<PAGE>
File No. 33-45961
File No. 811-6569
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ____
Post-Effective Amendment No. 3
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 3
WADDELL & REED FUNDS, INC.
- ---------------------------------------------------------------------------
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
- ---------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
- ---------------------------------------------------------------------------
Rodney O. McWhinney, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
- ---------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
__X__ on June 30, 1994 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)
_____ on (date) pursuant to paragraph (a) of Rule 485
==================================================================
DECLARATION REQUIRED BY RULE 24f-2 (a) (1)
The issuer has registered an indefinite amount of its securities under the
Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for the
Registrant's fiscal year ending March 31, 1994 was filed on May 24, 1994.
<PAGE>
WADDELL & REED FUNDS, INC.
==========================
Cross Reference Sheet
=====================
Part A of
Form N-1A
Item No. Prospectus Caption
- --------- ------------------
1 ........................ Cover Page
2(a) ..................... Summary of Expenses
(b) ..................... Prospectus Summary
(c) ..................... Prospectus Summary
3(a) ..................... Financial Highlights
(b) ..................... Financial Highlights
(c) ..................... Performance Information
4(a) ..................... What is Waddell & Reed Funds, Inc.?: Goals,
Investment Policies and Risks of the Five Funds
(b) ..................... Goals, Investment Policies and Risks of the Five
Funds
(c) ..................... Goals, Investment Policies and Risks of the Five
Funds
5(a) ..................... What is Waddell & Reed Funds, Inc.?
(b)...................... Inside Back Cover; Management
(c) ..................... Management
(d) ..................... Inside Back Cover; Management
(e) ..................... Inside Back Cover; Management; Distribution
(f) ..................... Management
(g)(i)................... *
(g)(ii).................. Management
5A........................ **
6(a) ..................... What is Waddell & Reed Funds, Inc.?
(b) ..................... *
(c) ..................... *
(d) ..................... *
(e) ..................... Management
(f)...................... Dividends, Distributions and Taxes
(g) ..................... Dividends, Distributions and Taxes
7(a) ..................... Management; Distribution, Inside Back Cover
(b) ..................... Purchase of Shares
(c) ..................... Purchase of Shares; Redemption; Exchange Privilege
(d) ..................... Purchase of Shares
(e) ..................... *
(f) ..................... Distribution; Redemption
8(a) ..................... Redemption
(b) ..................... *
(c) ..................... Redemption
(d) ..................... Redemption
9 ........................ *
Part B of
Form N-1A
Item No. SAI Caption
- --------- -----------
10(a) ..................... Cover Page
(b) ..................... *
11 ........................ Cover Page
12 ........................ *
13(a) ..................... Investment Goals and Policies
(b) ..................... Investment Goals and Policies
(c) ..................... Investment Goals and Policies
(d) ..................... Investment Goals and Policies
14(a) ..................... Directors and Officers
(b) ..................... Directors and Officers
(c) ..................... *
15(a) ..................... Directors and Officers; Other Information
(b) ..................... Directors and Officers; Other Information
(c) ..................... Directors and Officers
16(a)(i) .................. Investment Management and Other Services
(a)(ii) ................. Directors and Officers
(a)(iii) ................ Investment Management and Other Services
(b) ..................... Investment Management and Other Services
(c) ..................... Investment Management and Other Services
(d) ..................... Investment Management and Other Services
(e) ..................... *
(f) ..................... Investment Management and Other Services
(g) ..................... *
(h) ..................... Investment Management and Other Services
(i) ..................... *
17(a) ..................... Portfolio Transactions and Brokerage
(b) ..................... *
(c) ..................... Portfolio Transactions and Brokerage
(d) ..................... Portfolio Transactions and Brokerage
(e) ..................... *
18(a) ..................... Other Information
(b) ..................... *
19(a) ..................... Purchase, Redemption and Pricing of Shares
(b) ..................... Purchase, Redemption and Pricing of Shares
(c) ..................... Purchase, Redemption and Pricing of Shares
20 ........................ Taxes
21(a) ..................... Investment Management and Other Services
(b) ..................... *
(c) ..................... *
22(a) ..................... *
(b)(i) .................. Performance Information
(b)(ii) ................. Performance Information
(b)(iii) ................ Performance Information
(b)(iv) ................. Performance Information
23 ........................ Financial Statements
- ---------------------------------------------------------------------------
*Not Applicable or Negative Answer
**Contained in the Annual Report to Shareholders
<PAGE>
WADDELL & REED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
- -----------------------------------------------------------------
June 30, 199 4
PROSPECTUS
- -----------------------------------------------------------------
Waddell & Reed Funds, Inc. (the "Corporation") is a management investment
company which has five separate Funds (the "Funds"), each of which is designed
for investors with different goals.
THE FIVE FUNDS
Total Return Fund -- seeks to provide current income while seeking capital
growth.
Growth Fund -- seeks capital appreciation.
Limited-Term Bond Fund -- seeks to provide a high level of current income
consistent with preservation of capital.
Municipal Bond Fund -- seeks to provide income which is not subject to
Federal income taxation.
Global Income Fund -- seeks to provide a high level of current income
consistent with safety of principal.
This Prospectus contains concise information about the Funds of which you
should be aware before investing. Additional information has been filed with
the Securities and Exchange Commission and is contained in a Statement of
Additional Information (the "SAI"), dated June 30, 199 4 . You may obtain
a copy of the SAI free of charge by request to the Corporation or Waddell &
Reed, Inc., its principal underwriter and distributor, at the address or
telephone number shown below. The SAI is incorporated by reference into this
Prospectus.
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.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing in the body of the Prospectus. Cross-references in this
summary are to headings in the body of the Prospectus.
The Funds: This Prospectus describes five separate series
(each a "Fund") of an open-end, management
investment company with different investment goals
and policies. Each of the Funds except Global
Income Fund is a diversified fund.
Investment Goals
and Policies:
Total Return Fund Current income while seeking capital growth;
invests primarily in common stocks, or securities
convertible into common stocks, of companies which
have a record of paying regular dividends on
common stock and also have the potential for
capital appreciation.
Growth Fund Capital appreciation; invests primarily in common
stocks, or securities convertible into common
stocks, of companies that offer, in the opinion of
the Fund's investment manager, above-average
growth potential, including relatively new or
unseasoned companies.
Limited-Term Bond Fund High level of current income consistent with
preservation of capital; invests primarily in debt
securities of investment grade, including debt
securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
the Fund will maintain a dollar weighted average
maturity of its portfolio of two to five years.
Municipal Bond Fund Income not subject to Federal income taxation;
invests primarily in municipal bonds; may invest
up to 10% of assets in taxable obligations (as
defined herein).
Global Income Fund High level of current income consistent with
safety of principal; invests primarily in high
quality debt securities denominated in various
currencies and multinational currency units having
remaining maturities of not more than five years
with the average maturity of the portfolio not to
exceed three years.
There can be no assurance that a Fund will be successful in meeting its
investment goal. For a further description of the five Funds, their investment
techniques and certain risks which may be associated with investments in
repurchase agreements, the securities of foreign issuers, non-investment grade
debt securities, options and futures contracts, and with other investment
techniques, see "Goals, Investment Policies and Risks of the Five Funds."
Investment Manager: Waddell & Reed Investment Management Company, a
wholly-owned subsidiary of Waddell & Reed, Inc.,
acts as investment manager for each Fund. See
"Management."
Distributor: Waddell & Reed, Inc. acts as principal underwriter
and distributor of shares of the Corporation.
Pursuant to a Distribution and Service Plan under
Rule 12b-1, each Fund may pay the distributor a
distribution fee of up to .75% and a service fee
of up to .25%, on an annual basis, of its average
daily net assets. See "Distribution."
Purchases: Shares of the Corporation are available at net
asset value through Waddell & Reed, Inc., the
principal underwriter and distributor of the
shares. A sales charge is not incurred upon
purchase of shares of a Fund, but the shares are
subject to a contingent deferred sales charge if
redeemed within a certain time period. The
minimum initial investment is ordinarily $1,000
with a minimum initial investment of $50
pertaining to certain retirement plan accounts and
a minimum initial investment of $25 pertaining to
payroll deductions for certain employees of the
distributor and its affiliates and certain
retirement plan accounts. See "Purchase of
Shares" and "Redemption."
Redemptions: Shares may be redeemed at net asset value less a
deferred sales charge, if any, which will vary
with the length of time a redeeming shareholder
has owned such shares. The deferred sales charge
will be assessed against the redemption amount and
paid to the distributor in an amount, subject to
certain limitations, equal to the applicable sales
charge times the amount invested to acquire the
shares during a calendar year or the value of the
shares redeemed, whichever is less. The
applicable charges/percentages are as follows: on
a redemption during the calendar year of
investment and first full calendar year after the
calendar year of investment, 3%; in the second
full calendar year, 2%; in the third full calendar
year, 1%; and thereafter, 0%. In most cases, the
Corporation may require the redemption of shares
of a Fund if all shares of that Fund owned by a
shareholder have a net asset value less than $500.
See "Redemption."
Dividends: Ordinarily, dividends are declared and paid as
follows:
Total Return Fund Annually
Growth Fund Annually
Limited-Term Bond
Fund Declared daily,
paid monthly
Municipal Bond Fund Declared daily,
paid monthly
Global Income Fund Declared daily,
paid monthly
Dividends and distributions are paid in
additional Fund shares unless the shareholder has
elected to receive dividends and other
distributions in cash. See "Dividends,
Distributions and Taxes."
<PAGE>
SUMMARY OF EXPENSES
Total Return Fund
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Load Imposed on Purchases ..... None
Maximum Sales Load Imposed on Reinvested
Dividends ................................... None
Maximum Contingent Deferred Sales Charge
(as a percentage of the offering price or redemption
amount, as applicable)1 ..................... 3%
Redemption Fees (other than contingent
deferred sales charge) ...................... None
Exchange Fee ................................ None
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
Management Fees 0.71%
12b-1 Fees2 0.98%
Other Expenses 0.48%
(Includes, among other expenses, transfer
agency, accounting, custodian, audit and legal fees)
Total Operating Expenses2.17%
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return3 and (2) redemption
at the end of each
time period: $52 $78 $116 $250
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return3 and (2) no redemption
at the end of each
time period: $22 $68 $116 $250
1The contingent deferred sales charge, which is imposed on redemption
proceeds, declines from 3% of the amount invested during the first calendar year
to 0% after 4 years (declining 1% annually). See "Redemption."
2It is possible that long-term shareholders of a Fund may bear 12b-1
distribution fees which are more than the economic equivalent of the maximum
front-end sales charge permitted under the rules of the National Association of
Securities Dealers, Inc. See "Distribution."
3Use of assumed annual return of 5% is for illustration purposes only and
not a representation of a Fund's future performance, which may be greater or
lesser.
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.
For a more complete discussion of certain costs and expenses, see "Management,"
"Redemption" and "Distribution."
<PAGE>
SUMMARY OF EXPENSES
Growth Fund
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Load Imposed on Purchases ..... None
Maximum Sales Load Imposed on Reinvested
Dividends ................................... None
Maximum Contingent Deferred Sales Charge
(as a percentage of the offering price or redemption
amount, as applicable)4 ..................... 3%
Redemption Fees (other than contingent
deferred sales charge) ...................... None
Exchange Fee ................................ None
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
Management Fees 0.81%5
12b-1 Fees6 0.97%
Other Expenses 0.58%
(Includes, among other expenses, transfer
agency, accounting, custodian, audit and legal fees)
Total Operating Expenses2.36%
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return7 and (2) redemption
at the end of each
time period: $54 $84 $126 $270
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return7 and (2) no redemption
at the end of each
time period: $24 $74 $126 $270
4The contingent deferred sales charge, which is imposed on redemption
proceeds, declines from 3% of the amount invested during the first calendar year
to 0% after 4 years (declining 1% annually). See "Redemption."
5The management fee for Growth Fund is higher than that of most funds.
6It is possible that long-term shareholders of a Fund may bear 12b-1
distribution fees which are more than the economic equivalent of the maximum
front-end sales charge permitted under the rules of the National Association of
Securities Dealers, Inc. See "Distribution."
7Use of assumed annual return of 5% is for illustration purposes only and
not a representation of a Fund's future performance, which may be greater or
lesser.
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.
For a more complete discussion of certain costs and expenses, see "Management,"
"Redemption" and "Distribution."
<PAGE>
SUMMARY OF EXPENSES
Limited-Term Bond Fund
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Load Imposed on Purchases ..... None
Maximum Sales Load Imposed on Reinvested
Dividends ................................... None
Maximum Contingent Deferred Sales Charge
(as a percentage of the offering price or redemption
amount, as applicable)8 ..................... 3%
Redemption Fees (other than contingent
deferred sales charge) ...................... None
Exchange Fee ................................ None
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
Management Fees 0.56%
12b-1 Fees9 0.97%
Other Expenses 0.62%
(Includes, among other expenses, transfer
agency, accounting, custodian, audit and legal fees)
Total Operating Expenses2.15%
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return10 and (2) redemption
at the end of each
time period: $52 $77 $115 $248
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return10 and (2) no redemption
at the end of each
time period: $22 $67 $115 $248
8The contingent deferred sales charge, which is imposed on redemption
proceeds, declines from 3% of the amount invested during the first calendar year
to 0% after 4 years (declining 1% annually). See "Redemption."
9It is possible that long-term shareholders of a Fund may bear 12b-1
distribution fees which are more than the economic equivalent of the maximum
front-end sales charge permitted under the rules of the National Association of
Securities Dealers, Inc. See "Distribution."
10Use of assumed annual return of 5% is for illustration purposes only and
not a representation of a Fund's future performance, which may be greater or
lesser.
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.
For a more complete discussion of certain costs and expenses, see "Management,"
"Redemption" and "Distribution."
<PAGE>
SUMMARY OF EXPENSES
Municipal Bond Fund
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Load Imposed on Purchases ..... None
Maximum Sales Load Imposed on Reinvested
Dividends ................................... None
Maximum Contingent Deferred Sales Charge
(as a percentage of the offering price or redemption
amount, as applicable)11 .................... 3%
Redemption Fees (other than contingent
deferred sales charge) ...................... None
Exchange Fee ................................ None
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
Management Fees 0.56%
12b-1 Fees12 0.97%
Other Expenses 0.46%
(Includes, among other expenses, transfer
agency, accounting, custodian, audit and legal fees)
Total Operating Expenses1.99%
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return13 and (2) redemption
at the end of each
time period: $50 $72 $107 $232
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return13 and (2) no redemption
at the end of each
time period: $20 $62 $107 $232
11The contingent deferred sales charge, which is imposed on redemption
proceeds, declines from 3% of the amount invested during the first calendar year
to 0% after 4 years (declining 1% annually). See "Redemption."
12It is possible that long-term shareholders of a Fund may bear 12b-
1 distribution fees which are more than the economic equivalent of the maximum
front-end sales charge permitted under the rules of the National Association of
Securities Dealers, Inc. See "Distribution."
13Use of assumed annual return of 5% is for illustration purposes only and
not a representation of a Fund's future performance, which may be greater or
lesser.
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.
For a more complete discussion of certain costs and expenses, see "Management,"
"Redemption" and "Distribution."
<PAGE>
SUMMARY OF EXPENSES
Global Income Fund
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Load Imposed on Purchases ..... None
Maximum Sales Load Imposed on Reinvested
Dividends ................................... None
Maximum Contingent Deferred Sales Charge
(as a percentage of the offering price or redemption
amount, as applicable)14 .................... 3%
Redemption Fees (other than contingent
deferred sales charge) ...................... None
Exchange Fee ................................ None
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
Management Fees 0.66%
12b-1 Fees15 0.88%
Other Expenses 0.71%
(Includes, among other expenses, transfer
agency, accounting, custodian, audit and legal fees)
Total Operating Expenses2.25%
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return16 and (2) redemption
at the end of each
time period: $53 $80 $120 $258
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return3 and (2) no redemption
at the end of each
time period: $23 $70 $120 $258
14The contingent deferred sales charge, which is imposed on redemption
proceeds, declines from 3% of the amount invested during the first calendar year
to 0% after 4 years (declining 1% annually). See "Redemption."
15It is possible that long-term shareholders of a Fund may bear 12b-
1 distribution fees which are more than the economic equivalent of the maximum
front-end sales charge permitted under the rules of the National Association of
Securities Dealers, Inc. See "Distribution."
16Use of assumed annual return of 5% is for illustration purposes only and
not a representation of a Fund's future performance, which may be greater or
lesser.
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.
For a more complete discussion of certain costs and expenses, see "Management,"
"Redemption" and "Distribution."
<PAGE>
FINANCIAL HIGHLIGHTS OF WADDELL & REED FUNDS, INC.
Total Return Fund
(Audited)
The following information has been audited by Price Waterhouse, independent
accountants, and should be read in conjunction with the financial statements and
notes thereto, together with the report of Price Waterhouse, included in the
SAI.
For a Share of Capital Stock Outstanding Throughout Each Period:
For the For the
year ended period ended
March 31, March 31,
1994 1993*
---------- ------------
Net asset value,
beginning of
period ........... $11.07 $10.00
------ ------
Income from investment
operations:
Net investment
income (loss) ... (0.01) 0.02
Net realized and
unrealized gain
on investments .. 0.93 1.07
------ ------
Total from investment
operations ....... 0.92 1.09
------ ------
Less dividends from net
investment income (0.00) (0.02)
------ ------
Net asset value,
end of period .... $11.99 $11.07
====== ======
Total return ....... 8.31% 10.91%
Net assets, end of
period (000
omitted) .......... $61,735 $12,460
Ratio of expenses
to average net
assets ........... 2.16% 2.21%**
Ratio of net investment
income to average
net assets ....... -0.12% 0.32%**
Portfolio turnover
rate ............. 17.31% 23.97%**
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993.
**Annualized.
Information regarding the performance of the Funds is contained in the
Funds' annual report to shareholders which may be obtained without charge by
request to the Funds at the address or phone number shown on the cover of this
Prospectus.
<PAGE>
FINANCIAL HIGHLIGHTS OF WADDELL & REED FUNDS, INC.
Growth Fund
(Audited)
The following information has been audited by Price Waterhouse, independent
accountants, and should be read in conjunction with the financial statements and
notes thereto, together with the report of Price Waterhouse, included in the
SAI.
For a Share of Capital Stock Outstanding Throughout Each Period:
For the For the
year ended period ended
March 31, March 31,
1994 1993*
---------- ------------
Net asset value,
beginning of
period ........... $11.68 $10.00
------ ------
Income from investment
operations:
Net investment
loss ............ (0.04) (0.02)
Net realized and
unrealized gain
on investments .. 2.75 1.79
------ ------
Total from investment
operations ....... 2.71 1.77
------ ------
Less distributions:
Dividends from net
investment
income .......... (0.00) (0.01)
Distribution from
capital gains ... (0.31) (0.08)
------ ------
Total distributions (0.31) (0.09)
------ ------
Net asset value,
end of period .... $14.08 $11.68
====== ======
Total return ....... 23.16% 17.71%
Net assets, end of
period (000
omitted) ......... $43,524 $7,976
Ratio of expenses
to average net
assets ........... 2.34% 2.50%**
Ratio of net investment
income to average
net assets ....... -0.97% -0.68%**
Portfolio turnover
rate ............. 69.12% 124.44%**
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993.
**Annualized.
Information regarding the performance of the Funds is contained in the
Funds' annual report to shareholders which may be obtained without charge by
request to the Funds at the address or phone number shown on the cover of this
Prospectus.
<PAGE>
FINANCIAL HIGHLIGHTS OF WADDELL & REED FUNDS, INC.
Limited-Term Bond Fund
(Audited)
The following information has been audited by Price Waterhouse, independent
accountants, and should be read in conjunction with the financial statements and
notes thereto, together with the report of Price Waterhouse, included in the
SAI.
For the For the
year ended period ended
March 31, March 31,
1994 1993*
---------- ------------
Net asset value,
beginning of
period ........... $10.06 $10.00
------ ------
Income from investment
operations:
Net investment
income .......... 0.35 0.18
Net realized and
unrealized gain
(loss) on
investments ..... (0.20) 0.06
------ ------
Total from investment
operations ....... 0.15 0.24
------ ------
Less distributions:
Dividends declared
from net investment
income .......... (0.35) (0.18)
Distribution from
capital gains ... (0.02) (0.00)
------ ------
Total distributions (0.37) (0.18)
------ ------
Net asset value,
end of period .... $ 9.84 $10.06
====== ======
Total return ....... 1.41% 2.40%
Net assets, end of
period (000
omitted) ......... $11,671 $6,259
Ratio of expenses
to average net
assets ........... 2.14% 2.15%**
Ratio of net investment
income to average
net assets ....... 3.41% 3.48%**
Portfolio turnover
rate ............. 25.90% 39.64%**
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993.
**Annualized.
Information regarding the performance of the Funds is contained in the
Funds' annual report to shareholders which may be obtained without charge by
request to the Funds at the address or phone number shown on the cover of this
Prospectus.
<PAGE>
FINANCIAL HIGHLIGHTS OF WADDELL & REED FUNDS, INC.
Municipal Bond Fund
(Audited)
The following information has been audited by Price Waterhouse, independent
accountants, and should be read in conjunction with the financial statements and
notes thereto, together with the report of Price Waterhouse, included in the
SAI.
For a Share of Capital Stock Outstanding Throughout Each Period:
For the For the
year ended period ended
March 31, March 31,
1994 1993*
---------- ------------
Net asset value,
beginning of
period ........... $10.53 $10.00
------ ------
Income from investment
operations:
Net investment
income .......... 0.39 0.21
Net realized and
unrealized gain
(loss) on
investments ..... (0.28) 0.53
------ ------
Total from investment
operations ....... 0.11 0.74
------ ------
Less distributions:
Dividends declared
from net investment
income .......... (0.39) (0.21)
Distribution from
capital gains ... (0.13) (0.00)
------ ------
Total distributions (0.52) (0.21)
------ ------
Net asset value,
end of period .... $10.12 $10.53
====== ======
Total return ....... 0.76% 7.37%
Net assets, end of
period (000
omitted) ......... $24,960 $8,557
Ratio of expenses
to average net
assets ........... 1.98% 1.94%**
Ratio of net investment
income to average
net assets ....... 3.62% 3.99%**
Portfolio turnover
rate ............. 18.93% 140.02%**
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993.
**Annualized.
Information regarding the performance of the Funds is contained in the
Funds' annual report to shareholders which may be obtained without charge by
request to the Funds at the address or phone number shown on the cover of this
Prospectus.
<PAGE>
FINANCIAL HIGHLIGHTS OF WADDELL & REED FUNDS, INC.
Global Income Fund
(Audited)
The following information has been audited by Price Waterhouse, independent
accountants, and should be read in conjunction with the financial statements and
notes thereto, together with the report of Price Waterhouse, included in the
SAI.
For a Share of Capital Stock Outstanding Throughout Each Period:
For the For the
year ended period ended
March 31, March 31,
1994 1993*
---------- -----------
Net asset value,
beginning of
period ........... $9.68 $10.00
----- ------
Income from investment
operations:
Net investment
income .......... 0.34 0.20
Net realized and
unrealized loss
on investments .. (0.31) (0.32)
----- ------
Total from investment
operations ....... 0.03 (0.12)
----- ------
Less distributions:
Dividends declared
from net investment
income .......... (0.26) (0.20)
Tax-basis return of
capital.......... (0.08) (0.00)
----- ------
Total distributions. (0.34) (0.20)
----- ------
Net asset value,
end of period .... $9.37 $ 9.68
===== ======
Total return ....... 0.33% -1.28%
Net assets, end of
period (000
omitted) ......... $10,282 $7,181
Ratio of expenses
to average net
assets ........... 2.24% 2.06%**
Ratio of net investment
income to average
net assets ....... 3.56% 3.88%**
Portfolio turnover
rate ............. 34.90% 8.35%**
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993.
**Annualized.
Information regarding the performance of the Funds is contained in the
Funds' annual report to shareholders which may be obtained without charge by
request to the Funds at the address or phone number shown on the cover of this
Prospectus.
<PAGE>
What is Waddell & Reed Funds, Inc.?
Waddell & Reed Funds, Inc. is a corporation organized under Maryland law on
January 29, 1992. It is an open-end management investment company commonly
called a "mutual fund." The Corporation 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 Corporation has
five series of shares (the "Funds"), each of which operates as a separate mutual
fund with separate assets and liabilities. Each Fund except Global Income Fund
is a diversified fund. An investor in one of the Funds has an interest only in
that Fund. Each share of a Fund has the same rights to dividends and to vote as
other shares in a Fund. Shares are fully paid and nonassessable when bought.
The Corporation 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 a 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 Corporation 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
Corporation, 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 outstanding shares.
Performance Information
From time to time Waddell & Reed, Inc. or a 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 yield, total return and performance
rankings.
A Fund's yield is based on a 30-day period ending on a specific date and is
computed by dividing the Fund's net investment income per share earned during
the period by the Fund's offering price per share on the last day of the period.
Municipal Bond Fund may also advertise or include in information furnished to
present or prospective shareholders its tax equivalent yield, which is
calculated by applying the stated income tax rate to only the net investment
income exempt from taxation, according to a standard formula.
A Fund's total return is its overall change in value for the period shown
including the effect of reinvesting dividends and distributions and any
change in the net asset value per share. A cumulative total return reflects the
Fund's change in value over a stated period of time. An average annual total
return reflects the hypothetical annually compounded return that would have
produced the cumulative total return for a stated period if the Fund's
performance had been constant during each year of that period. Average annual
total returns are not actual year-by-year results and investors should realize
that total returns will fluctuate.
Standardized total return figures reflect payment of the maximum applicable
contingent deferred sales charge. The Fund may also provide non-standardized
performance information which does not reflect deduction of such sales charge,
which is for periods other than those required to be presented or which differs
otherwise from standardized performance information. See the SAI for further
information regarding total return and yield and methods of computation.
From time to time in advertisements and information furnished to present or
prospective shareholders a 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. A 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 a 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 any Fund's shares when redeemed may be more or less than their original cost.
Goals, Investment Policies and Risks of the Five Funds
The goal of each Fund is a matter of fundamental policy and may not be
changed without the approval of the shareholders of that Fund. Unless otherwise
indicated below, the types of securities in which a Fund may invest and other
policies are operating (i.e., non-fundamental) policies which may be changed by
the Board of Directors without the approval of shareholders. There is no
assurance that a Fund will achieve its goals; some market risks are inherent in
all securities to varying degrees.
Subject to the statement of the goal of each Fund included below, the two
main kinds of securities that the Funds may own are common stock and debt
securities. They may also own convertible securities, including convertible
preferred stock in certain circumstances described in this Prospectus. Common
stock is an ownership interest in a company. Debt securities are obligations to
pay specified sums on specified dates and to pay interest until such times.
Convertible securities are securities which may be exchanged for another type of
security; for example, certain debt securities are convertible into common
stock. These securities in which the Funds may invest may 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.
Common stocks generally offer the greatest possibilities for growth, but may not
offer as much safety of capital as debt securities. 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 the debt security
to go up. Changes in value and yield based on changes in prevailing interest
rates may have a lesser effect on short-term debt obligations than long-term
debt obligations.
Total Return Fund
The goal of Total Return Fund is to provide current income while seeking
capital growth. The Fund seeks to achieve this goal by investing primarily in
common stocks, or securities convertible into common stocks, of companies which
have a record of paying regular dividends on common stock and also have the
potential for capital appreciation. When conditions are such that stocks with
high yields are less attractive than other common stocks, lower yielding or non-
dividend-paying common stocks may be held because of their prospects for capital
growth. At other times, the Fund may seek to achieve its goal by investing in
debt securities when the return on these securities is attractive relative to
the return on common stocks.
Growth Fund
The goal of Growth Fund is capital appreciation. This Fund attempts to
achieve this goal through a diversified holding of securities consisting
primarily of common stocks, or securities convertible into common stocks, of
companies that offer, in the opinion of the Fund's Manager, Waddell & Reed
Investment Management Company (the "Manager"), above-average growth potential,
including relatively new or unseasoned companies. This Fund is not intended for
investors who desire assured income and conservation of capital. Growth Fund
ordinarily invests in securities whose market price can be subject to rapid and
wide fluctuation. In selecting companies, the Manager usually looks for such
characteristics as aggressive or creative management, technology or specialized
expertise, new or unique products or services, entry into new or emerging
industries and special situations arising out of governmental priorities and
programs.
Limited-Term Bond Fund
The goal of Limited-Term Bond Fund is to provide a high level of current
income consistent with preservation of capital by investing primarily in debt
securities of investment grade (subject to the policy regarding non-investment
grade securities described below), including debt securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities ("U.S.
Government Securities"). See the Appendix to the SAI for a description of
certain ratings. "Limited-Term" means that the Fund will maintain a dollar
weighted average maturity of its portfolio of not less than two years and not
more than five years. The maturity of collateralized mortgage obligations
("CMOs") and other asset backed securities will be deemed to be the estimated
average life of such securities, as determined in accordance with certain
prescribed models or formulas, such as those provided by the Public Securities
Association. The maturity of other debt securities will be deemed to be the
earlier of the call date or the maturity date, whichever is appropriate. The
debt securities, other than U.S. Government Securities, in which the Fund
invests include without limitation corporate bonds, medium-term notes, asset-
backed securities (such as mortgage-backed securities) and other financial
obligations which are commonly considered debt, all of which securities will be
denominated in U.S. dollars. At least 65% of the Fund's total assets during
normal market conditions will be invested in bonds. The Fund intends to invest
a significant percentage of its net assets in CMOs.
U.S. Government Securities 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. Some are backed by the right of the issuer to borrow from
the Treasury; others by discretionary authority of the U.S. Government to
purchase the agencies' obligations; while others are supported only by the
credit of the instrumentality. In the case of securities not backed by the full
faith and credit of the United States, the investor must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment. The Fund
will invest in securities of such instrumentalities only when the Manager is
satisfied the credit risk 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"), Federal Home Loan Mortgage Corporation ("Freddie Mac") and the
Federal National Mortgage Association ("Fannie Mae"). These mortgage-backed
securities include pass-through securities, participation certificates and CMOs.
The yield characteristics of the 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 on Ginnie Mae (but not Freddie
Mac or Fannie Mae) pass-through securities is guaranteed by the full faith and
credit of the United States. This is not a guarantee against market decline of
the value of these securities or shares of the Fund. It is possible that the
availability (i.e., liquidity) of these securities could be adversely affected
by actions of the U.S. Government to tighten the availability of its
credit . See the SAI for additional information about the characteristics
of U.S. Government Securities. This Fund does not intend to invest more than
50% of its assets in securities rated in the lowest tier of investment grade
debt securities. The lowest tier of investment grade debt securities is that
which includes securities rated BBB by Standard & Poor's Corporation ("S&P") or
Baa by Moody's Investors Services, Inc. ("Moody's"). The lowest tier of
investment grade securities have some speculative features. See "Other
Investment Policies" for a discussion of investment in non-investment grade debt
securities.
Municipal Bond Fund
The goal of Municipal Bond Fund is to provide income which is not subject
to Federal income taxation. The Fund attempts to achieve this goal by investing
primarily in municipal bonds. As a fundamental policy, at least 80% of this
Fund's net assets during normal market conditions will be invested in municipal
bonds. As used in this Prospectus, "municipal bonds" means obligations the
interest on which is not includable in gross income for
Federal income tax purposes. At least 65% of this Fund's total assets during
normal market conditions will be invested in bonds. See "Dividends,
Distributions and Taxes" concerning the alternative minimum tax. The
Fund and the Manager rely on the opinion of bond counsel for the issuer in
determining whether obligations are municipal bonds.
Municipal bonds are issued by a wide range of governments, agencies and
authorities for various purposes. The types of municipal bonds in which the
Fund may invest include "general obligation" bonds, "revenue" bonds and certain
"industrial development" bonds. Industrial development bonds are revenue bonds
issued by or on behalf of public authorities to obtain funds to finance
privately operated facilities. Their credit quality is generally dependent on
the credit standing of the company involved. Municipal obligations in which the
Fund may invest also include municipal lease obligations and participations in
these obligations (collectively, "lease obligations") of municipal authorities
or entities. The Manager determines liquidity of lease obligations in
accordance with guidelines established by the Fund's Board of Directors.
Unrated municipal lease obligations will be considered to be illiquid. In
determining the credit quality of unrated municipal lease obligations, one of
the factors, among others, to be considered will be the likelihood that the
lease will not be canceled. Certain "non-appropriation" lease obligations may
present special risks because the municipality's obligation to make future lease
or installment payments depends on money being appropriated each year for this
purpose. See the SAI for further information about lease obligations.
Municipal bonds vary widely as to their interest rates, degree of security
and maturity. The bonds purchased by this Fund are selected primarily on the
basis of quality, yield and diversification. Factors which affect the yield on
municipal bonds include general money market conditions, municipal bond market
conditions, the size of a particular offering, the maturity of the obligation
and the nature of the issue. Lower rated bonds usually, but not always, have
higher yields than similar but higher rated bonds. At least 80% of the Fund's
assets will consist of municipal bonds of investment grade; provided that, as
described below, the Fund will not purchase non-investment grade debt securities
if, as a result of such purchase, more than 5% of its assets would be so
invested. The Fund will have less than 25% of its assets in securities of
issuers located in any single state.
Up to 10% of the Fund's assets may be invested in debt securities other
than municipal bonds (referred to as "taxable obligations"). The only taxable
obligations which the Fund may purchase are (i) U.S. Government Securities; (ii)
bank obligations of domestic banks or savings and loan associations which are
subject to regulation by the U.S. Government (including, without limitation,
certificates of deposit, letters of credit and acceptances); and (iii)
commercial paper rated at least A by a recognized statistical rating
organization.
The ability of the governments, agencies, companies or others to pay
principal and interest on debt securities held by the Fund may change. Such
changes, actual or expected, may also affect the value of these debt securities,
and in turn the value of Fund shares.
Global Income Fund
Global Income Fund's goal is to provide a high level of current income
consistent with safety of principal by investing primarily in a global portfolio
of high quality (as described below) debt securities which are denominated in
various currencies and multinational currency units and that have remaining
maturities of not more than five years; provided that the average maturity of
all securities in the portfolio of this Fund will not exceed three years at any
time. See the Appendix to the SAI for a description of certain bond ratings.
As a global fund, the Fund may invest in United States and foreign securities.
The debt securities in which the Fund may invest are denominated either in
multinational currency units or in the currencies of countries whose governments
are considered stable by the Manager and whose currency is convertible into U.S.
dollars. An issuer of debt securities purchased by the Fund may be domiciled in
a country other than the country in whose currency the instrument is
denominated.
Global Income Fund seeks to minimize credit risk by investing primarily in
high-quality (as described below) debt securities. Accordingly (subject to the
policy regarding non-investment grade debt securities described below), it may
only invest in: (i) obligations issued or guaranteed by foreign governments or
supranational organizations or their agencies, instrumentalities or subdivisions
and that are rated at least AA by S&P or at least Aa by Moody's or similarly
rated by another comparable rating service ("High Quality Rating") or, if
unrated, are determined by the Manager to be of comparable quality; (ii)
corporate debt securities having at least one High Quality Rating or, if
unrated, determined by the Manager to be of comparable quality; (iii)
certificates of deposit and bankers' acceptances issued or guaranteed by, or
time deposits maintained at, banks (including foreign branches of U.S. banks or
U.S. or foreign branches of foreign banks) having total assets of more than $500
million and determined by the Manager to be of high quality; (iv) commercial
paper rated A-1 by S&P, Prime-1 by Moody's or similarly rated by another
comparable rating service as determined by the Manager or, if not rated, issued
by U.S. or foreign issuers having outstanding debt securities rated at least A
by S&P or Moody's or similarly rated by another comparable rating service, or
determined by the Manager to be of comparable quality; and (v) debt securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
In pursuing its investment goal, the Fund seeks to minimize fluctuations in
net asset value as a result of changes in market rates of interest by investing
only in shorter-term debt securities having remaining maturities of not more
than five years; provided that the average maturity of all securities in the
portfolio of this Fund may not exceed three years at any time. The Fund's net
asset value may fluctuate as a result of changes in foreign exchange rates,
independent of fluctuations in market rates of interest, although as described
herein this Fund may engage in foreign currency hedging transactions to seek to
minimize such fluctuations. Global Income Fund may not invest more than 50% of
its assets in securities denominated in the U.S. dollar; and may not invest more
than 25% of its assets in securities denominated in any other single currency.
This Fund may not invest 25% or more of its assets in securities issued by any
single foreign government.
From time to time the returns available on short-term debt instruments
denominated in the currencies of certain foreign countries may be more
attractive than the corresponding returns available on U.S. dollar denominated
short-term debt instruments. However, the attractive returns which may from
time to time be available from certain short-term foreign currency denominated
debt instruments can be adversely affected by changes in currency exchange
rates. The Fund receives much of its income and gains, if any, in currencies
other than U.S. dollars, although the Fund makes distributions in U.S. dollars.
A reduction in the value of such foreign currencies relative to the value of the
U.S. dollar would adversely affect the dollar value of the net assets (including
accrued income and unrealized appreciation or depreciation of investments) of
the Fund. The Fund intends to seek to maintain a portfolio of investments that
is, in the aggregate, relatively neutral to fluctuations in the value of the
U.S. dollar relative to the currencies of major industrialized nations. In
addition, the Fund may engage in hedging and risk management transactions in
instruments such as forward currency contracts, options on foreign currencies,
indexed commercial paper and certificates of deposit, foreign currency swap
agreements, financial futures contracts and options thereon. There can be no
assurance that the Fund will not be adversely affected by fluctuations in
currency exchange rates. Such hedging and risk management transactions entail
risks.
The Fund may invest in debt securities issued by supranational
organizations such as the World Bank, which was chartered to finance development
projects in developing member countries, and the Asian Development Bank, which
is an international development bank established to lend funds, promote
investment and provide technical assistance to member nations in the Asian and
Pacific regions. Supranational entities do not have taxing authority and are
therefore dependent on their members' support in order to meet interest and
principal payments.
The Fund may invest in debt securities denominated in the European Currency
Unit ("ECU"), which is a "basket" consisting of specified amounts of the
currencies of certain of the member states of the European Economic Community.
The specific amounts of currencies comprising the ECU may be adjusted by the
Council of Ministers of the European Community to reflect changes in relative
values of the underlying currencies. European supranationals, in particular,
issue ECU-denominated obligations.
In normal circumstances, the Fund's assets will be invested in obligations
of, or issued by issuers located in, at least three different countries, one of
which may be the United States. Investments in securities of foreign entities
and securities denominated in foreign currencies involve risks not typically
involved in domestic investment, such as fluctuations in foreign exchange rates,
future foreign political and economic developments, and the possible imposition
of exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments. Since the Fund may invest in
securities denominated or quoted in currencies other than the United States
dollar, changes in foreign currency exchange rates may affect the value of
investments in the portfolio and the accrued income and unrealized appreciation
or depreciation of investments. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of the Fund's
assets denominated in that currency and the Fund's yield on such assets. See
the SAI for other risks associated with foreign transactions.
The Fund may also invest in U.S. Government Securities. See "Limited-Term
Bond Fund" and the SAI for a discussion of the various types of U.S. Government
Securities.
The Global Income Fund is a "non-diversified" investment company, which
means it is not limited in the proportion of its assets that may be invested in
the securities of a single issuer, except the limit with respect to foreign
governments. However, the Fund intends to conduct its operations so as to
qualify for treatment as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended, which will relieve the Fund of any
liability for Federal income tax to the extent its earnings and gains are
distributed to shareholders. See "Dividends, Distributions and Taxes" below
and the SAI for discussion s of this tax status. As a non-
diversified fund, Global Income Fund is subject to greater risks with respect to
its portfolio securities than investment companies that have a broader range of
investments because changes in the financial conditions of an issuer may cause
greater fluctuations in this Fund's performance and price of its shares.
Defensive Positions
Sometimes the Manager may believe that a full or partial defensive position
is desirable temporarily for a Fund due to present or anticipated market or
economic conditions which are affecting or could affect the value of securities
in a Fund's portfolio. To achieve a temporary defensive position with
respect to up to all of the Fund's respective assets , the Manager may take
certain steps, including, without limitation, the following:
Total Return Fund and Growth Fund: (i) hold cash or cash equivalents
(short-term investments, such as commercial paper and certificates of
deposit) ; (ii) invest in debt securities (including commercial paper or
short-term U.S. Government Securities); or (iii) invest in convertible preferred
stock.
Limited-Term Bond Fund and Global Income Fund: (i) shorten the average
maturity of the Fund's portfolio; (ii) hold cash or cash equivalents (short-
term investments, such as commercial paper and certificates of deposit) ;
(iii) emphasize debt securities of a higher quality than those the Fund would
ordinarily hold; or (iv) invest in convertible preferred stock.
Municipal Bond Fund: (i) shorten the average maturity of the Fund's
portfolio; (ii) hold cash or cash equivalents (short-term investments, such
as commercial paper and certificates of deposit) ; (iii) hold taxable
obligations, subject to the limitations stated above; or (iv) emphasize debt
securities of a higher quality or higher coupon than those the Fund would
ordinarily hold.
A defensive posture may create a reduction in a Fund's yield. As an
alternative to taking a temporary defensive position, the Funds may invest in
options, futures and certain other strategies, as described below.
Options, Futures and Other Strategies
A Fund may use certain options to attempt to enhance income or may attempt
to reduce the overall risk of its investments by using certain options, futures
contracts, forward currency contracts, indexed commercial paper and certificates
of deposit and certain other strategies described herein. The strategies
described below may be used in an attempt to manage a Fund's foreign currency
exposure as well as other risks of a Fund's investments that can affect
fluctuation in its net asset value. A Fund's ability to use these strategies
may be limited by market conditions, regulatory limits and tax considerations.
A Fund might not use any of these strategies, and there can be no assurance that
any strategy which is used will succeed. The risks associated with such
strategies are described below. Also see the SAI for more information on these
strategies and risk considerations relating thereto.
Options
The Funds may engage in certain strategies involving options to attempt to
enhance the Fund's income or to attempt to reduce the overall risk of its
investments. A call option gives the purchaser the right to buy, and obligates
the writer to sell, the underlying investment at the agreed upon exercise price
during the option period. A put option gives the purchaser the right to sell,
and obligates the writer to buy, the underlying investment at the agreed upon
exercise price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract.
Total Return Fund and Growth Fund may write and purchase listed options on
domestic stock indices which are not limited to stocks of any industry or group
of industries ("broadly-based stock indices"). Total Return Fund and Growth
Fund may also write listed covered call options and purchase listed covered put
options on domestic stock as well as purchase listed call options and write
listed put options on domestic stocks that are not covered.
Limited-Term Bond Fund, Municipal Bond Fund and Global Income Fund may
write and purchase listed options on domestic debt securities, which securities
include, without limitation, U.S. Government Securities ("Domestic Debt
Securities"). Global Income Fund may write and purchase listed options on
foreign debt securities.
Limited-Term Bond Fund and Global Income Fund may write and purchase over-
the-counter ("OTC") options on Domestic Debt Securities and Global Income Fund
may write and purchase listed or OTC options on foreign currencies.
Municipal Bond Fund may write and purchase listed options on indices on
municipal bonds ("Municipal Bond Indices").
Futures Contracts and Options on Futures Contracts
When a Fund purchases a futures contract, it incurs an obligation to take
delivery of a specified amount of the obligation underlying the contract at a
specified time in the future for a specified price. When a Fund sells a futures
contract it incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.
When a Fund writes an option on a futures contract it becomes obligated, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the term of the option. If a Fund
has written a call it assumes a short futures position. If it has written a put
it assumes a long futures position. When the Fund purchases an option on a
futures contract it acquires a right in return for the premium it pays to assume
a position in a futures contract.
Total Return Fund and Growth Fund may buy and sell futures contracts on
broadly-based stock indices ("Stock Index Futures"). Limited-Term Bond Fund,
Municipal Bond Fund and Global Income Fund may buy and sell futures on Domestic
Debt Securities ("Domestic Debt Futures"). Global Income Fund may also buy and
sell futures on foreign debt securities ("Foreign Debt Futures") and on foreign
currency exchange rates ("Foreign Currency Exchange Rate Futures"). Municipal
Bond Fund may buy and sell futures on Municipal Bond Indices ("Municipal Bond
Index Futures").
Total Return Fund and Growth Fund may write and purchase options on Stock
Index Futures. Limited-Term Bond Fund, Municipal Bond Fund and Global Income
Fund may write and purchase options on Domestic Debt Futures. Global Income
Fund may write and purchase options on Foreign Currency Exchange Rate Futures.
Subject to the further limitations stated in the SAI, the Funds'
limitations on the above instruments are as follows: Total Return Fund and
Growth Fund may not purchase or sell options, futures contracts or options on
futures contracts if immediately thereafter the aggregate value of such
contracts and options held by the Fund would exceed 10% of its assets.
Similarly, Municipal Bond Fund may not purchase or sell options, futures
contracts or options on futures contracts if immediately thereafter the
aggregate value of such contracts and options held by the Fund would exceed 20%
of its assets. Dividends paid by Municipal Bond Fund that are derived from
income from taxable obligations and futures contracts are subject to Federal
income tax. Limited-Term Bond Fund may not purchase or sell options, futures
contracts or options on futures contracts if immediately thereafter the
aggregate value of such options and contracts held by the Fund would exceed 25%
of its assets. Global Income Fund may not purchase or sell options, futures
contracts or options on futures contracts if immediately thereafter the
aggregate value of such options and contracts held by the Fund would exceed 33
1/3% of its assets.
Forward Contracts
Global Income Fund, Total Return Fund and Growth Fund may enter into
forward currency contracts for the purchase or sale of a specified currency at a
specified future date either with respect to specific transactions or with
respect to portfolio positions. For example, when the Manager anticipates
purchasing or selling a security, a Fund may enter into a forward contract in
order to set the exchange rate at which the transaction will be made. A Fund
also may enter into a forward contract to sell an amount of a foreign currency
approximating the value of some or all of the Fund's securities positions
denominated in such currency. Each of these three Funds may also use forward
contracts in one currency to attempt to hedge against fluctuations in the value
of securities denominated in a different currency if the Manager anticipates
that there will be a correlation between the two currencies. The purpose of
entering into these contracts is to minimize the risk to the Funds from adverse
changes in the relationship between the U.S. dollar and foreign currencies.
Indexed Commercial Paper and Certificates of Deposit
Global Income Fund may invest without limitation in commercial paper and
certificates of deposit which are indexed to certain specific foreign currency
exchange rates. The terms of such commercial paper or certificates of deposit
provide that the principal amount is adjusted upwards or downwards (but not
below zero) at maturity to reflect fluctuations in the exchange rate between two
currencies during the term of the obligation, depending on the terms of the
specific security. The Fund will purchase such commercial paper or certificates
of deposit with the currency in which it is denominated and, at maturity, will
receive interest at the agreed upon rate and principal payments thereon in that
currency, but the amount of principal payable by the issuer at maturity will
vary in proportion to the change, if any, in the exchange rate between the two
specified currencies between the date the instrument is issued and the date the
instrument matures. While such commercial paper and certificates of deposit
entail the risk of loss of principal, the potential for realizing gains as a
result of changes in foreign currency exchange rates enables the Fund to attempt
to hedge (or cross-hedge) against a decline in the U.S. dollar value of
investments denominated in foreign currencies while providing an attractive
money market rate of return. The Fund may purchase such commercial paper and
certificates of deposit for hedging purposes in connection with a portfolio
security only, not for speculation.
Swaps, Caps and Floors
Global Income Fund, Limited-Term Bond Fund and Municipal Bond Fund may
enter into interest rate swap transactions and purchase or sell interest rate
caps and floors as described below. These transactions may be entered into only
in connection with hedging strategies and not for speculative purposes.
Global Income Fund may enter into transactions involving swaps, caps and
floors relating to domestic or foreign interest rates or foreign currency
exchange rates. Limited-Term Bond Fund may enter into such transactions with
respect to domestic interest rates. Municipal Bond Fund may enter into such
transactions with respect to municipal interest rates.
Interest rate swaps involve the exchange by a Fund with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate floor.
The Fund expects to enter into these transactions primarily to preserve a return
or spread on a particular investment or portion of its portfolio or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date.
A Fund usually will enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. The creditworthiness
of firms with which a Fund enters into interest rate swaps, caps or floors will
be monitored by the Manager in accordance with procedures adopted by the Board
of Directors. If a default occurs by the other party to such transaction, the
Fund will have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation.
Any such transactions relating to foreign exchange rates may be effected
with respect to hedging of non-U.S. dollar denominated securities (including
securities denominated in the ECU) owned by a Fund, sold by a Fund but not yet
delivered, committed or anticipated to be purchased by a Fund or in transaction
or cross-hedging strategies.
The Funds understand that the position of the staff of the Securities and
Exchange Commission is that assets involved in such transactions are illiquid
securities and are, therefore, subject to the limitations on investment in
illiquid securities as described in the SAI.
Risks of Hedging Techniques
The use of options, futures contracts, options on futures contracts,
forward contracts, swaps, caps, floors and indexed commercial paper and
certificates of deposit involve special risks, including (i) possible imperfect
or no correlation between price movements of the portfolio investments (held or
intended to be purchased) involved in the transaction and price movements of the
instruments involved in the transaction; (ii) possible lack of a liquid
secondary market for any particular instrument at a particular time; (iii) the
need for additional portfolio management skills and techniques; (iv) losses due
to unanticipated market price movements; (v) the fact that, while such
strategies can reduce the risk of loss, they can also reduce the opportunity for
gain, or even result in losses, by offsetting favorable price movements in
investments involved in the transaction; (vi) incorrect forecasts by the Manager
concerning interest or currency exchange rates or direction of price
fluctuations of the investment involved in the transaction which may result in
the strategy being ineffective; (vii) loss of premiums paid by a Fund on options
it purchases; and (viii) the possible inability of a Fund to purchase or sell a
portfolio security at a time when it would otherwise be favorable for it to do
so, or the possible need for a Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with such transactions and the possible
inability of a Fund to close out or liquidate its position.
For a hedging strategy to be completely effective, the price change of the
hedging instrument must equal the price change of the investment being hedged.
The risk of imperfect correlation of these price changes increases as the
composition of the Funds' respective portfolios diverges from instruments
underlying a hedging instrument. Such equal price changes are not always
possible because the investment underlying the hedging instruments may not be
the same investment that is being hedged. The Manager will attempt to create a
closely correlated hedge but hedging activity may not be completely successful
in eliminating market value fluctuation.
The ordinary spreads between prices in the cash and futures markets, due to
the differences in the natures of those markets, are subject to distortion. Due
to the possibility of distortion, a correct forecast of general interest,
foreign currency or stock market trends by the Manager may still not result in a
successful transaction. The Manager may be incorrect in its expectations as to
the extent of various interest or foreign exchange rate movements or stock
market movements or the time span within which the movements take place.
Options and futures transactions may increase portfolio turnover rates,
which results in correspondingly greater commission expenses and transactions
costs and may result in certain tax consequences. See the SAI for further
information regarding these and other risks.
New financial products and risk management techniques continue to be
developed. Each Fund may use these instruments and techniques to the extent
consistent with its investment goal and regulatory requirements applicable to
investment companies.
Other Investment Policies
Total Return Fund, Growth Fund, Limited-Term Bond Fund and Global Income
Fund may each purchase securities subject to repurchase agreements (which can be
considered as collateralized loans by the Fund). No Fund may invest more than
10% of its net assets in illiquid securities, which include repurchase
agreements not terminable within seven days. The majority of repurchase
transactions in which a 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. A Fund's risk is limited to the ability of the vendor to pay the
agreed-upon sum on the delivery date.
Subject to each Fund's policies stated herein, no Fund may invest in non-
investment grade debt securities if as a result of such investment more than 5%
of that Fund's assets would consist of such investments. See the SAI for a
discussion of the risks associated with non-investment grade debt securities.
See the appendix to the SAI for a list of certain ratings of securities. Non-
investment grade debt securities are those securities which are rated lower than
Baa by Moody's or lower than BBB by S&P's and unrated securities which, in the
opinion of the Manager, are of similar quality to rated bonds in these
categories.
Subject to the other limitations described herein, Global Income Fund may
purchase an unlimited amount of foreign securities. Limited-Term Bond Fund and
Municipal Bond Fund may not invest in foreign securities. Total Return Fund and
Growth Fund may each invest up to 10% of its assets in foreign securities, in
each case subject to limitations explained in the SAI. There are certain risks
associated with foreign securities not usually associated with U.S. securities,
including the absence of uniform accounting, auditing and financial standards,
less government regulation, changes in currency rates and in exchange
regulations, and political instability. See the SAI for a discussion of these
risks.
No Fund may invest more than 5% of its assets, taken at market value at the
time of investment, in companies, including predecessors, with less than three
years continuous operation.
Each of the Funds, except Limited-Term Bond Fund and Municipal Bond Fund,
may buy shares of other investment companies which do not redeem their shares,
subject to certain conditions explained in the SAI.
Global Income Fund may purchase restricted securities if, as a result of
such purchase, not more than 5% of its assets would be invested in such
securities. Restricted securities may be illiquid due to restrictions on their
resale.
Growth Fund and Global Income Fund may purchase warrants (which are rights
to purchase securities) up to 5% of their respective assets at the time of
investment, subject to certain limitations explained in the SAI.
Each Fund, except Municipal Bond Fund, may lend its securities for the
purpose of realizing income. Such loans may be short term or long term. Such
loans will be fully collateralized in accordance with certain regulatory
requirements. As a fundamental policy, no more than 10% of the respective
assets of Total Return Fund, Growth Fund or Global Income Fund, or 30% of the
assets of Limited-Term Bond Fund, may be loaned at any one time. If a material
event affecting the investment is to be voted on the Fund will take such action
as may be appropriate in order to vote its shares. There are certain risks
associated with lending securities in that a Fund may experience delay in
recovering the collateral or even loss of the collateral. See the SAI for
further discussion of these risks.
Municipal Bond Fund, Limited-Term Bond Fund and Global Income Fund may each
purchase securities in which it may invest on a when-issued or delayed delivery
basis or sell them on a delayed delivery basis. Each of these Funds may enter
into such transactions in order to secure what the Manager considers to be an
advantageous price and yield at the time of entering into the transaction.
Values of securities in such transactions are subject to market fluctuation and
the value may be less when delivered than the purchase price paid.
The Funds may have a high portfolio turnover. See the Financial
Highlights table for past turnover. A high turnover rate will increase
transaction costs and commission costs that will be borne by a Fund and could
generate taxable income or loss. See "Dividends, Distributions and
Taxes" and the SAI for additional information with respect to portfolio
transactions and brokerage.
Management
Waddell & Reed Investment Management Company (the "Manager") is investment
manager to the Funds. It is a wholly-owned subsidiary of Waddell & Reed, Inc.
Waddell & Reed, Inc. and its predecessors served as investment manager to each
of the registered investment companies in the United Group of Mutual Funds since
1940 or the inception of the investment company, whichever was later, and to
TMK/United Funds, Inc. since its inception. On January 8, 1992, Waddell & Reed,
Inc. assigned its investment management duties (and assigned its professional
staff for investment management services) to Waddell & Reed Investment
Management Company. The Manager has also served as investment manager
for Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free
Fund, Inc. since each commenced operations in February 1993. Waddell & Reed,
Inc. serves as the Funds' underwriter and distributor and as underwriter for
each of the investment companies in the United Group of Mutual Funds and
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 Corporation's Board of Directors, the Manager
provides investment advice and supervises investments for which services it is
paid a fee computed on each Fund's net asset value as of the close of business
each day at an annual rate as follows:
Annual
Fund Rate
---- ------
Total Return Fund .....................................0.71%
Growth Fund ...........................................0.81%
Limited-Term Bond Fund ................................0.56%
Municipal Bond Fund ...................................0.56%
Global Income Fund ....................................0.66%
The fee is accrued and paid daily. The fee for Growth Fund is higher than
that of most funds.
Waddell & Reed Services Company, a subsidiary of Waddell & Reed, Inc., acts
as transfer agent ("Shareholder Servicing Agent") for the Corporation and
processes the payments of dividends to Fund shareholders. 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 Corporation 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
Corporation and pricing daily the value of shares of the Funds. For these
services, each 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 Fund
------------------------- ------------------
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
Management fees for each Fund as a percentage of each Fund's net assets
for the fiscal year ended March 31, 1994 were as shown above. Total expenses as
a percentage of each Fund's average net assets for that year were as follows:
Total Return 2.16%; Growth 2.34%; Limited-Term Bond 2.14%; Municipal Bond 1.98%;
and Global Income 2.24%.
The Manager may place transactions for the portfolio of each Fund and in
doing so may consider sales of shares of the Fund by a broker, if any, as a
factor in the selection of brokers to execute portfolio transactions. See the
SAI for further information.
John M. Holliday is primarily responsible for the day-to-day management
of the portfolio of the Municipal Bond Fund. Mr. Holliday is Senior Vice
President of the Manager and Vice President of the Fund. Mr. Holliday is Vice
President of other investment companies for which the Manager serves as
investment manager. Mr. Holliday has held his Fund responsibilities since the
Fund's inception and has been an employee of Waddell & Reed, Inc., and its
successor, the Manager, since April 1978. Mr. Holliday has served as the
portfolio manager of other investment companies managed by Waddell & Reed, Inc.
since August 1979. He has been Senior Vice President of Waddell & Reed Asset
Management Company, an affiliate of the Manager, since January 1983 and Vice
President since June 1978.
Mark G. Seferovich is primarily responsible for the day-to-day management
of the portfolio of the Growth Fund. Mr. Seferovich is Vice President of the
Manager and Vice President of the Fund. Mr. Seferovich is Vice President of
other investment companies for which the Manager serves as investment manager.
Mr. Seferovich has held his Fund responsibilities since the Fund's inception and
has been an employee of Waddell & Reed, Inc. and its successor, the Manager,
since February 1989. Mr. Seferovich has served as the portfolio manager of
other investment companies managed by Waddell & Reed, Inc. since February 1989.
He previously served as a portfolio manager for a brokerage firm.
W. Patrick Sterner is primarily responsible for the day-to-day management
of the portfolio of the Limited-Term Bond Fund. Mr. Sterner is Vice President
of the Manager and Vice President of the Fund. Mr. Sterner is Vice President of
another investment company for which the Manager serves as investment manager.
Mr. Sterner has held his Fund responsibilities since the Fund's inception and
has been an employee of the Manager since August 1992. He has been Vice
President of Waddell & Reed Asset Management Company, an affiliate of the
Manager, since August 1992. Prior to that date, Mr. Sterner was Chief
Investment Officer of a bank.
John E. Sundeen, Jr. shares responsibility for the day-to-day management of
the portfolio of the Global Income Fund. Mr. Sundeen is Vice President of the
Manager and Vice President of the Fund. Mr. Sundeen is Vice President of other
investment companies for which the Manager serves as investment manager. Mr.
Sundeen has held his Fund responsibilities since the Fund's inception and has
been an employee of Waddell & Reed, Inc. and its successor, the Manager, since
June 1983. He has served as the portfolio manager for other investment
companies managed by Waddell & Reed, Inc. since January 1991. He has been Vice
President of Waddell & Reed Asset Management Company, an affiliate of the
Manager, since August 1992.
James C. Cusser shares responsibility for the day-to-day management of the
portfolio of the Global Income Fund. Mr. Cusser is Vice President of the
Manager and Vice President of the Fund. Mr. Cusser is Vice President of other
investment companies for which the Manager serves as investment manager. Mr.
Cusser has held his Fund responsibilities since the Fund's inception and has
been an employee of the Manager since August 1992. Prior to that date Mr.
Cusser was a fixed income strategist for a major brokerage firm.
Russell E. Thompson is primarily responsible for the day-to-day management
of the portfolio of Total Return Fund. Mr. Thompson is Senior Vice President of
the Manager and Vice President of the Fund. Mr. Thompson is Vice President of
other investment companies for which the Manager serves as investment manager.
Mr. Thompson has held his Fund responsibilities since the Fund's inception and
has been an employee of Waddell & Reed, Inc. since March 1971. Mr. Thompson has
served as the portfolio manager for other investment companies managed by
Waddell & Reed, Inc. since January 1976. He has been Senior Vice President of
Waddell & Reed Asset Management Company, an affiliate of the Manager, since
January 1992 and Vice President since July 1986.
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.
Distribution
Waddell & Reed, Inc. (the "Distributor"), the parent company of the
Manager, is the principal underwriter and sole distributor of the Corporation's
shares.
The Corporation, pursuant to Rule 12b-1 of the Investment Company Act of
1940 (the "1940 Act") and as authorized under a Distribution and Service Plan
(the "Plan"), may finance the distribution of the shares of the Funds.
The Plan provides that the Corporation, with respect to each Fund, may
compensate the Distributor in an amount calculated and payable daily up to 1%
annually of each of the Fund's average daily net assets. There are two parts to
this fee: up to 0.75% may be paid to the Distributor for distribution services
and distribution expenses including commissions paid by the Distributor to its
sales representatives and managers (the "distribution fee") with respect to the
distribution of the particular Fund's shares, and up to 0.25% may be paid to
reimburse the Distributor for continuing payments made to the Distributor's
sales representatives and managers, its administrative costs in
overseeing these payments, and the expenses of Waddell & Reed Services Company,
a subsidiary of the Distributor, in providing certain personal services to
shareholders.
The service fee of 0.25% annually of each Fund's daily net asset value is
paid to the Distributor for providing personal services to shareholders through
the Distributor's sales representatives and sales managers and to maintain
shareholder accounts. Up to 0.05% of the 0.25% service fee may be paid by the
Distributor to Waddell & Reed Services Company to cover its costs in providing
the services to shareholders in order to maintain shareholder accounts. These
ongoing payments will be made only in amounts sufficient to constitute
reimbursement for expenses actually incurred and will cease if the Plan and
Underwriting Agreement with the Distributor terminate.
In addition to these fees, the Distributor may be compensated for
distribution of the Fund shares by a contingent deferred sales charge ("deferred
sales charge") imposed at the time of redemption. See "Redemption."
The distribution fee and the deferred sales charge are designed to allow
investors to purchase shares without a front end sales charge and at the same
time to allow the Distributor to pay commissions to its field sales force and
pay other expenses of distribution including the cost of prospectuses for
prospective investors, sales literature, advertising, sales office expenses and
overhead. In this respect, the distribution fee and deferred sales charge are
comparable to a front end sales charge. See "Summary of Expenses" for the
amount of these charges and the service fee that may be paid over certain
periods. The distribution fee would be the equivalent of a 6.25% and 7.25%
front end sales charge after 9 and 10.5 years respectively, assuming a 5% growth
rate. These are the maximum sales charges permitted under Rules of the National
Association of Securities Dealers, Inc. ("NASD") for asset based sales charges
and front end sales charges, respectively, were the Corporation's shares offered
with such charges.
No payment of the distribution fee will be made, and no deferred sales
charge will be paid, to the Distributor by any Fund if, and to the extent that,
the aggregate of the distribution fees paid by the Fund and the deferred sales
charges received by the Distributor would exceed the maximum amount of such
charges that the Distributor is permitted to receive under NASD rules as then in
effect. During any one period of time, the amount paid by the Distributor in
commissions to its sales force and attendant promotional and overhead costs may
exceed the amount it receives from the distribution fees and deferred sales
charges. Although such fees and charges are paid to reimburse the Distributor
for such expenses, the expenses are not a liability of the Corporation, and the
Corporation at any time may on written notice terminate the Plan and the
Underwriting Agreement with the Distributor without penalty and without further
payment of the distribution fee. In such event the deferred sales charge may
remain in effect as to investments made prior to termination.
Dividends, Distributions and Taxes
Ordinarily, dividends from net investment income (which includes accrued
interest, earned discount, dividends and other income earned on portfolio
securities less expenses) are declared and paid at the following times: Total
Return Fund and Growth Fund, annually (in December); and Limited-Term Bond Fund,
Municipal Bond Fund and Global Income Fund, declared daily and paid monthly
(usually paid on the 27th day of the month or the last business day prior to the
27th if the 27th falls on a weekend or holiday). When shares are redeemed, any
declared but unpaid dividends on those shares will be paid with the next regular
dividend payment and not at the time of redemption. Each 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 (for certain
Funds) any net realized gains from foreign currency transactions, with its
regular dividend at the end of the calendar year. Each Fund may make additional
distributions if necessary to avoid Federal income or excise taxes on certain
undistributed income and capital gains.
Dividends and distributions are ordinarily paid in shares of the
distributing Fund at the net asset value generally determined as of the close of
business on the applicable date for the dividend or distribution, although this
practice could be changed by the Board of Directors of the Corporation without
shareholder approval. You may instead receive dividends and distributions in
cash, or receive dividends in cash and distributions in shares, as you may
instruct in writing to Waddell & Reed Services Company at the address shown on
the inside back cover of this Prospectus at least five days prior to the
applicable date of the distribution; the election remains in effect until
revoked by written notice given in the same manner. In the absence of
instructions, dividends and distributions will be paid in shares.
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986 (the "Code") so that
it will be relieved of Federal income tax on that part of its investment company
taxable income (consisting generally of taxable net investment income, net
short-term capital gains and for certain Funds, net gains from certain foreign
currency transactions) and net capital gains that is distributed to its
shareholders. In addition, Municipal Bond Fund intends to continue to qualify
to pay "exempt-interest" dividends, which requires, among other things, that at
the close of each calendar quarter at least 50% of the value of its total assets
must consist of obligations the interest on which is excludable from gross
income under section 103(a) of the Code.
Dividends from a 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 in additional Fund shares. Distributions by Municipal
Bond Fund that are designated by it as exempt-interest dividends generally may
be excluded by you from your gross income. Distributions of a Fund's realized
net capital gains, when designated as such, are taxable to you as long-term
capital gains, whether received in cash or in additional Fund shares and
regardless of the length of time you have owned your shares. Each 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 either or both of Total Return Fund and
Growth Fund, whether received in cash or 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. No part of the dividends paid by any
other Fund is expected to be eligible for this deduction.
Each Fund is required to withhold 31% of all dividends, distributions and
redemption proceeds payable to individuals and certain other noncorporate
shareholders who do not furnish the Fund with a correct taxpayer identification
number. Withholding at that rate from taxable dividends and distributions also
is required for such shareholders who otherwise are subject to backup
withholding.
Redemption of Fund shares will result in taxable gains or losses to you,
depending on whether the redemption proceeds are more or less than your adjusted
basis for the redeemed shares. An exchange of shares of one Fund for shares of
any other Fund generally will have similar tax consequences. In addition, if
you purchase Fund shares within thirty days before or after redeeming other
shares of that Fund at a loss, part or all of that loss will not be deductible
and will increase the basis of the newly purchased shares.
Exempt-interest dividends paid by Municipal Bond Fund may be subject to
income taxation under state and local tax laws. In addition, a portion of those
dividends is expected to be attributable to interest on certain bonds that is
treated as a "tax preference item" for purposes of the alternative minimum tax
("AMT"); such portion, which that Fund anticipates will be not more than one-
third of the dividends it will pay to its shareholders, must be treated by you
as such a tax preference item in calculating your liability, if any, for the
AMT. Municipal Bond Fund will provide you with information concerning the
amount of distributions subject to the AMT after the end of each calendar year.
Shareholders who may be subject to the AMT should consult with their tax
advisors concerning investment in that Fund.
Interest on indebtedness incurred or continued to purchase or carry shares
of Municipal Bond Fund will not be deductible for Federal income tax purposes to
the extent that Fund's distributions consist of exempt-interest dividends.
Proposals may be introduced before Congress for the purpose of restricting or
eliminating the Federal income tax exemption for interest on municipal bonds.
If such a proposal were enacted, the availability of municipal bonds for
investment by that Fund and the value of its portfolio would be affected. In
that event, that Fund may decide to reevaluate its investment goal and policies.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for a further discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax advisor.
Purchase of Shares
You may purchase shares of the Funds through the Distributor and its sales
representatives. To open an account you must complete an application. The
Funds do not issue certificates representing shares of a Fund. 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. Shares are
sold at the net asset value next determined following acceptance of the order by
the Distributor. This net asset value per share is the value of a Fund's
assets, less liabilities, divided by the number of shares outstanding. Net
asset value is ordinarily determined once each day as of the later of the close
of the regular session of the New York Stock Exchange ("NYSE") or the close of
the regular session of any domestic securities exchange or commodities exchange
on which an option or futures contract held by the Fund is traded on each day
the NYSE is open. Ordinarily, the close of the NYSE is 4:00 p.m. Eastern time,
the close of options 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.
A Fund's portfolio securities listed or traded on an exchange are valued using
market quotations or, if such quotations are not available, at their fair value
in a manner determined in good faith by or at the direction of the Board of
Directors. Bonds are generally valued according to prices quoted by a dealer in
bonds which offers a pricing service. Short-term debt securities are valued at
amortized cost which approximates market value. Other assets are valued at
their fair value by or at the direction of the Board of Directors.
Ordinarily, the minimum initial investment is $1,000. A $50 minimum
initial investment pertains to certain retirement plan accounts and $25 for
certain payroll deduction purchases for employees of the Distributor and its
affiliates and certain retirement plan accounts. These minimums may be waived
or reduced for purchases by employees of the Distributor or its affiliates,
certain pension and retirement plan accounts and participants in the automatic
investment plans.
You may arrange with the Distributor to purchase shares in a Fund by having
regular monthly withdrawals of $50 or more made from your checking account or by
having regular monthly redemptions of shares with a value of $100 or more made
from United Cash Management, Inc., a fund in the United Group of Mutual Funds,
and invested in shares of a Fund, subject to certain conditions explained in the
SAI. These privileges may be eliminated or modified by the Corporation at any
time.
Redemption
You have the right to sell your shares back to the Corporation (redeem) at
any time by sending a written request to the Corporation at the address on the
front cover of this Prospectus. 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. The Corporation 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 guarantors in accordance
with the procedures of the Corporation's transfer agent if the request for
redemption is made by a corporation, partnership or fiduciary, or if the
redemption request is made otherwise in good order by, or if redemption proceeds
are payable to, someone other than the owner of record. If you recently
purchased the shares by check, the payment of redemption proceeds on these
shares may be delayed. You may arrange for the bank upon which the purchase
check was drawn to provide to the Corporation telephone or written assurance,
satisfactory to the Corporation, 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
Corporation has been able to verify that your purchase check has cleared and
been honored.
The Corporation 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 Corporation's address shown on the
front cover of this Prospectus, subject to the deferred sales charge discussed
herein. Payment will be made within seven days, unless delayed because of
emergency conditions determined by the Securities and Exchange Commission, when
the NYSE is closed (other than on weekends and holidays) or when trading on the
NYSE is restricted. Payment will be made in cash, although under extraordinary
conditions redemptions may be made in portfolio securities.
You may reinvest in any one of the five Funds all or part of the amount you
redeemed by sending to the Fund the amount you wish to reinvest. If you
reinvest within thirty days of a redemption of Fund shares, the Distributor
will, with your reinvestment, restore an amount equal to the deferred sales
charge attributable to the amount reinvested by adding the deferred sales charge
amount to your reinvestment. You may obtain the benefit of this reinvestment
privilege only once as to shares of the Corporation. For purposes of
determining future deferred sales charges, the reinvestment will be treated as a
new investment. This privilege may be eliminated or modified at any time
without prior notice to shareholders.
Under the terms of the 401(k) Plan which the Distributor has available, the
Plan may have the right to make a loan to a plan participant by redeeming
Corporation 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
in shares of any of the Funds in which the Plan may invest.
Information concerning the establishment of automatic payments from an
account is available from the Distributor's representatives.
The Corporation reserves the right to redeem at net asset value all shares
owned by a particular shareholder in a Fund having an aggregate net asset value
less than $500. The Corporation will give the shareholder notice of intention
to redeem prior to any such redemption and a 60-day opportunity to
purchase a sufficient number of additional shares to bring the net asset value
of his or her shares of that Fund to $500. Such redemptions are not subject to
the deferred sales charge. The Corporation will not apply such redemption right
to individual retirement plan accounts, retirement accounts or accounts which
have a net asset value of less than $500 due to market forces.
Deferred Sales Charges
A contingent deferred sales charge may be assessed against a shareholder's
redemption amount and paid to the Distributor, subject to the limitation
described under "Distribution" and as further described below. The purpose of
the deferred sales charge is to compensate the Distributor for the costs
incurred by the Distributor in connection with the sale of a Fund's shares. The
amount of the deferred sales charge will be the following percent of the total
amount invested during a calendar year to acquire the shares or the value of the
shares redeemed, whichever is less: redemption at any time during the calendar
year of investment and the first full calendar year after the calendar year of
investment, 3%; the second full calendar year, 2%; the third full calendar year,
1%; and thereafter, 0%. All investments made during a calendar year shall be
deemed as a single investment during the calendar year for purposes of
calculating the deferred sales charge. The deferred sales charge will not be
imposed on shares representing payment of dividends or distributions or on
amounts which represent an increase in the value of the shareholder's account
resulting from capital appreciation above the amount paid for shares purchased
during the deferred sales charge period.
For purposes of determining the applicability and rate of any deferred
sales charge, it will be assumed that a redemption is made first of shares
purchased during the deferred sales charge period representing capital
appreciation, next of shares purchased during the deferred sales charge period
representing payment of dividends and distributions and then to shares held by
the shareholder for the longest period of time.
Unless instructed otherwise, the Corporation, when requested to redeem a
specific dollar amount, will redeem additional shares equal in value to the
deferred sales charge. For example, should you request a $1,000 redemption and
the applicable deferred sales charge is $27, the Fund will redeem shares having
an aggregate net asset value of $1,027, absent different instructions.
The deferred sales charge will not apply in the following circumstances:
(i) in connection with redemptions of shares requested within one year of
the shareholder's death or disability, provided the Corporation is notified of
the death or disability at the time of the request and furnished proof of such
event satisfactory to the Distributor.
(ii) in connection with redemptions of shares that are made to effect a
distribution from a qualified retirement plan following retirement, a required
minimum distribution from an individual retirement account, Keogh Plan or Code
section 403(b)(7) custodial account, or a tax-free return of an excess
contribution, or that otherwise results from the death or disability of the
employee, as well as in connection with redemptions by any tax-exempt employee
benefit plan for which, as a result of a subsequent law or legislation, the
continuation of its investment would be improper.
(iii) in connection with redemptions of shares purchased by current or
retired directors of the Corporation, or current or retired officers or
employees of the Corporation, the Manager, the Distributor or their affiliated
companies, registered representatives of the Distributor, and by the members of
immediate families of such persons.
(iv) in connection with redemptions of shares made pursuant to a
shareholder's participation in any systematic withdrawal plan adopted for a
Fund.
(v) in connection with redemptions the proceeds of which are reinvested in
shares of a Fund within thirty days after such redemption. See "Redemption."
(vi) in connection with exercise of certain exchange privileges. See
"Exchange Privilege."
(vii) on redemptions effected pursuant to the Corporation's right to
liquidate a shareholder's shares of a Fund if the aggregate net asset value of
those shares is less than $500. See "Redemption."
(viii) in connection with redemptions effected by another registered
investment company by virtue of a merger or other reorganization with a Fund or
by a former shareholder of such investment company of shares of a Fund acquired
pursuant to such reorganization.
These exceptions may be modified or eliminated by the Corporation at any
time without prior notice to shareholders, except with respect to (vii) which
requires certain notices.
Exchange Privilege
Shares of any of the Funds may be exchanged for shares of another Fund
without payment of a deferred sales charge and the time period with respect to
the deferred sales charge will continue to run. A $100 minimum initial exchange
amount is required. This exchange privilege may be eliminated or modified by
the Corporation at any time , upon notice in certain circumstances .
Exchanges may only be made into Funds which are legally registered for sale in
the state of residence of the investor.
Other Information
Further information as to exchange privileges, Flexible Withdrawal Service,
and individual retirement accounts, Code section 403(b) plans, self-employed
individual retirement plans (so-called "Keogh" plans), Code section 401(k)
plans, Code section 457 plans and other employee benefit plans sponsored by the
Distributor is contained in the SAI. Applicable forms are available from the
Distributor's sales representatives.
<PAGE>
WADDELL & REED FUNDS, INC.
Custodian Distributor
United Missouri Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas 66201-9217
Kirkpatrick & Lockhart (913) 236-2000
1800 M Street, N. W.
Washington, D. C. Shareholder Servicing Agent
Waddell & Reed Services Company
Independent Accountants 6300 Lamar Avenue
Price Waterhouse P. O. Box 29217
Kansas City, Missouri Shawnee Mission, Kansas 66201-9217
(913) 236-2000
Investment Manager Accounting Services Agent
Waddell & Reed Investment Waddell & Reed Services Company
Management Company 6300 Lamar Avenue
6300 Lamar Avenue P. O. Box 29217
P. O. Box 29217 Shawnee Mission, Kansas 66201-9217
Shawnee Mission, (913) 236-2000
Kansas 66201-9217
(913) 236-2000
<PAGE>
WADDELL & REED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
PROSPECTUS
June 30, 199 4
TABLE OF CONTENTS
Prospectus Summary .......................... 2
Summary of Expenses ......................... 4
Financial Highlights .....................9
What is Waddell & Reed Funds, Inc.? ......... 14
Performance Information ..................... 14
Goals, Investment Policies and Risks
of the Five Funds ......................... 15
Management .................................. 26
Distribution................................. 28
Dividends, Distributions and Taxes........29
Purchase of Shares .......................... 31
Redemption .................................. 32
Exchange Privilege .......................... 34
Other Information ........................... 34
WRP 4 000(6-9 4 )
printed on recycled paper
<PAGE>
WADDELL & REED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
June 30, 199 4
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 Waddell & Reed Funds, Inc. (the "Corporation") dated June 30,
199 4 , which may be obtained from Waddell & Reed Funds, Inc. or its
principal underwriter and distributor, Waddell & Reed, Inc., at the address or
telephone number shown above.
TABLE OF CONTENTS
Performance Information .......................... 2
Investment Goals and Policies .................... 4
Investment Management and Other Services ......... 27
Purchase, Redemption and Pricing of Shares ....... 32
Directors and Officers ........................... 38
Payments to Shareholders ......................
Taxes ............................................ 43
Portfolio Transactions and Brokerage ............. 48
Other Information ................................ 50
Financial Statements ............................. 60
<PAGE>
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Corporation's principal underwriter and
distributor ("Distributor"), or the Corporation may from time to time publish
for one or more of the five Funds (the "Funds") total return information, yield
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.
Total return is calculated by assuming an initial $1,000 investment. Shares
redeemed during the first four years after their purchase may be subject to a
contingent deferred sales charge (the "deferred sales charge") in a maximum
amount equal to 3%. See "Purchase, Redemption and Pricing of Shares." The
average annual total return quotations reflect the imposition of the maximum
applicable deferred sales charge. 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 average annual 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 that may
not reflect the deferred sales charge.
The average annual total return quotations with the maximum deferred sales
charge deducted as of 3/31/94, which is the most recent balance sheet included
in this SAI, for the periods shown were as follows:
One Year Period Period from
From 4-1-93 9-21-92* to
to 3-31-94 3-31-94
--------------- -----------
Total Return Fund 5.31% 11.56%
Growth Fund 20.16% 26.45%
Limited-Term Bond Fund -1.53% 1.23%
Municipal Bond Fund -2.12% 4.02%
Global Income Fund -2.58% -1.87%
*Date of initial public offering
The average annual total return quotations without the maximum deferred
sales charge deducted as of 3/31/94, which is the most recent balance sheet
included in this SAI, for the periods shown were as follows:
One Year Period Period from
From 4/1/93 9/21/92* to
to 3/31/94 March 31, 1994
--------------- --------------
Total Return Fund 8.31% 12.79%
Growth Fund 23.16% 27.61%
Limited-Term Bond Fund 1.41% 2.51%
Municipal Bond Fund 0.76% 5.30%
Global Income Fund 0.33% -0.63%
*Date of initial public offering
Yield
A yield quoted for a Fund is computed by dividing the net investment income
per share earned during the period for which the yield is shown by the maximum
offering price per share on the last day of that period according to the
following formula:
6
Yield = 2((((a - b)/cd)+1) -1)
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The yields computed according to the formula for the 30-day period ended on
March 31, 199 4 , the date of the most recent balance sheet included in
this SAI, for Limited-Term Bond Fund, Municipal Bond Fund and Global Income Fund
are:
Limited-Term Bond Fund 2.91 %
Municipal Bond Fund 4.05 %
Global Income Fund 2.30 %
Municipal Bond Fund may also advertise or include in sales materials its
tax equivalent yield, which is calculated by applying the stated income tax rate
to only the net investment income exempt from taxation according to a standard
formula which provides for computation of tax equivalent yield by dividing that
portion of the Fund's yield which is tax-exempt by one minus a stated income tax
rate and adding the product to that portion, if any, of the yield of the Fund
that is not tax-exempt.
The tax equivalent yield computed according to the formula for the 30-day
period ended on March 31, 199 4 , the date of the most recent balance sheet
included in this SAI, is 4.73%, 5.55%, 5.78%, 6.21% and 6.57% for
marginal tax brackets of 15%, 28% , 31%, 36% and 39.6%, respectively.
Changes in yields primarily reflect different interest rates received by a
Fund as its portfolio securities change. Yield is also affected by portfolio
quality, portfolio maturity, type of securities held and operating expenses.
Yield quotations do not reflect the imposition of the deferred sales charge
described above. If such deferred sales charge imposed at the time of
redemption was reflected, it would reduce the performance quoted.
Non-standardized performance information may also be presented.
Performance Rankings
The Distributor or the Corporation also may from time to time publish for
one or more of the five Funds in advertisements or sales material performance
rankings as published by recognized independent mutual fund statistical services
such as Lipper Analytical Services, Inc., or by publications of general interest
such as Forbes, Money, The Wall Street Journal, Business Week, Barron's, Fortune
or Morningstar Mutual Fund Values. A 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 a 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 GOALS AND POLICIES
The investment goals and policies of the Funds are described in the
Prospectus, which refers to the Funds' investment methods and practices.
Additional information regarding certain methods and practices are included
below.
Securities - General
Certain of the Funds 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.
Certain of the Funds 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.
Certain of the Funds 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.
Certain Types of Securities
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, Land Banks, Maritime Administration, the Tennessee Valley
Authority, the Resolution Funding Corporation, and the Student Loan Marketing
Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by the Federal National Mortgage
Association, are supported only by the credit of the instrumentality and not by
the Treasury. If the securities are not backed by the full faith and credit of
the United States, the owner of the securities must look principally to the
agency issuing the obligation for repayment and may not be able to assert a
claim against the United States in the event that the agency or instrumentality
does not meet its commitment. The Funds will invest in securities of agencies
and instrumentalities only if Waddell & Reed Investment Management Company,
investment manager to the Funds (the "Manager"), is satisfied that the credit
risk involved is acceptable.
The various types of U.S. Government Securities include "mortgage-backed
securities" of the Government National Mortgage Association ("Ginnie Mae"), the
Federal Home Loan Mortgage Corporation ("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 mortgage loans or
mortgage pass-through securities. Timely payment of principal and interest on
Ginnie Mae pass-throughs is guaranteed by the full faith and credit of the
United States. Freddie Mac and Fannie Mae are both instrumentalities of the
U.S. Government, but their obligations are not backed by the full faith and
credit of the United States. It is possible that the availability and the
marketability (i.e., liquidity) of the securities discussed in this section
could be adversely affected by actions of the U.S. Government to tighten the
availability of its credit .
Limited-Term Bond Fund, Municipal Bond Fund and Global Income Fund
may also invest in deposits in banks (represented by certificates of deposit or
other evidence of deposit issued by such banks of varying maturities) to the
extent that the principal of such deposits is insured by the Federal Deposit
Insurance Corporation; such deposits are referred to as "Insured Deposits."
Such insurance (and accordingly, the Funds' aggregated investments) is currently
limited to $100,000 per bank; any interest above that amount is not insured.
Insured Deposits are not marketable, and a Fund may invest in them only within
the 10% limit mentioned below under "Illiquid Investments" unless such
obligations are payable at principal amount plus accrued interest on demand or
within seven days after demand.
Municipal Bonds
Municipal bonds are issued by a wide range of state and local governments,
agencies and authorities for various purposes. The two main kinds of municipal
bonds are "general obligation" bonds and "revenue" bonds. In "general
obligation" bonds, the issuer has pledged its full faith, credit and taxing
power for the payment of principal and interest. "Revenue" bonds are payable
only from specific sources; these may include revenues from a particular
facility or class of facilities or special tax or other revenue source.
A special class of bonds issued by state and local government authorities
and agencies are "industrial development bonds." Only industrial development
bonds, the interest on which is free from Federal income taxation (though it
may be an item of tax preferences for purposes of the alternative minimum
tax), are considered "municipal bonds." In general, industrial development
bonds are revenue bonds and are issued by or on behalf of public authorities to
obtain funds to finance privately operated facilities. They generally depend
for their credit quality on the credit standing of the company involved.
Municipal Bond Fund may not be an appropriate investment for entities which are
"substantial users" of facilities financed by industrial development bonds or
for investors who are "related persons," as such terms are defined in the
Internal Revenue Code of 1986, as amended (the "Code"). Such entities and
persons should consult with their tax advisors before investing in Municipal
Bond Fund. Municipal Bond Fund does not intend to invest 25% or more of its
assets in industrial development bonds.
Another specific type of municipal bond in which the Fund may invest
includes municipal leases and participation interests therein. The factors to
be considered in determining whether or not any rated municipal lease
obligations are liquid include (i) the frequency of trades and quotes for the
obligations; (ii) the number of dealers willing to purchase or sell the security
and the number of other potential buyers; (iii) the willingness of dealers to
undertake to make a market in the securities; (iv) the nature of marketplace
trades, including the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer; (v) the likelihood that the
marketability of the obligation will be maintained through the time the
instrument is held; (vi) the credit quality of the issuer and the lessee; and
(vii) the essentiality to the lessee of the property covered by the lease.
Unrated municipal lease obligations are considered illiquid. These obligations,
which may take the form of a lease, an installment purchase, or a conditional
sale contract, are issued by state and local governments and authorities to
acquire land and a variety of equipment and facilities. The Funds have not held
and do not intend to hold such obligations directly as a lessor of the property,
but may from time to time purchase a participation interest in a municipal
obligation from a bank or other third party. A participation interest gives a
Fund a specified, undivided interest in the obligation in proportion to its
purchased interest in the total amount of the obligation. Municipal leases
frequently have risks distinct from those associated with general obligation or
revenue bonds. State constitutions and statutes set forth requirements that
states or municipalities must meet to incur debt, including voter referenda,
interest rate limits or public sale requirements. Leases, installment purchases
or conditional sale contracts have evolved as a means for governmental issuers
to acquire property and equipment without being required to meet these
constitutional and statutory requirements. Many leases and contracts include
"non-appropriation clauses" providing that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the legislative body on a yearly or other
periodic basis. Non-appropriation clauses free the issuer from debt issuance
limitations. In determining the liquidity of a municipal lease obligation, the
Manager will differentiate between direct interests in municipal leases and
municipal lease-backed securities, the latter of which may take the form of a
lease-backed revenue bond, a tax-exempt asset-backed security or any other
investment structure using a municipal lease-purchased agreement as its base.
While the former may present liquidity issues, the latter are based on a well
established method of securing payment of a municipal lease obligation.
The Manager and the Funds rely on the opinion of bond counsel for the
issuer in determining whether obligations are municipal bonds. If a court holds
that an obligation held by a Fund is not a municipal bond (i.e., that the
interest thereon is taxable), the Fund will sell the obligation as soon as
possible, but it might incur a loss upon such sale.
With respect to ratings of municipal bonds (see the Appendix to this SAI),
now or in the future, Standard and Poor's Corporation ("S&P") or Moody's
Investors Services, Inc. ("MIS") may use different rating designations for
municipal bonds depending on their maturities on issuance or other
characteristics. For example, MIS currently rates the top four categories of
"municipal notes" (i.e., municipal bonds generally with a maturity at the time
of issuance ranging from six months to three years) as MIG 1, MIG 2, MIG 3 and
MIG 4. Subject to the particular Fund's investment policies and goal, municipal
bonds purchased by a Fund will comply with the percentage limits discussed in
the Prospectus if they are within the top four rating designations of S&P or MIS
for the type of municipal bond in question. A Fund is not required to dispose
of any municipal bond if its rating falls below the rating required for its
purchase, nor does such a fall in rating affect the amount of unrated municipal
bonds which a Fund may buy.
Foreign Securities
Subject to the restrictions described in the Prospectus, Global Income Fund
may purchase an unlimited amount of foreign securities, including those
represented by American Depositary Receipts or other receipts evidencing
ownership of foreign securities, such as International Depositary Receipts,
European Depositary Receipts, and Global Depositary Receipts ("Depositary
Receipts"). Limited-Term Bond Fund and Municipal Bond Fund may not invest in
foreign securities. Total Return Fund and Growth Fund may purchase securities
of foreign issuers only if immediately after any such purchase not more than 10%
of that Fund's assets (including foreign currency exchange contracts) are
foreign securities and only if those foreign securities (i) are, or are
represented by Depositary Receipts which are, listed or admitted to trading on a
domestic or foreign securities exchange, or in the case of American Depositary
Receipts, so listed or traded in the U.S. over-the-counter
("OTC") market; or (ii) are issued or guaranteed by any foreign
government or any subdivision, agency or instrumentality thereof. In general,
Depositary Receipts are securities convertible into and evidencing ownership of
securities of foreign corporate issuers, although Depositary Receipts may not
necessarily be denominated in the same currency as the securities into which
they may be converted. American Depositary Receipts, in registered form, are
dollar-denominated receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. International Depositary
Receipts and European Depositary Receipts, in bearer form, are foreign receipts
evidencing a similar arrangement and are designed for use by non-U.S. investors
and traders in non-U.S. markets. Global Depositary Receipts are more recently
developed receipts designed to facilitate the trading of foreign issuers by U.S.
and non-U.S. investors and traders.
The Manager believes that there are investment opportunities as well as
risks in investing in foreign securities. Individual foreign economies may
differ favorably or unfavorably from the U.S. economy or each other in such
matters as gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Individual foreign
companies may also differ favorably or unfavorably from domestic companies in
the same industry. Foreign currencies may be stronger or weaker than the U.S.
dollar or than each other. The Manager believes that ability to invest assets
abroad might enable a Fund to take advantage of these differences and strengths
where they are favorable.
Further, an investment may be affected by changes in currency rates and in
exchange control regulations (i.e., currency blockage). A 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 ("NYSE") 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, a Fund
would normally encounter greater difficulties in commencing a lawsuit against
the issuer of a foreign security than it would against a U.S. issuer.
Restricted Securities
Global Income Fund may purchase restricted securities, if, as a result of
such purchase, not more than 5% of its assets would be invested in such
securities. The other Funds do not intend to invest in restricted securities.
Restricted securities, which are also referred to as private placements, are
securities subject to legal or contractual restrictions on resale.
Lending Securities
Each of the Funds except Municipal Bond Fund may lend its portfolio
securities to attempt to increase income. If a 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.
Any securities loan which a Fund makes must be collateralized in accordance
with applicable regulatory requirements (the "Guidelines"). Under the present
Guidelines, the collateral must consist of cash, U.S. Government Securities or
bank letters of credit, at least equal in value to the market value of the
securities 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 the return of the excess collateral.
Under the Funds' current securities lending procedures, the Funds may lend
securities only to creditworthy broker-dealers and financial
institutions. A Fund may pay reasonable finder's, administrative and custodian
fees in connection with loans of securities.
No more than 10% of the respective assets of Total Return Fund, Growth Fund
or Global Income Fund, or 30% of the assets of Limited-Term Bond Fund, may be
loaned at any one time. 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
Each of the Funds, except Municipal Bond Fund, may purchase securities
subject to repurchase agreements but may not cause more than 10% of the net
assets of a Fund to be invested in illiquid securities, which includes
repurchase agreements not terminable within seven days. A repurchase
transaction occurs when, at the time a 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
a 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. A Fund's risk is
limited to the ability of the vendor to pay the agreed-upon sum on the delivery
date. In the event of bankruptcy or other default by the vendor, there may be
possible delays and expenses in liquidating the Resold Securities, decline in
their value and 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 Funds' repurchase agreements will be structured so as to fully collateralize
the loans, i.e., the value of the Resold Securities, which will be held by the
Fund's custodian bank or by a third party that qualifies as a custodian under
section 17(f) of the Investment Company Act of 1940, is and, during the entire
term of the agreement, remains at least equal to the value of the loan,
including the accrued interest earned thereon. Repurchase agreements are
entered into only with those entities approved by the Manager on the basis of
criteria established by the Board of Directors.
Investment in Warrants
Growth Fund and Global Income Fund may not invest more than 5% of their
respective assets (at the time of investment) in warrants (other than those that
have been acquired in units or attached to other securities). Of such 5%, no
more than 2% of its assets (at the time of investment) may be invested in
warrants that are not listed on the NYSE or the American Stock
Exchange . 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.
When-Issued and Delayed Delivery Transactions
Municipal Bond Fund, Limited-Term Bond Fund and Global Income Fund may each
purchase any securities in which it may invest on a when-issued or delayed
delivery basis or sell them on a delayed delivery basis. These Funds do not
intend to enter into such transactions in an amount exceeding 5% of their
respective total assets. The 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 are fixed on the transaction date. A
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 securities so purchased by a Fund are
subject to market fluctuation; their value may be less when delivered than the
purchase price paid. No interest accrues to a Fund until delivery and payment
is completed. When a Fund makes a commitment to purchase securities on a when-
issued or delayed delivery basis it will record the transaction and thereafter
reflect the value of the securities in determining its net asset value per
share. The securities so sold by a Fund on a delayed delivery basis are also
subject to market fluctuation; their value when a Fund delivers them may be more
than the purchase price the Fund receives. When a Fund makes a commitment to
sell securities on a delayed 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 a Fund purchases 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 securities, other than those purchased on
a when-issued or delayed delivery basis, at least equal to the amount it will
have to pay on the settlement date; these other securities may be sold at or
before the settlement date.
Illiquid Investments
Each Fund may not invest more than 10% of its net assets in illiquid
securities. The investments which are included in this 10% limit include: (i)
repurchase agreements not terminable within seven days; (ii) securities for
which market quotations are not readily available; (iii) unlisted options and
their underlying collateral; (iv) Insured Deposits, unless they are payable at
principal amount plus accrued interest on demand or within seven days after
demand; (v) restricted securities not determined to be liquid pursuant to
guidelines established by or under the direction of the Board of Directors; and
(vi) securities involved in swap, cap and floor transactions. The assets used
as cover for OTC options written by a Fund will be considered illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund may
repurchase any OTC option it writes at a maximum price to be calculated by a
formula set forth in the option agreement. The cover for an OTC option written
subject to this procedure will be considered illiquid only to the extent that
the maximum repurchase price under the formula exceeds the intrinsic value of
the option.
Options, Futures and Other Strategies
As discussed in the Prospectus, the Manager may use a variety of financial
instruments ("Financial Instruments"), including certain options, futures
contracts (sometimes referred to as "futures"), options on futures contracts and
forward currency contracts, with respect to options to attempt to enhance the
Funds' income or to attempt to hedge the Funds' portfolios, or, with respect to
other strategies, to attempt to hedge the Funds' portfolios. The particular
Financial Instruments are described in Appendix A to this Statement of
Additional Information.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Financial Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in a Fund's portfolio. Thus, in a short hedge a Fund takes a
position in a Financial Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a long
hedge a Fund takes a position in a Financial Instrument whose price is expected
to move in the same direction as the price of the prospective investment being
hedged. A long hedge is sometimes referred to as an anticipatory hedge. In an
anticipatory hedge transaction, a Fund does not own a corresponding security
and, therefore, the transaction does not relate to a security the Fund owns.
Rather, it relates to a security that the Fund intends to acquire. If a Fund
does not complete the hedge by purchasing the security it anticipated
purchasing, the effect on the Fund's portfolio is the same as if the transaction
were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to hedge
against price movements in one or more particular securities positions that a
Fund owns or intends to acquire. Financial Instruments on stock indices, in
contrast, generally are used to attempt to hedge against price movements in
broad equity market sectors in which the Fund has invested or expects to invest.
Financial Instruments on debt securities may be used to hedge either individual
securities or broad fixed income market sectors.
The use of Financial Instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several exchanges upon
which they are traded, the Commodity Futures Trading Commission ("CFTC") and
various state regulatory authorities. In addition, a Fund's ability to use
Financial Instruments will be limited by tax considerations. See "Taxes."
In addition to the products, strategies and risks described below and in
the Prospectus, the Manager expects to discover additional opportunities in
connection with options, futures contracts, forward currency contracts and other
similar or related techniques. These new opportunities may become available as
the Manager develops new techniques, as regulatory authorities broaden the range
of permitted transactions and as new options, futures contracts, forward
currency contracts or other techniques are developed. The Manager may utilize
these opportunities to the extent that they are consistent with the Funds'
investment goals and permitted by the Funds' investment limitations and
applicable regulatory authorities. The Funds' Prospectus or Statement of
Additional Information will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon the
Manager's ability to predict movements of the overall securities, currency and
interest rate markets, which requires different skills that predicting changes
in the prices of individual securities. There can be no assurance that any
particular strategy will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Financial Instrument and price movements of the investments
being hedged. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
(3) If successful, the above-discussed strategies can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if a
Fund entered into a short hedge because the Manager projected a decline in the
price of a security in the Fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Financial Instrument. Moreover, if the
price of the Financial Instrument declined by more than the increase in the
price of the security, the Fund could suffer a loss. In either such case, the
Fund would have been in a better position had it not attempted to hedge at all.
(4) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties.
(i.e., Financial Instruments other than purchased options). If a Fund were
unable to close out its positions in such Financial Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair a Fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that a Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a Financial Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any position can be closed out
at a time and price that is favorable to the Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies or other options or futures
contracts or (2) cash, receivables and short-term debt securities, with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. Each Fund will comply with SEC guidelines
regarding cover for hedging transactions and will, if the guidelines so require,
set aside cash, U.S. Government Securities or other liquid, high-grade debt
securities in a segregated account with its custodian in the prescribed amount
as determined daily on a mark-to-market basis.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Financial Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
a Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. As discussed in the Prospectus, certain of the Funds may purchase
and/or write (sell) call and put options on equity and debt securities, foreign
currencies, stock indices and bond indices. The purchase of call options serves
as a long hedge, and the purchase of put options serves as a short hedge.
Writing covered put or call options can enable a Fund to enhance income by
reason of the premiums paid by the purchasers of such options. However, if the
market price of the security underlying a covered put option declines to less
than the exercise price on the option, minus the premium received, the Fund
would expect to suffer a loss. Writing covered call options serves as a limited
short hedge, because declines in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However,
if the security appreciates to a price higher than the exercise price of the
call option, it can be expected that the option will be exercised and the Fund
will be obligated to sell the security at less than its market value. If the
covered call option is an OTC option, the securities or other assets used as
cover would be considered illiquid to the extent described under "Illiquid
Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration
dates of up to nine months. Options that expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call option that it had written by purchasing an identical
call option; this is known as a closing purchase transaction. Conversely, a
Fund may terminate a position in a put or call option it had purchased by
writing an identical put or call option; this is known as a closing sale
transaction. Closing transactions permit a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
Certain of the Funds may purchase or write both exchange-traded and OTC
options. Currently, many options on equity securities are exchange-traded.
Exchange markets for options on debt securities and foreign currencies exist but
are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction.
In contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when a Fund purchases an OTC option, it relies on the contra party from
whom it purchased the option to make or take delivery of the underlying
investment upon exercise of the option. Failure by the contra party to do so
would result in the loss of any premium paid by the Fund as well as the loss of
any expected benefit of the transaction.
A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-trade options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although a Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
contra party, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Limitations on the Use of Options. The Funds' use of options is governed
by the following guidelines, which can be changed by the Corporation's Board of
Directors without shareholder vote:
(1) options may be purchased or written only when the Manager believes
that there exists a liquid secondary market in such options;
(2) Total Return Fund and Growth Fund may only write call
options that are listed and covered and may only
purchase put options that are listed and covered and
each such option will remain covered so long as the Fund is obligated under the
option (except in the case of closing transactions);
(3) no Fund may write call options having aggregate exercise prices
greater than 25% of its net assets; and
(4) a Fund may purchase a put or call option (including any straddles or
spreads) only if the value of its premium, when aggregated with the premiums on
all other options held by the Fund, does not exceed 5% of the Fund's total
assets.
Futures. The purchase of futures or call options on futures can serve as a
long hedge, and the sale of futures or the purchase of put options on futures
can serve as a short hedge. Writing covered call options on futures contracts
can serve as a limited short hedge, using a strategy similar to that used for
writing covered call options on securities or indices. Similarly, writing
covered put options on futures contracts can serve as a limited long hedge.
Futures strategies also can be used to manage the average duration of a
Fund's portfolio. If the Manager wishes to shorten the average duration of a
Fund, the Fund may sell a futures contract or a call option thereon, or purchase
a put option on that futures contract. If the Manager wishes to lengthen the
average duration of a Fund, the Fund may buy a futures contract or a call option
thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, U.S. Government
Securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the Fund
at the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Holders and writers of futures contracts and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Fund intends to enter into futures and options on futures only on exchanges
or boards of trade where there appears to be a liquid secondary market.
However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are less
onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage, "program trading" and other investment strategies might result in
temporary price distortions.
Limitations on the Use of Futures. The Funds' use of futures is governed
by the following guidelines, which can be changed by the Corporation's Board of
Directors without shareholder vote. For purposes of these guidelines, options
on futures contracts and foreign currency options traded on a commodities
exchange are considered "related options:"
(1) No Fund may purchase or sell futures contracts or related options if,
immediately thereafter, the sum of the initial margin deposits on the Fund's
existing futures contracts positions and initial margin and premiums paid for
related options would exceed 5% of the market value of the Fund's total assets.
This guideline does not limit to 5% the percentage of the Fund's assets that are
at risk in futures contracts and related options transactions;
(2) In instances involving the purchase by a Fund of futures contracts or
the writing of related put options, an amount of cash, U.S. Government
Securities or other liquid, high-grade debt instruments, equal to the market
value of the futures positions held (or the Fund's exposure in the case of
futures-related options) less any initial margin deposits thereon held by the
Fund's custodian, will be deposited in a segregated account with the custodian
to collateralize the position and thereby ensure that the use of such futures
contracts or related options is unleveraged;
(3) The value of all futures contracts sold may not exceed the total
market value of a Fund's portfolio; and
(4) Futures contracts and related options may not be purchased if
immediately thereafter more than 30% of a Fund's total assets would be so
invested.
In addition, each Fund has represented to the CFTC that it will use futures
contracts, options thereon and foreign currency options traded on a commodities
exchange solely in bona fide hedging transactions or under other circumstances
permitted by the CFTC.
Foreign Currency Hedging Strategies--Special Considerations. Certain of
the Funds may use options and futures contracts on foreign currencies, as
described above, and foreign currency forward contracts, as described below, to
attempt to hedge against movements in the values of the foreign currencies in
which the Funds' securities are denominated. Such currency hedges can protect
against price movements in a security that a Fund owns or intends to acquire
that are attributable to changes in the value of the currency in which it is
denominated. Such hedges do not, however, protect against price movements in
the securities that are attributable to other causes.
The Funds might seek to hedge against changes in the value of a particular
currency when no Financial Instruments on that currency are available or such
Financial Instruments are more expensive than certain other Financial
Instruments. In such cases, a Fund may seek to hedge against price movements in
that currency by entering into transactions using Financial Instruments on other
currencies, the values of which the Manager believes will have a high degree of
positive correlation to the value of the currency being hedged. The risk that
movements in the price of the Financial Instrument will not correlate perfectly
with movements in the price of the currency subject to the hedging transaction
is magnified when this strategy is used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, the Funds could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the Financial Instruments until they
reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, a Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
Forward Currency Contracts. Global Income Fund, Total Return Fund and
Growth Fund may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency. Such transactions may serve as long hedges; for example, a Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges; for
example, a Fund may sell a forward currency contract to lock in the U.S. dollar
equivalent of the proceeds from the anticipated sale of a security denominated
in a foreign currency.
These Funds also may use forward currency contracts for "cross-hedging."
Under this strategy, a Fund would increase its exposure to foreign currencies
that the Manager believes might rise in value relative to the U.S. dollar, or
shift its exposure to foreign currency fluctuations from one country to another.
For example, if a Fund owned securities denominated in a foreign currency and
the Manager believed that currency would decline relative to another currency,
it might enter into a forward contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign currency.
The cost to a Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When a Fund enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying currency at the maturity of the
contract. Failure by the contra party to do so would result in the loss of any
expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument held or written.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the contra party. Thus, there can
be no assurance that a Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the contra party, the Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund
would continue to be subject to market risk with respect to the position, and
would continue to be required to maintain a position in securities denominated
in the foreign currency or to maintain cash or securities in a segregated
account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, a Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
Limitations on the Use of Forward Currency Contracts. Global Income Fund,
Total Return Fund and Growth Fund may enter into forward currency contracts or
maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not 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 or (2) the Fund maintains cash, U.S. Government Securities or
liquid, high-grade debt securities in a segregated account in an amount not less
than the value of its total assets committed to the consummation of the contract
and not covered as provided in (1) above, as marked to market daily. Under
normal circumstances, consideration of the prospect for currency parities will
be incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Manager believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of a Fund will be served.
Risk Factors of High-Yield Investing
The market for high-yield, high-risk debt securities (so-called "junk
bonds") 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, the value of high-yield
debt securities in a Fund's portfolio, a Fund's net asset value and the ability
of the bonds' issuers to repay principal and interest, meet projected business
goals and obtain additional financing than on higher rated securities. An
investment in a Fund which has the ability to invest in high-yield debt
securities may be considered more speculative than investment in shares of a
Fund which invests only in higher rated debt securities.
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, a
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. Unrated
securities are usually not as attractive to as many buyers as rated securities
are, a factor which may make unrated securities less marketable. These factors
may have the effect of limiting the availability of the securities for purchase
by a Fund and may also limit the ability of a Fund to sell such securities at
their fair value either to meet redemption requests or in response to changes in
the economy or the financial markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield debt securities, especially in a thinly
traded market. To the extent a Fund owns or may acquire illiquid or restricted
high-yield securities, these securities may involve special registration
responsibilities, liabilities and costs, and liquidity and valuation
difficulties. Changes in values of debt securities which a Fund owns will
affect its net asset value per share. If market quotations are not readily
available for a Fund's lower rated or unrated securities, these securities will
be valued by a method that the Corporation'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.
New and proposed laws may have an impact on the market for high-yield debt
securities. For example, as a result of the Financial Institution's Reform,
Recovery, and Enforcement Act of 1989, savings and loan associations must
dispose of their high-yield bonds no later than July 1, 1994. Qualified
affiliates of savings and loan associations, however, may purchase and retain
these securities, and savings and loan associations may divest these securities
by sale to their qualified affiliates. The Manager is unable at this time to
predict what effect, if any, this legislation may have on the market for high-
yield debt securities.
Special tax considerations are associated with investing in high-yield debt
securities structured as zero coupon or pay-in-kind securities. See "Taxes."
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 rating agencies may fail to timely
change the credit ratings to reflect subsequent events; however, the Manager
continuously monitors the issuers of high-yield debt securities in its portfolio
in an attempt to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments. Achievement of a
Fund's investment goal may be more dependent upon the Manager's credit analysis
than is the case for higher quality debt securities. Credit ratings for
individual securities may change from time to time and a Fund may retain a
portfolio security whose rating has been changed.
Investment Restrictions
Certain of the Funds' investment restrictions are described in the
Prospectus and this SAI. The following are fundamental policies and together
with certain restrictions described in the Prospectus cannot be changed without
the approval of the holders of a majority of the outstanding shares of the
affected Fund. As defined in the Investment Company Act of 1940, as amended
("1940 Act") , this means the lesser of the vote of (a) 67% of the shares
of the Fund at a meeting where more than 50% of the outstanding shares are
present in person or by proxy, or (b) more than 50% of the outstanding shares of
the Fund. If a percentage restriction is adhered to at the time of an
investment or transaction, later changes in percentage resulting from a change
in value of portfolio securities or amount of total assets will not be
considered a violation of the restriction. No Fund may:
(i) Buy real estate, any nonliquid interests in real estate investment
trusts or interests in real estate limited partnerships; however, each
Fund may buy obligations or instruments which it otherwise may buy even
though the issuer invests in real estate or interests in real estate;
(ii) Acquire shares of an investment company which issues redeemable
securities. Total Return Fund, Growth Fund and Global Income Fund may
buy shares of an investment company which does not issue redeemable
securities if the Fund does so in a regular transaction in the open
market and in compliance with the requirements of the 1940 Act .
Notwithstanding the foregoing, each Fund may also acquire investment
company shares as part of a merger, consolidation or other
reorganization;
(iii) Lend money or other assets, other than through certain limited types of
loans; however, subject to the restrictions stated in this SAI and in
the Prospectus regarding the types of securities each Fund may buy,
each Fund may buy debt securities which have been sold to the public
and other obligations customarily acquired by institutional investors
and, except Municipal Bond Fund, may lend its portfolio securities and
enter into repurchase agreements;
(iv) Invest for the purpose of exercising control or management of another
issuer;
(v) Buy or continue to hold securities of an issuer if, to the knowledge of
the Corporation, the directors and officers of the Corporation and of
the Manager (each owning beneficially 0.5% of the securities of such
issuer) own in the aggregate more than 5% of that issuer's securities;
(vi) Sell securities short, buy securities on margin or engage in arbitrage
transactions; however, a Fund may make margin deposits in connection
with its use of any financial instrument permitted by its policies.
Also, as applicable, a Fund may enter into escrow and collateral
arrangements in connection with options, futures contracts and other
financial instruments;
(vii) Engage in the underwriting of securities of other issuers, except to
the extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed an underwriter under Federal
securities laws;
(viii) Invest in a security if, as a result, it would own more than 10% of the
outstanding voting securities of an issuer, or if more than 5% of the
Fund's total assets would be invested in securities of that issuer,
provided that U.S. Government Securities are not subject to this
limitation and up to 25% of the Fund's total assets may be invested
without regard to these restrictions; except that Global Income Fund
may, with respect to 50% of its assets, invest up to 25% of its assets
in the securities of any one issuer;
(ix) Buy a security if, as a result, 25% or more of the Fund's total assets
would then be invested in securities of issuers having their principal
business activities in the same industry, except for municipal bonds
other than industrial development bonds and U.S. Government Securities;
(x) Purchase warrants, except Growth Fund and Global Income Fund may
purchase warrants to the extent described above. See "Investments in
Warrants;"
(xi) Buy or sell commodities or commodity contracts except to the extent
that instruments in which the Funds may invest for hedging, income
enhancing or other purposes as such purposes may be permitted by
the CFTC and the Fund's policies , are considered to be
commodities or commodity contracts;
(xii) Issue senior securities or borrow money, except that the Funds may
borrow money (and pledge assets in connection therewith) from banks for
temporary, extraordinary or emergency purposes but only up to 5% of
their respective assets; or
(xiii) Invest in interests in oil, gas or mineral leases or mineral
development programs, including oil and gas limited partnerships.
For purposes of applying restriction (viii) there may be a question as to
who is the "issuer" of municipal bonds. For example, municipal bonds may be
created by a particular government but be backed only by the assets and revenues
of a subdivision of that government such as an agency, instrumentality,
authority or other subdivision. In such case, such subdivision would be
considered the "issuer" for the purposes of the 5% restriction. In the case of
industrial development bonds, the nongovernmental user of facilities financed by
them is also considered as a separate "issuer." This restriction does not apply
to U.S. Government Securities. The method of determining who is an "issuer" may
be changed without shareholder vote. In applying this 5% restriction, the same
standards apply as set forth above for determining who is an "issuer;" however,
it also considers for the purpose of this 5% restriction that a guarantee by a
government or other entity of a municipal bond is a separate security which
would be given a value and included in the 5% restriction if the value of all
municipal bonds created by the government or entity and owned by a Fund should
exceed 10% of the value 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 and dividing
it by the monthly average of the market value of such securities during the
year, excluding certain short-term securities. A 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 portfolio turnover rates for each of the Funds for the fiscal years
ended March 31, 1994 and 1993 were as follows:
1994 1993*
---- -----
Total Return Fund 17.31% 23.97%
Growth Fund 69.12% 124.44%
Limited-Term Bond Fund 25.90% 39.64%
Municipal Bond Fund 18.93% 140.02%
Global Income Fund 34.90% 8.35%
*For the period 9/21/92, the date of initial public offering, to 3/31/93.
A high turnover rate will increase transaction costs and commission
costs that will be borne by the Funds and could generate taxable income or loss.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Corporation was organized on January 29, 1992.
The Management Agreement
The Corporation has an Investment Management Agreement (the "Management
Agreement") with the Manager, a wholly-owned subsidiary of Waddell and Reed,
Inc. Under the Management Agreement, the Manager is employed to supervise the
investments of the Funds and provide investment advice to the Funds. The
address of the Manager and Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217. Waddell & Reed, Inc. (the
"Distributor") is the Corporation's principal underwriter and distributor.
The Management Agreement permits the Manager or an affiliate of the Manager
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 Corporation. The Management
Agreement contains detailed provisions as to the matters to be considered by the
Corporation's Board of Directors prior to approving any Shareholder Servicing
Agreement or Accounting Services Agreement.
Torchmark Corporation and United Investors Management Company
The Manager is a wholly-owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly-owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly-
owned subsidiary of United Investors Management Company. United Investors
Management Company is a wholly-owned subsidiary of Torchmark Corporation.
Torchmark Corporation is a publicly held company . The address of
Torchmark Corporation and United Investors Management Company is 2001 Third
Avenue South, Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the company's inception date, whichever was later, and to
TMK/United Funds, Inc. since that fund's inception, until January 8, 1992 when
it assigned its duties as investment manager for these funds (and the related
professional staff) to the Manager. The Manager has also served as investment
manager for Torchmark Government Securities Fund, Inc. and Torchmark Insured
Tax-Free Fund, Inc. since they each commenced operations in February 1993.
Waddell & Reed, Inc. serves as principal underwriter for the Funds, the
investment companies in the United Group of Mutual Funds and TMK/United Funds,
Inc.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between Waddell &
Reed Services Company (the "Agent"), a subsidiary of the Distributor, and the
Corporation, 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 Corporation's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the
Corporation and the Agent, the Agent provides the Corporation with bookkeeping
and accounting services and assistance, including maintenance of the
Corporation's records, pricing of the Corporation'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 Corporation's Board of Directors without shareholder approval.
Payments for Management, Accounting and Shareholder Services
Under the Management Agreement, for the Manager's management services, the
Corporation pays the Manager a fee as described in the Prospectus. The
management fees paid to the Manager during the fiscal years ended March 31, 1994
and 1993 were as follows:
1994 1993*
---- -----
Total Return Fund $255,556 $21,358
Growth Fund 185,715 17,277
Limited-Term Bond Fund 52,456 10,247
Municipal Bond Fund 95,328 12,598
Global Income Fund 62,024 19,695
*For the period 9/21/92, the date of initial public offering, to 3/31/93
For purposes of calculating the daily fee the Corporation does not include
money owed to it by the Distributor for shares which it has sold but not yet
paid to the Corporation. The Corporation accrues and pays this fee daily.
The Management Agreement requires the Manager to reduce or refund to
a Fund the amount of those of the Fund's operating and management expenses which
exceed the lowest of the expense limitations of any state in which the Fund's
shares are qualified for sale.
Under the Shareholder Servicing Agreement, the Corporation pays the Agent a
monthly fee of $1.0208 for each shareholder account which was in existence at
any time during the prior month, plus $0.30 for each account on which a dividend
or distribution, of cash or shares, had a record date in that month. It also
pays certain out-of-pocket expenses of the Agent, including long distance
telephone communications costs; microfilm and storage costs for certain
documents; forms, printing and mailing costs; and costs of legal and special
services not provided by the Distributor, the Manager or the Agent.
Under the Accounting Services Agreement, the Corporation pays the Agent a
fee for accounting services as described in the Prospectus. Fees paid to the
Agent during the fiscal years ended March 31, 1994 and 1993 were as follows:
1994 1993*
---- -----
Total Return Fund $20,000 $833
Growth Fund 13,333 ---
Limited-Term Bond Fund 4,167 ---
Municipal Bond Fund 10,833 ---
Global Income Fund 5,833 ---
*For the period 9/21/92, the date of initial public offering, to 3/31/93
Because the Corporation 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 Corporation under the Shareholder Servicing
Agreement are described above. The Distributor and its affiliates pay the
Corporation's Directors and officers who are affiliated with the Distributor and
its affiliates. The Corporation pays the fees and expenses of the Corporation's
other Directors.
The Corporation pays all of its other expenses. These include, for each
Fund, the costs of materials sent to shareholders, audit and outside legal fees,
taxes, brokerage commissions, interest, insurance premiums, custodian fees, fees
payable by the Corporation under Federal or other securities laws and to the
Investment Company Institute and nonrecurring and extraordinary expenses,
including litigation and indemnification relating to litigation.
Distribution Arrangement
The Distributor acts as principal underwriter and distributor of the
Corporation's shares pursuant to an underwriting agreement ("Agreement"). The
Agreement requires the Distributor to use its best efforts to sell the shares of
the Corporation but is not exclusive, and permits and recognizes that the
Distributor also distributes shares of other investment companies and other
securities. Shares are sold on a continuous basis.
Under a Distribution and Service Plan (the "Plan") adopted by the
Corporation pursuant to Rule 12b-1 under the Investment Company Act of 1940, the
Corporation, with respect to each Fund, pays the Distributor daily a
distribution fee at the annual rate of up to 0.75% of the particular Fund's net
asset value and a service fee of up to 0.25% of the particular Fund's net asset
value.
The Distributor offers the Corporation's shares through its registered
representatives and sales managers (sales force) unless it elects, which is not
contemplated, to make distribution of shares also through other broker-dealers.
In distributing shares through its sales force, the Distributor will pay
commissions and incentives to the sales force at or about the time of sale and
will incur other expenses including for prospectuses, sales literature,
advertisements, sales office maintenance, processing of orders and general
overhead with respect to its efforts to distribute the Corporation's shares.
The Plan and the Agreement contemplate that the Distributor may be compensated
for these distribution efforts through the distribution fee. The sales force
may be paid continuing compensation based on the value of the shares held by
shareholders to whom the member of the sales force is assigned to provide
personal services, and the Distributor or its subsidiary, Waddell & Reed
Services Company, may also provide services to shareholders through telephonic
means and written communications. The amounts actually paid by the Distributor
in providing these services to shareholders are reimbursed by the service fee,
subject to the limitations set forth in the Plan. A service fee is not payable,
however, unless the amounts have actually been expended by the Distributor in
providing these continuing services. For its fiscal year ended March 31,
199 4 , the Corporation paid (or accrued) the following amounts to the
Distributor as distribution fees and service fees, respectively, under the Plan:
Total Return Fund - $ 274,052 and $ 85,722 ; Growth Fund -
$ 174,653 and $ 51,486 ; Limited-Term Bond Fund - $ 70,849 and
$ 20,588 ; Municipal Bond Fund - $ 129,488 and $ 38,870 ; and
Global Income Fund - $ 70,692 and $ 11,997 . The distribution fees
were paid to compensate the Distributor for its expenses relating to sales force
compensation, providing prospectuses and sales literature to prospective
investors, advertising, sales processing, field office expenses and home office
sales management in connection with the distribution of Fund shares. The
service fees were paid to reimburse the Distributor for its expense of
compensating its sales personnel for personal services to the particular Fund's
shareholders.
The Plan and Agreement were approved by the Corporation's Board of
Directors, including the Directors who are not interested persons of the
Corporation or of the Distributor 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 as to each Fund by
the Distributor as the sole shareholder of the shares of each of the Funds at
the time. The Plan will be submitted for approval by shareholders of each Fund
at the first meeting of shareholders following the commencement of the public
distribution of the Corporation's shares.
Among other things, the Plan provides that (i) the Distributor will submit
to the Directors at least quarterly, and the Directors will review, reports
regarding all 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 are approved
by the Directors including the Plan Directors acting in person at a meeting
called for that purpose, (iii) payments by the Corporation under the Plan shall
not be materially increased without the affirmative vote of the holders of a
majority of the outstanding shares of each affected Fund, and (iv) while the
Plan remains in effect, the selection and nomination of the Directors who are
Plan Directors shall be committed to the discretion of the Plan Directors.
In approving the Plan and the Agreement, the Directors, including the Plan
Directors, considered that investors will be offered an alternative to
purchasing shares of a mutual fund with a front end sales charge and considered
the incentive provided by the service fee to the Distributor, and particularly
to its sales force, to provide continuing service to shareholders in maintaining
their investments in the Corporation's shares. In addition, these Directors
considered the features of the distribution system including (i) the conditions
under which the deferred sales charge would be imposed and the amount thereof,
(ii) the advantage to investors of having the entire amount of their purchase
payment immediately invested in the Corporation's shares, (iii) the
Distributor's belief that the ability of the sales force to receive sales
commissions when the shares are sold and continuing service fees thereafter will
prove attractive to the sales force, resulting in the greater growth of each of
the Funds than might otherwise be the case, (iv) the advantages to shareholders
of a Fund of the economies of scale resulting from growth of the Fund's assets
and the ability to achieve greater diversification of Fund investments than if
the Fund's assets were limited, (v) the services provided to the Corporation and
its shareholders by the Distributor and its affiliates, (vi) the Distributor's
expenses and costs in promoting the sale of Corporation shares and particularly
the payments of commissions and incentives to its sale force and (vii) the
indirect costs to shareholders of the distribution and service fees. The
Directors also recognized the Distributor's willingness to undertake the
distribution expenses without the concomitant receipt of an initial front end
sales charge and without any guarantee that the compensation under the Plan will
not unilaterally be terminated by the Corporation before the Distributor can
recover its expenses. The Directors also considered all the fees that would be
payable to the Distributor and its affiliates for the various services provided
to the Corporation and its shareholders, which fees would increase if the Plan
is successful and the Funds attained and maintained significant asset levels.
For the Corporation's fiscal year ended March 31, 199 4 , the
Distributor earned deferred sales charges from the respective Funds as follows:
Total Return Fund - $ 31,390 ; Growth Fund - $ 19,373 ; Limited-Term
Bond Fund - $ 13,456 ; Municipal Bond Fund - $ 36,544 ; and Global
Income Fund - $ 5,470 .
Custodial and Auditing Services
The custodian for each Fund is United Missouri Bank, n.a., Kansas City,
Missouri. In general, the custodian is responsible for holding each Fund's cash
and securities. The Funds may place and maintain foreign securities and cash
with a foreign custodian in accordance with Rule 17f-5 of the Investment Company
Act of 1940. Price Waterhouse, Kansas City, Missouri, the Fund's independent
accountants, audits the Corporation's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each of the shares of a Fund is the value of
the Fund's assets, less its liabilities, divided by the total number of
shares. For example, if on a particular day a 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).
The offering price of a share is its net asset value next determined
following acceptance of a purchase order. The number of shares you receive for
your purchase depends on the next offering price after the Distributor 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.
The Distributor need not accept any purchase order, and it or the
Corporation may determine to discontinue offering Corporation shares for
purchase.
The net asset value per share is ordinarily computed once each day that the
NYSE is open for trading. Net asset value per share is computed on each
day on which it is computed as of the later of the close of the regular
session of the NYSE or the close of the regular session of any such domestic
securities or commodities exchange on which an option or future held by a Fund
is traded. The NYSE annually announces the days on which it will not be open
for trading. The most recent announcement indicates that it will not be open on
the following days: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However, it is
possible that the NYSE may close on other days. The net asset value changes
every business day, since the value of the assets changes every business day and
so does the number of shares.
The portfolio securities of each Fund, except as otherwise noted, listed or
traded on a stock exchange, are valued on the basis of the last sale on that day
or, lacking any sales, at a price which is the mean between the closing bid and
asked prices. Other securities which are traded over-the-counter are priced
using NASDAQ (National Association of Securities Dealers Automated Quotations),
which provides information on bid and asked prices quoted by major dealers in
such stocks. Bonds, other than convertible bonds, are generally valued using a
pricing system provided by a major dealer in bonds. Convertible bonds are
valued using this pricing system only on days when there is no sale reported.
Short-term debt securities are valued at amortized cost, which approximates
market. When market quotations are not readily available, securities are valued
at fair value as determined in good faith by or under the direction of the Board
of Directors. Foreign currency exchange rates are generally determined prior to
the close of trading of the regular session of the NYSE. Occasionally events
affecting the value of foreign investments and such exchange rates occur between
the time at which they are determined and the close of the regular session of
trading on the NYSE, which events will not be reflected in a computation of a
Fund's net asset value on that day. If events materially affecting the value of
such investments or currency exchange rates occur during such time period, the
investments will be valued at their fair value as determined in good faith by or
under the direction of the Board of Directors. The foreign currency exchange
transactions of a Fund conducted on a spot (that is, cash) basis are valued at
the spot rate for purchasing or selling currency prevailing on the foreign
exchange market. This rate under normal market conditions differs from the
prevailing exchange rate in an amount generally less than one-tenth of one
percent due to the costs of converting from one currency to another.
Options and futures contracts purchased and held by a Fund are valued at
the last sales price thereof on the securities or commodities exchanges on which
they are traded, or, if there are no transactions, at the mean between bid and
asked prices. Ordinarily, the close of the regular session for option trading
on national securities exchanges is 4:10 P.M. Eastern time and the close of the
regular session for commodities exchanges is 4:15 P.M. Eastern time. Futures
contracts will be valued with reference to established futures exchanges. The
value of a futures contract purchased by a Fund will be either the closing price
of that contract or the bid price. Conversely, the value of a futures contract
sold by a Fund will be either the closing price or the asked price.
Minimum Initial and Subsequent Investments
Initial investments must be at least $1,000 with the exceptions described
in this paragraph. A $50 minimum initial investment pertains to certain
retirement plan accounts. A minimum initial investment of only $25 is
applicable to purchases made through payroll deduction for or by employees of
the Manager, the Distributor, their affiliates or certain retirement plan
accounts. A $100 minimum initial investment pertains to exchanges of shares
from one Fund to another Fund. Except with respect to certain exchanges and
automatic withdrawals from a checking account, a shareholder may make subsequent
investments of any amount.
The Distributor, in addition to distributing shares of the Corporation and
the funds in the United Group of Mutual Funds and TMK/United Funds, Inc., may
distribute certain limited partnership investment interests from time to time.
These investments may provide distributions at various intervals in amounts less
than $500. A Fund account may be set up by an investor in these limited
partnerships to receive partnership distributions of $25 or more. Accordingly,
the $1,000 minimum initial investment will not apply to such accounts.
Flexible Withdrawal Service
If you qualify, you may arrange to receive regular monthly, quarterly,
semiannual or annual payments. This can be done by redeeming shares on a
regular basis. This service is called Flexible Withdrawal Service (the
"Service"). To qualify for the Service, you must have invested at least $10,000
in shares which you still own of any of the Funds or you must own shares having
a value of at least $10,000.
The maximum amount of the withdrawal for monthly, quarterly, semiannual and
annual withdrawals is 2%, 6%, 12% and 24% respectively of the value of your
account at the time the Service is established. The withdrawal proceeds are not
subject to the deferred sales charge, but only within these percentage
limitations. The minimum withdrawal is $50.
To start this Service, you must fill out a form (available from the
Distributor), advising the Distributor how you want your shares redeemed to make
the payments. You have three choices within the above stated maximums:
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 a
percentage of the value of the shares in your account; 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 ordinarily 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 usually made within five days of the redemption.
The Fund, not the Distributor, pays the costs of the Service. There is a
$2.00 fee for each withdrawal from a retirement plan account.
The dividends and distributions on shares of a Fund that you have made
available for this Service are paid in additional shares of that Fund. All
payments under the Service are made by redeeming shares, which may involve a
gain or loss for tax purposes. To the extent that payments exceed dividends and
distributions, the number of shares you own will decrease. When all of the
shares in your account are redeemed, you will not receive any 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 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. Subject to the deferred sales
charge, you can at any time redeem part or all of the shares of a Fund 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.
Exchange Privilege
You may exchange shares of one Fund of the Corporation for shares of
another Fund of the Corporation without charge. The exchange will be made at
the net asset values next determined after receipt and acceptance of your
written request by the Corporation. When you exchange shares, the total shares
you receive will have the same aggregate net asset value as the total shares you
exchange.
These exchange rights may be eliminated or modified at any time by the
Corporation , upon notice in certain circumstances .
The redemption of a Fund's shares as part of an exchange is not subject to
the deferred sales charge. For purposes of computing the deferred sales charge,
if any, applicable to the redemption of the shares acquired in the exchange,
those acquired shares are treated as having been purchased when the original
redeemed shares were purchased.
You may have a specific dollar amount of shares of United Cash Management,
Inc., a fund in the United Group of Mutual Funds for which the Manager also acts
as investment manager, automatically redeemed each month and invested into a
Fund. The shares of United Cash Management, Inc. which you designate must be
worth at least $100, which may be allocated among different Funds so long as
each Fund receives a value of at least $25. Minimum initial investment and
minimum balance requirements apply to such service. These exchange and other
rights can in most instances be eliminated or modified at any time and any
related request may not be accepted.
Retirement Plans
For individual taxpayers meeting certain requirements, the Distributor
offers four retirement plan arrangements which provide tax deferral and
contribute to retirement assets. All four of them involve investment in shares
of the Corporation.
First. A self-employed person may set up a plan that is commonly called a
Keogh Plan. As a general rule, an investor under a defined contribution Keogh
Plan can contribute each year up to 25% of his or her annual earned income, with
a maximum of $30,000.
Second. Investors having earned income may set up a plan that is commonly
called an IRA . Under an IRA, an investor can contribute each year up to
100% of his or her earned income up to a maximum of $2,000. The maximum
is $2,250 if an investor 's spouse has no earned income in a taxable year .
If an investor 's spouse has at least $2,000 of earned income in a taxable
year , the maximum is $4,000 ($2,000 for each spouse).
These contributions are deductible unless the investor (or, if married,
either spouse) is an active participant in a qualified retirement plan or if,
notwithstanding that the investor or one or both spouses so participates, the
adjusted gross income does not exceed certain levels.
An investor may also use an IRA to receive a rollover contribution which is
either (a) a direct rollover from an employer's plan or (b) a rollover of an
eligible distribution paid to the investor from an employer's plan or another
IRA. To the extent a rollover contribution is made to an IRA, the distribution
will not be subject to Federal income tax until distributed from the IRA. A
direct rollover generally applies to any distribution from an employer's plan
(including a custodial account under Section 403(b)(7) of the Code , but
not an IRA) other than certain periodic payments, required minimum distributions
and other specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a portion
of that distribution generally may be rolled over to an IRA within 60 days after
receipt of the distribution. Because mandatory Federal income tax withholding
applies to any eligible rollover distribution which is not paid in a direct
rollover, investors should consult their tax advisors or pension consultants as
to the applicable tax rules. If you already have an IRA, you may have the
assets in that IRA transferred directly into an IRA offered by Waddell & Reed,
Inc.
Third. If an investor is an employee of a public school system or of
certain types of charitable organizations, he or she may be able to enter into a
deferred compensation arrangement through a custodian account under Section
403(b)(7) 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.
The Distributor also offers to businesses prototype employee benefit plans
qualified under Section 401 of the Code. Investments may be made in shares of
the Corporation in accordance with the terms of the plans.
More detailed information about these arrangements is in the applicable
forms which are available from the Distributor. These plans may involve complex
tax questions as to premature distributions and other matters. Investors should
consult their tax advisor or pension consultant.
Redemptions
The Prospectus gives information as to redemption procedures and deferred
sales charges. The emergency or other extraordinary conditions there indicated
under which payment may be delayed beyond seven days are certain emergency
conditions determined by the SEC , when the NYSE is closed other than for
weekends or holidays, or when trading on the NYSE is restricted. The
extraordinary conditions mentioned in the Prospectus under which payment for
redemptions of shares of the Corporation may be made in portfolio securities are
those the Corporation's Board of Directors has determined make cash payments
undesirable. Redemptions made in securities will be made only in readily
marketable securities and the shareholder will incur commission or other
transaction charges in order to convert these securities into cash. Securities
used for payment of redemptions are valued at the value used in figuring net
asset value. The Corporation, however, has elected to be governed by Rule 18f-1
under the 1940 Act, pursuant to which it is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of its net asset value during
any 90-day period for any one shareholder.
As stated in the Prospectus, a deferred sales charge is inapplicable in a
variety of circumstances. The deferred sales charge is the subject of an
effective order of exemption issued by the staff of the SEC . For
purposes of determining application of the deferred sales charge, "employees"
include retired employees and "directors" includes retired directors. A retired
employee is an individual separated from service from the Distributor or any of
its affiliated companies with a vested interest in any employee benefit plan
sponsored by the Distributor or any of 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 the Distributor, a Senior Account Representative. A custodian
under the Uniform Gifts (or Transfers) to Minors Act purchasing for the child of
any employee or sales representative may redeem shares without a deferred sales
charge whether or not the custodian is an eligible purchaser.
Reinvestment Privilege
The Prospectus discusses the reinvestment privilege under which you may
reinvest in any one or more of the five Funds all or part of any amount you
redeemed and have the corresponding amount of the deferred sales charge, if any,
which you paid restored to your account by adding the amount of that charge to
the amount you are reinvesting. If shares of a Fund are then being offered, you
can put all or part of your redemption payment back into that Fund's shares at
the net asset value next determined after you have returned the amount. Your
written request to do this must be received within 30 days after your
redemption. You can do this only once as to shares of that Fund. For purposes
of determining future deferred sales charges, the reinvestment will be treated
as a new investment. 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.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Corporation are handled by outside
organizations selected by the Board of Directors. The Board of Directors has
responsibility for establishing broad corporate policies for the Corporation and
for overseeing overall performance of the selected experts. It has the benefit
of advice and reports from independent counsel and independent auditors.
Each of the Corporation's Directors is also a Director of each of the
registered investment companies in the United Group of Mutual Funds, TMK/United
Funds, Inc., Torchmark Government Securities Fund, Inc. and Torchmark Insured
Tax-Free Fund, Inc. and each of the Corporation's officers is also an officer of
one or more of these other funds. The principal occupation of each Director and
officer during at least the past five years is given below. Each of the persons
listed through and including Mr. Wright is a member of the Corporation's Board
of Directors. The other persons are officers but not members of the Board of
Directors.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund; Chairman of the Board of
Directors of Waddell & Reed Financial Services, Inc., United Investors
Management Company and United Investors Life Insurance Company; Chairman of the
Board of Directors and Chief Executive Officer of Torchmark Corporation;
formerly, Chairman of the Board of Directors of Waddell & Reed, Inc.
KEITH A. TUCKER*
President of the Fund; President, Chief Executive Officer and Director of
Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors of
the Manager, Waddell & Reed, Inc., Waddell & Reed Services Company, Waddell &
Reed Asset Management Company and Torchmark Distributors, Inc., an affiliate of
Waddell & Reed, Inc.; Vice Chairman of the Board of Directors, Chief Executive
Officer and President of United Investors Management Company; Vice Chairman of
the Board of Directors of Torchmark Corporation; formerly, partner in Trivest, a
private investment concern; formerly, Director of Atlantis Group, Inc., a
diversified company.
HENRY L. BELLMON
Route 1
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma; prior to his current service as Director of the funds in the United
Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc., he served in
such capacity for the funds in the United Group and TMK/United Funds, Inc.
DODDS I. BUCHANAN
University of Colorado
Campus Box 419
Boulder, Colorado 80309
Professor of Marketing, College of Business, University of Colorado;
Advisory Director, The Hand Companies; President, Buchanan Ranch Corp.;
formerly, Senior Vice President and Director of Marketing Services, The Meyer
Group of Management Consultants; formerly, Chairman, Department of Marketing,
Transportation and Tourism, University of Colorado.
JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Partner in Dillingham Farms, a farming operation; formerly, President and
Director of Kansas City Stock Yards Company.
JOHN F. HAYES*
335 N. Washington
P. O. Box 2977
Hutchinson, Kansas 67504-2977
President of Gilliland & Hayes, P.A., a law firm; Director of Central Bank
and Trust.
GLENDON E. JOHNSON
7300 Corporate Center Drive
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Life Insurance Company.
WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of the
Fund, each Fund in the United Group, TMK/United Funds, Inc., Waddell & Reed
Funds, Inc., Torchmark Government Securities Fund, Inc. and Torchmark Insured
Tax-Free Fund, Inc. (Mr. Morgan retired as Chairman of the Board of Directors
and President of these Funds on April 30, 1993); formerly, President, Director
and Chief Executive Officer of the Manager and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company; formerly,
Director of Waddell & Reed Asset Management Company, United Investors Management
Company and United Investors Life Insurance Company, affiliates of Waddell &
Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management and
investment; formerly, Director of The Vendo Company, a manufacturer and
distributor of vending machines.
FREDERICK VOGEL, III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired .
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
LESLIE S. WRIGHT
Samford University
800 Lakeshore Drive
Birmingham, Alabama 35209
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association; formerly, President of Samford University.
Robert L. Hechler
Vice President of the Fund; Vice President, Chief Operations Officer,
Director and Treasurer of Waddell & Reed Financial Services, Inc.; Executive
Vice President, Principal Financial Officer, Director and Treasurer of the
Manager; President, Chief Executive Officer, Principal Financial Officer,
Director and Treasurer of Waddell & Reed, Inc.; Director and Treasurer of
Waddell & Reed Asset Management Company; President, Director and Treasurer of
Waddell & Reed Services Company; Vice President, Treasurer and Director of
Torchmark Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund; Vice President, Chief Investment Officer and
Director of Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed,
Inc.; President, Chief Executive Officer, Chief Investment Officer and Director
of the Manager and Waddell & Reed Asset Management Company; Senior Vice
President and Chief Investment Officer of United Investors Management Company.
Theodore W. Howard
Vice President and Treasurer of the Fund; Vice President of Waddell & Reed
Services Company.
Rodney O. McWhinney
Vice President, Assistant Secretary and General Counsel of the Fund; Vice
President, Secretary and General Counsel of Waddell & Reed Financial Services,
Inc.; Senior Vice President, Secretary and General Counsel of the Manager and
Waddell & Reed, Inc.; Director, Senior Vice President, Secretary and General
Counsel of Waddell & Reed Services Company; Director, Secretary and General
Counsel of Waddell & Reed Asset Management Company; Vice President, Secretary
and General Counsel of Torchmark Distributors, Inc.; Director of ICI Mutual
Insurance Company.
Sharon K. Pappas
Vice President, Secretary and Assistant General Counsel of the Fund;
Assistant Secretary and Assistant General Counsel of the Manager; Assistant
General Counsel of Waddell & Reed Financial Services, Inc., Waddell & Reed,
Inc., Waddell & Reed Asset Management Company and Waddell & Reed Services
Company .
James C. Cusser
Vice President of the Corporation; Vice President of the Manager; formerly,
Vice President of Kidder Peabody & Company.
John M. Holliday
Vice President of the Corporation; Senior Vice President of the Manager and
of Waddell & Reed Asset Management Company; formerly, Senior Vice President of
Waddell & Reed, Inc.
Mark G. Seferovich
Vice President of the Corporation; Vice President of the Manager; formerly,
Vice President of Waddell & Reed, Inc.; formerly a fund manager with Security
Management Company, a brokerage firm.
W. Patrick Sterner
Vice President of the Corporation; Vice President of the Manager; Vice
President of Waddell & Reed Asset Management Company; formerly, Chief Investment
Officer of The Merchants Bank.
John E. Sundeen, Jr.
Vice President of the Corporation; Vice President of the Manager; Vice
President of Waddell & Reed Asset Management Company.
Russell E. Thompson
Vice President of the Corporation; Senior Vice President of the Manager;
Senior Vice President of Waddell & Reed Asset Management Company; formerly,
Senior 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 Corporation's Directors may be
deemed to be "interested persons" of the Distributor and the Manager and, as
such, also of the Corporation. The Directors who may be deemed to be
"interested persons" as defined in the 1940 Act 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
of Directors provided the Director has attained the age of 75 and has served as
a Director of the Corporation 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 Corporation.
The Corporation, the funds in the United Group and TMK/United Funds,
Inc. pay to each Director a total of $40,000 per year, plus $500 for each
meeting of the Board of Directors attended and $500 for each committee meeting
attended which is not in conjunction with a Board of Directors meeting, other
than Directors who are affiliates of Waddell & Reed, Inc. The fees to the
Directors who receive them are divided among the Corporation, the funds in the
United Group and TMK/United Funds, Inc. based on their relative size. During
the Corporation's fiscal year ended March 31, 1994, its share was $1,803. The
officers are paid by the Manager or its affiliates.
Shareholdings
As of May 31, 199 4 , all of the Corporation's Directors and officers
as a group owned less than 1% of the outstanding shares of the Corporation. As
of such date, United Investors Life Insurance Company, an affiliate of the
Distributor, owned of record and beneficially 5.99 % of the Corporation's
outstanding shares. United Investors Life Insurance Company is a Missouri
corporation whose address is 2001 Third Avenue South, Birmingham, Alabama
32533. The address of the Distributor is stated on the front cover of this SAI.
PAYMENTS TO SHAREHOLDERS
General
There are two (three, in the case of certain Funds) sources for the
payments a Fund makes to you as a shareholder, other than payments when you
redeem your shares. The first source is a Fund's net investment income, which
is derived from the dividends, interest and earned discount on the securities it
holds, less its expenses. The second source is realized capital gains, which
are derived from the proceeds received from the sale of securities at a price
higher than a Fund's tax basis (usually cost) in such securities; these gains
can be either long-term or short-term, depending on how long a Fund has owned
the securities before it sells them. The third source (in the case of Total
Return Fund, Growth Fund and Global Income Fund)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.
Each Fund pays distributions only if it has net capital gains (the excess
of net long-term capital gains over net short-term capital losses). It may or
may not have such gains, depending on whether securities are sold and at what
price. If a Fund has net capital gains, it will pay distributions once each
year, in the latter part of the fourth calendar quarter. Even if a Fund has net
capital gains for a year, it does not pay the gains out if it has applicable
prior year losses to offset the gains.
Choices you Have on your Dividends and Distributions
In your application form, you can give instructions that (i) you want cash
for your dividends and distributions or (ii) you want cash for your dividends
and want your distributions reinvested in shares of the distributing Fund. You
can change your instructions at any time. If you give neither instruction, your
dividends and distributions will be reinvested in Fund shares. All
reinvestments are at net asset value without any sales charge. The net asset
value used for this purpose is that computed as of the payment 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, a Fund (each Fund being treated as a separate
entity for these purposes) must distribute to its shareholders for each taxable
year at least 90% of its investment company taxable income (consisting generally
of taxable net investment income, net short-term capital gains and for certain
Funds, net gains from certain foreign currency transactions) plus, in the case
of Municipal Bond Fund, its net interest income excludable from gross income
under Section 103(a) of the Code, and must meet several additional requirements.
With respect to each Fund, these requirements include the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of securities, or any of the
following, that were held for less than three months -- options or futures
(other than those on foreign currencies), or foreign currencies (or options,
futures or forward contracts thereon) that are not directly related to the
Fund's principal business of investing in securities (or options and futures
with respect to securities) ("Short-Short Limitation"); (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government Securities,
securities of other RICs and other securities that are limited, in respect of
any one issuer, to an amount that does not exceed 5% of the value of the Fund's
total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (4) at the close of each quarter of the
Fund's taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. Government securities or the securities
of other RICs) of any one issuer.
Dividends and distributions declared by the Fund in 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 the
shareholders on that December 31 of that year if they are paid by the Fund
during the following January. Accordingly, those dividends and distributions
will be taxed to shareholders for the year in which that December 31 falls.
If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any distributions received on those shares. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or distribution, the purchaser will receive some portion of the
purchase price back as a taxable dividend or distribution.
Each 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 a 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. If more than 50% of the value of a
Fund's total assets at the close of its taxable year consists of securities of
foreign corporations, the Fund will be eligible to, and may, file an election
with the Internal Revenue Service that will enable its shareholders, in effect,
to receive the benefit of the foreign tax credit with respect to any foreign and
U.S. possessions income taxes paid by it. Pursuant to any such election, a Fund
would treat those taxes as dividends paid to its shareholders and each
shareholder would be required to (1) include in gross income, and treat as paid
by the shareholder, the shareholder's proportionate share of those taxes, (2)
treat the shareholder's share of those taxes and of any dividend paid by the
Fund that represents income from foreign or U.S. possessions sources as the
shareholder's own income from those sources and (3) either deduct the taxes
deemed paid by the shareholder in computing the shareholder's taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against the shareholder's federal income tax. Each Fund that may invest
in foreign securities will report to its shareholders shortly after each taxable
year their respective shares of the Fund's income from sources within, and taxes
paid to, foreign countries and U.S. possessions if it makes this election.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of debt securities denominated in foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of each security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest, dividends or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally are treated
as ordinary income or loss. These gains or losses, referred to under the Code
as "section 988" gains or losses, may increase or decrease the amount of the
Fund's investment company taxable income to be distributed to its shareholders.
Income from Options, Futures and Currencies
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures and entering into forward contracts, 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,
futures and forward contracts derived by a Fund with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement. However, income from the disposition of
options and futures (other than those on foreign currencies) will be subject to
the Short-Short Limitation if they are held for less than three months. Income
from the disposition of foreign currencies, and options, futures and forward
contracts thereon, that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to the Short-Short Limitation if they are held
for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gains (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all of each Fund's hedging transactions. To the
extent this treatment is not available, a Fund may be forced to defer the
closing out of certain options, futures and forward contracts beyond the time
when it otherwise would be advantageous to do so, in order for the Fund to
continue to qualify as a RIC.
Any income a Fund earns from writing options is treated as short-term
capital gains. If a Fund enters into a closing purchase transaction, it will
have short-term capital gains or losses 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 a Fund lapses without being exercised,
the premium it receives also will be a short-term gain. If such an option is
exercised and thus the Fund sells the securities subject to the option, the
premium the Fund receives will be added to the exercise price to determine the
gain or loss on the sale. A Fund will not write so many options that it could
fail to continue to qualify as a RIC.
Certain options and futures in which the Fund may invest will be "section
1256 contracts." Section 1256 contracts held by a Fund at the end of each
taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which the Fund has made an election not to have the
following rules apply, are "marked-to-market" (that is, treated as sold for
their fair market value) for Federal income tax purposes, with the result that
unrealized gains or losses are treated as though they were realized. Sixty
percent of any net gains or losses recognized on these deemed sales, and 60% of
any net realized gains or losses from any actual sales of section 1256
contracts, are treated as long-term capital gains or losses, and the balance are
treated as short-term capital gains or losses. Section 1256 contracts also may
be marked-to-market for purposes of the Excise Tax and for other purposes.
Code section 1092 (dealing with straddles) may also affect the taxation of
options and futures contracts in which the Funds 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 a 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 Funds are not entirely clear.
Zero Coupon and Payment-in-Kind Securities
Certain Funds may acquire zero coupon or other securities issued with
original issue discount. As the holder of those securities, a Fund must include
in its income the original issue discount that accrues on the securities during
the taxable year, even if the Fund receives no corresponding payment on the
securities during the year. Similarly, a Fund must include in its gross income
securities it receives as "interest" on payment-in-kind securities. Because
each Fund annually must distribute substantially all of its investment company
taxable income, including any original issue discount and other non-cash income,
in order to satisfy the distribution requirement described above and to avoid
imposition of the Excise Tax, a Fund may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from a Fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. A
Fund may realize capital gains or losses from those sales, which would increase
or decrease its investment company taxable income and/or net capital gains. In
addition, any such gains may be realized on the disposition of securities held
for less than three months. Because of the Short-Short Limitation, any such
gains would reduce a Fund's ability to sell other securities, or certain
options, futures or forward contracts, held for less than three months that it
might wish to sell in the ordinary course of its portfolio management.
Municipal Bond Fund
The aggregate dividends excludable from the gross income of a Municipal
Bond Fund shareholder may not exceed the Fund's net tax-exempt income. If the
Fund's shares are sold at a loss after being held for six months or less, the
loss will be disallowed to the extent of any exempt-interest dividends received
on those shares. Tax-exempt interest attributable to certain private activity
bonds ("PABs") (including a proportionate part of the exempt-interest dividends
paid by the Fund attributable thereto) is subject to the alternative minimum
tax. Exempt-interest dividends received by a corporate shareholder also may be
indirectly subject to that tax without regard to whether the Fund's tax-exempt
interest was attributable to those PABs.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by PABs or industrial development
bonds should consult their tax advisers before purchasing shares of the Fund
because, for users of certain of these facilities, the interest on such bonds is
not exempt from Federal income tax. For these purposes, the term "substantial
user" is defined generally to include a "non-exempt person" who regularly uses
in trade or business a part of a facility financed from the proceeds of PABs or
industrial development bonds.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from the Fund still are
tax-exempt to the extent described in the Prospectus; they are only included in
the calculation of whether a recipient's income exceeds the established amounts.
If the Fund invests in any instruments that generate taxable income, under
the circumstances described in the Prospectus, distributions of the interest
earned thereon will be taxable to the Fund's shareholders as ordinary income to
the extent of its earnings and profits. Moreover, if the Fund realizes capital
gains as a result of market transactions, any distribution of that gain will be
taxable to its shareholders. There also may be collateral Federal income tax
consequences regarding the receipt of exempt-interest dividends by shareholders
such as S corporations, financial institutions, and property and casualty
insurance companies. A shareholder falling into any such category should
consult its tax adviser concerning its investment in shares of the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by the Manager pursuant to the Management
Agreement is to arrange for the purchase and sale of securities for the
portfolio of each Fund. With respect to Limited-Term Bond Fund and Municipal
Bond Fund, many purchases are made directly from issuers or from underwriters,
dealers or banks. Purchases from underwriters include a commission or
concession paid by the issuer to the underwriter. Purchases from dealers will
include the spread between the bid and the asked prices. Otherwise 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.
To effect the portfolio transactions of a Fund, the Manager is authorized
to engage broker-dealers ("brokers") which, in its best judgment based on
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 ("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.
Such 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.
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 Corporation 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 a Fund's portfolio or being considered for purchase.
In placing transactions for a portfolio, the Manager may consider sales of
shares of each portfolio of the Corporation as a factor in the selection of
brokers to execute portfolio transactions. The Manager intends to allocate
brokerage on the basis of this factor, among others, only if the sale is $2
million or more. This results in the consideration only of sales which by their
nature would not ordinarily be made by the Distributor'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 the Corporation's brokerage.
The table below sets forth the brokerage commissions paid by each of the
five Funds during the fiscal years ended March 31, 1994 and 1993 . These
figures do not include principal transactions or spreads or concessions on
principal transactions, i.e., those in which a Fund sells securities to a
broker-dealer firm or buys from a broker-dealer firm securities owned by it.
1994 1993*
---- -----
Total Return Fund $70,780 $16,390
Growth Fund 26,876 1,525
Limited-Term Bond Fund --- ---
Municipal Bond Fund --- ---
Global Income Fund --- ---
------- -------
Total $97,656 $17,915
======= =======
*For the period 9/21/92, the date of initial public offering, to 3/31/93
The next table shows for each of the five Funds the transactions, other
than principal transactions, which were directed to broker-dealers who provided
research as well as execution and the brokerage commissions paid during
the fiscal year ended March 31, 1994 . These transactions were allocated
to these broker-dealers by the internal allocation procedures described above.
Amount of Brokerage
Transactions Commissions
------------ -----------
Total Return Fund .............. $42,003,630$59,153
Growth Fund ....................... 5,454,781 14,058
Limited-Term Bond Fund ............ --- ---
Municipal Bond Fund ............... --- ---
Global Income Fund ................ --- ---
---------- -------
Total ..........................$ 47,458,411$73,211
========== =======
Buying and Selling With Other Funds
The individual who manages each of the respective Funds may manage other
advisory accounts with similar investment objectives. It can be anticipated
that the manager will frequently place concurrent orders for all or most
accounts for which the manager has responsibility. Transactions effected
pursuant to such combined orders are averaged as to price and allocated in
accordance with the purchase or sale orders actually placed for each fund or
advisory account. One or more Funds and one or more of the funds in the
United Group, TMK/United Funds, Inc., Torchmark Government Securities Fund, Inc.
and Torchmark Insured Tax-Free Fund, Inc. or accounts over which Waddell & Reed
Asset Management Company exercises investment discretion frequently will
buy or sell the same securities at the same time. If this happens, the
amount of each purchase or sale is divided. This is done on the basis of the
amount each fund or account wanted to buy or sell. Sharing in large
transactions could affect the price a 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 Five Funds
The shares of each of the five Funds represent an interest in that Fund's
securities and other assets and in its profits or losses. Each share of each
Fund has the same rights to dividends and to receive assets if the Corporation
liquidates (winds-up) as every other share of that Fund. Each fractional share
has the same rights, in proportion, as a full share. All shares of each Fund
are fully paid and nonassessable when you buy them.
Each share of each Fund is entitled to one vote. On certain matters such
as the election of Directors, all shares of all of the five Funds vote together
as a single class. On other matters affecting a particular Fund, the shares of
that Fund vote as a separate class; an example would be a change in an
investment restriction of a particular Fund. In voting on the Management
Agreement or the Plan, approval by the shareholders of a Fund is effective as to
that Fund whether or not enough votes are received from the shareholders of any
of the other Funds to approve the Management Agreement or the Plan for the other
Funds.
Those shares held by the Distributor or its corporate affiliates (as
described below) will be voted in proportion to the voting instructions which
are received on any matter. Voting instructions to abstain on any item to be
voted upon will be applied to reduce the votes eligible to be cast by the
Distributor and its corporate affiliates.
Initial Investment and Organizational Expenses
On April 24, 1992, the Distributor purchased for investment 2,000 shares of
each Fund at a net asset value of $10.00 per share.
The Corporation's organizational expenses in the amount of $162,960 have
been advanced by the Distributor and are an obligation to be paid by the
Corporation. These expenses are being amortized over the 60-month period
following the date of the initial public offering of the Corporation's shares.
In the event that all or part of the Distributor's initial investment in the
Corporation's shares is redeemed prior to the full reimbursement of the
organizational expenses, the Corporation's obligation to make reimbursement will
cease.
<PAGE>
APPENDIX A
The Funds may use some or all of the following instruments as discussed in
the Prospectus and this SAI:
Options on Equity and Debt Securities and Foreign Currencies--A call option
is a short-term contract pursuant to which the purchaser of the option, in
return for a premium, has the right to buy the security or currency underlying
the option at a specified price at any time during the term of the option. The
writer of the call option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to deliver the underlying
security or currency against payment of the exercise price. A put option is a
similar contract that gives its purchaser, in return for a premium, the right to
sell the underlying security or currency at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.
Options on Stock Indices--A stock index assigns relative values to the
stocks included in the index and fluctuates with changes in the market values of
those stocks. A stock index option operates in the same way as a more
traditional stock option, except that exercise of a stock index option is
effected with cash payment and does not involve delivery of securities. Thus,
upon exercise of a stock index option, the purchaser will realize, and the
writer will pay, an amount based on the difference between the exercise price
and the closing price of the stock index.
Options on Bond Indices--A bond index assigns relative values to the debt
securities included in the index and fluctuates with changes in such values.
Settlements of bond index options are effected with cash payments and do not
involve delivery of securities. Thus, upon settlement of a bond index option,
the purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the bond index.
Stock Index and Bond Index Futures Contracts--An index futures contract is
a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the value of the stock or bond index,
as the case may be, at the close of trading of the contract and the price at
which the futures contract is originally struck. No physical delivery of the
securities comprising the index is made. Generally, contracts are closed out
prior to the expiration date of the contract.
Interest Rate and Foreign Currency Futures Contracts--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
Options on Futures Contracts--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon
exercise of the option, the delivery of the futures position to the holder of
the option will be accompanied by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the future. The writer of an option, upon exercise, will
assume a short position in the case of a call and a long position in the case of
a put.
Forward Currency Contracts--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
<PAGE>
APPENDIX B
The following are descriptions of some of the ratings of securities which
the Funds may use. The Funds may also use ratings provided by other nationally
recognized statistical rating organizations.
DESCRIPTION OF BOND RATINGS
Standard & Poor's Corporation. A Standard & Poor's corporate or municipal
bond rating is a current assessment of the creditworthiness of an obligor with
respect to a specific obligation. This assessment of creditworthiness may take
into consideration obligors such as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform any audit in connection with the
ratings and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA -- Debt rated AA also qualifies as high quality debt obligations.
Capacity to pay interest and repay principal is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. It is used when interest payments
or principal payments are not made on a due date even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace periods; it will also be used upon a filing of a bankruptcy
petition if debt service payments are jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulation issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
are generally regarded as eligible for bank investment. In addition, the Legal
Investment Laws of various states may impose certain rating or other standards
for obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
Moody's Investors Service. A brief description of the applicable Moody's
Investors Service rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest investment
attributes are designated by the symbol "1" following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
A Standard & Poor's Corporation note rating reflects the liquidity
concerns and market access risks unique to notes. Notes due in 3 years or less
will likely receive a note rating. Notes maturing beyond 3 years will most
likely receive a long-term debt rating. The following criteria will be used in
making that assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
--Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.)
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings -- Moody's ratings for state and municipal
short-term obligations will be designated Moody's Investment Grade (MIG). This
distinction is in recognition of the differences between short-term credit risk
and long-term risk. Factors affecting the liquidity of the borrower are
uppermost in importance in short-term borrowing, while various factors of major
importance in bond risk are of lesser importance over the short run. Rating
symbols and their meanings follow:
MIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3 -- This designation denotes favorable quality. All security elements
are accounted for but this is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4 -- This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Standard & Poor's Corporation commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. Ratings are graded into four categories,
ranging from A for the highest quality obligations to D for the lowest. Issuers
rated A are further referred to by use of numbers 1, 2 and 3 to indicate the
relative degree of safety. Issues assigned an A rating (the highest rating) are
regarded as having the greatest capacity for timely payment. An A-1 designation
indicates that the degree of safety regarding timely payment is either
overwhelming or very strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus sign designation. An A-2 rating
indicates that capacity for timely payment is strong; however, the relative
degree of safety is not as high as for issues designated A-1. Issues rated A-3
have a satisfactory capacity for timely payment; however, they are somewhat more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations. Issues rated B are regarded as having only an
adequate capacity for timely payment; however, such capacity may be damaged by
changing conditions or short-term adversities. A C rating is assigned to short-
term debt obligations with a doubtful capacity for payment. Debt rated D is in
payment default, which occurs when interest payments or principal payments are
not made on the date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such grace period.
Moody's Investors Service, Inc. commercial paper ratings are opinions of
the ability of issuers to repay punctually promissory obligations not having an
original maturity in excess of nine months. Moody's employs the designations of
Prime 1, Prime 2 and Prime 3, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers. Issuers rated Prime 1 have a
superior capacity for repayment of short-term promissory obligations and
repayment capacity will normally be evidenced by (1) lending market positions in
well established industries; (2) high rates of return on funds employed; (3)
conservative capitalization structures with moderate reliance on debt and ample
asset protection; (4) broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and (5) well established access to a
range of financial markets and assured sources of alternate liquidity. Issuers
rated Prime 2 also have a strong capacity for repayment of short-term promissory
obligations as will normally be evidenced by many of the characteristics
described above for Prime 1 issuers, but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation;
capitalization characteristics, while still appropriate, may be more affected by
external conditions; and ample alternate liquidity is maintained. Issuers rated
Prime 3 have an acceptable capacity for repayment of short-term promissory
obligations, as will normally be evidenced by many of the characteristics above
for Prime 1 issuers, but to a lesser degree. The effect of industry
characteristics and market composition may be more pronounced; variability in
earnings and profitability may result in changes in the level of debt protection
measurements and requirement for relatively high financial leverage; and
adequate alternate liquidity is maintained.
<PAGE>
THE INVESTMENTS OF
TOTAL RETURN FUND
MARCH 31, 1994
Shares Value
COMMON STOCKS
Airlines - 2.53%
AMR Corporation* ....................... 8,100 $ 461,700
Southwest Airlines Co. ................. 33,550 1,098,763
Total ................................. 1,560,463
Automotive - 8.88%
Chrysler Corporation ................... 22,300 1,151,238
Daimler-Benz AG, ADS .................. 2,800 142,450
Dana Corporation ....................... 7,700 440,825
Eaton Corporation ...................... 10,100 584,538
Ford Motor Company ..................... 19,300 1,133,875
General Motors Corporation ............. 14,400 777,600
Magna Group, Inc., Class A ............. 7,100 333,700
Superior Industries International, Inc. 5,300 184,838
Varity Corporation* .................... 4,200 175,875
Volvo AB, ADR, Class B ................ 7,200 559,346
Total ................................. 5,484,285
Banks and Savings and Loans - 7.02%
Banc One Corporation ................... 9,952 328,416
BankAmerica Corporation ................ 10,200 401,625
Chase Manhattan Corporation ............ 17,200 556,850
Chemical Banking Corporation ........... 12,700 461,963
Citicorp* .............................. 20,300 761,250
First Bank Systems, Inc. ............... 12,400 396,800
First Fidelity Bancorporation .......... 6,100 446,825
Midlantic Corporation* ................. 12,200 348,456
NationsBank Corporation ................ 7,900 361,425
PNC Financial Corp. .................... 10,100 268,913
Total ................................. 4,332,523
Beverages - 2.35%
Cott Corporation ...................... 10,000 248,750
PepsiCo, Inc. .......................... 26,400 966,900
Whitman Corporation .................... 15,500 234,438
Total ................................. 1,450,088
Biotechnology and Medical Services - 0.95%
Medtronic, Inc. ........................ 4,100 328,000
Ventritex, Inc.* ....................... 12,300 258,300
Total ................................. 586,300
Building - 3.71%
Armstrong World Industries, Inc. ....... 14,100 761,400
Centex Corporation ..................... 5,600 172,900
Georgia-Pacific Corporation ............ 4,100 262,400
Louisiana-Pacific Corporation .......... 4,100 148,113
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
TOTAL RETURN FUND
MARCH 31, 1994
Shares Value
COMMON STOCKS(Continued)
Building (Continued)
Pulte Corporation ...................... 6,000 $ 174,000
Stanley Works (The) .................... 3,000 118,125
Temple-Inland Inc. ..................... 7,100 324,825
Weyerhaeuser Company ................... 7,600 328,700
Total ................................. 2,290,463
Chemicals Major - 4.96%
Air Products & Chemicals, Inc. ......... 16,200 722,925
du Pont (E. I.) de Nemours and Company . 12,200 646,600
PPG Industries, Inc. ................... 12,700 944,563
Praxair, Inc. .......................... 20,300 352,713
Union Carbide Corporation .............. 17,700 398,250
Total ................................. 3,065,051
Chemicals Specialty and Miscellaneous Technology - 5.11%
Betz Laboratories, Inc. ................ 5,700 286,425
Ferro Corporation ...................... 8,000 248,000
Geon Company (The) ..................... 25,000 659,375
Minnesota Mining and Manufacturing
Company ............................... 5,100 505,538
Polaroid Corporation ................... 28,400 905,250
Xerox Corporation ...................... 5,700 544,350
Total ................................. 3,148,938
Computers and Office Equipment - 1.13%
General Motors Corporation, Class E .... 20,300 695,275
Consumer Electronics and Appliances - 2.12%
Harmon International Industries,
Incorporated* ......................... 7,600 210,900
Maytag Corporation ..................... 24,300 455,625
Rival Company (The) .................... 3,800 78,375
Whirlpool Corporation .................. 9,300 564,975
Total ................................. 1,309,875
Electrical Equipment - 2.75%
Emerson Electric Co. ................... 8,100 480,938
General Electric Company ............... 12,200 1,215,425
Total ................................. 1,696,363
Electronics - 7.37%
AMP Incorporated* ...................... 11,200 674,800
Analog Devices, Inc.* .................. 10,600 275,600
Applied Materials, Inc.* ............... 18,300 816,638
Intel Corporation ...................... 15,500 1,044,313
Motorola, Inc. ......................... 17,200 1,741,500
Total ................................. 4,552,851
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
TOTAL RETURN FUND
MARCH 31, 1994
Shares Value
COMMON STOCKS(Continued)
Engineering and Construction - 1.18%
Fluor Corporation ...................... 8,100 $ 405,000
Foster Wheeler Corporation ............. 8,100 324,000
Total ................................. 729,000
Financial - 2.17%
Federal Home Loan Mortgage Corporation . 10,100 512,575
Federal National Mortgage Association .. 6,000 466,500
Household International, Inc. .......... 12,200 361,425
Total ................................. 1,340,500
Food and Related - 1.23%
CPC International Inc. ................. 10,100 478,488
Pet Incorporated ....................... 15,500 279,000
Total ................................. 757,488
Household Products - 3.76%
Avon Products, Inc. .................... 5,700 322,050
Colgate-Palmolive Company .............. 12,200 706,075
Gillette Company (The) ................. 10,100 638,825
Procter & Gamble Company (The) ......... 12,200 654,225
Total.................................. 2,321,175
Leisure Time - 2.27%
Walt Disney Company (The) .............. 14,200 594,625
McDonald's Corporation ................. 14,200 807,625
Total ................................. 1,402,250
Machinery - 7.45%
Caterpillar Inc. ....................... 16,200 1,820,475
Clark Equipment Company* ............... 10,100 598,425
Deere & Company ........................ 13,900 1,167,600
Ingersoll-Rand Company ................. 8,100 301,725
Parker Hannifin Corporation ............ 8,100 286,538
Trinova Corporation .................... 12,200 422,425
Total ................................. 4,597,188
Metals and Mining - 0.48%
Phelps Dodge Corporation ............... 5,700 297,825
Multi-Industry - 1.83%
ITT Corporation ........................ 13,200 1,131,900
Paper - 2.09%
International Paper Company ............ 8,100 551,813
James River Corporation of Virginia .... 16,200 293,625
Union Camp Corporation ................. 10,100 446,925
Total ................................. 1,292,363
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
TOTAL RETURN FUND
MARCH 31, 1994
Shares Value
COMMON STOCKS(Continued)
Railroads - 3.97%
CSX Corporation ........................ 7,100 $ 582,200
Conrail Inc. ........................... 12,200 704,550
Norfolk Southern Corporation ........... 6,100 394,213
Southern Pacific Rail Corporation* ..... 9,500 199,500
Union Pacific Corporation .............. 10,100 573,175
Total ................................. 2,453,638
Retailing - 10.01%
Circuit City Stores, Inc. .............. 32,500 645,938
Dayton Hudson Corporation .............. 9,400 686,200
Dillard Department Stores, Inc.,
Class A ............................... 19,300 646,550
Ethan Allen Interiors Inc.* ............ 8,000 208,000
Gap, Inc. (The) ........................ 14,200 630,125
Home Depot, Inc. (The) ................. 15,533 632,970
May Department Stores Company (The) .... 20,300 844,988
Penney (J. C.) Company, Inc. ........... 13,700 724,388
Sears, Roebuck & Co. .................. 4,100 176,300
Spiegel, Inc., Class A ................. 11,000 248,875
Toys "R" Us, Inc.* .................... 6,100 211,975
Wal-Mart Stores, Inc. .................. 20,300 525,263
Total ................................. 6,181,572
Services, Consumer and Business - 0.85%
Block (H&R), Inc. ...................... 12,200 524,600
Steel - 1.20%
Bethlehem Steel Corporation* ........... 7,300 146,000
Inland Steel Industries, Inc.* ......... 7,300 219,913
USX Corporation - U.S. Steel Group ..... 10,100 374,963
Total ................................. 740,876
Telecommunications - 3.14%
American Telephone and Telegraph
Company ............................... 10,100 517,625
General Instrument Corporation* ........ 5,100 242,250
MCI Communications Corporation ......... 20,300 475,771
Telefonaktiebolaget LM Ericsson, ADR,
Class B ............................... 10,100 424,826
Vanguard Cellular Systems, Inc.* ....... 9,500 276,688
Total ................................. 1,937,160
Tire and Rubber - 1.10%
Goodyear Tire & Rubber Company (The) ... 16,700 676,350
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
TOTAL RETURN FUND
MARCH 31, 1994
Shares Value
COMMON STOCKS(Continued)
Trucking - 0.81%
Ryder System, Inc. ..................... 20,300 $ 502,425
TOTAL COMMON STOCKS - 92.42% $57,058,785
(Cost: $53,957,175)
TOTAL SHORT-TERM SECURITIES - 4.54% $ 2,800,011
(Cost: $2,800,011)
TOTAL INVESTMENT SECURITIES - 96.96% $59,858,796
(Cost: $56,757,186)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 3.04% 1,876,491
NET ASSETS - 100.00% $61,735,287
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
GROWTH FUND
MARCH 31, 1994
Shares Value
COMMON STOCKS
Automotive - 3.10%
Automotive Industries Holdings, Inc.* .. 12,500 $ 375,000
Gentex Corporation* .................... 20,000 452,500
Superior Industries International, Inc. 15,000 523,125
Total ................................. 1,350,625
Biotechnology and Medical Services - 4.92%
American Healthcorp, Inc.* ............. 30,000 420,000
Pyxis Corporation* .................... 25,000 656,250
Tecnol Medical Products, Inc.* ......... 10,600 139,125
Ventritex, Inc.* ....................... 30,000 630,000
Zoll Medical Corporation* .............. 10,000 293,750
Total ................................. 2,139,125
Building - 0.75%
NCI Building Systems, Inc.* ............ 20,000 327,500
Computers and Office Equipment - 20.67%
America Online, Inc.* .................. 12,000 859,500
BMC Software* .......................... 10,000 616,250
Broderbund Software, Inc.* ............. 13,000 531,375
Cerner Corporation* .................... 12,000 498,000
DSP Group, Inc.* ...................... 30,000 483,750
Health Management Systems, Inc.* ...... 20,000 455,000
Integrated Silicon Systems, Inc.* ..... 15,500 364,250
Intuit* ............................... 15,000 549,375
Macromedia, Inc.* ..................... 3,500 51,625
MapInfo Corporation* ................... 2,500 59,063
MEDSTAT Group (The)* ................... 25,000 384,375
Microsoft Corporation* ................. 10,000 850,000
Parametric Technology Corporation* ..... 25,000 684,375
ParcPlace Systems, Inc.* .............. 5,000 101,250
PeopleSoft, Inc.* ...................... 3,000 103,125
Pinnacle Micro, Inc.* .................. 20,000 315,000
QuickResponse Services, Inc.* .......... 15,000 320,625
Sterling, Software* ................... 20,000 577,500
Wall Data Incorporated* ................ 15,000 667,500
Wonderware Corporation* ............... 30,000 525,000
Total ................................. 8,996,938
Drugs and Hospital Supply - 1.90%
Circa Pharmaceuticals, Inc.* ........... 40,000 470,000
Copley Pharmaceutical, Inc.* ........... 15,000 358,125
Total ................................. 828,125
Electronics - 9.83%
ALANTEC Corporation* .................. 8,600 141,358
Applied Materials, Inc.* ............... 10,000 446,250
Atmel Corporation* .................... 10,000 424,370
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
GROWTH FUND
MARCH 31, 1994
Shares Value
COMMON STOCKS (Continued)
Electronics (Continued)
Digital Link Corporation* ............. 30,000 $ 465,000
Gasonics International Corporation.* .. 25,000 334,375
LSI Logic Corporation* ................. 20,000 400,000
Lam Research* .......................... 15,000 468,750
Level One Communications, Incorporated* 8,100 157,950
Megatest Corporation* .................. 15,000 271,875
Micron Technology, Inc.* .............. 13,000 1,085,500
TriQuint Semiconductor, Inc.* ......... 5,000 81,250
Total ................................. 4,276,678
Financial - 0.99%
Regional Acceptance Corporation* ....... 35,000 428,750
Hospital Management - 5.52%
Intergroup Healthcare Corporation* ..... 12,000 543,000
Sierra Health Services, Inc.* ......... 30,000 761,250
United HealthCare Corporation .......... 10,000 427,500
Vencor, Incorporated* .................. 20,000 670,000
Total ................................. 2,401,750
Household Products - 0.65%
Valence Technology, Inc.* ............. 20,000 285,000
Leisure Time - 0.27%
Cobra Golf Incorporated* ............... 4,100 117,363
Machinery - 0.95%
Cognex Corporation* .................... 20,000 412,500
Railroad Equipment - 0.42%
Atchison Casting Corporation* .......... 12,500 184,375
Retailing - 6.75%
Bombay Company, Inc.* .................. 17,150 426,606
Books-A-Million, Inc.* ................. 25,000 512,500
Leslie's Poolmart* .................... 14,000 157,500
Sunglass Hut International, Inc.* ...... 20,000 665,000
Tractor Supply Company* ............... 20,000 460,000
Williams-Sonoma, Inc.* ................ 22,500 714,375
Total ................................. 2,935,981
Services, Consumer and Business - 2.11%
Stewart Enterprises, Inc., Class A ..... 25,000 596,875
Thomas Group, Inc.* ................... 20,000 320,000
Total ................................. 916,875
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
GROWTH FUND
MARCH 31, 1994
Shares Value
COMMON STOCKS (Continued)
Steel - 0.86%
Huntco Inc., Class A .................. 15,000 $ 375,000
Telecommunications - 2.33%
Glenayre Technologies, Inc.* ........... 20,000 727,500
MFS Communications Company, Inc.* ...... 10,000 288,750
Total ................................. 1,016,250
Trucking - 1.94%
Heartland Express, Inc.* ............... 20,000 682,500
TRISM, Inc.* .......................... 10,000 163,750
Total ................................. 846,250
TOTAL COMMON STOCKS - 63.96% $27,839,085
(Cost: $26,016,539)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Banks and Savings and Loans - 3.80%
U.S. Bancorp,
Master Note ........................... $1,653 1,653,000
Beverages - 2.18%
PepsiCo, Inc.,
3.55%, 4-4-94.......................... 950 949,719
Building - 2.30%
Weyerhaeuser Company,
3.56%, 4-4-94.......................... 1,000 999,703
Computers and Office Equipment - 1.72%
Electronic Data Systems Corp.,
3.75%, 5-13-94......................... 750 746,719
Drugs and Hospital Supply - 3.65%
American Cyanamid Co.,
3.8%, 6-6-94........................... 1,600 1,588,853
Financial - 12.26%
Associates Corporation of North America,
Master Note ........................... 1,992 1,992,000
B.A.T. Capital Corp.,
3.35%, 4-4-94.......................... 1,300 1,299,637
BHP Finance (U.S.A.) Inc.,
3.57%, 4-18-94 ........................ 1,050 1,048,230
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
GROWTH FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Financial (Continued)
Textron Financial Corp.,
3.8%, 5-3-94........................... $1,000 $ 996,622
Total ................................. 5,336,489
Food and Related - 4.08%
Sara Lee Corporation,
Master Note ........................... 1,778 1,778,000
Household Products - 1.38%
Procter & Gamble Co.,
3.5%, 4-8-94........................... 600 599,592
Publishing and Advertising - 1.03%
American Greetings Corp.,
3.6%, 4-26-94.......................... 450 448,875
Telecommunications - 3.28%
Siemens Corp.,
3.47%, 4-7-94.......................... 1,430 1,429,173
TOTAL SHORT-TERM SECURITIES - 35.68% $15,530,123
(Cost: $15,530,123)
TOTAL INVESTMENT SECURITIES - 99.64% $43,369,208
(Cost: $41,546,662)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.36% 155,069
NET ASSETS - 100.00% $43,524,277
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
LIMITED-TERM BOND FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Airlines - 2.81%
Federal Express Corporation,
10.0%, 9-1-98 ......................... $296 $ 327,639
Automotive - 0.39%
Ford Motor Company,
6.27%, 1-2-2000 ....................... 45 45,106
Banks and Savings and Loans - 3.70%
First Chicago Corporation,
9.875%, 7-1-99 ........................ 150 168,479
Wells Fargo & Company,
8.375%, 5-15-2002 ..................... 250 263,668
Total ................................. 432,147
Building - 3.46%
Masco Corporation,
6.25%, 6-15-95 ........................ 400 404,620
Chemicals Specialty and Miscellaneous
Technology - 1.74%
Polaroid Corporation,
7.25%, 1-15-97......................... 200 202,980
Domestic Oil - 3.27%
BP America Inc.,
9.5%, 1-1-98 .......................... 150 164,237
Phillips Petroleum Company,
9.5%, 11-15-97 ........................ 200 217,774
Total ................................. 382,011
Drugs and Hospital Supply - 1.28%
Baxter International Inc.,
5.0%, 10-1-95 ......................... 150 148,821
Financial - 7.89%
Ford Motor Credit Company,
4.3%, 7-15-98 ......................... 304 300,216
General Motors Acceptance Corporation:
6.375%, 9-23-97 ....................... 50 49,465
7.75%, 1-15-99 ........................ 300 307,401
United States Leasing International Inc.,
8.75%, 5-1-96 ......................... 250 263,968
Total ................................. 921,050
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
LIMITED-TERM BOND FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Food and Related - 2.22%
ConAgra, Inc.,
9.75%, 11-1-97 ........................ $236 $ 259,397
Insurance - 3.58%
CIGNA Corporation,
8.0%, 9-1-96 .......................... 350 364,329
SAFECO Corporation,
10.75%, 9-15-95 ....................... 50 53,748
Total ................................. 418,077
Multi-Industry - 3.72%
ITT Corporation,
8.375%, 3-15-96 ....................... 415 434,053
Public Utilities - Electric - 0.86%
Connecticut Light & Power Company (The),
6.5%, 1-1-98 .......................... 100 100,430
Public Utilities - Pipelines - 2.82%
Tennessee Gas Pipeline Company,
9.25%, 5-15-96 ........................ 310 329,344
Railroads - 2.69%
CSX Corporation,
8.4%, 8-1-96 .......................... 300 314,223
Retailing - 5.71%
Dillard Department Stores, Inc.,
8.75%, 6-15-98 ........................ 100 107,592
Penney (J.C.) Company, Inc.,
10.0%, 10-15-97 ....................... 250 278,115
Sears, Roebuck and Co.,
8.55%, 8-1-96 ......................... 266 280,337
Total ................................. 666,044
Telecommunications - 4.06%
GTE Corporation,
8.85%, 3-1-98 ......................... 250 267,185
Southwestern Bell Telephone Company,
8.3%, 6-1-96 .......................... 100 105,297
US WEST Financial Services, Inc.,
6.75%, 11-24-97 ....................... 100 101,116
Total ................................. 473,598
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
LIMITED-TERM BOND FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Textiles and Apparel - 2.79%
Fruit of the Loom, Inc.,
7.875%, 10-15-99 ...................... $318 $ 325,123
TOTAL CORPORATE DEBT SECURITIES - 52.99% $ 6,184,663
(Cost: $6,260,016)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
6.75%, 7-15-2003 ...................... 100 101,187
5.75%, 7-15-2006 ...................... 250 232,890
6.0%, 1-1-2009 ........................ 389 366,664
6.0%, 2-1-2009 ........................ 391 368,199
5.5%, 4-15-2013 ....................... 100 97,500
5.5%, 9-15-2013 ....................... 100 99,406
6.4%, 2-15-2018 ....................... 250 241,483
Federal National Mortgage Association:
8.0%, 2-1-2008 ........................ 390 400,980
6.0%, 6-25-2014 ....................... 200 200,750
7.0%, 9-25-2020 ....................... 94 95,552
Government National Mortgage Association,
6.5%, 10-15-2008 ...................... 302 292,383
United States Treasury:
8.5%, 5-15-95 ......................... 300 312,141
4.0%, 1-31-96 ......................... 300 294,141
6.875%, 4-30-97 ....................... 400 412,812
5.625%, 8-31-97 ....................... 400 397,188
5.375%, 5-31-98 ....................... 300 292,218
5.125%, 11-30-98 ...................... 300 287,061
5.5%, 4-15-2000........................ 200 191,250
6.25%, 2-15-2003 ...................... 300 289,452
TOTAL UNITED STATES GOVERNMENT SECURITIES - 42.61% $ 4,973,257
(Cost: $5,124,836)
TOTAL SHORT-TERM SECURITIES - 0.93% $ 108,000
(Cost: $108,000)
TOTAL INVESTMENT SECURITIES - 96.53% $11,265,920
(Cost: $11,492,852)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 3.47% 405,215
NET ASSETS - 100.00% $11,671,135
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS
ARIZONA - 2.06%
City of Phoenix, Civic Improvement Corporation,
Wastewater System Lease Revenue Bonds,
Series 1993,
6.125%, 7-1-2023 ...................... $ 250 $ 265,000
City of Bullhead City, Arizona, Bullhead
Parkway Improvement District,
Improvement Bonds,
6.1%, 1-1-2013 ........................ 270 250,088
Total ................................. 515,088
ARKANSAS - 4.16%
Solid Waste Disposal Revenue Bonds
(International Paper Company Projects),
City of Pine Bluff, Arkansas,
5.55%, 10-1-2017 ...................... 500 443,750
Baxter County, Arkansas, Industrial Development
Revenue Refunding Bonds (Aeroquip Corporation
Project), Series 1993,
5.8%, 10-1-2013 ....................... 400 356,500
Pulaski County, Arkansas, Hospital Revenue
Bonds (Arkansas Children's Hospital Project),
Series 1993,
6.2%, 3-1-2022 ........................ 250 237,813
Total ................................. 1,038,063
CALIFORNIA - 3.40%
Carson Redevelopment Agency (California),
Redevelopment Project Area No. 2, Refunding
Tax Allocation Bonds, Series 1993,
6.0%, 10-1-2013 ....................... 500 456,875
Certificates of Participation, City of Upland,
California to San Antonio Community Hospital,
1993 Series,
5.0%, 1-1-2018 ........................ 500 391,875
Total ................................. 848,750
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
COLORADO - 1.17%
City and County of Denver, Colorado,
Airport System Revenue Bonds:
Series 1992C,
6.75%, 11-15-2013 ..................... $ 250 $ 239,375
Series 1991A,
0.0%, 11-15-2003 ...................... 100 52,375
Total ................................. 291,750
FLORIDA - 1.62%
Mid-Bay Bridge Authority (Florida),
Revenue Refunding Bonds, Series 1993A,
6.0%, 10-1-2013 ....................... 300 274,125
Hillsborough County, Florida, Capital
Improvement Non-Ad Valorem Revenue Bonds
(County Center Project),
Second Series 1992,
6.75%, 7-1-2022 ....................... 125 128,906
Total ................................. 403,031
GEORGIA - 3.82%
Hospital Authority of Savannah, Revenue Bonds:
Candler Hospital, Series 1992,
7.0%, 1-1-2023 ........................ 500 481,250
Saint Joseph's Hospital Project,
Series 1993,
6.2%, 7-1-2023 ........................ 500 472,500
Total ................................. 953,750
GUAM - 0.96%
Guam Power Authority, Revenue Bonds,
1992 Series A,
6.3%, 10-1-2022 ....................... 250 239,063
ILLINOIS - 7.60%
Illinois Health Facilities Authority,
Revenue Bonds, Series 1993 (OSF
Healthcare System),
5.75%, 11-15-2007 ..................... 700 666,750
City of Quincy, Adams County, Illinois,
Revenue Bonds, Series 1993
(Blessing Hospital),
6.0%, 11-15-2018 ...................... 500 450,625
Illinois Development Finance Authority,
Local Government Program Revenue Bonds,
Series 1993 (Village of Maywood Project),
6.0%, 1-1-2008 ........................ 400 383,500
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
ILLINOIS (Continued)
Metropolitan Pier and Exposition Authority
(Illinois), McCormick Place Expansion
Project Bonds, Series 1992A,
6.5%, 6-15-2027 ....................... $ 200 $ 198,750
The Illinois State Toll Highway Authority,
Toll Highway Priority Revenue Bonds,
1992 Series A,
6.375%, 1-1-2015 ...................... 200 198,250
Total ................................. 1,897,875
INDIANA - 5.54%
Indiana State Office Building Commission,
Capitol Complex Revenue Bonds (State
Office Building I Facility),
Series 1990B,
7.4%, 7-1-2015 ........................ 500 561,250
City of Sullivan, Indiana, Pollution
Control Revenue Refunding Bonds
(Indiana-Michigan Power Company Project),
Series C,
5.95%, 5-1-2009 ....................... 500 463,750
East Chicago Elementary School Building
Corporation (Lake County, Indiana),
First Mortgage Bonds, Series 1993A,
5.5%, 1-15-2016 ....................... 400 358,000
Total ................................. 1,383,000
IOWA - 1.29%
Scott County, Iowa, Refunding Certificates
of Participation (County Golf Course
Project, Series 1993),
6.2%, 5-1-2013 ........................ 340 322,575
KANSAS - 0.91%
City of Lawrence, Kansas, Multifamily
Housing Development Revenue Refunding
Bonds (Brandon Woods, Inc. Project),
Series 1993,
6.625%, 4-1-2012 ...................... 225 227,813
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
LOUISIANA - 2.86%
Parish of St. Charles, State of Louisiana:
Pollution Control Revenue Bonds (Union
Carbide Project), Series 1992,
7.35%, 11-1-2022 ...................... $ 200 $ 208,500
Solid Waste Disposal Revenue Bonds
(Louisiana Power & Light Company Project),
Series 1992-A,
7.0%, 12-1-2022 ....................... 200 203,000
Louisiana Public Facilities Authority,
Student Loan Revenue Bonds,
Series 1992A-2,
6.75%, 9-1-2006 ....................... 300 302,625
Total ................................. 714,125
MARYLAND - 7.81%
Prince George's County, Maryland,
Project and Refunding Revenue Bonds
(Dimensions Health Corporation Issue),
Series 1994,
5.375%, 7-1-2014 ...................... 1,000 866,250
Northeast Maryland Waste Disposal Authority,
Solid Waste Revenue Bonds (Montgomery
County Resource Recovery Project),
Series 1993A,
6.2%, 7-1-2010 ........................ 665 638,400
Maryland Health and Educational Facilities
Authority, Project and Refunding Revenue
Bonds, Doctors Community Hospital Issue,
Series 1993,
5.75%, 7-1-2013 ....................... 500 444,375
Total ................................. 1,949,025
MASSACHUSETTS - 4.30%
Massachusetts Water Resources Authority,
General Revenue Bonds:
1993 Series C,
5.25%, 12-1-2008 ...................... 750 692,813
1991 Series A,
6.5%, 12-1-2019 ....................... 150 164,625
Massachusetts Municipal Wholesale
Electric Company, Power Supply System
Revenue Bonds, 1992 Series B,
6.75%, 7-1-2017 ....................... 200 215,250
Total ................................. 1,072,688
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MICHIGAN - 3.40%
Michigan State Hospital Finance
Authority, Hospital Revenue Refunding
Bonds (Crittenton Hospital),
Series 1994A,
5.25%, 3-1-2014 ....................... $1,000 $ 847,500
MINNESOTA - 1.90%
City of Plymouth, Minnesota, Multifamily
Housing Revenue Bonds (Harbor Lane
Apartments Project), Series 1993,
5.95%, 9-1-2018 ....................... 500 473,125
MISSOURI - 1.28%
City of Ste. Genevieve, Missouri, Waterworks
Revenue Bonds, Series 1993,
6.6%, 2-1-2013 ........................ 250 247,188
The Industrial Development Authority of the
County of Jackson, State of Missouri,
Health Care System Revenue Bonds,
Saint Joseph Health Center Issue,
Series 1992,
6.5%, 7-1-2012 ........................ 75 72,188
Total ................................. 319,376
MONTANA - 2.24%
City of Forsyth, Rosebud County, Montana,
Pollution Control Revenue Refunding
Bonds (The Montana Power Company Colstrip
Project), Series 1993A,
6.125%, 5-1-2023 ...................... 500 460,625
Anaconda-Deer Lodge County, Montana,
Solid Waste Facility Revenue Bonds
(ARCO-Anaconda Smelter Site Project),
Series 1992,
6.375%, 10-1-2016 ..................... 100 98,500
Total ................................. 559,125
NEBRASKA - 1.94%
Nebraska Higher Education Loan Program, Inc.,
Senior Subordinate Bonds, Series A-SA,
6.2%, 6-1-2013 ........................ 500 484,375
NEVADA - 0.58%
Humboldt County, Nevada, Pollution Control
Revenue Bonds (Idaho Power Company
Project), Series 1984,
8.3%, 12-1-2014 ....................... 125 145,000
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW JERSEY - 4.06%
New Jersey Economic Development Authority:
Economic Growth Bonds,
Richard L. Tauber Composite Issue-1993
Series A,
5.4%, 10-1-2013 ....................... $ 700 $ 624,750
Economic Development Refunding Bonds
(Yellow Freight System, Inc.- 1993 Project),
6.125%, 4-1-2008 ...................... 400 388,000
Total ................................. 1,012,750
NEW YORK - 5.87%
The City of New York, General Obligation
Bonds, Fiscal 1994 Series D:
5.75%, 8-15-2012 ...................... 500 455,000
5.75%, 8-15-2007 ...................... 400 375,000
New York State Thruway Authority,
Local Highway and Bridge Service
Contract Bonds, Series 1993,
5.25%, 4-1-2013 ....................... 500 433,750
Onondaga County Resource Recovery Agency,
Project Revenue Bonds (Resource Recovery
Facility - 1992 Series),
7.0%, 5-1-2015 ........................ 200 202,250
Total ................................. 1,466,000
OHIO - 0.21%
Ohio Air Quality Development Authority,
State of Ohio, Collateralized Pollution
Control Revenue Refunding Bonds,
1989 Series B (The Toledo Edison Company
Project),
7.55%, 6-1-2023 ....................... 50 53,188
OKLAHOMA - 2.72%
Tulsa Public Facilities Authority
(Oklahoma), Assembly Center Lease Payment
Revenue Bonds, Refunding Series 1985:
6.2%, 11-1-2012 ....................... 500 475,625
6.6%, 7-1-2014 ........................ 200 202,000
Total ................................. 677,625
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
SOUTH CAROLINA - 1.20%
Charleston County, South Carolina, Industrial
Refunding Revenue Bonds, 1982 Series
(Massey Coal Terminal, South Carolina
Corporate Project), Adjustable Convertible
Extendible Securities,
2.9%, 1-1-2007 ........................ $ 300 $ 300,000
TEXAS - 7.23%
Brazos River Authority (Texas),
Variable Rate Demand, Pollution Control
Revenue Refunding Bonds (Monsanto Company
Project), Series 1994,
2.2%, 2-1-2004 ........................ 1,000 1,000,000
Sabine River Authority of Texas,
Collateralized Pollution Control
Revenue Refunding Bonds (Texas
Utilities Electric Company Project),
Series 1993B,
5.85%, 5-1-2002 ....................... 800 705,000
Alliance Airport Authority, Inc.,
Special Facilities Revenue Bonds,
Series 1991 (American Airlines, Inc.
Project),
7.0%, 12-1-2011 ....................... 100 99,250
Total ................................. 1,804,250
VIRGINIA - 3.71%
Virginia Education Loan Authority (A
Political Subdivision of the Commonwealth
of Virginia), Student Loan Program
Revenue Bonds, Series C Bonds,
5.75%, 9-1-2010 ....................... 1,000 926,250
WASHINGTON - 8.73%
Washington Public Power Supply System:
Nuclear Project No. 1, Refunding
Revenue Bonds:
Series 1989A,
6.0%, 7-1-2017 ........................ 450 420,750
Series 1994B,
7.375%, 7-1-2004 ...................... 500 545,000
Nuclear Project No. 2, Refunding
Revenue Bonds, Series 1991A,
6.0%, 7-1-2012 ........................ 190 180,025
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
WASHINGTON (Continued)
Washington Health Care Facilities
Authority, Revenue Bonds, Series 1993
(Highline Community Hospital, Seattle),
5.5%, 8-15-2014 ....................... $1,000 $ 881,250
Public Utility District No. 2 of Grant
County, Washington, Wanapum
Hydroelectric Development, Second Series
Revenue Bonds, 1992B,
6.75%, 1-1-2023 ....................... 150 153,000
Total ................................. 2,180,025
TOTAL MUNICIPAL BONDS - 92.57% $23,105,185
(Cost: $24,445,150)
SHORT-TERM SECURITIES
Banks and Savings and Loans - 0.68%
U.S. Bancorp,
Master Note............................ 170 170,000
Financial - 2.24%
Associates Corporation of North America,
Master Note............................ 560 560,000
Food and Related - 2.61%
Sara Lee Corporation,
Master Note............................ 650 650,000
TOTAL SHORT-TERM SECURITIES - 5.53% $ 1,380,000
(Cost: $1,380,000)
TOTAL INVESTMENT SECURITIES - 98.10% $24,485,185
(Cost: $25,825,150)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.90% 475,300
NET ASSETS - 100.00% $24,960,485
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
GLOBAL INCOME FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Automotive - 2.37%
Toyota Motor Credit Corporation,
6.695%, 8-5-96 ........................ $ 250 $ 243,125
Banks and Savings and Loans - 3.96%
Bayerische Landesbank Girozentrale,
5.34%, 3-28-97 ........................ $ 250 242,500
Deutsche Bank Aktiengesellschaft,
12.0%, 10-2-96 (A) .................... L250,000 165,000
Total ................................. 407,500
TOTAL CORPORATE DEBT SECURITIES - 6.33% $ 650,625
(Cost: $670,427)
OTHER GOVERNMENT SECURITIES
Australia - 7.85%
New South Wales Treasury,
8.5%, 3-1-96 (A) ...................... $A500 362,415
Queensland Treasury Corporation:
8.0%, 5-14-97 (A) ..................... $A400 286,180
12.0%, 5-15-97 (A) .................... $A200 158,878
Total ................................. 807,473
Canada - 14.83%
Province of Alberta,
8.625%, 11-27-96 ...................... $ 200 212,650
Government of Canada:
7.5%, 7-1-97 (A) ...................... $C1,000 727,880
6.25%, 2-1-98 (A) ..................... $C 350 243,229
10.75%, 3-15-98 (A) ................... $C 425 341,029
Total ................................. 1,524,788
Denmark - 2.84%
Kingdom of Denmark,
9.0%, 11-15-98 (A) .................... DKr1,750 292,355
France - 21.53%
Bon Du Tresor:
8.0%, 4-12-94 (A) ..................... F2,250 393,705
9.0%, 11-12-95 (A) .................... F1,000 183,340
8.0%, 5-12-98 (A) ..................... F4,500 844,875
0.0%, 10-25-98 (A) .................... F4,000 537,920
Credit Local de France,
5.9%, 2-23-96 ......................... $ 250 254,375
Total ................................. 2,214,215
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
GLOBAL INCOME FUND
MARCH 31, 1994
Principal
Amount in
Thousands Value
OTHER GOVERNMENT SECURITIES (Continued)
Germany - 8.19%
Bundesobligation:
7.25%, 12-20-94 (A) ................... DM550 $ 332,712
6.625%, 1-20-98 (A) ................... DM250 154,058
Bundesschatzanweisungen,
8.75%, 12-20-95 (A) ................... DM250 157,285
Kreditanstalt fur Weideraufbau,
10.6%, 5-18-98 (A) .................... L300,000 198,000
Total ................................. 842,055
Netherlands - 3.04%
Netherlands Government:
6.0%, 7-1-94 (A) ...................... Dfl300 159,705
6.5%, 10-1-94 (A) ..................... Dfl285 152,432
Total ................................. 312,137
Supranational - 4.66%
European Investment Bank,
6.75%, 5-14-98 (A) .................... F2,000 358,040
Inter-American Development Bank,
7.5%, 12-15-94 (A) .................... DM200 121,016
Total ................................. 479,056
TOTAL OTHER GOVERNMENT SECURITIES - 62.94% $ 6,472,079
(Cost: $6,695,084)
UNITED STATES GOVERNMENT SECURITIES
United States Treasury:
7.25%, 8-31-96 ........................ $1,300 1,351,181
6.875%, 4-30-97 ....................... $ 300 309,609
5.25%, 7-31-98 ........................ $ 150 145,008
4.75%, 10-31-98 ....................... $ 400 377,624
TOTAL UNITED STATES GOVERNMENT SECURITIES - 21.24% $ 2,183,422
(Cost: $2,219,764)
Face
Amount in
Thousands
UNREALIZED GAIN (LOSS) ON OPEN FORWARD
CURRENCY CONTRACTS
Canadian Dollar, 4-12-94 (A) ........... $C 500 11,423
Canadian Dollar, 11-2-94 (A) ........... $C 350 12,432
Canadian Dollar, 11-29-94 (A) .......... $C 425 15,635
Danish Krone, 3-25-96 (A) .............. DKr1,700 (4,047)
See Notes to Schedules of Investments on page .
<PAGE>
THE INVESTMENTS OF
GLOBAL INCOME FUND
MARCH 31, 1994
Face
Amount in
Thousands Value
UNREALIZED GAIN (LOSS) ON OPEN FORWARD
CURRENCY CONTRACTS (Continued)
French Franc, 5-24-94 (A) .............. F1,000 $ 3,699
French Franc, 8-4-94 (A) ............... F2,000 (15,040)
French Franc, 3-5-95 (A) ............... F3,000 (11,405)
French Franc, 3-7-95 (A) ............... F1,000 (3,296)
French Franc, 3-7-95 (A) ............... F2,500 (10,012)
TOTAL UNREALIZED LOSS ON OPEN FORWARD
CURRENCY CONTRACTS - (0.01%) $ (611)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper - 0.68%
Financial
Associates Corporation of North America,
Master Note............................ $ 70 70,000
Time Deposits
Canadian Imperial Bank of
Commerce - Grand Cayman,
4.0%, 4-11-94 (A) ..................... SFr503 356,028
Dresdner Bank AG - Grand Cayman,
5.6875%, 6-15-94 (A) .................. DM515 307,876
Total Time Deposits - 6.46% 663,904
TOTAL SHORT-TERM SECURITIES - 7.14% $ 733,904
(Cost: $757,624)
TOTAL INVESTMENT SECURITIES - 97.64% $10,039,419
(Cost: $10,342,899)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 2.36% 242,890
NET ASSETS - 100.00% $10,282,309
See Notes to Schedules of Investments on page .
<PAGE>
WADDELL & REED FUNDS, INC.
Notes to Schedules of Investments
* No income dividends were paid during the preceding 12 months.
(A) Principal amounts are denominated in the indicated foreign currency, where
applicable (L - Italian Lira, $A - Australian Dollar, $C - Canadian Dollar,
DKr - Danish Krone, F - French Franc, DM - German Mark, Dfl - Dutch
Guilder, SFr - Swiss Franc,).
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 4 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
WADDELL & REED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1994
Total Limited- Municipal Global
Return Growth Term Bond Bond Income
Fund Fund Fund Fund Fund
<TABLE>
Assets -------------------------------------------------------
Investment securities--at value
<S> <C> <C> <C> <C> <C>
(Notes 1 and 4) ... $59,858,796 $43,369,208$11,265,920$24,485,185$10,039,419
Cash ............... 3,922 7,190 484 3,943 2,765
Receivables:
Fund shares sold .. 1,917,953 1,102,327 255,517 150,996 35,960
Dividends and interest 90,382 14,500 189,942 440,277
255,906
Other ............. --- --- --- --- 2,768
Unamortized organization
expenses (Note 2) . 22,814 22,814 22,814 22,814 22,814
Prepaid insurance premium 226 226 192 226 192
-------------------------------------------------------
Total assets .... 61,894,093 44,516,265 11,734,869 25,103,441 10,359,824
Liabilities -------------------------------------------------------
Payable for investment
securities purchased --- 773,750 --- --- ---
Payable for Fund shares
redeemed .......... 85,717 158,757 26,884 82,512 44,481
Organization expenses
payable ........... 22,814 22,814 22,814 22,814 22,814
Accrued service fee . 31,546 22,003 4,480 13,456 2,847
Accrued transfer agency
and dividend disbursing 10,120 9,483 2,129 3,159 1,612
Dividends payable .. --- --- 4,789 16,768 4,928
Accrued accounting
services fee ...... 2,500 1,667 833 1,667 833
Other .............. 6,109 3,514 1,805 2,580 ---
-------------------------------------------------------
Total liabilities 158,806 991,988 63,734 142,956 77,515
-------------------------------------------------------
Total net assets $61,735,287$43,524,277$11,671,135$24,960,485$10,282,309
Net Assets =======================================================
$0.01 par value capital stock
Capital stock ..... $ 51,506$ 30,920$ 11,863$ 24,666$ 10,978
Additional paid-in
capital ......... 59,073,522 40,901,759 11,876,315 26,274,326 10,642,305
Accumulated undistributed
gain (loss):
Accumulated undistributed
net realized gain
(loss) on investment
transactions ..... (491,351) 769,052 9,889 1,458 (70,287)
Net unrealized appreciation
(depreciation) of investments
at end of period . 3,101,610 1,822,546 (226,932)(1,339,965) (302,869)
Net unrealized depreciation on
forward currency contracts --- --- --- --- (611)
Net unrealized appreciation from
foreign currency translation--- --- --- --- 2,793
-------------------------------------------------------
Net assets applicable to
outstanding units
of capital ..... $61,735,287$43,524,277$11,671,135$24,960,485$10,282,309
=======================================================
Net asset value, redemption
and offering price
per share ........... $11.99 $14.08 $ 9.84 $10.12 $9.37
====== ====== ====== ====== =====
Capital shares outstanding5,150,639 3,091,974 1,186,316 2,466,559 1,097,815
Capital shares
authorized .......... 500,000,000500,000,000500,000,000500,000,000500,000,000
See notes to financial statements.
</TABLE>
<PAGE>
WADDELL & REED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year ended March 31, 1994
Total Limited- Municipal Global
Return Growth Term Bond Bond Income
Fund Fund Fund Fund Fund
Investment Income -------------------- ------------------- --------
Income:
Interest .......... $ 87,147$ 317,264 $ 526,188$ 969,271 $547,683
Dividends ......... 661,516 3,991 --- --- ---
-------------------- -------- --------- --------
Total income .... 748,663 321,255 526,188 969,271 547,683
Expenses (Notes 2 and 3):-------------------- -------- --------- --------
Distribution fees . 274,052 174,653 70,849 129,488 70,692
Investment management fee255,556 185,715 52,456 95,328 62,024
Transfer agency and
dividend disbursing 80,832 69,730 20,235 26,507 17,286
Service fee ....... 85,722 51,486 20,588 38,870 11,997
Registration fees.. 23,941 20,387 14,987 18,704 15,235
Accounting services fee 20,000 13,333 4,167 10,833 5,833
Custodian fees .... 20,730 7,631 2,796 3,859 9,805
Amortization of organization
expenses ........ 6,518 6,518 6,518 6,518 6,518
Audit fees ........ 5,785 5,111 4,112 4,448 5,738
Legal fees ........ 3,318 1,962 1,299 1,783 1,564
Other ............. 14,962 10,755 5,076 6,439 5,090
-------------------- -------- --------- --------
Total expenses .. 791,416 547,281 203,083 342,777 211,782
-------------------- -------- --------- --------
Net investment income
(loss) ........ (42,753) (226,026) 323,105 626,494 335,901
-------------------- -------- --------- --------
Realized and Unrealized Gain
(Loss) on Investments
Realized net gain (loss)
on securities...... (472,421)1,570,093 33,900 163,024 (54,459)
Realized net loss from foreign
currency translation --- --- --- --- (30,802)
Realized net gain on forward
currency contracts --- --- --- --- 7,231
-------------------- -------- --------- --------
(472,421)1,570,093 33,900 163,024 (78,030)
-------------------- -------- --------- --------
Unrealized appreciation
(depreciation) in value
of securities during
the period ........ 2,475,374 1,574,011 (311,607)(1,533,977)(248,620)
Unrealized depreciation on
forward currency contracts --- --- --- --- (2,222)
Unrealized appreciation from
foreign currency translation --- --- --- --- 3,070
-------------------- ------------------ --------
2,475,374 1,574,011 (311,607)(1,533,977)(247,772)
-------------------- ------------------ --------
Net gain (loss) on
investments ....... 2,002,953 3,144,104 (277,707)(1,370,953)(325,802)
-------------------- ------------------ --------
Net increase (decrease)
in net assets resulting
from operations $1,960,200$2,918,078 $ 45,398$ (744,459)$ 10,099
==================== ================== ========
See notes to financial statements.
<PAGE>
WADDELL & REED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year ended March 31, 1994
Total Limited- Municipal Global
Return Growth Term Bond Bond Income
Fund Fund Fund Fund Fund
------ ------ --------- --------- ------
<TABLE>
<S> <C> <C> <C> <C> <C>
Increase in Net Assets
Operations:
Net investment income
(loss) ..........$ (42,753)$ (226,026)$ 323,105$ 626,494$ 335,901
Realized net gain (loss)
on investments ... (472,421) 1,570,093 33,900 163,024 (78,030)
Unrealized appreciation
(depreciation) .. 2,475,374 1,574,011 (311,607)(1,533,977) (247,772)
----------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations. 1,960,200 2,918,078 45,398 (744,459) 10,099
----------------------------------------------------------
Dividends to shareholders from:*
Net investment income --- --- (323,105) (626,494) (247,980)
Realized net gain
from investment
transactions ..... --- (656,864) (18,818) (253,457) ---
Tax-basis return of
capital .......... --- --- --- --- (87,921)
---------------------------------------------------------
--- (656,864) (341,923) (879,951) (335,901)
---------------------------------------------------------
Capital share
transactions** .... 47,315,309 33,287,538 5,708,291 18,028,155 3,427,061
---------------------------------------------------------
Total increase . 49,275,509 35,548,752 5,411,766 16,403,745 3,101,259
Net Assets
Beginning of period 12,459,778 7,975,525 6,259,369 8,556,740 7,181,050
---------------------------------------------------------
End of period ......$61,735,287 $43,524,277 $11,671,135$24,960,485$10,282,309
=========================================================
Undistributed net
investment income $--- $--- $--- $--- $---
==== ==== ==== ==== ====
*See "Financial Highlights" on pages 50-54.
**Shares issued from sale
of shares .......... 4,355,295 2,456,137 708,062 1,770,824 506,618
Shares issued from reinvest-
ment of dividends and/or
capital gains distributions --- 46,641 32,737 74,079 34,499
Shares redeemed ...... (329,843) (93,395) (176,690) (191,170) (185,224)
--------- --------- ------- --------- -------
Increase in outstanding
capital shares ...... 4,025,452 2,409,383 564,109 1,653,733 355,893
========= ========= ======= ========= =======
Value issued from sale
of shares ..........$51,194,063 $33,940,272 $7,164,902$19,289,336 $4,868,350
Value issued from reinvest-
ment of dividends and/or
capital gains distributions --- 656,245 330,864 805,677 330,513
Value redeemed ....... (3,878,754) (1,308,979) (1,787,475)(2,066,858)(1,771,802)
---------------------------------------------------------
Increase in outstanding
capital ............$47,315,309 $33,287,538 $5,708,291$18,028,155 $3,427,061
=========================================================
See notes to financial statements.
</TABLE>
<PAGE>
WADDELL & REED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period From September 21, 1992 Through March 31, 1993
Total Limited- Municipal Global
Return Growth Term Bond Bond Income
Fund Fund Fund Fund Fund
Increase in Net Assets ----------------------------------------- ---------
Operations:
Net investment income
(loss) ........... $ 10,205$ (15,082)$ 66,093$ 93,466$ 117,869
Realized net gain (loss)
on investments ... (18,930) 127,667 (5,193) 91,891 (92,391)
Unrealized appreciation
(depreciation) .. 626,236 248,535 84,675 194,012 (52,915)
---------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations. 617,511 361,120 145,575 379,369 (27,437)
---------------------------------------------------
Dividends to shareholders from:*
Net investment income (10,156) (3,420) (66,093) (93,466) (117,869)
Realized net gain
from investment
transactions ..... --- (27,316) --- --- ---
----------------------------------------------------
(10,156) (30,736) (66,093) (93,466) (117,869)
---------------------------------------------------
Capital share transactions**11,832,4237,625,1416,159,8878,250,8377,306,356
---------------------------------------------------
Total increase . 12,439,778 7,955,525 6,239,369 8,536,740 7,161,050
Net Assets
Beginning of period 20,000 20,000 20,000 20,000 20,000
---------------------------------------------------
End of period ...... $12,459,778$7,975,525$6,259,369$8,556,740$7,181,050
===================================================
Undistributed net
investment income $49 ($18,502) $--- $--- $---
====== ======= ==== ==== ====
*See "Financial Highlights" on pages 40-44.
**Shares issued from sale
of shares .......... 1,131,789 684,223 632,763 807,410 747,250
Shares issued from reinvest-
ment of dividends and/or
capital gains distributions 954 2,658 5,783 7,312 10,403
Shares redeemed ...... (9,556) (6,290) (18,339) (3,896) (17,731)
--------- ------- ------- ------- -------
Increase in outstanding
capital shares ...... 1,123,187 680,591 620,207 810,826 739,922
========= ======= ======= ======= ======
Value issued from sale
of shares .......... $11,926,378$7,667,750$6,284,160$8,215,099$7,376,488
Value issued from reinvest-
ment of dividends and/or
capital gains distributions 10,139 30,733 57,386 75,761 99,966
Value redeemed ....... (104,094) (73,342) (181,659) (40,023) (170,098)
---------------------------------------------------
Increase in outstanding
capital ............ $11,832,423$7,625,141$6,159,887$8,250,837$7,306,356
==================================================
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
TOTAL RETURN FUND
For a Share of Capital Stock Outstanding Throughout Each Period:
For the For the
year ended period ended
March 31, March 31,
1994 1993*
---------- ------------
Net asset value,
beginning of
period ........... $11.07 $10.00
------ ------
Income from investment
operations:
Net investment
income (loss) ... (0.01) 0.02
Net realized and
unrealized gain
on investments .. 0.93 1.07
------ ------
Total from investment
operations ....... 0.92 1.09
------ ------
Less dividends from net
investment income (0.00) (0.02)
------ ------
Net asset value,
end of period .... $11.99 $11.07
====== ======
Total return ....... 8.31% 10.91%
Net assets, end of
period (000
omitted) .......... $61,735 $12,460
Ratio of expenses
to average net
assets ........... 2.16% 2.21%**
Ratio of net investment
income to average
net assets ....... -0.12% 0.32%**
Portfolio turnover
rate ............. 17.31% 23.97%**
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993.
**Annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
GROWTH FUND
For a Share of Capital Stock Outstanding Throughout Each Period:
For the For the
year ended period ended
March 31, March 31,
1994 1993*
---------- ------------
Net asset value,
beginning of
period ........... $11.68 $10.00
------ ------
Income from investment
operations:
Net investment
loss ............ (0.04) (0.02)
Net realized and
unrealized gain
on investments .. 2.75 1.79
------ ------
Total from investment
operations ....... 2.71 1.77
------ ------
Less distributions:
Dividends from net
investment
income .......... (0.00) (0.01)
Distribution from
capital gains ... (0.31) (0.08)
------ ------
Total distributions (0.31) (0.09)
------ ------
Net asset value,
end of period .... $14.08 $11.68
====== ======
Total return ....... 23.16% 17.71%
Net assets, end of
period (000
omitted) ......... $43,524 $7,976
Ratio of expenses
to average net
assets ........... 2.34% 2.50%**
Ratio of net investment
income to average
net assets ....... -0.97% -0.68%**
Portfolio turnover
rate ............. 69.12% 124.44%**
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993.
**Annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
LIMITED-TERM BOND
For a Share of Capital Stock Outstanding Throughout Each Period:
For the For the
year ended period ended
March 31, March 31,
1994 1993*
---------- ------------
Net asset value,
beginning of
period ........... $10.06 $10.00
------ ------
Income from investment
operations:
Net investment
income .......... 0.35 0.18
Net realized and
unrealized gain
(loss) on
investments ..... (0.20) 0.06
------ ------
Total from investment
operations ....... 0.15 0.24
------ ------
Less distributions:
Dividends declared
from net investment
income .......... (0.35) (0.18)
Distribution from
capital gains ... (0.02) (0.00)
------ ------
Total distributions (0.37) (0.18)
------ ------
Net asset value,
end of period .... $ 9.84 $10.06
====== ======
Total return ....... 1.41% 2.40%
Net assets, end of
period (000
omitted) ......... $11,671 $6,259
Ratio of expenses
to average net
assets ........... 2.14% 2.15%**
Ratio of net investment
income to average
net assets ....... 3.41% 3.48%**
Portfolio turnover
rate ............. 25.90% 39.64%**
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993.
**Annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
MUNICIPAL BOND FUND
For a Share of Capital Stock Outstanding Throughout Each Period:
For the For the
year ended period ended
March 31, March 31,
1994 1993*
---------- ------------
Net asset value,
beginning of
period ........... $10.53 $10.00
------ ------
Income from investment
operations:
Net investment
income .......... 0.39 0.21
Net realized and
unrealized gain
(loss) on
investments ..... (0.28) 0.53
------ ------
Total from investment
operations ....... 0.11 0.74
------ ------
Less distributions:
Dividends declared
from net investment
income .......... (0.39) (0.21)
Distribution from
capital gains ... (0.13) (0.00)
------ ------
Total distributions (0.52) (0.21)
------ ------
Net asset value,
end of period .... $10.12 $10.53
====== ======
Total return ....... 0.76% 7.37%
Net assets, end of
period (000
omitted) ......... $24,960 $8,557
Ratio of expenses
to average net
assets ........... 1.98% 1.94%**
Ratio of net investment
income to average
net assets ....... 3.62% 3.99%**
Portfolio turnover
rate ............. 18.93% 140.02%**
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993.
**Annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
GLOBAL INCOME FUND
For a Share of Capital Stock Outstanding Throughout Each Period:
For the For the
year ended period ended
March 31, March 31,
1994 1993*
---------- -----------
Net asset value,
beginning of
period ........... $9.68 $10.00
----- ------
Income from investment
operations:
Net investment
income .......... 0.34 0.20
Net realized and
unrealized loss
on investments .. (0.31) (0.32)
----- ------
Total from investment
operations ....... 0.03 (0.12)
----- ------
Less distributions:
Dividends declared
from net investment
income .......... (0.26) (0.20)
Tax-basis return of
capital.......... (0.08) (0.00)
----- ------
Total distributions. (0.34) (0.20)
----- ------
Net asset value,
end of period .... $9.37 $ 9.68
===== ======
Total return ....... 0.33% -1.28%
Net assets, end of
period (000
omitted) ......... $10,282 $7,181
Ratio of expenses
to average net
assets ........... 2.24% 2.06%**
Ratio of net investment
income to average
net assets ....... 3.56% 3.88%**
Portfolio turnover
rate ............. 34.90% 8.35%**
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993.
**Annualized.
See notes to financial statements.
<PAGE>
WADDELL & REED FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1994
NOTE 1 -- Significant Accounting Policies
Waddell & Reed Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940 as an open-end management investment company.
The Corporation issues five classes of capital shares; each class represents
ownership of a separate mutual fund. Each Fund except Global Income Fund is a
diversified fund. The assets belonging to each Fund are held separately by the
Custodian. The capital shares of each Fund represent a pro rata beneficial
interest in the principal, net income and realized and unrealized capital gains
or losses of its respective investments and other assets. The following is a
summary of significant accounting policies consistently followed by the
Corporation 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
pricing systems provided by a major dealer in bonds or by an information
service. Convertible bonds are valued using this pricing system only on
days when there is no sale reported. Stocks which are traded over-the-
counter are priced using 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. 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 Corporation's Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market. Short-
term debt securities denominated in foreign currencies are valued at
amortized cost in that currency.
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. Interest income is recorded on the accrual basis. See Note
4 -- 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, net realized and unrealized gains and losses from foreign
currency translation arise from changes in currency exchange rates. The
Corporation combines fluctuations from currency exchange rates and
fluctuations in market value when computing net realized and unrealized
gain or loss from investments.
D. Federal income taxes -- It is the Corporation'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 Corporation intends to pay distributions as required to
avoid imposition of excise tax. Accordingly, provision has not been made
for Federal income taxes. See Note 5 -- Federal Income Tax Matters.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by each Fund on the record date. During the period ended
March 31, 1994, the Corporation adopted Statement of Position 93-2
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies.
Accordingly, permanent book and tax basis differences relating to
shareholder distributions have been reclassified to additional paid-in
capital. In addition, reclassifications have been made between accumulated
undistributed net investment income and accumulated undistributed net
realized gain on investment transactions to more appropriately conform book
and tax treatment of dividend distributions paid to shareholders. As of
April 1, 1993 and March 31, 1994, these reclassifications were as follows:
Undistributed Undistributed Additional
Net Investment Net Realized Paid-In
Income Gain Capital
-------------- ------------- ----------
April 1, 1993
Global Income Fund $ --- $ 12,214 $(12,214)
Growth Fund 18,502 (18,502) ---
March 31, 1994
Total Return Fund 42,704 --- (42,704)
Global Income Fund --- 87,921 (87,921)
Growth Fund 226,026 (226,026) ---
Net investment income, net realized gains and net assets were not affected
by this change.
NOTE 2 -- Organization
The Corporation was incorporated in Maryland on January 29, 1992 and was
inactive (except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and registration of
shares under the Securities Act of 1933) until September 21, 1992 (the date of
the initial public offering).
On April 24, 1992, Waddell & Reed, Inc. ("W&R"), the Corporation's
principal distributor and underwriter, purchased for investment 2,000 shares of
each class of the Corporation at their net asset value of $10.00 per share.
The Corporation's organizational expenses in the amount of $162,960 were
advanced to the Corporation by W&R and are an obligation to be paid by it.
These expenses are being amortized and are payable evenly over 60 months
following the date of the initial public offering.
NOTE 3 -- Investment Management And Payments To Affiliated Persons
Waddell & Reed Investment Management Company ("WRIMCO"), a wholly-owned
subsidiary of W&R, serves as the Corporation's investment manager. WRIMCO
provides advice and supervises investments for which services it is paid a fee
computed on each Fund's net assets as of the close of business each day at the
following annual rates: Total Return Fund - 0.71% of net assets, Growth Fund -
0.81% of net assets, Limited-Term Bond Fund - 0.56% of net assets, Municipal
Bond Fund - 0.56% of net assets and Global Income Fund - 0.66% of net assets.
The fee is accrued and paid daily.
The Corporation 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 Corporation and pricing daily the value of shares of the
Corporation. For these services, each of the five Funds 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 Fund
------------------------ -------------------
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
The Corporation also 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 that
month. The Corporation also reimburses W&R, WRIMCO, and WARSCO for certain out-
of-pocket costs.
The Corporation has adopted a 12b-1 plan under which W&R, principal
underwriter and sole distributor of the Corporation's shares, is compensated in
an amount calculated and payable daily up to 1% annually of each of the Fund's
average daily net assets. This fee consists of two elements: (i) up to 0.75%
may be paid to the Distributor (W&R) for distribution services and distribution
expenses including commissions paid by the Distributor to its sales
representatives and managers and (ii) up to 0.25% may be paid to reimburse the
Distributor for continuing payments made to the Distributor's representatives
and managers, its administrative costs in overseeing these payments, and the
expenses of WARSCO in providing certain personal services to shareholders.
During the period ended March 31, 1994, the Distributor received $928,397 in
12b-1 payments. During this same period W&R paid sales commissions of
$2,189,596.
A contingent deferred sales charge may be assessed against a shareholder's
redemption amount and paid to the Distributor, W&R. The purpose of the deferred
sales charge is to compensate the Distributor for the costs incurred by the
Distributor in connection with the sale of a Fund's shares. The amount of the
deferred sales charge will be the following percent of the total amount invested
during a calendar year to acquire the shares or the value of the shares
redeemed, whichever is less. Redemption at any time during the calendar year of
investment and the first full calendar year after the calendar year of
investment, 3%; the second full calendar year, 2%; the third full calendar year,
1%; and thereafter, 0%. All investments made during a calendar year shall be
deemed as a single investment during the calendar year for purposes of
calculating the deferred sales charge. The deferred sales charge will not be
imposed on shares representing payment of dividends or distributions or on
amounts which represent an increase in the value of the shareholder's account
resulting from capital appreciation above the amount paid for shares purchased
during the deferred sales charge period. During the period ended March 31,
1994, the Distributor received $106,233 in deferred sales charges.
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 4 -- Investment Securities Transactions
Investment securities transactions for the period ended March 31, 1994 are
summarized as follows:
Total Limited- Municipal Global
Return Growth Term Bond Bond Income
Fund Fund Fund Fund Fund
-----------------------------------------------------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $50,751,859$30,002,615$3,551,127$19,497,805$4,961,893
Purchases of U.S. Government
securities --- --- 4,450,189 --- 1,293,120
Purchases of short-term
securities 44,726,21394,950,896 7,344,69619,088,000 7,229,605
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 5,949,298 9,297,157 597,163 3,044,422 1,152,125
Proceeds from maturities
and sales of U.S.
Government securities --- --- 1,693,785 --- 1,441,071
Proceeds from maturities
and sales of short-term
securities 44,558,09884,009,762 7,509,51618,468,088 7,566,412
Realized gain (loss) on U.S.
Government securities --- --- 18,549 --- (24,865)
Realized loss on short-term
securities --- --- --- --- (30,936)
For Federal income tax purposes, cost of investments owned at March 31,
1994 and the related unrealized appreciation (depreciation) were as follows:
Aggregate
Appreciation
Cost AppreciationDepreciation(Depreciation)
----------- -------------------------------------
Total Return Fund $56,761,664 $4,430,055 $1,332,923 $ 3,097,132
Growth Fund 41,546,662 3,168,843 1,346,297 1,822,546
Limited-Term Bond Fund11,492,852 21,490 248,422 (226,932)
Municipal Bond Fund 25,825,150 91,686 1,431,651 (1,339,965)
Global Income Fund 10,342,899 33,626 336,495 (302,869)
NOTE 5 -- Federal Income Tax Matters
The Corporation's income and expenses attributed to each Fund and the gains
and losses on security transactions of each Fund have been attributed to that
Fund for Federal income tax purposes as well as for accounting purposes. For
Federal income tax purposes, Growth Fund, Limited-Term Bond Fund and Municipal
Bond Fund realized capital gain net income of $1,570,093, $28,708 and $163,023,
respectively, during the period ended March 31, 1994 of which a portion was paid
to shareholders during the period ended March 31, 1994. Remaining net capital
gains will be distributed to each Fund's shareholders. Total Return Fund
realized net capital losses of $486,873 during the period ended March 31, 1994,
of which $267,022 was deferred to the year ending March 31, 1995 (see discussion
below). The remaining $219,851 is available to offset future net realized
capital gains through March 31, 2002. As a result of foreign currency exchange
losses in Global Income Fund, $87,921 of the investment income dividends paid by
that Fund represent a tax-basis return of capital. In addition, the Fund
realized net capital and foreign currency exchange losses of $65,969 during the
period ended March 31, 1994, of which $49,197 was deferred to the year ending
March 31, 1995 (see discussion below). The remaining $16,772 is available to
offset future net realized capital gains through March 31, 2002.
Internal Revenue Code regulations permit each Fund to defer into its next
fiscal year net capital losses incurred between each November 1 and the end of
its next fiscal year ("post-October losses"). From November 1, 1993, through
March 31, 1994, Total Return Fund and Global Income Fund incurred net capital
losses of $267,022 and $49,197, respectively, which have been deferred to the
fiscal year ending March 31, 1995.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Waddell & Reed Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedules 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 each of the five mutual funds
comprising Waddell & Reed Funds, Inc.(the "Corporation"), issuer of the
respective five classes of capital shares (Total Return Fund, Growth Fund,
Limited-Term Bond Fund, Municipal Bond Fund and Global Income Fund) at March 31,
1994, the results of its operations for the year then ended and the changes in
its net assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at March
31, 1994 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Kansas City, Missouri
April 29, 1994
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements -- Waddell & Reed Funds, Inc.
Included in Part B:
-------------------
As of March 31, 1994
Statements of Assets and Liabilities
For the period ended March 31, 1994
Statements of Operations
For the period ended March 31, 1994
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of March 31, 1994
Report of Independent Accountants
Included in Part C:
-------------------
Consent of Independent Accountants
Other schedules prescribed by Regulation S-X are not filed because the
required matter is not present or is insignificant.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A of our report dated April 29, 1994 relating to the
financial statements and the financial highlights of Waddell & Reed Funds, Inc.,
which appears in such Statement of Additional Information. We further consent
to the references to us under the heading "Custodial and Auditing Services" in
such Statement of Additional Information and reference to us under the heading
"Financial Highlights" in the Prospectus constituting part of this Post-
Effective Amendment.
PRICE WATERHOUSE
Kansas City, Missouri
June 28, 1994
<PAGE>
(b) Exhibits:
(1) (a) Articles of Incorporation filed February 25, 1992 as Exhibit
(b)(1)(a) to the initial Registration Statement on Form N-1A*
(b) Articles of Amendment filed February 25, 1992 as Exhibit
(b)(1)(b) to the initial Registration Statement on Form N-1A*
(c) Articles of Amendment filed August 7, 1992 as Exhibit (b)(1)(c)
to the Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-1A*
(2) By-Laws filed February 25, 1992 as Exhibit (b)(2) to the initial
Registration Statement on Form N-1A*
(a) Amendment to By-Laws filed June 2, 1992 as Exhibit (b)(2)(a) to
Pre-Effective Amendment No. 1 to the initial Registration
Statement on Form N-1A*
(b) Amendment to By-Laws filed August 7, 1992 as Exhibit (b)(2)(b) to
Pre-Effective Amendment No. 2 to the Registration Statement on
Form N-1A*
(3) Not applicable
(4) Article FIFTH and Article SEVENTH of the Articles of Incorporation of
Registrant filed February 25, 1992 as Exhibit (b)(1)(a) to the initial
Registration Statement on Form N-1A*; Article II, Article VII, Article
VIII and Article XI of the Bylaws of the Registrant filed February 25,
1992 as Exhibit (b)(2) to the initial Registration Statement on Form
N-1A*
(5) Investment Management Agreement filed February 25, 1992 as Exhibit
(b)(5) to the initial Registration Statement on Form N-1A*
(6) Underwriting Agreement filed February 25, 1992 as Exhibit (b)(6) to
the initial Registration Statement on Form N-1A*
(7) Not applicable
(8) Custodian Agreements including schedule of remuneration filed February
25, 1992 as Exhibits (b)(8)(a); (b)(8)(b); (b)(8)(c); (b)(8)(d); and
(b)(8)(e) on Form SE to the initial Registration Statement on Form N-
1A*
(a) Amended Custodian Agreement filed August 7, 1992 as Exhibit
(b)(8)(c)(a) on Form SE to Pre-Effective Amendment No. 2 to the
initial Registration Statement on Form N-1A*
(b) Amendments to Custodian Agreement dated October 28, 1992 filed
February 17, 1993 as Exhibits (b)(8)(b) to Post Effective
Amendment No. 1 to the Registration Statement on Form N-1A*
(c) Amendments to Custodian Agreement dated December 9, 1992 filed
February 17, 1993 as Exhibits (b)(8)(c) to Post Effective
Amendment No. 1 to the Registration Statement on Form N-1A*
(d) Amendments to Custodian Agreement dated February 17, 1993 filed
June 23, 1993 as Exhibit (b)(8)(c) to Post-Effective Amendment
No. 2 to the Registration Statement on Form N-1A*
(9) (a) Shareholder Servicing Agreement filed February 17, 1993 as
Exhibits (b)(9)(a) to Post Effective Amendment No. 1 to the
Registration Statement on Form N-1A*
- ---------------------------------
*Incorporated herein by reference
(b) Accounting Services Agreement filed February 25, 1992 as Exhibit
(b)(9)(b) to the initial Registration Statement on Form N-1A*
(c) Fund application filed February 25, 1992 as Exhibit (b)(9)(c) on
Form SE to the initial Registration Statement on Form N-1A*
(10) Opinion and Consent of Counsel filed February 25, 1992 as Exhibit
(b)(10) on Form SE to the initial Registration Statement on Form N-1A*
(11) Not applicable
(12) Not applicable
(13) Agreement with initial shareholder, Waddell & Reed, Inc. filed June 2,
1992 as Exhibit (b)(13) to Pre-Effective Amendment NO. 1 to the
initial Registration Statement on Form N-1A*
(14) (a) Individual Retirement Plan Agreement filed February 25, 1992 as
Exhibit (b)(14)(a) on Form SE to the initial Registration
Statement on Form N-1A*
(b) Simplified Employee Pension Plan filed February 25, 1992 as
Exhibit (b)(14)(b) on Form SE to the initial Registration
Statement on Form N-1A*
(c) Tax Sheltered Account for Employees of Public and Private Schools
and Tax-Exempt Organizations filed February 25, 1992 as Exhibit
(b)(14)(c) on Form SE to the initial Registration Statement on
Form N-1A*
(d) Tax Sheltered Keogh Retirement Plan for self-employed
individuals, sole proprietors and common partnerships filed
February 25, 1992 as Exhibit (b)(14)(d) on Form SE to the initial
Registration Statement on Form N-1A*
(e) Defined Contribution Plan filed February 25, 1992 as Exhibit
(b)(14)(e) on Form SE to the initial Registration Statement on
Form N-1A*
(f) 457 Plan for Public Employees filed February 25, 1992 as Exhibit
(b)(14)(f) on Form SE to the initial Registration Statement on
Form N-1A*
(g) 401(k) Plan for Public Employees filed February 25, 1992 as
Exhibit (b)(14)(g) on Form SE to the initial Registration
Statement on Form N-1A*
(15) Distribution and Service Plan filed February 25, 1992 as Exhibit
(b)(15) to the initial Registration Statement on Form N-1A*
(16) Schedule for computation of average annual total return performance
quotation filed February 12, 1993 as Exhibit (b)(16) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A*
Computation of yield performance quotation filed February 12, 1993 as
Exhibit (b)(16) on Form SE to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A*
(17) Not applicable
25. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
- ---------------------------------
*Incorporated herein by reference
26. Number of Holders of Securities
-------------------------------
Number of Record Holders as of
Title of Class March 31, 1994
-------------- ------------------------------
Common 14,750
27. Indemnification
---------------
Reference is made to Article 10.2 of the Articles of Incorporation of
Registrant filed February 25, 1992 as Exhibit (b)(1) to the initial
Registration Statement on Form N-1A*, Article IX of the Bylaws filed
February 25, 1992 as Exhibit (b)(2) to the initial Registration Statement
on Form N-1A* and to Article V of the Underwriting Agreement filed February
25, 1992 as Exhibit (b)(6) to the initial Registration Statement on Form N-
1A*, each of which provides indemnification. Also refer to Section 2-418
of the Maryland General Corporation Law regarding indemnification of
directors, officers, employees and agents.
28. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the Investment Manager of
the Registrant under the terms of an Investment Management Agreement
whereby it provides investment management services to the Registrant.
Waddell & Reed Investment Management Company is not engaged in any business
other than the provision of investment management services to those
registered investment companies as described in Part A and Part B of this
Post-Effective Amendment.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to Part A and Part B of this Post-Effective
Amendment.
29. Principal Underwriter and Distributor
-------------------------------------
(a) Waddell & Reed, Inc. is the principal underwriter and distributor of
the Registrant's shares. It is also the principal underwriter to the
following investment companies:
United Funds, Inc.
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
TMK/United Funds, Inc.
and is depositor of the following unit investment trusts:
United Periodic Investment Plans to acquire shares of United Science
and Energy Fund
- ---------------------------------
*Incorporated herein by reference
United Periodic Investment Plans to acquire shares of United
Accumulative Fund
United Income Investment Programs
United International Growth Investment Programs
United Continental Income Investment Programs
United Vanguard Investment Programs
(b) The information contained in the underwriter's application on form BD,
under the Securities Exchange Act of 1934, is herein incorporated by
reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or an
affiliated person of such affiliated person.
30. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940
and rules promulgated thereunder are under the possession of Mr. Rodney O.
McWhinney and Mr. Robert L. Hechler, as officers of the Registrant, each of
whose business address is Post Office Box 29217, Shawnee Mission, Kansas
66201-9217.
31. Management Services
-------------------
There are no service contracts other than as discussed in Part A and B of
this Post-Effective Amendment and listed in response to Items (b)(9) and
(b)(15) hereof.
32. Not applicable
--------------
(a) Not applicable
(b) Not applicable
(c) The Fund agrees to furnish to each person to whom a prospectus is
delivered a copy of the Fund's latest annual report to shareholders
upon request and without charge.
(d) To the extent that Section 16(c) of the Investment Company Act of
1940, as amended, applies to the Fund, the Fund agrees, if requested
in writing by the shareholders of record of not less than 10% of the
Fund's outstanding shares, to call a meeting of the shareholders of
the Fund for the purpose of voting upon the question of removal of any
director.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, the Registrant (certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment pursuant to
Rule 485(b) of the Securities Act of 1933) and has duly caused this Post-
Effective Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Overland Park, and State of Kansas, on the 28th
day of June 1994.
WADDELL & REED FUNDS, INC.
(Registrant)
By /s/ Keith A. Tucker*
------------------------
Keith A. Tucker, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
Signatures Title
---------- -----
/s/Ronald K. Richey* Chairman of the Board June 28, 1994
- ---------------------- ----------------
Ronald K. Richey
/s/Keith A. Tucker* President and Director June 28, 1994
- ---------------------- (Principal Executive Officer) ----------------
Keith A. Tucker
/s/Theodore W. Howard* Vice President, Treasurer June 28, 1994
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/Robert L. Hechler* Vice President and June 28, 1994
- ---------------------- Principal Financial ----------------
Robert L. Hechler Officer
/s/Henry L. Bellmon* Director June 28, 1994
- ---------------------- ----------------
Henry L. Bellmon
/s/Dodds I. Buchanan* Director June 28, 1994
- --------------------- ----------------
Dodds I. Buchanan
/s/Jay B. Dillingham* Director June 28, 1994
- -------------------- ----------------
Jay B. Dillingham
/s/John F. Hayes* Director June 28, 1994
- ------------------- ----------------
John F. Hayes
Director
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director June 28, 1994
- ------------------- ----------------
William T. Morgan
/s/Doyle Patterson* Director June 28, 1994
- ------------------- ----------------
Doyle Patterson
/s/Frederick Vogel, III* Director June 28, 1994
- ------------------- ----------------
Frederick Vogel, III
/s/Paul S. Wise* Director June 28, 1994
- ------------------- ----------------
Paul S. Wise
/s/Leslie S. Wright* Director June 28, 1994
- ------------------- ----------------
Leslie S. Wright
*By
Rodney O. McWhinney
Attorney-in-Fact
ATTEST:
Sharon K. Pappas
Vice President and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED FUNDS,
INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND, INC.,
UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., TMK/UNITED FUNDS, INC., WADDELL & REED
FUNDS, INC., TORCHMARK INSURED TAX-FREE FUND, INC. AND TORCHMARK GOVERNMENT
SECURITIES FUND, INC. (each hereinafter called the "Corporation"), and certain
directors and officers for the Corporation, do hereby constitute and appoint
KEITH A. TUCKER, ROBERT L. HECHLER, and RODNEY O. MCWHINNEY, and each of them
individually, their true and lawful attorneys and agents to take any and all
action and execute any and all instruments which said attorneys and agents may
deem necessary or advisable to enable each Corporation to comply with the
Securities Act of 1933 and/or the Investment Company Act of 1940, as amended,
and any rules, regulations, orders or other requirements of the United States
Securities and Exchange Commission thereunder, in connection with the
registration under the Securities Act of 1933 and/or the Investment Company Act
of 1940, as amended, including specifically, but without limitation of the
foregoing, power and authority to sign the names of each of such directors and
officers in his behalf as such director or officer has indicated below opposite
his signature hereto, to any amendment or supplement to the Registration
Statement filed with the Securities and Exchange Commission under the Securities
Act of 1933 and/or the Investment Company Act of 1940, as amended, and to any
instruments or documents filed or to be filed as a part of or in connection with
such Registration Statement; and each of the undersigned hereby ratifies and
confirms all that said attorneys and agents shall do or cause to be done by
virtue hereof.
Date: May 1, 1993 /s/Keith A. Tucker
--------------------------
Keith A. Tucker, President
/s/Ronald K. Richey Chairman of the Board May 1, 1993
- -------------------- --------------------
Ronald K. Richey
/s/Keith A. Tucker President and Director May 1, 1993
- -------------------- (Principal Executive Officer) --------------------
Keith A. Tucker
/s/Theodore W. Howard Vice President, Treasurer May 1, 1993
- -------------------- and Principal Accounting --------------------
Theodore W. Howard Officer
/s/Robert L. Hechler Vice President and May 1, 1993
- -------------------- Principal Financial --------------------
Robert L. Hechler Officer
/s/Henry L. Bellmon Director May 1, 1993
- -------------------- --------------------
Henry L. Bellmon
/s/Dodds I. Buchanan Director May 1, 1993
- -------------------- --------------------
Dodds I. Buchanan
/s/Jay B. Dillingham Director May 1, 1993
- -------------------- --------------------
Jay B. Dillingham
/s/John F. Hayes Director May 1, 1993
- -------------------- --------------------
John F. Hayes
Director
- -------------------- --------------------
Glendon E. Johnson
/s/William T. Morgan Director May 1, 1993
- -------------------- --------------------
William T. Morgan
/s/Doyle Patterson Director May 1, 1993
- -------------------- --------------------
Doyle Patterson
/s/Frederick Vogel, III Director May 1, 1993
- -------------------- --------------------
Frederick Vogel, III
/s/Paul S. Wise Director May 1, 1993
- -------------------- --------------------
Paul S. Wise
/s/Leslie S. Wright Director May 1, 1993
- -------------------- --------------------
Leslie S. Wright
Attest:
/s/Sharon K. Pappas
- --------------------------------
Sharon K. Pappas, Vice President
and Secretary
June 28, 1994
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N. W.
Judiciary Plaza
Washington, D. C. 20549
Re: Waddell & Reed Funds, Inc.
Post-Effective Amendment No. 3
Dear Sir or Madam:
In connection with the filing of the above-referenced Post-Effective Amendment,
I hereby represent that the Amendment does not contain disclosures which would
render it ineligible to become effective pursuant to paragraph (b) of Rule 485.
Yours truly,
Rodney O. McWhinney
General Counsel
ROM:sw
