than the
exercise price of the put, which amount of cash is determined by the multiplier,
as described above for calls. When the Fund writes a put on a stock index it
receives a premium and the purchaser has the right during the put period to
require the Fund to deliver to it an amount of cash equal to the difference
between the closing level of the stock index and the exercise price times the
multiplier, if the closing level is less than the exercise price.
When the Fund writes a call on a broadly-based stock index it will, until
it enters into a closing purchase transaction as to that call, segregate and
maintain cash or readily marketable assets adequate to make the required cash
delivery if the call is exercised. When it writes a put on a broadly-based
stock index, it will, until it enters into a closing purchase transaction as to
that put, maintain designated cash or readily marketable assets adequate to
purchase the related investments should the put be exercised.
Risks of Options on Stock Indexes
The risks of investment in options on stock indexes may be greater than
options on securities. Because exercises of stock index options are settled in
cash, when the Fund writes a call on a stock index it cannot provide in advance
for its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of its writing position by
holding a diversified portfolio of stocks similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same stocks as the
underlying index and, as a result, bears a risk that the value of the securities
held will vary from the value of the index. Even if the Fund could assemble a
stock portfolio that exactly reproduced the composition of the underlying index,
it still would not be fully covered from a risk standpoint because of the
"timing risk" inherent in writing index options. When an index option is
exercised, the amount of cash that the holder is entitled to receive is
determined by the difference between the exercise price and the closing index
level on the date when the option is exercised. As with other kinds of options,
the Fund as the call writer will not learn that it has been assigned until the
next business day at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security, such as a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
stocks that exactly match the composition of the underlying index, it will not
be able to satisfy its assignment obligations by delivering those stocks against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date; and by the time it
learns that it has been assigned, the index may have declined, with a
corresponding decline in the value of its stock portfolio. This "timing risk"
is an inherent limitation on the ability of index call writers to cover their
risk exposure by holding stock positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available it runs the risk that the level of
the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund exercising the option will
be required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the assigned
writer.
Futures Contracts and Options on Futures Contracts
The Fund is permitted to purchase and sell futures contracts and options on
futures contracts subject to the limitations set forth under "Operating
Restrictions" and "Investment Restrictions." When the Fund purchases a futures
contract, it incurs an obligation to take delivery of a specified amount of the
obligation underlying the contract at a specified time in the future for a
specified price. When the Fund sells a futures contract it incurs an obligation
to deliver the specified amount of the underlying obligation at a specified time
in return for an agreed upon price. In the case of Stock Index Futures the
obligation underlying the futures contract is an amount of cash equal to a
specified dollar amount times the difference between the index value at the
close of the last trading day of the futures contract and the price at which the
futures contract is originally struck. In the case of a Debt Future the
underlying obligation is the related debt security.
When the Fund writes an option on a futures contract it becomes obligated,
in return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the term of the option. If the Fund
has written a call it becomes obligated to assume a "long" position in a futures
contract which means that it is required to take delivery of the underlying
securities. If it has written a put it is obligated to assume a "short"
position in a futures contract which means that it is required to deliver the
underlying securities. When the Fund purchases an option on a futures contract
it acquires the right in return for the premium it pays to assume a position in
a futures contract.
The Fund will not purchase or sell futures contracts and options thereon
for speculative purposes but rather only for the purpose of hedging against
changes in the market value of its portfolio securities or changes in the market
value of securities which the Manager anticipates that it may wish to include in
the portfolio of the Fund. The Fund may sell a Stock Index Future or write a
call or purchase a put on a Stock Index Future if the Manager anticipates that a
general market or market sector decline may adversely affect the market value of
any or all of the Fund's common stock holdings. The Fund may buy a Stock Index
Future or purchase a call or sell a put on a Stock Index Future if the Manager
anticipates a significant market advance in the common stock it intends to
purchase for the Fund's portfolio. The Fund may purchase a Stock Index Future
or a call option thereon as a temporary substitute for the purchase of
individual stocks which may then be purchased in an orderly fashion. In the
case of debt securities the Fund could sell a Debt Future or write a call or buy
a put on a Debt Future to attempt to protect against the risk that the value of
debt securities held by the Fund might decline. The Fund could purchase a Debt
Future or purchase a call or write a put on a Debt Future to protect against the
risk of an increase in the value of debt securities at a time when the Fund is
not invested in debt securities to the extent permitted by its investment
policies. As securities are purchased, corresponding Futures positions would be
terminated by offsetting sales.
Unlike when the Fund purchases or sells securities, no price is paid or
received by it upon the purchase or sale of a futures contract. Initially, the
Fund will be required to deposit an amount of cash or U.S. Treasury Bills equal
to a varying specified percentage of the contract amount. This amount is known
as initial margin. Cash held in the margin account is not income producing.
Subsequent payments, called variation margin, to and from the broker will be
made on a daily basis as the price of the underlying index fluctuates making the
futures contract more or less valuable, a process known as marking-to-market.
If the Fund writes an option on a futures contract it will be required to
deposit initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option on a future are included in the initial margin deposit.
Changes in variation margin are recorded by the Fund as unrealized gains or
losses. Initial margin payments will be deposited in the Fund's custodian bank
in an account registered in the broker's name; access to the assets in that
account may be made by the broker only under specified conditions. At any time
prior to expiration of a futures contract or an option thereon, the Fund may
elect to close the position by taking an opposite position which will operate to
terminate its position in the futures contract or option. A final determination
of variation margin is made at that time, additional cash is required to be paid
by or released to it and it realizes a loss or gain. Although futures contracts
by their terms call for the actual delivery or acquisition of the underlying
obligation, in most cases the contractual obligation is so fulfilled without
having to make or take delivery. The Fund does not intend to make or take
delivery of the underlying obligation. All transactions in futures contracts
and options thereon are made, offset or fulfilled through a clearing house
associated with the exchange on which the contracts are traded. Although the
Fund intends to buy and sell futures contracts only on exchanges where there
appears to be an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular future at any particular time.
In such event, it may not be possible to close a futures contract position.
The Fund will deposit in a segregated account with its custodian bank high-
quality debt obligations maturing in one year or less, or cash, in an amount
equal to the fluctuating market value of long futures contracts it has purchased
less any margin deposited on its long position. It may hold cash or acquire
such debt obligations for the purpose of making these deposits.
The use of futures contracts and options thereon to attempt to protect
against the market risk of a decline in the value of portfolio securities is
referred to as having a "short futures position." The use of futures contracts
and options thereon to attempt to protect against the market risk that the Fund
might not be fully invested at a time when the value of securities in which it
invests is increasing is referred to as having a "long futures position." The
Fund must operate within certain restrictions as to long and short positions in
futures contracts and options thereon under a rule (the "CFTC Rule") adopted by
the Commodity Futures Trading Commission ("CFTC") under the Commodity Exchange
Act (the "CEA") to be eligible for the exclusion provided by the CFTC Rule from
registration by the Fund with the CFTC as a "commodity pool operator" (as
defined under the CEA), and must represent to the CFTC that it will operate
within such restrictions. Under these restrictions the Fund will not, as to any
positions, whether long, short or a combination thereof, enter into futures and
options thereon for which the aggregate initial margins and premiums exceed 5%
of the fair market value of the Fund's assets after taking into account
unrealized profits and losses on options the Fund has entered into; in the case
of an option that is "in-the-money" (as defined under the CEA) the "in-the-
money" amount may be excluded in computing such 5%. (In general a call option
on a futures contract is "in-the-money" if the value of the future exceeds the
strike, i.e. exercise, price of the call; a put option on a futures contract is
"in-the-money" if the value of the futures contract which is the subject of the
put is exceeded by the strike price of the put.) Under the restrictions, the
Fund also must, as to short positions, use futures contracts and options thereon
solely for bona fide hedging purposes within the meaning and intent of the
applicable provisions under the CEA. As to its long positions which are used as
part of the Fund's portfolio strategy and are incidental to the Fund's
activities in the underlying cash market, the "underlying commodity value" (see
below) of the Fund's futures contract and options thereon must not exceed the
sum of (i) cash set aside in an identifiable manner, or short-term U.S. debt
obligations or other U.S. dollar-denominated high-quality short-term money
market instruments so set aside, plus any funds deposited as margin; (ii) cash
proceeds from existing investments due in 30 days; and (iii) accrued profits
held at the futures commission merchant. (There is described above the
segregated accounts which the Fund must maintain with its custodian bank as to
its options and futures contracts activities due to Securities and Exchange
Commission ("SEC") requirements; the Fund will, as to its long positions, be
required to abide by the more restrictive of these SEC and CFTC requirements.)
The "underlying commodity value" of a futures contract is computed by
multiplying the size (dollar amount) of the futures contract by the daily
settlement price of the futures contract. For an option on a futures contract
that value is the underlying commodity value of the Future underlying the
option.
Risk of Futures Contracts and Options Thereon
Since futures contracts and options thereon can replicate movements in the
cash markets for the securities in which the Fund invests without the large cash
investments required for dealing in such markets, they may subject the Fund to
greater and more volatile risks than might otherwise be the case. The principal
risks related to the use of such instruments are (i) the offsetting correlation
between movements in the market price of the portfolio investments (held or
intended) being hedged and in the price of the futures contract or option may be
imperfect; (ii) possible lack of a liquid secondary market for closing out
futures or options positions; (iii) the need for additional portfolio management
skills and techniques; and (iv) losses due to unanticipated market price
movements. For a hedge to be completely effective, the price change of the
hedging instrument should equal the price change of the security being hedged.
Such equal price changes are not always possible because the investment
underlying the hedging instrument may not be the same investment that is being
hedged. The Manager will attempt to create a closely correlated hedge but
hedging activity may not be completely successful in eliminating market value
fluctuation. (See below for additional discussion of correlation as it relates
to Stock Index Futures.) The ordinary spreads between prices in the cash and
futures markets, due to the differences in the natures of those markets, are
subject to the following factors which may create distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
could distort the normal relationship between the cash and futures markets.
Second, the liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point of
view of speculators the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of
general interest or stock market trends by the Manager may still not result in a
successful transaction. The Manager may be incorrect in its expectations as to
the extent of various interest rate movements or stock market movements or the
time span within which the movements take place.
The risk of imperfect correlation between movements in the price of a Stock
Index Future and movements in the price of the securities which are the subject
of the hedge increases as the composition of the Fund's common stock portfolio
diverges from the common stocks included in the applicable index. The price of
the Stock Index Future may move more than or less than the price of the
securities being hedged. If the price of the Stock Index Future moves less than
the price of the securities which are the subject of the hedge, the hedge will
not be fully effective but, if the price of the common stocks being hedged has
moved in an unfavorable direction, the Fund would be in a better position than
if it had not hedged at all. If the price of the common stocks being hedged has
moved in a favorable direction, this advantage will be partially offset by the
futures contract. If the price of the futures contract moves more than the
price of the stock, the Fund will experience either a loss or a gain on the
futures contract which will not be completely offset by movements in the price
of the securities which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of the securities being hedged
and movements in the price of the Stock Index Futures, the Fund may buy or sell
Stock Index Futures in a greater dollar amount than the dollar amount of common
stocks being hedged if the historical volatility of the prices of such common
stocks being hedged is less than the historical volatility of the stock index.
It is also possible that, where the Fund has sold futures contracts to hedge its
common stocks against decline in the market, the market may advance and the
value of common stocks held in the portfolio may decline. If this occurred, the
Fund would lose money on the futures contract and also experience a decline in
value in its portfolio securities. However, while this could occur for a very
brief period or to a very small degree, over time the value of a diversified
portfolio of common stocks will tend to move in the same direction as the market
indices upon which the futures contracts are based.
Where Stock Index Futures are purchased to hedge against a possible
increase in the price of stocks before the Fund is able to invest in common
stocks in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest in common stocks at that time
because of concern as to possible further market decline or for other reasons,
it will realize a loss on the futures contract that is not offset by a reduction
in the price of the common stocks it had anticipated purchasing.
Operating Restrictions
The Fund is subject to certain operating restrictions pertaining to
investments in options and futures. Such operating restrictions may be revised
by the Board depending on its judgments regarding the ability of the Manager to
make use of these instruments to the benefit of the Fund and in order to conform
to rules and regulations of the Commodities Futures Trading Commission ("CFTC"),
the Securities and Exchange Commission ("SEC"), various state securities
commissions, Federal tax law and regulations, and the rules of the exchanges on
which the investments are traded.
(i) Options on stock indexes, futures contracts and options on futures
contracts will be used only for risk management ("hedging") purposes
within the meaning of applicable regulations. The Fund will not hedge
more than 10% of its total assets.
(ii) Only options on securities which are issued by the Options Clearing
Corporation may be purchased or sold except the Fund may write unlisted
put options and purchase unlisted put and call options on securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities and except for optional delivery standby commitments;
only options on stock indexes, options on futures contracts and futures
contracts which are listed on a national securities or commodities
exchange may be purchased or sold; to the extent option transactions
involving unlisted options are illiquid, such options and the underlying
collateral will be subject to an operating policy of the Fund which
limits investment in illiquid securities to 10% of net assets.
(iii) The aggregate premiums paid for the purchase of permitted options which
are held by the Fund at any one time, adjusted for the portion of any
premium attributable to a difference between the "strike price" of the
option and the market value of the underlying security or futures
contract at the time of purchase, may not exceed 20% of the total assets
of the Fund;
(iv) The aggregate margin deposits and premiums required on all futures
contracts and options thereon held or outstanding at any one time by the
Fund may not exceed 5% of the total assets of the Fund adjusted for
unrealized gains or losses of the Fund on such options and futures
contracts;
(v) The aggregate amount of the obligations underlying the puts written by
the Fund which are outstanding at any one time may not exceed 25% of the
net assets of the Fund computed at the time of sale.
Risk Factors of High-Yield Investing
As an operating (i.e., nonfundamental) policy, the Fund does not intend to
invest in non-investment grade debt securities if as a result of such investment
more than 5% of its assets would consist of such investments. The market for
high-yield, high-risk debt securities is relatively new and much of its growth
has paralleled a long economic expansion, during which this market has involved
a significant increase in the use of high-yield debt securities to fund highly
leveraged corporate acquisitions and restructurings. Thereafter, this market
was affected by a relatively high percentage of defaults with respect to high-
yield securities as compared with higher rated securities. An economic downturn
or increase in interest rates is likely to have a greater negative effect on
this market and the value of high-yield debt securities, if any, in the Fund's
portfolio.
Prices of high-yield debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities. Market
prices of high-yield debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash.
Where it deems it appropriate and in the best interests of Fund shareholders,
the Fund may incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to protect the interests
of security holders of its portfolio companies.
Because the market for lower rated securities may be thinner and less
active than for higher rated securities, there may be market price volatility
for these securities and limited liquidity in the resale market. If market
quotations are not readily available for the Fund's lower rated or unrated
securities, these securities will be valued by a method that the Fund's Board of
Directors believes accurately reflects fair value. Valuation becomes more
difficult and judgment plays a greater role in valuing high-yield debt
securities than with respect to securities for which more external sources of
quotations and last sale information are available.
While credit ratings are only one factor the Manager relies on in
evaluating high-yield debt securities, certain risks are associated with using
credit ratings. Credit ratings evaluate the safety of principal and interest
payments, not market value risk. Credit ratings of individual securities may
change from time to time, and the Fund may retain a portfolio security whose
rating has been changed.
Investment Restrictions
Certain of the Fund's investment restrictions are described in the
Prospectus. The following are fundamental policies and, together with certain
restrictions described in the Prospectus, cannot be changed without shareholder
approval. Under these additional restrictions, the Fund may not:
(i) Buy or sell commodities or commodity contracts except that it may, for
non-speculative purposes, buy or sell futures contracts on broadly-based
stock indexes ("Stock Index Futures"), futures contracts on debt
securities ("Debt Futures") and options on Stock Index Futures and Debt
Futures; the Fund may enter into the forward foreign currency exchange
contracts discussed above;
(ii) Buy real estate nor any nonliquid interest in real estate investment
trusts;
(iii) Buy shares of other investment companies which redeem their shares. The
Fund can buy shares of investment companies which do not redeem their
shares if it does it in a regular transaction in the open market and
then does not have more than one tenth (i.e., 10%) of its total assets
in these shares; however, the Fund does not have any current intent to
invest more than 5% of its assets in such securities in the foreseeable
future nor has it done so within the past year. The Fund may also buy
these shares as part of a merger or consolidation;
(iv) Lend money or other assets, other than through certain limited types of
loans described herein; the Fund can buy debt securities which have been
sold to the public; it can buy other obligations customarily acquired by
institutional investors; it can also lend its portfolio securities (see
"Lending Securities" above) or, except as provided above, enter into
repurchase agreements (see "Repurchase Agreements" above);
(v) Invest for the purpose of exercising control or management of other
companies;
(vi) Buy or continue to hold securities if the Fund's Directors or officers
or certain others own too much of the same securities; if any one of
these people owns more than one two-hundredths (i.e., .5 of 1%) of the
shares of a company and if the people who own that much or more own one
twentieth (i.e., 5%) of that company's shares, the Fund cannot buy that
company's shares or continue to own them;
(vii) Participate on a joint, or a joint and several, basis in any trading
account in any securities;
(viii) Sell securities short, buy securities on margin or engage in arbitrage
transactions; however, the Fund may make margin deposits in connection
with its use of any financial instrument permitted by its fundamental
policies. Also, the Fund may enter into escrow and collateral
arrangements in connection with its use of options and futures;
(ix) Engage in the underwriting of securities, that is, the selling of
securities for others; also, the Fund does not invest in restricted
securities; restricted securities are securities which cannot freely be
sold for legal reasons;
(x) Deviate from the percentage or other restrictions set forth above under
"Foreign Securities" and "Investment in Warrants";
(xi) Purchase or write puts, calls or combinations thereof on securities;
however, call options ("calls") may be written on securities if: (i)
such calls are listed on a domestic securities exchange; (ii) when any
such call is written and at all times prior to a closing purchase
transaction as to such call, or its lapse or exercise, the Fund owns the
securities which are subject to the call or has the right to acquire
such securities without the payment of further consideration; and (iii)
when any such call is written, not more than 25% of the Fund's total
assets would be subject to calls; calls may be purchased to effect a
closing purchase transaction as to any call written in accordance with
the foregoing. In addition, the Fund may purchase calls and write and
purchase put options ("puts") on securities in which the Fund may invest
and may, for non-speculative purposes, write and purchase options on
broadly-based stock indexes; or
(xii) Buy the securities of any company if it would then own more than 10% of
its voting securities or any class of its securities; or buy the
securities of any company if more than 5% of the Fund's total assets
(valued at market value) would then be invested in that company; or buy
the securities of companies in any one industry if more than 25% of the
Fund's total assets would then be in companies in that industry.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities for a year and dividing
it by the monthly average of the market value of such securities during the
year, excluding 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 decreased from 57.10% for the fiscal
year ended March 31, 1993 to 55.23% for the fiscal year ended March 31, 1994 in
response to changes in market conditions.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to Waddell & Reed Investment Management Company, a wholly-
owned subsidiary of Waddell & Reed, Inc. Under the Management Agreement, the
Manager is employed to supervise the investments of the Fund and provide
investment advice to the Fund. The address of the Manager and Waddell & Reed,
Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's Directors prior to approving any Shareholder Servicing
Agreement or Accounting Services Agreement.
Torchmark Corporation and United Investors Management Company
The Manager is a wholly-owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly-owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly-
owned subsidiary of United Investors Management Company. United Investors
Management Company is a wholly-owned subsidiary of Torchmark Corporation.
Torchmark Corporation is a publicly held company. The address of Torchmark
Corporation and United Investors Management Company is 2001 Third Avenue South,
Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the company's inception date, whichever was later, and to
TMK/United Funds, Inc. since that fund's inception, until January 8, 1992 when
it assigned its duties as investment manager for these funds (and the related
professional staff) to the Manager. The Manager has also served as investment
manager for Waddell & Reed Funds, Inc. since its inception in September 1992 and
Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund,
Inc. since they each commenced operations in February 1993. Waddell & Reed,
Inc. serves as principal underwriter for the investment companies in the United
Group of Mutual Funds, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between Waddell &
Reed Services Company (the "Agent"), a subsidiary of Waddell & Reed, Inc., and
the Fund, the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Directors without
shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for the Manager's management services, the
Fund pays the Manager a fee as described in the Prospectus. Prior to the above-
described assignment from Waddell & Reed, Inc. to Waddell & Reed Investment
Management Company, all fees were paid to Waddell & Reed, Inc. The management
fees paid by the Fund to Waddell & Reed, Inc. or the Manager, as the case may
be, during the Fund's fiscal years ended March 31, 1994, 1993 and 1992 were
$1,577,044, $1,254,675 and $887,712, respectively.
For purposes of calculating the daily fee the Fund does not include money
owed to it by Waddell & Reed, Inc. for shares which it has sold but not yet paid
to the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, the Fund pays the Agent a
monthly fee of $1.0208 for each shareholder account which was in existence at
any time during the prior month, plus $0.30 for each account on which a dividend
or distribution, of cash or shares, had a record date in that month. It also
pays certain out-of-pocket expenses of the Agent, including long distance
telephone communications costs; microfilm and storage costs for certain
documents; forms, printing and mailing costs; and legal and special services not
provided by Waddell & Reed, Inc., the Manager or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a fee for
accounting services as described in the Prospectus. Fees paid to the Agent for
the fiscal years ended March 31, 1994, 1993 and 1992 were $46,667, $40,000 and
$36,667, respectively.
The State of California imposes limits on the amount of certain expenses
the Fund can incur. The Manager must reduce the amount of such expenses which
exceed these expense limits.
The State of California has granted the Fund a variance from the expense
limitation to allow the Fund to exclude from its aggregate annual expenses
transfer agency fees, professional fees, and report costs attributable to the
Fund's average account size being smaller than the average account size for
open-end investment companies with an objective similar to the Fund's. Other
expenses excluded from aggregate annual expenses include interest, taxes,
brokerage commissions and extraordinary expenses, such as litigation.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, the Manager
and the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement
are described above. Waddell & Reed, Inc. and affiliates pay the Fund's
Directors and officers who are affiliated with the Manager and its affiliates.
The Fund pays the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
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 the fiscal years ended March 31, 1994, 1993 and
1992 were $1,435,848, $1,621,610 and $1,812,828, respectively. The amounts
retained by Waddell & Reed, Inc. for these same periods were $624,994, $704,791
and $782,498, respectively.
A major portion of the sales charge is paid to sales representatives and
managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may compensate its sales
representatives as to purchases for which there is no sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under a Service Plan (the "Plan") adopted by the Fund pursuant to Rule 12b-
1 under the Investment Company Act of 1940, the Fund may pay Waddell & Reed,
Inc., the principal underwriter for the Fund, a fee not to exceed .25% of the
Fund's average annual net assets, paid monthly, to reimburse Waddell & Reed,
Inc. for its costs and expenses in connection with the provision of personal
services to Fund shareholders and/or maintenance of shareholder accounts.
The Plan and a related Service Agreement between the Fund and Waddell &
Reed, Inc. contemplate that Waddell & Reed, Inc. may be reimbursed for amounts
it expends in compensating, training and supporting registered sales
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located at
field sales offices; engaging in other activities useful in providing personal
service to Fund shareholders and/or maintenance of shareholder accounts; and in
compensating broker-dealers who may regularly sell Fund shares for providing
shareholder services and/or maintaining shareholder accounts.
Fees paid (or accrued) as service fees by the Fund for the fiscal year
ended March 31, 1994 were $120,619.
The Plan and the Service Agreement were approved by the Fund's Board of
Directors, including the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operations of the
Plan or any agreement referred to in the Plan (hereafter, the "Plan Directors").
The Plan was also approved by shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will be
effective only if approved, by the Directors including the Plan Directors acting
in person at a meeting called for that purpose, (iii) amounts to be paid by the
Fund under the Plan may not be materially increased without the vote of the
holders of a majority of the outstanding shares of the Fund, and (iv) while the
Plan remains in effect, the selection and nomination of the Directors who are
Plan Directors will be committed to the discretion of the Plan Directors.
Custodial and Auditing Services
The Fund's Custodian is United Missouri Bank, n.a., Kansas City, Missouri.
In general, the custodian is responsible for holding the Fund's cash and
securities. If Fund assets are held in foreign countries, the Fund will comply
with Rule 17f-5 under the Investment Company Act of 1940. Price Waterhouse,
Kansas City, Missouri, the Fund's independent accountants, audits the Fund's
financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each of the shares of the Fund is the value of the
Fund's assets, less what it owes, divided by the total number of shares. For
example, if on a particular day the Fund owned securities worth $100 and had
cash of $15, the total value of the assets would be $115. If it owed $5, the
net asset value would be $110 ($115 minus $5). If it had 11 shares outstanding,
the net asset value of one share would be $10 ($110 divided by 11).
Shares of the Fund are sold at their next determined net asset value plus
the sales charge described in the Prospectus. The price makeup as of March 31,
1994 was as follows:
Net asset value per share (net assets divided by
capital shares outstanding) .............. $10.94
Add: selling commission (5.75% of offering
price) .................................... .67
------
Maximum offering price per share (net asset
value divided by 94.25%) ................. $11.61
======
The offering price of a share is its net asset value next determined
following acceptance of a purchase order plus the sales charge. The number of
shares you receive for your purchase depends on the next offering price after
Waddell & Reed, Inc. receives and accepts your order at its principal business
office at the address shown on the cover of this SAI. You will be sent a
confirmation after your purchase which will indicate how many shares you have
purchased. Shares are normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the Fund
may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily computed
once on each day that the New York Stock Exchange is open for trading at the
time discussed below. That Exchange annually announces the days on which it
will not be open for trading. Net asset value per share will be computed on
each day on which it is computed (see above) as of the close of the regular
session of the New York Stock Exchange or the close of the regular session of
any such domestic securities or commodities exchange on which an option or
future held by the Fund is traded. The most recent announcement indicates that
the New York Stock Exchange will not be open on the following days: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, it is possible that the Exchange
may close on other days. The net asset value will change every business day,
since the value of the assets and the number of shares change every day.
The Fund's portfolio securities, except as otherwise noted, listed or
traded on a stock exchange, are valued on the basis of the last sale on that day
or, lacking any sales, at a price which is the mean between the closing bid and
asked prices. Other securities which are traded over-the-counter are priced
using NASDAQ (National Association of Securities Dealers Automated Quotations),
which provides information on bid and asked prices quoted by major dealers in
such stocks. Bonds, other than convertible bonds, are valued using a pricing
system provided by a major dealer in bonds. Convertible bonds are valued using
this pricing system only on days when there is no sale reported. Short-term
debt securities are valued at amortized cost, which approximates market. When
market quotations are not readily available, securities are valued at fair value
as determined in good faith under procedures established by and under the
general supervision and responsibility of the Fund's Board of Directors.
Puts, calls and Futures purchased and held by the Fund are valued at the
last sales price thereof on the securities or commodities exchanges on which
they are traded, or, if there are no transactions, at the mean between bid and
asked prices. (Ordinarily, the close of the regular session for 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 with 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 investment is increased by the amount of the premium
paid. If a put written by the Fund is exercised, the amount that the Fund pays
to purchase the related investment is decreased by the amount of the premium it
received. If the Fund exercises a put it purchased, the amount 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, it
will have a gain or loss depending on whether the premium was more or less than
the cost of the closing transaction.
Optional delivery standby commitments are valued at fair value under the
general supervision and responsibility of the Fund's Board of Directors. They
are accounted for in the same manner as exchange-listed puts.
Minimum Initial and Subsequent Investments
Initial investments must be at least $500 with the exceptions described in
this paragraph. A $50 minimum initial investment pertains to sales to certain
retirement plan accounts. A minimum initial investment of $25 is applicable to
purchases made through payroll deduction for or by employees of the Manager,
Waddell & Reed, Inc., their affiliates, or certain retirement plan accounts. A
$100 minimum initial investment pertains to certain exchanges of shares from
another fund in the United Group. Except with respect to certain exchanges and
automatic withdrawals from a checking account, a shareholder may make subsequent
investments of any amount. See "Exchanges for Shares of Other Funds in the
United Group."
Waddell & Reed, Inc., in addition to distributing shares of the funds in
the United Group, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc., may
distribute certain limited partnership investment interests from time to time.
These investments may provide distributions at various intervals in amounts less
than $500. A Fund account may be set up by an investor in these limited
partnerships to receive partnership distributions of $25 or more. Accordingly,
the $500 minimum initial investment will not apply to such accounts.
Reduced Sales Charges
Account Grouping
Large purchases are subject to lower sales charges. The schedule of sales
charges appears in the Prospectus. For the purpose of taking advantage of the
lower sales charges available for large purchases, a purchase in any of
categories 1 through 7 listed below made by an individual or deemed to be made
by an individual may be grouped with purchases in any other of these categories.
1. Purchases by an individual for his or her own account (includes purchases
under the United Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own account
(includes United Funds Revocable Trust Form of spouse);
3. Purchases by that individual or his or her spouse in their joint account;
4. Purchases by that individual or his or her spouse for the account of their
child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in a
Uniform Gift to Minors Act ("UGMA") or Uniform Transfers to Minors Act
account;
6. Purchases by that individual or his or her spouse for his or her Individual
Retirement Account ("IRA"), Section 457 of the Internal Revenue Code of
1986, as amended (the "Code"), salary reduction plan account, tax sheltered
annuity account ("TSA") or Keogh Plan account, provided that the individual
and spouse are the only participants in the Keogh Plan; and
7. Purchases by a trustee under a trust where that individual or his or her
spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens a UGMA account for grandson A; Grandmother has an
account in her own name; A's father has an account in his own name;
the UGMA account may be grouped with A's father's account but may not
be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in the
trust account is eligible for grouping with an IRA account of W, H's
wife;
C. H's will provides for the establishment of a trust for the benefit of
his minor children upon H's death; his bank is named as trustee; upon
H's death, an account is established in the name of the bank, as
trustee; a purchase in the account may be grouped with an account held
by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account may
not be grouped with R's individual account. If X's spouse, Y, was
successor trustee, this purchase could be grouped with Y's individual
account.
All purchases made for a participant in a multi-participant Keogh plan may
be grouped only with other purchases made under the same plan; a multi-
participant Keogh plan is defined as a plan in which there is more than one
participant where one or more of the participants is other than the spouse of
the owner/employer.
Example A: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made under
the plan with any purchases in categories 1 through 7 above.
Example B: H has established a Keogh Plan; his wife, W, is a participant and
they have hired one or more employees who also become participants
in the plan; H and W may not combine any purchases made under the
plan with any purchases in categories 1 through 7 above; however,
all purchases made under the plan for H, W or any other employee
will be combined.
All purchases made under a "qualified" employee benefit plan of an
incorporated business will be grouped. A "qualified" employee benefit plan is
established pursuant to Section 401 of the Code. All qualified employee benefit
plans of any one employer or affiliated employers will also be grouped. An
affiliate is defined as an employer that directly, or indirectly, controls or is
controlled by or is under control with another employer.
Example: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made under
both plans will be grouped.
All purchases made under a simplified employee pension plan ("SEP"),
payroll deduction plan or similar arrangement adopted by an employer or
affiliated employers (as defined above) may be grouped provided that the
employer elects to have all such purchases grouped at the time the plan is set
up. If the employer does not make such an election, the purchases made by
individual employees under the plan may be grouped with the other accounts of
the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase in accounts eligible for grouping may be combined for
purposes of determining the availability of a reduced sales charge. In order
for an eligible purchase to be grouped, the investor must advise Waddell & Reed,
Inc. at the time the purchase is made that it is eligible for grouping and
identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $75,000; at the same
time, H's parents open up three UGMA accounts for H and W's three
minor children and invest $10,000 in each child's name; the combined
purchase of $105,000 is subject to a reduced sales load of 4.75%
provided that Waddell & Reed, Inc. is advised that the purchases are
entitled to grouping.
Rights of Accumulation
If shares are held in any account and an additional purchase is made in
that account or in any account eligible for grouping with that account, the
additional purchase is combined with the net asset value of the existing account
as of the date the new purchase is accepted by Waddell & Reed, Inc. for the
purpose of determining the availability of a reduced sales charge.
Example: H is a current shareholder who invested in the Fund three years ago.
His account has a net asset value of $80,000. His wife, W, now wishes
to invest $20,000 in the Fund. W's purchase will be combined with H's
existing account and will be entitled to a reduced sales charge of
4.75%. H's original purchase was subject to a full sales charge and
the reduced charge does not apply retroactively to that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under an investment
program ("contractual plan") the shares held under the plan may be combined with
the additional purchase only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases is also
available under a Statement of Intention. By signing a Statement of Intention
form, which is available from Waddell & Reed, Inc., the purchaser indicates an
intention to invest, over a 13-month period, a dollar amount which is sufficient
to qualify for a reduced sales charge. The 13-month period begins on the date
the first purchase made under the Statement is accepted by Waddell & Reed, Inc.
Each purchase made from time to time under the Statement is treated as if the
purchaser were buying at one time the total amount which he or she intends to
invest. The sales charge applicable to all purchases made under the terms of
the Statement will be the sales charge in effect on the beginning date of the
13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, shares already held in the same account in which the purchase is being made
or in any account eligible for grouping with that account, as described above,
will be included.
Example: H signs a Statement of Intention indicating his intent to invest in
his own name a dollar amount sufficient to entitle him to purchase
shares at the sales charge applicable to a purchase of $100,000. H
has an IRA account and the shares held under the IRA in the Fund have
a net asset value as of the date the Statement is accepted by Waddell
& Reed, Inc. of $15,000; H's wife, W, has an account in her own name
invested in another fund in the United Group which charges the same
sales load as the Fund, with a net asset value as of the date of
acceptance of the Statement of $10,000; H needs to invest $75,000 over
the 13-month period in order to qualify for the reduced sales load
applicable to a purchase of $100,000.
A copy of the Statement of Intention signed by a purchaser will be returned
to the purchaser after it is accepted by Waddell & Reed, Inc. and will set forth
the dollar amount which must be purchased within the 13-month period in order to
qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under an investment
program ("contractual plan"), the shares held under the plan will be taken into
account in determining the amount which must be invested under the Statement
only if the contractual plan has been completed.
The minimum initial investment under a Statement of Intention is 5% of the
dollar amount which must be invested under the Statement. An amount equal to 5%
of the purchase required under the Statement will be held "in escrow." If a
purchaser does not, during the period covered by the Statement, invest the
amount required to qualify for the reduced sales charge under the terms of the
Statement, he or she will be responsible for payment of the sales charge
applicable to the amount actually invested. The additional sales charge owed on
purchases made under a Statement which is not completed will be collected by
redeeming part of the shares purchased under the Statement and held "in escrow"
unless the purchaser makes payment of this amount to Waddell & Reed, Inc. within
20 days of Waddell & Reed, Inc.'s request for payment.
If the actual amount invested is higher than the amount an investor intends
to invest, and is large enough to qualify for a sales charge lower than that
available under the Statement of Intention, the lower sales charge will apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell &
Reed, Inc. to sell, the shares covered by the Statement.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement will be deducted in computing the aggregate purchases under the
Statement.
Statements of Intention are not available for purchases made under a
simplified employee pension plan where the employer has elected to have all
purchases under the SEP grouped.
Other Funds in the United Group
Reduced sales charges for larger purchases apply to purchases of any of the
funds in the United Group which are subject to a sales charge. A purchase of,
or shares held, in any of the funds in the United Group which are subject to the
same sales charge as the Fund will be treated as an investment in the Fund for
the purpose of determining the applicable sales charge. The following funds in
the United Group are subject to a maximum 5.75% ("full") sales charge as
described in the prospectus of each Fund: United Funds, Inc., United
International Growth Fund, Inc., United Continental Income Fund, Inc., United
Vanguard Fund, Inc., United Retirement Shares, Inc., United High Income Fund,
Inc., United New Concepts Fund, Inc., United Gold & Government Fund, Inc. and
United High Income Fund II, Inc. The following funds in the United Group are
subject to a "reduced" sales charge as described in the prospectus of each fund:
United Municipal Bond Fund, Inc., United Government Securities Fund, Inc. and
United Municipal High Income Fund, Inc. For the purposes of obtaining the lower
sales charge which applies to large purchases, purchases in a fund in the United
Group which is subject to a full sales charge may not be grouped with purchases
in a fund in the United Group which is subject to a reduced sales charge;
conversely, purchases made in a fund with a reduced sales charge may not be
grouped or combined with purchases of a fund which is subject to a full sales
charge.
United Cash Management, Inc. is not subject to a sales charge. Purchases
in that fund are not eligible for grouping with purchases in any other fund.
Net Asset Value Purchases
As stated in the Prospectus, Fund shares may be purchased at net asset
value by the Directors and officers of the Fund, employees of Waddell & Reed,
Inc., employees of their affiliates, sales representatives of Waddell & Reed,
Inc. and the spouse, children, parents, children's spouses and spouse's parents
of each such Director, officer, employee and sales representative. "Child"
includes stepchild; "parent" includes stepparent. Purchases in an IRA sponsored
by Waddell & Reed, Inc. established for any of these eligible purchasers may
also be at net asset value. Purchases in any tax qualified retirement plan
under which the eligible purchaser is the sole participant may also be made at
net asset value. Trusts under which the grantor and the trustee or a co-trustee
are each an eligible purchaser are also eligible for net asset value purchases.
"Employees" includes retired employees. A retired employee is an individual
separated from service from Waddell & Reed, Inc. or affiliated companies with a
vested interest in any Employee Benefit Plan sponsored by Waddell & Reed, Inc.
or its affiliated companies. "Sales representatives" includes retired sales
representatives. A "retired sales representative" is any sales representative
who was, at the time of separation from service from Waddell & Reed, Inc., a
Senior Account Representative. A custodian under the Uniform Gifts (or
Transfers) to Minors Act purchasing for the child or grandchild of any employee
or sales representative may purchase at net asset value whether or not the
custodian himself is an eligible purchaser.
Reasons for Difference in Public Offering Price
As described herein and in the Prospectus, there are a number of instances
in which the Fund's shares are sold or issued on a basis other than the maximum
public offering price, that is, the net asset value plus the highest sales
charge. Some of these relate to lower or eliminated sales charges for larger
purchases, whether made at one time or over a period of time as under a
Statement of Intention or right of accumulation. See the table of sales charges
in the Prospectus. The reasons for these quantity discounts are, in general,
that (i) they are traditional and have long been permitted in the industry and
are therefore necessary to meet competition as to sales of shares of other funds
having such discounts; (ii) certain quantity discounts are required by rules of
the National Association of Securities Dealers, Inc. (as are elimination of
sales charges on the reinvestment of dividends and distributions); and (iii)
they are designed to avoid an unduly large dollar amount of sales charge on
substantial purchases in view of reduced selling expenses. Quantity discounts
are made available to certain related persons for reasons of family unity and to
provide a benefit to tax exempt plans and organizations.
The reasons for the other instances in which there are reduced or
eliminated sales charges are as follows. Exchanges at net asset value are
permitted because a sales charge has already been paid on the shares exchanged.
Sales without sales charge are permitted to Directors, officers and certain
others due to reduced or eliminated selling expenses and because such sales may
aid in the development of a sound employee organization, encourage incentive,
responsibility and interest in the United Group and an identification with its
aims and policies. Limited reinvestments of redemptions at no sales charge are
permitted to attempt to protect against mistaken or not fully informed
redemption decisions. Shares may be issued at no sales charge in plans of
reorganization due to reduced or eliminated sales expenses and since, in some
cases, such issuance is exempted in the Investment Company Act of 1940 from the
otherwise applicable restrictions as to what sales charge must be imposed. In
no case in which there is a reduced or eliminated sales charge are the interests
of existing shareholders adversely affected since, in each case, the Fund
receives the net asset value per share of all shares sold or issued.
Flexible Withdrawal Service
If you qualify, you may arrange to receive regular monthly, quarterly,
semi-annual or annual payments; this can be done by redeeming shares on a
regular basis. This service is called Flexible Withdrawal Service (the
"Service"). It is available not only for Fund shares but also for shares of any
of the funds in the United Group. It would be a disadvantage to an investor to
make additional purchases of shares while a withdrawal program is in effect as
this would result in duplication of sales charges.
To qualify for this Service, you must have invested at least $10,000 in
shares which you still own of any of the funds in the United Group; or, you must
own shares having a value of at least $10,000. The value for this purpose is
not the net asset value but the value at the offering price, i.e., the net asset
value plus the sales charge.
To start this Service, you must fill out a form (available from Waddell &
Reed, Inc.), advising Waddell & Reed, Inc. how you want your shares redeemed to
make the payments. You have three choices:
First. To get a monthly, quarterly, semi-annual or annual payment of $50
or more;
Second. To get a monthly payment, which will change each month, equal to
one-twelfth of a percentage of the value of the shares in the Account; you fix
the percentage; or
Third. To get a monthly or quarterly payment, which will change each month
or quarter, by redeeming a 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.
The Fund, not Waddell & Reed, Inc., pays the costs of this Service. Having
the Service costs you nothing extra individually. There is a $2.00 fee for each
withdrawal from Retirement Plan Accounts.
If you have a share certificate for the shares you want to make available
for the Service, you must enclose the certificate with the form initiating the
Service.
The dividends and distributions on shares you have made available for this
Service are reinvested in additional shares. All payments are made by redeeming
shares, which may involve a gain or loss for tax purposes. To the extent that
payments exceed dividends and distributions, the number of shares you own will
decrease. When all of the shares in an account are redeemed, you will not
receive any more 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. For example, if you started out with a $50 monthly payment,
you could change to a $200 quarterly payment. You can at any time redeem part
or all of the shares in your account; if you redeem all of the shares, the
Service is terminated. The Fund can also terminate the Service by notifying you
in writing.
After the end of each calendar year, information on shares redeemed will be
sent to you to assist you in completing your Federal income tax return.
Exchanges for Shares of Other Funds in the United Group
Once a sales charge has been paid on shares of a fund in the United Group,
these shares and any shares added to them from reinvestment of dividends or
distributions may be freely exchanged for shares of another fund in the United
Group. The shares you exchange must be worth at least $100 or you must already
own shares of the fund in the United Group into which you want to exchange.
You may exchange shares you own in another fund in the United Group for
Fund shares without charge if (i) a sales charge was paid on these shares, or
(ii) the shares were received in exchange for shares for which a sales charge
was paid, or (iii) the shares were acquired from reinvestment of dividends and
distributions paid on such shares. There may have been one or more such
exchanges so long as a sales charge was paid on the shares originally purchased.
Also, shares acquired without a sales charge because the purchase was $2 million
or more will be treated the same as shares on which a sales charge was paid.
United Municipal Bond Fund, Inc., United Government Securities Fund, Inc.
and United Municipal High Income Fund, Inc. shares are the exceptions and
special rules apply. Shares of these funds may be exchanged for Fund shares
only if (i) you have received those shares as a result of one or more exchanges
of shares on which a sales charge was originally paid, or (ii) the shares have
been held from the date of the original purchase for at least six months.
Subject to the above rules regarding sales charges, you may have a specific
dollar amount of shares of United Cash Management, Inc. automatically exchanged
each month into the Fund or any other fund in the United Group. The shares of
United Cash Management, Inc. which you designate for automatic exchange must be
worth at least $100 or you must own shares of the fund in the United Group into
which you want to exchange. The minimum value of shares which you may designate
for automatic exchange is $100, which may be allocated among different funds in
the United Group so long as each fund receives a value of $25. Minimum initial
investment and minimum balance requirements apply to such automatic exchange
service.
When you exchange shares, the total shares you receive will have the same
aggregate net asset value as the total shares you exchange. The relative values
are those next figured after your written exchange request is received in good
order.
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any time
and any such exchange may not be accepted.
Retirement Plans
For individual taxpayers meeting certain requirements, Waddell & Reed, Inc.
offers four retirement plan arrangements which provide tax deferral and
contribute to retirement assets. All four of them involve investment in Fund
shares (or the shares of certain other funds in the United Group).
First. A self-employed person may set up a plan that is commonly called a
Keogh Plan. As a general rule, an investor under a defined contribution Keogh
Plan can contribute each year up to 25% of his or her annual earned income, with
a maximum of $30,000.
Second. Investors having earned income may set up a plan that is commonly
called an IRA. Under an IRA, an investor can contribute each year up to 100% of
his or her earned income up to a maximum of $2,000. The maximum is $2,250 if an
investor's spouse has no earned income in a taxable year. If an investor's
spouse has at least $2,000 of earned income in a taxable year, the maximum is
$4,000 ($2,000 for each spouse).
These contributions are deductible unless the investor (or, if married,
either spouse) is an active participant in a qualified retirement plan or if,
notwithstanding that the investor or one or both spouses so participates, the
adjusted gross income does not exceed certain levels.
An investor may also use an IRA to receive a rollover contribution which is
either (a) a direct rollover from an employer's plan or (b) a rollover of an
eligible distribution paid to the investor from an employer's plan or another
IRA. To the extent a rollover contribution is made to an IRA, the distribution
will not be subject to Federal income tax until distributed from the IRA. A
direct rollover generally applies to any distribution from an employer's plan
(including a custodial account under Section 403(b)(7) of the Code, but not an
IRA) other than certain periodic payments, required minimum distributions and
other specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a portion
of that distribution generally may be rolled over to an IRA within 60 days after
receipt of the distribution. Because mandatory Federal income tax withholding
applies to any eligible rollover distribution which is not paid in a direct
rollover, investors should consult their tax advisors or pension consultants as
to the applicable tax rules. If you already have an IRA, you may have the
assets in that IRA transferred directly to an IRA offered by Waddell & Reed,
Inc.
Third. If an investor is an employee of a public school system or of
certain types of charitable organizations, he or she may be able to enter into a
deferred compensation arrangement through a custodian account under Section
403(b) of the Code.
Fourth. If an investor is an employee of a state or local government or of
certain types of charitable organizations, he or she may be able to enter into a
deferred compensation arrangement in accordance with Section 457 of the Code.
Waddell & Reed, Inc. also offers to businesses prototype employee benefit
plans qualified under Section 401 of the Code. Investments may be made in the
Fund in accordance with the terms of the plans.
More detailed information about these arrangements is in the applicable
forms which are available from Waddell & Reed, Inc. These plans may involve
complex tax questions as to premature distributions and other matters.
Investors should consult their tax advisor or pension consultant.
Redemptions
The Prospectus gives information as to redemption procedures; the emergency
or other extraordinary conditions there indicated under which payment may be
delayed beyond seven days are certain emergency conditions determined by the
Securities and Exchange Commission, when the New York Stock Exchange is closed
other than for weekends or holidays, or when trading on the Exchange is
restricted. The extraordinary conditions mentioned in the Prospectus under
which redemptions may be made in portfolio securities are that the Fund's Board
of Directors can decide that conditions exist making cash payments undesirable.
If they should, redemption payments could be made in securities. They would be
valued at the value used in figuring net asset value. There would be brokerage
costs to the redeeming shareholder in selling such securities. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, pursuant to which it is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of its net asset value during any 90-day period for any
one shareholder.
Reinvestment Privilege
The Prospectus discusses the reinvestment privilege under which, if you
redeem and then decide it was not a good idea, you may reinvest. If Fund shares
are then being offered, you can put all or part of your redemption payment back
into Fund shares without any sales charge at the net asset value next determined
after you have returned the amount. Your written request to do this must be
received within 30 days after your redemption request was received. You can do
this only once as to Fund shares. You do not use up this privilege by redeeming
shares to invest the proceeds at net asset value in a Keogh Plan or an IRA.
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.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board has responsibility for
establishing broad corporate policies for the Fund and for overseeing overall
performance of the selected experts. It has the benefit of advice and reports
from independent counsel and independent auditors.
Each of the Fund's Directors is also a Director of each of the other funds
in the United Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc.,
Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund,
Inc. and each of its officers is also an officer of one or more of these funds.
The principal occupation of each Director and officer during at least the past
five years is given below. Each of the persons listed through and including Mr.
Wright is a member of the Fund's Board of Directors. The other persons are
officers but not Board members.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund; Chairman of the Board of
Directors of Waddell & Reed Financial Services, Inc., United Investors
Management Company and United Investors Life Insurance Company; Chairman of the
Board of Directors and Chief Executive Officer of Torchmark Corporation;
formerly, Chairman of the Board of Directors of Waddell & Reed, Inc.
KEITH A. TUCKER*
President of the Fund; President, Chief Executive Officer and Director of
Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors of
the Manager, Waddell & Reed, Inc., Waddell & Reed Services Company, Waddell &
Reed Asset Management Company and Torchmark Distributors, Inc., an affiliate of
Waddell & Reed, Inc.; Vice Chairman of the Board of Directors, Chief Executive
Officer and President of United Investors Management Company; Vice Chairman of
the Board of Directors of Torchmark Corporation; formerly, partner in Trivest, a
private investment concern; formerly, Director of Atlantis Group, Inc., a
diversified company.
HENRY L. BELLMON
Route 1
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma; prior to his current service as Director of the funds in the United
Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc., he served in
such capacity for the funds in the United Group and TMK/United Funds, Inc.
DODDS I. BUCHANAN
University of Colorado
Campus Box 419
Boulder, Colorado 80309
Professor of Marketing, College of Business, University of Colorado;
Advisory Director, The Hand Companies; President, Buchanan Ranch Corp.;
formerly, Senior Vice President and Director of Marketing Services, The Meyer
Group of Management Consultants; formerly, Chairman, Department of Marketing,
Transportation and Tourism, University of Colorado.
JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Partner in Dillingham Farms, a farming operation; formerly, President and
Director of Kansas City Stock Yards Company.
JOHN F. HAYES*
335 N. Washington
P.O. Box 2977
Hutchinson, Kansas 67504-2977
President of Gilliland & Hayes, P.A., a law firm; Director of Central Bank
and Trust.
GLENDON E. JOHNSON
7300 Corporate Center Drive
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Life Insurance Company.
WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of the
Fund, each Fund in the United Group, TMK/United Funds, Inc., Waddell & Reed
Funds, Inc., Torchmark Government Securities Fund, Inc. and Torchmark Insured
Tax-Free Fund, Inc. (Mr. Morgan retired as Chairman of the Board of Directors
and President of these Funds on April 30, 1993); formerly, President, Director
and Chief Executive Officer of the Manager and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company; formerly,
Director of Waddell & Reed Asset Management Company, United Investors Management
Company and United Investors Life Insurance Company, affiliates of Waddell &
Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management and
investment; formerly, Director of The Vendo Company, a manufacturer and
distributor of vending machines.
FREDERICK VOGEL, III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired.
PAUL S. WISE
P.O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
LESLIE S. WRIGHT
Samford University
800 Lakeshore Drive
Birmingham, Alabama 35209
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association; formerly, President of Samford University.
Robert L. Hechler
Vice President of the Fund; Vice President, Chief Operations Officer,
Director and Treasurer of Waddell & Reed Financial Services, Inc.; Executive
Vice President, Principal Financial Officer, Director and Treasurer of the
Manager; President, Chief Executive Officer, Principal Financial Officer,
Director and Treasurer of Waddell & Reed, Inc.; Director and Treasurer of
Waddell & Reed Asset Management Company; President, Director and Treasurer of
Waddell & Reed Services Company; Vice President, Treasurer and Director of
Torchmark Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund; Vice President, Chief Investment Officer and
Director of Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed,
Inc.; President, Chief Executive Officer, Chief Investment Officer and Director
of the Manager and Waddell & Reed Asset Management Company; Senior Vice
President and Chief Investment Officer of United Investors Management Company.
Theodore W. Howard
Vice President and Treasurer of the Fund; Vice President of Waddell & Reed
Services Company.
Rodney O. McWhinney
Vice President, Assistant Secretary and General Counsel of the Fund; Vice
President, Secretary and General Counsel of Waddell & Reed Financial Services,
Inc.; Senior Vice President, Secretary and General Counsel of the Manager and
Waddell & Reed, Inc.; Director, Senior Vice President, Secretary and General
Counsel of Waddell & Reed Services Company; Director, Secretary and General
Counsel of Waddell & Reed Asset Management Company; Vice President, Secretary
and General Counsel of Torchmark Distributors, Inc.; Director of ICI Mutual
Insurance Company.
Sharon K. Pappas
Vice President, Secretary and Assistant General Counsel of the Fund;
Assistant Secretary and Assistant General Counsel of the Manager; Assistant
General Counsel of Waddell & Reed Financial Services, Inc., Waddell & Reed,
Inc., Waddell & Reed Asset Management Company and Waddell & Reed Services
Company.
Mark G. Seferovich
Vice President of the Fund; Vice President of the Manager; formerly, a fund
manager with Security Management Company, a brokerage firm; formerly, Vice
President of Waddell & Reed, Inc.
Carl E. Sturgeon
Vice President of the Fund; Vice President of the Manager; formerly, Vice
President of Waddell & Reed, Inc.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
As of the date of this SAI, four of the Fund's Directors may be deemed to
be "interested persons" of its underwriter, Waddell & Reed, Inc. The Directors
who may be deemed to be "interested persons" as defined in the Investment
Company Act of 1940 are denoted by an asterisk.
The Board has created an honorary position of Director Emeritus, which
position a director may elect after resignation from the Board provided the
director has attained the age of 75 and has served as a director of the Funds in
the United Group for a total of at least five years. A Director Emeritus
receives fees in recognition of his past services whether or not services are
rendered in his capacity as Director Emeritus, but has no authority or
responsibility with respect to management of the Fund.
The funds in the United Group, TMK/United Funds, Inc. and Waddell & Reed
Funds, Inc. pay to each Director a total of $40,000 per year, plus $500 for each
meeting of the Board of Directors attended and $500 for each committee meeting
attended which is not in conjunction with a Board of Directors' meeting, other
than Directors who are affiliates of Waddell & Reed, Inc. The fees to the
Directors who receive them are divided among the funds in the United Group,
TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. based on their relative
size. During the Fund's fiscal year ended March 31, 1994, its share was $7,534.
The officers are paid by Waddell & Reed, Inc. or its affiliates.
Shareholdings
As of May 31, 1994, all of the Fund's Directors and officers as a group
owned less than 1% of the outstanding shares of the Fund. As of such date no
person owned of record or was known by the Fund to own beneficially 5% or more
of the Fund's outstanding shares.
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder, other than payments when you redeem your shares. The first source
is the Fund's net investment income, which is derived from the dividends,
interest and earned discount on the securities it holds, less its expenses. The
second source is realized capital gains, which are derived from the proceeds
received from the sale of securities at a price higher than the Fund's tax basis
(usually cost) in such securities; these gains can be either long-term or short-
term, depending on how long the Fund has owned the securities before it sells
them. The third source is net realized gains from foreign currency
transactions. The payments made to shareholders from net investment income, net
short-term capital gains, and net realized gains from certain foreign currency
transactions are called dividends. Payments, if any, from long-term capital
gains are called distributions.
The Fund pays distributions only if it has net capital gains (the excess of
net long-term capital gains over net short-term capital losses). It may or may
not have such gains, depending on whether securities are sold and at what price.
If the Fund has net capital gains, it will pay distributions once each year, in
the latter part of the fourth calendar quarter. Even if it has net capital
gains for a year, the Fund does not pay the gains out if it has applicable prior
year losses to offset the gains.
Choices you Have on your Dividends and Distributions
In your application form, you can give instructions that (i) you want cash
for your dividends and distributions or (ii) you want cash for your dividends
and want your distributions reinvested in Fund shares. You can change your
instructions at any time. If you give neither instruction, your dividends and
distributions will be reinvested in Fund shares. All reinvestments are at net
asset value without any sales charge. The net asset value used for this purpose
is that computed as of the record date for the dividend or distribution,
although this could be changed by the Directors.
Even if you get dividends and distributions in cash, you can thereafter
reinvest them (or distributions only) in Fund shares at net asset value (i.e.,
no sales charge) next determined after receipt by Waddell & Reed, Inc. of the
amount clearly identified as a reinvestment. The reinvestment must be within 45
days after the payment.
TAXES
General
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Code, the Fund must distribute to its shareholders for
each taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital gains and
net gains from certain foreign currency transactions) and must meet several
additional requirements. These requirements include the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of securities, or any of the
following, that were held for less than three months -- options or futures, or
foreign currencies (or forward contracts thereon) that are not directly related
to the Fund's principal business of investing in securities (or options and
futures with respect to securities) ("Short-Short Limitation"); (3) at the close
of each quarter of the Fund's taxable year, at least 50% of the value of its
total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs and other securities that are limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets and that does not represent more than 10% of the
outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. Government securities or
the securities of other RICs) of any one issuer.
Dividends and distributions declared by the Fund in December of any year
and payable to shareholders of record on a date in that month are deemed to have
been paid by the Fund and received by the shareholders on that December 31 if
they are paid by the Fund during the following January. Accordingly, those
dividends and distributions will be taxed to shareholders for the year in which
that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any distributions received on those shares. Investors also should
be aware that if shares are purchased shortly before the record date for a
dividend or distribution, the purchaser will receive some portion of the
purchase price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
It is the Fund's policy to make sufficient distributions each year to avoid
imposition of the Excise Tax. The Code permits the Fund to defer into the next
calendar year net capital losses incurred between each November 1 and the end of
the current calendar year.
Income from Foreign Securities
Dividends and interest received by the Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of debt securities denominated in foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of each security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest, dividends or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally are treated
as ordinary income or loss. These gains or losses, referred to under the Code
as "section 988" gains or losses, may increase or decrease the amount of the
Fund's investment company taxable income to be distributed to its shareholders.
Income from Options, Futures and Currencies
The use of hedging strategies, such as writing (selling) and purchasing
options for hedging purposes and writing and purchasing futures contracts and
options thereon, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses the
Fund realizes in connection therewith. Income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in options and futures derived by the Fund with respect to its
business of investing in securities or foreign currencies, will qualify as
permissible income under the Income Requirement. However, income from the
disposition of options and futures will be subject to the Short-Short Limitation
if they are held for less than three months. Income from the disposition of
foreign currencies, and forward contracts thereon, that are not directly related
to the Fund's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gains (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all of the Fund's hedging transactions. To the
extent this treatment is not available, the Fund may be forced to defer the
closing out of options, futures and certain forward contracts beyond the time
when it otherwise would be advantageous to do so, in order for the Fund to
continue to qualify as a RIC.
Any income the Fund earns from writing options is taxed as short-term
capital 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 expires without being
exercised, the premium it receives also will be a short-term gain. If such an
option is exercised and thus the Fund sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale. The Fund will not write so many options
that it could fail to continue to qualify as a RIC.
Certain options and futures in which the Fund may invest will be "section
1256 contracts." Section 1256 contracts held by the Fund at the end of each
taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which the Fund has made an election not to have the
following rules apply, are "marked-to-market" (that is, treated as sold for
their fair market value) for Federal income tax purposes, with the result that
unrealized gains or losses are treated as though they were realized. Sixty
percent of any net gains or losses recognized on these deemed sales, and 60% of
any net realized gains or losses from any actual sales of section 1256
contracts, are treated as long-term capital gains or losses, and the balance are
treated as short-term capital gains or losses. Section 1256 contracts also may
be marked-to-market for purposes of the Excise Tax and for other purposes.
Code section 1092 (dealing with straddles) may also affect the taxation of
options and futures contracts in which the Fund may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property.
Section 1092 generally provides that any loss from the disposition of a position
in a straddle may be deducted only to the extent the loss exceeds the unrealized
gain on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, which apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If the Fund makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences of
straddle transactions to the Fund are not entirely clear.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by the Manager pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio of
the Fund. Transactions in securities other than those for which an exchange is
the primary market are generally done with dealers acting as principals or
market makers. Brokerage commissions are paid primarily for effecting
transactions in securities traded on an exchange and otherwise only if it
appears likely that a better price or execution can be obtained. The individual
who manages the Fund may manage other advisory accounts with similar investment
objectives. It can be anticipated that the manager will frequently place
concurrent orders for all or most accounts for which the manager has
responsibility. Transactions effected pursuant to such combined orders are
averaged as to price and allocated in accordance with the purchase or sale
orders actually placed for each fund or advisory account.
To effect the portfolio transactions of the Fund, the Manager is authorized
to engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to achieve "best
execution" (prompt and reliable execution at the best price obtainable) for
reasonable and competitive commissions. The Manager need not seek competitive
commission bidding but is expected to minimize the commissions paid to the
extent consistent with the interests and policies of the Fund. Subject to
review by the Board of Directors, such policies include the selection of brokers
which provide execution and/or research services and other services including
pricing or quotation services directly or through others ("brokerage services")
considered by the Manager to be useful or desirable for its investment
management of the Fund and/or the other funds and accounts over which the
Manager or its affiliates have investment discretion.
Brokerage services are, in general, defined by reference to Section 28(e)
of the Securities Exchange Act of 1934 as including (i) advice, either directly
or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities and the
availability of securities and purchasers or sellers; (ii) furnishing analyses
and reports; or (iii) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). "Investment
discretion" is, in general, defined as having authorization to determine what
securities shall be purchased or sold for an account, or making those decisions
even though someone else has responsibility.
The commissions paid to brokers that provide such brokerage services may be
higher than another qualified broker would charge for effecting comparable
transactions if a good faith determination is made by the Manager that the
commission is reasonable in relation to the brokerage services provided.
Subject to the foregoing considerations the Manager may also consider the
willingness of particular brokers and dealers to sell shares of the Fund and
other funds managed by the Manager and its affiliates as a factor in their
selection. No allocation of brokerage or principal business is made to provide
any other benefits to the Manager or its affiliates.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of the Manager and its affiliates
and investment research received for the commissions of those other accounts may
be useful both to the Fund and one or more of such other accounts. To the
extent that electronic or other products provided by such brokers to assist the
Manager in making investment management decisions are used for administration of
other non-research purposes, a reasonable allocation of the cost of the product
attributable to its non-research use is made by the Manager.
Such investment research (which may be supplied by a third party at the
instance of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of the
Manager; serves to make available additional views for consideration and
comparisons; and enables the Manager to obtain market information on the price
of securities held in the Fund's portfolio or being considered for purchase.
In placing transactions for the Fund's portfolio, the Manager may consider
sales of shares of the Fund and other funds managed by the Manager and its
affiliates as a factor in the selection of brokers to execute portfolio
transactions. The Manager intends to allocate brokerage on the basis of this
factor only if the sale is $2 million or more and there is no sales charge.
This results in the consideration only of sales which by their nature would not
ordinarily be made by Waddell & Reed, Inc.'s direct sales force and is done in
order to prevent the direct sales force from being disadvantaged by the fact
that it cannot participate in Fund brokerage.
During the Fund's fiscal years ended March 31, 1994, 1993 and 1992, it paid
brokerage commissions of $91,014, $66,017 and $59,404, respectively. These
figures do not include principal transactions or spreads or concessions on
principal transactions, i.e., those in which the Fund sells securities to a
broker-dealer firm or buys from a broker-dealer firm securities owned by it.
During the Fund's last fiscal year, the transactions, other than principal
transactions, which were directed to broker-dealers who provided research as
well as execution totaled $38,553,297 on which $44,639 in brokerage commissions
were paid. These transactions were allocated to these broker-dealers by the
internal allocation procedures described above.
Buying and Selling With Other Funds
The Fund and one or more of the other funds in the United Group, TMK/United
Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government Securities Fund,
Inc. and Torchmark Insured Tax-Free Fund, Inc. or accounts over which Waddell &
Reed Asset Management Company exercises investment discretion frequently will
buy or sell the same securities at the same time. If this happens, the amount
of each purchase or sale is divided. This is done on the basis of the amount of
securities each fund or account wanted to buy or sell. Sharing in large
transactions could affect the price the Fund pays or receives or the amount it
buys and sells. However, sometimes a better negotiated commission is available.
OTHER INFORMATION
The Shares of the Fund
The Fund presently has only one kind (class) of shares. Each share has
the same rights to dividends, to vote and to receive assets if the Fund
liquidates (winds up). Each fractional share has the same rights, in
proportion, as a full share. Shares are fully paid and nonassessable when
bought.
