File No. 811-7217
File No. 33-55753
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ____
Post-Effective Amendment No. 9
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 9
UNITED ASSET STRATEGY FUND, INC.
- --------------------------------------------------------------------------------
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
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Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
__X__ on December 31, 1999 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
DECLARATION REQUIRED BY RULE 24f-2(a)(1)
The issuer has registered an indefinite amount of its securities under the
Securities Act of 1933 pursuant to Rule 24f-2(a)(1). The Notice for the
Registrant's fiscal year ending September 30, 1999 was filed on December 16,
1999.
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United Asset Strategy Fund, Inc.
This Fund seeks high total return over the long term through investments in
stocks, bonds and short-term instruments.
The Securities and Exchange Commission has not approved or disapproved the
Fund's securities, or determined whether this Prospectus is accurate or
adequate. It is a criminal offense to state otherwise.
Prospectus
December 31, 1999
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Table of Contents
AN OVERVIEW OF THE FUND......................................................3
PERFORMANCE..................................................................6
FEES AND EXPENSES............................................................8
THE INVESTMENT PRINCIPLES OF THE FUND.......................................10
Investment Goal, Principal Strategies and Other Investments...............10
Risk Considerations of Principal Strategies and Other Investments.........11
Year 2000 and Euro Issues.................................................12
YOUR ACCOUNT................................................................14
Choosing a Share Class....................................................14
Sales Charge Reductions and Waivers.....................................15
Waivers for Certain Investors...........................................16
Ways to Set Up Your Account...............................................20
Buying Shares.............................................................22
Minimum Investments.......................................................24
Adding to Your Account....................................................25
Selling Shares............................................................25
Telephone Transactions....................................................27
Shareholder Services......................................................28
Personal Service........................................................29
Reports.................................................................29
Exchanges...............................................................29
Automatic Transactions for Class A, Class B and Class C Shareholders....30
Distributions and Taxes...................................................30
Distributions...........................................................30
Taxes...................................................................31
THE MANAGEMENT OF THE FUND..................................................33
Portfolio Management......................................................33
Management Fee............................................................33
FINANCIAL HIGHLIGHTS........................................................35
2
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An Overview of the Fund
Goal
United Asset Strategy Fund, Inc. (the "Fund") seeks high total return over the
long term.
Principal Strategy
The Fund seeks to achieve its investment goal by allocating its assets among
stocks, bonds and short-term instruments. The Fund allocates its assets among
the following classes, or types, of investments.
o The stock class includes equity securities of all types, although Waddell
& Reed Investment Management Company ("WRIMCO"), the Fund's investment
manager, typically emphasizes a blend of value and growth potential in
selecting stocks. Value stocks are those that WRIMCO believes are
currently selling below their true worth. Growth stocks are those whose
earnings WRIMCO believes are likely to grow faster than the economy. The
Fund can invest in securities of companies of any size.
o The bond class includes all varieties of fixed-income instruments, such as
corporate or U.S. Government debt securities, with remaining maturities of
more than three years. This class may include a significant amount of junk
bonds, up to 35% of the Fund's total assets, which are rated BB and below
by Standard and Poor's ("S&P") and Ba and below by Moody's Investors
Service, Inc. ("MIS"), or unrated bonds deemed by WRIMCO to be of
equivalent quality.
o The short-term class includes all types of short-term instruments with
remaining maturities of three years or less, including high-quality money
market instruments.
o Within each of these classes, the Fund may invest in both domestic and
foreign securities.
The Fund selects a mix which represents the way the Fund's investments will
generally be allocated over the long term as indicated in the box below. This
mix will vary over shorter time periods as WRIMCO changes the Fund's holdings
based on the current outlook for the different markets. These changes may be
based on such factors as interest rate changes, security valuation levels and a
rise in the potential for growth stocks.
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Mix
|_| Stocks 70% |_| Bonds 25%
(can range (can range
from from
0-100%) 0-100%)
|_| Short-term 5%
(can range from
0-100%)
Principal Risks of Investing in the Fund
Because the Fund owns different types of investments, a variety of factors can
affect its investment performance, such as:
o the skill of WRIMCO in allocating the Fund's assets among different types
of investments;
o the mix of securities in the Fund's portfolio, particularly the relative
weightings in, and exposure to, different sectors of the economy;
o an increase in interest rates, which may cause the value of the Fund's
fixed-income securities, especially bonds with longer maturities, to
decline;
o prepayment of higher-yielding bonds held by the Fund;
o the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds; and
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's
holdings to fall as part of a broad market decline.
Market risk for small or medium sized companies may be greater than that for
large companies. Smaller companies are more likely to have limited financial
resources and inexperienced management. Additionally, stock of smaller companies
may experience volatile trading and price fluctuations.
Investments by the Fund in junk bonds are more susceptible to the risk of
non-payment or default, and their prices may be more volatile than higher-rated
bonds.
As well, the Fund may invest a significant portion of its assets in foreign
securities. Foreign securities present additional risks such as currency
fluctuations and political or economic conditions affecting the foreign
countries.
4
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As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
Asset allocation funds are designed for investors who want to diversify among
stocks, bonds, and short-term instruments, in one fund. If you are looking for
an investment that uses this technique in pursuit of high total return, this
Fund may be appropriate for you.
5
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Performance
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
o The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year.
o The bar chart does not reflect any sales charge that you may be required
to pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
o The performance table shows Class A and Class Y average annual total
returns and compares them to the market indicators listed. No performance
information is provided for Class B or Class C shares since these classes
do not have annual returns for at least one calendar year.
o The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
1996 5.39%
1997 12.18%
1998 9.26%
In the period shown in the chart, the highest quarterly return was 11.92%
(the second quarter of 1997) and the lowest quarterly return was -4.82%
(the first quarter of 1997). The Fund's return for its Class A shares for
the year through September 30, 1999 was 5.88%.
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Average Annual Total Returns
as of December 31, 1998 (%)
Life of Class
1 Year Class A* Class Y**
Class A Shares of the Fund 2.98% 7.40%
S&P 500 Index 28.70% 29.63% 28.10%
Salomon Brothers Broad
Investment Grade Debt Index 8.71% 9.25% 8.11%
Salomon Brothers Short-Term
Index for 1-Month
Certificates of Deposit 5.67% 5.72% 5.65%
Lipper All Flexible Portfolio
Funds Universe Average 14.22% 17.63% 16.01%
Class Y Shares of the Fund 9.62% 8.11%
S&P 500 Index 28.70% 29.63% 28.10%
Salomon Brothers Broad
Investment Grade Debt Index 8.71% 9.25% 8.11%
Salomon Brothers Short-Term
Index for 1-Month
Certificates of Deposit 5.67% 5.72% 5.65%
Lipper All Flexible Portfolio
Funds Universe Average 14.22% 17.63% 16.01%
The indexes shown are broad-based, securities market indexes that are unmanaged.
The Lipper average is a composite of mutual funds with goals similar to the goal
of the Fund.
*Since March 9, 1995. Because Class A commenced operations on a date other
than at the end of a month, and partial month calculations of the
performances of the above indexes (including income) are not available,
index performance is calculated from March 31, 1995.
**Since September 27, 1995. Because Class Y commenced operations on a date
other than at the end of a month, and partial month calculations of the
performance of the above indexes (including income) are not available,
index performance is calculated from September 30, 1995.
7
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Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees Class A Class B Class C Class Y
(fees paid directly from Shares Shares Shares Shares
your investment) ------ ------ ------ ------
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of
offering price) 5.75% None None None
Maximum Deferred
Sales Charge (Load)(1) None 5% 1% None
(as a percentage of
lesser of amount
invested or redemption
value)
Annual Fund Operating Expenses(2)
(expenses that are deducted from Fund assets)
Management Fees 0.70% 0.70% 0.70% 0.70%
Distribution and
Service (12b-1) Fees 0.25% 1.00% 1.00% None
Other Expenses 0.89% 0.89% 0.89% 0.74%
Total Annual Fund Operating
Expenses 1.84% 2.59% 2.59% 1.44%
- ----------
(1) The contingent deferred sales charge ("CDSC"), which is imposed on the
lesser of amount invested or redemption value of Class B shares, declines from
5% for redemptions made within the first calendar year of purchase, to 4% for
redemptions made within the second calendar year, to 3% for redemptions made
within the third and fourth calendar years, to 2% for redemptions made within
the fifth calendar year, to 1% for redemptions made within the sixth calendar
year and to 0% for redemptions made after the sixth calendar year. Please note
that the CDSC is not based on the length of time that Class B shares are held.
Instead, the CDSC is based on the calendar year of purchase and the calendar
year of redemption. For Class C shares, a 1% CDSC applies to the lesser of
amount invested or redemption value of Class C shares redeemed within twelve
months.
(2) Management Fees and Total Annual Fund Operating Expenses have been restated
to reflect the change in management fees effective June 30, 1999; otherwise,
expense ratios are based on other Fund-level expenses for the fiscal year ended
September 30, 1999, and for Class B and Class C, the expenses attributable to
each class that are anticipated for the current year. Actual expenses may be
greater or less than those shown.
8
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Example: This example is intended to help you compare the cost of investing in
the shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class A, Class B,
Class C or Class Y shares for each time period specified, (b) your investment
has a 5% return each year, and (c) the expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions, your costs
would be:
If shares are redeemed
at end of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $751 $1,115 $1,501 $2,580
Class B Shares $662 $1,105 $1,475 $2,663*
Class C Shares $362 $ 805 $1,375 $2,925
Class Y Shares $147 $ 450 $ 774 $1,691
If shares are not
redeemed at end
of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $751 $1,115 $1,501 $2,580
Class B Shares $262 $ 805 $1,375 $2,663*
Class C Shares $262 $ 805 $1,375 $2,925
Class Y Shares $147 $ 450 $ 774 $1,691
* Reflects annual operating expenses of Class A after conversion of Class B
shares into Class A shares at the end of the seventh calendar year
following the first calendar year of purchase.
9
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The Investment Principles of the Fund
Investment Goal, Principal Strategies and Other Investments
The Fund seeks high total return over the long term. The Fund seeks to achieve
its goal by allocating its assets among a diversified portfolio of stocks, bonds
and short-term instruments. There is no guarantee that the Fund will achieve its
goal.
Allocating assets among different types of investments allows the Fund to take
advantage of opportunities wherever they may occur, but also subjects the Fund
to the risks of a given investment type. Stock values generally fluctuate in
response to the activities of individual companies and general market and
economic conditions. The values of bonds and short-term instruments generally
fluctuate based on changes in interest rates and in the credit quality of the
issuer.
WRIMCO regularly reviews the Fund's allocation of assets and makes changes to
favor investments that it believes provide the best opportunity to achieve the
Fund's goal. Although WRIMCO uses its expertise and resources in choosing
investments and in allocating assets, WRIMCO's decisions may not always be
beneficial to the Fund.
Generally, the mix of assets in the Fund will change from time to time depending
on WRIMCO's assessment of the market for each asset class. The allowable range
and approximate percentage of the mix for each asset class are listed below.
Some types of investments, such as indexed securities, can fall into more than
one asset class.
Mix
|_| Stocks 70% |_| Bonds 25%
(can range (can range
from from
0-100%) 0-100%)
|_| Short-term 5%
(can range from
0-100%)
WRIMCO tries to balance the Fund's investment risks against potentially higher
total returns by reducing the stock class allocation during stock market down
cycles and increasing the stock class allocation during periods of strongly
positive market performance. Typically, WRIMCO makes asset shifts among classes
gradually over time. WRIMCO considers various aspects when it decides to sell a
security, such as an individual security's performance and/or if it is an
appropriate time to vary the Fund's mix.
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As a defensive measure, the Fund may increase its holdings in the bond or
short-term classes when WRIMCO believes that there is a potential bear market,
prolonged downturn in stock prices or significant loss in stock value. WRIMCO
may also, as a temporary defensive measure, invest up to all of the Fund's
assets in:
o money market instruments rated A-1 by S&P, or Prime 1 by MIS, or unrated
securities judged by WRIMCO to be of equivalent quality; or
o precious metals.
Although WRIMCO may seek to preserve appreciation in the Fund by taking a
temporary defensive position, doing so may prevent the Fund from achieving its
investment objective.
WRIMCO may invest in and use other types of securities in seeking to achieve the
Fund's goal. For example, the Fund may invest in options, futures contracts,
asset-backed securities and other derivative instruments if it is permitted to
invest in the type of asset by which the return on, or value of, the derivative
is measured. Currently, the Fund has limited exposure to derivative instruments.
You will find more information about the Fund's permitted investments and
strategies, as well as the restrictions that apply to them, in the Statement of
Additional Information ("SAI").
Risk Considerations of Principal Strategies
and Other Investments
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk.
o Market risk is the possibility of a change in the price of the security
because of market factors, including changes in interest rates. Bonds with
longer maturities are more interest-rate sensitive. For example, if
interest rates increase, the value of a bond with a longer maturity is
more likely to decrease. Because of market risk, the share price of the
Fund will likely change as well.
o Financial risk is based on the financial situation of the issuer of the
security. The financial risk of the Fund may depend, for example, on the
earnings performance of the issuer of stock held by the Fund. To the
extent the Fund invests in debt securities, the financial risk of the Fund
may also depend on the credit quality of the securities in which it
invests.
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o Prepayment risk is the possibility that, during periods of falling
interest rates, an asset-backed security or other debt security with a
high stated interest rate will be prepaid before its expected maturity
date.
Certain types of the Fund's authorized investments and strategies, such as
foreign securities, junk bonds and derivative instruments, involve special
risks. Depending on how much the Fund invests or uses these strategies, these
special risks may become significant. 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.
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 due to changes in
interest rates, market conditions and other company and economic news.
Performance will also depend on WRIMCO's skill in allocating the Fund's 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.
The Fund may actively trade securities in seeking to achieve its goal. Doing so
may increase transaction costs (which may reduce performance) and increase
distributions paid by the Fund, which may increase your taxable income.
Year 2000 and Euro Issues
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by WRIMCO and the Fund's other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
WRIMCO has taken steps that it believes are reasonably designed to address Year
2000 computer-related problems with respect to the computer systems that it uses
and to obtain assurances that comparable steps are being taken by the Fund's
other major service providers. Although there can be no
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assurances, WRIMCO believes these steps will be sufficient to avoid any adverse
impact on the Fund. Similarly, the companies and other issuers in which the Fund
invests could be adversely affected by Year 2000 computer-related problems, and
there can be no assurance that the steps taken, if any, by these issuers will be
sufficient to avoid any adverse impact on the Fund.
The Fund could also be adversely affected by the conversion of certain European
currencies into the Euro. This conversion, which is underway, is scheduled to be
completed in 2002. However, problems with the conversion process and delays
could increase volatility in world capital markets and affect European capital
markets in particular.
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Your Account
Choosing a Share Class
This Prospectus offers four classes of shares for the Fund: Class A, Class B,
Class C and Class Y. Each class has its own sales charge, if any, and expense
structure. The decision as to which class of shares is best suited to your needs
depends on a number of factors that you should discuss with your financial
advisor. Some factors to consider are how much you plan to invest and how long
you plan to hold your investment. If you are investing a substantial amount and
plan to hold your shares for a long time, Class A shares may be the most
appropriate for you. Class B and Class C shares are not available for
investments of $2 million or more. If you are investing a lesser amount, you may
want to consider Class B shares (if investing for at least seven calendar years)
or Class C shares (if investing for less than seven calendar years). Class Y
shares are designed for institutional investors and others investing through
certain intermediaries, as described below.
Since your objectives may change over time, you may want to consider another
class when you buy additional Fund shares. All of your future investments in the
Fund will be made in the class you select when you open your account, unless you
inform the Fund otherwise, in writing, when you make a future investment.
General Comparison of Class A, Class B and Class C Shares
Class A Class B Class C
- ------- ------- -------
o Initial sales charge o No initial sales o No initial sales
charge charge
o No deferred sales o Deferred sales charge o A 1% deferred sales
charge on shares you sell charge on shares
within six calendar you sell within
years after purchase twelve months
o Maximum distribution o Maximum distribution o Maximum distribution
and service (12b-1) and service (12b-1) and service (12b-1)
fees of 0.25% fees of 1.00% fees of 1.00%
o For an investment o Converts to Class A o Does not convert to
of $2 million or shares at the end of Class A shares, so
more, only Class A the seventh calendar annual expenses do
shares are available year following the not decrease
year of purchase,
thus reducing future
annual expenses
14
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o For an investment of
$300,000 or more
Waddell & Reed
financial advisors
typically will
recommend purchase of
Class A shares due to
a reduced sales
charge and lower
annual expenses
The Fund has adopted a Distribution and Service Plan ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, for each of its
Class A, Class B and Class C shares. Under the Class A Plan, the Fund may pay
Waddell & Reed, Inc. a fee of up to 0.25%, on an annual basis, of the average
daily net assets of the Class A shares. This fee is to reimburse Waddell & Reed,
Inc. for the amounts it spends for distributing the Fund's Class A shares,
providing service to Class A shareholders and/or maintaining Class A shareholder
accounts. Under the Class B Plan and the Class C Plan, the Fund may pay Waddell
& Reed, Inc., on an annual basis, a service fee of up to 0.25% of the average
daily net assets of the class to compensate Waddell & Reed, Inc. for providing
service to shareholders of that class and/or maintaining shareholder accounts
for that class and a distribution fee of up to 0.75% of the average daily net
assets of the class to compensate Waddell & Reed, Inc. for distributing shares
of that class. Because a class's fees are paid out of the assets of that class
on an ongoing basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Class A shares are subject to an initial sales charge when you buy them, based
on the amount of your investment, according to the table below. Class A shares
pay an annual 12b-1 fee of up to 0.25% of average Class A net assets. The
ongoing expenses of this class are lower than those for Class B or Class C
shares and higher than those for Class Y shares.
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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
Sales Charge Reductions and Waivers
Lower sales charges are available by:
o Combining additional purchases of Class A shares of any of the funds in
the United Group, except shares of United Cash Management, Inc. unless
acquired by exchange for Class A shares on which a sales charge was paid
(or as a dividend or distribution on such acquired shares), with the net
asset value ("NAV") of Class A shares already held ("Rights of
Accumulation");
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o Grouping all purchases of Class A shares, except shares of United Cash
Management, Inc., made during a thirteen-month period ("Letter of
Intent"); and
o Grouping purchases by certain related persons.
Additional information and applicable forms are available from Waddell & Reed
financial advisors.
Waivers for Certain Investors
Class A shares may be purchased at NAV by:
o The Directors and officers of the Fund or of any affiliated entity of
Waddell & Reed, Inc., employees of Waddell & Reed, Inc., employees of
their affiliates, financial advisors of Waddell & Reed, Inc. and the
spouse, children, parents, children's spouses and spouse's parents of
each;
o Certain retirement plans and certain trusts for these persons; and
o A 401(k) plan or a 457 plan having 100 or more eligible employees, and the
shares are held in individual plan participant accounts on the Fund's
records.
You will find more information in the SAI about sales charge reductions and
waivers.
Contingent Deferred Sales Charge. A contingent deferred sales charge ("CDSC")
may be assessed against your redemption amount of Class B or Class C shares and
paid to Waddell & Reed, Inc. (the "Distributor"), as further described below.
The purpose of the CDSC is to compensate the Distributor for the costs incurred
by it in connection with the sale of the Fund's Class B or Class C shares. The
CDSC will not be imposed on Class B or Class C shares representing payment of
dividends or other distributions or on amounts which represent an increase in
the value of a shareholder's account resulting from capital appreciation above
the amount paid for Class B or Class C shares purchased during the CDSC period.
The CDSC is applied to the lesser of amount invested or redemption value.
To keep your CDSC as low as possible, each time you place a request to redeem
shares, the Fund first redeems shares in your account representing payment
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of dividends and other distributions. If there are not enough of these to meet
your request, the Fund will next redeem your Class B shares in the order they
were purchased.
Unless instructed otherwise, the Fund, when requested to redeem a specific
dollar amount, will redeem additional Class B or Class C shares equal in value
to the CDSC. For example, should you request a $1,000 redemption and the
applicable CDSC is $27, the Fund will redeem shares having an aggregate NAV of
$1,027, absent different instructions.
Class B shares are not subject to an initial sales charge when you buy them.
However, you may pay a CDSC if you sell your Class B shares within six calendar
years of their purchase, based on the table below. Class B shares pay an annual
12b-1 service fee of up to 0.25% of average net assets and a distribution fee of
up to 0.75% of average net assets. Over time, these fees will increase the cost
of your investment and may cost you more than if you had bought Class A shares.
Class B shares will automatically convert to Class A shares of the Fund at the
end of the seventh calendar year following the year of purchase. The Class A
shares have lower ongoing expenses.
The Fund will redeem your Class B shares at their NAV next calculated after
receipt of a written request for redemption in good order, subject to the CDSC
discussed below.
Deferred
Date of Sales
Redemption Charge
- ---------- ------
anytime within 1st calendar year 5%
anytime within 2nd calendar year 4%
anytime within 3rd calendar year 3%
anytime within 4th calendar year 3%
anytime within 5th calendar year 2%
anytime within 6th calendar year 1%
after 6th calendar year 0%
All Class B investments made during a calendar year are deemed a single
investment during that calendar year for purposes of calculating the CDSC. For
Class B, the date of redemption is measured, in calendar years, from the first
calendar year of purchase. For example, if a shareholder opens an account on
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November 1, 1999, then redeems all Class B shares on March 1, 2000, the
shareholder will pay a CDSC of 4%, the rate applicable to redemptions made
within the second calendar year of purchase. Please note that the CDSC is not
based on the length of time that shares are held. Instead, the CDSC is based on
the calendar year of purchase and the calendar year of redemption.
Class C shares are not subject to an initial sales charge when you buy them, but
if you sell your Class C shares within twelve months of buying them, you will
pay a 1% CDSC. For purposes of a CDSC, purchases of Class C shares within a
month will be considered as being purchased on the first day of the month. Class
C shares pay an annual 12b-1 service fee of up to 0.25% of average net assets
and a distribution fee of up to 0.75% of average net assets. Over time, these
fees will increase the cost of your investment and may cost you more than if you
had bought Class A shares. Class C shares do not convert to any other class.
For Class C shares, the CDSC will be applied to the lesser of amount invested or
redemption value of shares that have been held for twelve months or less.
The CDSC will not apply in the following circumstances:
o redemptions of Class B or Class C shares requested within one year of the
shareholder's death or disability, provided the Fund is notified of the
death or disability at the time of the request and furnished proof of such
event satisfactory to the Distributor.
o redemptions of Class B or Class C shares made to satisfy required minimum
distributions after age 70 1/2 from a qualified retirement plan, a
required minimum distribution from an individual retirement account, Keogh
plan or custodial account under section 403(b)(7) of the Internal Revenue
Code of 1986, as amended ("Code"), a tax-free return of an excess
contribution, or that otherwise results from the death or disability of
the employee, as well as in connection with redemptions by any tax-exempt
employee benefit plan for which, as a result of a subsequent law or
legislation, the continuation of its investment would be improper.
o redemptions of Class B or Class C shares made pursuant to a shareholder's
participation in any systematic withdrawal service adopted for a Fund.
(The service and this exclusion from the CDSC do not apply to a one-time
withdrawal.)
o redemptions the proceeds of which are reinvested in Class B or Class C
shares (must be reinvested in the same class as that which was redeemed)
of the Fund within forty-five days after such redemption.
o the exercise of certain exchange privileges.
19
<PAGE>
o redemptions effected pursuant to the Fund's right to liquidate a
shareholder's Class B or Class C shares if the aggregate NAV of those
shares is less than $500.
o redemptions effected by another registered investment company by virtue of
a merger or other reorganization with the Fund or by a former shareholder
of such investment company of Class B or Class C shares of the Fund
acquired pursuant to such reorganization.
These exceptions may be modified or eliminated by the Fund at any time without
prior notice to shareholders, except with respect to redemptions effected
pursuant to the Fund's right to liquidate a shareholder's shares, which requires
certain notice.
Class Y shares are not subject to a sales charge or annual 12b-1 fees.
Class Y shares are only available for purchase by:
o participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401 of the Code, including 401(k)
plans, when the plan has 100 or more eligible employees and holds the
shares in an omnibus account on the Fund's records;
o banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an
omnibus account on the Fund's records;
o government entities or authorities and corporations whose investment
within the first twelve months after initial investment is $10 million or
more; and
o certain retirement plans and trusts for employees and financial advisors
of Waddell & Reed, Inc. and its affiliates.
The different ways to set up (register) your account are listed below.
Ways to Set Up Your Account
- -------------------------------------------------
Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
20
<PAGE>
- -------------------------------------------------
Business or Organization
For investment needs of corporations, associations, partnerships, institutions
or other groups
- -------------------------------------------------
Retirement Plans
To shelter your retirement savings from taxes
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts (other
than Roth IRAs and Education IRAs) may be tax-deductible.
o Individual Retirement Accounts (IRAs) allow an individual under 70 1/2,
with earned income, to invest up to $2,000 per tax year. The maximum
annual contribution for an investor and his or her spouse is $4,000
($2,000 for each spouse) or, if less, the couple's combined earned income
for the taxable year.
o IRA Rollovers retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
o Roth IRAs allow certain individuals to make nondeductible contributions up
to $2,000 per year. The maximum annual contribution 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. Withdrawals of
earnings may be tax free if the account is at least five years old and
certain other requirements are met.
o Education IRAs are established for the benefit of a minor, with
nondeductible contributions, and permit tax-free withdrawals to pay the
higher education expenses of the beneficiary.
o Simplified Employee Pension Plans (SEP-IRAs) provide small business owners
or those with self-employed income (and their eligible employees) with
many of the same advantages as a Keogh Plan, but with fewer administrative
requirements.
o Savings Incentive Match Plans for Employees (SIMPLE Plans) can be
established by small employers to contribute to their employees'
retirement accounts and generally involve fewer administrative
requirements than 401(k) or other qualified plans.
o Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves of up to 25% of their annual earned income,
with a maximum of $30,000 per year.
21
<PAGE>
o Pension and Profit-Sharing Plans, including 401(k) Plans, allow
corporations and nongovernmental tax-exempt organizations of all sizes
and/or their employees to contribute a percentage of the employees' wages
or other amounts on a tax-deferred basis. These accounts need to be
established by the administrator or trustee of the plan.
o 403(b) Custodial Accounts are available to employees of public school
systems or certain types of charitable organizations.
o 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on
a tax-deferred basis.
- -------------------------------------------------
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA").
- -------------------------------------------------
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.
- -------------------------------------------------
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its financial
advisors. To open your account you must complete and sign an application. Your
Waddell & Reed financial advisor can help you with any questions you might have.
To purchase any class of shares by check, make your check payable to Waddell &
Reed, Inc. Mail the check, along with your completed application, to:
Waddell & Reed, Inc.
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
22
<PAGE>
To purchase Class Y shares by wire, you must first obtain an account number by
calling 800-366-2520, then mail a completed application to Waddell & Reed, Inc.,
P.O. Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to 913-236-5044.
Instruct your bank to wire the amount you wish to invest, along with the account
number and registration, to UMB Bank, n.a., ABA Number 101000695, for the
account of Waddell & Reed Number 0007978, FBO Customer Name and Account Number.
You may also buy Class Y shares of the Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements regarding the purchase of
Class Y shares.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a share (the price to buy one share of a particular class)
is the next NAV calculated per share of that class plus, for Class A shares, the
sales charge shown in the table above.
In the calculation of the Fund's NAV:
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which
approximates market value.
o Other investment assets for which market prices are unavailable are valued
at their fair value by or at the direction of the Board of Directors.
The 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 close of
business of the NYSE, normally 4 p.m. Eastern time, except that an option or
futures contract held by the Fund may be priced at the close of the regular
session of any other securities or commodities exchange on which that instrument
is traded.
The Fund may invest in securities listed on foreign exchanges which may trade on
Saturdays or on U.S. national business holidays when the NYSE is closed.
Consequently, the NAV of Fund shares may be significantly affected on days when
the Fund does not price its shares and when you are not able to purchase or
redeem the Fund's shares. Similarly, if an event materially affecting the value
of foreign investments or foreign currency exchange rates occurs prior to the
close of business of the NYSE
23
<PAGE>
but after the time their values are otherwise determined, such investments or
exchange rates may be valued at their fair value as determined in good faith by
or under the direction of the Board of Directors.
When you place an order to buy shares, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
o If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
o The Fund does not issue certificates representing shares of the Fund.
o If you purchase Class Y shares of the Fund from certain broker-dealers,
banks or other authorized third parties, the Fund will be deemed to have
received your purchase order when that third party (or its designee) has
received your order. Your order will receive the Class Y offering price
next calculated after the order has been received in proper form by the
authorized third party (or its designee). You should consult that firm to
determine the time by which it must receive your order for you to purchase
shares of the Fund at that day's price.
When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders, including
purchases by exchange, and it and the Fund reserve the right to discontinue
offering Fund shares for purchase.
Minimum Investments
For Class A, Class B and Class C:
To Open an Account $500
For certain exchanges $100
24
<PAGE>
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 Any amount
For certain exchanges $100
For Automatic Investment Service $25
For Class Y:
To Open an Account
For a government entity or authority or for a corporation $10 million
(within first twelve months)
For other investors Any amount
To Add to an Account Any amount
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 to Waddell & Reed, Inc., along with:
o the detachable form that accompanies the confirmation of a prior purchase
or your year-to-date statement; or
o a letter stating your account number, the account registration and the
class of shares that you wish to purchase.
To add to your Class Y account by wire: Instruct your bank to wire the amount
you wish to invest, along with the account number and registration, to UMB Bank,
n.a., ABA Number 101000695, for the account of Waddell & Reed Number 0007978,
FBO Customer Name and Account Number.
If you purchase Class Y shares from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
25
<PAGE>
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 share of a particular class) is the NAV
per share of that class, subject to any CDSC applicable to Class B or Class C
shares.
To sell shares by written request: Complete an Account Service Request form,
available from your Waddell & Reed financial advisor, or write a letter of
instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number, and the class, of shares to be redeemed; and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:
Waddell & Reed Services Company
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed Services Company will send a check
to the address on the account.
To sell Class Y shares by telephone or fax: If you have elected this method in
your application or by subsequent authorization, call 800-366-5465, or fax your
request to 913-236-5044, and give your instructions to redeem Class Y shares and
make payment by wire to your predesignated bank account or by check to you at
the address on the account.
When you place an order to sell shares, your shares will be sold at the next NAV
calculated, subject to any applicable CDSC, after receipt of a written request
for redemption in good order by Waddell & Reed Services Company at the address
listed above.
Note the following:
o If more than one person owns the shares, each owner must sign the written
request.
o If you recently purchased the shares by check, the Fund may delay payment
of redemption proceeds. You may arrange for the bank upon which the
purchase check was drawn to provide to the
26
<PAGE>
Fund telephone or written assurance that the check has cleared and been
honored. If you do not, payment of the redemption proceeds on these shares
will be delayed until the earlier of 10 days or the date the Fund can
verify that your purchase check has cleared and been honored.
o Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE
is restricted, or as permitted by the Securities and Exchange Commission.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities when the Fund's Board of
Directors determines that conditions exist making cash payments
undesirable. The Fund is obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1% of its NAV during any 90-day period for any
one shareholder.
o If you purchased Class Y shares from certain broker-dealers, banks or
other authorized third parties, you may sell those shares through those
firms, some of which may charge you a fee and may have additional
requirements to sell Fund shares. The Fund will be deemed to have received
your order to sell Class Y shares when that firm (or its designee) has
received your order. Your order will receive the Class Y NAV next
calculated after the order has been received in proper form by the
authorized firm (or its designee). You should consult that firm to
determine the time by which it must receive your order for you to sell
Class Y shares at that day's price.
27
<PAGE>
Special Requirements for Selling Shares
Account Type Special Requirements
Individual or Joint The written instructions must be signed by all persons
Tenant required to sign for transactions, exactly as their names
appear on the account.
Sole Proprietorship The written instructions must be signed by the individual
owner of the business.
UGMA, UTMA The custodian must sign the written instructions
indicating capacity as custodian.
Retirement Account The written instructions must be signed by a properly
authorized person.
Trust The trustee must sign the written instructions indicating
capacity as trustee. If the trustee's name is not in the
account registration, provide a currently certified copy
of the trust document.
Business or At least one person authorized by corporate resolution to
Organization act on the account must sign the written instructions.
Conservator, The written instructions must be signed by the person
Guardian or Other properly authorized by court order to act in the
Fiduciary particular fiduciary capacity.
The Fund may require a signature guarantee in certain situations such as:
o a redemption request made by a corporation, partnership or fiduciary;
o a redemption request made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
This requirement is intended to protect you and Waddell & Reed from fraud. You
can obtain a signature guarantee from most banks and securities dealers, but not
from a notary public.
The Fund reserves the right to redeem at NAV all of your Fund shares if their
aggregate NAV is less than $500. The Fund will
28
<PAGE>
give you notice 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 of Class A shares
you redeemed by sending to the Fund the amount you want to reinvest. The
reinvested amounts must be received by the Fund within forty-five days after the
date of your redemption. You may do this only once with Class A shares of the
Fund.
The CDSC will not apply to the proceeds of Class B or Class C shares which are
redeemed and then reinvested in Class B or Class C shares, as applicable, within
forty-five days after such redemption. The Distributor will, with your
reinvestment, restore an amount equal to the deferred sales charge attributable
to the amount reinvested by adding the deferred sales charge amount to your
reinvestment. For purposes of determining future deferred sales charges, the
reinvestment will be treated as a new investment. You may do this only once as
to Class B shares of the Fund and only once as to Class C shares of the Fund.
Payments of principal and interest on loans made pursuant to a 401(a) qualified
plan (if such loans are permitted by the plan) may be reinvested without payment
of a sales charge in Class A shares of any United Group fund in which the plan
may invest.
Telephone Transactions
The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Fund fails to do so, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. Current procedures
relating to instructions communicated by telephone include tape recording
instructions, requiring personal identification and providing written
confirmations of transactions effected pursuant to such instructions.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your account.
Personal Service
Your local Waddell & Reed financial advisor is available to provide personal
service. Additionally, a toll-free call, 800-366-5465, connects you to a
Customer Service Representative or our automated customer telephone service.
During normal business
29
<PAGE>
hours, our Customer Service staff is available to answer your questions or
update your account records. At almost any time of the day or night, you may
access your account information from a touch-tone phone, or from our web site,
www.waddell.com, to:
o obtain information about your accounts;
o obtain price information about other funds in the United Group; or
o request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange,
transfer or redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports will be mailed to your household, even if you have more than one account
with the Fund. Call the telephone number listed above for Customer Service if
you need additional copies of annual or semiannual reports or account
information.
Exchanges
You may sell your shares and buy shares of the same class of other funds in the
United Group without the payment of an additional sales charge if you buy Class
A shares or payment of a CDSC when you exchange Class B or Class C shares. For
Class B and Class C shares, the time period for the CDSC will continue to run.
In addition, exchanging Class Y shareholders may buy Class A shares of United
Cash Management, Inc.
You may exchange only into funds that are legally permitted 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 for Class A, Class B and Class C Shareholders
Flexible withdrawal service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
30
<PAGE>
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 financial advisor for more
information.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Fund account
Minimum Amount 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 in the same class
Minimum Amount Minimum Frequency
$100 Monthly
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to its shareholders each year.
Usually, the Fund distributes net investment income quarterly in March, June,
September and December. Net capital gains (and any net gains from foreign
currency transactions) usually are distributed in December.
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 dividends, capital gains and other distributions
with respect to a class will be automatically paid in additional shares of the
same class 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 non-dividend distributions
with respect to a class will be automatically paid in shares of the same class,
but you will be sent a check for each dividend distribution. However, if the
dividend distribution is less than five dollars, the distribution
31
<PAGE>
will be automatically paid in additional shares of the same class of the Fund.
3. Cash Option. You will be sent a check for your dividends, capital gains and
other distributions if the total distribution is equal to or greater than five
dollars. If the distribution is less than five dollars, it will be automatically
paid in additional shares of the same class of the Fund.
For retirement accounts, all distributions are automatically paid in additional
shares.
Taxes
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 (or you are
not otherwise exempt from income tax), you should be aware of the following tax
implications:
Taxes on distributions. Dividends from the Fund's investment company taxable
income (which includes net short-term gains), if any, 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. For Federal income tax purposes, your long-term capital gains
generally are taxed at a maximum rate of 20%.
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.
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 Federal alternative minimum
tax.
Withholding. The Fund must withhold 31% of all dividends, capital gains and
other 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, capital
gains and other distributions also is required for shareholders subject to
backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in a taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than what you paid for the
32
<PAGE>
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 Class
A Fund shares through a redemption or exchange within ninety days after your
purchase and then reacquire Class A Fund shares or acquire Class A shares of
another fund in the United Group without paying a sales charge due to the
forty-five day reinvestment privilege or exchange privilege. See "Your Account."
In these cases, any gain on the disposition of the original Class A Fund shares
will 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 and local income taxes. The portion of the dividends paid by the Fund
attributable to 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 sale of those securities are
fully subject to those taxes. You should consult your tax adviser to determine
the taxability of dividends and other distributions by the Fund in your state
and locality.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting the Fund and its shareholders; you will find
more information in the SAI. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
33
<PAGE>
The Management of the Fund
Portfolio Management
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. WRIMCO and its predecessors have served as investment
manager to each of the registered investment companies in the United Group of
Mutual Funds, Waddell & Reed Funds, Inc. and Target/United Funds, Inc. since the
inception of the company. WRIMCO is located at 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
Michael L. Avery is primarily responsible for the management of the equity
portion of the portfolio of the Fund. Mr. Avery has managed the equity portion
of the Fund since January 1997. He is Senior Vice President of WRIMCO, Vice
President of the Fund and Vice President of other investment companies for which
WRIMCO serves as investment manager. From March 1995 to March 1998, Mr. Avery
was Vice President of, and Director of Research for, Waddell & Reed Asset
Management Company, a former affiliate of WRIMCO. Mr. Avery has served as the
portfolio manager for investment companies managed by WRIMCO since February 1,
1994, has served as the Director of Research for WRIMCO and its predecessors
since August 1987, and has been an employee of such since June 1981.
Daniel J. Vrabac is primarily responsible for the management of the fixed-income
portion of the portfolio of the Fund. Mr. Vrabac has managed the fixed-income
portion of the Fund since January 1997. He is Vice President of the Fund and
Vice President of other investment companies for which WRIMCO serves as
investment manager. From May 1994 to March 1998, Mr. Vrabac was Vice President
of, and a portfolio manager for, Waddell & Reed Asset Management Company. Mr.
Vrabac has served as an investment analyst with WRIMCO since May 1994, and 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.
Management Fee
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.
34
<PAGE>
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 in the SAI.
The management fee is payable by the Fund at the annual rates of: 0.70% of net
assets up to $1 billion, 0.65% of net assets over $1 billion and up to $2
billion, 0.60% of net assets over $2 billion and up to $3 billion, and 0.55% of
net assets over $3 billion.
Prior to June 30, 1999, the management fee of the Fund was calculated by adding
a group fee to a specific fee. The specific fee was computed on the Fund's NAV
as of the close of business each day at the annual rate of .30 of 1% of its net
assets. The group fee was determined on the basis of the combined NAVs of all
the funds in the United Group and then allocated pro rata to the Fund based on
its relative net assets at the annual rates shown in the following table:
Group Fee Rate
<TABLE>
<CAPTION>
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
<S> <C>
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%
</TABLE>
Management fees for the fiscal year ended September 30, 1999 were 0.69% of the
Fund's average net assets.
35
<PAGE>
Financial Highlights
The following information is to help you understand the financial performance of
the Fund's Class A and Class Y shares for the fiscal periods shown. Certain
information reflects financial results for a single Fund share. "Total return"
shows how much your investment would have increased (or decreased) during each
period, assuming reinvestment of all dividends and distributions. This
information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended September 30, 1999, is included in the SAI, which is available upon
request.
For a Class A share outstanding throughout each period*:
<TABLE>
<CAPTION>
For the
period
For the fiscal year from
ended September 30, 3/9/95**
----------------------------------------- through
1999 1998 1997 1996 9/30/95
----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C>
Class A Per-Share Data
Net asset value,
beginning of period ............ $5.78 $5.99 $5.24 $5.42 $5.00
----- ----- ----- ----- -----
Income from investment operations:
Net investment
income ....................... 0.09 0.15 0.16 0.15 0.07
Net realized and
unrealized gain (loss)
on investments ............... 0.29 0.28 0.74 (0.17) 0.40
----- ----- ----- ----- -----
Total from investment
operations ..................... 0.38 0.43 0.90 (0.02) 0.47
----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.10) (0.17) (0.15) (0.15) (0.05)
From capital gains ............. (0.24) (0.47) (0.00) (0.00) (0.00)
In excess of capital
gains ........................ (0.00) (0.00) (0.00) (0.01) (0.00)
----- ----- ----- ----- -----
Total distributions .............. (0.34) (0.64) (0.15) (0.16) (0.05)
----- ----- ----- ----- -----
Net asset value,
end of period .................. $5.82 $5.78 $5.99 $5.24 $5.42
===== ===== ===== ===== =====
Class A Ratios/Supplemental Data
Total return*** .................. 6.90% 7.89% 17.46% -0.49% 9.42%
Net assets, end of period
(000 omitted) .................. $48,106 $32,868 $28,221 $31,828 $22,248
Ratio of expenses to
average net assets ............. 1.90% 1.62% 1.70% 1.68% 1.64%****
Ratio of net investment
income to average net
assets ......................... 1.55% 2.45% 2.87% 2.93% 3.71%****
Portfolio
turnover rate .................. 176.63% 230.09% 173.88% 91.06% 9.32%
</TABLE>
* 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.
36
<PAGE>
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
For the
period
For the fiscal year from
ended September 30, 9/27/95*
----------------------------------------- through
1999 1998 1997 1996 9/30/95
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Class Y Per-Share Data
Net asset value,
beginning of period .............. $5.78 $5.99 $5.24 $5.42 $5.41
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ......................... 0.12 0.16 0.17 0.16 0.00
Net realized and
unrealized gain
(loss) on
investments .................... 0.28 0.29 0.75 (0.17) 0.01
----- ----- ----- ----- -----
Total from investment
operations ....................... 0.40 0.45 0.92 (0.01) 0.01
----- ----- ----- ----- -----
Less distributions:
From net investment
income ......................... (0.11) (0.19) (0.17) (0.16) (0.00)
From capital gains ............... (0.24) (0.47) (0.00) (0.00) (0.00)
In excess of
capital gains .................. (0.00) (0.00) (0.00) (0.01) (0.00)
----- ----- ----- ----- -----
Total distributions ................ (0.35) (0.66) (0.17) (0.17) (0.00)
----- ----- ----- ----- -----
Net asset value,
end of period .................... $5.83 $5.78 $5.99 $5.24 $5.42
===== ===== ===== ===== =====
Class Y Ratios/Supplemental Data
Total return ....................... 7.35% 8.26% 17.93% -0.21% 0.18%
Net assets, end of
period (000
omitted) ......................... $284 $243 $322 $330 $3
Ratio of expenses
to average net
assets ........................... 1.49% 1.37% 1.28% 1.29% 0.00%
Ratio of net
investment income
to average net
assets ........................... 1.96% 2.79% 3.29% 3.43% 0.00%
Portfolio
turnover rate .................... 176.63% 230.09% 173.88% 91.06% 9.32%**
</TABLE>
* Commencement of operations.
** Rate is for the period from March 9, 1995 through September 30, 1995.
37
<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 Auditors Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Avenue Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment (913) 236-2000
Management Company (800) 366-5465
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
(800) 366-5465 P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
38
<PAGE>
United Asset Strategy Fund, Inc.
You can get more information about the Fund in--
o its Statement of Additional Information (SAI), which contains
detailed information about the Fund, particularly its investment
policies and practices. You may not be aware of important
information about the Fund unless you read both the Prospectus and
the SAI. The current SAI is on file with the Securities and Exchange
Commission (SEC) and it is incorporated into this Prospectus by
reference (that is, the SAI is legally part of the Prospectus).
o its Annual and Semiannual Reports to Shareholders, which detail the
Fund's actual investments and include financial statements as of the
close of the particular annual or semiannual period. The annual
report also contains a discussion of the market conditions and
investment strategies that significantly affected the Fund's
performance during the year covered by the report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the Fund
or Waddell & Reed, Inc. at the address and telephone number below. Copies of the
SAI, Annual and/or Semiannual reports may also be requested via e-mail at
[email protected].
Information about the Fund (including its current SAI and most recent Annual and
Semiannual Reports) is available from the SEC's web site at http://www.sec.gov
and from the SEC's Public Reference Room in Washington, D.C. You can find out
about the operation of the Public Reference Room and applicable copying charges
by calling 800-SEC-0330.
The Fund's SEC file number is: 811-7217.
WADDELL & REED, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
800-366-5465
39
<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, 1999
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus ("Prospectus")
for the United Asset Strategy Fund, Inc. (the "Fund") dated December 31, 1999,
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
Investment Strategies, Policies and Practices.................. 4
Investment Management and Other Services ...................... 42
Purchase, Redemption and Pricing of Shares .................... 47
Directors and Officers ........................................ 63
Payments to Shareholders ...................................... 69
Taxes ......................................................... 70
Portfolio Transactions and Brokerage .......................... 75
Other Information ............................................. 77
Appendix A..................................................... 79
Financial Statements .......................................... 86
<PAGE>
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 company organized as a Maryland
corporation on August 25, 1994.
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
Total return is the overall change in the value of an investment over a
given period of time. 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, deducting the maximum sales load of 5.75%. 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, 1999, which is the most recent
2
<PAGE>
balance sheet included in this SAI, for the periods shown were as follows:
<TABLE>
<CAPTION>
With Without
Sales Load Sales Load
Deducted Deducted
<S> <C> <C>
One-year period from October 1, 1998
to September 30, 1999: 0.76% 6.90%
Period from March 9, 1995* to
September 30, 1999: 7.49% 8.89%
</TABLE>
*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, 1999, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
<TABLE>
<S> <C>
One-year period from October 1, 1998 to
September 30, 1999: 7.35%
Period from September 27, 1995* to
September 30, 1999: 8.27%
</TABLE>
*Commencement of operations.
No performance information is provided for Class B or Class C shares since
these Classes had not begun operations as of September 30, 1999.
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.
3
<PAGE>
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. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
related, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of sales charges, fee waivers and/or expense
reimbursements.
All performance information that 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.
INVESTMENT STRATEGIES, POLICIES AND PRACTICES
This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and policies
the Fund's investment manager, Waddell & Reed Investment Management Company
("WRIMCO"), may employ and the types of instruments in which the Fund may
invest, in pursuit of the Fund's goal. A summary of the risks associated with
these instrument types and investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques, or use them to the full extent permitted by the Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help the Fund achieve its goal. See "Investment
Restrictions" for a listing of the fundamental and non-fundamental (e.g.,
operating) investment restrictions and policies of the Fund.
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). WRIMCO seeks to maximize total return within this asset class by
actively allocating assets to industry sectors expected to benefit from
4
<PAGE>
major trends, and to individual stocks that WRIMCO believes to have superior
growth potential and/or value 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 seeks 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.
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. As a temporary defensive measure, WRIMCO may invest up to all of
the Fund's assets in (i) money market instruments rated A-1 by Standard & Poor's
("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.
5
<PAGE>
Securities - General
The Fund may invest in securities including common stock, preferred stock,
debt securities and convertible securities. Although common stocks and other
equity securities have a history of long-term growth in value, their prices tend
to fluctuate in the short-term, particularly those of smaller companies. The
Fund may invest in preferred stock in any rating category that is rated by an
established rating service or, if unrated, judged by WRIMCO to be of equivalent
quality. Debt securities have varying levels of sensitivity to changes in
interest rates and varying degrees of quality. As a general matter, however,
when interest rates rise, the values of fixed-rate securities fall and,
conversely, when interest rates fall, the values of fixed-rate debt securities
rise. Similarly, long-term bonds are generally more sensitive to interest rate
changes than short-term bonds.
Lower quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than high-quality securities and may decline
significantly in periods of general economic difficulty. The market for
lower-rated debt securities may be thinner and less active than that for
higher-rated debt securities, which can adversely affect the prices at which the
former are sold. Adverse publicity and changing investor perceptions may
decrease the values and liquidity of lower-rated debt securities, especially in
a thinly traded market. Valuation becomes more difficult and judgment plays a
greater role in valuing lower-rated debt securities than with respect to
securities for which more external sources of quotations and last sale
information are available. Since the risk of default is higher for lower-rated
debt securities, WRIMCO's research and credit analysis are an especially
important part of managing securities of this type held by 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.
The Fund may invest in debt securities rated in any rating category of the
established rating services, including securities rated in the lowest category
(securities rated D by S&P and C by MIS). Debt securities rated D by S&P or C by
MIS are in payment default or are regarded as having extremely poor prospects of
ever attaining any real investment standing. Debt securities rated at least BBB
by S&P or Baa by MIS are considered to be investment grade debt securities.
Securities rated BBB or Baa may have speculative characteristics. In addition,
the Fund
6
<PAGE>
will treat unrated securities judged by WRIMCO to be of equivalent quality to a
rated security as having that rating.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from time
to time, and the Fund may retain a portfolio security whose rating has been
changed.
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 invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or
different issuer within a particular period of time at a specified price or
formula. Convertible securities generally have higher yields than common stocks
of the same or similar issuers, but lower yields than comparable nonconvertible
securities, are less subject to fluctuation in 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.
7
<PAGE>
A convertible security may be subject to redemption at the option of the
issuer at a price established in the security's offering document. 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. Convertible securities are
typically issued by smaller capitalized companies whose stock prices may be
volatile. Thus, any of these actions could have an adverse effect on the Fund's
ability to achieve its investment objective.
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.
Specific Securities and Investment Practices
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government securities") are high quality debt
instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or
8
<PAGE>
instrumentality of the U.S. Government. These securities include Treasury Bills
(which mature within one year of the date they are issued), Treasury Notes
(which have maturities of one to ten years) and Treasury Bonds (which generally
have maturities of more than 10 years). All such Treasury securities are backed
by the full faith and credit of the United States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (also known as, 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.
Money Market Instruments
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government securities,
commercial paper and other short-term
9
<PAGE>
corporate obligations, and certificates of deposit and other financial
institution obligations. These instruments may carry fixed or variable interest
rates.
Zero Coupon Securities
Zero coupon securities are debt obligations that do not entitle the holder
to any periodic payment of interest prior to maturity or that specify a future
date when the securities begin to pay current interest; instead, they are sold
at a deep discount from their face value and are redeemed at face value when
they mature. Because zero coupon securities do not pay current income, their
prices can be very volatile when interest rates change and generally are subject
to greater price fluctuations in response to changing interest rates than prices
of comparable maturities that make current distributions of interest in cash.
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"). 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 and includable in the dividends paid to its shareholders. 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.
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
10
<PAGE>
and payable from, mortgage loans secured by real property and include single-
and multi-class pass-through securities and collateralized mortgage obligations.
Multi-class pass-through securities and collateralized mortgage obligations are
collectively referred to in this SAI as "CMOs." Some CMOs are directly supported
by other CMOs, which in turn are supported by mortgage pools. Investors
typically receive payments out of the interest and principal on the underlying
mortgages. The portions of the payments that investors receive, as well as the
priority of their rights to receive payments, are determined by the specific
terms of the CMO class.
The U.S. Government mortgage-backed securities in which the 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.
For example, interest-only ("IO") classes are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets underlying
an IO experience greater than anticipated principal prepayments, then the total
amount of interest allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In
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some instances, an investor in an IO may fail to recoup all of the investor's
initial investment, even if the security is guaranteed by the government or
considered to be of the highest quality. Conversely, principal-only ("PO")
classes are entitled to receive all or a portion of the principal payments, but
none of the interest, from the underlying mortgage assets. PO classes are
purchased at substantial discounts from par, and the yield to investors will be
reduced if principal payments are slower than expected. IOs, POs and other CMOs
involve special risks, and evaluating them requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
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The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed-rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Changes in the rate or "speed" of these payments can
cause the value of the mortgage-backed securities to fluctuate rapidly. However,
these effects may not be present, or may differ in degree, if the mortgage loans
in the pools have adjustable interest rates or other special payment terms, such
as a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics, such
as yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
reduced. These changes can result in volatility in the
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market value and in some instances reduced liquidity of the CMO class.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased directly
from issuers) bear variable or floating interest rates and may carry rights that
permit holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries on dates prior to
their stated maturities. Floating rate securities have interest rates that
change whenever there is a change in a designated base rate while variable rate
instruments provide for a specified periodic adjustment in the interest rate.
These formulas are designed to result in a market value for the instrument that
approximates its par value.
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. The
performance of indexed securities depends to a great extent on the performance
of the security, currency or other instrument to which they are indexed and may
also be influenced by interest rate changes in the United States and abroad. At
the same time, indexed securities are subject to the credit risks associated
with the issuer of the security and their values may decline substantially if
the issuer's creditworthiness deteriorates. Indexed securities may be more
volatile than the underlying investments.
Gold-indexed securities, for example, typically provide for a maturity
value that depends on the price of gold, resulting in a security whose price
tends to rise and fall together with gold prices. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
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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. 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,
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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
The Fund may invest in the securities of foreign issuers, including
depositary receipts. 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
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form, are foreign receipts evidencing a similar arrangement and are designed for
use by non-U.S. investors and traders in non-U.S. markets. Global depositary
receipts are designed to facilitate the trading of foreign issuers by U.S. and
non-U.S. investors and traders.
WRIMCO believes that there are investment opportunities as well as risks
in investing in foreign securities. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy or each other in such matters as
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Individual foreign companies
may also differ favorably or unfavorably from domestic companies in the same
industry. Foreign currencies may be stronger or weaker than the U.S. dollar or
than each other. Thus, the value of securities denominated in or indexed to
foreign currencies, and of dividends and interest from such securities, can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. dollar. WRIMCO believes that 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.
However, foreign securities and foreign currencies involve additional
significant risks, apart from the risks inherent in U.S. investments. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial conditions and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars or other government intervention. There may be greater possibility of
default by foreign governments or government-sponsored enterprises. Investments
in
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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 these potential
events or counter their effects.
The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is likely
to experience long-term gross domestic product growth above that expected to
occur in the United States, the United Kingdom, France, Germany, Italy, Japan
and Canada. Developing countries may have relatively unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities.
Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The Fund may purchase and sell foreign currency and invest in foreign
currency deposits, and may enter into forward currency contracts. The Fund may
incur a transaction charge in connection with the exchange of currency. Currency
conversion involves dealer spreads and other costs, although commissions are not
usually charged. See "Options, Futures and Other Strategies - Forward Currency
Contracts".
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual restriction on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, or in a registered
public offering. Where registration is required, 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.
Certain restricted securities, e.g., Rule 144A
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securities, may be determined to be liquid in accordance with guidelines adopted
by the Board of Directors. See "Illiquid Investments".
Lending Securities
Securities loans may be made on a short-term or long-term basis for the
purpose of increasing the Fund's income. If the Fund lends securities, the
borrower pays the Fund an amount equal to the dividends or interest on the
securities that the Fund would have received if it had not lent the securities.
The Fund also receives additional compensation. Under the Fund's current
securities lending procedures, the Fund may lend securities only to
broker-dealers and financial institutions deemed creditworthy by WRIMCO.
Any securities loan that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). At the
time of each loan, the Fund must receive collateral equal to no less than 100%
of the market value of the securities loaned. Under the present Guidelines, the
collateral must consist of cash, U.S. Government securities or bank letters of
credit, at least equal in value to the market value of the securities lent on
each day that the loan is outstanding. If the market value of the securities
lent exceeds the value of the collateral, the borrower must add more collateral
so that it at least equals the market value of the securities lent. If the
market value of the securities decreases, the borrower is entitled to 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.
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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.
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,
however, 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.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned increases, as well as
risks of delay in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially.
Repurchase Agreements
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 will 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
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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. In either case, payment and
delivery for the securities take place at a future date. 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. When
purchasing securities on a when-issued or delayed-delivery basis, the Fund
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. 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. 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. 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. 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.
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.
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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.
Investment Company Securities
The Fund may purchase 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.
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 in sales; a negative return
will be realized if the metal is sold at a loss. Investments in precious metals
do not provide a yield. The Fund's direct investment in precious metals is
limited by tax considerations. See "Taxes" for a more detailed discussion of the
tax implications of investments in precious metals.
Illiquid Investments
Illiquid investments are investments that cannot be sold or 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;
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(ii) securities for which market quotations are not readily
available;
(iii) securities involved in swap, cap, floor and collar transactions;
(iv) bank deposits, unless they are payable at principal plus accrued
interest 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. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, forward currency
contracts, swaps, caps, floors, collars, indexed securities and other derivative
instruments (collectively, "Financial Instruments") to attempt to enhance the
Fund's income or yield or to attempt to hedge the Fund's 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.
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
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measured. Since the Fund is authorized to invest in foreign securities, it may
purchase and sell foreign currency derivatives.
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 may be limited by tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with the Fund's goal and permitted by the Fund's
investment limitations and applicable regulatory authorities.
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The Fund might not use any of these strategies, and there can be no assurance
that any strategy used will succeed. 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. In general,
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. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities, currency and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Financial Instrument and price movements of the investments
being hedged. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match 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
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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.
(5) 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
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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. A call option gives the purchaser the right to buy, and obligates
the writer to sell, the underlying investment at the agreed-upon price during
the option period. A put option gives the purchaser the right to sell, and
obligates the writer to buy, the underlying investment at the agreed-upon price
during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the purchase
of put options can serve as a short hedge. Writing put or call options can
enable 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
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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. 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 instrument. 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
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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
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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
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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.
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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
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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-
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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 total 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 (including the
Euro), 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
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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 Euros, it could enter
into a forward currency contract to sell Euros in return for U.S. dollars to
hedge against possible declines in the Euro's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the Euro. This type of hedge,
sometimes referred to as a "proxy hedge," could offer advantages in terms of
cost, yield or efficiency, but generally would not hedge currency exposure as
effectively as a
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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
36
<PAGE>
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.
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 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 WRIMCO will hedge at an
appropriate time.
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, Floors and Collars. The Fund may enter into swaps, caps,
floors and collars to preserve
37
<PAGE>
a return or a spread on a particular investment or portion of its portfolio, to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date or to attempt to enhance yield. Swaps involve the
exchange by 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 the cap. The purchase of a
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined value, to receive payments on a notional principal amount from the
party selling the floor. A collar combines elements of buying a cap and selling
a floor.
Swap agreements, including caps, floors and collars, can be individually
negotiated and structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap agreements may
increase or decrease the overall volatility of the Fund's investments and its
share price and yield because, and to the extent, these agreements affect 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. If a firm's creditworthiness declines,
the value of the agreement would be likely to decline, potentially resulting in
losses. If a default occurs by the other party to such transaction, 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
38
<PAGE>
Act and, accordingly, will not treat them as being subject to the Fund's
borrowing restrictions. The Fund understands that the position of the SEC is
that assets involved in swap transactions are illiquid and are, therefore,
subject to the limitations on investing in illiquid securities.
Borrowing
The Fund may borrow money, but only from banks and for emergency or
extraordinary purposes. If the Fund does borrow, its share price may be subject
to greater fluctuation until the borrowing is paid off.
Investment Restrictions and Limitations
Certain of the Fund's investment restrictions and other limitations are
described in this SAI. The following are the Fund's fundamental investment
limitations set forth in their entirety, which, like the Fund's goal, cannot be
changed without shareholder approval. For this purpose, shareholder approval
means the approval, at a meeting of Fund shareholders, by the lesser of (1) the
holders of 67% or more of the Fund's shares represented at the meeting, if more
than 50% of the Fund's outstanding shares are present in person or by proxy or
(2) more than 50% of the Fund's outstanding shares. 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, floors, collars 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,
39
<PAGE>
options, forward contracts, swaps, caps, floors and collars,
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, floors, collars and
other financial instruments;
(ix) Make loans, except (a) by lending portfolio securities to the
extent allowed, and in accordance with the requirements, under
the 1940 Act; (b) through the purchase of debt securities and
other obligations consistent with its goal and its other
investment policies and restrictions; and (c) by engaging in
repurchase agreements with respect to portfolio securities;
40
<PAGE>
(x) Participate on a joint, or a joint and several, basis in any
trading account in any securities; or
(xi) Issue senior securities.
The following investment limitations are not fundamental and may be
changed by the Board of Directors without shareholder approval.
(i) The Fund may not invest more than 35% of its total assets in
debt securities rated below BBB by S&P or below Baa by MIS and
unrated securities judged by WRIMCO to be of equivalent quality.
(ii) 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 a money market instrument
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 that is rated A-1 by S&P or
Prime 1 by MIS.
(iii) Under normal conditions, the Fund intends to limit its
investments in foreign securities to no more than 50% of its
total assets.
(iv) 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.
(v) The Fund will not purchase any security while borrowings
representing more than 5% of its total assets are outstanding.
(vi) 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.
(vii) 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 subdivisions
thereof) if, as a result, more than 5% of its total assets would
be invested in securities of business enterprises that,
including
41
<PAGE>
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, indexed securities or over-the-counter derivative
instruments.
(viii) 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.)
(ix) The Fund does not currently intend to invest in oil, gas, or
other mineral exploration or development programs or leases.
An investment policy or limitation that states a maximum percentage of the
Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
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, 1999, was 217.03%, while the
rate for the remainder of the portfolio was 136.27%. The Fund's overall
portfolio turnover was 176.63% for the fiscal year ended September 30, 1999 and
230.09% for the fiscal year ended September 30, 1998.
42
<PAGE>
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.
Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company which is a wholly owned subsidiary of Waddell & Reed
Financial, Inc., a publicly held company. The address of these companies is 6300
Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
Waddell & Reed, Inc. and its predecessors have 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 Target/United Funds, Inc. since that Fund's inception, until January 8,
1992, when it assigned the Management Agreement for these Funds and all related
investment management duties (and the related professional staff) to WRIMCO,
subject to the authority of the fund's Board of Directors. WRIMCO has also
served as investment manager for Waddell & Reed Funds, Inc. since its inception
in September 1992, and United Small Cap Fund, Inc. since it commenced operations
in October 1999. 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 for which Target/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
43
<PAGE>
"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, preparation of prospectuses for existing shareholders,
preparation of proxy statements and certain shareholder 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, 1999, 1998 and 1997 were $270,508, $208,147 and $205,329, respectively.
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, Class
B and Class C 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.
44
<PAGE>
Accounting Services Fee
<TABLE>
<CAPTION>
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- --------------------
<S> <C> <C> <C>
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
</TABLE>
The fees paid to the agent for accounting services for the fiscal years
ended September 30, 1999, 1998 and 1997 were $20,000, $20,000 and $20,000,
respectively.
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, 1999, 1998 and 1997 were $335,001,
$215,190 and $154,700, respectively. The amount retained by Waddell & Reed, Inc.
for each period was $142,111, $91,391 and $67,976, respectively.
No portion of the sales charge is reallowed to dealers. A major portion of
the sales charge for Class A shares and the contingent deferred sales charge for
Class B and Class C shares is paid to financial advisors and sales managers of
Waddell &
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<PAGE>
Reed, Inc. Waddell & Reed, Inc. may compensate its financial advisors as to
purchases for which there is no sales or deferred 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 the Distribution and Service Plan (the "Plan") for Class A shares
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.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for providing services to shareholders of that
class and/or maintaining shareholder accounts for that class and a distribution
fee of up to 0.75% of the average daily net assets of the class to compensate
Waddell & Reed, Inc. for distributing the shares of that class. The Class B Plan
and the Class C Plan each permit Waddell & Reed, Inc. to receive compensation,
through the distribution and service fee, respectively, for its distribution
activities for that class, which are similar to the distribution activities
described with respect to the Class A Plan, and for its activities in providing
personal services to shareholders of that class and/or maintaining shareholder
accounts of that class, which are similar to the corresponding activities for
which it is entitled to reimbursement under the Class A Plan.
Waddell & Reed, Inc. offers the Fund's shares through its financial
advisors, registered representatives and sales managers ("sales force") unless
it elects, which is not currently contemplated for Class A, Class B and Class C
shares, 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 costs 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 Class
A Plan permits Waddell & Reed, Inc. to receive reimbursement for these Class
A-related distribution activities through the distribution fee, subject to the
limit contained in
46
<PAGE>
the Plan. The Class A Plan also contemplates that Waddell & Reed, Inc. may be
reimbursed for amounts it expends in compensating, training and supporting
registered financial advisors, 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
and distribution fees in the amounts of $87,938 and $8,300, respectively, were
paid (or accrued) by the Fund under the Class A Plan for the fiscal year ended
September 30, 1999. To the extent that Waddell & Reed, Inc. incurs expenses for
which reimbursement may be made under the Plan that relate to distribution
activities also involving another fund in the United Group of Funds or Waddell &
Reed Funds, Inc., Waddell & Reed, Inc. typically determines the amount
attributable to the Fund's expenses under the Plan on the basis of a combination
of the respective classes' relative net assets and number of shareholder
accounts.
The only Directors or interested persons, as defined in the 1940 Act, of
the Fund who have a direct or indirect financial interest in the operation of a
Plan are the officers and Directors who are also officers of either Waddell &
Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. Each Plan
is anticipated to benefit the Fund and its shareholders of the affected class
through Waddell & Reed, Inc.'s activities not only to distribute the shares of
the affected
47
<PAGE>
class but also to provide personal services to shareholders of that class and
thereby promote the maintenance of their accounts with the Fund. The Fund
anticipates that shareholders of a particular class may benefit to the extent
that Waddell & Reed's activities are successful in increasing the assets of the
Fund, through increased sales or reduced redemptions, or a combination of these,
and reducing a shareholder's share of Fund and class expenses. Increased Fund
assets may also provide greater resources with which to pursue the goal of the
Fund. Further, continuing sales of shares may also reduce the likelihood that it
will be necessary to liquidate portfolio securities, in amounts or at times that
may be disadvantageous to the Fund, to meet redemption demands. In addition, the
Fund anticipates that the revenues from the Plan will provide Waddell & Reed,
Inc. with greater resources to make the financial commitments necessary to
continue to improve the quality and level of services to the Fund and the
shareholders of the affected class. Each 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 Class A 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, each 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 shares of the affected class 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
auditors, audits the Fund's financial statements.
48
<PAGE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value ("NAV") 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 NAV plus the
sales charge described in the Prospectus. The sales charge is paid to Waddell &
Reed, Inc., the Fund's underwriter. The price makeup as of September 30, 1999,
which is the most recent balance sheet included in this SAI, was as follows:
<TABLE>
<S> <C>
NAV per Class A share (Class A
net assets divided by Class A shares
outstanding) ...................................... $5.82
Add: selling commission (5.75% of offering
price) ............................................ .36
-----
Maximum offering price per Class A share
(Class A NAV divided by 94.25%).................... $6.18
=====
</TABLE>
The offering price of a Class A share is its NAV next calculated following
acceptance of a purchase order plus the sales charge described in the
Prospectus. The offering price of a Class B, Class C or a Class Y share is its
NAV next calculated 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 NAV 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 futures contract 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,
49
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Labor Day, Thanksgiving Day and Christmas Day. However, it is possible that the
NYSE may close on other days. The NAV 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 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
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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 NAV 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, Class B and Class C 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.
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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"), salary reduction plan account under
Section 457 of the Internal Revenue Code of 1986, as amended (the "Code"),
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 under a "qualified" plan -- either an
employee benefit plan of an incorporated business or, for an unincorporated
business, a Keogh 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 will be
grouped. A "qualified" plan is established pursuant to Section 401 of the Code.
All qualified 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
qualified employee benefit plans of an employer who is a franchisor and those of
its franchisee(s) may also be grouped.
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Example A: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made under
both plans will be grouped.
Example B: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made
under the plan with any purchases in categories 1 through 7 above.
Example C: H has established a Keogh plan; his wife, W, is a participant
and they have hired one or more employees who also become
participants in the plan; H and W may not combine any purchases
made under the plan with any purchases in categories 1 through 7
above; however, all purchases made under the plan for H, W or any
other employee will be combined.
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 NAV 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(s) with which the purchase may be combined.
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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.
Letter of Intent
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Letter of Intent. By signing a Letter of Intent
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 Letter of Intent is accepted by Waddell &
Reed, Inc. Each purchase made from time to time under the Letter of Intent 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 Letter of Intent 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 Letter of Intent, 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 Letter of Intent 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 Letter of Intent only if the
contractual plan has been completed.
The minimum initial investment under a Letter of Intent is 5% of the
dollar amount which must be invested under the Letter of Intent. An amount equal
to 5% of the purchase required under the Letter of Intent will be held "in
escrow." If a purchaser does not, during the period covered by the Letter of
Intent, invest the amount required to qualify for the reduced sales charge under
the terms of the Letter of Intent, 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 Letter of Intent
which is not completed will be collected by redeeming part of the
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shares purchased under the Letter of Intent 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 Letter of Intent, the lower sales charge will apply.
A Letter of Intent does not bind the purchaser to buy, or Waddell & Reed,
Inc. to sell, the shares covered by the Letter of Intent.
With respect to Letters of Intent for $2,000,000 or purchases otherwise
qualifying for no sales charge under the terms of the Letter of Intent, the
initial investment must be at least $200,000.
The value of any shares redeemed during the 13-month period which were
acquired under the Letter of Intent will be deducted in computing the aggregate
purchases under the Letter of Intent.
Letters of Intent 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 Class A shares of any of the funds in the United Group
subject to a sales charge. A purchase of Class A shares, or Class A shares held,
in any of the funds in the United Group subject to a sales charge will be
treated as an investment in the Fund in determining the applicable sales charge.
For these purposes, Class A shares of United Cash Management, Inc. that were
acquired by exchange of another United Group fund's Class A shares on which a
sales charge was paid, plus the shares paid as dividends on those acquired
shares, are also taken into account.
Net Asset Value Purchases of Class A Shares
Class A shares of the Fund may be purchased at NAV by the Directors and
officers of the Fund or of any affiliated entity of Waddell & Reed, Inc.,
employees of Waddell & Reed, Inc., employees of their affiliates, financial
advisors of Waddell & Reed, Inc. and the spouse, children, parents, children's
spouses and spouse's parents of each such Director, officer, employee and
financial advisor. "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 NAV. Purchases
of Class A shares in any tax-qualified
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retirement plan under which the eligible purchaser is the sole participant may
also be made at NAV. Trusts under which the grantor and the trustee or a
co-trustee are each an eligible purchaser are also eligible for NAV purchases of
Class A shares. "Employees" include retired employees. A "retired employee" is
an individual separated from service from Waddell & Reed, Inc., or from an
affiliated company, with a vested interest in any Employee Benefit Plan
sponsored by Waddell & Reed, Inc. or any of its affiliated companies.
"Employees" also include individuals who, on November 6, 1998, were employees
(including retired employees) of a company that on that date was an affiliate of
Waddell & Reed, Inc. "Financial advisors" include retired financial advisors. A
"retired financial advisor" is any financial advisor who was, at the time of
separation from service from Waddell & Reed, Inc., a Senior Financial Advisor. A
custodian under UGMA or UTMA purchasing for the child or grandchild of any
employee or financial advisor may purchase Class A shares at NAV 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, and the shares are held in individual plan participant
accounts on the Fund's records, 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.
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 at the maximum public offering price, that is, NAV plus the
highest sales charge. Some of these instances 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 Letter of Intent or rights 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 is 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.
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The reasons for the other instances in which there are reduced or
eliminated sales charges for Class A shares are as follows. Exchanges at NAV are
permitted because a sales charge has already been paid on the shares exchanged.
Sales of Class A shares without a 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 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 NAV per share of all shares sold or issued.
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 of Class A shares that you wish to reinvest. The
amount you return will be reinvested in Class A shares at the NAV next
calculated after the Fund receives the returned amount. Your written request to
reinvest and the amount to be reinvested must be received within forty-five days
after your redemption request was received, and the Fund must be offering Class
A shares of the Fund at the time your reinvestment request is received. You can
do this only once as to Class A shares of the Fund; however, you do not use up
this privilege by redeeming shares to invest the proceeds at NAV in a Keogh plan
or an IRA.
There is also a reinvestment privilege for Class B and Class C shares
under which you may reinvest all or part of any amount of Class B or Class C
shares you redeemed and have the corresponding amount of the deferred sales
charge, if any, which you paid restored to your account by adding the amount of
that charge to the amount you are reinvesting in Class B or Class C shares, as
applicable. If Class B or Class C shares of the Fund are then being offered, you
can put all or part of your redemption payment back into the Class B or Class C
shares of the Fund at the NAV next calculated after you have returned the
amount. Your written request to do this must be received within forty-five days
after your redemption request was received. You can do this only once as to
Class B shares of the Fund and only once as to Class C shares of the
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Fund. For purposes of determining future deferred sales charges, the
reinvestment will be treated as a new investment. You do not use up this
privilege by redeeming Class B or Class C shares to invest the proceeds at NAV
in a Keogh plan or an IRA.
Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
Once a sales charge has been paid on Class A 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 on shares subject to a full sales charge and
for which a sales charge was paid. The shares you are exchanging may have been
involved in 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 maximum sales charge was originally paid (currently 5.75%),
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, provided you already own Class A shares of the fund.
The shares of United Cash Management, Inc. which you designate for automatic
exchange must be worth at least $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
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of the Fund and use the proceeds to purchase Class Y shares of the Fund if you
meet the criteria for purchasing Class Y shares.
Class B Share Exchanges
You may exchange Class B shares of the Fund for Class B shares of other
funds in the United Group without charge.
The redemption of the Fund's Class B shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class B shares of United Cash
Management, Inc. automatically exchanged each month into Class B shares of the
Fund or any other fund in the United Group, provided you already own Class B
shares of a fund. The shares of United Cash Management, Inc. which you designate
for automatic exchange must be worth at least $100, which may be allocated among
different funds so long as each fund receives a value of at least $25. Minimum
initial investment and minimum balance requirements apply to such automatic
exchange service.
Class C Share Exchanges
You may exchange Class C shares of the Fund for Class C shares of other
funds in the United Group without charge.
The redemption of the Fund's Class C shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class C shares of United Cash
Management, Inc. automatically exchanged each month into Class C shares of the
Fund or any other fund in the United Group, provided you already own Class C
shares of a fund. The shares of United Cash Management, Inc. which you designate
for automatic exchange must be worth at least $100, which may be allocated among
different funds so long as each fund receives a value of at least $25. Minimum
initial investment and minimum balance requirements apply to such automatic
exchange service.
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.
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General Exchange Information
When you exchange shares, the total shares you receive will have the same
aggregate NAV 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.
Retirement Plans
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, 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,
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all or a portion of that distribution generally may be rolled over to an IRA
within 60 days after receipt of the distribution. Because mandatory Federal
income tax withholding applies to any eligible rollover distribution which is
not paid in a direct rollover, investors should consult their tax advisers or
pension consultants as to the applicable tax rules. If you already have an IRA,
you may have the assets in that IRA transferred directly to an IRA offered by
Waddell & Reed, Inc.
Roth IRAs. Investors whose adjusted gross income (or combined adjusted
gross income, if married) does not exceed certain levels may establish and
contribute up to $2,000 per tax year to a Roth IRA. In addition, for an investor
whose adjusted gross income does not exceed $100,000 (and who is not 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 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 plan to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an
employer can choose to match employee contributions dollar-for-dollar
(generally, up to 3% of the employee's compensation) or may contribute to all
eligible employees 2% of their compensation, whether or not they defer salary to
their SIMPLE
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plans. SIMPLE plans involve fewer administrative requirements, generally, than
401(k) or other qualified plans.
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.
Pension and Profit-Sharing Plans, including 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.
Redemptions
The Prospectus gives information as to redemption procedures. Redemption
payments are made within seven days from receipt of request, 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 NAV. 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
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1% of its NAV during any 90-day period for any one shareholder.
Flexible Withdrawal Service For Class A, Class B and Class C 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, Class B or Class C 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. Class B and Class C shares redeemed under the Service are not subject
to a CDSC. Applicable forms to start the Service are available through Waddell &
Reed Services Company.
The maximum amount of the withdrawal for monthly, quarterly, semiannual
and annual withdrawals is 2%, 6%, 12% and 24% respectively of the value of your
account at the time the Service is established. The withdrawal proceeds are not
subject to the deferred sales charge, but only within these percentage
limitations. The minimum withdrawal is $50. The Service, and this exclusion from
the deferred sales charge, does not apply to a one-time withdrawal.
To qualify for the Service, you must have invested at least $10,000 in
Class A, Class B or Class C shares which you still own of any of the Funds in
the United Group; or, you must own Class A, Class B or Class C shares having a
value of at least $10,000. The value for this purpose is the value at the
current 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.
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<PAGE>
The dividends and distributions on shares of a class you have made
available for the Service are paid in additional shares of that class. All
payments under the Service are made by redeeming shares, which may involve a
gain or loss for tax purposes. To the extent that payments exceed dividends and
distributions, the number of shares you own will decrease. When all of the
shares in your account are redeemed, you will not receive any further payments.
Thus, the payments are not an annuity, 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 NAV 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 majority of
the Directors are not affiliated with Waddell & Reed, Inc.
The principal occupation during the past five years of each Director and
officer of the Fund is stated below. Each of the persons listed through and
including Mr. Vogel is a member of the Fund's Board of Directors. The other
persons are officers of the Fund but are 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
Target/United Funds, Inc.
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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.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other funds
in the Fund Complex; Chairman of the Board of Directors, Chief Executive Officer
and Director of Waddell & Reed Financial, Inc.; President, Chairman of the Board
of Directors and Chief Executive Officer of Waddell & Reed Financial Services,
Inc.; Chairman of the Board of Directors of WRIMCO, Waddell & Reed, Inc. and
Waddell & Reed Services Company; formerly, President of each of the funds in the
Fund Complex; formerly, Chairman of the Board of Directors of Waddell & Reed
Asset Management Company, a former affiliate of Waddell & Reed Financial, Inc.
Date of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President of JoDill Corp., an agricultural company; President and Director
of Dillingham Enterprises Inc.; formerly, Director and consultant, McDougal
Construction Company; formerly, Instructor at Central Missouri State University;
formerly, Member of the Board of Police Commissioners, Kansas City, Missouri;
formerly, Senior Vice President-Sales and Marketing of Garney Companies, Inc., a
specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e Eccles
Foundation; Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal; formerly, President
of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Date of birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of
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Oklahoma; Adjunct Professor of Law at the University of Oklahoma College of Law;
Managing Member, Harroz Investments, L.L.C.; formerly, Vice President for
Executive Affairs of the University of Oklahoma; formerly, Attorney with Crowe &
Dunlevy, a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a law
firm; formerly, President of Gilliland & Hayes, P.A.; formerly, Director of
Central Properties, Inc. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Executive Vice President, Chief Operating
Officer and Director of Waddell & Reed Financial, Inc.; Vice President, Chief
Operating Officer, Director and Treasurer of Waddell & Reed Financial Services,
Inc.; Executive Vice President, Principal Financial Officer, Director and
Treasurer of WRIMCO; President, Chief Executive Officer, Principal Financial
Officer, Director and Treasurer of Waddell & Reed, Inc.; Director and Treasurer
of Waddell & Reed Services Company; Chairman, Chief Executive Officer, President
and Director of Fiduciary Trust Company of New Hampshire, an affiliate of
Waddell & Reed, Inc.; formerly, Vice President of each of the funds in the Fund
Complex; formerly, Director and Treasurer of Waddell & Reed Asset Management
Company; formerly, President of Waddell & Reed Services Company. Date of birth:
November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer and Director of Waddell & Reed
Financial, Inc.; Vice President, Chief Investment Officer and Director of
Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; Chairman of the Board of Directors of Austin, Calvert & Flavin, Inc., an
affiliate of WRIMCO; formerly, President, Chief Executive Officer, Chief
Investment Officer and Director of Waddell & Reed Asset Management Company. Date
of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and its subsidiaries. Date of birth: February 19, 1924.
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<PAGE>
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of
each of the funds in the Fund Complex then in existence. (Mr. Morgan retired as
Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company. Date of birth:
April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director and Vice President of Network Rehabilitation Services; Board
Member, Member of Executive Committee and Finance Committee of Truman Medical
Center; formerly, Employment Counselor and Director of McCue-Parker Center. Date
of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm; Director
of Columbian Bank and Trust. Date of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
Professor of Business Administration, University of Missouri-Kansas City;
formerly, Chancellor, University of Missouri-Kansas City. Date of birth: January
1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
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.
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<PAGE>
Michael L. Avery
Vice President of the Fund and two other funds in the Fund Complex; Senior
Vice President of WRIMCO; formerly, 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;
formerly, 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.
The Directors who may be deemed to be "interested persons" as defined in
the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc., or of its manager,
WRIMCO, are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a director may elect after resignation from the Board
provided the director has attained the age of 70 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 he or she
has no authority or responsibility with respect to the management of the Fund.
Messrs. Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey
and Paul S. Wise retired as Directors of the Fund and of each of the funds in
the Fund Complex and each elected a position as Director Emeritus.
The funds in the United Group, Target/United Funds, Inc. and Waddell &
Reed Funds, Inc. pay to each Director, effective October 1, 1999, an annual base
fee of $50,000, plus $3,000 for each meeting of the Board of Directors attended
and effective January 1, 2000, an annual base fee of $52,000 plus $3,250 for
each meeting of the Board of Directors attended, plus reimbursement of expenses
for attending such meeting and $500 for each committee meeting attended which is
not in conjunction with a Board of Directors meeting, other than Directors who
are affiliates of Waddell & Reed, Inc. (prior to October 1, 1999, the funds in
the United Group, Target/United Funds, Inc. and Waddell & Reed Funds, Inc. paid
to each Director an annual base fee
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<PAGE>
of $48,000 plus $2,500 for each meeting of the Board of Directors attended plus
reimbursement of expenses of attending such meeting and $500 for each committee
meeting attended which is not in conjunction with a Board of Directors meeting,
other than Directors who are affiliates of Waddell & Reed, Inc.). The fees to
the Directors are divided among the funds in the United Group, Target/United
Funds, Inc. and Waddell & Reed Funds, Inc. based on the funds' relative size.
During the Fund's fiscal year ended September 30, 1999, the Fund's Directors
received the following fees for service as a director:
Compensation Table
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
<S> <C> <C>
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 585 59,000
John A. Dillingham 585 59,000
David P. Gardner 582 56,500
Linda K. Graves 585 59,000
Joseph Harroz, Jr. 582 56,500
John F. Hayes 585 59,000
Glendon E. Johnson 586 59,500
William T. Morgan 585 59,000
Ronald C. Reimer 582 56,500
Frank J. Ross, Jr. 585 59,000
Eleanor B. Schwartz 586 59,500
Frederick Vogel III 586 59,500
</TABLE>
*No pension or retirement benefits have been accrued as a part of Fund expenses.
Messrs. Harroz, Hechler, Herrmann and Reimer were elected as Directors on
November 18, 1998. The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of November 30, 1999, 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, 1999,
regarding the ownership of the Fund's shares.
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<PAGE>
<TABLE>
<CAPTION>
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
- ------------------- ----- ------------ -------
<S> <C> <C> <C>
Fiduciary Trust Co NH Cust Class B 3,650 5.94%
IRA Rollover
FBO Bernard Samuel
7226 Devereux Court
Alexandria VA 22315-4229
Dale W. Lambson & Class B 5,194 8.45%
Jean Jambson Co-Ttees
Lambson Family Trust
U/A dtd 8-31-93
903 Lupin Dr
Salinas CA 93906-3909
Homer W. Lang & Class B 5,890 9.59%
Helen M. Lang Co-Ttees
U/A dtd 5-30-80
Lang Family Trust
911 Berendsen Ct
Clayton CA 94517-1622
Fiduciary Trust Co NH Cust Class B 7,756 12.62%
IRA Rollover
FBO Yvonne E. Norman
7 E Carriage Way Dr #104
Hazelcrest Il 60429-2019
Fiduciary Tr Co NH Cust Class B 6,278 10.22%
IRA Rollover
FBO Kathleen H. Bell
4609 Rosewold Ave
Royal Oak MI 48073-1744
Fiduciary Tr Co NH Cust Class B 5,764 9.38%
IRA
FBO Robert H. Fuller
627 Maple St
Sauk City WI 53583-1332
Kevin Decoster & Class C 696 5.04%
Marta Decoster Jtn Ros
30560 Stellmacher Dr
Albany OR 97321-9402
John W. Neary & Class C 5,254 38.09%
Anne Marie C. Neary Jtn Ros
10401 S Hamlin
Chicago IL 60655-3115
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Rebecca Thomas Class C 868 6.29%
8200 Offenhauser Dr #125B
Reno NV 89511-1703
Marjorie E. Stender Class C 2,369 17.18%
309 Carter St NE Apt 16
Watertown MN 55388-9229
Jackie B. McGhee & Class C 1,257 9.11%
Brenda L McGhee Jtn Ros (TOD)
805 1st Ave
Sterling IL 61081-3624
Karen K. Williams (TOD) Class C 1,715 12.44%
P. O. Box 16572
Boise ID 83715-6572
Waddell & Reed
Financial, Inc. Class Y 33,003 66.52%
401(k) and Thrift Plan
6300 Lamar Avenue
Overland Park KS 66201
Compass Bank Tr Class Y 13,271 26.75%
Profit Sharing Plan
FBO Torchmark Corp
Savings & Investment Plan
Attn: Wayne Laugevin
15 20th St S Fl 8
Birmingham AL 35233-2000
</TABLE>
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.
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<PAGE>
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 carried over from a prior year or years to offset the gains. The
Fund expects to have, for its current taxable year, tax loss carryforwards
derived from its reorganization with United Gold & Government Fund, Inc., the
Fund's use of which will be subject to certain limitations.
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. However, a total dividend and/or distribution amount
less than five dollars will be automatically 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 NAV without
any sales charge. The NAV 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 receive dividends and distributions on Fund shares in cash,
you can thereafter reinvest them (or distributions only) in shares of the Fund
at NAV (i.e., with no sales charge) next calculated after receipt by Waddell &
Reed, Inc. of the amount clearly identified as a reinvestment. The reinvestment
must be within forty-five days after the payment.
TAXES
General
The Fund has qualified since inception for treatment as a regulated
investment company ("RIC") under the Code, so that it is relieved of Federal
income tax on that part of its investment company taxable income (consisting
generally of net investment income, net short-term capital gains and net gains
from certain foreign currency transactions) that it distributes to its
shareholders. To continue to qualify for treatment as a RIC, the
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<PAGE>
Fund must distribute to its shareholders for each taxable year at least 90% of
its investment company taxable income ("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 continue to
manage its portfolio so as to avoid failing to satisfy those requirements for
these reasons.
If the Fund failed to qualify for treatment as a RIC for any taxable year,
(a) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year (even if it distributed that income to its
shareholders) and (b) the shareholders would treat all distributions out of its
earnings and profits, including distributions of net capital gains, as dividends
(that is, ordinary income). In addition, the Fund could be required to recognize
unrealized gains, pay substantial taxes and interest and make substantial
distributions before qualifying for RIC treatment.
Dividends and distributions declared by the Fund in December of any year
and payable to its shareholders of record on a date in that month 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.
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<PAGE>
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. For these purposes, the Fund may defer into the next calendar
year net capital losses incurred between November 1 and the end of the current
calendar year. It is the Fund's policy to pay sufficient dividends and
distributions each year to avoid imposition of the Excise Tax.
Income from Foreign Securities
Dividends and interest received and gains realized, by the Fund, may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is any foreign corporation (with certain exceptions) 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
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<PAGE>
taxable to it to the extent it distributes that income 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.
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 may 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 under the election (and under regulations proposed in 1992 that
provided a similar election with respect to the stock of certain PFICs). 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.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, including
forward currency contracts, (2) on the disposition of each debt security
denominated in a foreign currency that are attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the security
and the date of disposition, and (3) that are attributable to fluctuations in
exchange rates that occur between the time the Fund accrues interest, dividends
or other receivables, or 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 as ordinary income, rather than affecting
the amount of its net capital gain.
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<PAGE>
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, futures contracts and forward currency contracts in which
the Fund may invest may be "section 1256 contracts." Section 1256 contracts held
by the Fund at the end of its taxable year, other than contracts subject to a
"mixed straddle" election made by the Fund, are "marked-to-market" (that is,
treated as sold at that time for their fair market value) for Federal income tax
purposes, with the result that unrealized gains or losses are treated as though
they were realized. Sixty percent of any net gains or losses recognized on these
deemed sales, and 60% of any net realized gains or losses from any actual sales
of section 1256 contracts, are treated as long-term capital gains or losses, and
the balance is treated as short-term capital gains or losses. Section 1256
contracts also may be marked-to-market for purposes of the Excise Tax and other
purposes. The Fund may need to distribute any mark-to-market gains to its
shareholders to satisfy the Distribution Requirement and/or avoid imposition of
the Excise Tax, even though it may not have closed the transactions and received
cash to pay the distributions.
Code section 1092 (dealing with straddles) may also affect the taxation of
options and futures contracts in which the Fund may invest. That section defines
a "straddle" as offsetting positions with respect to personal property; for
these purposes, options, futures contracts and forward currency contracts are
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<PAGE>
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.
In addition, these rules may postpone the recognition of loss that would
otherwise be recognized under the mark-to-market rules discussed above. The
regulations under section 1092 also provide certain "wash sale" rules, which
apply to transactions where a position is sold at a loss and a new offsetting
position is acquired within a prescribed period, and "short sale" rules
applicable to straddles. If the Fund makes certain elections, the amount,
character and timing of the recognition of gains and losses from the affected
straddle positions will be determined under rules that vary according to the
elections made. Because only a few of the regulations implementing the straddle
rules have been promulgated, the tax consequences of straddle transactions to
the Fund are not entirely clear.
If the Fund has an appreciated financial position -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the position, the
Fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or futures or forward
currency contract entered into by the Fund or a related person with respect to
the same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction
during any taxable year that otherwise would be treated as a constructive sale
if the transaction is closed within 30 days after the end of that year and the
Fund holds the appreciated financial position unhedged for 60 days after that
closing (i.e., at no time during that 60-day period is the Fund's risk of loss
regarding that position reduced by reason of certain specified transactions with
respect to substantially identical or related property, such as having an option
to sell, being contractually obligated to sell, making a short sale, or granting
an option to buy substantially identical stock or securities).
Zero Coupon and Payment-in-Kind Securities
The Fund may acquire zero coupon or other securities issued with 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
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<PAGE>
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 gain.
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
effected 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 WRIMCO may otherwise combine orders for the Fund with those of
other funds in the United Group, Target/United Funds, Inc. or Waddell & Reed
Funds, Inc. or other accounts for which it has investment discretion, including
accounts affiliated with WRIMCO. Under current written procedures, transactions
effected pursuant to such combined orders are averaged as to price and allocated
in accordance with the purchase or sale orders actually placed for each Fund or
advisory account, except where the combined order is not filled completely. In
this case, WRIMCO will ordinarily allocate the transaction pro rata based on the
orders placed, subject to certain variances provided for in the written
procedures. 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 through combined orders.
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 seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions. WRIMCO need not seek competitive commission bidding but
is expected to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of Directors,
such policies include the selection of brokers which provide execution and/or
research services and other services, including pricing or
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<PAGE>
quotation services directly or through others ("research and brokerage
services") considered by WRIMCO to be useful or desirable for its investment
management of the Fund and/or the other Funds and accounts over which WRIMCO has
investment discretion.
Research and brokerage services are, in general, defined by reference to
Section 28(e) of the Securities Exchange Act of 1934 as including (i) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers; (ii) furnishing
analyses and reports; or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than the commission another qualified broker
would charge for effecting comparable transactions if a good faith determination
is made by WRIMCO that the commission is reasonable in relation to the research
and brokerage services provided. Subject to the foregoing considerations WRIMCO
may also consider sales of Fund shares as a factor in the selection of
broker-dealers to execute portfolio transactions. No allocation of brokerage or
principal business is made to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of WRIMCO and investment research
received for the commissions of those other accounts may be useful both to the
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
request 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, 1999, 1998 and 1997, it
paid brokerage commissions of
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<PAGE>
$87,109, $43,500 and $45,466, 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, 1999, the transactions,
other than principal transactions, which were directed to broker-dealers who
provided research services as well as execution totaled $28,576,509 on which
$52,198 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.
OTHER INFORMATION
The Fund offers four classes of shares: Class A, Class B, Class C 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
appropriately limited to that class; Class A shares are subject to an initial
sales charge and to an ongoing distribution and/or service fee; Class B and
Class C are subject to a contingent deferred sales charge and to ongoing
distribution and service fees; Class B shares convert at the end of the seventh
year following the first year of purchase to Class A shares; and Class Y shares,
which are designated for institutional investors, have no sales charge nor
ongoing distribution and/or 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
classes, dividends and liquidation proceeds of Class B shares and Class C shares
are expected to be lower than for Class A shares, which in turn 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. Shares are
fully paid and nonassessable when purchased.
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
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<PAGE>
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 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 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.
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 NAV 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.
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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. An S&P
corporate bond rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment of
creditworthiness may take into consideration obligors such as guarantors,
insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to pay
interest and repay principal is very strong, and debt rated AA differs from AAA
issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
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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.
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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 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
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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
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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.
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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
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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.
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THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS
Business Services - 4.91%
BMC Software, Inc.* ............................. 7,400 $ 529,331
Clear Channel Communications, Inc.* ............. 7,000 559,125
Microsoft Corporation* .......................... 5,800 525,444
Oracle Corporation* ............................. 11,800 537,269
TMP Worldwide Inc.* ............................. 3,700 225,353
Total ......................................... 2,376,522
Chemicals and Allied Products - 8.91%
American Home Products Corporation .............. 9,100 377,650
Forest Laboratories, Inc.* ...................... 9,400 395,975
Johnson & Johnson ............................... 4,500 413,438
Lilly (Eli) and Company ......................... 11,000 704,000
Merck & Co., Inc. ............................... 8,100 524,981
Pharmacia & Upjohn, Inc. ........................ 8,000 397,000
Schering-Plough Corporation ..................... 15,000 654,375
Smith International, Inc.* ...................... 5,600 226,800
Warner-Lambert Company .......................... 9,300 617,288
Total ......................................... 4,311,507
Communication - 1.56%
Cox Communications, Inc., Class A* .............. 8,771 366,189
EchoStar Communications Corporation,
Class A* ...................................... 4,300 390,628
Total ......................................... 756,817
Depository Institutions - 0.97%
U. S. Bancorp. .................................. 15,500 467,906
Eating and Drinking Places - 1.92%
McDonald's Corporation .......................... 11,800 507,400
Wendy's International, Inc. ..................... 16,000 422,000
Total ......................................... 929,400
Electronic and Other Electric Equipment - 2.91%
Analog Devices, Inc.* ........................... 12,900 661,125
Eaton Corporation ............................... 4,300 371,144
JDS Uniphase Corporation* ....................... 3,300 375,478
Total ......................................... 1,407,747
Fabricated Metal Products - 0.96%
Parker Hannifin Corporation ..................... 10,400 466,050
</TABLE>
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
General Merchandise Stores - 1.86%
BJ's Wholesale Club, Inc.* ...................... 16,200 $ 478,913
Dayton Hudson Corporation ....................... 7,000 420,437
Total ......................................... 899,350
Holding and Other Investment Offices - 1.58%
ABB Ltd. (Sweden) (A)* .......................... 3,700 379,753
"Shell" Transport and Trading
Company, p.l.c. (The), ADR .................... 8,400 382,200
Total ......................................... 761,953
Industrial Machinery and Equipment - 3.58%
Applied Materials, Inc.* ........................ 3,300 256,266
Baker Hughes Incorporated ....................... 13,200 382,800
Case Corporation ................................ 6,100 303,856
Cooper Cameron Corporation* ..................... 7,000 264,250
SPX Corporation* ................................ 5,800 526,350
Total ......................................... 1,733,522
Instruments and Related Products - 3.62%
Beckman Coulter, Inc. ........................... 9,800 442,225
CONMED Corporation* ............................. 16,600 407,219
KLA-Tencor Corporation* ......................... 3,300 214,603
Raytheon Company, Class B ....................... 9,600 476,400
Teradyne, Inc.* ................................. 6,000 211,500
Total ......................................... 1,751,947
Insurance Carriers - 0.76%
American International Group, Inc. .............. 4,250 369,484
Metal Mining - 5.40%
Barrick Gold Corporation ........................ 23,000 500,250
Franco-Nevada Mining Corporation
Limited (A) ................................... 41,598 898,399
Homestake Mining Company ........................ 57,500 528,281
Placer Dome Inc. ................................ 46,000 684,250
Total ......................................... 2,611,180
Motion Pictures - 1.20%
AT&T Corp. - Liberty Media Group, Class A* ...... 15,600 579,150
Oil and Gas Extraction - 2.39%
Burlington Resources Incorporated ............... 10,000 367,500
Schlumberger Limited ............................ 6,300 392,569
Transocean Offshore Incorporated ................ 6,700 205,188
USX Corporation - Marathon Group ................ 6,500 190,125
Total ......................................... 1,155,382
Petroleum and Coal Products - 0.39%
Texaco Inc. ..................................... 3,000 189,375
</TABLE>
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Primary Metal Industries - 0.94%
Phelps Dodge Corporation ........................ 8,300 $ 457,019
Transportation by Air - 0.84%
Southwest Airlines Co. .......................... 26,700 405,506
Transportation Equipment - 3.73%
Ford Motor Company .............................. 6,300 316,181
General Motors Corporation ...................... 6,200 390,212
Gentex Corporation* ............................. 26,250 542,227
Lockheed Martin Corporation ..................... 17,000 555,688
Total ......................................... 1,804,308
Wholesale Trade -- Nondurable Goods - 2.37%
Cardinal Health, Inc. ........................... 8,400 457,800
McKesson HBOC, Inc. ............................. 8,600 249,400
U.S. Foodservice* ............................... 24,500 441,000
Total ......................................... 1,148,200
TOTAL COMMON STOCKS - 50.80% $24,582,325
(Cost: $22,448,759)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Communication - 1.08%
Grupo Televisa, S.A.,
11.375%, 5-15-2003 ............................ $ 500 523,750
Fabricated Metal Products - 1.03%
Crown Cork & Seal Company, Inc.,
7.125%, 9-1-2002 .............................. 500 498,610
Finance, Taxation and Monetary Policy - 0.94%
Banco Nacional de Comercio Exterior, S.N.C.,
7.25%, 2-2-2004 ............................... 500 453,750
Petroleum and Coal Products - 0.99%
Petroleos Mexicanos
(Daily Adjusted Yield Securities (DAYS)),
9.52019%, 7-15-2005 ........................... 500 477,500
Primary Metal Industries - 0.50%
Ispat Mexicana, S.A. de C.V.,
10.375%, 3-15-2001 (B)......................... 250 240,000
</TABLE>
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITIES (Continued)
Stone, Clay and Glass Products - 0.92%
Vicap, S.A. de C.V.,
10.25%, 5-15-2002 ............................. $ 500 $ 447,500
TOTAL CORPORATE DEBT SECURITIES - 5.46% $ 2,641,110
(Cost: $2,649,337)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Banks:
6.2%, 2-27-2004 ............................... 500 487,240
7.15%, 1-20-2005 .............................. 1,000 991,720
7.04%, 2-16-2005 .............................. 1,000 989,370
6.02%, 3-30-2006 .............................. 500 477,810
United States Treasury,
5.625%, 12-31-2002 ............................ 11,250 11,204,325
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 29.24% $14,150,465
(Cost: $14,205,453)
SHORT-TERM SECURITIES
Electric, Gas and Sanitary Services - 4.12%
Allegheny Energy Inc.,
5.32%, 10-20-99 ............................... 2,000 1,994,384
Fabricated Metal Products - 4.52%
Danaher Corporation,
5.38%, Master Note ............................ 2,187 2,187,000
Food and Kindred Products - 1.65%
General Mills, Inc.,
5.235%, Master Note ........................... 795 795,000
TOTAL SHORT-TERM SECURITIES - 10.29% $ 4,976,384
(Cost: $4,976,384)
TOTAL INVESTMENT SECURITIES - 95.79% $46,350,284
(Cost: $44,279,933)
CASH AND OTHER ASSETS, NET OF
LIABILITIES - 4.21% 2,039,632
NET ASSETS - 100.00% $48,389,916
</TABLE>
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1999
Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside the United States.
(B) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be resold in transactions exempt from registration, normally
to qualified institutional buyers. At September 30, 1999, the value of
this security amounted to $240,000 or 0.50% of net assets.
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, 1999
(In Thousands, Except for Per Share Amounts)
<TABLE>
<S> <C>
Assets
Investment securities -- at value
(Notes 1 and 4) ........................................... $46,350
Cash ........................................................ 2
Receivables:
Investment securities sold ................................ 2,785
Dividends and interest .................................... 266
Fund shares sold .......................................... 38
Prepaid insurance premium ................................... 10
Unamortized organization expenses (Note 2) .................. 5
-------
Total assets ............................................ 49,456
-------
Liabilities
Payable from securities purchased ........................... 929
Payable to Fund shareholders ................................ 93
Accrued transfer agency and dividend
disbursing (Note 3) ....................................... 18
Accrued service fee (Note 3) ................................ 10
Organization expenses payable (Note 2) ...................... 5
Accrued accounting services fee (Note 3) .................... 2
Accrued management fee (Note 3) ............................. 1
Other liabilities ........................................... 8
-------
Total liabilities ....................................... 1,066
-------
Total net assets ...................................... $48,390
=======
Net Assets
$0.01 par value capital stock
Capital stock ............................................. $ 83
Additional paid-in capital ................................ 44,708
Accumulated undistributed income:
Accumulated undistributed net investment income .......... 58
Accumulated undistributed net realized gain on
investment transactions ................................. 1,471
Net unrealized appreciation in value of
investments ............................................. 2,070
-------
Net assets applicable to outstanding
units of capital ...................................... $48,390
=======
Net asset value per share (net assets divided
by shares outstanding)
Class A ..................................................... $5.82
Class Y ..................................................... $5.83
Capital shares outstanding
Class A ..................................................... 8,264
Class Y ..................................................... 49
Capital shares authorized ..................................... 1,000,000
</TABLE>
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1999
(In Thousands)
<TABLE>
<S> <C>
Investment Income
Income (Note 1B):
Interest and amortization ................................. $1,195
Dividends ................................................. 150
------
Total income ............................................ 1,345
------
Expenses (Notes 2 and 3):
Investment management fee ................................. 271
Transfer agency and dividend disbursing - Class A.......... 156
Service fee - Class A ..................................... 88
Registration fees ......................................... 51
Legal fees ................................................ 41
Accounting services fee ................................... 20
Audit fees ................................................ 15
Amortization of organization expenses ..................... 10
Custodian fees ............................................ 9
Distribution fee - Class A ................................ 8
Other ..................................................... 71
------
Total expenses .......................................... 740
------
Net investment income ................................. 605
------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 4)
Realized net gain on securities ............................. 1,671
Realized net loss on foreign currency
transactions .............................................. (2)
------
Realized net gain on investments .......................... 1,669
Unrealized appreciation in value of investments
during the period ......................................... 595
------
Net gain on investments ................................. 2,264
------
Net increase in net assets resulting
from operations ...................................... $2,869
======
</TABLE>
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the fiscal year
ended September 30,
-------------------
1999 1998
------- -------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income ............................ $ 605 $ 738
Realized net gain on investments ................. 1,669 2,284
Unrealized appreciation
(depreciation) ................................. 595 (751)
------- -------
Net increase in net assets
resulting from operations .................... 2,869 2,271
------- -------
Distributions to shareholders from (Note 1E):*
Net investment income:
Class A ........................................ (627) (833)
Class Y ........................................ (5) (10)
Realized gains on securities transactions:
Class A ........................................ (1,478) (2,183)
Class Y ........................................ (10) (28)
------- -------
(2,120) (3,054)
------- -------
Capital share transactions:
Proceeds from sale of shares and
exchanges of shares (Note 7):
Class A (3,707,930 and 1,316,486
shares, respectively) ........................ 20,949 7,660
Class Y (51,985 and 14,599
shares, respectively) ........................ 292 85
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (380,250 and 552,747
shares, respectively) ........................ 2,091 2,995
Class Y (2,751 and 7,024
shares, respectively) ........................ 15 38
Payments for shares redeemed:
Class A (1,506,056 and 901,720
shares, respectively) ........................ (8,548) (5,234)
Class Y (47,870 and 33,384
shares, respectively) ........................ (269) (193)
------- -------
Net increase in net assets
resulting from capital
share transactions .......................... 14,530 5,351
------- -------
Total increase .............................. 15,279 4,568
Net Assets
Beginning of period ................................ 33,111 28,543
------- -------
End of period, including undistributed
net investment income of $58
and $29, respectively ............................ $48,390 $33,111
======= =======
</TABLE>
*See "Financial Highlights" on pages - .
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:
<TABLE>
<CAPTION>
For the
period
For the fiscal year from
ended September 30, 3/9/95*
----------------------------------------- through
1999 1998 1997 1996 9/30/95
----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............ $5.78 $5.99 $5.24 $5.42 $5.00
----- ----- ----- ----- -----
Income from investment operations:
Net investment
income ....................... 0.09 0.15 0.16 0.15 0.07
Net realized and
unrealized gain (loss)
on investments ............... 0.29 0.28 0.74 (0.17) 0.40
----- ----- ----- ----- -----
Total from investment
operations ..................... 0.38 0.43 0.90 (0.02) 0.47
----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.10) (0.17) (0.15) (0.15) (0.05)
From capital gains ............. (0.24) (0.47) (0.00) (0.00) (0.00)
In excess of capital
gains ........................ (0.00) (0.00) (0.00) (0.01) (0.00)
----- ----- ----- ----- -----
Total distributions .............. (0.34) (0.64) (0.15) (0.16) (0.05)
----- ----- ----- ----- -----
Net asset value,
end of period .................. $5.82 $5.78 $5.99 $5.24 $5.42
===== ===== ===== ===== =====
Total return** ................... 6.90% 7.89% 17.46% -0.49% 9.42%
Net assets, end of period
(000 omitted) .................. $48,106 $32,868 $28,221 $31,828 $22,248
Ratio of expenses to
average net assets ............. 1.90% 1.62% 1.70% 1.68% 1.64%***
Ratio of net investment
income to average net
assets ......................... 1.55% 2.45% 2.87% 2.93% 3.71%***
Portfolio
turnover rate .................. 176.63% 230.09% 173.88% 91.06% 9.32%
</TABLE>
*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:
<TABLE>
<CAPTION>
For the
period
For the fiscal year from
ended September 30, 9/27/95*
----------------------------------------- through
1999 1998 1997 1996 9/30/95
----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ... $5.78 $5.99 $5.24 $5.42 $5.41
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income .............. 0.12 0.16 0.17 0.16 0.00
Net realized and
unrealized gain
(loss) on
investments ......... 0.28 0.29 0.75 (0.17) 0.01
----- ----- ----- ----- -----
Total from investment
operations ............ 0.40 0.45 0.92 (0.01) 0.01
----- ----- ----- ----- -----
Less distributions:
From net investment
income .............. (0.11) (0.19) (0.17) (0.16) (0.00)
From capital gains .... (0.24) (0.47) (0.00) (0.00) (0.00)
In excess of
capital gains ....... (0.00) (0.00) (0.00) (0.01) (0.00)
----- ----- ----- ----- -----
Total distributions ..... (0.35) (0.66) (0.17) (0.17) (0.00)
----- ----- ----- ----- -----
Net asset value,
end of period ......... $5.83 $5.78 $5.99 $5.24 $5.42
===== ===== ===== ===== =====
Total return ............ 7.35% 8.26% 17.93% -0.21% 0.18%
Net assets, end of
period (000
omitted) .............. $284 $243 $322 $330 $3
Ratio of expenses
to average net
assets ................ 1.49% 1.37% 1.28% 1.29% 0.00%
Ratio of net
investment income
to average net
assets ................ 1.96% 2.79% 3.29% 3.43% 0.00%
Portfolio
turnover rate ......... 176.63% 230.09% 173.88% 91.06% 9.32%**
</TABLE>
*Commencement of operations.
**Rate is for the period from March 9, 1995 through September 30, 1995.
See notes to financial statements.
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 the Nasdaq Stock Market, which provides information on bid
and asked 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
<PAGE>
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 business day following record date. Net
investment income dividends and capital gains distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are due to differing
treatments for items such as deferral of wash sales and post-October
losses, foreign currency transactions, net operating losses and expiring
capital loss carryovers. At September 30, 1999, the Fund reclassified
$57,996 between additional paid-in capital and accumulated undistributed
net investment income. This reclass was due to reorganization expenses
incurred through the merger (see Note 7) that are not deductible for
income tax purposes. Additionally, the Fund reclassified $123,386 between
additional paid-in capital and accumulated undistributed net realized gain
on investment transactions. This reclass was the result of the utilization
of capital loss carryovers that were transferred from United Gold &
Government Fund, Inc. ("UGG") through the merger. Reported net investment
income, net realized gains and net assets were not affected by these
reclassifications.
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
<PAGE>
business. As of June 30, 1999, the fee is payable by the Fund at the annual
rates of: 0.70% of net assets up to $1 billion, 0.65% of net assets over $1
billion and up to $2 billion, 0.60% of net assets over $2 billion and up to $3
billion, and 0.55% of net assets over $3 billion. Prior to June 30, 1999, the
fee consisted 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 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 the
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
<PAGE>
of the Fund) of $335,001, out of which W&R paid sales commissions of $192,890
and all expenses in connection with the sale of Fund shares, except for
registration fees and related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $7,343, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
NOTE 4 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and
short-term securities, aggregated $52,793,566 while proceeds from maturities and
sales aggregated $38,188,615. Purchases of short-term securities and U.S.
Government securities aggregated $105,927,972 and $21,446,953, respectively.
Proceeds from maturities and sales of short-term securities and U.S. Government
securities aggregated $106,951,463 and $23,833,121, respectively.
For Federal income tax purposes, cost of investments owned at September
30, 1999 was $44,368,572, resulting in net unrealized appreciation of
$1,981,712, of which $3,326,680 related to appreciated securities and $1,344,968
related to depreciated securities.
NOTE 5 -- Federal Income Tax Matters
UGG was merged into the Fund as of June 30, 1999. At the time of the
merger UGG had capital loss carryovers of $3,550,047 available to offset future
gains of the Fund. These carryovers are limited to $123,386 for the fiscal year
ended September 30, 1999 and $489,523 for each period ending from September 30,
2000 through 2006.
For Federal income tax purposes, the Fund realized capital gain net income
of $1,636,012 during its fiscal year ended September 30, 1999, which included
utilization of $123,386 of UGG's capital loss carryovers. A portion of the
capital gain net income of the Fund was paid to the shareholders during the
period ended September 30, 1999. Remaining capital gain net income will be
distributed to the Fund's shareholders.
NOTE 6 -- Multiclass Operations
The Fund is authorized to offer four classes of shares, Class A, Class B,
Class C and Class Y, each of which have equal rights as to assets and voting
privileges. Only Class A and Class Y shares were issued during the fiscal year
ended September 30, 1999. Class Y shares are not subject to a sales charge on
purchases, are not subject
<PAGE>
to a Rule 12b-1 Distribution and Service Plan and are subject to 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 their
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
NOTE 7 -- Acquisition of United Gold & Government Fund, Inc.
On June 30, 1999, the Fund acquired all the net assets of UGG pursuant to
a plan of reorganization approved by UGG shareholders on June 28, 1999. The
acquisition was accomplished by a tax-free exchange of 1,726,021 shares of the
Fund (valued at $10,096,747) for the 1,859,216 shares of UGG outstanding on June
30, 1999. UGG had net assets of $10,096,747, including $433,285 of net
unrealized appreciation in value of investments and $15,531,931 of accumulated
net realized losses on investments which were combined with those of the Fund.
The aggregate net assets of the Fund and UGG immediately before the acquisition
were $38,078,327 and $10,096,747, respectively. The aggregate net assets of the
Fund and UGG immediately following the acquisition were $48,175,074 and $0,
respectively. Transactions in capital stock related to the exchange were as
follows:
<TABLE>
<CAPTION>
Shares
Exchanged Value
--------- -----
<S> <C> <C>
Class A shares ........................ 1,707,548 $ 9,989,154
Class Y shares ........................ 18,473 107,593
--------- -----------
Total ............................... 1,726,021 $10,096,747
========= ===========
</TABLE>
<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, 1999, and the related statement of operations for the fiscal
year then ended, the statements of changes in net assets for each of the two
fiscal years in the period then ended, and the financial highlights for each of
the five fiscal years in the period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of United
Asset Strategy Fund, Inc. as of September 30, 1999, the results of its
operations for the fiscal year then ended, the changes in its net assets for
each of the two fiscal years in the period then ended, and the financial
highlights for each of the five fiscal years in the period then ended in
conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Kansas City, Missouri
November 5, 1999
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits:
---------
(a) Articles of Incorporation filed by EDGAR on October 3, 1994 as
EX-99.B1-asarticles to the initial Registration Statement on Form
N-1A*
Articles Supplementary filed by EDGAR on December 28, 1995 as
EX-99.B1-asartsup to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-1A*
Articles Supplementary filed by EDGAR on July 2, 1999 as
EX-99.B(a)assuppbc to Post-Effective Amendment No. 8 to the
Registration Statement on Form N-1A*
(b) Bylaws filed by EDGAR on December 27, 1996 as EX-99.B2-asbylaws to
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A*
Amendment to Bylaws filed by EDGAR on July 2, 1999 as
EX-99.B(b)asbylaw2 to Post-Effective Amendment No. 8 to the
Registration Statement on Form N-1A*
(c) Not applicable
(d) Investment Management Agreement filed by EDGAR on October 3, 1994 as
EX-99.B5-ASIMA to the initial Registration Statement on Form N-1A*
Fee Schedule (Exhibit A) to the Investment Management Agreement, as
amended, filed by EDGAR on July 2, 1999 as EX-99.B(d)asimafee to
Post-Effective Amendment No. 8 to the Registration Statement on Form
N-1A*
(e) Underwriting Agreement filed by EDGAR on March 7, 1995 as
EX-99.B6-asua to Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-1A*
(f) Not applicable
(g) Custodian Agreement, as amended, attached hereto as EX-99.B(g)asca
(h) Shareholder Servicing Agreement filed by Edgar on December 1, 1998
as EX-99.B9-asssa to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A*
Compensation table (Exhibit B) to the Shareholder Servicing
Agreement, as amended, filed by EDGAR on July 2, 1999 as
EX-
<PAGE>
99.B(h)asssacom to Post-Effective Amendment No. 8 to the
Registration Statement on Form N-1A*
Accounting Services Agreement filed by EDGAR on October 3, 1994 as
EX-99.B9-ASASA to the initial Registration Statement on Form N-1A*
Service Agreement filed by EDGAR on October 3, 1994 as EX-99.B9-ASSA
to the initial Registration Statement on Form N-1A*
Amendment to Service Agreement, filed by EDGAR on July 14, 1995 as
EX-99.B9-assaam to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A*
Fund NAV Application filed by EDGAR on March 7, 1995 as
EX-99.B9-asnavapp to Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-1A*
Fund Class Y Application, filed by EDGAR on July 14, 1995 as
EX-99.B9-ascyapp to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A*
Class Y letter of understanding filed by EDGAR on December 27, 1996
as EX-99.B9-aslou to Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A*
Fund Class A Application, as amended, filed by EDGAR on May 30, 1997
as EX-99.B9-asappca to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A*
Fidelity Bond Coverage (Exhibit C) to the Shareholder Servicing
Agreement, as amended, attached hereto as EX-99.B(h)asssafid
Fund Class A, B and C Application (Non-Retirement Plan) attached
hereto as EX-99.B(h)asappnon
Fund Class A, B and C Application (Retirement Plan) attached hereto
as EX-99.B(h)asappabc
(i) Opinion and Consent of Counsel attached hereto as EX-99.B(i)aslegopn
(j) Consent of Deloitte & Touche LLP, Independent Accountants, attached
hereto as EX-99.B(j)asconsnt
(k) Not applicable
(l) Agreement with initial shareholder, Waddell & Reed, Inc. filed by
EDGAR on March 7, 1995 as EX-99.B13-iniagr to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-1A*
(m) Service Plan, as restated, filed by EDGAR on July 14, 1995 as
EX-99.B15-assp to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A*
Distribution and Service Plan for Class A shares filed by EDGAR
<PAGE>
on December 29, 1997 as EX-99.B15-asdsp to Post-Effective Amendment
No. 6 to the Registration Statement on Form N1-A*
Distribution and Service Plan for Class B shares filed by EDGAR on
July 2, 1999 as EX-99.B(m)asdspb to Post-Effective Amendment No. 8
to the Registration Statement on Form N-1A*
Distribution and Service Plan for Class C shares filed by EDGAR on
July 2, 1999 as EX-99.B(m)asdspc to Post-Effective Amendment No. 8
to the Registration Statement on Form N-1A*
(n) Not applicable
(o) Multiple Class Plan, as amended, filed by EDGAR on July 2, 1999 as
EX-99.B(o)-asmcp to Post-Effective Amendment No. 8 to the
Registration Statement on Form N-1A*
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Article X of the Articles of Incorporation of
Registrant filed by EDGAR on December 1, 1998 as EX-99.B1-charter to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A*, Article IX of the By-Laws filed by EDGAR on December 27, 1996 as
EX-99.B2-asbylaws to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A*; and to Article II of the Underwriting Agreement,
filed by EDGAR on July 14, 1994 as EX-99.B6-asua to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A*, each of which
provides indemnification. Also refer to Section 2-418 of the Maryland
General Corporation Law regarding indemnification of directors, officers,
employees and agents.
26. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the Investment Manager of
the Registrant under the terms of an Investment Management Agreement
whereby it provides investment management services to the Registrant.
Waddell & Reed Investment Management Company is not engaged in any
business other than the provision of investment management services to
those registered investment companies as described in Part A and Part B of
this Post-Effective Amendment and to other investment advisory clients.
Each director and executive officer of Waddell & Reed Investment
Management Company has had as his sole business, profession, vocation or
employment during the past two years only his duties as an executive
officer and/or employee of Waddell & Reed Investment Management Company or
its predecessors, except as to persons who are directors and/or officers
of the Registrant and have served in the capacities shown in the Statement
of Additional Information of the
<PAGE>
Registrant. The address of the officers is 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to Part A and Part B of this Registration
Statement.
27. Principal Underwriter
---------------------
(a) Waddell & Reed, Inc. is the principal underwriter of the Registrant.
It is also the principal underwriter to the following investment
companies:
United Funds, Inc.
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Retirement Shares, Inc.
United Small Cap Fund, Inc.
Advantage I
Advantage II
Advantage Plus
Waddell & Reed Funds, Inc.
(b) The information contained in the underwriter's application on Form
BD, under the Securities Exchange Act of 1934, is herein
incorporated by reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or any
affiliated person of such affiliated person.
28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant, each
of whose business address is Post Office Box 29217, Shawnee Mission,
Kansas 66201-9217.
29. Management Services
-------------------
There are no service contracts other than as discussed in Part A and B of
this Registration Statement and listed in response to Items 23.(h) and
23.(m) hereof.
<PAGE>
30. Undertakings
------------
Not applicable
- ---------------------------------
*Incorporated herein by reference
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED
FUNDS, INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND,
INC., UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC., UNITED
SMALL CAP FUND, INC., UNITED TAX-MANAGED EQUITY FUND, INC., TARGET/UNITED FUNDS,
INC. AND WADDELL & REED FUNDS, INC. (each hereinafter called the "Corporation"),
and certain directors and officers for the Corporation, do hereby constitute and
appoint KEITH A. TUCKER, ROBERT L. HECHLER, HELGE K. LEE and KRISTEN A.
RICHARDS, and each of them individually, their true and lawful attorneys and
agents to take any and all action and execute any and all instruments which said
attorneys and agents may deem necessary or advisable to enable each Corporation
to comply with the Securities Act of 1933 and/or the Investment Company Act of
1940, as amended, and any rules, regulations, orders or other requirements of
the United States Securities and Exchange Commission thereunder, in connection
with the registration under the Securities Act of 1933 and/or the Investment
Company Act of 1940, as amended, including specifically, but without limitation
of the foregoing, power and authority to sign the names of each of such
directors and officers in his/her behalf as such director or officer as
indicated below opposite his/her signature hereto, to any Registration Statement
and to any amendment or supplement to the Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 and/or the
Investment Company Act of 1940, as amended, and to any instruments or documents
filed or to be filed as a part of or in connection with such Registration
Statement or amendment or supplement thereto; and each of the undersigned hereby
ratifies and confirms all that said attorneys and agents shall do or cause to be
done by virtue hereof.
Date: November 17, 1999 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
/s/Keith A. Tucker Chairman of the Board November 17, 1999
- ------------------ -----------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal November 17, 1999
- -------------------- Financial Officer and -----------------
Robert L. Hechler Director
<PAGE>
/s/Henry J. Herrmann Vice President and November 17, 1999
- -------------------- Director -----------------
Henry J. Herrmann
/s/Theodore W. Howard Vice President, Treasurer November 17, 1999
- --------------------- and Principal Accounting -----------------
Theodore W. Howard Officer
/s/James M. Concannon Director November 17, 1999
- --------------------- -----------------
James M. Concannon
/s/John A. Dillingham Director November 17, 1999
- --------------------- -----------------
John A. Dillingham
/s/David P. Gardner Director November 17, 1999
- ------------------- -----------------
David P. Gardner
/s/Linda K. Graves Director November 17, 1999
- ------------------ -----------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director November 17, 1999
- --------------------- -----------------
Joseph Harroz, Jr.
/s/John F. Hayes Director November 17, 1999
- ---------------- -----------------
John F. Hayes
/s/Glendon E. Johnson Director November 17, 1999
- --------------------- -----------------
Glendon E. Johnson
/s/William T. Morgan Director November 17, 1999
- -------------------- -----------------
William T. Morgan
<PAGE>
/s/Ronald C. Reimer Director November 17, 1999
- ------------------- -----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr. Director November 17, 1999
- --------------------- -----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director November 17, 1999
- ---------------------- -----------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director November 17, 1999
- ---------------------- -----------------
Frederick Vogel III
Attest:
/s/Kristen A. Richards
- ----------------------
Kristen A. Richards
Assistant Secretary
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment pursuant to
Rule 485(b) of the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Overland Park, and State of Kansas, on
the 29th day of December, 1999.
UNITED ASSET STRATEGY FUND, INC.
(Registrant)
By /s/ Robert L. Hechler*
-------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
Signatures Title
---------- -----
/s/Keith A. Tucker* Chairman of the Board December 29, 1999
- ------------------- -----------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal December 29, 1999
- --------------------- Financial Officer and -----------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and December 29, 1999
- --------------------- Director -----------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer December 29, 1999
- ---------------------- and Principal Accounting -----------------
Theodore W. Howard Officer
/s/James M. Concannon* Director December 29, 1999
- ---------------------- -----------------
James M. Concannon
/s/John A. Dillingham* Director December 29, 1999
- ---------------------- -----------------
John A. Dillingham
<PAGE>
/s/David P. Gardner* Director December 29, 1999
- -------------------- -----------------
David P. Gardner
/s/Linda K. Graves* Director December 29, 1999
- ------------------- -----------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director December 29, 1999
- ---------------------- -----------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director December 29, 1999
- ----------------- -----------------
John F. Hayes
/s/Glendon E. Johnson* Director December 29, 1999
- ---------------------- -----------------
Glendon E. Johnson
/s/William T. Morgan* Director December 29, 1999
- --------------------- -----------------
William T. Morgan
/s/Ronald C. Reimer* Director December 29, 1999
- -------------------- -----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director December 29, 1999
- ---------------------- -----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director December 29, 1999
- ---------------------- -----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director December 29, 1999
- ----------------------- -----------------
Frederick Vogel III
*By
Robert L. Hechler
Attorney-in-Fact
ATTEST:
Kristen A. Richards
Assistant Secretary
CUSTODIAN AGREEMENT
Dated as of February 22, 1995
Amended and Restated as of May 13, 1998
Between
UMB BANK, n.a.
and
UNITED ASSET STRATEGY FUND, INC.
<PAGE>
Table of Contents
ARTICLE
I. Appointment of Custodian
II. Powers and Duties of Custodian
2.01 Safekeeping
2.02 Manner of Holding Securities
2.03 Purchase of Assets
2.04 Exchanges of Securities
2.05 Sales of Securities
2.06 Depositary Receipts
2.07 Exercise of Rights, Tender Offers, Etc.
2.08 Stock Dividends, Rights, Etc.
2.09 Options
2.10 Futures Contracts
2.11 Borrowing
2.12 Interest Bearing Deposits
2.13 Foreign Exchange Transactions
2.14 Securities Loans
2.15 Collections
2.16 Dividends, Distributions and Redemptions
2.17 Proceeds from Shares Sold
2.18 Proxies, Notices, Etc.
2.19 Bills and Other Disbursements
2.20 Nondiscretionary Functions
2.21 Bank Accounts
2.22 Deposit of Fund Assets in Securities System
2.23 Other Transfers
2.24 Establishment of Segregated Account
2.25 Custodian's Books and Records
2.26 Opinion of Fund's Independent
Certified Public Accountants
2.27 Reports by Independent Certified Public Accountants
2.28 Overdraft Facility
III. Proper Instructions, Special Instructions
and Related Matters
3.01 Proper Instruction and Special Instructions
3.02 Authorized Persons
3.03 Persons Having Access to Assets of the Portfolios
3.04 Actions of Custodian Based on Proper
Instructions and Special Instructions
2
<PAGE>
IV. Subcustodians
4.01 Domestic Subcustodians
4.02 Foreign Sub-Subcustodians and
Interim Sub-Subcustodians
4.03 Special Subcustodians
4.04 Termination of a Subcustodian
4.05 Certification Regarding Foreign Sub-Subcustodians
V. Standard of Care, Indemnification
5.01 Standard of Care
5.02 Liability of the Custodian for Actions
of Other Person
5.03 Indemnification by Fund
5.04 Investment Limitations
5.05 Fund's Right to Proceed
5.06 Indemnification by Custodian
5.07 Custodian's Right to Proceed
VI. Compensation
VII. Termination
VIII. Defined Terms
IX. Miscellaneous
9.01 Execution of Documents, Etc.
9.02 Representations and Warranties
9.03 Entire Agreement
9.04 Waivers and Amendments
9.05 Interpretation
9.06 Captions
9.07 Governing Law
9.08 Notices
9.09 Assignment
9.10 Counterparts
9.11 Confidentiality; Survival of Obligations
Appendix "A"
3
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of the 22nd day of February, 1995 between United Asset
Strategy Fund, Inc. (the "Fund") and UMB Bank, n.a. (the "Custodian") and as
amended and restated as of May 13, 1998.
WITNESSETH
WHEREAS, the Fund desires to appoint the Custodian as custodian on behalf
of the Fund in accordance with the provisions of the Investment Company Act of
1940, as amended (the "1940 Act") and the rules and regulations thereunder,
under the terms and conditions set forth in this Agreement, and the Custodian
has agreed so to act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
Subject to the terms and provisions of this Agreement, the Fund hereby
employs and appoints the Custodian as a custodian of the cash, securities and
other assets owned by the Fund and deposited from time to time with the
Custodian ("Assets"). The Fund shall deliver to the Custodian, or shall cause to
be delivered to the Custodian, Assets during the term of this Agreement. The
Custodian is authorized to act under the terms and conditions of this Agreement
as the Fund's agent and shall be representing the Fund when acting within the
scope of this Agreement. The Custodian hereby accepts such appointment as
custodian and shall perform the duties and responsibilities set forth herein on
the terms and conditions set forth herein.
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
As custodian, the Custodian shall have and perform the powers and duties
set forth in this Article II. Pursuant to and in accordance with Article IV
hereof, the Custodian may appoint one or more Subcustodians (as hereinafter
defined) to exercise the powers and perform the duties of the Custodian set
forth in this Article II and references to the Custodian in this Article II
shall include any Subcustodian so appointed.
Section 2.01. Safekeeping. The Custodian shall accept delivery of and keep
safely the Assets in accordance with the terms and conditions hereof on behalf
of the Fund.
Section 2.02. Manner of Holding Securities.
(a) The Custodian shall at all times hold securities of the Fund either:
(i) by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form; or (ii) in book-entry
form by a Securities System (as hereinafter defined) in accordance with the
provisions of Section 2.22 below.
(b) The Custodian may at all times hold registered securities of the Fund
in the name of the Fund or the Fund's nominee, or in the nominee name of the
Custodian unless specifically directed by Proper Instructions (as hereinafter
defined) to hold such registered securities in so-called street name; provided
that, in any event, all Assets shall be held in an account of the Custodian
containing only assets of the Fund. Notwithstanding the
4
<PAGE>
foregoing, unless it receives Proper Instructions to the contrary, the Custodian
shall register all securities in the name of the Custodian's nominee as
authorized by the Fund. All securities held directly or indirectly by the
Custodian hereunder shall at all times be identifiable on the records of the
Custodian. Except as otherwise provided herein, the Custodian shall keep the
Assets physically segregated from those of other persons or entities. The
Custodian shall execute and deliver all certificates and documents in connection
with registration of securities as may be required by the applicable provisions
of the Internal Revenue Code, the laws of any State or territory of the United
States and the laws of any jurisdiction in which the securities are held.
Section 2.03. Purchase of Assets.
(a) Security Purchases. Upon receipt of Proper Instructions, the Custodian
shall pay for and receive securities purchased for the account of the Fund,
provided that payment shall be made by Custodian only upon receipt of the
securities: (a) by the Custodian; (b) by a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) by a Securities
System. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i)
in the case of a repurchase agreement, the Custodian may release funds to a
Securities System prior to the receipt of advice from the Securities System that
the securities underlying such repurchase agreement have been transferred by
book-entry into the Account (as hereinafter defined) maintained with such
Securities System by the Custodian, provided that the Custodian's instructions
to the Securities System require that the Securities System may make payment of
such funds to the other party to the repurchase agreement only upon transfer by
book-entry of the securities underlying the repurchase agreement into the
Account; (ii) in the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures contracts or
options, pursuant to Sections 2.09, 2.10, 2.12 and 2.13 hereof, the Custodian
may make payment therefor before receipt of an advice or transaction; and (iii)
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make payment therefor
and receive delivery of such securities in accordance with local custom and
practice generally accepted by Institutional Clients (as hereinafter defined) in
the country in which the settlement occurs, but in all events subject to the
standard of care set forth in Article V hereof. For purposes of this Agreement,
an "Institutional Client" shall mean a major commercial bank, corporation,
insurance company, or substantially similar institution, which, as a substantial
part of its business operations, purchases or sells securities and makes use of
custodial services.
(b) Other Asset Purchases. Upon receipt of Proper Instructions and except
as otherwise provided herein, the Custodian shall pay for and receive other
Assets for the account of the Fund as provided in Proper Instructions.
Section 2.04. Exchanges of Securities. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of the Fund for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event relating to the securities or the issuer of such securities, and shall
deposit any such securities in accordance with the terms of any reorganization
or protective plan. The Custodian shall, without receiving Proper Instructions:
surrender securities for transfer into the name of the Fund, the Fund's nominee
or the nominee name of the Custodian as permitted by Section 2.02(b); and
surrender securities for a different number of certificates or instruments
representing the same number of shares or same principal amount of indebtedness,
provided that the securities to be issued will be delivered to the Custodian.
Section 2.05. Sales of Securities. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities which have been sold for the
account of the Fund, but only against payment therefor in the form of: (a) cash,
certified check, bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing corporation of a national
securities exchange of which the Custodian is
5
<PAGE>
a member; or (c) credit to the Account of the Custodian with a Securities
System, in accordance with the provisions of Section 2.22 hereof.
Notwithstanding the foregoing: (i) in the case of the sale of securities, the
settlement of which occurs outside of the United States of America, such
securities shall be delivered and paid for in accordance with local custom and
practice generally accepted by Institutional Clients in the country in which the
settlement occurs, but in all events subject to the standard of care set forth
in Article V hereof; and (ii) in the case of securities held in physical form,
such securities shall be delivered and paid for in accordance with "street
delivery custom" to a broker or its clearing agent, against delivery to the
Custodian of a receipt for such securities, provided that the Custodian shall
have taken reasonable steps to ensure prompt collection of the payment for, or
return of, such securities by the broker or its clearing agent, and provided
further that, subject to the standard of care set forth in Article V hereof, the
Custodian shall not be responsible for the selection of or the failure or
inability to perform of such broker or its clearing agent.
Section 2.06. Depositary Receipts. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used for such
securities by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter referred to, collectively , as "ADRs"), against
a written receipt therefor adequately describing such securities and written
evidence satisfactory to the Custodian that the depositary has acknowledged
receipt of instructions to issue ADRs with respect to such securities in the
name of the Custodian or a nominee of the Custodian, for delivery to the
Custodian at such place as the Custodian may from time to time designate. Upon
receipt of Proper Instructions, the Custodian shall surrender ADRs to the issuer
thereof, against a written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian that the issuer
of the ADRs has acknowledged receipt of instructions to cause its depository to
deliver the securities underlying such ADRs to the Custodian.
Section 2.07. Exercise of Rights, Tender Offers, Etc. Upon receipt of
Proper Instructions, the Custodian shall: (a) deliver warrants, puts, calls,
rights or similar securities to the issuer or trustee thereof (or to the agent
of such issuer or trustee) for the purpose of exercise or sale, provided that
the new securities, cash or other Assets, if any, acquired as a result of such
actions are to be delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the consideration for such
securities is to be paid or delivered to the Custodian, or the tendered
securities are to be returned to the Custodian. Notwithstanding any provision of
this Agreement to the contrary, the Custodian shall promptly notify the Fund in
writing of (i) any default in payment of funds on securities; (ii) any
securities that have matured, been called or redeemed; and (iii) to the extent
the Custodian has notice which is contained in services to which it normally
subscribes for such purposes, or actual knowledge if not contained in such
services, any other default involving securities; and all announcements of
defaults, bankruptcies, reorganizations, mergers, consolidations,
recapitalizations or rights or privileges to subscribe, convert, exchange, put,
redeem or tender securities held subject to this Agreement. The Custodian shall,
following receipt or knowledge, convey such information to the Fund in a timely
manner based upon the circumstances of each particular case. Whenever any such
rights or privileges exist, the Fund will, in a timely manner based upon the
circumstances of each particular case, provide the Custodian with Proper
Instructions. Absent the Custodian's timely receipt of Proper Instructions, the
Custodian shall not be liable for not taking any action or not exercising such
rights prior to their expiration unless such failure is due to Custodian's
failure to give timely notice to the Fund in accordance with this Section 2.07.
Section 2.08. Stock Dividends, Rights, Etc. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and, upon
receipt of Proper Instructions, take action with respect to the same as directed
in such Proper Instructions.
Section 2.09. Options. Upon receipt of Proper Instructions and in
accordance with the provisions of any agreement between the Custodian, any
registered broker-dealer and, if necessary, the Fund relating to compliance with
the rules of the Options Clearing Corporation (the "OCC") or of any registered
national
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securities exchange or similar organization(s), the Custodian shall: (a) receive
and retain confirmations or other documents, if any, evidencing the purchase or
writing of an option by the Fund; (b) deposit and maintain in a segregated
account, securities (either physically or by book-entry in a Securities System),
cash or other Assets; and (c) pay, release and/or transfer such securities, cash
or other Assets in accordance with any such agreement and with notices or other
communications evidencing the expiration, termination or exercise of such
options furnished by the OCC, the securities or options exchange on which such
options are traded or such other organization as may be responsible for handling
such option transactions. The Fund and the broker-dealer shall be responsible
for determining the sufficiency of assets held in any segregated account
established in compliance with applicable margin maintenance requirements and
the performance of other terms of any option contract; provided, however, that
the Custodian shall be liable for performance of its duties under this Agreement
and in accordance with Proper Instructions, and shall be liable for performance
of its duties under any other agreement between the Custodian, any registered
broker-dealer and, if necessary, the Fund. Notwithstanding anything herein to
the contrary, if the Fund issues Proper Instructions to sell a naked option
(including stock index options), then as part of the transaction, the Custodian,
the Fund and the broker-dealer shall have entered into a tri-party agreement, as
described above.
Section 2.10. Futures Contracts. Upon receipt of Proper Instructions, or
pursuant to the provisions of any futures margin procedural agreement among the
Fund, the Custodian and any futures commission merchant (a "Procedural
Agreement"), the Custodian shall: (a) receive and retain confirmations, if any
evidencing the purchase of or sale of a futures contract or an option on a
futures contract by the Fund; (b) deposit and maintain in a segregated account
cash, securities and other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written by the Fund, in accordance with the provisions of the
Commodity Futures Trading Commission and/or any commodity exchange or contract
market (such as the Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release assets from and/or transfer
assets into such margin accounts only in accordance with any such Procedural
Agreements. The Fund and such futures commission merchant shall be responsible
for determining the sufficiency of assets held in the segregated account in
compliance with applicable margin maintenance requirements and the performance
of any futures contract or option on a futures contract in accordance with its
terms; provided, however, that the Custodian shall be liable for performance of
its duties under this Agreement and in accordance with Proper Instructions, and
shall be liable for performance of its duties under any Procedural Agreement.
Section 2.11. Borrowing. Upon receipt of Proper Instructions, the
Custodian shall deliver securities of the Fund to lenders or their agents, or
otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for borrowings effected by the Fund, provided that such
borrowed money is payable by the lender (a) to or upon the Custodian's order, as
Custodian for the Fund, and (b) concurrently with delivery of such securities.
Section 2.12. Interest Bearing Deposits. Upon receipt of Proper
Instructions directing the Custodian to purchase interest bearing fixed term and
call deposits (hereinafter referred to collectively, as "Interest Bearing
Deposits") for the account of the Fund, the Custodian shall purchase such
Interest Bearing Deposits in the name of the Fund with such banks or trust
companies (including the Custodian, any Subcustodian or any subsidiary or
affiliate of the Custodian) (hereinafter referred to as "Banking Institutions")
and in such amounts as the Fund may direct pursuant to Proper Instructions. Such
Interest Bearing Deposits may be denominated in U.S. Dollars or other
currencies, as the Fund may determine and direct pursuant to Proper
Instructions. The Custodian shall include in its records with respect to the
Assets of the Fund appropriate notation as to the amount and currency of each
such Interest Bearing Deposit, the accepting Banking Institution and all other
appropriate details, and shall retain such forms of advice or receipt evidencing
such account, if any, as may be forwarded to the Custodian by the Banking
Institution. The responsibilities of the Custodian to the Fund for Interest
Bearing
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Deposits accepted on the Custodian's books in the United States shall be that of
a U.S. bank for a similar deposit. With respect to Interest Bearing Deposits
other than those accepted on the Custodian's books, (a) the Custodian shall be
responsible for the collection of income as set forth in Section 2.15 and the
transmission of cash and instructions to and from such accounts; and (b) the
Custodian shall have no duty with respect to the selection of the Banking
Institution or, so long as the Custodian acts in accordance with Proper
Instructions and the terms and conditions of this Agreement, for the failure of
such Banking Institution to pay upon demand. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable actions as the Fund deems
necessary or appropriate to cause each such Interest Bearing Deposit account to
be insured to the maximum extent possible by all applicable deposit insurers
including, without limitation, the Federal Deposit Insurance Corporation.
Section 2.13. Foreign Exchange Transactions.
(a) Foreign Exchange Transactions Other than as Principal. Upon receipt of
Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may determine and direct pursuant to Proper
Instructions. The Fund accepts full responsibility for its use of third party
foreign exchange brokers (any dealer other than the Foreign Subcustodian) (as
hereinafter defined) and for execution of said foreign exchange contracts and
understands that the Fund shall be responsible for any and all costs and
interest charges which may be incurred as a result of the failure or delay of
its third party broker to deliver foreign exchange unless such loss, damage, or
expense is caused by, or results from the negligence, misfeasance or misconduct
of the Custodian. Notwithstanding the foregoing, the Custodian shall be
responsible for the transmission of cash and instructions to and from the
currency broker or Banking Institution with which the contract or option is
made, the safekeeping of all certificates and other documents and agreements
evidencing or relating to such foreign exchange transactions and the maintenance
of proper records as set forth in Section 2.25. The Custodian shall have no duty
with respect to the selection of the currency brokers or Banking Institutions
with which the Fund deals or, so long as the Custodian acts in accordance with
Proper Instructions, for the failure of such brokers or Banking Institutions to
comply with the terms of any contract or option.
(b) Foreign Exchange Contracts as Principal. The Custodian shall not be
obligated to enter into foreign exchange transactions as principal. However, if
the Custodian has made available to the Fund its services as a principal in
foreign exchange transactions, upon receipt of Proper Instructions, the
Custodian shall enter into foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with the Custodian as principal. The
Custodian shall be responsible for the selection of the currency brokers or
Banking Institutions and the failure of such currency brokers or Banking
Institutions to comply with the terms of any contract or option.
(c) Payments. Notwithstanding anything to the contrary contained herein,
upon receipt of Proper Instructions the Custodian may, in connection with a
foreign exchange contract, make free outgoing payments of cash in the form of
U.S. Dollars or foreign currency prior to receipt of confirmation of such
foreign exchange contract or confirmation that the countervalue currency
completing such contract has been delivered or received.
Section 2.14. Securities Loans. Upon receipt of Proper Instructions, the
Custodian shall, in connection with loans of securities by the Fund, deliver
securities of the Fund to the borrower thereof and may, except as otherwise
provided below, deliver such securities prior to receipt of the collateral, if
any, for such borrowing; provided that, in cases of loans of securities secured
by cash collateral, the Custodian's instructions to the Securities System shall
require that the Securities System deliver the securities of the Fund to the
borrower thereof only upon receipt of the collateral for such borrowing. The
Custodian shall retain on the
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Fund's behalf the right to any dividends, interest or distribution on such
loaned securities and any other rights specified in Proper Instructions. Upon
receipt of Proper Instructions and the loaned securities, the Custodian will
release the collateral to the borrower.
Section 2.15. Collections. The Custodian shall: (a) collect amounts due
and payable to the Fund with respect to portfolio securities and other Assets;
(b) promptly credit to the account of the Fund all income and other payments
relating to portfolio securities and other Assets held by the Custodian
hereunder upon Custodian's receipt of such income or payments or as otherwise
agreed in writing by the Custodian and the Fund; (c) promptly endorse and
deliver any instruments required to effect such collection; and (d) promptly
execute ownership and other certificates and affidavits for all federal, state,
local and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio securities and other Assets, or in connection
with the transfer of such securities or other Assets; provided, however, that
with respect to portfolio securities registered in so-called street name, or
physical securities with variable interest rates, the Custodian shall use its
best efforts to collect amounts due and payable to the Fund. The Custodian shall
promptly notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian may agree in writing if any amount payable with
respect to portfolio securities or other Assets is not received by the Custodian
when due. The Custodian shall not be responsible for the collection of amounts
due and payable with respect to portfolio securities or other Assets that are in
default.
Section 2.16. Dividends, Distributions and Redemptions. To enable the Fund
to pay dividends or other distributions to shareholders of the Fund and to make
payment to shareholders who have requested repurchase or redemption of their
shares of the Fund (collectively, the "Shares"), the Custodian shall promptly
release cash or securities (a) in the case of cash, upon receipt of Proper
Instructions, to one or more Distribution Accounts (as hereinafter defined)
designated by the Fund in such Proper Instructions; or (b) in the case of
securities, upon the receipt of Special Instructions (as hereinafter defined) to
such entity or account designated by the Fund in such Special Instructions. For
purposes of this Agreement, a "Distribution Account" shall mean an account
established at a Banking Institution designated by the Fund in Special
Instructions.
Section 2.17. Proceeds from Shares Sold. The Custodian shall receive funds
representing cash payments received for Shares issued or sold from time to time
by the Fund, and shall promptly credit such funds to the account of the Fund.
The Custodian shall promptly notify the Fund of Custodian's receipt of cash in
payment for Shares issued by the Fund by facsimile transmission or in such other
manner as the Fund and Custodian may agree in writing. Upon receipt of Proper
Instructions, the Custodian shall: (a) deliver all federal funds received by the
Custodian in payment for Shares in payment for such investments as may be set
forth in such Proper Instructions and at a time agreed upon between the
Custodian and the Fund; and (b) make federal funds available to the Fund as of
specified times agreed upon from time to time by the Fund and the Custodian, in
the amount of checks received in payment for Shares which are deposited to the
accounts of the Fund.
Section 2.18. Proxies, Notices, Etc. The Custodian shall deliver or cause
to be delivered to the Fund, in the most expeditious manner practicable, all
forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Proper Instructions, the Custodian shall execute and
deliver, or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as directed pursuant
to Proper Instructions, neither the Custodian nor any Subcustodian or nominee
shall vote upon any such securities, or execute any proxy to vote thereon, or
give any consent or take any other action with respect thereto. The Custodian
will not release the identity of the Fund to an issuer which requests such
information pursuant to the Shareholder Communications Act of 1985, for the
specific purpose of direct communications between such issuer and the Fund
unless the Fund directs the Custodian otherwise in writing.
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Section 2.19. Bills and Other Disbursements. Upon receipt of Proper
Instructions, the Custodian shall pay or cause to be paid, all bills,
statements, or other obligations of the Fund.
Section 2.20. Nondiscretionary Functions. The Custodian shall attend to
all nondiscretionary details not specifically covered by this Agreement in
accordance with industry standards in connection with the sale, exchange,
substitution, purchase, transfer or other dealings with securities or other
Assets held by the Custodian, except as otherwise directed from time to time
pursuant to Proper Instructions.
Section 2.21. Bank Accounts.
(a) Accounts with the Custodian. The Custodian shall open and operate a
bank account or accounts (hereinafter referred to collectively, as "Bank
Accounts") on the books of the Custodian; provided that such Bank Account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
the Fund, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
(b) Deposit Insurance. Upon receipt of Proper Instructions, the Custodian
shall take such action as the Fund deems necessary or appropriate to cause each
deposit account established by the Custodian pursuant to this Section 2.21 to be
insured to the maximum extent possible by all applicable deposit insurers,
including, without limitation, the Federal Deposit Insurance Corporation.
Section 2.22. Deposit of Fund Assets in Securities Systems. The Custodian
may deposit and/or maintain domestic securities owned by the Fund in: (a) The
Depository Trust Company; (b) the Participants Trust Company; (c) any book-entry
system as provided in (i) Subpart O of Treasury Circular No. 300, 31 CFR 306.115
(ii) Subpart B of Treasury Circular Public Debt Series No. 27-76, 31 CFR 350.2,
or (iii) the book-entry regulations of federal agencies substantially in the
form of 31 CFR 306.115; or (d) any other domestic clearing agency registered
with the Securities and Exchange Commission ("SEC") under Section 17A of the
Securities Exchange Act of 1934 (or as may otherwise be authorized by the
Securities and Exchange Commission to serve in the capacity of depository or
clearing agent for the securities or other assets of investment companies) which
acts as a securities depository; provided, however, that no such deposit or
maintenance of securities may be made except with respect to those agencies and
entities the use of which the Fund has previously approved by Special
Instructions (each of the foregoing being referred to in this Agreement as a
"Securities System"). Use of a Securities System shall be in accordance with
applicable Federal Reserve Board and SEC rules and regulations, if any, and
subject to the following provisions:
(A) The Custodian or any Subcustodian may deposit and/or maintain
securities held hereunder in a Securities System, provided that such securities
are represented in an account ("Account") of the Custodian in the Securities
System which Account shall not contain any assets of the Custodian other than
assets held as fiduciary, custodian or otherwise for customers.
(B) The books and records of the Custodian shall at all times identify
those securities belonging to the Fund which are maintained in a Securities
System.
(C) The Custodian shall pay for securities purchased for the account of
the Fund only upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account of the Custodian, and (ii) the
making of an entry on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund only upon (iii) receipt of advice from the
Securities System that payment for such securities has been transferred to the
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Account of the Custodian, and (iv) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System relating to transfers of
securities for the account of the Fund shall identify the Fund, and shall be
maintained for the Fund by the Custodian. The Custodian shall deliver to the
Fund on the next succeeding business day daily transaction reports which shall
include each day's transactions in the Securities System for the account of the
Fund. Such transaction reports shall be delivered to the Fund or any agent
designated by the Fund pursuant to Proper Instructions, by computer or in such
other manner as the Fund and Custodian may agree in writing.
(D) The Custodian shall, if requested by the Fund pursuant to Proper
Instructions, provide the Fund with all reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Securities System.
(E) Upon receipt of Special Instructions, the Custodian shall terminate
the use of any Securities System (except the federal book-entry system) on
behalf of the Fund as promptly as practicable and shall take all actions
reasonably practicable to safeguard the securities of the Fund maintained with
such Securities System.
Section 2.23. Other Transfers. Upon receipt of Special Instructions, the
Custodian shall make such other dispositions of securities, funds, or other
Assets of the Fund in a manner or for purposes other than as expressly set forth
in this Agreement, provided that the Special Instructions relating to such
disposition shall include a statement of the purposes for which the delivery is
to be made, the amount of funds, Assets and/or securities to be delivered and
the name of the person or persons to whom delivery is to be made, and shall
otherwise comply with the provisions of Sections 3.01 and 3.03 hereof.
Section 2.24. Establishment of Segregated Account. Upon receipt of Proper
Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other Assets of the
Fund, including securities maintained by the Custodian in a Securities System
pursuant to Section 2.22 hereof, said account or accounts to be maintained: (a)
for the purposes set forth in Section 2.09, 2.10 and 2.11 hereof; (b) for the
purposes of compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as may be set forth, from time to
time, in Special Instructions. The Custodian shall not be responsible for the
determination of the type or amount of Assets to be held in any segregated
account referred to in this Section 2.24.
Section 2.25. Custodian's Books and Records. The Custodian shall provide
any assistance reasonably requested by the Fund in the preparation of reports to
Fund shareholders and others, audits of accounts, and other ministerial matters
of like nature. The Custodian shall maintain complete and accurate records with
respect to securities and other Assets held for the accounts of the Fund as
required by the rules and regulations of the SEC applicable to investment
companies registered under the 1940 Act, including, but not limited to: (a)
journals or other records of original entry containing a detailed and itemized
daily record of all receipts and deliveries of securities (including certificate
and transaction identification numbers, if any), and all receipts and
disbursements of cash; (b) ledgers or other records reflecting (i) securities in
transfer, (ii) securities in physical possession, (iii) securities borrowed,
loaned or collateralizing obligations of the Fund, (iv) monies borrowed and
monies loaned (together with a record of the collateral therefor and
substitutions of such collateral), and (v) dividends and interest received; and
(c) cancelled checks and bank records relating thereto. The Custodian shall keep
such other books and records of the Fund as the Fund shall reasonably request.
All such books and records maintained by the Custodian shall be maintained in a
form acceptable to the Fund and in compliance with the rules and regulations of
the SEC, including, but not limited to, books and records required to be
maintained by
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Section 31(a) of the 1940 Act and the rules and regulations from time to time
adopted thereunder. All books and records maintained by the Custodian pursuant
to this Agreement shall at all times be the property of the Fund and shall be
available during normal business hours for inspection and use by the Fund and
its agents, including without limitation, its independent certified public
accountants. Notwithstanding the preceding sentence, the Funds shall not take
any actions or cause the Custodian to take any actions which would knowingly
cause, either directly or indirectly, the Custodian to violate any applicable
laws, regulations or orders. Notwithstanding the provisions of this Section
2.25, in the event the Fund purchases cash, securities and other Assets
requiring the use of a Domestic Subcustodian or Foreign Sub-Subcustodian, the
Custodian shall be entitled to rely upon and use the books, records and
accountings of the Domestic Subcustodian as its means of accounting to the Fund
for all cash, securities and other Assets deposited with such entities; provided
however, that such books, records and accountings on which the Bank may rely
must be maintained in the United States by such Domestic Subcustodian and,
provided further, that any agreement between the Custodian and such Domestic
Subcustodian must state that the Domestic Subcustodian agrees to make any
records available upon request and preserve, for the periods described in Rule
31a-2 of the 1940 Act, the records required to be maintained by Rule 31a-1 of
the 1940 Act. In no event shall the Custodian be entitled to rely upon and use
books, records and accountings which are maintained outside of the United
States.
Section 2.26. Opinion of Fund's Independent Certified Public Accountants.
The Custodian shall take all reasonable action as the Fund may request to obtain
from year to year favorable opinions from the Fund's independent certified
public accountants with respect to the Custodian's activities hereunder in
connection with the preparation of the Fund's Form N-1A and the Fund's Form
N-SAR or other periodic reports to the SEC and with respect to any other
requirements of the SEC.
Section 2.27. Reports by Independent Certified Public Accountants. At the
request of the Fund, the Custodian shall deliver to the Fund a written report
prepared by the Custodian's independent certified public accountants with
respect to the services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
assets, including cash, securities and other assets deposited and/or maintained
in a Securities System or with a Subcustodian. Such report shall be of
sufficient scope and in sufficient detail as may reasonably be required by the
Fund and as may reasonably be obtained by the Custodian.
Section 2.28. Overdraft Facility. In the event that the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its sole discretion, provide an
overdraft (an "Overdraft") to the Fund in an amount sufficient to allow the
completion of such payment. Any Overdraft provided hereunder: (a) shall be
payable on the next business day, unless otherwise agreed by the Fund and the
Custodian; and (b) shall accrue interest from the date of the Overdraft to the
date of payment in full by the Fund at a rate agreed upon in writing, from time
to time, by the Custodian and the Fund. The purpose of such Overdrafts is to
temporarily finance extraordinary or emergency expenses not reasonably
foreseeable by the Fund. The Custodian shall promptly notify the Fund in writing
("Overdraft Notice") of any Overdraft by facsimile transmission or in such other
manner as the Fund and the Custodian may agree in writing. The Custodian shall
have a right of set-off against all Assets (except for Assets held in a
segregated margin account or otherwise pledged in connection with options or
futures contracts held for the benefit of the Fund and for Assets allocated to
any other Overdraft or loan made hereunder); provided, however, the Custodian
shall promptly notify the Fund in writing of any intent to exercise a right of
set-off against Assets hereunder and shall not exercise any such right of
set-off against Assets hereunder unless and until the Fund has failed to pay
(within ten (10) days after the Fund's receipt of such notice of intent to
exercise a right of set-off), any Overdraft, together with all accrued interest
thereon. Notwithstanding the provisions of any applicable law, including,
without limitation, the Uniform Commercial
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Code, the only rights or remedies which the Custodian is entitled to with
respect to Overdrafts is the right of set-off granted herein.
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
Section 3.01. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used herein, the term "Proper Instructions"
shall mean: (i) a tested telex, a written (including, without limitation,
facsimile transmission) request, direction, instruction or certification signed
or initialed by or on behalf of the Fund by two or more Authorized Persons (as
hereinafter defined); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) by or on behalf of the Fund by one or more Authorized
Persons; provided, however, that communications of the types described in
clauses (ii) and (iii) above purporting to be given by an Authorized Person
shall be considered Proper Instructions only if the Custodian reasonably
believes such communications to have been given by an Authorized Person with
respect to the transaction involved. Proper Instructions in the form of oral
communications shall be confirmed by the Fund by tested telex or in writing in
the manner set forth in clause (i) above, but the lack of such confirmation
shall in no way affect any action taken by the Custodian in reliance upon such
oral instructions prior to the Custodian's receipt of such confirmation. The
Fund and the Custodian are hereby authorized to record any and all telephonic or
other oral instructions communicated to the Custodian. Proper Instructions may
relate to specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
(b) Special Instructions. As used herein, the term "Special Instructions"
shall mean Proper Instructions countersigned or confirmed in writing by the
Treasurer or any Assistant Treasurer of the Fund or any other person designated
by the Treasurer of the Fund in writing, which countersignature or confirmation
shall be (i) included on the same instrument containing the Proper Instructions
or on a separate instrument relating thereto, and (ii) delivered by hand, by
facsimile transmission or in such other manner as the Fund and the Custodian
agree in writing.
(c) Address for Proper Instructions and Special Instructions. Proper
Instructions and Special Instructions shall be delivered to the Custodian at the
address and/or telephone, telecopy or telex number agreed upon from time to time
by the Custodian and the Fund.
Section 3.02. Authorized Persons. Concurrently with the execution of this
Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian, duly certified as appropriate by a Treasurer or
Assistant Treasurer of the Fund, a certificate setting forth: (a) the names,
titles, signatures, and scope of authority of all persons authorized to give
Proper Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of the Fund (collectively, the "Authorized
Persons" and individually, an "Authorized Person"); and (b) the names, titles
and signatures of those persons authorized to issue Special Instructions. Such
certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and shall be considered to be in full
force and effect until delivery to the Custodian of a similar certificate to the
contrary. Upon delivery of a certificate which deletes or does not include the
name(s) of a person previously authorized to give Proper Instructions or to
issue Special Instructions, such persons shall no longer be considered an
Authorized Person or authorized to issue Special Instructions.
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Section 3.03. Persons Having Access to Assets of the Portfolios.
Notwithstanding anything to the contrary contained in this Agreement, no
Authorized Person, Director, officer, employee or agent of the Fund shall have
physical access to the Assets of the Fund held by the Custodian nor shall the
Custodian deliver any Assets of the Fund to an account of such person; provided,
however, that nothing in this Section 3.03 shall prohibit (a) any Authorized
Person from giving Proper Instructions, or any person authorized to issue
Special Instructions from issuing Special Instructions, so long as such action
does not result in delivery of or access to Assets of the Fund prohibited by
this Section 3.03; or (b) the Fund's independent certified public accountants
from examining or reviewing the Assets of the Fund held by the Custodian. The
Fund will deliver from time to time a written certificate executed by two
Authorized Persons identifying such Authorized Persons, Directors, officers,
employees and agents of the Fund. Notwithstanding the foregoing, to the extent
that the person acting on behalf of the Custodian in making such delivery has
actual knowledge that any person is an Authorized Person, Director, officer,
employee or agent of the Fund, the Custodian will comply with this Section 3.03
as if the name of such Authorized Person, Director, officer, employee or agent
had been contained in a written certificate provided pursuant to this Section
3.03.
Section 3.04. Actions of Custodian Based on Proper Instructions and
Special Instructions. So long as and to the extent that the Custodian acts in
accordance with (a) Proper Instructions or Special Instructions, as the case may
be, and (b) the terms of this Agreement, the Custodian shall not be responsible
for the title, validity or genuineness of any property, or evidence of title
thereof, received by it or delivered by it pursuant to this Agreement.
ARTICLE IV
SUBCUSTODIANS
From time to time, in accordance with the relevant provisions of this
Agreement, (i) the Custodian may appoint one or more Domestic Subcustodians and
Special Subcustodians (each, as hereinafter defined) to act on behalf of the
Fund; and (ii) any Domestic Subcustodian so appointed and which has been
designated as a Foreign Custody Manager (as such term is defined in Rule 17f-5
of the 1940 Act) by the Custodian and approved by the Fund's board ("Approved
Foreign Custody Manager") may appoint a Foreign Sub-Subcustodian or Interim
Sub-Subcustodian (as each are hereinafter defined) in accordance with this
Article IV; provided that the Fund's board also has approved the agreement
between the Custodian and the Foreign Custody Manager specifying the Foreign
Custody Manager's duties ("Delegation Agreement"). For purposes of this
Agreement, all Domestic Subcustodians, Special Subcustodians, Foreign
Sub-Subcustodians and Interim Sub-Subcustodians shall be referred to
collectively as "Subcustodians".
Section 4.01. Domestic Subcustodians. The Custodian may, at any time and
from time to time, appoint any bank as defined in Section 2(a)(5) of the 1940
Act or any trust company or other entity any of which meet requirements of a
custodian under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act as agent for the Custodian on behalf of the Fund as a
subcustodian for purposes of holding cash, securities and other Assets of the
Fund and performing other functions of the Custodian within the United States (a
"Domestic Subcustodian"); provided, that, the Custodian shall notify the Fund in
writing of the identity and qualifications of any proposed Domestic Subcustodian
at least sixty (60) days prior to the desired appointment of such Domestic
Subcustodian, and the Fund will notify the Custodian, in writing signed by two
or more Authorized Persons, of approval or disapproval of the appointment of the
proposed Domestic Subcustodian; and provided, further, that the Custodian may
not appoint any such Domestic Subcustodian without such prior written approval
of the Fund by such Authorized Persons. Each such duly approved Domestic
Subcustodian and the countries where, Foreign Sub-Subcustodians and the
securities depositories and clearing agencies through which they may hold
securities and other Assets of the Fund shall be as agreed upon
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by the parties hereto in writing, from time to time, in accordance with the
provisions of Section 9.04 hereof (the "Subcustodian List").
Section 4.02. Foreign Sub-Subcustodians and Interim Sub-Subcustodians.
(a) Foreign Sub-Subcustodians. A Domestic Subcustodian which is an
Approved Foreign Custody Manager, or the Domestic Subcustodian, may appoint any
(1)(a) "Qualified Foreign Bank" (as such term is defined in Rule 17f-5) meeting
the requirements of an "Eligible Foreign Custodian" (as such term is defined in
Rule 17f-5) or by SEC order exempt therefrom; (b) majority-owned direct or
indirect subsidiary of a "U.S. bank" (as such term is defined in Rule 17f-5) or
bank holding company meeting the requirements of an Eligible Foreign Custodian
or exempt by SEC order therefrom; or (c) any bank (as such term is defined in
Section 2(a)(5) of the 1940 Act) meeting the requirements of a custodian under
Section 17(f) of the 1940 Act and the rules and regulations thereunder (each a
"Foreign Sub-Subcustodian") or (2) any "Securities Depository" (as such term is
defined in Rule 17f-5) or clearing agency meeting the requirements of an
Eligible Foreign Custodian or exempt by SEC order therefrom ("Securities
Depositories and Clearing Agencies"), provided that the Foreign Custody
Manager's appointments of such Eligible Foreign Custodians shall at all times be
governed by the Delegation Agreement, except that the Fund's investment adviser,
Waddell & Reed Investment Management Company, shall be responsible for the
appointment of a compulsory depository, as applicable.
(b) Interim Sub-Subcustodians. Notwithstanding the foregoing, in the event
that the Fund shall invest in a security or other Asset to be held in a country
in which the Foreign Custody Manager has not appointed an Eligible Foreign
Custodian, the Custodian shall, or shall cause the Domestic Subcustodian to,
promptly notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian shall agree in writing of the unavailability of
an approved Foreign Sub-Subcustodian in such country; and upon the receipt of
Special Instructions, the Custodian shall, or shall cause the Domestic
Subcustodian to, appoint or approve any Person (as hereinafter defined)
designated by the Fund in such Special Instructions, to hold such security or
other Asset. (Any Person appointed or approved as a sub-subcustodian pursuant to
this Section 4.02(b) is hereinafter referred to as an "Interim
Sub-Subcustodian.")
Section 4.03. Special Subcustodians. Upon receipt of Special Instructions,
the Custodian shall, on behalf of the Fund, appoint one or more banks, trust
companies or other entities designated in such Special Instructions to act as a
subcustodian for the purpose of (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities, (ii) providing
depository and clearing agency services with respect to certain variable rate
demand note securities; and (iii) effecting any other transactions designated by
the Fund in Special Instructions. (Each such designated subcustodian is
hereinafter referred to as a "Special Subcustodian.") Each such duly appointed
Special Subcustodian shall be listed on the Subcustodian List. In connection
with the appointment of any Special Subcustodian, the Custodian shall enter into
a subcustodian agreement with the Special Subcustodian in form and substance
approved by the Fund, provided that such agreement shall in all events comply
with the provisions of the 1940 Act and the rules and regulations thereunder and
the terms and provisions of this Agreement. The Custodian shall not amend any
subcustodian agreement entered into with a Special Subcustodian, or agree to
change or permit any changes thereunder, or waive any rights under such
agreement, except upon prior approval pursuant to Special Instructions.
Section 4.04. Termination of a Subcustodian. The Custodian shall (i) cause
each Domestic Subcustodian to, and (ii) use its best efforts to cause each
Interim Sub-Subcustodian and Special Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Domestic Subcustodian and Special
Subcustodian or between the Domestic Subcustodian and an Interim
Sub-Subcustodian. In the event that the Custodian is unable to cause such
subcustodian or sub-subcustodian to fully perform its obligations thereunder,
the Custodian shall promptly
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notify the Fund in writing and forthwith, upon the receipt of Special
Instructions, terminate or cause the termination of such Subcustodian or
Sub-Subcustodian with respect to the Fund and, if necessary or desirable,
appoint or cause the appointment of a replacement Subcustodian or
Sub-Subcustodian in accordance with the provisions of this Article IV. In
addition to the foregoing, the Custodian (A) may, at any time in its discretion,
upon written notification to the Fund, terminate any Domestic Subcustodian which
is not an approved Foreign Custody Manager, and (B) shall, upon receipt of
Special Instructions, terminate any Special Subcustodian or Domestic
Subcustodian which is an Approved Foreign Custody Manager with respect to the
Fund, in accordance with the termination provisions under the applicable
subcustodian agreement, and (C) shall, upon receipt of Special Instructions,
cause the Domestic Subcustodian to terminate any Foreign Sub-Subcustodian or
Interim Sub-Subcustodian as to its use of such entities with respect to the
Fund, in accordance with the termination provisions under the applicable
sub-subcustodian agreement.
Section 4.05. Certification Regarding Foreign Sub-Subcustodians. Upon
request of the Fund, the Custodian shall deliver, or cause any Domestic
Subcustodian that has been approved as a Foreign Custody Manager to deliver, to
the Fund a certificate stating: (i) the identity of each Foreign
Sub-Subcustodian then acting on behalf of the Custodian; (ii) the countries in
which and the Securities Depositories and Clearing Agents through which each
such Foreign Sub-Subcustodian is then holding cash, securities and other Assets
of the Fund; and (iii) such other information as may be requested by the Fund to
ensure compliance with rules and regulations under the 1940 Act.
ARTICLE V
STANDARD OF CARE: INDEMNIFICATION
Section 5.01. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise reasonable care
and diligence in carrying out all of its duties and obligations under this
Agreement, and shall be liable to the Fund for all loss, damage and expense
suffered or incurred by the Fund resulting from the failure of the Custodian to
exercise such reasonable care and diligence.
(b) Actions Prohibited by Applicable Law, Etc. In no event shall the
Custodian incur liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities Depository or Clearing Agency
utilized by any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement provides
shall be performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United States of
America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction (and the Custodian
nor any other Person shall not be obligated to take any action contrary
thereto); (ii) any act of God or war or other similar circumstance beyond the
control of the Custodian unless in each case, such delay or nonperformance is
caused by the negligence, misfeasance or misconduct of the Custodian; or (iii)
any "Sovereign Risk", which for the purpose of this Agreement shall mean
nationalization, expropriation, devaluation, revaluation, confiscation, seizure,
cancellation, destruction or similar action by any governmental authority, de
facto or de jure, or enactment, promulgation, imposition or enforcement by any
such governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting the Fund's property; or acts of war,
terrorism, insurrection or revolution, civil commotion, nuclear fission or
fusion or radioactivity.
(c) Mitigation by Custodian. Upon the occurrence of any event which causes
or may cause any loss, damage or expense to the Fund, (i) the Custodian shall,
(ii) the Custodian shall cause any applicable Domestic
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Subcustodian or Foreign Sub-Subcustodian to, and (iii) the Custodian shall use
its best efforts to cause any applicable Interim Sub-Subcustodian or Special
Subcustodian to, use all commercially reasonable efforts and take all reasonable
steps under the circumstances to mitigate the effects of such event and to avoid
continuing harm to the Fund.
(d) Advice of Counsel. The Custodian shall be without liability for any
action reasonably taken or omitted in good faith pursuant to the written advise
of (i) counsel for the Fund, or (ii) at the expense of the Custodian, such other
counsel as the Fund and the Custodian may agree upon in writing; provided,
however, with respect to the performance of any action or omission of any action
upon such advice, the Custodian shall be required to conform to the standard of
care set forth in Section 5.01 (a).
(e) Expenses of the Fund. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all expenses
incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim; provided however, that the Fund has
recovered from the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no liability in
respect of any loss, damage or expense suffered by the Fund, insofar as such
loss, damage or expense arises from the performance of the Custodian in reliance
upon records that were maintained for the Fund by entities other than the
Custodian prior to the Custodian's employment hereunder which the Custodian has
no reason to believe are inaccurate or incomplete after reasonable inquiry.
Section 5.02. Liability of the Custodian for Actions of Other Persons.
(a) Domestic Subcustodian and Foreign Sub-Subcustodian. The Custodian
shall be liable for the actions or omissions of any Domestic Subcustodian or
Foreign Sub-Subcustodian (excluding any Securities Depository or Clearing Agency
appointed by them) to the same extent as if such actions or omissions were
performed by the Custodian itself. In the event of any loss, damage or expense
suffered or incurred by the Fund caused by or resulting from the actions or
omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian for which the
Custodian would otherwise be liable, the Custodian shall promptly reimburse the
Fund in the amount of any such loss, damage or expense.
(b) Special Subcustodians, Interim Sub-Subcustodians, Security Systems,
Securities Depositories and Clearing Agencies. The Custodian shall not be liable
to the Fund for any loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of a Special Subcustodian, Interim
Sub-Subcustodian, Securities System, Securities Depository or Clearing Agency
unless such loss, damage or expense is caused by, or results from, the
negligence, misfeasance or misconduct of the Custodian; provided, however, in
the event of any such loss, damage or expense, the Custodian shall take all
reasonable steps to enforce such rights as it may have against such Special
Subcustodian, Interim Sub-Subcustodian, Security System, Securities Depository
or Clearing Agency to protect the interest of the Fund.
(c) Reimbursement of Expenses. The Fund agrees to reimburse the Custodian
for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under Section 5.01(c) as it
relates to Interim Sub-Subcustodians and Special Subcustodians and 5.02(b);
provided however, that such reimbursement shall not apply to expenses occasioned
by or resulting from the negligence, misfeasance or misconduct of the Custodian.
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Section 5.03. Indemnification by Fund.
(a) Indemnification Obligations of Fund. Subject to the limitations set
forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Custodian or its nominee
caused by or arising from actions taken by the Custodian, its employees or
agents in the performance of its duties and obligations under this Agreement;
provided, however, that such indemnity shall not apply to loss, damage and
expense occasioned by or resulting from the negligence, misfeasance or
misconduct of the Custodian or its nominee. In addition, the Fund agrees to
indemnify any Person against liability incurred by reason of taxes assessed to
such Person resulting from the fact that securities and other property of the
Fund are registered in the name of such Person in accordance with the provisions
of this Agreement; provided, however, that in no event shall such
indemnification be applicable to income, franchise or similar taxes which may be
imposed or assessed against any Person. It is also understood that the Fund
agrees to indemnify and hold harmless the Custodian and its nominee for any loss
arising from a foreign currency transaction or contract, where the loss results
from a Sovereign Risk (defined in Section 5.01(b)) or where any Person
maintaining securities, currencies, deposits or other Assets of the Fund in
connection with any such transactions has exercised reasonable care maintaining
such property or in connection with any such transaction involving such Assets.
A "Sovereign Risk" shall mean nationalization, expropriation, devaluation,
revaluation, confiscation, seizure, cancellation, destruction or similar action
by any governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting the
Fund's property; or acts of war, terrorism, insurrection or revolution.
(b) Notice of Litigation. Right to Prosecute, Etc. The Fund shall not be
liable for indemnification under this Section 5.03 unless a Person shall have
promptly notified the Fund in writing of the commencement of any litigation or
proceeding brought against the Custodian or other Person in respect of which
indemnity may be sought under this Section 5.03. With respect to claims in such
litigation or proceedings for which indemnity by the Fund may be sought and
subject to applicable law and the ruling of any court of competent jurisdiction,
the Fund shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Fund may be subject to an indemnification obligation;
provided, however, a Person shall be entitled to participate in (but not
control) at its own cost and expense, the defense of any such litigation or
proceeding if the Fund has not acknowledged in writing it obligation to
indemnify the Person with respect to such litigation or proceeding. If the Fund
is not permitted to participate or control such litigation or proceeding under
applicable law or by a ruling of a court of competent jurisdiction, or if the
Fund chooses not to so participate, the Custodian or other Person shall not
consent to the entry of any judgment or enter into any settlement in any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment, and without the Fund's prior written consent which
consent shall not be unreasonably withheld or delayed. All Persons shall submit
written evidence to the Fund with respect to any cost or expense for which they
are seeking indemnification in such form and detail as the Fund may reasonably
request.
Section 5.04. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its duty
generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund and the Fund agrees to indemnify the Custodian and its
nominees, for any loss, damage or expense suffered or incurred by the Custodian
and its nominees arising out of any violation of any investment or other
limitation to which the Fund is subject except for violations of which the
Custodian has actual knowledge. For purposes of this Section 5.04 the term
"actual knowledge" shall mean knowledge gained by the Custodian by means other
than from any prospectus published by the Fund or contained in any filing by the
Fund with the SEC.
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Section 5.05. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Fund by such Subcustodian, Securities System or other Person, which
the Custodian may have as a consequence of any such loss, damage or expense, if
and to the extent that the Fund has not been made whole for any such loss,
expense or damage. If the Custodian makes the Fund whole for any such loss,
expense or damage, the Custodian shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Fund's election to enforce any rights of the Custodian under this Section 5.05,
the Fund shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Custodian in respect of the loss, damage or
expense incurred by the Fund; provided that, so long as the Fund has
acknowledged in writing its obligation to indemnify the Custodian under Section
5.03 hereof with respect to such claim, the Fund shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Fund without the Custodian's consent and
provided further, that if the Fund has not made an acknowledgement of its
obligation to indemnify, the Fund shall not settle, compromise or terminate any
such action or proceeding without the written consent of the Custodian, which
consent shall not be unreasonably withheld or delayed. The Custodian agrees to
cooperate with the Fund and take all actions reasonably requested by the Fund in
connection with the Fund's enforcement of any rights of the Custodian. Nothing
contained in this Section 5.05 shall be construed as an obligation of the Fund
to enforce the Custodian's rights. The Fund agrees to reimburse the Custodian
for out-of-pocket expenses incurred by it in connection with the fulfillment of
its obligations under this Section 5.05; provided, however, that such
reimbursement shall not apply to expenses occasioned by or resulting from the
negligence, misfeasance or misconduct of the Custodian.
Section 5.06. Indemnification by Custodian.
(a) Indemnification Obligations of Custodian. Subject to the limitations
set forth in this Agreement and in addition to the reimbursement obligations
provided in Section 5.02(a), the Custodian agrees to indemnify and hold harmless
the Fund and its nominees from all loss, damage and expense (including
reasonable attorneys' fees) suffered or incurred by the Fund or its nominee
caused by or arising from the failure of the Custodian, its nominee, employees
or agents to comply with the terms or conditions of this Agreement or arising
out of the negligence, misfeasance or misconduct of the Custodian or its
nominee.
(b) Notice of Litigation, Right to Prosecute, Etc. The Custodian shall not
be liable for indemnification under this Section 5.06 unless the Fund shall have
promptly notified the Custodian in writing of the commencement of any litigation
or proceeding brought against the Fund in respect of which indemnity may be
sought under this Section 5.06. With respect to claims in such litigation or
proceedings for which indemnity by the Custodian may be sought and subject to
applicable law and the ruling of any court of competent jurisdiction, the
Custodian shall be entitled to participate in any such litigation or proceeding
with counsel of its choice at its own expense in respect of that portion of the
litigation for which the Custodian may be subject to an indemnification
obligation; provided, however, the Fund shall be entitled to participate in (but
not control) at its own cost and expense, the defense of any such litigation or
proceeding if the Custodian has not acknowledged in writing its obligation to
indemnify the Fund with respect to such litigation or proceeding. If the
Custodian is not permitted to participate or control such litigation or
proceeding under applicable law or by a ruling of a court of competent
jurisdiction, or if the Custodian chooses not to so participate, the Fund shall
not consent to the entry of any judgement or enter into any settlement in any
such litigation or proceeding without providing the Custodian with adequate
notice of any such settlement or judgement, and without the Custodian's prior
written consent which consent shall not be unreasonably withheld or delayed. The
Fund shall submit written
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evidence to the Custodian with respect to any cost or expense for which it is
seeking indemnification in such form and detail as the Custodian may reasonably
request.
Section 5.07. Custodian's Right to Proceed. Notwithstanding anything to
the contrary contained herein, the Custodian shall have, at its election upon
reasonable notice to the Fund, the right to enforce, to the extent permitted by
any applicable agreement and applicable law, the Fund's rights against any
Subcustodian, Securities System or other Person for loss, damage or expense
caused the Custodian by such Subcustodian, Securities System or other Person,
which the Fund may have as a consequence of any such loss, damage or expense, if
and to the extent that the Custodian has not been made whole for any such loss,
expense or damage. If the Fund makes the Custodian whole for any such loss,
expense or damage, the Fund shall retain the ability to enforce its rights
directly against such Subcustodian, Securities System or other Person. Upon the
Custodian's election to enforce any rights of the Fund under this Section 5.07,
the Custodian shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Fund in respect of the loss, damage and expense
incurred by the Custodian; provided that, so long as the Custodian has
acknowledged in writing its obligation to indemnify the Fund under Section 5.06
hereof with respect to such claim, the Custodian shall retain the right to
settle, compromise and/or terminate any action or proceeding in respect of the
loss, damage or expense incurred by the Custodian without the Fund's consent and
provided further, that if the Custodian has not made an acknowledgement of its
obligation to indemnify, the Custodian shall not settle, compromise or terminate
any such action or proceeding without the written consent of the Fund, which
consent shall not be unreasonably withheld or delayed. The Fund agrees to
cooperate with the Custodian and take all actions reasonably requested by the
Custodian in connection with the Custodian's enforcement of any rights of the
Fund. Nothing contained in this Section 5.07 shall be construed as an obligation
of the Custodian to enforce the Fund's rights. The Custodian agrees to reimburse
the Fund for out-of-pocket expenses incurred by it in connection with the
fulfillment of its obligations under this Section 5.07; provided, however, that
such reimbursement shall not apply to expenses occasioned by or resulting from
the negligence, misfeasance or misconduct of the Fund.
ARTICLE VI
COMPENSATION
For the initial three year period beginning on the effective date of this
Agreement, the Fund shall compensate the Custodian in the amount and at the
times specified in Appendix "A" attached hereto. Thereafter, the Fund shall
compensate the Custodian in the amount, and at times, as may be agreed upon in
writing, from time to time, by the Custodian and the Fund.
ARTICLE VII
TERMINATION
This Agreement shall continue in full force and effect until the first to
occur of: (a) termination by the Custodian by an instrument in writing delivered
or mailed (certified mail, return receipt requested) to the Fund, such
termination to take effect not sooner than ninety (90) days after the date of
such delivery or receipt; (b) termination by the Fund by an instrument in
writing delivered or mailed (certified mail, return receipt requested) to the
Custodian, such termination to take effect not sooner than ninety (90) days
after the date of such delivery or receipt; or (c) termination by the Fund by an
instrument in writing delivered to the Custodian, based upon the Fund's
determination that there is reasonable basis to conclude that the Custodian is
insolvent or that the financial condition of the Custodian is deteriorating in
any material respect, in which case termination shall take effect upon the
Custodian's receipt of such notice or at such later time as the Fund shall
designate. In the event of termination pursuant to this Article VII, the Fund
shall make payment of all accrued fees and unreimbursed expenses within a
reasonable time following termination and delivery of a statement to the Fund
setting forth such fees and expenses. The Fund shall identify in any notice of
termination a successor custodian to which the
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cash, securities and other Assets of the Fund shall, upon termination of this
Agreement, be delivered. In the event that securities and other Assets remain in
the possession of the Custodian after the date of termination hereof owing to
failure of the Fund to appoint a successor custodian, the Custodian shall be
entitled to compensation for its services in accordance with the fee schedule
most recently in effect, for such period as the Custodian retains possession of
such securities and other Assets, and the provisions of this Agreement relating
to the duties and obligations of the Custodian and the Fund shall remain in full
force and effect for such period. In the event of the appointment of a successor
custodian, the cash, securities and other Assets owned by the Fund and held by
the Custodian, any Subcustodian or nominee shall be delivered, at the
terminating party's expense, to the successor custodian; and the Custodian
agrees to cooperate with the Fund in the execution of documents and performance
of other actions necessary or desirable in order to substitute the successor
custodian for the Custodian under this Agreement.
ARTICLE VIII
DEFINED TERMS
The following terms are defined in the following sections:
Term Section
- ---- -------
Account 2.22(A)
ADRs 2.06
Approved Foreign Custody Manager Article IV
Assets Article I
Authorized Person 3.02
Banking Institution 2.12
Bank Accounts 2.21
Clearing Agency 4.02(a)
Delegation Agreement Article IV
Distribution Account 2.16
Domestic Subcustodian 4.01
Eligible Foreign Custodian 4.02(a)
Foreign Sub-Subcustodian 4.02(a)
Institutional Client 2.03
Interest Bearing Deposit 2.12
Interim Sub-Subcustodian 4.02(b)
OCC 2.09
Overdraft 2.28
Overdraft Notice 2.28
Person 5.01(b)
Procedural Agreement 2.10
Proper Instruction 3.01(a)
SEC 2.22
Securities Depositories and Clearing Agencies 4.02(a)
Securities System 2.22
Shares 2.16
Sovereign Risk 5.03(a)
Special Instruction 3.01(b)
Special Subcustodian 4.03
Subcustodian Article IV
1940 Act Preamble
21
<PAGE>
ARTICLE IX
MISCELLANEOUS
Section 9.01. Execution of Documents, Etc.
(a) Actions by the Fund. Upon request, the Fund shall execute and deliver
to the Custodian such proxies, powers of attorney or other instruments as may be
reasonable and necessary or desirable in connection with the performance by the
Custodian or any Subcustodian of their respective obligations under this
Agreement or any applicable subcustodian agreement, provided that the exercise
by the Custodian or any Subcustodian of any such rights shall in all events be
in compliance with the terms of this Agreement.
(b) Actions by Custodian. Upon receipt of Proper Instructions, the
Custodian shall execute and deliver to the Fund or to such other parties as the
Fund may designate in such Proper Instructions, all such documents, instruments
or agreements as may be reasonable and necessary or desirable in order to
effectuate any of the transactions contemplated hereby and designated therein.
Section 9.02. Representations and Warranties.
(a) Representations and Warranties of the Fund. The Fund hereby represents
and warrants that each of the following shall be true, correct and complete as
of the date of execution of this Agreement and, unless notice to the contrary is
provided by the Fund to the Custodian, at all times during the term of this
Agreement: (i) the Fund is duly organized under the laws of its jurisdiction of
organization and is registered as an open-end management investment company
under the 1940 Act or is a series of portfolio of such entity; and (ii) the
execution, delivery and performance by the Fund of this Agreement are (w) within
its power, (x) have been duly authorized by all necessary action, and (y) will
not (A) contribute to or result in a breach of or default under or conflict with
any existing law, order, regulation or ruling of any governmental or regulatory
agency or authority, or (B) violate any provision of the Fund's corporate
charter or other organizational document, or bylaws, or any amendment thereof or
any provision of its most recent Prospectus or Statement of Additional
Information.
(b) Representations and Warranties of the Custodian. The Custodian hereby
represents and warrants that each of the following shall be true, correct and
complete as of the date of execution of this Agreement and, unless notice to the
contrary is provided by the Custodian to the Fund, at all times during the term
of this Agreement: (i) the Custodian is duly organized under the laws of its
jurisdiction of organization and qualifies to serve as a custodian to open-end
management investment companies under the provisions of the 1940 Act; and (ii)
the execution, delivery and performance by the Custodian of this Agreement are
(w) within its power (x) have been duly authorized by all necessary action, and
(y) will not (A) contribute to or result in a breach of or default under or
conflict with any existing law, order, regulation or ruling of any governmental
or regulatory agency or authority, or (B) violate any provision of the
Custodian's corporate charter, or other organizational document, or bylaws, or
any amendment thereof. The Custodian acknowledges receipt of a copy of the
Fund's most recent Prospectus and Statement of Additional Information.
Section 9.03. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and accordingly, supersedes as of the effective date of this
Agreement any custodian agreement heretofore in effect between the Fund and the
Custodian.
Section 9.04. Waivers and Amendments. No provisions of this Agreement may
be waived, amended or deleted except by a statement in writing signed by the
party against which enforcement of such waiver, amendment or deletion is sought.
22
<PAGE>
Section 9.05. Interpretation. In connection with the operation of this
Agreement, the Custodian and the Fund may agree in writing from time to time on
such provisions interpretative of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general tenor of
this Agreement. No interpretative or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
Section 9.06. Captions. Headings contained in this Agreement, which are
included as convenient references only, shall have no bearing upon the
interpretation of the terms of the Agreement or the obligations of the parties
hereto.
Section 9.07. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Missouri, in each case
without giving effect to principles of conflicts of law.
Section 9.08. Notices. Except in the case of Proper Instructions or
Special Instructions, and as otherwise provided in this Agreement, notices and
other writings contemplated by this Agreement shall be delivered by hand or by
facsimile transmission or as otherwise agreed to by the Fund and the Custodian
in writing (provided that in the case of delivery by facsimile transmission,
notice shall also be mailed postage prepaid) to the parties at the following
addresses:
(a) If to the Fund:
United Asset Strategy Fund, Inc.
6300 Lamar Avenue
Overland Park, Kansas 66202
Attn: Fund Treasurer
Telephone: 913-236-2000
Telefax: 913-236-1595
(b) If to the Custodian:
UMB Bank, n.a.
928 Grand Avenue, 10th Floor
Kansas City, Missouri 64106
Attn: Securities Administration
Telephone: 816-860-7764
Telefax: 816-860-4869
or such other address as either party may have designated in writing to the
other party hereto.
Section 9.09. Assignment. This Agreement shall be binding on and shall
inure to the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that, subject to the provisions of Section 7.01
hereof, neither party hereto may assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party.
Section 9.10. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties.
23
<PAGE>
Section 9.11. Confidentiality; Survival of Obligations. The parties hereto
agree that each shall treat confidentially the terms and conditions of this
Agreement and all information provided by each party to the other regarding its
business and operations. All confidential information provided by a party hereto
shall be used by any other party hereto solely for the purpose of rendering
services pursuant to this Agreement and, except as may be required in carrying
out this Agreement, shall not be disclosed to any third party without the prior
consent of such providing party. The foregoing shall not be applicable to any
information that is publicly available when provided or thereafter becomes
publicly available other than through a breach of this Agreement, or that is
required to be disclosed by any bank examiner of the Custodian or any
Subcustodians, any auditor or examiner of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation. The
provisions of this Section 9.11 and Section 9.01, 9.07, Section 2.28, Section
3.04, Section 4.05, Section 7.01, Article V and Article VI hereof and any other
rights or obligations incurred or accrued by any party hereto prior to
termination of this Agreement shall survive any termination of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
UNITED ASSET STRATEGY FUND, INC. UMB BANK, n.a.
By: /s/Robert L. Hechler By: /s/Ralph Santoro
-------------------- ----------------
Name: Robert L. Hechler Name: Ralph Santoro
Title: President Title: Senior Vice President
24
<PAGE>
APPENDIX "A"
TO
CUSTODIAN AGREEMENT
BETWEEN
UNITED ASSET STRATEGY FUND, INC.
AND
UMB BANK, N.A.
Dated as of May 13, 1998
The Fund shall be responsible for providing the Custodian the net asset
levels the Custodian requires to calculate the net asset portion of the
Custodian's fees. Such determinations shall be based upon the average monthly
assets of each Fund and shall specify the level of domestic assets and foreign
assets by country, as appropriate. Domestic assets shall include all assets held
in the United States including but not limited to American Depositary Receipts.
Foreign assets shall include all assets held outside the United States including
but not limited to securities which clear through Euroclear or CEDEL. The
Custodian will provide as soon as practicable after receiving the information
provided by the Fund with respect to the net asset level numbers, a bill for the
Fund, including such reasonable detail in support of each bill as may be
reasonably requested by the Fund. As used in this Appendix "A", "United Funds"
shall mean all funds in the United Group of Funds, TMK/United Funds, Inc. and
Waddell & Reed Funds, Inc.
DOMESTIC CUSTODY FEE SCHEDULE
A. Annual Fee (combining all domestic assets):
An annual fee to be computed as of month end and payable each month of the
Fund's fiscal year (after receipt of the bill issued to each Fund based
upon its portion of domestic assets), at the annual rate of:
.00005 for the first $5,000,000,000 of the net assets of all the United
Funds, plus .00004 for any net assets exceeding $5,000,000,000 of the
assets of all the United Funds.
B. Portfolio Transaction Fees (billed to each Fund):
(a) For each portfolio transaction* processed through a
Depository (DTC, PTC or Fed) $ 7.00
(b) For each portfolio transaction* processed through
the New York office (physical settlement) $20.00
(c) For each futures/option contract written $25.00
(d) For each principal/interest paydown $ 6.00
(e) For each interfund note transaction $ 5.00
* A portfolio transaction includes a receive, delivery, maturity, free
security movement and corporate action.
C. Earnings Credits:
Positive earnings credits will be applied on all collected custody and
cash management balances of each Fund at the Custodian to earn the
Custodian's daily repurchase agreement rate less reserve requirements and
FDIC premiums. Negative earnings credits will be charged on all
uncollected custody and cash management balances of each Fund at the
Custodian's prime rate less 150 basis points on each day a negative
balance occurs. Positive and/or negative earnings credits will be
monitored daily for each Fund and the net positive or negative amount for
each Fund will be included in the monthly statements. Excess positive
credits for each Fund will be carried forward indefinitely.
D. Out-of-Pocket Expenses (passed directly from Special Subcustodians):
Includes all charges by any Special Subcustodian to the Custodian as
Custodian for any Assets held at the Special Subcustodian.
25
<PAGE>
GLOBAL CUSTODY FEE SCHEDULE
A. Global Fee Schedule:
Market: Annual Asset Fees Transaction Fees
------- ----------------- ----------------
Argentina .0037 $85
Australia .0009 $85
Austria .0011 $70
Belgium .0011 $60
Brazil .0035 $60
Canada .0008 $35
Chile .0045 $85
China .0045 $75
Czech Republic .0055 $135
Denmark .0011 $60
Finland .0011 $85
France .0011 $85
Germany .0008 $60
Hong Kong .0009 $85
Hungary .0065 $210
India .0055 $135
Indonesia .0009 $85
Ireland .0011 $60
Israel .0035 $160
Italy .0011 $70
Japan .0008 $40
Korea .0035 $60
Malaysia .0009 $85
Mexico .0016 $60
Netherlands .0011 $35
New Zealand .0009 $85
Norway .0011 $85
Peru .0070 $160
Phillippines .0035 $95
Poland .0060 $110
Portugal .0035 $145
Singapore .0009 $85
Spain .0009 $85
Sweden .0011 $70
Switzerland .0009 $85
Taiwan .0035 $85
Thailand .0009 $85
Turkey .0045 $110
U.K. .0011 $60
Segregated Account Fee: $175 monthly charge per fund holding foreign
assets.
Note: Fee Schedule eliminates sub-custodian asset and transaction-based
out-of-pocket expenses. Other sub-custodian out-of-pocket expenses (i.e.
Scrip fees, stamp duties, certificate fees, etc.)
B. Out-of-Pocket Expenses (passed directly from Brown Brothers Harriman &
Co.):
Includes, but is not limited to telex, legal, telephones, postage, and
direct expenses including but not limited to tax reclaim, customized
systems programming, certificate fees, duties, and registration fees.
C. Short-term Dollar Denominated Global Assets
Eurodollar CDs, Time Deposits:
(1) An annual fee to be computed as of month end and payable each month
of the Fund's fiscal year (after receipt of the bill issued to the
Fund based upon its portion of short-term dollar denominated
assets), at the annual rate of:
26
<PAGE>
.0004 on all short-term dollar denominated assets of the United
Funds.
(2) Portfolio Transaction Fees:
First Chicago Clearing Centre-Trades with Members $136.00
First Chicago Clearing Centre-Trades with Non-members $153.00
First Chicago Clearing Centre-Income Collection $ 64.00
D. Euroclear Eligible Issues:
(1) An annual fee to be computed as of month end and payable each month
of the Fund's fiscal year (after receipt of the bill issued to the
Fund based upon its portion of Euroclear issues), at the annual rate
of:
2.5 basis points on all United Funds Euroclear assets held in
account at UMB Bank, n.a.
(2) Portfolio Transaction Fees:
Euroclear $60.00
27
<PAGE>
SUBCUSTODIAN LIST
PURSUANT TO CUSTODIAN AGREEMENT
BETWEEN
UNITED ASSET STRATEGY FUND, INC.
AND
UMB BANK, n.a.
Dated as of August 18, 1999
This Subcustodian List relates to the Custodian Agreements between UMB
Bank, n.a. and each of the following funds dated the date specified by the
fund's name, as subsequently amended and restated:
Fund Date
---- ----
United Asset Strategy Fund, Inc. February 22, 1995
United Cash Management, Inc. November 26, 1991
United Continental Income Fund, Inc. November 26, 1991
United Gold & Government Fund, Inc. November 26, 1991
United Government Securities Fund, Inc. November 26, 1991
United High Income Fund, Inc. November 26, 1991
United High Income Fund II, Inc. November 26, 1991
United International Growth Fund, Inc. November 26, 1991
United Municipal Bond Fund, Inc. November 26, 1991
United Municipal High Income Fund, Inc. November 26, 1991
United New Concepts Fund, Inc. November 26, 1991
United Retirement Shares, Inc. November 26, 1991
United Vanguard Fund, Inc. November 26, 1991
United Funds, Inc.
United Bond Fund November 26, 1991
United Income Fund November 26, 1991
United Accumulative Fund November 26, 1991
United Science and Technology Fund November 26, 1991
Target/United Funds, Inc.*
High Income Portfolio November 26, 1991
Money Market Portfolio November 26, 1991
Bond Portfolio November 26, 1991
Income Portfolio November 26, 1991
Growth Portfolio November 26, 1991
Balanced Portfolio April 29, 1994
International Portfolio April 29, 1994
Limited-Term Bond Portfolio April 29, 1994
Small Cap Portfolio April 29, 1994
Asset Strategy Portfolio May 1, 1995
Science and Technology Portfolio April 4, 1997
Waddell & Reed Funds, Inc.
Total Return Fund April 24, 1992
Municipal Bond Fund April 24, 1992
Limited-Term Bond Fund April 24, 1992
International Growth Fund April 24, 1992
Growth Fund April 24, 1992
Asset Strategy Fund April 20, 1995
High Income Fund July 31, 1997
Science and Technology Fund July 31, 1997
United Small Cap Fund, Inc. August 18, 1999
*Formerly, TMK/United Funds, Inc.
The following is a list of Domestic Subcustodians, Foreign Subcustodian and
Special Subcustodians under the Custodian Agreement as amended:
28
<PAGE>
A. Domestic Custodians:
Brown Brothers Harriman & Co.
United Missouri Trust Company of New York
B. Foreign Sub-Custodians
<TABLE>
<CAPTION>
Country Sub-Custodian Depository
<S> <C> <C>
Argentina Citibank, n.a. CDV; CRYL
Australia National Australia Bank Ltd. AUSTRACLEAR, RITs
Austria Creditanstalt Bankverein KONTROLLBANK (OEKB)
Belgium Banque Bruxelles Lambert CIK, BNB
Brazil First National Bank of Boston, BOVESPA, CLC
Brazil
Canada Canadian Imperial Bank of Commerce CDS; The Bank of Canada
Chile Citibank, n.a. None
China Standard Chartered Bank SSCCRC; SSCC
Czech Republic Ceskoslovenska Obchodni CNB; SCP
Banka A.S.
Denmark Den Danske Bank VP
Finland Merita Securities Association; Finnish Central
Securities Depository Ltd.
France Banque Indosuez SICOVAM; Banque de France
Germany Deutsche Bank KASSENVEREIN
Hungary Citibank, N.A. KELER Ltd.
Hong Kong HongKong & Shanghai Banking Corp. HongKong Securities Clearing Company
India Citibank, N.A., Mumbai National Securities Depository Limited
Indonesia Citibank, n.a. None
Ireland Allied Irish Banks PLC Gilt Settlement Office
Israel Bank Hapoalim B.M. TASE Clearinghouse Ltd.
Italy Banca Commerciale Italiana MONTE TITOLI, Banca D'Italia
Japan The Bank of Tokyo, Ltd. JASDEC, Bank of Japan
Korea Citibank, n.a. Korean Securities Depository
Corporation (KSD)
Malaysia Hong Kong Bank Malaysia Berhad MCD; Bank Negara Malaysia
Mexico Citibank Mexico, s.a. INDEVAL; Banco De Mexico
Netherlands ABN - Amro Bank NECIGER; De Nederlandsche Bank
Norway Christiana Bank VPS
Peru Citibank, n.a. Caja De Valores (CAVAL)
Philippines Citibank, n.a. Phillipines Central Depository, Inc.
Poland Bank Polska Kasa Opieki S.A. NPB
Portugal Banco Espirito Santo E Comercial Interbolsa
De Lisboa
Singapore HongKong & Shanghai Banking Corp. CDP
Spain Banco Santander SCLV; Banco De Espana
Sweden Skandinaviska Enskilda Banken VPC
Switzerland Union Bank of Switzerland SEGA
Taiwan Standard Chartered Bank, Taipei TSCD
Thailand HongKong & Shanghai Banking Corp. Share Depository Center (SDC)
Turkey Citibank, n.a. TvS, Central Bank of Turkey
United Kingdom Midland Securities PLC CMO; CGO; CrestCo
</TABLE>
C. Special Subcustodians:
Republic National Bank of New York
The Bank of New York, n.a.
29
EX-99.B(h)asssafid
EXHIBIT C
<TABLE>
<CAPTION>
Bond or
Name of Bond Policy No. Insurer
<S> <C> <C> <C>
Investment Company 87015199B ICI
Blanket Bond Form Mutual
Insurance
Company
Fidelity $20,400,000
Audit Expense 50,000
On Premises 20,400,000
In Transit 20,400,000
Forgery or Alteration 20,400,000
Securities 20,400,000
Counterfeit Currency 20,400,000
Uncollectible Items of Deposit 25,000
Phone-Initiated Transactions 20,400,000
Total Limit 20,400,000
Directors and Officers/ 87015199D ICI
Errors and Omissions Liability Mutual
Insurance Form Insurance
Total Limit $10,000,000 Company
Blanket Lost Instrument Bond (Mail Loss) 30S100639551 Aetna
Life &
Casualty
Blanket Undertaking Lost Instrument
Waiver of Probate 42SUN339806 Hartford
Casualty
Insurance
</TABLE>
<TABLE>
<S> <C> <C>
Waddell & Reed, Inc. United Group of Funds Division Office Stamp
P.O. Box 29217 APPLICATION
Shawnee Mission, KS
66201-9217 (NON-RETIREMENT PLAN) Trans Code:________________________
Date Transmitted:__________________
</TABLE>
1 ------------------------------------------------------------------------------
I (We) make application for an account to be established as follows:
REGISTRATION TYPE (check one only)
<TABLE>
<S> <C>
[ ] Single Name [ ] Joint Tenants W/ROS [ ] Declaration of Trust Revocable (Attach CUF 0022)
TOD (Transfer On Death) [ ] Yes [ ] No NOT AVAILABLE IN ILLINOIS
[ ] Uniform Gifts (Transfers) To Minors (UGMA/UTMA) [ ] Other:_______________________________________
[ ] Dated Trust Date of Trust_________________
</TABLE>
------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
__________________
REGISTRATION [ ] NEW ACCOUNT or [ ] NEW FUND FOR EXISTING ACCOUNT | |
(must have same ownership): |__________________|
</TABLE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------------
Individual Name (exactly as desired)/Trustee/Custodian (Tax-responsible party)
------------------------------------------------------- ------------------------------
[ ] Social Security # or [ ] Taxpayer Identification # Date of Birth (Month/Day/Year)
--------------------------------------------------------------------------------------
Joint Name (if any, exactly as desired)/Co-Trustee/Minor (for UGMA/UTMA)
------------------------------------------------------- ------------------------------
[ ] Social Security # or [ ] Taxpayer Identification # Date of Birth (Month/Day/Year)
</TABLE>
-----------------------------------------------------------------------------
Name of Trust
-----------------------------------------------------------------------------
Mailing Address
-----------------------------------------------------------------------------
City/State/Zip
-----------------------------------------------------------------------------
Telephone (home) Telephone (work) Citizenship (Required in VA)
------------------------------------------------------------------------------
INVESTMENTS Make check payable to Waddell & Reed, Inc.
<TABLE>
<CAPTION>
Monthly Div/C.G. Distr*
Fund Amount AIS (Assumes RR)
(enter code) Enclosed (If Any) RR CC CR
<S> <C> <C> <C> <C> <C> <C>
CLASS OF SHARES ____________
(ONLY ONE) | |
|____________| $_______ $_______ [ ] [ ] [ ]
____________
| |
A [ ] B [ ] C [ ] |____________| $_______ $_______ [ ] [ ] [ ]
____________
| |
IF NOT CHECKED, |____________| $_______ $_______ [ ] [ ] [ ]
ASSUME A ____________
| |
|____________| $_______ $_______ [ ] [ ] [ ]
____________
| |
|____________| $_______ $_______ [ ] [ ] [ ]
Total $_______ Total $_______
</TABLE>
* RR = Reinvest Div/Cap Gain CC = Cash Div/Cap Gain CR = Cash Div/Reinvest
Cap Gain All Dividends/Capital Gains under $5.00 will be Reinvested. See
Section 12 if you wish your distribution to go to another Fund or Account.
<TABLE>
<CAPTION>
FUNDS CODES A B C A B C A B C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income 621 121 321 High Income 628 128 328 Asset Strategy 684 184 384
Science & Technology 622 122 322 Vanguard 629 129 329 Cash Management 750 150 350
Accumulative 623 123 323 New Concepts 630 130 330 Government Securities 753 153 353
Bond 624 124 324 High Income II 634 134 334 Municipal Bond 760 160 360
International Growth 625 125 325 Small Cap 677 177 377 Municipal High Income 762 162 362
Continental Income 627 127 327 Retirement Shares 680 180 380
</TABLE>
------------------------------------------------------------------------------
CLASS A ONLY
This purchase is entitled to a reduced sales load charge for the following
reason:
<TABLE>
<S> <C>
[ ] Letter of Intent To Invest $_____________ LOI Number____________
[ ] Cumulative discount number____________ or Rights of Accumulation With Existing Accounts____________
[ ] Identify Other New Accounts Established At This Time:________________________
</TABLE>
------------------------------------------------------------------------------
2 ------------------------------------------------------------------------------
LETTER OF INTENT (CLASS A SHARES ONLY) I agree to the terms of the Letter of
Intent conditions set forth in the Statement of Additional Information
(including the escrowing of shares). Although I am not obligated to do so, it
is my intention to invest over a 13-month period in shares of one or more
United funds in an aggregate amount at least equal to:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
[ ] $100,000 [ ] $200,000 [ ] $300,00 [ ] $500,00 [ ] $1,000,000 [ ] $2,000,000 See Section 9
</TABLE>
------------------------------------------------------------------------------
CAP1 Page 1 of 6
<PAGE>
3 ------------------------------------------------------------------------------
BENEFICIARY: For TOD (Transfer On Death) Accounts Only
To designate contingent beneficiaries or per stirpes distribution,
use MRP-0972 or MRP-1588
<TABLE>
<CAPTION>
Full Name of Beneficiary Tax Identification Number Date of Birth Relationship Percent
<S> <C> <C> <C> <C>
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
</TABLE>
------------------------------------------------------------------------------
4 ------------------------------------------------------------------------------
EXPEDITED REDEMPTION: For United Cash Management A [ ] B [ ] C [ ]
<TABLE>
<S> <C>
-------------------------------------------------- -------------------------------------------------
Name & Address of Bank/Financial Institution ABA/Routing # of Bank/Financial Institution
-------------------------------------------------- -------------------------------------------------
Street Customer's Bank Account Number
-------------------------------------------------- -------------------------------------------------
City/State/Zip
</TABLE>
On UCM Accounts where expedited redemption is requested, Waddell & Reed, Inc.
is authorized to honor any requests from anyone for redemption of fund shares
as long as the proceeds are transmitted to the identified account. All wires
must be transmitted exactly as registered on the UCM Account.
------------------------------------------------------------------------------
5 ------------------------------------------------------------------------------
CHECK SERVICE (CLASS "A" SHARES ONLY)
(Complete signature card)
[ ] United Government Securities [ ] United Cash Management (UCM)
SIGNATURE CARD FOR UNITED CASH MANAGEMENT/GOVERNMENT SECURITIES CLASS "A"
SHARES ONLY
The payment of funds on the conditions set forth below is authorized by the
persons signing below (the Shareholder).
UMB BANK, N.A. (the Bank) is authorized by the Shareholder to honor any
checks for not less than $250 presented against this account and is directed
to forward said checks to the redemption agent of United Cash Management,
Inc. and United Government Securities, Inc. (the "Mutual Funds") as authority
to pay the checks. Checks will be paid by redeeming a sufficient number of
shares for which share certificates have not been issued in the Shareholder's
account with the Mutual Funds.
Checks will be subject to the Bank's rules and regulations governing such
checks, including the right of the Bank not to honor checks in amounts
exceeding the value of the Shareholder's account with the Mutual Funds at the
time the check is presented for payment.
Shareholder hereby authorizes the Mutual Funds or their redemption agent to
honor redemption requests presented in the above manner by the Bank.
It is further agreed as follows:
1. Shareholder(s) below waive the right to receive the cancelled check(s)
after each check is processed and the underlying shares of the Mutual
Funds have been redeemed.
2. The account may not be used for any purpose other than the presentment,
forwarding and payment of checks relating to an account in the Mutual
Funds.
3. The Bank reserves the right to change, modify or terminate this agreement
at any time upon notification mailed to the address noted on the reverse
side of this card.
BY SIGNING BELOW, THE SIGNATOR(S) SIGNIFIES HIS (THEIR) AGREEMENT TO BE
SUBJECT TO THE RULES AND REGULATIONS OF UMB BANK, N.A. PERTAINING THERETO AND
AS AMENDED FROM TIME TO TIME, AND TO THE CONDITIONS PRINTED ABOVE.
Authorized Signature(s) "A" SHARES ONLY [ ] Check box if more than one
signature required on checks
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
------------------------------------------------------------------------------
Page 2 of 6
<PAGE>
6 ------------------------------------------------------------------------------
Establish NEW Automatic Investment Service
REGISTRATION INFORMATION
------------------------------------------------
Individual Name (exactly as registered)
------------------------------------------------
Joint Name (if any, exactly as registered)
<TABLE>
<CAPTION>
Fund Draft Is To Begin On
(Enter code) (Month/Day/Year) Draft Amount Special Instructions
<S> <C> <C> <C>
___________
| |
|___________| ____________________ $_____________ ______________________________
___________
| |
|___________| ____________________ $_____________ ______________________________
___________
| |
|___________| ____________________ $_____________ ______________________________
___________
| |
|___________| ____________________ $_____________ ______________________________
___________
| |
|___________| ____________________ $_____________ ______________________________
</TABLE>
Authorization to honor checks drawn by Waddell & Reed, Inc.
As a convenience to me, I hereby request and authorize you to pay and charge
to my or our account identified below, debit entries drawn on the account by
Waddell & Reed, Inc. provided there are sufficient funds in the account to
pay the same on presentation. This authorization shall remain in effect until
revoked by me in writing and until you actually receive such notice. I agree
that you shall be fully protected by honoring any such debit entry. I agree
that your rights in respect to any debit entry shall be the same as if it
were a check signed personally by me. I further agree, that if any such debit
entry be dishonored, whether intentionally or inadvertently, you shall be
under no liability whatsoever.
PLEASE COMPLETE THE FOLLOWING IN ITS ENTIRETY.
<TABLE>
<S> <C>
----------------------------------------------------- -------------------------
NAME OF DEPOSITOR (as shown on bank records(s)) Bank Account Number
----------------------------------------------------- See Section 10
BANK NAME
-----------------------------------------------------
BANK ADDRESS
-----------------------------------------------------
CITY/STATE/ZIP
</TABLE>
------------------------------------------------------------------------------
7 ------------------------------------------------------------------------------
Establish NEW Funds Plus Service
<TABLE>
<S> <C> <C> <C>
___________
REGISTRATION INFORMATION [ ] NEW ACCOUNT W/UCM or [ ] EXISTING ACCOUNT W/UCM |___________|
</TABLE>
-----------------------------------------------------
Individual Name (exactly as registered)
-----------------------------------------------------
Joint Name (if any, exactly as registered)
<TABLE>
<CAPTION>
FUNDS PLUS Service
Account(s) to RECEIVE Fund If new, Is To Begin On FUNDS PLUS
FUNDS PLUS Investment (Enter code) mark box (Month/Day/Year) Investment Amount
<S> <C> <C> <C> <C>
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
</TABLE>
------------------------------------------------------------------------------
Page 3 of 6
<PAGE>
8 ------------------------------------------------------------------------------
Establish NEW Flexible Withdrawal Service (See Section 11)
<TABLE>
<CAPTION>
Fund Changes To Be
(See Reverse Effective Beginning Amount
for Codes) (Month) (Year) Indicate dollars, shares or percentage Frequency Make Payable
<S> <C> <C> <C> <C>
____________ _________________ ______________
| | | | 20 | | | |
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] % [ ] monthly [ ] To registered owner(s)
____________ _________________ ______________
| | | | 20 | | | | [ ] quarterly [ ] To Alternate Payee
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] %
____________ _________________ ______________ [ ] semi-annually [ ] To registered owner(s)
| | | | 20 | | | | at alternate address
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] % [ ] annually
____________ _________________ ______________
| | | | 20 | | | | (If left blank,
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] % annual payments
will be assumed)
</TABLE>
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Designate Alternate Payee or Address (for Electronic Deposits of FWS, see
section 10)
Complete this section if the check is TO BE PAYABLE TO AN ALTERNATE PAYEE
(other than as registered) or SENT TO AN ALTERNATE ADDRESS. If sending FWS to
another fund/account please indicate account/fund. Must be same class.
<TABLE>
<CAPTION>
Alternate Payee Alternate Address (check will be payable as registered and sent to the following)
<S> <C>
---------------------------------------------- ----------------------------------------------
Name or institution C/O Name
---------------------------------------------- ----------------------------------------------
Street Street
---------------------------------------------- ----------------------------------------------
City/State/Zip City/State/Zip
---------------------------------------------- ----------------------------------------------
Bank Account Number (if applicable) Bank Account Number (if applicable)
</TABLE>
------------------------------------------------------------------------------
9 ------------------------------------------------------------------------------
LOI TERMS AND CONDITIONS
1. This Agreement does not bind the investor to buy, or Waddell & Reed, Inc.
to sell, any shares.
2. This Agreement can only be terminated before the 13 months has elapsed by
submitting a written request signed by all owners.
3. Any purchase made under this Agreement will be made at the offering price
applicable to a one-time purchase of the amount the investor has checked
on the front of this Agreement as described in the prospectus of the fund
or funds being purchased.
4. If the amount invested during the 13-month period covered by this
Agreement exceeds the required amount and is large enough to qualify for a
sales charge lower than that available under this Agreement, the lower
sales charge will be applied to the amount invested. Upon termination of
this Agreement, a price adjustment will be made to give effect to the
lower sales charge and the amount of the price adjustment will be
reinvested in additional shares of the fund(s) on the date of termination.
5. If the amount invested during the 13-month period covered by this
Agreement is less than the required amount, the sales charge for the
investments reverts back to that outlined in the Fund Prospectus, as if
the Agreement had not been executed. Waddell & Reed, Inc. will subtract
shares equal in value to the amount of the additional sales charge due
from escrowed shares. The investor hereby irrevocably appoints Waddell &
Reed, Inc. or its successors or assigns, as attorney to surrender for
redemption shares in an amount equal to the additional sales charge owed
on the purchases made. This appointment and the authority granted herein
shall be binding on the heirs, legal representatives, successors and
assigns of the investor.
6. While the value of purchases made prior to the acceptance date of this
Agreement will be considered in determining the Intended Investment, the
sales charge imposed on prior purchases will not be retroactively reduced.
7. Shares purchased directly to United Cash Management, Inc. will not be
considered when determining the net asset value of shares presently held
by the investor as of the date of acceptance of this Agreement, nor for
determining the amount invested under this Agreement. However,
non-commissionable shares are considered for there purposes.
------------------------------------------------------------------------------
Page 4 of 6
<PAGE>
10------------------------------------------------------------------------------
BANK ACCOUNT OR CREDIT UNION INFORMATION (optional)
This information will be used for
[ ] Div / Cap gain distributions taken in cash (Sec. 1)
[ ] Systematic investments (Sec. 6)
[ ] Flexible withdrawals (Sec. 8)
<TABLE>
<S> <C> <C>
--------------------------------------- ---------------------------------------
Checking account Bank or credit union's ABA route number Bank or credit union account number
--------------------------------------- ---------------------------------------
Savings account Bank or credit union's ABA route number Bank or credit union account number
</TABLE>
Tape your voided check or deposit slip here
Bank and credit union routing information
For deposits or withdrawals to your checking account, please tape a voided
check so we may get bank or credit union account information.
For deposits or withdrawals to a savings account, please tape a preprinted
deposit slip. (Do not staple the slips.)
------------------------------------------------------------------------------
11------------------------------------------------------------------------------
FLEXIBLE WITHDRAWAL REQUIREMENTS AND CONSIDERATIONS
1. This application directs Waddell & Reed Services Company to redeem the
amounts listed on the 20th day of the indicated month, or if not a
business day, on the preceding business day.
2. Allow five days from the date your instructions are received in the home
office for processing of any changes and/or initiation of a Flexible
Withdrawal Service.
3. The aggregate total investment, or the present net asset value of the
shareholder's United Group of Funds/or W&R Funds combined accounts should
exceed $10,000. You may add to your account by additional investments of
at least $1,000, except in United Cash Management, Inc., which has no
minimum additional investment amount.
4. Minimum withdrawals for dollars or shares are $50 aggregate or a 5 share
minimum per fund.
5. If withdrawals are to be made monthly, 1/12th of the indicated percentage
of the asset value of the shares in the account will be redeemed. If
withdrawals are to be made quarterly, 1/4th of the indicated percentage of
the asset value of the shares in the account will be redeemed. If
withdrawals are to be made semi-annually, 1/2 of the indicated percentage
will be redeemed.
6. Dividends and capital gains distributions are automatically reinvested.
Information about the federal tax status of shares redeemed through the
Flexible Withdrawal Services will be mailed to shareholders annually.
------------------------------------------------------------------------------
12------------------------------------------------------------------------------
ALTERNATE PAYEE/ADDRESS
To send systematic withdrawals (Section 8) or distributions (Section 1) to a
third party, or to another United Fund account, please fill in the
appropriate information below.
This address will be used for (check one):
[ ] Flexible Withdrawals
[ ] Div/Cap Gains
<TABLE>
<S> <C>
------------------------------------------------------------- To another United Fund
Name
------------------------------------------------------------- ---------------------------------
Address (including apartment or box number) Account # Fund #
Must be to same class of shares
-------------------------------------------------------------
City/State/Zip
</TABLE>
------------------------------------------------------------------------------
Page 5 of 6
<PAGE>
13------------------------------------------------------------------------------
CONFIDENTIAL DATA (Required)
1. Marital Status:__________
(Required in VA)
2. Gross Family Income: $__________
3. Taxable Income: $__________
4. Number of Dependents:__________
5. Occupation:______________________________________________________________
6. Employer Name:___________________________________________________________
7. Employer Address:________________________________________________________
8. Savings and Liquid Assets: $__________
9. Other Assets (excluding home, furnishings, cars): $__________
10. Net Worth (Assets minus liabilities): $__________
11. Are you associated with an NASD Member? [ ] Yes [ ] No
12. Investment Objectives (mark all that apply):
[ ] Retirement Savings [ ] Reserves [ ] College Funds [ ] Buy Major Asset
[ ] Other Needs/Goals (specify in Special Remarks)
13. Special Remarks/Considerations:__________________________________________
_____________________________________________________________________________
14. Residence Address:_______________________________________________________
(if different from Street City State Zip
Mailing Address
on reverse side)
<TABLE>
<S> <C> <C>
(Required in CT)
15. Was this investment solicited by a W&R Advisor/Representative? [ ] Yes [ ] No
(Required in CT)
16. Has any beneficial owner of this account conducted any prior investment activity? [ ] Yes [ ] No
If yes, which owner(s)?_________________________________________________________________________
17. Are proceeds from the sale of another security being used to open this account? [ ] Yes [ ] No
If yes, specify:________________________________________________________________________________
________________________________________________________________________________
</TABLE>
------------------------------------------------------------------------------
14------------------------------------------------------------------------------
ACKNOWLEDGEMENT
o I (We) have received a copy of the current prospectus of the Funds
selected, and agree to the terms therein and herein.
o Under penalties of perjury, I certify that the social security number or
other taxpayer identification number shown in Section 1 is correct (or I
am waiting for a number to be issued to me) and (strike the following if
not true) that I am not subject to backup withholding because (a) I am
exempt from backup withholding, or (b) I have not been notified by the IRS
that I am subject to backup withholding as a result of a failure to report
all interest and dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
o I (we) understand that there maybe a deferred sales charge upon the
redemption of any Class B or C shares held in the account for less than
the time specified in the prospectus.
Signature(s) of Purchasers (all joint purchasers must sign). Sign exactly as
name(s) appear in registration.
"The Internal Revenue Service does not require your consent to any provision
of this document other than the certification required to avoid backup
withholding."
<TABLE>
<S> <C> <C>
------------------------------------- ------------------------------------- -------------------------------------
(Signature) (Printed Name) (Title, if any)
------------------------------------- ------------------------------------- -------------------------------------
(Signature) (Printed Name) (Title, if any)
------------------------------------- --------------------
(Advisor/Representative Signature) (Date)
</TABLE>
_____________________________
| |
Advisor/Representative Number |_____________________________|
------------------------------------------------------------------------------
-----------------------------------------------|
Check Any Items Enclosed With Application |
|
[ ] Declaration Trust Revocable (CUF0022) |
|---------------|
[ ] Additional Applications______ |OSJ: |
|(H.O. USE) |
[ ] Check enclosed #______ | |
| |
[ ] Other:______ | |
-----------------------------------------------|---------------|
Page 6 of 6
<TABLE>
<S> <C> <C>
Waddell & Reed, Inc. United Group of Funds Division Office Stamp
P.O. Box 29217 APPLICATION
Shawnee Mission, KS
66201-9217 RETIREMENT PLAN Trans Code:________________________
ACCOUNT Date Transmitted:__________________
</TABLE>
1 ------------------------------------------------------------------------------
I (We) make application for an account to be established as follows:
PLAN TYPE -- DOCUMENT SPONSORED BY: [ ] W&R [ ] NON-W&R
PLEASE SELECT ONE OF THE FOLLOWING:
<TABLE>
<S> <C> <C>
[ ] IRA (701/050) [ ] Simplified Employee Pension -- SEP (702/050) [ ] 401(k) (401-801) [ ] Simple 401(k) (340)
(CRP0005) (MRP1166KT-Employer and CRP0005-Employee) (MRP0720-Non Inventory)
[ ] Rollover (703/050) [ ] Simple IRA (765/050) [ ] Owner-Only Profit Sharing (132)
(CRP0005) (MRP1659KT-Employer and MRP1699-Employee) (MRP0651 and MRP0651 AP)
[ ] Roth IRA (791/050) [ ] Non Title-1 TSA (773-050) [ ] ORP (773) [ ] Owner-Only Money Purchase (122)
(CRP1695) (MRP1198) (MRP0651 and MRP0651AM)
[ ] Conversion Roth IRA (792/050) [ ] Title-I TSA (724) [ ] 457 Plan (730/731) [ ] Multi Part. Profit Sharing (832/097/098)
(CRP1695) (MRP1198TI-Non Inventory) (MRP1401) (MRP0651 and MRP0651AP)
[ ] Education IRA (793/050) [ ] Church Sponsored TSA (774) [ ] Multi Part. Money Purchase (822/099/100)
(CRP1696) (Non Inventory-Case by Case) (MRP0651 and MRP0651AM)
</TABLE>
------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
__________________
REGISTRATION [ ] NEW ACCOUNT or [ ] NEW FUND FOR EXISTING ACCOUNT | |
(must have same ownership): |__________________|
</TABLE>
<TABLE>
<S> <C> <C> <C>
-----------------------------------------------------------------------------
Trustee/Custodian or Responsible Party (Education IRA Only)
-----------------------------------------------------------------------------
Employer or Business/Organization Name
------------------------------------------------------------ ----------------------------------------------
Participant, Planholder or Beneficiary (Education IRA Only) Plan Year End / Date of Birth (Month/Day/Year)
-----------------------------------------------------------------------------
Mailing Address
-----------------------------------------------------------------------------
City/State/Zip
------------------------- ----------------------- ----------------------------------
Social Security Number Employer Tax ID Number Plan (Trust) Identification Number
------------------------- ----------------------- ----------------------------------
Telephone (home) Telephone (work) Citizenship (Required in VA)
</TABLE>
------------------------------------------------------------------------------
INVESTMENTS Make check payable to Waddell & Reed, Inc.
<TABLE>
<CAPTION>
FUNDS CODES
A B C A B C A B C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income 621 121 321 Continental Income 627 127 327 Small Cap 677 177 377
Science & Technology 622 122 322 High Income 628 128 328 Retirement Shares 680 180 380
Accumulative 623 123 323 Vanguard 629 129 329 Asset Strategy 684 184 384
Bond 624 124 324 New Concepts 630 130 330 Cash Management 750 150 350
International Growth 625 125 325 High Income II 634 134 334 Government Securities 753 153 353
</TABLE>
<TABLE>
<CAPTION>
IRA TOP From Monthly
Fund Amount Year of Deductible or Another AIS
(enter code) Enclosed Contribution Non-Deductible Carrier (If Any)
<S> <C> <C> <C> <C> <C> <C>
CLASS OF SHARES ____________
(ONLY ONE) | |
|____________| $_______ ____________ __________ [ ] $_______
____________
| |
A [ ] B [ ] C [ ] |____________| $_______ ____________ __________ [ ] $_______
____________
| |
IF NOT CHECKED, |____________| $_______ ____________ __________ [ ] $_______
ASSUME A ____________
| |
|____________| $_______ ____________ __________ [ ] $_______
____________
| |
|____________| $_______ ____________ __________ [ ] $_______
Total $_______ $_______
</TABLE>
To prevent possible tax penalties, Dividends and Capital gains are
automatically re-invested in Retirement Plan accounts.
------------------------------------------------------------------------------
CAP1771 Page 1 of 6
<PAGE>
------------------------------------------------------------------------------
BENEFICIARY
To designate contingent beneficiaries or per stirpes distribution,
use MRP-0972 or MRP-1588
<TABLE>
<CAPTION>
Full Name of Beneficiary Tax Identification Number Date of Birth Relationship Percent
<S> <C> <C> <C> <C>
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
---------------------------- ----------------------------- -----/-----/----- ---------------- -----------%
MO DA YR
</TABLE>
------------------------------------------------------------------------------
A SHARES ONLY
This purchase is entitled to a reduced sales load charge for the following
reason:
<TABLE>
<S> <C>
[ ] Existing Letter of Intent To Invest $_____________ LOI Number____________
[ ] Cumulative discount number____________ or Rights of Accumulation With Existing Accounts____________
[ ] Identify Other New Accounts Established At This Time:________________________
</TABLE>
------------------------------------------------------------------------------
2 ------------------------------------------------------------------------------
STATEMENT OF INTENT (A SHARES ONLY) I agree to the terms of the Statement of
Intent conditions set forth in the Statement of Additional Information
(including the escrowing of shares). Although I am not obligated to do so, it
is my intention to invest over a 13-month period in shares of one or more
United funds in an aggregate amount at least equal to:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
[ ] $100,000 [ ] $200,000 [ ] $300,00 [ ] $500,00 [ ] $1,000,000 [ ] $2,000,000 See Section 8
</TABLE>
------------------------------------------------------------------------------
3 ------------------------------------------------------------------------------
EXPEDITED REDEMPTION: For United Cash Management A [ ] B [ ] C [ ]
<TABLE>
<S> <C>
-------------------------------------------------- -------------------------------------------------
Name & Address of Bank/Financial Institution ABA/Routing # of Bank/Financial Institution
-------------------------------------------------- -------------------------------------------------
Street Customer's Bank Account Number
-------------------------------------------------- -------------------------------------------------
City/State/Zip
</TABLE>
On UCM Accounts where expedited redemption is requested, Waddell & Reed, Inc.
is authorized to honor any requests from anyone for redemption of fund shares
as long as the proceeds are transmitted to the identified account. All wires
must be transmitted exactly as registered on the UCM Account.
------------------------------------------------------------------------------
4 ------------------------------------------------------------------------------
Establish NEW Automatic Investment Service ______________
REGISTRATION INFORMATION EXISTING ACCOUNT:| |
|______________|
-----------------------------------------------------------------------------
Individual Name (exactly as registered)
-----------------------------------------------------------------------------
Joint Name (if any, exactly as registered)
<TABLE>
<CAPTION>
Fund Draft Is To Begin On
(Enter code) (Month/Day/Year) Draft Amount Special Instructions
<S> <C> <C> <C>
____________
| |
|____________| ____________________ $___________ ________________________________
____________
| |
|____________| ____________________ $___________ ________________________________
____________
| |
|____________| ____________________ $___________ ________________________________
____________
| |
|____________| ____________________ $___________ ________________________________
____________
| |
|____________| ____________________ $___________ ________________________________
</TABLE>
------------------------------------------------------------------------------
Page 2 of 6
<PAGE>
5 ------------------------------------------------------------------------------
Authorization to honor checks drawn by Waddell & Reed, Inc.
As a convenience to me, I hereby request and authorize you to pay and charge
to my or our account identified below, debit entries drawn on the account by
Waddell & Reed, Inc. provided there are sufficient funds in the account to
pay the same on presentation. This authorization shall remain in effect until
revoked by me in writing and until you actually receive such notice. I agree
that you shall be fully protected by honoring any such debit entry.
I agree that your rights in respect to any debit entry shall be the same as
if it were a check signed personally by me. I further agree, that if any such
debit entry be dishonored, whether intentionally or inadvertently, you shall
be under no liability whatsoever.
PLEASE COMPLETE THE FOLLOWING IN ITS ENTIRETY.
<TABLE>
<S> <C>
----------------------------------------------------- -------------------------
NAME OF DEPOSITOR (as shown on bank records(s)) Bank Account Number
----------------------------------------------------- See Section 9
BANK NAME
-----------------------------------------------------
BANK ADDRESS
-----------------------------------------------------
CITY/STATE/ZIP
</TABLE>
------------------------------------------------------------------------------
6 ------------------------------------------------------------------------------
Establish NEW Funds Plus Service
<TABLE>
<S> <C> <C> <C>
___________
REGISTRATION INFORMATION [ ] NEW ACCOUNT W/UCM or [ ] EXISTING ACCOUNT W/UCM |___________|
</TABLE>
-----------------------------------------------------
Individual Name (exactly as registered)
-----------------------------------------------------
Joint Name (if any, exactly as registered)
<TABLE>
<CAPTION>
FUNDS PLUS Service
Account(s) to RECEIVE Fund If new, Is To Begin On FUNDS PLUS
FUNDS PLUS Investment (Enter code) mark box (Month/Day/Year) Investment Amount
<S> <C> <C> <C> <C>
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
_____________________________ __________
| | | | [ ]
|_____________________________| |__________| __________________ $__________________
</TABLE>
------------------------------------------------------------------------------
7 ------------------------------------------------------------------------------
Establish NEW Flexible Withdrawal Service (See Section 10)
<TABLE>
<CAPTION>
Fund Changes To Be
(See Reverse Effective Beginning Amount
for Codes) (Month) (Year) Indicate dollars, shares or percentage Frequency Make Payable
<S> <C> <C> <C> <C>
____________ _________________ ______________
| | | | 20 | | | |
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] % [ ] monthly [ ] To registered owner(s)
____________ _________________ ______________
| | | | 20 | | | | [ ] quarterly [ ] To Alternate Payee
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] %
____________ _________________ ______________ [ ] semi-annually [ ] To registered owner(s)
| | | | 20 | | | | at alternate address
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] % [ ] annually
____________ _________________ ______________
| | | | 20 | | | | (If left blank,
|____________| |_____|______|____| |______________| [ ] $ [ ] SH [ ] % annual payments
will be assumed)
</TABLE>
------------------------------------------------------------------------------
Designate Alternate Payee or Address (for Electronic Deposits of FWS, see
section 9)
Complete this section if the check is TO BE PAYABLE TO AN ALTERNATE PAYEE
(other than as registered) or SENT TO AN ALTERNATE ADDRESS. Please provide
voided check if FWS is to be electronically deposited. If sending FWS to
another fund/account please indicate account/fund. Must be same class.
<TABLE>
<CAPTION>
Alternate Payee Alternate Address (check will be payable as registered and sent to the following)
<S> <C>
---------------------------------------------- ----------------------------------------------
Name or institution C/O Name
---------------------------------------------- ----------------------------------------------
Street Street
---------------------------------------------- ----------------------------------------------
City/State/Zip City/State/Zip
---------------------------------------------- ----------------------------------------------
Bank Account Number (if applicable) Bank Account Number (if applicable)
</TABLE>
------------------------------------------------------------------------------
Page 3 of 6
<PAGE>
7 ------------------------------------------------------------------------------
Con't.
TO ESTABLISH Life Expectancy Payment Option For Retirement Plan Accounts
IMPORTANT INFORMATION (read carefully before proceeding)
If this option is selected, the information (joint/single life, age) provided
below will be used to determine the withdrawal amount applicable for the
CURRENT year only. The withdrawal amount will remain unchanged until a change
is authorized by the planholder.
Check applicable box: [ ] Age 70-1/2 or over Retirement planholders who
have reached age 70-1/2 must take a minimum
distribution from their plan in accordance
with IRS regulations. It is NOT necessary to
complete this section to meet IRS minimum
mandatory withdrawal requirement. The minimum
withdrawal will be automatically processed
unless otherwise instructed.
[ ] Prior to age 70-1/2 Enter annual $___________
(Do not enter amount in section below)
If dollar amount is blank, payments will be
calculated on a non-amortized basis, and will
remain unchanged. If amount provided is based
on an amortized life expectancy calculation,
attach UNET worksheet. PAYMENTS MUST CONTINUE
UNTIL THE LATER OF AGE 59-1/2 OR FIVE
SUCCESSIVE YEARS.
Complete applicable information:
<TABLE>
<S> <C>
[ ] SINGLE LIFE OR [ ] JOINT LIFE
Indicate Account Owner's Indicate Account Owner's Date of Birth |__|__|__|__|__|__|
Date of Birth |__|__|__|__|__|__| (Month/Day/Year)
(Month/Day/Year) and Beneficiary's Date of Birth |__|__|__|__|__|__|
(Month/Day/Year)
</TABLE>
<TABLE>
<CAPTION>
Amount Frequency
Fund If blank amount will Indicated monthly,
(See Reverse Effective Beginning be calculated as quarterly, semi-
For Codes) (Month) (Day) described above annually or annually Make Payable
------------ -------------------- -------------------- --------------------- --------------------------
<S> <C> <C> <C> <C>
|__|__|__| |__|__| 2 | 0 |__|__| ________ [ ] [ ] [ ] --------------------- [ ] To Registered owner(s)
(If left blank, annual pay-
ments will be assumed)
|__|__|__| |__|__| 2 | 0 |__|__| ________ [ ] [ ] [ ] [ ] To Alternate Payee*
|__|__|__| |__|__| 2 | 0 |__|__| ________ [ ] [ ] [ ] [ ] To Registered Owner(s) at
alternate address*
|__|__|__| |__|__| 2 | 0 |__|__| ________ [ ] [ ] [ ] *Complete Section 11
</TABLE>
FEDERAL INCOME TAX WITHHOLDING FOR RETIREMENT PLAN ACCOUNTS
Check One:*
A [ ] The undersigned directs that no Federal Income Tax shall be withheld
from the above described Withdrawal.
(Applicable to Retirement Plans only)
B [ ] The undersigned directs that Federal Income Tax be withheld from the
above described Withdrawal.
(Applicable to Retirement Plans only)
*IF NEITHER BLOCK IS SELECTED, FEDERAL INCOME TAXES WILL NOT BE
WITHHELD.
------------------------------------------------------------------------------
8 ------------------------------------------------------------------------------
LOI TERMS AND CONDITIONS
1. This Agreement does not bind the investor to buy, or Waddell & Reed, Inc.
to sell, any shares.
2. This Agreement can only be terminated before the 13 months has elapsed by
submitting a written request signed by all owners.
3. Any purchase made under this Agreement will be made at the offering price
applicable to a one-time purchase of the amount the investor has checked
on the front of this Agreement as described in the prospectus of the fund
or funds being purchased.
4. If the amount invested during the 13-month period covered by this
Agreement exceeds the required amount and is large enough to qualify for a
sales charge lower than that available under this Agreement, the lower
sales charge will be applied to the amount invested. Upon termination of
this Agreement, a price adjustment will be made to give effect to the
lower sales charge and the amount of the price adjustment will be
reinvested in additional shares of the fund(s) on the date of termination.
5. If the amount invested during the 13-month period covered by this
Agreement is less than the required amount, the sales charge for the
investments reverts back to that outlined in the Fund Prospectus, as if
the Agreement had not been executed. Waddell & Reed, Inc. will subtract
shares equal in value to the amount of the additional sales charge due
from escrowed shares. The investor hereby irrevocably appoints Waddell &
Reed, Inc. or its successors or assigns, as attorney to surrender for
redemption shares in an amount equal to the additional sales charge owed
on the purchases made. This appointment and the authority granted herein
shall be binding on the heirs, legal representatives, successors and
assigns of the investor.
6. While the value of purchases made prior to the acceptance date of this
Agreement will be considered in determining the Intended Investment, the
sales charge imposed on prior purchases will not be retroactively reduced.
7. Shares purchased directly to United Cash Management, Inc. will not be
considered when determining the net asset value of shares presently held
by the investor as of the date of acceptance of this Agreement, nor for
determining the amount invested under this Agreement. However,
non-commissionable shares are considered for these purposes.
------------------------------------------------------------------------------
Page 4 of 6
<PAGE>
9 ------------------------------------------------------------------------------
BANK ACCOUNT OR CREDIT UNION INFORMATION (optional)
This information will be used for
[ ] Systematic investments (Sec. 4) [ ] Flexible withdrawals (Sec. 7)
<TABLE>
<S> <C> <C>
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Checking account Bank or credit union's ABA route number Bank or credit union account number
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Savings account Bank or credit union's ABA route number Bank or credit union account number
</TABLE>
Tape your voided check or deposit slip here
Bank and credit union routing information
For deposits or withdrawals to your checking account, please tape a voided
check so we may get bank or credit union account information.
For deposits or withdrawals to a savings account, please tape a preprinted
deposit slip.
(Do not staple the slips.)
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FLEXIBLE WITHDRAWAL REQUIREMENTS AND CONSIDERATIONS
1. This application directs Waddell & Reed Services Company to redeem the
amounts listed on the 20th day of the indicated month, or if not a
business day, on the preceding business day.
2. Allow five days from the date your instructions are received in the home
office for processing of any changes and/or initiation of a Flexible
Withdrawal Service.
3. The aggregate total investment, or the present net asset value of the
shareholder's United Group of Funds/or W&R Funds combined accounts should
exceed $10,000. You may add to your account by additional investments of
at least $1,000, except in United Cash Management, Inc., which has no
minimum additional investment amount.
4. Minimum withdrawals for dollars or shares are $50 aggregate or a 5 share
minimum per fund.
5. If withdrawals are to be made monthly, 1/12th of the indicated percentage
of the asset value of the shares in the account will be redeemed. If
withdrawals are to be made quarterly, 1/4th of the indicated percentage of
the asset value of the shares in the account will be redeemed. If
withdrawals are to be made semi-annually, 1/2 of the indicated percentage
will be redeemed.
6. Dividends and capital gains distributions are automatically reinvested.
Information about the federal tax status of shares redeemed through the
Flexible Withdrawal Services will be mailed to shareholders annually.
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ALTERNATE PAYEE/ADDRESS
To send systematic withdrawals (Section 7) to a third party, or to another
United Fund account, please fill in the appropriate information below.
This address will be used for (check one):
[ ] Flexible Withdrawals
[ ] Div/Cap Gains
<TABLE>
<S> <C>
------------------------------------------------------------- To another United Fund
Name
------------------------------------------------------------- ---------------------------------
Address (including apartment or box number) Account # Fund #
Must be to same class of shares
-------------------------------------------------------------
City/State/Zip
</TABLE>
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Page 5 of 6
<PAGE>
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CONFIDENTIAL DATA (Required)
1. Marital Status:__________
(Required in VA)
2. Gross Family Income: $__________
3. Taxable Income: $__________
4. Number of Dependents:__________
5. Occupation:______________________________________________________________
6. Employer Name:___________________________________________________________
7. Employer Address:________________________________________________________
8. Savings and Liquid Assets: $__________
9. Other Assets (excluding home, furnishings, cars): $__________
10. Net Worth (Assets minus liabilities): $__________
11. Are you associated with an NASD Member? [ ] Yes [ ] No
12. Investment Objectives (mark all that apply):
[ ] Retirement Savings [ ] Reserves [ ] College Funds [ ] Buy Major Asset
[ ] Other Needs/Goals (specify in Special Remarks)
13. Special Remarks/Considerations:__________________________________________
_____________________________________________________________________________
14. Residence Address:_______________________________________________________
(if different from Street City State Zip
Mailing Address
on reverse side)
<TABLE>
<S> <C> <C>
(Required in CT)
15. Was this investment solicited by a W&R Advisor/Representative? [ ] Yes [ ] No
(Required in CT)
16. Has any beneficial owner of this account conducted any prior investment activity? [ ] Yes [ ] No
If yes, which owner(s)?_________________________________________________________________________
17. Are proceeds from the sale of another security being used to open this account? [ ] Yes [ ] No
If yes, specify:________________________________________________________________________________
________________________________________________________________________________
</TABLE>
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ACKNOWLEDGEMENT
o I (We) have received a copy of the current prospectus of the Funds
selected, and agree to the terms therein and herein.
o Under penalties of perjury, I certify that the social security number or
other taxpayer identification number shown in Section 1 is correct (or I
am waiting for a number to be issued to me) and (strike the following if
not true) that I am not subject to backup withholding because (a) I am
exempt from backup withholding, or (b) I have not been notified by the IRS
that I am subject to backup withholding as a result of a failure to report
all interest and dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
o I (we) understand that there maybe a deferred sales charge upon the
redemption of any class B or C shares held in the account for less than
the time specified in the prospectus.
Signature(s) of Purchasers (all joint purchasers must sign). Sign exactly as
name(s) appear in registration.
"The Internal Revenue Service does not require your consent to any provision
of this document other than the certification required to avoid backup
withholding."
<TABLE>
<S> <C> <C>
------------------------------------- ------------------------------------- -------------------------------------
(Signature) (Printed Name) (Title, if any)
------------------------------------- ------------------------------------- -------------------------------------
(Signature) (Printed Name) (Title, if any)
------------------------------------- --------------------
(Advisor/Representative Signature) (Date)
</TABLE>
_____________________________
| |
Advisor/Representative Number |_____________________________|
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Check Any Items Enclosed With Application |
|
[ ] Declaration Trust Revocable (CUF0022) |
|---------------|
[ ] Additional Applications______ |OSJ: |
|(H.O. USE) |
[ ] Check enclosed #______ | |
| |
[ ] Other:______ | |
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Page 6 of 6
EX-99.B(i)aslegopn
December 29, 1999
United Asset Strategy Fund, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
RE: United Asset Strategy Fund, Inc.
Post-Effective Amendment No. 9
Dear Sir or Madam:
In connection with the public offering of shares of Capital Stock of United
Asset Strategy Fund, Inc. (the "Fund"), I have examined such corporate records
and documents and have made such further investigation and examination as I
deemed necessary for the purpose of this opinion.
It is my opinion that the indefinite number of shares of such Capital Stock
covered by the Fund's Registration Statement on Form N-1A, when issued and paid
for in accordance with the terms of the offering, as set forth in the Prospectus
and Statement of Additional Information forming a part of the Registration
Statement, will be, when such Registration shall have become effective, legally
issued, fully paid and non-assessable by the Fund.
I hereby consent to the filing of this opinion as an Exhibit to the said
Registration Statement and to the reference to me in such Statement of
Additional Information.
Yours truly,
/s/ Kristen A. Richards
- --------------------------
Kristen A. Richards
Assistant Secretary
KAR/fr
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 9 to Registration
Statement No. 33-55753 of United Asset Strategy Fund, Inc. on Form N-1A of our
report dated November 5, 1999 appearing in the Statement of Additional
Information, which is part of such Registration Statement, and to the reference
to us under the caption "Financial Highlights" in such Prospectus.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Kansas City, Missouri
December 27, 1999
