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 December 31, 1997. 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 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
December 31, 1997
UNITED ASSET STRATEGY FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
800-366-5465
<PAGE>
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.............................................27
Ways to Set Up Your Account ..................................27
Buying Shares ................................................28
Minimum Investments ..........................................31
Adding to Your Account .......................................31
Selling Shares ...............................................31
Shareholder Services .........................................33
Personal Service ...........................................33
Reports ....................................................34
Exchanges ..................................................34
Automatic Transactions .....................................34
Distributions and Taxes ......................................35
Distributions ..............................................35
Taxes ......................................................35
ABOUT THE MANAGEMENT AND EXPENSES OF THE FUND..................38
WRIMCO and Its Affiliates ....................................39
Breakdown of Expenses ........................................40
Management Fee .............................................40
Other Expenses .............................................41
APPENDIX A.....................................................42
DESCRIPTION OF BOND RATINGS ..................................42
DESCRIPTION OF PREFERRED STOCK RATINGS .......................45
DESCRIPTION OF NOTE RATINGS ..................................48
DESCRIPTION OF COMMERCIAL PAPER RATINGS ......................49
DOLLAR-WEIGHTED AVERAGE MATURITY .............................50
<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 over the long term. The Fund seeks to achieve its investment goal
by allocating its assets among stocks, bonds and short-term 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
based on the current outlook for the different markets. See "About the
Investment Principles of the Fund" for further information.
Mix
_ Stocks 70% _ Bonds 25%
(can range (can range
from from
0-100%) 0-100%)
_ Short-term 5%
(can range from
0-100%)
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, 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 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 fees None
Exchange fee None
Annual Fund operating expenses
(as a percentage of average net assets).
Management fees 0.70%
12b-1 fees1 0.18%
Other expenses 0.82%
Total Fund operating
expenses 1.70%
Example: You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return2 and (2) redemption at the end of each time
period:
1 year $ 74
3 years $108
5 years $144
10 years $247
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 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."
1It is possible that long-term shareholders of the Fund may bear 12b-1
distribution fees which are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities
Dealers, Inc. See "Breakdown of Expenses."
2Use 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
The following information has been audited in conjunction with the
audits of the Financial Statements of the Fund. Financial Statements for
the fiscal year ended September 30, 1997 and the independent auditors'
report of Deloitte & Touche LLP thereon are included in the SAI and should
be read in conjunction with the Financial Highlights.
For a Class A share outstanding throughout each period.*
For the
For the For the period
fiscal fiscal from
year year 3/9/95**
ended ended through
9/30/97 9/30/96 9/30/95
------- ------- ---------
Net asset value,
beginning of period $5.24 $5.42 $5.00
----- ----- -----
Income from investment operations:
Net investment
income .......... 0.16 0.15 0.07
Net realized and
unrealized gain (loss)
on investments... 0.74 (0.17) 0.40
----- ----- -----
Total from investment
operations ........ 0.90 (0.02) 0.47
----- ----- -----
Less distributions:
From net investment
income .......... (0.15) (0.15) (0.05)
From capital gains (0.00) (0.01) (0.00)
----- ----- -----
Total distributions. (0.15) (0.16) (0.05)
----- ----- -----
Net asset value,
end of period ..... $5.99 $5.24 $5.42
===== ===== =====
Total return*** .... 17.46% -0.49% 9.42%
Net assets, end of period
(000 omitted) ....$28,221 $31,828 $22,248
Ratio of expenses to
average net assets 1.70% 1.68% 1.64%****
Ratio of net investment
income to average net
assets ............ 2.87% 2.93% 3.71%****
Portfolio
turnover rate ..... 173.88% 91.06% 9.32%
Average commission
rate paid ......... $0.0329 $0.0440
*On September 12, 1995, Fund shares outstanding were designated Class A
shares.
**Commencement of operations.
***Total return calculated without taking into account the sales load
deducted on an initial purchase.
****Annualized.
<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 other
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 not reflect deduction of the applicable sales charge or
may be for periods other than those required to be presented or may differ
otherwise from standardized total return. Total return quotations that do
not reflect the applicable sales charge will reflect a higher rate of
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 Composite Stock Price 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.
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 the
telephone number listed on the inside back cover of this Prospectus.
<PAGE>
About the Investment Principles of the Fund
Investment Goal and Principles
The Fund seeks high total return 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.
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 0-100%
70%
Bond
class 0-100%
25%
Short-term
class 0-100%
5%
WRIMCO seeks to balance the investment risks undertaken by the Fund
against the higher total returns that may be available by reducing exposure
to the stock market during down cycles and allowing a higher allocation in
the stock class during periods of strongly positive market performance.
The Fund has the ability to take a more defensive posture by increasing its
holdings in the bond or short-term classes when WRIMCO believes that there
exists a potential bear market, prolonged downturn in stock prices or
significant loss in value. 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.
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 (i) money market instruments rated A-1 by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"),
or Prime 1 by Moody's Investors Service, Inc. ("MIS"), or unrated
securities judged by WRIMCO to be of equivalent quality, or (ii) precious
metals.
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 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 may also invest in certain derivative instruments, including
options, futures contracts, options on futures contracts, forward
contracts, swaps, caps, collars, floors, indexed securities, stripped
securities and mortgage-backed and other asset-backed securities. The use
of derivative instruments involves special risks. See "Risks of Derivative
Instruments" for further information on the risks of investing in these
instruments.
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 goal. A summary of risks associated with these
instrument types and investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques to the full extent permitted by the Fund's investment policies
and restrictions unless it believes that doing so will help the Fund
achieve its goal.
Certain of the investment policies and restrictions of the Fund are
also stated below. A fundamental policy 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.
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 ("U.S. Government Securities").
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.
The Fund may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds, zero coupon bonds of corporate issuers and other
securities that are issued with original issue discount ("OID"). Zero
coupon bonds are debt obligations that do not entitle the holder to any
periodic payment of interest prior to maturity or that specify a future
date when the securities begin to pay current interest; instead, they are
sold at a deep discount from their face value and are redeemed at face
value when they mature. Because zero coupon bonds do not pay current
income, their prices can be very volatile when interest rates change and
generally are subject to greater fluctuations in response to changing
interest rates than the prices of debt obligations of comparable maturities
that make current distributions of interest in cash.
The Federal tax law requires that a holder of a security with OID
accrue a ratable portion of the OID on the security as income each year,
even though the holder may receive no interest payment on the security
during the year. Accordingly, although the Fund will receive no payments
on its zero coupon securities prior to their maturity or disposition, it
will have current income attributable to those securities. Nevertheless,
for income and excise tax purposes the Fund annually must distribute to its
shareholders substantially all of its net investment income, including OID.
Accordingly, the Fund will be required to include in its dividends an
amount equal to the income attributable to its zero coupon and other OID
securities. See "Taxes" in the SAI. Those dividends will be paid from the
Fund's cash assets or by liquidation of portfolio securities, if necessary,
at a time when the Fund otherwise might not have done so.
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.
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). 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.
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. See Appendix A for a description of bond ratings.
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.
Debt Holdings, by Ratings. During the fiscal year ended September 30,
1997, the percentage of the assets of the Fund invested in debt securities
in each of the rating categories of S&P and the corporate debt securities
not rated by an established rating service, determined on a dollar-weighted
average, were as follows:
Rated Percentage of
by S&P Fund Assets
------ ----------------
AAA 16.2%
AA 0.6
A 10.7
BBB 0.8
BB 11.2
B 3.9
CCC 0.0
CC 0.0
C 0.0
D 0.0
Unrated (Equivalent to)
-------
AAA 1.3%
AA 0.0
A 0.0
BBB 0.0
BB 5.4
B 0.0
CCC 1.0
CC 0.0
C 0.0
D 0.0
The percentage of assets in each category was calculated on the basis
of a monthly dollar-weighted average. The monthly dollar-weighted average
was calculated using the market value of the securities in the Fund's
portfolio at the end of each month in the thirteen-month period ended with
its last fiscal year, averaged over its last fiscal year. The rating used
for each security is that security's rating as of the end of each month
and, as ratings may change over time, does not necessarily indicate past or
future ratings of any particular security or the ratings of securities in
the Fund's portfolio in general. Asset composition of the Fund by rating
categories at any particular time does not necessarily indicate future
asset composition by rating categories.
Preferred Stock is also rated by S&P and MIS, as described in Appendix
A. 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 generally have higher yields than common stocks of
the same or similar issuers, but lower yields than comparable
nonconvertible securities, are less subject to fluctuation in 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.
Policies and Restrictions: The Fund may not invest more than 35% of
its total assets in debt securities rated below BBB by S&P or Baa by MIS
and unrated securities 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 the highest rating category
by S&P or MIS, or judged by WRIMCO to be of equivalent quality; provided,
however, that the Fund may invest in money-market instruments rated below
the highest rating category by S&P or MIS if such instrument is subject to
a letter of credit or similar unconditional credit enhancement which is
rated A-1 by S&P or Prime 1 by MIS.
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
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
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.
Options, Futures and Other Strategies. The Fund may use certain
options, futures contracts, forward currency contracts, swaps, caps,
collars, floors, indexed securities, mortgage-backed and other asset-backed
securities and certain other strategies described herein to attempt to
enhance income or yield or to attempt to reduce the risk of its
investments. The strategies described below may be used in an attempt to
manage the Fund's foreign currency exposure as well as other risks of the
Fund's investments that can affect fluctuation in its net asset value. The
Fund may also 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.
The Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations. The Fund might not
use any of these strategies, and there can be no assurance that any
strategy that is used will succeed. The risks associated with such
strategies are described below. Also see the SAI for more information on
these instruments and strategies and their risk considerations.
Policies and Restrictions: Subject to the further limitations stated
in the SAI, generally, the Fund may purchase and sell any type of
derivative instrument including, without limitation, futures contracts,
options, forward contracts, swaps, caps, collars, floors and indexed
securities. However, the Fund will only purchase or sell a particular
derivative instrument if the Fund is authorized to invest in the type of
asset by which the return on, or value of, the derivative instrument is
primarily measured or, with respect to foreign currency derivatives, if the
Fund is authorized to invest in foreign securities.
Options. The Fund may engage in certain strategies involving options
to attempt to enhance its income or yield or to attempt to reduce the
overall risk of its investments. A call option gives the purchaser the
right to buy, and obligates the writer to sell, the underlying investment
at the agreed-upon exercise price during the option period. A put option
gives the purchaser the right to sell, and obligates the writer to buy, the
underlying investment at the agreed-upon exercise price during the option
period. Purchasers of options pay an amount, known as a premium, to the
option writer in exchange for the right under the option contract.
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 offsetting put or call. If
the Fund is not able to enter into an offsetting 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.
Futures Contracts and Options on Futures Contracts. When the Fund
purchases a futures contract, it incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified
time in the future for a specified price. When the Fund sells a futures
contract, it incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon
price.
When 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 writes a call, it assumes a short futures
position. If it writes a put, it assumes a long futures position. When
the Fund purchases an option on a futures contract, it acquires the right,
in return for the premium it pays, 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).
Forward Currency Contracts and Foreign Currencies. The Fund may enter
into forward currency contracts for the purchase or sale of a specified
currency at a specified future date either with respect to specific
transactions or with respect to portfolio positions in order to minimize
the risk to the Fund from adverse changes in the relationship between the
U.S. dollar and a foreign currency. For example, when WRIMCO anticipates
purchasing or selling a security denominated in a foreign currency, the
Fund may enter into a forward currency contract in order to set the
exchange rate at which the transaction will be made. The Fund also may
enter into a forward currency contract to sell an amount of a foreign
currency approximating the value of some or all of the Fund's securities
positions denominated in such currency. The Fund may also use forward
currency contracts in one currency or a basket of currencies to attempt to
hedge against fluctuations in the value of securities denominated in a
different currency if WRIMCO anticipates that there will be a correlation
between the two currencies.
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 currency
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 depends 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.
The Fund may also purchase and sell foreign currency and invest in
foreign currency deposits. Currency conversion involves dealer spreads and
other costs, although commissions usually are not charged.
Indexed Securities are securities the value of which varies in
relation to the value of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators,
subject to its operating policy regarding derivative instruments. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. The performance of indexed securities depends to
a great extent on the performance of the security, currency or other
instrument to which they are indexed and may also be influenced by interest
rate changes in the United States and abroad. At the same time, indexed
securities are subject to the credit risks associated with the issuer of
the security, and their values may decline substantially if the issuer's
creditworthiness deteriorates. Indexed securities may be more volatile
than the underlying instruments.
Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors as described below. The Fund may enter into these
transactions to preserve a return or spread on a particular investment or
portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance income or yield.
Swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of a cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined value, to receive payments on a notional principal amount
from the party selling such cap. The purchase of a floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
value, to receive payments on a notional principal amount from the party
selling such floor. A collar combines elements of buying a cap and selling
a floor.
Depending on how they are used, the swap, cap, collar and floor
agreements used by the Fund may also increase or decrease the overall
volatility of its investments and its share price and yield. The most
significant factor in the performance of these 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 receiving or paying, 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 a firm's
creditworthiness declines, the value of an agreement would be likely to
decline, potentially resulting in losses. If a default occurs by the other
party to such transaction, the Fund will have contractual remedies pursuant
to the agreements related to the transaction.
The Fund understands that the position of the staff of the Securities
and Exchange Commission is that assets involved in such transactions are
illiquid and are, therefore, subject to the limitations on investment in
illiquid investments as described in the SAI.
Mortgage-Backed and Other Asset-Backed Securities are bonds backed by
specific types of assets. Mortgage-backed securities represent direct or
indirect interests in pools of underlying mortgage loans that are secured
by real property. U.S. Government mortgage-backed securities are issued or
guaranteed as to principal and interest (but not as to market value) by the
Government National Mortgage Association, Fannie Mae (formerly, the Federal
National Mortgage Association), the Federal Home Loan Mortgage Corporation
or other government-sponsored enterprises. Other mortgage-backed
securities are sponsored or issued by private entities, including
investment banking firms and mortgage originators.
Mortgage-backed securities may be composed of one or more classes and
may be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to in
this Prospectus as "CMOs." Some CMOs are directly supported by other CMOs,
which in turn are supported by mortgage pools. Investors typically receive
payments out of the interest and principal on the underlying mortgages.
The portions of these payments that investors receive, as well as the
priority of their rights to receive payments, are determined by the
specific terms of the CMO class.
For example, interest-only ("IO") classes are entitled to receive all
or a portion of the interest, but none (or only a nominal amount) of the
principal payments, from the underlying mortgage assets. If the mortgage
assets underlying an IO experience greater than anticipated principal
prepayments, then the total amount of interest payments allocable to the IO
class, and therefore the yield to investors, generally will be reduced. In
some instances, an investor in an IO may fail to recoup all of his or her
initial investment, even if the security is government guaranteed or
considered to be of the highest quality. Conversely, principal-only ("PO")
classes are entitled to receive all or a portion of the principal payments,
but none of the interest, from the underlying mortgage assets. PO classes
are purchased at substantial discounts from par, and the yield to investors
will be reduced if principal payments are slower than expected. IOs, POs
and other CMOs involve special risks, and evaluating them requires special
knowledge.
When interest rates decline and homeowners refinance their mortgages,
mortgage-backed bonds may be paid off more quickly than investors expect.
When interest rates rise, mortgage-backed bonds may be paid off more slowly
than originally expected. Changes in the rate or "speed" of these
prepayments can cause the value of mortgage-backed securities to fluctuate
rapidly.
Other asset-backed securities are similar to mortgage-backed
securities, except that the underlying assets securing the debt are
different. These underlying assets may be nearly any type of financial
asset or receivable, such as motor vehicle installment sales contracts,
home equity loans, leases of various types of real and personal property
and receivables from credit cards.
The yield characteristics of mortgage-backed and asset-backed
securities differ from those traditional debt securities. Among the major
differences are that interest and principal payments are made more
frequently and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any
time. Generally, prepayments on fixed-rate mortgage loans will increase
during a period of falling interest rates and decrease during a period of
rising interest rates. Mortgage-backed and asset-backed securities may
also decrease in value as a result of increases in interest rates and,
because of prepayments, may benefit less than other bonds from declining
interest rates. Reinvestments of prepayments may occur at lower interest
rates than the original investment, thus adversely affecting the Fund's
yield. Actual prepayment experience may cause the yield of a mortgage-
backed security to differ from what was assumed when the Fund purchased the
security.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specially structured in a
manner that provides any of a wide variety of investment characteristics,
such as yield, effective maturity and interest rate sensitivity. As market
conditions change, however, and especially during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of some
CMO classes and the ability of the structure to provide the anticipated
investment characteristics may be significantly reduced. These changes can
result in volatility in the market value, and in some instances reduced
liquidity, of the CMO class.
Risks of Derivative Instruments. The use of options, futures
contracts, options on futures contracts, forward contracts, swaps, caps,
collars and floors, and the investment in indexed securities, stripped
securities and mortgage-backed and other asset-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 assets 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 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. The use of derivative techniques 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, 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
currency exchange rate or stock market movements or the time span within
which the movements take place.
Options and futures transactions may increase portfolio turnover
rates, which results in correspondingly greater commission expenses and
transactions costs and may result in certain tax consequences. See the SAI
for further information regarding these and other risks.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its goal, investment policies 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. When the Fund sells 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.
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 Securities and Illiquid Investments. 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. Certain restricted securities may be determined to be liquid in
accordance with guidelines adopted by the Board of Directors.
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 its 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.
Precious Metals. The ability of the Fund to purchase and hold
precious metals such as gold, silver and platinum may allow it to benefit
from a potential increase in the price of precious metals or stability in
the price of such metals at a time when the value of securities may be
declining. For example, during periods of declining stock prices, the
price of gold may increase or remain stable, while the value of the stock
market may be subject to a general decline.
Precious metals prices are affected by various factors, such as
economic conditions, political events and monetary policies. As a result,
the price of gold, silver or platinum may fluctuate widely. The sole
source of return to the Fund from such investments will be gains realized
on sales; a negative return will be realized if the metal is sold at a
loss. Investments in precious metals do not provide a yield. The Fund's
direct investment in precious metals may be limited by tax considerations.
See "Taxes" in the SAI.
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. 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.
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, rights 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 (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.
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, or a state or
local government authority, or their respective agencies or
instrumentalities, or to collateralized mortgage obligations, other
mortgage-related securities, asset-backed securities or indexed securities.
<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
(other than Roth IRAs and Education IRAs) may be tax deductible.
. 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 for an investor and his or her spouse is $4,000 ($2,000 for
each spouse) or, if less, the couple's combined earned income for the
taxable year.
. Rollover IRAs retain special tax advantages for certain distributions
from employer-sponsored retirement plans.
. Roth IRAs enable an individual whose adjusted gross income (or combined
adjusted gross income, if married) does not exceed certain levels to
make non-deductible contributions up to $2,000 per year. Withdrawals of
earnings from a Roth IRA generally are not taxable if the account has
been held at least five years and the account holder has reached age 59
1/2 (or other conditions are met).
. Education IRAs may be established for the benefit of a minor, and
contributions up to $500 per child per year may be made by any person
whose adjusted gross income does not exceed certain levels. Generally,
withdrawals used to pay the qualified higher education expenses of the
beneficiary (or a family member) are not taxable.
. Simplified Employee Pension Plans (SEP - IRAs) provide small business
owners or those with self-employed income (and their eligible employees)
with many of the same advantages as a Keogh Plan, but with fewer
administrative requirements.
. Savings Incentive Match Plans for Employees (SIMPLE Plans) can be
established by small employers to contribute to their employees'
retirement accounts and involve fewer administrative requirements than
401(k) or other qualified plans generally.
. 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.
. 401(k) Programs allow employees of corporations and non-governmental
tax-exempt organizations of all sizes to contribute a percentage of
their wages on a tax-deferred basis. These accounts need to be
established by the administrator or trustee of the plan.
. 403(b) Custodial Accounts are available to employees of public school
systems or certain types of charitable organizations.
. 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation
on a tax-deferred basis.
-----------------------------------------------------------------
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and
obtain tax benefits. An individual can give up to $10,000 a year per child
without paying Federal transfer 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.
Percent Percent
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
$1,000,000 1.50 1.52
$1,000,000
to less
than
$2,000,000 1.00 1.01
$2,000,000
and over 0.00 0.00
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 third-party 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 (the "NYSE") is open. The Fund normally calculates the NAVs 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 other taxpayer identification number
is correct and whether you are subject to backup withholding for failing
to report income to the Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase
orders, including purchases by exchange, and it and the Fund reserve the
right to discontinue offering Fund shares for purchase.
Lower sales charges are available by combining additional
purchases of Class A shares 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 NAV 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").
Class A shares of another fund purchased through a contractual plan may not
be included unless the plan has been completed. Purchases by certain
related persons may be grouped. Additional information and applicable
forms are available from Waddell & Reed account representatives.
Class A shares may be purchased at NAV 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 NAV. 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 NAV. Shares
may also be issued at NAV 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 stating your account number, the account registration and that
you wish to purchase Class A shares of the Fund.
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 Special Requirements
Type
Individual The written instructions
or Joint Tenant must be signed by all persons
required to sign for
transactions, exactly as their
names appear on the account.
Sole The written instructions
Proprietorship must 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
Account must be signed by a properly
authorized person.
Trust The trustee must sign the
written instructions
indicating capacity as
trustee. If the trustee's
name is not in the account
registration, provide a
currently certified copy of
the trust document.
Business At least one person
or Organization authorized by corporate
resolution to act on the
account must sign the written
instructions.
Conservato The written instructions
r, Guardian or must 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 Class
A shares 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, one toll-free call, 1-800-366-
5465, connects you to a Customer Service Representative or TeleWaddell, our
automated customer telephone service. During normal business hours, our
Customer Services staff is available to respond to your inquiries, process
a transaction or update your account records. At almost any time of the
day or night, you may access TeleWaddell from a touch-tone phone to:
. Obtain information about your accounts;
. Obtain price information about other funds in the United Group; or
. Request duplicate statements.
Reports
Statements and reports sent to you include the following:
. confirmation statements (after every purchase, other than those
purchases made through Automatic Investment Service, and after every
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 the telephone number listed on the inside back cover
of this Prospectus if you need copies of annual or semiannual reports or
historical account information.
Exchanges
You may sell your Class A shares and buy Class A 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.
Automatic Transactions
Flexible withdrawal service lets you set up ongoing monthly,
quarterly, semiannual or annual redemptions from your account.
Regular investment plans allow you to transfer money into your Fund
account 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
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income
and net capital gains to shareholders each year. Ordinarily, dividends are
distributed from the Fund's net investment income, which includes accrued
interest, earned OID, dividends and other income earned on portfolio assets
less expenses, quarterly in March, June, September and December. Net
capital gains (and any net 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 and other
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 and other 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 and other distributions.
For retirement accounts, all distributions are automatically paid in
Class A shares.
Taxes
The Fund has qualified and intends to continue to qualify for
treatment as a regulated investment company under the Internal Revenue Code
of 1986, as amended, 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 gains over net short-term capital losses) that is
distributed to its shareholders.
There are certain tax requirements that the Fund must satisfy 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 generally are taxable to you as ordinary income, whether
received in cash or paid in additional Fund shares. Distributions of the
Fund's net capital gains, when designated as such, are taxable to you as
long-term capital gains, whether received in cash or paid in additional
Fund shares and regardless of the length of time you have owned your
shares. Under the Taxpayer Relief Act of 1997 ("1997 Act"), different
maximum tax rates apply to a noncorporate taxpayer's net capital gains
depending on the taxpayer's holding period and marginal rate of Federal
income tax - generally, 28% for gains recognized on securities held for
more than one year but not more than 18 months and 20% (10% for taxpayers
in the 15% marginal tax bracket) for gains recognized on securities held
for more than 18 months. The Internal Revenue Service permits the Fund to
divide each net capital gains distribution into a 28% rate gains
distribution and a 20% rate gains distribution (in accordance with the
Fund's holding periods for the securities it sold that generated the
distributed gains) and requires Fund shareholders to treat those portions
accordingly.
The Fund notifies you after each calendar year-end as to the amounts
of dividends and other distributions paid (or deemed paid) to you for that
year, including the portions of capital gains distributions, if any,
subject to the different maximum rates of tax applicable under the 1997
Act. Under certain circumstances, the Fund may elect to permit
shareholders to take a credit or deduction for foreign income taxes paid by
the Fund. The Fund will notify you of any such election.
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,
capital gains distributions and redemption proceeds payable to individuals
and certain other noncorporate shareholders who do not furnish the Fund
with a correct taxpayer identification number. Withholding at that rate
from dividends and capital gains 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 original
Fund shares would be increased, or loss decreased, by the amount of the
sales charge you paid when those shares were acquired, and that amount will
increase the adjusted basis of the shares subsequently acquired. In
addition, if you purchase Fund shares within thirty days before or after
redeeming other Fund shares (regardless of class) at a loss, part or all of
that loss will not be deductible and will increase the basis of the newly
purchased shares.
State income taxes. The portion of the dividends paid by the Fund
attributable to the interest earned on its U.S. Government Securities
generally is not subject to state and local income taxes, although
distributions by the Fund to its shareholders of net realized gains on the
disposition of those securities are fully subject to those taxes. You
should consult your tax adviser to determine the taxability of dividends
and other distributions by the Fund in your state and locality.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the
SAI for a more detailed discussion. There may be other Federal, state or
local tax considerations applicable to a particular investor. You are
urged to consult your own tax adviser.
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. In addition to the Class A shares
offered by this Prospectus, the Fund has issued and outstanding Class Y
shares which are offered by Waddell & Reed, Inc. 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 or writing to Waddell & Reed, Inc. at the telephone number or
address on the inside back cover of this 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 have 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.
Michael L. Avery is primarily responsible for the day-to-day
management of the equity portion of the portfolio of the Fund. Mr. Avery
has held his Fund responsibilities since January 1997. He is Senior Vice
President of WRIMCO, Vice President of Waddell & Reed Asset Management
Company, an affiliate of WRIMCO, Vice President of the Fund and Vice
President of other investment companies for which WRIMCO serves as
investment manager. Mr. Avery has served as the portfolio manager for
investment companies managed by Waddell & Reed, Inc. and its successor,
WRIMCO, since February 1, 1994, has served as the director of research of
Waddell & Reed, Inc. and its successor, WRIMCO, since August 1987, and has
been an employee of Waddell & Reed, Inc. and its successor, WRIMCO, since
June 1981.
Daniel J. Vrabac is primarily responsible for the day-to-day
management of the fixed-income portion of the portfolio of the Fund. Mr.
Vrabac has held his Fund responsibilities since January 1997. He is Vice
President of Waddell & Reed Asset Management Company, an affiliate of
WRIMCO, Vice President of the Fund and Vice President of other investment
companies for which WRIMCO serves as investment manager. Mr. Vrabac has
served as an investment analyst with WRIMCO since May 1994, and was a Vice
President of Kansas City Life Insurance Company from May 1983 to May 1994.
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 acts as the principal underwriter and
distributor for variable life insurance and variable annuity policies
issued by United Investors Life Insurance Company for which TMK/United
Funds, Inc. is the underlying investment vehicle.
Waddell & Reed Services Company acts as transfer agent ("Shareholder
Servicing Agent") for the Fund and processes the payment 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.
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.
The combined net asset values of all of the funds in the United Group
were approximately $18.0 billion as of September 30, 1997. Management fees
for the fiscal year ended September 30, 1997 were 0.70% of the Fund's
average 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 Distribution and Service Plan (the "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 0.25% 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 distribution of the
Class A shares, and/or provision of personal services to Class A
shareholders and maintenance of Class A shareholder accounts.
There are two parts to this fee: all or a portion of the fee may be
paid to Waddell & Reed, Inc. for distribution services and distribution
expenses, including commissions paid by Waddell & Reed, Inc. to its account
representatives, account managers and/or other broker-dealers (the
"distribution fee") with respect to the Fund's Class A shares; and all or a
portion of the fee may be paid to Waddell & Reed, Inc. for the provision by
Waddell & Reed, Inc., Waddell & Reed Services Company and/or other third
parties (including broker-dealers who may sell Class A shares) of personal
services to Class A shareholders and other services to maintain Class A
shareholder accounts (the "service fee"). However, the total amount of the
distribution fee and service fee paid by the Fund pursuant to the Plan will
not exceed, on an annual basis, 0.25% of the average annual net assets of
the Fund's Class A shares.
The Fund cannot precisely predict what its portfolio turnover rate
will be, but the Fund may have a high portfolio turnover. A higher
turnover will increase transaction and commission costs and could generate
taxable income or loss.
<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, a division of The McGraw-Hill Companies, Inc. A
Standard & Poor's ("S&P") corporate bond rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment of creditworthiness may take into consideration obligors
such as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to
pay interest and repay principal is very strong, and debt rated AA differs
from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace periods. The D rating will also be
used upon a filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of
credit quality, the ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
NR -- Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the
top four categories (AAA, AA, A, BBB, commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In
addition, the laws of various states governing legal investments may impose
certain rating or other standards for obligations eligible for investment
by savings banks, trust companies, insurance companies and fiduciaries
generally.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service ("MIS") rating symbols and their meanings
follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuations of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the
rating.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect
to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF PREFERRED STOCK RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. An
S&P preferred stock rating is an assessment of the capacity and willingness
of an issuer to pay preferred stock dividends and any applicable sinking
fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect
this difference, the preferred stock rating symbol will normally not be
higher than the debt rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA -- This is the highest rating that may be assigned by 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, a division of The McGraw-Hill Companies, Inc. An
S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).
--Source of Payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note.)
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Investors Service, Inc. MIS Short-Term Loan Ratings -- MIS
ratings for state and municipal short-term obligations will be designated
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, a division of The McGraw-Hill Companies, Inc. An
S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to D for the lowest. Issuers rated A are
further referred to by use of numbers 1, 2 and 3 to indicate the relative
degree of safety. Issues assigned an A rating (the highest rating) are
regarded as having the greatest capacity for timely payment. An A-1
designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. An A-2
rating indicates that capacity for timely payment is satisfactory; however,
the relative degree of safety is not as high as for issues designated A-1.
Issues rated A-3 have adequate capacity for timely payment; however, they
are more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations. Issues rated B are regarded
as having only speculative capacity for timely payment. A C rating is
assigned to short-term debt obligations with a doubtful capacity for
payment. Debt rated D is in payment default, which occurs when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
Moody's Investors Service, Inc. 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>
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 Massachusetts Avenue, N. W. (913) 236-2000
Washington, D. C. 20036 (800) 366-5465
Independent Accountants Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Avenue Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment (913) 236-2000
Management Company (800) 366-5465
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
(800) 366-5465 P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Our INTERNET address is:
http://www.waddell.com
<PAGE>
United Asset Strategy Fund, Inc.
Class A Shares
PROSPECTUS
December 31, 1997
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(12-97)
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
(800) 366-5465
December 31, 1997
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 December
31, 1997, which may be obtained from the Fund or its underwriter, Waddell &
Reed, Inc., at the address or telephone number shown above.
TABLE OF CONTENTS
Performance Information ............................ 2
Goal and Investment Policies........................ 4
Investment Management and Other Services ........... 34
Purchase, Redemption and Pricing of Shares ......... 39
Directors and Officers ............................. 53
Payments to Shareholders ........................... 59
Taxes .............................................. 60
Portfolio Transactions and Brokerage ............... 64
Other Information .................................. 66
Financial Statements ............................... 68
<PAGE>
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 Securities and Exchange Commission
("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.
The average annual total return quotations for Class A shares as of
September 30, 1997, which is the most recent balance sheet included in this
SAI, for the periods shown were as follows:
With Without
Sales LoadSales Load
Deducted Deducted
One-year period from October 1, 1996
to September 30, 1997: 10.71% 17.46%
Period from March 9, 1995* to
September 30, 1997: 7.56% 10.07%
*Date of initial public offering
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. Since that date, Class Y shares of the Fund have been available to
certain institutional investors.
The average annual total return quotations for Class Y shares as of
September 30, 1997, which is the most recent balance sheet included in this
SAI, for the periods shown were as follows:
One-year period from October 1, 1996 to
September 30, 1997: 17.93%
Period from September 27, 1995* to
September 30, 1997: 8.73%
*Commencement of operations.
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 Composite
Stock Price Index and the Dow Jones Industrial Average. Performance
information may be quoted numerically or presented in a table, graph or
other illustration.
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.
GOAL AND INVESTMENT POLICIES
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.
Asset Allocation
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). Waddell & Reed Investment Management Company ("WRIMCO"),
the Fund's investment manager, 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.
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 securities, 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 not invest more than 35% of its total assets in lower quality,
high-yield debt securities.
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.
Securities - General
The Fund may invest in securities including common stock, preferred
stock, debt securities and convertible securities, as described in the
Prospectus. These securities may include the following described
securities from time to time.
The Fund may purchase debt securities whose principal amount at
maturity is dependent upon the performance of a specified equity security.
The issuer of such debt securities, typically an investment banking firm,
is unaffiliated with the issuer of the equity security to whose performance
the debt security is linked. Equity-linked debt securities differ from
ordinary debt securities in that the principal amount received at maturity
is not fixed, but is based on the price of the linked equity security at
the time the debt security matures. The performance of equity-linked debt
securities depends primarily on the performance of the linked equity
security and may also be influenced by interest rate changes. In addition,
although the debt securities are typically adjusted for diluting events
such as stock splits, stock dividends and certain other events affecting
the market value of the linked equity security, the debt securities are not
adjusted for subsequent issuances of the linked equity security for cash.
Such an issuance could adversely affect the price of the debt security. In
addition to the equity risk relating to the linked equity security, such
debt securities are also subject to credit risk with regard to the issuer
of the debt security. In general, however, such debt securities are less
volatile than the equity securities to which they are linked.
The Fund may also invest in a type of convertible preferred stock that
pays a cumulative, fixed dividend that is senior to, and expected to be in
excess of, the dividends paid on the common stock of the issuer. At the
mandatory conversion date, the preferred stock is converted into not more
than one share of the issuer's common stock at the "call price" that was
established at the time the preferred stock was issued. If the price per
share of the related common stock on the mandatory conversion date is less
than the call price, the holder of the preferred stock will nonetheless
receive only one share of common stock for each share of preferred stock
(plus cash in the amount of any accrued but unpaid dividends). At any time
prior to the mandatory conversion date, the issuer may redeem the preferred
stock upon issuing to the holder a number of shares of common stock equal
to the call price of the preferred stock in effect on the date of
redemption divided by the market value of the common stock, with such
market value typically determined one or two trading days prior to the date
notice of redemption is given. The issuer must also pay the holder of the
preferred stock cash in an amount equal to any accrued but unpaid dividends
on the preferred stock. This convertible preferred stock is subject to the
same market risk as the common stock of the issuer, except to the extent
that such risk is mitigated by the higher dividend paid on the preferred
stock. The opportunity for equity appreciation afforded by an investment
in such convertible preferred stock, however, is limited, because in the
event the market value of the issuer's common stock increases to or above
the call price of the preferred stock, the issuer may (and would be
expected to) call the preferred stock for redemption at the call price.
This convertible preferred stock is also subject to credit risk with regard
to the ability of the issuer to pay the dividend established upon issuance
of the preferred stock. Generally, convertible preferred stock is less
volatile than the related common stock of the issuer.
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.
Specific Securities and Investment Practices
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, Fannie Mae (formerly, the Federal National Mortgage
Association), Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage
Association ("Ginnie Mae"), General Services Administration, Central Bank
for Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation ("Freddie Mac"), Farm Credit Banks, Maritime Administration,
the Tennessee Valley Authority, the Resolution Funding Corporation and the
Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of
the United States. Some, such as securities issued by the Federal Home
Loan Banks, are backed by the right of the agency or instrumentality to
borrow from the Treasury. Others, such as securities issued by Fannie Mae,
are supported only by the credit of the instrumentality and by a pool of
mortgage assets. If the securities are not backed by the full faith and
credit of the United States, the owner of the securities must look
principally to the agency issuing the obligation for repayment and may not
be able to assert a claim against the United States in the event that the
agency or instrumentality does not meet its commitment.
U.S. Government Securities may include mortgage-backed securities
issued by U.S. Government agencies or instrumentalities including, but not
limited to, Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed
securities include pass-through securities, participation certificates and
collateralized mortgage obligations. See "Mortgage-Backed and Asset-Backed
Securities." Timely payment of principal and interest on Ginnie Mae pass-
throughs is guaranteed by the full faith and credit of the United States.
Freddie Mac and Fannie Mae are both instrumentalities of the U.S.
Government, but their obligations are not backed by the full faith and
credit of the United States. It is possible that the availability and the
marketability (i.e., liquidity) of the securities discussed in this section
could be adversely affected by actions of the U.S. Government to tighten
the availability of its credit.
Zero Coupon Securities
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.
Mortgage-Backed and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent
direct or indirect participations in, or are secured by and payable from,
mortgage loans secured by real property and include single- and multi-class
pass-through securities and collateralized mortgage obligations. Multi-
class pass-through securities and collateralized mortgage obligations are
collectively referred to in this SAI as "CMOs." The U.S. Government
mortgage-backed securities in which the Fund may invest include mortgage-
backed securities issued or guaranteed as to the payment of principal and
interest (but not as to market value) by Ginnie Mae, Fannie Mae or Freddie
Mac. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and
special purpose entities. Payments of principal and interest (but not the
market value) of such private mortgage-backed securities may be supported
by pools of mortgage loans or other mortgage-backed securities that are
guaranteed, directly or indirectly, by the U.S. Government or one of its
agencies or instrumentalities, or they may be issued without any government
guarantee of the underlying mortgage assets but with some form of non-
government credit enhancement. These credit enhancements do not protect
investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage lenders, or
other financial institutions. 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 goal and investment
policies.
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.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or
interests therein, but include assets such as motor vehicle installment
sales contracts, other installment sale contracts, home equity loans,
leases of various types of real and personal property and receivables from
revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts or special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to a certain
amount and for a certain time period by a letter of credit or pool
insurance policy issued by a financial institution unaffiliated with the
issuer, or other credit enhancements may be present. The value of asset-
backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed
Securities. The yield characteristics of mortgage-backed and asset-backed
securities differ from those of traditional debt securities. Among the
major differences are that interest and principal payments are made more
frequently, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans or other obligations generally may be
prepaid at any time. Prepayments on a pool of mortgage loans are
influenced by a variety of economic, geographic, social and other factors,
including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Similar factors apply
to prepayments on asset-backed securities, but the receivables underlying
asset-backed securities generally are of a shorter maturity and thus are
likely to experience substantial prepayments. Such securities, however,
often provide that for a specified time period the issuers will replace
receivables in the pool that are repaid with comparable obligations. If
the issuer is unable to do so, repayment of principal on the asset-backed
securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to certificateholders and to any guarantor, and
due to any yield retained by the issuer. Actual yield to the holder may
vary from the coupon rate, even if adjustable, if the mortgage-backed
securities are purchased or traded in the secondary market at a premium or
discount. In addition, there is normally some delay between the time the
issuer receives mortgage payments from the servicer and the time the issuer
makes the payments on the mortgage-backed securities, and this delay
reduces the effective yield to the holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and
the associated average life assumption. The average life of pass-through
pools varies with the maturities of the underlying mortgage loans. A
pool's term may be shortened by unscheduled or early payments of principal
on the underlying mortgages. Because prepayment rates of individual pools
vary widely, it is not possible to predict accurately the average life of a
particular pool. In the past, a common industry practice has been to
assume that prepayments on pools of fixed-rate 30-year mortgages would
result in a 12-year average life for the pool. At present, mortgage pools,
particularly those with loans with other maturities or different
characteristics, are priced on an assumption of average life determined for
each pool. In periods of declining interest rates, the rate of prepayment
tends to increase, thereby shortening the actual average life of a pool of
mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the
actual average life of the pool. However, these effects may not be
present, or may differ in degree, if the mortgage loans in the pools have
adjustable interest rates or other special payment terms, such as a
prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and may
carry rights that permit holders to demand payment of the unpaid principal
balance plus accrued interest from the issuers or certain financial
intermediaries on dates prior to their stated maturities. Floating rate
securities have interest rates that change whenever there is a change in a
designated base rate while variable rate instruments provide for a
specified periodic adjustment in the interest rate. These formulas are
designed to result in a market value for the instrument that approximates
its par value.
Indexed Securities
The Fund may purchase securities the value of which varies in relation
to the value of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators, subject to its
operating policy regarding derivative instruments. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument
or statistic. 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. 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 Securities and Currencies
In general, depositary receipts are securities convertible into and
evidencing ownership of securities of foreign corporate issuers, although
depositary receipts may not necessarily be denominated in the same currency
as the securities into which they may be converted. American depositary
receipts, in registered form, are dollar-denominated receipts typically
issued by a U.S. bank or trust company evidencing ownership of the
underlying securities. International depositary receipts and European
depositary receipts, in bearer form, are foreign receipts evidencing a
similar arrangement and are designed for use by non-U.S. investors and
traders in non-U.S. markets. Global depositary receipts are more recently
developed receipts designed to facilitate the trading of foreign issuers by
U.S. and non-U.S. investors and traders.
WRIMCO believes that there are investment opportunities as well as
risks in investing in foreign securities. Individual foreign economies may
differ favorably or unfavorably from the U.S. economy or each other in such
matters as gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Individual
foreign companies may also differ favorably or unfavorably from domestic
companies in the same industry. Foreign currencies may be stronger or
weaker than the U.S. dollar or than each other. WRIMCO believes that the
Fund's ability to invest a substantial portion of its assets abroad might
enable it to take advantage of these differences and strengths where they
are favorable.
Further, an investment in foreign securities may be affected by
changes in currency rates and in exchange control regulations (i.e.,
currency blockage). The Fund may bear a transaction charge in connection
with the exchange of currency. There may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards comparable to domestic companies. Most
foreign stock markets have substantially less volume than the New York
Stock Exchange (the "NYSE") and securities of some foreign companies are
less liquid and more volatile than securities of comparable domestic
companies. There is generally less government regulation of stock
exchanges, brokers and listed companies than in the United States. In
addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability or diplomatic developments that could adversely affect
investments in securities of issuers located in those countries. If it
should become necessary, the Fund would normally encounter greater
difficulties in commencing a lawsuit against the issuer of a foreign
security than it would against a U.S. issuer.
The Fund may purchase and sell foreign currency and invest in foreign
currency deposits, and may enter into forward currency contracts, as
described in the Prospectus and this SAI. The Fund may incur a transaction
charge in connection with the exchange of currency.
Restricted Securities
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the
Securities Act of 1933, as amended ("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" below.
Lending Securities
One of the ways in which the Fund may try to realize income is by
lending its securities. If the Fund does this, the borrower pays the Fund
an amount equal to the dividends or interest on the securities that the
Fund would have received if it had not loaned the securities. The Fund
also receives additional compensation.
Any securities loan that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines").
This policy can only be changed by shareholder vote. Under the present
Guidelines, the collateral must consist of cash, U.S. Government Securities
or bank letters of credit, at least equal in value to the market value of
the securities loaned on each day that the loan is outstanding. If the
market value of the loaned securities exceeds the value of the collateral,
the borrower must add more collateral so that it at least equals the market
value of the securities loaned. If the market value of the securities
decreases, the borrower is entitled to return of the excess collateral.
There are two methods of receiving compensation for making loans. The
first is to receive a negotiated loan fee from the borrower. This method
is available for all three types of collateral. The second method, which
is not available when letters of credit are used as collateral, is for the
Fund to receive interest on the investment of the cash collateral or to
receive interest on the U.S. Government Securities used as collateral.
Part of the interest received in either case may be shared with the
borrower.
The letters of credit that the Fund may accept as collateral are
agreements by banks (other than the borrowers of the Fund's securities),
entered into at the request of the borrower and for its account and risk,
under which the banks are obligated to pay to the Fund, while the letter is
in effect, amounts demanded by the Fund if the demand meets the terms of
the letter. The Fund's right to make this demand secures the borrower's
obligations to it. The terms of any such letters and the creditworthiness
of the banks providing them (which might include the Fund's custodian bank)
must be satisfactory to the Fund. Under the Fund's current securities
lending procedures, the Fund may lend securities only to broker-dealers and
financial institutions deemed creditworthy by WRIMCO. The Fund will make
loans only under rules of the NYSE, which presently require the borrower to
give the securities back to the Fund within five business days after the
Fund gives notice to do so. If the Fund loses its voting rights on
securities loaned, it will have the securities returned to it in time to
vote them if a material event affecting the investment is to be voted on.
The Fund may pay reasonable finder's, administrative and custodian fees in
connection with loans of securities.
There may be risks of delay in receiving additional collateral from
the borrower if the market value of the securities loaned increases, risks
of delay in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially.
Some, but not all, of these rules are necessary to meet requirements
of certain laws relating to securities loans. These rules will not be
changed unless the change is permitted under these requirements. These
requirements do not cover the present rules, which may be changed without
shareholder vote, as to: (i) whom securities may be loaned, (ii) the
investment of cash collateral, or (iii) voting rights.
Repurchase Agreements
A repurchase agreement is an instrument under which the Fund purchases
a security and the seller (normally a commercial bank or broker-dealer)
agrees, at the time of purchase, that it will repurchase the security at a
specified time and price. The amount by which the resale price is greater
than the purchase price reflects an agreed-upon market interest rate
effective for the period of the agreement. The return on the securities
subject to the repurchase agreement may be more or less than the return on
the repurchase agreement.
The majority of the repurchase transactions in which the Fund would
engage are overnight transactions, and the delivery pursuant to the resale
typically will occur within one to five days of the purchase. The primary
risk is that the Fund may suffer a loss if the seller fails to pay the
agreed-upon amount on the delivery date and that amount is greater than the
resale price of the underlying securities and other collateral held by the
Fund. In the event of bankruptcy or other default by the seller, there may
be possible delays or expenses in liquidating the underlying securities or
other collateral, decline in their value and loss of interest. The return
on such collateral may be more or less than that from the repurchase
agreement. The Fund's repurchase agreements will be structured so as to
fully collateralize the loans. In other words, the value of the underlying
securities, which will be held by the Fund's custodian bank or by a third
party that qualifies as a custodian under Section 17(f) of the Investment
Company Act of 1940, as amended ("1940 Act"), is and, during the entire
term of the agreement, will remain at least equal to the value of the loan,
including the accrued interest earned thereon. Repurchase agreements are
entered into only with those entities approved by WRIMCO on the basis of
criteria established by the Board of Directors.
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 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 and Rights
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. Rights are similar to
warrants, but normally have a short duration and are distributed directly
by the issuer to its shareholders. Rights and warrants have no voting
rights, receive no dividends and have no rights with respect to the assets
of the issuer. Warrants and rights are highly volatile and, therefore,
more susceptible to sharp decline in value than the underlying securities
might be. They are also generally less liquid than an investment in the
underlying shares.
Illiquid Investments
The Fund has an operating policy, which may be changed without
shareholder approval, which provides that 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. 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) securities
involved in swap, cap, collar and floor transactions; (iv) bank deposits,
unless they are payable on demand or within seven days after demand; (v)
non-government stripped fixed-rate mortgage-backed securities; (vi) direct
debt instruments; (vii) restricted securities not determined to be liquid
pursuant to guidelines established by the Fund's Board of Directors; and
(viii) over-the-counter ("OTC") options and their underlying collateral.
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.
Options, Futures and Other Strategies
General. As discussed in the Prospectus, WRIMCO may use certain
options, futures contracts (sometimes referred to as "futures"), options on
futures contracts, forward currency contracts, swaps, caps, collars, floors
and indexed securities (collectively, "Financial Instruments") to attempt
to enhance the Fund's income or yield or to attempt to hedge the Fund's
investments. Generally, the Fund may purchase and sell any type of
Financial Instrument. However, as an operating policy, the Fund will only
purchase or sell a particular Financial Instrument if the Fund is
authorized to invest in the type of asset by which the return on, or value
of, the Financial Instrument is primarily measured or, with respect to
foreign currency derivatives, if the Fund is authorized to invest in
foreign securities.
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential declines in the
value of one or more investments held in the Fund's portfolio. Thus, in a
short hedge the Fund takes a position in a Financial Instrument whose price
is expected to move in the opposite direction of the price of the
investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that the Fund intends to
acquire. Thus, in a long hedge, the Fund takes a position in a Financial
Instrument whose price is expected to move in the same direction as the
price of the prospective investment being hedged. A long hedge is
sometimes referred to as an anticipatory hedge. In an anticipatory hedge
transaction, the Fund does not own a corresponding security and, therefore,
the transaction does not relate to a security the Fund owns. Rather, it
relates to a security that the Fund intends to acquire. If the Fund does
not complete the hedge by purchasing the security it anticipated
purchasing, the effect on the Fund's portfolio is the same as if the
transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities
positions that the Fund owns or intends to acquire. Financial Instruments
on indices, in contrast, generally are used to attempt to hedge against
price movements in market sectors in which the Fund has invested or expects
to invest. Financial Instruments on debt securities may be used to hedge
either individual securities or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations
of the SEC, the several exchanges upon which they are traded and the
Commodity Futures Trading Commission (the "CFTC"). In addition, the Fund's
ability to use Financial Instruments will be limited by tax considerations.
See "Taxes."
In addition to the instruments, strategies and risks described below
and in the Prospectus, WRIMCO expects to discover additional opportunities
in connection with Financial Instruments and other similar or related
techniques. These new opportunities may become available as WRIMCO
develops new techniques, as regulatory authorities broaden the range of
permitted transactions and as new Financial Instruments or other techniques
are developed. WRIMCO may utilize these opportunities to the extent that
they are consistent with the Fund's goal and permitted by the Fund's
investment limitations and applicable regulatory authorities. The Fund's
Prospectus or SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or
in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. Risks
pertaining to particular Financial Instruments are described in the
sections that follow.
(1) Successful use of most Financial Instruments depends upon
WRIMCO's ability to predict movements of the overall securities, currency
and interest rate markets, which requires different skills than predicting
changes in the prices of individual securities. There can be no assurance
that any particular strategy will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Financial Instrument and price movements of
the investments being hedged. For example, if the value of a Financial
Instrument used in a short hedge increased by less than the decline in
value of the hedged investment, the hedge would not be fully successful.
Such a lack of correlation might occur due to factors unrelated to the
value of the investments being hedged, such as speculative or other
pressures on the markets in which Financial Instruments are traded. The
effectiveness of hedges using Financial Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts
available will not match 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.
(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable
price movements. However, such strategies can also reduce opportunity for
gain by offsetting the positive effect of favorable price movements. For
example, if the Fund entered into a short hedge because WRIMCO projected a
decline in the price of a security in the Fund's portfolio, and the price
of that security increased instead, the gain from that increase might be
wholly or partially offset by a decline in the price of the Financial
Instrument. Moreover, if the price of the Financial Instrument declined by
more than the increase in the price of the security, the Fund could suffer
a loss. In either such case, the Fund would have been in a better position
had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets
as "cover," maintain accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties
(i.e., Financial Instruments other than purchased options). If the Fund
were unable to close out its positions in such Financial Instruments, it
might be required to continue to maintain such assets or accounts or make
such payments until the position expired or matured. These requirements
might impair the Fund's ability to sell a portfolio security or make an
investment at a time when it would otherwise be favorable to do so, or
require that the Fund sell a portfolio security at a disadvantageous time.
The Fund's ability to close out a position in a Financial Instrument prior
to expiration or maturity depends on the existence of a liquid secondary
market or, in the absence of such a market, the ability and willingness of
the other party to the transaction (the "counterparty") to enter into a
transaction closing out the position. Therefore, there is no assurance
that any position can be closed out at a time and price that is favorable
to the Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. 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 and liquid assets with
a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. The Fund
will comply with SEC guidelines regarding cover for these instruments and
will, if the guidelines so require, set aside cash or liquid assets in an
account with its custodian in the prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a
large portion of the Fund's assets to cover accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other
current obligations.
Options. The purchase of call options can serve as a long hedge, and
the purchase of put options can serve as a short hedge. Writing put or
call options can enable the Fund to enhance income or yield by reason of
the premiums paid by the purchasers of such options. However, if the
market price of the security underlying a put option declines to less than
the exercise price of the option, minus the premium received, the Fund
would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the
security or currency appreciates to a price higher than the exercise price
of the call option, it can be expected that the option will be exercised
and the Fund will be obligated to sell the security or currency at less
than its market value. If the call option is an OTC option, the securities
or other assets used as cover would be considered illiquid to the extent
described under "Illiquid Investments."
Writing put options can serve as a limited long hedge because
increases in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the
security or currency depreciates to a price lower than the exercise price
of the put option, it can be expected that the put option will be exercised
and the Fund will be obligated to purchase the security or currency at more
than its market value. If the put option is an OTC option, the securities
or other assets used as cover would be considered illiquid to the extent
described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of
the underlying investment, the historical price volatility of the
underlying investment and general market conditions. Options that expire
unexercised have no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, the Fund may terminate a position in a
put or call option it had purchased by writing an identical put or call
option; this is known as a closing sale transaction. Closing transactions
permit the Fund to realize profits or limit losses on an option position
prior to its exercise or expiration.
A type of put that the Fund may purchase is an "optional delivery
standby commitment," which is entered into by parties selling debt
securities to the Fund. An optional delivery standby commitment gives the
Fund the right to sell the security back to the seller on specified terms.
This right is provided as an inducement to purchase the security.
Risks of Options on Securities. The Fund may purchase or write both
exchange-traded and OTC options. Exchange-traded options in the United
States are issued by a clearing organization affiliated with the exchange
on which the option is listed that, in effect, guarantees completion of
every exchange-traded option transaction. In contrast, OTC options are
contracts between the Fund and its counterparty (usually a securities
dealer or a bank) with no clearing organization guarantee. Thus, when the
Fund purchases an OTC option, it relies on the counterparty from whom it
purchased the option to make or take delivery of the underlying investment
upon exercise of the option. Failure by the counterparty to do so would
result in the loss of any premium paid by the Fund as well as the loss of
any expected benefit of the transaction.
The Fund's ability to establish and close out positions in exchange-
listed options depends on the existence of a liquid market. However, there
can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating
directly with the counterparty, or by a transaction in the secondary market
if any such market exists. There can be no assurance that the Fund will in
fact be able to close out an OTC option position at a favorable price prior
to expiration. In the event of insolvency of the counterparty, the Fund
might be unable to close out an OTC option position at any time prior to
its expiration.
If the Fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any
profit. The inability to enter into a closing purchase transaction for a
covered call option written by the Fund could cause material losses because
the Fund would be unable to sell the investment used as cover for the
written option until the option expires or is exercised.
Options on Indices. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in
cash and gain or loss depends on changes in the index in question rather
than on price movements in individual securities or futures contracts.
When 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 of
the put has the right, prior to the expiration date, to require the Fund to
deliver to it an amount of cash equal to the difference between the closing
level of the index and the exercise price times the multiplier if the
closing level is less than the exercise price.
Risks of Options on Indices. The risks of investment in options on
indices may be greater than options on securities. Because index options
are settled in cash, when 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 the Fund has been assigned until the next
business day at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security, such as common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as
of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the
exercise date is borne by the exercising holder. In contrast, even if the
writer of an index call holds securities that exactly match the composition
of the underlying index, it will not be able to satisfy its assignment
obligations by delivering those securities against payment of the exercise
price. Instead, it will be required to pay cash in an amount based on the
closing index value on the exercise date. By the time it learns that it
has been assigned, the index may have declined, with a corresponding
decline in the value of its portfolio. This "timing risk" is an inherent
limitation on the ability of index call writers to cover their risk
exposure by holding securities positions.
If 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.
OTC Options. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size,
and strike price, the terms of OTC options (options not traded on
exchanges) generally are established through negotiation with the other
party to the option contract. While this type of arrangement allows the
Fund great flexibility to tailor the option to its needs, OTC options
generally involve greater risk than exchange-traded options, which are
guaranteed by the clearing organization of the exchanges where they are
traded.
Generally, OTC foreign currency options used by 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.
Futures Contracts and Options on Futures Contracts. The purchase of
futures or call options on futures can serve as a long hedge, and the sale
of futures or the purchase of put options on futures can serve as a short
hedge. Writing call options on futures contracts can serve as a limited
short hedge, using a strategy similar to that used for writing call options
on securities or indices. Similarly, writing put options on futures
contracts can serve as a limited long hedge. Futures contracts and options
on futures contracts can also be purchased and sold to attempt to enhance
income or yield.
In addition, futures strategies can be used to manage the average
duration of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten
the average duration of the Fund's fixed-income portfolio, the Fund may
sell a debt futures contract or a call option thereon, or purchase a put
option on that futures contract. If WRIMCO wishes to lengthen the average
duration of the Fund's fixed-income portfolio, the Fund may buy a debt
futures contract or a call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at
the inception of a futures contract the Fund is required to deposit
"initial margin" in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call or put
option on a futures contract, in accordance with applicable exchange rules.
Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high
volatility, the Fund may be required by an exchange to increase the level
of its initial margin payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the
futures broker daily as the value of the futures position varies, a process
known as "marking-to-market." Variation margin does not involve borrowing,
but rather represents a daily settlement of the Fund's obligations to or
from a futures broker. When the Fund purchases an option on a future, the
premium paid plus transaction costs is all that is at risk. In contrast,
when the Fund purchases or sells a futures contract or writes a call or put
option thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Fund has
insufficient cash to meet daily variation margin requirements, it might
need to sell securities at a time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions
on options, by selling or purchasing, respectively, an instrument identical
to the instrument purchased or sold. Positions in futures and options on
futures may be closed only on an exchange or board of trade that provides a
secondary market. However, there can be no assurance that a liquid
secondary market will exist for a particular contract at a particular time.
In such event, it may not be possible to close a futures contract or
options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once
that limit is reached, no trades may be made that day at a price beyond the
limit. Daily price limits do not limit potential losses because prices
could move to the daily limit for several consecutive days with little or
no trading, thereby preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option
on a futures position due to the absence of a liquid secondary market or
the imposition of price limits, it could incur substantial losses. The
Fund would continue to be subject to market risk with respect to the
position. In addition, except in the case of purchased options, the Fund
would continue to be required to make daily variation margin payments and
might be required to maintain the position being hedged by the future or
option or to maintain cash or securities in a segregated account.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on
futures market), due to differences in the natures of those markets, are
subject to the following factors, which may create distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the cash
and futures markets. Second, the liquidity of the futures market depends
on participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus producing
distortion. Third, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation
by speculators in the futures market may cause temporary price distortions.
Due to the possibility of distortion, a correct forecast of general
interest rate, currency exchange rate or stock market trends by WRIMCO may
still not result in a successful transaction. WRIMCO may be incorrect in
its expectations as to the extent of various interest rate, currency
exchange rate or stock market movements or the time span within which the
movements take place.
Index Futures. The risk of imperfect correlation between movements in
the price of an index futures 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 futures
moves less than the price of the securities that are the subject of the
hedge, the hedge will not be fully effective but, if the price of the
securities being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction,
this advantage will be partially offset by the futures contract. If the
price of the futures contract moves more than the price of the securities,
the Fund will experience either a loss or a gain on the futures contract
that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of the securities being
hedged and movements in the price of the index futures, 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 index futures contracts to hedge against decline in
the market, the market may advance and the value of the securities held in
the portfolio may decline. If this occurred, the Fund would lose money on
the futures contract and also experience a decline in value of its
portfolio securities. However, while this could occur for a very brief
period or to a very small degree, over time the value of a diversified
portfolio of securities will tend to move in the same direction as the
market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase
in the price of securities before 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.
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.) This policy does not limit to 5% the percentage of the
Fund's assets that are at risk in futures contracts, options on futures
contracts and currency options.
Foreign Currency Hedging Strategies--Special Considerations. The Fund
may use options and futures contracts on foreign currencies, as described
above, and forward currency contracts, as described below, to attempt to
hedge against movements in the values of the foreign currencies in which
the Fund's securities are denominated or to attempt to enhance income or
yield. Currency hedges can protect against price movements in a security
that the Fund owns or intends to acquire that are attributable to changes
in the value of the currency in which it is denominated. Such hedges do
not, however, protect against price movements in the securities that are
attributable to other causes.
The Fund might seek to hedge against changes in the value of a
particular currency when no Financial Instruments on that currency are
available or such Financial Instruments are more expensive than certain
other Financial Instruments. In such cases, the Fund may seek to hedge
against price movements in that currency by entering into transactions
using Financial Instruments on another currency or a basket of currencies,
the value of which WRIMCO believes will have a high degree of positive
correlation to the value of the currency being hedged. The risk that
movements in the price of the Financial Instrument will not correlate
perfectly with movements in the price of the currency subject to the
hedging transaction is magnified when this strategy is used.
The value of Financial Instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might
involve substantially larger amounts than those involved in the use of such
Financial Instruments, the Fund could be disadvantaged by having to deal in
the odd lot market (generally consisting of transactions of less than $1
million) for the underlying foreign currencies at prices that are less
favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large
transactions in the interbank market and thus might not reflect odd-lot
transactions where rates might be less favorable. The interbank market in
foreign currencies is a global, round-the-clock market. To the extent the
U.S. options or futures markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements
might take place in the underlying markets that cannot be reflected in the
markets for the Financial Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might
be required to take place within the country issuing the underlying
currency. Thus, the Fund might be required to accept or make delivery of
the underlying foreign currency in accordance with any U.S. or foreign
regulations regarding the maintenance of foreign banking arrangements by
U.S. residents and might be required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.
Forward Currency Contracts. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves
an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days (term) from the date of the forward
currency contract agreed upon by the parties, at a price set at the time of
the forward currency contract. These forward currency contracts are traded
directly between currency traders (usually large commercial banks) and
their customers.
Such transactions may serve as long hedges; for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to
acquire. Forward currency contract transactions may also serve as short
hedges; for example, the Fund may sell a forward currency contract to lock
in the U.S. dollar equivalent of the proceeds from the anticipated sale of
a security, dividend or interest payment denominated in a foreign currency.
The Fund may also use forward currency 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 currency 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 currency 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 also may use forward currency contracts to attempt to enhance
income or yield. The Fund could use forward currency contracts to increase
its exposure to foreign currencies that WRIMCO believes might rise in value
relative to the U.S. dollar, or shift its exposure to foreign currency
fluctuations from one country to another. For example, if the Fund owned
securities denominated in a foreign currency and WRIMCO believed that
currency would decline relative to another currency, it might enter into a
forward currency contract to sell an appropriate amount of the first
foreign currency, with payment to be made in the second foreign currency.
The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because forward currency
contracts are usually entered into on a principal basis, no fees or
commissions are involved. When the Fund enters into a forward currency
contract, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract. Failure by the
counterparty to do so would result in the loss of any expected benefit of
the transaction.
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures contracts, by selling or
purchasing, respectively, an instrument identical to the instrument
purchased or sold. Secondary markets generally do not exist for forward
currency contracts, with the result that closing transactions generally can
be made for forward currency contracts only by negotiating directly with
the counterparty. Thus, there can be no assurance that the Fund will in
fact be able to close out a forward currency contract at a favorable price
prior to maturity. In addition, in the event of insolvency of the
counterparty, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and
would continue to be required to maintain a position in securities
denominated in the foreign currency or to maintain cash or liquid assets in
an account.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible because the
value of such securities, measured in the foreign currency, will change
after the forward currency contract has been established. Thus, the Fund
might need to purchase or sell foreign currencies in the spot (cash) market
to the extent such foreign currencies are not covered by forward currency
contracts. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the flexibility to enter into such forward currency
contracts when it determines that the best interests of the Fund will be
served.
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 its 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.
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.
Swaps, Caps, Collars and Floors. Swap agreements, including caps,
collars and floors, can be individually negotiated and structured to
include exposure to a variety of different types of investments or market
factors. Depending on their structure, swap agreements may increase or
decrease the Fund's exposure to long- or short-term interest rates (in the
United States or abroad), foreign currency values, mortgage-backed security
values, corporate borrowing rates or other factors such as security prices
or inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to
exchange payments in U.S. dollars for payments in foreign currency, the
swap agreement would tend to decrease the Fund's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Caps and floors have an effect similar to buying or writing options.
The creditworthiness of firms with which the Fund enters into swaps,
caps or floors will be monitored by WRIMCO in accordance with procedures
adopted by the Fund's Board of Directors. If a default occurs by the other
party to such transaction, the Fund will have contractual remedies pursuant
to the agreements related to the transaction.
The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap will be accrued on a daily basis
and an amount of cash or liquid assets having an aggregate net asset value
at least equal to the accrued excess will be maintained in an account with
the Fund's custodian that satisfies the requirements of the 1940 Act. The
Fund will also establish and maintain such accounts with respect to its
total obligations under any swaps that are not entered into on a net basis
and with respect to any caps or floors that are written by the Fund.
WRIMCO and the Fund believe that such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as
being subject to the Fund's borrowing restrictions.
Investment Restrictions
Certain of the Fund's investment restrictions are described in the
Prospectus and in this SAI. The following are the Fund's fundamental
investment limitations set forth in their entirety, which cannot be changed
without shareholder approval. The Fund may not:
(i) 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;
(ii) 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;
(iii) sell securities short (unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short) or purchase securities on margin, except that (a) this
policy does not prevent the Fund from entering into short
positions in foreign currency, futures contracts, options,
forward contracts, swaps, caps, collars, floors and other
financial instruments, (b) the Fund may obtain such short-term
credits as are necessary for the clearance of transactions, and
(c) the Fund may make margin payments in connection with futures
contracts, options, forward contracts, swaps, caps, collars,
floors and other financial instruments;
(iv) 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;
(v) underwrite securities issued by others, except to the extent that
the Fund may be deemed to be an underwriter within the meaning of the
1933 Act in the disposition of restricted securities;
(vi) 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;
(vii) 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);
(viii) purchase or sell physical commodities, except that the Fund may
purchase and sell precious metals for temporary defensive
purposes; however, this policy shall not prevent the Fund from
purchasing and selling foreign currency, futures contracts,
options, forward contracts, swaps, caps, collars, floors and
other financial instruments; and
(ix) 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 debt
securities and other obligations consistent with its goal and its
other investment policies and restrictions; and (c) by engaging
in repurchase agreements with respect to portfolio securities.
The following investment limitations are not fundamental and may be
changed by the Board of Directors without shareholder approval.
(i) 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.)
(ii) The Fund does not currently intend to invest in oil, gas, or
other mineral exploration or development programs or leases.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year
and dividing it by the monthly average of the market value of such
securities during the year, excluding certain short-term securities. 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 portfolio turnover rate for the common stock portion of the Fund's
portfolio for the fiscal year ended September 30, 1997, was 187.45%, while
the rate for the remainder of the portfolio was 140.98%. The Fund's
overall portfolio turnover was 173.88% for the fiscal year ended September
30, 1997 and 91.06% for the fiscal year ended September 30, 1996.
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.
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.
Torchmark Corporation and United Investors Management Company
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. 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 acts
as principal underwriter and distributor for variable life insurance and
variable annuity policies issued by United Investors Life Insurance Company
for which TMK/United Funds, Inc. is the underlying investment vehicle.
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 management fees paid by the Fund to WRIMCO for the fiscal
years ended September 30, 1997 and 1996 were $205,329 and $218,333,
respectively, and during the period beginning March 9, 1995 through
September 30, 1995 were $41,415.
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 $1.3125 for each
shareholder account that was in existence at any time during the prior
month, plus $0.30 for each account on which a dividend or distribution, of
cash or shares, had a record date in that month. For Class Y shares, 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 fees paid to the agent for accounting services for the fiscal
years ended September 30, 1997 and 1996 were $20,000 and $19,167,
respectively, and for the period March 9, 1995 through September 30, 1995
were $2,500.
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. The aggregate dollar amount of
underwriting commissions for Class A shares for the fiscal years ended
September 30, 1997 and 1996 were $154,700 and $717,578, respectively, and
for the period March 9, 1995 through September 30, 1995, were $714,944.
The amount retained by Waddell & Reed, Inc. for each period was $67,976,
$310,660 and $304,625, respectively.
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 Distribution and 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 0.25% 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 distribution of the Class A shares and/or the service and/or
maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its registered
representatives and sales managers (sales force) unless it elects, which is
not currently contemplated, to make distribution of shares also through
other broker-dealers. In distributing shares through its sales force,
Waddell & Reed, Inc. will pay commissions and incentives to the sales force
at or about the time of sale and will incur other expenses including for
prospectuses, sales literature, advertisements, sales office maintenance,
processing of orders and general overhead with respect to its efforts to
distribute the Fund's shares. The Plan permits Waddell & Reed, Inc. to
receive reimbursement for these distribution activities through the
distribution fee, subject to the limit contained in the Plan. The Plan
also contemplates 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.
Service fees in the amount of $51,568 were paid (or accrued) by the
Fund with respect to Class A shares for the fiscal year ended September 30,
1997.
The Plan was 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. Deloitte & Touche LLP, Kansas City, Missouri, the Fund's
independent accountants, audits the Fund's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each 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.
Class A shares of the Fund are sold at their next determined net asset
value plus the sales charge described in the Prospectus. The price makeup
as of September 30, 1997 was as follows:
Net asset value per Class A share (Class A
net assets divided by Class A shares
outstanding) ............................. $5.99
Add: selling commission (5.75% of offering
price) ................................... .37
-----
Maximum offering price per Class A share
(Class A net asset value divided by 94.25%) $6.36
=====
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 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,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
it is possible that the NYSE may close on other days. The net asset value
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 the Nasdaq stock market, which provides
information on bid and asked prices quoted by major dealers in such stocks.
Bonds, other than convertible bonds, are valued using a third-party pricing
system. Convertible bonds are valued using this pricing system only on
days when there is no sale reported. Short-term debt securities are valued
at amortized cost, which approximates market. When market quotations are
not readily available, securities and other assets are valued at fair value
as determined in good faith 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 Gifts to Minors Act ("UGMA") or Uniform Transfers to
Minors Act ("UTMA") account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), Section 457 of the Internal
Revenue Code of 1986, as amended (the "Code"), salary reduction plan
account provided that such purchases are subject to a sales charge
(see "Net Asset Value Purchases"), tax sheltered annuity account
("TSA") or Keogh plan account, provided that the individual and spouse
are the only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or
her spouse is the settlor (the person who establishes the trust).
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 such 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 of Intention is accepted by Waddell & Reed, Inc. Each purchase
made from time to time under the Statement of Intention 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 of Intention 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 of
Intention 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 of Intention.
An amount equal to 5% of the purchase required under the Statement of
Intention will be held "in escrow." If a purchaser does not, during the
period covered by the Statement of Intention, invest the amount required to
qualify for the reduced sales charge under the terms of the Statement of
Intention, 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 of Intention
which is not completed will be collected by redeeming part of the shares
purchased under the Statement of Intention 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 of
Intention.
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 of Intention will be deducted in computing the
aggregate purchases under the Statement of Intention.
Statements of Intention are not available for purchases made under an
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
UGMA or UTMA 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 for Class A shares, 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 model or 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 a traditional IRA,
an investor can contribute each year up to 100% of his or her earned
income, up to an annual maximum of $2,000 (provided the investor has not
reached age 70 1/2). For a married couple, the annual maximum is $4,000
($2,000 for each spouse) or, if less, the couple's combined earned income
for the taxable year, even if one spouse had no earned income. Generally,
the contributions are deductible unless the investor (or, if married,
either spouse) is an active participant in a qualified retirement plan or
if, notwithstanding that the investor or one or both spouses so
participate, their adjusted gross income does not exceed certain levels.
However, for tax years after 1997, a married investor who is not an active
participant, files jointly with his or her spouse and whose combined
adjusted gross income does not exceed $150,000, is not affected by the
spouse's active participant status.
An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be
subject to Federal income tax until distributed from the IRA. A direct
rollover generally applies to any distribution from an employer's plan
(including a custodial account under Section 403(b)(7) of the Code, but not
an IRA) other than certain periodic payments, required minimum
distributions and other specified distributions. In a direct rollover, the
eligible rollover distribution is paid directly to the IRA, not to the
investor. If, instead, an investor receives payment of an eligible
rollover distribution, all or a portion of that distribution generally may
be rolled over to an IRA within 60 days after receipt of the distribution.
Because mandatory Federal income tax withholding applies to any eligible
rollover distribution which is not paid in a direct rollover, investors
should consult their tax advisers or pension consultants as to the
applicable tax rules. If you already have an IRA, you may have the assets
in that IRA transferred directly to an IRA offered by Waddell & Reed, Inc.
Roth IRAs. Investors whose adjusted gross income (or combined
adjusted gross income, if married) does not exceed certain levels may
establish and contribute up to $2,000 per tax year after 1997 to a Roth
IRA. In addition, for an investor whose adjusted gross income does not
exceed $100,000 (or is not married filing a separate return), certain
distributions from traditional IRAs may be rolled over to a Roth IRA and
any of the investor's traditional IRAs may be converted into a Roth IRA;
these rollover distributions and conversions are, however, subject to
Federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in the Roth IRA, and withdrawals of earnings are not
subject to Federal income tax if the account has been held for at least
five years (or in the case of earnings attributable to rollover
contributions or conversions of a traditional IRA, the rollover or
conversion occurred more than 5 years prior to the withdrawal) and the
account holder has reached age 59 1/2 (or certain other conditions apply).
Education IRAs. Although not technically for retirement savings,
Education IRAs provide a vehicle for saving for a child's higher education.
An Education IRA may be established for the benefit of any minor, and any
person whose adjusted gross income does not exceed certain levels may
contribute to an Education IRA, provided that no more than $500 may be
contributed for any year to Education IRAs for the same beneficiary.
Contributions are not deductible and may not be made after the beneficiary
reaches age 18; however, earnings accumulate tax-free, and withdrawals are
not subject to tax if used to pay the qualified higher education expenses
of the beneficiary (or a member of his or her family).
Simplified Employee Pension (SEP) plans. Employers can make
contributions to SEP-IRAs established for employees. Generally, an
employer may contribute up to 15% of compensation, or $24,000, whichever is
less, per year for each employee.
Savings Incentive Match Plans for Employees (SIMPLE Plans). An
employer with 100 or fewer employees who does not sponsor another active
retirement plan may sponsor a SIMPLE to contribute to its employees'
retirement accounts. A SIMPLE plan can be funded by either an IRA or a
401(k) plan. An employer can choose to match employee contributions
dollar-for-dollar (generally, up to 3% of the employee's compensation) or
may contribute to all eligible employees 2% of their compensation, whether
or not they defer salary to their SIMPLE plans. SIMPLE plans involve fewer
administrative requirements than 401(k) or other qualified plans generally.
Keogh Plans. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money
purchase plan or a profit sharing plan. As a general rule, an investor
under a defined contribution Keogh plan can contribute each year up to 25%
of his or her annual earned income, with an annual maximum of $30,000.
457 Plans. If an investor is an employee of a state or local
government or of certain types of charitable organizations, he or she may
be able to enter into a deferred compensation arrangement in accordance
with Section 457 of the Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is an
employee of a public school system or of certain types of charitable
organizations, he or she may be able to enter into a deferred compensation
arrangement through a custodian account under Section 403(b) of the Code.
Some organizations have adopted Title I plans, which are funded by employer
contributions in addition to employee deferrals.
401(k) Plans. With a 401(k) plan, employees can make tax-deferred
contributions into a plan to which the employer may also contribute,
usually on a matching basis. An employee may defer each year up to 25% of
compensation, subject to certain annual maximums, which may be increased
each year based on cost-of-living adjustments.
More detailed information about these arrangements and applicable
forms are available from 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 Class A 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 Class A 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.
Class A 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 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 Class A 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 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 the 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 the Fund may be exchanged for Class Y shares of any
other fund in the United Group or for Class A shares of United Cash
Management, Inc.
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
The Prospectus gives information as to redemption procedures.
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 For Class A Shareholders
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service (the "Service") regular monthly, quarterly, semiannual
or annual payments by redeeming on an ongoing basis Class A shares that you
own of the Fund or 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 to start the Service are available from
Waddell & Reed, Inc.
To qualify for the Service, you must have invested at least $10,000 in
Class A shares which you still own of any of the Funds in the United Group;
or, you must own Class A 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 number of shares fixed by you (at least five
shares).
Shares are redeemed on the 20th day of the month in which the payment
is to be made, or on the prior business day if the 20th is not a business
day. Payments are made within five days of the redemption.
Retirement plan accounts may be subject to a fee imposed by the plan
custodian for use of their service.
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 Class A 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 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 may 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.
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. Wise 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. and TMK/United Funds, 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.; Director of Full House
Resorts, Inc., a developer of resorts and gaming casinos; 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. Date of birth: June 16, 1926.
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. Date of birth: February 11, 1945.
HENRY L. BELLMON
Route 1
P. O. Box 26
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University. Date of birth:
September 3, 1921.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law;
Director, AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
Director and consultant, McDougal Construction Company; President,
JoDill Corp.; formerly Senior Vice President-Sales and Marketing, Garney
Companies, Inc., a specialty utility contractor. Date of birth: January
9, 1939.
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. Date of birth: July 29,
1953.
JOHN F. HAYES*
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman, Gilliland &
Hayes, P.A., a law firm; formerly, President, Gilliland & Hayes, P.A. Date
of birth: December 11, 1919.
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. Date of birth: February 19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of
the Fund and each fund in the Fund Complex then in existence. (Mr. Morgan
retired as Chairman of the Board of Directors and President of the funds in
the Fund Complex then in existence on April 30, 1993); formerly, President,
Director and Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.;
formerly, Chairman of the Board of Directors of Waddell & Reed Services
Company; formerly, Director of Waddell & Reed Asset Management Company,
United Investors Management Company and United Investors Life Insurance
Company, affiliates of Waddell & Reed, Inc. Date of birth: April 27,
1928.
WILLIAM L. ROGERS
1999 Avenue of the Stars
Los Angeles, California 90067
Principal, Colony Capital, Inc., a real estate related investment
company. Date of birth: September 8, 1946.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Partner, Polsinelli, White, Vardeman & Shalton, a law firm. Date of
birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Chancellor, University of Missouri-Kansas City. Date of birth:
January 1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan, a fertilizer company.
Date of birth: July 16, 1920.
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. Date of birth:
November 12, 1936.
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. Date of
birth: December 8, 1942.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund
and each of the other funds in the Fund Complex; Vice President of Waddell
& Reed Services Company. Date of birth: July 18, 1942.
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
WRIMCO, Waddell & Reed Financial Services, Inc., Waddell & Reed, Inc.,
Waddell & Reed Asset Management Company and Waddell & Reed Services
Company. Date of birth: February 9, 1959.
Michael L. Avery
Vice President of the Fund and three other funds in the Fund Complex;
Senior Vice President of the Manager; Vice President of Waddell & Reed
Asset Management Company; formerly, Vice President of Waddell & Reed, Inc.
Date of birth: September 15, 1953.
Daniel J. Vrabac
Vice President of the Fund and two other funds in the Fund Complex;
Vice President of Waddell & Reed Asset Management Company. Date of birth:
July 24, 1954.
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, six 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 or her past
services whether or not services are rendered in his or her capacity as
Director Emeritus, but has no authority or responsibility with respect to
management of the Fund. Messrs. Doyle Patterson and Jay B. Dillingham
retired as Directors of the Fund and of each of the funds in the Fund
Complex effective January 1, 1997 and January 14, 1997, respectively, and
each has elected a position as Director Emeritus. During the Fund's fiscal
year ended September 30, 1997, Mr. Patterson received total compensation
for his service as a Director of $47,000 from the Fund Complex and the Fund
and aggregate compensation from the Fund of $83. During the Fund's fiscal
year ended September 30, 1997, Mr. Dillingham received total compensation
for his service as a Director of $47,000 from the Fund Complex and the Fund
and aggregate compensation from the Fund of $83.
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 from the Fund. The Funds in the United Group,
TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. pay to each Director
a total of $48,000 per year, plus $2,500 for each meeting of the Board of
Directors attended (prior to January 1, 1998, the funds in the United
Group, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. paid to each
Director a fee of $44,000 per year, plus $1,000 for each meeting of the
Board of Directors attended) and $500 for each committee meeting attended
which is not in conjunction with a Board of Directors meeting, other than
Directors who are affiliates of Waddell & Reed, Inc. The fees to the
Directors who receive them are divided among the funds in the United Group,
TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. based on their
relative size. During the Fund's fiscal year ended September 30, 1997, the
Fund's Directors received the following fees for service as a director:
Compensation Table
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
-------- ------------ ------------
Ronald K. Richey $ 0 $ 0
Keith A Tucker 0 0
Henry L. Bellmon 88 50,000
James M. Concannon 18 12,000
John A. Dillingham 18 12,000
Linda Graves 88 48,000
John F. Hayes 88 50,000
Glendon E. Johnson 86 49,000
William T. Morgan 88 50,000
William L. Rogers 83 47,000
Frank J. Ross, Jr. 84 48,000
Eleanor B. Schwartz 88 50,000
Frederick Vogel III 88 50,000
Paul S. Wise 88 50,000
*No pension or retirement benefits have been accrued as a part of Fund
expenses.
Messrs. Rogers and Ross were elected as Directors on October 16, 1996.
Messrs. Concannon and Dillingham were elected as Directors on July 28,
1997. The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of November 30, 1997, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. The
following table sets forth information with respect to the Fund, as of
November 30, 1997, regarding the ownership of the Fund's shares.
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
------------------- ----- ------------ -------
United Investors Class Y 31,404 52.30%
Management Company
Savings & Investment Plan
6300 Lamar Avenue
Overland Park KS 66201
Torchmark Corporation Class Y 27,557 45.89
Savings & Investment Plan
2001 Third Avenue South
Birmingham AL 35233
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 net investment income, which is
derived from the dividends, interest and earned discount on the securities
the Fund holds, less expenses (which will vary by class). The second
source is net realized capital gains, which are derived from the proceeds
received from the Fund's sale of securities at a price higher than the
Fund's tax basis (usually cost) in such securities, less losses from sales
of securities at a price lower than the Fund's basis therein; these gains
can be either long-term or short-term, depending on how long 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.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may
not have such gains, depending on whether securities are sold and at what
price. If the Fund has net capital gains, it will pay distributions once
each year, in the latter part of the fourth calendar quarter, except to the
extent it has net capital losses from a prior year or years 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 (i.e., with no sales charge)
next determined after receipt by Waddell & Reed, Inc. of the amount
clearly identified as a reinvestment. The reinvestment must be within
45 days after the payment.
TAXES
General
In order to continue to qualify for treatment as a regulated
investment company ("RIC") under the Code, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-
term capital gains and net gains from certain foreign currency
transactions) ("Distribution Requirement") 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) at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government Securities, securities
of other RICs and other securities that are limited, in respect of any one
issuer, to an amount that does not exceed 5% of the value of the Fund's
total assets and that does not represent more than 10% of the issuer's
outstanding voting securities ("50% Diversification Requirement"); and (3)
at the close of each quarter of the Fund's taxable year, not more than 25%
of the value of its total assets may be invested in securities (other than
U.S. Government Securities or the securities of other RICs) of any one
issuer.
Investments in precious metals would have adverse tax consequences for
the Fund and its shareholders if it either (1) derived more than 10% of its
gross income in any taxable year from the disposition of precious metals
and from other income that does not qualify under the Income Requirement or
(2) held precious metals in such quantities that the Fund failed to satisfy
the 50% Diversification Requirement for any quarter. The Fund intends to
manage its portfolio so as to avoid failing to satisfy those requirements
for these reasons.
Dividends and distributions declared by the Fund in October, November
or December of any year and payable to its 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 the 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 investor 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 pay sufficient dividends
and distributions each year to avoid imposition of the Excise Tax. The
Fund may defer into the next calendar year net capital losses incurred
between November 1 and the end of the current calendar year.
Income from Foreign Securities
Dividends and interest received 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.
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation other than a
"controlled foreign corporation" (i.e., a foreign corporation in which, on
any day during its taxable year, more than 50% of the total voting power of
all voting stock therein or the total value of all stock therein is owned,
directly, indirectly, or constructively, by "U.S. shareholders," defined as
U.S. persons that individually own, directly, indirectly, or
constructively, at least 10% of that voting power) as to which the Fund is
a U.S. shareholder (effective for its taxable year beginning October 1,
1998) that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under
certain circumstances, the Fund will be subject to Federal income tax on a
portion of any "excess distribution" received on the stock of a PFIC or of
any gain on disposition of the stock (collectively "PFIC income"), plus
interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be
included in the Fund's investment company taxable income and, accordingly,
will not be taxable to it to the extent that income is distributed to its
shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each
year its pro rata share of the QEF's annual ordinary earnings and net
capital gains -- which probably would have to be distributed by the Fund to
satisfy the Distribution Requirement and avoid imposition of the Excise Tax
-- even if those earnings and gains were not distributed to the Fund by the
QEF. In most instances it will be very difficult, if not impossible, to
make this election because of certain requirements thereof.
Effective for its taxable year beginning October 1, 1998, the Fund may
elect to "mark to market" its stock in any PFIC. "Marking-to-market," in
this context, means including in ordinary income each taxable year the
excess, if any, of the fair market value of a PFIC's stock over the Fund's
adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also would be allowed to deduct (as an ordinary, not
capital, loss) the excess, if any, of its adjusted basis in PFIC stock over
the fair market value thereof as of the taxable year-end, but only to the
extent of any net mark-to-market gains with respect to that stock included
by the Fund for prior taxable years. The Fund's adjusted basis in each
PFIC's stock with respect to which it makes this election will be adjusted
to reflect the amounts of income included and deductions taken under the
election. Regulations proposed in 1992 would provide a similar election
with respect to the stock of certain PFICs.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2)
from the disposition of a debt security 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 and Forward Currency Contracts and Foreign
Currencies
The use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts and entering into forward currency
contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and
losses the Fund realizes in connection therewith. Gains from the
disposition of foreign currencies (except certain gains that may be
excluded by future regulations), and gains from options, futures contracts
and forward currency contracts derived by the Fund with respect to its
business of investing in securities or foreign currencies will qualify as
permissible income under the Income Requirement.
Any income the Fund earns from writing options is treated as short-
term capital gain. If the Fund enters into a closing purchase transaction,
it will have a short-term capital gain or loss based on the difference
between the premium it receives for the option it wrote and the premium it
pays for the option it buys. If an option written by the Fund lapses
without being exercised, the premium it received also will be a short-term
capital gain. If such an option is exercised and the Fund thus sells the
securities subject to the option, the premium the Fund received will be
added to the exercise price to determine the gains or losses on the sale.
Certain options and futures in which the Fund may invest may be
"section 1256 contracts." Section 1256 contracts held by the Fund at the
end of each taxable year, other than section 1256 contracts that are part
of a "mixed straddle" with respect to which the Fund has made an election
not to have the following rules apply, are "marked-to-market" (that is,
treated 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. As of the date of this SAI, it is not entirely
clear whether that 60% portion will qualify for the reduced maximum tax
rates on net capital gains enacted by the Taxpayer Relief Act of 1997 - 20%
(10% for taxpayers in the 15% marginal tax bracket) for gains recognized on
capital assets held for more than 18 months - instead of the 28% rate in
effect before that legislation, which now applies to gains recognized on
capital assets held for more than one year but not more than 18 months,
although technical corrections legislation passed by the House of
Representatives would treat it as qualifying therefor. Section 1256
contracts also may be marked-to-market for purposes of the Excise Tax and
for other purposes. The Fund may need to distribute any such gains to its
shareholders to satisfy the Distribution Requirement and/or avoid
imposition of the Excise Tax even though it may not have closed the
transactions and received cash to pay the distributions.
Code section 1092 (dealing with straddles) may also affect the
taxation of options and futures contracts in which the Fund may invest.
That section defines a "straddle" as offsetting positions with respect to
personal property; for these purposes, options and futures contracts are
personal property. Section 1092 generally provides that any loss from the
disposition of a position in a straddle may be deducted only to the extent
the loss exceeds the unrealized gain on the offsetting position(s) of the
straddle. Section 1092 also provides certain "wash sale" rules, that apply
to transactions where a position is sold at a loss and a new offsetting
position is acquired within a prescribed period, and "short sale" rules
applicable to straddles. If 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 ("OID"). As a holder of those securities, the Fund
must include in its income the portion of the OID that accrues on the
securities during the taxable year, even if the Fund receives no
corresponding payment on the securities during the year. Similarly, 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
accrued OID and other non-cash income, to satisfy the Distribution
Requirement and 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.
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
sales of Fund shares as a factor in the selection of broker-dealers to
execute portfolio transactions. No allocation of brokerage or principal
business is made to provide any other benefits to WRIMCO 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.
The Fund may also use its brokerage to pay for pricing or quotation
services to value securities. During the Fund's fiscal years ended
September 30, 1997 and 1996, it paid brokerage commissions of $45,466 and
$54,643, respectively. This figure does not include principal transactions
or spreads or concessions on principal transactions, i.e., those in which
the Fund sells securities to a broker-dealer firm or buys from a broker-
dealer firm securities owned by it.
During the Fund's fiscal year ended September 30, 1997, the
transactions, other than principal transactions, which were directed to
broker-dealers who provided research as well as execution totaled
$14,665,977 on which $24,506 in brokerage commissions were paid. These
transactions were allocated to these broker-dealers by the internal
allocation procedures described above.
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. and TMK/United Funds, Inc. or accounts over
which Waddell & Reed Asset Management Company exercises investment
discretion frequently buy or sell the same securities at the same time. If
this happens, the amount of each purchase or sale is divided. This is done
on the basis of the amount of securities each Fund or account wanted to buy
or sell. Sharing in large transactions could affect the price the Fund
pays or receives or the amount it buys or sells. However, sometimes a
better negotiated commission is available.
OTHER INFORMATION
The Fund offers two classes of shares: Class A and Class Y. 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>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1997
Shares Value
COMMON STOCKS
Apparel and Accessory Stores - 1.42%
Payless ShoeSource, Inc. ............... 6,800 $ 405,872
Auto Repair, Services and Parking - 2.39%
Avis Rent A Car, Inc.* ................. 10,000 238,750
The Hertz Corp, Class A ................ 11,800 444,707
Total ................................. 683,457
Business Services - 7.50%
BISYS Group, Inc. (The)* ............... 6,700 215,023
BMC Software, Inc.* .................... 7,500 485,385
Intuit Inc.* ........................... 9,000 289,125
J. D. Edwards* ......................... 13,000 437,125
McAfee Associates, Inc.* ............... 8,300 439,900
Oracle Systems Corporation* ............ 7,500 273,510
Total ................................. 2,140,068
Chemicals and Allied Products - 5.43%
American Home Products Corporation ..... 4,200 306,600
BetzDearborn Inc. ...................... 6,500 444,438
Imperial Chemical Industries plc ADR ... 8,200 542,225
Monsanto Company ....................... 6,600 257,400
Total ................................. 1,550,663
Communication - 5.41%
AT&T Corporation ....................... 10,500 465,276
Clear Channel Communications, Inc.* .... 6,300 408,712
SBC Communications Inc. ................ 10,900 668,988
Total ................................. 1,542,976
Depository Institutions _ 2.87%
BankAmerica Corporation ................ 4,200 307,910
Norwest Corporation .................... 3,800 232,750
U. S. Bancorp. ......................... 2,900 279,850
Total ................................. 820,510
Electric, Gas and Sanitary Services - 1.40%
Duke Energy Corp. ...................... 8,100 400,439
Food and Kindred Products - 1.00%
CPC International Inc. ................. 1,500 138,937
ConAgra, Inc. .......................... 2,200 145,200
Total ................................. 284,137
Forestry - 1.64%
Weyerhaeuser Company ................... 7,900 469,063
Furniture and Fixtures - 1.71%
Lear Corporation* ...................... 9,900 487,575
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1997
Shares Value
COMMON STOCKS (Continued)
General Merchandise Stores - 3.73%
Federated Department Stores, Inc.* ..... 10,500 $ 452,813
Wal-Mart Stores, Inc. .................. 16,700 611,637
Total ................................. 1,064,450
Health Services - 0.89%
Centennial HealthCare Corporation* ..... 11,000 254,375
Industrial Machinery and Equipment - 4.33%
Case Corporation ....................... 4,700 313,137
Compaq Computer Corporation* ........... 3,900 291,525
New Holland NV ......................... 4,900 144,550
Parker Hannifin Corporation ............ 10,800 486,000
Total ................................. 1,235,212
Instruments and Related Products - 1.32%
General Motors Corporation, Class H .... 5,700 376,912
Miscellaneous Retail - 1.23%
Costco Companies, Inc.* ................ 9,300 349,615
Paper and Allied Products - 2.44%
Champion International Corporation ..... 4,200 255,935
Mead Corporation (The) ................. 6,100 440,725
Total ................................. 696,660
Personal Services - 1.87%
Equity Corporation International* ...... 22,900 533,845
Petroleum and Coal Products - 4.38%
Mobil Corporation ...................... 8,200 606,800
Royal Dutch Petroleum Company .......... 11,600 643,800
Total ................................. 1,250,600
Railroad Transportation - 1.83%
Burlington Northern Santa Fe Corporation 2,800 270,550
Union Pacific Corporation .............. 4,000 250,748
Total ................................. 521,298
Transportation by Air - 1.68%
Southwest Airlines Co. ................. 15,000 479,055
Transportation Equipment - 2.40%
Hayes Wheels International, Inc.* ...... 10,800 367,200
Sundstrand Corporation ................. 5,500 316,938
Total ................................. 684,138
See Notes to Schedule of Investments on page 72.
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1997
Shares Value
COMMON STOCKS (Continued)
Wholesale Trade - Durable Goods _ 1.81%
Motorola, Inc. ......................... 7,200 $ 517,500
TOTAL COMMON STOCKS - 58.68% $16,748,420
(Cost: $14,601,674)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 1.73%
The BOC Group, Inc.,
5.875%, 1-29-2001 ..................... $ 500 493,800
Depository Institutions _ 3.59%
Banco de Inversion y Comercio Exterior S.A.,
9.375%, 12-27-2000 (A) ................ 500 523,750
Banco Nacional de Comercio Exterior, S.N.C.,
7.5%, 7-1-2000 ........................ 500 500,625
Total ................................. 1,024,375
Electric, Gas and Sanitary Services - 1.81%
Companhia Paranaense de Energia-COPEL,
9.75%, 5-2-2005 (A) ................... 500 516,250
Fabricated Metal Products - 0.18%
Mark IV Industries, Inc.,
8.75%, 4-1-2003 ....................... 50 52,000
Food and Kindred Products - 7.15%
Cervejarias Kaiser S. A.,
8.875%, 9-26-2005 (A) ................. 500 501,250
Coca-Cola FEMSA, S.A. de C.V.,
8.95%, 11-1-2006 ...................... 500 527,750
JG Summit Holdings, Inc.,
8.0%, 5-6-2002 (A) .................... 500 483,125
Pepsi-Gemex, S.A. de C.V.,
9.75%, 3-30-2004 ...................... 500 528,125
Total ................................. 2,040,250
Industrial Machinery and Equipment - 1.75%
Tyco International Ltd.,
6.5%, 11-1-2001 ....................... 500 500,515
Paper and Allied Products - 1.78%
Buckeye Cellulose Corporation,
8.5%, 12-15-2005 ...................... 500 507,500
See Notes to Schedule of Investments on page 72.
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Primary Metal Industries - 1.88%
Ispat Mexicana, S.A. de C.V.,
10.375%, 3-15-2001 (A) ................ $ 500 $ 535,625
Stone, Clay and Glass Products - 1.86%
Vicap, S.A. de C.V.,
10.25%, 5-15-2002 (A) ................. 500 531,250
TOTAL CORPORATE DEBT SECURITIES - 21.73% $ 6,201,565
(Cost: $6,074,685)
OTHER GOVERNMENT SECURITIES
Argentina - 1.83%
Republic of Argentina (The),
9.25%, 2-23-2001 ...................... 500 522,500
Mexico - 2.42%
United Mexican States,
6.97%, 8-12-2000 ...................... 700 691,250
TOTAL OTHER GOVERNMENT SECURITIES - 4.25% $1,213,750
(Cost: $1,176,781)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Banks:
7.04%, 1-2-2003 ....................... 500 499,610
7.035%, 8-20-2004 ..................... 430 428,254
6.5%, 2-15-2023 ....................... 5,000 1,053,250
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 6.94% $ 1,981,114
(Cost: $2,066,099)
SHORT-TERM SECURITIES
Electric, Gas and Sanitary Services - 3.50%
Pacificorp,
5.51%, 10-6-97 ........................ 1,000 999,235
Fabricated Metal Products - 0.92%
Danaher Corporation,
5.6563% Master Note ................... 263 263,000
Food and Kindred Products - 0.39%
General Mills, Inc.,
5.5113% Master Note ................... 111 111,000
See Notes to Schedule of Investments on page 72.
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Textile Mill Products - 1.75%
Sara Lee Corporation,
5.5063% Master Note ................... $ 499 $ 499,000
TOTAL SHORT-TERM SECURITIES - 6.56% $ 1,872,235
(Cost: $1,872,235)
TOTAL INVESTMENT SECURITIES - 98.16% $28,017,084
(Cost: $25,791,474)
CASH AND OTHER ASSETS, NET OF
LIABILITIES - 1.84% 525,660
NET ASSETS - 100.00% $28,542,744
Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.
(A) As of September 30, 1997, the following restricted securities were
owned:
Principal
Acquisition Amount Market
Security Date in 000's Cost Value
-------- ----------- --------------------------------
Banco de Inversion y
Comercio Exterior S.A.,
9.375%, 12-27-2000 2-18-97 $500$ 520,000 $ 523,750
Cervejarias Kaiser S.A.,
8.875%, 9-26-2005 9-16-97 500 498,450 501,250
Companhia Paranaense de Energia-COPEL
9.75%, 5-2-2005 4-22-97 500 498,090 516,250
Ispat Mexicana, S.A. de C.V.,
10.375%, 3-15-2001 3-17-97 500 505,625 535,625
JG Summit Holdings, Inc.,
8.0%, 5-6-2002 5-19-97 500 494,375 483,125
Vicap, S.A. de C.V.,
10.25%, 5-15-2002 6-18-97 500 516,000 531,250
---------- ----------
$3,032,540 $3,091,250
========== ==========
The total market value of restricted securities represents 10.83% of the
total net assets at September 30, 1997.
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
SEPTEMBER 30, 1997
Assets
Investment securities -- at value
(Notes 1 and 4) ................................. $28,017,084
Cash ............................................ 4,166
Receivables:
Investment securities sold ...................... 592,331
Dividends and interest .......................... 220,894
Fund shares sold ................................ 105,376
Unamortized organization expenses (Note 2) ....... 24,765
Prepaid insurance premium ........................ 1,452
-----------
Total assets .................................. 28,966,068
-----------
Liabilities
Payable for investment securities purchased........ 294,252
Payable to Fund shareholders ..................... 78,902
Organization expenses payable .................... 24,765
Accrued transfer agency and dividend
disbursing (Note 3) ............................. 12,025
Accrued service fee (Note 3) ..................... 8,265
Accrued accounting services fee (Note 3) ......... 1,667
Accrued management fee (Note 3) .................. 543
Other liabilities ................................ 2,905
-----------
Total liabilities ............................. 423,324
-----------
Total net assets ............................. $28,542,744
===========
Net Assets
$0.01 par value capital stock
Capital stock ................................... $ 47,678
Additional paid-in capital ...................... 24,797,234
Accumulated undistributed income:
Accumulated undistributed net investment
income ......................................... 137,194
Accumulated undistributed net realized gain on
investment transactions ...................... 1,335,028
Net unrealized appreciation in value of
investments ................................... 2,225,610
-----------
Net assets applicable to outstanding
units of capital ............................. $28,542,744
===========
Net asset value per share (net assets divided
by shares outstanding)
Class A .......................................... $5.99
Class Y .......................................... $5.99
Capital shares outstanding
Class A .......................................... 4,714,148
Class Y .......................................... 53,668
Capital shares authorized .......................... 1,000,000,000
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1997
Investment Income
Income (Note 1B):
Interest and amortization ....................... $1,136,553
Dividends ....................................... 202,391
----------
Total income .................................. 1,338,944
----------
Expenses (Notes 2 and 3):
Investment management fee ....................... 205,329
Transfer agency and dividend disbursing - Class A 94,371
Service fee - Class A ........................... 51,568
Registration fees ............................... 34,645
Prospectus typesetting............................. 30,298
Accounting services fee ......................... 20,000
Audit fees ...................................... 11,096
Amortization of organization expenses ........... 9,906
Legal fees ...................................... 8,519
Custodian fees .................................. 6,629
Shareholder servicing - Class Y ................. 1,829
Other ........................................... 22,289
----------
Total expenses ................................ 496,479
----------
Net investment income ........................ 842,465
----------
Realized and Unrealized Gain on
Investments (Notes 1 and 4)
Realized net gain on securities .................. 1,687,454
Realized net gain on foreign currency
transactions .................................... 1,323
----------
Realized net gain on investments ................ 1,688,777
Unrealized appreciation in value of investments
during the period ............................... 2,055,672
----------
Net gain on investments ....................... 3,744,449
----------
Net increase in net assets resulting
from operations ............................ $4,586,914
==========
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS For the fiscal year
ended September 30,
-----------------------------
1997 1996
Increase (Decrease) in Net Assets -------------- ------------
Operations:
Net investment income ............ $ 842,465 $ 906,537
Realized net gain (loss) on
investments .................... 1,688,777 (355,560)
Unrealized appreciation
(depreciation) ................. 2,055,672 (618,911)
----------- -----------
Net increase (decrease) in net assets
resulting from operations ..... 4,586,914 (67,934)
----------- -----------
Distributions to shareholders (Note 1E):*
From net investment income
Class A ........................ (791,004) (867,732)
Class Y ........................ (10,686) (6,712)
In excess of realized gains on
securities transactions
Class A ........................ --- (27,304)
Class Y ........................ --- (17)
----------- -----------
(801,690) (901,765)
Capital share transactions: ----------- -----------
Proceeds from sale of shares:
Class A (667,368 and 3,452,074
shares, respectively) ......... 3,651,541 18,415,374
Class Y (33,050 and 69,480
shares, respectively) ......... 178,871 370,529
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (143,389 and 170,139
shares, respectively) ......... 785,910 892,867
Class Y (1,949 and 1,281
shares, respectively) ......... 10,686 6,728
Payments for shares redeemed:
Class A (2,170,564 and 1,656,072
shares, respectively) ......... (11,786,216) (8,764,002)
Class Y (44,348 and 8,373
shares, respectively) ......... (241,432) (44,600)
----------- -----------
Net increase (decrease) in net
assets resulting from capital
share transactions ............ (7,400,640) 10,876,896
----------- -----------
Total increase (decrease) ..... (3,615,416) 9,907,197
Net Assets
Beginning of period ............... 32,158,160 22,250,963
----------- -----------
End of period, including undistributed
net investment income of $137,194
and $95,096, respectively ........ $28,542,744 $32,158,160
=========== ===========
*See "Financial Highlights" on pages 76 - 77.
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period: For the
For the For period
fiscal the fiscal from
year year 3/9/95*
ended ended through
9/30/97 9/30/96 9/30/95
------- ------- -------
Net asset value,
beginning of period $5.24 $5.42 $5.00
----- ----- -----
Income from investment operations:
Net investment
income .......... 0.16 0.15 0.07
Net realized and
unrealized gain (loss)
on investments... 0.74 (0.17) 0.40
----- ----- -----
Total from investment
operations ........ 0.90 (0.02) 0.47
----- ----- -----
Less distributions:
From net investment
income .......... (0.15) (0.15) (0.05)
In excess of capital
gains............ (0.00) (0.01) (0.00)
----- ----- -----
Total distributions. (0.15) (0.16) (0.05)
----- ----- -----
Net asset value,
end of period ..... $5.99 $5.24 $5.42
===== ===== =====
Total return** ..... 17.46% -0.49% 9.42%
Net assets, end of period
(000 omitted) ....$28,221 $31,828 $22,248
Ratio of expenses to
average net assets 1.70% 1.68% 1.64%***
Ratio of net investment
income to average net
assets ............ 2.87% 2.93% 3.71%***
Portfolio
turnover rate ..... 173.88% 91.06% 9.32%
Average commission
rate paid ......... $0.0329 $0.0440
*Commencement of operations.
**Total return calculated without taking into account the sales load
deducted on an initial purchase.
***Annualized.
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the For the For the
fiscal fiscal period
year year from 9/27/95*
ended ended through
9/30/97 9/30/96 9/30/95
-------- -------- --------
Net asset value,
beginning of period $5.24 $5.42 $5.41
----- ----- -----
Income from investment
operations:
Net investment
income .......... 0.17 0.16 0.00
Net realized and
unrealized gain
(loss) on
investments...... 0.75 (0.17) 0.01
----- ----- -----
Total from investment
operations ........ 0.92 (0.01) 0.01
----- ----- -----
Less distributions:
From net investment
income........... (0.17) (0.16) (0.00)
In excess of
capital gains ... (0.00) (0.01) (0.00)
----- ----- -----
Total distributions. (0.17) (0.17) (0.00)
----- ----- -----
Net asset value,
end of period ..... $5.99 $5.24 $5.42
===== ===== =====
Total return ....... 17.93% -0.21% 0.18%
Net assets, end of
period (000
omitted) ......... $322 $330 $3
Ratio of expenses
to average net
assets ............ 1.28% 1.29% 0.00%
Ratio of net
investment income
to average net
assets ............ 3.29% 3.43% 0.00%
Portfolio
turnover rate ..... 173.88% 91.06% 9.32%**
Average commission
rate paid ......... $0.0329 $0.0440
*Commencement of operations.
**Annualized.
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1 -- Significant Accounting Policies
United Asset Strategy Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. Its investment objective is to provide a high total
return with reduced risk over the long term through investments in stocks,
bonds and short-term instruments. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The policies are in conformity
with generally accepted accounting principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal
period as reported by the principal securities exchange on which the
issue is traded or, if no sale is reported for a stock, the average of
the latest bid and asked prices. Bonds, other than convertible bonds,
are valued using a pricing system provided by a pricing service or
dealer in bonds. Convertible bonds are valued using this pricing
system only on days when there is no sale reported. Stocks which are
traded over-the-counter are priced using Nasdaq (National Association
of Securities Dealers Automated Quotations system) which provides
information on bid and asked or closing prices quoted by major dealers
in such stocks. Restricted securities and securities for which market
quotations are not readily available are valued at fair value as
determined in good faith under procedures established by and under the
general supervision of the Fund's Board of Directors. Short-term debt
securities are valued at amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to
buy or sell is executed). Securities gains and losses are calculated
on the identified cost basis. 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 Subchapter M of the
Internal Revenue Code. In addition, the Fund intends to pay
distributions as required to avoid imposition of excise tax.
Accordingly, provision has not been made for Federal income taxes.
See Note 5 -- Federal Income Tax Matters.
E. Dividends and distributions -- Dividends and distributions to
shareholders are recorded by the Fund on the record date. Net
investment income dividends and capital gains distributions are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
due to differing treatments for items such as deferral of wash sales
and post-October losses, foreign currency transactions, net operating
losses and expiring capital loss carryforwards. At September 30,
1997, $1,323 was reclassified between accumulated undistributed net
investment income and accumulated net realized gain on investment
transactions.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
NOTE 2 -- 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 $18.0 billion of combined net assets at September 30, 1997)
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
For Class A shares, the Fund also pays WARSCO a monthly per account
charge for transfer agency and dividend disbursement services of $1.3125
for each shareholder account which was in existence at any time during the
prior month, plus $0.30 for each account on which a dividend or
distribution of cash or shares had a record date in that month. With
respect to Class Y shares, the Fund pays WARSCO a monthly fee at an annual
rate of .15% of the average daily net assets of the class for the preceding
month. The Fund also reimburses W&R and WARSCO for certain out-of-pocket
costs.
As principal underwriter for the Fund's shares, W&R received gross
sales commissions for Class A shares (which are not an expense of the Fund)
of $154,700, out of which W&R paid sales commissions of $86,724 and all
expenses in connection with the sale of Fund shares, except for
registration fees and related expenses.
Under a Distribution and Service Plan for Class A shares adopted by
the Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940,
the Fund may pay monthly a distribution and/or service fee to W&R in an
amount not to exceed .25% of the Fund's average annual net assets. The fee
is to be paid to reimburse W&R for amounts it expends in connection with
the distribution of the Class A shares and/or provision of personal
services to Fund shareholders and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $1,195, which are included in other
expenses.
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 $37,946,036 while proceeds from
maturities and sales aggregated $33,955,393. Purchases of short-term
securities and U.S. Government securities aggregated $42,858,606 and
$7,186,828, respectively. Proceeds from maturities and sales of short-term
securities and U.S. Government securities aggregated $50,420,160 and
$11,594,382, respectively.
For Federal income tax purposes, cost of investments owned at
September 30, 1997 was $25,791,474, resulting in net unrealized
appreciation of $2,225,610, of which $2,473,519 related to appreciated
securities and $247,909 related to depreciated securities.
NOTE 5 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net
income of $1,336,140 during its fiscal year ended September 30, 1997, which
included losses of $338,796 deferred from the year ended September 30,
1996. The capital gain will be distributed to the Fund's shareholders.
NOTE 6 -- Multiclass Operations
On September 12, 1995, the Fund was authorized to offer investors a
choice of two classes of shares, Class A and Class Y, each of which has
equal rights as to assets and voting privileges. Class Y shares are not
subject to a sales charge on purchases; they are not subject to a Rule 12b-
1 Distribution and Service Plan and have a separate transfer agency and
dividend disbursement services fee structure. A comprehensive discussion
of the terms under which shares of either class are offered is contained in
the Prospectus and the Statement of Additional Information for the Fund.
Income, non-class specific expenses and realized and unrealized gains
and losses are allocated daily to each class of shares based on the value
of relative net assets as of the beginning of each day adjusted for the
prior day's capital share activity.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Asset Strategy Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of United Asset Strategy Fund, Inc.
(the "Fund") as of September 30, 1997, the related statements of operations
and changes in net assets for the year then ended, and the financial
highlights for the year then ended. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
the financial highlights based on our audit. The financial statements and
the financial highlights of the Fund for each of the periods in the two-
year period ended September 30, 1996 were audited by other auditors whose
report, dated November 8, 1996, expressed an unqualified opinion on those
statements and financial highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned at September 30, 1997 by correspondence with the custodian
and broker. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of United Asset
Strategy Fund, Inc. as of September 30, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for
the year then ended in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Kansas City, Missouri
October 31, 1997
