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. 11
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 11
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
- ---------------------------------------------------------------------------
Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
- ---------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
__X__ on June 30, 1999 pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
==================================================================
DECLARATION REQUIRED BY RULE 24f-2 (a) (1)
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 ended March 31, 1999 will be filed on or about June 25, 1999.
<PAGE>
Waddell & Reed Funds, Inc.
Waddell & Reed Funds, Inc. (the "Corporation") is a management investment
company that has eight separate funds (the "Funds"), each of which is designed
for investors with different goals.
Asset Strategy Fund seeks high total return over the long term.
Growth Fund seeks capital appreciation.
High Income Fund seeks, as a primary goal, high current income with a secondary
goal of capital growth.
International Growth Fund seeks, as a primary goal, long-term appreciation of
capital, with a secondary goal of current income.
Limited-Term Bond Fund seeks a high level of current income consistent with
preservation of capital.
Municipal Bond Fund seeks to provide income that is not subject to Federal
income tax.
Science and Technology Fund seeks long-term capital growth through investment in
a portfolio emphasizing science and technology securities.
Total Return Fund seeks to provide current income while seeking capital growth.
The Securities and Exchange Commission has not approved or disapproved the
Fund's securities, or determined whether this Prospectus is accurate or
adequate. It is a criminal offense to state otherwise.
Prospectus
June 30, 1999
<PAGE>
Table of Contents
AN OVERVIEW OF THE FUNDS.......................................................4
ASSET STRATEGY FUND ........................................................4
PERFORMANCE ................................................................6
FEES AND EXPENSES ..........................................................8
GROWTH FUND ...............................................................10
PERFORMANCE ...............................................................11
FEES AND EXPENSES .........................................................13
HIGH INCOME FUND ..........................................................15
PERFORMANCE ...............................................................17
FEES AND EXPENSES .........................................................19
INTERNATIONAL GROWTH FUND .................................................21
PERFORMANCE ...............................................................22
FEES AND EXPENSES .........................................................24
LIMITED-TERM BOND FUND ....................................................26
PERFORMANCE ...............................................................27
FEES AND EXPENSES .........................................................29
MUNICIPAL BOND FUND .......................................................31
PERFORMANCE ...............................................................33
FEES AND EXPENSES .........................................................35
SCIENCE AND TECHNOLOGY FUND ...............................................37
PERFORMANCE ...............................................................39
FEES AND EXPENSES .........................................................41
TOTAL RETURN FUND .........................................................43
PERFORMANCE ...............................................................45
FEES AND EXPENSES .........................................................47
THE INVESTMENT PRINCIPLES OF THE FUNDS........................................49
Investment Goals, Principles Strategies and Other Investments..............49
All Funds .................................................................56
Risk Considerations of Principal Strategies and Other Investments...56
Year 2000 and Euro Issues ..............................................57
YOUR ACCOUNT..................................................................58
Choosing a Share Class.....................................................61
Ways to Set Up Your Account................................................61
Buying Shares..............................................................62
Minimum Investments........................................................65
Adding to Your Account.....................................................66
Selling Shares.............................................................66
Telephone Transactions ....................................................69
Shareholder Services ......................................................70
Personal Service .......................................................70
Reports ................................................................70
Exchanges ..............................................................70
Automatic Transactions for Class B Shareholders ........................71
Distributions and Taxes....................................................71
Distributions...........................................................71
Taxes...................................................................72
THE MANAGEMENT AND EXPENSES OF THE FUNDS......................................75
Portfolio Management.......................................................75
Management Fee.............................................................77
FINANCIAL HIGHLIGHTS..........................................................80
<PAGE>
An Overview of the Funds
Asset Strategy Fund
Goal
Asset Strategy Fund seeks high total return over the long term.
Principal Strategies
Asset Strategy Fund seeks to achieve its goal by allocating its assets among
stocks, bonds of any quality including junk bonds (rated BB and below by
Standard & Poor's ("S&P") and Ba and below by Moody's Investors Services
("MIS")) and short-term instruments, both in the United States and abroad. The
Fund can invest in securities of companies of any size. The Fund selects a mix
which represents the way the Fund's investments will generally be allocated over
the long term as indicated in the box below. This mix will vary over shorter
time periods as Waddell & Reed Investment Management Company ("WRIMCO"), the
Fund's investment manager, changes the Fund's holdings based on WRIMCO's current
outlook for the different markets. These changes may be based on such factors as
interest rate changes, security valuation levels and a rise in the potential for
growth stocks.
Mix
Stocks 70% Bonds 25%
(can range (can range
from from
0-100%) 0-100%)
Short-term 5%
(can range from
0-100%)
Principal Risks of Investing in the Fund
Because Asset Strategy Fund owns different types of investments, a variety of
factors can affect its investment performance, such as:
o an increase in interest rates, which may cause the value of the Fund's
fixed-income securities to decline;
o prepayment of higher-yielding bonds held by the Fund;
o the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline; and
o the skill of WRIMCO in allocating the Fund's assets among different types of
investments.
Market risk for small- or medium-sized companies may be greater than that for
large companies. Smaller companies are more likely to have limited financial
resources and inexperienced management. Additionally, stock of smaller companies
may experience volatile trading and price fluctuations. Investments by the Fund
in "junk bonds" are more susceptible to the risk of non-payment or default, and
their prices may be more volatile, than higher-rated bonds.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
Asset allocation funds are designed for investors who want to diversify among
stocks, bonds and short-term instruments, in one fund. If you are looking for an
investment that uses this technique in pursuit of high total return, this Fund
may be appropriate for you.
<PAGE>
Performance
The chart and table below provide some indication of the risks of investing in
Asset Strategy Fund by showing changes in the Fund's performance from year to
year and by showing how the Fund's average annual returns for 1 year and the
life of the Fund compare with those of a broad measure of market performance.
o The chart presents the total annual returns for Class B and shows how
performance has varied from year to year over the life of the Fund.
o The table shows Class B and Class Y average annual returns and compares them
to the market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1996 3.92%
1997 10.84%
1998 8.64%
In the period shown in the chart, the highest quarterly return was
11.10% (the second quarter of 1997) and the lowest quarterly return was
-4.97% (the first quarter of 1997). The Class B return for the fiscal
year ended March 31, 1999 was 1.79%.
The chart does not reflect any deferred sales charge that you may be
required to pay upon redemption of the Fund's Class B shares. If the
deferred sales charge were included, the returns would be less than
those shown. Class Y shares are not subject to a deferred sales charge.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year Life of Fund*
Class B Shares of Asset
Strategy Fund 5.64% 6.99%
S&P 500 Index 28.70% 29.35%
Salomon Brothers Broad
Investment Grade Debt Index 8.71% 9.06%
Salomon Brothers Short-Term
Index for 1 Month Certificates
of Deposit 5.67% 5.70%
Lipper All Flexible Portfolio
Funds Universe Average 14.22% 17.36%
*The Fund commenced operations on April 20, 1995, with a single class of shares
that was subsequently designated Class B shares. Because the Fund commenced
operations on a date other than at the end of a month, and partial month
calculations of the performance of all the indexes are not available, the
investments were effected as of April 30, 1995.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year Life of Class**
Class Y Shares of Asset
Strategy Fund 9.57% 8.66%
S&P 500 Index 28.70% 28.30%
Salomon Brothers Broad
Investment Grade Debt Index 8.71% 7.29%
Salomon Brothers Short-Term
Index for 1 Month Certificates
of Deposit 5.67% 5.63%
Lipper All Flexible Portfolio
Funds Universe Average 14.22% 15.52%
The indexes shown are broad-based, securities market indexes that are unmanaged.
The Lipper average is a composite of mutual funds with goals similar to the goal
of the Fund.
**Since December 29, 1995, the date on which Class Y shares were first acquired
by shareholders. Because the Fund commenced operations on a date other than
at the end of a month, and partial month calculations of the performance of
all the indexes are not available, the investments were effected as of
December 31, 1995.
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of Asset Strategy Fund:
Shareholder Fees
(fees paid directly from Class B Class Y
your investment) ------- -------
Maximum Sales Charge(Load)
Imposed on Purchases
(as a percentage
of offering price) None None
Maximum Contingent Deferred
Sales Charge (Load) 3% None
(as a percentage of
lesser of amount invested
or redemption value)(1)
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends None None
(and other Distributions)
Redemption Fees None None
(other than contingent
deferred sales charge)
Exchange Fee None None
Maximum Account Fee None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.% 0.%
Distribution and
Service (12b-1) Fees(2) 0.% 0.%
Other Expenses 0.% 0.%
Total Annual Fund
Operating Expenses 0.% 0.%
- ----------
(1) The contingent deferred sales charge, which is imposed on redemption
proceeds, declines 1% annually from 3% of the amount invested during the
first calendar year to 0% after 4 years. See "Your Account" for further
information about the contingent deferred sales charge applicable to Class
B shares.
(2) It is possible that long-term Class B shareholders of the Fund may bear
12b-1 distribution fees which are more than the maximum front-end sales
charge permitted under the rules of the National Association of Securities
Dealers, Inc.
Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class B or Class Y
shares for each time period specified, (b) your investment has a 5% return each
year, and (c) the expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
Assuming Assuming
Redemption No Redemption
at End of at End of
Each Period Each Period
----------- -------------
Class B Class Y Class B Class Y
------- ------- ------- -------
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
For a more complete discussion of certain expenses and fees, see "Management
Fee."
<PAGE>
Growth Fund
Goals
Growth Fund seeks capital appreciation.
Principal Strategies
Growth Fund seeks to achieve its goal by investing primarily in common stocks of
U.S. and foreign companies. The Fund typically invests in companies that offer,
in the opinion of WRIMCO, above average growth potential, including relatively
new or unseasoned companies.
Principal Risks of Investing in the Fund
Because Growth Fund owns different types of investments, a variety of factors
can affect its investment performance, such as:
o the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
o the mix of securities in the Fund, particularly the relative weightings in,
and exposure to, different sectors and industries; and
o WRIMCO's skill in evaluating and selecting securities for the Fund.
Also, the Fund may invest, to a lesser degree, in foreign securities, which
present additional risks such as currency fluctuations and political or economic
conditions affecting the foreign country.
Market risk for small- and medium-sized companies may be greater than that for
large companies. Stock of smaller companies, as well as stock of companies with
high-growth expectations reflected in their stock price, may experience volatile
trading and price fluctuations.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
Growth Fund is designed for investors seeking long-term capital appreciation,
and are willing to accept greater risks than are present with many other mutual
funds. It is not intended for investors who desire assured income and
conservation of capital. You should consider whether the Fund fits your
particular investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the risks of investing in
Growth Fund by showing changes in the Fund's performance from year to year and
by showing how the Fund's average annual returns for 1 year, 5 years and life of
the Fund compare with those of a broad measure of market performance.
o The chart presents the total annual returns for Class B and shows how
performance has varied from year to year over the life of the Fund.
o The table shows Class B and Class Y average annual returns and compares them
to the market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1993 24.20%
1994 12.75%
1995 32.14%
1996 2.30%
1997 21.12%
1998 44.57%
In the period shown in the chart, the highest quarterly return was
28.82% (the fourth quarter of 1998) and the lowest quarterly return was
-13.74% (the third quarter of 1998). The Class B return for the fiscal
year ended March 31, 1999 was 44.57%.
The chart does not reflect any deferred sales charge that you may be
required to pay upon redemption of the Fund's Class B shares. If the
deferred sales charge were included, the returns would be less than
those shown. Class Y shares are not subject to a deferred sales charge.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year 5 Years Life of Fund*
---------------------------------------------
Class B Shares of Growth Fund 41.57% 21.69% 24.30%
Nasdaq Industrials Index 6.62% 10.11% 12.61%
Lipper Small Company Growth Fund
Universe Average -0.29% 12.92% 15.78%
* The Fund commenced operations on September 21, 1992 with a single class of
shares that was subsequently designated Class B shares. Because the Fund
commenced operations on a date other than at the end of a month, and partial
month calculations of the performance of all the indexes are not available,
the investments were effected as of September 30, 1992.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year Life of Class**
------ ---------------
Class Y Shares of Growth Fund 45.88% 22.72%
Nasdaq Industrials Index 6.62% 10.58%
Lipper Small Company Growth Fund
Universe Average -0.29% 12.73%
The indexes shown are broad-based, securities market indexes that are unmanaged.
The Lipper average is a composite of mutual funds with goals similar to the goal
of the Fund.
** Since December 29, 1995, the date on which Class Y shares were first acquired
by shareholders. Because the Fund commenced operations on a date other than
at the end of a month, and partial month calculations of the performance of
all the indexes are not available, the investments were effected as of
December 31, 1995.
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of Growth Fund:
Shareholder Fees
(fees paid directly from Class B Class Y
your investment) ------- -------
Maximum Sales Charge(Load)
Imposed on Purchases
(as a percentage
of offering price) None None
Maximum Contingent Deferred
Sales Charge (Load) 3% None
(as a percentage of
lesser of amount invested
or redemption value)3
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends None None
(and other Distributions)
Redemption Fees None None
(other than contingent
deferred sales charge)
Exchange Fee None None
Maximum Account Fee None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.% 0.%
Distribution and
Service (12b-1) Fees4 0.% 0.%
Other Expenses 0.% 0.%
Total Annual Fund
Operating Expenses 0.% 0.%
- ----------
(3) The contingent deferred sales charge, which is imposed on redemption
proceeds, declines 1% annually from 3% of the amount invested during the
first calendar year to 0% after 4 years. See "Your Account" for further
information about the contingent deferred sales charge applicable to Class B
shares.
(4) It is possible that long-term Class B shareholders of the Fund may bear
12b-1 distribution fees which are more than the maximum front-end sales
charge permitted under the rules of the National Association of Securities
Dealers, Inc. For a more complete discussion of certain expenses and fees,
see "Management Fee."
Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class B or Class Y
shares for each time period specified, (b) your investment has a 5% return each
year, and (c) the expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
Assuming Assuming
Redemption No Redemption
at End of at End of
Each Period Each Period
----------- -------------
Class B Class Y Class B Class Y
------- ------- ------- -------
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
For a more complete discussion of certain expenses and fees, see "Management
Fee."
<PAGE>
High Income Fund
Goals
High Income Fund seeks, as a primary goal, high current income. As a secondary
goal, the Fund seeks capital growth when consistent with its primary goal.
Principal Strategies
High Income Fund seeks to achieve its goals by investing primarily in
high-yield, high-risk, fixed-income securities of U.S. and foreign issuers, the
risks of which are, in the judgment of WRIMCO, consistent with the Fund's goals.
The Fund invests primarily in lower quality bonds, commonly called "junk bonds,"
which are bonds rated BB and below by S&P and Ba and below by MIS. The Fund may
also invest a significant portion of its assets in common or preferred stock in
order to seek capital growth.
Principal Risks of Investing in the Fund
Because High Income Fund owns different types of investments, a variety of
factors can affect its investment performance, such as:
o the credit quality, earnings performance and other conditions of the
companies whose securities the Fund holds;
o the susceptibility of junk bonds to the risk of non-payment or default, that
they may have more volatile prices, and may not be as liquid as higher-rated
bonds;
o an increase in interest rates, which may cause the value of a bond held by
the Fund to decline;
o changes in the maturities of bonds owned by the Fund;
o adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline; and
o the skill of WRIMCO in evaluating and managing the interest rate and credit
risks of the Fund's portfolio.
The Fund can invest in companies of any size. Market risk for small- or
medium-sized companies may be greater than that for large companies. For
example, smaller companies may have limited financial resources, limited product
lines or inexperienced management.
Investments in foreign securities present additional risks such as currency
fluctuations and political or economic conditions affecting the foreign country.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
High Income Fund is designed for investors who primarily seek a level of current
income that is higher than is normally available with securities in the higher
rated categories and, secondarily, seek capital growth where consistent with
this income goal, through a diversified, actively managed portfolio. The Fund is
not suitable for all investors. You should consider whether the Fund fits
your particular investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the risks of investing in
High Income Fund by showing changes in the Fund's performance from year to year
and by showing how the Fund's average annual returns for 1 year and life of the
Fund compare with those of a broad measure of market performance.
o The chart presents the total annual returns for Class B and shows how
performance has varied from year to year over the life of the Fund.
o The table shows Class B and Class Y average annual returns and compares them
to the market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1998 3.64%
In the period shown in the chart, the highest quarterly return was
6.82% (the first quarter of 1998) and the lowest quarterly return was
-6.62% (the third quarter of 1998). The Class B return for the fiscal
year ended March 31, 1999 was -1.72%.
The chart does not reflect any deferred sales charge that you may be
required to pay upon redemption of the Fund's Class B shares. If the
deferred sales charge were included, the returns would be less than
those shown. Class Y shares are not subject to a deferred sales charge.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year Life of Fund*
------ -------------
Class B Shares of High
Income Fund 0.72% 3.81%
Salomon Brothers High
Yield Composite Index 4.04% 6.44%
Lipper High Current Yield
Fund Universe Average -0.41% 2.32%
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year Life of Fund*
------ -------------
Class Y Shares of High
Income Fund NA% NA%
Salomon Brothers High
Yield Composite Index 4.04% NA%
Lipper High Current Yield
Fund Universe Average -0.41% NA%
The index shown is a broad-based, securities market index that is unmanaged. The
Lipper average is a composite of mutual funds with goals similar to the goals of
the Fund.
*The Fund, offering both Class B and Class Y shares, commenced operations on
July 31, 1997.
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of High Income Fund:
Class B Class Y
------- -------
Shareholder Fees
(fees paid directly from
your investment)
Maximum Sales Charge(Load)
Imposed on Purchases
(as a percentage
of offering price) None None
Maximum Contingent Deferred
Sales Charge (Load) 3% None
(as a percentage of
lesser of amount invested
or redemption value)(5)
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends None None
(and other Distributions)
Redemption Fees None None
(other than contingent
deferred sales charge)
Exchange Fee None None
Maximum Account Fee None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.% 0.%
Distribution and
Service (12b-1) Fees(6) 0.% 0.%
Other Expenses 0.% 0.%
Total Annual Fund
Operating Expenses 0.% 0.%
- ----------
(5) The contingent deferred sales charge, which is imposed on redemption
proceeds, declines 1% annually from 3% of the amount invested during the first
calendar year to 0% after 4 years. See "Your Account" for further information
about the contingent deferred sales charge applicable to Class B shares.
(6) It is possible that long-term Class B shareholders of the Fund may bear
12b-1 distribution fees which are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc.
Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class B or Class Y
shares for each time period specified, (b) your investment has a 5% return each
year, and (c) the expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
Assuming Assuming
Redemption No Redemption
at End of at End of
Each Period Each Period
----------- -------------
Class B Class Y Class B Class Y
------- ------- ------- -------
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
For a more complete discussion of certain expenses and fees, see "Management
Fee."
<PAGE>
International Growth Fund
Goals
International Growth Fund seeks, as a primary goal, long-term appreciation of
capital. As a secondary goal, the Fund seeks current income.
Principal Strategies
International Growth Fund seeks to achieve its goals by investing primarily in
common stocks of foreign companies that WRIMCO believes have the potential for
long-term growth. The Fund may also invest in preferred stocks, convertible
securities and in fixed-income securities.
Principal Risks of Investing in the Fund
Because International Growth Fund owns different types of investments, a variety
of factors can affect its investment performance, such as:
o changes in foreign exchange rates, which may affect the value of the
securities the Fund holds;
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
o the earnings performance, credit quality and other conditions of the issuers
whose securities the Fund holds; and
o WRIMCO's skill in evaluating and selecting securities for the Fund.
Investing in foreign securities presents additional risks, such as currency
fluctuations and political or economic conditions affecting the foreign country.
Accounting and disclosure standards also differ from country to country, which
makes obtaining reliable research information more difficult. There is the
possibility that, under unusual international monetary or political conditions,
the Fund's assets might be more volatile than would be the case with other
investments.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
International Growth Fund is designed for investors seeking long-term
appreciation of capital by investing primarily in securities issued by foreign
companies and governments. You should consider whether the Fund fits your
investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the risks of investing in
International Growth Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual returns for 1 year, 5 years
and life of the Fund compare with those of a broad measure of market
performance.
o The chart presents the total annual returns for Class B and shows how
performance has varied from year to year over the life of the Fund.
o The table shows Class B and Class Y average annual returns and compares them
to the market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1993 3.62%
1994 0.12%
1995 8.34%
1996 19.11%
1997 16.89%
1998 31.72%
In the period shown in the chart, the highest quarterly return was
23.89% (the first quarter of 1998) and the lowest quarterly return was
-18.21% (the third quarter of 1998). The Class B return for the fiscal
year ended March 31, 1999 was 10.36%.
The chart does not reflect any deferred sales charge that you may be
required to pay upon redemption of the Fund's Class B shares. If the
deferred sales charge were included, the returns would be less than
those shown. Class Y shares are not subject to a deferred sales charge.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year 5 Years Life of Fund*
---------------------------------------------
Class B Shares of International
Growth Fund 28.72% 14.74% 11.56%
Morgan Stanley Capital
International E.A.FE. Index 20.00% 9.19% 8.81%
Lipper International
Fund Universe Average 13.02% 7.80% 9.99%
* The Fund commenced operations on September 21, 1992 with a single class of
shares that was subsequently designated Class B shares. Because the Fund
commenced operations on a date other than at the end of a month, and partial
month calculations of the performance of all the indexes are not available,
the investments were effected as of September 30, 1992.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year Life of Class**
------ ---------------
Class Y Shares of International
Growth Fund 32.94% 23.45%
Morgan Stanley Capital
International E.A.FE. Index 20.00% 9.00%
Lipper International
Fund Universe Average 13.02% 9.93%
The index shown is a broad-based, securities market index that is unmanaged. The
Lipper average is a composite of mutual funds with goals similar to the goal of
the Fund.
**Since December 2, 1995, the date on which Class Y shares were first acquired
by the public. Because the Fund commenced operations on a date other than at the
end of a month, and partial month calculations of the performance of all the
indexes are not available, the investments were effected as of December 30,
1995.
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of International Growth Fund:
Shareholder Fees
(fees paid directly from Class B Class Y
your investment) ------- -------
Maximum Sales Charge(Load)
Imposed on Purchases
(as a percentage
of offering price) None None
Maximum Contingent Deferred
Sales Charge (Load) 3% None
(as a percentage of
lesser of amount invested
or redemption value)(7)
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends None None
(and other Distributions)
Redemption Fees None None
(other than contingent
deferred sales charge)
Exchange Fee None None
Maximum Account Fee None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.% 0.%
Distribution and
Service (12b-1) Fees(8) 0.% 0.%
Other Expenses 0.% 0.%
Total Annual Fund
Operating Expenses 0.% 0.%
- ----------
(7) The contingent deferred sales charge, which is imposed on redemption
proceeds, declines 1% annually from 3% of the amount invested during the first
calendar year to 0% after 4 years. See "Your Account" for further information
about the contingent deferred sales charge applicable to Class B shares.
(8) It is possible that long-term Class B shareholders of the Fund may bear
12b-1 distribution fees which are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc.
Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class B or Class Y
shares for each time period specified, (b) your investment has a 5% return each
year, and (c) the expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
Assuming Assuming
Redemption No Redemption
at End of at End of
Each Period Each Period
----------- -------------
Class B Class Y Class B Class Y
------- ------- ------- -------
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
For a more complete discussion of certain expenses and fees, see "Management
Fee."
<PAGE>
Limited-Term Bond Fund
Goal
Limited-Term Bond Fund seeks to provide a high level of current income
consistent with preservation of capital.
Principal Strategies
Limited-Term Bond Fund seeks to achieve its goal by investing primarily in
investment-grade debt securities of U.S. issuers, including U.S. Government
securities. The Fund maintains a dollar-weighted average portfolio maturity of
not less than two years and not more than five years.
Principal Risks of Investing in the Fund
Because Limited-Term Bond Fund primarily owns different types of debt
securities, a variety of factors can affect its investment performance, such as:
o an increase in interest rates, which may cause the value of the Fund's
fixed-income securities to decline;
o the credit quality, earnings performance and other conditions of the issuers
whose securities the Fund holds;
o prepayment of higher-yielding bonds held by the Fund;
o adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline; and
o WRIMCO's skill in evaluating and managing the interest rate and credit risks
of the Fund.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
Limited-Term Bond Fund is designed for investors seeking a high level of current
income consistent with preservation of capital. You should consider whether the
Fund fits your investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the risks of investing in
Limited-Term Bond Fund by showing changes in the Fund's performance from year to
year and by showing how the Fund's average annual returns for 1 year, 5 years
and life of the Fund compare with those of a broad measure of market
performance.
o The chart presents the total annual returns for Class B and shows how
performance has varied from year to year over the life of the Fund.
o The table shows Class B and Class Y average annual returns and compares them
to the market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1993 7.32%
1994 -3.04%
1995 12.39%
1996 3.04%
1997 5.64%
1998 5.36%
In the period shown in the chart, the highest quarterly return was
4.52% (the second quarter of 1995) and the lowest quarterly return was
-1.99% (the first quarter of 1994). The Class B return for the fiscal
year ended March 31, 1999, was 4.65%.
The chart does not reflect any deferred sales charge that you may be
required to pay upon redemption of the Fund's Class B shares. If the
deferred sales charge were included, the returns would be less than
those shown. Class Y shares are not subject to a deferred sales charge.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year 5 Years Life of Fund*
--------------------------------------------
Class B Shares of Limited-Term
Bond Fund 2.36% 4.56% 4.57%
Salomon Brothers 1-5 Years
Treasury/Government Sponsored/
Corporate Index 7.65% 6.24% 6.09%
Lipper Short-Intermediate
Investment Grade Debt
Fund Universe Average 6.63% 5.57% 5.65%
* The Fund commenced operations on September 21, 1992, with a single class of
shares that was subsequently designated Class B shares. Because the Fund
commenced operations on a date other than at the end of a month, and partial
month calculations of the performance of all the indexes are not available,
the investments were effected as of September 30, 1992.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year Life of Class**
Class Y Shares of Limited-Term
Bond Fund 6.25% 5.51%
Salomon Brothers 1-5 Years
Treasury/Government Sponsored/
Corporate Index 7.65% 6.48%
Lipper Short-Intermediate
Investment Grade Debt
Fund Universe Average 6.63% 5.78%
The index shown is a broad-based, securities market index that is unmanaged. The
Lipper average is a composite of mutual funds with goals similar to the goal of
the Fund.
** Since December 29, 1995, the date on which Class Y shares were first acquired
by shareholders. Because the Fund commenced operations on a date other than
at the end of a month, and partial month calculations of the performance of
all the indexes are not available, the investments were effected as of
December 31, 1995.
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of Limited Term Bond Fund:
Shareholder Fees
(fees paid directly from Class B Class Y
your investment) ------ -------
Maximum Sales Charge(Load)
Imposed on Purchases
(as a percentage
of offering price) None None
Maximum Contingent Deferred
Sales Charge (Load) 3% None
(as a percentage of
lesser of amount invested
or redemption value)(9)
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends None None
(and other Distributions)
Redemption Fees None None
(other than contingent
deferred sales charge)
Exchange Fee None None
Maximum Account Fee None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.% 0.%
Distribution and
Service (12b-1) Fees(10) 0.% 0.%
Other Expenses 0.% 0.%
Total Annual Fund
Operating Expenses 0.% 0.%
- ----------
(9) The contingent deferred sales charge, which is imposed on redemption
proceeds, declines 1% annually from 3% of the amount invested during the first
calendar year to 0% after 4 years. See "Your Account" for further information
about the contingent deferred sales charge applicable to Class B shares.
(10) It is possible that long-term Class B shareholders of the Fund may bear
12b-1 distribution fees which are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc.
Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class B or Class Y
shares for each time period specified, (b) your investment has a 5% return each
year, and (c) the expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
Assuming Assuming
Redemption No Redemption
at End of at End of
Each Period Each Period
----------- -------------
Class B Class Y Class B Class Y
------- ------- ------- -------
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
For a more complete discussion of certain expenses and fees, see "Management
Fee."
<PAGE>
Municipal Bond Fund
Goal
Municipal Bond Fund seeks to provide income not subject to Federal income tax.
Principal Strategy
Municipal Bond Fund seeks to achieve its goal by investing primarily in
tax-exempt municipal bonds, mainly of investment grade (rated BBB or higher by
S&P or Baa or higher by MIS). "Municipal bonds" mean obligations the interest on
which is not includable in gross income for Federal income tax purposes. The
Fund diversifies its holdings among two main types of municipal bonds:
o general obligation bonds, which are backed by the full faith, credit and
taxing power of the governmental authority, and
o revenue bonds, which are payable only from specific sources, such as the
revenue from a particular facility or a special tax. Revenue bonds include
industrial development bonds ("IDBs"), which finance privately operated
facilities.
Principal Risks of Investing in the Fund
Because Municipal Bond Fund primarily owns fixed income securities issued by
municipal authorities, a variety of factors can affect its investment
performance, such as:
o an increase in interest rates which may cause the value of the Fund's
securities to decline;
o prepayment of higher-yielding bonds held by the Fund ("call risk");
o changes in the maturities of bonds owned by the Fund;
o the credit quality of the issuers whose securities the Fund owns or of the
private companies involved in IDB-financed projects;
o the local economic, political or regulatory environment affecting bonds owned
by the Fund;
o failure of a bond's interest to qualify as tax-exempt;
o adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
o legislation affecting the tax status of municipal bond interest; and
o the skill of WRIMCO in evaluating and managing the interest rate and credit
risks of the Fund's portfolio.
A significant portion of the Fund's municipal bond interest may subject
investors to the alternative minimum tax ("AMT") for Federal income tax
purposes; this would have the effect of reducing the Fund's return to any such
investor.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
Municipal Bond Fund is designed for investors seeking current income that is
primarily free from Federal income tax, through a highly diversified, actively
managed portfolio. You should consider whether the Fund fits your
particular investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the risks of investing in
Municipal Bond Fund by showing changes in the Fund's performance from year to
year and by showing how the Fund's average annual returns for 1 year, 5 years
and life of the Fund compare with those of a broad measure of market
performance.
o The chart presents the total annual returns for Class B and shows how
performance has varied from year to year over the life of the Fund.
o The table shows Class B average annual returns and compares them to the
market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1993 13.73%
1994 -8.83%
1995 19.14%
1996 3.53%
1997 9.17%
1998 5.12%
In the period shown in the chart, the highest quarterly return was
8.36% (the first quarter of 1995) and the lowest quarterly return was
-7.14% (the first quarter of 1994). The Class B return for the fiscal
year ended March 31, 1999, was 4.64%.
The chart does not reflect any deferred sales charge that you may be
required to pay upon redemption of the Fund's Class B shares. If the
deferred sales charge were included, the returns would be less than
those shown. Class Y shares are not subject to a deferred sales charge.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year 5 Years Life of Fund*
---------------------------------------------
Class B Shares of Municipal
Bond Fund 2.12% 5.23% 6.71%
Lehman Brothers Municipal
Debt Index 6.48% 6.23% 7.22%
Lipper General Municipal Bond
Debt Fund Universe Average 5.32% 5.44% 6.69%
The index shown is a broad-based, securities market index that is unmanaged. The
Lipper average is a composite of mutual funds with goals similar to the goal of
the Fund.
* The Fund commenced operations on September 21, 1992. Because the Fund
commenced operations on a date other than at the end of a month, and partial
month calculations of the performance of all the indexes are not available,
the investments were effected as of September 30, 1992.
There were no outstanding Class Y shares until December 30, 1998.
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of Municipal Bond Fund:
Shareholder Fees
(fees paid directly from Class B Class Y
your investment) ------- -------
Maximum Sales Charge(Load)
Imposed on Purchases
(as a percentage
of offering price) None None
Maximum Contingent Deferred
Sales Charge (Load) 3% None
(as a percentage of
lesser of amount invested
or redemption value)(11)
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends None None
(and other Distributions)
Redemption Fees None None
(other than contingent
deferred sales charge)
Exchange Fee None None
Maximum Account Fee None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.% 0.%
Distribution and
Service (12b-1) Fees(12) 0.% 0.%
Other Expenses 0.% 0.%
Total Annual Fund
Operating Expenses 0.% 0.%
- ----------
(11) The contingent deferred sales charge, which is imposed on redemption
proceeds, declines 1% annually from 3% of the amount invested during the first
calendar year to 0% after 4 years. See "Your Account" for further information
about the contingent deferred sales charge applicable to Class B shares.
(12) It is possible that long-term Class B shareholders of the Fund may bear
12b-1 distribution fees which are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc.
Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class B or Class Y
shares for each time period specified, (b) your investment has a 5% return each
year, and (c) the expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
Assuming Assuming
Redemption No Redemption
at End of at End of
Each Period Each Period
----------- -------------
Class B Class Y Class B Class Y
------- ------- ------- -------
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
For a more complete discussion of certain expenses and fees, see "Management
Fee."
<PAGE>
Science and Technology Fund
Goal
Science and Technology Fund seeks long-term capital growth.
Principal Strategies
Science and Technology Fund seeks to achieve its goal by concentrating its
investments primarily in science and technology securities of U.S. and foreign
companies. Science and technology securities are securities of companies whose
products, processes or services, in WRIMCO's opinion, are being or are expected
to be significantly benefited by the use or commercial application of scientific
or technological developments or discoveries. The Fund may invest in companies
of any size.
Principal Risks of Investing in the Fund Because Science and Technology Fund
owns different types of investments, a variety of factors can affect its
investment performance, such as:
o the mix of securities in the Fund's portfolio, particularly the relative
weightings in, and exposure to, different sectors of the science and
technology industries;
o rapid obsolescence of products or processes of companies in which the Fund
invests;
o governmental regulation in the science and technology industry;
o the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline; and
o WRIMCO's skill in evaluating and selecting securities for the Fund.
Market risk for small- to medium-sized companies may be greater than that for
large companies. Smaller companies are more likely to have limited financial
resources and inexperienced management. As well, stock of smaller companies may
experience volatile trading and price fluctuations.
Investments in foreign securities present additional risks such as currency
fluctuations and political or economic conditions affecting the foreign country.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
Science and Technology Fund is designed for investors who seek long-term capital
growth by investing in an actively managed Fund concentrating in science and
technology securities. This Fund is not suitable for all investors. You should
consider whether the Fund fits your investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the risks of investing in
Science and Technology Fund by showing changes in the Fund's performance from
year to year and by showing how the Fund's average annual returns for 1 year and
the life of the Fund compare with those of a broad measure of market
performance.
o The chart presents the total annual returns for Class B and shows how
performance has varied from year to year over the life of the Fund.
o The table shows Class B and Class Y average annual returns and compares them
to the market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1998 44.03%
In the period shown in the chart, the highest quarterly return was
28.22% (the fourth quarter of 1998) and the lowest quarterly return was
-12.63% (the third quarter of 1998). The Class B return for the fiscal
year ended March 31, 1999, was 42.30%.
The chart does not reflect any deferred sales charge that you may be
required to pay upon redemption of the Fund's Class B shares. If the
deferred sales charge were included, the returns would be less than
those shown. Class Y shares are not subject to a deferred sales charge.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year Life of Fund*
Class B Shares of Science
and Technology Fund 41.03% 29.42%
S&P 400 Index 33.85% 23.65%
Lipper Science and Technology
Fund Universe Average 53.01% 26.48%
*The Fund commenced operations on July 31, 1997.
Cumulative Total Returns
as of December 31, 1998 (%)
Life of Class**
Class Y Shares of Science
and Technology Fund 21.80%
S&P 400 Index 12.64%
Lipper Science and Technology
Fund Universe Average 26.36%
The index shown is a broad-based, securities market index that is unmanaged. The
Lipper average is a composite of mutual funds with goals similar to the goal of
the Fund.
** Since June 9, 1998, the date on which Class Y shares were first acquired by
shareholders. Because the Fund commenced operations on a date other than at
the end of a month, and partial month calculations of the performance of all
the indexes are not available, the investments were effected as of July 1,
1998.
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of Science and Technology Fund:
Shareholder Fees
(fees paid directly from Class B Class Y
your investment) ------- -------
Maximum Sales Charge(Load)
Imposed on Purchases
(as a percentage
of offering price) None None
Maximum Contingent Deferred
Sales Charge (Load) 3% None
(as a percentage of
lesser of amount invested
or redemption value)(13)
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends None None
(and other Distributions)
Redemption Fees None None
(other than contingent
deferred sales charge)
Exchange Fee None None
Maximum Account Fee None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.% 0.%
Distribution and
Service (12b-1) Fees(14) 0.% 0.%
Other Expenses 0.% 0.%
Total Annual Fund
Operating Expenses 0.% 0.%
- ----------
(13) The contingent deferred sales charge, which is imposed on redemption
proceeds, declines 1% annually from 3% of the amount invested during the first
calendar year to 0% after 4 years. See "Your Account" for further information
about the contingent deferred sales charge applicable to Class B shares.
(14)It is possible that long-term Class B shareholders of the Fund may bear
12b-1 distribution fees which are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc.
Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class B or Class Y
shares for each time period specified, (b) your investment has a 5% return each
year, and (c) the expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
Assuming Assuming
Redemption No Redemption
at End of at End of
Each Period Each Period
----------- -------------
Class B Class Y Class B Class Y
------- ------- ------- -------
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
For a more complete discussion of certain expenses and fees, see "Management
Fee."
<PAGE>
Total Return Fund
Goal
Total Return Fund seeks to provide current income while seeking capital growth.
Principal Strategies
Total Return Fund seeks to achieve its goal by investing primarily in common
stocks, or securities convertible into common stocks, of U.S. and foreign
companies that have a record of paying regular dividends on common stock or have
the potential for capital appreciation. When WRIMCO believes that stocks with
high yields are less attractive than other common stocks, the Fund may hold
lower-yielding or non-dividend-paying common stocks because of their prospects
for capital appreciation. At other times, the Fund may seek to achieve its goal
by investing in investment grade debt securities when WRIMCO believes the return
on these securities is attractive relative to the return on common stocks.
Principal Risks of Investing in the Fund
Because Total Return Fund owns different types of investments, a variety of
factors can affect its investment performance, such as:
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
o the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
o an increase in interest rates, which may cause the value of the Fund's
fixed-income securities to decline; and
o WRIMCO's skill in evaluating and selecting securities for the Fund.
Investments in foreign securities present additional risks such as currency
fluctuations and political or economic conditions affecting the foreign country.
Market risk for small- or medium-sized companies may be greater than that for
large companies. Stock of smaller companies, as well as stock of companies with
high-growth expectations reflected in their stock price, may experience volatile
trading and price fluctuations.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
Total Return Fund is designed for investors who seek dividend income with
potential for capital growth. You should consider whether the Fund fits your
investment objectives.
<PAGE>
Performance
The chart and table below provide some indication of the risks of investing in
Total Return Fund by showing changes in the Fund's performance from year to year
and by showing how the Fund's average annual returns for 1 year, 5 years and
life of the Fund compare with those of a broad measure of market performance.
o The chart presents the total annual returns for Class B and shows how
performance has varied from year to year over the life of the Fund.
o The table shows Class B and Class Y average annual returns and compares them
to the market indicators listed.
o Both the chart and the table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.
Chart of Year-by-Year Returns
as of December 31 each year (%)
1993 14.03%
1994 -2.07%
1995 29.65%
1996 18.12%
1997 24.61%
1998 20.73%
In the period shown in the chart, the highest quarterly return was
17.05% (the second quarter of 1997) and the lowest quarterly return was
-7.12% (the third quarter of 1998). The Class B return for the fiscal
year ended March 31, 1999 was 7.47%.
The chart does not reflect any deferred sales charge that you may be
required to pay upon redemption of the Fund's Class B shares. If the
deferred sales charge were included, the returns would be less than
those shown. Class Y shares are not subject to a deferred sales charge.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year 5 Years Life of Fund*
---------------------------------------------
Class B Shares of Total
Return Fund 17.73% 17.68% 17.40%
S&P 500 Index 28.70% 24.08% 21.63%
Lipper Growth and Income
Fund Universe Average 15.78% 18.38% 17.50%
The Fund commenced operations on September 21, 1992, with a single class of
shares that was subsequently designated Class B shares. Because the Fund
commenced operations on a date other than at the end of a month, and partial
month calculations of the performance of all the indexes are not available, the
investments were effected as of September 30, 1992.
Average Annual Total Returns
as of December 31, 1998 (%)
1 Year Life of Class**
Class Y Shares of Total
Return Fund 20.73% 41.90%
S&P 500 Index 28.70% 28.30%
Lipper Growth and Income
Fund Universe Average 15.78% 21.30%
The indexes shown is a broad-based, securities market index that is unmanaged.
The Lipper average is a composite of mutual funds with goals similar to the goal
of the Fund.
* Since December 29, 1995, the date on which Class Y shares were first acquired
by shareholders. Because the Fund commenced operations on a date other than
at the end of a month, and partial month calculations of the performance of
all the indexes are not available, the investments were effected as of
December 31, 1995.
<PAGE>
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of Total Return Fund:
Class B Class Y
------- -------
Shareholder Fees
(fees paid directly from
your investment)
Maximum Sales Charge(Load)
Imposed on Purchases
(as a percentage
of offering price) None None
Maximum Contingent Deferred
Sales Charge (Load) 3% None
(as a percentage of
lesser of amount invested
or redemption value)(15)
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends None None
(and other Distributions)
Redemption Fees None None
(other than contingent
deferred sales charge)
Exchange Fee None None
Maximum Account Fee None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.% 0.%
Distribution and
Service (12b-1) Fees(16) 0.% 0.%
Other Expenses 0.% 0.%
Total Annual Fund
Operating Expenses 0.% 0.%
- ----------
(15) The contingent deferred sales charge, which is imposed on redemption
proceeds, declines 1% annually from 3% of the amount invested during the first
calendar year to 0% after 4 years. See "Your Account" for further information
about the contingent deferred sales charge applicable to Class B shares.
(16) It is possible that long-term Class B shareholders of the Fund may bear
12b-1 distribution fees which are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc.
Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class B or Class Y
shares for each time period specified, (b) your investment has a 5% return each
year, and (c) the expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
Assuming Assuming
Redemption No Redemption
at End of at End of
Each Period Each Period
----------- -------------
Class B Class Y Class B Class Y
------- ------- ------- -------
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
For a more complete discussion of certain expenses and fees, see "Management
Fee."
<PAGE>
The Investment Principles of the Funds
Investment Goals, Principal Strategies and Other Investments
Asset Strategy Fund
The goal of Asset Strategy Fund is high total return over the long term. The
Fund seeks to achieve its goal by allocating its assets among a diversified
portfolio of stocks, bonds, and short-term instruments. There is no guarantee
that the Fund will achieve its goal.
Allocating assets among different types of investments allows the Fund to take
advantage of opportunities wherever they may occur, but also subjects the Fund
to the risks of a given investment type. Stock values generally fluctuate in
response to the activities of individual companies and general market and
economic conditions. The values of bonds and short-term instruments generally
fluctuate based on changes in interest rates and in the credit quality of the
issuer.
WRIMCO regularly reviews the Fund's allocation of assets and makes changes to
favor investments that it believes provide the best opportunity to achieve the
Fund's goal. Although WRIMCO uses its expertise and resources in choosing
investments and in allocating assets, WRIMCO's decisions may not always be
beneficial to the Fund.
The Fund allocates its assets among the following classes, or types, of
investments.
o The stock class includes equity securities of all types (including preferred
stock), although WRIMCO typically emphasizes a blend of value and growth
potential in selecting stocks. Value stocks are those that WRIMCO believes
are currently selling below their true worth. Growth stocks are those whose
earnings WRIMCO believes are likely to grow faster than the economy.
o The bond class includes all varieties of fixed-income instruments, such as
corporate or U.S. Government debt securities, with maturities of more than
three years (including adjustable rate preferred stocks). This asset class
may include a significant amount of junk bonds which are rated BB and below
by S&P and Ba and below by MIS.
o The short-term class includes all types of short-term instruments with
remaining maturities of three years or less, including high-quality money
market instruments.
o Within each of these classes, the Fund may invest in both domestic and
foreign securities.
The Fund's mix shows the benchmark for its combination of investments in each
class over time. WRIMCO may change the mix within the specified ranges from time
to time depending on WRIMCO's assessment of the market for each asset class in
general. The range and approximate percentage of the mix for each asset class
are stated below. Some types of investments, such as indexed securities, can
fall into more than one asset class.
Mix Range
- --- -----
Stock
class 0-100%
70%
Bond
class 0-100%
25%
Short-term
class 0-100%
5%
WRIMCO tries to balance the Fund's investment risks against potentially higher
total returns by reducing the stock class allocation during stock market down
cycles and increasing the stock class allocation during periods of strongly
positive market performance. Typically, WRIMCO makes asset shifts among classes
gradually over time. WRIMCO considers various factors when it decides to sell a
security, such as an individual security's performance and/or if it is an
appropriate time to vary the Fund's mix.
As a defensive measure, the Fund may increase its holdings in the bond or
short-term classes when WRIMCO believes that there is a potential bear market,
prolonged downturn in stock prices or significant loss in stock value. WRIMCO
may also, as a temporary defensive measure, invest up to all of the Fund's
assets in:
o money market instruments rated A-1 by S&P or Prime 1 by MIS, or unrated
securities judged by WRIMCO to be of equivalent quality; or
o precious metals.
Although WRIMCO may seek to preserve appreciation in the Fund by taking a
defensive position, doing so may reduce the potential for further appreciation.
Growth Fund
The primary goal of Growth Fund is capital appreciation. The Fund seeks to
achieve its goal by investing primarily in a diversified portfolio of common
stocks, or securities convertible into common stocks, of U.S. and foreign
companies. Generally, the Fund may invest in a wide range of marketable
securities that, in WRIMCO's opinion, offer the potential for growth. There is
no guarantee that the Fund will achieve its goal.
In selecting companies, WRIMCO may look at a number of factors relating to a
company, such as:
o aggressive or creative management;
o technological or specialized expertise
o new or unique products or services;
o entry into new or emerging industries; and
o special situations arising out of government priorities or programs.
When WRIMCO believes that a temporary defensive position is desirable, WRIMCO
may take certain steps with respect to up to all of the Fund's assets, including
any one or more of the following:
o hold cash, commercial paper, certificates of deposit or other short-term
investments;
o invest in debt securities (including commercial paper or short-term U.S.
Government securities); or
o invest in convertible preferred stock.
Taking a defensive position may reduce the potential for appreciation in the
Fund.
High Income Fund
The primary goal of High Income Fund is to earn a high level of current income.
As a secondary goal, the Fund seeks capital growth when consistent with its
primary goal. The Fund seeks to achieve these goals by investing primarily in a
diversified portfolio of high-yield, high-risk, fixed-income securities, the
risks of which are, in the judgment of WRIMCO, consistent with the Fund's goals.
There is no guarantee that the Fund will achieve its goals.
The Fund primarily owns debt securities; however, it may also own preferred
stock, common stock and convertible securities. In general, the high income that
the Fund seeks is paid by debt securities rated in the lower rating categories
of the established rating services or unrated securities that are determined by
WRIMCO to be of comparable quality; these are securities rated BBB or lower by
S&P, or Baa or lower by MIS and unrated securities. Lower-quality debt
securities (which include "junk bonds") are considered to be speculative and
involve greater risk of default or price changes due to changes in the issuer's
creditworthiness. The market prices of these securities may fluctuate more than
higher-quality securities and may decline significantly in periods of general
economic difficulty.
The Fund will normally invest at least 80% of its total assets to seek a high
level of current income. The Fund limits its acquisition of common stock so that
no more than 20% of its total assets will consist of common stock and no more
than 10% of its total assets will consist of non-dividend-paying common stock.
WRIMCO may look at a number of factors in selecting securities for the Fund.
These include an issuer's past, current and estimated future:
o financial strength;
o cash flow;
o management;
o borrowing requirements; and
o responsiveness to changes in interest rates and business conditions.
When WRIMCO believes that a temporary defensive position is desirable, WRIMCO
may take any one or more of the following steps with respect to up to all of the
assets in the Fund:
o shorten the average maturity of the Fund's debt holdings;
o hold cash or cash equivalents (short-term investments, such as commercial
paper and certificates of deposit); and
o emphasize high-grade debt securities.
Taking a defensive position may reduce the yield on the Fund's
portfolio. As an alternative to taking a temporary defensive position or in
order to more quickly participate in anticipated market changes or market
conditions, the Fund may invest in options and futures contracts.
International Growth Fund
The primary goal of the International Growth Fund is long-term capital
appreciation, with current income as a secondary goal. The Fund seeks to achieve
these goals by investing primarily in a diversified portfolio of common stocks,
preferred stocks and debt securities (mostly of investment grade) of foreign
issuers. There is no guarantee that the Fund will achieve its goals.
Under normal conditions, the Fund invests at least 80% of its assets in foreign
securities and at least 65% of its assets in issuers of at least three foreign
countries. The Fund generally limits its holdings so that no more than 75% of
its assets are invested in issuers of a single foreign country and no more than
25% of its assets are invested in securities issued by the government of a
foreign country.
When WRIMCO believes that a temporary defensive position is desirable, WRIMCO
may take certain steps with respect to up to all of the Fund's assets in debt
securities (including commercial paper or short-term U.S. Government securities)
or preferred stocks, or both. Taking a defensive position may reduce the
potential for appreciation in the Fund's portfolio.
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. The Fund seeks to achieve its goal by
investing primarily in a diversified portfolio of investment-grade,
intermediate-term debt securities of U.S. issuers, including U.S. Government
securities, collateralized mortgage obligations and other asset-backed
securities. There is no guarantee that the Fund will achieve its goal.
The maturity of an asset-backed security is the estimated average life of the
security, based on certain prescribed models or formulas used by WRIMCO. The
maturity of other types of debt securities is the earlier of the call date or
the maturity date, as appropriate. The Fund may also own common stocks and
convertible securities, including convertible preferred stock in certain
circumstances.
When WRIMCO believes that a temporary defensive position is desirable, WRIMCO
may take certain steps with respect to up to all of the Fund's assets, including
any one or more of the following:
o shorten the average maturity of the Fund's portfolio;
o hold short-term investments, cash or cash equivalents;
o emphasize debt securities of a higher quality than those the Fund would
ordinarily hold; or
o invest in convertible preferred stock.
Taking a defensive position may reduce the Fund's yield.
Municipal Bond Fund
The goal of Municipal Bond Fund is to provide income that is not subject to
Federal income tax. The Fund seeks to achieve this goal by investing principally
in a diversified portfolio of municipal bonds. There is no guarantee that the
Fund will achieve its goal.
As used in this Prospectus, "municipal bonds" mean obligations the interest on
which is not includable in gross income for Federal income tax purposes. The
Fund anticipates that not more than 40% of the dividends it will pay to
shareholders will be treated as a tax preference item for AMT purposes. The Fund
and WRIMCO 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 state and local governments,
agencies and authorities for various purposes. The two main types of municipal
bonds are general obligation bonds and revenue bonds. For 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 a special tax or other revenue source. IDBs are revenue bonds
issued by or on behalf of public authorities to obtain funds to finance
privately operated facilities. Other municipal obligations include lease
obligations of municipal authorities or entities and participations in these
obligations.
At least 80% of the Fund's net assets will be invested during normal market
conditions in municipal bonds of investment grade, which means that the bonds
are either:
o rated at least BBB by S&P, or Baa by MIS; or
o if unrated, are determined by WRIMCO to be of comparable quality.
The Fund may invest up to 10% of its assets in taxable debt securities other
than municipal bonds. These must be either:
o U.S. Government securities;
o obligations of domestic banks and certain savings and loan associations;
o commercial paper rated at least A by S&P or MIS; and/or
o any of the foregoing obligations subject to repurchase agreements.
When WRIMCO believes that a temporary defensive position is desirable, WRIMCO
may take certain steps with respect to up to all of the Fund's assets, including
any one or more of the following:
o shorten the average maturity of the Fund's portfolio;
o hold taxable obligations, subject to the limitations stated above; or
o emphasize debt securities of a higher quality than those the Fund would
ordinarily hold.
Taking a defensive position may reduce the Fund's yield.
Science and Technology Fund
The goal of Science and Technology Fund is long-term capital growth. The Fund
seeks to achieve this goal by investing primarily in a diversified portfolio of
science and technology securities. Science and technology securities are
securities of companies whose products, processes or services, in WRIMCO's
opinion, are being or are expected to be significantly benefited by the use or
commercial application of scientific or technological discoveries. There is no
guarantee that the Fund will achieve its goal.
The Fund invests in such areas as:
o aerospace and defense electronics;
o biotechnology;
o business machines;
o cable and broadband access;
o communications and electronic equipment;
o computer software and services;
o computer systems;
o electronics;
o electronic media;
o internet and internet-related services;
o medical devices and drugs;
o medical and hospital supplies and services; and
o office equipment and supplies.
The Fund primarily owns common stock; however, it may also invest in preferred
stock, debt securities and convertible securities. WRIMCO typically emphasizes
growth potential in selecting stocks. A stock has growth potential if, in
WRIMCO's opinion, the earnings of the company are likely to grow faster than the
economy.
Under normal economic and market conditions, the Fund will not invest more than
20% of its total assets in securities other than science or technology
securities. When WRIMCO believes that a temporary defensive position is
desirable, the Fund may invest up to all of its assets in U.S. Government
securities or other debt securities, mostly of investment grade. Taking a
defensive position may reduce the potential for appreciation in the Fund's
portfolio.
Total Return Fund
The goal of Total Return Fund is to provide current income while seeking capital
growth. The Fund seeks to achieve its goal by investing primarily in a
diversified portfolio of common stocks, or securities convertible into common
stocks, of U.S. and foreign companies that have a record of paying regular
dividends on common stock or have the potential for capital appreciation. There
is no guarantee that the Fund will achieve its goal.
WRIMCO attempts to select securities with income and growth possibilities by
looking at many factors including the company's:
o dividend payment history;
o profitability record;
o history of improving sales and profits;
o management;
o leadership position in its industry; and
o stock price value.
When WRIMCO believes that a temporary defensive position is desirable, WRIMCO
may take certain steps with respect to up to all of the Fund's assets, including
any one or more of the following:
o hold cash, commercial paper, certificates of deposit or other short-term
investments;
o invest in debt securities (including commercial paper or short-term U.S.
Government securities); or
o invest in convertible preferred stock.
Taking a defensive position may reduce the Fund's yield as well as the potential
for appreciation of the Fund's portfolio.
All Funds
Each Fund may also invest in and use certain other types of instruments in
seeking to achieve its goals. For example, each Fund is permitted to invest in
options, futures contracts, asset-backed securities and other derivative
instruments if it is permitted to invest in the type of asset by which the
return on, or value of, the derivative is measured. At this time, each Fund has
limited exposure to derivative investments. You will find more information in
the Statement of Additional Information ("SAI") about each Fund's permitted
investments and strategies, as well as the restrictions that apply to them.
Risk Considerations of Principal Strategies and Other Investments
Risks exist in any investment. Each Fund is subject to market risk,
financial risk, and, in some cases, prepayment risk.
o Market risk is the possibility of a change in the price of the security
because of market factors including changes in interest rates. Bonds with
longer maturities are more interest-rate sensitive. For example, if interest
rates increase, the value of a bond with a longer maturity is more likely to
decrease. Because of market risk, the share price of each Fund will likely
change as well.
o Financial risk is based on the financial situation of the issuer of the
security. To the extent a Fund invests in debt securities, the Fund's
financial risk depends on the credit quality of the underlying securities in
which it invests. For an equity investment, a Fund's financial risk may
depend, for example, on the earnings performance of the company issuing the
stock.
o Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid
before its expected maturity date.
Because each Fund owns different types of investments, its performance
will be affected by a variety of factors. The value of a Fund's investments and
the income it generates will vary from day to day, generally reflecting changes
in interest rates, market conditions, and other company and economic news.
Performance will also depend on WRIMCO's skill in selecting investment and, with
respect to Asset Strategy Fund, on WRIMCO's skill in allocating assets.
Asset Strategy Fund and Science and Technology Fund may each actively
trade securities in seeking to achieve its goals. Doing so may increase
transaction costs (which may reduce performance) and increase distributions paid
by the Fund, which may increase your taxable income.
Certain types of each Fund's authorized investments and strategies
(such as foreign securities, "junk bonds" and derivative instruments) involve
special risks. Depending on how much the Fund invests or uses these strategies,
these special risks may become significant. For example, foreign investments may
subject a Fund to restrictions on receiving the investment proceeds from a
foreign country, foreign taxes, and potential difficulties in enforcing
contractual obligations, as well as fluctuations in foreign currency values and
other developments that may adversely affect a foreign country. Junk bonds
(bonds rated BB and below by S&P and Ba and below by MIS) pose a greater risk of
nonpayment of interest or principal than higher-rated bonds. Derivative
instruments may expose a Fund to greater volatility than an investment in a more
traditional stock, bond or other security.
Year 2000 and Euro Issues
Like other mutual funds, financial and business organizations and individuals
around the world, the Funds could be adversely affected if the computer systems
used by WRIMCO and the Funds' other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
WRIMCO is taking steps that it believes are reasonably designed to address year
2000 computer-related problems with respect to the computer systems that it uses
and to obtain assurances that comparable steps are being taken by the Funds'
other, major service providers. Although there can be no assurances, WRIMCO
believes these steps will be sufficient to avoid any adverse impact on the
Funds. Similarly, the companies and other issuers in which the Funds invest
could be adversely affected by year 2000 computer-related problems. The risk may
be greater for issuers in certain foreign countries, especially developing
countries, than for U.S. issuers. There can be no assurance that the steps
taken, if any, by issuers in which a Fund invests will be sufficient to avoid
any adverse impact on the Fund.
Also, certain of the Funds could be adversely affected by the conversion of
certain European currencies into the Euro. This conversion, which is underway,
is scheduled to be completed in 2002. However, problems with the conversion
process and delays could increase volatility in world capital markets and affect
European capital markets in particular.
<PAGE>
Your Account
Choosing a Share Class
This Prospectus offers two classes of shares of each Fund: Class B and Class Y.
Each class has its own sales charge, if any, and expense structure. You should
choose the class for which you are eligible and that seems best for you, which
usually depends on how much you plan to invest and how long you plan to hold
your shares. Class B shares are available for both individual and institutional
investors. Class Y shares are designed only for institutional investors and
others investing through certain intermediaries, as described below. All of your
future investments in a Fund will be made in the class you select when you open
your account, unless you inform the Fund otherwise, in writing, when you make
the future investment.
Class B shares are subject to a contingent deferred sales charge if you sell
them within three years of their purchase according to the table below. Class B
shares pay an annual 12b-1 service fee of up to 0.25% of average Class B net
assets and an annual 12b-1 distribution fee of up to 0.75% of average Class B
net assets. The ongoing expenses of this class are higher than those for Class Y
shares.
Deferred
Date of Sales
Redemption Charge
any time during the calendar year of investment and the first full calendar year
after the calendar year of investment 3%
second full calendar year 2%
third full calendar year 1%
after third full calendar year 0%
Additional information and applicable forms are available from Waddell & Reed
financial advisors.
The deferred sales charge will be applied to the total amount invested during a
calendar year to acquire shares or the value of the shares redeemed, whichever
is less. All investments made during a calendar year are deemed a single
investment during that calendar year for purposes of calculating the deferred
sales charge.
Contingent Deferred Sales Charge. A contingent deferred sales charge
may be assessed against your redemption amount for Class B shares and paid to
Waddell & Reed, Inc. (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 it in
connection with the sale of a Fund's Class B shares. The deferred sales charge
will not be imposed on Class B shares representing payment of dividends or
distributions or on amounts which represent an increase in the value of a
shareholder's account resulting from capital appreciation above the amount paid
for Class B shares purchased during the 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 Class B
shares purchased during the deferred sales charge period representing capital
appreciation, next of Class B shares purchased during the deferred sales charge
period representing payment of dividends and distributions and then of Class B
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 Class B 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 ("NAV") of $1,027, absent different
instructions.
The deferred sales charge will not apply in the following
circumstances:
o in connection with redemptions of Class B 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.
o in connection with redemptions of Class B 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 Internal Revenue Code ("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.
o in connection with redemptions of Class B shares purchased by current or
retired directors of the Corporation, or current or retired officers or
employees of the Corporation, WRIMCO, the Distributor or their affiliated
companies, registered representatives of Waddell & Reed, Inc., and by the
members of immediate families of such persons.
o in connection with redemptions of Class B shares made pursuant to a
shareholder's participation in any systematic withdrawal plan adopted for a
Fund. (The Plan and this exclusion from the deferred sales charge do not
apply to a one-time withdrawal.)
o in connection with redemptions the proceeds of which are reinvested in Class
B shares of a Fund within thirty days after such redemption.
o in connection with the exercise of certain exchange privileges.
o on redemptions effected pursuant to the Corporation's right to liquidate a
shareholder's Class B shares of a Fund if the aggregate NAV of those shares
is less than $500.
o 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 Class B 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
redemptions effected pursuant to the Corporation's right to liquidate a
shareholder's shares, which requires certain notices.
Class Y shares are not subject to a sales charge upon purchase or a
contingent deferred sales charge upon redemption. Class Y shares are subject to
an annual 12b-1 fee of up to 0.25% of average Class Y net assets and may cost
you less than if you had bought Class B shares. Class Y shares are only
available for purchase by:
o participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401, including 401(k) plans, of the
Code, when an unaffiliated third party provides certain administrative,
distribution, and/or other support services to the plan and the plan holds
the shares in an omnibus account on the Fund's records;
o banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an omnibus
account on the Fund's records and to which entity an unaffiliated third party
provides certain administrative, distribution and/or other support services;
o government entities or authorities and corporations and to which entity an
unaffiliated third party provides certain administrative, distribution and/or
other support services where the investment is $1 million; and
o certain retirement plans and trusts for employees and financial advisors of
Waddell & Reed, Inc. and its affiliates. The different ways to set up
(register) your account are listed below.
Ways to Set Up Your Account
- -------------------------------------------------
Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
- -------------------------------------------------
Business or Organization
For investment needs of corporations, associations, partnerships, institutions
or other groups
- -------------------------------------------------
Retirement
To shelter your retirement savings from taxes
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts (other
than Roth IRAs and Education IRAs) may be tax deductible.
o Individual Retirement Accounts (IRAs) allow an individual under 70 1/2, with
earned income, to invest up to $2,000 per tax year. The maximum annual
contribution for an investor and his or her spouse is $4,000 ($2,000 per
spouse) or, if less, the couple's combined earned income for the taxable
year.
o Rollover IRAs retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
o Roth IRAs allow certain individuals to make non-deductible contributions up
to $2,000 per year. Withdrawals of earnings may be tax-free if the account is
at least five years old and certain other requirements are met.
o Education IRAs are established for the benefit of a minor, with
non-deductible contributions, and permit tax-free withdrawals to pay the
higher education expenses of the beneficiary.
o Simplified Employee Pension Plans (SEP - IRAs) provide small business owners
or those with self-employed income (and their eligible employees) with many
of the same advantages as a Keogh Plan, but with fewer administrative
requirements.
o Savings Incentive Match Plans for Employees (SIMPLE Plans) can be established
by small employers to contribute to their employees' retirement accounts and
involve fewer administrative requirements than 401(k) or other qualified
plans generally.
o Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves up to 25% of their annual earned income, with a
maximum of $30,000 per year.
o 401(k) Programs allow employees of corporations and non-governmental
tax-exempt organizations of all sizes to contribute a percentage of their
wages on a tax-deferred basis. These accounts need to be established by the
administrator or trustee of the plan.
o 403(b) Custodial Accounts are available to employees of public school systems
or certain types of charitable organizations.
o 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.
- -------------------------------------------------
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA").
- -------------------------------------------------
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.
- -------------------------------------------------
Buying Shares
You may buy shares of each of the Funds through Waddell & Reed, Inc. and its
financial advisors. To open your account you must complete and sign an
application. Your Waddell & Reed financial advisor can help you with any
questions you might have.
To purchase Class B and Class Y shares by check, make your check payable to
Waddell & Reed, Inc. Mail the check, along with your completed application, to
Waddell & Reed, Inc., P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
To purchase Class Y shares by wire, you must first obtain an account number by
calling 1-800-366-5465, then mail a completed application to Waddell & Reed,
Inc., P.O. Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to
913-236-5044. Instruct your bank to wire the amount you wish to invest, along
with the account number and registration, to UMB Bank, n.a., ABA Number
101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and Account
Number.
You may also buy Class Y shares of the Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements to buy Class Y shares.
The price to buy a share of a particular class of a Fund, called the NAV of that
class, is calculated every business day. The Funds' shares are sold without a
sales charge.
In the calculation of a Fund's NAV:
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
o Other investment assets for which market prices are unavailable are valued at
their fair value by or at the direction of the Board of Directors.
The Funds are open for business each day the New York Stock Exchange (the
"NYSE") is open. Each Fund normally calculates its NAV as of the close of
business of the NYSE, normally 4 p.m. Eastern time, except that an option or
futures contract held by the Fund may be priced at the close of the regular
session of any other securities or commodities exchange on which that instrument
is traded.
Certain of the Funds may invest in securities listed on foreign
exchanges which may trade on Saturdays or on U.S. national business holidays
when the NYSE is closed. Consequently, the NAV of such Fund shares may be
significantly affected on days when the Fund does not price its shares and when
you are not able to purchase or redeem the Fund's shares. Similarly, if an event
materially affecting the value of foreign investments or foreign currency
exchange rates occurs prior to the close of business of the NYSE but after the
time their vales are otherwise determined, such investments or exchange rates
may be valued at their fair value as determined in good faith by or under the
direction of the Board of Directors..
When you place an order to buy shares, your order will be processed at
the next NAV calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another Fund, the payment may be delayed for up to ten
days to ensure that your previous investment has cleared.
o The Funds do not issue certificates representing Class Y shares of a Fund.
o If you purchase Class Y shares of a Fund from certain broker-dealers, banks
or other authorized third parties, the Fund will be deemed to have received
your purchase order when that third party (or its designee) has received your
order. Your order will receive the Class Y offering price next calculated
after the order has been received in proper form by the authorized third
party (or its designee). You should consult that firm to determine the time
by which it must receive your order for you to purchase shares of the Fund at
that day's price.
When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders, including
purchases by exchange, and it and the Corporation reserve the right to
discontinue offering shares of the Funds for purchase.
For Class B shares, the Corporation has adopted a Distribution and
Service Plan ("Class B Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 ("Rule 12b-1"). Under the Class B Plan, each Fund may pay
the distributor a fee of up to 0.75%, on an annual basis, of the average daily
net assets of the Fund's Class B shares to compensate the Distributor for the
distribution of the Class B shares of that Fund and a fee of up to 0.25%, on an
annual basis, of the average daily net assets of the Fund's Class B shares to
compensate the Distributor for providing personal services to Class B
shareholders and/or maintaining Class B shareholder accounts. 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 with respect to the Fund's Class B shares would exceed the
maximum amount of such charges that the Distributor is permitted to receive
under NASD rules as then in effect.
For Class Y shares, the Corporation has adopted a Distribution and Service Plan
("Class Y Plan") pursuant to Rule 12b-1. Under the Class Y Plan, each Fund may
pay the Distributor a fee of up to 0.25%, on an annual basis, of the average
daily net assets of the Fund's Class Y shares to compensate the Distributor for
distributing the Class Y shares of that Fund, providing personal services to
Class Y shareholders and/or maintaining Class Y shareholder accounts.
Because the Plan fees are paid out of the assets of the applicable class on an
on-going basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.
Minimum Investments
For Class B:
To Open an Account $1,000
For certain exchanges $100
For certain retirement accounts and accounts opened through Automatic Investment
Service $50
For certain retirement accounts and accounts opened through payroll deductions
for or by employees of WRIMCO, Waddell & Reed, Inc. and their affiliates $25
To Add to an Account
For certain exchanges $100
For Automatic Investment Service $25
For Class Y:
To Open an Account
For a government entity or authority or for a corporation: $10 million
(within
first
twelve
months)
For other
investors: Any amount
To Add to An Account Any amount
The minimum investment required to open an account may be waived or
reduced for purchases by employees of Waddell & Reed, Inc. or its affiliates,
certain pension and retirement plan accounts and participants in automatic
investment plans.
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can
make additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed, Inc.
Mail the check along with:
o the detachable form that accompanies the confirmation of a prior purchase or
your year-to-date statement; or
o a letter stating your account number, the account registration, and that you
wish to purchase Class B or Class Y shares of the Fund.
Mail to Waddell & Reed, Inc. at:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
To add to your Class Y account by wire: Instruct your bank to wire the
amount you wish to invest, along with the account number and registration, to
UMB Bank, n.a., ABA Number 101000695, W&R Underwriter Account Number 0007978,
FBO Customer Name and Account Number.
If you purchase Class Y shares from certain broker-dealers, banks or
other authorized third parties, additional purchases may be made through those
firms.
Selling Shares
You can arrange to take money out of your account at any time by
selling (redeeming) some or all of your shares.
The Corporation will redeem your shares at their NAV next calculated
after receipt of a written request for redemption in good order by Waddell &
Reed, Inc. at it home office and, for Class B shares, subject to the contingent
deferred sales charge discussed above.
To sell shares by written request: Complete an Account Service Request
form, available from your Waddell & Reed financial advisor, or write a letter of
instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number, and the class, of shares to be redeemed; and o
any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial
advisor, or mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the
address on the account.
To sell Class Y shares by telephone or fax: If you have elected this
method in your application or by subsequent authorization, call 1-800-366-5465,
or fax your request to 913-236-5044, and give your instructions to redeem Class
Y shares and make payment by wire to your pre-designated bank account or by
check to you at the address on the account.
When you place an order to sell shares, please note the following:
o If more than one person owns the shares, each owner must sign the written
request.
o If you recently purchased the shares by check, the Corporation may delay
payment of redemption proceeds. 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 the
date the Corporation is able to verify that your purchase check has cleared
and been honored.
o Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the Securities and Exchange Commission.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
o If you purchased Class Y shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms, some
of which may charge you a fee and may have additional requirements to sell
Fund shares. The Fund will be deemed to have received your order to sell
Class Y shares when that firm (or its designee) has received your order. Your
order will receive the Class Y NAV next calculated after the order has been
received in proper form by the authorized firm (or its designee). You should
consult that firm to determine the time by which it must receive your order
for you to sell Class Y shares at that day's price.
Special Requirements for Selling Shares
Account Type Special Requirements
------------ --------------------
Individual or Joint Tenant The written instructions must be signed by all
persons required to sign for transactions,
exactly as their names appear on the account.
Sole Proprietorship The written instructions must be signed by the
individual owner of the business.
UGMA, UTMA The custodian must sign the written instructions
indicating capacity as custodian.
Retirement Account The written instructions must be signed by a
properly authorized person.
Trust The trustee must sign the written instructions
indicating capacity as trustee. If the trustee's
name is not in the account registration, provide
a currently certified copy of the trust
document.
Business or Organization At least one person authorized by corporate
resolution to act on the account must sign the
written instructions.
Conservator, Guardian or The written instructions must be signed by the
Other Fiduciary person properly authorized by court order to act
in the particular fiduciary capacity.
The Corporation may require a signature guarantee in certain situations
such as:
o a redemption request made by a corporation, partnership or fiduciary;
o a redemption request made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
This requirement is intended to protect you and Waddell & Reed from
fraud. You can obtain a signature guarantee from most banks and securities
dealers, but not from a notary public.
The Corporation reserves the right to redeem at NAV all shares of a
Fund owned or held by you having an aggregate NAV of less than $500. The
Corporation will give you notice of its intention to redeem your shares and a
60-day opportunity to purchase a sufficient number of additional shares to bring
the aggregate NAV of your shares of that Fund to $500. For Class B shares, these
redemptions are not subject to the deferred sales charge. The Corporation will
not apply its redemption right to individual retirement plan accounts,
retirement accounts or accounts which have an aggregate NAV of less than $500
due to market forces.
You may reinvest in any one of the eight Funds all or part of the
amount you redeemed by sending to the Fund the amount you want to reinvest. If
you reinvest in Class B shares within thirty days after the date of your
redemption of Class B 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. For
purposes of determining future deferred sales charges, the reinvestment will be
treated as a new investment. You may do this only once as to shares of the
Corporation. This privilege may be eliminated or modified at any time without
prior notice to shareholders.
Under the terms of the 401(k) prototype 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.
Telephone Transactions
The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Fund fails to do so, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. Current procedures
relating to instructions communicated by telephone include tape recording
instructions, requiring personal identification and providing written
confirmations of transactions effected pursuant to such instructions.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your
account.
Personal Service
Your local Waddell & Reed financial advisor is available to provide
personal service. Additionally, one toll-free call, 1-800-366-5465, connects you
to a Customer Service Representative or TeleWaddell, our automated customer
telephone service. During normal business hours, our Customer Service staff is
available to answer your questions or update your account records. At almost any
time of the day or night, you may access TeleWaddell from a touch-tone phone to:
o obtain information about your accounts;
o obtain price information about other funds in the United Group; or
o request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange, transfer
or redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent annual and
semiannual reports will be mailed to your household, even if you have more than
one account with the Funds. Call the telephone number listed above for Customer
Service if you need copies of annual or semiannual reports or account
information.
Exchanges
You may sell your Class B shares of any of the Funds and buy Class B
shares of another Fund or of United Cash Management, Inc., a fund in the United
Group of Mutual Funds, without payment of a deferred sales charge. The time
period with respect to the deferred sales charge will continue to run. You may
sell your Class Y shares of any of the Funds and buy Class Y shares of another
Fund or Class A shares of United Cash Management, Inc., a fund in the United
Group of Mutual Funds. Subject to certain conditions stated in the SAI,
automatic monthly exchanges of Class A shares of United Cash Management, Inc.
may be made into the Funds.
Exchanges may only be made into Funds which are legally permitted for
sale in the state of residence of the investor. Note that exchanges out of the
Funds may have tax consequences for you. Before exchanging into a Fund, read its
prospectus.
The Fund reserves the right to terminate or modify these exchange
privileges at any time, upon notice in certain instances.
Automatic Transactions for Class B Shareholders
Flexible Withdrawal Service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund
account, or between Fund accounts, automatically. While Regular Investment Plans
do not guarantee a profit and will not protect you against loss in a declining
market, they can be an excellent way to invest for retirement, a home,
educational expenses and other long-term financial goals.
Certain restrictions and fees imposed by the plan custodian may also
apply for retirement accounts. Speak with your Waddell & Reed financial advisor
for more information.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Class B account with Waddell
& Reed Funds, Inc.
Minimum Frequency
$25 Monthly
Funds Plus Service
To move money from United Cash Management, Inc. to a Fund in Waddell & Reed
Funds, Inc., whether in the same or a different Class B account
Minimum Frequency
$100 Monthly
Distributions and Taxes
Distributions
Each Fund distributes substantially all of its net investment income
and net capital gains to its shareholders each year. Usually, a Fund distributes
net investment income at the following times: Total Return Fund, Growth Fund,
International Growth Fund and Science and Technology Fund, annually in December;
Asset Strategy Fund, quarterly in March, June, September and December; and
Limited-Term Bond Fund, Municipal Bond Fund and High Income Fund declared daily
and paid monthly. Dividends declared for a particular day are paid to
shareholders of record on the prior business day. However, dividends declared
for Saturday and Sunday are paid to shareholders of record on the preceding
Thursday. Net capital gains (and any net gains from foreign currency
transactions) ordinarily are distributed by each Fund in December.
Distribution Options. When you open an account, specify on your
application how you want to receive your distributions. Each Fund offers three
options:
1. Share Payment Option. Your dividends, capital gains and other
distributions with respect to a class will be automatically paid in
additional shares of the same class of the distributing Fund. If you do
not indicate a choice on your application, you will be assigned this
option.
2. Income-Earned Option. Your capital gains and other distributions with
respect to a class will be automatically paid in additional shares of the
same class of the distributing Fund, but you will be sent a check for
each dividend distribution. However, if the dividend distribution is less
than ten dollars, the distribution will be automatically paid in
additional shares of the same class of the distributing Fund.
3. Cash Option. You will be sent a check for your dividends, capital gains
and other distributions if the total distribution is ten dollars or
greater. If the distribution total is less than ten dollars, the total
distribution will be automatically paid in additional shares of the same
class of the distributing Fund.
For retirement accounts, all distributions are automatically paid in
additional Fund shares of the distributing Fund.
Taxes
As with any investment, you should consider how your investment in a
Fund will be taxed. If your account is not a tax-deferred retirement account (or
you are not otherwise exempt from income tax), you should be aware of the
following tax implications:
Taxes on distributions. Dividends from a Fund's investment company
taxable income generally are taxable to you as ordinary income, whether received
in cash or paid in additional Fund shares. Distributions 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 net capital gains, when
designated as such, are taxable to you as long-term capital gains, whether
received in cash or paid in additional Fund shares and regardless of the length
of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains (if you are a noncorporate shareholder of the Fund) may
be taxable at different rates depending on how long the Fund held the assets
generating the gains, but generally are taxed at a maximum rate of 20%.
Each Fund notifies you after each calendar year-end as to the amounts
of dividends and other distributions paid (or deemed paid) to you for that year.
A portion of the dividends paid by Total Return Fund, Growth Fund,
Asset Strategy Fund, International Growth Fund, High Income Fund and/or Science
and Technology Fund, whether received in cash or paid 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 Federal alternative minimum tax ("AMT"). No part of the
dividends paid by Limited-Term Bond Fund and Municipal Bond Fund is expected to
be eligible for this deduction.
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 must
be treated by you as a "tax preference item" for purposes of calculating your
liability, if any, for the AMT; that Fund anticipates such portion will be not
more than 40% of the dividends it will pay to its shareholders. 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 advisers concerning investment
in that Fund.
Entities or other persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity bonds
("PABs") or industrial development bonds ("IBDs") should consult their tax
advisers before purchasing Municipal Bond Fund shares because, for users of
certain of these facilities, the interest on those 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 IDBs.
Withholding. Each Fund must to withhold 31% of all taxable dividends,
capital gains distributions and redemption proceeds payable to individuals and
certain other noncorporate shareholders who do not furnish the Fund with a
correct taxpayer identification number. Withholding at that rate from taxable
dividends and capital gains distributions also is required for shareholders
subject to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in
taxable gain or loss to you, depending on whether the redemption proceeds are
more or less than what you paid for the redeemed shares. An exchange of shares
of one Fund for shares of any other Fund or of United Cash Management, Inc.
generally will have similar tax consequences. In addition, if you purchase
shares of a Fund within thirty days before or after redeeming other shares of
that Fund (regardless of class) at a loss, part or all of that loss will not be
deductible and will increase the basis of the newly purchased shares.
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.
State and local income taxes. The portion of the dividends paid by
Limited-Term Bond Fund (and, to a lesser extent, the other Funds) attributable
to interest earned on its U.S. Government securities generally is not subject to
state and local income taxes, although distributions by any Fund to its
shareholders of net realized gains on the sale of those securities are fully
subject to those taxes. You should consult your tax adviser to determine the
taxability of dividends and other distributions by the Funds in your state and
locality.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Funds and their shareholders; you will
find more information in the SAI. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
<PAGE>
The Management and Expenses of the Funds
Portfolio Management
The Funds are managed by WRIMCO, subject to the authority of the
Corporation's Board of Directors. WRIMCO provides investment advice to each of
the Funds and supervises each Fund's investments. WRIMCO and its predecessors
have served as investment manager to each of the registered investment companies
in the United Group of Mutual Funds, Waddell & Reed Funds, Inc. and
Target/United Funds, Inc. since 1940 or the inception of the company, whichever
was later. WRIMCO is located at 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
James D. Wineland is primarily responsible for the management of the
portfolio of Total Return Fund. Mr. Wineland has held his Fund responsibilities
since July 1, 1997. He is Vice President of WRIMCO, Vice President of the
Corporation and Vice President of other investment companies for which WRIMCO
serves as investment manager. From March 1995 to March 1998 Mr. Wineland was
Vice President of, and a portfolio manager for, Waddell & Reed Asset Management
Company. Mr. Wineland has served as the portfolio manager for investment
companies managed by Waddell & Reed, Inc. and its successor, WRIMCO, since
January 1988 and has been an employee of such since November 1984.
Mark G. Seferovich and Grant P. Sarris are primarily responsible for
the management of the portfolio of Growth Fund. Mr. Seferovich has held his Fund
responsibilities since September 1992. He is Senior Vice President of WRIMCO,
Vice President of the Corporation and Vice President of another investment
company for which WRIMCO serves as investment manager. Mr. Seferovich has served
as the portfolio manager of investment companies managed by Waddell & Reed, Inc.
and its successor, WRIMCO, since February 1989 and has been an employee of such
since February 1989. From March 1996 to March 1998, Mr. Seferovich was Vice
President of, and a portfolio manager for, Waddell & Reed Asset Management
Company.
Mr. Sarris has held his Fund responsibilities since May 1998. He is
Vice President of WRIMCO and Vice President of another investment company for
which WRIMCO serves as investment manager. Mr. Sarris has served as an
investment analyst with Waddell & Reed, Inc. and its successor, WRIMCO, since
October 1, 1991 and had served as Assistant Portfolio Manager of Growth Fund
from January 1, 1996 until May, 1998. He has been an employee of WRIMCO since
October 1, 1991.
W. Patrick Sterner is primarily responsible for the management of the
portfolio of Limited-Term Bond Fund. Mr. Sterner has held his Fund
responsibilities since September 1992. He is Vice President of WRIMCO, Vice
President of the Corporation and Vice President of another investment company
for which WRIMCO serves as investment manager. From August 1992 to March 1998,
Mr. Sterner was Vice President of, and a portfolio manager for, Waddell & Reed
Asset Management Company. He has been an employee of WRIMCO since August 1992.
John M. Holliday is primarily responsible for the management of the
portfolio of Municipal Bond Fund. Mr. Holliday has held his Fund
responsibilities since September 1992. He is Senior Vice President of WRIMCO,
Vice President of the Corporation and Vice President of other investment
companies for which WRIMCO serves as investment manager. From July 1986 to March
1998, Mr. Holliday was Senior Vice President of, and a portfolio manager for,
Waddell & Reed Asset Management Company. Mr. Holliday has served as the
portfolio manager for investment companies managed by Waddell & Reed, Inc. and
its successor, WRIMCO, since August 1979 and has been an employee of such since
April 1978.
Thomas A. Mengel is primarily responsible for the management of the
portfolio of International Growth Fund. Mr. Mengel has held his Fund
responsibilities since May 1, 1996. Mr. Mengel is Vice President of WRIMCO, Vice
President of the Corporation and Vice President of other investment companies
for which WRIMCO serves as investment manager. From 1993 to 1996, Mr. Mengel was
the President of Sal. Oppenheim jr. & Cie. Securities, Inc.
Michael L. Avery is primarily responsible for the management of the
equity portion of the portfolio of Asset Strategy Fund. Mr. Avery has held his
Fund responsibilities since January 1997. He is Senior Vice President of WRIMCO,
Vice President of the Corporation and Vice President of other investment
companies for which WRIMCO serves as investment manager. From March 1995 to
March 1998, Mr. Avery was Vice President of, and Director of Research for,
Waddell & Reed Asset Management Company. Mr. Avery has served as the portfolio
manager for investment companies managed by WRIMCO, since February 1, 1994, has
served as the Director of Research of Waddell & Reed, Inc. and its successor,
WRIMCO, since August 1987, and has been an employee of such since June 1981.
Daniel J. Vrabac is primarily responsible for the management of the
fixed-income portion of the portfolio of Asset Strategy Fund. Mr. Vrabac has
held his Fund responsibilities since January 1997. He is Vice President of the
Corporation and Vice President of other investment companies for which WRIMCO
serves as investment manager. From May 1994 to March 1998, Mr. Vrabac was Vice
President of, and a portfolio manager for, Waddell & Reed Asset Management
Company. Mr. Vrabac has served as an investment analyst with WRIMCO since May
1994 and has been an employee of WRIMCO since May 1993. Mr. Vrabac was a Vice
President of Kansas City Life Insurance Company from May 1983 to May 1994.
Abel Garcia is primarily responsible for the management of the
portfolio of Science and Technology Fund. Mr. Garcia has held his Fund
responsibilities since July 31, 1997. He is Vice President of WRIMCO, Vice
President of the Corporation and Vice President of other investment companies
for which WRIMCO serves as investment manager. From May 1988 to March 1998, Mr.
Garcia was Vice President of, and a portfolio manager for, Waddell & Reed Asset
Management Company. Mr. Garcia has been an employee of Waddell & Reed, Inc. and
its successor, WRIMCO, since August 1983.
Louise D. Rieke is primarily responsible for the management of the
portfolio of High Income Fund. Ms. Rieke has held her Fund responsibilities
since July 31, 1997. She is Vice President of WRIMCO, Vice President of the
Corporation and Vice President of other investment companies for which WRIMCO
serves as investment manager. From November 1985 to March 1998, Ms. Rieke was
Vice President of, and a portfolio manager for, Waddell & Reed Asset Management
Company. Ms. Rieke has served as the portfolio manager for investment companies
managed by Waddell & Reed, Inc. and its successor, WRIMCO, since July 1986 and
has been an employee of such since May 1971.
Other members of WRIMCO's investment management department provide
input on market outlook, economic conditions, investment research and other
considerations relating to the Funds' investments.
Management Fee
Like all mutual funds, the Funds pay fees related to their daily
operations. Expenses paid out of each Fund's assets are reflected in the share
price or dividends of that Fund; they are neither billed directly to
shareholders nor deducted from shareholder accounts.
Each Fund pays a management fee to WRIMCO for providing investment
advice and supervising its investments. Each Fund also pays other expenses,
which are explained in the SAI.
The management fee is payable by a Fund at the annual rates of:
for Asset Strategy Fund, 0.70% of net assets up to $1 billion, 0.65% of net
assets over $1 billion and up to $2 billion, 0.60% of net assets over $2 billion
and up to $3 billion, and 0.55% of net assets over $3 billion;
for Growth Fund, 0.85% of net assets up to $1 billion, 0.83% of net assets over
$1 billion and up to $2 billion, 0.80% of net assets over $2 billion and up to
$3 billion, and 0.76% of net assets over $3 billion;
for High Income Fund, 0.625% of net assets up to $500 million, 0.60% of net
assets over $500 million and up to $1 billion, 0.55% of net assets over $1
billion and up to $1.5 billion, and 0.50% of net assets over $1.5 billion;
for International Growth Fund, 0.85% of net assets up to $1 billion, 0.83% of
net assets over $1 billion and up to $2 billion, 0.80% of net assets over $2
billion and up to $3 billion, and 0.76% of net assets over $3 billion;
for Limited-Term Bond Fund, 0.50% of net assets up to $500 million, 0.45% of net
assets over $500 million and up to $1 billion, 0.40% of net assets over $1
billion and up to $1.5 billion, and 0.35% of net assets over $1.5 billion;
for Municipal Bond Fund, 0.525% of net assets up to $500 million, 0.50% of net
assets over $500 million and up to $1 billion, 0.45% of net assets over $1
billion and up to $1.5 billion, and 0.40% of net assets over $1.5 billion;
for Science & Technology Fund, 0.85% of net assets up to $1 billion, 0.83% of
net assets over $1 billion and up to $2 billion, 0.80% of net assets over $2
billion and up to $3 billion, and 0.76% of net assets over $3 billion; and
for Total Return Fund, 0.70% of net assets up to $1 billion, 0.65% of net assets
over $1 billion and up to $2 billion, 0.60% of net assets over $2 billion and up
to $3 billion, 0.55% of net assets over $3 billion.
Prior to July 1, 1999 the management fee was computed on each Fund's
net asset value as of the close of business each day at an annual rate as
follows:
Fund Rate Annual
- ---- ---- ------
Asset Strategy
Fund 0.81%
Growth Fund 0.81%
High Income
Fund 0.66%
International
Growth Fund 0.81%
Limited-Term
Bond Fund 0.56%
Municipal Bond
Fund 0.56%
Science and Technology
Fund 0.71%
Total Return
Fund 0.71%
For the fiscal year ended March 31, 1999, management fees for each Fund
as a percentage of such Fund's net assets were as follows:
Management
Fund Fee
- ---- ---
Asset Strategy
Fund 0.%
Growth Fund 0.%
High Income
Fund
International
Growth Fund 0.%
Limited-Term
Bond Fund 0.%
Municipal
Bond Fund 0.%
Science and
Technology Fund
Total Return
Fund 0.%
<PAGE>
Financial Highlights
Asset Strategy Fund
The following information is to help you understand the financial
performance of the Fund's Class B* and Class Y shares for the fiscal periods
shown. Certain information reflects financial results for a single Fund share.
"Total return" shows how much your investment would have increased (or
decreased) during each period, assuming reinvestment of all dividends and
distributions. This information has been audited by Deloitte & Touche LLP, whose
independent auditors' report, along with the Fund's financial statements for the
fiscal year ended March 31, 1999, are included in the SAI, which is available
upon request.
For a Class B share outstanding throughout each period*:
<TABLE>
<CAPTION>
For the
period from
For the fiscal year April 20,
ended March 31, 1995**
--------------------------------------- to
1999 1998 1997 March 31, 1996
Class B Per-Share Data ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period ......... $ 9.73 $ 10.15 $ 10.00
---------- ---------- ----------
Income from investment
operations:
Net investment
income ................... 0.21 0.23 0.16
Net realized and
unrealized gain (loss)
on investments ........... 2.16 (0.30) 0.14
---------- ---------- ----------
Total from investment
operations .................. 2.37 (0.07) 0.30
---------- ---------- ----------
Less distributions:
From net investment
income ................... (0.22) (0.21) (0.15)
From capital gains .......... (0.46) (0.14) (0.00)
---------- ---------- ----------
Total distributions ............ (0.68) (0.35) (0.15)
---------- ---------- ----------
Net asset value,
end of period ............... $ 11.42 $ 9.73 $ 10.15
========== ========== ==========
Total return ................... 24.94% -0.86% 3.00%
Class B Ratios/Supplemental Data
Net assets, end of
period (000
omitted) .................... $ 19,415 $ 13,398 $ 13,221
Ratio of expenses
to average net
assets ...................... 2.44% 2.52% 2.54%***
Ratio of net investment
income to average net
assets ...................... 2.02% 2.21% 2.14%***
Portfolio
turnover rate ............... 220.67% 109.92% 75.02%
</TABLE>
* On December 2, 1995, Fund shares outstanding were designated Class B shares.
** Commencement of operations.
*** Annualized.
<PAGE>
ASSET STRATEGY FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
For the
period from
For the fiscal year December 29,
ended March 31, 1995*
--------------------------------------- to
1999 1998 1997 March 31, 1996
Class Y Per-Share Data ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period ......... $ 9.73 $ 10.16 $10.23
------- ------- ------- ------
Income from investment
operations:
Net investment
income ................... 0.31 0.27 0.07
Net realized and
unrealized gain (loss)
on investments ........... 2.16 (0.26) (0.08)
------- ------- ------- ------
Total from investment
operations .................. 2.47 0.01 (0.01)
------- ------- ------- ------
Less distributions:
From net investment
income ................... (0.31) (0.30) (0.06)
From capital gains .......... (0.46) (0.14) (0.00)
------- ------- ------- ------
Total distributions ............ (0.77) (0.44) (0.06)
------- ------- ------- ------
Net asset value,
end of period ............... $ 11.43 $ 9.73 $10.16
======= ======= ======= ======
Total return ................... 0.% 26.06% 0.05% -0.25%
Class Y Ratios/Supplemental Data
Net assets, end of
period (000
omitted) .................... $ $ 225 $ 116 $ 1
Ratio of expenses
to average net
assets ...................... 0.% 1.58% 1.61% 1.95%**
Ratio of net investment
income to average net
assets ...................... 0.% 2.90% 2.97% 2.34%**
Portfolio
turnover rate ............... 0.% 220.67% 109.92% 75.02%**
</TABLE>
* Commencement of operations.
** Annualized.
<PAGE>
Growth Fund
The following information is to help you understand the financial
performance of the Fund's Class B* and Class Y shares for the fiscal periods
shown. Certain information reflects financial results for a single Fund share.
"Total return" shows how much your investment would have increased (or
decreased) during each period, assuming reinvestment of all dividends and
distributions. This information has been audited by Deloitte & Touche LLP, whose
independent auditors' report, along with the Fund's financial statements for the
fiscal year ended March 31, 1999, are included in the SAI, which is available
upon request.
For a Class B share outstanding throughout each period*:
For the fiscal
year ended March 31,
---------------------------------------------------
1999 1998 1997 1996 1995
Class B Per Share Data ..... ------- -------- -------- -------- --------
Net asset value,
beginning of
period .................. $ $ 18.16 $ 21.00 $ 16.90 $ 14.08
------- -------- -------- -------- --------
Income from investment
operations:
Net investment
income (loss) ........ (0.25) (0.06) (0.02) 0.00
Net realized and
unrealized gain (loss)
on investments ....... 11.81 (2.18) 4.49 3.15
------- -------- -------- -------- --------
Total from investment
operations .............. 11.56 (2.24) 4.47 3.15
------- -------- -------- -------- --------
Less distributions:
From net investment
income ............... (0.00) (0.00) (0.00) (0.00)
From capital gains ...... (1.15) (0.60) (0.37) (0.33)
------- -------- -------- -------- --------
Total distributions ..... (1.15) (0.60) (0.37) (0.33)
------- -------- -------- -------- --------
Net asset value,
end of period ........... $ 28.57 $ 18.16 $ 21.00 $ 16.90
======= ======== ======== ======== ========
Total return ............... 65.37% -10.97% 26.57% 22.61%
Class B Ratios/Supplemental Data
Net assets, end of period
(000 omitted) .......... $329,514 $198,088 $202,557 $100,683
Ratio of expenses
to average net
assets .................. 2.13% 2.12% 2.14% 2.23%
Ratio of net investment
income to average
net assets .............. -1.12% -0.27% -0.25% 0.01%
Portfolio turnover
rate .................... 33.46% 37.20% 31.84% 56.30%
*On December 2, 1995, Fund shares outstanding were designated Class B
shares.
<PAGE>
GROWTH FUND
For a Class Y share outstanding throughout each period:
For the fiscal For the
year ended March 31, period from
---------------------------- December 29, 1995*
1999 1998 1997 to March 31, 1996
Class Y Per-Share Data ..... ------- ------- ------ --------------------
Net asset value,
beginning of
period .................. $ $ 18.32 $ 21.04 $20.21
----- ------- ------- ------
Income from investment
operations:
Net investment
income (loss) ........ (0.06) 0.01 .04
Net realized and
unrealized gain (loss)
on investments ....... 11.98 (2.13) .79
----- ------- ------- ------
Total from investment
operations .............. 11.92 (2.12) .83
----- ------- ------- ------
Less distribution
from capital gains ...... (1.15) (0.60) (0.00)
----- ------- ------- ------
Net asset value,
end of period ........... $ $29.09 $ 18.32 $21.04
===== ======= ======= ======
Total return ............... 0.% 66.78% -10.37% 4.11%
Class Y Ratios/Supplemental Data
Net assets, end of period
(000 omitted) .......... $ $ 633 $ 264 $ 1
Ratio of expenses
to average net
assets .................. 0.% 1.30% 1.17% 1.17%**
Ratio of net investment
income to average
net assets .............. 0.% -0.30% -0.31% 0.78%**
Portfolio turnover
rate .................... 0.% 33.46% 37.20% 31.84%**
*Commencement of operations.
**Annualized.
<PAGE>
High Income Fund
The following information is to help you understand the financial
performance of the Fund's Class B* and Class Y shares for the fiscal periods
shown. Certain information reflects financial results for a single Fund share.
"Total return" shows how much your investment would have increased (or
decreased) during each period, assuming reinvestment of all dividends and
distributions. This information has been audited by Deloitte & Touche LLP, whose
independent auditors' report, along with the Fund's financial statements for the
fiscal year ended March 31, 1999, are included in the SAI, which is available
upon request.
For a Class B share outstanding throughout the period:
For the
period from
July 31, 1997*
to
March 31, 1998
Class B Per-Share Data ---------
Net asset value,
beginning of period ....................................... $ 10.00
----------
Income from investment
operations:
Net investment
income ................................................. 0.37
Net realized and
unrealized gain
on investments ......................................... 0.79
----------
Total from investment
operations ................................................ 1.16
----------
Less distributions:
Declared from net
investment income ...................................... (0.37)
From capital gains ........................................ (0.00)
----------
Total distributions .......................................... (0.37)
----------
Net asset value,
end of period ............................................. $ 10.79
==========
Total return ................................................. 11.77%
Class B Ratios/Supplemental Data
Net assets, end of
period (000
omitted) .................................................. $ 11,812
Ratio of expenses
to average net
assets .................................................... 2.52%**
Ratio of net investment
income to average net
assets .................................................... 5.98%**
Portfolio
turnover rate ............................................. 67.82%
*Commencement of operations.
**Annualized.
<PAGE>
HIGH INCOME FUND
For a Class Y share outstanding throughout the period:
For the fiscal year
ended March 31, 1999
Class Y Per-Share Data --------------------
Net asset value,
beginning of period ...........
-------- -------- --------
Income from investment
operations:
Net investment
income .....................
Net realized and
unrealized gain (loss)
on investments .............
-------- -------- --------
Total from investment
operations ....................
-------- -------- --------
Less distributions:
From net investment income ....
From capital gains ............
-------- -------- --------
Total distributions ..............
-------- -------- --------
Net asset value,
end of period .................
======== ======== ========
Total return .....................
Class Y Ratios/Supplemental Data
Net assets, end of
period (000
omitted) ......................
Ratio of expenses
to average net
assets ........................
Ratio of net investment
income to average net
assets ........................
Portfolio turnover rate ..........
*Commencement of operations.
**Annualized.
<PAGE>
International Growth Fund*
The following information is to help you understand the financial
performance of the Fund's Class B* and Class Y shares for the fiscal periods
shown. Certain information reflects financial results for a single Fund share.
"Total return" shows how much your investment would have increased (or
decreased) during each period, assuming reinvestment of all dividends and
distributions. This information has been audited by Deloitte & Touche LLP, whose
independent auditors' report, along with the Fund's financial statements for the
fiscal year ended March 31, 1999, are included in the SAI, which is available
upon request.
For a Class B share outstanding throughout each period**:
<TABLE>
<CAPTION>
For the fiscal
year ended March 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
Class B Per-Share Data ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......................... $12.40 $9.94 $9.36 $9.37
------ ------- ------- ------- -------
Income from investment
operations:
Net investment
income (loss) ................ (0.10) (0.03) 0.08 0.36
Net realized and
unrealized gain (loss)
on investments ............... 4.12 2.50 0.63 (0.01)
------ ------- ------- ------- -------
Total from investment
operations ...................... 4.02 2.47 0.71 0.35
------ ------- ------- ------- -------
Less distributions:
Declared from net
investment income ............ (0.00) (0.01) (0.11) (0.36)
From capital gains .............. (1.38) (0.00) (0.00) (0.00)
In excess of net
investment income ............ (0.00) (0.00) (0.02) (0.00)
Tax-basis return of
capital....................... (0.00) (0.00) (0.00) (0.00)
------ ------- ------- ------- -------
Total distributions.............. (1.38) (0.01) (0.13) (0.36)
------ ------- ------- ------- -------
Net asset value,
end of period ................... $ 15.04 $12.40 $9.94 $9.36
====== ======= ======= ======= =======
Total return ....................... 35.24% 24.85% 7.64% 3.84%
Class B Ratios/Supplemental Data
Net assets, end of
period (000
omitted) ........................ $87,041 $50,472 $20,874 $11,188
Ratio of expenses
to average net
assets .......................... 2.35% 2.46% 2.50% 2.29%
Ratio of net investment
income to average
net assets ...................... -0.82% -0.52% 0.63% 3.87%
Portfolio turnover
rate ............................ 105.11% 94.76% 88.55% 13.33%
------ ------- ------- ------- -------
</TABLE>
* International Growth Fund (formerly Global Income Fund) changed its name and
investment objective effective April 20, 1995.
** On December 2, 1995, Fund shares outstanding were designated Class B shares.
<PAGE>
INTERNATIONAL GROWTH FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
For the fiscal For the
year ended March 31, period from
---------------------------------- December 29, 1995*
1999 1998 1997 to March 31, 1996
Class Y Per-Share Data ------ ------- ------- -------------------
<S> <C> <C> <C>
Net asset value,
beginning of
period .......................... $ $12.52 $9.95 $9.70
------ ------ ------- ------
Income from investment
operations:
Net investment
income ....................... 0.01 0.02 0.02
Net realized and
unrealized gain
on investments ............... 4.20 2.56 0.23
------ ------ ------- ------
Total from investment
operations ...................... 4.21 2.58 0.25
------ ------ ------- ------
Less distributions:
From net investment income ...... (0.00) (0.01) (0.00)
From capital gains .............. (1.38) (0.00) (0.00)
------ ------ ------- ------
Total distributions.............. (1.38) (0.01) (0.00)
------ ------ ------- ------
Net asset value,
end of period ................... $ $15.35 $12.52 $9.95
====== ====== ======= ======
Total return ....................... 36.45% 25.93% 2.58%
Class Y Ratios/Supplemental Data
Net assets, end of
period (000
omitted) ........................ $ $419 $227 $7
Ratio of expenses
to average net
assets .......................... 0.% 1.51% 1.59% 1.84%**
Ratio of net investment
income to average
net assets ...................... 0.% 0.07% 0.05% 1.07%**
Portfolio turnover
rate ............................ 0.% 105.11% 94.76% 88.55%**
</TABLE>
*Commencement of operations.
**Annualized.
<PAGE>
Limited-Term Bond Fund
The following information is to help you understand the financial
performance of the Fund's Class B* and Class Y shares for the fiscal periods
shown. Certain information reflects financial results for a single Fund share.
"Total return" shows how much your investment would have increased (or
decreased) during each period, assuming reinvestment of all dividends and
distributions. This information has been audited by Deloitte & Touche LLP, whose
independent auditors' report, along with the Fund's financial statements for the
fiscal year ended March 31, 1999, are included in the SAI, which is available
upon request.
For a Class B share outstanding throughout each period*:
<TABLE>
<CAPTION>
For the fiscal
year ended March 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
Class B Per-Share Data ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......................... $ 9.90 $10.00 $ 9.70 $9.84
------ ------ ------ ----- ------
Income from investment
operations:
Net investment
income ....................... 0.45 0.44 0.41 0.39
Net realized and
unrealized gain
(loss) on
investments .................. 0.24 (0.09) 0.30 (0.13)
------ ------ ------ ----- ------
Total from investment
operations ...................... 0.69 0.35 0.71 0.26
------ ------ ------ ----- ------
Less distributions:
Declared from net
investment income ............ (0.45) (0.44) (0.41) (0.39)
From capital gains .............. (0.00) (0.01) (0.00) (0.01)
------ ------ ------ ----- ------
Total distributions ............ (0.45) (0.45) (0.41) (0.40)
------ ------ ------ ----- ------
Net asset value,
end of period ................... $10.14 $9.90 $10.00 $9.70
====== ====== ====== ===== ======
Total return ....................... 7.15% 3.52% 7.41% 2.73%
Class B Ratios/Supplemental Data
Net assets, end of
period (000
omitted) ........................ $18,148 $17,770 $23,682 $12,419
Ratio of expenses
to average net
assets .......................... 2.12% 2.07% 2.10% 2.17%
Ratio of net investment
income to average
net assets....................... 4.52% 4.40% 4.14% 4.05%
Portfolio turnover
rate ............................ 27.37% 23.05% 22.08% 29.20%
</TABLE>
* On December 2, 1995, Fund shares outstanding were designated Class B shares.
<PAGE>
LIMITED-TERM BOND FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
For the fiscal For the
year ended March 31, period from
-------------------------------- December 29, 1995*
1999 1998 1997 to March 31, 1996
Class Y Per-Share Data ------ ------ ------ --------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of
period .......................... $ $ 9.90 $10.00 $10.16
------ ------ ------ ------
Income from investment
operations:
Net investment
income ....................... 0.53 0.52 0.11
Net realized and
unrealized gain
(loss) on
investments .................. 0.24 (0.09) (0.16)
------ ------ ------ ------
Total from investment
operations ...................... 0.77 0.43 (0.05)
------ ------ ------ ------
Less distributions:
From net investment income ...... (0.53) (0.52) (0.11)
From capital gains .............. (0.00) (0.01) (0.00)
------ ------ ------ ------
Total distributions ............ (0.53) (0.53) (0.11)
------ ------ ------ ------
Net asset value,
end of period ................... $ $10.14 $9.90 $10.00
====== ====== ====== ======
Total return ....................... 0.% 7.91% 4.33% -0.49%
Class Y Ratios/Supplemental Data
Net assets, end of
period (000
omitted) ........................ $ $184 $105 $1
Ratio of expenses
to average net
assets .......................... 0.% 1.32% 1.04% 1.18%**
Ratio of net investment
income to average
net assets....................... 0.% 5.32% 5.62% 4.70%**
Portfolio turnover
rate ............................ 0.% 27.37% 23.05% 22.08%**
</TABLE>
*Commencement of operations.
**Annualized.
<PAGE>
Municipal Bond Fund
The following information is to help you understand the financial
performance of the Fund's Class B* and Class Y shares for the fiscal periods
shown. Certain information reflects financial results for a single Fund share.
"Total return" shows how much your investment would have increased (or
decreased) during each period, assuming reinvestment of all dividends and
distributions. This information has been audited by Deloitte & Touche LLP, whose
independent auditors' report, along with the Fund's financial statements for the
fiscal year ended March 31, 1999, are included in the SAI, which is available
upon request.
For a Class B share outstanding throughout each period*:
<TABLE>
<CAPTION>
For the fiscal
year ended March 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
Class B Per-Share Data ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......................... $10.74 $10.63 $10.30 $10.12
------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income ....................... 0.44 0.45 0.43 0.44
Net realized and
unrealized gain
(loss) on
investments .................. 0.71 0.11 0.33 0.18
------ ------ ------ ------ ------
Total from investment
operations ...................... 1.15 0.56 0.76 0.62
------ ------ ------ ------ ------
Less distributions:
Declared from net
investment income ............ (0.44) (0.45) (0.43) (0.44)
From capital gains .............. (0.00) (0.00) (0.00) (0.00)
------ ------ ------ ------ ------
Total distributions ............ (0.44) (0.45) (0.43) (0.44)
------ ------ ------ ------ ------
Net asset value,
end of period ................... $11.45 $10.74 $10.63 $10.30
====== ====== ====== ====== ======
Total return ....................... 10.89% 5.32% 7.48% 6.37%
Class B Ratios/Supplemental Data
Net assets, end of
period (000
omitted) ........................ $40,023 $36,618 $33,869 $27,434 $24,960 $8,557
Ratio of expenses
to average net
assets .......................... 1.89% 1.92% 1.93% 1.94% 1.98% 1.94%***
Ratio of net investment
income to average
net assets ...................... 3.94% 4.18% 4.05% 4.41% 3.62% 3.99%***
Portfolio turnover
rate ............................ 27.86% 34.72% 42.02% 56.92% 18.93% 140.02%***
</TABLE>
* On December 2, 1995, Fund shares outstanding were designated Class B shares.
<PAGE>
MUNICIPAL BOND FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
For the
For the For the fiscal For the
period from period year period from
December 30, 1998 ended ended December 29, 1995*
to March 31, 1999 6/23/97** 3/31/97 to March 31, 1996
----------------- --------- ------- ------------------
Class Y Per-Share Data
<S> <C> <C> <C> <C>
Net asset value,
beginning of
period .......................... $ $10.74 $10.63 $10.94
------ ------ ------ ------
Income from investment
operations:
Net investment
income ....................... 0.10 0.52 0.12
Net realized and
unrealized gain
(loss) on
investments .................. 0.29 0.11 (0.31)
------ ------ ------ ------
Total from investment
operations ...................... (0.39) 0.63 (0.19)
------ ------ ------ ------
Less dividends from net
investment income ............ (0.10) (0.52) (0.12)
------ ------ ------ ------
Net asset value,
end of period ................... $ $11.03 $10.74 $10.63
====== ====== ====== ======
Total return ....................... 3.22% 5.96% -1.80%
Class Y Ratios/Supplemental Data
Net assets, end of
period (000
omitted) ........................ $ $0 $1 $1
Ratio of expenses
to average net
assets .......................... 0.% 4.95%*** 1.28% 1.18%***
Ratio of net investment
income to average
net assets ...................... 0.% 4.12%*** 4.83% 4.33%***
Portfolio turnover
rate ............................ 0.% 1.45% 34.72% 42.02%***
</TABLE>
*Commencement of operations.
**All outstanding shares were redeemed on June 23, 1997 at the ending net asset
value shown in the table.
***Annualized.
<PAGE>
Science and Technology Fund
The following information is to help you understand the financial
performance of the Fund's Class B* and Class Y shares for the fiscal periods
shown. Certain information reflects financial results for a single Fund share.
"Total return" shows how much your investment would have increased (or
decreased) during each period, assuming reinvestment of all dividends and
distributions. This information has been audited by Deloitte & Touche LLP, whose
independent auditors' report, along with the Fund's financial statements for the
fiscal year ended March 31, 1999, are included in the SAI, which is available
upon request.
For a Class B share outstanding throughout the period:
For the
period from
July 31, 1997*
to
March 31, 1998
Class B Per-Share Data ---------
Net asset value,
beginning of period ........................................ $ 10.00
---------
Income from investment
operations:
Net investment
loss .................................................... (0.07)
Net realized and
unrealized gain
on investments .......................................... 2.08
---------
Total from investment
operations ................................................. 2.01
---------
Net asset value,
end of period .............................................. $ 12.01
=========
Total return .................................................. 20.10%
Class B Ratios/Supplemental Data
Net assets, end of
period (000
omitted) ................................................... $ 7,615
Ratio of expenses
to average net
assets ..................................................... 3.20%**
Ratio of net investment
loss to average net
assets ..................................................... -1.66%**
Portfolio
turnover rate .............................................. 26.64%
* Commencement of operations.
** Annualized.
<PAGE>
SCIENCE AND TECHNOLOGY FUND
For a Class Y share outstanding throughout each period:
For the fiscal year
ended March 31, 1999
Class Y Per-share Data --------------------
Net asset value,
beginning of period ........................................ $
---------
Income from investment
operations:
Net investment
income ..................................................
Net realized and
unrealized gain (loss)
on investments ..........................................
---------
Total from investment
operations .................................................
---------
Less distributions
From net investment
income ...................................................
From capital gains ......................................... ---------
Total distributions .......................................... ---------
Net asset value,
end of period .............................................. $
=========
Total return ..................................................
Class Y Ratios/Supplemental Data
Net assets, end of
period (000
omitted) ................................................... $
Ratio of expenses
to average net
assets .....................................................
Ratio of net investment
income to average net
assets .....................................................
Portfolio
turnover rate ..............................................
* Commencement of operations.
**Annualized.
<PAGE>
Total Return Fund
The following information is to help you understand the financial
performance of the Fund's Class B* and Class Y shares for the fiscal periods
shown. Certain information reflects financial results for a single Fund share.
"Total return" shows how much your investment would have increased (or
decreased) during each period, assuming reinvestment of all dividends and
distributions. This information has been audited by Deloitte & Touche LLP, whose
independent auditors' report, along with the Fund's financial statements for the
fiscal year ended March 31, 1999, are included in the SAI, which is available
upon request.
For a Class B share outstanding throughout each period*:
<TABLE>
<CAPTION>
For the fiscal
year ended March 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
Class B Per-Share Data ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period .......................... $18.18 $16.34 $12.73 $11.99
------ ------ ------ ------ ------
Income from investment
operations:
Net investment income
(loss)........................ (0.04) (0.02) (0.01) 0.00
Net realized and
unrealized gain
on investments ............... 7.12 1.97 3.67 0.74
------ ------ ------ ------ ------
Total from investment
operations ...................... 7.08 1.95 3.66 0.74
------ ------ ------ ------ ------
Less distributions:
From net investment
income ....................... (0.00) (0.00) (0.00) (0.00)
From capital gains ............. (0.78) (0.11) (0.05) (0.00)
------ ------ ------ ------ ------
Total distributions................. (0.78) (0.11) (0.05) (0.00)
------ ------ ------ ------ ------
Net asset value,
end of period ................... $24.48 $18.18 $16.34 $12.73
====== ====== ====== ====== ======
Total return ....................... 39.57% 11.93% 28.75% 6.17%
Class B Ratios/Supplemental Data
Net assets, end of
period (000
omitted).........................
$472,970 $317,453 $208,233 $104,691
Ratio of expenses
to average net
assets .......................... 1.92% 1.95% 1.99% 2.05%
Ratio of net investment
income to average
net assets ...................... -0.23% -0.17% -0.11% -0.04%
Portfolio turnover
rate ............................ 36.94% 26.23% 16.78% 16.60%
</TABLE>
* On December 2, 1995, Fund shares outstanding were designated Class B shares.
<PAGE>
TOTAL RETURN FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
For the fiscal year For the
ended March 31, period from
-------------------------------- December 29, 1995*
1999 1998 1997 to March 31, 1996
Class Y Per-share Data ------ ------ ------ --------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of
period .......................... $ $18.35 $16.38 $15.32
------ ------ ------ ------
Income from investment
operations:
Net investment
income ....................... 0.10 0.04 0.03
Net realized and
unrealized gain
on investments ............... 7.24 2.04 1.03
------ ------ ------ ------
Total from investment
operations ...................... 7.34 2.08 1.06
------ ------ ------ ------
Less distribution from
capital gains ................... (0.78) (0.11) (0.00)
------ ------ ------ ------
Net asset value,
end of period ................... $ $24.91 $18.35 $16.38
====== ====== ====== ======
Total return ....................... 0.% 40.63% 12.69% 6.92%
Class Y Ratios/Supplemental Data
Net assets, end of
period (000
omitted) ........................ $ $943 $504 $87
Ratio of expenses
to average net
assets .......................... 0.% 1.20% 1.18% 0.96%**
Ratio of net investment
income to average
net assets....................... 0.% 0.50% 0.65% 1.04%**
Portfolio turnover
rate ............................ 0.% 36.94% 26.23% 16.78%**
</TABLE>
*Commencement of operations.
**Annualized.
<PAGE>
Waddell & Reed Funds, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 Massachusetts Avenue, N. W. (913) 236-2000
Washington, D. C. 20036 (800) 366-5465
Independent Auditors Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Avenue Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment (913) 236-2000
Management Company (800) 366-5465
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
(800) 366-5465 P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
<PAGE>
Waddell & Reed Funds, Inc.
PROSPECTUS
June 30, 1999
You can get more information about the Funds in--
o The Statement of Additional Information (SAI) dated June 30, 1999, which
contains detailed information about each Fund, particularly the investment
policies and practices. You may not be aware of important information about
each Fund unless you read both the Prospectus and the SAI. The current SAI is
on file with the Securities and Exchange Commission (SEC) and it is
incorporated into this Prospectus by reference (that is, the SAI is legally
part of the Prospectus).
o The Annual and Semiannual Reports to Shareholders, which detail each Fund's
actual investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected each Fund's performance during the year covered by the
report.
To request a copy of the current SAI or copies of a Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the Fund
or Waddell & Reed, Inc. at the address and telephone number below. Copies of the
SAI, Annual and/or Semiannual reports may also be requested at
[email protected].
Information about the Fund (including the current SAI and most recent Annual and
Semiannual Reports) is available from the SEC's web site at http://www.sec.gov
and from the SEC's Public Reference Room in Washington, D.C. You can find out
about the operation of the Public Reference Room and applicable copying charges
by calling 1-800-SEC-0330.
The Funds' SEC file number is: 811-6569.
WADDELL & REED, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
800-366-5465
printed on recycled paper WRP3000(6-99)
<PAGE>
WADDELL & REED FUNDS, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
June 30, 1999
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus ("Prospectus")
for the Class B shares and the Class Y shares of Waddell & Reed Funds, Inc. (the
"Corporation") dated June 30, 1999, which may be obtained from the Corporation
or its principal underwriter and distributor, Waddell & Reed, Inc., at the
address or telephone number shown above.
TABLE OF CONTENTS
Performance Information .................................... 2
Investment Strategies, Policies and Practices............... 6
Investment Management and Other Services ................... 41
Purchase, Redemption and Pricing of Shares ................. 47
Directors and Officers ..................................... 55
Payments to Shareholders ................................... 63
Taxes ...................................................... 64
Portfolio Transactions and Brokerage ....................... 70
Other Information .......................................... 73
Financial Statements ....................................... 75
Appendix A .................................................
<PAGE>
Waddell & Reed Funds, Inc. is a mutual fund; an investment that pools
shareholders' money and invests it toward a specified goal. In technical terms,
the Corporation is an open-end, diversified management company organized as a
Maryland corporation on January 29, 1992.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Corporation's principal underwriter and
distributor (the "Distributor"), or the Corporation may, from time to time,
publish for one or more of the eight Funds (each a "Fund" and collectively the
"Funds") total return information, yield information and/or performance rankings
in advertisements and sales materials.
Total Return
The total return is the overall change in the value of an investment over
a given period of time. An average annual total return quotation is computed by
finding the average annual compounded rates of return over the one-, five-, and
ten-year periods that would equate the initial amount invested to the ending
redeemable value. Total return is calculated by assuming an initial $1,000
investment. Class B 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 for Class B
shares reflect the imposition of the maximum applicable deferred sales charge.
All dividends and distributions are assumed to be reinvested in shares of the
applicable class at net asset value as of the day the dividend or distribution
is paid. No sales load is charged on reinvested dividends or distributions on
Class B shares. The formula used to calculate the average annual total return
for a particular class of a Fund is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for
the periods shown.
Non-standardized performance information may also be presented that may
not reflect the deferred sales charge.
The average annual total return quotations for Class B shares of each Fund
with the maximum deferred sales charge deducted as of March 31, 1999, which is
the most recent balance sheet included in this SAI, for the periods shown were
as follows:
One Year Period Five Year Period Period from
From 4-1-98 From 4-1-94 9-21-92* to
to 3-31-99 3-31-99 3-31-99
--------------- ---------------- -----------
Asset Strategy Fund % %**
Growth Fund % % %
High Income Fund %***
International Growth Fund % % %
Limited-Term Bond Fund % % %
Municipal Bond Fund % % %
Science and Technology Fund %***
Total Return Fund % % %
* Date of initial public offering
** For the period from April 20, 1995, the date of initial public offering, to
March 31, 1999.
*** For the period from July 31, 1997, the date of initial public offering, to
March 31, 1999.
The average annual total return quotations for the Class B shares of each
fund without the maximum deferred sales charge deducted as of March 31, 1999,
which is the most recent balance sheet included in this SAI, for the periods
shown were as follows:
One Year Period Five Year Period Period from
From 4-1-98 From 4-1-94 9/21/92* to
to 3-31-99 to 3-31-99 3-31-99
--------------- ---------------- -----------
Asset Strategy Fund % %**
Growth Fund % % %
High Income Fund %***
International Growth Fund % % %
Limited-Term Bond Fund % % %
Municipal Bond Fund % % %
Science and Technology Fund %***
Total Return Fund % % %
* Date of initial public offering
** For the period from April 20, 1995, the date of initial public offering, to
March 31, 1999.
*** For the period from July 31, 1997, the date of initial public offering, to
March 31, 1999.
International Growth Fund (formerly Global Income Fund) changed its name
and investment objective effective April 20, 1995. Prior to this change, this
Fund's policies related to providing a high level of current income rather than
long-term appreciation.
Prior to December 2, 1995, the Funds offered only one class of shares to
the public. Shares of each Fund outstanding on that date were designated as
Class B shares. Since that date, Class Y shares of each of the Funds have been
available to certain institutional investors.
The average annual total return quotations for Class Y shares as of March
31, 1999, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
One Year Period Period from
From 4-1-98 inception* to
to 3-31-99 3-31-99
--------------- --------------
Asset Strategy Fund % %
Growth Fund % %
High Income Fund % %
International Growth Fund % %
Limited-Term Bond Fund % %
Municipal Bond Fund %** %
Science and Technology Fund % %
Total Return Fund % %
* Each of these Funds (other than Science and Technology Fund and High Income
Fund) commenced selling Class Y shares on December 29, 1995.
** For the period from April 1, 1997 through June 23, 1997.
High Income Fund and Science and Technology Fund commenced operations on
July 31, 1997.
Yield
Yield refers to the income generated by an investment in a Fund over a
given period of time. A yield quoted for a class of a Fund is computed by
dividing the net investment income per share of that class earned during the
period for which the yield is shown by the maximum offering price per share of
that class on the last day of that period according to the following formula:
6
Yield = 2((((a - b)/cd)+1) -1)
Where, with respect to a particular class of a Fund:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares of the class
outstanding during the period that were entitled to
receive dividends.
d = the maximum offering price per share of the class on the
last day of the period.
The yields computed according to the formula for the 30-day period ended
on March 31, 1999, the date of the most recent balance sheet included in this
SAI, for Class B shares of each of Limited-Term Bond Fund and Municipal Bond
Fund are:
Limited-Term Bond Fund %
Municipal Bond Fund %
The yield computed according to the formula for the 30-day period ended on
March 31, 1999, the date of the most recent balance sheet included in this SAI,
for Class Y shares of Limited-Term Bond Fund is:
Limited-Term Bond Fund %
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 for Class B shares of Municipal Bond Fund
computed according to the formula for the 30-day period ended on March 31, 1999,
the date of the most recent balance sheet included in this SAI, is %, %, %, %
and % 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 for Class B shares 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 eight 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. Each class of 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 Composite Stock Price Index and the
Dow Jones Industrial Average. Performance information may be quoted numerically
or presented in a table, graph or other illustration. In connection with a
ranking, a Fund may provide additional information, such as the particular
category to which it related, the number of funds in the category, the criteria
upon which the ranking is based, and the effect of sales charges, fee waivers
and/or expense reimbursements.
All performance information that 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 STRATEGIES, POLICIES AND PRACTICES
This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and policies
the Funds' investment manager, Waddell & Reed Investment Management Company
("WRIMCO"), may employ and the types of instruments in which a Fund may invest,
in pursuit of a Fund's goal(s). A summary of the risks associated with these
instrument types and investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by a Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help a Fund achieve its goal. See "Investment
Restrictions and Limitations" for a listing of the fundamental and
non-fundamental (e.g., operating) investment restrictions and policies of each
Fund.
Asset Allocation
Asset Strategy Fund allocates its assets among the following classes, or
types, of investments:
The short-term class includes all types of domestic and foreign securities
and money market instruments with remaining maturities of three years or less.
WRIMCO, will seek to maximize total return within the short-term asset class by
taking advantage of yield differentials between different instruments, issuers,
and currencies. Short-term instruments may include corporate debt securities,
such as commercial paper and notes; government securities issued by U.S. or
foreign governments or their agencies or instrumentalities; bank deposits and
other financial institution obligations; repurchase agreements involving any
type of security; and other similar short-term instruments. These instruments
may be denominated in U.S.
dollars or foreign currency.
The bond class includes all varieties of domestic and foreign fixed-income
securities with maturities greater than three years. WRIMCO seeks to maximize
total return within the bond class by adjusting Asset Strategy Fund's
investments in securities with different credit qualities, maturities, and
coupon or dividend rates, and by seeking to take advantage of yield
differentials between securities. Securities in this class may include bonds,
notes, adjustable-rate preferred stocks, convertible bonds, mortgage-related and
asset-backed securities, domestic and foreign government and government agency
securities, zero coupon bonds, and other intermediate and long-term securities.
As with the short-term class, these securities may be denominated in U.S.
dollars or foreign currency. Asset Strategy Fund may not invest more than 35% of
its total assets in lower quality, high-yielding debt securities.
The stock class includes domestic and foreign equity securities of all
types (other than adjustable rate preferred stocks, which are included in the
bond class). WRIMCO seeks to maximize total return within this asset class by
actively allocating assets to industry sectors expected to benefit from major
trends, and to individual stocks that WRIMCO believes to have superior growth
potential. Securities in the stock class may include common stocks, fixed-rate
preferred stocks (including convertible preferred stocks), warrants, rights,
depositary receipts, securities of closed-end investment companies, and other
equity securities issued by companies of any size, located anywhere in the
world.
WRIMCO seeks to take advantage of yield differentials by considering the
purchase or sale of instruments when differentials on spreads between various
grades and maturities of such instruments approach extreme levels relative to
long-term norms.
In making asset allocation decisions, WRIMCO typically evaluates
projections of risk, market conditions, economic conditions, volatility, yields,
and returns.
Securities - General
The main types of securities in which the Funds may invest include common
stock, preferred stock, debt securities and convertible securities. Although
common stocks and other equity securities have a history of long-term growth in
value, their prices tend to fluctuate in the short term, particularly those of
smaller companies. A Fund may invest in preferred stock that is rated by an
established rating service or, if unrated, judged by WRIMCO to be of equivalent
quality. Debt securities have varying levels of sensitivity to changes in
interest rates and varying degrees of quality. As a general matter, however,
when interest rates rise, the values of fixed-rate securities fall and,
conversely, when interest rates fall, the values of fixed-rate debt rise.
Similarly, long-term bonds are generally more sensitive to interest rate changes
than shorter-term bonds.
Lower quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than high-quality securities and may decline
significantly in periods of general economic difficulty. The market for
lower-rated debt securities may be thinner and less active than that for
higher-rated debt securities, which can adversely affect the prices at which the
former are sold. Adverse publicity and changing investor perceptions may
decrease the values and liquidity of lower-rated debt securities, especially in
a thinly traded market. Valuation becomes more difficult and judgment plays a
greater role in valuing lower-rated debt securities than with respect to
securities for which more external sources of quotations and last sale
information are available. Since the risk of default is higher for lower-rated
debt securities, WRIMCO's research and credit analysis are an especially
important part of managing securities of this type held by a Fund. WRIMCO
continuously monitors the issuers of lower-rated debt securities in a Fund's
portfolio in an attempt to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments. A Fund may
choose, at its expense or in conjunction with others, to pursue litigation or
otherwise exercise its rights as a security holder to seek to protect the
interests of security holders if it determines this to be in the best interest
of the Fund's shareholders.
A Fund may invest in debt securities rated in any rating category of the
established rating services, including securities rated in the lowest category
(such as those rated D by Standard & Poor's ("S&P") and C by Moody's Investor
Services, Inc. ("MIS")). Debt securities rated D by S&P or C by MIS are in
payment default or are regarded as having extremely poor prospects of ever
attaining any real investment standing. Debt securities rated at least BBB by
S&P or Baa by MIS are considered to be investment grade debt securities.
Securities rated BBB or Baa may have speculative characteristics. In addition, a
Fund will treat unrated securities judged by WRIMCO to be of equivalent quality
to a rated security having that rating.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from time
to time, and a Fund may retain a portfolio security whose rating has been
changed.
Each of the Funds (other than Municipal Bond Fund) may purchase debt
securities whose principal amount at maturity is dependent upon the performance
of a specified equity security. The issuer of such debt securities, typically an
investment banking firm, is unaffiliated with the issuer of the equity security
to whose performance the debt security is linked. Equity-linked debt securities
differ from ordinary debt securities in that the principal amount received at
maturity is not fixed, but is based on the price of the linked equity security
at the time the debt security matures. The performance of equity-linked debt
securities depends primarily on the performance of the linked equity security
and may also be influenced by interest rate changes. In addition, although the
debt securities are typically adjusted for diluting events such as stock splits,
stock dividends and certain other events affecting the market value of the
linked equity security, the debt securities are not adjusted for subsequent
issuances of the linked equity security for cash. Such an issuance could
adversely affect the price of the debt security. In addition to the equity risk
relating to the linked equity security, such debt securities are also subject to
credit risk with regard to the issuer of the debt security. In general, however,
such debt securities are less volatile than the equity securities to which they
are linked.
Certain of the Funds may invest in convertible securities. A convertible
security is a bond, debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of common stock of the
same or different issuer within a particular period of time at a specified price
or formula. Convertible securities generally have higher yields than common
stocks of the same or similar issuers, but lower yields than comparable
nonconvertible securities, are less subject to fluctuation in the value that the
underlying stock because they have fixed income characteristics, and provide the
potential for capital appreciation if the market price of the underlying common
stock increases.
The value of a convertible security is influenced by changes in interest
rates, with investment value declining as interest rates increase and increasing
as interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value.
Each of the Funds (other than Municipal Bond Fund) may also invest in a
type of convertible preferred stock that pays a cumulative, fixed dividend that
is senior to, and expected to be in excess of, the dividends paid on the common
stock of the issuer. At the mandatory conversion date, the preferred stock is
converted into not more than one share of the issuer's common stock at the "call
price" that was established at the time the preferred stock was issued. If the
price per share of the related common stock on the mandatory conversion date is
less than the call price, the holder of the preferred stock will nonetheless
receive only one share of common stock for each share of preferred stock (plus
cash in the amount of any accrued but unpaid dividends). At any time prior to
the mandatory conversion date, the issuer may redeem the preferred stock upon
issuing to the holder a number of shares of common stock equal to the call price
of the preferred stock in effect on the date of redemption divided by the market
value of the common stock, with such market value typically determined one or
two trading days prior to the date notice of redemption is given. The issuer
must also pay the holder of the preferred stock cash in an amount equal to any
accrued but unpaid dividends on the preferred stock. This convertible preferred
stock is subject to the same market risk as the common stock of the issuer,
except to the extent that such risk is mitigated by the higher dividend paid on
the preferred stock. The opportunity for equity appreciation afforded by an
investment in such convertible preferred stock, however, is limited, because in
the event the market value of the issuer's common stock increases to or above
the call price of the preferred stock, the issuer may (and would be expected to)
call the preferred stock for redemption at the call price. This convertible
preferred stock is also subject to credit risk with regard to the ability of the
issuer to pay the dividend established upon issuance of the preferred stock.
Generally, convertible preferred stock is less volatile than the related common
stock of the issuer.
Specific Securities and Investment Practices
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government securities") are high quality debt
instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date they
are issued), Treasury Notes (which have maturities of one to ten years) and
Treasury Bonds (which generally have maturities of more than 10 years). All such
Treasury securities are backed by the full faith and credit of the United
States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (formerly, the Federal National Mortgage Association), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation, and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by Fannie Mae, are supported only by
the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and 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. Limited-Term Bond Fund will invest in securities of agencies and
instrumentalities only if WRIMCO is satisfied that the credit risk involved is
acceptable.
U.S. Government securities may include mortgage-backed securities issued
by U.S. Government agencies or instrumentalities including, but not limited to,
Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed securities include
"pass-through" securities, "participation certificates" and collateralized
mortgage obligations. See "Mortgage-Backed and Asset-Backed Securities." Timely
payment of principal and interest on Ginnie Mae pass-throughs is guaranteed by
the full faith and credit of the United States. Freddie Mac and Fannie Mae are
both instrumentalities of the U.S. Government, but their obligations are not
backed by the full faith and credit of the United States. It is possible that
the availability and the marketability (i.e., liquidity) of the securities
discussed in this section could be adversely affected by actions of the U.S.
Government to tighten the availability of its credit.
Money Market Instruments
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
Zero Coupon Securities
Zero coupon securities are debt obligations that do not entitle the holder
to any periodic payment of interest prior to maturity or that specify a future
date when the securities begin to pay current interest; instead, they are sold
at a deep discount from their face value and are redeemed at face value when
they mature. Because zero coupon securities do not pay current income, their
prices can be very volatile when interest rates change and generally are subject
to greater price fluctuations in response to changing interest rates than prices
of comparable maturities that make current distributions of interest in cash.
A Fund may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds, zero coupon bonds of corporate issuers and other
securities that are issued with original issue discount ("OID"). The Federal tax
law requires that a holder of a security with OID accrue a ratable portion of
the OID on the security as income each year, even though the holder may receive
no interest payment on the security during the year. Accordingly, although a
Fund will receive no payments on its zero coupon securities prior to their
maturity or disposition, it will have current income attributable to those
securities and includable in the dividends paid to its shareholders. Those
dividends will be paid from a Fund's cash assets or by liquidation of portfolio
securities, if necessary, at a time when the Fund otherwise might not have done
so.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury
Receipts) are examples of derivative zeros.
A Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury security and selling them as
individual securities. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) can also be separated in this
fashion. Original issue zeros are zero coupon securities originally issued by
the U.S. Government, a government agency, or a corporation in zero coupon form.
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 those industrial development
bonds the interest on which is free from Federal income taxation (although it
may be an item of tax preference for purposes of the Federal alternative minimum
tax ("AMT")) will be 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. Such entities and persons should consult with their tax advisers
before investing in Municipal Bond Fund.
Municipal leases and participation interests therein are another specific
type of municipal bond. The factors that WRIMCO considers in determining whether
or not any rated municipal lease obligations are liquid include the following:
(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,
WRIMCO 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.
WRIMCO and the Funds rely on the opinion of bond counsel for the issuer in
determining whether obligations are municipal bonds. If a court should hold that
an obligation held by Municipal Bond Fund is not a municipal bond (i.e., that
the interest thereon is taxable), Municipal Bond 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 Appendix A to this SAI),
now or in the future, S&P, or 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. 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 that a Fund may buy.
Mortgage-Backed and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Funds may
invest include mortgage-backed securities issued or guaranteed as to the payment
of principal and interest (but not as to market value) by Ginnie Mae, Fannie Mae
or Freddie Mac. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities. Payments of principal and interest (but not the market value)
of such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or
indirectly, by the U.S. Government or one of its agencies or instrumentalities,
or they may be issued without any government guarantee of the underlying
mortgage assets but with some form of non-government credit enhancement. These
credit enhancements do not protect investors from changes in market value.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
are created when a U.S. Government agency or a financial institution separates
the interest and principal components of a mortgage-backed security and sells
them as individual securities. The holder of the "principal-only" security
("PO") receives the principal payments made by the underlying mortgage-backed
security, while the holder of the "interest-only" security ("IO") receives
interest payments from the same underlying security.
For example, interest-only ("IO") classes are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets underlying
an IO experience greater than anticipated principal prepayments, then the total
amount of interest allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is government guaranteed or considered to be of the highest quality.
Conversely, principal-only ("PO") classes are entitled to receive all or a
portion of the principal payments, but none of the interest, from the underlying
mortgage assets. PO classes are purchased at substantial discounts from par, and
the yield to investors will be reduced if principal payments are slower than
expected. IOs, POs and other CMOs involve special risks, and evaluating them
requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed-rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Changes in the rate or "speed" of these payments can
cause the value of the mortgage backed securities to fluctuate rapidly. However,
these effects may not be present, or may differ in degree, if the mortgage loans
in the pools have adjustable interest rates or other special payment terms, such
as a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics, such
as yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
reduced. These changes can result in volatility in the market value and in some
instances reduced liquidity, of the CMO class.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased directly
from issuers) bear variable or floating interest rates and may carry rights that
permit holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries on dates prior to
their stated maturities. Floating rate securities have interest rates that
change whenever there is a change in a designated base rate while variable rate
instruments provide for a specified periodic adjustment in the interest rate.
These formulas are designed to result in a market value for the instrument that
approximates its par value. Each Fund may invest in variable and floating rate
instruments as long as WRIMCO determines that it is consistent with the Fund's
goal(s) and investment policies.
Bank Deposits
Among the debt securities in which the Funds may invest are deposits in
banks (represented by certificates of deposit or other evidence of deposit
issued by such banks) of varying maturities. The Federal Deposit Insurance
Corporation insures the principal of certain such deposits, currently to the
extent of $100,000 per bank. Bank deposits are not marketable, and a Fund may
invest in them only within the limit mentioned under "Illiquid Investments"
unless such obligations are payable at principal amount plus accrued interest on
demand or within seven days after demand.
Indexed Securities
Each Fund (other than Municipal Bond Fund) may purchase securities the
value of which varies in relation to the value of other securities, securities
indices, currencies, precious metals or other commodities, or other financial
indicators, subject to its operating policy regarding derivative instruments.
Indexed securities typically, but not always, are debt securities or deposits
whose value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. The performance of indexed securities depends to a
great extent on the performance of the security, currency or other instrument to
which they are indexed and may also be influenced by interest rate changes in
the United States and abroad. At the same time, indexed securities are subject
to the credit risks associated with the issuer of the security and their values
may decline substantially if the issuer's creditworthiness deteriorates. Indexed
securities may be more volatile than the underlying investments. Gold-indexed
securities, for example, typically provide for a maturity value that depends on
the price of gold, resulting in a security whose price tends to rise and fall
together with gold prices. Currency-indexed securities typically are short-term
to intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government agencies. WRIMCO will use its judgment in
determining whether indexed securities should be treated as short-term
instruments, bonds, stocks, or as a separate asset class for purposes of Asset
Strategy Fund's investment allocations, depending on the individual
characteristics of the securities. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
Loans and Other Direct Debt Instruments
Direct debt instruments are interests in amounts owed by a corporate,
governmental, or other borrower to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments are subject to a
Fund's policies regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of principal and
interest. Direct debt instruments may not be rated by any nationally recognized
rating service. If a Fund does not receive scheduled interest or principal
payments on such indebtedness, the Fund's share price and yield could be
adversely affected. Loans that are fully secured offer a Fund more protections
than an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the borrower's obligation, or that the
collateral could be liquidated. Indebtedness of borrowers whose creditworthiness
is poor involves substantially greater risks, and may be highly speculative.
Borrowers that are in bankruptcy or restructuring may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Direct
indebtedness of developing countries also involves a risk that the governmental
entities responsible for the repayment of the debt may be unable, or unwilling,
to pay interest and principal when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional risks to a
Fund. For example, if a loan is foreclosed, a Fund could become part owner of
any collateral, and would bear the costs and liabilities associated with owning
and disposing of the collateral. Direct debt instruments may also involve a risk
of insolvency of the lending bank or other intermediary. Direct debt instruments
that are not in the form of securities may offer less legal protection to a Fund
in the event of fraud or misrepresentation. In the absence of definitive
regulatory guidance, a Fund relies on WRIMCO's research in an attempt to avoid
situations where fraud or misrepresentation could adversely affect the Fund.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower. If
assets held by the agent for the benefit of a Fund were determined to be subject
to the claims of the agent's general creditors, the Fund might incur certain
costs and delays in realizing payment on the loan or loan participation and
could suffer a loss of principal or interest.
Investments in direct debt instruments may entail less legal protection
for a Fund. Direct indebtedness purchased by a Fund may include letters of
credit, revolving credit facilities, or other standby financing commitments
obligating a Fund to pay additional cash on demand. These commitments may have
the effect of requiring a Fund to increase its investment in a borrower at a
time when it would not otherwise have done so, even if the borrower's condition
makes it unlikely that the amount will ever be repaid. A Fund will set aside
appropriate liquid assets in a segregated custodial account to cover its
potential obligations under standby financing commitments. Other types of direct
debt instruments, such as loans through direct assignment of a financial
institution's interest with respect to a loan, may involve additional risks to a
Fund. For example, if a loan is foreclosed, the Fund could become part owner of
any collateral, and would bear the costs and liabilities associated with owning
and disposing of the collateral.
For purposes of the limitations on the amount of total assets that a Fund
will invest in any one issuer or in issuers within the same industry, a Fund
generally will treat the borrower as the "issuer" of indebtedness held by the
Fund. In the case of loan participations where a bank or other lending
institution serves as financial intermediary between a Fund and the borrower, if
the participation does not shift to the Fund the direct debtor-creditor
relationship with the borrower, Securities and Exchange Commission ("SEC")
interpretations require the Fund, in appropriate circumstances, to treat both
the lending bank or other lending institution and the borrower as "issuers" for
these purposes. Treating a financial intermediary as an issuer of indebtedness
may restrict a Fund's ability to invest in indebtedness related to a single
financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries.
Foreign Securities and Currencies
International Growth Fund, Asset Strategy Fund, Total Return Fund, Growth
Fund, Science and Technology Fund and High Income Fund may purchase securities
of foreign issuers, including depositary receipts, subject to the restrictions
described in the Prospectus and this SAI. Limited-Term Bond Fund and Municipal
Bond Fund may not invest in foreign securities.
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 designed to facilitate the trading of foreign issuers by U.S. and
non-U.S. investors and traders.
WRIMCO believes that there are investment opportunities as well as risks
in investing in foreign securities. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy or each other in such matters as
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Individual foreign companies
may also differ favorably or unfavorably from domestic companies in the same
industry. Foreign currencies may be stronger or weaker than the U.S. dollar or
than each other. Thus, the value of securities denominated in or indexed to
foreign currencies, and of dividends and interest from such securities, can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. dollar. WRIMCO believes that ability to invest assets abroad might
enable a Fund to take advantage of these differences and strengths where they
are favorable.
However, foreign securities and foreign currencies involve additional
significant risks, apart from the risks inherent in U.S. investments. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial conditions and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be greater possibility of
default by foreign governments or government-sponsored enterprises. Investments
in foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
These is no assurance that WRIMCO will be able to anticipate these potential
events or counter their effects.
The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is likely
to experience long-term gross domestic product growth above that expected to
occur in the United States, the United Kingdom, France, Germany, Italy, Japan
and Canada. Developing countries may have relatively unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities.
Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
Each of the Funds (other than Limited-Term Bond Fund and Municipal Bond
Fund) may purchase and sell foreign currency and invest in foreign currency
deposits, and may enter into forward currency contracts, as described in the
Prospectus and this SAI. Each of those Funds may incur a transaction charge in
connection with the exchange of currency. Currency conversion involves dealer
spreads and other costs, although commissions are not usually charged. See
"Options, Futures and Other Strategies - Forward Currency Contracts" below.
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, or in a registered
public offering. Where registration is required, a Fund may be obligated to pay
all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, a Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent a Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities in
which a Fund seeks to invest need not be listed or admitted to trading on a
foreign or domestic exchange and may be less liquid than listed securities.
Certain restricted securities, e.g., Rule 144A securities may be determined to
be liquid in accordance with guidelines adopted by the Board of Directors. See
"Illiquid Investments."
Lending Securities
Securities loans may be made by each Fund (except Municipal Bond Fund) on
a short-term or long-term basis for the purpose of increasing the Fund's income.
If a Fund lends securities, the borrower pays the Fund an amount equal to the
dividends or interest on the securities that the Fund would have received if it
had not lent the securities. The Fund also receives additional compensation.
Each of the Funds makes loans of its securities only to parties deemed by WRIMCO
to be creditworthy.
Any securities loan that 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 lent on each day that the loan is outstanding. If the market value of
the lent securities exceeds the value of the collateral, the borrower must add
more collateral so that it at least equals the market value of the securities
lent. If the market value of the securities decreases, the borrower is entitled
to the return of the excess collateral.
There are two methods of receiving compensation for making loans. The
first is to receive a negotiated loan fee from the borrower. This method is
available for all three types of collateral. The second method, which is not
available when letters of credit are used as collateral, is for a Fund to
receive interest on the investment of the cash collateral or to receive interest
on the U.S. Government securities used as collateral. Part of the interest
received in either case may be shared with the borrower.
The letters of credit that a Fund may accept as collateral are agreements
by banks (other than the borrowers of the Fund's securities), entered into at
the request of the borrower and for its account and risk, under which the banks
are obligated to pay to the Fund, while the letter is in effect, amounts
demanded by the Fund if the demand meets the terms of the letter. The Fund's
right to make this demand secures the borrower's obligations to it. The terms of
any such letters and the creditworthiness of the banks providing them (which
might include the Fund's custodian bank) must be satisfactory to the Fund. Under
the Funds' current securities lending procedures, a Fund may lend securities
only to broker-dealers and financial institutions deemed creditworthy by WRIMCO.
A Fund will make loans only under rules of the New York Stock Exchange ("NYSE"),
which presently require the borrower to return the securities to the Fund within
five business days after the Fund gives notice to do so. If a Fund loses its
voting rights on securities loaned, it will have the securities returned to it
in time to vote them if a material event affecting the investment is to be voted
on. A Fund may pay reasonable finder's, administrative and custodian fees in
connection with loans of securities.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned increases, risks of delay
in recovering the securities loaned or even loss of rights in the collateral
should the borrower of the securities fail financially.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules, which may be changed without shareholder vote, as
to (i) whom securities may be loaned, (ii) the investment of cash collateral, or
(iii) voting rights.
Repurchase Agreements
Each of the Funds may purchase securities subject to repurchase agreements
subject to its limitation on investment in illiquid investments. See "Illiquid
Investments." A repurchase agreement is an instrument under which a Fund
purchases a security and the seller (normally a commercial bank or
broker-dealer) agrees, at the time of purchase, that it will repurchase the
security at a specified time and price. The amount by which the resale price is
greater than the purchase price reflects an agreed-upon market interest rate
effective for the period of the agreement. The return on the securities subject
to the repurchase agreement may be more or less than the return on the
repurchase agreement.
The majority of the repurchase agreements in which a Fund would engage are
overnight transactions, and the delivery pursuant to the resale typically will
occur within one to five days of the purchase. The primary risk is that a Fund
may suffer a loss if the seller fails to pay the agreed-upon amount on the
delivery date and that amount is greater than the resale price of the underlying
securities and other collateral held by the Fund. In the event of bankruptcy or
other default by the seller, there may be possible delays and expenses in
liquidating the underlying securities or other collateral, decline in their
value and loss of interest. The return on such collateral may be more or less
than that from the repurchase agreement. The Funds' repurchase agreements will
be structured so as to fully collateralize the loans. In other words, the value
of the underlying securities, which will be held by the Fund's custodian bank or
by a third party that qualifies as a custodian under Section 17(f) of the
Investment Company Act of 1940, as amended (the "1940 Act"), is and, during the
entire term of the agreement, will remain at least equal to the value of the
loan, including the accrued interest earned thereon. Repurchase agreements are
entered into only with those entities approved by WRIMCO on the basis of
criteria established by the Board of Directors.
Warrants and Rights
Warrants are options to purchase equity securities at a specified price
valid for a specific period of time. Their prices do not necessarily move
parallel to the prices of the underlying securities. Rights are similar to
warrants, but normally have a short duration and are distributed directly by the
issuer to its shareholders. Rights and warrants have no voting rights, receive
no dividends, and have no rights with respect to the assets of the issuer.
Warrants and rights are highly volatile and, therefore, more susceptible to
sharp decline in value than the underlying security might be. They are also
generally less liquid than an investment in the underlying shares.
When-Issued and Delayed-Delivery Transactions
Each Fund may purchase any securities in which it may invest on a
when-issued or delayed-delivery basis or sell them on a delayed-delivery basis.
In either case payment and delivery for the securities takes place at a future
date. The securities so purchased or sold by a Fund are subject to market
fluctuation; their value may be less or more when delivered than the purchase
price paid or received. When purchasing securities on a when issued or
delayed-delivery basis, a Fund assumes the rights and risks of ownership,
including the risk of price and yield fluctuations. 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. When a Fund sells a security on a
delayed-delivery basis, the Fund does not participate in further gains or losses
with respect to the security. When a Fund makes a commitment to sell securities
on a delayed-delivery basis, it will record the transaction and thereafter value
the securities at the sales price in determining the Fund's net asset value per
share. If the other party to a delayed-delivery transaction fails to deliver or
pay for the securities, a Fund could miss a favorable price or yield
opportunity, or could suffer a loss.
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 WRIMCO 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,
however, be sold at or before the settlement date to pay the purchase price of
the when-issued or delayed-delivery securities.
Investment Company Securities
Certain of the Funds may purchase securities of closed-end investment
companies. As a shareholder in an investment company, a Fund would bear its pro
rata share of that investment company's expenses, which could result in
duplication of certain fees, including management and administrative fees.
Precious Metals
The ability of Asset Strategy Fund to purchase and hold precious metals
such as gold, silver and platinum may allow it to benefit from a potential
increase in the price of precious metals or stability in the price of such
metals at a time when the value of securities may be declining. For example,
during periods of declining stock prices, the price of gold may increase or
remain stable, while the value of the stock market may be subject to a general
decline.
Precious metals prices are affected by various factors, such as economic
conditions, political events and monetary policies. As a result, the price of
gold, silver or platinum may fluctuate widely. The sole source of return to
Asset Strategy Fund from such investments will be gains realized in sales; a
negative return will be realized if the metal is sold at a loss. Investments in
precious metals do not provide a yield. Asset Strategy Fund's direct investment
in precious metals may be limited by tax considerations. See "Taxes" below for a
more detailed discussion of the tax implications of investments in Precious
metals.
Illiquid Investments
Illiquid investments are investments that cannot be sold or otherwise
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Investments currently
considered to be illiquid include:
(i) repurchase agreements not terminable within seven days;
(ii) securities for which market quotations are not readily available;
(iii) over-the-counter ("OTC") options and their underlying collateral;
(iv) bank 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 the Board of Directors;
(vi) securities involved in swap, cap, collar and floor transactions;
(vii) non-government stripped fixed-rate mortgage-backed securities;
and
(viii) direct debt instruments.
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 would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
If through a change in values, net assets, or other circumstances, each
Fund (except Asset Strategy Fund) were in a position where more than 10% (15%
for Asset Strategy Fund) of its net assets were invested in illiquid securities,
it would seek to take appropriate steps to protect liquidity.
Options, Futures and Other Strategies
General. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, forward currency
contracts, swaps, caps, collars, floors, indexed securities and other derivative
instruments (collectively "Financial Instruments") to attempt to enhance a
Fund's income or yield or to attempt to hedge a Fund's investments.
The strategies described below may be used in an attempt to manage a Fund's
foreign currency exposure, if applicable, as well as other risks of the Fund's
investments that can affect fluctuation in its net asset value.
Generally, a Fund may purchase and sell any type of Financial Instrument.
However, as an operating policy, a Fund will only purchase or sell a particular
Financial Instrument if the Fund is authorized to invest in the type of asset by
which the return on, or value of, the Financial Instrument is primarily measured
or, with respect to foreign currency derivatives, if the Fund is authorized to
invest in foreign securities.
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 indices, in contrast,
generally are used to attempt to hedge against price movements in market sectors
in which a Fund has invested or expects to invest. Financial Instruments on debt
securities may be used to hedge either individual securities or broad debt
market sectors.
The use of Financial Instruments is subject to applicable regulations of
the SEC, the several exchanges upon which they are traded and the Commodity
Futures Trading Commission (the "CFTC"). In addition, a Fund's ability to use
Financial Instruments will be limited by tax considerations.
See "Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with a Fund's goal(s) and permitted by a Fund's
investment limitations and applicable regulatory authorities. A Fund might not
use any of these strategies, and there can be no assurance that any strategy
used will succeed. The Funds' Prospectus or SAI will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general these
techniques may increase the volatility of a Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities, currency and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy will succeed and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Financial Instrument and price movements of the investments
being hedged. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match a Fund's current or anticipated investments exactly. A Fund may invest
in options and futures contracts based on securities with different issuers,
maturities or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. A Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in a Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if a
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that 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.
(5) 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 the
other party to the transaction (the "counterparty") to enter into a transaction
closing out the position. Therefore, there is no assurance that any position can
be closed out at a time and price that is favorable to the Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. A Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies or other options, futures
contracts or forward contracts, or (2) cash and liquid assets with a value,
marked-to-market daily, sufficient to cover its potential obligations to the
extent not covered as provided in (1) above. Each Fund will comply with SEC
guidelines regarding cover for these instruments and will, if the guidelines so
require, set aside cash or liquid assets in an account with its custodian in the
prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of a Fund's assets to cover or accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. A call option gives the purchaser the right to buy, and obligates
the writer to sell, the underlying investment at the agreed-upon price during
the option period. A put option gives the purchaser the right to sell, and
obligates the writer to buy, the underlying investment at the agreed-upon price
during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the purchase
of put options can serve as a short hedge. Writing put or call options can
enable a Fund to enhance income or yield by reason of the premiums paid by the
purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security or currency at less than its market value. If the call option
is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid Investments."
Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and a Fund will be obligated
to purchase the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
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 or put option that it had written by purchasing an
identical call or put 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.
A type of put that a Fund may purchase is an "optional delivery standby
commitment," which is entered into by parties selling debt securities to the
Fund. An optional delivery standby commitment gives a Fund the right to sell the
security back to the seller on specified terms. This right is provided as an
inducement to purchase the security.
Risks of Options on Securities. Options offer large amounts of leverage,
which will result in a Fund's net asset value being more sensitive to changes in
the value of the related instrument. A Fund may purchase or write both
exchange-traded and OTC options. Exchange-traded options in the United States
are issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every exchange-traded
option transaction. In contrast, OTC options are contracts between a Fund and
its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a Fund purchases an OTC option, it relies on
the counterparty from whom it purchased the option to make or take delivery of
the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the Fund
as well as the loss of any expected benefit of the transaction.
A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. However, there can be no assurance that a Fund will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, a 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.
Options on Indices. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When a Fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple ("multiplier"),
which determines the total dollar value for each point of such difference. When
a Fund buys a call on an index, it pays a premium and has the same rights as to
such call as are indicated above. When a Fund buys a put on an index, it pays a
premium and has the right, prior to the expiration date, to require the seller
of the put, upon the Fund's exercise of the put, to deliver to the Fund an
amount of cash if the closing level of the index upon which the put is based is
less than the exercise price of the put, which amount of cash is determined by
the multiplier, as described above for calls. When a Fund writes a put on an
index, it receives a premium and the purchaser of the put has the right, prior
to the expiration date, to require the Fund to deliver to it an amount of cash
equal to the difference between the closing level of the index and the exercise
price times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices. The risks of investment in options on indices
may be greater than options on securities. Because index options are settled in
cash, when a Fund writes a call on an index it cannot provide in advance for its
potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of writing a call index option
by holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as underlie
the index and, as a result, bears a risk that the value of the securities held
will vary from the value of the index.
Even if a Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, a Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If a Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows a Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
Generally, OTC foreign currency options used by a Fund are European-style
options. This means that the option is only exercisable immediately prior to its
expiration. This is in contrast to American-style options, which are exercisable
at any time prior to the expiration date of the option.
Futures Contracts and Options on Futures Contracts. The purchase of
futures or call options on futures can serve as a long hedge, and the sale of
futures or the purchase of put options on futures can serve as a short hedge.
Writing call options on futures contracts can serve as a limited short hedge,
using a strategy similar to that used for writing call options on securities or
indices. Similarly, writing put options on futures contracts can serve as a
limited long hedge. Futures contracts and options on futures contracts can also
be purchased and sold to attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average duration
of a Fund's fixed-income portfolio. If WRIMCO wishes to shorten the average
duration of a Fund's fixed-income portfolio, the Fund may sell a debt futures
contract or a call option thereon, or purchase a put option on that futures
contract. If WRIMCO wishes to lengthen the average duration of a Fund's
fixed-income portfolio, the Fund may buy a debt 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 "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When 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.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions in
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or an option on a futures
contract can vary from the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price beyond the limit. Daily price
limits do not limit potential losses because prices could move to the daily
limit for several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option or to maintain liquid
assets in an account.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to differences in the natures of those markets, are subject to the
following factors, which may create distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationships between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate, currency exchange rate or stock market trends by WRIMCO may still
not result in a successful transaction. WRIMCO may be incorrect in its
expectations as to the extent of various interest rate, currency exchange rate
or stock market movements or the time span within which the movements take
place.
Index Futures. The risk of imperfect correlation between movements in the
price of an index future and movements in the price of the securities that are
the subject of the hedge increases as the composition of a Fund's portfolio
diverges from the securities included in the applicable index. The price of the
index futures may move more than or less than the price of the securities being
hedged. If the price of the index future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, a Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where a Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase in
the price of securities before a Fund is able to invest in them in an orderly
fashion, it is possible that the market may decline instead. If the Fund then
concludes not to invest in them at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
Operating Policy. To the extent that a Fund enters into futures contracts,
options on futures contracts or options on foreign currencies traded on a
CFTC-regulated exchange, in each case other than for bona fide hedging purposes
(as defined by the CFTC), the aggregate initial margin and premiums required to
establish those positions (excluding the amount by which options are
"in-the-money" at the time of purchase) will not exceed 5% of the liquidation
value of that Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any contracts the Fund has entered into. (In general, a
call option on a futures contract is "in-the-money" if the value of the
underlying futures contract exceeds the strike, i.e., exercise, price of the
call; a put option on a futures contract is "in-the-money" if the value of the
underlying futures contract is exceeded by the strike price of the put.) This
policy does not limit to 5% the percentage of a Fund's assets that are at risk
in futures contracts, options on futures contracts and currency options.
Foreign Currency Hedging Strategies--Special Considerations. Each Fund
(other than Limited-Term Bond Fund and Municipal Bond Fund) may use options and
futures contracts on foreign currencies (including the Euro), 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
Fund's securities are denominated or to attempt to enhance income or yield.
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.
Each of these 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
another currency or a basket of currencies, the values of which WRIMCO believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Financial Instrument
will not correlate perfectly with movements in the price of the currency subject
to the hedging transaction is magnified when this strategy is used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, a Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.
Settlement of transactions involving foreign currencies might be required
to take place within the country issuing the underlying currency. Thus, 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. Each Fund (other than Limited-Term Bond Fund
and Municipal Bond Fund) may enter into forward currency contracts to purchase
or sell foreign currencies for a fixed amount of U.S. dollars or another foreign
currency. A forward currency contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days
(term) from the date of the forward currency contract agreed upon by the
parties, at a price set at the time of the forward currency contract. These
forward currency contracts are traded directly between currency traders (usually
large commercial banks) and their customers.
Such transactions may serve as long hedges; for example, 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 a 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, dividend or
interest payment denominated in a foreign currency.
Each of these Funds may also use forward contracts to hedge against a
decline in the value of existing investments denominated in foreign currency.
For example, if a Fund owned securities denominated in Euros, it could enter
into a forward currency contract to sell Euros in return for U.S. dollars to
hedge against possible declines in the Euro's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. Each of these Funds could also hedge the position by
selling another currency expected to perform similarly to the Euro. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms
of cost, yield, or efficiency, but generally would not hedge currency exposure
as effectively as a simple hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.
Each of these Funds also may use forward currency contracts to attempt to
enhance income or yield. A Fund could use forward currency contracts to increase
its exposure to foreign currencies that WRIMCO believes might rise in value
relative to the U.S. dollar, or shift its exposure to foreign currency
fluctuations from one country to another. For example, if a Fund owned
securities denominated in a foreign currency and WRIMCO believed that currency
would decline relative to another currency, it might enter into a forward
currency contract to sell an appropriate amount of the first foreign currency,
with payment to be made in the second foreign currency.
The cost to 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
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that 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 counterparty, a Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in an account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, 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 currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the flexibility to enter into such forward currency contracts
when it determines that the best interests of a Fund will be served.
Successful use of forward currency contracts depends on WRIMCO's skill in
analyzing and predicting currency values. Forward currency contracts may
substantially change a Fund's exposure to changes in currency exchange rates and
could result in losses to the Fund if currencies do not perform as WRIMCO
anticipates. There is no assurance that WRIMCO's use of forward currency
contracts will be advantageous to a Fund or that WRIMCO will hedge at an
appropriate time.
Combined Positions. A Fund may purchase and write options in combination
with each other, or in combination with futures or forward contracts, to adjust
the risk and return characteristics of its overall position. For example, a Fund
may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
Turnover. A Fund's options and futures activities may affect its turnover
rate and brokerage commission payments. The exercise of calls or puts written by
a Fund, and the sale or purchase of futures contracts, may cause it to sell or
purchase related investments, thus increasing its turnover rate. Once a Fund has
received an exercise notice on an option it has written, it cannot effect a
closing transaction in order to terminate its obligation under the option and
must deliver or receive the underlying securities at the exercise price. The
exercise of puts purchased by a Fund may also cause the sale of related
investments, also increasing turnover; although such exercise is within the
Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. A Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
Swaps, Caps, Collars and Floors. A Fund may enter into swaps, caps,
collars and floors to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed-rate payments. The purchase of a cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
value, to receive payments on a notional principal amount from the party selling
the cap. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling the floor. A collar combines
elements of buying a cap and selling a floor.
Swap agreements, including caps, collars and floors, can be individually
negotiated and structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield because, and to the extent, these agreements affect a
Fund's exposure to long- or short-term interest rates (in the United States or
abroad), foreign currency values, mortgage-backed security values, corporate
borrowing rates, or other factors such as security prices or inflation rates.
Swap agreements will tend to shift a Fund's investment exposure from one
type of investment to another. For example, if a Fund agrees to exchange
payments in U.S. dollars for payments in foreign currency, the swap agreement
would tend to decrease the Fund's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options.
The creditworthiness of firms with which a Fund enters into swaps, caps or
floors will be monitored by WRIMCO in accordance with procedures adopted by the
Corporation's Board of Directors. If a firm's creditworthiness declines, the
value of the agreement would be likely to decline, potentially resulting in
losses. If a default occurs by the other party to such transaction, a Fund will
have contractual remedies pursuant to the agreements related to the transaction.
The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. Each Fund will also
establish and maintain such account with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that are written by the Fund. WRIMCO and the Funds believe that such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to a Fund's borrowing
restrictions. The Corporation understands that the position of the SEC is that
assets involved in swap transactions are illiquid and are, therefore, subject to
the limitations on investing in illiquid securities.
Investment Restrictions and Limitations
Certain of the Funds' investment restrictions and other limitations are
described in this SAI. The following are each Fund's fundamental investment
restrictions set forth in their entirety, which, like each Fund's goal(s),
cannot be changed without shareholder approval for the affected Fund. For this
purpose, shareholder approval means the approval, at a meeting of Fund
shareholders, by the lesser of (1) the holders of 67% or more of a Fund's shares
represented at the meeting, if more than 50% of the Fund's outstanding shares
are present in person or by proxy or (2) more than 50% of the Fund's outstanding
shares. 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.
(i) Total Return Fund, Growth Fund, Limited-Term Bond Fund, Municipal
Bond Fund, International Growth Fund, Science and Technology Fund
and High Income Fund may not buy real estate, any nonliquid
interests in real estate investment trusts or interests in real
estate limited partnerships; however, each of these Funds may buy
obligations or instruments that it otherwise may buy even though
the issuer invests in real estate or interests in real estate.
Asset Strategy Fund may not invest in real estate limited
partnerships or purchase or sell real estate unless acquired as a
result of ownership of securities (but this shall not prevent
this Fund from purchasing and selling securities issued by
companies or other entities or investment vehicles that deal in
real estate or interests therein, nor shall this prevent this
Fund from purchasing interests in pools of real estate mortgage
loans);
(ii) Total Return Fund, Growth Fund, Limited-Term Bond Fund, Municipal
Bond Fund, International Growth Fund, High Income Fund and
Science and Technology Fund may not acquire shares of an
investment company that issues redeemable securities. Total
Return Fund, Growth Fund, International Growth Fund, High Income
Fund and Science and Technology Fund may buy shares of an
investment company that 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 of these Funds may also
acquire investment company shares as part of a merger,
consolidation or other reorganization;
(iii) Total Return Fund, Growth Fund, Limited-Term Bond Fund, Municipal
Bond Fund, International Growth Fund, High Income Fund and
Science and Technology Fund may not lend money or other assets,
other than through certain limited types of loans; however, each
of these Funds may buy debt securities and other obligations
consistent with its goal and its other investment policies and
restrictions, may enter into repurchase agreements and, except
Municipal Bond Fund, may lend its portfolio securities to the
extent allowed, and in accordance with the requirements under,
the 1940 Act. Asset Strategy Fund may not make loans, except (a)
by lending portfolio securities to the extent allowed, and in
accordance with the requirements under, the 1940 Act; (b) through
the purchase of debt securities and other obligations consistent
with its goal and its other investment policies and restrictions;
and (c) by engaging in repurchase agreements with respect to
portfolio securities;
(iv) No Fund may invest for the purpose of exercising control or
management of another issuer;
(v) No Fund may sell securities short (unless it owns or has the
right to obtain securities equivalent in kind and amount to the
securities sold short) or purchase securities on margin, except
that (1) this policy does not prevent a Fund from entering into
short positions in foreign currency, futures contracts, options,
forward contracts, swaps, caps, collars, floors and other
financial instruments, (2) a Fund may obtain such short-term
credits as are necessary for the clearance of transactions, and
(3) a Fund may make margin payments in connection with futures
contracts, options, forward contracts, swaps, caps, collars,
floors and other financial instruments;
(vi) No Fund may 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;
(vii) No Fund may 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;
(viii) No Fund (other than Science and Technology Fund) may 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;
(ix) Municipal Bond Fund may not purchase warrants;
(x) Total Return Fund, Growth Fund, Limited-Term Bond Fund, Municipal
Bond Fund, International Growth Fund, High Income Fund and
Science and Technology Fund may not purchase or sell physical
commodities; however, this policy does not prevent these Funds
from purchasing and selling foreign currency, futures contracts,
options, forward contracts, swaps, caps, collars, floors and
other financial instruments. Asset Strategy Fund may not
purchase or sell physical commodities, except that this Fund may
purchase and sell precious metals for temporary, defensive
purposes; however, this policy shall not prevent this Fund from
purchasing and selling foreign currency, futures contracts,
options, forward contracts, swaps, caps, collars, floors and
other financial instruments;
(xi) Total Return Fund, Growth Fund, Limited-Term Bond Fund, Municipal
Bond Fund, International Growth Fund, High Income Fund and
Science and Technology Fund may not issue senior securities.
Asset Strategy Fund may not issue bonds or any other class of
securities preferred over shares of the Fund in respect of the
Fund's assets or earnings, provided that this Fund may issue
additional series and classes of shares in accordance with its
Articles of Incorporation;
Total Return Fund, Growth Fund, Limited-Term Bond Fund, Municipal
Bond Fund, International Growth Fund, Science and Technology Fund
and High Income Fund may not borrow money, except that these 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. Asset Strategy Fund may not borrow
money, except that this Fund may borrow money for emergency or
extraordinary purposes (not for leveraging or investment) in an
amount not exceeding 33 1/3% of the value of its total assets (less
liabilities other than borrowings). Any borrowings that come to
exceed 33 1/3% of the value of Asset Strategy Fund's total assets by
reason of a decline in net assets will be reduced within three days
to the extent necessary to comply with the 33 1/3% limitation. For
purposes of this limitation, "three days" means three days,
exclusive of Sundays and holidays;
(xii) Total Return Fund, Growth Fund, Limited-Term Bond Fund, Municipal
Bond Fund, International Growth Fund and High Income Fund may not
invest in interests in oil, gas or mineral leases or mineral
development programs, including oil and gas limited partnerships;
and
(xiii) At least 80% of Municipal Bond Fund's net assets will be invested
during normal market conditions in municipal bonds.
For purposes of applying restriction (vii) 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 that 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.
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval:
(i) At least 65% of Growth Fund's and International Growth Fund's
respective assets will be invested during normal market conditions
in growth securities.
(ii) During normal market conditions, at least 80% of International
Growth Fund's assets will be invested in foreign securities and
at least 65% of its assets will be invested in at least three
different countries outside the United States. International
Growth Fund may not purchase a foreign security if, as a result
of such purchase, more than 75% of its assets would be invested
in issuers of any one foreign country. International Growth Fund
will not invest more than 25% of its total assets in securities
issued by the government of any one foreign country.
(iii) During normal market conditions, Science and Technology Fund will
not invest in any securities other than science securities or
technology securities if, as a result, more than 20% of its total
assets would be invested in such other securities.
(iv) At least 65% of High Income Fund's total assets will be invested
during normal market conditions to seek a high level of current
income. High Income Portfolio will not purchase a common stock
if, as a result, more than 20% of its total assets would be
invested in common stocks. This 20% limit includes common stocks
acquired on conversion of convertible securities, on exercise of
warrants or call options or in any other voluntary manner. The
Fund does not currently intend to invest more than 10% of its
total assets in non-dividend-paying common stocks.
(v) At least 80% of Municipal Bond Fund's assets will consist of
municipal bonds of investment grade. Municipal Bond Fund does not
intend to invest more than 50% of its assets in industrial
development bonds. Up to 10% of Municipal Bond Fund's assets may be
invested in debt securities other than municipal bonds. Municipal
Bond Fund will have less than 25% of its assets in securities of
issuers located in any single state.
(vi) At least 65% of Limited-Term Bond Fund's total assets will be
invested during normal market conditions in bonds, and at 65% of
Municipal Bond Fund's total assets will be invested during normal
market conditions in bonds exclusive of other municipal debt
obligations.
(vii) Each of Growth Fund, International Growth Fund, Limited-Term Bond
Fund, Municipal Bond Fund, Science and Technology Portfolio Fund,
and Total Return Fund does not currently intend to invest in
non-investment grade debt securities if, as a result, more than
5% of its assets would consist of such investments. Asset
Strategy Fund may not invest more than 35% of its total assets in
non-investment grade debt securities and unrated securities
judged by WRIMCO to be of equivalent quality. Limited-Term Bond
Fund does not currently intend to invest more than 50% of its
assets in securities rated in the lowest tier of investment grade
debt securities (those rated BBB by S&P or Baa by MIS).
(viii) Asset Strategy Fund currently intends to limit its investments in
foreign securities, under normal market conditions, to no more than
50% of its total assets and to limit its investments in obligations
of any single foreign government to less than 25% of its total
assets.
(ix) Each of Total Return Fund and Growth Fund may invest up to 10% of
its assets, and Science and Technology Fund may invest up to 20% of
its net assets, in foreign securities. High Income Fund will not
invest more than 25% of its total assets in securities issued by any
single foreign government. Limited-Term Bond Fund and Municipal Bond
Fund may not invest in foreign securities.
(x) Asset Strategy Fund, Limited-Term Bond Fund and Municipal Bond Fund
do not currently intend to invest more than 5% of their respective
total assets in when-issued and delayed delivery transactions.
(xi) Each Fund may not purchase a security if, as a result, more than 10%
(15% for Asset Strategy Fund) of its net assets would consist of
illiquid investments.
(xii) High Income Fund and Science and Technology Fund do not currently
intend to invest more than 5% of their respective assets in the
shares of investment companies. Asset Strategy Fund does not
currently intend to purchase shares of investment companies that
do not redeem their shares except in a regular transaction in the
open market where no commission except ordinary broker's
commission is paid and if, as a result, no more than 10% of its
total assets would be invested in such securities. Asset
Strategy Portfolio does not currently intend to purchase shares
of open-end investment companies. These limitations do not apply
to securities received by Asset Strategy Fund as dividends,
through offers of exchange, or as a result of a reorganization,
consolidation or merger.
(xiii) No Fund (other than Growth Fund and Science and Technology Fund)
may invest in the securities of any issuer if, as a result, more
than 5% of its total assets would be invested in the securities
of business enterprises that, including predecessors, have a
record of less than three years of continuous operation. This
restriction does not apply to any obligations issued or
guaranteed by the U.S. government or a state or local government
authority, or their respective instrumentalities, or to CMOs,
other mortgage-related securities, asset-backed securities,
indexed securities or OTC derivative instruments.
(xiv) Asset Strategy Fund may borrow money only from a bank. Asset
Strategy Fund will not purchase any security while borrowings
representing more than 5% of its total assets are outstanding.
(xv) Asset Strategy Fund does not currently intend to lend assets other
than securities to other parties, except by acquiring loans, loan
participations, or other forms of direct debt instruments. (This
limitation does not apply to purchases of debt securities and other
obligations or to repurchase agreements.)
(xvi) Asset Strategy Fund does not currently intend to invest in oil, gas,
or other mineral exploration or development programs or leases.
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 the fiscal years ended March 31, 1999 and
1998 for each of the Funds then in existence were as follows:
1999 1998
---- -----
Asset Strategy Fund 220.67
Growth Fund 33.46
High Income Fund 67.82
International Growth Fund 105.11
Limited-Term Bond Fund 27.37
Municipal Bond Fund 27.86
Science and Technology Fund 26.64
Total Return Fund 36.94%
The portfolio turnover rate for the common stock portion of Asset Strategy
Fund's portfolio for the fiscal year ended March 31, 1999 was %; the rate for
the remainder of the portfolio was %.
Science and Technology Fund and High Income Fund commenced operations on
July 31, 1997.
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 Management Agreement
The Corporation has an Investment Management Agreement (the "Management
Agreement") with WRIMCO. Under the Management Agreement, WRIMCO is employed
to supervise the investments of the Funds and provide investment advice to
the Funds. The address of WRIMCO 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 WRIMCO or an affiliate of WRIMCO to enter
into a separate agreement for transfer agency services (the "Shareholder
Servicing Agreement") and a separate agreement for accounting services (the
"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.
Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly
owned subsidiary of Waddell & Reed Financial, Inc., a publicly held company.
The address of these companies is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds,
except United Asset Strategy Fund, Inc., since 1940 or the company's inception
date, whichever was later, and to Target/United Funds, Inc. since that fund's
inception, until January 8, 1992, when it assigned its duties as investment
manager for these funds (and the related professional staff) to WRIMCO. WRIMCO
has also served as investment manager for United Asset Strategy Fund, Inc. since
it commenced operations in March 1995. Waddell & Reed, Inc. serves as principal
underwriter for the Funds, the investment companies in the United Group of
Mutual Funds and acts as principal underwriter and distributor for variable life
insurance and variable annuity policies issued by United Investors Life
Insurance Company for which Target/United Funds, Inc. is the underlying
investment vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the
Corporation and Waddell & Reed Services Company (the "Agent"), a subsidiary of
the Distributor, 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 Corporation 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 WRIMCO's management services, the
Corporation pays WRIMCO a fee as described in the Prospectus. The management
fees paid to WRIMCO during the fiscal years ended March 31, 1999, 1998 and 1997
for each of the Funds then in existence were as follows:
1999 1998 1997
---- ----- ----
Asset Strategy Fund 127,507 116,390
Growth Fund 2,041,002 1,904,258
High Income Fund 24,352**
International Growth Fund* 553,692 251,914
Limited-Term Bond Fund 101,985 108,389
Municipal Bond Fund 216,501 200,636
Science and Technology Fund 17,585**
Total Return Fund $2,837,414 $1,886,789
* International Growth Fund (formerly Global Income Fund) changed its name,
investment objective and management fee effective April 20, 1995.
** For the period from 7/31/97, the date of initial public offering, to
3/31/99.
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.
Under the Shareholder Servicing Agreement, with respect to Class B shares,
each Fund pays the Agent a monthly fee of $1.3125 for each shareholder account
that was in existence at any time during the prior month, plus $0.30 for each
account on which a dividend or distribution, of cash or shares, had a record
date in that month. For Class Y shares, each Fund pays the Agent a monthly fee
equal to one-twelfth of .15 of 1% of the average daily net assets of that class
for the preceding month. Each Fund also pays certain out-of-pocket expenses of
the Agent, including long distance telephone communications costs; microfilm and
storage costs for certain documents; forms, printing and mailing costs; and
costs of legal and special services not provided by the Distributor, WRIMCO or
the Agent.
Under the Accounting Services Agreement, each Fund pays the Agent a
monthly fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each 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
Fees paid to the Agent during the fiscal years ended March 31, 1999, 1998
and 1997 for each of the Funds then in existence were as follows:
1999 1998 1997
---- ----- ----
Asset Strategy Fund 10,000 10,000
High Income Fund 833**
Growth Fund 49,167 50,000
International Growth Fund* 30,000 17,500
Limited-Term Bond Fund 10,000 10,000
Municipal Bond Fund 20,000 20,000
Science and Technology Fund 2,972**
Total Return Fund $59,167 $50,000
* International Growth Fund (formerly Global Income Fund) changed its name and
investment objective effective April 20, 1995.
** For the period 7/31/97, the date of initial public offering, to 3-31-98.
Because the Corporation pays a management fee for investment supervision
and an accounting services fee for accounting services as discussed above,
WRIMCO and the Agent, respectively, pay all of their own expenses in providing
these services. Amounts paid by the 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 (the "Underwriting
Agreement"). The Underwriting 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 for the Class B shares (the "Class B
Plan") adopted by the Corporation pursuant to Rule 12b-1 under the 1940 Act, the
Corporation, with respect to each Fund, pays the Distributor daily a
distribution fee not to exceed, on an annual basis, 0.75% of the particular
Fund's Class B net asset value and a service fee not to exceed, on an annual
basis, 0.25% of the particular Fund's Class B net asset value. Under a
Distribution and Service Plan for Class Y shares (the "Class Y Plan") adopted by
the Corporation pursuant to Rule 12b-1, with respect to each Fund, the
Corporation pays the Distributor daily a distribution and/or service fee not to
exceed, on an annual basis, 0.25% of the particular Fund's Class Y 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 for Class B shares, 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 costs 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 Class B Plan, the Class Y Plan and the Underwriting Agreement
contemplate that the Distributor may be compensated for these Class B-related
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. For the fiscal year ended
March 31, 1999, the Corporation paid (or accrued) the following amounts to the
Distributor as distribution fees and service fees under the Class B Plan for
each of the Funds: Total Return Fund - $ and $; Growth Fund - $ and $;
Limited-Term Bond Fund - $ and $; Municipal Bond Fund - $ and $; International
Growth Fund - $ and $; Asset Strategy Fund - $ and $; Science and Technology
Fund - $ and $; and High Income Fund - $ and $. For the fiscal year ended March
31, 1999, the Corporation paid (or accrued) the following amounts to the
Distributor as distribution fees and service fees under the Class Y Plan for
each of the Funds: Total Return Fund - $; Growth Fund - $; Limited-Term Bond
Fund - $; Municipal Bond Fund - $; International Growth Fund - $; Asset Strategy
Fund - $; Science and Technology Fund - $; and High Income Fund - $. 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
Class B and/or Class Y shares of a Fund. The service fees were paid to
compensate the Distributor for providing personal services to the particular
Fund's Class B and/or Class Y shareholders and for the maintenance of Class B
and/or Class Y accounts.
The only Directors or interested persons, as defined in the 1940 Act, of
the Corporation who have a direct or indirect financial interest in the
operation of a Plan are the officers and Directors who are also officers of
either Waddell & Reed, Inc. or its affiliate(s) or who are shareholders of
Waddell & Reed Financial, Inc., the indirect parent company of Waddell & Reed,
Inc. Each Plan is anticipated to benefit the applicable Fund and its
shareholders affected by the particular Plan through Waddell & Reed, Inc.'s
activities not only to distribute the affected shares of the Fund but also to
provide personal services to shareholders of the affected class and thereby
promote the maintenance of their accounts with the Fund. Each Fund anticipates
that shareholders of a particular class may benefit to the extent that Waddell &
Reed's activities are successful in increasing the assets of that Fund class,
through increased sales or reduced redemptions, or a combination of these, and
reducing a shareholder's share of Fund and class expenses. Increased Fund assets
may also provide greater resources with which to pursue the goal of a Fund.
Further, continuing sales of Fund shares may also reduce the likelihood that it
will be necessary to liquidate portfolio securities, in amounts or at times that
may be disadvantageous to a Fund, to meet redemption demands. In addition, each
Fund anticipates that the revenues from the Plan will provide Waddell & Reed,
Inc. with greater resources to make the financial commitments necessary to
continue to improve the quality and level of services to the Fund and its
affected shareholders.
The Class B Plan, the Class Y Plan and the Underwriting 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"). Each Plan
was also approved as to each Fund by the Distributor as the sole shareholder of
the affected shares of each of the Funds, and classes thereof, at the time.
Among other things, the Plan for each class 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 that
class 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.
For the Corporation's fiscal year ended March 31, 1999, the Distributor
earned deferred sales charges from each of the Funds with respect to Class B
shares then in existence as follows: Total Return Fund - $; Growth Fund - $;
Limited-Term Bond Fund - $; Municipal Bond Fund - $; International Growth Fund -
$; Asset Strategy Fund - $; Science and Technology Fund - $; and High
Income Fund - $.
Custodial and Auditing Services
The custodian for each Fund is UMB Bank, n.a., Kansas City, Missouri. In
general, the custodian is responsible for holding each Fund's cash and
securities. Deloitte & Touche LLP, Kansas City, Missouri, the Funds' independent
accountants, audits the Corporation's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each class of the shares of a Fund is the value of
the assets of that class, less the liabilities of that class, divided by the
total number of shares outstanding of that class.
The offering price of a Class B or a Class Y share is its net asset value
next determined following acceptance of a purchase order. The number of shares
you receive for your purchase depends on the next offering price after 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 on each day that
the NYSE is open for trading as of the later of the close of the regular session
of the NYSE or the close of the regular session of any domestic securities or
commodities exchange on which an option or future held by 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 the NYSE will not be open on the
following days: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, it is possible that the NYSE may close on other days.
The net asset value changes every business day, since the value of the assets
and the number of shares outstanding changes every business day.
The securities in the portfolio of each Fund, except as otherwise noted,
that are listed or traded on a stock exchange, are valued on the basis of the
last sale on that day or, lacking any sales, at a price that is the mean between
the closing bid and asked prices. Other securities that are traded
over-the-counter are priced using The Nasdaq Stock Market, which provides
information on bid and asked prices quoted by major dealers in such stocks.
Bonds, other than convertible bonds, are generally valued using a third-party
pricing system. Convertible bonds are valued using this pricing system only on
days when there is no sale reported. Short-term debt securities are valued at
amortized cost, which approximates market. When market quotations are not
readily available, securities and other assets are valued at fair value as
determined in good faith 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 (i.e., 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.
When a Fund writes a put or call, an amount equal to the premium received
is included in the Statement of Assets and Liabilities as an asset, and an
equivalent deferred credit is included in the liability section. The deferred
credit is "marked-to-market" to reflect the current market value of the put or
call. If the call a Fund wrote is exercised, the proceeds received on the sale
of the related investment are increased by the amount of the premium the Fund
received. If a Fund exercised a call it purchased, the amount paid to purchase
the related investment is increased by the amount of the premium paid. If a put
written by a Fund is exercised, the amount that the Fund pays to purchase the
related investment is decreased by the amount of the premium it received. If a
Fund exercises a put it purchased, the amount the Fund receives from the sale of
the related investment is reduced by the amount of the premium it paid. If a put
or call written by a Fund expires, it has a gain in the amount of the premium;
if a Fund enters into a closing purchase transaction, it will have a gain or
loss depending on whether the premium was more or less than the cost of the
closing transaction.
Minimum Initial and Subsequent Investments
For Class B shares, initial investments must be at least $1,000 with the
exceptions described in this paragraph. A $100 minimum initial investment
pertains to exchanges of shares from one Fund to another Fund. A $50 minimum
initial investment pertains to purchases for certain retirement plan accounts
and to accounts for which an investor has arranged, at the time of initial
investment, to make subsequent purchases for the account by having regular
monthly withdrawals of $25 or more made from a bank account. A minimum initial
investment of $25 is applicable to purchases made through payroll deduction for
or by employees of WRIMCO, the Distributor, their affiliates or certain
retirement plan accounts. Except with respect to certain exchanges and automatic
withdrawals from a bank account, a shareholder may make subsequent investments
of any amount.
For Class Y shares, investments by government entities or authorities or
by corporations must total at least $1 million. There is no initial investment
minimum for other Class Y investors.
Flexible Withdrawal Service
If you qualify, you may arrange to receive through the Flexible Withdrawal
Service (the "Service") regular monthly, quarterly, semiannual or annual
payments by redeeming on an ongoing basis Class B shares. To qualify for the
Service, you must have invested at least $10,000 in Class B shares which you
still own of any of the Funds, or Class B shares of United Cash Management,
Inc., a fund in the United Group of Mutual Funds, or you must own Class B shares
having a value of at least $10,000. Applicable forms to start the Service are
available from Waddell & Reed, Inc.
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. The Service, and this exclusion from
the deferred sales charge, does not apply to a one-time withdrawal.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to a percentage
of the value of the shares in your Account (you select the percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least five shares).
Shares 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.
Retirement plan accounts may be subject to a fee imposed by the plan
custodian for use of their service.
The dividends and distributions on shares of a Fund that you have made
available for the Service are paid in additional Class B shares of that Fund.
All payments under the Service are made by redeeming Class B shares, which may
involve a gain or loss for tax purposes. To the extent that payments exceed
dividends and distributions, the number of Class B shares you own will decrease.
When all of the shares in your account are redeemed, you will not receive any
further 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 to any of the other choices originally available to you. Subject
to the deferred sales charge, you may 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
Class B Share Exchanges
You may exchange Class B shares of one Fund of the Corporation for Class B
shares of another Fund of the Corporation, or for Class B shares of United Cash
Management, Inc., without charge.
The redemption of a Fund's Class B shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class A shares of United Cash
Management, Inc. automatically redeemed each month and invested in Class B
shares of 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, upon notice
in certain circumstances, and any related request may not be accepted.
Class Y Share Exchanges
Class Y shares of a Fund may be exchanged for Class Y shares of any other
Fund of the Corporation or for Class A shares of United Cash Management, Inc.
General Exchange Information
The exchange will be made at the net asset values next determined after
receipt of your written request in good order 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.
Retirement Plans
As described in the Prospectus, your account may be set up as a funding
vehicle for a retirement plan. For individual taxpayers meeting certain
requirements, Waddell & Reed, Inc. offers model or prototype documents for the
following retirement plans. All of these plans involve investment in shares of
one or more of the Funds (other than Municipal Bond Fund).
Individual Retirement Accounts (IRAs). Investors having earned income may
set up a plan that is commonly called an IRA. Under a traditional IRA, an
investor can contribute each year up to 100% of his or her earned income, up to
an annual maximum of $2,000 (provided the investor has not reached age 70 1/2).
For a married couple, the annual maximum is $4,000 ($2,000 for each spouse) or,
if less, the couple's combined earned income for the taxable year, even if one
spouse had no earned income. Generally, the contributions are deductible unless
the investor (or, if married, either spouse) is an active participant in a
qualified retirement plan or if, notwithstanding that the investor or one or
both spouses so participate, their adjusted gross income does not exceed certain
levels. However, a married investor who is not an active participant, files
jointly with his or her spouse and whose combined adjusted gross income does not
exceed $150,000, is not affected by the spouse's active participant status.
An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be subject
to Federal income tax until distributed from the IRA. A direct rollover
generally applies to any distribution from an employer's plan (including a
custodial account under Section 403(b)(7) of the Internal Revenue Code of 1986,
as amended (the "Code"), but not an IRA) other than certain periodic payments,
required minimum distributions and other specified distributions. In a direct
rollover, the eligible rollover distribution is paid directly to the IRA, not to
the investor. If, instead, an investor receives payment of an eligible rollover
distribution, all or a portion of that distribution generally may be rolled over
to an IRA within 60 days after receipt of the distribution. Because mandatory
Federal income tax withholding applies to any eligible rollover distribution
which is not paid in a direct rollover, investors should consult their tax
advisers or pension consultants as to the applicable tax rules. If you already
have an IRA, you may have the assets in that IRA transferred directly to an IRA
offered by Waddell & Reed, Inc.
Roth IRAs. Investors whose adjusted gross income (or combined adjusted
gross income, if married) does not exceed certain levels may establish and
contribute up to $2,000 per tax year to a Roth IRA. In addition, for an investor
whose adjusted gross income does not exceed $100,000 (and who is not a married
person filing a separate return), certain distributions from traditional IRAs
may be rolled over to a Roth IRA and any of the investor's traditional IRAs may
be converted into a Roth IRA; these rollover distributions and conversions are,
however, subject to Federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in the Roth IRA, and withdrawals of earnings are not subject
to Federal income tax if the account has been held for at least five years and
the account holder has reached age 59 1/2 (or certain other conditions apply).
Education IRAs. Although not technically for retirement savings, Education
IRAs provide a vehicle for saving for a child's higher education. An Education
IRA may be established for the benefit of any minor, and any person whose
adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than $500 may be contributed for any year
to Education IRAs for the same beneficiary. Contributions are not deductible and
may not be made after the beneficiary reaches age 18; however, earnings
accumulate tax-free, and withdrawals are not subject to tax if used to pay the
qualified higher education expenses of the beneficiary (or a member of his or
her family).
Simplified Employee Pension (SEP) plans. Employers can make contributions
to SEP-IRAs established for employees. An employer may contribute up to 15% of
compensation, or $24,000, whichever is less, per year for each employee.
Savings Incentive Match Plans for Employees (SIMPLE Plans). An employer
with 100 or fewer employees who does not sponsor another active retirement plan
may sponsor a SIMPLE to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an
employer can choose to match employee contributions dollar-for-dollar
(generally, up to 3% of the employee's compensation) or may contribute to all
eligible employees 2% of their compensation, whether or not they defer salary to
their SIMPLE plans. SIMPLE plans involve fewer administrative requirements than
401(k) or other qualified plans generally.
Keogh Plans. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money purchase
plan or a profit-sharing plan. As a general rule, an investor under a defined
contribution Keogh plan can contribute each year up to 25% of his or her annual
earned income, with an annual maximum of $30,000.
457 Plans. If an investor is an employee of a state or local government or
of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is an employee
of a public school system or of certain types of charitable organizations, he or
she may be able to enter into a deferred compensation arrangement through a
custodian account under Section 403(b) of the Code. Some organizations have
adopted Title I plans, which are funded by employer contributions in addition to
employee deferrals.
401(k) Plans. With a 401(k) plan, employees can make tax-deferred
contributions into a plan to which the employer may also contribute, usually on
a matching basis. An employee may defer each year up to 25% of compensation,
subject to certain annual maximums, which may be increased each year based on
cost-of-living adjustments.
More detailed information about these arrangements and applicable forms
are available from the Distributor. These plans may involve complex tax
questions as to premature distributions and other matters. Investors should
consult their tax adviser or pension consultant.
Redemptions
The Prospectus gives information as to redemption procedures and deferred
sales charges. Redemption payments are made within seven days unless delayed
because of emergency conditions determined by the SEC, when the NYSE is closed
other than for weekends or holidays, or when trading on the NYSE is restricted.
Payment is made in cash, although under extraordinary conditions redemptions may
be made in portfolio securities. Payment for redemptions of shares of the
Corporation may be made in portfolio securities when the Corporation's Board of
Directors determines that conditions exist making 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 for Class B shares, 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. "Financial
advisors" includes retired financial advisors. A "retired financial advisor" is
any financial advisor who was, at the time of separation from service from the
Distributor, a Senior Financial Advisor. A custodian under the Uniform Gifts (or
Transfers) to Minors Act purchasing for the child of any employee or financial
advisor may redeem shares without a deferred sales charge whether or not the
custodian is an eligible purchaser.
Reinvestment Privilege
The Prospectus for Class B shares discusses the reinvestment privilege for
Class B shares under which you may reinvest in any one or more of the Funds all
or part of any amount of Class B shares you redeemed and have the corresponding
amount of the deferred sales charge, if any, which you paid restored to your
account by adding the amount of that charge to the amount you are reinvesting.
If Class B shares of a Fund are then being offered, you can put all or part of
your redemption payment back into the Class B shares of that Fund at the net
asset value next determined after you have returned the amount. Your written
request to do this must be received within 30 days after your redemption. You
can do this only once as to Class B shares of 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 Class B shares to
invest the proceeds at net asset value in a Keogh plan or an IRA.
Mandatory Redemption of Certain Small Accounts
Each of the Funds has the right to require the redemption of shares held
under any account or any plan if the aggregate net asset value of such shares
(taken at cost or value as the Board of Directors may determine) is less than
$500. The Board has no intent to require redemptions in the foreseeable future.
If it should elect to require redemptions, shareholders who are affected will
receive prior written notice and will be permitted 60 days to bring their
accounts up to the minimum before this redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the 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. The
majority of the Directors are not affiliated with Waddell & Reed, Inc.
The principal occupation during at least the past five years of each
Director and officer of the Corporation is given below. Each of the persons
listed through and including Mr. Vogel is a member of the Corporation's Board of
Directors. The other persons are officers but not members of the Board of
Directors. For purposes of this section, the term "Fund Complex" includes each
of the registered investment companies in the United Group of Mutual Funds,
Waddell & Reed Funds, Inc. and Target/United Funds, Inc. Each of the
Corporation's Directors is also a Director of each of the funds in the Fund
Complex and each of the Corporation's officers is also an officer of one or more
of the funds in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other funds
in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer, Principal Financial Officer and Director of Waddell & Reed Financial,
Inc.; President, Chairman of the Board of Directors and Chief Executive Officer
of Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
of WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of the Fund and each of the other funds in the Fund Complex; formerly,
Chairman of the Board of Directors of Waddell & Reed Asset Management Company, a
former affiliate of Waddell & Reed Financial, Inc. Date of birth: February 11,
1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President, JoDill Corp., an agricultural company; President and Director
of Dillingham Enterprises Inc.; formerly, Director and consultant, McDougal
Construction Company; formerly, Instructor at Central Missouri State University;
formerly, Member of the Board of Police Commissioners, Kansas City, Missouri;
formerly, Senior Vice President-Sales and Marketing, Garney Companies, Inc., a
specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George S. and Delores
Dori Eccles Foundation. Director of First Security Corp., a bank holding
company, and Director of Fluor Corp., a company with interests in coal. Date
of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Partner, Levy and Craig, P.C., a law firm. Date
of birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct Professor of Law at
the University of Oklahoma College of Law; formerly, Vice President for
Executive Affairs of the University of Oklahoma; formerly, an Attorney with
Crowe & Dunlevy, a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman of the Board of
Directors, Gilliland & Hayes, P.A., a law firm; formerly, President, Gilliland &
Hayes, P.A. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Executive Vice President, Chief Operating
Officer and Director of Waddell & Reed Financial, Inc.; Vice President, Chief
Operating Officer, Director and Treasurer of Waddell & Reed Financial Services,
Inc.; Executive Vice President, Principal Financial Officer, Director and
Treasurer of WRIMCO; President, Chief Executive Officer, Principal Financial
Officer, Director and Treasurer of Waddell & Reed, Inc.; President, Director and
Treasurer of Waddell & Reed Services Company; formerly, Vice President of the
Fund and each of the other funds in the Fund Complex; formerly, Director and
Treasurer of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. Date of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer, Treasurer and Director of Waddell
& Reed Financial, Inc.; Vice President, Chief Investment Officer and Director of
Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; formerly, President, Chief Executive Officer, Chief Investment Officer
and Director of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. Date of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and subsidiaries. Date of birth: February 19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of the
Fund and each fund in the Fund Complex then in existence. (Mr. Morgan retired as
Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company. Date of birth:
April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director of Network Rehabilitation Services; formerly, Employment
Counselor and Director of McCue-Parker Center. Date of birth: August 3,
1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm. Date
of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Professor of Business Administration, University of Missouri-Kansas
City; formerly, Chancellor, University of Missouri-Kansas City. Date of
birth: January 1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
Helge K. Lee
Vice President, Secretary and General Counsel of the Fund and each of the
other funds in the Fund Complex; Secretary and General Counsel of Waddell & Reed
Financial, Inc.; Vice President, Secretary, General Counsel and Director of
Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary and
General Counsel of WRIMCO and Waddell & Reed, Inc.; Senior Vice President,
Secretary, General Counsel and Director of Waddell & Reed Services Company;
formerly, Executive Vice President, Secretary and Chief Compliance Officer of
LGT Asset Management, Inc. and affiliates; formerly, Senior Vice President,
General Counsel and Secretary of Strong Capital Management, Inc.
and affiliates. Date of birth: March 30, 1946.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund and
each of the other funds in the Fund Complex; Vice President of Waddell & Reed
Services Company. Date of birth: July 18, 1942.
Michael L. Avery
Vice President of the Corporation and three other Funds in the Fund
Complex; Senior Vice President of WRIMCO; formerly, Vice President of Waddell &
Reed Asset Management Company. Date of birth: September 15, 1953.
Abel Garcia
Vice President of the Corporation and two other funds in the Fund Complex;
Senior Vice President of WRIMCO; formerly, Vice President of Waddell & Reed
Asset Management Company. Date of birth: April 28, 1949.
John M. Holliday
Vice President of the Corporation and eight other funds in the Fund
Complex; Senior Vice President of WRIMCO; formerly, Senior Vice President of
Waddell & Reed Asset Management Company. Date of birth: June 11, 1935.
Thomas A. Mengel
Vice President of the Corporation and two other funds in the Fund
Complex; Vice President of WRIMCO; formerly, President of Sal. Oppenheim jr.
& Cie. Securities, Inc.; formerly, Vice President of Hauck and Hope
Securities. Date of birth: April 13, 1957.
Louise D. Rieke
Vice President of the Corporation and two other funds in the Fund Complex;
Vice President of WRIMCO; formerly, Vice President of Waddell & Reed Asset
Management Company. Date of birth: April 24, 1949.
Grant P. Sarris
Vice President of the Fund and one other Fund in the Fund Complex, and
Vice President of WRIMCO. Date of birth: September 14, 1966.
Mark G. Seferovich
Vice President of the Corporation and one other Fund in the Fund Complex
and Senior Vice President of the Manager; formerly, Vice President of, and a
portfolio manager for, Waddell & Reed Asset Management Company.
Date of birth: April 6, 1947.
W. Patrick Sterner
Vice President of the Corporation and one other fund in the Fund Complex;
Vice President of WRIMCO; formerly, Vice President of Waddell & Reed Asset
Management Company. Date of birth: January 11, 1949.
Daniel J. Vrabac
Vice President of the Corporation and two other funds in the Fund Complex;
Vice President of WRIMCO; formerly, Vice President of Waddell & Reed Asset
Management Company. Date of birth: July 24, 1954.
James D. Wineland
Vice President of the Corporation and two other funds in the Fund Complex;
Vice President of WRIMCO; formerly, Vice President of Waddell & Reed Asset
Management Company. Date of birth: September 25, 1951.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
The Directors who may be deemed to be "interested persons" as defined in
the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc., or of WRIMCO are
indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a Director may elect after resignation from the Board
of Directors provided the Director has attained the age of 70 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 or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Corporation.
Messrs. Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey
and Paul S. Wise retired as Directors of the Corporation and of each of the
funds in the Fund Complex and elected a position as Director Emeritus.
The Corporation, the funds in the United Group and Target/United Funds,
Inc. pay to each Director a total of $48,000 per year, plus $2,500 for each
meeting of the Board of Directors attended plus reimbursement of expenses of
attending such meeting and $500 for each committee meeting attended which is not
in conjunction with a Board of Directors meeting, other than Directors who are
affiliates of Waddell & Reed, Inc. The fees to the Directors who receive them
are divided among the Corporation, the funds in the United Group and
Target/United Funds, Inc. based on the funds' relative size. During the
Corporation's fiscal year ended March 31, 1999, the Corporation's Directors
received the following fees for service as a director:
COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Corporation
From and Fund
Director Corporation Complex*
- -------- ------------ ------------
Robert L. Hechler
Henry J. Herrmann
Keith A. Tucker 0 0
James M. Concannon
John A. Dillingham
David P. Gardner
Linda K. Graves
Joseph Harroz, Jr.
John F. Hayes
Glendon E. Johnson
William T. Morgan
Ronald C. Reimer
Frank J. Ross, Jr.
Eleanor B. Schwartz
Frederick Vogel III
Paul S. Wise
* No pension or retirement benefits have been accrued as a part of Corporation
expenses.
Mr. Gardner was elected as a Director on August 18, 1998. Messrs.
Messrs. Harroz, Hechler, Herrmann and Reimer were elected as Directors on
November 18, 1998. The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of May 31, 1999, all of the Corporation's Directors and officers as a
group owned less than 1% of the outstanding shares of the Corporation. The
following table sets forth information with respect to the Corporation, as of
May 31, 1999, regarding the beneficial ownership of the series, and classes
thereof, of the Corporation's shares.
Shares owned
Name and Address Series and Beneficially
of Beneficial Owner Class or of Record Percent
- ------------------- ---------- ------------ -------
Liberty National Life International Growth Fund
Insurance Company Class B %
2001 Third Avenue South
Birmingham AL 35233
Richard Voss TR Total Return Fund
Church TSA Archdiocese Class Y
of OK
FBO Unallocated Assets Growth Fund
Church Sponsored Class Y
403(B) Plan
P. O. Box 32180 Limited-Term Bond Fund
Oklahoma City OK 73123 Class Y
International Growth Fund
Class Y
Asset Strategy Fund
Class Y
Fiduciary Trust Co NH TR Total Return Fund
Corporate Money Pension Class Y
Plan
Okanogan County Hospital International Growth Fund
District 3 Class Y
FBO Unallocated Assets
Qualified Plan 1329481
P. O. Box 793
Omak WA 98841
M E. Collins Contracting Total Return Fund
Co Inc Class Y
401K and Profit Sharing
980 East 25th St Box 83 Growth Fund
Wahoo NE 68066 Class Y
Limited-Term Bond Fund
Class Y
International Growth Fund
Class Y
Asset Strategy Fund
Class Y
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 of a class of shares of a Fund,
other than payments when you redeem your shares. The first source is net
investment income, which is derived from the dividends, interest and earned
discount on the securities a Fund holds, less expenses (which will vary by
class). The second source is net realized capital gains, which are derived from
the proceeds received from a Fund's sale of securities at a price higher than a
Fund's tax basis (usually cost) in such securities, less losses from sales of
securities at a price lower than the Fund's basis therein; these gains can be
either long-term or short-term, depending on how long a Fund has owned the
securities before it sells them. The third source (in the case of Total Return
Fund, Growth Fund, International Growth Fund, Asset Strategy Fund, Science and
Technology Fund and High 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.
Each Fund pays distributions from 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, except to the extent it has net
capital losses carried over from a prior year or years to offset the gains. It
is the policy of each Fund to make annual capital gains distributions to the
extent that net capital gains are realized in excess of available capital loss
carryovers.
Income and expenses are earned and incurred separately by each Fund, and
gains and losses on portfolio transactions of each Fund are attributable only to
that Fund. For example, capital losses realized by one Fund would not affect
capital gains realized by another Fund.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you want cash
for your dividends and distributions, however, a total dividend and/or
distribution amount less than ten dollars will be automatically paid in shares
of a Fund of the same class as that with respect to which they were paid (ii)
you want your dividends and distributions paid in shares of a Fund of the same
class as that with respect to which they were paid, or (iii) you want cash for
your dividends and want your distributions paid in shares of a Fund of the same
class as that with respect to which they were paid, however, a total dividend
amount less than ten dollars will be automatically paid in shares of a Fund of
the same class as that with respect to which it was paid. You can change your
instructions at any time. If you give no instructions, your dividends and
distributions will be paid in shares of a Fund of the same class as that with
respect to which they were paid. All payments in shares are at net asset value
without any sales charge. The net asset value used for this purpose is that
computed as of the payment date for the dividend or distribution, although this
could be changed by the Board of Directors.
TAXES
General
Each of the Funds have qualified for treatment as a regulated investment
company ("RIC") under the Code, so that it is relieved of Federal income tax on
that part of its investment company taxable income (consisting generally of net
investment income, net short-term capital gains and, for certain Funds, net
gains from certain foreign currency transactions) that is distributed to its
shareholders. To continue to qualify as a RIC, a Fund must distribute to its
shareholders for each taxable year at least 90% of the sum of its investment
company taxable income plus, in the case of Municipal Bond Fund, its net
interest income excludable from gross income under Section 103(a) of the Code
("Distribution Requirement") 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 contracts or forward contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. Government securities, securities of other RICs and other
securities that are limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities ("50%
Diversification Requirement"); and (3) at the close of each quarter of the
Fund's taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. Government securities or the securities
of other RICs) of any one issuer.
Investments in precious metals would have adverse tax consequences for
Asset Strategy Fund and its shareholders if it either (1) derived more than 10%
of its gross income in any taxable year from the disposition of precious metals
and from other income that does not qualify under the Income Requirement or (2)
held precious metals in such quantities that the Fund failed to satisfy the 50%
Diversification Requirement for any quarter. Asset Strategy Fund intends to
manage its portfolio so as to avoid failing to satisfy those requirements for
these reasons.
Dividends and distributions declared by a Fund in October, November or
December of any year and payable to its 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 December 31 of that year if they are paid by the Fund during the
following January. Accordingly, those dividends and distributions will be taxed
to the shareholders for the year in which that December 31 falls.
If 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 investor 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 pay sufficient dividends and
distributions each year to avoid imposition of the Excise Tax. The Code permits
the Fund to defer into the next calendar year net capital losses incurred
between November 1 and the end of the current calendar year.
Income from Foreign Securities
Dividends and interest received, and gains realized, by a Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
If more than 50% of the value of International Growth Fund's total assets
at the close of its taxable year consists of securities of foreign corporations,
that 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 taxes paid by it.
Pursuant to any such election, International Growth 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 that 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. International Growth Fund will report to its
shareholders shortly after each taxable year their respective shares of that
Fund's income from sources within foreign countries and U.S. possessions and
foreign taxes paid, if it makes this election. If International Growth Fund
makes this election, then pursuant to the Taxpayer Relief Act of 1997 ("Tax
Act"), beginning in 1998 individuals who have no more than $300 ($600 for
married persons filing jointly) of creditable foreign taxes included on Forms
1099 and all of whose foreign source income is "qualified passive income" may
elect each year to be exempt from the extremely complicated foreign tax credit
limitation and will be able to claim a foreign tax credit without having to file
the detailed Form 1116 that otherwise is required.
Each of International Growth Fund, Asset Strategy Fund, Total Return Fund,
Growth Fund, Science and Technology Fund and High Income Fund may invest in the
stock of "passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation -- other than a "controlled foreign corporation" (i.e., a foreign
corporation in which, on any day during its taxable year, more than 50% of the
total voting power of all voting stock therein or the total value of all stock
therein is owned, directly, indirectly, or constructively, by "U.S.
shareholders," defined as U.S. persons that individually own, directly,
indirectly, or constructively, at least 10% of that voting power) as to which
the Fund is a U.S. shareholder that, in general, meets either of the following
tests: (1) at least 75% of its gross income is passive or (2) an average of at
least 50% of its assets produce, or are held for the production of, passive
income. Under certain circumstances, a Fund will be subject to Federal income
tax on a portion of any "excess distribution" received on the stock of a PFIC or
of any gain on disposition of the stock (collectively "PFIC income"), plus
interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain -- which
probably would have to be distributed by the Fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if those earnings and
gain were not distributed to the Fund by the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
A Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
a Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years. A Fund's adjusted basis in each PFIC's stock with respect
to which it makes this election will be adjusted to reflect the amounts of
income included and deductions taken under the election. Regulations proposed in
1992 would provide a similar election with respect to the stock of certain
PFICs.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of debt securities denominated in a foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time a
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 a Fund's
investment company taxable income to be distributed to its shareholders.
Income from Options, Futures and Forward Currency Contracts and Foreign
Currencies
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures contracts and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the amount, character and timing of recognition of the gains and losses a Fund
realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures contracts and forward currency 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.
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 received also will be a short-term capital gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale.
Certain options, futures and forward contracts in which the Funds may
invest may be "section 1256 contracts." Section 1256 contracts held by a Fund at
the end of its taxable year, other than contracts subject to a "mixed straddle"
election made by the Fund, are "marked-to-market" (that is, treated as sold at
that time for their fair market value) for Federal income tax purposes, with the
result that unrealized gains or losses are treated as though they were realized.
Sixty percent of any net gains or losses recognized on these deemed sales, and
60% of any net realized gains or losses from any actual sales of section 1256
contracts, are treated as long-term capital gains or losses, and the balance are
treated as short-term capital gains or losses. That 60% portion will qualify for
the 20% (10% for taxpayers in the 15% marginal tax bracket) maximum tax rate on
net capital gains enacted by the Taxpayers Relief Act of 1997.
Section 1256 contracts also may be marked-to-market for purposes of the
Excise Tax and other purposes. The Fund may need to distribute any
mark-to-market gains to its shareholders to satisfy the Distribution Requirement
and/or avoid imposition of the Excise Tax, even though it may not have closed
the transactions and received cash to pay the distributions.
Code section 1092 (dealing with straddles) may also affect the taxation of
options and futures contracts in which the Funds may invest. That section
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. The regulations under section
1092 also provide certain "wash sale" rules that apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If 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.
If a Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward currency contract entered into by a
Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.
Zero Coupon and Payment-in-Kind Securities
Certain Funds may acquire zero coupon or other securities issued with OID.
As the holder of those securities, a Fund must include in its income the OID
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
accrued OID and other non-cash income, in order to satisfy the Distribution
Requirement 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.
Municipal Bond Fund
The aggregate dividends excludable from the gross income of the Municipal
Bond Fund's shareholders 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 a tax preference item for purposes of
the AMT. Exempt-interest dividends received by a corporate shareholder also may
be indirectly subject to the AMT without regard to whether the Fund's tax-exempt
interest was attributable to those PABs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
tax-exempt income such as the Fund's exempt interest dividends) 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 income
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 those gains 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 WRIMCO 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, Municipal Bond
Fund and High Income 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. The individuals who manage the 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 or WRIMCO may otherwise combine orders for
the Fund with those of other funds in the United Group and Target/United Funds,
Inc. or other accounts over which it has investment discretion. Transactions
effected pursuant to such combined orders are averaged as to price and allocated
in accordance with the purchase or sale orders actually placed for each fund or
advisory account, except where the combined order is not filled completely. In
this case, WRIMCO will ordinarily allocate the transaction pro rata based on the
orders placed. Sharing in large transactions could affect the price a Fund pays
or receives or the amount it buys or sells. However, sometimes a better
negotiated commission is available through combined orders.
To effect the portfolio transactions of a Fund, WRIMCO is authorized to
engage broker-dealers ("brokers") which, in its best judgment based on relevant
factors, will implement the policy of the Fund to seek "best execution" (prompt
and reliable execution at the best price obtainable) for reasonable and
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution and/or
research services and or other services, including pricing or quotation
services, directly or through others ("research and brokerage services")
considered by WRIMCO to be useful or desirable for its investment management of
the Fund and/or the other funds and accounts over which WRIMCO has investment
discretion.
Such research and brokerage services are, in general, defined by reference
to Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers; (ii) furnishing
analyses and reports; or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than another qualified broker would charge for
effecting comparable transactions if a good faith determination is made by
WRIMCO that the commission is reasonable in relation to the research or
brokerage services provided. Subject to the foregoing considerations, WRIMCO may
also consider sales of Fund shares as a factor in the selection of
broker-dealers to execute portfolio transactions. No allocation of brokerage or
principal business is made to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of WRIMCO, 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 WRIMCO 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 WRIMCO.
Such investment research (which may be supplied by a third party at the
instance of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of WRIMCO;
serves to make available additional views for consideration and comparisons; and
enables WRIMCO to obtain market information on the price of securities held in a
Fund's portfolio or being considered for purchase.
The Corporation may also use its brokerage to pay for pricing or quotation
services to value securities.
The table below sets forth the brokerage commissions paid by each of the
Funds then in existence during the fiscal years ended March 31, 1999, 1998 and
1997. 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.
1999 1998 1997
---- ----- -----
Asset Strategy Fund 26,334 18,737
Growth Fund 82,603 136,278
High Income Fund ---
International Growth Fund* 386,865 254,192
Limited-Term Bond Fund --- --- ---
Municipal Bond Fund 1,371 ---
Science and Technology Fund 4,802
Total Return Fund $288,547 $200,131
-------- ------- -------
Total $790,522 $609,338 $
======== ======== =======
* Formerly Global Income Fund.
*** For the period from July 31, 1997, the date of the initial public offering,
to March 31, 1998.
The next table shows for each of the 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, 1999 for each of the Funds. These transactions were
allocated to these broker-dealers by the internal allocation procedures
described above.
Amount of Brokerage
Transactions Commissions
------------ -----------
Asset Strategy Fund ......................
Growth Fund ..............................
High Income Fund* ........................ --- ---
International Growth Fund ................
Limited-Term Bond Fund ................... --- ---
Municipal Bond Fund ...................... --- ---
Science and Technology Fund*..............
Total Return Fund ........................ $ $
------------ --------
Total ................................. $ $
============ ========
* For the period from July 31, 1997, the date of the initial public offering, to
March 31, 1999.
As of March 31, 1998, Waddell & Reed Growth Fund owned Merrill Lynch &
Co., Inc. securities in the aggregate amount of $6,277,249. Merrill Lynch &
Co., Inc. is a regular broker of the Fund. Waddell & Reed Limited-Term Bond
Fund owned Salomon Inc. securities in the aggregate amount of $515,770.
Salomon Inc. is a regular broker of the Fund. Waddell & Reed International
Growth Fund owned Credit Suisse Group securities in the aggregate amount of
$3,401,561. Credit Suisse Group is a regular broker of the Fund.
The Corporation, WRIMCO and Waddell & Reed, Inc. have adopted a Code of
Ethics which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
OTHER INFORMATION
General
The Corporation was organized on January 29, 1992.
The Shares of the Funds
The shares of each of the Funds represents an interest in that Fund's
securities and other assets and in its profits or losses. Each fractional share
of a class has the same rights, in proportion, as a full share of that class.
Each Fund offers two classes of its shares: Class B and Class Y. Each
class of a Fund represents an interest in the same assets of the Fund and differ
as follows: each class of shares has exclusive voting rights on matters
pertaining to matters appropriately limited to that class; Class B shares are
subject to a contingent deferred sales charge; Class Y shares are not subject to
a contingent deferred sales charge but are subject to an ongoing distribution
and service fee that differs in amount from that of the Class B shares; each
class may bear differing amounts of certain class-specific expenses; and each
class has a separate exchange privilege. The Funds do not anticipate that there
will be any conflicts between the interests of holders of the different classes
of shares of the same Fund by virtue of those classes. On an ongoing basis, the
Board of Directors will consider whether any such conflict exists and, if so,
take appropriate action. Each share of a Fund is entitled to equal voting,
dividend, liquidation and redemption rights, except that due to the differing
expenses borne by the two classes, dividends and liquidation proceeds of Class B
shares are expected to be lower than for Class Y shares of the same Fund. Shares
are fully paid and nonassessable when purchased.
The Funds do not hold annual meetings of shareholders; however, certain
significant corporate matters, such as the approval of a new investment advisory
agreement or a change in fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by 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 are met. There will normally be no meeting of
the shareholders for the purpose of electing directors until such time as less
than a majority of directors holding office have been elected by shareholders,
at time which the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the 1940 Act
applies to a Fund, the directors are required to call a meeting of shareholders
for the purpose of voting upon the question of removal of any director when
requested in writing to do so by the shareholders of record of not less than 10%
of the Fund's outstanding shares.
Each share (regardless of class) has one vote. All shares of a Fund vote
together as a single class, except as to any matter for which a separate vote of
any class is required by the 1940 Act, and except as to any matter which affects
the interests of one or more particular classes, in which case only the
shareholders of the affected classes are entitled to vote, each as a separate
class.
Each share of each Fund (regardless of class) is entitled to one vote. On
certain matters such as the election of Directors, all shares of the eight Funds
vote together as a single class. On other matters affecting a particular Fund,
the shares of that Fund vote together as a separate class, such as with respect
to a change in an investment restriction of a particular Fund, except that as to
matters for which a separate vote of a class is required by the 1940 Act or
which affects the interests of one or more particular classes, the affected
shareholders vote as a separate class. In voting on a Management Agreement,
approval by the shareholders of a Fund is effective as to that Fund whether or
not enough votes are received from the shareholders of the other Funds to
approve the Management Agreement for the other Funds.
Initial Investment
On April 24, 1992, the Distributor purchased for investment 2,000 Class B
shares of each Fund (other than Asset Strategy Fund, Science and Technology Fund
and High Income Fund) at a net asset value of $10.00 per share.
On April 20, 1995, the Distributor purchased for investment 2,000 Class B
shares of Asset Strategy Fund at a net asset value of $10.00 per share.
On July 31, 1997, the Distributor purchased for investment 2,000 Class B
shares and 2,000 Class Y shares of Science and Technology Fund and High Income
Fund at a net asset value of $10.00 per share.
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities which
the Corporation may use. The Corporation may also use ratings provided by other
nationally recognized statistical rating organizations in determining the
securities eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. A
Standard & Poor's ("S&P") corporate bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment of creditworthiness may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to pay
interest and repay principal is very strong, and debt rated AA differs from AAA
issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. It is used when interest payments
or principal payments are not made on a due date even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace periods. The D rating will also be used upon a filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "investment grade" ratings)
are generally regarded as eligible for bank investment. In addition, the laws of
various states governing legal investments may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service ("MIS") rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Description of Preferred Stock Ratings
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. An S&P
preferred stock rating is an assessment of the capacity and willingness of an
issuer to pay preferred stock dividends and any applicable sinking fund
obligations. A preferred stock rating differs from a bond rating inasmuch as it
is assigned to an equity issue, which issue is intrinsically different from, and
subordinated to, a debt issue. Therefore, to reflect this difference, the
preferred stock rating symbol will normally not be higher than the debt rating
symbol assigned to, or that would be assigned to, the senior debt of the same
issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA -- This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A -- An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB -- An issue rated BBB is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB, B, CCC -- Preferred stock rated BB, B, and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC -- The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C -- A preferred stock rated C is a non-paying issue.
D -- A preferred stock rated D is a non-paying issue with the issuer in
default on debt instruments.
NR -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-) -- To provide more detailed indications of preferred
stock quality, the rating from AA to CCC may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
A preferred stock rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable. S&P does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Moody's Investors Service, Inc. Because of the fundamental differences
between preferred stocks and bonds, a variation of MIS familiar bond rating
symbols is used in the quality ranking of preferred stock. The symbols are
designed to avoid comparison with bond quality in absolute terms. It should
always be borne in mind that preferred stock occupies a junior position to bonds
within a particular capital structure and that these securities are rated within
the universe of preferred stocks.
Note: MIS applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Preferred stock rating symbols and their definitions are as follows:
aaa -- An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well-maintained in the foreseeable
future.
a -- An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the aaa
and aa classification, earnings and asset protection are, nevertheless, expected
to be maintained at adequate levels.
baa -- An issue which is rated baa is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba -- An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b -- An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated caa is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca -- An issue which is rated ca is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
c -- This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF NOTE RATINGS
Standard and Poor's, a division of The McGraw-Hill Companies, Inc. An S&P
note rating reflects the liquidity factors and market access risks unique to
notes. Notes maturing 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 the issue is to be treated as a note).
--Source of Payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Investors Service, Inc. MIS Short-Term Loan Ratings -- MIS ratings
for state and municipal short-term obligations will be designated MIS 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, a division of The McGraw-Hill Companies, Inc. An S&P
commercial paper rating is a current assessment of the likelihood of timely
payment of debt considered short-term in the relevant market. Ratings are graded
into several categories, ranging from "A-1" 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 strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An A-2
rating indicates that capacity for timely payment is satisfactory; however, the
relative degree of safety is not as high as for issues designated A-1. Issues
rated A-3 have adequate capacity for timely payment; however, they are more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations. Issues rated B are regarded as having only
speculative capacity for timely payment. 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. MIS 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>
22. Financial Statements
---------------------------------
(a) Financial Statements -- Waddell & Reed Funds, Inc.
Included in Part B:
-------------------
As of March 31, 1999
Statement of Assets and Liabilities
For the year ended March 31, 1999
Statement of Operations
For each of the two years in the period ended March 31, 1999
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of March 31, 1999
Report of Independent Accountants
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits:
(a) Articles of Incorporation, as amended, filed May 16, 1997 as
EX-99.B1-charter to Post-Effective Amendment No. 8 to the Registration
Statement on Form N-1A*
Articles Supplementary, filed May 16, 1997 as EX-99.B1-wrartsup to
Post-Effective Amendment No. 8 to the Registration Statement on Form
N-1A*
(b) Bylaws, as amended, filed June 27, 1996 as EX-99.B2-wrbylaw to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A*
Amendment to Bylaws attached hereto as EX-99.B(b)-wrbylaw2
(c) Not applicable
(d) Investment Management Agreement with amended fee schedule to reflect
the addition of Science and Technology Fund and High Income Fund,
filed May 16, 1997 as EX-99.B5-wrima to Post-Effective Amendment No. 8
to the Registration Statement on Form N-1A*
(e) Underwriting Agreement filed June 27, 1995 as EX-99.B6-wrua to
Post-Effective Amendment No. 5 to the Registration Statement on Form
N-1A*
(f) Not applicable
(g) Custodian Agreement, as amended, attached hereto as EX-99.B(g)-wrca
(h) Shareholder Servicing Agreement, as amended, attached hereto as
EX-99.B(h)-wrssa
Accounting Services Agreement filed October 3, 1995, as EX-99.B9-wrasa
to Post-Effective Amendment No. 6 to the Registration Statement on
Form N-1A*
Fund NAV Application filed February 3, 1995 as EX-99.B9-wrnavapp to
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A*
Fund Class B Application, as amended, filed May 16, 1997 as
EX-99.B9-wrappcb to Post-Effective Amendment No. 8 to the Registration
Statement on Form N-1A*
Fund Class Y Application, filed October 3, 1995, as EX-99.B9-wrappcy
to Post-Effective Amendment No. 6 to the Registration Statement on
Form N-1A*
Class Y Letter of Understanding, filed June 27, 1996 as EX-99.B9-wrlou
to Post-Effective Amendment No. 7 to the Registration Statement on
Form N-1A*
(i) Not Applicable
(j) Consent of Deloitte & Touche LLP, Independent Accountants, will be
attached as EX-99.B(j)-wrconsnt in the 485(b) filing to be completed
on June 28, 1999.
(k) Not applicable
(l) 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*. Agreement with Initial
Shareholder of Waddell & Reed Funds, Inc. Asset Strategy Fund, filed
on June 27, 1995 as EX-99.B13-wragree to Post-Effective Amendment No.
5 to the Registration Statement on Form N-1A*
(m) Distribution and Service Plan Class B shares, filed October 3, 1995 as
EX-99.B15-wrdspcb to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A*
Distribution and Service Plan Class Y shares, filed October 3, 1995 as
EX-99.B15-wrdspcy to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A*
(n) The applicable Financial Data Schedules, will be attached as
EX-27.B17-wrfds1, EX-27.B17-wrfds2, EX-27.B17-wrfds3,
EX-27.B17-wrfds4, EX-27.B17-wrfds5, EX-27.B17-wrfds6, EX-27.B17-wrfds7
and EX-27.B17-wrfds8 in the 485(b) filing to be completed on June 28,
1999.
(o) Multiple Class Plan, filed June 27, 1996 as EX-99.B18-wrmcp to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A*
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Article 10.2 of the Registrant's Articles of
Incorporation, filed May 16, 1997 as EX-99.B1-charter to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A*; Article IX of
the Bylaws, filed June 27, 1996 as EX-99.B2-wrbylaw to Post-Effective
Amendement No. 7 to the Registration Statement on Form N-1A*; and Article V
of the Underwriting Agreement filed June 27, 1995 as EX-99.B6-wrua to the
Post-Effective Amendment No. 5 to the 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.
26. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the Investment Manager of
the Registrant under the terms of an Investment Management Agreement
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 and to other investment advisory clients.
Each director and executive officer of Waddell & Reed Investment Management
Company has had as his sole business, profession, vocation or employment
during the past two years only his duties as an executive officer and/or
employee of Waddell & Reed Investment Management Company or its
predecessors, except as to persons who are directors and/or officers of the
Registrant and have served in the capacities shown in the Statement of
Additional Information of the Registrant The address of the officers is
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to Part A and Part B of this Post-Effective
Amendment.
27. 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.
United Asset Strategy Fund, Inc.
Advantage I
Advantage II
Advantage Plus
(b) The information contained in the underwriter's application on form BD,
under the Securities Exchange Act of 1934, is herein incorporated by
reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or an
affiliated person of such affiliated person.
28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940
and rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant, each of
whose business address is Post Office Box 29217, Shawnee Mission, Kansas
66201-9217.
29. Management Services
-------------------
There 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.
30. Undertakings
--------------
Not applicable
- ---------------------------------
*Incorporated herein by reference
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED
FUNDS, INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND,
INC., UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC.,
TARGET/UNITED FUNDS, INC. AND WADDELL & REED FUNDS, INC. (each hereinafter
called the "Corporation"), and certain directors and officers for the
Corporation, do hereby constitute and appoint KEITH A. TUCKER, ROBERT L.
HECHLER, and KRISTEN A. RICHARDS, and each of them individually, their true and
lawful attorneys and agents to take any and all action and execute any and all
instruments which said attorneys and agents may deem necessary or advisable to
enable each Corporation to comply with the Securities Act of 1933 and/or the
Investment Company Act of 1940, as amended, and any rules, regulations, orders
or other requirements of the United States Securities and Exchange Commission
thereunder, in connection with the registration under the Securities Act of 1933
and/or the Investment Company Act of 1940, as amended, including specifically,
but without limitation of the foregoing, power and authority to sign the names
of each of such directors and officers in his/her behalf as such director or
officer as indicated below opposite his/her signature hereto, to any
Registration Statement and to any amendment or supplement to the Registration
Statement filed with the Securities and Exchange Commission under the Securities
Act of 1933 and/or the Investment Company Act of 1940, as amended, and to any
instruments or documents filed or to be filed as a part of or in connection with
such Registration Statement or amendment or supplement thereto; and each of the
undersigned hereby ratifies and confirms all that said attorneys and agents
shall do or cause to be done by virtue hereof.
Date: November 18, 1998 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
/s/Keith A. Tucker Chairman of the Board November 18, 1998
- ------------------- -----------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal November 18, 1998
- -------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann Vice President and November 18, 1998
- -------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard Vice President, Treasurer November 18, 1998
- -------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon Director November 18, 1998
- -------------------- ----------------
James M. Concannon
/s/John A. Dillingham Director November 18, 1998
- -------------------- ----------------
John A. Dillingham
/s/David P. Gardner Director November 18, 1998
- ------------------- ----------------
David P. Gardner
/s/Linda K. Graves Director November 18, 1998
- -------------------- ----------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director November 18, 1998
- -------------------- ----------------
Joseph Harroz, Jr.
/s/John F. Hayes Director November 18, 1998
- -------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson Director November 18, 1998
- -------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan Director November 18, 1998
- -------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer Director November 18, 1998
- -------------------- ----------------
Ronald C. Reimer
/s/Frank J. Ross Director November 18, 1998
- -------------------- ----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director November 18, 1998
- -------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director November 18, 1998
- -------------------- ----------------
Frederick Vogel III
Attest:
/s/Kristen A. Richards
- --------------------------------
Kristen A. Richards
Assistant Secretary
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment pursuant to Rule
485(a) of the Securities Act of 1933 and 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 30th day
of April, 1999.
WADDELL & REED FUNDS, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
Signatures Title
---------- -----
/s/Keith A. Tucker* Chairman of the Board April 30, 1999
- ---------------------- ----------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal April 30, 1999
- ---------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and April 30, 1999
- ---------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer April 30, 1999
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon* Director April 30, 1999
- ------------------ ----------------
James M. Concannon
/s/John A. Dillingham* Director April 30, 1999
- ------------------ ----------------
John A. Dillingham
/s/David P. Gardner* Director April 30, 1999
- ------------------ ----------------
David P. Gardner
/s/Linda K. Graves* Director April 30, 1999
- ------------------ ----------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director April 30, 1999
- ------------------ ----------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director April 30, 1999
- ------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson* Director April 30, 1999
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director April 30, 1999
- ------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer* Director April 30, 1999
- ------------------ ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director April 30, 1999
- ------------------ ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director April 30, 1999
- ------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director April 30, 1999
- ------------------- ----------------
Frederick Vogel III
*By
Kristen A. Richards
Attorney-in-Fact
ATTEST:
David R. Burford
Assistant Secretary
EX-99.B(b)
AMENDMENT TO BYLAWS
RESOLVED, That the Bylaws of each of United Funds, Inc., United Asset
Strategy Fund, Inc., United Cash Management, Inc., United Continental Income
Fund, Inc., United Gold & Government Fund, Inc., United Government Securities
Fund, Inc., United High Income Fund, Inc., United High Income Fund II, Inc.,
United International Growth Fund, Inc., United Municipal Bond Fund, Inc., United
Municipal High Income Fund, Inc., United New Concepts Fund, Inc., United
Retirement Shares, Inc., United Vanguard Fund, Inc., Target/United Funds, Inc.
and Waddell & Reed Funds, Inc. are amended by substitution of the following for
the initial paragraph of Article I, Section 7, regarding voting and inspectors;
and, with respect to United Asset Strategy Fund, Inc., United Retirement Shares,
Inc. and Waddell & Reed Funds, Inc., for Article II, Section 2, regarding voting
and proxies:
At all meetings of the stockholders, every stockholder of record
entitled to vote thereat shall be entitled to vote either in person or
by proxy, which term shall include proxies provided by such
stockholder, or his duly authorized attorney, through written,
electronic, telephonic, computerized, facsimile, telecommunications,
telex or oral communication or by any other form of communication, each
pursuant to such voting procedures and through such systems as are
authorized by the Board of Directors or one or more executive officers
of the Corporation. No proxy which is dated or, if otherwise provided
as permitted by these Bylaws and applicable Maryland law, provided more
than three months before the meeting at which it is offered shall be
accepted, unless such proxy shall, on its face, name or, if otherwise
provided as permitted by these Bylaws and applicable Maryland law,
provide a longer period for which it is to remain in force.
I certify that I am Assistant Secretary of each of the following
Corporations, and as such officer, have custody of the minute books of the
Corporations, and that the foregoing resolutions are true and correct
resolutions duly passed by the Board of Directors of each of the following
Corporations at a meeting held on February 10, 1999.
United Funds, Inc.
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Gold & Government Fund, Inc.
United Government Securities Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United International Growth Fund, Inc.
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United New Concepts Fund, Inc.
United Retirement Shares, Inc.
United Vanguard Fund, Inc.
Target/United Funds, Inc.
Waddell & Reed Funds, Inc.
---------------------------------
Kristen A. Richards, Assistant Secretary
Dated this 10th day of February, 1999.
Ex-99.B(g)
CUSTODIAN AGREEMENT
Dated as of April 24, 1992
Amended and Restated as of May 13, 1998
Between
UMB BANK, n.a.
and
WADDELL & REED FUNDS, INC. GROWTH FUND
<PAGE>
Table of Contents
ARTICLE
I. Appointment of Custodian
II. Powers and Duties of Custodian
2.01 Safekeeping
2.02 Manner of Holding Securities
2.03 Purchase of Assets
2.04 Exchanges of Securities
2.05 Sales of Securities
2.06 Depositary Receipts
2.07 Exercise of Rights, Tender Offers, Etc.
2.08 Stock Dividends, Rights, Etc.
2.09 Options
2.10 Futures Contracts
2.11 Borrowing
2.12 Interest Bearing Deposits
2.13 Foreign Exchange Transactions
2.14 Securities Loans
2.15 Collections
2.16 Dividends, Distributions and Redemptions
2.17 Proceeds from Shares Sold
2.18 Proxies, Notices, Etc.
2.19 Bills and Other Disbursements
2.20 Nondiscretionary Functions
2.21 Bank Accounts
2.22 Deposit of Fund Assets in Securities System
2.23 Other Transfers
2.24 Establishment of Segregated Account
2.25 Custodian's Books and Records
2.26 Opinion of Fund's Independent
Certified Public Accountants
2.27 Reports by Independent Certified Public
Accountants
2.28 Overdraft Facility
III. Proper Instructions, Special Instructions
and Related Matters
3.01 Proper Instruction and Special Instructions
3.02 Authorized Persons
3.03 Persons Having Access to Assets of the Portfolios
3.04 Actions of Custodian Based on Proper
Instructions and Special Instructions
<PAGE>
IV. Subcustodians
4.01 Domestic Subcustodians
4.02 Foreign Sub-Subcustodians and
Interim Sub-Subcustodians
4.03 Special Subcustodians
4.04 Termination of a Subcustodian
4.05 Certification Regarding Foreign Sub-Subcustodians
V. Standard of Care, Indemnification
5.01 Standard of Care
5.02 Liability of the Custodian for Actions
of Other Person
5.03 Indemnification by Fund
5.04 Investment Limitations
5.05 Fund's Right to Proceed
5.06 Indemnification by Custodian
5.07 Custodian's Right to Proceed
VI. Compensation
VII. Termination
VIII. Defined Terms
IX. Miscellaneous
9.01 Execution of Documents, Etc.
9.02 Representations and Warranties
9.03 Entire Agreement
9.04 Waivers and Amendments
9.05 Interpretation
9.06 Captions
9.07 Governing Law
9.08 Notices
9.09 Assignment
9.10 Counterparts
9.11 Confidentiality; Survival of Obligations
Appendix "B"
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of the 24th day of April, 1992 between Waddell & Reed
Funds, Inc. Growth Fund (the "Fund") and UMB Bank, n.a. (the "Custodian") and as
amended and restated as of May 13, 1998.
WITNESSETH
WHEREAS, the Fund desires to appoint the Custodian as custodian on
behalf of the Fund in accordance with the provisions of the Investment Company
Act of 1940, as amended (the "1940 Act") and the rules and regulations
thereunder, under the terms and conditions set forth in this Agreement, and the
Custodian has agreed so to act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
Subject to the terms and provisions of this Agreement, the Fund hereby
employs and appoints the Custodian as a custodian of the cash, securities and
other assets owned by the Fund and deposited from time to time with the
Custodian ("Assets"). The Fund shall deliver to the Custodian, or shall cause to
be delivered to the Custodian, Assets during the term of this Agreement. The
Custodian is authorized to act under the terms and conditions of this Agreement
as the Fund's agent and shall be representing the Fund when acting within the
scope of this Agreement. The Custodian hereby accepts such appointment as
custodian and shall perform the duties and responsibilities set forth herein on
the terms and conditions set forth herein.
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
As custodian, the Custodian shall have and perform the powers and
duties set forth in this Article II. Pursuant to and in accordance with Article
IV hereof, the Custodian may appoint one or more Subcustodians (as hereinafter
defined) to exercise the powers and perform the duties of the Custodian set
forth in this Article II and references to the Custodian in this Article II
shall include any Subcustodian so appointed.
Section 2.01. Safekeeping. The Custodian shall accept delivery of and
keep safely the Assets in accordance with the terms and conditions hereof on
behalf of the Fund.
Section 2.02. Manner of Holding Securities.
(a) The Custodian shall at all times hold securities of the Fund
either: (i) by physical possession of the share certificates or other
instruments representing such securities in registered or bearer form; or (ii)
in book-entry form by a Securities System (as hereinafter defined) in accordance
with the provisions of Section 2.22 below.
(b) The Custodian may at all times hold registered securities of the
Fund in the name of the Fund or the Fund's nominee, or in the nominee name of
the Custodian unless specifically directed by Proper Instructions (as
hereinafter defined) to hold such registered securities in so-called street
name; provided that, in any event, all Assets shall be held in an account of the
Custodian containing only assets of the Fund. Notwithstanding the foregoing,
unless it receives Proper Instructions to the contrary, the Custodian shall
register all securities in the name of the Custodian's nominee as authorized by
the Fund. All securities held directly or indirectly by the Custodian hereunder
shall at all times be identifiable on the records of the Custodian. Except as
otherwise provided herein, the Custodian shall keep the Assets physically
segregated from those of other persons or entities. The Custodian shall execute
and deliver all certificates and documents in connection with registration of
securities as may be required by the applicable provisions of the Internal
Revenue Code, the laws of any State or territory of the United States and the
laws of any jurisdiction in which the securities are held.
Section 2.03. Purchase of Assets.
(a) Security Purchases. Upon receipt of Proper Instructions, the
Custodian shall pay for and receive securities purchased for the account of the
Fund, provided that payment shall be made by Custodian only upon receipt of the
securities: (a) by the Custodian; (b) by a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) by a Securities
System. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i)
in the case of a repurchase agreement, the Custodian may release funds to a
Securities System prior to the receipt of advice from the Securities System that
the securities underlying such repurchase agreement have been transferred by
book-entry into the Account (as hereinafter defined) maintained with such
Securities System by the Custodian, provided that the Custodian's instructions
to the Securities System require that the Securities System may make payment of
such funds to the other party to the repurchase agreement only upon transfer by
book-entry of the securities underlying the repurchase agreement into the
Account; (ii) in the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures contracts or
options, pursuant to Sections 2.09, 2.10, 2.12 and 2.13 hereof, the Custodian
may make payment therefor before receipt of an advice or transaction; and (iii)
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make payment therefor
and receive delivery of such securities in accordance with local custom and
practice generally accepted by Institutional Clients (as hereinafter defined) in
the country in which the settlement occurs, but in all events subject to the
standard of care set forth in Article V hereof. For purposes of this Agreement,
an "Institutional Client" shall mean a major commercial bank, corporation,
insurance company, or substantially similar institution, which, as a substantial
part of its business operations, purchases or sells securities and makes use of
custodial services.
(b) Other Asset Purchases. Upon receipt of Proper Instructions and
except as otherwise provided herein, the Custodian shall pay for and receive
other Assets for the account of the Fund as provided in Proper Instructions.
Section 2.04. Exchanges of Securities. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of the Fund for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event relating to the securities or the issuer of such securities, and shall
deposit any such securities in accordance with the terms of any reorganization
or protective plan. The Custodian shall, without receiving Proper Instructions:
surrender securities for transfer into the name of the Fund, the Fund's nominee
or the nominee name of the Custodian as permitted by Section 2.02(b); and
surrender securities for a different number of certificates or instruments
representing the same number of shares or same principal amount of indebtedness,
provided that the securities to be issued will be delivered to the Custodian.
Section 2.05. Sales of Securities. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor in the form of: (a) cash,
certified check, bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) credit to the
Account of the Custodian with a Securities System, in accordance with the
provisions of Section 2.22 hereof. Notwithstanding the foregoing: (i) in the
case of the sale of securities, the settlement of which occurs outside of the
United States of America, such securities shall be delivered and paid for in
accordance with local custom and practice generally accepted by Institutional
Clients in the country in which the settlement occurs, but in all events subject
to the standard of care set forth in Article V hereof; and (ii) in the case of
securities held in physical form, such securities shall be delivered and paid
for in accordance with "street delivery custom" to a broker or its clearing
agent, against delivery to the Custodian of a receipt for such securities,
provided that the Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such securities by the broker or
its clearing agent, and provided further that, subject to the standard of care
set forth in Article V hereof, the Custodian shall not be responsible for the
selection of or the failure or inability to perform of such broker or its
clearing agent.
Section 2.06. Depositary Receipts. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used for such
securities by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter referred to, collectively , as "ADRs"), against
a written receipt therefor adequately describing such securities and written
evidence satisfactory to the Custodian that the depositary has acknowledged
receipt of instructions to issue ADRs with respect to such securities in the
name of the Custodian or a nominee of the Custodian, for delivery to the
Custodian at such place as the Custodian may from time to time designate. Upon
receipt of Proper Instructions, the Custodian shall surrender ADRs to the issuer
thereof, against a written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian that the issuer
of the ADRs has acknowledged receipt of instructions to cause its depository to
deliver the securities underlying such ADRs to the Custodian.
Section 2.07. Exercise of Rights, Tender Offers, Etc. Upon receipt of
Proper Instructions, the Custodian shall: (a) deliver warrants, puts, calls,
rights or similar securities to the issuer or trustee thereof (or to the agent
of such issuer or trustee) for the purpose of exercise or sale, provided that
the new securities, cash or other Assets, if any, acquired as a result of such
actions are to be delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the consideration for such
securities is to be paid or delivered to the Custodian, or the tendered
securities are to be returned to the Custodian. Notwithstanding any provision of
this Agreement to the contrary, the Custodian shall promptly notify the Fund in
writing of (i) any default in payment of funds on securities; (ii) any
securities that have matured, been called or redeemed; and (iii) to the extent
the Custodian has notice which is contained in services to which it normally
subscribes for such purposes, or actual knowledge if not contained in such
services, any other default involving securities; and all announcements of
defaults, bankruptcies, reorganizations, mergers, consolidations,
recapitalizations or rights or privileges to subscribe, convert, exchange, put,
redeem or tender securities held subject to this Agreement. The Custodian shall,
following receipt or knowledge, convey such information to the Fund in a timely
manner based upon the circumstances of each particular case. Whenever any such
rights or privileges exist, the Fund will, in a timely manner based upon the
circumstances of each particular case, provide the Custodian with Proper
Instructions. Absent the Custodian's timely receipt of Proper Instructions, the
Custodian shall not be liable for not taking any action or not exercising such
rights prior to their expiration unless such failure is due to Custodian's
failure to give timely notice to the Fund in accordance with this Section 2.07.
Section 2.08. Stock Dividends, Rights, Etc. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and, upon
receipt of Proper Instructions, take action with respect to the same as directed
in such Proper Instructions.
Section 2.09. Options. Upon receipt of Proper Instructions and in
accordance with the provisions of any agreement between the Custodian, any
registered broker-dealer and, if necessary, the Fund relating to compliance with
the rules of the Options Clearing Corporation (the "OCC") or of any registered
national securities exchange or similar organization(s), the Custodian shall:
(a) receive and retain confirmations or other documents, if any, evidencing the
purchase or writing of an option by the Fund; (b) deposit and maintain in a
segregated account, securities (either physically or by book-entry in a
Securities System), cash or other Assets; and (c) pay, release and/or transfer
such securities, cash or other Assets in accordance with any such agreement and
with notices or other communications evidencing the expiration, termination or
exercise of such options furnished by the OCC, the securities or options
exchange on which such options are traded or such other organization as may be
responsible for handling such option transactions. The Fund and the
broker-dealer shall be responsible for determining the sufficiency of assets
held in any segregated account established in compliance with applicable margin
maintenance requirements and the performance of other terms of any option
contract; provided, however, that the Custodian shall be liable for performance
of its duties under this Agreement and in accordance with Proper Instructions,
and shall be liable for performance of its duties under any other agreement
between the Custodian, any registered broker-dealer and, if necessary, the Fund.
Notwithstanding anything herein to the contrary, if the Fund issues Proper
Instructions to sell a naked option (including stock index options), then as
part of the transaction, the Custodian, the Fund and the broker-dealer shall
have entered into a tri-party agreement, as described above.
Section 2.10. Futures Contracts. Upon receipt of Proper Instructions,
or pursuant to the provisions of any futures margin procedural agreement among
the Fund, the Custodian and any futures commission merchant (a "Procedural
Agreement"), the Custodian shall: (a) receive and retain confirmations, if any
evidencing the purchase of or sale of a futures contract or an option on a
futures contract by the Fund; (b) deposit and maintain in a segregated account
cash, securities and other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written by the Fund, in accordance with the provisions of the
Commodity Futures Trading Commission and/or any commodity exchange or contract
market (such as the Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release assets from and/or transfer
assets into such margin accounts only in accordance with any such Procedural
Agreements. The Fund and such futures commission merchant shall be responsible
for determining the sufficiency of assets held in the segregated account in
compliance with applicable margin maintenance requirements and the performance
of any futures contract or option on a futures contract in accordance with its
terms; provided, however, that the Custodian shall be liable for performance of
its duties under this Agreement and in accordance with Proper Instructions, and
shall be liable for performance of its duties under any Procedural Agreement.
Section 2.11. Borrowing. Upon receipt of Proper Instructions, the
Custodian shall deliver securities of the Fund to lenders or their agents, or
otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for borrowings effected by the Fund, provided that such
borrowed money is payable by the lender (a) to or upon the Custodian's order, as
Custodian for the Fund, and (b) concurrently with delivery of such securities.
Section 2.12. Interest Bearing Deposits. Upon receipt of Proper
Instructions directing the Custodian to purchase interest bearing fixed term and
call deposits (hereinafter referred to collectively, as "Interest Bearing
Deposits") for the account of the Fund, the Custodian shall purchase such
Interest Bearing Deposits in the name of the Fund with such banks or trust
companies (including the Custodian, any Subcustodian or any subsidiary or
affiliate of the Custodian) (hereinafter referred to as "Banking Institutions")
and in such amounts as the Fund may direct pursuant to Proper Instructions. Such
Interest Bearing Deposits may be denominated in U.S. Dollars or other
currencies, as the Fund may determine and direct pursuant to Proper
Instructions. The Custodian shall include in its records with respect to the
Assets of the Fund appropriate notation as to the amount and currency of each
such Interest Bearing Deposit, the accepting Banking Institution and all other
appropriate details, and shall retain such forms of advice or receipt evidencing
such account, if any, as may be forwarded to the Custodian by the Banking
Institution. The responsibilities of the Custodian to the Fund for Interest
Bearing Deposits accepted on the Custodian's books in the United States shall be
that of a U.S. bank for a similar deposit. With respect to Interest Bearing
Deposits other than those accepted on the Custodian's books, (a) the Custodian
shall be responsible for the collection of income as set forth in Section 2.15
and the transmission of cash and instructions to and from such accounts; and (b)
the Custodian shall have no duty with respect to the selection of the Banking
Institution or, so long as the Custodian acts in accordance with Proper
Instructions and the terms and conditions of this Agreement, for the failure of
such Banking Institution to pay upon demand. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable actions as the Fund deems
necessary or appropriate to cause each such Interest Bearing Deposit account to
be insured to the maximum extent possible by all applicable deposit insurers
including, without limitation, the Federal Deposit Insurance Corporation.
Section 2.13. Foreign Exchange Transactions.
(a) Foreign Exchange Transactions Other than as Principal. Upon receipt
of Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may determine and direct pursuant to Proper
Instructions. The Fund accepts full responsibility for its use of third party
foreign exchange brokers (any dealer other than the Foreign Subcustodian) (as
hereinafter defined) and for execution of said foreign exchange contracts and
understands that the Fund shall be responsible for any and all costs and
interest charges which may be incurred as a result of the failure or delay of
its third party broker to deliver foreign exchange unless such loss, damage, or
expense is caused by, or results from the negligence, misfeasance or misconduct
of the Custodian. Notwithstanding the foregoing, the Custodian shall be
responsible for the transmission of cash and instructions to and from the
currency broker or Banking Institution with which the contract or option is
made, the safekeeping of all certificates and other documents and agreements
evidencing or relating to such foreign exchange transactions and the maintenance
of proper records as set forth in Section 2.25. The Custodian shall have no duty
with respect to the selection of the currency brokers or Banking Institutions
with which the Fund deals or, so long as the Custodian acts in accordance with
Proper Instructions, for the failure of such brokers or Banking Institutions to
comply with the terms of any contract or option.
(b) Foreign Exchange Contracts as Principal. The Custodian shall not be
obligated to enter into foreign exchange transactions as principal. However, if
the Custodian has made available to the Fund its services as a principal in
foreign exchange transactions, upon receipt of Proper Instructions, the
Custodian shall enter into foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with the Custodian as principal. The
Custodian shall be responsible for the selection of the currency brokers or
Banking Institutions and the failure of such currency brokers or Banking
Institutions to comply with the terms of any contract or option.
(c) Payments. Notwithstanding anything to the contrary contained
herein, upon receipt of Proper Instructions the Custodian may, in connection
with a foreign exchange contract, make free outgoing payments of cash in the
form of U.S. Dollars or foreign currency prior to receipt of confirmation of
such foreign exchange contract or confirmation that the countervalue currency
completing such contract has been delivered or received.
Section 2.14. Securities Loans. Upon receipt of Proper Instructions,
the Custodian shall, in connection with loans of securities by the Fund, deliver
securities of the Fund to the borrower thereof and may, except as otherwise
provided below, deliver such securities prior to receipt of the collateral, if
any, for such borrowing; provided that, in cases of loans of securities secured
by cash collateral, the Custodian's instructions to the Securities System shall
require that the Securities System deliver the securities of the Fund to the
borrower thereof only upon receipt of the collateral for such borrowing. The
Custodian shall retain on the Fund's behalf the right to any dividends, interest
or distribution on such loaned securities and any other rights specified in
Proper Instructions. Upon receipt of Proper Instructions and the loaned
securities, the Custodian will release the collateral to the borrower.
Section 2.15. Collections. The Custodian shall: (a) collect amounts due
and payable to the Fund with respect to portfolio securities and other Assets;
(b) promptly credit to the account of the Fund all income and other payments
relating to portfolio securities and other Assets held by the Custodian
hereunder upon Custodian's receipt of such income or payments or as otherwise
agreed in writing by the Custodian and the Fund; (c) promptly endorse and
deliver any instruments required to effect such collection; and (d) promptly
execute ownership and other certificates and affidavits for all federal, state,
local and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio securities and other Assets, or in connection
with the transfer of such securities or other Assets; provided, however, that
with respect to portfolio securities registered in so-called street name, or
physical securities with variable interest rates, the Custodian shall use its
best efforts to collect amounts due and payable to the Fund. The Custodian shall
promptly notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian may agree in writing if any amount payable with
respect to portfolio securities or other Assets is not received by the Custodian
when due. The Custodian shall not be responsible for the collection of amounts
due and payable with respect to portfolio securities or other Assets that are in
default.
Section 2.16. Dividends, Distributions and Redemptions. To enable the
Fund to pay dividends or other distributions to shareholders of the Fund and to
make payment to shareholders who have requested repurchase or redemption of
their shares of the Fund (collectively, the "Shares"), the Custodian shall
promptly release cash or securities (a) in the case of cash, upon receipt of
Proper Instructions, to one or more Distribution Accounts (as hereinafter
defined) designated by the Fund in such Proper Instructions; or (b) in the case
of securities, upon the receipt of Special Instructions (as hereinafter defined)
to such entity or account designated by the Fund in such Special Instructions.
For purposes of this Agreement, a "Distribution Account" shall mean an account
established at a Banking Institution designated by the Fund in Special
Instructions.
Section 2.17. Proceeds from Shares Sold. The Custodian shall receive
funds representing cash payments received for Shares issued or sold from time to
time by the Fund, and shall promptly credit such funds to the account of the
Fund. The Custodian shall promptly notify the Fund of Custodian's receipt of
cash in payment for Shares issued by the Fund by facsimile transmission or in
such other manner as the Fund and Custodian may agree in writing. Upon receipt
of Proper Instructions, the Custodian shall: (a) deliver all federal funds
received by the Custodian in payment for Shares in payment for such investments
as may be set forth in such Proper Instructions and at a time agreed upon
between the Custodian and the Fund; and (b) make federal funds available to the
Fund as of specified times agreed upon from time to time by the Fund and the
Custodian, in the amount of checks received in payment for Shares which are
deposited to the accounts of the Fund.
Section 2.18. Proxies, Notices, Etc. The Custodian shall deliver or
cause to be delivered to the Fund, in the most expeditious manner practicable,
all forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Proper Instructions, the Custodian shall execute and
deliver, or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as directed pursuant
to Proper Instructions, neither the Custodian nor any Subcustodian or nominee
shall vote upon any such securities, or execute any proxy to vote thereon, or
give any consent or take any other action with respect thereto. The Custodian
will not release the identity of the Fund to an issuer which requests such
information pursuant to the Shareholder Communications Act of 1985, for the
specific purpose of direct communications between such issuer and the Fund
unless the Fund directs the Custodian otherwise in writing.
Section 2.19. Bills and Other Disbursements. Upon receipt of Proper
Instructions, the Custodian shall pay or cause to be paid, all bills,
statements, or other obligations of the Fund.
Section 2.20. Nondiscretionary Functions. The Custodian shall attend to
all nondiscretionary details not specifically covered by this Agreement in
accordance with industry standards in connection with the sale, exchange,
substitution, purchase, transfer or other dealings with securities or other
Assets held by the Custodian, except as otherwise directed from time to time
pursuant to Proper Instructions.
Section 2.21. Bank Accounts.
(a) Accounts with the Custodian. The Custodian shall open and operate a
bank account or accounts (hereinafter referred to collectively, as "Bank
Accounts") on the books of the Custodian; provided that such Bank Account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
the Fund, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
(b) Deposit Insurance. Upon receipt of Proper Instructions, the
Custodian shall take such action as the Fund deems necessary or appropriate to
cause each deposit account established by the Custodian pursuant to this Section
2.21 to be insured to the maximum extent possible by all applicable deposit
insurers, including, without limitation, the Federal Deposit Insurance
Corporation.
Section 2.22. Deposit of Fund Assets in Securities Systems. The
Custodian may deposit and/or maintain domestic securities owned by the Fund in:
(a) The Depository Trust Company; (b) the Participants Trust Company; (c) any
book-entry system as provided in (i) Subpart O of Treasury Circular No. 300, 31
CFR 306.115 (ii) Subpart B of Treasury Circular Public Debt Series No. 27-76, 31
CFR 350.2, or (iii) the book-entry regulations of federal agencies substantially
in the form of 31 CFR 306.115; or (d) any other domestic clearing agency
registered with the Securities and Exchange Commission ("SEC") under Section 17A
of the Securities Exchange Act of 1934 (or as may otherwise be authorized by the
Securities and Exchange Commission to serve in the capacity of depository or
clearing agent for the securities or other assets of investment companies) which
acts as a securities depository; provided, however, that no such deposit or
maintenance of securities may be made except with respect to those agencies and
entities the use of which the Fund has previously approved by Special
Instructions (each of the foregoing being referred to in this Agreement as a
"Securities System"). Use of a Securities System shall be in accordance with
applicable Federal Reserve Board and SEC rules and regulations, if any, and
subject to the following provisions:
(A) The Custodian or any Subcustodian may deposit and/or maintain
securities held hereunder in a Securities System, provided that such securities
are represented in an account ("Account") of the Custodian in the Securities
System which Account shall not contain any assets of the Custodian other than
assets held as fiduciary, custodian or otherwise for customers.
(B) The books and records of the Custodian shall at all times identify
those securities belonging to the Fund which are maintained in a Securities
System.
(C) The Custodian shall pay for securities purchased for the account of
the Fund only upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account of the Custodian, and (ii) the
making of an entry on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund only upon (iii) receipt of advice from the
Securities System that payment for such securities has been transferred to the
Account of the Custodian, and (iv) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System relating to transfers of
securities for the account of the Fund shall identify the Fund, and shall be
maintained for the Fund by the Custodian. The Custodian shall deliver to the
Fund on the next succeeding business day daily transaction reports which shall
include each day's transactions in the Securities System for the account of the
Fund. Such transaction reports shall be delivered to the Fund or any agent
designated by the Fund pursuant to Proper Instructions, by computer or in such
other manner as the Fund and Custodian may agree in writing.
(D) The Custodian shall, if requested by the Fund pursuant to Proper
Instructions, provide the Fund with all reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Securities System.
(E) Upon receipt of Special Instructions, the Custodian shall terminate
the use of any Securities System (except the federal book-entry system) on
behalf of the Fund as promptly as practicable and shall take all actions
reasonably practicable to safeguard the securities of the Fund maintained with
such Securities System.
Section 2.23. Other Transfers. Upon receipt of Special Instructions,
the Custodian shall make such other dispositions of securities, funds, or other
Assets of the Fund in a manner or for purposes other than as expressly set forth
in this Agreement, provided that the Special Instructions relating to such
disposition shall include a statement of the purposes for which the delivery is
to be made, the amount of funds, Assets and/or securities to be delivered and
the name of the person or persons to whom delivery is to be made, and shall
otherwise comply with the provisions of Sections 3.01 and 3.03 hereof.
Section 2.24. Establishment of Segregated Account. Upon receipt of
Proper Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other Assets of the
Fund, including securities maintained by the Custodian in a Securities System
pursuant to Section 2.22 hereof, said account or accounts to be maintained: (a)
for the purposes set forth in Section 2.09, 2.10 and 2.11 hereof; (b) for the
purposes of compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as may be set forth, from time to
time, in Special Instructions. The Custodian shall not be responsible for the
determination of the type or amount of Assets to be held in any segregated
account referred to in this Section 2.24.
Section 2.25. Custodian's Books and Records. The Custodian shall
provide any assistance reasonably requested by the Fund in the preparation of
reports to Fund shareholders and others, audits of accounts, and other
ministerial matters of like nature. The Custodian shall maintain complete and
accurate records with respect to securities and other Assets held for the
accounts of the Fund as required by the rules and regulations of the SEC
applicable to investment companies registered under the 1940 Act, including, but
not limited to: (a) journals or other records of original entry containing a
detailed and itemized daily record of all receipts and deliveries of securities
(including certificate and transaction identification numbers, if any), and all
receipts and disbursements of cash; (b) ledgers or other records reflecting (i)
securities in transfer, (ii) securities in physical possession, (iii) securities
borrowed, loaned or collateralizing obligations of the Fund, (iv) monies
borrowed and monies loaned (together with a record of the collateral therefor
and substitutions of such collateral), and (v) dividends and interest received;
and (c) cancelled checks and bank records relating thereto. The Custodian shall
keep such other books and records of the Fund as the Fund shall reasonably
request. All such books and records maintained by the Custodian shall be
maintained in a form acceptable to the Fund and in compliance with the rules and
regulations of the SEC, including, but not limited to, books and records
required to be maintained by Section 31(a) of the 1940 Act and the rules and
regulations from time to time adopted thereunder. All books and records
maintained by the Custodian pursuant to this Agreement shall at all times be the
property of the Fund and shall be available during normal business hours for
inspection and use by the Fund and its agents, including without limitation, its
independent certified public accountants. Notwithstanding the preceding
sentence, the Funds shall not take any actions or cause the Custodian to take
any actions which would knowingly cause, either directly or indirectly, the
Custodian to violate any applicable laws, regulations or orders. Notwithstanding
the provisions of this Section 2.25, in the event the Fund purchases cash,
securities and other Assets requiring the use of a Domestic Subcustodian or
Foreign Sub-Subcustodian, the Custodian shall be entitled to rely upon and use
the books, records and accountings of the Domestic Subcustodian as its means of
accounting to the Fund for all cash, securities and other Assets deposited with
such entities; provided however, that such books, records and accountings on
which the Bank may rely must be maintained in the United States by such Domestic
Subcustodian and, provided further, that any agreement between the Custodian and
such Domestic Subcustodian must state that the Domestic Subcustodian agrees to
make any records available upon request and preserve, for the periods described
in Rule 31a-2 of the 1940 Act, the records required to be maintained by Rule
31a-1 of the 1940 Act. In no event shall the Custodian be entitled to rely upon
and use books, records and accountings which are maintained outside of the
United States.
Section 2.26. Opinion of Fund's Independent Certified Public
Accountants. The Custodian shall take all reasonable action as the Fund may
request to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to the Custodian's
activities hereunder in connection with the preparation of the Fund's Form N-1A
and the Fund's Form N-SAR or other periodic reports to the SEC and with respect
to any other requirements of the SEC.
Section 2.27. Reports by Independent Certified Public Accountants. At
the request of the Fund, the Custodian shall deliver to the Fund a written
report prepared by the Custodian's independent certified public accountants with
respect to the services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
assets, including cash, securities and other assets deposited and/or maintained
in a Securities System or with a Subcustodian. Such report shall be of
sufficient scope and in sufficient detail as may reasonably be required by the
Fund and as may reasonably be obtained by the Custodian.
Section 2.28. Overdraft Facility. In the event that the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its sole discretion, provide an
overdraft (an "Overdraft") to the Fund in an amount sufficient to allow the
completion of such payment. Any Overdraft provided hereunder: (a) shall be
payable on the next business day, unless otherwise agreed by the Fund and the
Custodian; and (b) shall accrue interest from the date of the Overdraft to the
date of payment in full by the Fund at a rate agreed upon in writing, from time
to time, by the Custodian and the Fund. The purpose of such Overdrafts is to
temporarily finance extraordinary or emergency expenses not reasonably
foreseeable by the Fund. The Custodian shall promptly notify the Fund in writing
("Overdraft Notice") of any Overdraft by facsimile transmission or in such other
manner as the Fund and the Custodian may agree in writing. The Custodian shall
have a right of set-off against all Assets (except for Assets held in a
segregated margin account or otherwise pledged in connection with options or
futures contracts held for the benefit of the Fund and for Assets allocated to
any other Overdraft or loan made hereunder); provided, however, the Custodian
shall promptly notify the Fund in writing of any intent to exercise a right of
set-off against Assets hereunder and shall not exercise any such right of
set-off against Assets hereunder unless and until the Fund has failed to pay
(within ten (10) days after the Fund's receipt of such notice of intent to
exercise a right of set-off), any Overdraft, together with all accrued interest
thereon. Notwithstanding the provisions of any applicable law, including,
without limitation, the Uniform Commercial Code, the only rights or remedies
which the Custodian is entitled to with respect to Overdrafts is the right of
set-off granted herein.
<PAGE>
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS AND RELATED MATTERS
Section 3.01. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used herein, the term "Proper Instructions"
shall mean: (i) a tested telex, a written (including, without limitation,
facsimile transmission) request, direction, instruction or certification signed
or initialed by or on behalf of the Fund by two or more Authorized Persons (as
hereinafter defined); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) by or on behalf of the Fund by one or more Authorized
Persons; provided, however, that communications of the types described in
clauses (ii) and (iii) above purporting to be given by an Authorized Person
shall be considered Proper Instructions only if the Custodian reasonably
believes such communications to have been given by an Authorized Person with
respect to the transaction involved. Proper Instructions in the form of oral
communications shall be confirmed by the Fund by tested telex or in writing in
the manner set forth in clause (i) above, but the lack of such confirmation
shall in no way affect any action taken by the Custodian in reliance upon such
oral instructions prior to the Custodian's receipt of such confirmation. The
Fund and the Custodian are hereby authorized to record any and all telephonic or
other oral instructions communicated to the Custodian. Proper Instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
(b) Special Instructions. As used herein, the term "Special
Instructions" shall mean Proper Instructions countersigned or confirmed in
writing by the Treasurer or any Assistant Treasurer of the Fund or any other
person designated by the Treasurer of the Fund in writing, which
countersignature or confirmation shall be (i) included on the same instrument
containing the Proper Instructions or on a separate instrument relating thereto,
and (ii) delivered by hand, by facsimile transmission or in such other manner as
the Fund and the Custodian agree in writing.
(c) Address for Proper Instructions and Special Instructions. Proper
Instructions and Special Instructions shall be delivered to the Custodian at the
address and/or telephone, telecopy or telex number agreed upon from time to time
by the Custodian and the Fund.
Section 3.02. Authorized Persons. Concurrently with the execution of
this Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian, duly certified as appropriate by a Treasurer or
Assistant Treasurer of the Fund, a certificate setting forth: (a) the names,
titles, signatures, and scope of authority of all persons authorized to give
Proper Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of the Fund (collectively, the "Authorized
Persons" and individually, an "Authorized Person"); and (b) the names, titles
and signatures of those persons authorized to issue Special Instructions. Such
certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and shall be considered to be in full
force and effect until delivery to the Custodian of a similar certificate to the
contrary. Upon delivery of a certificate which deletes or does not include the
name(s) of a person previously authorized to give Proper Instructions or to
issue Special Instructions, such persons shall no longer be considered an
Authorized Person or authorized to issue Special Instructions.
Section 3.03. Persons Having Access to Assets of the Portfolios.
Notwithstanding anything to the contrary contained in this Agreement, no
Authorized Person, Director, officer, employee or agent of the Fund shall have
physical access to the Assets of the Fund held by the Custodian nor shall the
Custodian deliver any Assets of the Fund to an account of such person; provided,
however, that nothing in this Section 3.03 shall prohibit (a) any Authorized
Person from giving Proper Instructions, or any person authorized to issue
Special Instructions from issuing Special Instructions, so long as such action
does not result in delivery of or access to Assets of the Fund prohibited by
this Section 3.03; or (b) the Fund's independent certified public accountants
from examining or reviewing the Assets of the Fund held by the Custodian. The
Fund will deliver from time to time a written certificate executed by two
Authorized Persons identifying such Authorized Persons, Directors, officers,
employees and agents of the Fund. Notwithstanding the foregoing, to the extent
that the person acting on behalf of the Custodian in making such delivery has
actual knowledge that any person is an Authorized Person, Director, officer,
employee or agent of the Fund, the Custodian will comply with this Section 3.03
as if the name of such Authorized Person, Director, officer, employee or agent
had been contained in a written certificate provided pursuant to this Section
3.03.
Section 3.04. Actions of Custodian Based on Proper Instructions and
Special Instructions. So long as and to the extent that the Custodian acts in
accordance with (a) Proper Instructions or Special Instructions, as the case may
be, and (b) the terms of this Agreement, the Custodian shall not be responsible
for the title, validity or genuineness of any property, or evidence of title
thereof, received by it or delivered by it pursuant to this Agreement.
ARTICLE IV
SUBCUSTODIANS
From time to time, in accordance with the relevant provisions of this
Agreement, (i) the Custodian may appoint one or more Domestic Subcustodians and
Special Subcustodians (each, as hereinafter defined) to act on behalf of the
Fund; and (ii) any Domestic Subcustodian so appointed and which has been
designated as a Foreign Custody Manager (as such term is defined in Rule 17f-5
of the 1940 Act) by the Custodian and approved by the Fund's board ("Approved
Foreign Custody Manager") may appoint a Foreign Sub-Subcustodian or Interim
Sub-Subcustodian (as each are hereinafter defined) in accordance with this
Article IV; provided that the Fund's board also has approved the agreement
between the Custodian and the Foreign Custody Manager specifying the Foreign
Custody Manager's duties ("Delegation Agreement"). For purposes of this
Agreement, all Domestic Subcustodians, Special Subcustodians, Foreign
Sub-Subcustodians and Interim Sub-Subcustodians shall be referred to
collectively as "Subcustodians".
Section 4.01. Domestic Subcustodians. The Custodian may, at any time
and from time to time, appoint any bank as defined in Section 2(a)(5) of the
1940 Act or any trust company or other entity any of which meet requirements of
a custodian under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act as agent for the Custodian on behalf of the Fund as a
subcustodian for purposes of holding cash, securities and other Assets of the
Fund and performing other functions of the Custodian within the United States (a
"Domestic Subcustodian"); provided, that, the Custodian shall notify the Fund in
writing of the identity and qualifications of any proposed Domestic Subcustodian
at least sixty (60) days prior to the desired appointment of such Domestic
Subcustodian, and the Fund will notify the Custodian, in writing signed by two
or more Authorized Persons, of approval or disapproval of the appointment of the
proposed Domestic Subcustodian; and provided, further, that the Custodian may
not appoint any such Domestic Subcustodian without such prior written approval
of the Fund by such Authorized Persons. Each such duly approved Domestic
Subcustodian and the countries where, Foreign Sub-Subcustodians and the
securities depositories and clearing agencies through which they may hold
securities and other Assets of the Fund shall be as agreed upon by the parties
hereto in writing, from time to time, in accordance with the provisions of
Section 9.04 hereof (the "Subcustodian List").
Section 4.02. Foreign Sub-Subcustodians and Interim Sub-Subcustodians.
(a) Foreign Sub-Subcustodians. Provided that the Custodian of a
Domestic Subcustodian is an Approved Foreign Custody Manager, the Custodian or
any such Domestic Subcustodian, as applicable, may appoint any (1)(a) "Qualified
Foreign Bank" (as such term is defined in Rule 17f-5) meeting the requirements
of an "Eligible Foreign Custodian" (as such term is defined in Rule 17f-5) or by
SEC order exempt therefrom; (b) majority-owned direct or indirect subsidiary of
a "U.S. bank" (as such term is defined in Rule 17f-5) or bank holding company
meeting the requirements of an Eligible Foreign Custodian or exempt by SEC order
therefrom; or (c) any bank (as such term is defined in Section 2(a)(5) of the
1940 Act) meeting the requirements of a custodian under Section 17(f) of the
1940 Act and the rules and regulations thereunder (each a "Foreign
Sub-Subcustodian") or (2) any "Securities Depository" (as such term is defined
in Rule 17f-5) or clearing agency meeting the requirements of an Eligible
Foreign Custodian or exempt by SEC order therefrom ("Securities Depositories and
Clearing Agencies"), provided that the Foreign Custody Manager's appointments of
such Eligible Foreign Custodians shall at all times be governed by the
Delegation Agreement.
(b) Interim Sub-Subcustodians. Notwithstanding the foregoing, in the
event that the Fund shall invest in a security or other Asset to be held in a
country in which the Foreign Custody Manager has not appointed an Eligible
Foreign Custodian, the Custodian shall, or shall cause the Domestic Subcustodian
to, promptly notify the Fund in writing by facsimile transmission or in such
other manner as the Fund and Custodian shall agree in writing of the
unavailability of an approved Foreign Sub-Subcustodian in such country; and upon
the receipt of Special Instructions, the Custodian shall, or shall cause the
Domestic Subcustodian to, appoint or approve any Person (as hereinafter defined)
designated by the Fund in such Special Instructions, to hold such security or
other Asset. (Any Person appointed or approved as a sub-subcustodian pursuant to
this Section 4.02(b) is hereinafter referred to as an "Interim
Sub-Subcustodian.")
Section 4.03. Special Subcustodians. Upon receipt of Special
Instructions, the Custodian shall, on behalf of the Fund, appoint one or more
banks, trust companies or other entities designated in such Special Instructions
to act as a subcustodian for the purpose of (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities, (ii) providing
depository and clearing agency services with respect to certain variable rate
demand note securities; and (iii) effecting any other transactions designated by
the Fund in Special Instructions. (Each such designated subcustodian is
hereinafter referred to as a "Special Subcustodian.") Each such duly appointed
Special Subcustodian shall be listed on the Subcustodian List. In connection
with the appointment of any Special Subcustodian, the Custodian shall enter into
a subcustodian agreement with the Special Subcustodian in form and substance
approved by the Fund, provided that such agreement shall in all events comply
with the provisions of the 1940 Act and the rules and regulations thereunder and
the terms and provisions of this Agreement. The Custodian shall not amend any
subcustodian agreement entered into with a Special Subcustodian, or agree to
change or permit any changes thereunder, or waive any rights under such
agreement, except upon prior approval pursuant to Special Instructions.
Section 4.04. Termination of a Subcustodian. The Custodian shall (i)
cause each Domestic Subcustodian to, and (ii) use its best efforts to cause each
Interim Sub-Subcustodian and Special Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Domestic Subcustodian and Special
Subcustodian or between the Domestic Subcustodian and a Foreign Sub-Subcustodian
or Interim Sub-Subcustodian. In the event that the Custodian is unable to cause
such subcustodian or sub-subcustodian to fully perform its obligations
thereunder, the Custodian shall promptly notify the Fund in writing and
forthwith, upon the receipt of Special Instructions, terminate or cause the
termination of such Subcustodian or Sub-Subcustodian with respect to the Fund
and, if necessary or desirable, appoint or cause the appointment of a
replacement Subcustodian or Sub-Subcustodian in accordance with the provisions
of this Article IV. In addition to the foregoing, the Custodian (A) may, at any
time in its discretion, upon written notification to the Fund, terminate any
Domestic Subcustodian which is not an approved Foreign Custody Manager, and (B)
shall, upon receipt of Special Instructions, terminate any Special Subcustodian
or Domestic Subcustodian which is an Approved Foreign Custody Manager with
respect to the Fund, in accordance with the termination provisions under the
applicable subcustodian agreement, and (C) shall, upon receipt of Special
Instructions, cause the Domestic Subcustodian to terminate any Foreign
Sub-Subcustodian or Interim Sub-Subcustodian as to its use of such entities with
respect to the Fund, in accordance with the termination provisions under the
applicable sub-subcustodian agreement.
Section 4.05. Certification Regarding Foreign Sub-Subcustodians. Upon
request of the Fund, the Custodian shall deliver to the Fund a certificate
stating: (i) the identity of each Foreign Sub-Subcustodian then acting on behalf
of the Custodian; (ii) the countries in which and the Securities Depositories
and Clearing Agents through which each such Foreign Sub-Subcustodian is then
holding cash, securities and other Assets of the Fund; and (iii) such other
information as may be requested by the Fund to ensure compliance with rules and
regulations under the 1940 Act.
ARTICLE V
STANDARD OF CARE: INDEMNIFICATION
Section 5.01. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise reasonable
care and diligence in carrying out all of its duties and obligations under this
Agreement, and shall be liable to the Fund for all loss, damage and expense
suffered or incurred by the Fund resulting from the failure of the Custodian to
exercise such reasonable care and diligence.
(b) Actions Prohibited by Applicable Law, Etc. In no event shall the
Custodian incur liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities Depository or Clearing Agency
utilized by any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement provides
shall be performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United States of
America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction (and the Custodian
nor any other Person shall not be obligated to take any action contrary
thereto); or (ii) any act of God or war or other similar circumstance beyond the
control of the Custodian unless in each case, such delay or nonperformance is
caused by the negligence, misfeasance or misconduct of the Custodian.
(c) Mitigation by Custodian. Upon the occurrence of any event which
causes or may cause any loss, damage or expense to the Fund, (i) the Custodian
shall, (ii) the Custodian shall cause any applicable Domestic Subcustodian or
Foreign Sub-Subcustodian to, and (iii) the Custodian shall use its best efforts
to cause any applicable Interim Sub-Subcustodian or Special Subcustodian to, use
all commercially reasonable efforts and take all reasonable steps under the
circumstances to mitigate the effects of such event and to avoid continuing harm
to the Fund.
(d) Advice of Counsel. The Custodian shall be without liability for any
action reasonably taken or omitted in good faith pursuant to the written advise
of (i) counsel for the Fund, or (ii) at the expense of the Custodian, such other
counsel as the Fund and the Custodian may agree upon in writing; provided,
however, with respect to the performance of any action or omission of any action
upon such advice, the Custodian shall be required to conform to the standard of
care set forth in Section 5.01 (a).
(e) Expenses of the Fund. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all expenses
incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim; provided however, that the Fund has
recovered from the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no liability
in respect of any loss, damage or expense suffered by the Fund, insofar as such
loss, damage or expense arises from the performance of the Custodian in reliance
upon records that were maintained for the Fund by entities other than the
Custodian prior to the Custodian's employment hereunder which the Custodian has
no reason to believe are inaccurate or incomplete after reasonable inquiry.
Section 5.02. Liability of the Custodian for Actions of Other Persons.
(a) Domestic Subcustodian and Foreign Sub-Subcustodian. The Custodian
shall be liable for the actions or omissions of any Domestic Subcustodian or
Foreign Sub-Subcustodian (excluding any Securities Depository or Clearing Agency
appointed by them) to the same extent as if such actions or omissions were
performed by the Custodian itself. In the event of any loss, damage or expense
suffered or incurred by the Fund caused by or resulting from the actions or
omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian for which the
Custodian would otherwise be liable, the Custodian shall promptly reimburse the
Fund in the amount of any such loss, damage or expense.
(b) Special Subcustodians, Interim Sub-Subcustodians, Security Systems,
Securities Depositories and Clearing Agencies. The Custodian shall not be liable
to the Fund for any loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of a Special Subcustodian, Interim
Sub-Subcustodian, Securities System, Securities Depository or Clearing Agency
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, in
the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against such Special
Subcustodian, Interim Sub-Subcustodian, Security System, Securities Depository
or Clearing Agency to protect the interest of the Fund.
(c) Reimbursement of Expenses. The Fund agrees to reimburse the
Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under Section 5.01(c) as it
relates to Interim Sub-Subcustodians and Special Subcustodians and 5.02(b);
provided however, that such reimbursement shall not apply to expenses occasioned
by or resulting from the negligence, misfeasance or misconduct of the Custodian.
Section 5.03. Indemnification by Fund.
(a) Indemnification Obligations of Fund. Subject to the limitations set
forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Custodian or its nominee
caused by or arising from actions taken by the Custodian, its employees or
agents in the performance of its duties and obligations under this Agreement;
provided, however, that such indemnity shall not apply to loss, damage and
expense occasioned by or resulting from the negligence, misfeasance or
misconduct of the Custodian or its nominee. In addition, the Fund agrees to
indemnify any Person against liability incurred by reason of taxes assessed to
such Person resulting from the fact that securities and other property of the
Fund are registered in the name of such Person in accordance with the provisions
of this Agreement; provided, however, that in no event shall such
indemnification be applicable to income, franchise or similar taxes which may be
imposed or assessed against any Person. It is also understood that the Fund
agrees to indemnify and hold harmless the Custodian and its nominee for any loss
arising from a foreign currency transaction or contract, where the loss results
from a Sovereign Risk (as hereinafter defined) or where any Person maintaining
securities, currencies, deposits or other Assets of the Fund in connection with
any such transactions has exercised reasonable care maintaining such property or
in connection with any such transaction involving such Assets. A "Sovereign
Risk" shall mean nationalization, expropriation, devaluation, revaluation,
confiscation, seizure, cancellation, destruction or similar action by any
governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution.
(b) Notice of Litigation. Right to Prosecute, Etc. The Fund shall not
be liable for indemnification under this Section 5.03 unless a Person shall have
promptly notified the Fund in writing of the commencement of any litigation or
proceeding brought against the Custodian or other Person in respect of which
indemnity may be sought under this Section 5.03. With respect to claims in such
litigation or proceedings for which indemnity by the Fund may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Fund shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Fund may be subject to an indemnification obligation;
provided, however, a Person shall be entitled to participate in (but not
control) at its own cost and expense, the defense of any such litigation or
proceeding if the Fund has not acknowledged in writing it obligation to
indemnify the Person with respect to such litigation or proceeding. If the Fund
is not permitted to participate or control such litigation or proceeding under
applicable law or by a ruling of a court of competent jurisdiction, or if the
Fund chooses not to so participate, the Custodian or other Person shall not
consent to the entry of any judgment or enter into any settlement in any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment, and without the Fund's prior written consent which
consent shall not be unreasonably withheld or delayed. All Persons shall submit
written evidence to the Fund with respect to any cost or expense for which they
are seeking indemnification in such form and detail as the Fund may reasonably
request.
Section 5.04. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its duty
generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund and the Fund agrees to indemnify the Custodian and its
nominees, for any loss, damage or expense suffered or incurred by the Custodian
and its nominees arising out of any violation of any investment or other
limitation to which the Fund is subject except for violations of which the
Custodian has actual knowledge. For purposes of this Section 5.04 the term
"actual knowledge" shall mean knowledge gained by the Custodian by means other
than from any prospectus published by the Fund or contained in any filing by the
Fund with the SEC.
Section 5.05. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Fund by such Subcustodian, Securities System or other Person, which
the Custodian may have as a consequence of any such loss, damage or expense, if
and to the extent that the Fund has not been made whole for any such loss,
expense or damage. If the Custodian makes the Fund whole for any such loss,
expense or damage, the Custodian shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Fund's election to enforce any rights of the Custodian under this Section 5.05,
the Fund shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Custodian in respect of the loss, damage or
expense incurred by the Fund; provided that, so long as the Fund has
acknowledged in writing its obligation to indemnify the Custodian under Section
5.03 hereof with respect to such claim, the Fund shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Fund without the Custodian's consent and
provided further, that if the Fund has not made an acknowledgement of its
obligation to indemnify, the Fund shall not settle, compromise or terminate any
such action or proceeding without the written consent of the Custodian, which
consent shall not be unreasonably withheld or delayed. The Custodian agrees to
cooperate with the Fund and take all actions reasonably requested by the Fund in
connection with the Fund's enforcement of any rights of the Custodian. Nothing
contained in this Section 5.05 shall be construed as an obligation of the Fund
to enforce the Custodian's rights. The Fund agrees to reimburse the Custodian
for out-of-pocket expenses incurred by it in connection with the fulfillment of
its obligations under this Section 5.05; provided, however, that such
reimbursement shall not apply to expenses occasioned by or resulting from the
negligence, misfeasance or misconduct of the Custodian.
Section 5.06. Indemnification by Custodian.
(a) Indemnification Obligations of Custodian. Subject to the
limitations set forth in this Agreement and in addition to the reimbursement
obligations provided in Section 5.02(a), the Custodian agrees to indemnify and
hold harmless the Fund and its nominees from all loss, damage and expense
(including reasonable attorneys' fees) suffered or incurred by the Fund or its
nominee caused by or arising from the failure of the Custodian, its nominee,
employees or agents to comply with the terms or conditions of this Agreement or
arising out of the negligence, misfeasance or misconduct of the Custodian or its
nominee.
(b) Notice of Litigation, Right to Prosecute, Etc. The Custodian shall
not be liable for indemnification under this Section 5.06 unless the Fund shall
have promptly notified the Custodian in writing of the commencement of any
litigation or proceeding brought against the Fund in respect of which indemnity
may be sought under this Section 5.06. With respect to claims in such litigation
or proceedings for which indemnity by the Custodian may be sought and subject to
applicable law and the ruling of any court of competent jurisdiction, the
Custodian shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Custodian may be subject to an indemnification
obligation; provided, however, the Fund shall be entitled to participate in (but
not control) at its own cost and expense, the defense of any such litigation or
proceeding if the Custodian has not acknowledged in writing its obligation to
indemnify the Fund with respect to such litigation or proceeding. If the
Custodian is not permitted to participate or control such litigation or
proceeding under applicable law or by a ruling of a court of competent
jurisdiction, or if the Custodian chooses not to so participate, the Fund shall
not consent to the entry of any judgement or enter into any settlement in any
such litigation or proceeding without providing the Custodian with adequate
notice of any such settlement or judgement, and without the Custodian's prior
written consent which consent shall not be unreasonably withheld or delayed. The
Fund shall submit written evidence to the Custodian with respect to any cost or
expense for which it is seeking indemnification in such form and detail as the
Custodian may reasonably request.
Section 5.07. Custodian's Right to Proceed. Notwithstanding anything to
the contrary contained herein, the Custodian shall have, at its election upon
reasonable notice to the Fund, the right to enforce, to the extent permitted by
any applicable agreement and applicable law, the Fund's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Custodian by such Subcustodian, Securities System or other Person,
which the Fund may have as a consequence of any such loss, damage or expense, if
and to the extent that the Custodian has not been made whole for any such loss,
expense or damage. If the Fund makes the Custodian whole for any such loss,
expense or damage, the Fund shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Custodian's election to enforce any rights of the Fund under this Section 5.07,
the Custodian shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Fund in respect of the loss, damage and expense
incurred by the Custodian; provided that, so long as the Custodian has
acknowledged in writing its obligation to indemnify the Fund under Section 5.06
hereof with respect to such claim, the Custodian shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Custodian without the Fund's consent and
provided further, that if the Custodian has not made an acknowledgement of its
obligation to indemnify, the Custodian shall not settle, compromise or terminate
any such action or proceeding without the written consent of the Fund, which
consent shall not be unreasonably withheld or delayed. The Fund agrees to
cooperate with the Custodian and take all actions reasonably requested by the
Custodian in connection with the Custodian's enforcement of any rights of the
Fund. Nothing contained in this Section 5.07 shall be construed as an obligation
of the Custodian to enforce the Fund's rights. The Custodian agrees to reimburse
the Fund for out-of-pocket expenses incurred by it in connection with the
fulfillment of its obligations under this Section 5.07; provided, however, that
such reimbursement shall not apply to expenses occasioned by or resulting from
the negligence, misfeasance or misconduct of the Fund.
ARTICLE VI
COMPENSATION
For the initial three year period beginning on the effective date of
this Agreement, the Fund shall compensate the Custodian in the amount and at the
times specified in Appendix "B" attached hereto. Thereafter, the Fund shall
compensate the Custodian in the amount, and at times, as may be agreed upon in
writing, from time to time, by the Custodian and the Fund.
ARTICLE VII
TERMINATION
This Agreement shall continue in full force and effect until the first
to occur of: (a) termination by the Custodian by an instrument in writing
delivered or mailed (certified mail, return receipt requested) to the Fund, such
termination to take effect not sooner than ninety (90) days after the date of
such delivery or receipt; (b) termination by the Fund by an instrument in
writing delivered or mailed (certified mail, return receipt requested) to the
Custodian, such termination to take effect not sooner than ninety (90) days
after the date of such delivery or receipt; or (c) termination by the Fund by an
instrument in writing delivered to the Custodian, based upon the Fund's
determination that there is reasonable basis to conclude that the Custodian is
insolvent or that the financial condition of the Custodian is deteriorating in
any material respect, in which case termination shall take effect upon the
Custodian's receipt of such notice or at such later time as the Fund shall
designate. In the event of termination pursuant to this Article VII, the Fund
shall make payment of all accrued fees and unreimbursed expenses within a
reasonable time following termination and delivery of a statement to the Fund
setting forth such fees and expenses. The Fund shall identify in any notice of
termination a successor custodian to which the cash, securities and other Assets
of the Fund shall, upon termination of this Agreement, be delivered. In the
event that securities and other Assets remain in the possession of the Custodian
after the date of termination hereof owing to failure of the Fund to appoint a
successor custodian, the Custodian shall be entitled to compensation for its
services in accordance with the fee schedule most recently in effect, for such
period as the Custodian retains possession of such securities and other Assets,
and the provisions of this Agreement relating to the duties and obligations of
the Custodian and the Fund shall remain in full force and effect for such
period. In the event of the appointment of a successor custodian, the cash,
securities and other Assets owned by the Fund and held by the Custodian, any
Subcustodian or nominee shall be delivered, at the terminating party's expense,
to the successor custodian; and the Custodian agrees to cooperate with the Fund
in the execution of documents and performance of other actions necessary or
desirable in order to substitute the successor custodian for the Custodian under
this Agreement.
ARTICLE VIII
DEFINED TERMS
The following terms are defined in the following sections:
Term Section
Account 2.22(A)
ADRs 2.06
Approved Foreign Custody Manager Article IV
Assets Article I
Authorized Person 3.02
Banking Institution 2.12
Bank Accounts 2.21
Clearing Agency 4.02(a)
Delegation Agreement Article IV
Distribution Account 2.16
Domestic Subcustodian 4.01
Eligible Foreign Custodian 4.02(a)
Foreign Sub-Subcustodian 4.02(a)
Institutional Client 2.03
Interest Bearing Deposit 2.12
Interim Sub-Subcustodian 4.02(b)
OCC 2.09
Overdraft 2.28
Overdraft Notice 2.28
Person 5.01(b)
Procedural Agreement 2.10
Proper Instruction 3.01(a)
SEC 2.22
Securities Depositories 4.02(a)
Securities System 2.22
Shares 2.16
Sovereign Risk 5.03(a)
Special Instruction 3.01(b)
Special Subcustodian 4.03
Subcustodian Article IV
1940 Act Preamble
ARTICLE IX
MISCELLANEOUS
Section 9.01. Execution of Documents, Etc.
(a) Actions by the Fund. Upon request, the Fund shall execute and
deliver to the Custodian such proxies, powers of attorney or other instruments
as may be reasonable and necessary or desirable in connection with the
performance by the Custodian or any Subcustodian of their respective obligations
under this Agreement or any applicable subcustodian agreement, provided that the
exercise by the Custodian or any Subcustodian of any such rights shall in all
events be in compliance with the terms of this Agreement.
(b) Actions by Custodian. Upon receipt of Proper Instructions, the
Custodian shall execute and deliver to the Fund or to such other parties as the
Fund may designate in such Proper Instructions, all such documents, instruments
or agreements as may be reasonable and necessary or desirable in order to
effectuate any of the transactions contemplated hereby and designated therein.
Section 9.02. Representations and Warranties.
(a) Representations and Warranties of the Fund. The Fund hereby
represents and warrants that each of the following shall be true, correct and
complete as of the date of execution of this Agreement and, unless notice to the
contrary is provided by the Fund to the Custodian, at all times during the term
of this Agreement: (i) the Fund is duly organized under the laws of its
jurisdiction of organization and is registered as an open-end management
investment company under the 1940 Act or is a series of portfolio of such
entity; and (ii) the execution, delivery and performance by the Fund of this
Agreement are (w) within its power, (x) have been duly authorized by all
necessary action, and (y) will not (A) contribute to or result in a breach of or
default under or conflict with any existing law, order, regulation or ruling of
any governmental or regulatory agency or authority, or (B) violate any provision
of the Fund's corporate charter or other organizational document, or bylaws, or
any amendment thereof or any provision of its most recent Prospectus or
Statement of Additional Information.
(b) Representations and Warranties of the Custodian. The Custodian
hereby represents and warrants that each of the following shall be true, correct
and complete as of the date of execution of this Agreement and, unless notice to
the contrary is provided by the Custodian to the Fund, at all times during the
term of this Agreement: (i) the Custodian is duly organized under the laws of
its jurisdiction of organization and qualifies to serve as a custodian to
open-end management investment companies under the provisions of the 1940 Act;
and (ii) the execution, delivery and performance by the Custodian of this
Agreement are (w) within its power (x) have been duly authorized by all
necessary action, and (y) will not (A) contribute to or result in a breach of or
default under or conflict with any existing law, order, regulation or ruling of
any governmental or regulatory agency or authority, or (B) violate any provision
of the Custodian's corporate charter, or other organizational document, or
bylaws, or any amendment thereof. The Custodian acknowledges receipt of a copy
of the Fund's most recent Prospectus and Statement of Additional Information.
Section 9.03. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and accordingly, supersedes as of the effective date of this
Agreement any custodian agreement heretofore in effect between the Fund and the
Custodian.
Section 9.04. Waivers and Amendments. No provisions of this Agreement
may be waived, amended or deleted except by a statement in writing signed by the
party against which enforcement of such waiver, amendment or deletion is sought.
Section 9.05. Interpretation. In connection with the operation of this
Agreement, the Custodian and the Fund may agree in writing from time to time on
such provisions interpretative of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general tenor of
this Agreement. No interpretative or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
Section 9.06. Captions. Headings contained in this Agreement, which are
included as convenient references only, shall have no bearing upon the
interpretation of the terms of the Agreement or the obligations of the parties
hereto.
Section 9.07. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Missouri, in each case
without giving effect to principles of conflicts of law.
Section 9.08. Notices. Except in the case of Proper Instructions or
Special Instructions, and as otherwise provided in this Agreement, notices and
other writings contemplated by this Agreement shall be delivered by hand or by
facsimile transmission or as otherwise agreed to by the Fund and the Custodian
in writing (provided that in the case of delivery by facsimile transmission,
notice shall also be mailed postage prepaid) to the parties at the following
addresses:
(a) If to the Fund:
Waddell & Reed Funds, Inc. Growth Fund
6300 Lamar Avenue
Overland Park, Kansas 66202
Attn: Fund Treasurer
Telephone: 913-236-2000
Telefax: 913-236-1595
(b) If to the Custodian:
UMB Bank, n.a.
928 Grand Avenue, 10th Floor
Kansas City, Missouri 64106
Attn: Securities Administration
Telephone: 816-860-7764
Telefax: 816-860-4869
or such other address as either party may have designated in writing to the
other party hereto.
Section 9.09. Assignment. This Agreement shall be binding on and shall
inure to the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that, subject to the provisions of Section 7.01
hereof, neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
Section 9.10. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original. This
Agreement shall become effective when one or more counterparts have been signed
and delivered by each of the parties.
Section 9.11. Confidentiality; Survival of Obligations. The parties
hereto agree that each shall treat confidentially the terms and conditions of
this Agreement and all information provided by each party to the other regarding
its business and operations. All confidential information provided by a party
hereto shall be used by any other party hereto solely for the purpose of
rendering services pursuant to this Agreement and, except as may be required in
carrying out this Agreement, shall not be disclosed to any third party without
the prior consent of such providing party. The foregoing shall not be applicable
to any information that is publicly available when provided or thereafter
becomes publicly available other than through a breach of this Agreement, or
that is required to be disclosed by any bank examiner of the Custodian or any
Subcustodians, any auditor or examiner of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation. The
provisions of this Section 9.11 and Section 9.01, 9.07, Section 2.28, Section
3.04, Section 4.05, Section 7.01, Article V and Article VI hereof and any other
rights or obligations incurred or accrued by any party hereto prior to
termination of this Agreement shall survive any termination of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
WADDELL & REED FUNDS, INC. UMB BANK, n.a.
GROWTH FUND
By: /s/Sharon K. Pappas By: /s/Ralph Santoro
Name: Sharon K. Pappas Name: Ralph Santoro
Title: Vice President Title: Senior Vice President
<PAGE>
APPENDIX "B"
TO
CUSTODIAN AGREEMENT
BETWEEN
WADDELL & REED FUNDS, INC. GROWTH FUND
AND
UMB BANK, N.A.
Dated as of May 1, 1997
The Fund shall be responsible for providing the Custodian the net asset
levels the Custodian requires to calculate the net asset portion of the
Custodian's fees. Such determinations shall be based upon the average monthly
assets of each Fund and shall specify the level of domestic assets and foreign
assets by country, as appropriate. Domestic assets shall include all assets held
in the United States including but not limited to American Depositary Receipts.
Foreign assets shall include all assets held outside the United States including
but not limited to securities which clear through Euroclear or CEDEL. The
Custodian will provide as soon as practicable after receiving the information
provided by the Fund with respect to the net asset level numbers, a bill for the
Fund, including such reasonable detail in support of each bill as may be
reasonably requested by the Fund. As used in this Appendix "B", "United Funds"
shall mean all funds in the United Group of Funds, TMK/United Funds, Inc. and
Waddell & Reed Funds, Inc.
DOMESTIC CUSTODY FEE SCHEDULE
A. Annual Fee (combining all domestic assets):
An annual fee to be computed as of month end and payable each month of
the Fund's fiscal year (after receipt of the bill issued to each Fund
based upon its portion of domestic assets), at the annual rate of:
.00005 for the first $5,000,000,000 of the net assets of all the United
Funds, plus .00004 for any net assets exceeding $5,000,000,000 of the
assets of all the United Funds.
B. Portfolio Transaction Fees (billed to each Fund):
(a) For each portfolio transaction* processed through a
Depository (DTC, PTC or Fed) $ 7.00
(b) For each portfolio transaction* processed through
the New York office (physical settlement) $20.00
(c) For each futures/option contract written $25.00
(d) For each principal/interest paydown $ 6.00
(e) For each interfund note transaction $ 5.00
* A portfolio transaction includes a receive, delivery, maturity, free
security movement and corporate action.
C. Earnings Credits:
Positive earnings credits will be applied on all collected custody and
cash management balances of each Fund at the Custodian to earn the
Custodian's daily repurchase agreement rate less reserve requirements
and FDIC premiums. Negative earnings credits will be charged on all
uncollected custody and cash management balances of each Fund at the
Custodian's prime rate less 150 basis points on each day a negative
balance occurs. Positive and/or negative earnings credits will be
monitored daily for each Fund and the net positive or negative amount
for each Fund will be included in the monthly statements. Excess
positive credits for each Fund will be carried forward indefinitely.
D. Out-of-Pocket Expenses (passed directly from Special Subcustodians):
Includes all charges by any Special Subcustodian to the Custodian as
Custodian for any Assets held at the Special Subcustodian.
GLOBAL CUSTODY FEE SCHEDULE
A. Global Fee Schedule:
Market: Annual Asset Fees Transaction Fees
------ ----------------- ----------------
Argentina .0037 $85
Australia .0009 $85
Austria .0011 $70
Belgium .0011 $60
Brazil .0035 $60
Canada .0008 $35
Chile .0045 $85
China .0045 $75
Czech Republic .0055 $135
Denmark .0011 $60
Finland .0011 $85
France .0011 $85
Germany .0008 $60
Hong Kong .0009 $85
Hungary .0065 $210
India .0055 $135
Indonesia .0009 $85
Ireland .0011 $60
Israel .0035 $160
Italy .0011 $70
Japan .0008 $40
Korea .0035 $60
Malaysia .0009 $85
Mexico .0016 $60
Netherlands .0011 $35
New Zealand .0009 $85
Norway .0011 $85
Peru .0070 $160
Philippines .0035 $95
Poland .0060 $110
Portugal .0035 $145
Singapore .0009 $85
Spain .0009 $85
Sweden .0011 $70
Switzerland .0009 $85
Taiwan .0035 $85
Thailand .0009 $85
Turkey .0045 $110
U.K. .0011 $60
Note: Fee Schedule eliminates sub-custodian asset and transaction-based
out-of-pocket expenses. Other sub-custodian out-of-pocket expenses
(i.e. Scrip fees, stamp duties, certificate fees, etc.)
B. Out-of-Pocket Expenses (passed directly from Brown Brothers Harriman & Co.):
Includes, but is not limited to telex, legal, telephones, postage, and
direct expenses including but not limited to tax reclaim, customized
systems programming, certificate fees, duties, and registration fees.
<PAGE>
C. Short-term Dollar Denominated Global Assets
Eurodollar CDs, Time Deposits:
(1) An annual fee to be computed as of month end and payable each
month of the Fund's fiscal year (after receipt of the bill
issued to the Fund based upon its portion of short-term dollar
denominated assets), at the annual rate of:
.0004 on all short-term dollar denominated assets of the
United Funds.
(2) Portfolio Transaction Fees:
First Chicago Clearing Centre-Trades with Members $136.00
First Chicago Clearing Centre-Trades with Non-members $153.00
First Chicago Clearing Centre-Income Collection $ 64.00
D. Euroclear Eligible Issues:
(1) An annual fee to be computed as of month end and payable each
month of the Fund's fiscal year (after receipt of the bill
issued to the Fund based upon its portion of Euroclear
issues), at the annual rate of:
2.5 basis points on all United Funds Euroclear assets held
in account at UMB Bank, n.a.
(2) Portfolio Transaction Fees:
Euroclear $60.00
<PAGE>
SUBCUSTODIAN LIST
PURSUANT TO CUSTODIAN AGREEMENT
BETWEEN
WADDELL & REED FUNDS, INC. GROWTH FUND
AND
UMB BANK, n.a.
Dated as of August 31, 1998
This Subcustodian List relates to the Custodian Agreements between UMB
Bank, n.a. and each of the following funds dated the date specified by the
fund's name, as subsequently amended and restated:
Fund Date
---- ----
United Asset Strategy Fund, Inc. February 22, 1995
United Cash Management, Inc. November 26, 1991
United Continental Income Fund, Inc. November 26, 1991
United Gold & Government Fund, Inc. November 26, 1991
United Government Securities Fund, Inc. November 26, 1991
United High Income Fund, Inc. November 26, 1991
United High Income Fund II, Inc. November 26, 1991
United International Growth Fund, Inc. November 26, 1991
United Municipal Bond Fund, Inc. November 26, 1991
United Municipal High Income Fund, Inc. November 26, 1991
United New Concepts Fund, Inc. November 26, 1991
United Retirement Shares, Inc. November 26, 1991
United Vanguard Fund, Inc. November 26, 1991
United Funds, Inc.
United Bond Fund November 26, 1991
United Income Fund November 26, 1991
United Accumulative Fund November 26, 1991
United Science and Technology Fund November 26, 1991
Target/United Funds, Inc.*
High Income Portfolio November 26, 1991
Money Market Portfolio November 26, 1991
Bond Portfolio November 26, 1991
Income Portfolio November 26, 1991
Growth Portfolio November 26, 1991
Balanced Portfolio April 29, 1994
International Portfolio April 29, 1994
Limited-Term Bond Portfolio April 29, 1994
Small Cap Portfolio April 29, 1994
Asset Strategy Portfolio May 1, 1995
Science and Technology Portfolio April 4, 1997
Waddell & Reed Funds, Inc.
Total Return Fund April 24, 1992
Municipal Bond Fund April 24, 1992
Limited-Term Bond Fund April 24, 1992
International Growth Fund April 24, 1992
Growth Fund April 24, 1992
Asset Strategy Fund April 20, 1995
High Income Fund July 31, 1997
Science and Technology Fund July 31, 1997
*Formerly, TMK/United Funds, Inc.
The following is a list of Domestic Subcustodians, Foreign Subcustodian and
Special Subcustodians under the Custodian Agreement as amended:
<PAGE>
A. Domestic Custodians:
Brown Brothers Harriman & Co.
United Missouri Trust Company of New York
B. Foreign Sub-Custodians
Country Sub-Custodian Depository
Argentina Citibank, n.a. CDV; CRYL
Australia National Australia Bank Ltd. AUSTRACLEAR, RITs
Austria Creditanstalt Bankverein KONTROLLBANK (OEKB)
Belgium Banque Bruxelles Lambert CIK, BNB
Brazil First National Bank of Boston, BOVESPA, CLC
Brazil
Canada Canadian Imperial Bank of Commerce CDS; The Bank of Canada
Chile Citibank, n.a. None
China Standard Chartered Bank SSCCRC; SSCC
Czech Republic Ceskoslovenska Obchodni CNB; SCP
Banka A.S.
Denmark Den Danske Bank VP
Finland Merita Securities Association;
Finnish Central
Securities Depository Ltd.
France Banque Indosuez SICOVAM; Banque de France
Germany Deutsche Bank KASSENVEREIN
Hungary Citibank, N.A. KELER Ltd.
Hong Kong HongKong & Shanghai Banking Corp. HongKong Securities
Clearing Company
India Citibank, N.A., Mumbai National Securities
Depository Limited
Indonesia Citibank, n.a. None
Ireland Allied Irish Banks PLC Gilt Settlement Office
Israel Bank Hapoalim B.M. TASE Clearinghouse Ltd.
Italy Banca Commerciale Italiana MONTE TITOLI, Banca
D'Italia
Japan The Bank of Tokyo, Ltd. JASDEC, Bank of Japan
Korea Citibank, n.a. Korean Securities
Depository Corporation (KSD)
Malaysia Hong Kong Bank Malaysia Berhad MCD; Bank Negara Malaysia
Mexico Citibank Mexico, s.a. INDEVAL; Banco De Mexico
Netherlands ABN - Amro Bank NECIGER; De Nederlandsche
Bank
Norway Christiana Bank VPS
Peru Citibank, n.a. Caja De Valores (CAVAL)
Philippines Citibank, n.a. Phillipines Central
Depository, Inc.
Poland Bank Polska Kasa Opieki S.A. NPB
Portugal Banco Espirito Santo E Comercial Interbolsa
De Lisboa
Singapore HongKong & Shanghai Banking Corp. CDP
Spain Banco Santander SCLV; Banco De Espana
Sweden Skandinaviska Enskilda Banken VPC
Switzerland Union Bank of Switzerland SEGA
Taiwan Standard Chartered Bank, Taipei TSCD
Thailand HongKong & Shanghai Banking Corp. Share Depository
Center (SDC)
Turkey Citibank, n.a. TvS, Central Bank of Turkey
United Kingdom Midland Securities PLC CMO; CGO; CrestCo
C. Special Subcustodians:
Wilmington Trust Co.
The Bank of New York, n.a.
Euroclear
EX-99.B(h)
SHAREHOLDER SERVICING AGREEMENT
THIS AGREEMENT, made as of the 1ST day of November, 1992, by and
between WADDELL & REED FUNDS, INC., and Waddell & Reed Services Company (the
"Agent"), as amended and restated as of April 1, 1996,
W I T N E S S E T H :
WHEREAS, The Company wishes, as applicable, to appoint the Agent or to
continue the appointment of the Agent to be its shareholder servicing agent
upon, and subject to, the terms and provisions of this Agreement;
NOW THEREFORE, in consideration of the mutual covenants contained in
this Agreement, the parties agree as follows:
1. Appointment of Agent as Shareholder Servicing Agent for the
Company; Acceptance.
(1) The Company hereby appoints the Agent to act as
Shareholder Servicing Agent for the Company upon, and subject to, the terms and
provisions of this Agreement.
(2) The Agent hereby accepts the appointment as Shareholder
Servicing Agent for the Company and agrees to act as such upon, and subject to,
the terms and provisions of this Agreement.
(3) The Agent may appoint an entity or entities approved by
the Company in writing to perform any portion of Agent's duties hereunder (the
"Subagent").
2. Definitions.
(1) In this Agreement -
(a) The term the "Act" means the Investment
Company Act of 1940 as amended from time to time;
(b) The term "account" means the shares of the
Company registered on the books of the Company in the name
of a shareholder under a particular account registration number and includes
shares subject to instructions by the shareholder with respect to periodic
redemptions and/or reinvestment in additional shares of any dividends payable on
said shares;
(c) The term "affiliate" of a person shall mean a
person controlling, controlled by, or under common
control with that person;
(d) The term "Class" shall mean each separate
sub-class of a class of shares of the Company, as may now
or in the future exist;
(e) The term "Fund" shall mean each separate class of
shares of the Company, as may now or in the future
exist;
(f) The term "officers' instruction" means an
instruction given on behalf of the Company to the Agent and signed on behalf of
the Company by any one or more persons authorized to do so by the Company's
Board of Directors;
(g) The term "prospectus" means the prospectus and
Statement of Additional Information of the applicable
Fund or Class from time to time in effect;
(h) The term "shares" means shares including
fractional shares of capital stock of the Company, whether or not such shares
are evidenced by an outstanding stock certificate issued by the Company;
(i) The term "shareholder" shall mean the owner of
record of shares of the Company;
(j) The term "stock certificate" means a certificate
representing shares in the form then currently in
use by the Company.
3. Duties of the Agent.
The Agent shall perform such duties as shall be set forth in
this paragraph 3 and in accordance with the practice stated in Exhibit A of this
Agreement or any amendment thereof, any or all of which duties may be delegated
to or performed by one or more Subagents pursuant to Paragraph (3) above.
(1) Transfers.
Subject to the provisions of this Agreement the Agent
hereby agrees to perform the following functions as transfer agent for the
Company:
(a) Recording the ownership, transfer, exchange
and cancellation of ownership of shares of the Company on the books of the
Company;
(b) Causing the issuance, transfer, exchange and
cancellation of stock certificates;
(c) Establishing and maintaining records of
accounts;
(d) Computing and causing to be prepared and mailed
or otherwise delivered to shareholders payment checks
and notices of reinvestment in additional shares of dividends, stock dividends
or stock splits declared by the Company on shares and of redemption proceeds due
by the Company on redemption of shares;
(e) Furnishing to shareholders such information
as may be reasonably required by the Company, including appropriate income tax
information;
(f) Addressing and mailing to shareholders
prospectuses, annual and semi-annual reports and proxy materials for shareholder
meetings prepared by or on behalf of the Company;
(g) Replacing allegedly lost, stolen or
destroyed stock certificates in accordance with and subject to procedures and
conditions agreed upon and set out in officers' instructions;
(h) Maintaining such books and records relating to
transactions effected by the Agent pursuant to this
Agreement as are required by the Act, or by rules or regulations thereunder, or
by any other applicable provisions of law, to be maintained by the Company or
its transfer agent with respect to such transactions; preserving, or causing to
be preserved, any such books and records for such periods as may be required by
any such law, rule or regulation; furnishing the Company such information as to
such transactions and at such time as may be reasonably required by it to comply
with applicable laws and regulations;
(i) Providing such services and carrying out such
responsibilities on behalf of the Company, or imposed
on the Agent as the Company's transfer agent, not otherwise expressly provided
for in this Paragraph 3, as may be required by or be reasonably necessary to
comply with any statute, act, governmental rule, regulation or directive or
court order, including, without limitation, the requirements imposed by the Tax
Equity and Fiscal Responsibility Act of 1982 and the Income and Dividend Tax
Compliance Act of 1983 relating to the withholding of tax from distributions to
shareholders.
(2) Correspondence.
The Agent agrees to deal with and answer all
correspondence from or on behalf of shareholders relating to its functions under
this Agreement.
4. Compensation of the Agent.
The Company agrees to pay the Agent for its services under
this Agreement in accordance with the schedule as then in effect set forth in
Exhibit B of this Agreement or any amendment thereof. In addition, the Company
agrees to reimburse the Agent for the following "out-of-pocket" expenses of the
Agent within five days after receipt of an itemized statement of such expenses,
to the extent that payment of such expenses has not been or is not to be made
directly by the Company: (i) costs of stationery, appropriate forms, envelopes,
checks, postage, printing (except cost of printing prospectuses, annual and
semi-annual reports and proxy materials) and mailing charges, including returned
mail and proxies, incurred by the Agent with respect to materials and
communications sent to shareholders in carrying out its duties to the Company
under this Agreement; (ii) long distance telephone costs incurred by the Agent
for telephone communications and microfilm and storage costs for transfer agency
records and documents; (iii) costs of all ancillary and supporting services and
related expenses (other than insurance premiums) reasonably required by and
provided to the Agent, other than by its employees or employees of an affiliate,
with respect to functions of the Company being performed by it in its capacity
as Agent hereunder, including legal advice and representation in litigation to
the extent that such payments are permitted under Paragraph 7 of this Agreement
and charges to Agent made by any Subagent; (iv) costs for special reports or
information furnished on request pursuant to this Agreement and not specifically
required by the Agent by Paragraph 3 of this Agreement; and (v) reasonable costs
and expenses incurred by the Agent in connection with the duties of the Agent
described in Paragraph (3)(1)(i). In addition, the Company agrees to promptly
pay over to the Agent any fees or payment of charges it may receive from a
shareholder for services furnished to the shareholder by the Agent.
Services and operations incident to the sale and distribution
of the Company's shares, including sales communications, confirmations of
investments (not including reinvestment of dividends) and the clearing or
collection of payments will not be for the account or at the expense of the
Company under this Agreement.
5. Right of Company to Inspect Records, etc.
The Company will have the right under this Agreement to
perform on site inspection of records and accounts and to perform audits
directly pertaining to the Company shareholder accounts serviced by the Agent
hereunder at the Agent's or any Subagent's facilities in accordance with
reasonable procedures at the frequency necessary to assure proper administration
of the Agreement. The Agent will cooperate with the Company's auditors or
representatives of appropriate regulatory agencies and furnish all reasonably
requested records and data.
6. Insurance.
The Agent now has the insurance coverage described in Exhibit
C, attached hereto, and the Agent will not take any action to eliminate or
decrease such coverage during the term of this Agreement without receiving the
approval of the Fund in advance of any change, except the Agent, after giving
reasonable notice to the Company, may eliminate or decrease any coverage if the
premiums for such coverage are substantially increased.
7. Standard of Care; Indemnification.
The Agent will at all times exercise due diligence and good
faith in performing its duties hereunder. The Agent will make every reasonable
effort and take all reasonably available measures to assure the adequacy of its
personnel and facilities as well as the accurate performance of all services to
be performed by it hereunder within, at a minimum, the time requirements of any
applicable statutes, rules or regulations or as set forth in the prospectus.
The Agent shall not be responsible for, and the Company agrees
to indemnify the Agent for any losses, damages or expenses (including reasonable
counsel fees and expenses) (i) resulting from any claim, demand, action or suit
not resulting from the Agent's failure to exercise good faith or due diligence
and arising out of or in connection with the Agent's duties on behalf of the
Company hereunder; (ii) for any delay, error or omission by reason of
circumstances beyond its control, including acts of civil or military authority,
national emergencies, labor difficulties (except with respect to the Agent's
employees), fire, mechanical breakdown beyond its control, flood or catastrophe,
acts of God, insurrection, war, riots, or failure beyond its control of
transportation, communication or power supply; or (iii) for any action taken or
omitted to be taken by the Agent in good faith in reliance on (a) the
authenticity of any instrument or communication reasonably believed by it to be
genuine and to have been properly made and signed or endorsed by an appropriate
person, (b) the accuracy of any records or information provided to it by the
Company, (c) any authorization or instruction contained in any officers'
instruction, or (d) with respect to the functions performed for the Company
listed under Paragraph 3(1) of this Agreement, any advice of counsel approved by
the Company who may be internally employed counsel or outside counsel, in either
case for the Company and/or the Agent.
In order for the rights to indemnification to apply, it is
understood that if in any case the Company may be asked to indemnify or hold the
Agent harmless, the Company shall be advised of all pertinent facts concerning
the situation in question, and it is further understood that the Agent will use
reasonable care to identify and notify the Company promptly concerning any
situation which presents or appears likely to present a claim for
indemnification against the Company. The Company shall have the option to defend
the Agent against any claim which may be the subject of this indemnification
and, in the event that the Company so elects, it will so notify the Agent and
thereupon the Company shall take over complete defense of the claim and the
Agent shall sustain no further legal or other expenses in such situation for
which the Agent shall seek indemnification under this paragraph. The Agent will
in no case confess any claim or make any compromise in any case in which the
Company will be asked to indemnify the Agent except with the Company's prior
written consent.
8. Term of the Agreement; Taking Effect; Amendments.
This Agreement shall become effective at the start of business
on the date hereof and shall continue, unless terminated as hereinafter
provided, for a period of one year and from year to year thereafter, provided
that such continuance shall be specifically approved as provided below.
This Agreement shall go into effect, or may be continued, or
may be amended or a new agreement between the Company and the Agent covering the
substance of this Agreement may be entered into only if the terms of this
Agreement, such continuance, the terms of such amendment or the terms of such
new agreement have been approved by the Board of Directors of the Company,
including the vote of a majority of the directors who are not "interested
persons," as defined in the Act, of either party to this Agreement or of Waddell
& Reed Investment Management Company, cast in person at a meeting called for the
purpose of voting on such approval. Such a vote is hereinafter referred to as a
"disinterested director vote."
Any disinterested director vote shall include a determination
that (i) the Agreement, amendment, new agreement or continuance in question is
in the best interests of the Company and its shareholders; (ii) the services to
be performed under the Agreement, the Agreement as amended, new agreement or
agreement to be continued, are services required for the operation of the
Company; (iii) the Agent can provide services the nature and quality of which
are at least equal to those provided by others offering the same or similar
services; and (iv) the fees for such services are fair and reasonable in the
light of the usual and customary charges made by others for services of the same
nature and quality.
9. Termination.
(1) This Agreement may be terminated by the Agent at any time
without penalty upon giving the Company 120 days' written notice (which notice
may be waived by the Company) and may be terminated by the Company at any time
without penalty upon giving the Agent sixty (60) days' written notice (which
notice may be waived by the Agent), provided that such termination by the
Company shall be directed or approved by the vote of a majority of the Board of
Directors of the Company in office at the time or by the vote of the holders of
a majority (as defined in or under the Act) of the outstanding shares of the
Company.
(2) On termination, the Agent will deliver to the Company or
its designee all files, documents and records of the Company used, kept or
maintained by the Agent in the performance of its services hereunder, including
such of the Company's records in machine readable form as may be maintained by
the Agent, as well as such summary and/or control data relating thereto used by
or available to the Agent.
(3) In the event of any termination which involves the
appointment of a new shareholder servicing agent, including the Company's acting
as such on its own behalf, the Company shall have the non-exclusive right to the
use of the data processing programs used by the Agent in connection with the
performance of its duties under this Agreement without charge.
(4) In addition, on such termination or in preparation
therefore, at the request of the Company and at the Company's expense the Agent
shall provide to the extent that its capabilities then permit such
documentation, personnel and equipment as may be reasonably necessary in order
for a new agent or the Company to fully assume and commence to perform the
agency functions described in this Agreement with a minimum disruption to the
Company's activities.
10. Construction; Governing Law.
The headings used in this Agreement are for convenience only
and shall not be deemed to constitute a part hereof. Whenever the context
requires, words denoting singular shall be read to include the plural. This
Agreement and the rights and obligations of the parties hereunder, shall be
construed and interpreted in accordance with the laws of the State of Kansas,
except to the extent that the laws of the State of Maryland apply with respect
to share transactions.
11. Representations and Warranties of Agent.
Agent represents and warrants that it is a corporation duly
organized and existing and in good standing under the laws of the State of
Missouri, that it is duly qualified to carry on its business in the State of
Kansas and wherever its duties require, that it has the power and authority
under laws and by its Articles of Incorporation and Bylaws to enter into this
Shareholder Servicing Agreement and to perform the services contemplated by this
Agreement.
12. Entire Agreement.
This Agreement and the Exhibits annexed hereto constitutes the
entire and complete agreement between the parties hereto relating to the subject
matter hereof, supersedes and merges all prior discussions between the parties
hereto, and may not be modified or amended orally.
IN WITNESS WHEREOF, the parties have hereto caused this
Agreement to be duly executed on the day and year first above written.
WADDELL & REED FUNDS, INC.
By:_________________________________
Sharon K. Pappas, Vice President
ATTEST:
By:____________________________
Sheryl Strauss, Assistant Secretary
WADDELL & REED SERVICES COMPANY
By:_________________________________
Robert L. Hechler, President
ATTEST:
By:___________________________
Sharon K. Pappas, Secretary
<PAGE>
EXHIBIT A
A. DUTIES IN SHARE TRANSFERS AND REGISTRATION
1. The Agent in carrying out its duties shall follow general commercial
practices and the Rules of the Stock Transfer Association, Inc. except as they
may conflict or be inconsistent with the specific provisions of the Company's
Articles of Incorporation and Bylaws, prospectus, applicable Federal and state
laws and regulations and this Agreement.
2. The Agent shall not require that the signature of the appropriate
person be guaranteed, witnessed or verified in order to effect a redemption,
transfer, exchange or change of address except as may from time to time be
directed by the Company as set forth in an officers' instruction. In the event a
signature guarantee is required by the Company, the Agent shall not inquire as
to the genuineness of the guarantee.
3. The Agent shall not replace a lost, stolen or misplaced stock
certificate without requiring and being furnished with an open penalty surety
bond protecting the Company and the Agent against loss.
B. The practices, procedures and requirements specified in A above may be
modified, altered, varied or supplemented as from time to time may be mutually
agreed upon by the Company and the Agent and evidenced on behalf of the Company
by an officers' instruction. Any such change shall not be deemed to be an
amendment to the Agreement within the meaning of Paragraph 8 of the Agreement.
<PAGE>
EXHIBIT B
COMPENSATION
Class B Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class Y Shares
An amount payable on the first day of each month equal to 1/12 of .15 of 1% of
the average daily net assets of the Class for the preceding month.
<PAGE>
EXHIBIT C
Bond or
Name of Bond Policy No. Insurer
Investment Company 87015198B ICI
Blanket Bond Form Mutual
Insurance
Company
Fidelity $20,400,000
Audit Expense 50,000
On Premises 20,400,000
In Transit 20,400,000
Forgery or Alteration 20,400,000
Securities 20,400,000
Counterfeit Currency 20,400,000
Uncollectible Items of
Deposit 25,000
Phone-Initiated Transactions 500,000
Total Limit 20,400,000
Directors and Officers/ 87015198D ICI
Errors and Omissions Liability Mutual
Insurance Form Insurance
Total Limit $ 5,000,000 Company
Blanket Lost Instrument Bond (Mail Loss) 30S100639551 Aetna
Life &
casualty
Blanket Undertaking Lost Instrument
Waiver of Probate 42SUN339806 Hartford
Casualty
Insurance
