UNITED
GOLD &
GOVERNMENT
FUND, INC.
ANNUAL
REPORT
-------------------------------------------
For the fiscal year ended December 31, 1998
<PAGE>
MANAGER'S LETTER
DECEMBER 31, 1998
- -----------------------------------------------------------------
Dear Shareholder:
This report relates to the operation of the United Gold & Government Fund for
the fiscal year ended December 31, 1998. The following discussion, graphs and
tables provide you with information regarding the Fund's performance during that
period.
The price of gold ended the year at $287.80 (London PM Fix), which was down
slightly from the year-end 1997 close of $289.20. During the year, the price of
gold traded between the April 24th high of $313.15 and the August 31st low of
$273.40. Strong equity markets, low global inflation and poor supply and demand
fundamentals resulted in very low investor interest in either gold or gold-
related securities.
The Fund has the ability to shift among the major asset classes (physical metal,
equities, U.S. government securities and cash). At various times during the
year, we reduced the Fund's exposure to U.S. government securities and increased
its weighting in gold-related securities in order to participate in trading
rallies during the first and fourth quarters. In the first quarter, gold
improved on the perception that Asian economies were stabilizing, which proved
short-lived. The fourth quarter rally was based on the outlook for a weaker
U.S. dollar, which was aborted due to a recovery in the U.S. equity market.
The strategies and techniques we applied resulted in mixed performance compared
to the indexes charted on the following page. Those indexes reflect the
performance of securities that generally represent the stock market (the S&P 500
Index), the U.S. Government securities market (the Salomon Brothers
Treasury/Government-Sponsored/Mortgage Index) and the universe of funds with
similar investment objectives (the Lipper Gold Oriented Fund Universe Average).
The Fund's performance was well below the S&P 500 Index and Salomon Brothers
Index, but was moderately above the Lipper Average.
As 1999 begins, several factors that were helping gold rally in September are
still evident, including a weak U.S. dollar, global interest rate cuts and
reduced concerns about central bank selling of gold reserves. These factors,
combined with renewed concerns about the strength of global equities, could make
gold and gold-related securities more attractive to investors. However, several
prevailing factors could make a sustainable rally in gold implausible. First,
physical demand for gold is still very poor. Without an economic recovery in
Asia, the leading gold consumer, it will be difficult for gold to advance
significantly. Second, in spite of record low gold prices, there has yet to be
a significant cutback in global gold production. We believe that excess
capacity must be curtailed before the price of gold can exceed a narrow trading
range. And third, although sales of gold reserves by central banks diminished
in importance in the later months of 1998, this issue could resurface quickly.
We will continue to monitor developments in the precious metals market and
respond by shifting among the major asset classes as we deem conditions warrant.
Thank you very much for your continued support and confidence.
Respectfully,
Michael L. Avery
Manager, United Gold & Government Fund, Inc.
<PAGE>
Comparison of Change in Value of $10,000 Investment in
United Gold & Government Fund, Inc., Class A Shares,
The S&P 500 Index,
The Salomon Brothers Treasury/ Government Sponsored/ Mortgage Index
and The Lipper Gold Oriented Fund Universe Average
Salomon
Brothers Lipper
United Treasury/ Gold
Gold & Government Oriented
Government S&PSponsored/ Fund
Fund, 500 Mortgage Universe
Class A Shares Index Index Average
--------- --------- --------- -----------
12/31/88 Purchase 9,425 10,000 10,000 10,000
12/31/89 11,161 13,169 11,454 12,206
12/31/90 8,752 12,760 12,540 9,509
12/31/91 8,881 16,648 14,478 9,069
12/31/92 7,711 17,917 15,533 7,690
12/31/93 13,557 19,722 16,995 13,713
12/31/94 11,204 19,982 16,538 11,996
12/31/95 12,302 27,492 19,487 12,304
12/31/96 12,835 33,804 20,205 13,189
12/31/97 9,924 45,058 22,124 7,539
12/31/98 8,902 57,989 24,061 6,703
===== United Gold & Government Fund, Class A Shares* -- $8,902
- ----- S&P 500 Index -- $57,989
>>>>> Salomon Brothers Treasury/ Gov't Sponsored/ Mortgage Index --
$24,061
_____ Lipper Gold Oriented Fund Universe Average -- $6,703
*The value of the investment in the Fund is impacted by the sales load at the
time of the investment and by the ongoing expenses of the Fund and assumes
reinvestment of dividends and distributions.
Average Annual Total Return +
Class A++ Class Y
-----------------------------
Year Ended
12/31/98 -15.46% -9.75%
5 Years Ended
12/31/98 -9.15% N/A
10 Years Ended
12/31/98 -1.16% N/A
Life of
Class Y +++ N/A -12.27%
+ Total return for the Class Y shares may be greater than that of the Class A
shares because the Fund's Class Y shares are not subject to a sales load or
12b-1 fees.
++ Performance data quoted represents past performance and is based on
deduction of a 5.75% sales load on the initial purchase in each of the
three periods. Investment return and principal value will fluctuate and an
investor's shares, when redeemed, may be worth more or less than their
original cost.
+++ 2/27/96 (the date on which Fund Class Y shares were first acquired by
shareholders) through 12/31/98.
<PAGE>
SHAREHOLDER SUMMARY
- ----------------------------------------------------------------------
UNITED GOLD & GOVERNMENT FUND, INC.
PORTFOLIO STRATEGY:
Inflationary strategies: OBJECTIVE: High total return (income
plus appreciation of
Up to 100% in minerals-related share value).
securities.
Minimum of 25% so invested. STRATEGY: Invests in precious
Up to 100% in foreign securities. metals and minerals
-related securities
Disinflationary strategies: during periods of
actual or expected
Up to 100% in U.S. Government inflation or when the
Securities. investment environment
Maximum of 25% in minerals- appears favorable;
related securities. invests in U.S.
Government Securities during periods of
disinflation or low inflation.
FOUNDED: 1985
SCHEDULED DIVIDEND FREQUENCY: QUARTERLY (March, June, September,
December)
<PAGE>
PERFORMANCE SUMMARY -- Class A Shares
PER SHARE DATA
For the Fiscal Year Ended December 31, 1998
- --------------------------------------
DIVIDENDS PAID $0.002
======
NET ASSET VALUE ON
12/31/98 $ 6.16
12/31/97 6.87
------
CHANGE PER SHARE $(0.71)
======
Past performance is not necessarily indicative of future results.
TOTAL RETURN HISTORY
Average Annual Total Return
-----------------------------
With Without
Period Sales Load* Sales Load**
- ------ ---------- ------------
1-year period ended 12-31-98 -15.46% -10.31%
5-year period ended 12-31-98 -9.15% -8.07%
10-year period ended 12-31-98 -1.16% -0.57%
*Performance data quoted represents past performance and is based on deduction
of 5.75% sales load on the initial purchase in each of the three periods.
**Performance data quoted in this column represents past performance without
taking into account the sales load deducted on an initial purchase.
Investment return and principal value will fluctuate and an investor's shares,
when redeemed, may be worth more or less than their original cost.
<PAGE>
PORTFOLIO HIGHLIGHTS
On December 31, 1998, United Gold & Government Fund, Inc. had net assets
totaling $12,764,416 invested in a diversified portfolio of:
61.60% Common Stocks and Warrants
24.80% Bullion
13.60% Cash and Cash Equivalents
As a shareholder of United Gold & Government Fund, Inc. for every $100 you had
invested on December 31, 1998, your Fund owned:
$41.25 Foreign Mining Stocks
24.80 Bullion
17.82 Domestic Mining Stocks
13.60 Cash and Cash Equivalents
2.53 Miscellaneous Stocks
<PAGE>
THE INVESTMENTS OF
UNITED GOLD & GOVERNMENT FUND, INC.
DECEMBER 31, 1998
Troy
Ounces Value
BULLION - 24.80%
Gold ................................... 10,987 $ 3,165,262
(Cost: $3,281,109)
COMMON STOCKS AND WARRANTS Shares
Gold
Canada - 35.81%
Agnico-Eagle Mines Limited ............. 112,000 462,000
Barrick Gold Corporation ............... 29,000 565,500
Cambior Inc. ........................... 98,100 480,725
Euro-Nevada Mining Corporation
Limited ............................... 37,400 610,912
Franco-Nevada Mining Corporation
Limited ............................... 23,200 444,900
Goldcorp Inc., Class A* ................ 60,000 341,065
Greenstone Resources Ltd.* ............. 263,900 236,225
Kinross Gold Corporation* .............. 110,000 253,708
Meridian Gold Inc.* .................... 50,000 284,375
Placer Dome Inc. ....................... 11,000 126,500
Repadre Capital Corporation* ........... 140,000 219,536
TVX Gold, Inc.* ........................ 235,000 425,938
Vengold Inc.* .......................... 195,000 119,765
Total ................................. 4,571,149
United States - 16.18%
Battle Mountain Gold Company ........... 138,000 569,250
Getchell Gold Corporation* ............. 20,100 547,725
Homestake Mining Company ............... 60,000 551,250
Newmont Mining Corporation ............. 22,000 397,375
Total ................................. 2,065,600
Total Gold - 51.99% 6,636,749
Metal Mining
United Kingdom - 2.13%
Rio Tinto plc, ADR ..................... 6,000 271,875
United States - 1.64%
Freeport-McMoRan Copper & Gold Inc. .... 20,000 208,750
Total Metal Mining - 3.77% 480,625
Silver - 3.31%
Cayman Islands
Apex Silver Mines Limited* ............. 52,000 422,500
See Notes to Schedule of Investments on page 7.
<PAGE>
THE INVESTMENTS OF
UNITED GOLD & GOVERNMENT FUND, INC.
DECEMBER 31, 1998
Shares Value
COMMON STOCKS AND WARRANTS (Continued)
Miscellaneous - 2.53%
Stone, Clay and Glass Products
Geomaque Explorations Ltd.* ............ 329,400 $ 322,836
Geomaque Explorations Ltd.,
Warrants* ............................. 25,000 408
Total ................................. 323,244
TOTAL COMMON STOCKS AND WARRANTS - 61.60% $ 7,863,118
(Cost: $8,903,849)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Repurchase Agreement - 12.53%
J.P. Morgan Securities, 4.75% Repurchase
Agreement dated 12-31-98, to be
repurchased at $1,600,844 on 1-4-99** . $1,600 1,600,000
United States Government - 15.55%
Federal Mortgage Corporation,
5.0%, 2-26-99 ......................... 2,000 1,984,445
TOTAL SHORT-TERM SECURITIES - 28.08% $ 3,584,445
(Cost: $3,584,445)
TOTAL INVESTMENTS - 114.48% $14,612,825
(Cost: $15,769,403)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (14.48%) (1,848,409)
NET ASSETS - 100.00% $12,764,416
Notes To Schedule Of Investments
*No dividends were paid during the preceding 12 months.
**Collateralized by $1,154,000 U.S. Treasury Bonds, 8.75% due 5-15-2017,
market value and accrued interest aggregate $1,616,642.
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, 1998
(In Thousands, Except for Per Share Amounts)
Assets
Investments -- at value (Notes 1 and 3):
Bullion (cost - $3,281) ......................... $ 3,165
Securities (cost - $12,488) ..................... 11,448
-------
14,613
Cash ............................................ 5
Receivables:
Fund shares sold ................................ 80
Interest and dividends .......................... 3
Prepaid insurance premium ........................ 10
-------
Total assets .................................. 14,711
-------
Liabilities
Payable for investment securities purchased ...... 1,761
Payable to Fund shareholders ..................... 165
Accrued transfer agency and
dividend disbursing (Note 2) .................... 13
Accrued accounting services fee (Note 2) ......... 1
Accrued distribution fee (Note 2) ................ 1
Other ............................................ 6
-------
Total liabilities ............................. 1,947
-------
Total net assets ............................. $12,764
=======
Net Assets
$1.00 par value capital stock
Capital stock ................................... $ 2,073
Additional paid-in capital ...................... 24,379
Accumulated undistributed loss:
Accumulated undistributed net investment loss ... ---
Accumulated net realized loss on investment
transactions .................................. (12,531)
Net unrealized depreciation in value of
investments ................................... (1,157)
-------
Net assets applicable to outstanding units
of capital.................................... $12,764
=======
Capital shares outstanding
Class A .......................................... 2,057
Class Y .......................................... 16
Capital shares authorized .......................... 100,000
Net asset value per share (net assets divided
by shares outstanding)
Class A .......................................... $6.16
Class Y .......................................... $6.19
See notes to financial statements.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended DECEMBER 31, 1998
(In Thousands)
Investment Income (Loss)
Income (Note 1B):
Interest and amortization ....................... $ 253
Dividends ....................................... 106
-------
Total income .................................. 359
-------
Expenses (Note 2):
Transfer agency and dividend disbursing - Class A 117
Investment management fee ....................... 104
Service fees - Class A .......................... 34
Registration fees ............................... 27
Custodian fees .................................. 15
Audit fees ...................................... 11
Accounting services fee ......................... 10
Distribution fees - Class A ..................... 3
Legal fees ...................................... 2
Other ........................................... 44
-------
Total expenses ................................ 367
-------
Net investment loss .......................... (8)
-------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Realized net loss on bullion ..................... (124)
Realized net gain on securities .................. 242
Realized net gain on foreign
currency transactions ........................... 10
-------
Realized net gain on investments ................ 128
Unrealized depreciation in value of investments
during the period ............................... (1,977)
-------
Net loss on investments ....................... (1,849)
-------
Net decrease in net assets resulting from
operations ................................. ($1,857)
=======
See notes to financial statements.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
For the fiscal year
ended December 31,
-----------------------
1998 1997
----------- -----------
Decrease in Net Assets
Operations:
Net investment income (loss) ........ $ (8) $ 394
Realized net gain (loss) on investments 128 (5,222)
Unrealized depreciation ............. (1,977) (1,441)
------- -------
Net decrease in net assets
resulting from operations ........ (1,857) (6,269)
------- -------
Dividends to shareholders from
net investment income (Note 1E):*
Class A ............................. (4) (380)
Class Y** ........................... --- (11)
------- -------
(4) (391)
------- -------
Capital share transactions:
Proceeds from sale of shares:
Class A (1,665,528 and 371,968
shares, respectively)............. 11,487 3,025
Class Y (1,315 and 1,959
shares, respectively) ............ 8 16
Proceeds from reinvestment of
dividends:
Class A (638 and 52,977
shares, respectively) ............ 4 372
Class Y (24 and 1,544
shares, respectively)** .......... --- 11
Payments for shares redeemed:
Class A (2,119,821 and 1,312,755
shares, respectively) ............ (14,221) (10,432)
Class Y (41,765 and 4,561
shares, respectively) ............ (278) (34)
------- -------
Net decrease in net assets
resulting from capital
share transactions ............. (3,000) (7,042)
------- -------
Total decrease ................. (4,861) (13,702)
Net Assets
Beginning of period .................. 17,625 31,327
------- -------
End of period ........................ $12,764 $17,625
======= =======
Undistributed net investment
income ........................... $--- $---
==== ====
*See "Financial Highlights" on pages 11 - 12.
** Amounts for 1998 not shown due to rounding.
See notes to financial statements.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the fiscal year ended December 31,
-------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Net asset value,
beginning of
period ........... $6.87 $9.07 $8.75 $8.19 $9.97
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income (loss).... (0.00) 0.15 0.06 0.24 0.05
Net realized and
unrealized gain
(loss) on
investments ..... (0.71) (2.20) 0.32 0.56 (1.78)
----- ----- ----- ----- -----
Total from investment
operations ....... (0.71) (2.05) 0.38 0.80 (1.73)
----- ----- ----- ----- -----
Less dividends from
net investment
income ........... (0.00) (0.15) (0.06) (0.24) (0.05)
----- ----- ----- ----- -----
Net asset value,
end of period ..... $6.16 $6.87 $9.07 $8.75 $8.19
===== ===== ===== ===== =====
Total return* ...... -10.31%-22.68% 4.33% 9.80% -17.36%
Net assets, end
of period (000
omitted) ......... $12,669$17,241 $30,811$32,733 $37,422
Ratio of expenses
to average net
assets ........... 2.47% 2.11% 1.84% 1.66% 1.59%
Ratio of net investment
income (loss) to average
net assets ....... -0.06% 1.60% 0.66% 2.55% 0.57%
Portfolio turnover
rate** ........... 236.11% 94.00% 101.34%164.21% 64.89%
*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.
See notes to financial statements.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the fiscal For the
year ended period
December 31, from 2/27/96*
-------------- through
1998 1997 12/31/96
------ ------ --------
Net asset value,
beginning of period $6.87 $9.07 $9.35
----- ----- -----
Income from investment
operations:
Net investment
income .......... 0.00 0.19 0.09
Net realized and
unrealized loss
on investments... (0.67) (2.19) (0.26)
----- ----- -----
Total from investment
operations ........ (0.67) (2.00) (0.17)
----- ----- -----
Less dividends from
net investment
income ............ (0.01) (0.20) (0.11)
----- ----- -----
Net asset value,
end of period ..... $6.19 $6.87 $9.07
===== ===== =====
Total return ....... -9.75%-22.18% -1.88%
Net assets, end of
period (000
omitted) ......... $95 $384 $516
Ratio of expenses
to average net
assets ............ 1.85% 1.44% 1.18%***
Ratio of net
investment income
to average net
assets ............ 0.71% 2.31% 1.30%***
Portfolio
turnover rate** .. 236.11% 94.00% 101.34%***
*Commencement of operations.
**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.
See notes to financial statements.
<PAGE>
UNITED GOLD & GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. Its investment objective is to seek a high total return through
investments in precious metals, minerals-related securities or U.S. Government
Securities. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a pricing service or dealer in bonds.
Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Stocks which are traded over-the-counter are
priced using the Nasdaq Stock Market, which provides information on bid and
asked prices quoted by major dealers in such stocks. 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 for
current delivery 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.
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. For assets and liabilities other than investments in
securities and bullion, net realized and unrealized gains and losses from
foreign currency translations arise from changes in currency exchange
rates. 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 Subchapter M of the Internal
Revenue Code. In addition, the Fund intends to pay distributions as
required to avoid imposition of excise tax. Accordingly, provision has not
been made for Federal income taxes. See Note 4 -- Federal Income Tax
Matters.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the business day following record date. Net
investment income dividends and capital gains distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are due to differing
treatments for items such as deferral of wash sales and post-October
losses, foreign currency transactions, net operating losses and expiring
capital loss carryovers. At December 31, 1998, the Fund reclassified
$4,509,049 between additional paid-in-capital, accumulated undistributed
net realized loss on investment transactions and accumulated undistributed
net investment income. In addition, $9,817 was reclassified to accumulated
undistributed net investment income from accumulated undistributed net
realized gain on investment transactions. Net investment income, net
realized gains and net assets were not affected by this change.
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.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .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 $21.0 billion of
combined net assets at December 31, 1998) 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
For Class A shares, the Fund also pays WARSCO a monthly per account charge
for transfer agency and dividend disbursement services of $1.3125 for each
shareholder account which was in existence at any time during the prior month,
plus $0.30 for each account on which a dividend or distribution of cash or
shares had a record date in that month. With respect to Class Y shares, the
Fund pays WARSCO a monthly fee at an annual rate of .15% of the average daily
net assets of the class for the preceding month. The Fund also reimburses W&R
and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross sales
commissions for Class A shares (which are not an expense of the Fund) of
$32,835, out of which W&R paid sales commissions of $18,572 and all expenses in
connection with the sale of Fund shares, except for registration fees and
related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $557, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
NOTE 3 -- Investment Securities Transactions
Purchases of investment securities, other than U.S. Government and short-
term securities, aggregated $19,477,119 while proceeds from maturities and sales
aggregated $13,884,063. Purchases of bullion aggregated $7,388,119 while
proceeds from the sale of bullion aggregated $3,983,558. Purchases of short-
term securities and U.S. Government securities aggregated $535,590,640 and
$6,839,610, respectively. Proceeds from maturities and sales of short-term
securities and U.S. Government securities aggregated $534,212,000 and
$18,349,492, respectively.
For Federal income tax purposes, cost of investments owned at December 31,
1998 was $16,087,625, resulting in net unrealized depreciation of $1,474,800, of
which $1,028,031 related to appreciated investments and $2,502,831 related to
depreciated investments.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital losses of
$1,909,871 during the year ended December 31, 1998, which included the effect of
certain losses deferred into the next fiscal year, as well as the effect of
losses recognized from the prior year (see discussion below). The realized
losses are available to offset future realized capital gain net income through
December 31, 2006. In addition, prior year capital loss carryovers aggregated
$10,268,798 at December 31, 1998, and are available to offset future capital
gain net income as follows: $1,865,351 through December 31, 1999; $4,958,441
through December 31, 2000, and $3,445,006 through December 31, 2005.
Internal Revenue Code regulations permit the Fund to defer into its next
fiscal year net capital losses or net long-term capital losses incurred between
each November 1 and the end of its fiscal year (_post-October losses_). From
November 1, 1998 through December 31, 1998, the Fund incurred net capital losses
of $34,492, which have been deferred to the fiscal year ending December 31,
1999. In addition, during the year ended December 31, 1998, the Fund recognized
post-October losses of $2,380,802 that had been deferred from the year ended
December 31, 1997.
NOTE 5 -- Multiclass Operations
On February 19, 1996, the Fund was authorized to offer investors two
classes of shares, Class A and Class Y, each of which has equal rights as to
assets and voting privileges. Class Y shares are not subject to a sales charge
on purchases; they are not subject to a Rule 12b-1 Distribution and Service Plan
and have a separate transfer agency and dividend disbursement services fee
structure. A comprehensive discussion of the terms under which shares of either
class are offered is contained in the prospectus and the Statement of Additional
Information for the Fund. The Fund commenced multiclass operations on February
27, 1996.
Income, non-class specific expenses and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Gold & Government Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United Gold & Government Fund, Inc. (the "Fund")
as of December 31, 1998, and the related statement of operations for the fiscal
year then ended, the statement of changes in net assets for each of the two
fiscal years in the period then ended, and the financial highlights for each of
the five fiscal years in the period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of United
Gold & Government Fund, Inc. as of December 31, 1998, the results of its
operations for the fiscal year then ended, the changes in its net assets for
each of the two fiscal years in the period then ended, and the financial
highlights for each of the five fiscal years in the period then ended, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
February 5, 1999
<PAGE>
INCOME TAX INFORMATION
The amounts of the dividends below, multiplied by the number of shares owned by
you on the record dates, will give you the total amounts to be reported in your
1998 Federal income tax return.
PER-SHARE AMOUNTS REPORTABLE AS:
--------------------------------------------------------------------
For Individuals For Corporations
-------------------------------------------------------------
Record Ordinary Long-Term Non- Long-Term
Date Total Income Capital Gain Qualifying Qualifying Capital Gain
- ----------- ----- -------- ------------ -------- ---------- ------------
Class A
12-16-98 $0.002 $0.0020 $0.0000 $0.0005 $0.0015 $0.0000
------ ------- ------- ------- ------- -------
Total $0.002 $0.0020 $0.0000 $0.0005 $0.0015 $0.0000
====== ======= ======= ======= ======= =======
Class Y
12-16-98 $0.010 $0.0100 $0.0000 $0.0027 $0.0073 $0.0000
------ ------- ------- ------- ------- -------
Total $0.010 $0.0100 $0.0000 $0.0027 $0.0073 $0.0000
====== ======= ======= ======= ======= =======
CORPORATION DEDUCTIONS -- Under Federal tax law, the amounts reportable as
Qualifying Dividends are eligible for the dividends received deduction in the
year received as provided by Section 243 of the Internal Revenue Code.
Shareholders are advised to consult with their tax adviser concerning the tax
treatment of dividends and distributions from the Fund.
<PAGE>
This report is submitted for the general information of the shareholders of
United Gold & Government Fund, Inc. It is not authorized for distribution to
prospective investors in the Fund unless accompanied with or preceded by the
United Gold & Government Fund, Inc. current prospectus.
Lower sales charges are available by combining the net asset value ("NAV") of
existing Class A shares of the Fund with additional purchases of Class A shares
of any fund in the United Group, except that only the Class A shares of United
Cash Management, Inc. that were acquired by exchange of another United Group
fund's Class A shares on which a sales charge was paid, plus the shares paid as
dividends on those acquired shares, may be combined.
To all traditional IRA Planholders:
As required by law, income tax will automatically be withheld from any
distribution or withdrawal from a traditional IRA unless you make a written
election not to have taxes withheld. The election may be made by submitting
forms provided by Waddell & Reed, Inc. which can be obtained from your Waddell &
Reed representative or by submitting Internal Revenue Service Form W-4P. Once
made, an election can be revoked by providing written notice to Waddell & Reed,
Inc. If you elect not to have tax withheld you may be required to make payments
of estimated tax. Penalties may be imposed by the IRS if withholding and
estimated tax payments are not adequate.
<PAGE>
DIRECTORS
Keith A. Tucker, Overland Park, Kansas, Chairman of the Board
James M. Concannon, Topeka, Kansas
John A. Dillingham, Kansas City, Missouri
David P. Gardner, Menlo Park, California
Linda K. Graves, Topeka, Kansas
Joseph Harroz, Jr., Norman, Oklahoma
John F. Hayes, Hutchinson, Kansas
Robert L. Hechler, Overland Park, Kansas
Henry J. Herrmann, Overland Park, Kansas
Glendon E. Johnson, Miami, Florida
William T. Morgan, Coronado, California
Ronald C. Reimer, Mission Hills, Kansas
Frank J. Ross, Jr., Kansas City, Missouri
Eleanor B. Schwartz, Kansas City, Missouri
Frederick Vogel III, Milwaukee, Wisconsin
OFFICERS
Robert L. Hechler, President
Michael L. Avery, Vice President
Henry J. Herrmann, Vice President
John M. Holliday, Vice President
Theodore W. Howard, Vice President and Treasurer
Helge K. Lee, Vice President and Secretary
<PAGE>
THE UNITED GROUP OF MUTUAL FUNDS
United Cash Management, Inc.
United Government Securities Fund, Inc.
United Bond Fund
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United Continental Income Fund, Inc.
United Retirement Shares, Inc.
United Asset Strategy Fund, Inc.
United Income Fund
United Accumulative Fund
United Vanguard Fund, Inc.
United New Concepts Fund, Inc.
United Science and Technology Fund
United International Growth Fund, Inc.
United Gold & Government Fund, Inc.
- ---------------------------------
FOR MORE INFORMATION:
Contact your representative, or your
local office as listed on your
Account Statement, or contact:
WADDELL & REED
CUSTOMER SERVICE
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
(800) 366-5465
Our INTERNET address is:
http://www.waddell.com
NUR1013A(12-98)
printed on recycled paper
