<PAGE>
Please read this Prospectus before investing, and keep it on file for future
reference. It sets forth concisely the information about the Fund that you
ought to know before investing.
Additional information has been filed with the Securities and Exchange
Commission and is contained in a Statement of Additional Information ("SAI")
dated September 12, 1995. The SAI is available free upon request to the Fund
or Waddell & Reed, Inc., the Fund's underwriter, at the address or telephone
number below. The SAI is incorporated by reference into this Prospectus and
you will not be aware of all facts unless you read both this Prospectus and the
SAI.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
United Asset Strategy Fund, Inc.
Class A Shares
This Fund seeks high total return with reduced risk over the long term through
investments in stocks, bonds, and short-term instruments.
This Prospectus describes one class of shares of the Fund -- Class A shares.
Prospectus
September 12, 1995
UNITED ASSET STRATEGY FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
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Table of Contents
An Overview of the Fund..................................3
Expenses.................................................5
Financial Highlights ....................................6
Performance..............................................7
Explanation of Terms................................7
About Waddell & Reed.....................................8
About the Investment Principles of the Fund..............9
Investment Goal and Principles......................9
Risk Considerations.................................10
Securities and Investment Practices.................11
About Your Account.......................................24
Ways to Set Up Your Account.........................24
Buying Shares.......................................25
Minimum Investments.................................27
Adding to Your Account..............................27
Selling Shares......................................28
Shareholder Services................................30
Personal Service...............................30
Reports........................................30
Exchanges......................................30
Automatic Transactions.........................30
Dividends, Distributions, and Taxes.................31
Distributions..................................31
Taxes..........................................32
About the Management and Expenses of the Fund............34
WRIMCO and Its Affiliates...........................35
Breakdown of Expenses...............................36
Management Fee.................................36
Other Expenses.................................37
<PAGE>
An Overview of the Fund
The Fund: This Prospectus describes the Class A shares of United Asset
Strategy Fund, Inc., an open-end diversified management investment company.
Goal: United Asset Strategy Fund, Inc. (the "Fund") seeks high total return
with reduced risk over the long term. The Fund seeks to reduce risk over the
long term by spreading its assets among stocks, bonds and short-term
instruments, attempting to moderate the risk potential of investing solely in
one class of instruments. As with any mutual fund, there is no assurance that
the Fund will achieve its goal. See "About the Investment Principles of the
Fund" for further information.
Strategy: The Fund diversifies among stocks, bonds, and short-term
instruments, both in the United States and abroad, to pursue its specific goal.
The Fund designates a mix which represents the way the Fund's investments will
generally be allocated over the long term. This mix will vary over short-term
periods as Fund management adjusts the Fund's holdings - within defined ranges
- based on the current outlook for the different markets. See "About the
Investment Principles of the Fund" for further information.
Mix
_ Stocks 40% _ Bonds 40%
(can range (can range
from from
10-60%) 20-60%)
_ Short-term 20%
(can range from
0-70%)
Management: Waddell & Reed Investment Management Company ("WRIMCO") provides
investment advice to the Fund and manages the Fund's investments. WRIMCO is a
wholly-owned subsidiary of Waddell & Reed, Inc. WRIMCO, Waddell & Reed, Inc.
and its predecessors have provided investment management services to registered
investment companies since 1940. See "About the Management and Expenses of the
Fund" for further information about management fees.
Distributor: Waddell & Reed, Inc. acts as principal underwriter and
distributor of the shares of the Fund.
Purchases: You may buy Class A shares of the Fund through Waddell & Reed, Inc.
and its account representatives. The price to buy a Class A share of the Fund
is the net asset value of a Class A share plus a sales charge. See "About Your
Account" for information on how to purchase Class A shares.
Redemptions: You may redeem your shares at net asset value. When you sell
your shares, they may be worth more or less than what you paid for them. See
"About Your Account" for a description of redemption and reinvestment
procedures.
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 with reduced risk, this Fund may be appropriate for you.
Risk Considerations: Because the Fund owns different types of investments, its
performance will be affected by a variety of factors. The value of the Fund's
investments and the income it generates will vary from day to day, generally
reflecting changes in interest rates, market conditions, and other company and
economic news. Performance will also depend on WRIMCO's skill in allocating
assets. See "About the Investment Principles of the Fund" for information
about the risks associated with the Fund's investments.
<PAGE>
Expenses
Shareholder transaction expenses are charges you pay when you buy or sell
shares of a fund.
Maximum sales load
on purchases (as a
percentage of
offering price)5.75%
Maximum sales load
on reinvested
dividends None
Deferred
sales load None
Redemption feesNone
Exchange fee None
Annual Fund operating expenses
Management fees10.81%
12b-1 fees2 0.25%
Other expenses3 0.29%
Total Fund
operating expenses4 1.35%
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return5 and (2) redemption at the end of each time period:
1 year $70
3 years $98
The purpose of the table is to assist you in understanding the various costs
and expenses that a shareholder of the Class A shares of the Fund will bear
directly or indirectly. The expenses are pro forma and estimated for the first
fiscal year of operations. The example should not be considered a
representation of past or future expenses; actual expenses may be greater or
lesser than those shown. For a more complete discussion of certain expenses
and fees, see "Breakdown of Expenses."
1The management fee for the Fund is higher than that of most funds.
2Expense information reflects the maximum 12b-1 service fee. The 12b-1 service
fee is paid as reimbursement for amounts actually expended by account
representatives, Waddell & Reed, Inc. and/or other third parties in connection
with the provision of personal services to Fund shareholders and/or maintenance
of shareholder accounts. See "Breakdown of Expenses" for further information
about the 12b-1 service fee.
3Estimated expenses for the first fiscal year of operation. Actual expenses
may be greater or lesser than those shown.
4Retirement plan accounts may be subject to a $2 fee imposed by the plan
custodian for use of the Flexible Withdrawal Service.
5Use of an assumed annual return of 5% is for illustration purposes only and is
not a representation of the Fund's future performance, which may be greater or
lesser.
<PAGE>
Financial Highlights*
(Unaudited)
For a Class A share outstanding throughout the period from March 9, 1995
through July 31, 1995.*
Net asset value,
beginning of
period ............... $5.00
------
Income from investment
operations:
Net investment income 0.04
Net realized and
unrealized gain
on investments ..... 0.28
------
Total from investment
operations ........... 0.32
Less distributions:
Dividends from net
investment income .. (0.02)
------
Net asset value,
end of period ........ $5.30
======
Total return*** ......... 6.41%
Net assets, end of
period (000
omitted) ............. $15,883
Ratio of expenses to
average net assets ... 1.33%
Ratio of net investment
income to average net
assets ............... 4.02%
Portfolio turnover
rate ................. 23.93%
*On September 12, 1995, the Fund began offering Class Y shares to the public.
Fund shares outstanding prior to that date were designated Class A shares.
**The Fund's inception date is August 25, 1994; however, since the Fund did
not have investment activity or incur expenses prior to the date of public
offering, the per-share data and ratios are for a capital share outstanding
for the period from March 9, 1995 (initial public offering) through July 31,
1995. Ratios and the portfolio turnover rate have been annualized.
***Total return calculated without taking into account the sales load deducted
on an initial purchase.
<PAGE>
Performance
Mutual fund performance is commonly measured as total return. The Fund may
also advertise its performance by showing performance rankings. Performance
information is calculated and presented separately for each class of Fund
shares.
Explanation of Terms
Total Return is the overall change in value of an investment in the Fund over a
given period, assuming reinvestment of any dividends and distributions. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period. Average annual total
returns smooth out variations in performance; they are not the same as actual
year-by-year results. Standardized total return figures reflect payment of the
maximum sales charge. The Fund may also provide non-standardized performance
information which does not reflect deduction of the sales charge or which is
for periods other than those required to be presented or which differs
otherwise from standardized performance information.
Performance Rankings are comparisons of the Fund's performance to the
performance of other selected mutual funds, selected recognized market
indicators such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average, or non-market indices or averages of mutual fund industry
groups. The Fund may quote its performance rankings and/or other information
as published by recognized independent mutual fund statistical services or by
publications of general interest. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
relates, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of sales charges, fee waivers and/or expense
reimbursements.
All performance information that the Fund advertises or includes in information
provided to present or prospective shareholders is historical in nature and is
not intended to represent or guarantee future results. The value of the Fund's
shares when redeemed may be more or less than their original cost.
The Fund's recent performance and holdings will be detailed twice a year in the
Fund's annual and semiannual reports, which are sent to all Fund shareholders.
<PAGE>
About Waddell & Reed
Since 1937, Waddell & Reed has been helping people make the most of their
financial future by helping them take advantage of various financial services.
Today, Waddell & Reed has over 2500 account representatives located throughout
the United States. Your primary contact in your dealings with Waddell & Reed
will be your local account representative. However, the Waddell & Reed
shareholder services department, which is part of the Waddell & Reed
headquarters operations in Overland Park, Kansas, is available to assist you
and your Waddell & Reed account representative. You may speak with a customer
service representative by calling 913-236-2000.
<PAGE>
About the Investment Principles of the Fund
Investment Goal and Principles
The Fund seeks high total return with reduced risk over the long term by
allocating its assets among stocks, bonds, and short-term instruments. There
is no assurance 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 value of bonds and short-term instruments generally
fluctuates 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 most favorable outlook for
achieving 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 advantageous to the Fund. When you sell your shares, they may be
worth more or less than what you paid for them.
The Fund allocates its assets among the following classes, or types, of
investments. The stock class includes equity securities of all types. The
bond class includes all varieties of fixed-income instruments with maturities
of more than three years (including adjustable rate preferred stocks). The
short-term class includes all types of short-term instruments with remaining
maturities of three years or less. Within each of these classes, the Fund may
invest in both domestic and foreign securities.
WRIMCO has the ability to allocate the Fund's assets within specified ranges.
The Fund's mix indicates 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. The range and approximate percentage of the mix for each
asset class are shown below. Some types of investments, such as indexed
securities, can fall into more than one asset class.
Mix Range
--------- ------
Stock
class 10-60%
40%
Bond
class 20-60%
40%
Short-term
class 0-70%
20%
In pursuit of the Fund's goal, WRIMCO will not try to pinpoint the precise
moment when a major reallocation should be made. Asset shifts among classes
may be made gradually over time. Under normal circumstances, a single
reallocation will not involve more than 10% of the Fund's total assets.
Within each class, WRIMCO seeks to maximize total return. WRIMCO seeks to
maximize total return within the stock 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. WRIMCO seeks to
maximize total return within the bond class by adjusting the 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. WRIMCO seeks to maximize total return within the short-term asset
class by taking advantage of yield differentials between different
instruments,issuers, and currencies. WRIMCO intends 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.
WRIMCO normally invests the Fund's assets according to its investment strategy;
however, as a temporary defensive measure at times when WRIMCO believes that a
mix of stocks, bonds and certain short-term instruments does not offer a good
investment opportunity, it may temporarily invest up to all of the Fund's
assets in money market instruments rated A-1 by Standard & Poor's Ratings
Services ("S&P") or Prime 1 by Moody's Investors Service, Inc. ("MIS"), or
unrated securities judged by WRIMCO to be of equivalent quality.
Risk Considerations
There are risks inherent in any investment. The Fund is subject to varying
degrees of market risk, financial risk and, in some cases, prepayment risk.
Market risk is the potential for fluctuations in the price of the security
because of market factors. Because of market risk, you should anticipate that
the share price of the Fund will fluctuate. Financial risk is based on the
financial situation of the issuer. The financial risk of the Fund depends on
the credit quality of the underlying securities. Prepayment risk is the
possibility that, during periods of falling interest rates, a debt security
with a high stated interest rate will be prepaid prior to its expected maturity
date.
Because the Fund owns different types of investments, its performance will be
affected by a variety of factors. The value of the Fund's investments and the
income it generates will vary from day to day, generally reflecting changes in
interest rates, market conditions, and other company and economic news.
Performance will also depend on WRIMCO's skill in allocating assets. The Fund
diversifies across investment types more than most mutual funds. No one mutual
fund, however, can provide an appropriate balanced investment plan for all
investors.
As more fully discussed under "Securities and Investment Practices," certain
types of instruments in which the Fund may invest, and certain strategies
WRIMCO may employ in pursuit of the Fund's investment goal, involve special
risks. 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 higher-quality securities and may
decline significantly in periods of general economic difficulty. Foreign
securities and foreign currencies may involve risks relating to currency
fluctuations, political or economic conditions in the foreign country, and the
potentially less stringent investor protection and disclosure standards of
foreign markets. These factors could make foreign investments, especially
those in developing countries, more volatile.
The Fund can use various techniques to increase or decrease its exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices, or other factors that affect security values. These techniques may
involve derivative transactions. If WRIMCO judges market conditions
incorrectly or employs a strategy that does not correlate well with the Fund's
investments, these techniques could result in a loss, regardless of whether the
intent was to reduce risk or increase return. These techniques may increase
the volatility of the Fund and may involve a small investment of cash relative
to the magnitude of the risk assumed. In addition, these techniques could
result in a loss if the counterparty to the transaction does not perform as
promised or if there is not a liquid secondary market to close out a position
that the Fund has entered into.
The value of mortgage-backed securities may be significantly affected by
changes in interest rates, the market's perception of the issuers, and the
creditworthiness of the parties involved. These securities may also be subject
to prepayment risk. Stripped securities involve risks that are similar to
those of other debt securities, although stripped securities may be more
volatile.
See "Securities and Investment Practices" for a more detailed discussion
concerning the instruments in which the Fund may invest, and the strategies
WRIMCO may employ in pursuit of the Fund's investment goal.
Securities and Investment Practices
The following pages contain more detailed information about types of
instruments in which the Fund may invest, and strategies WRIMCO may employ in
pursuit of the Fund's investment goal. Certain types of instruments and
investment practices could entail significant risks and WRIMCO will invest in
these instruments and engage in these practices only to the extent that they
are consistent with the Fund's goal of high total return with reduced risk over
the long term. A summary of risks and restrictions 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 to
the full extent permitted unless it believes that doing so will help the Fund
achieve its goal. As a shareholder, you will receive annual and semiannual
reports detailing the Fund's holdings.
Certain of the investment policies and restrictions of the Fund are also stated
below. A fundamental policy of the Fund may not be changed without the
approval of the shareholders of the Fund. Operating policies may be changed by
the Board of Directors without the approval of the affected shareholders. The
goal of the Fund is a fundamental policy. Unless otherwise indicated, the
types of securities and other assets in which the Fund may invest and other
policies are operating policies.
Policies and limitations are typically considered at the time of purchase; the
sale of instruments is usually not required in the event of a subsequent change
in circumstances.
Please see the SAI for further information concerning the following instruments
and associated risks and the Fund's investment policies and restrictions.
Equity Securities. Equity securities represent an ownership interest in an
issuer. This ownership interest often gives the Fund the right to vote on
measures affecting the issuer's organization and operations. The Fund may
invest in domestic and foreign equity securities. Equity securities 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. Although common stocks and other
equity securities have a history of long-term growth in value, their prices
tend to fluctuate in the short term, particularly those of smaller companies.
The equity securities in which the Fund invests may include preferred stock
that converts to common stock either automatically or after a specified period
of time or at the option of the issuer.
Debt Securities. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest, and must repay the amount borrowed at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values. The debt securities in which
the Fund invests may include debt securities whose performance is linked to a
specified equity security or securities index.
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 debt securities fall and, conversely, when
interest rates fall, the values of fixed-rate debt securities rise. The values
of floating and adjustable-rate debt securities are not as sensitive to changes
in interest rates as the values of fixed-rate debt securities. Longer-term
bonds are generally more sensitive to interest rate changes than shorter-term
bonds.
U.S. Government Securities are high-quality instruments issued or guaranteed as
to principal or interest by the U.S. Treasury or by an agency or
instrumentality of the U.S. Government. Not all U.S. Government Securities are
backed by the full faith and credit of the United States. Some are backed by
the right of the issuer to borrow from the U.S. Treasury; others are backed by
discretionary authority of the U.S. Government to purchase the agencies'
obligations; while others are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment.
Subject to its investment restrictions, the Fund may invest in debt securities
rated in any rating category of the established rating services, including
securities rated in the lowest category (such as those rated D by S&P and C by
MIS). In addition, the Fund will treat unrated securities judged by WRIMCO to
be of equivalent quality to a rated security to be equivalent to securities
having that rating. 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. 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. S&P and MIS ratings
are described in Appendix A to the SAI. While credit ratings are only one
factor WRIMCO relies on in evaluating high-yield debt securities, certain risks
are associated with credit ratings. Credit ratings evaluate the safety of
principal and interest payments, not market value risk. Credit ratings for
individual securities may change from time to time, and the Fund may retain a
portfolio security whose rating has been changed.
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. While the market for
high-yield, high-risk corporate debt securities has been in existence for many
years and has weathered previous economic downturns, the 1980s brought a
dramatic increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructurings. Past experience may not provide an
accurate indication of the future performance of the high-yield, high-risk bond
market, especially during periods of economic recession. The market for lower-
rated debt securities may be thinner and less active than that for higher-rated
debt securities, which can adversely affect the prices at which the former are
sold. Adverse publicity and changing investor perceptions may decrease the
values and liquidity of lower-rated debt securities, especially in a thinly-
traded market. Valuation becomes more difficult and judgment plays a greater
role in valuing lower-rated debt securities than with respect to securities for
which more external sources of quotations and last sale information are
available. Since the risk of default is higher for lower-rated debt
securities, WRIMCO's research and credit analysis are an especially important
part of managing securities of this type held by the Fund. WRIMCO continuously
monitors the issuers of lower-rated debt securities in the Fund's portfolio in
an attempt to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments. The Fund may choose,
at its expense or in conjunction with others, to pursue litigation or otherwise
to 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.
Zero coupon bonds do not make interest payments; instead, they are sold at a
deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can
be very volatile when interest rates change. In calculating its dividends, the
Fund takes into account as income a portion of the difference between a zero
coupon bond's purchase price and its face value.
Preferred Stock is also rated by S&P and MIS, as described in Appendix A to the
SAI. Preferred stock rated AAA, AA, A or BBB by S&P or aaa, aa, a or baa by
MIS is considered to be of investment grade. Preferred stock rated BB or lower
by S&P or ba or lower by MIS is considered to have speculative characteristics.
The Fund may invest in preferred stock rated in any rating category by an
established rating service and unrated preferred stock judged by WRIMCO to be
of equivalent quality.
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 a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities have unique
investment characteristics in that they generally have higher yields than those
of common stocks of the same or similar issuers, but lower yields than
comparable nonconvertible securities, are less subject to fluctuation in value
than 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.
Convertible securities are typically issued by smaller capitalized companies
whose stock prices may be volatile. A convertible security may be subject to
redemption at the option of the issuer at a price established in the security's
governing instrument. If a convertible security held by the Fund is called for
redemption, the Fund will be required to convert it into the underlying common
stock, sell it to a third party or permit the issuer to redeem the security.
Any of these actions could have an adverse effect on the Fund's ability to
achieve its investment objective.
Policies and Restrictions: The Fund may not invest more than 35% of its assets
in lower-quality debt securities (those rated below BBB by S&P or Baa by MIS
and unrated securities judged by WRIMCO to be of equivalent quality). However,
the Fund does not currently intend to invest more than 20% of its total assets
in securities rated below investment-grade or judged by WRIMCO to be of
equivalent quality.
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, bankers' acceptances, bank deposits, and other financial
institution obligations. These instruments may carry fixed or variable
interest rates.
Policies and Restrictions: The Fund does not currently intend to invest in
money-market instruments rated below A-1 by S&P or Prime 1 by MIS, or judged by
WRIMCO to be of equivalent quality.
Foreign Securities and foreign currencies can involve significant risks in
addition to the risks inherent in U.S. investments. 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. 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 condition 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 a greater possibility
of default by foreign governments or foreign 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. There is no assurance that WRIMCO will be able to
anticipate or counter these potential events or counter their effects.
The considerations noted above generally are intensified for investments 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 U.S. 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.
Policies and Restrictions: Under normal conditions, the Fund intends to limit
its investments in foreign securities to no more than 50% of total assets. The
Fund currently intends to limit its investments in obligations of any single
foreign government to less than 25% of its total assets.
Derivative Transactions. The Fund can use various techniques to increase or
decrease its exposure to changing security prices, interest rates, currency
exchange rates, commodity prices, or other factors that affect security values.
These techniques may involve derivative transactions such as buying and selling
options and futures contracts, entering into currency exchange contracts or
swap agreements, and purchasing indexed securities. The strategies described
below may be used in an attempt to manage certain risks of the Fund's
investments that can affect fluctuation in its net asset value.
Options offer large amounts of leverage, which will result in the Fund's net
asset value being more sensitive to changes in the value of the related
investment. There is no assurance that a liquid secondary market will exist
for exchange-listed options. The market for options that are not listed on an
exchange may be less active than the market for exchange-listed options. The
Fund will be able to close a position in an option it has written only if there
is a market for the put or call. If the Fund is not able to enter into a
closing transaction on an option it has written, it will be required to
maintain the securities, or cash in the case of an option on an index, subject
to the call or the collateral underlying the put until a closing purchase
transaction can be entered into or the option expires. Because index options
are settled in cash, the Fund cannot provide in advance for its potential
settlement obligations on a call it has written on an index by holding the
underlying securities. The Fund bears the risk that the value of the
securities it holds will vary from the value of the index. Option transactions
may increase the Fund's portfolio turnover rate creating greater commission
expenses, transaction costs and tax consequences.
Futures Contracts and Options on Futures Contracts. Since futures contracts
and options thereon can replicate movements in the cash markets for the
securities in which the Fund invests without the large cash investments
required for dealing in such markets, they may subject the Fund to greater and
more volatile risks than might otherwise be the case. The principal risks
related to the use of such instruments are: imperfect correlation between
movements in the market price of the portfolio investments (held or intended)
and in the price of the futures contract or option; possible lack of a liquid
secondary market for closing out futures or options positions; the need for
additional portfolio management skills and techniques; and losses due to
unanticipated market price movements. The ordinary spreads between prices in
the cash and futures markets, due to the differences in the natures of those
markets, are subject to distortion. Due to the possibility of distortion, a
correct forecast of general interest 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 movements or stock
market movements or the time span within which the movements take place.
Gains and losses on investments in options and futures contracts depends on
WRIMCO's ability to predict correctly the direction of stock prices, interest
rates and other economic factors. See the SAI for further information about
these instruments and their risks.
Forward Currency Contracts. Currencies may be exchanged on a spot (i.e., cash)
basis, or by entering into forward currency contracts to purchase or sell
foreign currencies at a future date, at a price set when the contract is
entered into. Currency conversion involves dealer spreads and other costs,
although commissions usually are not charged. Successful use of forward
currency contracts will depend on WRIMCO's skill in analyzing and predicting
currency values. Forward currency contracts may substantially change the
Fund's investment exposure to changes in currency exchange rates, and could
result in losses to the Fund if currencies do not perform as WRIMCO
anticipates. There is no assurance that WRIMCO's use of forward currency
contracts will be advantageous to the Fund or that it will hedge at an
appropriate time.
With respect to the Fund's options, futures and forward currency contract
positions, the Fund will segregate assets as described in the SAI.
Policies and Restrictions: The Fund does not currently intend to invest more
than 5% of its total assets in forward currency contracts
Swaps, Caps and Floors. The Fund is not limited in the type of swap, cap,
collar or floor it may enter into as long as WRIMCO determines it is consistent
with the Fund's investment goal and policies.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. The purchaser of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds a
predetermined value, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below a
predetermined value. The purchase of a floor entitles the purchaser, to the
extent that a specified index falls below a predetermined value, to receive
payments from the party selling the floor. An interest rate collar combines
elements of buying a cap and selling a floor. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments and its share price and yield. The most significant factor in the
performance of swap agreements is the change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to and
from the Fund.
The Fund usually will enter into swaps on a net basis, i.e., the two payment
streams are netted out, with the Fund paying or receiving, as the case may be,
only the net amount of the two payments. If, however, an agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when due.
The creditworthiness of firms with which the Fund enters into swaps, caps,
collars or floors will be monitored by WRIMCO in accordance with procedures
adopted by the Board of Directors. If the counterparty's creditworthiness
declined, the value of a swap agreement would be likely to decline, potentially
resulting in losses.
Indexed Securities. The Fund may purchase and sell indexed securities, which
are securities whose prices are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, or other
financial indicators. 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 U.S. 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 instruments.
The Fund may invest in derivative mortgage-backed securities. These securities
are subject to significant market risks. See "Mortgage-Backed Securities".
WRIMCO can use each of the practices described above for hedging purposes and
for speculative purposes. The use of derivative techniques for speculative
purposes can increase investment risk. See the SAI for further information
regarding the risks associated with these techniques.
Mortgage-Backed Securities may include pools of mortgages, such as
collateralized mortgage obligations and stripped mortgage-backed securities.
The value of these securities may be significantly affected by changes in
interest rates, the market's perception of the issuers, and the
creditworthiness of the parties involved. The effective maturities of these
securities are estimated based upon expected prepayments. Rates of prepayment
that exceed or do not meet those anticipated may affect total return and
increase risk.
Policies and Restrictions: The Fund does not currently intend to invest more
than 40% of its total assets in mortgage-backed securities.
Stripped Securities are the separate income or principal components of a debt
instrument. These involve risks that are similar to those of other debt
securities, although they may be more volatile. The prices of stripped
mortgage-backed securities may be particularly affected by changes in interest
rates. As interest rates fall, prepayment rates tend to increase, which tends
to reduce prices of "interest only" securities and increase prices of
"principal only" securities. Rising interest rates can have the opposite
effect.
Policies and Restrictions: The Fund does not currently intend to invest more
than 5% of its total assets in stripped securities.
Risks of Derivative Instruments. The use of options, futures contracts,
options on futures contracts, forward currency contracts, swaps, caps, collars
and floors, and the investment in indexed securities, stripped securities and
mortgage-backed securities involve special risks, including: (i) possible
imperfect or no correlation between price movements of the portfolio
investments (held or intended to be purchased) involved in the transaction and
price movements of the instruments involved in the transaction; (ii) possible
lack of a liquid secondary market for any particular instrument at a particular
time; (iii) the need for additional portfolio management skills and techniques;
(iv) losses due to unanticipated market price movements; (v) the fact that,
while such strategies can reduce the risk of loss, they can also reduce the
opportunity for gain, or even result in losses, by offsetting favorable price
movements in investments involved in the transaction; (vi) incorrect forecasts
by WRIMCO concerning interest or currency exchange rates or direction of price
fluctuations of the investment involved in the transaction, which may result in
the strategy being ineffective; (vii) loss of premiums paid by the Fund on
options it purchases; and (viii) the possible inability of the Fund to purchase
or sell a portfolio security at a time when it would otherwise be favorable for
it to do so, or the possible need for the Fund to sell a portfolio security at
a disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with such transactions and the possible
inability of the Fund to close out or liquidate its position.
For a hedging strategy to be completely effective, the price change of the
hedging instrument must equal the price change of the investment being hedged.
The risk of imperfect correlation of these price changes increases as the
composition of the Fund's portfolio diverges from instruments underlying a
hedging instrument. Such equal price changes are not always possible because
the investment underlying the hedging instruments may not be the same
investment that is being hedged. WRIMCO will attempt to create a closely
correlated hedge but hedging activity may not be completely successful in
eliminating market value fluctuation.
WRIMCO may use derivative instruments, including securities with embedded
derivatives, for hedging purposes to adjust the risk characteristics of the
Fund's portfolio of investments and may use some of these instruments to adjust
the return characteristics of the Fund's portfolio of investments. An embedded
derivative is a derivative that is part of another financial instrument.
Embedded derivatives typically, but not always, are debt securities whose
return of principal or interest, in part, is determined by reference to
something that is not intrinsic to the security itself. The use of derivative
instruments for speculative purposes can increase investment risk. If WRIMCO
judges market conditions incorrectly or employs a strategy that does not
correlate well with the Fund's investments, these techniques could result in a
loss, regardless of whether the intent was to reduce risk or increase return.
These techniques may increase the volatility of the Fund and may involve a
small investment of cash relative to the magnitude of the risk assumed. In
addition, these techniques could result in a loss if the counterparty to the
transaction does not perform as promised or if there is not a liquid secondary
market to close out a position that the Fund has entered into.
The ordinary spreads between prices in the cash and futures markets, due to the
differences in the natures of those markets, are subject to distortion. Due to
the possibility of distortion, a correct forecast of general interest rate,
foreign 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 or foreign exchange rate
movements or stock market movements or the time span within which the movements
take place.
Options and futures contracts may increase portfolio turnover rates, which
results in correspondingly greater commission expenses and transactions costs
and may result in certain tax consequences.
New financial products and risk management techniques continue to be developed.
The Fund may use these instruments and techniques to the extent consistent with
its investment goal and regulatory requirements applicable to investment
companies.
When-Issued and Delayed-Delivery Transactions are trading practices in which
payment and delivery for the securities take place at a future date. The
market value of a security could change during this period.
When purchasing securities on a delayed-delivery basis, the Fund assumes the
rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with the
Fund's other investments. If the Fund remains substantially fully invested at
a time when delayed-delivery purchases are outstanding, the delayed-delivery
purchases may result in a form of leverage. When delayed-delivery purchases
are outstanding, the Fund will set aside appropriate liquid assets in a
segregated custodial account to cover its purchase obligations.
When the Fund has sold a security on a delayed-delivery basis, the Fund does
not participate in further gains or losses with respect to the security. If
the other party to a delayed-delivery transaction fails to deliver or pay for
the securities, the Fund could miss a favorable price or yield opportunity, or
could suffer a loss. The Fund may renegotiate delayed-delivery transactions
after they are entered into, and may sell underlying securities before they are
delivered, which may result in capital gains or losses.
Policies and Restrictions: The Fund does not currently intend to invest more
than 5% of its total assets in when-issued and delayed-delivery transactions.
Repurchase Agreements. In a repurchase agreement, the Fund buys a security at
one price and simultaneously agrees to sell it back at a higher price. Delays
or losses could result if the other party to the agreement defaults or becomes
insolvent.
Restricted and Illiquid Securities. Restricted securities are securities that
are subject to legal or contractual restrictions on resale. Restricted
securities may be illiquid due to restrictions on their resale.
Illiquid investments may be difficult to sell promptly at an acceptable price.
Difficulty in selling securities may result in a loss or may be costly to the
Fund.
Policies and Restrictions: The Fund does not currently intend to purchase a
security if, as a result, more than 15% of its net assets would be invested in
illiquid investments.
Diversification. Diversifying the Fund's investment portfolio can reduce the
risks of investing. This may include limiting the amount of money invested in
any one issuer or, on a broader scale, in any one industry.
Policies and Restrictions: As a fundamental policy, with respect to 75% of
total assets, the Fund may not buy a security if, as a result, more than 5% of
its total assets would be invested in any one issuer and may not own more than
10% of the outstanding voting securities of a single issuer. As a fundamental
policy, the Fund may not buy a security if, as a result, more than 25% of its
total assets would be invested in any one industry. These limitations do not
apply to U.S. Government Securities.
Borrowing. If the Fund borrows money, its share price may be subject to
greater fluctuation until the borrowing is paid off. The Fund may only borrow
from banks.
If the Fund makes additional investments while borrowings are outstanding, this
may be considered a form of leverage.
Policies and Restrictions: As a fundamental policy, the Fund may borrow only
for emergency or extraordinary purposes, but not in an amount exceeding 33 1/3%
of its total assets.
Lending. Securities loans may be made on a short-term or long-term basis for
the purpose of increasing the Fund's income. This practice could result in a
loss or a delay in recovering the Fund's securities. Loans will be made only
to parties deemed by WRIMCO to be creditworthy.
Policies and Restrictions: As a fundamental policy, securities loans, in the
aggregate, may not exceed 10% of the Fund's total assets.
Other Instruments may include warrants and securities of closed-end investment
companies. As a shareholder in an investment company, the Fund would bear its
pro rata share of that investment company's expenses, which could result in
duplication of certain fees, including management and administrative fees.
Policies and Restrictions: The Fund does not currently intend to purchase
shares of other investment companies that do not redeem their shares if more
than 10% of its total assets would be invested in these shares.
The Fund does not currently intend to purchase warrants if, as a result, more
than 5% of its net assets would be invested in warrants.
<PAGE>
About Your Account
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 may be
tax deductible.
o Individual Retirement Accounts (IRAs) allow anyone of legal age and under 70
1/2/ with earned income to invest up to $2,000 per tax year. The maximum is
$2,250 if the investor's spouse has less than $250 of earned income in the
taxable year.
o Rollover IRAs retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
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, but with fewer administrative
requirements.
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 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 (UGMA, UTMA)
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 without paying
Federal gift tax. 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
account representative for the form.
-------------------------------------------------
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its account
representatives. To open your account you must complete and sign an
application. Your Waddell & Reed account representative can help you with any
questions you might have.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a Class A share (price to buy one Class A share) is the
Fund's Class A net asset value ("NAV") plus the sales charge shown in the table
below.
Sales
Sales Charge
Charge as
as Approx.
PercentPercent
of of
Size of Offering Amount
Purchase Price Invested
-----------------------
Under
$100,000 5.75% 6.10%
$100,000
to less
than
$200,000 4.75 4.99
$200,000
to less
than
$300,000 3.50 3.63
$300,000
to less
than
$500,000 2.50 2.56
$500,000
to less
than
$1,000,0001.50 1.52
$1,000,000
to less
than
$2,000,0001.00 1.01
$2,000,000
and over 0.00 0.00
The Fund's Class A NAV is the value of a single share. The Class A NAV is
computed by adding with respect to that Class the value of the Fund's
investments, cash, and other assets, subtracting its liabilities, and then
dividing the result by the number of Class A shares outstanding.
The securities in the Fund's portfolio that are listed or traded on an exchange
are valued primarily using market quotations or, if market quotations are not
available, at their fair value in a manner determined in good faith by or at
the direction of the Board of Directors. Bonds are generally valued according
to prices quoted by a dealer in bonds that offers a pricing service. Short-
term debt securities are valued at amortized cost, which approximates market
value. Other assets are valued at their fair value by or at the direction of
the Board of Directors.
The Fund is open for business each day the New York Stock Exchange ("NYSE") is
open. The Fund normally calculates the net asset values of its shares as of
the later of the close of business of the NYSE, normally 4 p.m. Eastern time,
or the close of the regular session of any other securities or commodities
exchange on which an option or future held by the Fund is traded.
The Fund may invest in securities listed on foreign exchanges which may trade
on Saturdays or on customary U.S. national business holidays when the NYSE is
closed. Consequently, the NAV of Fund shares may be significantly affected on
days when the Fund does not price its shares and when you have no access to the
Fund.
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
Orders are accepted only at the home office of Waddell & Reed, Inc.
All of your purchases must be made in U.S. dollars.
If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
The Fund does not issue certificates representing shares of the Fund.
When you sign your account application, you will be asked to certify that your
Social Security or taxpayer identification number is correct and whether you
are subject to backup withholding for failing to report income to the IRS.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Lower sales charges are available by combining additional purchases of shares
of a corresponding class of any of the funds in the United Group, to the extent
otherwise permitted, except United Municipal Bond Fund, Inc., United Cash
Management, Inc., United Government Securities Fund, Inc. and United Municipal
High Income Fund, Inc., with the net asset value of Class A shares already held
("rights of accumulation") and by grouping all purchases of Class A shares made
during a thirteen-month period ("Statement of Intention"). Shares of a
corresponding class of another fund purchased through a contractual plan may
not be included unless the plan has been completed. Purchases by certain
related persons may be grouped. Additional information and applicable forms
are available from Waddell & Reed account representatives.
Class A shares may be purchased at net asset value by the Directors and
officers of the Fund, employees of Waddell & Reed, Inc., employees of their
affiliates, account representatives of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each such
Director, officer, employee and account representative. Purchases of Class A
shares in certain retirement plans and certain trusts for these persons may
also be made at net asset value. Purchases of Class A shares in a 401(k) plan
having 100 or more eligible employees and purchases of Class A shares in a 457
plan having 100 or more eligible employees may be made at net asset value.
Shares may also be issued at net asset value in a merger, acquisition or
exchange offer made pursuant to a plan of reorganization to which the Fund is a
party.
Minimum Investments
To Open an Account $500
For certain exchanges $100
For certain retirement accounts and accounts opened with Automatic Investment
Service $50
For certain retirement accounts and accounts opened through payroll deductions
for or by employees of WRIMCO, Waddell & Reed, Inc. and their affiliates $25
To Add to an Account
For certain exchanges $100
For Automatic Investment Service $25
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:
the detachable form that accompanies the confirmation of a prior purchase by
you or your year-to-date statement, or
a letter showing your account number, the account registration, and stating
that you wish to purchase Class A shares of United Asset Strategy Fund, Inc.
Mail to Waddell & Reed, Inc. at the address printed on your confirmation or
year-to-date statement.
Selling Shares
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The redemption price (price to sell one Class A share) is the Fund's Class A
NAV.
To sell shares, your request must be made in writing.
Complete an Account Service Request form, available from your Waddell & Reed
account representative, or write a letter of instruction with:
the name on the account registration,
the Fund's name,
the Fund account number,
the dollar amount or number of shares to be redeemed, and
any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed account representative,
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.
Special Requirements for Selling Shares
Account Type Special Requirements
Individual or The written instructions must
Joint Tenant be signed by all persons
required to sign for
transactions, exactly as their
names appear on the account.
Sole The written instructions must
Proprietorship be signed by the individual
owner of the business.
UGMA, UTMA The custodian must sign the
written instructions
indicating capacity as
custodian.
Retirement The written instructions must
Account 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 At least one person authorized
Organization by corporate resolution to act
on the account must sign the
written instructions.
Conservator, The written instructions must
Guardian or be signed by the person
Other Fiduciary properly authorized by court
order to act in the particular
fiduciary capacity.
When you place an order to sell shares, your shares will be sold at the next
NAV calculated after receipt of a written request for redemption in good order
by Waddell & Reed, Inc. at its home office. Note the following:
If more than one person owns the shares, each owner must sign the written
request.
If you recently purchased the shares by check, the Fund may delay payment of
redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance,
satisfactory to the Fund, that the check has cleared and been honored. If
no such assurance is given, payment of the redemption proceeds on these
shares will be delayed until the earlier of 10 days or the date the Fund is
able to verify that your purchase check has cleared and been honored.
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.
Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
The Fund reserves the right to require a signature guarantee on certain
redemption requests. This requirement is designed to protect you and Waddell &
Reed from fraud. The Fund may require a signature guarantee in certain
situations such as:
the request for redemption is made by a corporation, partnership or
fiduciary;
the request for redemption is made by someone other than the owner of
record; or
the check is being made payable to someone other than the owner of record.
The Fund will accept a signature guarantee from a national bank, a federally
chartered savings and loan or a member firm of a national stock exchange or
other eligible guarantor in accordance with procedures of the Fund's transfer
agent. A notary public cannot provide a signature guarantee.
The Fund reserves the right to redeem at NAV all shares of the Fund owned or
held by you having an aggregate NAV of less than $500. The Fund 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 to $500.
You may reinvest without charge all or part of the amount you redeemed by
sending to the Fund the amount you want to reinvest. The reinvested amounts
must be received by the Fund within thirty days after the date of your
redemption. You may do this only once as to Class A shares of the Fund.
Under the terms of the 401(k) prototype plan which Waddell & Reed, Inc. has
available, the plan may have the right to make a loan to a plan participant by
redeeming Fund shares held by the plan. Principal and interest payments on the
loan made in accordance with the terms of the plan may be reinvested by the
plan, without payment of a sales charge, in shares of a corresponding class of
any of the funds in the United Group in which the plan may invest.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your account.
Personal Service
Your local Waddell & Reed account representative is available to provide
personal service. Additionally, the Waddell & Reed Customer Services staff is
available to respond promptly to your inquiries and requests.
Reports
Statements and reports sent to you include the following:
confirmation statements (after every purchase, exchange, transfer or
redemption)
year-to-date statements (quarterly)
annual and semiannual reports (every six months)
To reduce expenses, only one copy of annual and semiannual reports will be
mailed to your household, even if you have more than one account with the Fund.
Call 913-236-2000 if you need copies of annual or semiannual reports or
historical account information.
Exchanges
You may sell your Class A shares and buy corresponding shares of other funds in
the United Group. You may exchange only into funds that are legally registered
for sale in your state of residence. Note that exchanges out of the Fund may
have tax consequences for you. Before exchanging into a fund, read its
prospectus.
Subject to certain conditions, exchanges of corresponding shares of certain
other funds in the United Group and automatic monthly exchanges of
corresponding shares of United Cash Management, Inc. may be made into the Fund.
The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
Automatic Transactions
Flexible Withdrawal Service lets you set up 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 account representative for
more information.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Fund account
Minimum Frequency
$25 Monthly
Funds Plus Service To move money from United Cash Management, Inc. to the Fund
whether in the same or a different account
Minimum Frequency
$100 Monthly
Dividends, Distributions and Taxes
Distributions
The Fund distributes substantially all of its net income and capital gains to
shareholders each year. Ordinarily, dividends are distributed from the Fund's
net investment income, which includes accrued interest, earned discount,
dividends and other income earned on portfolio assets less expenses, quarterly
in March, June, September and December. Net capital gains (and any net
realized gains from foreign currency transactions) ordinarily are distributed
in December. The Fund may make additional distributions if necessary to avoid
Federal income or excise taxes on its undistributed income and capital gains.
Distribution Options. When you open an account, specify on your application
how you want to receive your distributions. The Fund offers three options:
1. Share Payment Option. Your dividend and capital gains distributions will
be automatically paid in additional Class A shares of the Fund. If you do not
indicate a choice on your application, you will be assigned this option.
2. Income-Earned Option. Your capital gains distributions will be
automatically paid in Class A shares, but you will be sent a check for each
dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital gains
distributions.
For retirement accounts, all distributions are automatically paid in Class A
shares.
Taxes
The Fund intends to qualify for treatment as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code") so that itwill
be relieved of Federal income tax on that part of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gains and net gains from certain foreign currency transactions) and net
capital gains (the excess of net long-term capital gain over net short-term
capital loss) that are distributed to its shareholders.
There are tax requirements that all funds must follow in order to avoid Federal
taxation. In its effort to adhere to these requirements, the Fund may have to
limit its investment activity in some types of instruments.
As with any investment, you should consider how your investment in the Fund
will be taxed. If your account is not a tax-deferred retirement account, you
should be aware of the following tax implications:
Taxes on distributions. Dividends from the Fund's investment company taxable
income are taxable to you as ordinary income whether received in cash or paid
in additional Fund shares. Distributions of the Fund's realized net capital
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or reinvested in additional Fund shares and regardless
of the length of time you have owned your shares. The Fund notifies you after
each calendar year-end as to the amounts of dividends and distributions paid
(or deemed paid) to you for that year.
A portion of the dividends paid by the Fund, whether received in cash or 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 alternative minimum
tax.
Withholding. The Fund is required to withhold 31% of all dividends,
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate from dividends and
distributions also is required for such shareholders who otherwise are 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 your adjusted basis for the redeemed shares (which normally includes
any sales charge paid). An exchange of Fund shares for shares of any other
fund in the United Group generally will have similar tax consequences.
However, special rules apply when you dispose of Fund shares through a
redemption or exchange within ninety days after your purchase thereof and
subsequently reacquire Fund shares or acquire shares of another fund in the
United Group without paying a sales charge due to the thirty-day reinvestment
privilege or exchange privilege. See "About Your Account." In these cases,
any gain on the disposition of the Fund shares would be increased, or loss
decreased, by the amount of the sales charge you paid when those shares were
acquired, and that amount will increase the adjusted basis of the shares
subsequently acquired. In addition, if you purchase Class A shares of the Fund
within thirty days before or after redeeming other Class A shares of the Fund
at a loss, part or all of that loss will not be deductible and will increase
the basis of the newly purchased shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders. 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>
About the Management and Expenses of the Fund
United Asset Strategy Fund, Inc. is a mutual fund: an investment that pools
shareholders' money and invests it toward a specified goal. In technical
terms, the Fund is an open-end diversified management investment company
organized as a corporation under Maryland law on August 25, 1994.
The Fund is governed by a Board of Directors, which has overall responsibility
for the management of the Fund's affairs. The majority of directors are not
affiliated with Waddell & Reed, Inc.
The Fund has two classes of shares. Prior to September 12, 1995, the Fund
offered only one class of shares to the public. Shares outstanding on that
date were designated as Class A shares, which are offered by this Prospectus.
In addition, the Fund offers Class Y shares through a separate Prospectus.
Class Y shares are designed for institutional investors. Class Y shares are
not subject to a sales charge on purchases and are not subject to redemption
fees. Class Y shares are not subject to a Rule 12b-1 fee. Additional
information about Class Y shares may be obtained by calling 913-236-2000 or by
writing to Waddell & Reed, Inc. at the address on the inside back cover of the
Prospectus.
The Fund does not hold annual meetings of shareholders; however, certain
significant corporate matters, such as the approval of a new investment
advisory agreement or a change in a fundamental investment policy, which
require shareholder approval will be presented to shareholders at a meeting
called by the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon receipt by
the Fund of a request in writing signed by shareholders holding not less than
25% of all shares entitled to vote at such meeting, provided certain conditions
stated in the Bylaws of the Fund 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 which time the directors then in office will call a shareholders' meeting
for the election of directors. To the extent that Section 16(c) of the
Investment Company Act of 1940, as amended, (the "1940 Act") applies to the
Fund, the directors are required to call a meeting of shareholders for the
purpose of voting upon the question of removal of any director when requested
in writing to do so by the shareholders of record of not less than 10% of the
Fund's outstanding shares.
Each share (regardless of Class) has one vote. All shares of the Fund vote
together as a single Class, except as to any matter for which a separate vote
of any Class is required by the 1940 Act, and except as to any matter which
affects the interests of one or more particular Classes, in which case only the
shareholders of the affected Classes are entitled to vote, each as a separate
Class. Shares are fully paid and nonassessable when purchased.
WRIMCO and Its Affiliates
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. Waddell & Reed, Inc. and its predecessors served as
investment manager to each of the registered investment companies in the United
Group of Mutual Funds since 1940 or the inception of the company, whichever was
later, and to TMK/United Funds, Inc. since that Fund's inception, until January
8, 1992, when it assigned its duties as investment manager and assigned its
professional staff for investment management services to WRIMCO. WRIMCO has
also served as investment manager for Waddell & Reed Funds, Inc. since its
inception in September 1992 and Torchmark Government Securities Fund, Inc. and
Torchmark Insured Tax-Free Fund, Inc. since each commenced operations in
February 1993.
James D. Wineland is primarily responsible for the day-to-day management of the
Fund. Mr. Wineland has held his Fund responsibilities since March 1995. He is
Vice President of WRIMCO, Vice President of the Fund and Vice President of
other investment companies for which WRIMCO serves as investment manager. Mr.
Wineland has served as the portfolio manager of investment companies managed by
Waddell & Reed, Inc. and its successor, WRIMCO, since January 1988 and has been
an employee of Waddell & Reed, Inc. and its successor, WRIMCO, since November
1984. Other members of WRIMCO's investment management department provide input
on market outlook, economic conditions, investment research and other
considerations relating to the Fund's investments.
Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter for
each of the other funds in the United Group of Mutual Funds and Waddell & Reed
Funds, Inc., and serves as the distributor for TMK/United Funds, Inc.
Waddell & Reed Services Company acts as transfer agent ("Shareholder Servicing
Agent") for the Fund and processes the payments of dividends. Waddell & Reed
Services Company also acts as agent ("Accounting Services Agent") in providing
bookkeeping and accounting services and assistance to the Fund and pricing
daily the value of shares of the Fund.
WRIMCO and Waddell & Reed Services Company are subsidiaries of Waddell & Reed,
Inc. Waddell & Reed, Inc. is a direct subsidiary of Waddell & Reed Financial
Services, Inc., a holding company, and an indirect subsidiary of United
Investors Management Company, a holding company, and Torchmark Corporation, a
holding company.
WRIMCO places transactions for the portfolio of the Fund and in doing so may
consider sales of shares of the Fund and other funds it manages as a factor in
the selection of brokers to execute portfolio transactions.
Breakdown of Expenses
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained below.
Management Fee
The management fee of the Fund is calculated by adding a group fee to a
specific fee. It is accrued and paid to WRIMCO daily.
The specific fee is computed on the Fund's net asset value as of the close of
business each day at the annual rate of .30 of 1% of net assets. The group fee
is a pro rata participation based on the relative net asset size of the Fund in
the group fee computed each day on the combined net asset values of all the
funds in the United Group at the annual rates shown in the following table:
Group Fee Rate
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
------------ --------
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Growth in assets of the United Group assures a lower group fee rate. When the
group net asset level is less than $750,000,000, the management fee for the
Fund is higher than that of most funds. For example, when the group net asset
level is less than $750,000,000, the Fund will pay a total management fee of
.81 of 1% of net assets (a specific fee of .30 of 1% of net assets plus a group
fee of .51 of 1% of net assets).
Other Expenses
While the management fee is a significant component of the Fund's annual
operating costs, the Fund has other expenses as well.
The Fund pays the Accounting Services Agent a monthly fee based on the average
net assets of the Fund for accounting services. With respect to its Class A
shares, the Fund pays the Shareholder Servicing Agent a monthly fee for each
Class A shareholder account that was in existence at any time during the month,
and a fee for each account on which a dividend or distribution had a record
date during the month.
The Fund also pays other expenses, such as fees and expenses of certain
directors, audit and outside legal fees, costs of materials sent to
shareholders, taxes, brokerage commissions, interest, insurance premiums,
custodian fees, fees payable by the Fund under Federal or other securities laws
and to the Investment Company Institute, and extraordinary expenses including
litigation and indemnification relative to litigation.
The Fund has adopted a Service Plan pursuant to Rule 12b-1 of the 1940 Act with
respect to its Class A shares. Under the Plan, the Fund may pay monthly a fee
to Waddell & Reed, Inc. in an amount not to exceed .25% of the Fund's average
annual net assets of its Class A shares. The fee is to be paid to reimburse
Waddell & Reed, Inc. for amounts it expends in connection with the provision of
personal services to Class A shareholders and/or maintenance of Class A
shareholder accounts. In particular, the Service Plan and a related Service
Agreement between the Fund and Waddell & Reed, Inc. contemplate that these
expenditures may include costs and expenses incurred by Waddell & Reed, Inc.
and its affiliates in compensating, training and supporting registered account
representatives, sales managers and/or other appropriate personnel in providing
personal services to Class A shareholders and/or maintaining Class A
shareholder accounts; increasing services provided to Class A shareholders by
office personnel located at field sales offices; engaging in other activities
useful in providing personal services to Class A shareholders and/or the
maintenance of shareholder accounts; and in compensating broker-dealers who may
regularly sell Class A shares, and other third parties, for providing Class A
shareholder services and/or maintaining Class A shareholder accounts.
The Fund cannot precisely predict what its portfolio turnover rate will be, but
it is anticipated that the annual turnover rate for the common stock portion of
its portfolio will not exceed 200% and that the annual turnover rate for the
other portion of its portfolio will not exceed 200%. A turnover rate in excess
of 100% could be considered high. A higher turnover will increase transaction
and commission costs and could generate taxable income or loss.
<PAGE>
United Asset Strategy Fund, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 M Street, N. W. (913) 236-2000
Washington, D. C. 20036
Shareholder Servicing Agent
Independent Accountants Waddell & Reed
Price Waterhouse LLP Services Company
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Investment Manager Shawnee Mission, Kansas
Waddell & Reed Investment 66201-9217
Management Company (913) 236-2000
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
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
<PAGE>
United Asset Strategy Fund, Inc.
Class A Shares
PROSPECTUS
September 12, 1995
The United Group of Mutual Funds
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
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.
NUP2017(9-95)
printed on recycled paper
<PAGE>
Please read this Prospectus before investing, and keep it on file for future
reference. It sets forth concisely the information about the Fund that you
ought to know before investing.
Additional information has been filed with the Securities and Exchange
Commission and is contained in a Statement of Additional Information ("SAI")
dated September 12, 1995. The SAI is available free upon request to the Fund
or Waddell & Reed, Inc., the Fund's underwriter, at the address or telephone
number below. The SAI is incorporated by reference into this Prospectus and
you will not be aware of all facts unless you read both this Prospectus and the
SAI.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
United Asset Strategy Fund, Inc.
Class Y Shares
This Fund seeks high total return with reduced risk over the long-term through
investments in stocks, bonds, and short-term instruments.
This Prospectus describes one class of shares of the Fund -- Class Y Shares.
Prospectus
September 12, 1995
UNITED ASSET STRATEGY FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
<PAGE>
Table of Contents
An Overview of the Fund..................................3
Expenses.................................................38
Performance.........................................39
Explanation of Terms................................41
About Waddell & Reed.....................................42
About the Investment Principles of the Fund..............43
Investment Goal and Principles .....................43
Securities and Investment Practices.................46
About Your Account.......................................13
Buying Shares.......................................13
Minimum Investments.................................16
Adding to Your Account..............................16
Selling Shares......................................16
Telephone Transactions..............................20
Shareholder Services................................20
Personal Service...............................21
Reports........................................21
Exchanges......................................21
Dividends, Distributions, and Taxes.................21
Distributions..................................21
Taxes..........................................22
About the Management and Expenses of the Fund............25
WRIMCO and Its Affiliates...........................26
Breakdown of Expenses...............................28
Management Fee.................................28
Other Expenses.................................29
<PAGE>
An Overview of the Fund
The Fund: This Prospectus describes the Class Y shares of United Asset
Strategy Fund, Inc., an open-end, diversified management investment company.
Goal: United Asset Strategy Fund, Inc. (the "Fund") seeks high total return
with reduced risk over the long term. The Fund seeks to reduce risk over the
long term by spreading its assets among stocks, bonds and short-term
instruments, attempting to moderate the risk potential of investing solely in
one class of instruments. As with any mutual fund, there is no assurance that
the Fund will achieve its goal. See "About the Investment Principles of the
Fund" for further information.
Strategy: The Fund diversifies among stocks, bonds, and short-term
instruments, both in the United States and abroad, to pursue its specific goal.
The Fund designates a mix which represents the way the Fund's investments will
generally be allocated over the long term. This mix will vary over short-term
periods as Fund management adjusts the Fund's holdings - within defined ranges
- based on the current outlook for the different markets. See "About the
Investment Principles of the Fund" for further information.
Mix
_ Stocks 40% _ Bonds 40%
(can range (can range
from from
10-60%) 20-60%)
_ Short-term 20%
(can range from
0-70%)
Management: Waddell & Reed Investment Management Company ("WRIMCO") provides
investment advice to the Fund and manages the Fund's investments. WRIMCO is a
wholly-owned subsidiary of Waddell & Reed, Inc. WRIMCO, Waddell & Reed, Inc.
and its predecessors have provided investment management services to registered
investment companies since 1940. See "About the Management and Expenses of the
Fund" for further information about management fees.
Distributor: Waddell & Reed, Inc. acts as principal underwriter and
distributor of the shares of the Fund.
Purchases: You may buy Class Y shares of the Fund through Waddell & Reed, Inc.
and its account representatives. The price to buy a Class Y share of the Fund
is the net asset value of a Class Y share. There is no sales charge incurred
upon purchase of Class Y shares of the Fund. See "About Your Account" for
information on how to purchase Class Y shares.
Redemptions: You may redeem your shares at net asset value. When you sell
your shares, they may be worth more or less than what you paid for them. See
"About Your Account" for a description of redemption procedures.
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 with reduced risk, this Fund may be appropriate for you.
Risk Considerations: Because the Fund owns different types of investments, its
performance will be affected by a variety of factors. The value of the Fund's
investments and the income generated will vary from day to day, generally
reflecting changes in interest rates, market conditions, and other company and
economic news. Performance will also depend on WRIMCO's skill in selecting
investments. See "About the Investment Principles of the Fund" for information
about the risks associated with the Fund's investments.
<PAGE>
Expenses
Shareholder transaction expenses are charges you pay when you buy or sell
shares of a fund.
Maximum sales load
on purchases None
Maximum sales load
on reinvested
dividends None
Deferred
sales load None
Redemption fees None
Exchange fee None
Annual Fund operating expenses (as a percentage of average net assets). 6
Management fees7 0.81%
12b-1 fees None
Other expenses 0.28%
Total Fund
operating expenses 1.09%
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return8 and (2) redemption at the end of each time period:
1 year $11
3 years $35
The purpose of this table is to assist you in understanding the various costs
and expenses that a shareholder of the Class Y shares of the Fund will bear
directly or indirectly. The example should not be considered a representation
of past or future expenses; actual expenses may be greater or lesser than those
shown. For a more complete discussion of certain expenses and fees, see
"Breakdown of Expenses."
6Estimated expenses for the first year of operation. Actual expenses may be
greater or lesser than those shown.
7The management fee for the Fund is higher than that of most funds.
8Use of an assumed annual return of 5% is for illustration purposes only and is
not a representation of the Fund's future performance, which may be greater or
lesser.
<PAGE>
Financial Highlights
Financial Highlights for Class Y shares are not included because the fund did
not offer class Y shares during the fiscal period ended July 31, 1995.
<PAGE>
Performance
Mutual fund performance is commonly measured as total return. The Fund may
also advertise its performance by showing performance rankings. Performance
information is calculated and presented separately for each class of Fund
shares.
Explanation of Terms
Total Return is the overall change in value of an investment in the Fund over a
given period, assuming reinvestment of any dividends and distributions. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period. Average annual total
returns smooth out variations in performance; they are not the same as actual
year-by-year results. Non-standardized total return may be for periods other
than those required to be presented or may otherwise differ from standardized
total return.
Performance Rankings are comparisons of the Fund's performance to the
performance of other selected mutual funds, selected recognized market
indicators such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average, or non-market indices or averages of mutual fund industry
groups. The Fund may quote its performance rankings and/or other information
as published by recognized independent mutual fund statistical services or by
publications of general interest. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
relates, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of sales charges, fee waivers and/or expense
reimbursements.
All performance information that the Fund advertises or includes in information
provided to present or prospective shareholders is historical in nature and is
not intended to represent or guarantee future results. The value of the Fund's
shares when redeemed may be more or less than their original cost.
The Fund's recent performance and holdings will be detailed twice a year in the
Fund's annual and semiannual reports, which are sent to all Fund shareholders.
<PAGE>
About Waddell & Reed
Since 1937, Waddell & Reed has been helping people make the most of their
financial future by helping them take advantage of various financial services.
Today, Waddell & Reed has over 2500 account representatives located throughout
the United States. Your primary contact in your dealings with Waddell & Reed
will be your local account representative. However, the Waddell & Reed
shareholder services department, which is part of the Waddell & Reed
headquarters operations in Overland Park, Kansas, is available to assist you
and your Waddell & Reed account representative. You may speak with a customer
service representative by calling 913-236-2000.
<PAGE>
About the Investment Principles of the Fund
Investment Goal and Principles
The Fund seeks high total return with reduced risk over the long term by
allocating its assets among stocks, bonds, and short-term instruments. There
is no assurance 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 value of bonds and short-term instruments generally
fluctuates 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 most favorable outlook for
achieving 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 advantageous to the Fund. When you sell your shares, they may be
worth more or less than what you paid for them.
The Fund allocates its assets among the following classes, or types, of
investments. The stock class includes equity securities of all types. The
bond class includes all varieties of fixed-income instruments with maturities
of more than three years (including adjustable rate preferred stocks). The
short-term class includes all types of short-term instruments with remaining
maturities of three years or less. Within each of these classes, the Fund may
invest in both domestic and foreign securities.
WRIMCO has the ability to allocate the Fund's assets within specified ranges.
The Fund's mix indicates 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. The range and approximate percentage of the mix for each
asset class are shown below. Some types of investments, such as indexed
securities, can fall into more than one asset class.
Mix Range
--------- ------
Stock
class 10-60%
40%
Bond
class 20-60%
40%
Short-term
class 0-70%
20%
In pursuit of the Fund's goal, WRIMCO will not try to pinpoint the precise
moment when a major reallocation should be made. Asset shifts among classes
may be made gradually over time. Under normal circumstances, a single
reallocation will not involve more than 10% of the Fund's total assets.
Within each class, WRIMCO seeks to maximize total return. WRIMCO seeks to
maximize total return within the stock 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. WRIMCO seeks to
maximize total return within the bond class by adjusting the 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. WRIMCO seeks to maximize total return within the short-term asset
class by taking advantage of yield differentials between different instruments,
issuers, and currencies. WRIMCO intends 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.
WRIMCO normally invests the Fund's assets according to its investment strategy;
however, as a temporary defensive measure at times when WRIMCO believes that a
mix of stocks, bonds and certain short-term instruments does not offer a good
investment opportunity, it may temporarily invest up to all of the Fund's
assets in money market instruments rated A-1 by Standard & Poor's Ratings
Services ("S&P") or Prime 1 by Moody's Investors Service, Inc. ("MIS"), or
unrated securities judged by WRIMCO to be of equivalent quality.
Risk Considerations
There are risks inherent in any investment. The Fund is subject to varying
degrees of market risk, financial risk and, in some cases, prepayment risk.
Market risk is the potential for fluctuations in the price of the security
because of market factors. Because of market risk, you should anticipate that
the share price of the Fund will fluctuate. Financial risk is based on the
financial situation of the issuer. The financial risk of the Fund depends on
the credit quality of the underlying securities. Prepayment risk is the
possibility that, during periods of falling interest rates, a debt security
with a high stated interest rate will be prepaid prior to its expected maturity
date.
Because the Fund owns different types of investments, its performance will be
affected by a variety of factors. The value of the Fund's investments and the
income it generates will vary from day to day, generally reflecting changes in
interest rates, market conditions, and other company and economic news.
Performance will also depend on WRIMCO's skill in allocating assets. The Fund
diversifies across investment types more than most mutual funds. No one mutual
fund, however, can provide an appropriate balanced investment plan for all
investors.
As more fully discussed under "Securities and Investment Practices," certain
types of instruments in which the Fund may invest, and certain strategies
WRIMCO may employ in pursuit of the Fund's investment goal, involve special
risks. 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 higher-quality securities and may
decline significantly in periods of general economic difficulty. Foreign
securities and foreign currencies may involve risks relating to currency
fluctuations, political or economic conditions in the foreign country, and the
potentially less stringent investor protection and disclosure standards of
foreign markets. These factors could make foreign investments, especially
those in developing countries, more volatile.
The Fund can use various techniques to increase or decrease its exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices, or other factors that affect security values. These techniques may
involve derivative transactions. If WRIMCO judges market conditions
incorrectly or employs a strategy that does not correlate well with the Fund's
investments, these techniques could result in a loss, regardless of whether the
intent was to reduce risk or increase return. These techniques may increase
the volatility of the Fund and may involve a small investment of cash relative
to the magnitude of the risk assumed. In addition, these techniques could
result in a loss if the counterparty to the transaction does not perform as
promised or if there is not a liquid secondary market to close out a position
that the Fund has entered into.
The value of mortgage-backed securities may be significantly affected by
changes in interest rates, the market's perception of the issuers, and the
creditworthiness of the parties involved. These securities may also be subject
to prepayment risk. Stripped securities involve risks that are similar to
those of other debt securities, although stripped securities may be more
volatile.
See "Securities and Investment Practices" for a more detailed discussion
concerning the instruments in which the Fund may invest, and the strategies
WRIMCO may employ in pursuit of the Fund's investment goal.
Securities and Investment Practices
The following pages contain more detailed information about types of
instruments in which the Fund may invest, and strategies WRIMCO may employ in
pursuit of the Fund's investment goal. Certain types of instruments and
investment practices could entail significant risks and WRIMCO will invest in
these instruments and engage in these practices only to the extent that they
are consistent with the Fund's goal of high total return with reduced risk over
the long term. A summary of risks and restrictions 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 to
the full extent permitted unless it believes that doing so will help the Fund
achieve its goal. As a shareholder, you will receive annual and semiannual
reports detailing the Fund's holdings.
Certain of the investment policies and restrictions of the Fund are also stated
below. A fundamental policy of the Fund may not be changed without the
approval of the shareholders of the Fund. Operating policies may be changed by
the Board of Directors without the approval of the affected shareholders. The
goal of the Fund is a fundamental policy. Unless otherwise indicated, the
types of securities and other assets in which the Fund may invest and other
policies are operating policies.
Policies and limitations are typically considered at the time of purchase; the
sale of instruments is usually not required in the event of a subsequent change
in circumstances.
Please see the SAI for further information concerning the following instruments
and associated risks and the Fund's investment policies and restrictions.
Equity Securities. Equity securities represent an ownership interest in an
issuer. This ownership interest often gives the Fund the right to vote on
measures affecting the issuer's organization and operations. The Fund may
invest in domestic and foreign equity securities. Equity securities 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. Although common stocks and other
equity securities have a history of long-term growth in value, their prices
tend to fluctuate in the short term, particularly those of smaller companies.
The equity securities in which the Fund invests may include preferred stock
that converts to common stock either automatically or after a specified period
of time or at the option of the issuer.
Debt Securities. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest, and must repay the amount borrowed at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values. The debt securities in which
the Fund invests may include debt securities whose performance is linked to a
specified equity security or securities index.
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 debt securities fall and, conversely, when
interest rates fall, the values of fixed-rate debt securities rise. The values
of floating and adjustable-rate debt securities are not as sensitive to changes
in interest rates as the values of fixed-rate debt securities. Longer-term
bonds are generally more sensitive to interest rate changes than shorter-term
bonds.
U.S. Government Securities are high-quality instruments issued or guaranteed as
to principal or interest by the U.S. Treasury or by an agency or
instrumentality of the U.S. Government. Not all U.S. Government Securities are
backed by the full faith and credit of the United States. Some are backed by
the right of the issuer to borrow from the U.S. Treasury; others are backed by
discretionary authority of the U.S. Government to purchase the agencies'
obligations; while others are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment.
Subject to its investment restrictions, the Fund may invest in debt securities
rated in any rating category of the established rating services, including
securities rated in the lowest category (such as those rated D by S&P and C by
MIS). In addition, the Fund will treat unrated securities judged by WRIMCO to
be of equivalent quality to a rated security to be equivalent to securities
having that rating. 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. 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. S&P and MIS ratings
are described in Appendix A to the SAI. While credit ratings are only one
factor WRIMCO relies on in evaluating high-yield debt securities, certain risks
are associated with credit ratings. Credit ratings evaluate the safety of
principal and interest payments, not market value risk. Credit ratings for
individual securities may change from time to time, and the Fund may retain a
portfolio security whose rating has been changed.
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. While the market for
high-yield, high-risk corporate debt securities has been in existence for many
years and has weathered previous economic downturns, the 1980s brought a
dramatic increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructurings. Past experience may not provide an
accurate indication of the future performance of the high-yield, high-risk bond
market, especially during periods of economic recession. The market for lower-
rated debt securities may be thinner and less active than that for higher-rated
debt securities, which can adversely affect the prices at which the former are
sold. Adverse publicity and changing investor perceptions may decrease the
values and liquidity of lower-rated debt securities, especially in a thinly-
traded market. Valuation becomes more difficult and judgment plays a greater
role in valuing lower-rated debt securities than with respect to securities for
which more external sources of quotations and last sale information are
available. Since the risk of default is higher for lower-rated debt
securities, WRIMCO's research and credit analysis are an especially important
part of managing securities of this type held by the Fund. WRIMCO continuously
monitors the issuers of lower-rated debt securities in the Fund's portfolio in
an attempt to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments. The Fund may choose,
at its expense or in conjunction with others, to pursue litigation or otherwise
to 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.
Zero coupon bonds do not make interest payments; instead, they are sold at a
deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can
be very volatile when interest rates change. In calculating its dividends, the
Fund takes into account as income a portion of the difference between a zero
coupon bond's purchase price and its face value.
Preferred Stock is also rated by S&P and MIS, as described in Appendix A to the
SAI. Preferred stock rated AAA, AA, A or BBB by S&P or aaa, aa, a or baa by
MIS is considered to be of investment grade. Preferred stock rated BB or lower
by S&P or ba or lower by MIS is considered to have speculative characteristics.
The Fund may invest in preferred stock rated in any rating category by an
established rating service and unrated preferred stock judged by WRIMCO to be
of equivalent quality.
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 a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities have unique
investment characteristics in that they generally have higher yields than those
of common stocks of the same or similar issuers, but lower yields than
comparable nonconvertible securities, are less subject to fluctuation in value
than 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.
Convertible securities are typically issued by smaller capitalized companies
whose stock prices may be volatile. A convertible security may be subject to
redemption at the option of the issuer at a price established in the security's
governing instrument. If a convertible security held by the Fund is called for
redemption, the Fund will be required to convert it into the underlying common
stock, sell it to a third party or permit the issuer to redeem the security.
Any of these actions could have an adverse effect on the Fund's ability to
achieve its investment objective.
Policies and Restrictions: The Fund may not invest more than 35% of its assets
in lower-quality debt securities (those rated below BBB by S&P or Baa by MIS
and unrated securities judged by WRIMCO to be of equivalent quality). However,
the Fund does not currently intend to invest more than 20% of its total assets
in securities rated below investment-grade or judged by WRIMCO to be of
equivalent quality.
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, bankers' acceptances, bank deposits, and other financial
institution obligations. These instruments may carry fixed or variable
interest rates.
Policies and Restrictions: The Fund does not currently intend to invest in
money-market instruments rated below A-1 by S&P or Prime 1 by MIS, or judged by
WRIMCO to be of equivalent quality.
Foreign Securities and foreign currencies can involve significant risks in
addition to the risks inherent in U.S. investments. 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. 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 condition 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 a greater possibility
of default by foreign governments or foreign 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. There is no assurance that WRIMCO will be able to
anticipate or counter these potential events or counter their effects.
The considerations noted above generally are intensified for investments 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 U.S. 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.
Policies and Restrictions: Under normal conditions, the Fund intends to limit
its investments in foreign securities to no more than 50% of total assets. The
Fund currently intends to limit its investments in obligations of any single
foreign government to less than 25% of its total assets.
Derivative Transactions. The Fund can use various techniques to increase or
decrease its exposure to changing security prices, interest rates, currency
exchange rates, commodity prices, or other factors that affect security values.
These techniques may involve derivative transactions such as buying and selling
options and futures contracts, entering into currency exchange contracts or
swap agreements, and purchasing indexed securities. The strategies described
below may be used in an attempt to manage certain risks of the Fund's
investments that can affect fluctuation in its net asset value.
Options offer large amounts of leverage, which will result in the Fund's net
asset value being more sensitive to changes in the value of the related
investment. There is no assurance that a liquid secondary market will exist
for exchange-listed options. The market for options that are not listed on an
exchange may be less active than the market for exchange-listed options. The
Fund will be able to close a position in an option it has written only if there
is a market for the put or call. If the Fund is not able to enter into a
closing transaction on an option it has written, it will be required to
maintain the securities, or cash in the case of an option on an index, subject
to the call or the collateral underlying the put until a closing purchase
transaction can be entered into or the option expires. Because index options
are settled in cash, the Fund cannot provide in advance for its potential
settlement obligations on a call it has written on an index by holding the
underlying securities. The Fund bears the risk that the value of the
securities it holds will vary from the value of the index. Option transactions
may increase the Fund's portfolio turnover rate creating greater commission
expenses, transaction costs and tax consequences.
Futures Contracts and Options on Futures Contracts. Since futures contracts
and options thereon can replicate movements in the cash markets for the
securities in which the Fund invests without the large cash investments
required for dealing in such markets, they may subject the Fund to greater and
more volatile risks than might otherwise be the case. The principal risks
related to the use of such instruments are: imperfect correlation between
movements in the market price of the portfolio investments (held or intended)
and in the price of the futures contract or option; possible lack of a liquid
secondary market for closing out futures or options positions; the need for
additional portfolio management skills and techniques; and losses due to
unanticipated market price movements. The ordinary spreads between prices in
the cash and futures markets, due to the differences in the natures of those
markets, are subject to distortion. Due to the possibility of distortion, a
correct forecast of general interest 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 movements or stock
market movements or the time span within which the movements take place.
Gains and losses on investments in options and futures contracts depends on
WRIMCO's ability to predict correctly the direction of stock prices, interest
rates and other economic factors. See the SAI for further information about
these instruments and their risks.
Forward Currency Contracts. Currencies may be exchanged on a spot (i.e., cash)
basis, or by entering into forward currency contracts to purchase or sell
foreign currencies at a future date, at a price set when the contract is
entered into. Currency conversion involves dealer spreads and other costs,
although commissions usually are not charged. Successful use of forward
currency contracts will depend on WRIMCO's skill in analyzing and predicting
currency values. Forward currency contracts may substantially change the
Fund's investment exposure to changes in currency exchange rates, and could
result in losses to the Fund if currencies do not perform as WRIMCO
anticipates. There is no assurance that WRIMCO's use of forward currency
contracts will be advantageous to the Fund or that it will hedge at an
appropriate time.
With respect to the Fund's options, futures and forward currency contract
positions, the Fund will segregate assets as described in the SAI.
Policies and Restrictions: The Fund does not currently intend to invest more
than 5% of its total assets in forward currency contracts
Swaps, Caps and Floors. The Fund is not limited in the type of swap, cap,
collar or floor it may enter into as long as WRIMCO determines it is consistent
with the Fund's investment goal and policies.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. The purchaser of an interest rate cap obtains the right to receive
payments to the extent that a specified interest rate exceeds a predetermined
value, while the seller of an interest rate floor is obligated to make payments
to the extent that a specified interest rate falls below a predetermined value.
The purchase of a floor entitles the purchaser, to the extent that a specified
index falls below a predetermined value, to receive payments from the party
selling the floor. An interest rate collar combines elements of buying a cap
and selling a floor. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of the Fund's investments and its
share price and yield. The most significant factor in the performance of swap
agreements is the change in the specific interest rate, currency, or other
factors that determine the amounts of payments due to and from the Fund.
The Fund usually will enter into swaps on a net basis, i.e., the two payment
streams are netted out, with the Fund paying or receiving, as the case may be,
only the net amount of the two payments. If, however, an agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when due.
The creditworthiness of firms with which the Fund enters into swaps, caps,
collars or floors will be monitored by WRIMCO in accordance with procedures
adopted by the Board of Directors. If the counterparty's creditworthiness
declined, the value of a swap agreement would be likely to decline, potentially
resulting in losses.
Indexed Securities. The Fund may purchase and sell indexed securities, which
are securities whose prices are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, or other
financial indicators. 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 U.S. 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 instruments.
The Fund may invest in derivative mortgage-backed securities. These securities
are subject to significant market risks. See "Mortgage-Backed Securities".
WRIMCO can use each of the practices described above for hedging purposes and
for speculative purposes. The use of derivative techniques for speculative
purposes can increase investment risk. See the SAI for further information
regarding the risks associated with these techniques.
Mortgage-Backed Securities may include pools of mortgages, such as
collateralized mortgage obligations and stripped mortgage-backed securities.
The value of these securities may be significantly affected by changes in
interest rates, the market's perception of the issuers, and the
creditworthiness of the parties involved. The effective maturities of these
securities are estimated based upon expected prepayments. Rates of prepayment
that exceed or do not meet those anticipated may affect total return and
increase risk.
Policies and Restrictions: The Fund does not currently intend to invest more
than 40% of its total assets in mortgage-backed securities.
Stripped Securities are the separate income or principal components of a debt
instrument. These involve risks that are similar to those of other debt
securities, although they may be more volatile. The prices of stripped
mortgage-backed securities may be particularly affected by changes in interest
rates. As interest rates fall, prepayment rates tend to increase, which tends
to reduce prices of "interest only" securities and increase prices of
"principal only" securities. Rising interest rates can have the opposite
effect.
Policies and Restrictions: The Fund does not currently intend to invest more
than 5% of its total assets in stripped securities.
Risks of Derivative Instruments. The use of options, futures contracts,
options on futures contracts, forward currency contracts, swaps, caps, collars
and floors, and the investment in indexed securities, stripped securities and
mortgage-backed securities involve special risks, including: (i) possible
imperfect or no correlation between price movements of the portfolio
investments (held or intended to be purchased) involved in the transaction and
price movements of the instruments involved in the transaction; (ii) possible
lack of a liquid secondary market for any particular instrument at a particular
time; (iii) the need for additional portfolio management skills and techniques;
(iv) losses due to unanticipated market price movements; (v) the fact that,
while such strategies can reduce the risk of loss, they can also reduce the
opportunity for gain, or even result in losses, by offsetting favorable price
movements in investments involved in the transaction; (vi) incorrect forecasts
by WRIMCO concerning interest or currency exchange rates or direction of price
fluctuations of the investment involved in the transaction, which may result in
the strategy being ineffective; (vii) loss of premiums paid by the Fund on
options it purchases; and (viii) the possible inability of the Fund to purchase
or sell a portfolio security at a time when it would otherwise be favorable for
it to do so, or the possible need for the Fund to sell a portfolio security at
a disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with such transactions and the possible
inability of the Fund to close out or liquidate its position.
For a hedging strategy to be completely effective, the price change of the
hedging instrument must equal the price change of the investment being hedged.
The risk of imperfect correlation of these price changes increases as the
composition of the Fund's portfolio diverges from instruments underlying a
hedging instrument. Such equal price changes are not always possible because
the investment underlying the hedging instruments may not be the same
investment that is being hedged. WRIMCO will attempt to create a closely
correlated hedge but hedging activity may not be completely successful in
eliminating market value fluctuation.
WRIMCO may use derivative instruments, including securities with embedded
derivatives, for hedging purposes to adjust the risk characteristics of the
Fund's portfolio of investments and may use some of these instruments to adjust
the return characteristics of the Fund's portfolio of investments. An embedded
derivative is a derivative that is part of another financial instrument.
Embedded derivatives typically, but not always, are debt securities whose
return of principal or interest, in part, is determined by reference to
something that is not intrinsic to the security itself. The use of derivative
instruments for speculative purposes can increase investment risk. If WRIMCO
judges market conditions incorrectly or employs a strategy that does not
correlate well with the Fund's investments, these techniques could result in a
loss, regardless of whether the intent was to reduce risk or increase return.
These techniques may increase the volatility of the Fund and may involve a
small investment of cash relative to the magnitude of the risk assumed. In
addition, these techniques could result in a loss if the counterparty to the
transaction does not perform as promised or if there is not a liquid secondary
market to close out a position that the Fund has entered into.
The ordinary spreads between prices in the cash and futures markets, due to the
differences in the natures of those markets, are subject to distortion. Due to
the possibility of distortion, a correct forecast of general interest rate,
foreign 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 or foreign exchange rate
movements or stock market movements or the time span within which the movements
take place.
Options and futures contracts may increase portfolio turnover rates, which
results in correspondingly greater commission expenses and transactions costs
and may result in certain tax consequences.
New financial products and risk management techniques continue to be developed.
The Fund may use these instruments and techniques to the extent consistent with
its investment goal and regulatory requirements applicable to investment
companies.
When-Issued and Delayed-Delivery Transactions are trading practices in which
payment and delivery for the securities take place at a future date. The
market value of a security could change during this period.
When purchasing securities on a delayed-delivery basis, the Fund assumes the
rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with the
Fund's other investments. If the Fund remains substantially fully invested at
a time when delayed-delivery purchases are outstanding, the delayed-delivery
purchases may result in a form of leverage. When delayed-delivery purchases
are outstanding, the Fund will set aside appropriate liquid assets in a
segregated custodial account to cover its purchase obligations.
When the Fund has sold a security on a delayed-delivery basis, the Fund does
not participate in further gains or losses with respect to the security. If
the other party to a delayed-delivery transaction fails to deliver or pay for
the securities, the Fund could miss a favorable price or yield opportunity, or
could suffer a loss. The Fund may renegotiate delayed-delivery transactions
after they are entered into, and may sell underlying securities before they are
delivered, which may result in capital gains or losses.
Policies and Restrictions: The Fund does not currently intend to invest more
than 5% of its total assets in when-issued and delayed-delivery transactions.
Repurchase Agreements. In a repurchase agreement, the Fund buys a security at
one price and simultaneously agrees to sell it back at a higher price. Delays
or losses could result if the other party to the agreement defaults or becomes
insolvent.
Restricted and Illiquid Securities. Restricted securities are securities that
are subject to legal or contractual restrictions on resale. Restricted
securities may be illiquid due to restrictions on their resale.
Illiquid investments may be difficult to sell promptly at an acceptable price.
Difficulty in selling securities may result in a loss or may be costly to the
Fund.
Policies and Restrictions: The Fund does not currently intend to purchase a
security if, as a result, more than 15% of its net assets would be invested in
illiquid investments.
Diversification. Diversifying the Fund's investment portfolio can reduce the
risks of investing. This may include limiting the amount of money invested in
any one issuer or, on a broader scale, in any one industry.
Policies and Restrictions: As a fundamental policy, with respect to 75% of
total assets, the Fund may not buy a security if, as a result, more than 5% of
its total assets would be invested in any one issuer and may not own more than
10% of the outstanding voting securities of a single issuer. As a fundamental
policy, the Fund may not buy a security if, as a result, more than 25% of its
total assets would be invested in any one industry. These limitations do not
apply to U.S. Government Securities.
Borrowing. If the Fund borrows money, its share price may be subject to
greater fluctuation until the borrowing is paid off. The Fund may only borrow
from banks.
If the Fund makes additional investments while borrowings are outstanding, this
may be considered a form of leverage.
Policies and Restrictions: As a fundamental policy, the Fund may borrow only
for emergency or extraordinary purposes, but not in an amount exceeding 33 1/3%
of its total assets.
Lending. Securities loans may be made on a short-term or long-term basis for
the purpose of increasing the Fund's income. This practice could result in a
loss or a delay in recovering the Fund's securities. Loans will be made only
to parties deemed by WRIMCO to be creditworthy.
Policies and Restrictions: As a fundamental policy, securities loans, in the
aggregate, may not exceed 10% of the Fund's total assets.
Other Instruments may include warrants and securities of closed-end investment
companies. As a shareholder in an investment company, the Fund would bear its
pro rata share of that investment company's expenses, which could result in
duplication of certain fees, including management and administrative fees.
Policies and Restrictions: The Fund does not currently intend to purchase
shares of other investment companies that do not redeem their shares if more
than 10% of its total assets would be invested in these shares.
The Fund does not currently intend to purchase warrants if, as a result, more
than 5% of its net assets would be invested in warrants.
<PAGE>
About Your Account
Class Y shares are designed for institutional investors. Class Y shares are
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
Internal Revenue Code of 1986, as amended (the "Code"), when the plan has 100
or more eligible employees and holds the shares in an omnibus account on the
Fund's records;
o banks, trust institutions and investment fund administrators investing for
their own accounts or for the accounts of their customers where such
investments for customer accounts are held in an omnibus account on the Fund's
records;
o government entities or authorities and corporations whose investment
within the first twelve months after initial investment is $10 million or more;
and
o certain retirement plans and trusts for employees and account
representatives of Waddell & Reed, Inc. and its affiliates.
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its account
representatives. To open your account you must complete and sign an
application. Your Waddell & Reed account representative can help you with any
questions you might have.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a Class Y share (price to buy one Class Y share) is the
Fund's Class Y net asset value ("NAV"). The Fund's Class Y shares are sold
without a sales charge.
To purchase by wire, you must first obtain an account number by calling 1-800-
366-2520, 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 to UMB Bank, n.a., ABA
Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and
Account Number.
To purchase 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.
The Fund's Class Y NAV is the value of a single share. The Class Y NAV is
computed by adding with respect to that Class the value of the Fund's
investments, cash, and other assets, subtracting its liabilities, and then
dividing the result by the number of Class Y shares outstanding.
The securities in the Fund's portfolio that are listed or traded on an exchange
are valued primarily using market quotations or, if market quotations are not
available, at their fair value in a manner determined in good faith by or at
the direction of the Board of Directors. Bonds are generally valued according
to prices quoted by a dealer in bonds that offers a pricing service. Short-
term debt securities are valued at amortized cost, which approximates market
value. Other assets are valued at their fair value by or at the direction of
the Board of Directors.
The Fund is open for business each day the New York Stock Exchange ("NYSE") is
open. The Fund normally calculates the net asset values of its shares as of
the later of the close of business of the NYSE, normally 4 p.m. Eastern time,
or the close of the regular session of any other securities or commodities
exchange on which an option held by the Fund is traded.
The Fund may invest in securities listed on foreign exchanges which may trade
on Saturdays or on customary U.S. national business holidays when the NYSE is
closed. Consequently, the NAV of Fund shares may be significantly affected on
days when the Fund does not price its shares and when you have no access to the
Fund.
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has cleared.
o The Fund does not issue certificates representing Class Y shares of the
Fund.
When you sign your account application, you will be asked to certify that your
Social Security or taxpayer identification number is correct and whether you
are subject to backup withholding for failing to report income to the IRS.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Minimum Investments
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
Adding to Your Account
You can make additional investments of any amount at any time.
To add to your 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.
To add to your account by mail: Make your check payable to Waddell & Reed,
Inc. Mail the check along with a letter showing your account number, the
account registration and stating the fund whose shares you wish to purchase to:
Waddell & Reed, Inc.
P.O. Box 29217
Shawnee Mission, Kansas 66201-9217
Selling Shares
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The redemption price (price to sell one Class Y share) is the Fund's Class Y
NAV.
To sell 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 shares and make
payment by wire to your pre-designated bank account or by check to you at the
address on the account.
To sell shares by written request: Complete an Account Service Request form,
available from your Waddell & Reed account representative, or write a letter of
instruction with:
the name on the account registration,o
the Fund's name,o
the Fund account number,o
the dollar amount or number of shares to be redeemed, ando
any other applicable requirements listed in the table below.o
Deliver the form or your letter to your Waddell & Reed account representative,
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.
Special Requirements for Selling Shares
Account Type Special Requirements
Retirement The written instructions must
Account 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 At least one person authorized
Organization by corporate resolution to act
on the account must sign the
written instructions.
When you place an order to sell shares, your shares will be sold at the next
NAV calculated after receipt of a written request for redemption in good order
by Waddell & Reed, Inc. at its home office. 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 Fund may delay payment
of redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance,
satisfactory to the Fund, that the check has cleared and been honored. If no
such assurance is given, payment of the redemption proceeds on these shares
will be delayed until the earlier of 10 days or the date the Fund 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.
The Fund reserves the right to require a signature guarantee on certain
redemption requests. This requirement is designed to protect you and Waddell &
Reed from fraud. The Fund may require a signature guarantee in certain
situations such as:
o the request for redemption is made by a corporation, partnership or
fiduciary,
o the request for redemption is made by someone other than the owner of
record, or
o the check is being made payable to someone other than the owner of record.
The Fund will accept a signature guarantee from a national bank, a federally
chartered savings and loan or a member firm of a national stock exchange or
other eligible guarantor in accordance with procedures of the Fund's transfer
agent. A notary public cannot provide a signature guarantee.
The Fund reserves the right to redeem at NAV all shares of the Fund owned or
held by you having an aggregate NAV of less than $500. The Fund 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 to $500.
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 account representative is available to provide
personal service. Additionally, the Waddell & Reed Customer Services staff is
available to respond promptly to your inquiries and requests.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, exchange, transfer or
redemption)
o year-to-date statements (quarterly)
o annual and
semiannual reports (every six months)
To reduce expenses, only one copy of most annual and semiannual reports will be
mailed to your household, even if you have more than one account with the Fund.
Call 913-236-2000 if you need copies of annual or semiannual reports or
historical account information.
Exchanges
You may sell your Class Y shares and buy Class Y shares of other funds in the
United Group. You may exchange only into funds that are legally registered for
sale in your state of residence. Note that exchanges out of the Fund may have
tax consequences for you. Before exchanging into a fund, read its prospectus.
The Fund reserves the right to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
Dividends, Distributions and Taxes
Distributions
The Fund distributes substantially all of its net income and capital gains to
shareholders each year. Ordinarily, dividends are distributed from the Fund's
net investment income, which includes accrued interest, earned discount,
dividends and other income earned on portfolio assets less expenses, quarterly
in March, June, September and December. Net capital gains (and any net
realized gains from foreign currency transactions) ordinarily are distributed
in December. The Fund may make additional distributions if necessary to avoid
Federal income or excise taxes on undistributed income and capital gains.
Distribution Options. When you open an account, specify on your application
how you want to receive your distributions. The Fund offers three options:
1. Share Payment Option. Your dividend and capital gains distributions will
be automatically paid in additional Class Y shares of the Fund. If you do not
indicate a choice on your application, you will be assigned this option.
2. Income-Earned Option. Your capital gains distributions will be
automatically paid in Class Y shares, but you will be sent a check for each
dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital gains
distributions.
For retirement accounts, all distributions are automatically paid in Class Y
shares.
Taxes
The Fund intends to qualify for treatment as a regulated investment company
under the Code so that it will be relieved of Federal income tax on that part
of its investment company taxable income (consisting generally of net
investment income, net short-term capital gains and net gains from certain
foreign currency transactions) and net capital gains (the excess of net long-
term capital gain over net short term capital loss) that are distributed to its
shareholders.
There are tax requirements that the Fund must follow in order to avoid Federal
taxation. In its effort to adhere to these requirements, the Fund may have to
limit its investment activity in some types of instruments.
As with any investment, you should consider how your investment in the Fund
will be taxed. If your account is not a tax-deferred retirement account, you
should be aware of the following tax implications:
Taxes on distributions. Dividends from the Fund's investment company taxable
income are taxable to you as ordinary income whether received in cash or paid
in additional Fund shares. Distributions of the Fund's realized net capital
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or reinvested in additional Fund shares and regardless
of the length of time you have owned your shares. The Fund notifies you after
each calendar year-end as to the amounts of dividends and distributions paid
(or deemed paid) to you for that year.
A portion of the dividends paid by the Fund, whether received in cash or 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 alternative minimum
tax.
Withholding. The Fund is required to withhold 31% of all dividends,
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate from dividends and
distributions also is required for such shareholders who otherwise are 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 your adjusted basis for the redeemed shares (which normally includes
any sales charge paid). An exchange of Fund shares for shares of any other
fund in the United Group generally will have similar tax consequences. In
addition, if you purchase Class Y shares of the Fund within thirty days before
or after redeeming other Class Y shares of the Fund at a loss, part or all of
that loss will not be deductible and will increase the basis of the newly
purchased shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders. 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>
About the Management and Expenses of the Fund
United Asset Strategy Fund, Inc. is a mutual fund: an investment that pools
shareholders' money and invests it toward a specified goal. In technical
terms, the Fund is an open-end management investment company organized as a
corporation under Maryland law on August 25, 1994.
The Fund is governed by a Board of Directors, which has overall responsibility
for the management of its affairs. The majority of directors are not
affiliated with Waddell & Reed, Inc.
The Fund has two classes of shares. In addition to the Class Y shares offered
by this Prospectus, the Fund has issued and outstanding Class A shares which
are offered by Waddell & Reed, Inc. through a separate Prospectus. Prior to
September 12, 1995, the Fund offered only one class of shares to the public.
Shares outstanding on that date were designated as Class A shares. Class A
shares are subject to a sales charge on purchases but are not subject to
redemption fees. Class A shares are subject to a Rule 12b-1 fee at an annual
rate of up to 0.25% of the Fund's average net assets attributable to Class A
shares. Additional information about Class A shares may be obtained by calling
913-236-2000 or by writing to Waddell & Reed, Inc. at the address on the inside
back cover of the Prospectus.
The Fund does not hold annual meetings of shareholders; however, certain
significant corporate matters, such as the approval of a new investment
advisory agreement or a change in a fundamental investment policy, which
require shareholder approval will be presented to shareholders at a meeting
called by the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon receipt by
the Fund of a request in writing signed by shareholders holding not less than
25% of all shares entitled to vote at such meeting, provided certain conditions
stated in the Bylaws of the Fund 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 which time the directors then in office will call a shareholders' meeting
for the election of directors. To the extent that Section 16(c) of the
Investment Company Act of 1940, as amended (the "1940 Act"), applies to the
Fund, the directors are required to call a meeting of shareholders for the
purpose of voting upon the question of removal of any director when requested
in writing to do so by the shareholders of record of not less than 10% of the
Fund's outstanding shares.
Each share (regardless of Class) has one vote. All shares of the Fund vote
together as a single Class, except as to any matter for which a separate vote
of any Class is required by the 1940 Act, and except as to any matter which
affects the interests of one or more particular Classes, in which case only the
shareholders of the affected Classes are entitled to vote, each as a separate
Class. Shares are fully paid and nonassessable when purchased.
WRIMCO and Its Affiliates
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board of
Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. Waddell & Reed, Inc. and its predecessors served as
investment manager to each of the registered investment companies in the United
Group of Mutual Funds since 1940 or the inception of the company, whichever was
later, and to TMK/United Funds, Inc. since that fund's inception, until January
8, 1992, when it assigned its duties as investment manager and assigned its
professional staff for investment management services to WRIMCO. WRIMCO has
also served as investment manager for Waddell & Reed Funds, Inc. since its
inception in September 1992 and Torchmark Government Securities Fund, Inc. and
Torchmark Insured Tax-Free Fund, Inc. since each commenced operations in
February 1993.
James D. Wineland is primarily responsible for the day-to-day management of the
Fund. Mr. Wineland has held his Fund responsibilities since March 1995. He is
Vice President of WRIMCO, Vice President of the Fund, and Vice President of
other investment companies for which WRIMCO serves as investment manager. 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 Waddell & Reed, Inc. and its successor, WRIMCO, since
November 1984. Other members of WRIMCO's investment management department
provide input on market outlook, economic conditions, investment research and
other considerations relating to the Fund's investments.
Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter for
each of the other funds in the United Group of Mutual Funds and Waddell & Reed
Funds, Inc., and serves as the distributor for TMK/United Funds, Inc.
Waddell & Reed Services Company acts as transfer agent ("Shareholder Servicing
Agent") for the Fund and processes the payments of dividends. Waddell & Reed
Services Company also acts as agent ("Accounting Services Agent") in providing
bookkeeping and accounting services and assistance to the Fund and pricing
daily the value of its shares.
WRIMCO and Waddell & Reed Services Company are subsidiaries of Waddell & Reed,
Inc. Waddell & Reed, Inc. is a direct subsidiary of Waddell & Reed Financial
Services, Inc., a holding company, and an indirect subsidiary of United
Investors Management Company, a holding company, and Torchmark Corporation, a
holding company.
WRIMCO places transactions for the portfolio of the Fund and in doing so may
consider sales of shares of the Fund and other funds it manages as a factor in
the selection of brokers to execute portfolio transactions.
Breakdown of Expenses
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. The Fund also pays other expenses, which are
explained below.
Management Fee
The management fee of the Fund is calculated by adding a group fee to a
specific fee. It is accrued and paid to WRIMCO daily.
The specific fee is computed on the Fund's net asset value as of the close of
business each day at the annual rate of .30 of 1% of its net assets. The group
fee is a pro rata participation based on the relative net asset size of the
Fund in the group fee computed each day on the combined net asset values of all
the funds in the United Group at the annual rates shown in the following table:
Group Fee Rate
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
------------ --------
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Growth in assets of the United Group assures a lower group fee rate.
Other Expenses
While the management fee is a significant component of the Fund's annual
operating costs, the Fund has other expenses as well.
The Fund pays the Accounting Services Agent a monthly fee based on the average
net assets of the Fund for accounting services. With respect to its Class Y
shares, the Fund pays the Shareholder Servicing Agent a monthly fee based on
the average daily net assets of the Class for the preceding month.
The Fund also pays other expenses, such as fees and expenses of certain
directors, audit and outside legal fees, costs of materials sent to
shareholders, taxes, brokerage commissions, interest, insurance premiums,
custodian fees, fees payable by the Fund under federal or other securities laws
and to the Investment Company Institute, and extraordinary expenses including
litigation and indemnification relative to litigation.
The Fund cannot precisely predict what its portfolio turnover rate will be, but
it is anticipated that the annual turnover rate for the common stock portion of
its portfolio will not exceed 200% and that the annual turnover rate for the
other potion of its portfolio will not exceed 200%. A turnover rate in excess
of 100% could be considered high. A higher turnover will increase transaction
and commission costs and could generate taxable income or loss.
<PAGE>
United Asset Strategy Fund, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 M Street, N. W. (913) 236-2000
Washington, D. C. 20036
Shareholder Servicing Agent
Independent Accountants Waddell & Reed
Price Waterhouse LLP Services Company
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Investment Manager Shawnee Mission, Kansas
Waddell & Reed Investment 66201-9217
Management Company (913) 236-2000
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
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
<PAGE>
United Asset Strategy Fund, Inc.
Class Y Shares
PROSPECTUS
September 12, 1995
The United Group of Mutual Funds
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
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.
NUP2017-Y(9-95)
printed on recycled paper
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
September 12, 1995
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with a prospectus ("Prospectus")
for the Class A shares or the Class Y shares, as applicable, of United Asset
Strategy Fund, Inc. (the "Fund") dated September 12, 1995, which may be
obtained from the Fund or its underwriter, Waddell & Reed, Inc., at the address
or telephone number shown above.
TABLE OF CONTENTS
Investment Policies and Limitations ................ 2
Portfolio Transactions and Brokerage ............... 27
Purchase, Redemption and Pricing of Shares ......... 29
Performance Information ............................ 42
Payments to Shareholders ........................... 43
Taxes .............................................. 44
Investment Management and Other Services ........... 48
Directors and Officers ............................. 52
Organization of the Fund ........................... 57
Appendix A ......................................... 58
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset. Accordingly, any subsequent change in values, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
The Fund's fundamental investment policies and limitations cannot be
changed without approval by a "majority of the outstanding voting securities"
(as defined in the Investment Company Act of 1940, as amended (the "1940 Act"))
of the Fund. However, except for the fundamental investment limitations set
forth below, the investment policies and limitations of the Fund are not
fundamental and may be changed by the Board of Directors without shareholder
approval.
The following are the Fund's fundamental investment limitations set forth
in their entirety. The Fund may not:
(1) with respect to 75% of the Fund's total assets, purchase the
securities of any issuer (other than obligations issued or guaranteed by the
United States government, or any of its agencies or instrumentalities) if, as a
result thereof, (a) more than 5% of the Fund's total assets would be invested
in the securities of such issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of such issuer;
(2) 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 the Fund
may issue additional series and classes of shares in accordance with its
Articles of Incorporation;
(3) sell securities short, provided that transactions in futures
contracts, options and other financial instruments are not deemed to constitute
short sales;
(4) purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that the Fund may make initial and variation margin payments in
connection with transactions in futures contracts, options and other financial
instruments;
(5) borrow money, except that the 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 the
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;
(6) underwrite securities issued by others, except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities;
(7) purchase the securities of any issuer (other than obligations issued
or guaranteed by the United States government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the Fund's total assets
(taken at current value) would be invested in the securities of issuers having
their principal business activities in the same industry;
(8) 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 the 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 the Fund from purchasing interests in pools of
real estate mortgage loans);
(9) purchase or sell physical commodities unless acquired as a result of
ownership of securities (but this shall not prevent the Fund from purchasing
and selling currencies, futures contracts, options, forward currency contracts
or other financial instruments);
(10) make loans, except (a) by lending portfolio securities provided that
no securities loan will be made if, as a result thereof, more than 10% of the
Fund's total assets (taken at current value) would be lent to another party;
(b) through the purchase of a portion of an issue of debt securities in
accordance with its investment objective, policies, and limitations; and (c) by
engaging in repurchase agreements with respect to portfolio securities; or
(11) purchase or retain the securities of an issuer if the officers and
directors of the Fund and of Waddell & Reed Investment Company, the Fund's
investment manager ("WRIMCO"), owning beneficially more than / of 1% of the
securities of an issuer together own beneficially more than 5% of the
securities of that issuer.
The following investment limitations are not fundamental and may be
changed by the Board of Directors without shareholder approval.
(i) The Fund may borrow money only from a bank. The Fund will not
purchase any security while borrowings representing more than 5% of its total
assets are outstanding.
(ii) The Fund does not currently intend to purchase any security if, as a
result, more than 15% of its net assets would be invested in illiquid
investments.
(iii) The 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 or to repurchase agreements.)
(iv) The Fund does not currently intend to (a) purchase securities of
other investment companies, except in the open market where no commission
except the ordinary broker's commission is paid and if, as a result of such
purchase, the Fund does not have more than 10% of its total assets invested in
such securities, or (b) purchase or retain securities issued by other open-end
investment companies. Limitations (a) and (b) do not apply to securities
received as dividends, through offers of exchange, or as a result of a
reorganization, consolidation, or merger. As a shareholder in an investment
company, the Fund would bear its pro rata share of that investment company's
expenses, which could result in duplication of certain fees, including
management and administrative fees. However, in the event that the Fund
purchases or retains securities issued by any other open-end investment
company, WRIMCO will waive its advisory fee on that portion of the Fund's
assets invested in such securities and the Fund will only purchase securities
of no-load, open-end investment companies.
(v) The Fund does not currently intend to purchase the securities of any
issuer (other than securities issued or guaranteed by domestic or foreign
governments or political subdivision thereof) 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, its agencies or instrumentalities,
or to collateralized mortgage obligations, other mortgage-related securities,
asset-backed securities or indexed securities.
(vi) The Fund does not currently intend to purchase warrants, valued at
the lower of cost or market, in excess of 5% of the Fund's net assets.
Included in that amount, but not to exceed 2% of the Fund's net assets, may be
warrants that are not listed on the New York Stock Exchange or the American
Stock Exchange. Warrants acquired by the Fund in units or attached to
securities are not subject to these restrictions.
(vii) The Fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
For the Fund's limitations on futures and options transactions, see the
section entitled "Limitations on Futures and Options Transactions."
Asset Allocation
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 the 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. The Fund may also invest in lower quality, high-yielding
debt securities (commonly referred to as "junk bonds"). The Fund currently
intends to limit its investments in these securities to 20% of its total
assets.
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 intends 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.
Specific Securities and Investment Practices
Illiquid Investments
Illiquid investments are investments that cannot be sold or disposed of in
the ordinary course of business within seven days at approximately the prices
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) non-
government stripped fixed-rate mortgage-backed securities; (v) direct debt
instruments; (vi) restricted securities; and (vii) swap agreements. However,
certain restricted securities, such as securities eligible for resale under
Rule 144A of the Securities Act of 1933, as amended (the "1933 Act") and
commercial paper that is exempt from registration under Section 4(2) of the
1933 Act, will not be considered by the Fund to be illiquid if WRIMCO has made
a determination of liquidity pursuant to guidelines established by the Fund's
Board of Directors. The assets used as cover for OTC options written by the
Fund will be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Fund may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option written subject to this procedure would be
considered illiquid only to the extent that the maximum repurchase price under
the formula exceeds the intrinsic value of the option. If through a change in
values, net assets, or other circumstances, the Fund were in a position where
more than 15% of its net assets were invested in illiquid securities, it would
seek to take appropriate steps to protect liquidity.
Restricted Securities
Restricted Securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act, or
in a registered public offering. Where registration is required, the Fund may
be obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the time
the Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, the Fund might obtain a less favorable price than prevailed when it
decided to seek registration of the security.
There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale might be desirable. Restricted securities
in which the Fund seeks to invest need not be listed or admitted to trading on
a foreign or domestic exchange and may be less liquid than listed securities.
See "Illiquid Investments" above.
Certain Other Securities
The Fund may purchase debt securities whose principal amount at maturity
is dependent upon the performance of a specified equity security. The issuer
of such debt securities, typically an investment banking firm, is unaffiliated
with the issuer of the equity security to whose performance the debt security
is linked. Equity-linked debt securities differ from ordinary debt securities
in that the principal amount received at maturity is not fixed, but is based on
the price of the linked equity security at the time the debt security matures.
The performance of equity-linked debt securities depends primarily on the
performance of the linked equity security and may also be influenced by
interest rate changes. In addition, although the debt securities are typically
adjusted for diluting events such as stock splits, stock dividends and certain
other events affecting the market value of the linked equity security, the debt
securities are not adjusted for subsequent issuances of the linked equity
security for cash. Such an issuance could adversely affect the price of the
debt security. In addition to the equity risk relating to the linked equity
security, such debt securities are also subject to credit risk with regard to
the issuer of the debt security. In general, however, such debt securities are
less volatile than the equity securities to which they are linked.
The Fund may also invest in a type of convertible preferred stock that
pays a cumulative, fixed dividend that is senior to, and expected to be in
excess of, the dividends paid on the common stock of the issuer. At the
mandatory conversion date, the preferred stock is converted into not more than
one share of the issuer's common stock at the "call price" that was established
at the time the preferred stock was issued. If the price per share of the
related common stock on the mandatory conversion date is less than the call
price, the holder of the preferred stock will nonetheless receive only one
share of common stock for each share of preferred stock (plus cash in the
amount of any accrued but unpaid dividends). At any time prior to the
mandatory conversion date, the issuer may redeem the preferred stock upon
issuing to the holder a number of shares of common stock equal to the call
price of the preferred stock in effect on the date of redemption divided by the
market value of the common stock, with such market value typically determined
one or two trading days prior to the date notice of redemption is given. The
issuer must also pay the holder of the preferred stock cash in an amount equal
to any accrued but unpaid dividends on the preferred stock. This convertible
preferred stock is subject to the same market risk as the common stock of the
issuer, except to the extent that such risk is mitigated by the higher dividend
paid on the preferred stock. The opportunity for equity appreciation afforded
by an investment in such convertible preferred stock, however, is limited,
because in the event the market value of the issuer's common stock increases to
or above the call price of the preferred stock, the issuer may (and would be
expected to) call the preferred stock for redemption at the call price. This
convertible preferred stock is also subject to credit risk with regard to the
ability of the issuer to pay the dividend established upon issuance of the
preferred stock. Generally, convertible preferred stock is less volatile than
the related common stock of the issuer.
Securities Lending
The Fund may lend securities to creditworthy parties such as broker-
dealers or institutional investors.
Securities lending allows the Fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since there may be
delays in the recovery of loaned securities, or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be made
only to parties deemed by WRIMCO to be creditworthy. Furthermore, securities
loans will only be made if, in WRIMCO's judgment, the consideration to be
earned from such loans would justify the risk.
WRIMCO understands that it is the current view of the Staff of the
Securities and Exchange Commission (the "SEC") that the Fund may engage in loan
transactions only under the following conditions: (1) the Fund must receive
100% collateral in the form of cash or cash equivalents (e.g., U.S. Treasury
bills or notes) from the borrower; (2) the borrower must increase the
collateral whenever the market value of the securities loaned (determined on a
daily basis) rises above the value of the collateral; (3) after giving notice,
the Fund must be able to terminate the loan at any time; (4) the Fund must
receive reasonable interest on the loan or a flat fee from the borrower, as
well as amounts equivalent to any dividends, interest, or other distributions
on the securities loaned and to any increase in market value; (5) the Fund may
pay only reasonable custodian fees in connection with the loan; and (6) the
Board of Directors must be able to vote proxies on the securities loaned,
either by terminating the loan or by entering into an alternative arrangement
with the borrower.
Cash received through loan transactions may be invested in any security in
which the Fund is authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
Repurchase Agreements
In a repurchase agreement, the Fund purchases a security and
simultaneously commits to resell that security to the seller at an agreed upon
price on an agreed upon date. The resale price reflects the purchase price
plus an agreed upon incremental amount which is unrelated to the coupon rate or
maturity of the purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value (at least equal to the amount of the agreed upon
resale price and marked to market daily) of the underlying security. The Fund
may engage in a repurchase agreement with respect to any security in which it
is authorized to invest. While it does not presently appear possible to
eliminate all risks from these transactions (particularly the possibility of a
decline in the market value of the underlying securities, as well as delays and
costs to the Fund in connection with bankruptcy proceedings), it is the Fund's
current policy to limit repurchase agreement transactions to those parties
whose creditworthiness has been reviewed and found satisfactory by WRIMCO on
the basis of criteria established by the Board of Directors.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase securities on a when-issued or delayed-delivery
basis or sell them on a delayed-delivery basis. The securities so purchased or
sold by the Fund are subject to market fluctuation; their value may be less or
more when delivered than the purchase price paid or received. For example,
delivery to the Fund and payment by the Fund in the case of a purchase by it,
or delivery by the Fund and payment to it in the case of a sale by the Fund,
may take place a month or more after the date of the transaction. The purchase
or sale price is fixed on the transaction date. The Fund will enter into when-
issued or delayed-delivery transactions in order to secure what is considered
to be an advantageous price and yield at the time of entering into the
transaction. No interest accrues to the Fund until delivery and payment is
completed. When the Fund makes a commitment to purchase securities on a when-
issued or delayed-delivery basis, it will record the transaction and thereafter
reflect the value of the securities in determining its net asset value per
share. The securities so sold by the Fund on a delayed-delivery basis are also
subject to market fluctuation; their value when the Fund delivers them may be
more than the purchase price the Fund receives. When the Fund makes a
commitment to sell securities on a delayed basis, it will record the
transaction and thereafter value the securities at the sales price in
determining the Fund's net asset value per share.
Ordinarily the Fund purchases 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.
Warrants
Warrants are options to purchase equity securities at specific prices
valid for a specific period of time. Their prices do not necessarily move
parallel to the prices of the underlying securities. Warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer. Warrants are highly volatile and, therefore, more susceptible to
sharp decline in value than the underlying securities might be. They are also
generally less liquid than an investment in the underlying shares.
U.S. Government Securities
U.S. Government Securities include Treasury Bills (which mature within one
year of the date they are issued), Treasury Notes (which have maturities of one
to ten years) and Treasury Bonds (which generally have maturities of more than
10 years). All such Treasury securities are backed by the full faith and
credit of the United States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Federal National Mortgage Association, Farmers Home Administration, Export-
Import Bank of the United States, Small Business Administration, Government
National Mortgage Association, General Services Administration, Central Bank
for Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Farm Credit Banks, Maritime Administration, the Tennessee Valley
Authority, the Resolution Funding Corporation, and the Student Loan Marketing
Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by the Federal National Mortgage
Association, are supported only by the credit of the instrumentality and not by
the Treasury. If the securities are not backed by the full faith and credit of
the United States, the owner of the securities must look principally to the
agency issuing the obligation for repayment and may not be able to assert a
claim against the United States in the event that the agency or instrumentality
does not meet its commitment.
U.S. Government Securities may include "mortgage-backed securities" of the
Government National Mortgage Association ("Ginnie Mae"), the Federal Home Loan
Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage
Association ("Fannie Mae"). These mortgage-backed securities include "pass-
through" securities and "participation certificates." Another type of
mortgage-backed security is a collateralized mortgage obligation ("CMO"). See
"Mortgage-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.
Mortgage-Backed Securities
The Fund may purchase mortgage-backed securities issued by government and
non-government entities such as banks, mortgage lenders, or other financial
institutions. A mortgage-backed security may be an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Some mortgage-backed securities, such as collateralized
mortgage obligations ("CMOs"), make payments of both principal and interest at
a variety of intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the Fund
may invest in them if WRIMCO determines they are consistent with the Fund's
investment objective and policies.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities and may lower their
total returns.
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.
The prices of stripped mortgage-backed securities may be particularly
affected by changes in interest rates. As interest rates fall, prepayment
rates tend to increase, which tends to reduce prices of IOs and increase prices
of POs. Rising interest rates can have the opposite effect.
Asset-Backed Securities
Asset-backed securities represent interest in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as pass-
through securities. Interest and principal payments ultimately depend upon
payment of the underlying loans by individuals, although the securities may be
supported by letters of credit or other credit enhancements. 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. The Fund does not
currently intend to invest in non-mortgage asset-backed securities.
Zero Coupon Bonds
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 bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and
the Financing Corporation (FICO) can also be separated in this fashion.
Original issue zeros are zero coupon securities originally issued by the U.S.
government, a government agency, or a corporation in zero coupon form.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased directly
from issuers) bear variable or floating interest rates and carry rights that
permit holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries. 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.
Indexed Securities
The Fund may purchase securities whose prices are indexed to the prices of
other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. 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. 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 the
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 the
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 the Fund does not receive scheduled interest or
principal payments on such indebtedness, the Fund's share price could be
adversely affected. Loans that are fully secured offer the 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
the 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. 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 the Fund in the event of fraud or misrepresentation. In the
absence of definitive regulatory guidance, the 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, the 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 the 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 the Fund. Direct indebtedness purchased by the Fund may include letters of
credit, revolving credit facilities, or other standby financing commitments
obligating the Fund to pay additional cash on demand. These commitments may
have the effect of requiring the 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. The 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
the 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.
The Fund limits the amount of total assets that it will invest in any one
issuer or in issuers within the same industry (see limitations (1) and (7)).
For purposes of these limitations, the 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 the Fund and the borrower, if the participation does not
shift to the Fund the direct debtor-creditor relationship with the borrower,
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 the 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 Investments
American Depositary Receipts and European Depositary Receipts (ADRs and
EDRs) are certificates evidencing ownership of shares of a foreign-based issuer
held in trust by a bank or similar financial institution. Designed for use in
U.S. and European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies and are not subject to the currency risk as in the case
of foreign denominated securities.
Foreign Currency Transactions
The Fund may hold foreign currency deposits from time to time, and may
convert dollars and foreign currencies in the foreign exchange markets.
Currencies may be exchanged on a spot (i.e., cash) basis, or by entering into
forward contracts to purchase or sell foreign currencies at a future date, at a
price set when the contract is entered into. Forward contracts generally are
traded in an interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. The parties to a forward
contract may agree to offset or terminate the contract before its maturity, or
may hold the contract to maturity and complete the contemplated currency
exchange.
The Fund may use forward currency contracts to manage currency risks and
to facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving forward
contracts that could be used by the Fund.
In connection with purchases and sales of securities denominated in
foreign currencies, the Fund may enter into forward currency contracts to fix a
definite price for the purchase or sale in advance of the trade's settlement
date. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge." WRIMCO expects to enter into settlement hedges in the
normal course of managing the Fund's foreign investments. The Fund could also
enter into forward contracts to hedge an anticipated dividend or interest
payment denominated in a foreign currency or in anticipation of future
purchases or sales of securities denominated in foreign currency, even if the
specific investments have not yet been selected by WRIMCO.
The Fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if
the Fund owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the pound sterling, for
example, by entering into a forward contract to sell Deutsche marks or European
Currency Units in return for U.S. dollars. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost, yield,
or efficiency, but generally would not hedge currency exposure as effectively
as a simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
The Fund may also use forward currency contracts to shift the Fund's
exposure to foreign currency exchange rate changes from one foreign currency to
another. For example, if the Fund owns securities denominated in a foreign
currency and WRIMCO believes that currency will decline relative to another
currency, it might enter into a forward contract to sell the appropriate amount
of the first foreign currency with payment to be made in the second foreign
currency. Transactions that use two foreign currencies are sometimes referred
to as "cross hedging." Use of a different foreign currency magnifies the
Fund's exposure to foreign currency exchange rate fluctuations. The Fund may
also purchase forward currency contracts to enhance income when WRIMCO
anticipates that the foreign currency will appreciate in value, but securities
denominated in that currency do not present attractive investment
opportunities.
Successful use of forward currency contracts will depend on WRIMCO's skill
in analyzing and predicting currency values. Forward contracts may
substantially change the Fund's investment exposure to changes in currency
exchange rates, and could result in losses to the Fund if currencies do not
perform as WRIMCO anticipates. There is no assurance that WRIMCO's use of
forward currency contracts will be advantageous to the Fund or that it will
hedge at an appropriate time.
At the maturity of a forward contract that the Fund has sold, the Fund may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate the obligation to deliver the
foreign currency by purchasing an "offsetting" forward contract with the same
currency trader obligating the Fund to purchase, on the same maturity date, the
same amount of the foreign currency. However, the currency trader is not
obligated to enter into such an offsetting forward contract. It is impossible
to forecast with absolute precision the market value of portfolio securities at
the expiration of the forward contract. Accordingly, if the Fund determines to
sell the portfolio security and make delivery of the underlying foreign
currency, it may be necessary for the Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security is less than the amount of foreign currency that
the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or loss to the extent that there has been
movement in forward contract prices. Should forward prices decline during the
period between the Fund's entering into a forward contract for the sale of a
foreign currency and the date it enters into the offsetting forward contract,
the Fund will realize a gain to the extent the price at which it has agreed to
sell the foreign currency exceeds the price at which it has agreed to purchase
the foreign currency. Should forward prices increase, it will suffer a loss to
the extent the price at which it has agreed to purchase the foreign currency
exceeds the price at which it has agreed to sell the foreign currency. The
policies described in this section are non-fundamental policies of the Fund.
Limitations on Futures and Options Transactions. The Fund must operate
within certain restrictions as to positions in futures contracts, options on
futures contracts and options on a foreign currency traded on an exchange
regulated by CFTC under a rule (the "CFTC Rule") adopted by the CFTC under the
Commodity Exchange Act (the "CEA") to be eligible for the exclusion provided by
the CFTC Rule from regulation by the Fund with the CFTC as a "commodity pool
operator" (as defined under the CEA), and must represent to the CFTC that it
will operate within such restrictions. Under these restrictions, to the extent
that the Fund enters into futures contracts, options on futures contracts and
options on foreign currencies traded on a CFTC-regulated exchange, in each case
that are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish these positions
(excluding the amount by which options are "in-the-money") may not exceed 5% of
the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any contracts the Fund has entered
into. (In general, a call option on a futures contract is "in-the-money" if
the value of the underlying futures contract exceeds the strike, i.e.,
exercise, price of the call; a put option on a futures contract is "in-the-
money" if the value of the underlying futures contract is exceeded by the
strike price of the put.)
In addition, the Fund will not: (a) sell futures contracts, purchase put
options, or write call options if, as a result, more than 50% of the Fund's
total assets would be hedged with futures and options under normal conditions;
or (b) purchase futures contracts or write put options if, as a result, the
Fund's total obligations upon settlement or exercise of purchased futures
contracts and written put options would exceed 25% of its total assets. These
limitations do not apply to options attached to or acquired or traded together
with their underlying securities, and do not apply to securities that
incorporate features similar to options. The Fund will not invest in puts,
calls, straddles, spreads, and any combination thereof if by reason thereof the
value of its aggregate investment in such classes of securities will exceed 5%
of its total assets. For as long as required by applicable state securities
regulation, (1) the aggregate value of securities underlying put options
written by the Fund, determined as of the date the put options are written,
will not exceed 50% of the Fund's net assets, (2) the Fund will only buy or
sell (a) options on securities, indices or futures contracts, or (b) futures
contracts, in each case that are offered through the facilities of a national
securities association or that are listed on a national securities or
commodities exchange, other than the permitted OTC options described under "OTC
Options" below, (3) the aggregate premiums paid on all options on securities,
indices or futures contracts purchased by the Fund that are held at any time
will not exceed 20% of the Fund's total net assets, and (4) the aggregate
margin deposits on all futures and options thereon held at any time by the Fund
will not exceed 5% of the Fund's total assets.
The above limitations on the Fund's investments in futures contracts and
options, and the Fund's policies regarding futures contracts and options
discussed elsewhere in this SAI, may be changed as regulatory agencies permit.
Futures Contracts. When the Fund purchases a futures contract, it agrees
to purchase a specified underlying instrument or commodity at a specified
future date. When the Fund sells a futures contract, it agrees to sell the
underlying instrument or commodity at a specified future date. The price at
which the purchase and sale will take place is fixed when the Fund enters into
the contract. Some currently available futures contracts are based on specific
securities, such as U.S. Treasury bonds or notes, and some are based on indices
of securities prices, such as the Standard & Poor's 500 Composite Stock Price
Index (S&P 500). Futures contracts are also traded on commodities, such as
precious metals, foreign currencies, and other financial instruments. Futures
can be held until their delivery dates, or can be closed out before then if a
liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument or commodity. Therefore,
purchasing futures contracts will tend to increase the Fund's exposure to
positive and negative price fluctuations in the underlying instrument or
commodity, much as if it had purchased the underlying instrument or commodity
directly. When the Fund sells a futures contract, in contrast, the value of
its futures position will tend to move in a direction contrary to the market.
Selling futures contracts, therefore, will tend to offset both positive and
negative market price changes, much as if the underlying instrument or
commodity had been sold.
Purchasing Put and Call Options. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the underlying instrument at
a fixed strike price. In return for this right, the Fund pays the current
market price for the option (known as the option premium).Options have various
types of underlying instruments, including specific securities, indices of
securities prices, currencies, and futures contracts.
The Fund may terminate its position in a put option it has purchased by
allowing it to expire or by exercising the option. If the option is allowed to
expire, the Fund will lose the entire premium it paid. If the Fund exercises
the option, it completes the sale of the underlying instrument at the strike
price. The Fund may also terminate a put option position by closing it out in
the secondary market at its current price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if the
underlying instrument's price falls substantially. However, if the underlying
instrument's price does not fall enough to offset the cost of purchasing the
option, a put buyer can expect to suffer a loss (limited to the amount of the
premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in a potential price
increase in the underlying instrument with risk limited to the cost of the
option if the instrument's price falls. At the same time, the buyer can expect
to suffer a loss if the instrument's price does not rise sufficiently to offset
the cost of the option.
Writing Put and Call Options. When the Fund writes a put option, it takes
the opposite side of the transaction from the option's purchaser. In return
for receipt of the premium, the Fund assumes the obligation to pay the strike
price for the option's underlying instrument if the other party to the option
chooses to exercise it. The Fund may seek to terminate its position in a put
option it writes before exercise by closing out the option in the secondary
market at its current price. If the secondary market is not liquid, however,
the Fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received.
If security prices remain the same over time, it is likely that the writer will
also profit, because it should be able to close out the option at a lower
price. If security prices fall, the put writer would expect to suffer a loss.
This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in security price
increases.
Options on Indices. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in
cash and gain or loss depends on changes in the index in question rather than
on price movements in individual securities or futures contracts. When the
Fund writes a call on an index, it receives a premium and agrees that, prior to
the expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is 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 the Fund buys a call on an index, it pays a premium and has
the same rights as to such call as are indicated above. When the Fund buys a
put on an index, it pays a premium and has the right, prior to the expiration
date, to require the seller of the put, upon the Fund's exercise of the put, to
deliver to the Fund an amount of cash if the closing level of the index upon
which the put is based is less than the exercise price of the put, which amount
of cash is determined by the multiplier, as described above for calls. When
the Fund writes a put on an index, it receives a premium and the purchaser has
the right, prior to the expiration date, to require the Fund to deliver to it
an amount of cash equal to the difference between the closing level of the
index and the exercise price times the multiplier if the closing level is less
than the exercise price.
Risks of Options on Indices. The risks of investment in options on
indices may be greater than options on securities. Because index options are
settled in cash, when the Fund writes a call on an index it cannot provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. The Fund can offset some of the risk of writing a call
index option by holding a diversified portfolio of securities similar to those
on which the underlying index is based. However, the Fund cannot, as a
practical matter, acquire and hold a portfolio containing exactly the same
securities as underlie the index and, as a result, bears a risk that the value
of the securities held will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that it 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 the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
Options on Futures Contracts. When the Fund writes an option on a futures
contract, it becomes obligated, in return for the premium paid, to assume a
position in the futures contract at a specified exercise price at any time
during the term of the option. If the Fund has written a call, it becomes
obligated to assume a "short" position in the futures contract, which means
that it is required to deliver the underlying securities. If it has written a
put, it becomes obligated to assume a "long" position in the futures contract,
which means that it is required to take delivery of the underlying securities.
When the Fund purchases an option on a futures contract, it acquires the right,
in return for the premium it paid, to assume a position in the futures
contract, a "long" position if the option is a call and a "short" position if
the option is a put.
Combined Positions. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the 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.
Correlation of Price Changes. Because there are limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although
this may not be successful in all cases. If price changes in the Fund's
options or futures positions are poorly correlated with its other investments,
the positions may fail to produce anticipated gains or result in losses that
are not offset by gains in other investments.
The risk of imperfect correlation between movements in the price of an
index future and movements in the price of the securities that are the subject
of the hedge increases as the composition of the Fund's portfolio diverges from
the securities included in the applicable index. The price of the index
futures may move more than or less than the price of the securities being
hedged. If the price of the index future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had
not hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of
the security, 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, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities
being hedged is more than the historical volatility of the prices of the
securities included in the index. It is also possible that, where the Fund has
sold futures contracts to hedge its portfolio 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 the Fund is able to invest in them in an orderly
fashion, it is possible that the market may decline instead. If the Fund then
concludes not to invest in them at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
Margin Requirements and Daily Limits. Unlike when the Fund purchases or
sells securities, no price is paid or received by it when it purchases or sells
a futures contract. Initially, the Fund will be required to deposit an amount
of cash or U.S. Treasury Bills equal to a varying specified percentage of the
contract amount. This amount is known as initial margin. Cash held in the
margin account is not income producing. Subsequent payments, called variation
margin, to and from the futures commission merchant ("FCM") will be made on a
daily basis as the price of the underlying instrument fluctuates making the
futures contract more or less valuable, a process known as "marking-to-market."
If the Fund writes an option on a futures contract, it will be required to
deposit initial and variation margin pursuant to the requirements similar to
those applicable to futures contracts. Premiums received from the writing of
an option on a futures contract are included in the initial margin deposit.
Changes in variation margin are recorded by the Fund as unrealized gains
or losses. If required by the SEC, initial margin payments will be deposited
with the Fund's custodian bank in an account registered in the FCM's name;
access to the assets in that account may be made by the FCM only under
specified conditions. At any time prior to expiration of a futures contract or
option thereon, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate its position in the futures contract
or option. A final determination of variation margin is then made, additional
cash is required to be paid by or released to the Fund and the Fund realizes a
loss or a gain. Although futures contracts by their terms call for the actual
delivery or acquisition of the underlying obligation, in most cases the
contractual obligation is fulfilled without having to make or take delivery.
The Fund does not generally intend to make or take delivery of the underlying
obligation. All transactions in futures contracts and options thereon are
made, offset or fulfilled through a clearing house associated with the exchange
on which the contracts are traded. Although the Fund intends to buy and sell
futures contracts and options thereon only on exchanges where there appears to
be an active secondary market, there is no assurance that a liquid secondary
market will exist for any particular futures contract or option thereon at any
particular time. In such event, it may not be possible to close a futures
contract or options position.
Liquidity of Options and Futures Contracts. There is no assurance a
liquid secondary market will exist for any particular options or futures
contract at any particular time. Options may have relatively low trading
volume and liquidity if their strike prices are not close to the underlying
instrument's current price. Under certain circumstances, futures exchanges may
establish daily limits on the amount that the price of a futures contract or
option thereon 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 the liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or option thereon
due to 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, the Fund would be required to make daily variation margin payments
and might be required to maintain the position being hedged by the futures
contract or option or to maintain cash or securities in a segregated account.
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 over-the-counter ("OTC") options (options not traded
on exchanges) generally are established through negotiation with the other
party to the option contract. While this type of arrangement allows the Fund
great flexibility to tailor an option to its needs, OTC options generally
involve greater credit risk than exchange-traded options, which are guaranteed
by the clearing organization of the exchanges where they are traded.
Generally, the OTC foreign currency options used by the Fund are European-
style options. This means that the option is only exercisable immediately
prior to its expiration. This is in contrast to American-style options, which
are exercisable at any time prior to the expiration date of the option.
For so long as required by applicable state securities regulation, the
Fund will only trade OTC options (a) if exchange-traded options are not
available, (b) there is an active OTC market in such options, and (c)
transactions are all through a broker-dealer with a minimum net worth of $20
million. This guideline may be modified by the Fund's Board of Directors
without a shareholder vote.
Options and Futures Relating to Foreign Currencies. Currency futures
contracts are similar to forward currency exchange contracts, except that they
are traded on exchanges (and have margin requirements) and are standardized as
to contract size and delivery date. Most currency futures contracts call for
payment or delivery in U.S. dollars. The underlying instrument of a currency
option may be a foreign currency, which generally is purchased or delivered in
exchange for U.S. dollars, or may be a futures contract. The purchaser of a
currency call obtains the right to purchase the underlying currency, and the
purchaser of a currency put obtains the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indices, as discussed above. The Fund
may purchase and sell currency futures and may purchase and write currency
options to increase or decrease its exposure to different foreign currencies.
The Fund may also purchase and write currency options in conjunction with each
other or with currency futures or forward contracts. Currency futures and
options values can be expected to correlate with exchange rates, but may not
reflect other factors that affect the value of the Fund's investments. A
currency hedge, for example, should protect a Yen-denominated security from a
decline in the Yen, but will not protect the Fund against a price decline
resulting from deterioration in the issuer's creditworthiness. Because the
value of the Fund's foreign-denominated investments changes in response to many
factors other than exchange rates, it may not be possible to match the amount
of currency options and futures to the value of the Fund's investments exactly
over time.
Turnover. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause
it to sell or purchase related investments, thus increasing its turnover rate.
Once the Fund has received an exercise notice on an option it has written, it
cannot effect a closing transaction in order to terminate its obligation under
the option and must deliver or receive the underlying securities at the
exercise price. The exercise of puts purchased by the Fund may also cause the
sale of related investments, also increasing turnover; although such exercise
is within the Fund's control, holding a protective put might cause it to sell
the related investments for reasons that would not exist in the absence of the
put. The Fund will pay a brokerage commission each time it buys or sells a put
or call or purchases or sells a futures contract. Such commissions may be
higher than those that would apply to direct purchases or sales.
Asset Coverage for Forward Contract, Futures and Options Positions.
Transactions using forward contracts, futures contracts and options (other than
options that the Fund has purchased) expose the Fund to an obligation to
another party. The Fund will not enter into any such transactions unless it
owns either (1) an offsetting ("covered") position in securities, currencies,
or other options, futures contracts or forward contracts, or (2) cash,
receivables and short-term debt securities with a value sufficient at all times
to cover its potential obligations not covered as provided in (1) above. The
Fund will comply with SEC guidelines regarding cover for these instruments and,
if the guidelines so require, set aside cash, U.S. Government Securities or
other liquid, high-grade debt securities in a segregated account with its
custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding forward contract, futures contract or option
is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of the Fund's assets to cover or segregated
accounts could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year and
dividing it by the monthly average of the market value of such securities
during the year, excluding certain short-term securities. The Fund's turnover
rate may vary greatly from year to year as well as within a particular year and
may be affected by cash requirements for the redemption of its shares.
The Fund cannot precisely predict what its portfolio turnover rate will
be, but it is anticipated that its annual turnover rate for the common stock
portion of its portfolio will not exceed 200% and that the annual turnover rate
for the other portion of its portfolio will not exceed 200%. A high turnover
rate will increase transaction costs and commission costs that will be borne by
the Fund and could generate taxable income or loss.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Investment
Management Agreement between the Fund and WRIMCO is to arrange the purchase and
sale of securities for the portfolio of the Fund. Transactions in securities
other than those for which an exchange is the primary market are generally done
with dealers acting as principals or market makers. Brokerage commissions are
paid primarily for effecting transactions in securities traded on an exchange
and otherwise only if it appears likely that a better price or execution can be
obtained. The individual who manages the Fund may manage other Funds or
advisory accounts with similar investment objectives. It can be anticipated
that the manager will frequently place concurrent orders for all or most
accounts for which the manager has responsibility. Transactions effected
pursuant to such combined orders are averaged as to price and allocated in
accordance with the purchase or sale orders actually placed for each Fund or
advisory account.
To effect the portfolio transactions of the Fund, WRIMCO is authorized to
engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to achieve "best
execution" (prompt and reliable execution at the best price obtainable) for
reasonable and competitive commissions. WRIMCO need not seek competitive
commission bidding but is expected to minimize the commissions paid to the
extent consistent with the interests and policies of the Fund. Subject to
review by the Board of Directors, such policies include the selection of
brokers which provide execution and/or research services and other services,
including pricing or quotation services directly or through others ("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 or
its affiliates have investment discretion.
Brokerage services are, in general, defined by reference to Section 28(e)
of the Securities Exchange Act of 1934 as including (i) advice, either directly
or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities and the
availability of securities and purchasers or sellers; (ii) furnishing analyses
and reports; or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such brokerage services may
be higher than another qualified broker would charge for effecting comparable
transactions if a good faith determination is made by WRIMCO that the
commission is reasonable in relation to the brokerage services provided.
Subject to the foregoing considerations WRIMCO may also consider the
willingness of particular brokers and dealers to sell shares of the Fund and
other Funds managed by WRIMCO and its affiliates as a factor in their
selection. No allocation of brokerage or principal business is made to provide
any other benefits to WRIMCO or its affiliates.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of WRIMCO and its affiliates and
investment research received for the commissions of those other accounts may be
useful both to the Fund and one or more of such other accounts. To the extent
that electronic or other products provided by such brokers to assist 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 the Fund's portfolio or being considered for purchase.
In placing transactions for the Fund's portfolio, WRIMCO may consider
sales of shares of the Fund and other Funds managed by WRIMCO and its
affiliates as a factor in the selection of brokers to execute portfolio
transactions. WRIMCO intends to allocate brokerage on the basis of this factor
only if the sale is $2 million or more and there is no sales charge. This
results in the consideration only of sales which by their nature would not
ordinarily be made by Waddell & Reed, Inc.'s direct sales force and is done in
order to prevent the direct sales force from being disadvantaged by the fact
that it cannot participate in Fund brokerage.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
Buying and Selling with Other Funds
The Fund and one or more of the other funds in the United Group, Waddell &
Reed Funds, Inc., TMK/United Funds, Inc., Torchmark Government Securities Fund,
Inc. and Torchmark Insured Tax-Free Fund, Inc. or accounts over which Waddell &
Reed Asset Management Company exercises investment discretion frequently buy or
sell the same securities at the same time. If this happens, the amount of each
purchase or sale is divided. This is done on the basis of the amount of
securities each Fund or account wanted to buy or sell. Sharing in large
transactions could affect the price the Fund pays or receives or the amount it
buys or sells. However, sometimes a better negotiated commission is available.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each Class of the shares of the Fund is the value
of the assets of that Class, less the Class's liabilities, divided by the total
number of outstanding shares of that Class.
The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge
described in the Prospectus. The offering price of a Class Y share is its net
asset value next determined following acceptance of a purchase order.
The number of shares you receive for your purchase depends on the next
offering price after Waddell & Reed, Inc., the Fund's underwriter, 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.
Waddell & Reed, Inc. need not accept any purchase order, and it or the
Fund may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily computed
once on each day that the New York Stock Exchange, Inc. (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 other securities or commodities
exchange on which an option or future held by the Fund is traded. The NYSE
annually announces the days on which it will not be open for trading. The most
recent announcement indicates that it will not be open on the following days:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. However, it is possible that
the NYSE may close on other days. The net asset value will change every
business day, since the value of the Fund's assets and the number of shares
outstanding changes every business day.
The securities in the portfolio of the Fund, except as otherwise noted,
listed or traded on a stock exchange, are valued on the basis of the last sale
on that day or, lacking any sales, at a price which is the mean between the
closing bid and asked prices. Other securities that are traded over-the-
counter are priced using National Association of Securities Dealers Automated
Quotations ("NASDAQ"), which provides information on bid and asked prices
quoted by major dealers in such stocks. Bonds, other than convertible bonds,
are valued using a pricing system provided by a major dealer in bonds.
Convertible bonds are valued using this pricing system only on days when there
is no sale reported. Short-term debt securities are valued at amortized cost,
which approximates market. When market quotations are not readily available,
securities and other assets are valued at fair value as determined in good
faith under procedures established by and under the general supervision and
responsibility of the Fund's Board of Directors.
Options and futures contracts purchased and held by the Fund are valued at
the last sales price thereof on the securities or commodities exchanges on
which they are traded, or, if there are no transactions, at the mean between
bid and asked prices. Ordinarily, the close of the regular session for 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 the Fund will be
either the closing price of that contract or the bid price. Conversely, the
value of a futures contract sold by the Fund will be either the closing price
or the asked price.
When the Fund writes a put or call, an amount equal to the premium
received is included in the Fund's Statement of Assets and Liabilities as an
asset, and an equivalent deferred credit is included in the liability section.
The deferred credit is marked-to-market to reflect the current market value of
the put or call. If a call the Fund wrote is exercised, the proceeds received
on the sale of the related investment are increased by the amount of the
premium the Fund received. If the Fund exercised a call it purchased, the
amount paid to purchase the related investment is increased by the amount of
the premium paid. If a put written by the Fund is exercised, the amount that
the Fund pays to purchase the related investment is decreased by the amount of
the premium it received. If the Fund exercises a put it purchased, the amount
the Fund receives from the sale of the related investment is reduced by the
amount of the premium it paid. If a put or call written by the Fund expires,
it has a gain in the amount of the premium; if it enters into a closing
purchase transaction, it will have a gain or loss depending on whether the
premium was more or less than the cost of the closing transaction.
Foreign currency exchange rates are generally determined prior to the
close of the 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 the 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 under procedures established by and under the general
supervision and responsibility of the Board of Directors. The foreign currency
exchange transactions of the Fund conducted on a spot basis are valued at the
spot rate for purchasing or selling currency prevailing on the foreign exchange
market. Under normal market conditions, this rate differs from the prevailing
exchange rate by an amount generally less than one-tenth of one percent due to
the costs of converting from one currency to another.
Optional delivery standby commitments are valued at fair value under the
general supervision and responsibility of the Fund's Board of Directors. They
are accounted for in the same manner as exchange-listed puts.
Minimum Initial and Subsequent Investments
For Class A shares, initial investments must be at least $500 with the
exceptions described in this paragraph. A $100 minimum initial investment
pertains to certain exchanges of shares from another fund in the United Group.
A $50 minimum initial investment pertains to purchases for certain retirement
plan accounts and to accounts for which an investor has arranged, at the time
of initial investment, to make subsequent purchases for the account by having
regular monthly withdrawals of $25 or more made from a bank account. A minimum
initial investment of $25 is applicable to purchases made through payroll
deduction for or by employees of WRIMCO, Waddell & Reed, Inc., their
affiliates, or certain retirement plan accounts. Except with respect to
certain exchanges and automatic withdrawals from a bank account, a shareholder
may make subsequent investments of any amount. See "Exchanges for Shares of
Other Funds in the United Group."
For Class Y shares, investments by government entities or authorities or
by corporations must total at least $10 million within the first twelve months
after initial investment. There is no initial investment minimum for other
Class Y investors.
Reduced Sales Charges (Applicable to Class A Shares Only)
Account Grouping
For the purpose of taking advantage of the lower sales charges available
for large purchases of Class A shares, a purchase in any of categories 1
through 7 listed below made by an individual or deemed to be made by an
individual may be grouped with purchases in any other of these categories.
1. Purchases by an individual for his or her own account (includes purchases
under the United Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own
account (includes purchases under the United Funds Revocable Trust Form of
spouse);
3. Purchases by that individual or his or her spouse in their joint account;
4. Purchases by that individual or his or her spouse for the account of their
child under age 21;
5. Purchases by any custodian for the child of that individual or spouse in a
Uniform Gift to Minors Act ("UGMA") or Uniform Transfers to Minors Act
account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), Section 457 of the Code salary
reduction plan account provided that such purchases are subject to a sales
charge (see "Net Asset Value Purchases"), tax sheltered annuity account
("TSA") or Keogh plan account, provided that the individual and spouse are
the only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or her
spouse is the settlor (the person who establishes the trust).
All purchases of Class A shares made for a participant in a multi-
participant Keogh plan may be grouped only with other purchases made under the
same plan; a multi-participant Keogh plan is defined as a plan in which there
is more than one participant where one or more of the participants is other
than the spouse of the owner/employer.
All purchases of Class A shares made under a "qualified" employee benefit
plan of an incorporated business will be grouped. A "qualified" employee
benefit plan is established pursuant to Section 401 of the Code. All qualified
employee benefit plans of any one employer or affiliated employers will also be
grouped. An affiliate is defined as an employer that directly, or indirectly,
controls or is controlled by or is under control with another employer.
All purchases of Class A shares made under a simplified employee pension
plan ("SEP"), payroll deduction plan or similar arrangement adopted by an
employer or affiliated employers (as defined above) may be grouped provided
that the employer elects to have all such purchases grouped at the time the
plan is set up. If the employer does not make such an election, the purchases
made by individual employees under the plan may be grouped with the other
accounts of the individual employees described above.
Account grouping as described above is available under the following
circumstances.
One-time Purchases. A one-time purchase of Class A shares in accounts
eligible for grouping may be combined for purposes of determining the
availability of a reduced sales charge. In order for an eligible purchase to
be grouped, the investor must advise Waddell & Reed, Inc. at the time the
purchase is made that it is eligible for grouping and identify the accounts
with which it may be grouped.
Rights of Accumulation. If Class A shares are held in any account and an
additional purchase is made in that account or in any account eligible for
grouping with that account, the additional purchase is combined with the net
asset value of the existing account as of the date the new purchase is accepted
by Waddell & Reed, Inc. for the purpose of determining the availability of a
reduced sales charge.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan the shares held under the plan may be combined with the additional
purchase only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Statement of Intention. By signing a
Statement of Intention form, which is available from Waddell & Reed, Inc., the
purchaser indicates an intention to invest, over a 13-month period, a dollar
amount which is sufficient to qualify for a reduced sales charge. The 13-month
period begins on the date the first purchase made under the Statement is
accepted by Waddell & Reed, Inc. Each purchase made from time to time under
the Statement is treated as if the purchaser were buying at one time the total
amount which he or she intends to invest. The sales charge applicable to all
purchases of Class A shares made under the terms of the Statement will be the
sales charge in effect on the beginning date of the 13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's rights of accumulation (see above) will be taken into account; that
is, Class A shares already held in the same account in which the purchase is
being made or in any account eligible for grouping with that account, as
described above, will be included.
A copy of the Statement of Intention signed by a purchaser will be
returned to the purchaser after it is accepted by Waddell & Reed, Inc. and will
set forth the dollar amount of Class A shares which must be purchased within
the 13-month period in order to qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under a contractual
plan, the shares held under the plan will be taken into account in determining
the amount which must be invested under the Statement only if the contractual
plan has been completed.
The minimum initial investment under a Statement of Intention is 5% of the
dollar amount which must be invested under the Statement. An amount equal to
5% of the purchase required under the Statement will be held "in escrow." If a
purchaser does not, during the period covered by the Statement, invest the
amount required to qualify for the reduced sales charge under the terms of the
Statement, he or she will be responsible for payment of the sales charge
applicable to the amount actually invested. The additional sales charge owed
on purchases of Class A shares made under a Statement which is not completed
will be collected by redeeming part of the shares purchased under the Statement
and held "in escrow" unless the purchaser makes payment of this amount to
Waddell & Reed, Inc. within 20 days of Waddell & Reed, Inc.'s request for
payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower than
that available under the Statement of Intention, the lower sales charge will
apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell &
Reed, Inc. to sell, the shares covered by the Statement.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement will be deducted in computing the aggregate purchases under the
Statement.
Statements of Intention are not available for purchases made under a SEP
where the employer has elected to have all purchases under the SEP grouped.
Other Funds in the United Group
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the funds in the United Group which are subject to a sales
charge. A purchase of, or shares held, in any of the funds in the United Group
which are subject to the same sales charge as the Fund will be treated as an
investment in the Fund for the purpose of determining the applicable sales
charge. The following funds in the United Group have shares that are subject
to a maximum 5.75% ("full") sales charge as described in the prospectus of each
fund: United Funds, Inc., United International Growth Fund, Inc., United
Continental Income Fund, Inc., United Vanguard Fund, Inc., United Retirement
Shares, Inc., United High Income Fund, Inc., United New Concepts Fund, Inc.,
United Gold & Government Fund, Inc., United High Income Fund II, Inc., and
United Asset Strategy Fund, Inc. The following funds in the United Group have
shares that are subject to a "reduced" sales charge as described in the
prospectus of each fund: United Municipal Bond Fund, Inc., United Government
Securities Fund, Inc. and United Municipal High Income Fund, Inc. For the
purposes of obtaining the lower sales charge which applies to large purchases,
purchases in a fund in the United Group of shares that are subject to a full
sales charge may not be grouped with purchases of shares in a fund in the
United Group that are subject to a reduced sales charge; conversely, purchases
of shares in a fund with a reduced sales charge may not be grouped or combined
with purchases of shares of a fund that are subject to a full sales charge.
United Cash Management, Inc. is not subject to a sales charge. Purchases
in that fund are not eligible for grouping with purchases in any other fund.
Net Asset Value Purchases of Class A Shares
As stated in the Prospectus, Class A shares of the Fund may be purchased
at net asset value by the Directors and officers of the Fund, employees of
Waddell & Reed, Inc., employees of their affiliates, account representatives of
Waddell & Reed, Inc. and the spouse, children, parents, children's spouses and
spouse's parents of each such Director, officer, employee and account
representative. "Child" includes stepchild; "parent" includes stepparent.
Purchases of Class A shares in an IRA sponsored by Waddell & Reed, Inc.
established for any of these eligible purchasers may also be at net asset
value. Purchases of Class A shares in any tax qualified retirement plan under
which the eligible purchaser is the sole participant may also be made at net
asset value. Trusts under which the grantor and the trustee or a co-trustee
are each an eligible purchaser are also eligible for net asset value purchases
of Class A shares. "Employees" includes retired employees. A retired employee
is an individual separated from service from Waddell & Reed, Inc. or affiliated
companies with a vested interest in any Employee Benefit Plan sponsored by
Waddell & Reed, Inc. or its affiliated companies. "Account representatives"
includes retired account representatives. A "retired account representative"
is any account representative who was, at the time of separation from service
from Waddell & Reed, Inc., a Senior Account Representative. A custodian under
the Uniform Gifts (or Transfers) to Minors Act purchasing for the child or
grandchild of any employee or account representative may purchase Class A
shares at net asset value whether or not the custodian himself is an eligible
purchaser.
Purchases of Class A shares in a 401(k) plan having 100 or more eligible
employees and purchases of Class A shares in a 457 plan having 100 or more
eligible employees may be made at net asset value.
Reinvestment Privilege
The Fund offers a one-time reinvestment privilege that allows you to
reinvest without charge all or part of any amount you redeem from the Fund by
sending to the Fund the amount you wish to reinvest. The amount you return
will be reinvested at the net asset value next determined after the Fund
receives the returned amount. Your written request to reinvest and the amount
to be reinvested must be received within 30 days after your redemption request
was received, and the Fund must be offering shares of the Fund at the time your
reinvestment request is received. You can do this only once as to shares of
the Fund; however, you do not use up this privilege by redeeming shares to
invest the proceeds at net asset value in a Keogh plan or an IRA.
Reasons for Differences in Public Offering Price of Class A shares
As described herein and in the Prospectus, there are a number of instances
in which the Fund's Class A shares are sold or issued on a basis other than the
maximum public offering price, that is, the net asset value plus the highest
sales charge. Some of these relate to lower or eliminated sales charges for
larger purchases of Class A shares, whether made at one time or over a period
of time as under a Statement of Intention or right of accumulation. See the
table of sales charges in the Prospectus. The reasons for these quantity
discounts are, in general, that (i) they are traditional and have long been
permitted in the industry and are therefore necessary to meet competition as to
sales of shares of other funds having such discounts; (ii) certain quantity
discounts are required by rules of the National Association of Securities
Dealers, Inc. (as are elimination of sales charges on the reinvestment of
dividends and distributions); and (iii) they are designed to avoid an unduly
large dollar amount of sales charge on substantial purchases in view of reduced
selling expenses. Quantity discounts are made available to certain related
persons for reasons of family unity and to provide a benefit to tax-exempt
plans and organizations.
The reasons for the other instances in which there are reduced or
eliminated sales charges for Class A shares are as follows. Exchanges at net
asset value are permitted because a sales charge has already been paid on the
shares exchanged. Sales of Class A shares without sales charge are permitted
to Directors, officers and certain others due to reduced or eliminated selling
expenses and since such sales may aid in the development of a sound employee
organization, encourage incentive, responsibility and interest in the United
Group and an identification with its aims and policies. Limited reinvestments
of redemptions of Class A shares at no sales charge are permitted to attempt to
protect against mistaken or not fully informed redemption decisions. Class A
shares may be issued at no sales charge in plans of reorganization due to
reduced or eliminated sales expenses and since, in some cases, such issuance is
exempted by the 1940 Act from the otherwise applicable restrictions as to what
sales charge must be imposed. In no case in which there is a reduced or
eliminated sales charge are the interests of existing Class A shareholders
adversely affected since, in each case, the Fund receives the net asset value
per share of all shares sold or issued.
Retirement Plans
As described in the Class A 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 prototype documents for the
following retirement plans. All of these plans involve investment in shares of
the Fund (or shares of certain other funds in the United Group).
Individual Retirement Accounts (IRAs). Investors having earned income may
set up a plan that is commonly called an IRA. Under an IRA, an investor can
contribute each year up to 100% of his or her earned income, up to an annual
maximum of $2,000. The annual maximum is $2,250 if an investor's spouse has
earned income of $250 or less in a taxable year. If an investor's spouse has
at least $2,000 of earned income in a taxable year, the annual maximum is
$4,000 ($2,000 for each spouse). 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.
An investor may also use an IRA to receive a rollover contribution which
is either (a) a direct rollover from an employer's plan or (b) a rollover of an
eligible distribution paid to the investor from an employer's plan or another
IRA. To the extent a rollover contribution is made to an IRA, the distribution
will not be subject to Federal income tax until distributed from the IRA. A
direct rollover generally applies to any distribution from an employer's plan
(including a custodial account under Section 403(b)(7) of the Code, but not an
IRA) other than certain periodic payments, required minimum distributions and
other specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a
portion of that distribution generally may be rolled over to an IRA within 60
days after receipt of the distribution. Because mandatory Federal income tax
withholding applies to any eligible rollover distribution which is not paid in
a direct rollover, investors should consult their tax advisers or pension
consultants as to the applicable tax rules. If you already have an IRA, you
may have the assets in that IRA transferred directly to an IRA offered by
Waddell & Reed, Inc.
Simplified Employee Pension (SEP) plans and Salary Reduction SEP (SARSEP)
plans. Employers can make contributions to SEP-IRAs established for employees.
An employer may contribute up to 15% of compensation, not to exceed $22,500,
per year for each employee.
Keogh Plans. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money purchase
plan or a profit sharing plan. As a general rule, an investor under a defined
contribution Keogh plan can contribute each year up to 25% of his or her annual
earned income, with an annual maximum of $30,000.
457 Plans. If an investor is an employee of a state or local government
or of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is an
employee of a public school system or of certain types of charitable
organizations, he or she may be able to enter into a deferred compensation
arrangement through a custodian account under Section 403(b) of the Code. Some
organizations have adopted Title I plans, which are funded by employer
contributions in addition to employee deferrals.
401(k) Plans. With a 401(k) plan, employees can make tax-deferred
contributions into a plan to which the employer may also contribute, usually on
a matching basis. An employee may defer each year up to 25% of compensation,
subject to certain annual maximums, which may be increased each year based on
cost-of-living adjustments.
More detailed information about these arrangements and applicable forms
are available from Waddell & Reed, Inc. These plans may involve complex tax
questions as to premature distributions and other matters. Investors should
consult their tax adviser or pension consultant.
Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
Once a sales charge has been paid on shares of a fund in the United Group,
you may exchange these shares and any shares acquired through payment of
dividends or distributions from these shares for corresponding shares of
another fund in the United Group. The shares you exchange must be worth at
least $100 or you must already own shares of the fund in the United Group into
which you want to exchange.
You may exchange corresponding shares you own in another fund in the
United Group for Class A shares of the Fund without charge if (i) the shares of
the fund you are exchanging from are subject to a full sales charge and a sales
charge was paid on these shares, or (ii) the shares were received in exchange
for shares of a fund that are subject to a full sales charge and for which a
sales charge was paid, or (iii) the shares were acquired from payment of
dividends and distributions paid or shares subject to a full sales charge and
for which a sales charge was paid. The shares you are exchanging may have been
involved one or more such exchanges so long as a sales charge was paid on the
shares originally purchased. Also, shares acquired without a sales charge
because the purchase was $2 million or more will be treated the same as shares
on which a sales charge was paid.
Corresponding shares of funds subject to a reduced sales charge (United
Municipal Bond Fund, Inc., United Government Securities Fund, Inc. and United
Municipal High Income Fund, Inc.) may be exchanged for Class A shares of the
Fund only if (i) you have received those shares as a result of one or more
exchanges of shares on which a sales charge was originally paid, or (ii) the
shares have been held from the date of the original purchase for at least six
months.
Subject to the above rules regarding sales charges, you may have a
specific dollar amount of corresponding shares of United Cash Management, Inc.
automatically exchanged each month into Class A shares of the Fund or any other
fund in the United Group. The shares of United Cash Management, Inc. which you
designate for automatic exchange must be worth at least $100 or you must own
Class A shares of the fund in the United Group into which you want to exchange.
The minimum value of shares which you may designate for automatic exchange is
$100, which may be allocated among the Class A or corresponding shares of
different funds in the United Group so long as each fund receives a value of at
least $25. Minimum initial investment and minimum balance requirements apply
to such automatic exchange service. You may redeem your Class A shares of a
Fund and use the proceeds to purchase Class Y shares of that Fund if you meet
the criteria for purchasing Class Y shares.
Class Y Share Exchanges
Class Y shares of a Fund may be exchanged for Class Y shares of any other
fund in the United Group.
General Exchange Information
When you exchange shares, the total shares you receive will have the same
aggregate net asset value as the total shares you exchange. The relative
values are those next figured after your exchange request is received in good
order.
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any
time, upon notice in certain circumstances, and any such exchange may not be
accepted.
Redemptions
Redemption payments are made within seven days, unless delayed because of
emergency conditions determined by the SEC, when the NYSE is closed (other than
on weekends and 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. Redemptions may be made in portfolio securities
if the Fund's Board of Directors decides that conditions exist making cash
payments undesirable. The securities would be valued at the value used in
determining net asset value. There would be brokerage costs to the redeeming
shareholder in selling such securities. The Fund, however, has elected to be
governed by Rule 18f-1 under the 1940 Act, pursuant to which it is obligated to
redeem shares solely in cash up to the lesser of $250,000 or 1% of its net
asset value during any 90-day period for any one shareholder.
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 a regular basis Class A shares that you own of the
Fund or Class A or corresponding shares of any of the funds in the United
Group. It would be a disadvantage to an investor to make additional purchases
of shares while a withdrawal program is in effect because it would result in
duplication of sales charges. Applicable forms are available from Waddell &
Reed, Inc.
To qualify for the Service, you must have invested at least $10,000 in
Class A or corresponding shares which you still own of any of the Funds in the
United Group; or, you must own Class A or corresponding shares having a value
of at least $10,000. The value for this purpose is the value at the offering
price.
You can choose to have your shares redeemed to receive:
(1) a monthly, quarterly, semiannual or annual payment of $50 or more;
(2) a monthly payment, which will change each month, equal to one-twelfth
of a percentage of the value of the shares in the Account (you select the
percentage); or
(3) a monthly or quarterly payment, which will change each month or
quarter, by redeeming a fixed number of shares (at least five shares).
Shares are redeemed on the 20th day of the month in which the payment is
to be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
Retirement Plan Accounts may be subject to a fee imposed by the Plan
Custodian for use of their service.
The dividends and distributions on shares you have made available for the
Service are paid in additional shares. All payments under the Service are made
by redeeming shares, which may involve a gain or loss for tax purposes. To the
extent that payments exceed dividends and distributions, the number of Class A
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 an 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. You
can at any time redeem part or all of the shares in your account; if you redeem
all of the shares, the Service is terminated. The Fund can also terminate the
Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed will
be sent to you to assist you in completing your Federal income tax return.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to compel the redemption of shares held under any
account or any plan if the aggregate net asset value of such shares (taken at
cost or value as the Board of Directors may determine) is less than $500. The
Board of Directors has no intent to compel redemptions in the foreseeable
future. If it should elect to compel redemptions, shareholders who are
affected will receive prior written notice and will be permitted 60 days to
bring their accounts up to the minimum before the redemption is processed.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may from time to
time publish the Fund's total return and/or performance information in
advertisements and sales materials.
Total Return
The Fund's average annual total return quotation is computed according to
a standardized method prescribed by SEC rules. The average annual total return
for the Fund for a specific period is found by taking a hypothetical $1,000
investment in Fund shares on the first day of the period and computing the
"redeemable value" of that investment at the end of the period. Standardized
total return information is calculated by assuming an initial $1,000 investment
and, for Class A shares, from which the maximum sales load of 5.75% is
deducted. All dividends and distributions are assumed to be reinvested in
shares of the applicable Class at net asset value for the Class as of the day
the dividend or distribution is paid. No sales load is charged on reinvested
dividends or distributions on Class A shares. The formula used to calculate
the total return for a particular class of the Fund is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for the
periods shown.
Non-standardized performance information may also be presented. For
example, a Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to
have been invested. If the sales charge applicable to Class A shares were
reflected, it would reduce the performance quoted for that Class.
Calculation of cumulative total return is not subject to a prescribed
formula. The cumulative total return for a Class for a specific period is
calculated by first taking a hypothetical initial investment in Fund shares on
the first day of the period and computing the "redeemable value" of that
investment at the end of the period. The cumulative total return percentage is
then determined by subtracting the initial investment from the redeemable value
and dividing the remainder by the initial investment and expressing the result
as a percentage. The calculation assumes that all income and capital gains
distributions of the Class have been reinvested at net asset value on the
reinvestment dates during the period. Cumulative total return may also be
shown as the increased dollar value of the hypothetical investment in the Class
over the period.
Performance Rankings
Waddell & Reed, Inc. or the Fund also may from time to time publish in
advertisements or sales material performance rankings as published by
recognized independent mutual fund statistical services such as Lipper
Analytical Services, Inc., or by publications of general interest such as
Forbes, Money, The Wall Street Journal, Business Week, Barron's, Fortune or
Morningstar Mutual Fund Values. Each Class of the Fund may also compare its
performance to that of other selected mutual funds or selected recognized
market indicators such as the Standard & Poor's 500 Stock Index and the Dow
Jones Industrial Average. Performance information may be quoted numerically or
presented in a table, graph or other illustration.
All performance information that the Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of the Fund's shares when redeemed may be more or
less than their original cost.
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder of a Class of shares of the Fund, other than payments when you
redeem your shares. The first source is the Fund's net investment income,
which is derived from the dividends, interest and earned discount on the
securities it holds, less expenses (which will vary by Class). The second
source is realized capital gains, which are derived from the proceeds received
from the sale of securities at a price higher than the Fund's tax basis
(usually cost) in such securities; these gains can be either long-term or
short-term, depending on how long the Fund has owned the securities before it
sells them. The third source is net realized gains from foreign currency
transactions. The payments made to shareholders from net investment income,
net short-term capital gains, and net realized gains from certain foreign
currency transactions are called dividends. Payments, if any, from long-term
capital gains are called distributions.
The Fund pays distributions only if it has net realized capital gain (the
excess of net long-term capital gains over net short-term capital losses). It
may or may not have such gains, depending on whether securities are sold and at
what price. If the Fund has net realized capital gains, it will pay
distributions once each year, in the latter part of the fourth calendar
quarter. Even if it has net capital gains for a year, the Fund does not pay
out the gains if it has applicable prior year losses to offset the gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you want cash
for your dividends and distributions, (ii) you want your dividends and
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid or (iii) you want cash for your dividends and want your
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid. You can change your instructions at any time. If you
give no instructions, your dividends and distributions will be paid in shares
of the Fund of the same class as that with respect to which they were paid.
All payments in Fund shares are at net asset value without any sales charge.
The net asset value used for this purpose is that computed as of the record
date for the dividend or distribution, although this could be changed by the
Board of Directors.
Even if you get dividends and distributions on Class A shares in cash, you
can thereafter reinvest them (or distributions only) in Class A shares of the
Fund at net asset value next determined after receipt by Waddell & Reed, Inc.
of the amount clearly identified as a reinvestment. The reinvestment must be
within 45 days after the payment.
TAXES
General
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986 (the "Code"), the Fund
must distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gains and net gains from certain foreign
currency transactions) and must meet several additional requirements. These
requirements include the following: (1) the Fund must derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) the
Fund must derive less than 30% of its gross income each taxable year from the
sale or other disposition of securities, or any of the following, that were
held for less than three months -- (i) options, futures contracts, or forward
contracts or (ii) foreign currencies (or options, futures contracts or forward
contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures contracts
withrespect to securities) ("Short-Short Limitation"); (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government Securities,
securities of other RICs and other securities that are limited, in respect of
any one issuer, to an amount that does not exceed 5% of the value of the Fund's
total assets and that does not represent more than 10% of the outstanding
voting securities of the issuer; and (4) at the close of each quarter of the
Fund's taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. Government Securities or the securities
of other RICs) of any one issuer.
Dividends and distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in one 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 shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any distributions received on those shares. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or distribution, the purchaser will receive some portion of the
purchase price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gains net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. It is the Fund's policy to make sufficient distributions each
year to avoid imposition of the Excise Tax. The Code permits the Fund to defer
into the next calendar year net capital losses incurred between each November 1
and the end of the current calendar year.
Income from Foreign Securities
Dividends and interest received by the Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of debt securities denominated in foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest, dividends or other receivables or accrues expenses
or other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally are
treated as ordinary income or loss. These gains or losses, referred to under
the Code as "section 988" gains or losses, may increase or decrease the amount
of the Fund's investment company taxable income to be distributed to its
shareholders.
Income from Options, Futures Contracts and Currencies
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the gains and losses the Fund realizes in connection
therewith. Income from foreign currencies (except certain gains therefrom that
may be excluded by future regulations), and income from transactions in
options, futures contracts and forward contracts derived by the Fund with
respect to its business of investing in securities will qualify as permissible
income under the Income Requirement. However, income from the disposition of
options and futures will be subject to the Short-Short Limitation if they are
held for less than three months. Income from the disposition of foreign
currencies and forward contracts thereon that are not directly related to the
Fund's principal business of investing in securities (or options and futures
with respect to securities) also will be subject to the Short-Short Limitation
if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gains (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all of the Fund's hedging transactions. To the
extent this treatment is not available, the Fund may be forced to defer the
closing out of options, futures and certain forward contracts beyond the time
when it otherwise would be advantageous to do so, in order for the Fund to
continue to qualify as a RIC.
Any income the Fund earns from writing options is taxed as short-term
capital gains. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund expires without being
exercised, the premium it receives also will be a short-term gain. If such an
option is exercised and thus the Fund sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gains or losses on the sale. The Fund will not write so many
options that it could fail to continue to qualify as a RIC.
Certain options and futures in which the Fund may invest will be "section
1256 contracts." Section 1256 contracts held by the Fund at the end of each
taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which the Fund has made an election not to have the
following rules apply, are "marked-to-market" (that is, treated as sold for
their fair market value) for federal income tax purposes, with the result that
unrealized gains or losses are treated as though they were realized. Sixty
percent of any net gains or losses recognized on these deemed sales, and 60% of
any net realized gains or losses from any actual sales of section 1256
contracts, are treated as long-term capital gains or losses, and the balance is
treated as short-term capital gains or losses. Section 1256 contracts also may
be marked-to-market for purposes of the Excise Tax and for other purposes.
Code section 1092 (dealing with straddles) may also affect the taxation of
options and futures contracts in which the Fund may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property.
Section 1092 generally provides that any loss from the disposition of a
position in a straddle may be deducted only to the extent the loss exceeds the
unrealized gain on the offsetting position(s) of the straddle. Section 1092
also provides certain "wash sale" rules, which apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the Fund
makes certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions will be determined under
rules that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.
Zero Coupon and Payment-in-Kind Securities
The Fund may acquire zero coupon or other securities issued with original
issue discount. As the holder of those securities, the Fund must include in
its income the original issue discount that accrues on the securities during
the taxable year, even if the Fund receives no corresponding payment on the
securities during the year. Similarly, the Fund must include in its gross
income securities it receives as "interest" on payment-in-kind securities.
Because the Fund annually must distribute substantially all of its investment
company taxable income, including any original issue discount and other non-
cash income, in order to satisfy the distribution requirement described above
and to avoid imposition of the Excise Tax, it may be required in a particular
year to distribute as a dividend an amount that is greater than the total
amount of cash it actually receives. Those distributions will be made from the
Fund's cash assets or from the proceeds of sales of portfolio securities, if
necessary. The Fund may realize capital gains or losses from those sales,
which would increase or decrease its investment company taxable income and/or
net capital gains. In addition, any such gains may be realized on the
disposition of securities held for less than three months. Because of the
Short-Short Limitation, any such gains would reduce the Fund's ability to sell
other securities, or options or futures, held for less than three months that
it might wish to sell in the ordinary course of its portfolio management.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with WRIMCO. Under the Management Agreement, WRIMCO is employed to
supervise the investments of the Fund and provide investment advice to the
Fund. The address of WRIMCO is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
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 United Investors Management Company. United Investors
Management Company is a wholly-owned subsidiary of Torchmark Corporation.
Torchmark Corporation is a publicly held company. The address of Torchmark
Corporation and United Investors Management Company is 2001 Third Avenue South,
Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the company's inception date, whichever was later, and to
TMK/United Funds, Inc. since that Fund's inception, until January 8, 1992, when
it assigned the Management Agreement for these Funds and all related investment
management duties (and the related professional staff) to WRIMCO, subject to
the authority of the fund's Board of Directors. WRIMCO has also served as
investment manager for Waddell & Reed Funds, Inc. since its inception in
September 1992 and Torchmark Government Securities Fund, Inc. and Torchmark
Insured Tax-Free Fund, Inc. since they each commenced operations in February
1993. Waddell & Reed, Inc. serves as principal underwriter for the Fund and
the investment companies in the United Group of Mutual Funds and Waddell & Reed
Funds, Inc. and serves as distributor for TMK/United Funds, Inc.
The Management Agreement permits WRIMCO or an affiliate of WRIMCO to enter
into a separate agreement for transfer agency services ("Shareholder Servicing
Agreement") and a separate agreement for accounting services ("Accounting
Services Agreement") with the Fund. The Management Agreement contains detailed
provisions as to the matters to be considered by the Fund's Board of Directors
prior to approving any Shareholder Servicing Agreement or Accounting Services
Agreement.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund
and Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell &
Reed, Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Board of Directors
without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, as compensation for WRIMCO's management
services, the Fund pays WRIMCO a fee as described in the Prospectus. The Fund
accrues and pays this fee daily. For purposes of calculating the daily fee the
Fund does not include money owed to it by Waddell & Reed, Inc. for shares which
it has sold but not yet paid to the Fund.
Under the Shareholder Servicing Agreement, with respect to Class A shares
the Fund pays the Agent a monthly fee of $1.0208 for each shareholder account
that was in existence at any time during the prior month, plus $0.30 for each
account on which a dividend or distribution, of cash or shares, had a record
date in that month. For Class Y shares, the Fund pays the Agent a monthly fee
equal to one-twelfth of .15 of 1% of the average daily net assets of that Class
for the preceding month. The Fund also pays certain out-of-pocket expenses of
the Agent, including long distance telephone communication costs; microfilm and
storage costs for certain documents; forms, printing and mailing costs; and
legal and special services not provided by Waddell & Reed, Inc., WRIMCO or the
Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a monthly
fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- --------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $ 1,000 $ 85,000
$1,000 and Over $100,000
The State of California imposes limits on the amount of certain expenses
the Fund can pay by requiring WRIMCO to reduce its fee to the extent any
included expenses exceed 2.5% of the Fund's first $30 million of average net
assets, 2% of the next $70 million of average net assets and 1.5% of any
remaining average net assets during a fiscal year. The limit does not include
interest, taxes, brokerage commissions and extraordinary expenses, such as
litigation, that usually do not arise in the normal operations of a mutual
fund. The Fund's other expenses, including its management fee, are included.
The Fund will notify shareholders of any change in the limitation.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for the accounting services as discussed above, WRIMCO
and the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement
are described above. Waddell & Reed, Inc. and its affiliates pay the Fund's
Directors and officers who are affiliated with WRIMCO and its affiliates. The
Fund pays the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an Underwriting Agreement separate from the
Management Agreement, Shareholder Servicing Agreement and Accounting Services
Agreement, acts as the Fund's underwriter. Waddell & Reed, Inc. offers and
sells the Fund's shares on a continuous basis. It is not required to sell any
particular number of shares and thus sells shares only for purchase orders
received. Under this Underwriting Agreement, Waddell & Reed, Inc. pays the
costs of sales literature, including the costs of shareholder reports used as
sales literature, and the costs of printing the prospectuses furnished to it by
the Fund.
A major portion of the sales charge for Class A shares is paid to account
representatives and sales managers of Waddell & Reed, Inc. Waddell & Reed,
Inc. may compensate its account representatives as to purchases for which there
is no sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under a Service Plan for Class A shares (the "Plan") adopted by the Fund
pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay Waddell & Reed,
Inc., a fee not to exceed .25% of the Fund's average annual net assets
attributable to Class A shares, paid monthly, to reimburse Waddell & Reed, Inc.
for its costs and expenses in connection with the provision of personal
services to Class A shareholders of the Fund and/or maintenance of Class A
shareholder accounts.
The Plan and a related Service Agreement between the Fund and Waddell &
Reed, Inc. contemplate that Waddell & Reed, Inc. may be reimbursed for amounts
it expends in compensating, training and supporting registered account
representatives, sales managers and/or other appropriate personnel in providing
personal services to Class A shareholders of the Fund and/or maintaining Class
A shareholder accounts; increasing services provided to Class A shareholders of
the Fund by office personnel located at field sales offices; engaging in other
activities useful in providing personal service to Class A shareholders of the
Fund and/or maintenance of Class A shareholder accounts; and in compensating
broker-dealers who may regularly sell Class A shares of the Fund, and other
third parties, for providing shareholder services and/or maintaining
shareholder accounts with respect to Class A shares.
The Plan and the Service Agreement were approved by the Fund's Board of
Directors, including the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operations of the
Plan or any agreement referred to in the Plan (hereafter, the "Plan
Directors"). The Plan was also approved by Waddell & Reed, Inc. as the sole
shareholder of the affected shares of the Fund at the time.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will
be effective only if approved, by the Directors including the Plan Directors
acting in person at a meeting called for that purpose, (iii) amounts to be paid
by the Fund under the Plan may not be materially increased without the vote of
the holders of a majority of the outstanding Class A shares of the Fund, and
(iv) while the Plan remains in effect, the selection and nomination of the
Directors who are Plan Directors will be committed to the discretion of the
Plan Directors.
Custodial and Auditing Services
The custodian for the Fund is UMB Bank, n.a., Kansas City, Missouri. In
general, the custodian is responsible for holding the Fund's cash and
securities. If Fund assets are held in foreign countries, the Fund will comply
with Rule 17f-5 under the 1940 Act. Price Waterhouse LLP, Kansas City,
Missouri, the Fund's independent accountants, audits the Fund's financial
statements.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. The Board has the benefit of
advice and reports from independent counsel and independent auditors.
The principal occupation during at least the past five years of each
Director and officer of the Fund is given below. Each of the persons listed
through and including Mr. Wright is a member of the Fund's Board of Directors.
The other persons are officers but not Board members. 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.,
TMK/United Funds, Inc., Torchmark Government Securities Fund, Inc. and
Torchmark Insured Tax-Free Fund, Inc. Each of the Fund's Directors is also a
Director of each of the Funds in the Fund Complex and each of the Fund's
officers is also an officer of one or more of the Funds in the Fund Complex.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund and each of the other funds
in the Fund Complex; Chairman of the Board of Directors of Waddell & Reed
Financial Services, Inc., United Investors Management Company and United
Investors Life Insurance Company; Chairman of the Board of Directors and Chief
Executive Officer of Torchmark Corporation; Chairman of the Board of Directors
of Vesta Insurance Group, Inc.; formerly, Chairman of the Board of Directors of
Waddell & Reed, Inc. Father of Linda Graves, Director of the Fund and each of
the other funds in the Fund Complex.
KEITH A. TUCKER*
President of the Fund and each of the other Funds in the Fund Complex;
President, Chief Executive Officer and Director of Waddell & Reed Financial
Services, Inc.; Chairman of the Board of Directors of WRIMCO, Waddell & Reed,
Inc., Waddell & Reed Services Company, Waddell & Reed Asset Management Company
and Torchmark Distributors, Inc., an affiliate of Waddell & Reed, Inc.; Vice
Chairman of the Board of Directors, Chief Executive Officer and President of
United Investors Management Company; Vice Chairman of the Board of Directors of
Torchmark Corporation; Director of Southwestern Life Corporation; formerly,
partner in Trivest, a private investment concern; formerly, Director of
Atlantis Group, Inc., a diversified company.
HENRY L. BELLMON
Route 1
P. O. Box 26
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma; prior to his current service as Director of the funds in the United
Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc., he served in
such capacity for the funds in the United Group and TMK/United Funds, Inc.
DODDS I. BUCHANAN
905 13th Street
Boulder, Colorado 80302
Advisory Director, The Hand Companies; President, Buchanan Ranch Corp.;
formerly, Senior Vice President and Director of Marketing Services, The Meyer
Group of Management Consultants; formerly, Chairman, Department of Marketing,
Transportation and Tourism, University of Colorado; formerly, Professor of
Marketing, College of Business, University of Colorado.
JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Formerly, President and Director of Kansas City Stock Yards Company;
formerly, Partner in Dillingham Farms, a farming operation.
LINDA GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, partner, Levy and Craig, P.C., a law firm.
Daughter of Ronald K. Richey, Chairman of the Board of the Fund and each of the
other funds in the Fund Complex.
JOHN F. HAYES*
335 N. Washington
Suite 260
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; formerly, President of Gilliland & Hayes, P.A., a law firm.
GLENDON E. JOHNSON
7300 Corporate Center Drive
P. O. Box 020270
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Financial Corporation
and subsidiaries.
JAMES B. JUDD
No. 1 Ward Parkway
Suite 138
Kansas City, Missouri 64112
Retired; formerly, partner, KPMG Peat Marwick. A petition relating to Mr.
Judd's property was filed under the Federal bankruptcy laws and is now final.
WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of the
Fund and each fund in the Fund Complex then in existence. (Mr. Morgan retired
as Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company; formerly,
Director of Waddell & Reed Asset Management Company, United Investors
Management Company and United Investors Life Insurance Company, affiliates of
Waddell & Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management
and investment; formerly, Director of The Vendo Company, a manufacturer and
distributor of vending machines.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64110
Chancellor, University of Missouri-Kansas City; formerly, Interim
Chancellor, University of Missouri-Kansas City; formerly, Vice Chancellor for
Academic Affairs, University of Missouri-Kansas City.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired.
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
LESLIE S. WRIGHT
2302 Brookshire Place
Birmingham, Alabama 35213
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association; formerly, President of Samford University.
Robert L. Hechler
Vice President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Vice President, Chief Operations Officer,
Director and Treasurer of Waddell & Reed Financial Services, Inc.; Executive
Vice President, Principal Financial Officer, Director and Treasurer of WRIMCO;
President, Chief Executive Officer, Principal Financial Officer, Director and
Treasurer of Waddell & Reed, Inc.; Director and Treasurer of Waddell & Reed
Asset Management Company; President, Director and Treasurer of Waddell & Reed
Services Company; Vice President, Treasurer and Director of Torchmark
Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund and each of the other funds in the Fund
Complex; Vice President, Chief Investment Officer and Director of Waddell &
Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.; President,
Chief Executive Officer, Chief Investment Officer and Director of WRIMCO and
Waddell & Reed Asset Management Company; Senior Vice President and Chief
Investment Officer of United Investors Management Company.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund and
each of the other funds in the Fund Complex; Vice President of Waddell & Reed
Services Company.
Sharon K. Pappas
Vice President, Secretary and General Counsel of the Fund and each of the
other funds in the Fund Complex; Vice President, Secretary and General Counsel
of Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary
and General Counsel of WRIMCO and Waddell & Reed, Inc.; Director, Senior Vice
President, Secretary and General Counsel of Waddell & Reed Services Company;
Director, Secretary and General Counsel of Waddell & Reed Asset Management
Company; Vice President, Secretary and General Counsel of Torchmark
Distributors, Inc.; formerly Assistant General Counsel of Waddell & Reed, Inc.,
WRIMCO, Waddell & Reed Financial Services, Inc., Waddell & Reed Asset
Management Company and Waddell & Reed Services Company.
James D. Wineland
Vice President of the Fund and Vice President of three other funds in the
Fund Complex; Vice President of WRIMCO; formerly Vice President of Waddell &
Reed, Inc.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
As of the date of this SAI, five of the Fund's Directors may be deemed to
be "interested persons" as defined in the 1940 Act of its underwriter, Waddell
& Reed, Inc., or of its manager, WRIMCO. The Directors who may be deemed to be
"interested persons" are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a director may elect after resignation from the Board
provided the director has attained the age of 75 and has served as a director
of the funds in the United Group for a total of at least five years. A
Director Emeritus receives fees in recognition of his past services whether or
not services are rendered in his capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Currently,
no person serves as a Director Emeritus.
The Fund will pay annual fees to each Director, other than Directors who
are affiliates of Waddell & Reed, Inc., and to each Director Emeritus in an
amount to be determined by the Board of Directors after the Fund has been in
operation one full year. No fees are currently paid to Directors or Directors
Emeritus. The Director's fees will be allocated among the funds in the United
Group, Waddell & Reed Funds, Inc. and TMK/United Funds, Inc. based on their
relative size. The officers will be paid by Waddell & Reed, Inc. or its
affiliates.
Shareholdings
As of August 31, 1995, all of the Fund's Directors and officers as a group
owned less than 1% of the outstanding shares of the Fund.
ORGANIZATION OF THE FUND
The Fund was organized on August 25, 1994, and has no prior history.
The Shares of the Fund
The Fund offers two Classes of shares: Class A and Class Y. Prior to
September 12, 1995, the Fund offered only one Class of shares to the public.
Shares outstanding on that date were designated as Class A shares. Each Class
represents interest in the same assets of the Fund and differ as follows: each
Class of shares has exclusive voting rights on matters pertaining to matters
appropriately limited to that Class; Class A shares are subject to an initial
sales charge and to an ongoing service fee; each Class may bear differing
amounts of certain Class-specific expenses; and each Class has a separate
exchange privilege. The Fund does not anticipate that there will be any
conflicts between the interests of holders of the different Classes of shares
of the Fund by virtue of those Classes. On an ongoing basis, the Board of
Directors will consider whether any such conflict exists and, if so, take
appropriate action. Each share of the Fund is entitled to equal voting,
dividend, liquidation and redemption rights, except that due to the differing
expenses borne by the two Classes, dividends and liquidation proceeds of Class
A shares are expected to be lower than for Class Y shares of the Fund. Each
fractional share of a Class has the same rights, in proportion, as a full share
of that Class.
Those shares held by Waddell & Reed, Inc. (as described below) will be
voted in proportion to the voting instructions which are received on any
matter. Voting instructions to abstain on any item to be voted upon will be
applied to reduce the votes eligible to be cast by Waddell & Reed, Inc.
Initial Investment and Organizational Expenses
On February 23, 1995, Waddell & Reed, Inc. purchased for investment 20,000
shares of the Fund at a net asset value of $5.00 per share.
The Fund's organizational expenses in the amount of $48,800 have been
advanced by Waddell & Reed, Inc. and are an obligation to be paid by the Fund.
These expenses are being amortized over the 60-month period following the date
of the initial public offering of the Fund's shares. In the event that all or
part of Waddell & Reed, Inc.'s initial investment in the Fund's shares is
redeemed prior to the full reimbursement of the organizational expenses, the
Fund's obligation to make reimbursement will cease.
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities which
the Fund may use. The Fund may also use ratings provided by other nationally
recognized statistical rating organizations in determining the securities
eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Services. 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 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 Ratings Services. A 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 S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A -- An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB -- An issue rated BBB is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB, B, CCC -- Preferred stock rated BB, B, and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC -- The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
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 Rating's Services. A 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
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in short-
term borrowing, while various factors of major importance in bond risk are of
lesser importance over the short run. Rating symbols and their meanings
follow:
MIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3 -- This designation denotes favorable quality. All security
elements are accounted for but this is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4 -- This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Standard & Poor's Ratings Services. A 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. MIS 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.
DOLLAR-WEIGHTED AVERAGE MATURITY
Dollar-Weighted Average Maturity is derived by multiplying the value of
each investment by the number of days remaining to its maturity, adding these
calculations, and then dividing the total by the value of the Fund's portfolio.
An obligation's maturity is typically determined on a stated final maturity
basis, although there are some exceptions to this rule.
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be called,
refunded, or redeemed may be considered to be its maturity date. Also, the
maturities of mortgage-backed securities and some asset-backed securities, such
as collateralized mortgage obligations, are determined on a weighted average
life basis, which is the average time for principal to be repaid. For a
mortgage security, this average time is calculated by assuming a constant
prepayment rate for the life of the mortgage. The weighted average life of
these securities is likely to be substantially shorter than their stated final
maturity.
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
JULY 31, 1995
Shares Value
COMMON STOCKS
Automotive - 1.55%
Ford Motor Company ..................... 8,500 $ 245,438
Banks and Savings and Loans - 3.46%
Compass Bancshares, Inc. ............... 8,000 258,000
CoreStates Financial Corp. ............. 8,000 292,000
Total.................................. 550,000
Beverages - 0.70%
Buenos Aires Embotelladora S.A., ADR ... 4,500 111,938
Biotechnology and Medical Services - 2.32%
Genentech, Inc.* ........................ 3,500 167,125
KeraVision, Inc.* ....................... 16,000 202,000
Total.................................. 369,125
Building - 0.40%
TJ International, Inc. ................. 3,000 63,000
Chemicals Specialty and Miscellaneous Technology - 3.20%
Crompton & Knowles Corporation ......... 15,000 226,875
Geon Company (The) ...................... 10,000 281,250
Total.................................. 508,125
Consumer Electronics and Appliances - 3.08%
Corning Incorporated ................... 5,000 160,000
Samsung Electronics Co., Ltd., GDR* ..... 5,000 328,600
Total.................................. 488,600
Domestic Oil - 1.77%
Enron Corp. ............................ 13,000 281,125
Hospital Management - 3.99%
American Oncology Resources, Inc.* ..... 5,500 183,562
LTC Properties, Inc. ................... 16,000 224,000
United HealthCare Corporation .......... 5,000 226,250
Total.................................. 633,812
Machinery - 1.19%
Keystone International, Inc. ........... 9,000 189,000
Metals and Mining - 0.31%
RTZ Corporation PLC, ADR ............... 850 49,406
Paper - 1.47%
James River Corporation of Virginia .... 7,000 233,625
Services, Consumer and Business - 2.13%
Dun & Bradstreet Corporation (The) ...... 6,000 337,500
TOTAL COMMON STOCKS - 25.57% $ 4,060,694
(Cost: $3,742,765)
See Notes to Schedule of Investments on page 71.
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
JULY 31, 1995
Shares Value
PREFERRED STOCK - 0.59%
Drugs and Hospital Supply
United States Surgical Corporation,
Convertible Class A ................... 3,500 $ 94,500
(Cost: $84,745)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITY - 0.33%
Multi-Industry
Mark IV Industries, Inc.,
8.75%, 4-1-2003 ....................... $ 50 $ 51,500
(Cost: $49,019)
UNITED STATES GOVERNMENT SECURITIES
United States Treasury:
6.875%, 2-28-97 ....................... 270 274,218
6.125%, 5-31-97 ....................... 2,000 2,007,820
7.25%, 2-15-98 ........................ 270 277,889
7.125%, 2-29-2000 ..................... 270 279,914
7.5%, 2-15-2005 ....................... 270 289,405
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 19.70% $ 3,129,246
(Cost: $3,104,331)
SHORT-TERM SECURITIES
Automotive - 3.14%
Echlin, Inc.,
5.76%, 8-21-95 ........................ 500 498,400
Banks and Savings and Loans - 4.48%
U.S. Bancorp,
Master Note ........................... 712 712,000
Chemicals Major - 2.51%
Hercules, Inc.,
5.89%, 8-22-95 ........................ 400 398,626
See Notes to Schedule of Investments on page 71.
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
JULY 31, 1995
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Domestic Oil - 3.14%
Enron Corp.,
6.05%, 8-11-95 ........................ $500 $ 499,160
Financial - 9.99%
B.A.T. Capital Corp.:
5.75%, 8-7-95 ......................... 100 99,904
5.74%, 8-28-95 ........................ 300 298,708
BHP Finance (U.S.A.) Inc.:
5.7%, 8-25-95 ......................... 250 249,050
5.73%, 8-25-95 ........................ 200 199,236
Dana Credit Corp.,
6.04%, 8-21-95 ........................ 250 249,161
PHH Corp.,
5.75%, 8-15-95 ........................ 490 488,904
Total ................................. 1,584,963
Food and Related - 6.48%
General Mills, Inc.,
Master Note ........................... 315 315,000
Sara Lee Corporation,
Master Note ........................... 715 715,000
Total ................................. 1,030,000
Machinery - 4.40%
Cooper Industries, Inc.,
5.8%, 8-15-95 ......................... 700 698,421
Paper - 3.77%
Champion International Corporation,
5.875%, 8-14-95 ....................... 600 598,727
Public Utilities - Electric - 1.25%
Public Service Company of Colorado,
5.85%, 8-16-95 ........................ 200 199,513
Railroad - 3.15%
Burlington Northern Railroad Co.,
6.1%, 8-4-95 .......................... 500 499,746
Retailing - 1.56%
K Mart Corporation,
5.87%, 9-8-95 ......................... 250 248,451
Telecommunications - 3.77%
GTE Corporation,
5.78%, 8-10-95 ........................ 600 599,133
See Notes to Schedule of Investments on page 71.
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
JULY 31, 1995
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Tobacco - 3.14%
Philip Morris Companies Inc.,
5.68%, 8-18-95 ........................ $500 $ 498,659
TOTAL SHORT-TERM SECURITIES - 50.78% $ 8,065,799
(Cost: $8,065,799)
TOTAL INVESTMENT SECURITIES - 96.97% $15,401,739
(Cost: $15,046,659)
CASH AND OTHER ASSETS, NET OF
LIABILITIES - 3.03% 481,668
NET ASSETS - 100.00% $15,883,407
Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 4 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1995
(Unaudited)
Assets
Investment securities -- at value
(Notes 1 and 4) ................................. $15,401,739
Cash ............................................ 534
Receivables:
Fund shares sold ................................ 638,278
Dividends and interest .......................... 67,811
Unamortized organization expenses (Note 2) ....... 46,228
Prepaid insurance premium ........................ 330
Other assets ..................................... 5,037
-----------
Total assets .................................. 16,159,957
-----------
Liabilities
Payable for investment securities purchases ...... 216,000
Organization expenses payable .................... 46,228
Payable for Fund shares redeemed ................. 13,489
Accrued accounting services fee .................. 833
-----------
Total liabilities ............................. 276,550
-----------
Total net assets ............................. $15,883,407
===========
Net Assets
$0.01 par value capital stock, authorized --
1,000,000,000; shares outstanding -- 2,994,877
Capital stock ................................... $29,949
Additional paid-in capital ...................... 15,373,072
Accumulated undistributed income:
Accumulated undistributed net investment
income ......................................... 72,277
Accumulated undistributed net realized gain on
investment transactions ...................... 53,029
Net unrealized appreciation in value of
investments at end of period ................... 355,080
-----------
Net assets applicable to outstanding
units of capital ............................. $15,883,407
===========
Net asset value per share (net assets divided
by shares outstanding) ........................... $5.30
=====
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF OPERATIONS
For the Period Ended JULY 31, 1995
(Unaudited)
Investment Income
Income:
Interest ........................................ $135,600
Dividends ....................................... 12,807
--------
Total income .................................. 148,407
--------
Expenses (Note 3):
Investment management fee ....................... 18,863
Transfer agency and dividend disbursing ......... 7,546
Service fee ..................................... 3,678
Amortization of organization expenses ........... 3,302
Custodian fees .................................. 1,135
Accounting services fee ......................... 833
Legal fee ....................................... 810
Other ........................................... 714
--------
Total expenses ................................ 36,881
--------
Net investment income ........................ 111,526
--------
Realized and Unrealized Gain on Investments
Realized net gain on securities .................. 53,029
Realized net gain on foreign currency
transactions .................................... 60
--------
Realized net gain on investments ................ 53,089
Unrealized appreciation in value of investments
during the period ............................... 355,080
--------
Net gain on investments ....................... 408,169
--------
Net increase in net assets resulting
from operations ............................ $519,695
========
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
For the
period
ended
July 31,
1995
-----------
Increase in Net Assets
Operations:
Net investment income ............ $ 111,526
Realized net gain on
investments .................... 53,089
Unrealized appreciation........... 355,080
-----------
Net increase in net assets
resulting from operations ..... 519,695
-----------
Dividends to shareholders from
net investment income* ........... (39,309)
-----------
Capital share transactions:
Proceeds from sale of shares
(3,141,945 shares) ............. 16,169,836
Proceeds from reinvestment of
dividends (7,568 shares) ....... 39,278
Payments for shares redeemed
(174,636 shares) ............... (906,093)
-----------
Net increase in net assets
resulting from capital
share transactions ............ 15,303,021
-----------
Total increase ................ 15,783,407
Net Assets
Beginning of period ............... 100,000
-----------
End of period, including undistributed
net investment income of $72,277 . $15,883,407
===========
*See "Financial Highlights" on page 75.
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
FINANCIAL HIGHLIGHTS
(Unaudited)
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the
period
from
March 9,
1995
through
March 31,
1995*
-------
Net asset value,
beginning of period $5.00
-----
Income from investment
operations:
Net investment
income .......... .04
Net realized and
unrealized gain
on investments... .28
-----
Total from investment
operations ........ .32
Less dividends from
net investment
income........... (0.02)
-----
Net asset value,
end of period ..... $5.30
=====
Total return** ..... 6.41%
Net assets, end of
period (000
omitted) ......... $15,883
Ratio of expenses
to average net
assets ............ 1.33%
Ratio of net investment
income to average net
assets ............ 4.02%
Portfolio
turnover rate ..... 23.93%
*The Fund's inception date is August 25, 1994; however, since the Fund
did not have investment activity or incur expenses prior to the date of
public offering, the per-share data and ratios are for a capital share
outstanding for the period from March 9, 1995 (initial public offering)
through July 31, 1995. Ratios and the portfolio turnover rate have been
annualized.
**Total return calculated without taking into account the sales load
deducted on an initial purchase.
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1995
(Unaudited)
NOTE 1 -- Significant Accounting Policies
United Asset Strategy Fund, Inc. (the "Fund") is registered under the In-
vestment Company Act of 1940 as a diversified, open-end management investment
company. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a major dealer in bonds. Convertible bonds are
valued using this pricing system only on days when there is no sale re-
ported. Stocks which are traded over-the-counter are priced using Nasdaq
(National Association of Securities Dealers Automated Quotations) which
provides information on bid and asked or closing prices quoted by major
dealers in such stocks. Short-term debt securities are valued at amor-
tized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. See Note 4 --
Investment Security Transactions.
C. Foreign currency translations -- All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars daily. Purchases and
sales of investment securities and accruals of income and expenses are
translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translations arise from changes in currency exchange rates. The
Fund combines fluctuations from currency exchange rates and fluctuations
in market value when computing net realized and unrealized gain or loss
from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all of its
taxable income and capital gains to its shareholders and otherwise qualify
as a regulated investment company under the Internal Revenue Code. In
addition, the Fund intends to pay distributions as required to avoid
imposition of excise tax. Accordingly, provision has not been made for
Federal income taxes.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the record date. Net investment income
distributions and capital gains distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are due to differing treatments
for items such as deferral of wash sales and post-October losses, foreign
currency transactions, net operating losses and expiring capital loss
carryforwards.
F. Repurchase agreements -- Repurchase agreements are collateralized by the
value of the resold securities which, during the entire period of the
agreement, remains at least equal to the value of the loan, including
accrued interest thereon. The collateral for the repurchase agreement is
held by the Fund's custodian bank.
NOTE 2 -- Organization
The Fund, a Maryland corporation, was organized on August 25, 1994 and was
inactive (except for matters relating to its organization and registration as
an investment company under the Investment Company Act of 1940 and the
registration of its shares under the Securities Act of 1933) until March 9,
1995 (the date of the initial public offering.)
On February 23, 1995, Waddell & Reed, Inc. ("W&R") purchased for
investment 20,000 shares of the Fund at their net asset value of $5.00 per
share.
The Fund's organizational expenses in the amount of $49,530 were advanced
to the Fund by W&R and are an obligation to be paid by it. These expenses are
being amortized and are payable evenly over 60 months following the date of the
initial public offering. In the event that all or a part of W&R's initial
investment in the Fund's shares is redeemed prior to the full reimbursement of
these organizational expenses, the Fund's obligation to make further
reimbursement will cease.
NOTE 3 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as
of the close of business each day at the annual rate of .30% of net assets and
(ii) a "Group" fee computed each day on the combined net asset values of all of
the funds in the United Group of mutual funds (approximately $12.6 billion of
combined net assets at July 31, 1995) at annual rates of .51% of the first $750
million of combined net assets, .49% on that amount between $750 million and
$1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between $2.25
billion and $3 billion, .43% between $3 billion and $3.75 billion, .40% between
$3.75 billion and $7.5 billion, .38% between $7.5 billion and $12 billion, and
.36% of that amount over $12 billion. The Fund accrues and pays this fee
daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and W&R, Waddell & Reed Investment Management Company ("WRIMCO"), a
wholly-owned subsidiary of W&R, serves as the Fund's investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services,
the Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in
the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The Fund also pays WARSCO a monthly per account charge for transfer agency
and dividend disbursement services of $1.0208 for each shareholder account
which was in existence at any time during the prior month, plus $0.30 for each
account on which a dividend or distribution of cash or shares had a record date
in that month. The Fund also reimburses W&R and WARSCO for certain out-of-
pocket costs.
As principal underwriter for the Fund's shares, W&R received direct and
indirect gross sales commissions (which are not an expense of the Fund) of
$488,259, out of which W&R paid sales commissions of $280,537 and all expenses
in connection with the sale of Fund shares, except for registration fees and
related expenses.
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to W&R in an
amount not to exceed .25% of the Fund's average annual net assets. The fee is
to be paid to reimburse W&R for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts.
The Fund paid no Directors' fees.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 4 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and short-
term securities, aggregated $4,140,644 while proceeds from maturities and sales
aggregated $317,298. Purchases of short-term securities aggregated $36,797,365
while proceeds from maturities and sales aggregated $28,805,784. Purchase of
U.S. Government securities aggregated $3,106,019. There were no sales of U.S.
Government securities .
For Federal income tax purposes, cost of investments owned at July 31,
1995 was $15,046,659, resulting in net unrealized appreciation of $355,080, of
which $399,048 related to appreciated securities and $43,968 related to
depreciated securities.
