File No. 2-82587
File No. 811-3695
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. _____
Post-Effective Amendment No. 25
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 23
UNITED NEW CONCEPTS FUND, INC.
- --------------------------------------------------------------------------------
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Overland Park, Kansas 66202-4200
- --------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
__X__ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
================================================================================
DECLARATION REQUIRED BY RULE 24f-2 (a)(1)
<PAGE>
The issuer has registered an indefinite amount of its securities under the
Securities Act of 1933 pursuant to Rule 24f-2 (a)(1). Notice for the
Registrant's fiscal year ending March 31, 1999 was filed on or about June 25,
1999.
<PAGE>
United New Concepts Fund, Inc.
This Fund seeks the growth of your investment through a diversified holding of
mid-sized companies believed to offer above-average growth potential.
The Securities and Exchange Commission has not approved or disapproved the
Fund's securities, or determined whether this Prospectus is accurate or
adequate. It is a criminal offense to state otherwise.
Prospectus
September 1, 1999
<PAGE>
Table of Contents
AN OVERVIEW OF THE FUND.......................................................4
PERFORMANCE...................................................................8
FEES AND EXPENSES.............................................................8
THE INVESTMENT PRINCIPLES OF THE FUND........................................10
Investment Goal, Principal Strategies and Other Investments...............10
Risk Considerations of Principal Strategies and Other Investments.........10
Year 2000 and Euro Issues.................................................11
YOUR ACCOUNT.................................................................24
Choosing a Share Class......................................................
Sales Charge Reductions and Waivers......................................
Waivers for Certain Investors............................................
Ways to Set Up Your Account...............................................24
Buying Shares.............................................................25
Minimum Investments.......................................................28
Adding to Your Account....................................................28
Selling Shares............................................................28
Telephone Transactions......................................................
Shareholder Services......................................................31
Personal Service.......................................................31
Reports................................................................31
Exchanges..............................................................31
Automatic Transactions for Class A, B and C Shareholders...............31
Distributions and Taxes...................................................32
Distributions..........................................................32
Taxes..................................................................33
THE MANAGEMENT OF THE FUND...................................................35
Portfolio Management......................................................36
Management Fee............................................................37
2
<PAGE>
Financial Highlights...........................................................
3
<PAGE>
An Overview of the Fund
Goal
United New Concepts Fund, Inc. (the "Fund") seeks the growth of your investment.
Principal Strategies
The Fund seeks to achieve its goal by investing primarily in common stocks of
U.S. companies whose market capitalizations are within the range of
capitalizations of companies comprising the Standard & Poor's MidCap 400 Index
("S&P MidCap 400") and that Waddell & Reed Investment Management Company, the
Fund's investment manager ("WRIMCO"), believes offer above-average growth
potential.
Principal Risks of Investing in the Fund
Because the Fund owns different types of investments, a variety of factors can
affect its investment performance, such as:
o the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
o the mix of securities in the Fund's portfolio, particularly the relative
weightings in, and exposure to, different sectors of the economy; and
o the skill of WRIMCO in evaluating and selecting securities for the Fund.
Market risk for medium-sized companies may be greater than that for large
companies. Medium-sized companies may have limited financial resources and less
experienced management compared to large companies. Stocks of medium-sized
companies may experience volatile trading and price fluctuations.
Also, the Fund may invest, to a lesser extent, in foreign securities, which
present additional risks such as currency fluctuations and political or economic
conditions affecting the foreign country.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
The Fund is designed for investors who are willing to accept greater risks than
are present with many other mutual funds. The Fund is not intended for investors
who desire assured income and
4
<PAGE>
conservation of capital. You should consider whether the Fund fits your
particular investment objectives.
5
<PAGE>
Performance
The chart and table below provide some indication of the risks of investing in
the Fund by showing changes in the Fund's performance from year to year and by
showing how the Fund's average annual returns for the periods shown compare with
those of a broad measure of market performance.
o The chart presents the total annual returns for Class A and shows how
performance has varied from year to year over the past ten years.
o The chart does not reflect any sales charge that you may be required to pay
upon purchase of the Fund's Class A shares. If the sales charge were
included, the returns would be less than those shown.
o The table shows Class A and Class Y average annual returns and compares
them to the market indicators listed. No performance information is
provided for Class B or Class C shares since these classes had not
commenced operations as of December 31, 1998.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does
not necessarily indicate how it will perform in the future.
Note that the performance information in the chart and table is based on
calendar-year periods, while the information shown in the Financial Highlights
section of this Prospectus and in the Fund's shareholder reports is based on the
Fund's fiscal year.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1989 8.97%
1990 1.39%
1991 89.72%
1992 5.47%
1993 10.75%
1994 11.30%
1995 33.94%
1996 4.57%
1997 16.74%
1998 38.70%
In the period shown in the chart, the highest quarterly return was
31.71% (the fourth quarter of 1998) and the lowest quarterly return
was -18.14% (the third quarter of 1990). The Class A return for the
quarter ended June 30, 1999 was 0.__%.
6
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
1 Year 5 Years 10 Years Life of Class*
-----------------------------------------------
Class A Shares of the Fund 30.72% 18.93% 19.09%
Nasdaq Industrials Index 6.82% 10.11% 13.16% 9.60%
Standard & Poor's
MidCap 400 Index 19.11% 18.84% 19.29% 12.36%
Class Y Shares of the Fund 39.32% 18.04%
Nasdaq Industrials Index 6.82% 10.11% 13.16% 9.60%
Standard & Poor's
MidCap 400 Index 19.11% 18.84% 19.29% 12.36%
The indexes shown are broad-based, securities market indexes that are
unmanaged. After June 30, 1999, the new or unseasoned companies in which the
Fund invests are primarily companies whose market capitalizations are within
those of companies comprising the S&P MidCap 400.
*Since September 6, 1995 for Class Y shares. Because the Class commenced
operations on a date other than at the end of a month, and partial month
calculations of the performance of the indexes (including income) are not
available, performance of the indexes is from September 1, 1995.
7
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees Class A Class B Class C Class Y
(fees paid directly from Shares Shares Shares Shares
your investment) ------ ------ ------ ------
Maximum Sales Charge (Load)
Imposed on Purchases
(as a percentage of
offering price) 5.75% None None None
Maximum Deferred Sales
Charge (Load)(1) None 5% 1% None
(as a percentage of
amount invested)
Annual Fund Operating Expenses(2)
(expenses that are deducted from Fund assets)
Management Fees 0.85% 0.85% 0.85% 0.85%
Distribution and
Service (12b-1) Fees(5) 0.25% 1.00% 1.00% None
Other Expenses 0.30% 0.30% 0.30% 0.22%
Total Annual Fund
Operating Expenses 1.40% 2.15% 2.15% 1.07%
Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class A, Class B,
Class C or Class Y shares for each time period specified, (b) your investment
has a 5% return each year, and (c) the expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions, your costs
would be:
- ----------
(1) The contingent deferred sales charge which is imposed on redemption
proceeds of Class B shares declines from 5% of the amount invested to 0%
after 6 years. For Class C shares, a 1% contingent deferred sales charge
applies to the proceeds of redemption of Class C shares held for less than
12 months.
(2) Management Fees and Total Annual Fund Operating Expenses have been restated
to reflect the change in management fees effective June 30, 1999;
otherwise, expense ratios are based on the management fees and other
Fund-level expenses of the Fund for the fiscal year ended March 31, 1999,
and for Class B and Class C, the expenses attributable to each Class that
are anticipated for the current year. Actual expenses may be greater or
less than those shown.
(3)
(4)
(5) It is possible that long-term Class A, Class B and Class C shareholders of
the Fund may bear 12b-1 distribution fees which are more than the maximum
asset-based sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
8
<PAGE>
If shares are redeemed
at end of period: 1 year 3 years 5 years 10 years
Class A shares $709 $993 $1,297 $2,158
Class B shares $618 $973 N/A N/A
Class C shares $318 $673 N/A N/A
Class Y shares $109 $340 $ 590 $1,306
If shares are not redeemed
at end of period: 1 year 3 years 5 years 10 years
Class A shares $709 $993 $1,297 $2,158
Class B shares $218 $673 N/A N/A
Class C shares $218 $673 N/A N/A
Class Y shares $109 $340 $ 590 $1,306
9
<PAGE>
The Investment Principles of the Fund
Investment Goal, Principal Strategies and Other Investments
The goal of the Fund is the growth of your investment. The Fund seeks to achieve
its goal by investing primarily in a diversified portfolio of common stocks of
U.S. companies whose market capitalizations are within the range of
capitalizations of companies comprising the S&P MidCap 400 and that WRIMCO
believes offer above-average growth potential. For this purpose, the Fund
considers a company's capitalization at the time the Fund acquires the company's
securities, and the company need not be listed in the S&P MidCap 400. Companies
whose capitalization falls outside the range of the S&P MidCap 400 after
purchase continue to be considered medium capitalization companies for purposes
of the Fund's investment policy. There is no guarantee that the Fund will
achieve its goal.
In selecting companies, WRIMCO may look at a number of factors, such as:
o new or innovative products or services,
o adaptive or creative management,
o strong financial and operational capabilities to sustain growth,
o market potential, and
o profit potential.
In determining whether to sell a stock, WRIMCO will use the same type of
analysis that it uses when buying stocks in order to determine whether the stock
continues to meet the desired capitalization range. As well, if the company
position weakens in the industry or market, WRIMCO may sell the holdings.
In addition to common stocks, the Fund may invest in convertible securities,
preferred stocks and debt securities of any maturity and mostly of investment
grade. The Fund may also invest up to 10% of its total assets in foreign
securities, but only those that are:
o exchange-traded or quoted on an automatic quotations system;
o represented by U.S.-traded American Depositary Receipts; or
o issued or guaranteed by a foreign government (or any of its subdivisions,
agencies or instrumentalities).
When WRIMCO believes that a temporary defensive position is desirable, the Fund
may invest up to all of its assets in debt securities (including commercial
paper, short-term securities issued by the U.S. Government or its agencies or
instrumentalities and other money market instruments) and/or preferred stocks.
The Fund may also use options and futures
10
<PAGE>
contracts for defensive purposes. Taking a defensive position may reduce the
potential for appreciation of the Fund's portfolio.
The Fund may also invest in other types of investments and use certain other
instruments in seeking to achieve the Fund's goal. For example, the Fund may
invest in options, futures contracts, asset-backed securities and other
derivative instruments if it is permitted to invest in the type of asset by
which the return on, or value of, the derivative is measured. You will find more
information in the Statement of Additional Information ("SAI") about the Fund's
permitted investments and strategies, as well as the restrictions that apply to
them.
Risk Considerations of Principal Strategies and Other Investments
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk.
o Market risk is the possibility of a change in the price of the security
because of market factors including changes in interest rates. Bonds with
longer maturities are more interest-rate sensitive. For example, if
interest rates increase, the value of a bond with a longer maturity is more
likely to decrease. Because of market risks, the share price of the Fund
will likely change as well.
o Financial risk is based on the financial situation of the issuer of the
security. The financial risk of the Fund may depend, for example, on the
earnings performance of the issuer of stock held by the Fund. To the extent
the Fund invests in debt securities, the financial risk of the Fund may
also depend on the credit quality of the underlying securities in which it
invests.
o Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid
before its expected maturity date.
Because the Fund owns different types of investments, its performance will be
affected by a variety of factors. In general, the value of the Fund's
investments and the income it generates will vary from day to day, generally
reflecting changes in interest rates, market conditions and other company and
economic news. Performance will also depend on WRIMCO's skill in selecting
investments.
Certain types of the Fund's authorized investments and strategies (such as
foreign securities and derivative instruments) involve special risks. Depending
on how much the Fund invests or uses these strategies, these special risks may
become significant. For example, foreign investments may subject the Fund to
restrictions on receiving the investment proceeds from a foreign country,
foreign taxes, and potential difficulties in enforcing contractual obligations,
as well as fluctuations in foreign
11
<PAGE>
currency values and other developments that may adversely affect a foreign
country. Derivative instruments may expose the Fund to greater volatility than
an investment in a more traditional stock, bond or other security.
Year 2000 and Euro Issues
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by WRIMCO and the Fund's other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
WRIMCO is taking steps that it believes are reasonably designed to address year
2000 computer-related problems with respect to the computer systems that it uses
and to obtain assurances that comparable steps are being taken by the Fund's
other, major service providers. Although there can be no assurances, WRIMCO
believes these steps will be sufficient to avoid any adverse impact on the Fund.
Similarly, the companies and other issuers in which the Fund invests could be
adversely affected by year 2000 computer-related problems, and there can be no
assurance that the steps taken, if any, by these issuers will be sufficient to
avoid any adverse impact on the Fund.
Also, the Fund could be adversely affected by the conversion of certain European
currencies into the Euro. This conversion, which is underway, is scheduled to be
completed in 2002. However, problems with the conversion process and delays
could increase volatility in world capital markets and affect European capital
markets in particular.
12
<PAGE>
Your Account
Choosing a Share Class
This Prospectus offers four classes of shares for the Fund: Class A, Class B,
Class C and Class Y. Each class has its own sales charge, if any, and expense
structure. The decision as to which class of shares is best suited to your needs
depends on a number of factors that you should discuss with your financial
advisor. Some factors to consider are how much you plan to invest and how long
you plan to hold your investment. For example, if you are investing a
substantial amount and plan to hold your shares for a long time, Class A shares
may be the most appropriate for you. If you are investing a lesser amount, you
may want to consider Class B shares (if investing for at least seven years) or
Class C shares (if investing for less than seven years). Class Y shares are
designed for institutional investors and others investing through certain
intermediaries, as described below. Since your objectives may change over time,
you may want to consider another class when you buy additional Fund shares. All
of your future investments in the Fund will be made in the class you select when
you open your account, unless you inform the Fund otherwise, in writing, when
you make the future investment.
General comparison of Class A, B and C shares
Class A Class B Class C
- ------- ------- -------
o Initial sales o No initial sales o No initial
charge charge sales charge
o No deferred sales o Deferred sales o A 1% deferred
charge charge on shares you sales charge on
sell within six shares you sell
years within one year
o Maximum distribution o Distribution and o Distribution and
and service (12b-1) service (12b-1) service (12b-1)
fees of 0.25% fees of 1.00% fees of 1.00%
o Converts to Class A o Does not convert to
shares in eighth Class A shares, so
year, thus reducing annual expenses do
future annual not decrease
expenses
o An investment of o An investment of
$300,000 or more may $2,000,000 or more
be placed in Class A will be placed in
shares due to a Class A shares due
13
<PAGE>
reduced sales charge to no sales charge
and lower annual and lower annual
expenses. expenses.
The Fund has adopted a Distribution and Service Plan ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940 for each of its Class A, Class B
and Class C shares. Under the Class A Plan, the Fund may pay Waddell & Reed,
Inc. a fee of up to 0.25%, on an annual basis, of the average daily net assets
of the Class A shares. This fee is to reimburse Waddell & Reed, Inc. for the
amounts it spends for distributing the Fund's Class A shares, providing services
to Class A shareholders and/or maintaining Class A shareholder accounts. Under
the Class B Plan and the Class C Plan, the Fund may pay Waddell & Reed, Inc., on
an annual basis, a service fee of up to 0.25% of the average daily net assets of
the class to compensate Waddell & Reed, Inc. for providing services to
shareholders of that class and/or maintaining shareholders accounts for that
class and a distribution fee of up to 0.75% of the average daily net assets of
the class to compensate Waddell & Reed, Inc. for distributing shares of that
class. Because a class's fees are paid out of the assets of that class on an
on-going basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.
Class A shares are subject to a sales charge when you buy them, based on the
amount of your investment, according to the table below. Class A shares pay an
annual 12b-1 fee of up to 0.25% of average Class A net assets. The ongoing
expenses of this class are lower than those for Class B or Class C shares and
higher than those for Class Y shares.
14
<PAGE>
Sales
Sales Charge
Charge as
as Approx.
Percent Percent
of of
Size of Offering Amount
Purchase Price 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
Sales Charge Reductions and Waivers
Lower sales charges are available by:
o Combining additional purchases of Class A shares of any of the funds
in the United Group, except shares of United Cash Management, Inc.
unless acquired by exchange for Class A shares on which a sales charge
was paid (or as a dividend or distribution on such acquired shares),
with the NAV of Class A shares already held ("Rights of
Accumulation");
o Grouping all purchases of Class A shares made during a thirteen-month
period ("Letter of Intent"); and
o Grouping purchases by certain related persons.
15
<PAGE>
Additional information and applicable forms are available from Waddell & Reed
financial advisors.
Waivers for Certain Investors
Class A shares may be purchased at NAV by:
o The Directors and officers of the Fund, employees of Waddell & Reed,
Inc., employees of their affiliates, financial advisors of Waddell &
Reed, Inc. and the spouse, children, parents, children's spouses and
spouse's parents of each;
o Certain retirement plans and certain trusts for these persons; and
o A 401(k) plan having 100 or more eligible employees.
You will find more information in the SAI about sales charge reductions and
waivers.
Class B shares are not subject to a sales charge when you buy them. However, you
may pay a contingent deferred sales charge ("CDSC") if you sell your Class B
shares within six years of their purchase, based on the table below. Class B
shares pay an annual 12b-1 service fee of up to 0.25% of average net assets and
distribution fee of up to 0.75% of average net assets. If you hold your Class B
shares for seven years, in the eighth year they will automatically convert to
Class A shares of the Fund, which have lower ongoing expenses.
The Fund will redeem your Class B shares at their NAV next calculated after
receipt of a written request for redemption in good order, subject to the CDSC
discussed below.
Deferred
Date of Sales
Redemption Charge
- ---------- ------
within 1st calendar year 5%
2nd full calendar year 4%
3rd full calendar year 3%
4th full calendar year 3%
5th full calendar year 2%
6th full calendar year 1%
after 6th full calendar year 0%
The CDSC will be applied to the total amount invested during a calendar year to
acquire Class B shares or the value of the Class
16
<PAGE>
B shares redeemed, whichever is less. All Class B investments made during a
calendar year are deemed a single investment during that calendar year for
purposes of calculating the CDSC.
Contingent Deferred Sales Charge. A CDSC may be assessed against your redemption
amount and paid to Waddell & Reed, Inc. (the "Distributor"), as further
described below. The purpose of the CDSC is to compensate the Distributor for
the costs incurred by it in connection with the sale of the Fund's Class B
shares. The CDSC will not be imposed on Class B shares representing payment of
dividends or distributions or on amounts which represent an increase in the
value of a shareholder's account resulting from capital appreciation above the
amount paid for Class B shares purchased during the CDSC period.
To keep your CDSC as low as possible, each time you place a request to redeem
shares the Fund first redeems any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, the Fund will
next redeem your Class B shares in the order they were purchased.
Unless instructed otherwise, the Fund, when requested to redeem a specific
dollar amount, will redeem additional Class B shares equal in value to the CDSC.
For example, should you request a $1,000 redemption and the applicable CDSC is
$27, the Fund will redeem shares having an aggregate NAV of $1,027, absent
different instructions.
The CDSC will not apply in the following circumstances:
o redemptions of Class B shares requested within one year of the
shareholder's death or disability, provided the Fund is notified of the
death or disability at the time of the request and furnished proof of such
event satisfactory to the Distributor.
o redemptions of Class B shares made to satisfy required minimum
distributions after age 70 1/2 from a qualified retirement plan, a required
minimum distribution from an individual retirement account, Keogh plan or
custodial account under section 403(b)(7) of the Internal Revenue Code of
1986, as amended ("Code"), or a tax-free return of an excess contribution,
or that otherwise results from the death or disability of the employee, as
well as in connection with redemptions by any tax-exempt employee benefit
plan for which, as a result of a subsequent law or legislation, the
continuation of its investment would be improper.
o redemptions of Class B shares purchased by current or retired directors of
the Fund, or current or retired officers or employees of the Fund, WRIMCO,
the Distributor or their affiliated companies, registered representatives
of Waddell & Reed, Inc., and by the members of immediate families of such
persons.
17
<PAGE>
o redemptions of Class B shares made pursuant to a shareholder's
participation in any systematic withdrawal plan adopted for a Fund. (The
Plan and this exclusion from the CDSC do not apply to a one-time
withdrawal.)
o redemptions the proceeds of which are reinvested in Class B shares of the
Fund within thirty days after such redemption.
o the exercise of certain exchange privileges.
o on redemptions effected pursuant to the Fund's right to liquidate a
shareholder's Class B shares if the aggregate NAV of those shares is less
than $500.
o redemptions effected by another registered investment company by virtue of
a merger or other reorganization with the Fund or by a former shareholder
of such investment company of Class B shares of the Fund acquired pursuant
to such reorganization.
These exceptions may be modified or eliminated by the Fund at any time without
prior notice to shareholders, except with respect to redemptions effected
pursuant to the Fund's right to liquidate a shareholder's shares, which requires
certain notices.
Class C shares are not subject to a sales charge when you buy them, but if you
sell your Class C shares within 12 months of buying them, you will pay a 1%
CDSC. Class C shares pay an annual 12b-1 service fee of up to 0.25% of average
net assets and distribution fee of up to 0.75% of average net assets. Over time,
these fees will increase the cost of your investment and may cost you more than
if you had bought Class A shares. Class C shares do not convert to any other
class.
Class Y shares are not subject to a sales charge or annual 12b-1 fees.
Class Y shares are only available for purchase by:
o participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401, including 401(k) plans, of the
Code , when the plan has 100 or more eligible employees and holds the
shares in an omnibus account on the Fund's records;
o banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an
omnibus account on the Fund's records;
o government entities or authorities and corporations whose investment within
the first twelve months after initial
18
<PAGE>
investment is $10 million or more; and
o certain retirement plans and trusts for employees and account
representatives of Waddell & Reed, Inc. and its affiliates.
The different ways to set up (register) your account are listed below.
Ways to Set Up Your Account
- --------------------------------------------------------------------------------
Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
- --------------------------------------------------------------------------------
Business or Organization
For investment needs of corporations, associations, partnerships, institutions
or other groups
- --------------------------------------------------------------------------------
Retirement
To shelter your retirement savings from taxes
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts (other
than Roth IRAs and Education IRAs) may be tax-deductible.
o Individual Retirement Accounts (IRAs) allow an individual under 70 1/2,
with earned income, to invest up to $2,000 per tax year. The maximum annual
contribution for an investor and his or her spouse is $4,000 ($2,000 for
each spouse) or, if less, the couple's combined earned income for the
taxable year.
o Rollover IRAs retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
o Roth IRAs allow certain individuals to make non-deductible contributions up
to $2,000 per year. Withdrawals of earnings may be tax-free if the account
is at least five years old and certain other requirements are met.
o Education IRAs are established for the benefit of a minor, with
non-deductible contributions, and permit tax-free
19
<PAGE>
withdrawals to pay the higher education expenses of the beneficiary.
o Simplified Employee Pension Plans (SEP - IRAs) provide small business
owners or those with self-employed income (and their eligible employees)
with many of the same advantages as a Keogh Plan, but with fewer
administrative requirements.
o Savings Incentive Match Plans for Employees (SIMPLE Plans) can be
established by small employers to contribute to their employees' retirement
accounts and involve fewer administrative requirements than 401(k) or other
qualified plans generally.
o Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves up to 25% of their annual earned income, with
a maximum of $30,000 per year.
o 401(k) Programs allow employees of corporations and non-governmental
tax-exempt organizations of all sizes to contribute a percentage of their
wages on a tax-deferred basis. These accounts need to be established by the
administrator or trustee of the plan.
o 403(b) Custodial Accounts are available to employees of public school
systems or certain types of charitable organizations.
o 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.
- --------------------------------------------------------------------------------
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA").
- --------------------------------------------------------------------------------
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.
- --------------------------------------------------------------------------------
20
<PAGE>
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its financial
advisors. To open your account you must complete and sign an application. Your
Waddell & Reed financial advisor can help you with any questions you might have.
To purchase any class of shares by check, make your check payable to Waddell &
Reed, Inc. Mail the check, along with your completed application, to Waddell &
Reed, Inc., P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
To purchase Class Y shares by wire, you must first obtain an account number by
calling 1-800-366-5465, then mail a completed application to Waddell & Reed,
Inc., P.O. Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to
913-236-5044. Instruct your bank to wire the amount you wish to invest, along
with the account number and registration, to UMB Bank, n.a., ABA Number
101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and Account
Number.
You may also buy Class Y shares of the Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements to buy Class Y shares.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a share (price to buy one share of a particular class) is
the net asset value ("NAV") per share of that class plus, for Class A shares,
the sales charge shown in the table above.
In the calculation of the Fund's NAV:
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
o Other investment assets for which market prices are unavailable are valued
at their fair value by or at the direction of the Board of Directors.
The Fund is open for business each day the New York Stock Exchange (the "NYSE")
is open. The Fund normally calculates the NAVs of its shares as of the close of
business of the NYSE, normally 4 p.m. Eastern time, except that an option or
futures contract held by the Fund may be priced at the close of the
21
<PAGE>
regular session of any other securities or commodities exchange on which that
instrument is traded.
The Fund may invest in securities listed on foreign exchanges which may trade on
Saturdays or on U.S. national business holidays when the NYSE is closed.
Consequently, the NAV of Fund shares may be significantly affected on days when
the Fund does not price its shares and when you are not able to purchase or
redeem the Fund's shares. Similarly, if an event materially affecting the value
of foreign investments or foreign currency exchange rates occurs prior to the
close of business of the NYSE but after the time their values are otherwise
determined, such investments or exchange rates may be valued at their fair value
as determined in good faith by or under the direction of the Board of Directors.
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
o The Fund does not issue certificates representing Class B, C or Y shares of
the Fund.
o If you purchase Class Y shares of the Fund from certain broker-dealers,
banks or other authorized third parties, the Fund will be deemed to have
received your purchase order when that third party (or its designee) has
received your order. Your order will receive the Class Y offering price
next calculated after the order has been received in proper form by the
authorized third party (or its designee). You should consult that firm to
determine the time by which it must receive your order for you to purchase
shares of the Fund at that day's price.
When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders, including
purchases by exchange, and it and the Fund reserve the right to discontinue
offering Fund shares for purchase.
22
<PAGE>
Minimum Investments
For Class A, Class B and Class C:
To Open an Account $500
For certain exchanges $100
For certain retirement accounts and accounts opened with Automatic Investment
Service $50
For certain retirement accounts and accounts opened through payroll deductions
for or by employees of WRIMCO, Waddell & Reed, Inc. and their affiliates $25
To Add to an Account
For certain exchanges $100
For Automatic Investment Service $25
For Class Y:
To Open an Account
For a government entity or authority or for a corporation: $10 million
(within
first
twelve
months)
For other
investors: Any amount
To Add to An Account Any amount
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed, Inc. Mail the
check along with:
o the detachable form that accompanies the confirmation of a prior purchase
or your year-to-date statement; or
o a letter stating your account number, the account registration and the
class of shares that you wish to purchase.
Mail to Waddell & Reed, Inc. at:
23
<PAGE>
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
To add to your Class Y account by wire: Instruct your bank to wire the amount
you wish to invest, along with the account number and registration, to UMB Bank,
n.a., ABA Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer
Name and Account Number.
If you purchase Class Y shares from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
Selling Shares
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The redemption price (price to sell one share of a particular class) is the NAV
per share of that class subject to any CDSC applicable to Class B or Class C
shares.
To sell shares by written request: complete an Account Service Request form,
available from your Waddell & Reed financial advisor, or write a letter of
instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number and the class of shares to be redeemed; and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.
To sell Class Y shares by telephone or fax: If you have elected this method in
your application or by subsequent authorization, call 1-800-366-5465, or fax
your request to 913-236-5044, and give your instructions to redeem Class Y
shares and make payment by wire to your predesignated bank account or by check
to you at the address on the account.
24
<PAGE>
When you place an order to sell shares, your shares will be sold at the next NAV
calculated after receipt of a written request for redemption in good order by
Waddell & Reed, Inc. at its home office subject to the applicable CDSC. Note the
following:
o If more than one person owns the shares, each owner must sign the written
request.
o If you hold a certificate, it must be properly endorsed and sent to the
Fund.
o If you recently purchased the shares by check, the Fund may delay payment
of redemption proceeds. You may arrange for the bank upon which the
purchase check was drawn to provide to the Fund telephone or written
assurance that the check has cleared and been honored. If you do not,
payment of the redemption proceeds on these shares will be delayed until
the earlier of 10 days or the date the Fund can verify that your purchase
check has cleared and been honored.
o Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE
is restricted, or as permitted by the Securities and Exchange Commission.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
o If you purchased Class Y shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms,
some of which may charge you a fee and may have additional requirements to
sell Fund shares. The Fund will be deemed to have received your order to
sell Class Y shares when that firm (or its designee) has received your
order. Your order will receive the Class Y NAV next calculated after the
order has been received in proper form by the authorized firm (or its
designee). You should consult that firm to determine the time by which it
must receive your order for you to sell Class Y shares at that day's price.
The Fund may require a signature guarantee in certain situations such as:
o a redemption request made by a corporation, partnership or fiduciary;
o a redemption request made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
25
<PAGE>
This requirement is intended to protect you and Waddell & Reed from fraud. You
can obtain a signature guarantee from most banks and securities dealers, but not
from a notary public.
The Fund reserves the right to redeem at NAV all your Fund shares if their
aggregate NAV is less than $500. The Fund will give you notice and a 60-day
opportunity to purchase a sufficient number of additional shares to bring the
aggregate NAV of your shares to $500.
You may reinvest, without charge, all or part of the amount of Class A shares
you redeemed by sending to the Fund the amount you want to reinvest. The
reinvested amounts must be received by the Fund within thirty days after the
date of your redemption. You may do this only once with Class A shares of the
Fund.
The deferred sales charge will not apply to the proceeds of Class B shares or
Class C shares which are redeemed and then reinvested in Class B shares or Class
C shares, as applicable, within thirty days after such redemption. You may do
this only once as to Class B shares of the Fund and once as to Class C shares of
the Fund.
Payments of principal and interest on loans made pursuant to Waddell & Reed's
401(k) prototype plan may be reinvested, without payment of a sales charge, in
Class A shares of any United Group fund in which the plan may invest.
26
<PAGE>
Special Requirements for Selling Shares
Account Type Special Requirements
------------ --------------------
Individual or Joint Tenant The written instructions must be
signed by all persons required to
sign for transactions, exactly as
their names appear on the account.
Sole Proprietorship The written instructions must be
signed by the individual owner of the
business.
UGMA,UTMA The custodian must sign the
written instructions indicating
capacity as custodian.
Retirement Account The written instructions must be
signed by a properly authorized
person.
Trust The trustee must sign the written
instructions indicating capacity
as trustee. If the trustee's name
is not in the account
registration, provide a currently
certified copy of the trust
document.
Business At least one person authorized by
or Organization corporate resolution to act on the
account must sign the written
instructions.
Conservator, Guardian The written instructions must be
or Other Fiduciary signed by the person properly
authorized by court order to act
in the particular fiduciary
capacity.
Telephone Transactions
The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
will employ reasonable
27
<PAGE>
procedures to confirm that instructions communicated by telephone are genuine.
If the Fund fails to do so, the Fund may be liable for losses due to
unauthorized or fraudulent instructions. Current procedures relating to
instructions communicated by telephone include tape recording instructions,
requiring personal identification and providing written confirmations of
transactions effected pursuant to such instructions.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your account.
Personal Service
Your local Waddell & Reed financial advisor is available to provide personal
service. Additionally, one toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or TeleWaddell, our automated customer telephone
service. During normal business hours, our Customer Service staff is available
to answer your questions or update your account records. At almost any time of
the day or night, you may access TeleWaddell from a touch-tone phone to:
o obtain information about your accounts;
o obtain price information about other funds in the United Group; or
o request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange,
transfer or redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports will be mailed to your household, even if you have more than one account
with the Fund. Call the telephone number listed above for Customer Service if
you need copies of annual or semiannual reports or account information.
Exchanges
You may sell your shares and buy shares of the same class of other funds in the
United Group without payment of an additional
28
<PAGE>
sales charge if you buy Class A shares or a CDSC when you exchange Class B or
Class C shares. For Class B and Class C shares, the time period for the CDSC
will continue to run. As well, exchanging Class Y shareholders may buy Class A
shares of United Cash Management, Inc. You may exchange only into funds that are
legally permitted for sale in your state of residence. Note that exchanges out
of the Fund may have tax consequences for you. Before exchanging into a fund,
read its prospectus.
The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
Automatic Transactions for Class A, B and C Shareholders
Flexible withdrawal service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund account
automatically. While Regular Investment Plans do not guarantee a profit and will
not protect you against loss in a declining market, they can be an excellent way
to invest for retirement, a home, educational expenses and other long-term
financial goals.
Certain restrictions and fees imposed by the plan custodian may also apply for
retirement accounts. Speak with your Waddell & Reed financial advisor for more
information.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Fund account
Minimum Frequency
$25 Monthly
Funds Plus Service
To move money from United Cash Management, Inc. to the Fund whether in the same
or a different account
Minimum Frequency
$100 Monthly
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Usually the Fund distributes net
investment income annually in December. Net capital gains (and any net gains
from foreign currency transactions) usually are distributed in December.
29
<PAGE>
Distribution Options. When you open an account, specify on your application how
you want to receive your distributions. The Fund offers three options:
1. Share Payment Option. Your dividends, capital gains and other distributions
with respect to a class will be automatically paid in additional shares of
the same class of the Fund. If you do not indicate a choice on your
application, you will be assigned this option.
2. Income-Earned Option. Your capital gains and other distributions with
respect to a class will be automatically paid in shares of the same class,
but you will be sent a check for each dividend distribution. However, if
the dividend distribution is less than ten dollars, the distribution will
be automatically paid in additional shares of the same class of the Fund.
3. Cash Option. You will be sent a check for your dividends, capital gains and
other distributions if the total distribution is ten dollars or greater. If
the distribution total is less than ten dollars, the total distribution
will be automatically paid in additional shares of the same class of the
Fund.
For retirement accounts, all distributions are automatically paid in additional
shares.
Taxes
As with any investment, you should consider how your investment in the Fund will
be taxed. If your account is not a tax-deferred retirement account, you should
be aware of the following tax implications:
Taxes on distributions. Dividends from the Fund's investment company taxable
income generally are taxable to you as ordinary income whether received in cash
or paid in additional Fund shares. Distributions of the Fund's net capital
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or paid in additional Fund shares and regardless of the
length of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains (if you are a noncorporate shareholder of the Fund) may
be taxable at different rates depending on how long the Fund held the assets
generating the gains, but generally are taxed at a maximum rate of 20%.
The Fund notifies you after each calendar year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that year.
A portion of the dividends paid by the Fund, whether received in cash or paid in
additional Fund shares, may be eligible for the
30
<PAGE>
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
Federal alternative minimum tax.
Withholding. The Fund must withhold 31% of all dividends, capital gains
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate from dividends and capital gains
distributions also is required for shareholders subject to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in a taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than what you paid for the redeemed shares (which normally includes any
sales charge paid). An exchange of Fund shares for shares of any other fund in
the United Group generally will have similar tax consequences. However, special
rules apply when you dispose of Class A Fund shares through a redemption or
exchange within ninety days after your purchase and then reacquire Class A Fund
shares or acquire Class A shares of another fund in the United Group without
paying a sales charge due to the thirty-day reinvestment privilege or exchange
privilege. See "Your Account." In these cases, any gain on the disposition of
the original Class A Fund shares would be increased, or loss decreased, by the
amount of the sales charge you paid when those shares were acquired, and that
amount will increase the adjusted basis of the shares subsequently acquired. In
addition, if you purchase Fund shares within thirty days before or after
redeeming other Fund shares (regardless of class) at a loss, part or all of that
loss will not be deductible and will increase the basis of the newly purchased
shares.
State and local income taxes. The portion of the dividends paid by the Fund
attributable to interest earned on its U.S. Government securities generally is
not subject to state and local income taxes, although distributions by the Fund
to its shareholders of net realized gains on the sale of those securities are
fully subject to those taxes. You should consult your tax adviser to determine
the taxability of dividends and other distributions by the Fund in your state
and locality.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; you will find
more information in the SAI. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
31
<PAGE>
The Management of the Fund
Portfolio Management
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. WRIMCO and its predecessors have served as investment
manager to each of the registered investment companies in the United Group of
Mutual Funds, Waddell & Reed Funds, Inc. and Target/United Funds, Inc. since the
inception of the company. WRIMCO is located at 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
Zachary H. Shafran is primarily responsible for the management of the portfolio
of the Fund. Mr. Shafran has held his responsibilities since February 1999. He
is Vice President of WRIMCO and Vice President of the Fund. Mr. Shafran has
served as the portfolio manager for another investment company managed by WRIMCO
since January 1996. Mr. Shafran served as an investment analyst with WRIMCO from
June 1990 to January 1996.
Other members of WRIMCO's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to the Fund's investments.
Management Fee
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained in the SAI.
The management fee is payable by the Fund at the annual rates of: 0.85% of net
assets up to $1 billion; 0.83% of net assets over $1 billion and up to $2
billion; 0.80% of net assets over $2 billion and up to $3 billion; and 0.76% of
net assets over $3 billion.
Prior to June 30, 1999, the management fee of the Fund was calculated by adding
a group fee to a specific fee. The specific fee was computed on the Fund's net
asset value as of the close of business each day at the annual rate of .35 of 1%
of its net assets. The group fee was a pro rata participation determined on the
basis of the combined net asset values of all the funds in the United Group at
the annual rates shown in the following table and then allocated pro rata to the
Fund based on its relative net assets.
32
<PAGE>
Group Fee Rate
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) 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%
Management fees for the fiscal year ended March 31, 1999 were 0.74% of the
Fund's average net assets.
33
<PAGE>
Financial Highlights
The following information is to help you understand the financial performance of
the Fund's Class A* and Class Y shares for the fiscal periods shown. Certain
information reflects financial results for a single Fund share. "Total return"
shows how much your investment would have increased (or decreased) during each
period, assuming reinvestment of all dividends and distributions. This
information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended March 31, 1999, are included in the SAI, which is available upon request.
For a Class A share outstanding throughout each period:*
<TABLE>
<CAPTION>
For the fiscal year ended March 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Class A Per-Share Data
Net asset value,
beginning of
period .................... $9.24 $6.80 $7.73 $6.13 $5.47
------ ------ ------ ------ -------
Income from investment
operations:
Net investment
income (loss) ......... (0.00) 0.01 0.03 0.02 0.02
Net realized and
unrealized gain
(loss) on
investments ........... 1.54 3.29 (0.64) 1.81 1.06
------ ----- ----- ----- -----
Total from investment
operations ................ 1.54 3.30 (0.61) 1.83 1.08
------- ----- ----- ----- -----
Less distributions:
From net investment
income ................ (0.01) (0.01) (0.03) (0.02) (0.01)
From capital gains ........ (1.25) (0.85) (0.29) (0.21) (0.41)
----- ----- ----- ----- -----
Total distributions............. (1.26) (0.86) (0.32) (0.23) (0.42)
------ ----- ----- ----- -----
Net asset value,
end of period ............. $9.52 $9.248 $6.80 $7.73 $6.13
===== ====-== ====== ===== ======
Class A Ratios/Supplemental Data
Total return** ................. 17.83% 51.44% -8.38% 30.18% 20.50
Net assets, end
of period (in
millions) ................. $972 $779 $501 $492 $304
Ratio of expenses to
average net assets ........ 1.29% 1.25% 1.27% 1.19% 1.24%
Ratio of net investment
income to average
net assets ................ -0.04% 0.06% 0.39% 0.29% 0.30%
Portfolio turnover
rate ...................... 48.95% 38.51% 38.82% 27.75% 44.01%
</TABLE>
* On July 18, 1995, Fund shares outstanding were designated Class A shares.
Per-share and share amounts have been adjusted retroactively to reflect the
100% stock dividend effected June 26, 1998.
** Total return calculated without taking into account the sales load deducted
on an initial purchase.
34
<PAGE>
For a Class Y share outstanding throughout each period:*
For the
For the fiscal period
year ended March 31, from 9/6/95**
---------------------------- through
1999 1998 1997 3/31/96
------ ------ ------ -------
Class Y Per-Share Data
Net asset value,
beginning of period ......... $ 9.25 $ 6.80 $ 7.74 $ 7.57
------ ------ ------ ------
Income from investment
operations:
Net investment
income ................... 0.03 0.03 0.05 0.02
Net realized and
unrealized gain (loss)
on investments ........... 1.54 3.30 (0.65) 0.38
------ ------ ------ ------
Total from investment
operations .................. 1.57 3.33 (0.60) 0.40
------ ------ ------ ------
Less distributions:
From net investment
income ................... (0.04) (0.03) (0.05) (0.02)
From capital gains .......... (1.25) (0.85) (0.29) (0.21)
------ ------ ------ ------
Total distributions ............ (1.29) (0.88) (0.34) (0.23)
------ ------ ------ ------
Net asset value,
end of period ............... $ 9.53 $ 9.25 $ 6.80 $ 7.74
====== ====== ====== ======
Class Y Ratios/Supplemental Data
Total return ................... 18.29% 51.83% -8.12% 5.44%
Net assets, end of
period (in
millions .................... $ 12 $ 11 $ 8 $ 7
Ratio of expenses
to average net
assets ...................... 0.95% 0.96% 0.97% 0.96%***
Ratio of net
investment income
to average net
assets ...................... 0.29% 0.35% 0.69% 0.54%***
Portfolio
turnover rate ............... 48.95% 38.51% 38.82% 27.75%***
* Per-share and share amounts have been adjusted retroactively to reflect the
100% stock dividend effected June 26, 1998.
** Commencement of operations.
*** Annualized.
35
<PAGE>
United New Concepts Fund, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 Massachusetts Avenue, N. W. (913) 236-2000
Washington, D.C. 20036 (800) 366-5465
Independent Auditors Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Avenue Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment (913) 236-2000
Management Company (800) 366-5465
6300 Lamar Avenue
P.O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
(800) 366-5465 P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
36
<PAGE>
United New Concepts Fund, Inc.
PROSPECTUS
September 1, 1999
You can get more information about the Fund in--
o its Statement of Additional Information (SAI) dated September 1, 1999,
which contains detailed information about the Fund, particularly its
investment policies and practices. You may not be aware of important
information about the Fund unless you read both the Prospectus and the SAI.
The current SAI is on file with the Securities and Exchange Commission
(SEC) and it is incorporated into this Prospectus by reference (that is,
the SAI is legally part of the Prospectus).
o its Annual and Semiannual Reports to Shareholders, which detail the Fund's
actual investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the year covered by
the report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the Fund
or Waddell & Reed, Inc. at the address and telephone number below. Copies of the
SAI, Annual and/or Semiannual reports may also be requested at
[email protected].
Information about the Fund (including its current SAI and most recent Annual and
Semiannual Reports) is available from the SEC's web site at http://www.sec.gov
and from the SEC's Public Reference Room in Washington, D.C. You can find out
about the operation of the Public Reference Room and applicable copying charges
by calling 1-800-SEC-0330.
The Fund's SEC file number is: 811-3695.
WADDELL & REED, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
800-366-5465
NUP2012(9-99)
37
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
September 1, 1999
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus ("Prospectus")
for the United New Concepts Fund, Inc. (the "Fund") dated September 1, 1999,
which may be obtained from the Fund or its underwriter, Waddell & Reed, Inc., at
the address or telephone number shown above.
TABLE OF CONTENTS
Performance Information ................................................... 2
Investment Strategies, Policies and Practices.............................. 4
Investment Management and Other Services .................................. 30
Purchase, Redemption and Pricing of Shares ................................ 35
Directors and Officers .................................................... 50
Payments to Shareholders .................................................. 56
Taxes ..................................................................... 57
Portfolio Transactions and Brokerage ...................................... 61
Other Information ......................................................... 63
Appendix A.................................................................
Financial Statements ...................................................... 65
<PAGE>
United New Concepts Fund, Inc. is a mutual fund; an investment that pools
shareholders' money and invests it toward a specified goal. In technical terms,
the Fund is an open-end, diversified management company organized as a Maryland
corporation on March 3, 1983.
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
Total return is the overall change in the value of an investment over a
given period of time. An average annual total return quotation is computed by
finding the average annual compounded rates of return over the one-, five-, and
ten-year periods that would equate the initial amount invested to the ending
redeemable value. Standardized total return information is calculated by
assuming an initial $1,000 investment and, for Class A shares, from deducting
the maximum sales load of 5.75%. All dividends and distributions are assumed to
be reinvested in shares of the applicable class at net asset value for the class
as of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions on Class A shares. The formula used to
calculate the total return for a particular class of the Fund is
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000
investment for the periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares were reflected,
it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of March
31, 1999, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
2
<PAGE>
With Without
Sales Load Sales Load
Deducted Deducted
One year period from April 1, 1998 to
March 31, 1999: 11.06% 17.83%
Five year period from April 1, 1994 to
March 31, 1999: 19.31% 20.73%
Ten year period from April 1, 1989 to
March 31, 1999: 18.89% 19.59%
Prior to July 18, 1995, the Fund offered only one class of shares to the
public. Shares outstanding on that date were designated as Class A shares. Since
that date, Class Y shares of the Fund have been available to certain
institutional investors.
The average annual total return quotations for Class Y shares as of March
31, 1999, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
One year period from April 1, 1998 to
March 31, 1999 18.29%
Period from September 6, 1995* to
March 31, 1999: 16.8%
* Date of inception.
No performance information is provided for Class B or Class C since neither
had commenced operations as of March 31, 1999.
The Fund may also quote unaveraged or cumulative total return for a class
which reflects the change in value of an investment in that class over a stated
period of time. Cumulative total returns will be calculated according to the
formula indicated above but without averaging the rate for the number of years
in the period.
Performance Rankings
Waddell & Reed, Inc. or the Fund also may, from time to time, publish in
advertisements and sales material performance rankings as published by
recognized independent mutual fund statistical services such as Lipper
Analytical Services, Inc., or by publications of general interest such as
Forbes, Money, The Wall Street Journal, Business Week, Barron's, Fortune or
Morningstar Mutual Fund Values. Each class of the Fund may also compare its
performance to that of other selected mutual funds or selected recognized market
indicators such as the Standard & Poor's 500 Composite Stock Price Index and the
Dow Jones Industrial Average. Performance information may be quoted numerically
or presented in a table, graph or other illustration.
3
<PAGE>
In connection with a ranking, the Fund may provide additional information, such
as the particular category to which it related, the number of funds in the
category, the criteria upon which the ranking is based, and the effect of sales
charges, fee waivers and/or expense reimbursements.
All performance information that the Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of the Fund's shares when redeemed may be more or less
than their original cost.
INVESTMENT STRATEGIES, POLICIES AND PRACTICES
This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and policies
the Fund's investment manager, Waddell & Reed Investment Management Company
("WRIMCO"), may employ and the types of instruments in which the Fund may
invest, in pursuit of the Fund's goal. A summary of the risks associated with
these instrument types and investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by the Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help the Fund achieve its goal. See "Investment
Restrictions and Limitations" for a listing of the fundamental and
non-fundamental (e.g., operating) investment restrictions and policies of the
Fund.
The goal and investment 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. Although common stocks and other
equity securities have a history of long-term growth in value, their prices tend
to fluctuate in the short term, particularly those of smaller companies. The
Fund may invest in preferred stock that is rated by an established rating
service or, if unrated, judged by WRIMCO to be of equivalent quality. Debt
securities have varying levels of sensitivity to changes in interest rates and
varying degrees of quality. As a general matter, however, when interest rates
rise, the values of fixed-rate securities fall and, conversely, when interest
rates fall, the values of fixed-rate debt rise. Similarly, long-term bonds are
generally more sensitive to interest rate changes than shorter-term bonds.
4
<PAGE>
Lower quality debt securities (commonly called "junk bonds") are considered
to be speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. The market prices of these securities
may fluctuate more than high-quality securities and may decline significantly in
periods of general economic difficulty. The market for lower-rated debt
securities may be thinner and less active than that for higher-rated debt
securities, which can adversely affect the prices at which the former are sold.
Adverse publicity and changing investor perceptions may decrease the values and
liquidity of lower-rated debt securities, especially in a thinly traded market.
Valuation becomes more difficult and judgment plays a greater role in valuing
lower-rated debt securities than with respect to securities for which more
external sources of quotations and last sale information are available. Since
the risk of default is higher for lower-rated debt securities, WRIMCO's research
and credit analysis are an especially important part of managing securities of
this type held by the Fund. WRIMCO continuously monitors the issuers of
lower-rated debt securities in the Fund's portfolio in an attempt to determine
if the issuers will have sufficient cash flow and profits to meet required
principal and interest payments. The Fund may choose, at its expense or in
conjunction with others, to pursue litigation or otherwise exercise its rights
as a security holder to seek to protect the interests of security holders if it
determines this to be in the best interest of the Fund's shareholders.
The Fund may invest in debt securities rated in any rating category of the
established rating services, including securities rated in the lowest category
(such as those rated D by Standard & Poor's ("S&P") and C by Moody's Investors
Service ("MIS")). Debt securities rated D by S&P or C by MIS are in payment
default or are regarded as having extremely poor prospects of ever attaining any
real investment standing. Debt securities rated at least BBB by S&P or Baa by
MIS are considered to be investment grade debt securities. Securities rated BBB
or Baa may have speculative characteristics. In addition, the Fund will treat
unrated securities judged by WRIMCO to be of equivalent quality to a rated
security having that rating.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from time
to time, and the Fund may retain a portfolio security whose rating has been
changed.
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
5
<PAGE>
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 invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or
different issuer within a particular period of time at a specified price or
formula. Convertible securities generally have higher yields than common stocks
of the same or similar issuers, but lower yields than comparable nonconvertible
securities, are less subject to fluctuation in the value that the underlying
stock because they have fixed income characteristics, and provide the potential
for capital appreciation if the market price of the underlying common stock
increases.
The value of a convertible security is influenced by changes in interest
rates, with investment value declining as interest rates increase and increasing
as interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value.
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
6
<PAGE>
value typically determined one or two trading days prior to the date notice of
redemption is given. The issuer must also pay the holder of the preferred stock
cash in an amount equal to any accrued but unpaid dividends on the preferred
stock. This convertible preferred stock is subject to the same market risk as
the common stock of the issuer, except to the extent that such risk is mitigated
by the higher dividend paid on the preferred stock. The opportunity for equity
appreciation afforded by an investment in such convertible preferred stock,
however, is limited, because in the event the market value of the issuer's
common stock increases to or above the call price of the preferred stock, the
issuer may (and would be expected to) call the preferred stock for redemption at
the call price. This convertible preferred stock is also subject to credit risk
with regard to the ability of the issuer to pay the dividend established upon
issuance of the preferred stock. Generally, convertible preferred stock is less
volatile than the related common stock of the issuer.
Specific Securities and Investment Practices
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government securities") are high quality debt
instruments issued or guaranteed as to principle or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date they
are issued), Treasury Notes (which have maturities of one to ten years) and
Treasury Bonds (which generally have maturities of more than 10 years). All such
Treasury securities are backed by the full faith and credit of the United
States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (formerly, the Federal National Mortgage Association), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by the Fannie Mae, are supported
only by the credit of the instrumentality and by a pool of mortgage assets. If
the securities are not backed by the full faith and
7
<PAGE>
credit of the United States, the owner of the securities must look principally
to the agency issuing the obligation for repayment and may not be able to assert
a claim against the United States in the event that the agency or
instrumentality does not meet its commitment.
U.S. Government securities may include mortgage-backed securities issued by
U.S. Government agencies or instrumentalities including, but not limited to,
Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed securities include
pass-through securities, participation certificates and collateralized mortgage
obligations. See "Mortgage-Backed and Asset-Backed Securities." Timely payment
of principal and interest on Ginnie Mae pass-throughs is guaranteed by the full
faith and credit of the United States. Freddie Mac and Fannie Mae are both
instrumentalities of the U.S. Government, but their obligations are not backed
by the full faith and credit of the United States. It is possible that the
availability and the marketability (i.e., liquidity) of the securities discussed
in this section could be adversely affected by actions of the U.S. Government to
tighten the availability of its credit.
Money Market Instruments
Money market instruments are high-quality, short-term debt instruments that
present minimal credit risk. They may include U.S. Government Securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
Zero Coupon Securities
Zero coupon securities are debt obligations that do not entitle the holder
to any periodic payment of interest prior to maturity or that specify a future
date when the securities begin to pay current interest; instead, they are sold
at a deep discount from their face value and are redeemed at face value when
they mature. Because zero coupon securities do not pay current income, their
prices can be very volatile when interest rates change and generally are subject
to greater price fluctuations in response to changing interest rates than prices
of comparable maturities that make current distributions of interest in cash.
The Fund may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds, zero coupon bonds of corporate issuers and other
securities that are issued with original issue discount ("OID"). The Federal tax
law requires that a holder of a security with OID accrue a ratable portion of
the OID on the security as income each year, even though the holder may receive
no interest payment on the security during the year. Accordingly, although the
Fund will receive no payments on its zero coupon securities prior to their
maturity or
8
<PAGE>
disposition, it will have current income attributable to those securities and
includable in the dividends paid to its shareholders. Those dividends will be
paid from the Fund's cash assets or by liquidation of portfolio securities, if
necessary, at a time when the Fund otherwise might not have done so.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. Original
issue zeros are zero coupon securities originally issued by the U.S. Government,
a government agency, or a corporation in zero coupon form.
Mortgage-Backed and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund may invest
include mortgage-backed securities issued or guaranteed as to the payment of
principal and interest (but not as to market value) by Ginnie Mae, Fannie Mae or
Freddie Mac. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities. Payments of principal and interest (but not the market value)
of such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or
indirectly, by the U.S. Government or one of its agencies or instrumentalities,
or they may be issued without any government guarantee of the underlying
mortgage assets but with some form of non-government credit enhancement.
9
<PAGE>
These credit enhancements do not protect investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both government
and non-government entities such as banks, mortgage lenders or other financial
institutions. Other types of mortgage-backed securities will likely be developed
in the future, and the Fund may invest in them if WRIMCO determines they are
consistent with the Fund's goal and investment policies.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
are created when a U.S. Government agency or a financial institution separates
the interest and principal components of a mortgage-backed security and sells
them as individual securities. The holder of the "principal-only" security
("PO") receives the principal payments made by the underlying mortgage-backed
security, while the holder of the "interest-only" security ("IO") receives
interest payments from the same underlying security.
For example, interest-only ("IO") classes are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets underlying
an IO experience greater than anticipated principal prepayments, then the total
amount of interest allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is government guaranteed or considered to be of the highest quality.
Conversely, principal-only ("PO") classes are entitled to receive all or a
portion of the principal payments, but none of the interest, from the underlying
mortgage assets. PO classes are purchased at substantial discounts from par, and
the yield to investors will be reduced if principal payments are slower than
expected. IOs, POs and other CMOs involve special risks, and evaluating them
requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool,
10
<PAGE>
the originator of the loans or the financial institution providing the credit
enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities. The
yield characteristics of mortgage-backed and asset-backed securities differ from
those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed-rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different
11
<PAGE>
characteristics, are priced on an assumption of average life determined for each
pool. In periods of declining interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of a pool of
mortgage-related securities. Conversely, in periods of rising interest rates,
the rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. Changes in the rate or "speed" of these payments can cause the
value of the mortgage backed securities to fluctuate rapidly. However, these
effects may not be present, or may differ in degree, if the mortgage loans in
the pools have adjustable interest rates or other special payment terms, such as
a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed securities
is smaller and less liquid than the market for U.S. Government mortgage-backed
securities. CMO classes may be specifically structured in a manner that provides
any of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and especially during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of some CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be reduced.
These changes can result in volatility in the market value and in some instances
reduced liquidity, of the CMO class.
Foreign Securities and Currencies
The Fund may purchase securities of foreign issuers only if not more than
10% of its assets (including the foreign currency exchange contracts described
below) are invested in foreign securities and only if such securities are (i)
listed or admitted to trading on a domestic or foreign exchange or quoted on an
automated quotation system, (ii) represented by American Depositary Receipts
(dollar-denominated receipts issued against securities of foreign issuers
deposited or to be deposited with an American depository), or (iii) issued or
guaranteed by a foreign government (or any of its subdivisions, agencies or
instrumentalities).
WRIMCO believes that there are investment opportunities as well as risks in
investing in foreign securities. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy or each other in such matters as
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Individual foreign companies
may also differ favorably or unfavorably from domestic companies in the same
industry. Foreign currencies may be stronger or weaker than the U.S. dollar or
than each other. Thus, the value of securities denominated in or indexed to
foreign currencies, and of dividends and interest from such
12
<PAGE>
securities, can change significantly when foreign currencies strengthen or
weaken relative to the U.S. dollar. WRIMCO 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.
However, foreign securities and foreign currencies involve additional
significant risks, apart from the risks inherent in U.S. investments. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial conditions and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be greater possibility of
default by foreign governments or government-sponsored enterprises. Investments
in foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
These is no assurance that WRIMCO will be able to anticipate these potential
events or counter their effects.
The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is likely
to experience long-term gross domestic product growth above that expected to
occur in the United States, the United Kingdom, France, Germany, Italy, Japan
and Canada. Developing countries may have relatively unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities.
Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities
13
<PAGE>
subject to transfer restrictions may be marketable abroad, they may be less
liquid than foreign securities of the same class that are not subject to such
restrictions.
The Fund may purchase and sell foreign currency and invest in foreign
currency deposits, and may enter into forward currency contracts, as described
in the Prospectus and this SAI. The Fund may incur a transaction charge in
connection with the exchange of currency. Currency conversion involves dealer
spreads and other costs, although commissions are not usually charged. See
"Options, Futures and Other Strategies - Forward Currency Contracts" below.
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 the Fund's 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,
as amended (the "1940 Act"). 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."
Warrants and Rights
Warrants 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. Rights are similar to warrants, but
normally have a short duration and are distributed directly by the issuer to its
shareholders. Rights and warrants have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer. Warrants and rights
are highly volatile and, therefore, more susceptible to sharp decline in value
than the underlying security might be. They are also generally less liquid than
an investment in the underlying shares.
14
<PAGE>
Lending Securities
Securities loans may be made on a short-term or long-term basis for the
purpose of increasing the Fund's income. If the Fund lends securities, the
borrower pays the Fund an amount equal to the dividends or interest on the
securities that the Fund would have received if it had not lent the securities.
The Fund also receives additional compensation. The Fund makes loans of its
securities only to parties deemed by WRIMCO to be creditworthy.
Any securities loans that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). Under the
present Guidelines, the collateral must consist of cash, U.S. Government
securities or bank letters of credit, at least equal in value to the market
value of the securities lent on each day that the loan is outstanding. If the
market value of the lent securities exceeds the value of the collateral, the
borrower must add more collateral so that it at least equals the market value of
the securities lent. If the market value of the securities decreases, the
borrower is entitled to return of the excess collateral.
There are two methods of receiving compensation for making loans. The first
is to receive a negotiated loan fee from the borrower. This method is available
for all three types of collateral. The second method, which is not available
when letters of credit are used as collateral, is for the Fund to receive
interest on the investment of the cash collateral or to receive interest on the
U.S. Government securities used as collateral. Part of the interest received in
either case may be shared with the borrower.
The letters of credit that the Fund may accept as collateral are agreements
by banks (other than the borrowers of the Fund's securities), entered into at
the request of the borrower and for its account and risk, under which the banks
are obligated to pay to the Fund, while the letter is in effect, amounts
demanded by the Fund if the demand meets the terms of the letter. The Fund's
right to make this demand secures the borrower's obligations to it. The terms of
any such letters and the creditworthiness of the banks providing them (which
might include the Fund's custodian bank) must be satisfactory to the Fund. Under
the Fund's current securities lending procedures, the Fund may lend securities
only to broker-dealers and financial institutions deemed creditworthy by WRIMCO.
The Fund will make loans only under rules of the New York Stock Exchange
("NYSE"), which presently require the borrower to give the securities back to
the Fund within five business days after the Fund gives notice to do so. If the
Fund loses its voting rights on securities loaned, it will have the securities
returned to it in time to vote them if a material event affecting the investment
is to be voted on. The
15
<PAGE>
Fund may pay reasonable finder's, administrative and custodian fees in
connection with loans of securities.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned increases, risks of delay
in recovering the securities loaned or even loss of rights in the collateral
should the borrower of the securities fail financially.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules, which may be changed without shareholder vote, as
to (i) whom securities may be loaned; (ii) the investment of cash collateral; or
(iii) voting rights.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. The Fund
will not enter into a repurchase transaction that will cause more than 10% of
its net assets to be invested in illiquid investments, which include repurchase
agreements not terminable within seven days. See "Illiquid Investments." A
repurchase agreement is an instrument under which the Fund purchases a security
and the seller (normally a commercial bank or broker-dealer) agrees, at the time
of purchase, that it will repurchase the security at a specified time and price.
The amount by which the resale price is greater than the purchase price reflects
an agreed-upon market interest rate effective for the period of the agreement.
The return on the securities subject to the repurchase agreement may be more or
less than the return on the repurchase agreement.
The majority of the repurchase agreements in which the Fund would engage
are overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is that the
Fund may suffer a loss if the seller fails to pay the agreed-upon amount on the
delivery date and that amount is greater than the resale price of the underlying
securities and other collateral held by the Fund. In the event of bankruptcy or
other default by the seller, there may be possible delays or expenses in
liquidating the underlying securities or other collateral, decline in their
value and loss of interest. The return on such collateral may be more or less
than that from the repurchase agreement. The Fund's repurchase agreements will
be structured so as to fully collateralize the loans. In other words, the value
of the underlying securities, which will be held by the Fund's custodian bank or
by a third party that qualifies as a custodian under Section 17(f) of the 1940
Act, is and, during the entire term of the agreement, will remain at least equal
to the value of the loan, including the accrued interest earned thereon.
Repurchase agreements are entered into only with those entities approved by
16
<PAGE>
WRIMCO on the basis of criteria established by the Board of Directors.
Investment Company Securities
The Fund may purchase securities of closed-end investment companies. As a
shareholder in an investment company, the Fund would bear its pro rata share of
that investment company's expenses, which could result in duplication of certain
fees, including management and administrative fees.
Indexed Securities
The Fund may purchase securities the value of which varies in relation to
the value of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators, subject to its operating
policy regarding derivative instruments. Indexed securities typically, but not
always, are debt securities or deposits whose value at maturity or coupon rate
is determined by reference to a specific instrument or statistic. The
performance of indexed securities depends to a great extent on the performance
of the security, currency or other instrument to which they are indexed and may
also be influenced by interest rate changes in the United States and abroad. At
the same time, indexed securities are subject to the credit risks associated
with the issuer of the security and their values may decline substantially if
the issuer's creditworthiness deteriorates. Indexed securities may be more
volatile than the underlying investments.
Currency-indexed securities, for example, typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
Recent issuers of indexed securities have included banks, corporations, and
certain U.S. Government agencies. Certain indexed securities that are not traded
on an established market may be deemed illiquid.
17
<PAGE>
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, or in a registered
public offering. Where registration is required, the Fund may be obligated to
pay all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
There are risks associated with investment in restricted securities in that
there can be no assurance of a ready market for resale. Also, the contractual
restrictions on resale might prevent the Fund from reselling the securities at a
time when such sale would be desirable. Restricted securities in which the Fund
seeks to invest need not be listed or admitted to trading on a foreign or
domestic exchange and may be less liquid than listed securities. Certain
restricted securities, e.g., Rule 144A securities, may be determined to be
liquid in accordance with guidelines adopted by the Board of Directors. See
"Illiquid Investments."
Illiquid Investments
Illiquid investments are investments that cannot be sold or otherwise
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Investments currently
considered to be illiquid include:
(i) repurchase agreements not terminable within seven days;
(ii) securities for which market quotations are not readily available;
(iii) restricted securities not determined to be liquid pursuant to
guidelines established by the Board of Directors;
(iv) bank deposits, unless they are payable at principal plus accrued
interest on demand or within seven days after demand;
(v) securities involved in swap, cap, collar and floor transactions;
(vi) non-government stripped fixed-rate mortgage-backed securities; and
(vii) over-the-counter ("OTC") options and their underlying collateral.
The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC
18
<PAGE>
option it writes at a maximum price to be calculated by a formula set forth in
the option agreement. The cover for an OTC option written subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
If through a change in values, net assets, or other circumstances, the Fund
was in a position where more than 10% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
Options, Futures and Other Strategies
General. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, forward currency
contracts, swaps, caps, collars, floors, indexed securities and other derivative
instruments (collectively, "Financial Instruments") to attempt to enhance income
or yield or to attempt to hedge the Fund's investments. The strategies described
below may be used in an attempt to manage the Fund's foreign currency exposure
as well as other risks of the Fund's investments that can affect fluctuation in
its net asset value.
Generally, the Fund may purchase and sell any type of Financial Instrument.
However, as an operating policy, the Fund will only purchase or sell a
particular Financial Instrument if the Fund is authorized to invest in the type
of asset by which the return on, or value of, the Financial Instrument is
primarily measured. Since the Fund is authorized to invest in foreign
securities, it may purchase and sell foreign currency derivatives.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Financial Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge, the Fund takes
a position in a Financial Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Financial Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not
19
<PAGE>
complete the hedge by purchasing the security it anticipated purchasing, the
effect on the Fund's portfolio is the same as if the transaction were entered
into for speculative purposes.
Financial Instruments on securities generally are used to attempt to hedge
against price movements in one or more particular securities positions that the
Fund owns or intends to acquire. Financial Instruments on indices, in contrast,
generally are used to attempt to hedge against price movements in market sectors
in which the Fund has invested or expects to invest. Financial Instruments on
debt securities may be used to hedge either individual securities or broad debt
market sectors.
The use of Financial Instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several exchanges upon
which they are traded and the Commodity Futures Trading Commission (the "CFTC").
In addition, the Fund's ability to use Financial Instruments will be limited by
tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with the Fund's goal and permitted by the Fund's
investment limitations and applicable regulatory authorities. The Fund might not
use any of these strategies, and there can be no assurance that any strategy
used will succeed. The Fund's Prospectus or SAI will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities, currency and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
20
<PAGE>
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Financial Instrument and price movements of the investments
being hedged. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match the Fund's current or anticipated investments exactly. The Fund may
invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that
21
<PAGE>
increase might be wholly or partially offset by a decline in the price of the
Financial Instrument. Moreover, if the price of the Financial Instrument
declined by more than the increase in the price of the security, the Fund could
suffer a loss. In either such case, the Fund would have been in a better
position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If the Fund were unable to close out
its positions in such Financial Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time.
(5) The Fund's ability to close out a position in a Financial Instrument
prior to expiration or maturity depends on the existence of a liquid secondary
market or, in the absence of such a market, the ability and willingness of the
other party to the transaction (the "counterparty") to enter into a transaction
closing out the position. Therefore, there is no assurance that any position can
be closed out at a time and price that is favorable to the Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies or other options, futures
contracts or forward contracts, or (2) cash and liquid assets with a value,
marked-to-market daily, sufficient to cover its potential obligations to the
extent not covered as provided in (1) above. The Fund will comply with SEC
guidelines regarding cover for these instruments and will, if the guidelines so
require, set aside cash or liquid assets in an account with its custodian in the
prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover or accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. A call option gives the purchaser the right to buy, and obligates
the writer to sell, the underlying investment at the agreed-upon price during
the option period. A put option gives the purchaser the right to sell, and
obligates the writer
22
<PAGE>
to buy, the underlying investment at the agreed-upon price during the option
period. Purchasers of options pay an amount, known as a premium, to the option
writer in exchange for the right under the option contract.
The purchase of call options can serve as a long hedge, and the purchase of
put options can serve as a short hedge. Writing put or call options can enable
the Fund to enhance income or yield by reason of the premiums paid by the
purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security or currency at less than its market value. If the call option
is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid Investments."
Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be obligated
to purchase the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
23
<PAGE>
A type of put that the Fund may purchase is an "optional delivery standby
commitment," which is entered into by parties selling debt securities to the
Fund. An optional delivery standby commitment gives the Fund the right to sell
the security back to the seller on specified terms. This right is provided as an
inducement to purchase the security.
Risks of Options on Securities. Options offer large amounts of leverage,
which will result in the Fund's net asset value being more sensitive to changes
in the value of the related instrument. The Fund may purchase or write both
exchange-traded and OTC options. Exchange-traded options in the United States
are issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the counterparty from whom it purchased the option to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the Fund
as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. There can be no assurance that the Fund will in fact be able to close
out an OTC option position at a favorable price prior to expiration. In the
event of insolvency of the counterparty, the Fund might be unable to close out
an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Options on Indices. Puts and calls on indices are similar to puts and calls
on securities or futures contracts except that all settlements are in cash and
gain or loss depends on changes in the index in question rather than on price
movements in individual securities or futures contracts. When the Fund writes a
call on an index, it receives a premium and agrees that, prior to the expiration
date, the purchaser of the call, upon exercise of , the call, will receive from
the Fund an amount of cash if the closing level of the index upon which the call
is based is
24
<PAGE>
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 an
index, it pays a premium and has the same rights as to such call as are
indicated above. When the Fund buys a put on an index, it pays a premium and has
the right, prior to the expiration date, to require the seller of the put, upon
the Fund's exercise of the put, to deliver to the Fund an amount of cash if the
closing level of the index upon which the put is based is less than the exercise
price of the put, which amount of cash is determined by the multiplier, as
described above for calls. When the Fund writes a put on an index, it receives a
premium and the purchaser of the put has the right, prior to the expiration
date, to require the Fund to deliver to it an amount of cash equal to the
difference between the closing level of the index and the exercise price times
the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices. The risks of investment in options on indices
may be greater than options on securities. Because index options are settled in
cash, when the Fund writes a call on an index it cannot provide in advance for
its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of writing a call index option
by holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as underlie
the index and, as a result, bears a risk that the value of the securities held
will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as 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 securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations
25
<PAGE>
by delivering those securities against payment of the exercise price. Instead,
it will be required to pay cash in an amount based on the closing index value on
the exercise date. By the time it learns that it has been assigned, the index
may have declined, with a corresponding decline in the value of its portfolio.
This "timing risk" is an inherent limitation on the ability of index call
writers to cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows the Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
Generally, OTC foreign currency options used by the Fund are European-style
options, This means that the option is only exercisable immediately prior to its
expiration. This is in contract to American-style options, which are exercisable
at any time prior to the expiration date of the option.
Futures Contracts and Options on Futures Contracts. The purchase of futures
or call options on futures can serve as a long hedge, and the sale of futures or
the purchase of put options on futures can serve as a short hedge. Writing call
options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing call options on securities or indices.
Similarly, writing put options on futures contracts can serve as a limited long
hedge. Futures contracts and options on futures contracts can also be purchased
and sold to attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average duration
of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten the average
duration of the Fund's fixed-income portfolio, the Fund may sell a debt futures
contract or a call option thereon, or purchase a put option on that futures
contract. If WRIMCO wishes to lengthen the average duration of the Fund's
fixed-income portfolio, the Fund may buy a debt futures contract or a call
option thereon, or sell a put option thereon.
26
<PAGE>
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or an option on a futures
contract can vary from the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price beyond the limit. Daily price
limits do not limit potential losses because prices could move to the daily
limit for several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could
27
<PAGE>
incur substantial losses. The Fund would continue to be subject to market risk
with respect to the position. In addition, except in the case of purchased
options, the Fund would continue to be required to make daily variation margin
payments and might be required to maintain the position being hedged by the
futures contract or option or to maintain cash or liquid assets in an account.
Risk of Futures Contracts and Options Thereon. The ordinary spreads between
prices in the cash and futures markets (including the options on 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 rate, currency exchange rate or stock market trends by WRIMCO may still
not result in a successful transaction. WRIMCO may be incorrect in its
expectations as to the extent of various interest rate, currency exchange rate
or stock market movements or the time span within which the movements take
place.
Index Futures. The risk of imperfect correlation between movements in the
price of an index future and movements in the price of the securities that are
the subject of the hedge increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable index. The price of the
index futures may move more than or less than the price of the securities being
hedged. If the price of the index future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price
28
<PAGE>
of the index futures, the Fund may buy or sell index futures in a greater dollar
amount than the dollar amount of the securities being hedged if the historical
volatility of the prices of such securities being hedged is more than the
historical volatility of the prices of the securities included in the index. It
is also possible that, where the Fund has sold index futures contracts to hedge
against decline in the market, the market may advance and the value of the
securities held in the portfolio may decline. If this occurred, the Fund would
lose money on the futures contract and also experience a decline in value of its
portfolio securities. However, while this could occur for a very brief period or
to a very small degree, over time the value of a diversified portfolio of
securities will tend to move in the same direction as the market indices upon
which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase in
the price of securities before the Fund is able to invest in them in an orderly
fashion, it is possible that the market may decline instead. If the Fund then
concludes not to invest in them at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case other than for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums required to establish those
positions (excluding the amount by which options are "in-the-money" at the time
of purchase) will not exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and unrealized losses on
any contracts the Fund has entered into. (In general, a call option on a futures
contract is "in-the-money" if the value of the underlying futures contract
exceeds the strike, i.e., exercise, price of the call; a put option on a futures
contract is "in-the-money" if the value of the underlying futures contract is
exceeded by the strike price of the put.) This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
Foreign Currency Hedging Strategies--Special Considerations. The Fund may
use options and futures contracts on foreign currencies (including the Euro), as
described above, and forward currency contracts, as described below, to attempt
to hedge against movements in the values of the foreign currencies in which the
Fund's securities are denominated or to attempt to enhance income or yield.
Currency hedges can protect against price movements in a security that the Fund
owns or intends to acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not,
29
<PAGE>
however, protect against price movements in the securities that are attributable
to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no Financial Instruments on that currency are available or such
Financial Instruments are more expensive than certain other Financial
Instruments. In such cases, the Fund may seek to hedge against price movements
in that currency by entering into transactions using Financial Instruments on
another currency or a basket of currencies, the values of which WRIMCO believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Financial Instrument
will not correlate perfectly with movements in the price of the currency subject
to the hedging transaction is magnified when this strategy is used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.
Settlement of transactions involving foreign currencies might be required
to take place within the country issuing the underlying currency. Thus, the Fund
might be required to accept or make delivery of the underlying foreign currency
in accordance with any U.S. or foreign regulations regarding the maintenance of
foreign banking arrangements by U.S. residents and might be required to pay any
fees, taxes and charges associated with such delivery assessed in the issuing
country.
Forward Currency Contracts. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or
30
<PAGE>
sell a specific currency at a future date, which may be any fixed number of days
(term) from the date of the forward currency contract agreed upon by the
parties, at a price set at the time of the forward currency contract. These
forward currency contracts are traded directly between currency traders (usually
large commercial banks) and their customers.
Such transactions may serve as long hedges; for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges; for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security,
dividend or interest payment denominated in a foreign currency.
The Fund may also use forward currency contracts to hedge against a decline
in the value of existing investments denominated in foreign currency. For
example, if the Fund owned securities denominated in Euros, it could enter into
a forward currency contract to sell Euros in return for U.S. dollars to hedge
against possible declines in the Euro's value. Such a hedge, sometimes referred
to as a "position hedge," would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. The Fund could also hedge the position by selling another
currency expected to perform similarly to the Euro. This type of hedge,
sometimes referred to as a "proxy hedge," could offer advantages in terms of
cost, yield, or efficiency, but generally would not hedge currency exposure as
effectively as a simple hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.
The Fund also may use forward currency contracts to attempt to enhance
income or yield. The Fund could use forward currency contracts to increase its
exposure to foreign currencies that WRIMCO believes might rise in value relative
to the U.S. dollar, or shift its exposure to foreign currency fluctuations from
one country to another. For example, if the Fund owned securities denominated in
a foreign currency and WRIMCO believed that currency would decline relative to
another currency, it might enter into a forward currency contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second foreign currency.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the
31
<PAGE>
underlying currency at the maturity of the contract. Failure by the counterparty
to do so would result in the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in an account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the flexibility to enter into such forward currency contracts
when it determines that the best interests of the Fund will be served.
Successful use of forward currency contracts depends on WRIMCO's skill in
analyzing and predicting currency values. Forward currency contracts may
substantially change the Fund's exposure to changes in currency exchange rates
and could result in losses to the Fund if currencies do not perform as WRIMCO
anticipates. There is no assurance that WRIMCO's use of forward currency
contracts will be advantageous to the Fund or that WRIMCO will hedge at an
appropriate time.
Combined Positions. The Fund may purchase and write options in combination
with each other, or in combination with futures or forward contracts, to adjust
the risk and return characteristics of its overall position. For example, the
Fund may purchase a
32
<PAGE>
put option and write a call option on the same underlying instrument, in order
to construct a combined position whose risk and return characteristics are
similar to selling a futures contract. Another possible combined position would
involve writing a call option at one strike price and buying a call option at a
lower price, in order to reduce the risk of the written call option in the event
of a substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Turnover. The Fund's options and futures activities may affect its turnover
rate and brokerage commission payments. The exercise of calls or puts written by
the Fund, and the sale or purchase of futures contracts, may cause it to sell or
purchase related investments, thus increasing its turnover rate. Once the Fund
has received an exercise notice on an option it has written, it cannot effect a
closing transaction in order to terminate its obligation under the option and
must deliver or receive the underlying securities at the exercise price. The
exercise of puts purchased by the Fund may also cause the sale of related
investments, also increasing turnover; although such exercise is within the
Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed-rate payments. The purchase of a cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
value, to receive payments on a notional principal amount from the party selling
the cap. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling the floor. A collar combines
elements of buying a cap and selling a floor.
Swap agreements, including caps, collars and floors, can be individually
negotiated and structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap agreements may
increase or decrease the overall volatility of the Fund's investments and its
share price and yield because, and to the extent, these agreements affect the
Fund's exposure to long- or short-term interest rates (in the United States or
abroad), foreign currency
33
<PAGE>
values, mortgage-backed security values, corporate borrowing rates, or other
factors such as security prices or inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agrees to exchange
payments in U.S. dollars for payments in foreign currency, the swap agreement
would tend to decrease the Fund's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options.
The creditworthiness of firms with which the Fund enters into swaps, caps
or floors will be monitored by WRIMCO. If a firm's creditworthiness declines,
the value of the agreement would be likely to decline, potentially resulting in
losses. If a default occurs by the other party to such transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such account with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that are written by the Fund. WRIMCO and the Fund believe that such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions. The Fund understands that the position of the SEC is that assets
involved in swap transactions are illiquid and are, therefore, subject to the
limitations on investing in illiquid securities.
Borrowing
The Fund may borrow money, but only from banks and for emergency or
extraordinary purposes. If the Fund does borrow, its share price may be subject
to greater fluctuation until the borrowing is paid off.
Investment Restrictions and Limitations
Certain of the Fund's investment restrictions and other limitations are
described in this SAI. The following are the Fund's fundamental investment
limitations set forth in their entirety, which, like the Fund's goal and the
types of securities in which the Fund may invest, cannot be changed without
shareholder approval. For this purpose, shareholder approval means the approval,
at a meeting of Fund shareholders, by the lesser of (1) the holders of 67% or
more of the Fund's shares
34
<PAGE>
represented at the meeting, if more than 50% of the Fund's outstanding shares
are present in person or by proxy or (2) more than 50% of the Fund's outstanding
shares. The Fund may not:
(i) Purchase or sell physical commodities; however, this policy shall
not prevent the Fund from purchasing and selling foreign currency,
futures contracts, options, forward contracts, swaps, caps, collars,
floors and other financial instruments;
(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 that 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. 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 and
other obligations consistent with its goal and its other investment
policies and restrictions; it can also lend its portfolio securities
to the extent allowed, and in accordance with the requirements,
under the 1940 Act 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) Participate on a joint, or a joint and several, basis in any trading
account in any securities;
(vii) Sell securities short (unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short) or purchase securities on margin, except that (1) this policy
does not prevent the Fund from entering into short positions in
foreign currency, futures contracts, options, forward contracts,
swaps, caps, collars, floors and other financial instruments, (2)
the Fund may obtain such short-term credits as are necessary for the
clearance of transactions, and (3) the Fund may make margin payments
in connection with futures contracts, options, forward contracts,
swaps, caps, collars, floors and other financial instruments;
(viii) Engage in the underwriting of securities, that is, the selling of
securities for others;
35
<PAGE>
(ix) Deviate from the percentage or other restrictions set forth above
under "Foreign Securities";
(x) With respect to 75% of its total assets, purchase securities of any
one issuer (other than cash items and "Government securities" as
defined in the 1940 Act), if immediately after and as a result of
such purchase, (a) the value of the holdings of the Fund in the
securities of such issuer exceeds 5% of the value of the Fund's
total assets, or (b) the Fund owns more than 10% of the outstanding
voting securities of such issuer;
(xi) 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; or
(xii) Issue senior securities.
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval:
(i) 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.
(ii) The Fund may not purchase a security if, as a result, more than 10%
of its net assets would consist of illiquid investments.
(iii) The Fund may borrow 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.
(iv) The Fund does not currently intend to invest more than 5% of its
assets in the securities of other investment companies.
An investment policy or limitation that states a maximum percentage of the
Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
36
<PAGE>
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities for a year and dividing
it by the monthly average of the market value of such securities during the
year, excluding certain short-term securities. The Fund's turnover rate may vary
greatly from year to year as well as within a particular year and may be
affected by cash requirements for the redemption of its shares.
The Fund's portfolio turnover rate for the fiscal years ended March 31,
1999 and 1998 was 48.95% and 38.51%, respectively.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly owned subsidiary of Waddell & Reed, Inc.
Under the Management Agreement, WRIMCO is employed to supervise the investments
of the Fund and provide investment advice to the Fund. The address of WRIMCO and
Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's Board of Directors prior to approving any Shareholder
Servicing Agreement or Accounting Services Agreement.
Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell & Reed,
Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services, Inc., a
holding company. Waddell & Reed Financial Services, Inc. is a wholly owned
subsidiary of Waddell & Reed Financial, Inc., a publicly held company. The
address of these companies is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
37
<PAGE>
Waddell & Reed, Inc. and its predecessors have served as investment manager
to each of the registered investment companies in the United Group of Mutual
Funds, except United Asset Strategy Fund, Inc., since 1940 or the company's
inception date, whichever was later, and to Target/United Funds, Inc. since that
fund's inception, until January 8, 1992 when it assigned its duties as
investment manager for these funds (and the related professional staff) to
WRIMCO. WRIMCO has also served as investment manager for Waddell & Reed Funds,
Inc. since its inception in September 1992 and United Asset Strategy Fund, Inc.
since it commenced operations in March 1995. Waddell & Reed, Inc. serves as
principal underwriter for the investment companies in the United Group of Mutual
Funds and Waddell & Reed Funds, Inc. and acts as principal underwriter and
distributor for variable life insurance and variable annuity policies for which
Target/United Funds, Inc. is the underlying investment vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund and
Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell & Reed,
Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Board of Directors
without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for the WRIMCO's management services, the
Fund pays WRIMCO a fee as described in the Prospectus. The management fees paid
by the Fund to WRIMCO during the Fund's fiscal years ended March 31, 1999, 1998
and 1997 were $6,234,647, $4,863,292 and $4,125,726, respectively.
For purposes of calculating the daily fee the Fund does not include money
owed to it by Waddell & Reed, Inc. for shares which
38
<PAGE>
it has sold but not yet paid the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, with respect to Class A, Class B
and Class C shares the Fund pays the Agent a monthly fee of $1.3125 for each
shareholder account that was in existence at any time during the prior month,
plus $0.30 for each account on which a dividend or distribution, of cash or
shares, had a record date in that month. For Class Y shares, the Fund pays the
Agent a monthly fee equal to one-twelfth of .15 of 1% of the average daily net
assets of that class for the preceding month. The Fund also pays certain
out-of-pocket expenses of the Agent, including long distance telephone
communications costs; microfilm and storage costs for certain documents; forms,
printing and mailing costs; and legal and special services not provided by
Waddell & Reed, Inc., WRIMCO or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a monthly
fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
Fees paid to the Agent for the fiscal years ended March 31, 1999, 1998 and
1997 were $82,500, $70,417 and $66,667, respectively.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement are
described above. Waddell & Reed, Inc. and affiliates pay the Fund's Directors
and officers who are affiliated with WRIMCO and its affiliates. The Fund pays
the fees and expenses of the Fund's other Directors.
39
<PAGE>
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The aggregate dollar amounts of
underwriting commissions for Class A shares for the fiscal years ended March 31,
1999, 1998 and 1997 were $4,777,199, $3,357,539 and $4,510,597, respectively.
The amounts retained by Waddell & Reed, Inc. for these same periods were
$1,997,903, $1,423,634 and $1,928,361, respectively.
No portion of the sales charge is reallowed to dealers. A major portion of
the sales charge for Class A shares and the contingent deferred sales charge for
Class B and Class C shares is paid to financial advisors and managers of Waddell
& Reed, Inc. Waddell & Reed, Inc. may compensate its financial advisors as to
purchases for which there is no sales or deferred 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 the Distribution and Service Plan (the "Plan") for Class A shares
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay
Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed 0.25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with the distribution of the Class A shares, the service
and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its registered
representatives and sales managers (sales force) unless it elects, which is not
currently contemplated for Class A, Class B and Class C shares, to make
distribution of shares also through other broker-dealers. In distributing shares
through its sales force, Waddell & Reed, Inc. will pay commissions and
incentives to the sales force at or about the time of sale and will incur other
expenses including costs for prospectuses, sales literature, advertisements,
sales office maintenance, processing of orders and general overhead with respect
to its efforts to distribute the Fund's shares. The Class A Plan permits Waddell
& Reed, Inc. to receive
40
<PAGE>
reimbursement for these Class A-related distribution activities through the
distribution fee, subject to the limit contained in the Plan. The Class A Plan
also permits Waddell & Reed, Inc. to be reimbursed for amounts it expends in
compensating, training and supporting registered financial advisors, sales
managers and/or other appropriate personnel in providing personal services to
Class A shareholders of the Fund and/or maintaining Class A shareholder
accounts; increasing services provided to Class A shareholders of the Fund by
office personnel located at field sales offices; engaging in other activities
useful in providing personal service to Class A shareholders of the Fund and/or
maintenance of Class A shareholder accounts; and in compensating broker-dealers
who may regularly sell Class A shares of the Fund, and other third parties, for
providing shareholder services and/or maintaining shareholder accounts with
respect to Class A shares. Fees paid (or accrued) as distribution and service
fees by the Fund under the Class A Plan for the fiscal year ended March 31, 1999
were $140,753 and $1,936,012, respectively.
To the extent that Waddell & Reed, Inc. incurs expenses for which
reimbursement may be made under the Plan that relate to distribution and service
activities also involving another fund in the United Group of Funds or Waddell &
Reed Funds, Inc., Waddell & Reed, Inc. typically determines the amount
attributable to the Fund's expenses under the Plan on the basis of a combination
of the respective classes' relative net assets and number of shareholder
accounts.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for providing services to shareholders of that
class and/or maintaining shareholder accounts for that class and a distribution
fee of up to 0.75% of the average daily net assets of the class to compensate
Waddell & Reed, Inc. for distributing the shares of that class. The Class B Plan
and the Class C Plan each permit Waddell & Reed, Inc. to receive compensation,
through the distribution and service fee, respectively, for its distribution
activities for that class, which are similar to the distribution activities
described with respect to the Class A Plan, and for its activities in providing
personal services to shareholders of that class and/or maintaining shareholder
accounts of that class, which are similar to the corresponding activities for
which it is entitled to reimbursement under the Class A Plan.
The only Directors or interested persons, as defined in the 1940 Act, of
the Fund who have a direct or indirect financial interest in the operation of a
Plan are the officers and Directors who are also officers of either Waddell &
Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. Each Plan
is anticipated to benefit the Fund and its
41
<PAGE>
shareholders of the affected class through Waddell & Reed, Inc.'s activities not
only to distribute the shares of the affected class but also to provide personal
services to shareholders of that class and thereby promote the maintenance of
their accounts with the Fund. The Fund anticipates that shareholders of a
particular class may benefit to the extent that Waddell & Reed's activities are
successful in increasing the assets of the Fund, through increased sales or
reduced redemptions, or a combination of these, and reducing a shareholder's
share of Fund and class expenses. Increased Fund assets may also provide greater
resources with which to pursue the goal of the Fund. Further, continuing sales
of a class's shares may also reduce the likelihood that it will be necessary to
liquidate portfolio securities, in amounts or at times that may be
disadvantageous to the Fund, to meet redemption demands. In addition, the Fund
anticipates that the revenues from the Plan will provide Waddell & Reed, Inc.
with greater resources to make the financial commitments necessary to continue
to improve the quality and level of services to the Fund and the shareholders of
the affected class.
Each Plan was approved by the Fund's Board of Directors, including the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operations of the Plan or any agreement
referred to in the Plan (hereafter, the "Plan Directors"). The Class A Plan was
also approved by the affected shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will be
effective only if approved, by the Directors including the Plan Directors acting
in person at a meeting called for that purpose, (iii) amounts to be paid by the
Fund under the Plan may not be materially increased without the vote of the
holders of a majority of the outstanding shares of the affected class of the
Fund, and (iv) while the Plan remains in effect, the selection and nomination of
the Directors who are Plan Directors will be committed to the discretion of the
Plan Directors.
Custodial and Auditing Services
The Fund's Custodian is UMB Bank, n.a., Kansas City, Missouri. In general,
the custodian is responsible for holding the Fund's cash and securities.
Deloitte & Touche LLP, Kansas City, Missouri, the Fund's independent auditors,
audits the Fund's financial statements.
42
<PAGE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each class of the shares of the Fund is the value of
the assets of that class, less the class's liabilities, divided by the total
number of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined net asset
value plus the sales charge described in the Prospectus. The sales charge is
paid to Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of
March 31, 1999 was as follows:
Net asset value per Class A share (Class A
net assets divided by Class A shares
outstanding) ................................................ $ 9.52
Add: selling commission (5.75% of offering price) ............... .58
------
Maximum offering price per Class A share
(Class A net asset value divided by 94.25%) ................. $10.10
======
The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge. The
offering price of a Class B, Class C or a Class Y share is its net asset value
next determined following acceptance of a purchase order. The number of shares
you receive for your purchase depends on the next offering price after Waddell &
Reed, Inc. receives and accepts your order at its principal business office at
the address shown on the cover of this SAI. You will be sent a confirmation
after your purchase which will indicate how many shares you have purchased.
Shares are normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the Fund
may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily computed
once on each day that the NYSE is open for trading as of the later of the close
of the regular session of the NYSE or the close of the regular session of any
domestic securities or commodities exchange on which an option or future held by
the Fund is traded. The NYSE annually announces the days on which it will not be
open for trading. The most recent announcement indicates that it will not be
open on the following days: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, it is possible that the NYSE may
close on other days. The net asset value will
43
<PAGE>
change every business day, since the value of the assets and the number of
shares outstanding change every day.
The securities in the portfolio of the Fund, except as otherwise noted,
that are listed or traded on a stock exchange, are valued on the basis of the
last sale on that day or, lacking any sales, at a price that is the mean between
the closing bid and asked prices. Other securities that are traded
over-the-counter are priced using the Nasdaq Stock Market, which provides
information on bid and asked prices quoted by major dealers in such stocks.
Bonds, other than convertible bonds, are valued using a third party pricing
system. Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Short-term debt securities are valued at amortized
cost, which approximates market. When market quotations are not readily
available, securities and other assets are valued at fair value as determined in
good faith under procedures established by and under the general supervision and
responsibility of the Fund's Board of Directors.
Puts, calls and futures contracts 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 options
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.
44
<PAGE>
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
For Class A, Class B and Class C shares, initial investments must be at
least $500 with the exceptions described in this paragraph. A $100 minimum
initial investment pertains to certain exchanges of shares from another fund in
the United Group. A $50 minimum initial investment pertains to purchases for
certain retirement plan accounts and to accounts for which an investor has
arranged, at the time of initial investment, to make subsequent purchases for
the account by having regular monthly withdrawals of $25 or more made from a
bank account. A minimum initial investment of $25 is applicable to purchases
made through payroll deduction for or by employees of WRIMCO, Waddell & Reed,
Inc., their affiliates, or certain retirement plan accounts. Except with respect
to certain exchanges and automatic withdrawals from a bank account, a
shareholder may make subsequent investments of any amount. See "Exchanges for
Shares of Other Funds in the United Group."
For Class Y shares, investments by government entities or authorities or by
corporations must total at least $10 million within the first twelve months
after initial investment. There is no initial investment minimum for other Class
Y investors.
Reduced Sales Charges (Applicable to Class A Shares Only)
Account Grouping
Large purchases of Class A shares are subject to lower sales charges. The
schedule of sales charges appears in the Prospectus for Class A shares. For the
purpose of taking advantage of the lower sales charges available for large
purchases, a purchase in any of categories 1 through 7 listed below made by an
individual or deemed to be made by an individual may be grouped with purchases
in any other of these categories:
1. Purchases by an individual for his or her own account (includes
purchases under the United Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own
account (includes United Funds Revocable Trust Form of spouse);
3. Purchases by that individual or his or her spouse in their joint
account;
45
<PAGE>
4. Purchases by that individual or his or her spouse for the account of
their child under age 21;
5. Purchase by any custodian for the child of that individual or spouse
in a Uniform Gift to Minors Act ("UGMA") or Uniform Transfers to
Minors Act ("UTMA") account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), salary reduction plan account
under Section 457 of the Internal Revenue Code of 1986, as amended
(the "Code"), provided that such purchases are subject to a sales
charge (see "Net Asset Value Purchases"), tax-sheltered annuity
account ("TSA") or Keogh Plan account, provided that the individual
and spouse are the only participants in the Keogh Plan; and
7. Purchases by a trustee under a trust where that individual or his or
her spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens a UGMA account for grandson A; Grandmother has an
account in her own name; A's father has an account in his own name;
the UGMA account may be grouped with A's father's account but may not
be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in the
trust account is eligible for grouping with an IRA account of W, H's
wife;
C. H's will provides for the establishment of a trust for the benefit of
his minor children upon H's death; his bank is named as trustee; upon
H's death, an account is established in the name of the bank, as
trustee; a purchase in the account may be grouped with an account held
by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account may
not be grouped with R's individual account. If X's spouse, Y, was
successor trustee, this purchase could be grouped with Y's individual
account.
All purchases of Class A shares made for a participant in a
multi-participant Keogh plan may be grouped only with other purchases made under
the same plan; a multi-participant Keogh plan is defined as a plan in which
there is more than one
46
<PAGE>
participant where one or more of the participants is other than the spouse of
the owner/employer.
Example A: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made
under the plan with any purchases in categories 1 through 7
above.
Example B: H has established a Keogh Plan; his wife, W, is a participant and
they have hired one or more employees who also become
participants in the plan; H and W may not combine any purchases
made under the plan with any purchases in categories 1 through 7
above; however, all purchases made under the plan for H, W or any
other employee will be combined.
All purchases of Class A shares made under a "qualified" employee benefit
plan of an incorporated business will be grouped. A "qualified" employee benefit
plan is established pursuant to Section 401 of the Code. All qualified employee
benefit plans of any one employer or affiliated employers will also be grouped.
An affiliate is defined as an employer that directly, or indirectly, controls or
is controlled by or is under control with another employer. All qualified
employee benefit plans of an employer who is a franchisor and those of its
franchisee(s) may also be grouped.
Example: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made
under both plans will be grouped.
All purchases of Class A shares made under a simplified employee pension
plan ("SEP"), payroll deduction plan or similar arrangement adopted by an
employer or affiliated employers (as defined above) may be grouped provided that
the employer elects to have all such purchases grouped at the time the plan is
set up. If the employer does not make such an election, the purchases made by
individual employees under the plan may be grouped with the other accounts of
the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase of Class A shares in accounts eligible for grouping may
be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
47
<PAGE>
Example: H and W open an account in the Fund and invest $75,000; at the
same time, H's parents open up three UGMA accounts for H and W's
three minor children and invest $10,000 in each child's name; the
combined purchase of $105,000 of Class A shares is subject to a
reduced sales load of 4.75% provided that Waddell & Reed, Inc. is
advised that the purchases are entitled to grouping.
Rights of Accumulation
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund three
years ago. His account has a net asset value of $80,000. His
wife, W, now wishes to invest $20,000 in Class A shares of the
Fund. W's purchase will be combined with H's existing account and
will be entitled to a reduced sales charge of 4.75%. H's original
purchase was subject to a full sales charge and the reduced
charge does not apply retroactively to that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan the shares held under such plan may be combined with the additional
purchase only if the contractual plan has been completed.
Letter of Intent
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Letter of Intent. By signing a Letter of Intent
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 Letter of Intent is accepted by Waddell &
Reed, Inc. Each purchase made from time to time under the Letter of Intent is
treated as if the purchaser were buying at one time the total amount which he or
she intends to invest. The sales charge applicable to all purchases of Class A
shares made under the terms of the Letter of Intent will be the
48
<PAGE>
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 Letter of Intent, the investor's
Rights of Accumulation (see above) will be taken into account; that is, Class A
shares already held in the same account in which the purchase is being made or
in any account eligible for grouping with that account, as described above, will
be included.
Example: H signs a Letter of Intent indicating his intent to invest in his
own name a dollar amount sufficient to entitle him to purchase
Class A shares at the sales charge applicable to a purchase of
$100,000. H has an IRA account and the Class A shares held under
the IRA in the Fund have a net asset value as of the date the
Letter of Intent 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
Letter of Intent of $10,000; H needs to invest $75,000 in Class A
shares over the 13-month period in order to qualify for the
reduced sales load applicable to a purchase of $100,000.
A copy of the Letter of Intent signed by a purchaser will be returned to
the purchaser after it is accepted by Waddell & Reed, Inc. and will set forth
the dollar amount of Class A shares which must be purchased within the 13-month
period in order to qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under a contractual
plan, the shares held under the plan will be taken into account in determining
the amount which must be invested under the Statement only if the contractual
plan has been completed.
The minimum initial investment under a Letter of Intent is 5% of the dollar
amount which must be invested under the Letter of Intent. An amount equal to 5%
of the purchase required under the Letter of Intent will be held "in escrow." If
a purchaser does not, during the period covered by the Letter of Intent, invest
the amount required to qualify for the reduced sales charge under the terms of
the Letter of Intent, he or she will be responsible for payment of the sales
charge applicable to the amount actually invested. The additional sales charge
owed on purchases of Class A shares made under a Letter of Intent which is not
completed will be collected by redeeming part of the shares purchased under the
Letter of Intent 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.
49
<PAGE>
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 Letter of Intent, the lower sales charge will apply.
A Letter of Intent does not bind the purchaser to buy, or Waddell & Reed,
Inc. to sell, the shares covered by the Letter of Intent.
With respect to Letters of Intent for $2,000,000 or purchases otherwise
qualifying for no sales charge under the terms of the Letter of Intent, 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 Letter of
Intent will be deducted in computing the aggregate purchases under the Letter of
Intent.
Letters of Intent are not available for purchases made under a SEP 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 of Class A shares apply to purchases
of any of the Class A shares of any of the funds in the United Group subject to
a sales charge. A purchase of Class A shares, or Class A shares held, in any of
the funds in the United Group subject to a sales charge will be treated as an
investment in the Fund in determining the applicable sales charge. For these
purposes, Class A shares of United Cash Management, Inc. that were acquired by
exchange of another United Group fund's Class A shares on which a sales charge
was paid, plus the shares paid as dividends on those acquired shares, are also
taken into account.
Net Asset Value Purchases of Class A Shares
As stated in the Prospectus, Class A shares of the Fund may be purchased at
net asset value by the Directors and officers of the Fund, employees of Waddell
& Reed, Inc., employees of their affiliates, financial advisors of Waddell &
Reed, Inc. and the spouse, children, parents, children's spouses and spouse's
parents of each such Director, officer, employee and financial advisor. "Child"
includes stepchild; "parent" includes stepparent. Purchases of Class A shares in
an IRA sponsored by Waddell & Reed, Inc. established for any of these eligible
purchasers may also be at net asset value. Purchases in any tax qualified
retirement plan under which the eligible purchaser is the sole participant may
also be made at net asset value. Trusts under which the grantor and the trustee
or a co-trustee are each an eligible purchaser are also eligible for net asset
value purchases of Class A shares. "Employees" includes retired employees. A
retired employee is an individual separated from
50
<PAGE>
service from Waddell & Reed, Inc. or affiliated companies with a vested interest
in any Employee Benefit Plan sponsored by Waddell & Reed, Inc. or its affiliated
companies. "Employees" also includes individuals who, on November 6, 1998, were
employees (including retired employees) of a company that on that date was an
affiliate of Waddell & Reed, Inc. "Financial advisors" includes retired
financial advisors. A "retired financial advisor" is any financial advisor who
was, at the time of separation from service from Waddell & Reed, Inc., a Senior
Financial Advisor. A custodian under UGMA or UTMA purchasing for the child or
grandchild of any employee or financial advisor may purchase Class A shares at
net asset value whether or not the custodian himself is an eligible purchaser.
Purchases of Class A shares in a 401(k) plan having 100 or more eligible
employees and purchases of Class A shares in a 457 plan having 100 or more
eligible employees may be made at net asset value.
Shares may also be issued at NAV in a merger, acquisition or exchange offer
made pursuant to a plan of reorganization to which the Fund is a party.
Reasons for Difference in Public Offering Price of Class A Shares
As described herein and in the Prospectus for Class A shares, there are a
number of instances in which the Fund's Class A shares are sold or issued on a
basis other than the maximum public offering price, that is, the net asset value
plus the highest sales charge. Some of these relate to lower or eliminated sales
charges for larger purchases of Class A shares, whether made at one time or over
a period of time as under a Letter of Intent 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 for Class A shares are as follows. Exchanges at net
asset value are permitted because a sales charge has already been paid on the
shares exchanged. Sales of Class A shares without sales charge are permitted to
Directors, officers and certain others due to reduced or eliminated selling
expenses and because such sales may aid in the
51
<PAGE>
development of a sound employee organization, encourage incentive,
responsibility and interest in the United Group and an identification with its
aims and policies. Limited reinvestments of redemptions of Class A shares at no
sales charge are permitted to attempt to protect against mistaken or not fully
informed redemption decisions. Class A shares may be issued at no sales charge
in plans of reorganization due to reduced or eliminated sales expenses and
since, in some cases, such issuance is exempted in the 1940 Act from the
otherwise applicable restrictions as to what sales charge must be imposed. In no
case in which there is a reduced or eliminated sales charge are the interests of
existing Class A shareholders adversely affected since, in each case, the Fund
receives the net asset value per share of all shares sold or issued.
Flexible Withdrawal Service for Class A, Class B and Class C Shareholders
If you qualify, you may arrange to receive through the Flexible Withdrawal
Service (the "Service") regular monthly, quarterly, semiannual or annual
payments by redeeming on an ongoing basis Class A, Class B or Class C shares
that you own of the Fund or of any of the funds in the United Group. It would be
a disadvantage to an investor to make additional purchases of Class A shares
while the service is in effect because it would result in duplication of sales
charges. Class C shares purchased within the past year remain subject to the
CDSC; however, Class B shares redeemed under the Service are not subject to a
CDSC. Applicable forms to start the Service are available through Waddell &
Reed, Inc.
To qualify for the Service, you must have invested at least $10,000 in
Class A, Class B or Class C shares which you still own of any of the funds in
the United Group; or, you must own Class A, Class B or Class C shares having a
value of at least $10,000. The value for this purpose is the value at the
offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to one-twelfth of
a percentage of the value of the shares in the account (you select the
percentage); or
3. a monthly or quarterly payment, which will change each month or quarter,
by redeeming a number of shares fixed by you (at least five shares).
Shares are redeemed on the 20th day of the month in which the payment is to
be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
52
<PAGE>
Retirement plan accounts may be subject to a fee imposed by the plan
custodian for use of their service.
If you have a share certificate for the shares you want to make available
for the Service, you must enclose the certificate with the form initiating the
Service.
The dividends and distributions on shares of a class you have made
available for the Service are paid in additional shares of that class. All
payments under the Service are made by redeeming shares, which may involve a
gain or loss for tax purposes. To the extent that payments exceed dividends and
distributions, the number of shares you own will decrease. When all of the
shares in an account are redeemed, you will not receive any further payments.
Thus, the payments are not an annuity or an income or return on your investment.
You may, at any time, change the manner in which you have chosen to have
shares redeemed. You can change to any one of the other choices originally
available to you. You may, at any time, redeem part or all of the shares in your
account; if you redeem all of the shares, the Service is terminated. The Fund
can also terminate the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed will be
sent to you to assist you in completing your Federal income tax return.
Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
Once a sales charge has been paid on shares of a fund in the United Group,
these shares and any shares added to them from dividends or distributions paid
in shares may be freely exchanged for corresponding shares of another fund in
the United Group. The shares you exchange must be worth at least $100 or you
must already own shares of the fund in the United Group into which you want to
exchange.
You may exchange Class A shares you own in another fund in the United Group
for Class A shares of the Fund without charge if (i) a sales charge was paid on
these shares, or (ii) the shares were received in exchange for shares for which
a sales charge was paid, or (iii) the shares were acquired from reinvestment of
dividends and distributions paid on such shares. There may have been one or more
such exchanges so long as a sales charge was paid on the shares originally
purchased. Also, shares acquired without a sales charge because the purchase was
$2 million or more will be treated the same as shares on which a sales charge
was paid.
United Municipal Bond Fund, Inc., United Government Securities Fund, Inc.
and United Municipal High Income Fund, Inc.
53
<PAGE>
shares are the exceptions and special rules apply. Class A shares of these funds
may be exchanged for Class A shares of the Fund only if (i) you 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 Class A shares of United Cash Management, Inc. automatically
exchanged each month into Class A shares of the Fund or any other fund in the
United Group. The shares of United Cash Management, Inc. which you designate for
automatic exchange must be worth at least $100 or you must own Class A shares of
the fund in the United Group into which you want to exchange. The minimum value
of shares which you may designate for automatic exchange is $100, which may be
allocated among the Class A shares of different funds in the United Group so
long as each fund receives a value of $25. Minimum initial investment and
minimum balance requirements apply to such automatic exchange service.
You may redeem your Class A shares of the Fund and use the proceeds to
purchase Class Y shares of the Fund if you meet the criteria for purchasing
Class Y shares.
Class B Share Exchanges
You may exchange Class B shares of the Fund for Class B shares of other
funds in the United Group without charge.
The redemption of the Fund's Class B shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class B shares of United Cash
Management, Inc. automatically redeemed each month and invested in Class B
shares of the Fund. The shares of United Cash Management, Inc. which you
designate must be worth at least $100, which may be allocated among different
funds so long as each fund receives a value of at least $25. Minimum initial
investment and minimum balance requirements apply to such service.
Class C Share Exchanges
You may exchange Class C shares of the Fund for Class C shares of other
funds in the United Group without charge.
The redemption of the Fund's Class C shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any,
54
<PAGE>
applicable to the redemption of the shares acquired in the exchange, those
acquired shares are treated as having been purchased when the original redeemed
shares were purchased.
You may have a specific dollar amount of Class C shares of United Cash
Management, Inc. automatically redeemed each month and invested in Class C
shares of the Fund. The shares of United Cash Management, Inc. which you
designate must be worth at least $100, which may be allocated among different
funds so long as each fund receives a value of at least $25. Minimum initial
investment and minimum balance requirements apply to such service.
Class Y Share Exchanges
Class Y shares of a Fund may be exchanged for Class Y shares of any other
fund in the United Group or for Class A shares of United Cash Management, Inc.
General Exchange Information
When you exchange shares, the total shares you receive will have the same
aggregate net asset value as the total shares you exchange. The relative values
are those next figured after your exchange request is received in good order.
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any time
and any such exchange may not be accepted.
Retirement Plans
As described in the Prospectus for Class A shares, your account may be set
up as a funding vehicle for a retirement plan. For individual taxpayers meeting
certain requirements, Waddell & Reed, Inc. offers model or prototype documents
for the following retirement plans. All of these plans involve investment in
shares of the Fund (or shares of certain other funds in the United Group).
Individual Retirement Accounts (IRAs). Investors having earned income may
set up a plan that is commonly called an IRA. Under a traditional IRA, an
investor can contribute each year up to 100% of his or her earned income, up to
an annual maximum of $2,000 (provided the investor has not reached age 70 1/2).
For a married couple, the annual maximum is $4,000 ($2,000 for each spouse) or,
if less, the couple's combined earned income for the taxable year even if one
spouse had no earned income. Generally, the contributions are deductible unless
the investor (or, if married, either spouse) is an active participant in a
qualified retirement plan or if, notwithstanding that the investor or one or
both spouses so participate, their adjusted gross income does
55
<PAGE>
not exceed certain levels. However, a married investor who is not an active
participant, files jointly with his or her spouse and whose combined adjusted
gross income does not exceed $150,000, is not affected by the spouse's active
participant status.
An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be subject
to Federal income tax until distributed from the IRA. A direct rollover
generally applies to any distribution from an employer's plan (including a
custodial account under Section 403(b)(7) of the Code, but not an IRA) other
than certain periodic payments, required minimum distributions and other
specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a portion
of that distribution generally may be rolled over to an IRA within 60 days after
receipt of the distribution. Because mandatory Federal income tax withholding
applies to any eligible rollover distribution which is not paid in a direct
rollover, investors should consult their tax advisers or pension consultants as
to the applicable tax rules. If you already have an IRA, you may have the assets
in that IRA transferred directly to an IRA offered by Waddell & Reed, Inc.
Roth IRAs. Investors whose adjusted gross income (or combined adjusted
gross income, if married) does not exceed certain levels may establish and
contribute up to $2,000 per tax year to a Roth IRA. In addition, for an investor
whose adjusted gross income does not exceed $100,000 (and who is not a married
person filing a separate return), certain distributions from traditional IRAs
may be rolled over to a Roth IRA and any of the investor's traditional IRAs may
be converted into a Roth IRA; these rollover distributions and conversions are,
however, subject to Federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in the Roth IRA, and withdrawals of earnings are not subject
to Federal income tax if the account has been held for at least five years and
the account holder has reached age 59 1/2 (or certain other conditions apply).
Education IRAs. Although not technically for retirement savings, Education
IRAs provide a vehicle for saving for a child's higher education. An Education
IRA may be established for the benefit of any minor, and any person whose
adjusted gross income does not exceed certain levels may contribute up to $500
to an Education IRA (or to each of multiple Education IRAs), provided that no
more than $500 may be contributed for any year to Education IRAs for the same
beneficiary. Contributions are
56
<PAGE>
not deductible and may not be made after the beneficiary reaches age 18;
however, earnings accumulate tax-free, and withdrawals are not subject to tax if
used to pay the qualified higher education expenses of the beneficiary (or a
member of his or her family).
Simplified Employee Pension (SEP) plans. Employers can make contributions
to SEP-IRAs established for employees. An employer may contribute up to 15% of
compensation or $24,000, whichever is less, per year for each employee.
Savings Incentive Match Plans for Employees (SIMPLE Plans). An employer
with 100 or fewer employees who does not sponsor another active retirement plan
may sponsor a SIMPLE to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an
employer can choose to match employee contributions dollar-for-dollar (up to 3%
of an employee's compensation) or may contribute to all eligible employees 2% of
their compensation, whether or not they defer salary to their retirement plans.
SIMPLE plans involve fewer administrative requirements than 401(k) or other
qualified plans generally.
Keogh Plans. Keogh plans, which are available to self-employed individuals,
are defined contribution plans that may be either a money purchase plan or a
profit-sharing plan. As a general rule, an investor under a defined contribution
Keogh plan can contribute each year up to 25% of his or her annual earned
income, with an annual maximum of $30,000.
457 Plans. If an investor is an employee of a state or local government or
of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is an employee
of a public school system or of certain types of charitable organizations, he or
she may be able to enter into a deferred compensation arrangement through a
custodian account under Section 403(b) of the Code. Some organizations have
adopted Title I plans, which are funded by employer contributions in addition to
employee deferrals.
401(k) Plans. With a 401(k) plan, employees can make tax-deferred
contributions into a plan to which the employer may also contribute, usually on
a matching basis. An employee may defer each year up to 25% of compensation,
subject to certain annual maximums, which may be increased each year based on
cost-of-living adjustments.
More detailed information about these arrangements and applicable forms are
available from Waddell & Reed, Inc. These plans may involve complex tax
questions as to premature
57
<PAGE>
distributions and other matters. Investors should consult their tax adviser or
pension consultant.
Redemptions
The Prospectus gives information as to redemption procedures. Redemption
payments are made within seven days unless delayed because of emergency
conditions determined by the SEC, when the NYSE is closed other than for
weekends or holidays, or when trading on the NYSE is restricted. Payment is made
in cash, although under extraordinary conditions redemptions may be made in
portfolio securities. Payment for redemption of shares of the Fund may be made
in portfolio securities when the Fund's Board of Directors determines that
conditions exist making cash payments undesirable. Securities used for payment
of redemptions are valued at the value used in figuring net asset value. There
would be brokerage costs to the redeeming shareholder in selling such
securities. The Fund, however, has elected to be governed by Rule 18f-1 under
the 1940 Act, pursuant to which it is obligated to redeem shares solely in cash
up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder.
Reinvestment Privilege
The Fund offers a one-time reinvestment privilege that allows you to
reinvest without charge all or part of any amount of Class A shares you redeem
from the Fund by sending to the Fund the amount you wish to reinvest. The amount
you return will be reinvested in Class A shares at the net asset value next
determined after the Fund receives the returned amount. Your written request to
reinvest and the amount to be reinvested must be received within 30 days after
your redemption request was received, and the Fund must be offering Class A
shares at the time your reinvestment request is received. You can do this only
once as to Class A shares of the Fund. You do not use up this privilege by
redeeming Class A shares to invest the proceeds at net asset value in a Keogh
Plan or an IRA.
There is also a reinvestment privilege for Class B and Class C shares under
which you may reinvest all or part of any amount of Class B or Class C shares
you redeemed and have the corresponding amount of the deferred sales charge, if
any, which you paid restored to your account by adding the amount of that charge
to the amount you are reinvesting in Class B or Class C shares, as applicable.
If Class B or Class C shares of the Fund are then being offered, you can put all
or part of your redemption payment back into the Class B or Class C shares of
the Fund 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. You can do this only once as to Class B shares of the Fund and
only once as to Class C shares of the Fund. For purposes of determining future
58
<PAGE>
deferred sales charges, the reinvestment will be treated as a new investment.
You do not use up this privilege by redeeming Class B or Class C shares to
invest the proceeds at 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 of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors. The majority of the
Directors are not affiliated with Waddell & Reed, Inc.
The principal occupation during at least the past five years of each
Director and officer is given below. Each of the persons listed through and
including Mr. Vogel is a member of the Fund's Board of Directors. The other
persons are officers but not members of the Board of Directors. For purposes of
this section, the term "Fund Complex" includes each of the registered investment
companies in the United Group of Mutual Funds, Waddell & Reed Funds, Inc. and
Target/United Funds, Inc. Each of the Fund's Directors is also a Director of
each of the other funds in the Fund Complex and each of its officers is also an
officer of one or more of the funds in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other funds
in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer, Principal Financial Officer and Director of Waddell & Reed Financial,
Inc.; President, Chairman of the Board of Directors and Chief Executive Officer
of Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
of WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of each of the funds in the Fund Complex; formerly, Chairman of the
Board of Directors of Waddell & Reed Asset Management Company, a former
affiliate of Waddell & Reed Financial, Inc. Date of birth: February 11, 1945.
59
<PAGE>
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President, JoDill Corp., an agricultural company; President and Director of
Dillingham Enterprises Inc.; formerly, Director and consultant, McDougal
Construction Company; formerly, Instructor at Central Missouri State University;
formerly, Member of the Board of Police Commissioners, Kansas City, Missouri;
formerly, Senior Vice President-Sales and Marketing, Garney Companies, Inc., a
specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George S. and Delores Dori
Eccles Foundation. Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal. Date of birth: March
24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Partner, Levy and Craig, P.C., a law firm. Date of
birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct Professor of Law at the
University of Oklahoma College of Law; formerly, Vice President for Executive
Affairs of the University of Oklahoma; formerly, an Attorney with Crowe &
Dunlevy, a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman of the Board of
Directors, Gilliland & Hayes, P.A., a law firm; formerly, President, Gilliland &
Hayes, P.A. Date of birth: December 11, 1919.
60
<PAGE>
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the other
funds in the Fund Complex; Executive Vice President, Chief Operating Officer and
Director of Waddell & Reed Financial, Inc.; Vice President, Chief Operating
Officer, Director and Treasurer of Waddell & Reed Financial Services, Inc.;
Executive Vice President, Principal Financial Officer, Director and Treasurer of
WRIMCO; President, Chief Executive Officer, Principal Financial Officer,
Director and Treasurer of Waddell & Reed, Inc.; President, Director and
Treasurer of Waddell & Reed Services Company; formerly, Vice President of each
of the funds in the Fund Complex; formerly, Director and Treasurer of Waddell &
Reed Asset Management Company, a former affiliate of Waddell & Reed Financial,
Inc. Date of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund Complex;
President, Chief Investment Officer, Treasurer and Director of Waddell & Reed
Financial, Inc.; Vice President, Chief Investment Officer and Director of
Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; formerly, President, Chief Executive Officer, Chief Investment Officer
and Director of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. Date of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and subsidiaries. Date of birth: February 19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of each
of the funds in the Fund Complex then in existence. (Mr. Morgan retired as
Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company. Date of birth:
April 27, 1928.
61
<PAGE>
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director of Network Rehabilitation Services; formerly, Employment
Counselor and Director of McCue-Parker Center. Date of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm. Date of
birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Professor of Business Administration, University of Missouri-Kansas City;
formerly, Chancellor, University of Missouri-Kansas City. Date of birth: January
1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
Helge K. Lee
Vice President, Secretary and General Counsel of the Fund and each of the
other funds in the Fund Complex; Secretary and General Counsel of Waddell & Reed
Financial, Inc.; Vice President, Secretary, General Counsel and Director of
Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary and
General Counsel of WRIMCO and Waddell & Reed, Inc.; Senior Vice President,
Secretary, General Counsel and Director of Waddell & Reed Services Company;
formerly, Executive Vice President, Secretary and Chief Compliance Officer of
LGT Asset Management, Inc. and affiliates; formerly, Senior Vice President,
General Counsel and Secretary of Strong Capital Management, Inc. and affiliates.
Date of birth: March 30, 1946.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund and
each of the other funds in the Fund Complex; Vice President of Waddell & Reed
Services Company. Date of birth: July 18, 1942.
Zachary H. Shafran
Vice President of the Fund and Vice President of WRIMCO. Date of birth:
October 12, 1965.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
62
<PAGE>
The Directors who may be deemed to be "interested persons" as defined in
the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc., or WRIMCO are
indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a Director may elect after resignation from the Board
provided the Director has attained the age of 70 and has served as a Director of
the Funds in the United Group for a total of at least five years. A Director
Emeritus receives fees in recognition of his or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Messrs.
Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey and Paul
Wise retired as Directors of the Fund and of each of the funds in the Fund
Complex and elected a position as Director Emeritus.
The funds in the United Group, Target/United Funds, Inc. and Waddell & Reed
Funds, Inc. pay to each Director a total of $48,000 per year, plus $2,500 for
each meeting of the Board of Directors attended plus reimbursement of expenses
of attending such meeting and $500 for each committee meeting attended which is
not in conjunction with a Board of Directors meeting, other than Directors who
are affiliates of Waddell & Reed, Inc. The fees to the Directors who receive
them are divided among the funds in the United Group, Target/United Funds, Inc.
and Waddell & Reed Funds, Inc. based on their relative size. During the Fund's
fiscal year ended March 31, 1999, the Fund's Directors received the following
fees for service as a director:
COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 2,025 58,000
John A. Dillingham 2,025 58,000
David P. Gardner 1,014 29,000
Linda K. Graves 2,025 58,000
Joseph Harroz, Jr 960 26,500
John F. Hayes 2,025 58,000
Glendon E. Johnson 2,043 58,500
William T. Morgan 2,025 58,000
Ronald C. Reimer 558 14,500
Frank J. Ross, Jr 2,025 58,000
Eleanor Schwartz 2,043 58,500
Frederick Vogel III 2,043 58,500
63
<PAGE>
* No pension or retirement benefits have been accrued as a part of Fund
expenses.
Mr. Gardner was elected as a Director on August 19, 1998. Messrs. Harroz,
Hechler, Herrmann and Reimer were elected as Directors on November 18, 1998. The
officers are paid by WRIMCO or its affiliates.
Shareholdings
As of July 31, 1999, all of the Fund's Directors and officers as a group
owned less than 1% of the outstanding shares of the Fund. The following table
sets forth information with respect to the Fund, as of July 31, 1999, regarding
the ownership of the Fund's shares.
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
- ------------------- ----- ------------ -------
Waddell & Reed Class Y %
Financial, Inc.
Savings & Investment Plan
6300 Lamar Avenue
Overland Park KS 66201
Torchmark Corporation Class Y
Savings & Investment Plan
2001 Third Avenue South
Birmingham AL 35233
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is derived
from the dividends, interest and earned discount on the securities the Fund
holds, less expenses (which will vary by class). The second source is net
realized capital gains, which are derived from the proceeds received from the
Fund's sale of securities at a price higher than the Fund's tax basis (usually
cost) in such securities, less losses from sales of securities at a price lower
than the Fund's basis therein these gains can be either long-term or short-term,
depending on how long the Fund has owned the securities before it sells them.
The 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
64
<PAGE>
gains from certain foreign currency transactions are called dividends.
The Fund pays distributions from net realized capital gains (the excess of
net long-term capital gains over net short-term capital losses). It may or may
not have such gains, depending on whether securities are sold and at what price.
If the Fund has net realized capital gains, it will pay distributions once each
year, in the latter part of the fourth calendar quarter, except to the extent it
has net capital losses carried over from a prior year or years to offset the
gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you want cash
for your dividends and distributions, however, a total dividend and/or
distribution amount less than ten dollars will be automatically paid in shares
of the Fund of the same class as that with respect to which they were paid (ii)
you want your dividends and distributions paid in shares of the Fund of the same
class as that with respect to which they were paid, or (iii) you want cash for
your dividends. However, a total dividend amount less than ten dollars will be
automatically paid in shares of the Fund of the same class as that with respect
to which it was paid and want your distributions paid in shares of the Fund of
the same class as that with respect to which they were paid. You can change your
instructions at any time. If you give no instructions, your dividends and
distributions will be paid in shares of the Fund of the same class as that with
respect to which they were paid. All payments in shares are at net asset value
without any sales charge. The net asset value used for this purpose is that
computed as of the record date for the dividend or distribution, although this
could be changed by the Board of Directors.
Even if you get dividends and distributions on Fund shares in cash, you can
thereafter reinvest them (or distributions only) in shares of the Fund at net
asset value (i.e., no sales charge) next determined after receipt by Waddell &
Reed, Inc. of the amount clearly identified as a reinvestment. The reinvestment
must be within 45 days after the payment.
TAXES
General
The Fund has qualified for treatment as a regulated investment company
("RIC") under the Code, so that it is relieved of Federal income tax on that
part of its investment company taxable income (consisting generally of taxable
net investment income, net short-term capital gains and net gains from certain
foreign currency transactions) that is distributed to its
65
<PAGE>
shareholders. To continue to qualify as a RIC, the Fund must distribute to its
shareholders for each taxable year at least 90% of the sum of its investment
company taxable income ("Distribution Requirement") and must meet several
additional requirements. These requirements include the following: (1) the Fund
must derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures contracts or forward contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. Government securities, securities of other RICs and other
securities that are limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities ("50%
Diversification Test"); and (3) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its total assets may be invested
in securities (other than U.S. Government securities or the securities of other
RICs) of any one issuer.
If the Fund failed to qualify for treatment as a RIC for any taxable year,
(a) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year (even if it distributed that income to its
shareholders) and (b) the shareholders would treat all distributions out of its
earnings and profits, including distributions of net capital gain (the excess of
net long-term capital gain over net short-term capital loss), as dividends (that
is, ordinary income). In addition, the Fund could be required to recognize
unrealized gains, pay substantial taxes and interest, and make substantial
distributions before requalifying for RIC treatment.
Dividends and distributions declared by the Fund in December of any year
and payable to its shareholders of record on a date in that month are deemed to
have been paid by the Fund and received by the shareholders on December 31 of
that year if they are paid by the Fund during the following January.
Accordingly, those dividends and distributions will be taxed to the shareholders
for the year in which that December 31 falls.
If 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 investor will receive some portion of the purchase
price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of
66
<PAGE>
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 pay sufficient
dividends and distributions each year to avoid imposition of the Excise Tax. The
Code permits the Fund to defer into the next calendar year net capital losses
incurred between November 1 and the end of the current calendar year.
Income from Foreign Securities
Dividends and interest received, and gains realized, by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
returns on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation other than a "controlled foreign
corporation" (i.e., a foreign corporation in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which the Fund is a U.S. shareholder that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive;
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, a Fund will be
subject to Federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on disposition of the stock (collectively
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gains -- which
probably would have to be distributed by the Fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if those earnings and
gains were not distributed to the Fund by the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
67
<PAGE>
The Fund may elect to "mark-to-market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years. The Fund's adjusted basis in each PFIC's stock with respect
to which it makes this election will be adjusted to reflect the amounts of
income included and deductions taken under the election. Regulations proposed in
1992 provide a similar election with respect to the stock of certain PFICs.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of debt securities denominated in a foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest, dividends or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally are treated
as ordinary income or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its shareholders.
Income from Options, Futures and Forward Currency Contracts and Foreign
Currencies
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures contracts and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the amount, character and timing of recognition of the gains and losses the Fund
realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures and forward currency contracts 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.
Any income the Fund earns from writing options is treated as short-term
capital gains. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or
68
<PAGE>
loss based on the difference between the premium it received for the option it
wrote and the premium it pays for the option it buys. If an option written by
the Fund lapses without being exercised, the premium it received also will be a
short-term capital 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.
Certain options, futures contracts and forward currency contracts in which
the Fund may invest may be "section 1256 contracts." Section 1256 contracts held
by the Fund at the end of its taxable year, other than contracts subject to a
"mixed straddle" election made by the Fund, are "marked-to-market" (that is,
treated as sold at that time for their fair market value) for Federal income tax
purposes, with the result that unrealized gains or losses are treated as though
they were realized. Sixty percent of any net gains or losses recognized on these
deemed sales, and 60% of any net realized gains or losses from any actual sales
of section 1256 contracts, are treated as long-term capital gains or losses, and
the balance is treated as short-term capital gains or losses. That 60% portion
will qualify for the 20% (10% for taxpayers in the 15% marginal tax bracket)
maximum tax rate on net capital gains enacted by the Taxpayer Relief Act of
1997. Section 1256 contracts also may be marked-to-market for purposes of the
Excise Tax and for other purposes. The Fund may need to distribute any
mark-to-market gains to its shareholders to satisfy the Distribution Requirement
and/or avoid imposition of the Excise Tax, even though it may not have closed
the transactions and received cash to pay the distributions.
Code section 1092 (dealing with straddles) may also affect the taxation of
options and futures contracts in which the Fund may invest. That section defines
a "straddle" as offsetting positions with respect to personal property; for
these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. The regulations under section
1092 also provide certain "wash sale" rules that apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the Fund
makes certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions will be determined under
rules that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.
If the Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect
69
<PAGE>
to any stock, debt instrument (other than "straight debt") or partnership
interest the fair market value of which exceeds its adjusted basis -- and enters
into a "constructive sale" of the same or substantially similar property, the
Fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or futures or forward
currency contract entered into by the Fund or a related person with respect to
the same or substantially similar property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially similar property will be deemed a
constructive sale.
Zero Coupon and Payment-in-Kind Securities
The Fund may acquire zero coupon or other securities issued with IOD. As
the holder of those securities, the Fund must include in its income the IOD that
accrues on the securities during the taxable year, even if the Fund receives no
corresponding payment on the securities during the year. Similarly, the Fund
must include in its gross income securities it receives as "interest" on
payment-in-kind securities. Because the Fund annually must distribute
substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, in order to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax, it may be required in a
particular year to distribute as a dividend an amount that is greater than the
total amount of cash it actually receives. Those distributions will be made from
the Fund's cash assets or from the proceeds of sales of portfolio securities, if
necessary. The Fund may realize capital gains or losses from those sales, which
would increase or decrease its investment company taxable income and/or net
capital gains.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management Agreement
is to arrange the purchase and sale of securities for the portfolio of 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 or WRIMCO may otherwise
combine orders for the Fund with those of other funds in the United Group,
Target/United Funds, Inc. and Waddell & Reed Funds, Inc. or other accounts for
which it has investment discretion.
70
<PAGE>
Transactions effected pursuant to such combined orders are averaged as to price
and allocated in accordance with the purchase or sale orders actually placed for
each fund or advisory account, except where the combined order is not filled
completely. In this case, WRIMCO will ordinarily allocate the transaction pro
rata based on the orders placed. Sharing in large transactions could affect the
price the Fund pays or receives or the amount it buys and sells. However,
sometimes a better negotiated commission is available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is authorized to
engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution and/or
research services and other services including pricing or quotation services
directly or through others ("research and brokerage services") considered by
WRIMCO to be useful or desirable for its investment management of the Fund
and/or the other funds and accounts over which WRIMCO has investment discretion.
Research and brokerage services are, in general, defined by reference to
Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers, (ii) furnishing
analyses and reports, or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or brokerage
services may be higher than another qualified broker would charge for effecting
comparable transactions if a good faith determination is made by WRIMCO that the
commission is reasonable in relation to the research or brokerage services
provided. Subject to the foregoing considerations WRIMCO may also consider sales
of Fund shares as a factor in the selection of broker-dealers to execute
portfolio transactions. No allocation of brokerage or principal business is made
to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of
71
<PAGE>
WRIMCO, and investment research received for the commissions of those other
accounts may be useful both to the Fund and one or more of such other accounts.
To the extent that electronic or other products provided by such brokers to
assist WRIMCO in making investment management decisions are used for
administration of other non-research purposes, a reasonable allocation of the
cost of the product attributable to its non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party at the
instance of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of WRIMCO;
serves to make available additional views for consideration and comparisons; and
enables WRIMCO to obtain market information on the price of securities held in
the Fund's portfolio or being considered for purchase.
The Fund may also use its brokerage to pay for pricing or quotation
services to value securities. During the Fund's fiscal years ended March 31,
1999, 1998 and 1997, it paid brokerage commissions of $457,817, $271,486 and
$205,914, 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 fiscal year ended March 31, 1999, the transactions, other
than principal transactions, which were directed to broker-dealers who provided
research as well as execution totaled $179,313,412 on which $261,041 in
brokerage commissions were paid. These transactions were allocated to these
broker-dealers by the internal allocation procedures described above.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
OTHER INFORMATION
The Shares of the Fund
The Fund offers four classes of shares: Class A, Class B, Class C and Class
Y. Each class represents an interest in the same assets of the Fund and differ
as follows: each class of shares has exclusive voting rights on matters
pertaining to matters appropriately limited to that class; Class A shares are
subject to an initial sales charge and to an ongoing distribution and/or
72
<PAGE>
service fee; Class B and Class C are subject to a contingent deferred sales
charge and to ongoing distribution and service fees; Class B shares convert in
the eighth year to Class A shares; and Class Y shares, which are designated for
institutional investors, have no sales charge nor ongoing distribution and/or
service fee; each class may bear differing amounts of certain class-specific
expenses; and each class has a separate exchange privilege. The Fund does not
anticipate that there will be any conflicts between the interests of holders of
the different classes of shares of the Fund by virtue of those classes. On an
ongoing basis, the Board of Directors will consider whether any such conflict
exists and, if so, take appropriate action. Each share of the Fund is entitled
to equal voting, dividend, liquidation and redemption rights, except that due to
the differing expenses borne by the four classes, dividends and liquidation
proceeds of Class B and Class C shares are expected to be lower than for Class A
shares, which in turn are expected to be lower than for Class Y shares of the
Fund. Each fractional share of a class has the same rights, in proportion, as a
full share of that class. Shares are fully paid and nonassessable when
purchased.
The Fund does not hold annual meetings of shareholders; however, certain
significant corporate matters, such as the approval of a new investment advisory
agreement or a change in fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon receipt
by the Fund of a request in writing signed by shareholders holding not less than
25% of all shares entitled to vote at such meeting, provided certain conditions
stated in the bylaws are met. There will normally be no meeting of the
shareholders for the purpose of electing directors until such time as less than
a majority of directors holding office have been elected by shareholders, at
time which the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the 1940 Act
applies to the Fund, the directors are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
director when requested in writing to do so by the shareholders of record of not
less than 10% of the Fund's outstanding shares.
Each share (regardless of class) has one vote. All shares of the Fund vote
together as a single class, except as to any matter for which a separate vote of
any class is required by the 1940 Act, and except as to any matter which affects
the interests of one or more particular classes, in which case only the
shareholders of the affected classes are entitled to vote, each as a separate
class.
73
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities which
the Fund may use. The Fund may also use ratings provided by other nationally
recognized statistical rating organizations in determining the securities
eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. An S&P
corporate bond rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment of
creditworthiness may take into consideration obligors such as guarantors,
insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to pay
interest and repay principal is very strong, and debt rated AA differs from AAA
issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the
74
<PAGE>
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
75
<PAGE>
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. It is used when interest payments
or principal payments are not made on a due date even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace periods. The D rating will also be used upon a filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "investment grade" ratings)
are generally regarded as eligible for bank investment. In addition, the laws of
various states governing legal investments may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable MIS
rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be
76
<PAGE>
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
DESCRIPTION OF PREFERRED STOCK RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. An S&P
preferred stock rating is an assessment of the capacity and willingness of an
issuer to pay preferred stock dividends and any applicable sinking fund
obligations. A preferred stock rating differs from a bond rating inasmuch as it
77
<PAGE>
is assigned to an equity issue, which issue is intrinsically different from, and
subordinated to, a debt issue. Therefore, to reflect this difference, the
preferred stock rating symbol will normally not be higher than the debt rating
symbol assigned to, or that would be assigned to, the senior debt of the same
issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA -- This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A -- An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB -- An issue rated BBB is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB, B, CCC -- Preferred stock rated BB, B, and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC -- The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
78
<PAGE>
C -- A preferred stock rated C is a non-paying issue.
D -- A preferred stock rated D is a non-paying issue with the issuer in
default on debt instruments.
NR -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-) -- To provide more detailed indications of preferred
stock quality, the rating from AA to CCC may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
A preferred stock rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information or based on other circumstances.
Moody's Investors Service, Inc. Because of the fundamental differences
between preferred stocks and bonds, a variation of MIS' familiar bond rating
symbols is used in the quality ranking of preferred stock. The symbols are
designed to avoid comparison with bond quality in absolute terms. It should
always be borne in mind that preferred stock occupies a junior position to bonds
within a particular capital structure and that these securities are rated within
the universe of preferred stocks.
Note: MIS applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Preferred stock rating symbols and their definitions are as follows:
aaa -- An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is a
79
<PAGE>
reasonable assurance the earnings and asset protection will remain relatively
well-maintained in the foreseeable future.
a -- An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the aaa
and aa classification, earnings and asset protection are, nevertheless, expected
to be maintained at adequate levels.
baa -- An issue which is rated baa is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba -- An issue which is rated ba is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b -- An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated caa is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca -- An issue which is rated ca is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
c -- This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
80
<PAGE>
22. Financial Statements
--------------------
(a) Financial Statements -- United New Concepts Fund, Inc.
Included in Part B:
-------------------
As of March 31, 1999
Statement of Assets and Liabilities
For the fiscal year ended March 31, 1999
Statement of Operations
For each of the two years in the period ended March 31, 1999
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of March 31, 1999
Report of Independent Accountants
<PAGE>
THE INVESTMENTS OF
UNITED NEW CONCEPTS FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS
Apparel and Accessory Stores - 0.39%
Children's Place Retail Stores, Inc. (The)* ............................ 142,300 $ 3,837,653
Automotive Dealers and Service Stations - 2.44%
O'Reilly Automotive, Inc.* ............................................. 537,750 24,047,508
Building Materials and Garden Supplies - 0.75%
Fastenal Company ....................................................... 210,000 7,356,562
Business Services - 24.90%
America Online, Inc.* .................................................. 500,000 73,000,000
Carreker-Antinori, Inc.* ............................................... 330,000 2,248,125
Cerner Corporation* .................................................... 1,000,000 16,000,000
Citrix Systems, Inc.* .................................................. 600,000 22,837,500
Concord EFS, Inc.* ..................................................... 569,530 15,662,075
Dendrite International, Inc.* .......................................... 600,000 13,556,250
Getty Images, Inc.* .................................................... 459,600 9,637,237
Inktomi Corporation* ................................................... 60,000 5,137,500
Intuit Inc.* ........................................................... 400,000 40,687,500
Learning Company, Inc. (The)* .......................................... 400,000 11,600,000
MemberWorks Incorporated* .............................................. 275,000 9,951,563
National Data Corporation .............................................. 250,000 10,500,000
Transaction Systems Architects, Inc.,
Class A* ............................................................ 300,000 10,809,375
Verity, Inc.* .......................................................... 100,000 3,343,750
Total ............................................................... 244,970,875
Chemicals and Allied Products - 3.06%
Forest Laboratories, Inc.* ............................................. 180,000 10,147,500
Genzyme Corporation - General Division* ................................ 150,000 7,560,937
PAREXEL International Corporation* ..................................... 300,000 6,187,500
SangStat Medical Corporation* .......................................... 500,000 6,171,875
Total ............................................................... 30,067,812
Communication - 14.21%
COLT Telecom Group plc, ADR* ........................................... 460,000 33,048,125
Concentric Network Corporation* ........................................ 280,000 20,956,250
Intermedia Communications of Florida, Inc.* ............................ 150,000 4,012,500
Paging Network, Inc.* .................................................. 1,500,000 6,984,375
PrimaCom AG, ADR* ...................................................... 130,000 2,275,000
Qwest Communications International Inc.*................................ 349,830 25,220,557
Research In Motion Limited (A)* ........................................ 800,000 8,354,078
SkyTel Communications, Inc.* ........................................... 600,000 9,993,750
Western Wireless Corporation, Class A* ................................. 800,000 28,975,000
Total ............................................................... 139,819,635
</TABLE>
See Notes to Schedule of Investments on page .
1
<PAGE>
THE INVESTMENTS OF
UNITED NEW CONCEPTS FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Computer Integrated Systems Design - 7.72%
FORE Systems, Inc.* .................................................... 700,000 $ 13,234,375
Parametric Technology Corporation* ..................................... 600,000 11,868,750
Shared Medical Systems Corporation ..................................... 300,000 16,706,250
Sunquest Information Systems, Inc.* .................................... 291,100 3,247,584
USWeb Corporation* ..................................................... 750,000 30,890,625
Total ............................................................... 75,947,584
Electric, Gas and Sanitary Services - 2.80%
Allied Waste Industries, Inc., New* .................................... 1,300,000 18,768,750
Montana Power Company (The) ............................................ 120,000 8,827,500
Total ............................................................... 27,596,250
Electronic and Other Electric Equipment - 5.14%
Broadcom Corporation, Class A* ......................................... 200,000 12,312,500
Celestica, Inc.* ....................................................... 250,000 8,109,375
Gemstar International Group Limited* ................................... 150,000 11,268,750
hi/fn, inc.* ........................................................... 53,300 1,982,094
Scientific-Atlanta, Inc. ............................................... 250,000 6,812,500
Xilinx, Inc.* .......................................................... 250,000 10,132,812
Total ............................................................... 50,618,031
Engineering and Management Services - 7.23%
AHL Services, Inc.* .................................................... 600,000 12,225,000
Corporate Executive Board Company (The)*................................ 200,000 5,250,000
Incyte Pharmaceuticals, Inc.* .......................................... 640,000 12,820,000
MAXIMUS, Inc.* ......................................................... 500,000 14,562,500
Quintiles Transnational Corp.* ......................................... 699,600 26,278,725
Total ............................................................... 71,136,225
Food and Kindred Products - 2.59%
American Italian Pasta Company, Class A* ............................... 525,000 13,125,000
Packaged Ice, Inc.* .................................................... 370,000 2,300,938
Tootsie Roll Industries, Inc. .......................................... 218,545 10,066,747
Total ............................................................... 25,492,685
Furniture and Home Furnishings Stores - 0.86%
Williams-Sonoma, Inc.* ................................................. 300,000 8,475,000
Health Services - 0.54%
Quorum Health Group, Inc.* ............................................. 527,500 5,324,453
Industrial Machinery and Equipment - 1.34%
Cisco Systems, Inc.* ................................................... 120,000 13,151,250
</TABLE>
See Notes to Schedule of Investments on page .
2
<PAGE>
THE INVESTMENTS OF
UNITED NEW CONCEPTS FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Instruments and Related Products - 1.51%
Bionx Implants, Inc.* .................................................. 450,000 $ 2,503,125
Cerus Corporation* ..................................................... 75,000 1,652,344
STERIS Corporation* .................................................... 400,000 10,650,000
Total ............................................................... 14,805,469
Insurance Carriers - 0.20%
ESG Re Limited ......................................................... 125,000 1,980,469
Miscellaneous Manufacturing Industries - 1.20%
Blyth Industries, Inc.* ................................................ 500,000 11,812,500
Miscellaneous Retail - 1.78%
MSC Industrial Direct Co., Inc., Class A*............................... 600,000 10,200,000
Spiegel, Inc., Class A* ................................................ 135,000 824,766
uBid, Inc.* ............................................................ 100,000 6,512,500
Total ............................................................... 17,537,266
Paper and Allied Products - 0.62%
IVEX Packaging Corporation* ............................................ 400,000 6,075,000
Real Estate - 1.05%
Stewart Enterprises, Inc., Class A ..................................... 644,500 10,332,141
Stone, Clay and Glass Products - 1.75%
Gentex Corporation* .................................................... 800,000 17,250,000
Transportation Equipment - 3.04%
Harley-Davidson, Inc. .................................................. 520,000 29,900,000
Wholesale Trade -- Nondurable Goods - 0.94%
U.S. Foodservice* ...................................................... 199,800 9,290,700
TOTAL COMMON STOCKS - 86.06% $846,825,068
(Cost: $532,356,030)
<CAPTION>
Number of
Contracts
OPTIONS
September 1600 Call Option on Morgan
Stanley High Tech Index,
Expires 9-22-99 ........................................................ 1,101 1,550,908
September 908.50 Put Spread Option on Morgan Stanley
High Tech Index, With Floor Price of 772.2
Expires 9-22-99 ........................................................ 1,101 4,824,436
TOTAL OPTIONS - 0.65% $ 6,375,344
(Cost: $7,907,540)
</TABLE>
See Notes to Schedule of Investments on page .
3
<PAGE>
THE INVESTMENTS OF
UNITED NEW CONCEPTS FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands
<S> <C> <C>
SHORT-TERM SECURITIES
Auto Repair, Services and Parking - 0.88%
PHH Corp.,
5.02%, 4-6-99 ....................................................... $ 8,700 8,693,934
Chemicals and Allied Products - 0.58%
du Pont (E.I.) de Nemours and Company,
4.8%, 4-12-99 ....................................................... 5,685 5,676,662
Communication - 1.21%
Dominion Resources, Inc.,
5.0%, 5-5-99 ........................................................ 12,000 11,943,333
Electric, Gas and Sanitary Services - 4.80%
Bay State Gas Co.,
4.86%, 4-13-99 ...................................................... 4,625 4,617,508
Commonwealth Edison Co.,
5.03%, 4-6-99 ....................................................... 6,700 6,695,319
PS Colorado Credit Corp.,
5.02%, 4-5-99 ....................................................... 11,500 11,493,586
Public Service Electric & Gas Co.,
5.0%, 4-7-99 ........................................................ 12,070 12,059,942
Questar Corp.,
4.87%, 4-8-99 ....................................................... 5,384 5,378,902
Western Resources, Inc.,
5.03%, 4-21-99 ...................................................... 7,000 6,980,439
Total ............................................................... 47,225,696
Engineering and Management Services - 0.43%
Halliburton Co.,
4.84%, 4-21-99 ...................................................... 4,200 4,188,707
Fabricated Metal Products - 0.46%
Danaher Corporation,
4.9388%, Master Note ................................................ 4,551 4,551,000
Food and Kindred Products - 2.27% ConAgra, Inc.:
5.05%, 4-6-99 ....................................................... 3,500 3,497,545
5.02%, 4-9-99 ....................................................... 5,750 5,743,586
General Mills, Inc.,
4.7938%, Master Note ................................................ 13,148 13,148,000
Total ............................................................... 22,389,131
</TABLE>
See Notes to Schedule of Investments on page .
4
<PAGE>
THE INVESTMENTS OF
UNITED NEW CONCEPTS FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands
<S> <C> <C>
SHORT-TERM SECURITIES (Continued)
Instruments and Related Products - 1.94%
Baxter International Inc.:
4.9%, 4-16-99 ....................................................... $14,100 $ 14,071,212
4.9%, 4-21-99 ....................................................... 5,000 4,986,389
Total ............................................................... 19,057,601
Metal Mining - 1.67%
BHP Finance (USA) Inc.,
5.07%, 4-9-99 ....................................................... 16,446 16,427,471
Nondepository Institutions - 0.51%
Ford Motor Credit Company,
4.86%, 4-8-99 ....................................................... 5,000 4,995,275
Personal Services - 0.81%
Block Financial Corp.,
4.84%, 4-20-99 ...................................................... 8,000 7,979,564
TOTAL SHORT-TERM SECURITIES - 15.56% $153,128,374
(Cost: $153,128,374)
TOTAL INVESTMENT SECURITIES - 102.27% $1,006,328,786
(Cost: $693,391,944)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (2.27%) (22,344,398)
NET ASSETS - 100.00% $983,984,388
</TABLE>
See Notes to Schedule of Investments on page .
5
<PAGE>
THE INVESTMENTS OF
UNITED NEW CONCEPTS FUND, INC.
MARCH 31, 1999
Notes To Schedule of Investments
*No income dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside the United States.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
As of March 31, 1999, the following written call option was outstanding (See
Note 6 to financial statements):
<TABLE>
<CAPTION>
Contracts
Underlying Subject Expiration Month/ Premium Market
Index to Call Exercise Price Received Price
--------------- --------- ------------------ ---------- -----------
Morgan Stanley
<S> <C> <C> <C> <C>
High Tech Index 1,101 September 1,044.80 $6,499,725 $13,285,636
</TABLE>
6
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999
(In Thousands, Except for Per Share Amounts)
<TABLE>
<S> <C>
Assets
Investment securities - at value
(Notes 1 and 3) ....................................................................... $1,006,329
Cash ..................................................................................... 76
Receivables:
Investment securities sold............................................................. 14,025
Fund shares sold ...................................................................... 2,644
Dividends and interest ................................................................ 108
Prepaid insurance premium ................................................................ 10
----------
Total assets ........................................................................ 1,023,192
----------
Liabilities
Payable for investment securities purchased............................................... 23,602
Outstanding call options at market (Note 6) .............................................. 13,286
Payable to Fund shareholders ............................................................. 1,845
Accrued transfer agency and dividend
disbursing (Note 2) ................................................................... 243
Accrued service fee (Note 2) ............................................................. 58
Accrued management fee (Note 2) .......................................................... 20
Accrued distribution fee (Note 2) ........................................................ 19
Accrued accounting services fee (Note 2) ................................................. 7
Other .................................................................................... 128
----------
Total liabilities ................................................................... 39,208
----------
Total net assets ................................................................. $ 983,984
==========
Net Assets
$1.00 par value capital stock
Capital stock ......................................................................... $ 103,314
Additional paid-in capital ............................................................ 510,305
Accumulated undistributed income:
Accumulated undistributed net realized gain
on investment transactions .......................................................... 64,214
Net unrealized appreciation in value of
investments ......................................................................... 312,937
Net unrealized depreciation in value of written
call options ........................................................................ (6,786)
----------
Net assets applicable to outstanding units
of capital ....................................................................... $ 983,984
==========
Net asset value per share (net assets divided
by shares outstanding)
Class A ............................................................................... $9.52
Class Y ............................................................................... $9.53
Capital shares outstanding
Class A ............................................................................... 102,046
Class Y ............................................................................... 1,268
Capital shares authorized ................................................................... 300,000
</TABLE>
See notes to financial statements.
7
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended MARCH 31, 1999
(In Thousands)
<TABLE>
<S> <C>
Investment Income (Loss)
Income (Note 1B):
Interest and amortization ............................................................. $ 10,002
Dividends ............................................................................. 502
--------
Total income ........................................................................ 10,504
--------
Expenses (Note 2):
Investment management fee ............................................................. 6,235
Transfer agency and dividend disbursing - Class A...................................... 2,016
Service fee - Class A ................................................................. 1,936
Distribution fee - Class A ............................................................ 141
Accounting services fee ............................................................... 82
Custodian fees ........................................................................ 45
Shareholder servicing - Class Y ....................................................... 17
Audit fees ............................................................................ 16
Legal fees ............................................................................ 9
Other ................................................................................. 318
--------
Total expenses ...................................................................... 10,815
--------
Net investment loss .............................................................. (311)
--------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 3)
Realized net gain on investments ......................................................... 110,614
Realized net loss on foreign currency transactions ....................................... (61)
--------
Realized net gain on investments ...................................................... 110,553
--------
Unrealized appreciation in value of investments
during the period ..................................................................... 45,716
Unrealized depreciation in value of written call
options during the period ............................................................. (6,786)
Unrealized depreciation in value of options
purchased during the period ........................................................... (1,532)
--------
Unrealized appreciation ............................................................... 37,398
--------
Net gain on investments ............................................................. 147,951
--------
Net increase in net assets resulting from
operations .................................................................... $147,640
========
</TABLE>
See notes to financial statements.
8
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the fiscal year
ended March 31,
---------------------------------------
1999 1998
Increase in Net Assets -------------- ------------
<S> <C> <C>
Operations:
Net investment income (loss) ............................... $ (311) $ 414
Realized net gain on investments ........................... 110,553 81,941
Unrealized appreciation .................................... 37,398 192,525
-------- ---------
Net increase in net assets
resulting from operations ............................. 147,640 274,880
-------- ---------
Distributions to shareholders from (Note 1D):*
Net investment income:
Class A .................................................. (348) (750)
Class Y .................................................. (40) (39)
Realized gains on securities transactions:
Class A .................................................. (108,654) (63,226)
Class Y .................................................. (1,329) (969)
-------- ---------
(110,371) (64,984)
-------- ---------
Capital share transactions:
Proceeds from sale of shares:
Class A (45,229,713 and 69,999,164
shares, respectively) ................................. 420,544 1,127,590
Class Y (1,008,266 and 166,671
shares, respectively) ................................. 9,457 2,765
Proceeds from reinvestment of dividend
and/or capital gains distribution:
Class A (12,288,232 and 4,237,797
shares, respectively) ................................. 107,269 63,567
Class Y (156,588 and 67,193
shares, respectively) ................................. 1,367 1,008
Payments for shares redeemed:
Class A (39,822,410 and 68,937,977
shares, respectively).................................. (371,985) (1,120,136)
Class Y (1,033,095 and 243,230
shares, respectively) ................................. (9,638) (3,950)
-------- ---------
Net increase in net assets resulting
from capital share transactions..................... 157,014 70,844
-------- ---------
Total increase ..................................... 194,283 280,740
Net Assets
Beginning of period ........................................... 789,701 508,961
-------- ---------
End of period ................................................. $983,984 $ 789,701
======== =========
Undistributed net investment income $--- $377
==== ====
</TABLE>
*See "Financial Highlights" on pages - .
See notes to financial statements.
9
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:*
<TABLE>
<CAPTION>
For the fiscal year ended March 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......................... $9.24 $6.80 $7.73 $6.13 $5.47
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income (loss) ................ (0.00) 0.01 0.03 0.02 0.02
Net realized and
unrealized gain
(loss) on
investments .................. 1.54 3.29 (0.64) 1.81 1.06
----- ----- ----- ----- -----
Total from investment
operations ...................... 1.54 3.30 (0.61) 1.83 1.08
----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.01) (0.01) (0.03) (0.02) (0.01)
From capital gains .............. (1.25) (0.85) (0.29) (0.21) (0.41)
----- ----- ----- ----- -----
Total distributions................. (1.26) (0.86) (0.32) (0.23) (0.42)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $9.52 $9.24 $6.80 $7.73 $6.13
===== ===== ===== ===== =====
Total return**...................... 17.83% 51.44% -8.38% 30.18% 20.50%
Net assets, end
of period (in
millions)........................ $972 $779 $501 $492 $304
Ratio of expenses
to average net
assets .......................... 1.29% 1.25% 1.27% 1.19% 1.24%
Ratio of net investment
income (loss)to average
net assets ...................... -0.04% 0.06% 0.39% 0.29% 0.30%
Portfolio turnover
rate ............................ 48.95% 38.51% 38.82% 27.75% 44.01%
</TABLE>
*Per-share and share amounts have been adjusted retroactively to reflect the
100% stock dividend effected June 26, 1998.
**Total return calculated without taking into account the sales load deducted on
an initial purchase.
See notes to financial statements.
10
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:*
<TABLE>
<CAPTION>
For the
For the fiscal period
year ended March 31, from 9/6/95**
--------------------- through
1999 1998 1997 3/31/96
------ ------ ------ --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $9.25 $6.80 $7.74 $7.57
----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.03 0.03 0.05 0.02
Net realized and
unrealized gain (loss)
on investments................ 1.54 3.30 (0.65) 0.38
----- ----- ----- -----
Total from investment
operations....................... 1.57 3.33 (0.60) 0.40
----- ----- ----- -----
Less distributions:
From net investment
income........................ (0.04) (0.03) (0.05) (0.02)
From capital gains............... (1.25) (0.85) (0.29) (0.21)
----- ----- ----- -----
Total distributions................. (1.29) (0.88) (0.34) (0.23)
----- ----- ----- -----
Net asset value,
end of period.................... $9.53 $9.25 $6.80 $7.74
===== ===== ===== =====
Total return ....................... 18.29% 51.83% -8.12% 5.44%
Net assets, end of
period (in
millions) ....................... $12 $11 $8 $7
Ratio of expenses
to average net
assets........................... 0.95% 0.96% 0.97% 0.96%***
Ratio of net
investment income
to average net
assets........................... 0.29% 0.35% 0.69% 0.54%***
Portfolio
turnover rate.................... 48.95% 38.51% 38.82% 27.75%***
</TABLE>
*Per-share and share amounts have been adjusted retroactively to reflect the
100% stock dividend effected June 26, 1998.
**Commencement of operations.
***Annualized.
See notes to financial statements.
11
<PAGE>
UNITED NEW CONCEPTS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
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. Its investment objective is to seek growth through a diversified
holding of securities issued primarily by 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. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a pricing service. Convertible bonds are valued
using this pricing system only on days when there is no sale reported.
Stocks which are traded over-the-counter are priced using the Nasdaq Stock
Market, which provides information on bid and asked prices quoted by major
dealers in such stocks. Short-term debt securities are valued at amortized
cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend date.
Interest income is recorded on the accrual basis. See Note 3 -- Investment
Security Transactions.
C. Foreign currency translations -- All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars daily. Purchases and
sales of investment securities and accruals of income and expenses are
translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates. The
Corporation combines fluctuations from currency exchange rates and
fluctuations in market value when computing net realized and unrealized
gain or loss from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of its
taxable income and capital gains to its shareholders and otherwise qualify
as a regulated investment company under Subchapter M of the Internal
Revenue Code. In
12
<PAGE>
addition, the Fund intends to pay distributions as required to avoid
imposition of excise tax. Accordingly, provision has not been made for
Federal income taxes. See Note 4 -- Federal Income Tax Matters.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the business day following record date. Net
investment income dividends and capital gains distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are due to differing
treatments for items such as deferral of wash sales and post-October
losses, foreign currency transactions, net operating losses and expiring
capital loss carryovers. At March 31, 1999, the Fund reclassified $310,712
between accumulated undistributed net investment income and accumulated
undistributed net realized gain on investment transactions. Net investment
income, net realized gains and net assets were not affected by this change.
F. Options -- See Note 6 -- Options.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management And Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of 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 $21.5 billion of
combined net assets at March 31, 1999) at annual rates of .51% of the first $750
million of combined net assets, .49% on that amount between $750 million and
$1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between $2.25
billion and $3 billion, .43% between $3 billion and $3.75 billion, .40% between
$3.75 billion and $7.5 billion, .38% between $7.5 billion and $12 billion, and
.36% of that amount over $12 billion. The Fund accrues and pays this fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of the Fund. For
these services, the Fund pays WARSCO a monthly fee of one-twelfth of the annual
fee shown in the following table.
13
<PAGE>
<TABLE>
<CAPTION>
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
For Class A shares, the Fund also pays WARSCO a monthly per account
charge for transfer agency and dividend disbursement services of $1.3125 for
each shareholder account which was in existence at any time during the prior
month, plus $0.30 for each account on which a dividend or distribution of cash
or shares had a record date in that month. With respect to Class Y shares, the
Fund pays WARSCO a monthly fee at an annual rate of .15% of the average daily
net assets of the class for the preceding month. The Fund also reimburses W&R
and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross
sales commissions for Class A shares (which are not an expense of the Fund) of
$4,777,199, out of which W&R paid sales commissions of $2,779,296 and all
expenses in connection with the sale of Fund shares, except for registration
fees and related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $29,364, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding
company, and a direct subsidiary of Waddell & Reed Financial Services, Inc., a
holding company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and
short-term securities, aggregated $380,112,854 while proceeds from maturities
and sales aggregated $326,857,921. Purchases of options aggregated $7,907,540
while proceeds from
14
<PAGE>
options aggregated $6,499,725. Purchases of short-term securities aggregated
$3,062,388,575 while proceeds from maturities and sales aggregated
$3,068,678,554. No U.S. Government securities were bought or sold during the
period ended March 31, 1999.
For Federal income tax purposes, cost of investments owned at March 31,
1999 was $693,391,944, resulting in net unrealized appreciation of $312,936,842,
of which $356,464,820 related to appreciated securities and $43,527,978 related
to depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net
income of $110,303,268 during the year ended March 31, 1999, of which a portion
was paid to shareholders during the period ended March 31, 1999. Remaining
capital gain net income will be distributed to the Fund's shareholders.
NOTE 5 -- Multiclass Operations
On July 18, 1995, the Fund was authorized to offer two classes of
shares, Class A and Class Y, each of which has equal rights as to assets and
voting privileges. Class Y shares are not subject to a sales charge on
purchases; they are not subject to a Rule 12b-1 Distribution and Service Plan
and have a separate transfer agency and dividend disbursement services fee
structure. A comprehensive discussion of the terms under which shares of either
class are offered is contained in the Prospectus and the Statement of Additional
Information for the Fund.
Income, non-class specific expenses, and realized and unrealized gains
and losses are allocated daily to each class of shares based on the value of
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
NOTE 6 -- Options
When the Fund writes (sells) an option, an amount equal to the premium
received by the Fund is recorded as a liability. The amount of the liability is
subsequently adjusted to reflect the current market value of the option written.
The current market value of an option is the last sales price on the principal
exchange on which the option is traded, or in the absence of transactions, the
mean between the bid and asked prices or at a value supplied by a broker-dealer.
When an option expires on its stipulated expiration date or the Fund enters into
a closing purchase transaction, the Fund realizes a gain (or loss if the cost of
a closing purchase transaction exceeds the premium received when the call option
was sold) and the liability related to such option is extinguished. When a call
option is exercised, the premium is added to the proceeds from the sale of the
underlying security in determining whether the Fund has realized a gain or loss.
For the Fund, when a put written is exercised, the cost basis of the securities
purchased by the Fund is reduced by the amount of the premium.
15
<PAGE>
Options purchased by the Fund are accounted for in the same manner as
marketable portfolio securities. The cost of portfolio securities acquired
through the exercise of call options is increased by the premium paid to
purchase the call. The proceeds from securities sold through the exercise of put
options are decreased by the premium paid to purchase the put.
Transactions in call options written were as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
--------- --------
<S> <C> <C>
Outstanding at March 31, 1998 .................................... --- $ ---
Options written .................................................. 1,101 6,499,725
Options terminated in closing
purchase transactions ....................................... --- ---
Options exercised ................................................ --- ---
Options expired .................................................. --- ---
----- ----------
Outstanding at March 31, 1999 .................................... 1,101 $6,499,725
===== ==========
</TABLE>
NOTE 7 -- Stock Dividend
The Fund's Board of Directors approved on February 11, 1998 a stock
dividend of 100% effected on June 26, 1998. Authorized shares of the Fund were
accordingly increased by 100,000,000 shares.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United New Concepts Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United New Concepts Fund, Inc. (the "Fund") as
of March 31, 1999, and the related statement of operations for the fiscal year
then ended, the statements of changes in net assets for each of the two fiscal
years in the period then ended, and the financial highlights for each of the
five fiscal years in the period then ended. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1999, by correspondence with the custodian and brokers or other alternative
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of United
New Concepts Fund, Inc. as of March 31, 1999, the results of its operations for
the fiscal year then ended, the changes in its net assets for each of the two
fiscal years in the period then ended, and the financial highlights for each of
the five fiscal years in the period then ended, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
May 7, 1999
17
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits:
(a) Articles of Incorporation, as amended, filed by EDGAR on June 29, 1998
as EX-99.B1-charter to Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A*
Articles Supplementary, filed by EDGAR on May 19, 1995 as
EX-99.B1-ncartsup to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A*
Articles Supplementary attached hereto as EX-99.B(a)ncsuppbc
(b) Bylaws, as amended, filed by EDGAR on June 27, 1996 as
EX-99.B2-ncbylaw to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A*
Amendment to Bylaws filed by EDGAR on April 30, 1999 as
EX-99.B(b)ncbylaw2 to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A*
(c) Not applicable
(d) Investment Management Agreement filed by EDGAR on May 19, 1995
EX-99.B5-ncima to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A*
Assignment of the Investment Management filed by EDGAR on May 19, 1995
as EX-99.B5-ncassign to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A*
Fee Schedule (Exhibit A) to the Investment Management Agreement, as
amended, filed by EDGAR on June 28, 1999 as EX-99.B(d)ncimafee to
Post-Effective Amendment No. 23 to the Registration Statement on Form
N-1A*
(e) Underwriting Agreement, filed by EDGAR on May 19, 1995 as
EX-99.B6-ncua to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A*
(f) Not applicable
(g) Custodian Agreement, filed by EDGAR on April 30, 1999 as
EX-99.B(g)-ncca to Post-Effective Amendment No. 22 to the Registration
Statement on Form N-1A*
<PAGE>
(h) Shareholder Servicing Agreement, as amended, filed by EDGAR on April
30, 1999 as EX-99.B(h)-ncssa to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A*
Compensation table (Exhibit B) to the Shareholder Servicing Agreement,
as amended, attached hereto as EX-99.B(h)ncssacom
Fund Class A application, filed by EDGAR on May 30, 1997 as
EX-99.B9-ncappca to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A*
Fund Class Y application, filed by EDGAR on May 19, 1995 as
EX-99.B9-ncappcy to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A*
Fund NAV application, filed by EDGAR on May 19, 1995 as
EX-99.B9-ncappnav to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A*
Class Y Letter of Understanding, filed by EDGAR on June 27, 1996, as
EX-99.B9-nclou to Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A*
Accounting Services Agreement filed by EDGAR on May 19, 1995 as
EX-99.B9-ncasa to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A*
Service Agreement filed by EDGAR on July 30, 1993 as Exhibit (b)(15)
to Post-Effective Amendment No. 16 to the Registration Statement on
Form N-1A*
Amendment to Service Agreement, filed by EDGAR on May 19, 1995
EX-99.B9-ncsaa1 to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A*
Amendment to Service Agreement, filed by EDGAR on May 19, 1995 as
EX-99.B9-ncsaa2 to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A*
(i) Opinion and Consent of Counsel attached hereto as EX-99.B(i)nclegopn
(j) Consent of Deloitte & Touche LLP, Independent Accountants, attached
hereto as EX-99.B(j)-ncconsnt
(k) Not applicable
(l) Confirmation of Agreement with initial shareholder, Waddell & Reed,
Inc., filed December 9, 1983 as Exhibit b(13) to Post-Effective
Amendment No. 2 to Registration Statement on Form N-1A*
<PAGE>
(m) Service Plan, as restated, filed by EDGAR on May 19, 1995 as
EX-99.B15-ncspca to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A*
Distribution and Service Plan for Class A shares filed by EDGAR on
June 29, 1998 as EX-99.B15-ncdsp to Post-Effective Amendment No. 21 to
the Registration Statement on Form N-1A*
Distribution and Service Plan for Class B shares attached hereto as
EX-99.B(m)ncdspb
Distribution and Service Plan for Class C shares attached hereto as
EX-99.B(m)ncdspc
(n) Not applicable
(o) Multiple Class Plan, as amended, attached hereto as EX-99.B(o)ncmcp
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Section (7) of Article SEVENTH of the Articles of
Incorporation of Registrant, as amended, filed May 19, 1995 as
EX-99.B1-charter to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A*; and to Article IV of the Underwriting Agreement,
filed May 19, 1995 as EX-99.B6-ncua to Post-Effective Amendment No. 18 to
the Registration Statement on Form N-1A*; each of which provide
indemnification. Also refer to Section 2-418 of the Maryland General
Corporation Law regarding indemnification of directors, officers and
employees and agents.
26. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the investment manager of
the Registrant. Under the terms of an Investment Management Agreement
between Waddell & Reed, Inc. and the Registrant, Waddell & Reed, Inc. is to
provide investment management services to the Registrant. Waddell & Reed,
Inc. assigned its investment management duties under this agreement to
Waddell & Reed Investment Management Company on January 8, 1992. Waddell &
Reed Investment Management Company is a corporation which is not engaged in
any business other than the provision of investment management services to
those registered investment companies described in Part A and Part B of
this Post-
<PAGE>
Effective Amendment and to other investment advisory clients.
Each director and executive officer of Waddell & Reed Investment Management
Company has had as his sole business, profession, vocation or employment
during the past two years only his duties as an executive officer and/or
employee of Waddell & Reed Investment Management Company or its
predecessors, except as to persons who are directors and/or officers of the
Registrant and have served in the capacities shown in the Statement of
Additional Information of the Registrant. The address of the officers is
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to the Prospectus and SAI of this Registrant.
27. Principal Underwriter
---------------------
(a) Waddell & Reed, Inc. is the principal underwriter to the Registrant.
It is also the principal underwriter to the following investment
companies:
United Funds, Inc.
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
Waddell & Reed Funds, Inc.
Advantage I
Advantage II
Advantage Plus
(b) The information contained in the underwriter's application on Form BD,
under the Securities Exchange Act of 1934, is herein incorporated by
reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or any
affiliated person of such affiliated person.
<PAGE>
28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant, each of
whose business address is Post Office Box 29217, Shawnee Mission, Kansas
66201-9217.
29. Management Services
-------------------
There is no service contract other than as discussed in Parts A and B of
this Post-Effective Amendment and listed in response to Items 23.(h) and
23.(m) hereof.
30. Undertakings
------------
Not applicable
- ---------------------------------
*Incorporated herein by reference
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED FUNDS,
INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND, INC.,
UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC.,
TARGET/UNITED FUNDS, INC. AND WADDELL & REED FUNDS, INC. (each hereinafter
called the "Corporation"), and certain directors and officers for the
Corporation, do hereby constitute and appoint KEITH A. TUCKER, ROBERT L.
HECHLER, HELGE K. LEE and KRISTEN A. RICHARDS, and each of them individually,
their true and lawful attorneys and agents to take any and all action and
execute any and all instruments which said attorneys and agents may deem
necessary or advisable to enable each Corporation to comply with the Securities
Act of 1933 and/or the Investment Company Act of 1940, as amended, and any
rules, regulations, orders or other requirements of the United States Securities
and Exchange Commission thereunder, in connection with the registration under
the Securities Act of 1933 and/or the Investment Company Act of 1940, as
amended, including specifically, but without limitation of the foregoing, power
and authority to sign the names of each of such directors and officers in
his/her behalf as such director or officer as indicated below opposite his/her
signature hereto, to any Registration Statement and to any amendment or
supplement to the Registration Statement filed with the Securities and Exchange
Commission under the Securities Act of 1933 and/or the Investment Company Act of
1940, as amended, and to any instruments or documents filed or to be filed as a
part of or in connection with such Registration Statement or amendment or
supplement thereto; and each of the undersigned hereby ratifies and confirms all
that said attorneys and agents shall do or cause to be done by virtue hereof.
Date: May 19, 1999 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
<TABLE>
<S> <C> <C>
/s/ Keith A. Tucker Chairman of the Board May 19, 1999
- ------------------- -------------
Keith A. Tucker
/s/ Robert L. Hechler President, Principal May 19, 1999
- --------------------- Financial Officer and -------------
Robert L. Hechler Director
/s/ Henry J. Herrmann Vice President and May 19, 1999
- -------------------- Director -------------
Henry J. Herrmann
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Theodore W. Howard Vice President, Treasurer May 19, 1999
- ---------------------- and Principal Accounting -------------
Theodore W. Howard Officer
/s/ James M. Concannon Director May 19, 1999
- ---------------------- -------------
James M. Concannon
/s/ John A. Dillingham Director May 19, 1999
- ---------------------- -------------
John A. Dillingham
/s/ David P. Gardner Director May 19, 1999
- ---------------------- -------------
David P. Gardner
/s/ Linda K. Graves Director May 19, 1999
- ---------------------- -------------
Linda K. Graves
/s/ Joseph Harroz, Jr. Director May 19, 1999
- ---------------------- -------------
Joseph Harroz, Jr.
/s/ John F. Hayes Director May 19, 1999
- ---------------------- -------------
John F. Hayes
/s/ Glendon E. Johnson Director May 19, 1999
- ---------------------- -------------
Glendon E. Johnson
/s/ William T. Morgan Director May 19, 1999
- ---------------------- -------------
William T. Morgan
/s/ Ronald C. Reimer Director May 19, 1999
- ---------------------- -------------
Ronald C. Reimer
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Frank J. Ross, Jr. Director May 19, 1999
- ---------------------- -------------
Frank J. Ross, Jr.
/s/ Eleanor B. Schwartz Director May 19, 1999
- ----------------------- -------------
Eleanor B. Schwartz
/s/ Frederick Vogel III Director May 19, 1999
- ----------------------- -------------
Frederick Vogel III
</TABLE>
Attest:
/s/ Kristen A. Richards
- -----------------------
Kristen A. Richards
Assistant Secretary
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment pursuant to
Rule 485(a) of the Securities Act of 1933 and the Registrant has duly caused
this Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Overland Park, and State of Kansas, on
the 2nd day of July, 1999.
UNITED NEW CONCEPTS FUND, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C> <C>
/s/ Keith A. Tucker* Chairman of the Board July 2, 1999
- ------------------------ ------------
Keith A. Tucker
/s/ Robert L. Hechler* President, Principal July 2, 1999
- ------------------------ Financial Officer and ------------
Robert L. Hechler Director
/s/ Henry J. Herrmann* Vice President and July 2, 199
- ------------------------ Director ------------
Henry J. Herrmann
/s/ Theodore W. Howard* Vice President, Treasurer July 2, 1999
- ------------------------ and Principal Accounting ------------
Theodore W. Howard Officer
/s/ James M. Concannon* Director July 2, 1999
- ------------------------ ------------
James M. Concannon
/s/ John A. Dillingham* Director July 2, 1999
- ------------------------ ------------
John A. Dillingham
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ David P. Gardner* Director July 2, 1999
- ------------------------ ------------
David P. Gardner
/s/ Linda K. Graves* Director July 2, 1999
- ------------------------ ------------
Linda K. Graves
/s/ Joseph Harroz, Jr.* Director July 2, 1999
- ------------------------ ------------
Joseph Harroz, Jr.
/s/ John F. Hayes* Director July 2, 1999
- ------------------------ ------------
John F. Hayes
/s/ Glendon E. Johnson* Director July 2, 1999
- ------------------------ ------------
Glendon E. Johnson
/s/ William T. Morgan* Director July 2, 1999
- ------------------------ ------------
William T. Morgan
/s/ Ronald C. Reimer* Director July 2, 1999
- ------------------------ ------------
Ronald C. Reimer
/s/ Frank J. Ross, Jr.* Director July 2, 1999
- ------------------------ ------------
Frank J. Ross, Jr.
/s/ Eleanor B Schwartz* Director July 2, 1999
- ------------------------ ------------
Eleanor B. Schwartz
/s/ Frederick Vogel III* Director July 2, 1999
- ------------------------ ------------
Frederick Vogel III
</TABLE>
<PAGE>
*By
Helge K. Lee
Attorney-in-Fact
ATTEST:
Kristen A. Richards
Assistant Secretary
EX-99.B(a)ncsuppbc
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
UNITED NEW CONCEPTS FUND, INC.
United New Concepts Fund, Inc. (the "Corporation"), a Maryland corporation,
having its principal office in Baltimore, Maryland, hereby certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority vested in the Board of Directors of the
Corporation by Article FIFTH of the Articles of Incorporation of the
Corporation, the Board of Directors has heretofore duly designated, in
accordance with Maryland General Corporation Law, the aggregate number of shares
of capital stock which the Corporation is authorized to issue at Three Hundred
Million (300,000,000) shares of capital stock, (par value $1.00 per share),
amounting in the aggregate to a par value of Three Hundred Million Dollars
($300,000,000.00).
SECOND: Pursuant to the authority vested in the Board of Directors of the
Corporation by Article FIFTH of the Articles of Incorporation of the
Corporation, the Board of Directors, in accordance with Maryland General
Corporation Law, now duly designates and classifies the capital stock of the
Corporation among the classes of the Corporation as follows:
<TABLE>
<S> <C>
Class A 200,000,000 shares
Class Y 50,000,000 shares
Class B 25,000,000 shares
Class C 25,000,000 shares
</TABLE>
The aggregate number of shares of all classes of stock of the Corporation
remains at Three Hundred Million (300,000,000) shares of capital stock, the par
value remains $1.00 per share, and the aggregate value of all authorized stock
remains Three Hundred Million Dollars ($300,000,000.00).
THIRD: The capital stock of the Corporation is divided into classes and
there are no changes in the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption as shares of capital stock as set forth in the
Corporation's Articles of Incorporation and Articles Supplementary thereto,
except as follows:
(1) The capital stock of Class A shares shall be subject to fees,
including a front-end sales load and a Rule 12b-1 fee, as
determined by the Board of Directors of the Corporation from time
to time;
<PAGE>
(2) The capital stock of the Class Y shares shall not be subject to
either a front-end or contingent deferred sales charge or Rule
12b-1 fees and is subject to a shareholder servicing fee which
differs from that of the Class A shares;
(3) To the extent not otherwise set forth in the Corporation's Articles
of Incorporation, each Class or Series of the Corporation shall
have such preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms
and conditions of redemption as shares of capital stock as are
determined by the Corporation's Board of Directors and described in
the Corporation's registration statement under the Securities Act
of 1933 ("1933 Act") or any amendment thereto or any supplement to
a prospectus or statement of additional information contained
therein.
FOURTH: The Corporation is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended.
IN WITNESS WHEREOF, the undersigned Vice President of the Corporation
hereby executes these Articles Supplementary on behalf of the Corporation this
30th day of June, 1999.
----------------------------
Helge K. Lee, Vice President
Attest: _____________________
Kristen A. Richards
Assistant Secretary
The undersigned, Vice President of United New Concepts Fund, Inc. who
executed on behalf said Corporation the foregoing Articles Supplementary, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said Corporation, the foregoing Articles Supplementary to be the act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
UNITED NEW CONCEPTS FUND, INC.
By: ____________________________
Helge K. Lee, Vice President
2
EX-99.B(h)ncssacom
EXHIBIT B
COMPENSATION
Class A Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class B Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class C Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class Y Shares
An amount payable on the first day of each month equal to 1/12 of .15 of 1% of
the average daily net assets of the Class for the preceding month.
EX-99.B(i)nclegopn
July 2, 1999
United New Concepts Fund, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
RE: United New Concepts Fund, Inc.
Post-Effective Amendment No. 24
Dear Sir or Madam:
In connection with the public offering of shares of Capital Stock of United New
Concepts Fund, Inc. (the "Fund"), I have examined such corporate records and
documents and have made such further investigation and examination as I deemed
necessary for the purpose of this opinion.
It is my opinion that the indefinite number of shares of such Capital Stock
covered by the Fund's Registration Statement on Form N-1A, when issued and paid
for in accordance with the terms of the offering, as set forth in the Prospectus
and Statement of Additional Information forming a part of the Registration
Statement, will be, when such Registration shall have become effective, legally
issued, fully paid and non-assessable by the Fund.
I hereby consent to the filing of this opinion as an Exhibit to the said
Registration Statement and to the reference to me in such Statement of
Additional Information.
Yours truly,
Helge K. Lee
General Counsel
HKL/fr
EX-99.B(j)-ncconsnt
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 25 to Registration
Statement No. 2-82587 of United New Concepts Fund, Inc. on Form N-1A of our
report dated May 7, 1999 appearing in the Prospectus, which is part of such
Registration Statement, and to the reference to us under the caption "Financial
Highlights" in such Prospectus.
Deloitte & Touche LLP
Kansas City, Missouri
June 30, 1999
EX-99.B(m)ncdspb
DISTRIBUTION AND SERVICE PLAN
FOR CLASS B SHARES
(Adopted on February 10, 1999)
This Plan is adopted by United New Concepts Fund, Inc. (the "Fund"), pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act") to
provide for payment by the Fund of certain expenses in connection with the
distribution of the Fund's Class B shares, provision of personal services to the
Fund's Class B shareholders and/or maintenance of its Class B shareholder
accounts. Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R")
which serves as the principal underwriter for the Fund under the terms of the
Underwriting Agreement pursuant to which W&R offers and sells the shares of the
Fund.
Distribution Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.75 of 1% of the Fund's average net assets of its Class B shares as a
"distribution fee" to finance the distribution of the Fund's Class B shares
payable to W&R daily or at such other intervals as the board of directors may
determine.
Service Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.25 of 1% of the Fund's average net assets of its Class B shares as a "service
fee" to finance shareholder servicing by W&R or its affiliated companies to
encourage and foster the maintenance of shareholder accounts of the Fund's Class
B shares. The amounts shall be payable to W&R daily or at such other intervals
as the board of directors may determine.
NASD Definition
For purposes of this Plan, the "distribution fee" may be considered as a sales
charge that is deducted from the Class B net assets of the Fund and does not
include the service fee. The "service fee" shall be considered a payment made by
the Fund for personal service and/or maintenance of Class B shareholder
accounts, as such is now defined by the National Association of Securities
Dealers, Inc. ("NASD"), provided, however, if the NASD adopts a definition of
"service fee" for purposes of Rule 2830 of the NASD Conduct Rules that differs
from the definition of "service fee" as presently used, or if the NASD adopts a
related definition intended to define the
<PAGE>
same concept, the definition of "service fee" as used herein shall be
automatically amended to conform to the NASD definition.
Quarterly Reports
W&R shall provide to the board of directors of the Fund and the board of
directors shall review at least quarterly a written report of the amounts so
expended of the distribution fee and/or service fee paid or payable to it under
this Plan and the purposes for which such expenditures were made.
Approval of Plan
This Plan shall become effective when it has been approved by a vote of the
board of directors of the Fund and of the directors who are not interested
persons of the Fund and have no direct or indirect financial interest in the
operation of the Plan or any agreement related to this Plan (other than as
directors or shareholders of the Fund) ("independent directors") cast in person
at a meeting called for the purposes of voting on such Plan.
Continuance
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the directors,
including the independent directors, as specified hereinabove for the adoption
of the Plan by the directors and independent directors.
Director Continuation
In considering whether to adopt, continue or implement this Plan, the directors
shall have a duty to request and evaluate, and W&R shall have a duty to furnish,
such information as may be reasonably necessary to an informed determination of
whether this Plan should be adopted, implemented or continued.
Termination
This Plan may be terminated at any time by a vote of a majority of the
independent directors of the Fund or by a vote of the majority of the
outstanding Class B voting securities of the Fund without penalty. On
termination, the payment of all distribution fees and service fees shall cease,
and the Fund shall have no obligation to W&R to reimburse it for any cost or
expenditure it has made or may make to distribute the Class B shares or service
Class B shareholder accounts.
2
<PAGE>
Amendments
This Plan may not be amended to increase materially the amount to be spent for
distribution of Class B shares, personal service and/or maintenance of
shareholder accounts without approval of the Class B shareholders, and all
material amendments of this Plan must be approved in the manner prescribed for
the adoption of the Plan as provided hereinabove. The distribution and service
fees may be reduced by action of the board of directors without shareholder
approval.
Directors
While this Plan is in effect, the selection and nomination of the directors who
are not interested persons of the Fund shall be committed to the discretion of
the directors who are not interested persons of the Fund.
Records
Copies of this Plan, the Underwriting Agreement and reports made pursuant to
this Plan shall be preserved as provided in Rule 12b-1(f) under the Act.
3
EX-99.B(m)ncdspc
DISTRIBUTION AND SERVICE PLAN
FOR CLASS C SHARES
(Adopted on February 10, 1999)
This Plan is adopted by United New Concepts Fund, Inc. (the "Fund"), pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act") to
provide for payment by the Fund of certain expenses in connection with the
distribution of the Fund's Class C shares, provision of personal services to the
Fund's Class C shareholders and/or maintenance of its Class C shareholder
accounts. Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R")
which serves as the principal underwriter for the Fund under the terms of the
Underwriting Agreement pursuant to which W&R offers and sells the shares of the
Fund.
Distribution Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.75 of 1% of the Fund's average net assets of its Class C shares as a
"distribution fee" to finance the distribution of the Fund's Class C shares
payable to W&R daily or at such other intervals as the board of directors may
determine.
Service Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.25 of 1% of the Fund's average net assets of its Class C shares as a "service
fee" to finance shareholder servicing by W&R or its affiliated companies to
encourage and foster the maintenance of shareholder accounts of the Fund's Class
C shares. The amounts shall be payable to W&R daily or at such other intervals
as the board of directors may determine.
NASD Definition
For purposes of this Plan, the "distribution fee" may be considered as a sales
charge that is deducted from the Class C net assets of the Fund and does not
include the service fee. The "service fee" shall be considered a payment made by
the Fund for personal service and/or maintenance of Class C shareholder
accounts, as such is now defined by the National Association of Securities
Dealers, Inc. ("NASD"), provided, however, if the NASD adopts a definition of
"service fee" for purposes of Rule 2830 of the NASD Conduct Rules that differs
from the definition of "service fee" as presently used, or if the NASD adopts a
related definition intended to define the same concept, the definition of
"service fee" as used herein shall be automatically amended to conform to the
NASD definition.
<PAGE>
Quarterly Reports
W&R shall provide to the board of directors of the Fund and the board of
directors shall review at least quarterly a written report of the amounts so
expended of the distribution fee and/or service fee paid or payable to it under
this Plan and the purposes for which such expenditures were made.
Approval of Plan
This Plan shall become effective when it has been approved by a vote of the
board of directors of the Fund and of the directors who are not interested
persons of the Fund and have no direct or indirect financial interest in the
operation of the Plan or any agreement related to this Plan (other than as
directors or shareholders of the Fund) ("independent directors") cast in person
at a meeting called for the purposes of voting on such Plan.
Continuance
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the directors,
including the independent directors, as specified hereinabove for the adoption
of the Plan by the directors and independent directors.
Director Continuation
In considering whether to adopt, continue or implement this Plan, the directors
shall have a duty to request and evaluate, and W&R shall have a duty to furnish,
such information as may be reasonably necessary to an informed determination of
whether this Plan should be adopted, implemented or continued.
Termination
This Plan may be terminated at any time by a vote of a majority of the
independent directors of the Fund or by a vote of the majority of the
outstanding Class C voting securities of the Fund without penalty. On
termination, the payment of all distribution fees and service fees shall cease,
and the Fund shall have no obligation to W&R to reimburse it for any cost or
expenditure it has made or may make to distribute the Class C shares or service
Class C shareholder accounts.
2
<PAGE>
Amendments
This Plan may not be amended to increase materially the amount to be spent for
distribution of Class C shares, personal service and/or maintenance of
shareholder accounts without approval of the Class C shareholders, and all
material amendments of this Plan must be approved in the manner prescribed for
the adoption of the Plan as provided hereinabove. The distribution and service
fees may be reduced by action of the board of directors without shareholder
approval.
Directors
While this Plan is in effect, the selection and nomination of the directors who
are not interested persons of the Fund shall be committed to the discretion of
the directors who are not interested persons of the Fund.
Records
Copies of this Plan, the Underwriting Agreement and reports made pursuant to
this Plan shall be preserved as provided in Rule 12b-1(f) under the Act.
EX-99.B(o)ncmcp
UNITED NEW CONCEPTS FUND, INC.
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
This Multiple Class Plan ("Plan") pursuant to Rule 18f-3 under the
Investment Company Act of 1940, as amended ("1940 Act"), sets forth the multiple
class structure for United New Concepts Fund, Inc. ("Fund"). This multiple class
structure was approved by the Board of Directors of the Fund on February 8,
1995, under an order of exemption issued by the Securities and Exchange
Commission on January 11, 1995. Subsequent to such approval, Rule 18f-3 under
the 1940 Act was adopted. It was determined that the Fund operate under Rule
18f-3, and this Plan was adopted pursuant to Rule 18f-3. This Plan describes the
classes of shares of stock of the Fund -- Class A shares and Class Y shares --
offered to the public on or after July 18, 1995 ("Implementation Date").
General Description of the Classes:
Class A Shares. Class A shares will be sold to the general public subject
to an initial sales charge. The maximum sales charge is 5.75% of the amount
invested and declines to 0% based on discounts for volume purchases. The initial
sales charge is waived for certain eligible purchasers.
Class A shares also will be subject to a service fee charged pursuant to a
Service Plan adopted pursuant to Rule 12b-1 under the 1940 Act ("Rule 12b-1")
that provides for a maximum fee of .25% of the average annual net assets of the
Class A shares of the Fund. All of the shares of the Fund issued pursuant to a
Fund prospectus effective prior to the Implementation Date and that are
outstanding on the Implementation Date will be designated as Class A shares.
Class B Shares. Class B shares will be sold subject to a contingent
deferred sales charge, which will be imposed on redemption proceeds. The maximum
contingent deferred sales charge will be 5.0% and will decline 1% per year after
the first full calendar year after investment to 0% after seven years, as
follows: in the first year, the contingent deferred sales charge will be 5%; in
the second year, 4%; in the third and fourth years, 3%; in the fifth year, 2%;
in the sixth year, 1%; and in the seventh year, 0%. Class B shares will also be
subject to distribution and service fees charged pursuant to a Distribution and
Service Plan adopted pursuant to Rule 12b-1 that provides for a maximum service
fee of 0.25% and a maximum distribution fee of 0.75% of the average annual net
assets of the Class B shares of the Fund. Class B shares convert automatically
into Class A shares in the eighth year held.
<PAGE>
Class C Shares. Class C shares will be sold without an initial sales charge
and will be subject to a contingent deferred sales charge of 1% if the shares
are redeemed within twelve months of purchase. Class C shares will be subject to
distribution and service fees charged pursuant to a Distribution and Service
Plan adopted pursuant to Rule 12b-1 that provides for a maximum service fee of
0.25% and a maximum distribution fee of 0.75% of the average annual net assets
of the Class C shares of the Fund.
Class Y Shares. Class Y shares will be sold without an initial sales charge
and without a Rule 12b-1 fee. Class Y shares are designed for institutional
investors and will be available for purchase by: (i) participants of employee
benefit plans established under section 403(b) or section 457, or qualified
under section 401, including 401(k) plans, of the Internal Revenue Code of 1986
("Code"), when the plan has 100 or more eligible employees and holds the shares
in an omnibus account on the Fund's records; (ii) banks, trust institutions,
investment fund administrators and other third parties investing for their own
accounts or for the accounts of their customers where such investments for
customer accounts are held in an omnibus account on the Fund's records; (iii)
government entities or authorities and corporations whose investment within the
first twelve months after initial investment is $10 million or more; and (iv)
certain retirement plans and trusts for employees and sales representatives of
Waddell & Reed, Inc. and its affiliates.
Expense Allocations of Each Class:
In addition to the difference with respect to 12b-1 fees, Class A, Class B
and Class C shares differ from Class Y shares of the Fund with respect to the
applicable shareholder servicing fees. Class A, Class B and Class C shares,
respectively, pay a monthly shareholder servicing fee of $1.0208 for each Class
A, Class B or Class C shareholder account which was in existence during the
prior month, plus $0.30 for each Class A, Class B or Class C account on which a
dividend or distribution had a record date in that month. Class Y shares pay a
monthly shareholder servicing fee equal to one-twelfth of .15 of 1% of the
average daily net Class Y assets for the preceding month.
Each Class may also pay a different amount of the following other expenses:
(a) stationery, printing, postage and delivery expenses related to
preparing and distributing materials such as shareholder reports,
prospectuses, and proxy
<PAGE>
statements to current shareholders of a specific Class of shares;
(b) Blue Sky registration fees incurred by a specific Class of shares;
(c) SEC registration fees incurred by a specific Class of shares;
(d) expenses of administrative personnel and services required to
support the shareholders of a specific Class of shares;
(e) Directors' fees or expenses incurred as a result of issues
relating to a specific Class of shares;
(f) accounting expenses relating solely to a specific Class of shares;
(g) auditors' fees, litigation expenses, and legal fees and expenses
relating to a specific Class of shares; and
(h) expenses incurred in connection with shareholders meetings as a
result of issues relating to a specific Class of shares.
These expenses may, but are not required to, be directly attributed and
charged to a particular Class. The shareholder servicing fees and other expenses
listed above that are attributed and charged to a particular Class are borne on
a pro rata basis by the outstanding shares of that Class.
Certain expenses that may be attributable to the Fund, but not a
particular Class, are allocated based on the relative daily net assets of that
Class.
Exchange Privileges:
Class A shares of the Fund may be exchanged for Class A shares of any
other fund in the United Group of Mutual Funds.
Class B shares of the Fund may be exchanged for Class B shares of any
other fund in the United Group of Mutual Funds.
Class C shares of the Fund may be exchanged for Class C shares of any
other fund in the United Group of Mutual Funds.
Class Y shares of the Fund may be exchanged for Class Y shares of any
other fund in the United Group of Mutual Funds.
These exchange privileges may be modified or terminated by the Fund,
and exchanges may only be made into funds that are legally registered for sale
in the investor's state of residence.
Additional Information:
<PAGE>
This Plan is qualified by and subject to the terms of the then current
prospectus for the applicable Class after the Implementation Date; provided,
however, that none of the terms set forth in any such prospectus shall be
inconsistent with the terms of the Classes contained in this Plan. The
prospectus for each Class contains additional information about that Class and
the Fund's multiple class structure.
Adopted: May 19, 1995
As Amended: December 6, 1995, Effective: January 9, 1996
As Amended: February 10, 1999, Effective: September 1, 1999
