<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
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March 31, 1995
PROSPECTUS
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United Gold & Government Fund, Inc. (the "Fund") is a management
investment company which seeks a high total return to investors by investing in
(i) minerals-related securities and gold, silver and platinum during periods of
actual or expected inflation; (ii) U.S. Government Securities during periods of
actual or expected disinflation or low inflation; and (iii) gold, silver and
platinum during periods when the environment for investment in precious metals
appears to be favorable. See "Goal and Investment Policies of the Fund" for
the definitions of each of these types of investments. There is no assurance
that the Fund will achieve its goal. The Fund is subject to significant risks
associated with investments in gold and other minerals-related securities,
foreign securities and precious metals. See "Risk Factors" for a discussion of
these risks.
This Prospectus contains concise information about the Fund of which you
should be aware before investing. Additional information has been filed with
the Securities and Exchange Commission and is contained in a Statement of
Additional Information (the "SAI"), dated March 31, 1995. You may obtain a
copy of the SAI free of charge by request to the Fund or its Underwriter,
Waddell & Reed, Inc., at the address or telephone number shown below. The SAI
is incorporated by reference into this Prospectus and you will not be aware of
all facts unless you read both this Prospectus and the SAI.
Retain This Prospectus For Future Reference
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Supplement is required by The Office of The Commissioner of Securities of
the State of Wisconsin
Section SEC 3.09(1)(c), Wis. Adm. Code permits an open-end investment company
to invest up to 10% of its assets in precious metals. This Fund may invest up
to 25% of its assets in a combination of gold, silver and platinum bullion and
coins. Thus, the Fund does not comply with the fairness standards set by the
Office of the Wisconsin Commissioner of Securities. See page 5. This Fund has
been registered for sale in the State of Wisconsin.
To be attached to the front cover page of the United Gold & Government Fund,
Inc. Prospectus
NUS2013WI
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
Summary of Expenses
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Load Imposed on Purchases 5.75%
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested None
Dividends (as a percentage of offering price)
Deferred Sales Load (as a percentage
of original purchase price or redemption
proceeds, as applicable) None
Redemption Fees (as a percentage
of amount redeemed, if applicable) None
Exchange Fee None
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
Management Fees 0.72%
12b-1 Fees* 0.14%
Other Expenses 0.73%
(Includes, among other expenses, transfer
agency, accounting, custodian, audit and legal fees)
Total Fund Operating Expenses 1.59%
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of each
time period: $73 $105 $139 $236
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown.
*See "Management and Services" for further information about the 12b-1 service
fees.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
FINANCIAL HIGHLIGHTS
(Audited)
The following information has been audited by Price Waterhouse LLP,
independent accountants, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Price Waterhouse LLP.
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
For the
period
from
September
4, 1985
through
For the fiscal year ended
December 31, December
-------------------------------------------------
- ------------------------------------ 31,
<S> <C> <C> <C> <C> <C>
<C> <C> <C> <C> <C>
1994 1993 1992 1991 1990
1989 1988 1987 1986 1985*
---- ---- ---- ---- ----
- ---- ---- ---- ---- ------
Net asset value,
beginning of period ..... $9.97 $5.70 $6.63 $6.68 $8.66
$7.47 $7.95 $6.83 $5.07 $5.00
----- ----- ----- ----- -----
- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment income ... .05 .04 .06 .15 .11
.16 .17 .14 .17 .06
Net realized and
unrealized gain
(loss) on
investments ........... (1.78) 4.27 (0.93) (0.05) (1.97)
1.20 (0.48) 1.93 1.89 .01
----- ----- ----- ----- -----
- ----- ----- ----- ----- -----
Total from investment
operations .............. (1.73) 4.31 (0.87) .10 (1.86)
1.36 (0.31) 2.07 2.06 .07
----- ----- ----- ----- -----
- ----- ----- ----- ----- -----
Less distributions:
Dividends from net
investment income ..... (0.05) (0.04) (0.06) (0.15) (0.12)
(0.17) (0.17) (0.13) (0.22) 0.00
Distributions from
capital gains ......... 0.00 0.00 0.00 0.00 0.00
0.00 0.00 (0.82) (0.08) 0.00
----- ----- ----- ----- -----
- ----- ----- ----- ----- -----
Total distributions ....... (0.05) (0.04) (0.06) (0.15) (0.12)
(0.17) (0.17) (0.95) (0.30) 0.00
----- ----- ----- ----- -----
- ----- ----- ----- ----- -----
Net asset value,
end of period ........... $8.19 $9.97 $5.70 $6.63 $6.68
$8.66 $7.47 $7.95 $6.83 $5.07
===== ===== ===== ===== =====
===== ===== ===== ===== =====
Total return** ............ -17.36% 75.82% -13.18% 1.47% -21.59%
18.42% -3.92% 30.36% 41.48% 4.39%
Net assets, end of period
(000 omitted) ........... $37,422 $46,908 $27,136 $40,587 $54,371
$83,154 $99,460 $119,894 $17,695 $1,769
Ratio of expenses to average
net assets .............. 1.59% 1.69% 1.88% 1.57% 1.56%
1.42% 1.42% 1.20% 1.48% 0.48%
Ratio of net investment income
to average net assets ... 0.57% 0.48% 0.90% 2.11% 1.43%
1.91% 2.14% 1.81% 3.46% 2.17%
Portfolio turnover rate*** 64.89% 84.00% 61.50% 112.80% 82.42%
89.92% 100.19% 107.00% 159.66% 21.73%
*The Fund's inception date is February 28, 1985; however, since the Fund did
not have investment activity or incur expenses
prior to the date of public offering, the per-share data and ratios are for
a capital share outstanding for the period from
September 4, 1985 (initial public offering) through December 31, 1985. On
an annual basis, the ratios of expenses and net
investment income to average net assets would have been approximately 1.50%
and 6.77%, respectively.
**Total return calculated without taking into account the sales load deducted
on an initial purchase.
***This rate is, in general, calculated by dividing the average value of the
Fund's portfolio securities during the period into
the lesser of its purchases or sales of securities in the period, excluding
short-term securities and bullion.
</TABLE>
Information regarding the performance of the Fund is contained in the
Fund's annual report to shareholders which may be obtained without charge by
request to the Fund at the address or phone number shown on the cover of this
Prospectus.
<PAGE>
What is the Fund?
United Gold & Government Fund, Inc. is a corporation organized under
Maryland law on February 28, 1985. It is an open-end diversified management
investment company commonly called a "mutual fund." The Fund has a Board of
Directors which has overall responsibility for the management of its affairs.
For the names of the Directors and other information about them, see the SAI.
The Fund has only one class of shares. Each share has the same rights to
dividends and to vote. Shares are fully paid and nonassessable when bought.
The Fund does not hold annual meetings of shareholders; however, certain
significant corporate matters, such as the approval of a new investment
advisory agreement or a change in a fundamental investment policy, which
require shareholder approval, will be presented to shareholders at an annual or
special meeting called by the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding not
less than 25% of all shares entitled to vote at such meeting, provided certain
conditions stated in the Bylaws of the Fund are met. There will normally be no
meeting of shareholders for the purpose of electing directors until such time
as less than a majority of directors holding office have been elected by
shareholders, at which time the directors then in office will call a
shareholders' meeting for the election of directors. To the extent that
Section 16(c) of the Investment Company Act of 1940, as amended, applies to the
Fund, the directors are required to call a meeting of shareholders for the
purpose of voting upon the question of removal of any director when requested
in writing to do so by the shareholders of record of not less than 10% of the
Fund's outstanding shares.
Performance Information
From time to time Waddell & Reed, Inc. or the Fund may include performance
data in advertisements or in information furnished to present or prospective
shareholders. Fund performance may be shown by presenting one or more
performance measurements, including total return and performance rankings.
The Fund's total return is its overall change in value for the period
shown including the effect of reinvesting dividends and capital gains
distributions and any change in the net asset value per share. A cumulative
total return reflects the Fund's change in value over a stated period of time.
An average annual total return reflects the hypothetical annually compounded
return that would have produced the cumulative total return for a stated period
if the Fund's performance had been constant during each year of that period.
Average annual total returns are not actual year-by-year results and investors
should realize that total returns will fluctuate.
Standardized total return figures reflect payment of the maximum sales
charge. The Fund may also provide non-standardized performance information
which does not reflect deduction of such sales charge or which is for periods
other than those required to be presented or which differs otherwise from
standardized performance information. See the SAI for total return and method
of computation.
From time to time in advertisements and information furnished to present
or prospective shareholders the Fund may discuss its performance rankings as
published by recognized independent mutual fund statistical services such as
Lipper Analytical Services, Inc., or by publications of general interest such
as Forbes, Money, The Wall Street Journal, Business Week, Barron's, Fortune or
Morningstar Mutual Fund Values. The Fund may also compare its performance to
that of other selected mutual funds or selected recognized market indicators.
Performance information may be quoted numerically or presented in a table,
graph or other illustration.
All performance information which the Fund advertises or includes in
information provided to present or prospective shareholders is historical in
nature and is not intended to represent or guarantee future results. The value
of the Fund's shares when redeemed may be more or less than their original
cost.
Goal and Investment Policies of the Fund
During past inflationary periods minerals-related securities and precious
metals such as gold, silver and platinum generally have increased in value
while the value of debt securities has tended to decrease due to rising
interest rates. Conversely, during periods of disinflation or low inflation,
the value of debt securities has generally increased while the value of
minerals-related securities and precious metals has decreased. Low inflation
is considered to be generally in the 3% to 6% range, as measured by the
Consumer Price Index. Also, during periods of declining stock prices, the
prices of gold, silver and platinum may increase or remain stable while the
value of minerals-related securities may be subject to a general decline
experienced by the stock market as a whole. Based on these historical trends,
the Fund's manager, Waddell & Reed Investment Management Company (the
"Manager"), will attempt to anticipate inflationary and disinflationary periods
and manage the Fund's investments in a manner designed to achieve the Fund's
goal.
The goal of the Fund is to seek a high total return to investors. Total
return is the aggregate of income and appreciation of share value. See above
for how total return is calculated. This goal is a fundamental policy which
can only be changed by shareholder vote. The Fund will attempt to achieve this
goal by investing (i) in minerals-related securities and gold, silver and
platinum during periods of actual or expected inflation; (ii) in U.S.
Government Securities during periods of actual or expected disinflation or low
inflation; and (iii) in gold, silver and platinum during periods when the
environment for investment in precious metals appears to be favorable.
Minerals-related securities are securities that offer an investment
participation in the mining, processing, production, exploration, refining or
sales of gold, platinum, silver or hydrocarbons. U.S. Government Securities
are securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
As a matter of fundamental policy the Fund will not invest in other than
(i) those minerals-related securities which are related to the mining,
processing, production, exploration, refining or sales of gold; and/or (ii)
U.S. Government Securities; and/or (iii) gold, silver and platinum if
thereafter less than 65% of its total assets would be invested in these
investments. It may invest in securities other than minerals-related
securities, U.S. Government Securities and gold, silver or platinum, subject to
this 65% test and to the other restrictions set forth in this Prospectus and
the SAI. As a fundamental policy, the Fund may not invest more than 25% of its
total assets in gold, silver and platinum.
It is a fundamental policy of the Fund to concentrate (i.e., invest more
than 25% of its assets) its investments in an industry related to gold and
other minerals during periods of actual or anticipated inflation and up to 100%
of its assets may be so invested. During periods of actual or expected
disinflation or low inflation, up to 100% of the Fund's assets may be invested
in U.S. Government Securities of varying maturities and not more than 25% will
be invested in gold and other minerals-related securities. When the Fund is
invested in minerals-related securities it is anticipated that a substantial
portion, and up to 100%, of its assets will be invested in foreign securities.
See "Risk Factors."
The Manager believes that this strategy will allow the Fund to achieve a
higher total return than could be achieved if it remained invested in minerals-
related securities and precious metals during periods of low inflation or
disinflation because the income and value of minerals-related securities and
precious metals might decline during periods of disinflation or low inflation.
During such periods the Manager expects that higher income can be achieved and
that capital will be better preserved by investing in U.S. Government
Securities. It is expected that during periods of disinflation and low
inflation a greater portion of the total return of the Fund will be
attributable to income achieved through investment in U.S. Government
Securities. It is expected that during inflationary periods a greater portion
of the total return of the Fund will be attributable to appreciation from
investment in minerals-related securities and precious metals.
The Manager will evaluate numerous economic and monetary factors in making
a determination as to whether the economy is in or is likely to enter into an
inflationary or disinflationary period. Among the factors the Manager will
evaluate are changes in governmental fiscal and monetary policy, rates of
changes in the Consumer Price Index and actual and anticipated changes and rate
of change in the value of the U.S. dollar in relation to other key foreign
currencies, short- and long-term interest rates and the money supply. For
example, when the Manager believes that the economy is in an inflationary cycle
or an inflationary cycle is expected because of rising interest rates, a
decline in the value of the U.S. dollar and a higher rate of change in the
Consumer Price Index, the Fund generally will concentrate in minerals-related
securities. On the other hand, when interest rates are declining, the value of
the U.S. dollar is increasing, and the rate of change in the Consumer Price
Index is declining, the Fund generally will invest in U.S. Government
Securities. However, the Manager will take into account factors other than
those given in these examples and the Manager's subjective judgment of all
factors it deems relevant precludes the application of any formulas or
mechanical determinations in assessing the state of the economy. The Manager's
evaluation takes into consideration political instability in certain parts of
the world as well as domestic and international economic factors.
The Fund anticipates that gold, silver and platinum will be purchased in
the form of bullion or coins or in the form of vault or other negotiable
receipts representing ownership of these metals. The Fund may incur expenses
for the shipping, storage and insurance of precious metals it purchases.
Precious metals prices are affected by various factors such as economic
conditions, political events and monetary policies. As a result, the price of
gold, silver or platinum may fluctuate widely. The sole source of return to
the Fund from such investments will be gains realized on sales; a negative
return will be realized if the metal is sold at a loss. Investments in
precious metals do not provide a yield.
Ownership of gold, silver and platinum may be prohibited by any one or
more of the states in which shares of the Fund are sold. In the event that any
state prohibits such investment, the Fund may elect not to make such
investments. In addition, the Fund's direct investment in these precious
metals may be limited by tax considerations. See "Taxes" in the SAI.
The securities the Fund will invest in include common stock, preferred
stock, debt securities and convertible securities. Common stock is an
ownership interest in a company. Preferred stock is also an ownership
interest, but usually is entitled to a stated amount of dividends. Debt
securities are an obligation to pay a specified sum on a specified date and to
pay interest in the meantime. Convertible securities may be exchanged for
another type of securities; for example, certain debt securities are
convertible into common stock. Common stocks generally offer the greatest
possibilities for growth, but may not offer as much safety of capital as
preferred stocks or debt securities. These securities in which the Fund may
invest include preferred stock that converts to common stock either
automatically or after a specified period of time or at the option of the
issuer, and debt securities whose performance is linked to a specified equity
security or securities index. U.S. Government and other debt securities
increase and decrease in value, depending in large part on changes in
prevailing interest rates. An increase in interest rates may cause the value
of a debt security to go down; a decrease in interest rates may cause the value
of a debt security to go up. Preferred stocks may increase and decrease in
value for similar reasons. Changes in interest rates may cause long-term
obligations to fluctuate more in value than short-term obligations. The Fund
has no policy limiting the maturity of the debt instruments in which it
invests. The Fund may invest in debt securities rated in any rating category
and unrated securities judged by the Manager to be of equivalent quality;
however, as an operating (i.e., nonfundamental) policy, the Fund does not
intend to invest more than 5% of its assets in non-investment grade debt
securities. See the SAI for a discussion of the risks associated with non-
investment grade debt securities.
Securities issued or guaranteed by the U.S. Government include a variety
of Treasury securities that differ only in their interest rates, maturities and
dates of issuance. Except for U.S. Treasury securities, obligations of U.S.
Government agencies and instrumentalities may or may not be supported by the
full faith and credit of the United States. Many are backed by the right of
the issuer to borrow from the Treasury; others such as the Student Loan
Marketing Association are supported by discretionary authority of the U.S.
Government to purchase the agencies' obligations. In the case of securities
not backed by the full faith and credit of the United States, the Fund must
look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment, and may not be able to assert or claim against the United
States itself in the event the agency or instrumentality does not meet its
commitment. The Fund will invest in securities of such instrumentality only
when the Manager is satisfied that the credit risk with respect to any such
instrumentality is acceptable.
Among the U.S. Government Securities that the Fund may purchase are
"mortgage-backed securities" of the Government National Mortgage Association
("Ginnie Mae"), the Federal Home Loan Mortgage Association ("Freddie Mac") and
the Federal National Mortgage Association ("Fannie Mae"). There is no
percentage limitation on its purchase of these securities. These mortgage-
backed securities include "pass-through" securities, participation certificates
and collateralized mortgage obligations ("CMOs"). The yield characteristics of
mortgage-backed securities, including CMOs, in which the Fund may invest differ
from those of traditional debt securities. Among the major differences are
that interest and principal payments are made more frequently on mortgage-
backed and asset-backed securities and that principal may be prepaid at any
time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if the Fund purchases these securities at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Conversely, if the Fund
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to
maturity. Accelerated prepayments on securities purchased by the Fund at a
premium also impose a risk of loss of principal because the premium may not
have been fully amortized at the time the principal is repaid in full. Timely
payment of principal and interest is guaranteed by the full faith and credit of
the United States as to Ginnie Mae pass-through securities but not as to
obligations of Freddie Mac and Fannie Mae which are backed by the right of the
issuer to borrow from the Treasury. There is no guarantee against market
decline of the value of these securities or shares of the Fund. It is possible
that the availability and the marketability (i.e., liquidity) of the securities
discussed in this paragraph could be adversely affected by actions of the U.S.
Government to tighten the availability of its credit. More information about
the characteristics of Treasury securities and the U.S. Government agencies
which issue or guarantee such securities is contained in the SAI.
The Fund may purchase U.S. Government Securities on a when-issued or
delayed delivery basis or sell them on a delayed delivery basis in order to
secure what is considered to be an advantageous price and yield at the time of
entering into the transaction. From the time of entering into the
transactionuntil the transaction is completed, the U.S. Government Securities
so purchased
or sold are subject to market fluctuation. See the SAI for further information
about these transactions.
The Fund may buy and write (sell) put and call options on U.S. Government
Securities or write calls on securities whether or not they are U.S. Government
Securities subject to certain limitations which are set forth in the SAI.
Calls written by the Fund must be covered (i.e., the Fund must own the
securities which are subject to the call or have the right to acquire them
without additional payment). It may write options on securities for the
purpose of increasing its income by receiving premiums paid by the purchaser of
the options. It may purchase calls to take advantage of an expected rise in
the market value of securities which the Fund does not hold in its portfolio.
It may purchase puts on related investments it owns ("protective puts") or
on related investments it does not own ("nonprotective puts"). Buying a
protective put permits the Fund to protect itself during the put period against
a decline in the value of the related investments below the exercise price by
selling them through the exercise of the put. Buying a nonprotective put
permits the Fund, if the market price of the related investments is below the
put price during the put period, either to resell the put or to buy the related
investments and sell them at the exercise price. Options offer large amounts
of leverage which will result in the Fund's net asset value being more
sensitive to changes in the value of the related investment.
The Fund may also buy and sell interest rate futures contracts relating to
U.S. Government Securities ("Government Securities Futures") and options on
such interest rate futures contracts for the purpose of hedging the value of
its securities portfolio against future changes in interest rates. At the
present time, the U.S. Government Securities to which Government Securities
Futures relate are long-term U.S. Treasury Bonds, Treasury Notes, Government
National Mortgage Association modified pass-through mortgage-backed securities
and three-month U.S. Treasury Bills. It is a fundamental policy that the
Fund's use of options and futures contracts is limited to those relating to
U.S. Government Securities except for the writing of covered call options as
stated above. When the Fund is invested in U.S. Government Securities it may
employ a hedging strategy as a temporary measure in lieu of immediately
restructuring the Fund's portfolio in response to changes in interest rates or
other economic indicators. This will allow the portfolio to be restructured by
lengthening or shortening maturities or changing the quality of the Fund's
portfolio securities in a more orderly fashion should the economic indicators
continue to support a restructuring. See "Risk Factors" and "Options and
Futures" for information concerning the risks of investments in options and
futures.
The Fund may enter into forward foreign currency exchange contracts
("Forward Contracts") provided that it does not thereafter have more than 15%
of its assets committed to the consummation of such contracts. A Forward
Contract is an obligation to purchase or sell specific currency at a future
date at a fixed price. The Fund enters into Forward Contracts to attempt to
protect against losses which may result from an adverse change in the
relationship between the U.S. dollar and a foreign currency but at the same
time Forward Contracts tend to limit any potential gain which might result from
currency changes. There are risks associated with the use of such contracts
due to the difficulty of accurately predicting short-term currency market
movements. See the SAI for further discussion.
The Fund may invest up to 2% of its assets in warrants which are rights to
purchase securities.
For the purpose of increasing income, the Fund may purchase securities
subject to repurchase agreements (which can be considered as collateralized
loans by the Fund) but may not cause more than ten percent of its net assets to
be subject to repurchase agreements not terminable within seven days. The
majority of the repurchase transactions in which the Fund would engage run
fromday to day, and the delivery pursuant to the resale typically will occur
within
one to five days of the purchase. The Fund's risk is limited to the ability of
the vendor to pay the agreed-upon sum upon the delivery date. The Fund may
also lend its securities on a short-term or long-term basis for the purpose of
realizing income. The Fund will not loan more than 30% of its assets at any
one time. The percentage limit and the requirement that such loans be on a
collateralized basis in accordance with certain regulatory requirements are
fundamental policies. 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 upon. There are certain
risks associated with lending securities in that the Fund may experience delays
in recovering the collateral or even loss of the collateral. See the SAI for
more information about these risks. The Fund may purchase restricted foreign
securities provided that after such purchase not more than 5% of its total
assets consist of such securities.
Due to their possible limited liquidity, the Fund may not make certain
investments if thereafter more than 10% of its net assets would consist of such
investments. The investments included in this 10% limit are: (i) repurchase
agreements not terminable within seven days; (ii) fixed time deposits
(including insured deposits) subject to withdrawal penalties other than
overnight deposits; (iii) restricted securities, i.e., securities which cannot
freely be sold for legal reasons; (iv) securities for which market quotations
are not readily available; and (v) unlisted options and their underlying
collateral to the extent such options are illiquid. However, this 10% limit
does not include any obligations payable at principal amount plus accrued
interest on demand or within seven days after demand, which, in the opinion of
the Manager, have minimal credit risk.
The Fund may purchase shares of investment companies which do not redeem
their shares provided that thereafter it does not have more than 10% of its
assets so invested, subject to the conditions stated in the SAI.
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 such securities during the year,
excluding certain short-term securities and bullion. Since the turnover rate
of the Fund will be affected by a number of factors, the Fund is unable to
predict what rate the Fund will have in any particular period or periods,
although such rate is not expected to exceed 100%. However, the rate could be
substantially higher or lower in any particular period. The factors which may
affect the rate include moving from a position emphasizing gold and other
minerals-related securities to a position emphasizing U.S. Government
Securities or vice versa and the possible necessary sales of securities to meet
redemptions. The Fund may engage in short-term trading and have a high
portfolio turnover. Option transactions may increase the turnover rate. This
results in correspondingly greater commission expenses and transaction costs
and may result in tax consequences. See the SAI for additional information.
There is no assurance that the Fund will achieve its goal and an
investment in the Fund should not be considered a complete investment program.
Risk Factors
Investments in minerals-related securities and precious metals are
considered speculative and involve substantial risks and special
considerations, including the following:
1. Risk of Price Fluctuations. Metals and minerals prices are affected
by various factors such as economic conditions, political events, monetary
policies and other factors. As a result, prices of minerals-related securities
and of gold, silver and platinum may fluctuate sharply.
2. Concentration of Source of Gold Supply and Control of Gold Sales. The
four largest producers of gold are the Republic of South Africa, the former
Union of Soviet Socialist Republics, Canada and the United States. Economic
and political conditions and objectives prevailing in these countries may have
a direct effect on the production and marketing of newly produced gold and
sales of central bank gold holdings. In South Africa, the activities of
companies engaged in gold mining are subject to the policies adopted by the
Ministry of Mines. The Reserve Bank of South Africa, as the sole authorized
sales agent for South African gold, has an influence on the price and timing of
sales of South African gold. Political and social conditions in South Africa
and unsettled political conditions prevailing in neighboring countries may pose
risks to the Fund, which may invest up to 100% of its assets in securities of
South African issuers.
3. Unpredictable International Monetary Policies, Economic and Political
Conditions. There is the possibility that under unusual international monetary
or political conditions, the Fund's assets might be less liquid or that the
change in value of its assets might be more volatile than would be the case
with other investments. In particular, the price of gold is affected by direct
and indirect use of it to settle net deficits and surpluses between nations.
Because the prices of metals and minerals may be affected by unpredictable
international monetary policies and economic conditions, there may be greater
likelihood of a more dramatic impact upon the market price of the Fund's
investments than of other investments.
4. Foreign Securities. A major portion of the Fund's assets will usually
be invested in foreign securities during periods of actual or anticipated
inflation. There are also certain risks associated with foreign securities not
usually associated with U.S. securities including absence of uniform
accounting, auditing and financial standards, less government regulation,
changes in currency rates and in exchange regulations, and political
instability. See the SAI for further discussions of these risks. When
purchasing foreign securities, the Fund may purchase American Depository
Receipts ("ADR's"), which are certificates issued by U.S. banks representing
the right to receive securities of a foreign issuer deposited with that or
another bank, and may also purchase securities of a foreign issuer directly in
the foreign market. 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.
5. Failure to Anticipate Changes in Economic Cycles. In addition to the
risks discussed above, the Fund's investment success will be dependent to a
high degree on the Manager's ability to anticipate the onset and termination of
inflationary and disinflationary cycles. A failure to anticipate a
disinflationary cycle could result in the Fund's assets being
disproportionately invested in minerals-related securities. Conversely, a
failure to predict an inflationary cycle could result in the Fund's assets
being disproportionately invested in U.S. Government Securities. The Fund's
investment success will be dependent to a high degree on the validity of the
premise that the values of minerals-related securities will move in a different
direction than the values of U.S. Government Securities during periods of
inflation or disinflation. If the values of both types of securities move down
during the same period of time the value of the shareholder's investment will
decline rather than stabilize or increase, as anticipated, regardless of
whether the Fund is invested in minerals-related securities or U.S. Government
Securities.
Options and Futures
The primary risks associated with the use of options and futures are: (i)
loss of the increase in the value of securities owned by the Fund if a call
option sold by the Fund is exercised thereby requiring the Fund to deliver the
securities at a price which is lower than the market value of the
securities;(ii) incurring higher costs to purchase securities which are subject
to a put
option sold by the Fund if the put is exercised and the option price is higher
than the market value of the security; (iii) loss of premiums paid by the Fund
on options it purchases; (iv) imperfect correlation between the change in the
market value of the U.S. Government Securities held in the Fund's portfolio and
the prices of futures and options thereon relating to U.S. Government
Securities purchased or sold by the Fund; (v) incorrect forecasts by the
Manager concerning interest rates which may result in the hedge being
ineffective; and (vi) possible lack of a liquid secondary market for any option
or futures contract; the resulting inability to close an option or futures
position could have an adverse impact on the Fund's ability to hedge or
increase income. For a hedge to be completely effective, the price change of
the hedging instrument should equal the price change of the security being
hedged. Such equal price changes are not always possible because the
investment underlying the hedging instrument may not be the same investment
that is being hedged. Because the Fund may write certain uncovered calls on
Debt Futures, there is the additional risk that if an uncovered call the Fund
wrote was exercised, to meet the exercise the Fund would have to purchase the
future at whatever the market price might be at the time of the exercise.
Gains and losses on investments in options and futures contracts depend on the
Manager's ability to predict correctly the direction of stock prices, interest
rates and other economic factors. See the SAI for further information about
these instruments and their risks.
Management and Services
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual
Funds, except United Asset Strategy Fund, Inc., since 1940 or the inception of
the investment company, whichever was later, and to TMK/United Funds, Inc.
since its inception. On January 8, 1992, subject to the authority of the
Fund's Board of Directors, Waddell & Reed, Inc. assigned its investment
management duties (and assigned its professional staff for investment
management services) to Waddell & Reed Investment Management Company, a wholly-
owned subsidiary of Waddell & Reed, Inc. The Manager has also served as
investment manager for Waddell & Reed Funds, Inc. since its inception in
September 1992, Torchmark Government Securities Fund, Inc. and Torchmark
Insured Tax-Free Fund, Inc. since each commenced operations in February 1993
and United Asset Strategy Fund, Inc. since it commenced operations in March
1995. Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter
for each of the investment companies in the United Group of Mutual Funds and
Waddell & Reed Funds, Inc. and serves as the distributor of TMK/United Funds,
Inc. Waddell & Reed, Inc. is an indirect subsidiary of Torchmark Corporation,
a holding company, and United Investors Management Company, a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
Subject to authority of the Fund's Board of Directors, the Manager
provides investment advice and supervises investments for which it is paid a
fee consisting of two elements: (i) a "Specific" fee computed on the Fund's net
asset value as of the close of business each day at the annual rate of .30 of
1% of net assets and (ii) a pro rata participation based on the relative net
asset size of the Fund in a "Group" fee computed each day on the combined net
asset value of all of the funds in the United Group at the annual rates shown
in the following table. The fee is accrued and paid daily. Prior to the
above-described assignment to the Manager on January 8, 1992, the fees were
paid to Waddell & Reed, Inc.
Group Fee Rate
Group Net Asset Level Annual Group
(all dollars in millions) Fee Rate for Each Level
- ------------------------- -----------------------
From $ 0 to $ 750 .51 of 1%
From $ 750 to $ 1,500 .49 of 1%
From $ 1,500 to $ 2,250 .47 of 1%
From $ 2,250 to $ 3,000 .45 of 1%
From $ 3,000 to $ 3,750 .43 of 1%
From $ 3,750 to $ 7,500 .40 of 1%
From $ 7,500 to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Waddell & Reed Services Company, a subsidiary of Waddell & Reed, Inc.,
acts as transfer agent ("Shareholder Servicing Agent") for the Fund and
processes the payments of dividends. See the SAI for the fees paid for these
services. Inquiries concerning shareholder accounts should be sent to that
company at the address shown on the inside back cover of this Prospectus or to
the Fund at the address shown on the front cover of this Prospectus.
Waddell & Reed Services Company also acts as agent ("Accounting Services
Agent") in providing bookkeeping and accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays the Accounting Services Agent a monthly fee of one-twelfth of the
annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to Waddell &
Reed, Inc., the principal underwriter for the Fund, in an amount not to exceed
.25% of the Fund's average annual net assets. The fee is to be paid to
reimburse Waddell & Reed, Inc. for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts. In particular, the Service Plan and a related Service
Agreement between the Fund and Waddell & Reed, Inc. contemplate that these
expenditures may include costs and expenses incurred by Waddell & Reed, Inc.
and its affiliates in compensating, training and supporting registered account
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located
at field sales offices; engaging in other activities useful in providing
personal services to Fund shareholders and/or maintenance of shareholder
accounts; and in compensating broker-dealers, and other third parties, who may
regularly sell Fund shares for providing shareholder services and/or
maintaining shareholder accounts. See the SAI for additional information and
terms of the Service Plan.
The combined net asset values of all of the funds in the United Group were
approximately $11.0 billion as of December 31, 1994. Management fees for the
fiscal year ended December 31, 1994 were 0.72% of the Fund's average net
assets. The Fund's total expenses for that year were 1.59% of its average net
assets.
The Manager places transactions for the Fund's portfolio and in doing so
may consider sales of shares of the Fund and other funds it manages as a factor
in the selection of brokers to execute portfolio transactions. See the SAI for
further information.
Michael L. Avery is primarily responsible for the day-to-day management of
the portfolio of the Fund. Mr. Avery has held his Fund responsibilities since
February 1, 1994. He is Vice President of the Manager and Vice President of
the Fund. Mr. Avery has been an employee of Waddell & Reed, Inc., and its
successor, the Manager, since June 1981. Other members of the Manager's
investment management department provide input on market outlook, economic
conditions, investment research and other considerations relating to the Fund's
investments.
Dividends, Distributions and Taxes
Ordinarily, dividends are paid quarterly from net investment income, which
includes dividends, accrued interest, earned discount, and other income earned
on portfolio securities less expenses. The Fund also distributes substantially
all of its net capital gains (the excess of net long-term capital gains over
net short-term capital losses) and net short-term capital gains, if any, after
deducting any available capital loss carryovers, and any net realized gains
from foreign currency transactions, with its regular dividend at the end of the
calendar year. The Fund may make additional distributions if necessary to
avoid Federal income or excise taxes on certain undistributed income and
capital gains.
You have the option to receive dividends and distributions in cash, to
reinvest them in additional Fund shares without charge or to receive dividends
in cash and reinvest distributions, as you may instruct. In the absence of
instructions, dividends and distributions will be reinvested.
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986 so that it will be
relieved of Federal income tax on that part of its investment company taxable
income (consisting generally of net investment income, net short-term capital
gains and net gains from certain foreign currency transactions) and net capital
gains that is distributed to its shareholders.
Dividends from the Fund's investment company taxable income are taxable to
you as ordinary income, to the extent of the Fund's earnings and profits,
whether received in cash or reinvested in additional Fund shares.
Distributions of the Fund's realized net capital gains, when designated as
such, are taxable to you as long-term capital gains, whether received in cash
or reinvested in additional Fund shares and regardless of the length of time
you have owned your shares. The Fund notifies you after each calendar year-end
as to the amounts of dividends and distributions paid (or deemed paid) to you
for that year.
A portion of the dividends paid by the Fund, whether received in cash or
reinvested in additional Fund shares, may be eligible for the dividends-
received deduction allowed to corporations. The eligible portion may not
exceed the aggregate dividends received by the Fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax.
The Fund is required to withhold 31% of all dividends, distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not furnish the Fund with a correct tax identification
number. Withholding at that rate from dividends and distributions also is
required for such shareholders who otherwise are subject to backup withholding.
Your redemption of Fund shares will result in taxable gain or loss to you,
depending on whether the redemption proceeds are more or less than your
adjusted basis for the redeemed shares (which normally includes any sales
charge paid). An exchange of Fund shares for shares of any other fund in the
United Group generally will have similar tax consequences. However, special
rules apply when you dispose of Fund shares through a redemption or exchange
within 90 days after your purchase thereof and subsequently reacquire Fund
shares or acquire shares of another fund in the United Group without paying a
sales charge due to the thirty-day reinvestment privilege or exchange
privilege. In these cases, any gain on the disposition of the Fund shares
would be increased, or loss decreased, by the amount of the sales charge you
paid when those shares were acquired, and that amount will increase the
adjusted basis of the shares subsequently acquired. In addition, if you
purchase Fund shares within thirty days after redeeming other Fund shares at a
loss, all or part of that loss will not be deductible and will increase the
basis of the newly purchased shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for a further discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
Purchase of Shares
You may purchase shares through Waddell & Reed, Inc. and its account
representatives. To open an account you must complete an application. Orders
are accepted only at the home office of Waddell & Reed, Inc. (see inside back
cover of this Prospectus for address) and it need not accept any orders. The
offering price of a share is its net asset value next determined following
acceptance plus the sales charge shown in the table below. This net asset
value per share is the value of the Fund's assets, less liabilities, divided by
the number of shares outstanding. Net asset value is determined once each day
as of the later of the close of the regular session of the New York Stock
Exchange or the close of the regular session of any domestic securities
exchange or commodities exchange on which an option or future held by the Fund
is traded on each day the New York Stock Exchange is open. The Fund may invest
in securities listed on foreign exchanges which may trade on Saturdays and on
customary U.S. national business holidays when the New York Stock Exchange is
closed. Consequently, the net asset value of Fund shares may be significantly
affected on days when the Fund does not price its shares and when the
shareholder has no access to the Fund. The securities in the Fund's portfolio
that are listed or traded on an exchange are valued using market quotations or,
if not available, at their fair value in a manner determined in good faith by
the Board of Directors. U.S. Government Securities are valued according to
prices quoted by a dealer in U.S. Government Securities which offers a pricing
service. Gold and silver bullion will be valued at the last spot settlement
price for current delivery as calculated by the Commodity Exchange, Inc. as of
the close of the regular session of the Exchange. Platinum bullion will be
valued at the last spot settlement price as calculated by the New York
Mercantile Exchange as of the close of the regular session of that Exchange.
If either exchange is closed on a day when the New York Stock Exchange is open,
value will be determined by averaging quotes from two major dealers in the
particular precious metal. Short-term debt securities are valued at amortized
cost which approximates market value. Other assets are valued at their fair
value.
Sales Charge
Sales Charge as Approximate
as Percent of Percent of
Size of Purchase Offering Price Amount Invested
Under $100,000 ......................... 5.75% 6.10%
$ 100,000 to less than 200,000 ..... 4.75 4.99
200,000 to less than 300,000 ..... 3.50 3.63
300,000 to less than 500,000 ..... 2.50 2.56
500,000 to less than 1,000,000 ..... 1.50 1.52
1,000,000 to less than 2,000,000 ..... 1.00 1.01
2,000,000 and over .................... 0.00 0.00
Ordinarily, the minimum initial investment is $500. A $50 minimum initial
investment pertains to certain retirement plan accounts. A $50 minimum initial
investment also pertains to accounts for which an investor has arranged, at the
time of initial investment, to make subsequent purchases for the account
through automatic bank withdrawals, as described below. A $100 minimum initial
investment pertains to certain exchanges of shares from other funds in the
United Group.
A shareholder may arrange with Waddell & Reed, Inc. to purchase shares by
having regular monthly withdrawals of $25 or more made from a bank account. A
shareholder may also arrange with Waddell & Reed, Inc. to purchase shares by
having regular monthly exchanges of shares with a value of $25 or more made
from United Cash Management, Inc., subject to certain conditions explained in
the SAI.
Lower sales charges are available by combining additional purchases of any
of the funds in the United Group except United Municipal Bond Fund, Inc.,
United Cash Management, Inc., United Government Securities Fund, Inc. and
United Municipal High Income Fund, Inc. with net asset value of shares already
held ("rights of accumulation") and by grouping all purchases made during a
thirteen-month period ("Statement of Intention"). Shares of another fund
purchased through a "contractual plan" may not be included unless the plan has
been completed. Purchases by certain related persons may be grouped. Shares
of this Fund may be exchanged for shares of another fund in the United Group
without payment of an additional sales charge. Subject to certain conditions,
automatic monthly exchanges of shares of United Cash Management, Inc. and
exchanges of shares of certain other funds in the United Group (listed on back
cover of this Prospectus) may be made into the Fund. These exchange privileges
may be eliminated or modified at any time, upon notice in certain instances.
Information as to rights of accumulation, Statements of Intention, grouping by
related persons, exchange privileges, Flexible Withdrawal Service, Individual
Retirement Accounts, Section 403(b) plans, Keogh, 401(k), 457 plans and other
qualified employee benefit plans is contained in the SAI. Applicable forms are
available from Waddell & Reed, Inc.'s representatives.
Fund shares may be purchased at net asset value by the Directors and
officers of the Fund, employees of Waddell & Reed, Inc., employees of their
affiliates, sales representatives of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each such
Director, officer, employee and sales representative. Purchases in certain
retirement plans and certain trusts for these persons may also be made at net
asset value. Purchases in a 401(k) plan having 100 or more eligible employees
and purchases in a 457 plan having 100 or more eligible employees may be made
at net asset value. Shares may also be issued at net asset value in a merger,
acquisition or exchange offer made pursuant to a plan of reorganization to
which the Fund is a party. See the SAI for additional information.
Redemption
You have the right to sell your shares back to the Fund (redeem) at any
time by sending a written request to the address on the front cover of this
Prospectus, stating how many shares or the amount in dollars you wish to
redeem. The written request must be in good order which requires that if more
than one person owns the shares, each owner must sign the written request. If
you hold a certificate, it must be properly endorsed and sent to the Fund. The
Fund reserves the right to require a signature guarantee by a national bank, a
federally chartered savings and loan or a member firm of a national stock
exchange or other eligible guarantor in accordance with procedures of the
Fund's transfer agent in certain situations, such as: the request for
redemption is made by a corporation, partnership or fiduciary, or the
redemption request is made by, or redemption proceeds are payable to, someone
other than the owner of record. If you recently purchased the shares by check,
the payment of redemption proceeds on these shares may be delayed. You may
arrange for the bank upon which the purchase check was drawn to provide to the
Fund telephone or written assurance, satisfactory to the Fund, that the check
has cleared and been honored. If no such assurance is given, payment of the
redemption proceeds on these shares will be delayed until the earlier of 10
days or when the Fund has been able to verify that your purchase check has
cleared and been honored.
The Fund will redeem your shares at their net asset value (which may be
more or less than what you paid) next computed after receipt of your written
request for redemption in good order at the Fund's address shown on the front
cover of this Prospectus. Payment is made within seven days, unless delayed
because of emergency conditions determined by the Securities and Exchange
Commission, when the New York Stock Exchange is closed (other than on weekends
and holidays) or when trading on the Exchange is restricted. Payment is made
in cash, although under extraordinary conditions redemptions may be made in
portfolio securities.
You may reinvest in the Fund all or part of the amount you redeemed
without charge by sending to the Fund the amount you wish to reinvest. The
reinvested amounts must be received within thirty days after the date of your
redemption. You may do this only once as to Fund shares.
Under the terms of the 401(k) plan which Waddell & Reed, Inc. has
available, the plan may have the right to make a loan to a plan participant by
redeeming Fund shares held by the plan. Principal and interest payments on the
loan made in accordance with the terms of the plan may be reinvested by the
plan, without payment of a sales charge, in shares of any of the funds in the
United Group in which the plan may invest.
The Fund reserves the right to redeem at net asset value all shares owned
by a particular shareholder in the Fund having an aggregate net asset value
less than $500. The Fund will give the shareholder notice of intention to
redeem and a 60-day opportunity to purchase a sufficient number of additional
shares to bring the net asset value of his or her shares in the Fund to $500.
See the SAI for further information.
Information concerning the establishment of automatic payments from an
account is available from account representatives of Waddell & Reed, Inc.
<PAGE>
THE INVESTMENTS OF
UNITED GOLD & GOVERNMENT FUND, INC.
DECEMBER 31, 1994
Troy
Ounces Value
BULLION
Gold* .................................. 3,399 $ 1,302,157
Platinum* .............................. 3,142 1,302,987
TOTAL BULLION - 6.96% $ 2,605,144
(Cost: $2,625,961)
Shares
COMMON STOCKS
Gold
Australia - 8.61%
Gold Mines of Kalgoorlie Limited . ...... 1,081,660 838,287
Newcrest Mining Limited ................ 125,000 557,125
Normandy Posieden Ltd. ................. 602,100 877,260
Nuigini Mining Ltd.* ................... 309,900 948,914
Total ................................. 3,221,586
Canada - 26.95%
Agnico-Eagle Mines Limited ............. 100,000 1,052,100
Cambior Inc. ........................... 71,600 823,543
Euro-Nevada Mining Corporation Limited . 76,200 1,603,400
Franco-Nevada Mining Corporation Limited 26,800 1,316,657
International Musto Explorations Ltd.* . 200,000 980,800
Kinross Gold Corporation* .............. 162,000 837,702
Pegasus Gold Inc. ...................... 50,000 568,750
Placer Dome Inc. ....................... 50,000 1,087,500
Royal Oak Mines Inc.* .................. 100,000 325,000
TVX Gold Inc.* ......................... 219,700 1,488,687
Total ................................. 10,084,139
South Africa - 7.94%
Driefontein Consolidated Limited, ADR .. 50,000 762,500
Free State Consolidated Gold Mines
Ltd., ADR ............................. 45,000 686,250
Kloof Gold Mining Company Ltd., ADR .... 44,000 646,228
St. Helena Gold Mines Ltd., ADR ........ 20,000 195,000
Vaal Reefs Exploration & Mining Co.
Ltd., New Shares, ADR ................. 75,000 681,975
Total.................................. 2,971,953
See Notes to Schedule of Investments on page 18.
<PAGE>
THE INVESTMENTS OF
UNITED GOLD & GOVERNMENT FUND, INC.
DECEMBER 31, 1994
Shares Value
COMMON STOCKS (Continued)
Gold (Continued)
United States - 16.86%
Amax Gold Inc. ......................... 106,137 $ 636,822
American Barrick Resources Corporation . 50,000 1,112,500
Battle Mountain Gold Company, Class A .. 100,000 1,100,000
Canyon Resources Corporation* .......... 200,000 325,000
Homestake Mining Company ............... 55,000 941,875
Newmont Gold Company ................... 35,000 1,246,875
Santa Fe Pacific Gold Corporation* ..... 73,600 947,600
Total ................................. 6,310,672
Total Gold Securities - 60.36% 22,588,350
Metals - 3.43%
United States
Cyprus Amax Minerals Company ........... 12,500 326,563
Freeport McMoRan Copper & Gold
Inc., Class A ......................... 45,000 956,250
Total ................................. 1,282,813
Miscellaneous
Coal - 1.57%
Zeigler Coal Holding Company ........... 50,000 587,500
Multi-Industry - 2.09%
RTZ Corporation PLC (The) .............. 60,344 781,696
Total Miscellaneous Securities - 3.66% 1,369,196
TOTAL COMMON STOCKS - 67.45% $25,240,359
(Cost: $22,299,089)
PREFERRED STOCKS - 5.79%
Gold
United States
Amax Gold Inc., Series B, Convertible .. 5,000 242,500
Battle Mountain Gold Company,
Convertible ........................... 10,000 610,000
Echo Bay Finance Corp., Series A,
Convertible ........................... 40,000 1,315,000
Total ................................. $2,167,500
(Cost: $1,748,700)
See Notes to Schedule of Investments on page 18.
<PAGE>
THE INVESTMENTS OF
UNITED GOLD & GOVERNMENT FUND, INC.
DECEMBER 31, 1994
Principal
Amount in
Thousands Value
TOTAL SHORT-TERM SECURITIES - 23.46%
J. P. Morgan Securities, 5.2%
Repurchase Agreement dated
12-30-94, to be repurchased
at $8,785,073 on 1-3-95** ............. $8,780 $ 8,780,000
(Cost: $8,780,000)
TOTAL INVESTMENTS - 103.66% $38,793,003
(Cost: $35,453,750)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (3.66%) (1,370,999)
NET ASSETS - 100.00% $37,422,004
Notes To Schedule Of Investments
*Non-income producing.
**Collateralized by $8,509,000 U.S. Treasury Notes, 8.375% due 8-15-2008,
market value and accrued interest aggregate $8,976,906.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
Assets
Investments -- at value (Notes 1 and 3):
Bullion (cost -- $2,625,961) .................... $ 2,605,144
Securities (cost -- $32,827,789) ................ 36,187,859
-----------
38,793,003
Cash ............................................. 4,408
Receivables:
Interest and dividends .......................... 56,262
Fund shares sold ................................ 28,697
Prepaid insurance premium ........................ 10,646
-----------
Total assets .................................. 38,893,016
-----------
Liabilities
Payable for investment securities purchased ...... 1,146,750
Payable for Fund shares redeemed ................. 242,154
Accrued transfer agency and dividend disbursing .. 18,189
Accrued service fee ............................... 10,423
Accrued accounting services fee .................. 1,667
Other ............................................ 51,829
-----------
Total liabilities ............................. 1,471,012
-----------
Total net assets ............................. $37,422,004
===========
Net Assets
$1.00 par value capital stock, authorized --
100,000,000; shares outstanding -- 4,571,446
Capital stock ................................... $ 4,571,446
Additional paid-in capital ...................... 60,888,325
Accumulated undistributed income (loss):
Accumulated undistributed net investment income . 7,099
Accumulated net realized loss on investment
transactions transactions ..................... (31,384,119)
Net unrealized appreciation in value of
investments at end of period .................. 3,339,253
-----------
Net assets applicable to outstanding units
of capital.................................... $37,422,004
===========
Net asset value per share (net assets divided by
shares outstanding) .............................. $8.19
Sales load (offering price x 5.75%) ................ .50
-----
Offering price per share (net asset value
divided by 94.25%) ............................... $8.69
=====
On sales of $100,000 or more the sales load
is reduced as set forth on page 14.
See notes to financial statements.
UNITED GOLD & GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1994
Investment Income
Income:
Dividends ....................................... $ 576,493
Interest ........................................ 368,506
-----------
Total income .................................. 944,999
-----------
Expenses (Note 2):
Investment management fee ....................... 312,911
Transfer agency and dividend disbursing ......... 191,123
Service fee ..................................... 60,162
Custodian fees .................................. 38,572
Accounting services fee ......................... 20,000
Audit fees ...................................... 14,447
Legal fees ...................................... 3,983
Other ........................................... 55,448
-----------
Total expenses ................................ 696,646
-----------
Net investment income ........................ 248,353
-----------
Realized and Unrealized Gain (Loss) on Investments
Realized net gain on bullion ...................... 81,381
Realized net gain on securities .................. 3,523,579
-----------
Realized net gain on investments ................ 3,604,960
-----------
Unrealized depreciation in value of bullion
during the period ............................... (184,530)
Unrealized depreciation in value of securities
during the period ............................... (12,037,954)
-----------
Unrealized depreciation in value of investments
during the period ............................. (12,222,484)
-----------
Net loss on investments ....................... (8,617,524)
-----------
Net decrease in net assets resulting from
operations ................................. $(8,369,171)
===========
See notes to financial statements.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year
ended December 31,
-----------------------
1994 1993
----------- -----------
Increase (Decrease) in Net Assets
Operations:
Net investment income ............... $ 248,353 $ 178,585
Realized net gain on investments .... 3,604,960 2,095,169
Unrealized appreciation
(depreciation) .................... (12,222,484) 17,844,721
----------- -----------
Net increase (decrease) in net
assets resulting from
operations ....................... (8,369,171) 20,118,475
----------- -----------
Dividends to shareholders from
net investment income* .............. (249,300) (188,719)
----------- -----------
Capital share transactions:
Proceeds from sale of shares
(1,361,695 and 1,720,096 shares,
respectively) ...................... 12,898,882 13,848,251
Proceeds from reinvestment of
dividends (28,118 and 23,934
shares, respectively) ............. 245,912 185,584
Payments for shares redeemed
(1,522,587 and 1,796,401 shares,
respectively) ...................... (14,012,232) (14,191,833)
----------- -----------
Net decrease in net assets
resulting from capital
share transactions ............... (867,438) (157,998)
----------- -----------
Total increase (decrease) ........ (9,485,909) 19,771,758
Net Assets
Beginning of period .................. 46,907,913 27,136,155
----------- -----------
End of period, including undistributed
net investment income of $7,099 and
$8,046, respectively ................ $37,422,004 $46,907,913
=========== ===========
*See "Financial Highlights" on page 22.
See notes to financial statements.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the
period
from
September
4, 1985
through
For the fiscal year ended
December 31, December
-------------------------------------------------
- ------------------------------------ 31,
<S> <C> <C> <C> <C> <C>
<C> <C> <C> <C> <C>
1994 1993 1992 1991 1990
1989 1988 1987 1986 1985*
---- ---- ---- ---- ----
- ---- ---- ---- ---- ------
Net asset value,
beginning of period ..... $9.97 $5.70 $6.63 $6.68 $8.66
$7.47 $7.95 $6.83 $5.07 $5.00
----- ----- ----- ----- -----
- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment income ... .05 .04 .06 .15 .11
.16 .17 .14 .17 .06
Net realized and
unrealized gain
(loss) on
investments ........... (1.78) 4.27 (0.93) (0.05) (1.97)
1.20 (0.48) 1.93 1.89 .01
----- ----- ----- ----- -----
- ----- ----- ----- ----- -----
Total from investment
operations .............. (1.73) 4.31 (0.87) .10 (1.86)
1.36 (0.31) 2.07 2.06 .07
----- ----- ----- ----- -----
- ----- ----- ----- ----- -----
Less distributions:
Dividends from net
investment income ..... (0.05) (0.04) (0.06) (0.15) (0.12)
(0.17) (0.17) (0.13) (0.22) 0.00
Distributions from
capital gains ......... 0.00 0.00 0.00 0.00 0.00
0.00 0.00 (0.82) (0.08) 0.00
----- ----- ----- ----- -----
- ----- ----- ----- ----- -----
Total distributions ....... (0.05) (0.04) (0.06) (0.15) (0.12)
(0.17) (0.17) (0.95) (0.30) 0.00
----- ----- ----- ----- -----
- ----- ----- ----- ----- -----
Net asset value,
end of period ........... $8.19 $9.97 $5.70 $6.63 $6.68
$8.66 $7.47 $7.95 $6.83 $5.07
===== ===== ===== ===== =====
===== ===== ===== ===== =====
Total return** ............ -17.36% 75.82% -13.18% 1.47% -21.59%
18.42% -3.92% 30.36% 41.48% 4.39%
Net assets, end of period
(000 omitted) ........... $37,422 $46,908 $27,136 $40,587 $54,371
$83,154 $99,460 $119,894 $17,695 $1,769
Ratio of expenses to average
net assets .............. 1.59% 1.69% 1.88% 1.57% 1.56%
1.42% 1.42% 1.20% 1.48% 0.48%
Ratio of net investment income
to average net assets ... 0.57% 0.48% 0.90% 2.11% 1.43%
1.91% 2.14% 1.81% 3.46% 2.17%
Portfolio turnover rate*** 64.89% 84.00% 61.50% 112.80% 82.42%
89.92% 100.19% 107.00% 159.66% 21.73%
*The Fund's inception date is February 28, 1985; however, since the Fund did
not have investment activity or incur expenses
prior to the date of public offering, the per-share data and ratios are for
a capital share outstanding for the period from
September 4, 1985 (initial public offering) through December 31, 1985. On
an annual basis, the ratios of expenses and net
investment income to average net assets would have been approximately 1.50%
and 6.77%, respectively.
**Total return calculated without taking into account the sales load deducted
on an initial purchase.
***This rate is, in general, calculated by dividing the average value of the
Fund's portfolio securities during the period into
the lesser of its purchases or sales of securities in the period, excluding
short-term securities and bullion.
</TABLE>
See notes to financial statements.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1 -- Significant Accounting Policies
United Gold & Government Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a major dealer in bonds. Convertible bonds are
valued using this pricing system only on days when there is no sale
reported. Stocks which are traded over-the-counter are priced using
NASDAQ (National Association of Securities Dealers Automated Quotations)
which provides information on bid and asked or closing prices quoted by
major dealers in such stocks. Gold and silver bullion are valued at the
last spot settlement price for current delivery as calculated by the
Commodity Exchange, Inc. as of the close of that Exchange. Platinum
bullion is valued at the last spot settlement price as calculated by the
New York Mercantile Exchange as of the close of that Exchange. Securities
for which quotations are not readily available are valued as determined in
good faith in accordance with procedures established by and under the
general supervision of the Fund's Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the
Internal Revenue Code), premiums on the purchase of bonds and post-1984
market discount are amortized for both financial and tax reporting
purposes over the remaining lives of the bonds. Dividend income is
recorded on the ex-dividend date except that certain dividends from
foreign securities are recorded as soon as the Fund is informed of the ex-
dividend date. Interest income is recorded on the accrual basis. See
Note 3 -- Investment Securities Transactions.
C. Foreign currency translations -- All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars daily. Purchases and
sales of investment securities and accruals of income and expenses are
translated at the rate of exchange prevailing on the date of the
transaction. The Fund combines fluctuations from currency exchange rates
and fluctuations in market value when computing net realized and
unrealized gain or loss from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of its
taxable income and capital gains to its shareholders and otherwise qualify
as a regulated investment company under the Internal Revenue Code. In
addition, the Fund intends to pay distributions as required to avoid
imposition of excise tax. Accordingly, provision has not been made for
Federal income taxes. See Note 4 -- Federal Income Tax Matters.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the record date. Net investment income
distributions and capital gains distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are due to differing treatments
for items such as deferral of wash sales and post-October losses, foreign
currency transactions, net operating losses and expiring capital loss
carryforwards.
F. Repurchase agreements -- Repurchase agreements are collateralized by the
value of the resold securities which, during the entire period of the
agreement, remains at least equal to the value of the loan, including
accrued interest thereon. The collateral for the repurchase agreement is
held by the Fund's custodian bank.
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 .30% 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 $11.0 billion of
combined net assets at December 31, 1994) at annual rates of .51% of the first
$750 million of combined net assets, .49% on that amount between $750 million
and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between
$2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion, .40%
between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly-owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services,
the Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in
the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
At present, the Fund operates under state expense requirements which limit
the amount of aggregate annual expenses, adjusted for certain excess expenses,
that the Fund may incur during its fiscal year. The Manager will reimburse the
Fund for any expenses in excess of the limitation. No such reimbursement is
required for the period ended December 31, 1994.
The Fund pays WARSCO a per account charge for transfer agency and dividend
disbursement services of $1.0208 for each shareholder account which was in
existence at any time during the prior month, plus $0.30 for each account on
which a dividend or distribution of cash or shares had a record date in
thatmonth. The Fund also reimburses W&R and WARSCO for certain out-of-pocket
costs.
As principal underwriter for the Fund's shares, W&R received direct and
indirect gross sales commissions (which are not an expense of the Fund) of
$153,080, out of which W&R paid sales commissions of $88,222 and all expenses
in connection with the sale of Fund shares, except for registration fees and
related expenses.
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to W&R in an
amount not to exceed .25% of the Fund's average annual net assets. The fee is
to be paid to reimburse W&R for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts.
The Fund paid Directors' fees of $1,589.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 3 -- Investment Securities Transactions
Purchases of investment securities, other than U.S. Government and short-
term securities, aggregated $15,087,203 while proceeds from maturities and
sales aggregated $17,206,144. Purchases of bullion aggregated $788,900 while
proceeds from the sale of bullion aggregated $3,931,754. Purchases of short-
term securities and U.S. Government securities aggregated $1,356,470,000 and
$6,108,946, respectively. Proceeds from maturities and sales of short-term
securities and U.S. Government securities aggregated $1,351,187,423 and
$5,928,047, respectively.
For Federal income tax purposes, cost of investments owned at December 31,
1994 was $35,453,750, resulting in net unrealized appreciation of $3,339,253,
of which $5,715,214 related to appreciated securities and $2,375,961 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $3,604,961 during the year ended December 31, 1994, which was fully offset
by utilization of capital loss carryforwards. Remaining prior year capital
loss carryforwards of the Fund aggregated $31,384,119 at December 31, 1994.
This amount is available to offset future realized capital gain net income for
Federal income tax purposes through December 31, 1996; $11,894,711 of this
amount is available through December 31, 1997: $11,331,322 is available through
December 31, 1998; $6,823,792 is available through December 31, 1999 and
$4,958,441 is available through December 31, 2000.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
United Gold & Government Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of United Gold & Government Fund,
Inc. (the "Fund") at December 31, 1994, the results of its operations for the
year then ended and the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of portfolio positions at December 31, 1994 by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
January 31, 1995
<PAGE>
United Gold & Government 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 66201-9217
Kirkpatrick & Lockhart (913) 236-2000
1800 M Street N. W.
Washington, D. C. Shareholder Servicing Agent
Waddell & Reed Services Company
Independent Accountants 6300 Lamar Avenue
Price Waterhouse LLP P. O. Box 29217
Kansas City, Missouri Shawnee Mission, Kansas 66201-9217
(913) 236-2000
Investment Manager
Waddell & Reed Investment Accounting Services Agent
Management Company Waddell & Reed Services Company
6300 Lamar Avenue 6300 Lamar Avenue
P. O. Box 29217 P. O. Box 29217
Shawnee Mission, Kansas Shawnee Mission, Kansas 66201-9217
66201-9217 (913) 236-2000
(913) 236-2000
<PAGE>
United Gold & Government Fund, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
PROSPECTUS
March 31, 1995
The United Group of Mutual Funds
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
TABLE OF CONTENTS
Summary of Expenses ..... 2
Financial Highlights .... 3
What is the Fund? ....... 4
Performance Information . 4
Goal and Investment Policies
of the Fund .......... 5
Risk Factors ............ 9
Options and Futures .....10
Management and Services .10
Dividends, Distributions
and Taxes ............12
Purchase of Shares ......13
Redemption ..............15
Financial Statements.....16
NUP1013(3-95)
printed on recycled paper
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
March 31, 1995
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus (the
"Prospectus") of United Gold & Government Fund, Inc. (the "Fund") dated March
31, 1995, which may be obtained from the Fund or its underwriter, Waddell &
Reed, Inc., at the address or telephone number shown above.
TABLE OF CONTENTS
Performance Information .......................... 2
Investment Objective and Policies ................ 3
Investment Management and Other Services ......... 25
Purchase, Redemption and Pricing of Shares ....... 29
Directors and Officers ........................... 44
Payments to Shareholders ......................... 49
Taxes ............................................ 50
Portfolio Transactions and Brokerage ............. 54
Other Information ................................ 56
<PAGE>
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may from time to
time publish the Fund's total return information and/or performance rankings in
advertisements and sales materials.
Total Return
An average annual total return quotation is computed by finding the
average annual compounded rates of return over the one-, five-, and ten-year
periods that would equate the initial amount invested to the ending redeemable
value. Standardized total return information is calculated by assuming an
initial $1,000 investment from which the maximum sales load of 5.75% is
deducted. All dividends and distributions are assumed to be reinvested at net
asset value as of the day the dividend or distribution is paid. No sales load
is charged on reinvested dividends or distributions. The formula used to
calculate the total return is
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for the
periods shown.
Non-standardized performance information may also be presented and it may
not reflect the sales charge. For example, the Fund may also compute total
return without deduction of the sales load in which case the same formula noted
above will be used but the entire amount of the $1,000 initial payment will be
assumed to have been invested. If the sales charge were reflected, it would
reduce the performance quoted.
The average annual total return quotations as of December 31, 1994, which
is the most recent balance sheet included in the Prospectus, for the periods
shown were as follows:
With Without
Sales LoadSales Load
Deducted Deducted
One-year period from January 1, 1994 to
December 31, 1994: -22.11% -17.36%
Five-year period from January 1, 1989 to
December 31, 1994: -1.10% 0.07%
Period from September 4, 1985* to
December 31, 1994: 7.79% 8.47%
*initial public offering date
The Fund may also quote unaveraged or cumulative total return which
reflects the change in value of an investment over a stated period of time.
Cumulative total returns will be calculated according to the formula indicated
above but without averaging the rate for the number of years in the period.
Performance Rankings
Waddell & Reed, Inc. or the Fund also may from time to time publish in
advertisements or sales material performance rankings as published byrecognized
independent mutual fund statistical services such as Lipper
Analytical Services, Inc., or by publications of general interest such as
Forbes, Money, The Wall Street Journal, Business Week, Barron's, Fortune, or
Morningstar Mutual Fund Values. The Fund may also compare its performance to
that of other selected mutual funds or selected recognized market indicators
such as the Standard & Poor's 500 Stock Index and the Dow Jones Industrial
Average. Performance information may be quoted numerically or presented in a
table, graph or other illustration.
All performance information which the Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of a Fund's shares when redeemed may be more or less
than their original cost.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are described in the
Prospectus, which refers to the following investment methods and practices.
Securities - General
The Fund may invest in securities including common stock, preferred stock,
debt securities and convertible securities, as described in the Prospectus.
These securities may include the following described securities from time to
time.
The Fund may purchase debt securities whose principal amount at maturity
is dependent upon the performance of a specified equity security. The issuer
of such debt securities, typically an investment banking firm, is unaffiliated
with the issuer of the equity security to whose performance the debt security
is linked. Equity-linked debt securities differ from ordinary debt securities
in that the principal amount received at maturity is not fixed, but is based on
the price of the linked equity security at the time the debt security matures.
The performance of equity-linked debt securities depends primarily on the
performance of the linked equity security and may also be influenced by
interest rate changes. In addition, although the debt securities are typically
adjusted for diluting events such as stock splits, stock dividends and certain
other events affecting the market value of the linked equity security, the debt
securities are not adjusted for subsequent issuances of the linked equity
security for cash. Such an issuance could adversely affect the price of the
debt security. In addition to the equity risk relating to the linked equity
security, such debt securities are also subject to credit risk with regard to
the issuer of the debt security. In general, however, such debt securities are
less volatile than the equity securities to which they are linked.
The Fund may also invest in a type of convertible preferred stock that
pays a cumulative, fixed dividend that is senior to, and expected to be in
excess of, the dividends paid on the common stock of the issuer. At the
mandatory conversion date, the preferred stock is converted into not more than
one share of the issuer's common stock at the "call price" that was established
at the time the preferred stock was issued. If the price per share of the
related common stock on the mandatory conversion date is less than the call
price, the holder of the preferred stock will nonetheless receive only one
share of common stock for each share of preferred stock (plus cash in the
amount of any accrued but unpaid dividends). At any time prior to the
mandatory conversion date, the issuer may redeem the preferred stock upon
issuing to the holder a number of shares of common stock equal to the call
price of the preferred stock in effect on the date of redemption divided by the
market value of the common stock, with such market value typically determined
one or two trading days prior to the date notice of redemption is given. The
issuer must also pay the holder of the preferred stock cash in an amount equal
to any accrued but unpaid dividends on the preferred stock. This convertible
preferred stock is subject to the same market risk as the common stock of the
issuer, except to the extent that such risk is mitigated by the higher dividend
paid on the preferred stock. The opportunity for equity appreciation afforded
by an investment in such convertible preferred stock, however, is limited,
because in the event the market value of the issuer's common stock increases to
or above the call price of the preferred stock, the issuer may (and would be
expected to) call the preferred stock for redemption at the call price. This
convertible preferred stock is also subject to credit risk with regard to the
ability of the issuer to pay the dividend established upon issuance of the
preferred stock. Generally, convertible preferred stock is less volatile than
the related common stock of the issuer.
Foreign Securities
Waddell & Reed Investment Management Company (the "Manager"), the Fund's
investment manager, believes that while there are investment risks (see below)
in investing in foreign securities, there are also investment opportunities in
foreign securities. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy or each other in such matters as gross
national product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position. Individual foreign companies may
also differ favorably or unfavorably from domestic companies in the same
industry. Foreign currencies may be stronger or weaker than the U.S. dollar or
than each other. The Manager believes that the Fund's ability to invest its
assets abroad might enable it to take advantage of these differences and
strengths where they are favorable.
An investment in foreign securities is also subject to currency
fluctuation. For example, when the Funds' assets are invested in securities
denominated in foreign currency, an investor can expect that the Fund's net
asset value per share will tend to increase when the value of the U.S. dollar
is decreasing as against such currencies. Conversely, a tendency toward
decline in net asset value can be expected when the value of the U.S. dollar is
increasing as against such currencies. An investment may also be affected by
changes in exchange control regulations (i.e., currency blockage). The Fund
may bear a transaction charge in connection with the exchange of currency.
There may be less publicly available information about a foreign company than
about a domestic company. Foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards comparable to
those applicable to domestic companies. Most foreign stock markets have
substantially less volume than the New York Stock Exchange and securities of
some foreign companies are less liquid and more volatile than securities of
comparable domestic companies. There is generally less government regulation
of stock exchanges, brokers and listed companies than in the United States. In
addition, with respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments which could adversely affect investments in securities
of issuers located in those countries. If it should become necessary, the Fund
would normally encounter greater difficulties in commencing a lawsuit against
the issuer of a foreign security than it would against a United States' issuer.
When purchasing foreign securities, the Fund will ordinarily purchase
securities which are traded in the U.S. or purchase American Depository
Receipts ("ADR's") which are certificates issued by U.S. banks representing the
right to receive securities of a foreign issuer deposited with that bank or a
correspondent bank. However, the Fund may purchase the securities of a foreign
issuer directly in foreign markets so long as in the Manager's judgment an
established public trading market exists. Such investments may increase the
risk with respect to the liquidity of the Fund's portfolio and the Fund's
ability to meet a large number of shareholder redemption requests should there
be economic, political or social turmoil in a country in which the Fund has a
substantial portion of its assets invested or should relations between the U.S.
and foreign countries deteriorate markedly.
Restricted Securities
The Fund may purchase foreign restricted securities. However, it will not
purchase restricted securities if as a result of such purchase more than 5% of
its total assets would consist of restricted securities. This is a fundamental
policy that may only be changed with shareholder approval. Restricted
securities are securities which are subject to legal or contractual
restrictions on resale.
Restricted securities which are traded in foreign markets are often
subject to restrictions which prohibit resale to United States persons or
entities or permit sales only to foreign broker-dealers who agree to limit
their resale to such persons or entities. The buyer of such securities must
enter into an agreement that, usually for a limited period of time, it will
resell such securities subject to such restrictions. 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.
Lending Securities
One of the ways in which the Fund may try to realize income is by lending
its securities. If the Fund does this, the borrower pays the Fund an amount
equal to the dividends or interest on the securities that the Fund would have
received if it had not loaned the securities. The Fund also receives
additional compensation as discussed below.
Any securities loans which the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). This
policy can only be changed by shareholder vote. Under the present Guidelines,
the collateral must consist of cash or U.S. Government Securities (as defined
in the Prospectus) or bank letters of credit at least equal in value to the
market value of the securities loaned on each day that the loan is outstanding.
If the market value of the loaned securities exceeds the value of the
collateral, the borrower must add more collateral so that it at least equals
the market value of the securities loaned. If the market value of the
securities decreases, the borrower is entitled to return of the excess
collateral.
There are two methods of receiving compensation for making loans. The
first is to receive a negotiated loan fee from the borrower. This method is
available for all three types of collateral. The second method, which is not
available when letters of credit are used as collateral, is for the Fund to
receive interest on the investment of the cash collateral or to receive
interest on the 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 which the Fund may accept as collateral are
agreements by banks (other than the borrowers of the Fund's securities),
entered into at the request of the borrower and for its account and risk, under
which the banks are obligated to pay to the Fund, while the letter is in
effect, amounts demanded by the Fund if the demand meets the terms of the
letter. The Fund's right to make this demand secures the borrower's
obligations to it. The terms of any such letters and the creditworthiness of
the banks providing them (which might include the Fund's custodian bank) must
be satisfactory to the Fund.
The Manager, subject to the direction and control of the Board of
Directors, has adopted additional rules concerning lending of securities which
may be changed without shareholder vote. At present, under these rules, the
Fund will lend securities only to creditworthy broker-dealers and financial
institutions. The Fund will make loans only under rules of the New York Stock
Exchange, which presently require the borrower to return the securities 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
securitiesreturned to it in time to vote them if a material event affecting the
investment is to be voted on. The Fund may pay reasonable finder's,
administrative and custodian fees in connection with loans of securities.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules which may be changed without shareholder vote as to
(i) whom securities may be loaned; (ii) the investment of cash collateral; or
(iii) voting rights.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned goes up, risks of delay
in recovering the securities loaned or even loss of rights in the collateral
should the borrower of the securities fail financially.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. A
repurchase transaction occurs when, at the time the Fund purchases securities,
it also agrees to resell them to the vendor (normally a commercial bank or
broker-dealer), and must deliver those securities and/or securities substituted
for them under the repurchase agreement to the vendor on an agreed-upon date in
the future. In this section, such securities, including any securities so
substituted, are referred to as the "Resold Securities." The resale price is
in excess of the purchase price in that it reflects an agreed-upon market
interest rate effective for the period of time during which the Fund's money is
invested in the Resold Securities. The majority of the repurchase transactions
in which the Fund would engage run from day to day, and the delivery pursuant
to the resale typically will occur within one to five days of the purchase.
The Fund's risk is limited to the ability of the vendor to pay the agreed-upon
sum upon the delivery date. In the event of bankruptcy or other default by the
vendor, there may be possible delays or expenses in liquidating the Resold
Securities, decline in their value or loss of interest. Upon default, the
Resold Securities constitute collateral security for the repurchase obligation.
The return on such collateral may be more or less than that from the repurchase
agreement. The Fund's repurchase agreements will be structured so as to fully
collateralize the loans, i.e., the value of the Resold Securities, which will
be held by the Fund's custodian bank or by a third party that qualifies as a
custodian under section 17f(5) of the Investment Company Act of 1940, is and,
during the entire term of the agreement, remains at least equal to the value of
the loan, including the accrued interest earned thereon. Repurchase Agreements
are entered into only with those entities approved on the basis of criteria
established by the Board of Directors.
Illiquid Investments
The Fund has an operating policy, which may be changed without shareholder
approval, which provides that due to their possible limited liquidity, the Fund
may not make certain illiquid investments if as a result more than 10% of its
net assets would consist of such investments. The investments which are
included in this 10% limit are: (i) repurchase agreements not terminable
within seven days; (ii) fixed time deposits (including insured deposits)
subject to withdrawal penalties other than overnight deposits; (iii) restricted
securities; (iv) securities for which market quotations are not readily
available; and (v) unlisted options and their underlying collateral.
Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts
("Forward Contracts"), provided that it does not thereafter have more than 15%
of the value of its assets committed to the consummation of all such Forward
Contracts; however, it will not enter into Forward Contracts or maintain a net
exposure to such Forward Contracts where the consummation of the Forward
Contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of its portfolio securities or other assets denominated in
that currency. The Fund may hold foreign currency only in connection with
Forward Contracts, only up to four business days, as well as in connection with
the purchase or sale of foreign securities, but not otherwise. All the
policies stated in this paragraph are fundamental policies.
A Forward Contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days (term) from
the date of the Forward Contract agreed upon by the parties, at a price set at
the time of the Forward Contract. These Forward Contracts are traded directly
between currency traders (usually large commercial banks) and their customers.
The Fund expects to use Forward Contracts under two circumstances:
1. When the Manager wishes to "lock in" the U.S. dollar price of a security
when the Fund is purchasing or selling a security denominated in a foreign
currency;
2. When the Manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, the Fund
would be able to enter into a Forward Contract to sell foreign currency
for a fixed U.S. dollar amount approximating the value of some or all of
the Fund's portfolio securities denominated in such foreign currency.
As to the first circumstance, when the Fund enters into a trade for the
purchase or sale of a security denominated in a foreign currency, it may be
desirable to establish (lock in) the U.S. dollar cost or proceeds. By entering
into Forward Contracts in U.S. dollars for the purchase or sale of a foreign
currency involved in an underlying security transaction, the Fund will be able
to protect itself against a possible loss between trade and settlement dates
resulting from the adverse change in the relationship between the U.S. dollar
and the subject foreign currency.
Under the second circumstance, when the Manager believes that the currency
of a particular country may suffer a substantial decline, the Fund could enter
into a Forward Contract to sell for a fixed dollar amount the amount in foreign
currencies approximating the value of some or all of its portfolio securities
denominated in such foreign currency. The Fund will place cash or liquid
equity or debt securities in a separate account with its Custodian in an amount
equal to the value of the Forward Contracts entered into under the second
circumstance. If the value of the securities placed in the separate account
declines, additional cash or securities will be placed in the account on a
daily basis so that the value of the account equals the amount of the Fund's
commitments with respect to such Forward Contracts.
The precise matching of Forward Contracts in the amounts and values of
securities involved would not generally be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the Forward Contract is entered
into and the date it matures. The projection of short-term currency market
movements is extremely difficult, and the successful execution of short-term
hedging strategy is highly uncertain. The Manager does not intend to enter
into such Forward Contracts on a regular basis. Normally, consideration of the
prospect for currency parities will be incorporated into the long-term
investment decisions made with respect to overall diversification strategies.
However, the Manager believes that it is important to have flexibility to enter
into such Forward Contracts when it determines that the Fund's best interests
may be served.
Generally, the Fund will not enter into a Forward Contract with a term of
greater than one year. At the maturity of the Forward Contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency,or
it may retain the security and terminate the obligation to deliver the
foreign currency by purchasing an "offsetting" Forward Contract with the same
currency trader obligating the Fund to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the Forward Contract. Accordingly,
it may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or loss (as described below) to the extent
that there has been movement in Forward Contract prices. If it engages in an
offsetting transaction, it may subsequently enter into a new Forward Contract
to sell the foreign currency. Should forward prices decline during the period
between the Fund's entering into a Forward Contract for the sale of a foreign
currency and the date it enters into an offsetting Forward Contract for the
purchase of the foreign currency, the Fund will realize a gain to the extent
the price of the currency it has agreed to sell exceeds the price of the
currency it agreed to purchase. Should forward prices increase, it will suffer
a loss to the extent the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell.
It should be realized that this method of attempting to protect the value
of the Fund's portfolio securities against a decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which one can achieve at some future
point in time. Additionally, although Forward Contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gains which might result should the value
of such currency increase. The Fund will enter into foreign forward currency
exchange contracts only for hedging purposes and has made an undertaking to a
State Securities Commission to this effect.
Investment in Warrants
The Fund may not invest more than 2% of its net assets valued at the lower
of cost or market in warrants. Warrants acquired in units or attached to other
securities are not considered for purposes of computing the 2% limitation.
Warrants basically are options to purchase equity securities at specific prices
valid for a specific period of time. The prices do not necessarily move
parallel to the prices of the underlying securities. Warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer.
Investment in Unseasoned Issuers
In order to comply with the regulations of certain states, the Fund will
not purchase securities of unseasoned issuers, including their predecessors,
which have been in operation for less than three years, if the value of its
investment in such securities will exceed 5% of its total assets.
U.S. Government Securities
U.S. Government 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,
Federal National Mortgage Association, Farmers Home Administration, Export-
Import Bank of the United States, Small Business Administration, Government
National Mortgage Association, General Services Administration, Central Bank
for Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Farm Credit Banks, Maritime Administration, the Tennessee Valley
Authority, the Resolution Funding Corporation and the Student Loan Marketing
Association.
Among the U.S. Government Securities that the Fund will purchase are
"mortgage-backed securities" of the Government National Mortgage Association
("Ginnie Mae"), the Federal Home Loan Mortgage Association ("Freddie Mac") and
the Federal National Mortgage Association ("Fannie Mae"). These mortgage-
backed securities include "pass-through" securities and "participation
certificates"; both are similar, representing pools of mortgages that are
assembled, with interests sold in the pool; the assembly is made by an
"issuer," such as a mortgage banker, commercial bank or savings and loan
association, which assembles the mortgages in the pool and passes through
payments of principal and interest for a fee payable to it. Payments of
principal and interest by individual mortgagors are "passed through" to the
holders of the interests in the pool. Thus, the monthly or other regular
payments on pass-through securities and participation certificates include
payments of principal (including prepayments on mortgages in the pool) rather
than only interest payments. Another type of mortgage-backed security is the
"collateralized mortgage obligation," which is similar to a conventional bond
(in that it has more regular principal and interest payments than pass-through
securities and participation certificates) and is secured by groups of
individual mortgages. Timely payment of principal and interest on Ginnie Mae
pass-throughs is guaranteed by the full faith and credit of the United States.
Freddie Mac and Fannie Mae are both instrumentalities of the U.S. Government,
but their obligations are not backed by the full faith and credit of the United
States. It is possible that the availability and the marketability (i.e.,
liquidity) of the securities discussed in this paragraph could be adversely
affected by actions of the U.S. Government to tighten the availability of its
credit.
The value of the U.S. Government Securities and other debt securities in
which the Fund may invest will fluctuate depending in large part on changes in
prevailing interest rates. If these rates go up after the Fund buys a
security, its value may go down; if these rates go down, its value may go up.
Changes in value and yield based on changes in prevailing interest rates may
have different effects on short-term debt obligations than on long-term
obligations. Long-term obligations (which often have higher yields) may
fluctuate in value more than short-term ones. The Fund has no policy limiting
the maturity of the U.S. Government Securities or other debt securities in
which it may invest.
Investments in Precious Metals
The ownership of precious metals will allow the Fund to take advantage of
those periods of time when the outlook for the price of gold, silver and
platinum is favorable while the outlook for the share prices of minerals-
related securities may be unfavorable. For example, during periods of
declining stock prices, the price of gold may increase or remain stable, while
the value of gold-related securities may be subject to the same general decline
experienced by the stock market as a whole. Under these or similar
circumstances, the ability of the Fund to purchase and hold gold, silver or
platinum will allow it to benefit from a potential increase in the price of
precious metals or stability in the price of such metals at a time when the
value of minerals-related securities may be declining.
The Fund's ability to purchase platinum will allow the Fund to invest in
platinum without the risks associated with owning shares of South African
companies engaged in the production of platinum. While the Fund is authorized
to invest in South African issuers, investments in South Africa are subject to
the risks associated with the unsettled political and social conditions
prevailing in that country and neighboring countries.
Ownership of gold, silver and platinum may be prohibited by any one or
more of the states in which the Fund is sold. In the event that any state
prohibits such investment, the Fund may elect not to make such investments.
The Fund anticipates that gold, silver and platinum will be purchased in
the form of bullion or coins or in the form of vault or other negotiable
receipts representing ownership of these metals. The Fund may incur expenses
for the shipping, storage and insurance of precious metals it purchases.
Precious metals prices are affected by various factors such as economic
conditions, political events and monetary policies. As a result, the price of
gold, silver or platinum may fluctuate widely. The sole source of return to
the Fund from such investments will be gains realized on sales; a negative
return will be realized if the metal is sold at a loss. Investments in
precious metals do not provide a yield.
Put and Call Options
The Fund may write (i.e., sell) call options ("calls") but only if (i) the
investments to which the call relates (the "related investments") are either
securities (whether or not they are U.S. Government Securities) or futures
contracts (see "Futures Contracts" below) relating to U.S. Government
Securities ("Government Securities Futures"); (ii) the calls are listed on a
domestic securities or commodities exchange or quoted on the automatic
quotation system of the National Association of Securities Dealers, Inc.
("NASDAQ"); and (iii) the calls are covered, i.e., the Fund owns the related
investments (or other investments acceptable for escrow arrangements) while the
call is outstanding.
The Fund may purchase calls but only if (i) the related investments are
either U.S. Government Securities or Government Securities Futures; and (ii)
the calls are listed on a domestic securities or commodities exchange or quoted
on NASDAQ.
The Fund may purchase put options ("puts") but only if (i) the investments
to which the put relates (the "related investments") are U.S. Government
Securities or Government Securities Futures; and (ii) either (a) the puts are
listed on a domestic securities or commodities exchange or quoted on NASDAQ; or
(b) are "optional delivery standby commitments" (see below). The Fund may
purchase puts as to related investments it owns ("protective puts") or as to
related investments it does not own ("nonprotective puts"). Optional delivery
standby commitments are entered into by sellers (other than broker-dealers) of
U.S. Government Securities as an inducement to the Fund to purchase such
securities and give the Fund the right to sell them back to the seller on
specified terms. They are thus a form of "protective puts." However, unlike
exchange listed puts, the Fund must rely on the creditworthiness of the seller,
which is evaluated by the Manager should the Fund exercise its right to make
the delivery and sale. These investments and exchange listed puts are
accounted for in the same manner. These investments will be valued at fair
value in good faith as determined under procedures established by and under the
general supervision and responsibility of the Fund's Board of Directors.
The Fund may write (i.e., sell) puts but only if (i) the related
investments are U.S. Government Securities or Government Securities Futures;
and (ii) the puts are listed on a domestic securities or commodities exchange
or quoted on NASDAQ.
The above limitations on the puts and calls the Fund may write or purchase
are fundamental policies, i.e., rules which may not be changed unless
shareholders vote to change them. The Fund has no fundamental policy as to
percentage limitations on its use of options.
At the present time, no puts or calls of any kind are quoted on NASDAQ.
The Fund has undertaken to certain State Securities Commissions that it will
not engage in options trading on NASDAQ listed securities and that it will not
purchase put options or call options if after such purchase the aggregate
premium paid for all such options owned at that time would exceed 5% of the
Fund's total assets. The Fund has also undertaken to a State Securities
Commission that it will write puts only when it is willing to purchase the
underlying security at the exercise price.
The Fund may write options for the purpose of increasing its income by
receiving premiums from the purchases of the options. The Fund may purchase
puts to protect against major price declines in the value of its portfolio
securities. The Fund may purchase calls to take advantage of an expected rise
in the market value of securities it does not hold in its portfolio (or in a
"closing purchase transaction" as discussed below).
When the Fund writes a call, it receives a premium and agrees to sell the
related investments to a purchaser of a call during the call period (usually
not more than 9 months) at a fixed exercise price (which may differ from the
market price of the related investments) regardless of market price changes
during the call period. If a call is exercised, the Fund foregoes any gain
from an increase in the market price over the exercise price.
To terminate its obligation on a call which it has written, the Fund may
purchase a call in a "closing purchase transaction." A profit or loss will be
realized depending on the amount of option transaction costs and whether the
premium previously received is more or less than the price of the call
purchased. A profit may also be realized if the call lapses unexercised,
because the Fund retains the related investments and the premium received.
When the Fund buys a call, it pays a premium and has the right to buy the
related investments from a seller of a call during the call period at a fixed
exercise price. The Fund benefits only if the market price of the related
investments is above the call price during the call period and the call is
either exercised or sold at a profit. If the call is not exercised or sold
(whether or not at a profit), it will become worthless at its expiration date
and the Fund will lose its premium payment and the right to purchase the
related investments.
When the Fund buys a put, it pays a premium and has the right to sell the
related investments to a seller of a put during the put period at a fixed
exercise price. Buying a protective put (as defined above) permits the Fund to
protect itself during the put period against a decline in the value of the
related investments below the exercise price by selling them through the
exercise of the put. Buying a nonprotective put (as defined above) permits the
Fund, if the market price of the related investments is below the put price
during the put period, either to resell the put or to buy the related
investments and sell them at the exercise price. If the market price of the
related investments is above the exercise price and as a result, the put is not
exercised or resold (whether or not at a profit), the put will become worthless
at its expiration date.
When the Fund writes a put, it receives a premium and agrees to purchase
the related investments from a purchaser of a put during the put period at a
fixed exercise price (which may differ from the market price of the related
investments) regardless of market price changes during the put period. If the
put is exercised, the Fund must purchase the related investments at the
exercise price, regardless of how much the market price of the related
investments has declined below the exercise price. The Fund's cost of
purchasing the investments will be adjusted by the amount of the premium it has
received.
To terminate its obligation on a put which it has written, the Fund may
purchase a put in a "closing purchase transaction." (As discussed above, the
Fund may also purchase puts other than as part of such closing transactions.)
A profit or loss will be realized depending on the amount of option transaction
costs and whether the premium previously received is more or less than the cost
of the put purchased. A profit will also be realized if the put lapses
unexercised because the Fund retains the premium received.
When the Fund writes a put it will, until it enters into a closing
purchase transaction as to that put, segregate and maintain designated cash or
readily marketable assets adequate to purchase the related investments should
the put be exercised.
An option position may be closed out only on an exchange which provides a
secondary market for options of the same series, and there is no assurance that
a liquid secondary market will exist for any particular option. The Fund's put
and call activities may affect its turnover rate and brokerage commission
payments. The exercise of calls or puts written by the Fund may cause it to
sell or purchase related investments, thus adversely increasing its turnover
rate in a manner beyond its control. The exercise of puts may also cause the
sale of related investments, also increasing turnover; although such exercise
is within the Fund's control, holding a protective put might cause the Fund to
sell the related investments for reasons which would not exist in the absence
of the put. Holding a nonprotective put might cause the purchase of the
related investments to permit the Fund to exercise the put. The Fund will pay
a brokerage commission each time it buys or sells a put or call or buys or
sells an underlying investment in connection with the exercise of a put or
call. Such commissions may be higher than those which would apply to direct
purchases or sales.
The Fund's custodian bank, or a securities depository acting for it, will
act as the Fund's escrow agent as to the related investments on which the Fund
has written calls, or as to other assets acceptable for such escrow, so that
pursuant to the rules of the Option Clearing Corporation and certain exchanges,
no margin deposit will be required of the Fund on such calls. Until the
related investments or other investments held in escrow are released from
escrow, they cannot be sold by the Fund; this release will take place on the
expiration of the call or the Fund's entering into a closing purchase
transaction.
Option premiums paid to control an amount of related investments are small
in relation to the market value of related investments and consequently, put
and call options offer large amounts of leverage. The leverage offered by
trading in debt options will result in the Fund's net asset value being more
sensitive to changes in the value of the related investment. Markets for
options on debt instruments and options on futures contracts are in their
initial stages so it is not possible to predict the amount of trading interest
which may exist in debt options or whether viable exchange markets will develop
or continue over time.
As indicated under "Taxes," to continue to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), the Fund must derive less than 30% of its gross income from the
disposition of certain investments held for less than three months. Due to
this limitation, the Fund will limit the extent to which it engages in the
following activities, but will not be precluded from them: (i) selling
investments held for less than three months, whether or not they were purchased
on the exercise of a call held by the Fund or a put written by the Fund; (ii)
the writing of calls on investments held for less than three months; (iii) the
writing or purchasing of puts or calls which expire in less than three months;
(iv) effecting closing transactions with respect to puts or calls written
orpurchased less than three months previously; and (v) exercising puts or calls
held by the Fund for less than three months.
Futures Contracts
The Fund may engage in buying and selling interest rate futures contracts,
but only those relating to U.S. Government Securities ("Government Securities
Futures" or "Futures"). This limitation of the Fund's engaging in interest
rate futures contracts to those relating to U.S. Government Securities is a
fundamental policy which may only be changed by shareholders. The Fund has no
other fundamental policies as to its use of futures contracts and thus no
fundamental policy as to a percentage limit thereon; however, see below for
limitations relating to the Commodity Futures Trading Commission ("CFTC").
At the present time, the U.S. Government Securities to which Government
Securities Futures relate are long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities and three-month U.S. Treasury Bills. See "Investment Objective and
Policies" for further information as to these securities.
The Fund will not use Government Securities Futures or puts and calls
related thereto for speculation but only to attempt to hedge (i.e., protect)
against future changes in interest rates which might otherwise adversely affect
the value of the U.S. Government Securities held in the Fund's portfolio. Such
adverse effects could occur because either (i) the value of the Fund's U.S.
Government Securities declines due to a rise in interest rates; or (ii) the
Fund's U.S. Government Securities or cash are not fully included in, i.e., do
not participate in, an increase in value in long-term U.S. Government
Securities due to a decline in interest rates at times when the Fund is not
fully invested in long-term U.S. Government Securities.
The "sale" of a Government Securities Future by the Fund means the
acquisition by the Fund of an obligation to deliver the related U.S. Government
Securities (i.e., those called for by the contract) at a specified price on a
specified date. The "purchase" of a Government Securities Future by the Fund
means the acquisition by the Fund of an obligation to acquire the related U.S.
Government Securities at a specified price on a specified date.
Unlike when the Fund purchases or sells a U.S. Government Security, no
price is paid or received by the Fund upon the purchase or sale of a Government
Securities Future. Initially, the Fund will be required to deposit with the
futures commission merchant (the "broker") an amount of cash or U.S. Treasury
Bills equal to a varying specified percentage of the contract amount. This
amount is known as initial margin. Cash held in the margin account is not
income producing. Subsequent payments, called variation margin, to and from
the broker, will be made on a daily basis as the price of the underlying U.S.
Government Securities fluctuates making the Government Securities Future more
or less valuable, a process known as mark to the market. Margin deposits are
also required in connection with the sale by the Fund of puts or calls on
Government Securities Futures. Changes in variation margin are recorded by the
Fund as unrealized gains or losses. Initial margin payments will be deposited
in the Fund's custodian bank in an account registered in the broker's name;
access to the assets in that account may be made by the broker only under
specified conditions. At any time prior to expiration of the Government
Securities Future, the Fund may elect to close the position by taking an
opposite position which will operate to terminate the Fund's position in the
Government Securities Future. A final determination of variation margin is then
made, additional cash is required to be paid by or released to the Fund and the
Fund realizes a loss or gain. Although Government Securities Futures by their
terms call for the actual delivery or acquisition of the related U.S.
Government Securities, in most cases the contractual obligation is so fulfilled
without having to make or take delivery of the related U.S. Government
Securities. The Fund does not intend to make or take delivery of these
securities. All transactions in the futures markets, including transactions in
Government Securities Futures, are made, offset or fulfilled through a clearing
house associated with the exchange on which the contracts are traded. Although
the Fund intends to buy and sell Government Securities Futures only on
exchanges where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular
Government Securities Future at any particular time. In such event, it may not
be possible to close a futures position.
One risk in employing Government Securities Futures to attempt to protect
against the price volatility of the U.S. Government Securities held in the
Fund's portfolio is the prospect that the prices of Government Securities
Futures will correlate imperfectly with the behavior of the cash (i.e., market
value) prices of the Fund's U.S. Government Securities. For a hedge to be
completely effective, the price change of the hedging instrument should equal
the price change of the security being hedged. Such equal price changes are
not always possible because the investment underlying the hedging instrument
may not be the same investment that is being hedged. The Manager will attempt
to create a closely correlated hedge but hedging activity may not be completely
successful in eliminating market value fluctuation. The ordinary spreads
between prices in the cash and futures markets, due to differences in the
natures of those markets, are subject to distortions. A discussion of some
factors which may create such distortions follows. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
future contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of
the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of
general interest trends by the Manager may still not result in a successful
transaction.
Another risk is that the Manager would be incorrect in the expectations as
to the extent of various interest rate movements
or the time span within which the movements take place. For example, if the
Fund sold a Government Securities Future in anticipation of an increase in
interest rates, and then interest rates went down instead, the Fund would lose
money on the sale.
The Fund will deposit in a segregated account with its custodian bank
high-quality debt obligations maturing in one year or less, or cash, in an
amount equal to the fluctuating market value of long futures contracts it has
purchased less any margin deposited on its long position. It may hold cash or
acquire such debt obligations for the purpose of making these deposits.
The use of Futures and options thereon to attempt to protect against the
market risk of a decline in the value of portfolio securities is referred to as
having a "short futures position." The use of Government Securities Futures
and options thereon to attempt to protect against the risk that the Fund might
not be fully invested to the extent permissible at a time when the value of
these securities is increasing due to declining interest rates is referred to
as having a "long futures position." The Fund must operate within certain
restrictions as to its long and short positions in Government Securities
Futures and options thereon under a rule (the "CFTC Rule") adopted by the
Commodity Futures Trading Commission (the "CFTC") under the Commodity Exchange
Act (the "CEA") to be eligible for the exclusion provided by the CFTC Rule from
registration by the Fund with the CFTC as a "commodity pool operator" (as
defined under the CEA), and must represent to the CFTC that it will operate
within such restrictions. Under these restrictions the Fund will not, as to
any positions, whether long, short or a combination thereof, enter
intoGovernment Securities Futures and options thereon for which the aggregate
initial margins and premiums exceed 5% of the fair market value of the Fund's
assets after taking into account unrealized profits and losses on options it
has entered into; in the case of an option that is "in-the-money" (as defined
under the CEA) the "in-the-money" amount may be excluded in computing such 5%.
(In general a call option on a Future is "in-the-money" if the value of the
future exceeds the strike, i.e., exercise, price of the call; a put option on a
future is "in-the-money" if the value of the future which is the subject of the
put is exceeded by the strike price of the put.) Under the restrictions, the
Fund also must, as to its short positions, use Government Securities Futures
and options thereon solely for bona fide hedging purposes within the meaning
and intent of the applicable provisions under the CEA; see the third paragraph
under "Futures Contracts" as to the meaning of "hedging" in the case of the
Fund. As to its long positions which are used as part of the Fund's portfolio
strategy and are incidental to the Fund's activities in the underlying cash
market, the "underlying commodity value" (see below) of the Fund's Government
Securities Futures and options thereon must not exceed the sum of (i) cash set
aside in an identifiable manner, or short-term U.S. debt obligations or other
U.S. dollar-denominated high-quality short-term money market instruments so set
aside, plus any funds deposited as margin; (ii) cash proceeds from existing
investments due in 30 days, and (iii) accrued profits held at the futures
commission merchant. (There is described above the segregated accounts which
the Fund must maintain with its custodian bank as to its option and futures
activities due to SEC requirements; the Fund will, as to its long positions, be
required to abide by the more restrictive of these SEC and CFTC requirements.)
The "underlying commodity value" of a future is computed by multiplying the
size (dollar amount) of the future by the daily settlement price of the future.
For an option on a future that value is the underlying commodity value of the
future underlying the option.
The Fund has no fundamental policy setting a percentage limitation on the
purchase and sale of Futures; see, however, the CFTC limitation discussed
above.
When-Issued and Delayed Delivery Transactions
The Fund may also purchase U.S. Government Securities on a when-issued or
delayed delivery basis or sell them on a delayed delivery basis; their value
may be less when delivered than the purchase price paid. For example, delivery
to the Fund and payment by the Fund in the case of a purchase by it, or
delivery by the Fund and payment to it in the case of a sale by the Fund, may
take place a month or more after the date of the transaction. The purchase or
sale price is fixed on the transaction date. The Fund will enter into when-
issued or delayed delivery transactions in order to secure what is considered
to be an advantageous price and yield at the time of entering into the
transaction. The U.S. Government Securities so purchased by the Fund are
subject to market fluctuation; their value may be less when delivered than the
purchase price paid. No interest accrues to the Fund until delivery and
payment is completed. When the Fund makes a commitment to purchase securities
on a when-issued or delayed delivery basis the Fund will record the transaction
and thereafter reflect the value of the securities in determining its net asset
value per share. The U.S. Government Securities sold by the Fund on a delayed
delivery basis are also subject to market fluctuation; their value when the
Fund delivers them may be more than the purchase price the Fund receives. When
the Fund makes a commitment to sell securities on a delayed delivery basis, it
will record the transaction and thereafter value the securities at the sales
price in determining the Fund's net asset value per share.
Ordinarily, the Fund purchases U.S. Government Securities on a when-issued
or delayed delivery basis with the intention of actually taking delivery of the
securities. However, before the securities are delivered to the Fund and
before it has paid for them, (the "settlement date") the Fund could sell the
securities if the Manager decided it was advisable to do so for investment
reasons. The Fund will hold aside or segregate cash or other U.S.
GovernmentSecurities at least equal to the amount it will have to pay on the
settlement
date; these other U.S. Government Securities will be sold at or before the
settlement date. There are no percentage limitations on the Fund's right to
buy U.S. Government Securities on a when-issued basis.
Risk Factors of High-Yield Investing
As an operating (i.e., nonfundamental) policy, the Fund does not intend to
invest more than 5% of its assets in non-investment grade debt securities. The
market for high-yield, high-risk debt securities is relatively new and much of
its growth paralleled a long economic expansion, during which this market
involved a significant increase in the use of high-yield debt securities to
fund highly leveraged corporate acquisitions and restructurings. Thereafter,
this market was affected by a relatively high percentage of defaults with
respect to high-yield securities as compared with higher rated securities. An
economic downturn or increase in interest rates is likely to have a greater
negative effect on this market and the value of high-yield debt securities, if
any, in the Fund's portfolio.
Prices of high-yield debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase
or decrease in value more than debt securities with shorter maturities. Market
prices of high-yield debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash.
Where it deems it appropriate and in the best interests of Fund shareholders,
the Fund may incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to protect the
interests of security holders of its portfolio companies.
Because the market for lower rated securities may be thinner and less
active than for higher rated securities, there may be market price volatility
for these securities and limited liquidity in the resale market. If market
quotations are not readily available for the Fund's lower rated or unrated
securities, these securities will be valued by a method that the Fund's Board
of Directors believes accurately reflects fair value. Valuation becomes more
difficult and judgment plays a greater role in valuing high-yield debt
securities than with respect to securities for which more external sources of
quotations and last sale information are available.
While credit ratings are only one factor the Manager relies on in
evaluating high-yield debt securities, certain risks are associated with using
credit ratings. Credit ratings evaluate the safety of principal and interest
payments, not market value risk. Credit ratings of individual securities may
change from time to time, and the Fund may retain a portfolio security whose
rating has been changed.
Investment Restrictions
Certain of the Fund's investment restrictions are described in the
Prospectus. The following are fundamental policies and, together with certain
restrictions described in the Prospectus, cannot be changed without shareholder
approval. Under these additional restrictions the Fund may not:
(i) Buy real estate nor any nonliquid interest in real estate investment
trusts;
(ii) Buy the securities of any company if it would then own more than 10%
of its voting securities or any class of its securities; or buy the
securities of any company if more than 5% of the Fund's total assets
(valued at market value) would then be invested in that company; or
buy the securities of companies in any one industry if more than 25%
of the Fund's total assets would then be in companies in that
industry, except, as stated in the Prospectus, the Fund intends to
concentrate in gold and other minerals-related securities;
(iii) Buy shares of other investment companies which redeem their shares.
The Fund can buy shares of investment companies which do not redeem
their shares if it does so in a regular transaction in the open market
and then does not have more than one tenth (i.e., 10%) of its total
assets in these shares; however, the Fund does not have any current
intent to invest more than 5% of its assets in such securities. The
Fund may also buy these shares as part of a merger or consolidation.
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;
(iv) Make loans other than certain limited types of loans; the Fund can
also buy debt securities which have been sold to the public; it can
also lend its portfolio securities (see "Lending Securities" above)
and enter into repurchase agreements (see "Repurchase Agreements"
above);
(v) Invest for the purpose of exercising control or management of other
companies;
(vi) Buy or continue to hold securities if the Fund's Directors or officers
or certain others own too much of the same securities; if any of these
people owns more than one two-hundredths (i.e., .5 of 1%) of the
shares of a company and if the people who own that much or more own
one twentieth (i.e., 5%) of that company's shares, the Fund cannot buy
that company's shares or continue to own them;
(vii) Participate on a joint, or a joint and several, basis in any trading
account in any securities;
(viii) Sell securities short or buy securities on margin; however, the Fund
may make margin deposits in connection with Government Securities
Futures contracts and options thereon; also, the Fund may not engage
in arbitrage transactions;
(ix) Engage in the underwriting of securities or invest in restricted
securities, except up to 5% of total assets taken at the time of
purchase may be invested in restricted foreign securities. Restricted
securities are securities which are subject to legal or contractual
restrictions on resale;
(x) Buy commodities except that it may invest up to 25% of its total
assets in gold, silver and platinum and may buy put and call options
and Government Securities Futures. Put and call options and
Government Securities Futures may, for various purposes, be considered
to be "commodities" or "securities" but the Fund may buy them whether
they are "commodities" or "securities." The Fund may also not buy any
minerals-related programs or leases;
(xi) Borrow for investment purposes, that is, to purchase securities or
mortgage or pledge any of its assets; this does not prohibit the
escrow deposits required by put and call transactions. The Fund may
borrow money from banks as a temporary measure or for extraordinary or
emergency purposes but only up to 5% of its total assets.
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
anddividing 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 was 64.89% for the fiscal year ended December
31, 1994 and 84.00% for the fiscal year ended December 31, 1993. A high
turnover rate will increase transaction costs and commission costs that will be
borne by the Fund and could generate taxable income or loss.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to Waddell & Reed Investment Management Company, a wholly-
owned subsidiary of Waddell & Reed, Inc. Under the Management Agreement, the
Manager is employed to supervise the investments of the Fund and provide
investment advice to the Fund. The address of Waddell & Reed, Inc. and the
Manager is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-
9217. Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's Directors prior to approving any Shareholder Servicing
Agreement or Accounting Services Agreement.
Torchmark Corporation and United Investors Management Company
The Manager is a wholly-owned subsidiary of Waddell & Reed, Inc. Waddell
& Reed, Inc. is a wholly-owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly-
owned subsidiary of United Investors Management Company. United Investors
Management Company is a wholly-owned subsidiary of Torchmark Corporation.
Torchmark Corporation is a publicly held company. The address of Torchmark
Corporation and United Investors Management Company is 2001 Third Avenue South,
Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual
Funds, except United Asset Strategy Fund, Inc., since 1940 or the company's
inception date, whichever was later, and to TMK/United Funds, Inc. since that
fund's inception, until January 8, 1992 when it assigned its duties as
investment manager for these funds (and the related professional staff) to the
Manager. The Manager has also served as investment manager for Waddell & Reed
Funds, Inc. since its inception in September 1992, Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc. since they each
commenced operations in February 1993 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 serves as the distributor of
TMK/United Funds, Inc.
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 Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Directors without
shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for the Manager's management services, the
Fund pays the Manager a fee as described in the Prospectus. Prior to the
above-described assignment from Waddell & Reed, Inc. to Waddell & Reed
Investment Management Company, all fees were paid to Waddell & Reed, Inc.
The management fees accrued by the Fund for the fiscal years ended
December 31, 1994, 1993 and 1992 were $312,911, $268,796 and $244,902,
respectively. For purposes of calculating the daily fee the Fund does not
include money owed to it by Waddell & Reed, Inc. for shares which it has sold
but not yet paid to the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, the Fund pays the Agent a
monthly fee of $1.0208 for each shareholder account that was in existence at
any time during the prior month, plus $0.30 for each account on which dividend
or distribution, of cash or shares, was paid in that month. It also pays
certain out-of-pocket expenses of the Agent, including long distance telephone
communications costs, microfilm and storage costs for certain documents; forms,
printing and mailing costs; and costs of legal and special services not
provided by Waddell & Reed, Inc., the Manager or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a fee for
accounting services as described in the Prospectus. The Fund paid the Agent
fees in the amount of $20,000 for each of the fiscal years ended December 31,
1994, 1993 and 1992.
The State of California imposes limits on the amount of certain expenses
the Fund can pay. If these expense limitations are exceeded, the Manager is
required to reduce the amount by which these expenses exceed the expense
limitation.
In the past, and for future fiscal periods, the state of California has
granted the Fund a variance from the expense limitation to allow the Fund to
exclude from its aggregate annual expenses transfer agency fees, professional
fees, and report costs attributable to the Fund's average account size being
smaller than the average account size for investment companies with an
objective similar to the Fund's and the amount by which its custodian fee ratio
exceeds the average custodian fee ratio for the domestic portion of portfolio
securities of the equity funds in the United Group. Other expenses excluded
from aggregate annual expenses include interest, taxes, brokerage commissions
and extraordinary expenses, such as litigation.
The Fund will notify shareholders of any change in the variance. For the
fiscal years ended December 31, 1994, 1993 and 1992, no expense reimbursement
by the Manager was required.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, the Manager
and the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement
are described above. Waddell & Reed, Inc. and affiliates pay the Fund's
Directors and officers who are affiliated with the Manager and its affiliates.
The Fund pays the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The aggregate dollar amounts of
underwriting commissions for the fiscal years ended December 31, 1994, 1993 and
1992 were $153,080, $180,359 and $87,567, respectively. The amounts retained
by Waddell & Reed, Inc. for these same periods were $64,858, $79,879 and
$39,053, respectively.
A major portion of the sales charge is paid to account representatives and
managers of Waddell & Reed, Inc. Waddell & Reed. Inc. may compensate its
account representatives as to purchases for which there is no sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under a Service Plan (the "Plan") adopted by the Fund pursuant to Rule
12b-1 under the Investment Company Act of 1940, the Fund may pay Waddell &
Reed, Inc., the principal underwriter for the Fund, a fee not to exceed .25% of
the Fund's average annual net assets, paid monthly, to reimburse Waddell &
Reed, Inc. for its costs and expenses in connection with the provision of
personal services to Fund shareholders and/or maintenance of shareholder
accounts.
The Plan and a related Service Agreement between the Fund and Waddell &
Reed, Inc. contemplate that Waddell & Reed, Inc. may be reimbursed for amounts
it expends in compensating, training and supporting registered sales
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located
at field sales offices; engaging in other activities useful in providing
personal service to Fund shareholders and/or maintenance of shareholder
accounts; and in compensating broker-dealers, and other third parties, who may
regularly sell Fund shares for providing shareholder services and/or
maintaining shareholder accounts. Service fees in the amount of $60,162 were
paid (or accrued) by the Fund for the fiscal year ended December 31, 1994.
The Plan and the Service Agreement were approved by the Fund's Board of
Directors, including the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operations of the
Plan or any agreement referred to in the Plan (hereafter, the "Plan
Directors"). The Plan was also approved by shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will
be effective only if approved, by the Directors including the Plan Directors
acting in person at a meeting called for that purpose, (iii) amounts to be paid
by the Fund under the Plan may not be materially increased without the vote of
the holders of a majority of the outstanding shares of the Fund, and (iv) while
the Plan remains in effect, the selection and nomination of the Directors who
are Plan Directors will be committed to the discretion of the Plan Directors.
Custodial and Auditing Services
The Fund's Custodian is UMB Bank, n.a., Kansas City, Missouri. In general,
it is responsible for holding the Fund's cash and securities. If Fund assets
are held in foreign countries, the Fund will comply with Rule 17f-5 under the
Investment Company Act of 1940. Price Waterhouse LLP, Kansas City, Missouri,
the Fund's independent accountants, audits the Fund's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each of the shares of the Fund is the value of the
Fund's assets, less what it owes, divided by the total number of shares
outstanding. For example, if on a particular day the Fund owned securities
worth $100 and had cash of $15, the total value of the assets would be $115.
If it owed $5, the net asset value would be $110 ($115 minus $5). If it had 11
shares outstanding, the net asset value of one share would be $10 ($110 divided
by 11).
Shares of the Fund are sold at their next determined net asset value plus
the sales charge described in the Prospectus. The price makeup as of December
31, 1994 was as follows:
Net asset value per share (net assets divided by
capital shares outstanding) ..................... $8.19
Add: selling commission (5.75% of offering price).. .50
----
Maximum offering price per share (net asset value
per share divided by 94.25%) .................... $8.69
====
The offering price of a share is its net asset value next determined
following acceptance of a purchase order plus the sales charge. The number of
shares you receive for your purchase depends on the next offering price after
Waddell & Reed, Inc. receives and accepts your order at its principal business
office at the address shown on the cover of this SAI. You will be sent a
confirmation after your purchase which will indicate how many shares you have
purchased. Shares are normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the
Fund may determine to discontinue offering Fund shares for purchase.
The net asset value per share and offering price are ordinarily computed
once daily on each day that the New York Stock Exchange is open for trading as
of the later of the close of the regular session of the New York Stock Exchange
(ordinarily 4:00 p.m. Eastern time) or the close of the regular session of any
such domestic securities or commodities exchange on which an option or future
held by the Fund is traded. The New York Stock Exchange annually announces the
days on which it will not be open for trading. The most recent announcement
indicates that the New York Stock Exchange will not be open on the following
days: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. However, it is possible
that the New York Stock Exchange may close on other days. The net asset value
will change every business day, since the number of shares outstanding and the
value of the assets changes every business day.
Except as otherwise noted, the securities in the Fund's portfolio that are
listed or traded on a national securities exchange are valued on the basis of
the last sale price on that day or, lacking any sales at a price which is the
mean between the closing bid and asked prices. Securities that are traded over-
the-counter are valued at the mean between bid and asked prices provided by
NASDAQ (National Association of Securities Dealers Automated Quotations).
Bonds, other than U.S. Government Securities and convertible bonds, are valued
using a pricing system provided by a major dealer in bonds. Convertible bonds
are valued using this pricing system only on days when there is no sale
reported. Short-term debt securities are valued at amortized cost, which
approximates market. Foreign securities that are listed or traded only on a
foreign securities exchange will be valued using the last sale price on that
exchange prior to the computation, or, if no sale is reported at that time, the
mean between the bid and asked prices. Foreign securities represented by
American Depository Receipts listed or admitted to trading on a domestic
securities exchange or traded in the United States over-the-counter market will
be valued in the same manner as domestic exchange listed or over-the-counter
securities. Foreign securities issued or guaranteed by any foreign government
or any subdivision, agency or instrumentality thereof are valued by the same
methods indicated above for the valuation of bonds. As to foreign securities
which are quoted in foreign currencies, such quotation will be converted to
U.S. dollars using foreign exchange rates. 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.
As to U.S. Government Securities, the Board of Directors has decided to
use the prices quoted by a dealer in bonds which offers a pricing service to
value U.S. Government Securities. The Board of Directors believes that such a
service does quote their fair value. The Board of Directors, however, may
hereafter determine to use another service or use the bid price quoted by
dealers if it should determine that such service or quotes more accurately
reflect the fair value of U.S. Government Securities held by the Fund.
Gold and silver bullion will be valued at the last spot settlement price
on the Commodity Exchange, Inc., and platinum bullion will be valued at the
last spot settlement price or, if not available, the settlement price of the
nearest contract month on the New York Mercantile Exchange. If prices are not
available on any of these exchanges, the relevant precious metal will be valued
at prices in the bullion market or markets approved by the Board of Directors
for that purpose; if there is no readily available market quotation, then
bullion will be valued at fair value as determined in good faith, by the Board
of Directors.
Puts, calls and Government Securities Futures purchased and held by the
Fund are valued at the last sales price thereof on the securities or
commodities exchanges on which they are traded, or, if there are no
transactions, at the mean between bid and asked prices. (Ordinarily, the close
of option trading on national securities exchanges is 4:10 P.M. Eastern time
and the close of commodities exchanges is 4:15 P.M. Eastern time.) Futures
contracts will be valued by reference to established futures exchanges. The
value of a futures contract purchased by the Fund will be either the closing
price of that contract or the bid price. Conversely, the value of a futures
contract sold by the Fund will be either the closing price or the asked price.
When the Fund writes a put or call, an amount equal to the premium
received is included in the Fund's Statement of Assets and Liabilities as an
asset, and an equivalent deferred credit is included in the liability
section.The deferred credit is "marked-to-market" to reflect the current market
value
of the put or call. If a call the Fund wrote is exercised, the proceeds
received on the sale of the related investment are increased by the amount of
the premium the Fund received. If the Fund exercised a call it purchased, the
amount paid to purchase the related investment is increased by the amount of
the premium paid. If a put written by the Fund is exercised, the amount the
Fund pays to purchase the related investment is decreased by the amount of the
premium it received. If the Fund exercises a put it purchased, the amount the
Fund receives from the sale of the related investment is reduced by the amount
of the premium it paid. If a put or call written by the Fund expires, it has a
gain in the amount of the premium; if it enters into a closing purchase
transaction, the Fund will have a gain or loss depending on whether the premium
was more or less than the cost of the closing transaction.
Minimum Initial and Subsequent Investments
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.
A $50 minimum initial investment also pertains 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 the Manager,
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."
Reduced Sales Charges
Account Grouping
Large purchases are subject to lower sales charges. The schedule of sales
charges appears in the Prospectus. For the purpose of taking advantage of the
lower sales charges available for large purchases, a purchase in any of
categories 1 through 7 listed below made by an individual or deemed to be made
by an individual may be grouped with purchases in any other of these
categories.
1. Purchases by an individual for his or her own account (includes purchases
under the United Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own
account (includes United Funds Revocable Trust Form of spouse);
3. Purchases by that individual or his or her spouse in their joint account;
4. Purchases by that individual or his or her spouse for the account of their
child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in a
Uniform Gift to Minors Act ("UGMA")or Uniform Transfers to Minors Act
account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), Section 457 of the Internal Revenue
Code of 1986, as amended (the "Code") salary reduction plan account
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 for grandson A; Grandmother has an account
in her own name; A's father has an account in his own name; the UGMA
may be grouped with A's father's account but may not be grouped with
Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in
the trust account is eligible for grouping with an IRA account of W,
H's wife;
C. H's will provides for the establishment of a trust for the benefit of
his minor children upon H's death; his bank is named as trustee; upon
H's death, an account is established in the name of the bank, as
trustee; a purchase in the account may be grouped with an account
held by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account may
not be grouped with R's individual account. If X's spouse, Y, was
successor trustee, this purchase could be grouped with Y's individual
account.
All purchases made for a participant in a multi-participant Keogh plan may
be grouped only with other purchases made under the same plan; a multi-
participant Keogh plan is defined as a plan in which there is more than one
participant where one or more of the participants is other than the spouse of
the owner/employer.
Example A: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made under
the plan with any purchases in categories 1 through 7 above.
Example B: H has established a Keogh plan; his wife, W, is a participant and
they have hired one or more employees who also become participants
in the plan; H and W may not combine any purchases made under the
plan with any purchases in categories 1 through 7 above; however,
all purchases made under the plan for H, W or any other employee
will be combined.
All purchases made under a "qualified" employee benefit plan of an
incorporated business will be grouped. A "qualified" employee benefit plan is
established pursuant to Section 401 of the Code. All qualified employee
benefit plans of any one employer or affiliated employers will also be grouped.
An affiliate is defined as an employer that directly or indirectly controls or
is controlled by or is under control with another employer.
Example: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made under
both plans will be grouped.
All purchases made under a simplified employee pension plan ("SEP"),
payroll deduction plan or similar arrangement adopted by an employer or
affiliated employers (as defined above) may be grouped provided that the
employer elects to have all such purchases grouped at the time the plan is set
up. If the employer does not make such an election, the purchases made by
individual employees under the plan may be grouped with the other accounts of
the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase in accounts eligible for grouping may be combined for
purposes of determining the availability of a reduced sales charge. In order
for an eligible purchase to be grouped, the investor must advise Waddell &
Reed, Inc. at the time the purchase is made that it is eligible for grouping
and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $75,000; at the same
time, H's parents open up three UGMA accounts for H and W's three
minor children and invest $10,000 in each child's name; the combined
purchase of $105,000 is subject to a reduced sales load of 4.75%
provided that Waddell & Reed, Inc. is advised that the purchases are
entitled to grouping.
Rights of Accumulation
If shares are held in any account and an additional purchase is made in
that account or in any account eligible for grouping with that account, the
additional purchase is combined with the net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.
Example: H is a current shareholder who invested in the Fund three years ago.
His account has a net asset value of $80,000. His wife, W, now wishes
to invest $20,000 in the Fund. W's purchase will be combined with H's
existing account and will be entitled to a reduced sales charge of
4.75%. H's original purchase was subject to a full sales charge and
the reduced charge does not apply retroactively to that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan the shares held under the plan may be combined with the additional
purchase only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases is also
available under a Statement of Intention. By signing a Statement of Intention
form, which is available from Waddell & Reed, Inc., the purchaser indicates an
intention to invest, over a 13-month period, a dollar amount which is
sufficient to qualify for a reduced sales charge. The 13-month period begins
on the date the first purchase made under the Statement is accepted by Waddell
& Reed, Inc.. Each purchase made from time to time under the Statement is
treated as if the purchaser were buying at one time the total amount which he
or she intends to invest. The sales charge applicable to all purchases made
under the terms of the Statement will be the sales charge in effect on the
beginning date of the 13-month period.
In determining the amount which the purchaser must invest in
order to qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, shares already held in the same account in which the purchase is being made
or in any account eligible for grouping with that account, as described above,
will be included.
Example: H signs a Statement of Intention indicating his intent to invest in
his own name a dollar amount sufficient to entitle him to purchase
shares at the sales charge applicable to a purchase of $100,000. H
has an IRA account and the shares held under the IRA in the Fund have
a net asset value as of the date the Statement is accepted by Waddell
& Reed, Inc. of $15,000; H's wife, W, has an account in her own name
invested in another fund in the United Group which charges the same
sales load as the Fund, with a net asset value as of the date of
acceptance of the Statement of $10,000; H needs to invest $75,000
over the 13-month period in order to qualify for the reduced sales
load applicable to a purchase of $100,000.
A copy of the Statement of Intention signed by a purchaser will be
returned to the purchaser after it is accepted by Waddell & Reed, Inc. and will
set forth the dollar amount which must be purchased within the 13-month period
in order to qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under 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 Statement of Intention is 5% of the
dollar amount which must be invested under the Statement. An amount equal to
5% of the purchase required under the Statement will be held "in escrow." If a
purchaser does not, during the period covered by the Statement, invest the
amount required to qualify for the reduced sales charge under the terms of the
Statement, he or she will be responsible for payment of the sales charge
applicable to the amount actually invested. The additional sales charge owed
on purchases made under a Statement which is not completed will be collected by
redeeming part of the shares purchased under the Statement and held "in escrow"
unless the purchaser makes payment of this amount to Waddell & Reed, Inc.
within 20 days of Waddell & Reed, Inc.'s request for payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower than
that available under the Statement of Intention, the lower sales charge will
apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell &
Reed, Inc. to sell, the shares covered by the Statement.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement will be deducted in computing the aggregate purchases under the
Statement.
Statements of Intention are not available for purchases made under a
simplified employee pension plan ("SEP") where the employer has elected to have
all purchases under the SEP grouped.
Other Funds in the United Group
Reduced sales charges for larger purchases apply to purchases of any of
the funds in the United Group which are subject to a sales charge. A purchase
of, or shares held, in any of the funds in the United Group which are subject
to the same sales charge as the Fund will be treated as an investment in the
Fund for the purpose of determining the applicable sales charge. The following
funds in the United Group are subject to a maximum 5.75% ("full") sales charge
as described in the prospectus of each Fund: United Funds, Inc., United
International Growth Fund, Inc., United Continental Income Fund, Inc., United
Vanguard Fund, Inc., United Retirement Shares, Inc., United High Income Fund,
Inc., United New Concepts Fund, Inc., United Gold & Government Fund, Inc.,
United High Income Fund II, Inc. and United Asset Strategy Fund, Inc. The
following funds in the United Group are subject to a "reduced" sales charge as
described in the prospectus of each fund: United Municipal Bond Fund, Inc.,
United Government Securities Fund, Inc. and United Municipal High Income Fund,
Inc. For the purposes of obtaining the lower sales charge which applies to
large purchases, purchases in a fund in the United Group which is subject to a
full sales charge may not be grouped with purchases in a fund in the United
Group which is subject to a reduced sales charge; conversely, purchases made in
a fund with a reduced sales charge may not be grouped or combined with
purchases of a fund which is subject to a full sales charge.
United Cash Management, Inc. is not subject to a sales charge. Purchases
in that fund are not eligible for grouping with purchases in any other fund.
Net Asset Value Purchases
As stated in the Prospectus, Fund shares may be purchased at net asset
value by the Directors and officers of the Fund, employees of Waddell & Reed,
Inc., employees of their affiliates, sales representatives of Waddell & Reed,
Inc. and the spouse, children, parents, children's spouse's and parents of each
such Director, officer, employee and sales representative. "Child" includes
stepchild; "parent" includes stepparent. Purchases in an IRA sponsored by
Waddell & Reed, Inc. established for any of these eligible purchasers may also
be at net asset value. Purchases in any tax qualified retirement plan under
which the eligible purchaser is the sole participant may also be made at net
asset value. Trusts under which the grantor and the trustee or a co-trustee
are each an eligible purchaser are also eligible for net asset value purchases.
"Employees" includes retired employees. A retired employee is an individual
separated from service from Waddell & Reed, Inc. or affiliated companies with a
vested interest in any Employee Benefit Plan sponsored by Waddell & Reed, Inc.
or its affiliated companies. "Sales representatives" includes retired sales
representatives. A "retired sales representative" is any sales representative
who was, at the time of separation from service from Waddell & Reed, Inc., a
Senior Account Representative. A custodian under the Uniform Gifts (or
Transfers) to Minors Act purchasing for the child or grandchild of any employee
or sales representative may purchase at net asset value whether or not the
custodian himself is an eligible purchaser.
Purchases in a 401(k) plan having 100 or more eligible employees and
purchases in a 457 plan having 100 or more eligible employees may be made at
net asset value.
Reasons for Differences in Public Offering Price
As described herein and in the Prospectus, there are a number of instances
in which the Fund's shares are sold or issued on a basis other than the maximum
public offering price, that is, the net asset value plus the highest sales
charge. Some of these relate to lower or eliminated sales charges for larger
purchases, whether made at one time or over a period of time as under a
Statement of Intention or right of accumulation. See the table of sales
charges in the Prospectus. The reasons for these quantity discounts are, in
general, that (i) they are traditional and have long been permitted in the
industry and are therefore necessary to meet competition as to sales of shares
of other funds having such discounts; (ii) certain quantity discounts are
required by rules of the National Association of Securities Dealers, Inc. (as
are elimination of sales charges on the reinvestment of dividends and
distributions); and (iii) they are designed to avoid an unduly large dollar
amount of sales charges on substantial purchases in view of reduced selling
expenses. Quantity discounts are made available to certain related persons for
reasons of family unity and to provide a benefit to tax exempt plans and
organizations.
The reasons for the other instances in which there are reduced or
eliminated sales charges are as follows. Exchanges at net asset value are
permitted because a sales charge has already been paid on the shares
exchanged.Sales without sales charge are permitted to Directors, officers and
certain
others due to reduced or eliminated selling expenses and since such sales may
aid in the development of a sound employee organization, encourage incentive,
responsibility and interest in the United Group and an identification with its
aims and policies. Limited reinvestments of redemptions at no sales charge are
permitted to attempt to protect against mistaken or not fully informed
redemption decisions. Shares may be issued at no sales charge in plans of
reorganization due to reduced or eliminated sales expenses and since, in some
cases, such issuance is exempted by the Investment Company Act of 1940 from the
otherwise applicable restrictions as to what sales charge must be imposed. In
no case in which there is a reduced or eliminated sales charge are the
interests of existing shareholders adversely affected since, in each case, the
Fund receives the net asset value per share of all shares sold or issued.
Flexible Withdrawal Service
If you qualify, you may arrange to receive regular monthly, quarterly,
semiannual or annual payments by redeeming shares on a regular basis through
the Flexible Withdrawal Service (the "Service"). It is available not only for
Fund shares but also for shares of any of the funds in the United Group. It
would be a disadvantage to an investor to make additional purchases of shares
while a withdrawal program is in effect as this would result in duplication of
sales charges.
To qualify for the Service, you must have invested at least $10,000 in
shares which you still own of any of the funds in the United Group; or, you
must own shares having a value of at least $10,000. The value for this purpose
is not the net asset value but the value at the offering price, i.e., the net
asset value plus the sales charge.
To start the Service, you must fill out a form (available from Waddell &
Reed, Inc.) advising Waddell & Reed, Inc. how you want your shares redeemed to
make the payments. You have three choices:
First. To get a monthly, quarterly, semiannual or annual payment of $50
or more;
Second. To get a monthly payment, which will change each month, equal to
one-twelfth of a percentage of the value of the shares in the Account; you fix
the percentage; or
Third. To get a monthly or quarterly payment, which will change each
month or quarter, by redeeming a number of shares fixed by you (at least five
shares).
Shares are redeemed on the 20th day of the month in which the payment is
to be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
Retirement Plan Accounts may be subject to a fee imposed by the plan
custodian for use of their service.
If you have a share certificate for the shares you want to make available
for the Service, you must enclose the certificate with the form initiating the
Service.
The dividends and distributions on shares you have made available for the
Service are reinvested in additional shares. All payments are made by
redeeming shares, which may involve a gain or loss for tax purposes. To the
extent that payments exceed dividends and distributions, the number of shares
you own will decrease. When all of the shares in an account are redeemed, you
will not receive any more payments. Thus, the payments are not an annuity or
income or return on your investment.
You may, at any time, change the manner in which you have chosen to have
shares redeemed. You can change to any one of the other choices originally
available to you. For example, if you started out with a $50 monthly payment,
you could change to a $200 quarterly payment. You can at any time redeem part
or all of the shares in your account; if you redeem all of the shares, the
Service is terminated. The Fund can also terminate the Service by notifying
you in writing.
After the end of each calendar year, information on shares redeemed will
be sent to you to assist you in completing your Federal income tax return.
Exchanges for Shares of Other Funds in the United Group
Once a sales charge has been paid on shares of a fund in the United Group,
these shares and any shares added to them from reinvestment of dividends or
distributions may be freely exchanged for shares of another fund in the United
Group. The shares you exchange must be worth at least $100 or you must already
own shares of the fund in the United Group into which you want to exchange.
You may exchange shares you own in another fund in the United Group for
Fund shares without charge if (i) a sales charge was paid on these shares; or
(ii) the shares were received in exchange for shares for which a sales charge
was paid; or (iii) the shares were acquired from reinvestment of dividends and
distributions paid on such shares. There may have been one or more such
exchanges so long as a sales charge was paid on the shares originally
purchased. Also, shares acquired without a sales charge because the purchase
was $2 million or more will be treated the same as shares on which a sales
charge was paid.
United Municipal Bond Fund, Inc., United Government Securities Fund, Inc.
and United Municipal High Income Fund, Inc. shares are the exceptions and
special rules apply. Shares of these funds may be exchanged for Fund shares
only if (i) you have received those shares as a result of one or more exchanges
of
shares on which a sales charge was originally paid, or (ii) the shares have
been held from the date of the original purchase for at least six months.
Subject to the above rules regarding sales charges, you may have a
specific dollar amount of shares of United Cash Management, Inc. automatically
exchanged each month into the Fund or any other fund in the United Group. The
shares of United Cash Management, Inc. which you designate for automatic
exchange must be worth at least $100 or you must own shares of the fund in the
United Group into which you want to exchange. The minimum value of shares
which you may designate for automatic exchange monthly is $100, which may be
allocated among different funds in the United Group so long as each fund
receives a value of at least $25. Minimum initial investment and minimum
balance requirements apply to such automatic exchange service.
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 we receive your written exchange request in
good order.
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any time
and any such exchange may not be accepted.
Retirement Plans
For individual taxpayers meeting certain requirements, Waddell & Reed,
Inc. offers four retirement plan arrangements which provide tax deferral and
contribute to retirement assets. All four of them involve investment in Fund
shares (or the shares of certain other funds in the United Group).
First. A self-employed person may set up a plan that is commonly called a
Keogh plan. As a general rule, an investor under a defined contribution Keogh
plan can contribute each year up to 25% of his or her annual earned income,
with a maximum of $30,000.
Second. Investors having earned income may set up a plan that is commonly
called an IRA. Under an IRA, an investor can contribute each year up to 100%
of his or her earned income up to a maximum of $2,000. The maximum is $2,250
if an investor's spouse has no earned income in a taxable year. If an
investor's spouse has at least $2,000 of earned income in a taxable year, the
maximum is $4,000 ($2,000 for each spouse).
These contributions are deductible unless the investor (or, if married,
either spouse) is an active participant in a qualified retirement plan or if,
notwithstanding that the investor or one or both spouses so participates, the
adjusted gross income does not exceed certain levels.
An investor may also use an IRA to receive a rollover contribution which
is either (a) a direct rollover from an employer's plan or (b) a rollover of an
eligible distribution paid to the investor from an employer's plan or another
IRA. To the extent a rollover contribution is made to an IRA, the distribution
will not be subject to Federal income tax until distributed from the IRA. A
direct rollover generally applies to any distribution from an employer's plan
(including a custodial account under Section 403(b)(7) of the Code, but not an
IRA) other than certain periodic payments, required minimum distributions and
other specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a
portion of that distribution generally may be rolled over to an IRA within 60
days after receipt of the distribution. Because mandatory Federal income tax
withholding applies to any eligible rollover distribution which is not paid in
a direct rollover, investors should consult their tax 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.
Third. If an investor is an employee of a public school system or of
certain types of charitable organizations, he or she may be able to enter into
a deferred compensation arrangement through a custodial account under Section
403(b) of the Code.
Fourth. If an investor is an employee of a state or local government or
of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.
Waddell & Reed, Inc. also offers to businesses prototype employee benefit
plans qualified under Section 401 of the Code. Investments may be made in the
Fund in accordance with the terms of the plans.
More detailed information about these arrangements is in the applicable
forms which are available from Waddell & Reed, Inc. These plans may involve
complex tax questions as to premature distributions and other matters.
Investors should consult their tax adviser or pension consultant.
Redemptions
The Prospectus gives information as to redemption procedures. Redemption
payments are made within seven days unless delayed because of certain emergency
conditions determined by the Securities and Exchange Commission, when the New
York Stock Exchange is closed other than for weekends or holidays, or when
trading on the Exchange is restricted. Payment is made in cash, although under
extraordinary conditions redemptions may be made in portfolio
securities.Payment for redemptions 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 Investment Company Act, pursuant
to which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for any one
shareholder.
Reinvestment Privilege
The Prospectus discusses the reinvestment privilege under which, if you
redeem and then decide it was not a good idea, you may reinvest. If Fund
shares are then being offered, you can put all or part of your redemption
payment back into Fund shares without any sales charge at the net asset value
next determined after you have returned the amount. Your written request to do
this must be received within 30 days after your redemption request was
received. You can do this only once as to Fund shares. You do not use up this
privilege by redeeming shares to invest the proceeds at net asset value in a
Keogh plan or an IRA.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to compel the redemption of shares held under any
account or any plan if the aggregate net asset value of such shares (taken at
cost or value as the Board of Directors may determine) is less than $500. The
Board of Directors has no intent to compel redemptions in the foreseeable
future. If it should elect to compel redemptions, shareholders who are
affected will receive prior written notice and will be permitted 60 days to
bring their accounts up to the minimum before this redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board has
responsibility for establishing broad corporate policies for the Fund and for
overseeing overall performance of the selected experts. It has the benefit of
advice and reports from independent counsel and independent auditors.
The principal occupation during at least the past five years of each
Director and officer of the Fund is given below. Each of the persons listed
through and including Mr. Wright is a member of the Fund's Board of Directors.
The other persons are officers but not 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, TMK/United
Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government Securities Fund,
Inc. and Torchmark Insured Tax-Free Fund, Inc. Each of the Fund's Directors is
also a Director of each of the funds in the Fund Complex and each of the Fund's
officers, with the exception of Mr. Avery, is also an officer of one or more of
the funds in the Fund Complex.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
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 of Waddell & Reed
Financial Services, Inc., United Investors Management Company and United
Investors Life Insurance Company; Chairman of the Board of Directors and Chief
Executive Officer of Torchmark Corporation; Chairman of the Board of Directors
of Vesta Insurance Group, Inc.; formerly, Chairman of the Board of Directors of
Waddell & Reed, Inc.
KEITH A. TUCKER*
President of the Fund and each of the other funds in the Fund Complex;
President, Chief Executive Officer and Director of Waddell & Reed Financial
Services, Inc.; Chairman of the Board of Directors of the Manager, Waddell &
Reed, Inc., Waddell & Reed Services Company, Waddell & Reed Asset Management
Company and Torchmark Distributors, Inc., an affiliate of Waddell & Reed, Inc.;
Vice Chairman of the Board of Directors, Chief Executive Officer and President
of United Investors Management Company; Vice Chairman of the Board of Directors
of Torchmark Corporation; Director of Southwestern Life Corporation; formerly,
partner in Trivest, a private investment concern; formerly, Director of
Atlantis Group, Inc., a diversified company.
HENRY L. BELLMON
Route 1
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma; prior to his current service as Director of the funds in the United
Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc., he served in
such capacity for the funds in the United Group and TMK/United Funds, Inc.
DODDS I. BUCHANAN
University of Colorado
Campus Box 419
Boulder, Colorado 80309
Advisory Director, The Hand Companies; President, Buchanan Ranch Corp.;
formerly, Senior Vice President and Director of Marketing Services, The Meyer
Group of Management Consultants; formerly, Chairman, Department of Marketing,
Transportation and Tourism, University of Colorado; formerly, Professor of
Marketing, College of Business, University of Colorado.
JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Formerly, President and Director of Kansas City Stock Yards Company;
formerly, Partner in Dillingham Farms, a farming operation.
JOHN F. HAYES*
335 N. Washington
P.O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; formerly, President of Gilliland & Hayes, P.A., a law firm.
GLENDON E. JOHNSON
7300 Corporate Center Drive
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Financial Corporation
and subsidiaries.
WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of the
Fund and each fund in the Fund Complex then in existence. (Mr. Morgan retired
as Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of the Manager and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company;
formerly, Director of Waddell & Reed Asset Management Company, United Investors
Management Company and United Investors Life Insurance Company, affiliates of
Waddell & Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management
and investment; formerly, Director of The Vendo Company, a manufacturer and
distributor of vending machines.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Formerly, President and Director of Univest Corporation, a real estate
investment company; formerly, Director of Classified Financial Corp., an
insurance company.
PAUL S. WISE
P.O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
LESLIE S. WRIGHT
Samford University
800 Lakeshore Drive
Birmingham, Alabama 35209
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association; formerly, President of Samford University.
Robert L. Hechler
Vice President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Vice President, Chief Operations Officer,
Director and Treasurer of Waddell & Reed Financial Services, Inc.; Executive
Vice President, Principal Financial Officer, Director and Treasurer of the
Manager; President, Chief Executive Officer, Principal Financial Officer,
Director and Treasurer of Waddell & Reed, Inc.; Director and Treasurer of
Waddell & Reed Asset Management Company; President, Director and Treasurer of
Waddell & Reed Services Company; Vice President, Treasurer and Director of
Torchmark Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund and each of the other funds in the Fund
Complex; Vice President, Chief Investment Officer and Director of Waddell &
Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.; President,
Chief Executive Officer, Chief Investment Officer and Director of the Manager
and Waddell & Reed Asset Management Company; Senior Vice President and Chief
Investment Officer of United Investors Management Company.
Theodore W. Howard
Vice President, 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.
Sharon K. Pappas
Vice President, Secretary and General Counsel of the Fund and each of the
other funds in the Fund Complex; Vice President, Secretary and General Counsel
of Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary
and General Counsel of the Manager and Waddell & Reed, Inc.; Director, Senior
Vice President, Secretary and General Counsel of Waddell & Reed Services
Company; Director, Secretary and General Counsel of Waddell & Reed Asset
Management Company; Vice President, Secretary and General Counsel of Torchmark
Distributors, Inc.; formerly, Assistant General Counsel of the Manager, Waddell
& Reed Financial Services, Inc., Waddell & Reed, Inc., Waddell & Reed Asset
Management Company and Waddell & Reed Services Company.
Michael L. Avery
Vice President of the Fund; Vice President of the Manager; formerly, Vice
President of Waddell & Reed, Inc.
John M. Holliday
Vice President of the Fund and nine other funds in the Fund Complex;
Senior Vice President of the Manager and of Waddell & Reed Asset Management
Company; formerly, Senior Vice President of Waddell & Reed, Inc.
Carl E. Sturgeon
Vice President of the Fund and eleven other funds in the Fund Complex;
Vice President of the Manager; formerly, Vice President of Waddell & Reed, Inc.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
As of the date of this SAI, four of the Fund's Directors may be deemed to
be "interested persons" as defined in the 1940 Act of its underwriter, Waddell
& Reed, Inc. The Directors who may be deemed to be "interested persons" 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 75 and has served as a director
of the funds in the United Group for a total of at least five years. A
Director Emeritus receives fees in recognition of his past services whether or
not services are rendered in his capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Currently
no person serves as Director Emeritus.
The funds in the United Group, TMK/United Funds, Inc. and Waddell & Reed
Funds, Inc. pay to each Director a total of $40,000 per year, plus $1,000 for
each meeting of the Board of Directors attended (prior to January 1, 1995, the
fee was $500 for each meeting of the Board of Directors attended) and $500 for
each committee meeting attended which is not in conjunction with a Board of
Directors meeting, other than Directors who are affiliates of Waddell & Reed,
Inc. The fees to the Directors who receive them are divided among the funds in
the United Group, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. based
on their relative size. The officers are paid by the Manager or its
affiliates.
During the Fund's fiscal year ended December 31, 1994, the Fund's
Directors received the following fees for service as a director:
Pension
or Retirement Total
Aggregate Benefits Compensation
Compensation Accrued As From Fund
From Part of Fund and Fund
Director Fund Expenses Complex
------------ -------------- ------------
Ronald K. Richey $ 0 $0 $ 0
Keith A Tucker 0 0 0
Henry L. Bellmon 160 0 43,000
Dodds I. Buchanan 160 0 43,000
Jay B. Dillingham 160 0 43,000
John F. Hayes 160 0 43,000
Glendon E. Johnson 160 0 43,000
William T. Morgan 118 0 32,000
Doyle Patterson 160 0 43,000
Frederick Vogel III 160 0 43,000
Paul S. Wise 158 0 42,500
Leslie S. Wright 154 0 41,500
Shareholdings
As of February 28, 1995, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. As of such
date no person owned of record or was known by the Fund to own beneficially 5%
or more of the Fund's outstanding shares.
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder 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 its
expenses. The second source is realized capital gains, which are derived from
the proceeds received from the sale of securities at a price higher than the
Fund's tax basis (usually cost) in such securities; these gains can be either
long-term or short-term, depending on how long the Fund has owned the
securities before it sells them. The third source is net realized gains from
foreign currency transactions. The payments made to shareholders from net
investment income, net short-term capital gains and net realized gains from
certain foreign currency transactions are called dividends. Payments, if any,
from long-term capital gains are called distributions.
The Fund pays distributions only if it has net 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 capital gains, it will ordinarily pay
distributions once each year, in the latter part of the fourth calendar
quarter. Even if the Fund has capital gains for a year, the Fund does not pay
out the gains if it has applicable prior year losses to offset the gains.
Choices You Have on Your Dividends and Distributions
In your application form, you can give instructions that (i) you want cash
for your dividends and distributions, (ii) you want your dividends and
distributions reinvested in Fund shares or (iii) you want cash for your
dividends and want your distributions reinvested in Fund shares. You can
change your instructions at any time. If you give no instruction, your
dividends and distributions will be reinvested in Fund shares. All
reinvestments are at net asset value without any sales charge. The net asset
value used for this purpose is that computed as of the record date for the
dividend or distribution, although this could be changed by the Directors.
Even if you get dividends and distributions in cash, you can thereafter
reinvest them (or distributions only) in Fund shares at net asset value (i.e.,
no sales charge) next determined after receipt by Waddell & Reed, Inc. of the
amount clearly identified as a reinvestment. The reinvestment must be within
45 days after the payment.
TAXES
General
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Code, the Fund must distribute to its shareholders
for each taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital gains
and net gains from certain foreign currency transactions) and must meet several
additional requirements. These requirements include the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures contracts or Forward Contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) the Fund must derive less than 30% of
its gross income each taxable year from the sale or other disposition of
securities, or any of the following, that were held for less than three months
- -- (i) options, futures contracts or Forward Contracts, or (ii) foreign
currencies (or options, futures contracts or Forward Contracts thereon) that
are not directly related to the Fund's principal business of investing in
securities (or in options and futures with respect to securities) ("Short-Short
Limitation"); (3) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government Securities, securities of other RICs and other
securities that are limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the outstanding voting securities of the issuer; and
(4) at the close of each quarter of the Fund's taxable year, not more than 25%
of the value of its total assets may be invested in securities (other than U.S.
Government Securities or the securities of other RICs) of any one issuer.
Investments in precious metals would have adverse tax consequences for the
Fund if it either (1) derived more than 10% of its gross income in any taxable
year from the disposition of precious metals and from other income that does
qualify under the Income Requirement or (2) held precious metals in such
quantities that the Fund failed to satisfy the 50% Diversification Requirement
for any quarter. The Fund intends to manage its portfolio so as to avoid
failing to satisfy those requirements for these reasons.
Dividends and distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months are deemed to have been paid by the Fund and received by you on
December 31 of that year even if they are paid by the Fund during the following
January. Accordingly, those dividends and distributions will be taxed to
shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any distributions received on those shares. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or distribution, the purchaser will receive some portion of the
purchase price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gains net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
It is the Fund's policy to make sufficient distributions each year to
avoid imposition of the Excise Tax. The Code permits the Fund to defer into
the next calendar year net capital losses incurred between each November 1 and
the end of the current calendar year.
Income from Foreign Securities
Dividends and interest received by the Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of a debt security denominated in a foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest, dividends or other receivables or accrues expenses
or other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally are
treated as ordinary income or loss. These gains or losses, referred to under
the Code as "section 988" gains or losses, may increase or decrease the amount
of the Fund's investment company taxable income to be distributed to its
shareholders.
Income from Options, Futures and Currencies
The use of hedging strategies, such as writing (selling) and purchasing
options and futures, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses the
Fund realizes in connection therewith. Income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in options and futures derived by the Fund with respect to
its business of investing in securities, will qualify as permissible income
under the Income Requirement. However, income from the disposition of options
and futures will be subject to the Short-Short Limitation if they are held for
less than three months. Income from the disposition of foreign currencies that
are not directly related to the Fund's principal business of investing in
securities (or options and futures with respect to securities) also will be
subject to the Short-Short Limitation if they are held for less than three
months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all the Fund's hedging transactions. To the
extent this treatment is not available, the Fund may be forced to defer the
closing out of certain options and futures beyond the time when it otherwise
would be advantageous to do so, in order for the Fund to continue to qualify as
a RIC.
Any income the Fund earns from writing options is taxed as short-term
capital gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund expires without being
exercised, the premium it receives also will be a short-term gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale. The Fund will not write so many
options that it could fail to continue to qualify as a RIC.
Certain options and futures contracts in which the Fund may invest may be
"section 1256 contracts." Section 1256 contracts held by the Fund at the end
of each taxable year, other than section 1256 contracts that are part of a
"mixed straddle" with respect to which the Fund has made an election not to
have the following rules apply, are "marked-to-market" (that is, treated assold
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 gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of
section 1256 contracts, are treated as long-term capital gain or loss, and the
balance is treated as short-term capital gain or loss. Section 1256 contracts
also may be marked-to-market for purposes of the Excise Tax and for other
purposes.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Fund may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property.
Section 1092 generally provides that any loss from the disposition of a
position in a straddle may be deducted only to the extent the loss exceeds the
unrealized gain on the offsetting position(s) of the straddle. Section 1092
also provides certain "wash sale" rules, which apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the Fund
makes certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions will be determined under
rules that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by the Manager pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio
of the Fund. Transactions in securities other than those for which an exchange
is the primary market are generally done with dealers acting as principals or
market makers. Brokerage commissions are paid primarily for effecting
transactions in securities traded on an exchange and otherwise only if it
appears likely that a better price or execution can be obtained. The
individual who manages the Fund may manage other advisory accounts with similar
investment objectives. It can be anticipated that the manager will frequently
place concurrent orders for all or most accounts which the manager has
responsibility. Transactions effected pursuant to such combined orders are
averaged as to price and allocated in accordance with the purchase or sale
orders actually placed for each fund or advisory account.
To effect the portfolio transactions of the Fund, the Manager is
authorized to engage broker-dealers ("brokers") which, in its best judgment
based on all relevant factors, will implement the policy of the Fund to achieve
"best execution" (prompt and reliable execution at the best price obtainable)
for reasonable and competitive commissions. The Manager need not seek
competitive commission bidding but is expected to minimize the commissions paid
to the extent consistent with the interests and policies of the Fund. Subject
to review by the Board of Directors, such policies include the selection of
brokers which provide execution and/or research services and other services,
including pricing or quotation services directly or through others ("brokerage
services") considered by the Manager to be useful or desirable for its
investment management of the Fund and/or the other funds and accounts over
which the Manager or its affiliates have investment discretion.
Brokerage services are, in general, defined by reference to Section 28(e)
of the Securities Exchange Act of 1934 as including (i) advice, either directly
or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities and the
availability of securities and purchasers or sellers; (ii) furnishing analyses
and reports; or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such brokerage services may
be higher than another qualified broker would charge for effecting comparable
transactions if a good faith determination is made by the Manager that the
commission is reasonable in relation to the brokerage services provided.
Subject to the foregoing considerations the Manager may also consider the
willingness of particular brokers and dealers to sell shares of the Fund and
other funds managed by the Manager and its affiliates as a factor in its
selection. No allocation of brokerage or principal business is made to provide
any other benefits to the Manager or its affiliates.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of the Manager and its affiliates
and investment research received for the commissions of those other accounts
may be useful both to the Fund and one or more of such other accounts. To the
extent that electronic or other products provided by such brokers to assist the
Manager in making investment management decisions are used for administration
or other non-research purposes, a reasonable allocation of the cost of the
product attributable to its non-research use is made by the Manager.
Such investment research (which may be supplied by a third party at the
instance of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of the
Manager; serves to make available additional views for consideration and
comparisons; and enables the Manager to obtain market information on the price
of securities held in the Fund's portfolio or being considered for purchase.
In placing transactions for the Fund's portfolio, the Manager may consider
sales of shares of the Fund and other funds managed by the Manager and its
affiliates as a factor in the selection of brokers to execute portfolio
transactions. The Manager intends to allocate brokerage on the basis of this
factor only if the sale is $2 million or more and there is no sales charge.
This results in the consideration only of sales which by their nature would not
ordinarily be made by Waddell & Reed, Inc.'s direct sales force and is done in
order to prevent the direct sales force from being disadvantaged by the fact
that it cannot participate in Fund brokerage.
During the Fund's fiscal years ended December 31, 1994, 1993 and 1992, the
Fund paid brokerage commissions of $69,862, $136,655 and $97,688, respectively.
These figures do not include principal transactions or spreads or concessions
on principal transactions, i.e., those in which the Fund sells securities to a
broker-dealer firm or buys from a broker-dealer firm securities owned by it.
During the Fund's last fiscal year, the transactions, other than principal
transactions, which were directed to broker-dealers who provided research as
well as execution totaled $8,371,587 on which $23,102 in brokerage commissions
were paid. These transactions were allocated to these broker-dealers by the
internal allocation procedures described above.
The Fund, the Manager 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.
Buying and Selling With Other Funds
The Fund and one or more of the other funds in the United Group,
TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc. or accounts
over which Waddell & Reed Asset Management Company exercises investment
discretion frequently buy or sell the same securities at the same time. If
this happens, the amount of each purchase or sale is divided. This is done on
the basis of the amount of securities each fund or account wanted to buy or
sell. Sharing in large transactions could affect the price the Fund pays or
receives or the amount it buys or sells. However, sometimes a better
negotiated commission is available.
OTHER INFORMATION
The Shares of the Fund
The Fund presently has only one kind (class) of shares. Each share has the
same rights to dividends, to vote and to receive assets if the Fund liquidates
(winds up). Each fractional share has the same rights, in proportion, as a
full share. Shares are fully paid and nonassessable when bought. The Board
has the authority to classify unissued shares into one or more additional
classes but it has no intention of doing so.
