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. 8
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 8
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)
_____ on (date) pursuant to paragraph (b)
__X__ 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, 1998 was filed on December 29,
1998.
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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.
United Asset Strategy Fund, Inc.
This Fund seeks high total return over the long term through investments in
stocks, bonds and short-term instruments.
Prospectus
September 1, 1999
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Table of Contents
AN OVERVIEW OF THE FUND........................................................3
PERFORMANCE....................................................................5
FEES AND EXPENSES..............................................................9
THE INVESTMENT PRINCIPLES OF THE FUND..........................................9
Investment Goal,Principal Strategiesand Other Investments...................9
Risk Considerations of Principal Strategies and Other Investments..........11
Year 2000 and Euro Issues..................................................
YOUR ACCOUNT..................................................................13
Choosing a Share Class.....................................................
Sales Charge Reductions and Waivers.....................................
Waivers for Certain Investors...........................................
Ways to Set Up Your Account................................................19
Buying Shares..............................................................21
Minimum Investments........................................................23
Adding to Your Account.....................................................23
Selling Shares.............................................................24
Telephone Transactions.....................................................
Shareholder Services.......................................................28
Personal Service........................................................28
Reports.................................................................28
Exchanges...............................................................28
Automatic Transactionsfor Class A, B and CShareholders..................29
Distributions and Taxes....................................................29
Distributions...........................................................29
Taxes...................................................................30
THE MANAGEMENT OF THE FUND....................................................32
Portfolio Management.......................................................32
Management Fee.............................................................32
FINANCIAL HIGHLIGHTS............................................................
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 (a blend of value of growth), bonds of any quality including junk bonds
(rated BB and below by Standard and Poor's ("S&P") and Ba and below by Moody's
Investors Service, Inc. ("MIS")) and short-term instruments, both in the United
States and abroad. The Fund can invest in securities of companies of any size.
The Fund selects a mix which represents the way the Fund's investments will
generally be allocated over the long term as indicated in the box below. This
mix will vary over shorter time periods as Waddell & Reed Investment Management
Company ("WRIMCO"), the Fund's investment manager, changes the Fund's holdings
based on 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.
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 an increase in interest rates, which may cause the value of the Fund's
fixed-income securities to decline;
o prepayment of higher-yielding bonds held by the Fund;
o the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds;
o adverse stock and bond market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline; and
o the skill of WRIMCO in allocating the Fund's assets among different types
of investments.
Market risk for small or medium sized companies may be greater than that for
large companies. Smaller companies are more likely to have limited financial
resources and inexperienced management.
3
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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; the Fund, however, intends to maintain a limited exposure to foreign
holdings. Foreign securities present additional risks such as currency
fluctuations and political or economic conditions affective the foreign
countries.
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.
4
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Performance
The chart and 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 returns for the periods shown compare with
those of a broad measure of market performance.
o The chart presents the annual total returns for Class A since these shares
were first offered and shows how performance has varied from year to year.
o The 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 were
included, the returns would be less than those shown.
o The table shows Class A and Class Y average annual returns and compares
them to the market indicators listed. No performance information is
provided for Class B or Class C shares since these classes had not
commenced operations as of December 31, 1998.
o The chart and the table assume reinvestment of dividends and distributions.
As with all mutual funds, the Fund's past performance does not necessarily
indicate how it will perform in the future.
Note that the performance information in the chart and 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 (%)
1995* 7.85%
1996 5.39%
1997 12.18%
1998 9.26%
*For the period March 9, 1995 through December 31, 1995.
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 quarter ended June 30, 1999 was %.
5
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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 Composite Stock
Price Index 28.70% 29.63%
Salomon Brothers Broad
Investment Grade Debt 8.71% 9.25%
Salomon Brothers Short-Term
Index for 1-Month
Certificates of Deposit 5.67% 5.72%
Lipper Flexible Portfolio
Universe Average 14.16% 17.63%
Class Y Shares of the Fund 9.62% 8.11%
S&P 500 Composite Stock
Price Index 28.70% 28.10%
Salomon Brothers Broad
Investment Grade Debt 8.71% 8.11%
Salomon Brothers Short-Term
Index for 1-Month
Certificates of Deposit 5.67% 5.65%
Lipper Flexible Portfolio
Universe Average 14.16% 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.
* 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 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 from September 30, 1995.
6
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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)
(as a percentage of
amount invested) None 5% 1% None
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(4) 0.24% 1.00% 1.00% None
Other Expenses 0.69% 0.69% 0.69% 0.49%
Total Annual Fund Operating
Expenses 1.63% 2.39% 2.39% 1.19%
o 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
- ----------
(1) The contingent deferred sales charge which is imposed on redemption
proceeds of Class B shares declines from 5% of the amount invested to 0%
after 6 years. For Class C shares, a 1% contingent deferred sales charge
applies to the proceeds of redemption of Class C shares held for less than
12 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 the management fees and other
Fund-level expenses of the Fund for the fiscal year ended September 30,
1998, 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.
(3)
(4) It is possible that long-term Class A, Class B and Class C shareholders of
the Fund may bear 12b-1 distribution fees which are more than the maximum
asset-based sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
7
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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 $731 $1,055 $1,398 $2,365
Class B shares $642 $1,045 N/A N/A
Class C shares $342 $ 745 N/A N/A
Class Y shares $121 $372 $641 $1,408
If shares are not redeemed
at end of period: 1 year 3 years 5 years 10 years
Class A shares $731 $1,055 $1,398 $2,365
Class B shares $242 $ 745 N/A N/A
Class C shares $242 $ 745 N/A N/A
Class Y shares $121 $ 372 $ 641 $1,408
8
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The Investment Principles of the Fund
Investment Goal, and Principal Strategies and Other Investments
The Fund seeks high total return over the long term. The Fund seeks to achieve
it 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 value of bonds and short-term instruments generally
fluctuates based on changes in interest rates and in the credit quality of the
issuer.
WRIMCO regularly reviews the Fund's allocation of assets and makes changes to
favor investments that it believes provide the best opportunity to achieve the
Fund's goal. Although WRIMCO uses its expertise and resources in choosing
investments and in allocating assets, WRIMCO's decisions may not always be
beneficial to the Fund.
The Fund allocates its assets among the following classes, or types, of
investments.
o The stock class includes equity securities of all types (including
preferred stock), although WRIMCO typically emphasizes a blend of value and
growth potential in selecting stocks. Value stocks are those that WRIMCO
believes are currently selling below their true worth. Growth stocks are
those whose earnings WRIMCO believes are likely to grow faster than the
economy.
o The bond class includes all varieties of fixed-income instruments, such as
corporate or U.S. Government debt securities, with maturities of more than
three years (including adjustable rate preferred stocks). This 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 S&P and Ba and below by MIS.
o The short-term class includes all types of short-term instruments with
remaining maturities of three years or less, including high-quality money
market instruments.
o Within each of these classes, the Fund may invest in both domestic and
foreign securities.
The mix of assets in the Fund will change from time to time depending on
WRIMCO's assessment of the market for each asset
9
<PAGE>
class, generally. 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 Range
- ---------- ------
Stock
class 0-100%
70%
Bond
class 0-100%
25%
Short-term
class 0-100%
5%
WRIMCO tries to balance the Fund's investment risks against potentially higher
total returns by reducing the stock class allocation during stock market down
cycles and increasing the stock class allocation during periods of strongly
positive market performance. Typically, WRIMCO makes asset shifts among classes
gradually over time. WRIMCO considers various areas when it decides to sell a
security, such as an individual security's performance and/or if it's an
appropriate time to vary the Fund's mix.
As a defensive measure, the Fund may increase its holdings in the bond or
short-term classes when WRIMCO believes that there is a potential bear market,
prolonged downturn in stock prices or significant loss in stock value. WRIMCO
may also, as a temporary defensive measure, invest up to all of the Fund's
assets in:
o money market instruments rated A-1 by S&P, or Prime 1 by MIS, or unrated
securities judged by WRIMCO to be of equivalent quality; or
o precious metals.
Although WRIMCO may seek to preserve appreciation in the Fund by taking a
defensive position, doing so may reduce the potential for further appreciation.
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. You will find more information in the Statement of Additional
Information ("SAI") about the Fund's permitted investments and strategies, as
well as the restrictions that apply to them.
10
<PAGE>
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.
o Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid
before its expected maturity date.
Because 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.
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.
The Fund may actively trade securities in seeking to achieve its goal. Active
trading may increase transaction costs (which may reduce performance) and
increase dividends paid by the Fund, which may increase your taxable income.
11
<PAGE>
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 is taking steps that it believes are reasonably designed to address year
2000 computer-related problems with respect to the computer systems that it uses
and to obtain assurances that comparable steps are being taken by the Fund's
other, major service providers. Although there can be no 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.
Also, the Fund could be adversely affected by the conversion of certain European
currencies into the Euro. This conversion, which is underway, is scheduled to be
completed in 2002. However, problems with the conversion process and delays
could increase volatility in world capital markets and affect European capital
markets in particular.
12
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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. For example, 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. If you are investing a lesser amount, you
may want to consider Class B shares (if investing for at least seven years) or
Class C shares (if investing for less than seven 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 the future investment.
General comparison of Class A, B and C shares
Class A Class B Class C
- ------- ------- -------
o Initial sales o No initial sales o No initial sales
charge charge charge
o No deferred sales o Deferred sales o A 1% deferred
charge charge on shares sales charge on
you sell within shares you sell
six years within one year
o Maximum o Distribution and o Distribution and
distribution and service (12b-1) service (12b-1)
service (12b-1) fees of 1.00% fees of 1.00%
fees of 0.25%
o Converts to Class o Does not convert
A shares in to Class A
eighth year, thus shares, so annual
reducing future expenses do not
annual expenses decrease
o An investment of o An investment of
$300,000 or more $2,000,000 or
may be placed in more will be
Class A shares placed in Class A
due to a reduced shares due to no
sales charge and sales charge and
lower annual lower annual
expenses. expenses.
13
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Class A shares are subject to a 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.
The Fund has adopted a Distribution and Service Plan ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940 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 services
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 services to
shareholders of that class and/or maintaining shareholders 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
on-going basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.
14
<PAGE>
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 NAV of Class A shares already held ("Rights of
Accumulation");
o Grouping all purchases of Class A shares made during a thirteen-month
period ("Letter of Intent"); and
o Grouping purchases by certain related persons.
15
<PAGE>
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, 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 having 100 or more eligible employees.
You will find more information in the SAI about sales charge reductions and
waivers.
Class B shares are not subject to a sales charge when you buy them. However, you
may pay a contingent deferred sales charge ("CDSC") if you sell your Class B
shares within six 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
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 in the eighth year.
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
- ---------- ------
within 1st calendar year 5%
2nd full calendar year 4%
3rd full calendar year 3%
4th full calendar year 3%
5th full calendar year 2%
6th full calendar year 1%
after 6th full calendar year 0%
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<PAGE>
The CDSC will be applied to the total amount invested during a calendar year to
acquire Class B shares or the value of the Class B shares redeemed, whichever is
less. All Class B investments made during a calendar year are deemed a single
investment during that calendar year for purposes of calculating the CDSC.
Contingent Deferred Sales Charge. A CDSC may be assessed against your redemption
amount 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
shares. The CDSC will not be imposed on Class B shares representing payment of
dividends or distributions or on amounts which represent an increase in the
value of a shareholder's account resulting from capital appreciation above the
amount paid for Class B shares purchased during the CDSC period.
To keep your CDSC as low as possible, each time you place a request to redeem
shares the Fund first redeems any shares in your account that are not subject to
a CDSC. 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 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.
The CDSC will not apply in the following circumstances:
o redemptions of Class B 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 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"), or a tax-free return of an excess contribution,
or that otherwise results from the death or disability of the employee, as
well as in connection with redemptions by any tax-exempt employee benefit
plan for which, as a result of a subsequent law or legislation, the
continuation of its investment would be improper.
o redemptions of Class B shares purchased by current or retired directors of
the Fund, or current or retired officers or employees of the Fund, WRIMCO,
the Distributor or their affiliated companies, registered representatives
of Waddell &
17
<PAGE>
Reed, Inc., and by the members of immediate families of such persons.
o redemptions of Class B shares made pursuant to a shareholder's
participation in any systematic withdrawal plan adopted for a Fund. (The
Plan and this exclusion from the CDSC do not apply to a one-time
withdrawal.)
o redemptions the proceeds of which are reinvested in Class B shares of the
Fund within thirty days after such redemption.
o the exercise of certain exchange privileges.
o on redemptions effected pursuant to the Fund's right to liquidate a
shareholder's Class B 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 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 notices.
Class C shares are not subject to a sales charge when you buy them, but if you
sell your Class C shares within 12 months of buying them, you will pay a 1%
CDSC. Class C shares pay an annual 12b-1 service fee of up to 0.25% of average
net assets and 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.
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, including 401(k) plans, of the
Code , when the plan has 100 or more eligible employees and holds the
shares in an omnibus account on the Fund's records;
o banks, trust institutions, 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;
18
<PAGE>
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).
- -------------------------------------------------
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. 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
19
<PAGE>
withdrawals to pay the higher education expenses of the beneficiary.
o Simplified Employee Pension Plans (SEP - IRAs) provide small business
owners or those with self-employed income (and their eligible employees)
with many of the same advantages as a Keogh Plan, but with fewer
administrative requirements.
o Savings Incentive Match Plans for Employees (SIMPLE Plans) can be
established by small employers to contribute to their employees' retirement
accounts and involve fewer administrative requirements than 401(k) or other
qualified plans generally.
o Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves up to 25% of their annual earned income, with
a maximum of $30,000 per year.
o 401(k) Programs allow employees of corporations and non-governmental
tax-exempt organizations of all sizes to contribute a percentage of their
wages on a tax-deferred basis. These accounts need to be established by the
administrator or trustee of the plan.
o 403(b) Custodial Accounts are available to employees of public school
systems or certain types of charitable organizations.
o 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.
- -------------------------------------------------
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA").
- -------------------------------------------------
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.
- -------------------------------------------------
20
<PAGE>
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.
To purchase Class Y shares by wire, you must first obtain an account number by
calling 1-800-366-5465, then mail a completed application to Waddell & Reed,
Inc., P.O. Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to
913-236-5044. Instruct your bank to wire the amount you wish to invest, along
with the account number and registration, to UMB Bank, n.a., ABA Number
101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and Account
Number.
You may also buy Class Y shares of the Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements to buy Class Y shares.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a share (price to buy one share of a particular class) is
the Fund's net asset value ("NAV") 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
21
<PAGE>
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 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 Class B, C or Y 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.
22
<PAGE>
Minimum Investments
For Class A, B and C:
To Open an Account $500
For certain exchanges $100
For certain retirement accounts and accounts opened
with Automatic Investment Service $50
For certain retirement accounts and accounts opened
through payroll deductions for or by employees of
WRIMCO, Waddell & Reed, Inc. and their affiliates $25
To Add to an Account
For certain exchanges $100
For Automatic Investment Service $25
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 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.
Mail to Waddell & Reed, Inc. at:
23
<PAGE>
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
To add to your Class Y account by wire: Instruct your bank to wire the amount
you wish to invest, along with the account number and registration, to UMB Bank,
n.a., ABA Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer
Name and Account Number.
If you purchase Class Y shares from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
Selling Shares
You can arrange to take money out of your 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, Inc.
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the address on
the account.
24
<PAGE>
To sell Class Y shares by telephone or fax: If you have elected this method in
your application or by subsequent authorization, call 1-800-366-5465, or fax
your request to 913-236-5044, and give your instructions to redeem Class Y
shares and make payment by wire to your pre-designated bank account or by check
to you at the address on the account.
When you place an order to sell shares, your shares will be sold at the next NAV
calculated after receipt of a written request for redemption in good order by
Waddell & Reed, Inc. at its home office, subject to any applicable CDSC. Note
the following:
o If more than one person owns the shares, each owner must sign the written
request.
o If you recently purchased the shares by check, the Fund may delay payment
of redemption proceeds. You may arrange for the bank upon which the
purchase check was drawn to provide to the Fund telephone or written
assurance 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.
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.
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.
25
<PAGE>
The Fund reserves the right to redeem at NAV all your Fund shares if their
aggregate NAV is less than $500. The Fund will 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 thirty days after the date of your
redemption. You may do this only once with Class A shares of the Fund.
The deferred sales charge will not apply to the proceeds of Class B shares or
Class C shares which are redeemed and then reinvested in Class B shares or Class
C shares, as applicable, within thirty days after such redemption. 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 Waddell & Reed's
401(k) prototype 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.
26
<PAGE>
Special Requirements for Selling Shares
Account Type Special Requirements
Individual or Joint Tenant The written instructions must be
signed by all persons required to sign for
transactions, exactly as their names appear on
the account.
Sole Proprietorship The written instructions must be
signed by the individual owner of the business.
UGMA, UTMA The custodian must sign the written
instructions indicating capacity as custodian.
Retirement Account The written instructions must be signed
by a properly authorized person.
Trust The trustee must sign the written instructions
indicating capacity as trustee. If the trustee's
name is not in the account registration, provide
a currently certified copy of the trust
document.
Business or Organization At least one person authorized
by corporate resolution to act on the account
must sign the written instructions.
Conservator, Guardian or The written instructions must be signed by the
Other Fiduciary person properly authorized by court order to act
in the particular fiduciary capacity.
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.
27
<PAGE>
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your account.
Personal Service
Your local Waddell & Reed financial advisor is available to provide personal
service. Additionally, one toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or TeleWaddell, our automated customer telephone
service. During normal business hours, our Customer Services staff is available
to answer your questions or update your account records. At almost any time of
the day or night, you may access TeleWaddell from a touch-tone phone to:
o obtain information about your accounts;
o obtain price information about other funds in the United Group; or
o request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange,
transfer or redemption)
o year-to-date statements (quarterly)
o annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports will be mailed to your household, even if you have more than one account
with the Fund. Call the telephone number listed above for Customer Service if
you need copies of annual or semiannual reports or account information.
Exchanges
You may sell your shares and buy shares of the same class of other funds in the
United Group without payment of additional sales charge if you buy Class A
shares, or 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. As well,
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
28
<PAGE>
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, B and C Shareholders
Flexible withdrawal service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund account
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 Frequency
$25 Monthly
Funds Plus Service
To move money from United Cash Management, Inc. to the Fund whether in the same
or a different account
Minimum Frequency
$100 Monthly
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year.
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:
29
<PAGE>
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 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 ten dollars, the distribution 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
ten dollars. If the distribution is less than ten 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, you should
be aware of the following tax implications:
Taxes on distributions. Dividends from the Fund's investment company taxable
income generally are taxable to you as ordinary income, whether received in cash
or paid in additional Fund shares. Distributions of the Fund's net capital
gains, when designated as such, are taxable to you as long-term capital gains,
whether received in cash or paid in additional Fund shares and regardless of the
length of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains (if you are a noncorporate shareholder of the Fund) may
be taxable at different rates depending on how long the Fund held the assets
generating the gains, but generally are taxed at a maximum rate of 20%.
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
30
<PAGE>
dividends-received deduction are subject indirectly to the Federal alternative
minimum tax.
Withholding. The Fund must withhold 31% of all dividends, capital gains
distributions and redemption proceeds payable to individuals and certain other
noncorporate shareholders who do not furnish the Fund with a correct taxpayer
identification number. Withholding at that rate from dividends and capital gains
distributions also is required for 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 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 thirty-day reinvestment privilege or exchange
privilege. See "Your Account." In these cases, any gain on the disposition of
the original Class A Fund shares would be increased, or loss decreased, by the
amount of the sales charge you paid when those shares were acquired, and that
amount will increase the adjusted basis of the shares subsequently acquired. In
addition, if you purchase Fund shares within thirty days before or after
redeeming other Fund shares (regardless of class) at a loss, part or all of that
loss will not be deductible and will increase the basis of the newly purchased
shares.
State 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 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.
31
<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 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 of WRIMCO since August 1987, and has been an employee of
WRIMCO 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 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.
32
<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 net
asset value as of the close of business each day at the annual rate of .30 of 1%
of its net assets. The group fee was determined on the basis of the combined net
asset values 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
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Management fees for the fiscal year ended September 30, 1998 were 0.69% of
the Fund's average net assets.
33
<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' reports, along with the Fund's financial statements for the fiscal
year ended September 30, 1998 and the six months ended March 31, 1999, are
included in the SAI, which is available upon request.
For a Class A share outstanding throughout each period:
<TABLE>
<CAPTION>
For the
For the period
six For the fiscal year from
months ended September 30, 3/9/95**
ended ---------------------------- through
3/31/99 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 ..................... 0.05 0.15 0.16 0.15 0.07
Net realized and
unrealized gain (loss)
on investments ............. 0.03 0.28 0.74 (0.17) 0.40
---------- ---------- ---------- ---------- ----------
Total from investment
operations .................... 0.08 0.43 0.90 (0.02) 0.47
---------- ---------- ---------- ---------- ----------
Less distributions:
From net investment
income ..................... (0.06) (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 .............. (0.30) (0.64) (0.15) (0.16) (0.05)
---------- ---------- ---------- ---------- ----------
Net asset value,
end of period ................. $5.56 $5.78 $5.99 $5.24 $5.42
========== ========== ========== ========== ==========
Class A Ratios/Supplemental Data
Total return*** .................. 1.51% 7.89% 17.46% -0.49% 9.42%
Net assets, end of period
(000 omitted) ................. $35,963 $32,868 $28,221 $31,828 $22,248
Ratio of expenses to
average net assets ............ 1.70%**** 1.62% 1.70% 1.68% 1.64%****
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Ratio of net investment
income to average net
assets ........................ 1.98%**** 2.45% 2.87% 2.93% 3.71%****
Portfolio
turnover rate ................. 79.31% 230.09% 173.88% 91.06% 9.32%
</TABLE>
* On September 12, 1995, Fund shares outstanding were designated class A
shares. There were no Class B or Class C shares outstanding during the
period shown.
** Commencement of operations.
*** Total return calculated without taking into account the sales load deducted
on an initial purchase.
**** Annualized.
35
<PAGE>
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
For the For the
six For the fiscal year period
months ended September 30, from 9/27/95*
ended ------------------------- through
3/31/99 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 ....................... 0.07 0.16 0.17 0.16 0.00
Net realized and
unrealized gain
(loss) on
investments .................. 0.02 0.29 0.75 (0.17) 0.01
------- ------- ------- ------- -------
Total from investment
operations ...................... 0.09 0.45 0.92 (0.01) 0.01
------- ------- ------- ------- -------
Less distributions:
From net investment
income ....................... (0.07) (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 ................ (0.31) (0.66) (0.17) (0.17) (0.00)
------- ------- ------- ------- -------
Net asset value,
end of period ................... $5.56 $5.78 $5.99 $5.24 $5.42
======= ======= ======= ======= =======
Class Y Ratios/Supplemental Data
Total return ....................... 1.67% 8.26% 17.93% -0.21% 0.18%
Net assets, end of
period (000
omitted) ........................ $244 $243 $322 $330 $3
Ratio of expenses
to average net
assets .......................... 1.30%** 1.37% 1.28% 1.29% 0.00%
Ratio of net
investment income
to average net
assets .......................... 2.37%** 2.79% 3.29% 3.43% 0.00%
Portfolio
turnover rate ................... 79.31% 230.09% 173.88% 91.06% 9.32%***
</TABLE>
* Commencement of operations.
** Annualized.
*** Rate is for the period from March 9, 1995 through September 30, 1995.
36
<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
37
<PAGE>
United Asset Strategy Fund, Inc.
You can get more information about the Fund in--
o its Statement of Additional Information (SAI) dated September 1, 1999,
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 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 1-800-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
NUP2017(9-99)
38
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
September 1, 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 September 1, 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 .................................................
Investment Strategies, Policies and Practices............................
Investment Management and Other Services ................................
Purchase, Redemption and Pricing of Shares ..............................
Directors and Officers ..................................................
Payments to Shareholders ................................................
Taxes ...................................................................
Portfolio Transactions and Brokerage ....................................
Other Information .......................................................
Appendix A.............................................................__
Financial Statements ....................................................
<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 March
31, 1999, which is the most recent balance
2
<PAGE>
sheet included in this SAI, for the periods shown were as follows:
With Without
Sales Load Sales Load
Deducted Deducted
One-year period from April 1, 1998
to March 31, 1999: -3.58% 2.31%
Period from March 9, 1995* to
March 31, 1999: 7.08% 8.65%
*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 March
31, 1999, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
One-year period from April 1, 1998 to
March 31, 1999: 2.66%
Period from September 27, 1995* to
March 31, 1999: 7.82%
*Commencement of operations.
No performance information is provided for Class B or Class C shares since
these Classes had not begun operations as of December 31, 1998.
Calculation of cumulative total return is not subject to a prescribed
formula. The cumulative total return for a class for a specific period is
calculated by first taking a hypothetical initial investment in Fund shares on
the first day of the period and computing the "redeemable value" of that
investment at the end of the period. The cumulative total return percentage is
then determined by subtracting the initial investment from the redeemable value
and dividing the remainder by the initial investment and expressing the result
as a percentage. The calculation assumes that all income and capital gains
distributions of the class have been reinvested at net asset value on the
reinvestment dates during the period. Cumulative total return may also be shown
as the increased dollar value of the hypothetical investment in the class over
the period.
Performance Rankings
Waddell & Reed, Inc. or the Fund also may from time to time publish in
advertisements or sales material performance rankings
3
<PAGE>
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 major
trends, and to individual stocks that WRIMCO believes to have superior growth
potential. Securities in the stock class may include common stocks, fixed-rate
preferred stocks (including
4
<PAGE>
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, a division of The McGraw-Hill Companies, Inc. ("S&P"), or Prime 1 by
Moody's Investors Service, Inc. ("MIS"), or unrated securities judged by WRIMCO
to be of equivalent quality, or (ii) precious metals.
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
5
<PAGE>
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
that is rated by an established rating service or, if unrated, judged by WRIMCO
to be of equivalent quality. Debt securities have varying levels of sensitivity
to changes in interest rates and varying degrees of quality. As a general
matter, however, when interest rates rise, the values of fixed-rate securities
fall and, conversely, when interest rates fall, the values of fixed-rate debt
rise. Similarly, long-term bonds are generally more sensitive to interest rate
changes than shorter-term bonds.
Lower quality debt securities (commonly called "junk bonds") are considered
to be speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. The market prices of these securities
may fluctuate more than high-quality securities and may decline significantly in
periods of general economic difficulty. The market for lower-rated debt
securities may be thinner and less active than that for higher-rated debt
securities, which can adversely affect the prices at which the former are sold.
Adverse publicity and changing investor perceptions may decrease the values and
liquidity of lower-rated debt securities, especially in a thinly traded market.
Valuation becomes more difficult and judgment plays a greater role in valuing
lower-rated debt securities than with respect to securities for which more
external sources of quotations and last sale information are available. Since
the risk of default is higher for lower-rated debt securities, WRIMCO's research
and credit analysis are an especially important part of managing securities of
this type held by 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
(such as those 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 will treat unrated securities judged by WRIMCO to be of equivalent
quality to a rated security having that rating.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are
6
<PAGE>
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 the value that the underlying
stock because they have fixed income characteristics, and provide the potential
for capital appreciation if the market price of the underlying common stock
increases.
The value of a convertible security is influenced by changes in interest
rates, with investment value declining as interest rates increase and increasing
as interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund will be
required to convert it into the underlying common stock, sell it to a third
party or
7
<PAGE>
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 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
8
<PAGE>
more than 10 years). All such Treasury securities are backed by the full faith
and credit of the United States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (formerly, the Federal National Mortgage Association), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by Fannie Mae, are supported only by
the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United States, the
owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment.
U.S. Government securities may include mortgage-backed securities issued by
U.S. Government agencies or instrumentalities including, but not limited to,
Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed securities include
pass-through securities, participation certificates and collateralized mortgage
obligations. See "Mortgage-Backed and Asset-Backed Securities." Timely payment
of principal and interest on Ginnie Mae pass-throughs is guaranteed by the full
faith and credit of the United States. Freddie Mac and Fannie Mae are both
instrumentalities of the U.S. Government, but their obligations are not backed
by the full faith and credit of the United States. It is possible that the
availability and the marketability (i.e., liquidity) of the securities discussed
in this section could be adversely affected by actions of the U.S. Government to
tighten the availability of its credit.
Money Market Instruments
Money market instruments are high-quality, short-term debt instruments that
present minimal credit risk. They may include U.S. Government securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
9
<PAGE>
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 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
10
<PAGE>
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 some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is government guaranteed or considered to be of the highest quality.
Conversely, principal-only ("PO") classes are entitled to receive
11
<PAGE>
all or a portion of the principal payments, but none of the interest, from the
underlying mortgage assets. PO classes are purchased at substantial discounts
from par, and the yield to investors will be reduced if principal payments are
slower than expected. IOs, POs and other CMOs involve special risks, and
evaluating them requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities. The
yield characteristics of mortgage-backed and asset-backed securities differ from
those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield
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retained by the issuer. Actual yield to the holder may vary from the coupon
rate, even if adjustable, if the mortgage-backed securities are purchased or
traded in the secondary market at a premium or discount. In addition, there is
normally some delay between the time the issuer receives mortgage payments from
the servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed-rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Changes in the rate or "speed" of these payments can
cause the value of the mortgage-backed securities to fluctuate rapidly. However,
these effects may not be present, or may differ in degree, if the mortgage loans
in the pools have adjustable interest rates or other special payment terms, such
as a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed securities
is smaller and less liquid than the market for U.S. Government mortgage-backed
securities. CMO classes may be specifically structured in a manner that provides
any of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and especially during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of some CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be reduced.
These changes can result in volatility in the market value and in some instances
reduced liquidity of the CMO class.
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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.
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
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be treated as short-term instruments, bonds, stocks or as a separate asset class
for purposes of the Fund's investment allocations, depending on the individual
characteristics of the securities. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
Loans and Other Direct Debt Instruments
Direct debt instruments are interests in amounts owed by a corporate,
governmental, or other borrower to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments are subject to the
Fund's policies regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
service. If the Fund does not receive scheduled interest or principal payments
on such indebtedness, the Fund's share price could be adversely affected. Loans
that are fully secured offer the Fund more protections than an unsecured loan in
the event of non-payment of scheduled interest or principal. However, there is
no assurance that the liquidation of collateral from a secured loan would
satisfy the borrower's obligation, or that the collateral could be liquidated.
Indebtedness of borrowers whose creditworthiness is poor involves substantially
greater risks, and may be highly speculative. Borrowers that are in bankruptcy
or restructuring may never pay off their indebtedness, or may pay only a small
fraction of the amount owed. Direct indebtedness of developing countries also
involves a risk that the governmental entities responsible for the repayment of
the debt may be unable, or unwilling, to pay interest and principal when due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the Fund. For
example, if a loan is foreclosed, the Fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. Direct debt instruments may also involve a risk of
insolvency of the lending bank or other intermediary. Direct debt instruments
that are not in the form of securities may offer less legal protection to the
Fund in the event of fraud or misrepresentation. In the absence of definitive
regulatory guidance, the Fund relies on WRIMCO's research in an attempt to avoid
situations where fraud or misrepresentation could adversely affect the Fund.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, the Fund has direct recourse against the borrower,
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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 more recently developed receipts designed to facilitate the trading
of foreign issuers by U.S. and non-U.S. investors and traders.
WRIMCO believes that there are investment opportunities as well as risks in
investing in foreign securities. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy or each other in such matters as
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Individual foreign companies
may also differ favorably or unfavorably from domestic companies in the same
industry. Foreign currencies may be stronger or weaker than the U.S. dollar or
than each other. 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.
These is no assurance that WRIMCO will be able to anticipate these potential
events or counter their effects.
The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is likely
to experience long-term gross domestic product growth above that expected to
occur in the United States, the United Kingdom, France, Germany, Italy, Japan
and Canada. Developing countries may have relatively unstable governments,
economies based on only a few industries and securities markets that trade a
small number of securities.
Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The Fund may purchase and sell foreign currency and invest in foreign
currency deposits, and may enter into forward currency contracts, as described
in the Prospectus and this SAI. The Fund may incur a transaction charge in
connection with the exchange of currency. Currency conversion involves dealer
spreads and other costs, although commissions are not usually charged. See
"Options, Futures and Other Strategies - Forward Currency Contracts" below.
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual 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" below.
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. The Fund makes loans of its
securities only to parties deemed by WRIMCO to be creditworthy.
Any securities loan that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). Under the
present Guidelines, the collateral must consist of cash, U.S. Government
securities or bank letters of credit, at least equal in value to the market
value of the securities lent on each day that the loan is outstanding. If the
market value of the 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. Under
the Fund's current securities lending procedures, the Fund may lend securities
only to broker-dealers and financial institutions deemed creditworthy by WRIMCO.
The Fund will make loans only under rules of the NYSE, which presently require
the borrower to give the securities back to the Fund within five business days
after the Fund gives notice to do so. If the Fund loses its
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voting rights on securities loaned, it will have the securities returned to it
in time to vote them if a material event affecting the investment is to be voted
on. The Fund may pay reasonable finder's, administrative and custodian fees in
connection with loans of securities.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned increases, risks of delay
in recovering the securities loaned or even loss of rights in the collateral
should the borrower of the securities fail financially.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements do
not cover the present rules, which may be changed without shareholder vote, as
to: (i) whom securities may be loaned, (ii) the investment of cash collateral,
or (iii) voting rights.
Repurchase Agreements
A repurchase agreement is an instrument under which the Fund purchases a
security and the seller (normally a commercial bank or broker-dealer) agrees, at
the time of purchase, that it will repurchase the security at a specified time
and price. The amount by which the resale price is greater than the purchase
price reflects an agreed-upon market interest rate effective for the period of
the agreement. The return on the securities subject to the repurchase agreement
may be more or less than the return on the repurchase agreement.
The majority of the repurchase transactions in which the Fund would engage
are overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is that the
Fund may suffer a loss if the seller fails to pay the agreed-upon amount on the
delivery date and that amount is greater than the resale price of the underlying
securities and other collateral held by the Fund. In the event of bankruptcy or
other default by the seller, there may be possible delays or expenses in
liquidating the underlying securities or other collateral, decline in their
value and loss of interest. The return on such collateral may be more or less
than that from the repurchase agreement. The Fund's repurchase agreements will
be structured so as to fully collateralize the loans. In other words, the value
of the underlying securities, which will be held by the Fund's custodian bank or
by a third party that qualifies as a custodian under Section 17(f) of the
Investment Company Act of 1940, as amended ("1940 Act"), is and, during the
entire term of the agreement, will remain at least equal to the value of the
loan, including the accrued interest earned thereon. Repurchase agreements are
entered into only with those entities approved by WRIMCO on the basis of
criteria established by the Board of Directors.
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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.
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.
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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 may be
limited by tax considerations. See "Taxes" below for a more detailed discussion
of the tax implications of investments in Precious Metals.
Illiquid Investments
Illiquid investments are investments that cannot be sold or disposed of in
the ordinary course of business within seven days at approximately the prices at
which they are valued. Investments currently considered to be illiquid include:
(i) repurchase agreements not terminable within seven days;
(ii) securities for which market quotations are not readily available;
(iii) securities involved in swap, cap, collar and floor transactions;
(iv) bank deposits, unless they are payable on demand or within seven days
after demand;
(v) non-government stripped fixed-rate mortgage-backed securities;
(vi) direct debt instruments;
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(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, collars, floors, 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 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
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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. 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.
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(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 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.
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(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 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
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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 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
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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 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.
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Options on Indices. Puts and calls on indices are similar to puts and calls
on securities or futures contracts except that all settlements are in cash and
gain or loss depends on changes in the index in question rather than on price
movements in individual securities or futures contracts. When the Fund writes a
call on an index, it receives a premium and agrees that, prior to the expiration
date, the purchaser of the call, upon exercise of the call, will receive from
the Fund an amount of cash if the closing level of the index upon which the call
is based is greater than the exercise price of the call. The amount of cash is
equal to the difference between the closing price of the index and the exercise
price of the call times a specified multiple ("multiplier"), which determines
the total dollar value for each point of such difference. When the Fund buys a
call on an index, it pays a premium and has the same rights as to such call as
are indicated above. When the Fund buys a put on an index, it pays a premium and
has the right, prior to the expiration date, to require the seller of the put,
upon the Fund's exercise of the put, to deliver to the Fund an amount of cash if
the closing level of the index upon which the put is based is less than the
exercise price of the put, which amount of cash is determined by the multiplier,
as described above for calls. When the Fund writes a put on an index, it
receives a premium and the purchaser of the put has the right, prior to the
expiration date, to require the Fund to deliver to it an amount of cash equal to
the difference between the closing level of the index and the exercise price
times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices. The risks of investment in options on indices
may be greater than options on securities. Because index options are settled in
cash, when the Fund writes a call on an index it cannot provide in advance for
its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of writing a call index option
by holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as underlie
the index and, as a result, bears a risk that the value of the securities held
will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such
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as common stock, because there the writer's obligation is to deliver the
underlying security, not to pay its value as of a fixed time in the past. So
long as the writer already owns the underlying security, it can satisfy its
settlement obligations by simply delivering it, and the risk that its value may
have declined since the exercise date is borne by the exercising holder. In
contrast, even if the writer of an index call holds securities that exactly
match the composition of the underlying index, it will not be able to satisfy
its assignment obligations by delivering those securities against payment of the
exercise price. Instead, it will be required to pay cash in an amount based on
the closing index value on the exercise date. By the time it learns that it has
been assigned, the index may have declined, with a corresponding decline in the
value of its portfolio. This "timing risk" is an inherent limitation on the
ability of index call writers to cover their risk exposure by holding securities
positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows the Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
Generally, OTC foreign currency options used by the Fund are European-style
options. This means that the option is only exercisable immediately prior to its
expiration. This is in contrast to American-style options, which are exercisable
at any time prior to the expiration date of the option.
Futures Contracts and Options on Futures Contracts. The purchase of futures
or call options on futures can serve as a long hedge, and the sale of futures or
the purchase of put options on futures can serve as a short hedge. Writing call
options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing call options on securities or indices.
Similarly, writing put options on futures contracts can serve as a limited long
hedge. Futures contracts and options on futures contracts can also be purchased
and sold to attempt to enhance income or yield.
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In addition, futures strategies can be used to manage the average duration
of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten the average
duration of the Fund's fixed-income portfolio, the Fund may sell a debt futures
contract or a call option thereon, or purchase a put option on that futures
contract. If WRIMCO wishes to lengthen the average duration of the Fund's
fixed-income portfolio, the Fund may buy a debt futures contract or a call
option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or an option on a futures
contract can vary from the previous
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day's settlement price; once that limit is reached, no trades may be made that
day at a price beyond the limit. Daily price limits do not limit potential
losses because prices could move to the daily limit for several consecutive days
with little or no trading, thereby preventing liquidation of unfavorable
positions.
If the Fund were unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to differences in the natures of those markets, are subject to the
following factors, which may create distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate, currency exchange rate or stock market trends by WRIMCO may still
not result in a successful transaction. WRIMCO may be incorrect in its
expectations as to the extent of various interest rate, currency exchange rate
or stock market movements or the time span within which the movements take
place.
Index Futures. The risk of imperfect correlation between movements in the
price of an index futures and movements in the price of the securities that are
the subject of the hedge increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable index. The price of the
index futures may move more than or less than the price of the securities being
hedged. If the price of the index futures moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged
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has moved in a favorable direction, this advantage will be partially offset by
the futures contract. If the price of the futures contract moves more than the
price of the securities, the Fund will experience either a loss or a gain on the
futures contract that will not be completely offset by movements in the price of
the securities that are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of the securities being hedged
and movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase in
the price of securities before the Fund is able to invest in them in an orderly
fashion, it is possible that the market may decline instead. If the Fund then
concludes not to invest in them at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums required to establish
these positions (excluding the amount by which options are "in-the-money") may
not exceed 5% of the liquidation value of the Fund's portfolio, after taking
into account unrealized profits and unrealized losses on any contracts the Fund
has entered into. (In general, a call option on a futures contract is
"in-the-money" if the value of the underlying futures contract exceeds the
strike, i.e., exercise, price of the call; a put option on a futures contract is
"in-the-money" if the value of the underlying futures contract is exceeded by
the strike price of the put.) This policy does not limit to 5% the percentage of
the Fund's assets that are at risk in futures contracts, options on futures
contracts and currency options.
Foreign Currency Hedging Strategies -- Special Considerations. The Fund may
use options and futures contracts on foreign currencies (including the Euro), as
described above,
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and forward currency contracts, as described below, to attempt to hedge against
movements in the values of the foreign currencies in which the Fund's securities
are denominated or to attempt to enhance income or yield. Currency hedges can
protect against price movements in a security that the Fund owns or intends to
acquire that are attributable to changes in the value of the currency in which
it is denominated. Such hedges do not, however, protect against price movements
in the securities that are attributable to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no Financial Instruments on that currency are available or such
Financial Instruments are more expensive than certain other Financial
Instruments. In such cases, the Fund may seek to hedge against price movements
in that currency by entering into transactions using Financial Instruments on
another currency or a basket of currencies, the value of which WRIMCO believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Financial Instrument
will not correlate perfectly with movements in the price of the currency subject
to the hedging transaction is magnified when this strategy is used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S.
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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 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.
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The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that the Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or liquid assets in an account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the flexibility to enter into such forward currency contracts
when it determines that the best interests of the Fund will be served.
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
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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, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by 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.
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Swap agreements, including caps, collars and floors, can be individually
negotiated and structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap agreements may
increase or decrease the overall volatility of 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 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.
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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,
collars, floors and other financial instruments, (b) the Fund may
obtain such short-term credits as are necessary for the clearance of
transactions, and (c) the Fund may make margin payments in connection
with futures contracts, options, forward contracts, swaps, caps,
collars, floors and other financial instruments;
(iv) borrow money, except that the Fund may borrow money for emergency or
extraordinary purposes (not for leveraging or investment) in an amount
not exceeding 33 1/3% of the value of its total assets (less
liabilities other than borrowings). Any borrowings that come to exceed
33 1/3% of the value of the Fund's total assets by reason of a decline
in net assets will be reduced within three days to the extent
necessary to comply with the 33 1/3% limitation. For purposes of this
limitation, "three days" means three days, exclusive of Sundays and
holidays;
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(v) underwrite securities issued by others, except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the 1933
Act in the disposition of restricted securities;
(vi) purchase the securities of any issuer (other than obligations issued
or guaranteed by the United States government or any of its agencies
or instrumentalities) if, as a result, more than 25% of the Fund's
total assets (taken at current value) would be invested in the
securities of issuers having their principal business activities in
the same industry;
(vii) invest in real estate limited partnerships or purchase or sell real
estate unless acquired as a result of ownership of securities (but
this shall not prevent the Fund from purchasing and selling securities
issued by companies or other entities or investment vehicles that deal
in real estate or interests therein, nor shall this prevent the Fund
from purchasing interests in pools of real estate mortgage loans);
(viii) purchase or sell physical commodities, except that the Fund may
purchase and sell precious metals for temporary defensive purposes;
however, this policy shall not prevent the Fund from purchasing and
selling foreign currency, futures contracts, options, forward
contracts, swaps, caps, collars, floors and other financial
instruments; and
(ix) make loans, except (a) by lending portfolio securities 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; or
(x) 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 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,
judged by WRIMCO to be of
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<PAGE>
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 total assets. The Fund
currently intends to limit its investments in obligations of any
single foreign government to less than 25% of its total assets.
(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 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 predecessors, have
a record of less than three years of continuous operation. This
restriction does not apply to any obligations issued or guaranteed by
the U.S. government, or a state or local government authority, or
their respective agencies or instrumentalities, or to collateralized
mortgage obligations, other mortgage-related securities, asset-backed
securities or indexed securities.
(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.)
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(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, 1998, was 221.13%, while the
rate for the remainder of the portfolio was 154.83%. The Fund's overall
portfolio turnover was 230.09% for the fiscal year ended September 30, 1998 and
173.88% for the fiscal year ended September 30, 1997.
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.
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Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell & Reed,
Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services, Inc., a
holding company. Waddell & Reed Financial Services, Inc. is a wholly owned
subsidiary of Waddell & Reed Financial, Inc., a publicly held company. The
address of these companies is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
Waddell & Reed, Inc. and its predecessors 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. 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 "Agent"), a subsidiary of Waddell & Reed,
Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Board of Directors
without shareholder approval.
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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, 1998, 1997 and 1996 were $208,147, $205,329 and $218,333, 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.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- --------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $ 1,000 $ 85,000
$1,000 and Over $100,000
The fees paid to the agent for accounting services for the fiscal years
ended September 30, 1998, 1997 and 1996 were $20,000, $20,000 and $19,167,
respectively.
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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, 1998, 1997 and 1996 were $215,190,
$154,700 and $717,578, respectively. The amount retained by Waddell & Reed, Inc.
for each period was $91,391, $67,976 and $310,660, 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 & 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.
Waddell & Reed, Inc. offers the Fund's shares through its registered
representatives and sales managers (sales force)
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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 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 $71,998 and $747,
respectively, were paid (or accrued) by the Fund under the Class A Plan for the
fiscal year ended September 30, 1998. 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.
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
describes 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
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activities for which it is entitled to reimbursement under the Class A Plan.
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 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 a class's 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.
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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.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each class of the shares of the Fund is the value of
the assets of that class, less the class's liabilities, divided by the total
number of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined net asset
value plus the sales charge described in the Prospectus. The sales charge is
paid to Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of
March 31, 1999, which is the most recent balance sheet included in this SAI, was
as follows:
Net asset value per Class A share
(Class A net assets divided by Class A shares
outstanding) ................................................. $5.56
Add: selling commission (5.75% of offering
price) ....................................................... .34
-----
Maximum offering price per Class A share
(Class A net asset value divided by 94.25%)................... $5.90
=====
The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge
described in the Prospectus. The offering price of a Class B, Class C or a Class
Y share is its net asset value next determined following acceptance of a
purchase order.
The number of shares you receive for your purchase depends on the next
offering price after Waddell & Reed, Inc., the Fund's underwriter, receives and
accepts your order at its principal business office at the address shown on the
cover of this SAI. You will be sent a confirmation after your purchase which
will indicate how many shares you have purchased.
Waddell & Reed, Inc. need not accept any purchase order, and it or the Fund
may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily computed
once on each day that the NYSE is open for
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trading as of the later of the close of the regular session of the NYSE or the
close of the regular session of any other securities or commodities exchange on
which an option or future held by the Fund is traded. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
it is possible that the NYSE may close on other days. The net asset value will
change every business day, since the value of the Fund's assets and the number
of shares outstanding changes every business day.
The securities in the portfolio of the Fund, except as otherwise noted,
listed or traded on a stock exchange, are valued on the basis of the last sale
on that day or, lacking any sales, at a price which is the mean between the
closing bid and asked prices. Other securities that are traded over-the-counter
are priced using the Nasdaq Stock Market, which provides information on bid and
asked prices quoted by major dealers in such stocks. Bonds, other than
convertible bonds, are valued using a third-party pricing system. Convertible
bonds are valued using this pricing system only on days when there is no sale
reported. Short-term debt securities are valued at amortized cost, which
approximates market. When market quotations are not readily available,
securities and other assets are valued at fair value as determined in good faith
under procedures established by and under the general supervision and
responsibility of the Fund's Board of Directors.
Options and futures contracts purchased and held by the Fund are valued at
the last sales price thereof on the securities or commodities exchanges on which
they are traded, or, if there are no transactions, at the mean between bid and
asked prices. Ordinarily, the close of the regular session for option trading on
national securities exchanges is 4:10 p.m. Eastern time and the close of the
regular session for commodities exchanges is 4:15 p.m. Eastern time. Futures
contracts will be valued with reference to established futures exchanges. The
value of a futures contract purchased by the Fund will be either the closing
price of that contract or the bid price. Conversely, the value of a futures
contract sold by the Fund will be either the closing price or the asked price.
When the Fund writes a put or call, an amount equal to the premium received
is included in the Fund's Statement of Assets and Liabilities as an asset, and
an equivalent deferred credit is included in the liability section. The deferred
credit is marked-to-market to reflect the current market value of the put or
call. If a call the Fund wrote is exercised, the proceeds received on the sale
of the related investment are increased by the amount of the premium the Fund
received. If the Fund exercised a call it purchased, the amount paid to purchase
the related investment is increased by the amount of the premium
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<PAGE>
paid. If a put written by the Fund is exercised, the amount that the Fund pays
to purchase the related investment is decreased by the amount of the premium it
received. If the Fund exercises a put it purchased, the amount the Fund receives
from the sale of the related investment is reduced by the amount of the premium
it paid. If a put or call written by the Fund expires, it has a gain in the
amount of the premium; if it enters into a closing purchase transaction, it will
have a gain or loss depending on whether the premium was more or less than the
cost of the closing transaction.
Foreign currency exchange rates are generally determined prior to the close
of the trading of the regular session of the NYSE. Occasionally, events
affecting the value of foreign investments and such exchange rates occur between
the time at which they are determined and the close of the regular session of
trading on the NYSE, which events will not be reflected in a computation of the
Fund's net asset value on that day. If events materially affecting the value of
such investments or currency exchange rates occur during such time period, the
investments will be valued at their fair value as determined in good faith under
procedures established by and under the general supervision and responsibility
of the Board of Directors. The foreign currency exchange transactions of the
Fund conducted on a spot basis are valued at the spot rate for purchasing or
selling currency prevailing on the foreign exchange market. Under normal market
conditions, this rate differs from the prevailing exchange rate by an amount
generally less than one-tenth of one percent due to the costs of converting from
one currency to another.
Optional delivery standby commitments are valued at fair value under the
general supervision and responsibility of the Fund's Board of Directors. They
are accounted for in the same manner as exchange-listed puts.
Minimum Initial and Subsequent Investments
For Class A, 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."
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For Class Y shares, investments by government entities or authorities or by
corporations must total at least $10 million within the first twelve months
after initial investment. There is no initial investment minimum for other Class
Y investors.
Reduced Sales Charges (Applicable to Class A Shares Only)
Account Grouping
For the purpose of taking advantage of the lower sales charges available
for large purchases of Class A shares, a purchase in any of categories 1 through
7 listed below made by an individual or deemed to be made by an individual may
be grouped with purchases in any other of these categories:
1. Purchases by an individual for his or her own account (includes purchases
under the United Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own account
(includes purchases under the United Funds Revocable Trust Form of spouse);
3. Purchases by that individual or his or her spouse in their joint account;
4. Purchases by that individual or his or her spouse for the account of their
child under age 21;
5. Purchases by any custodian for the child of that individual or spouse in a
Uniform Gifts to Minors Act ("UGMA") or Uniform Transfers to Minors Act
("UTMA") account;
6. Purchases by that individual or his or her spouse for his or her Individual
Retirement Account ("IRA"), 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
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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.
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 net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.
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In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan, the shares held under such plan may be combined with the additional
purchase only if the contractual plan has been completed.
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,
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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 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, and 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 dividend 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 net asset value by the
Directors and officers of the Fund, 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"
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includes stepchild; "parent" includes stepparent. Purchases of Class A shares in
an IRA sponsored by Waddell & Reed, Inc. established for any of these eligible
purchasers may also be at net asset value. Purchases of Class A shares in any
tax qualified retirement plan under which the eligible purchaser is the sole
participant may also be made at net asset value. Trusts under which the grantor
and the trustee or a co-trustee are each an eligible purchaser are also eligible
for net asset value purchases of Class A shares. "Employees" includes retired
employees. A "retired employee" is an individual separated from service from
Waddell & Reed, Inc. or affiliated companies with a vested interest in any
Employee Benefit Plan sponsored by Waddell & Reed, Inc. or its affiliated
companies. "Employees" also includes 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" includes 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
net asset value whether or not the custodian himself is an eligible purchaser.
Purchases of Class A shares in a 401(k) plan having 100 or more eligible
employees and purchases of Class A shares in a 457 plan having 100 or more
eligible employees may be made at net asset value.
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.
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 net asset value
next determined after the Fund receives the returned amount. Your written
request to reinvest and the amount to be reinvested must be received within 30
days after your redemption request was received, and the Fund must be offering
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 net asset
value 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
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charge to the amount you are reinvesting on 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 net asset value next determined after you have
returned the amount. Your written request to do this must be received within 30
days after your redemption. You can do this only once as to Class B shares of
the Fund and only once as to Class C shares of the 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 net asset value in a Keogh plan or an IRA.
Reasons for Differences in Public Offering Price of Class A shares
As described herein and in the Prospectus for Class A shares, there are a
number of instances in which the Fund's Class A shares are sold or issued on a
basis other than the maximum public offering price, that is, the net asset value
plus the highest sales charge. Some of these relate to lower or eliminated sales
charges for larger purchases of Class A shares, whether made at one time or over
a period of time as under a Letter of Intent or right of accumulation. See the
table of sales charges in the Prospectus. The reasons for these quantity
discounts are, in general, that (i) they are traditional and have long been
permitted in the industry and are therefore necessary to meet competition as to
sales of shares of other funds having such discounts, (ii) certain quantity
discounts are required by rules of the National Association of Securities
Dealers, Inc. (as are elimination of sales charges on the reinvestment of
dividends and distributions), and (iii) they are designed to avoid an unduly
large dollar amount of sales charge on substantial purchases in view of reduced
selling expenses. Quantity discounts are made available to certain related
persons for reasons of family unity and to provide a benefit to tax-exempt plans
and organizations.
The reasons for the other instances in which there are reduced or
eliminated sales charges for Class A shares are as follows. Exchanges at net
asset value are permitted because a sales charge has already been paid on the
shares exchanged. Sales of Class A shares without sales charge are permitted to
Directors, officers and certain others due to reduced or eliminated selling
expenses and since such sales may aid in the development of a sound employee
organization, encourage incentive, responsibility and interest in the United
Group and an identification with its aims and policies. Limited reinvestments of
redemptions of Class A shares at no sales charge are permitted to attempt to
protect against mistaken or not fully informed redemption decisions. Class A
shares may be issued at no sales charge in plans of reorganization due to
reduced or eliminated sales expenses and since, in some cases, such issuance is
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exempted by the 1940 Act from the otherwise applicable restrictions as to what
sales charge must be imposed. In no case in which there is a reduced or
eliminated sales charge are the interests of existing Class A shareholders
adversely affected since, in each case, the Fund receives the net asset value
per share of all shares sold or issued.
Retirement Plans
As described in the Class A Prospectus, your account may be set up as a
funding vehicle for a retirement plan. For individual taxpayers meeting certain
requirements, Waddell & Reed, Inc. offers model or prototype documents for the
following retirement plans. All of these plans involve investment in shares of
the Fund (or shares of certain other funds in the United Group).
Individual Retirement Accounts (IRAs). Investors having earned income may
set up a plan that is commonly called an IRA. Under a traditional IRA, an
investor can contribute each year up to 100% of his or her earned income, up to
an annual maximum of $2,000 (provided the investor has not reached age 70 1/2).
For a married couple, the annual maximum is $4,000 ($2,000 for each spouse) or,
if less, the couple's combined earned income for the taxable year, even if one
spouse had no earned income. Generally, the contributions are deductible unless
the investor (or, if married, either spouse) is an active participant in a
qualified retirement plan or if, notwithstanding that the investor or one or
both spouses so participate, their adjusted gross income does not exceed certain
levels. However, a married investor who is not an active participant, files
jointly with his or her spouse and whose combined adjusted gross income does not
exceed $150,000, is not affected by the spouse's active participant status.
An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be subject
to Federal income tax until distributed from the IRA. A direct rollover
generally applies to any distribution from an employer's plan (including a
custodial account under Section 403(b)(7) of the Code, but not an IRA) other
than certain periodic payments, required minimum distributions and other
specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead, an
investor receives payment of an eligible rollover distribution, all or a portion
of that distribution generally may be rolled over to an IRA within 60 days after
receipt of the distribution. Because mandatory Federal income tax withholding
applies to any eligible rollover distribution which is not paid in a direct
rollover, investors should consult their tax advisers or pension
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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 to contribute to its employees' retirement accounts. A
SIMPLE plan can be funded by either an IRA or a 401(k) plan. In general, an
employer can choose to match employee contributions dollar-for-dollar
(generally, up to 3% of the employee's compensation) or may contribute to all
eligible employees 2% of their compensation, whether or not they defer salary to
their SIMPLE plans. SIMPLE plans involve fewer administrative requirements than
401(k) or other qualified plans generally.
Keogh Plans. Keogh plans, which are available to self-employed individuals,
are defined contribution plans that may be either a money purchase plan or a
profit-sharing plan. As a
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general rule, an investor under a defined contribution Keogh plan can contribute
each year up to 25% of his or her annual earned income, with an annual maximum
of $30,000.
457 Plans. If an investor is an employee of a state or local government or
of certain types of charitable organizations, he or she may be able to enter
into a deferred compensation arrangement in accordance with Section 457 of the
Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is an employee
of a public school system or of certain types of charitable organizations, he or
she may be able to enter into a deferred compensation arrangement through a
custodian account under Section 403(b) of the Code. Some organizations have
adopted Title I plans, which are funded by employer contributions in addition to
employee deferrals.
401(k) Plans. With a 401(k) plan, employees can make tax-deferred
contributions into a plan to which the employer may also contribute, usually on
a matching basis. An employee may defer each year up to 25% of compensation,
subject to certain annual maximums, which may be increased each year based on
cost-of-living adjustments.
More detailed information about these arrangements and applicable forms are
available from Waddell & Reed, Inc. These plans may involve complex tax
questions as to premature distributions and other matters. Investors should
consult their tax adviser or pension consultant.
Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
Once a sales charge has been paid on shares of a fund in the United Group,
you may exchange these shares and any shares acquired through payment of
dividends or distributions from these shares for Class A shares of another fund
in the United Group. The shares you exchange must be worth at least $100 or you
must already own shares of the fund in the United Group into which you want to
exchange.
You may exchange Class A shares you own in another fund in the United Group
for Class A shares of the Fund without charge if (i) the shares of the fund you
are exchanging from are subject to a full sales charge and a sales charge was
paid on these shares, or (ii) the shares were received in exchange for shares of
a fund that are subject to a full sales charge and for which a sales charge was
paid, or (iii) the shares were acquired from payment of dividends and
distributions paid or shares subject to a full sales charge and for which a
sales charge was paid. The shares you are exchanging may have been involved one
or more such exchanges so long as a sales charge was paid on the shares
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originally purchased. Also, shares acquired without a sales charge because the
purchase was $2 million or more will be treated the same as shares on which a
sales charge was paid.
Class A shares of funds subject to a reduced sales charge (United Municipal
Bond Fund, Inc., United Government Securities Fund, Inc. and United Municipal
High Income Fund, Inc.) may be exchanged for Class A shares of the Fund only if
(i) you received those shares as a result of one or more exchanges of shares on
which a sales charge was originally paid, or (ii) the shares have been held from
the date of the original purchase for at least six months.
Subject to the above rules regarding sales charges, you may have a specific
dollar amount of Class A shares of United Cash Management, Inc. automatically
exchanged each month into Class A shares of the Fund or any other fund in the
United Group. The shares of United Cash Management, Inc. which you designate for
automatic exchange must be worth at least $100 or you must own Class A shares of
the fund in the United Group into which you want to exchange. The minimum value
of shares which you may designate for automatic exchange is $100, which may be
allocated among the Class A shares of different funds in the United Group so
long as each fund receives a value of at least $25. Minimum initial investment
and minimum balance requirements apply to such automatic exchange service. You
may redeem your Class A shares of the Fund and use the proceeds to purchase
Class Y shares of 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 redeemed each month and invested in Class B
shares of the Fund. The shares of United Cash Management, Inc. which you
designate must be worth at least $100, which may be allocated among different
funds so long as each fund receives a value of at least $25. Minimum initial
investment and minimum balance requirements apply to such service.
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.
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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 redeemed each month and invested in Class C
shares of the Fund. The shares of United Cash Management, Inc. which you
designate must be worth at least $100, which may be allocated among different
funds so long as each fund receives a value of at least $25. Minimum initial
investment and minimum balance requirements apply to such service.
Class Y Share Exchanges
Class Y shares of the Fund may be exchanged for Class Y shares of any other
fund in the United Group or for Class A shares of United Cash Management, Inc.
General Exchange Information
When you exchange shares, the total shares you receive will have the same
aggregate net asset value as the total shares you exchange. The relative values
are those next figured after your exchange request is received in good order.
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any time,
upon notice in certain circumstances, and any such exchange may not be accepted.
Redemptions
The Prospectus gives information as to redemption procedures. Redemption
payments are made within seven days, unless delayed because of emergency
conditions determined by the SEC, when the NYSE is closed (other than on
weekends and holidays) or when trading on the NYSE is restricted. Payment is
made in cash, although under extraordinary conditions, redemptions may be made
in portfolio securities. Redemptions may be made in portfolio securities if the
Fund's Board of Directors decides that conditions exist making cash payments
undesirable. The securities would be valued at the value used in determining net
asset value. There would be brokerage costs to the redeeming shareholder in
selling such securities. The Fund, however, has elected to be governed by Rule
18f-1 under the 1940 Act, pursuant to which it is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of its net asset value during
any 90-day period for any one shareholder.
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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 C shares purchased within the past year remain subject to the
CDSC; however, Class B shares redeemed under the Service are not subject to a
CDSC. Applicable forms to start the Service are available from Waddell & Reed,
Inc.
To qualify for the Service, you must have invested at least $10,000 in
Class A, 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
offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to one-twelfth of
a percentage of the value of the shares in the Account (you select the
percentage); or
3. a monthly or quarterly payment, which will change each month or quarter,
by redeeming a number of shares fixed by you (at least five shares).
Shares are redeemed on the 20th day of the month in which the payment is to
be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
Retirement plan accounts may be subject to a fee imposed by the plan
custodian for use of their service.
The dividends and distributions on shares 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 or income or return on your investment.
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You may at any time change the manner in which you have chosen to have
shares redeemed to any of the other choices originally available to you. You may
at any time redeem part or all of the shares in your account; if you redeem all
of the shares, the Service is terminated. The Fund can also terminate the
Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed will be
sent to you to assist you in completing your Federal income tax return.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to compel the redemption of shares held under any
account or any plan if the aggregate net asset value of such shares (taken at
cost or value as the Board of Directors may determine) is less than $500. The
Board of Directors has no intent to compel redemptions in the foreseeable
future. If it should elect to compel redemptions, shareholders who are affected
will receive prior written notice and will be permitted 60 days to bring their
accounts up to the minimum before the redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. The Board has the benefit of advice
and reports from independent counsel and independent auditors. The majority of
the Directors is not affiliated with Waddell & Reed, Inc.
The principal occupation during at least the past five years of each
Director and officer of the Fund is given below. Each of the persons listed
through and including Mr. Vogel is a member of the Fund's Board of Directors.
The other persons are officers but not Board members. For purposes of this
section, the term "Fund Complex" includes each of the registered investment
companies in the United Group of Mutual Funds, Waddell & Reed Funds, Inc. and
Target/United Funds, Inc. Each of the Fund's Directors is also a Director of
each of the Funds in the Fund Complex and each of the Fund's officers is also an
officer of one or more of the Funds in the Fund Complex.
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KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other funds
in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer, Principal Financial Officer and Director of Waddell & Reed Financial,
Inc.; President, Chairman of the Board of Directors and Chief Executive Officer
of Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
of WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of 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, JoDill Corp., an agricultural company; President and Director of
Dillingham Enterprises Inc.; formerly, Director and consultant, McDougal
Construction Company; formerly, Instructor at Central Missouri State University;
formerly, Member of the Board of Police Commissioners, Kansas City, Missouri;
formerly, Senior Vice President-Sales and Marketing, Garney Companies, Inc., a
specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George S. and Delores Dori
Eccles Foundation. Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal. Date of birth: March
24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Partner, Levy and Craig, P.C., a law firm. Date of
birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct Professor of Law at the
University of Oklahoma College of Law; formerly, Vice President for Executive
Affairs of the University
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of Oklahoma; formerly, an Attorney with Crowe & Dunlevy, a law firm. Date of
birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman of the Board of
Directors, Gilliland & Hayes, P.A., a law firm; formerly, President, Gilliland &
Hayes, P.A. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the other
funds in the Fund Complex; Executive Vice President, Chief Operating Officer and
Director of Waddell & Reed Financial, Inc.; Vice President, Chief Operating
Officer, Director and Treasurer of Waddell & Reed Financial Services, Inc.;
Executive Vice President, Principal Financial Officer, Director and Treasurer of
WRIMCO; President, Chief Executive Officer, Principal Financial Officer,
Director and Treasurer of Waddell & Reed, Inc.; President, Director and
Treasurer of Waddell & Reed Services Company; formerly, Vice President of each
of the funds in the Fund Complex; formerly, Director and Treasurer of Waddell &
Reed Asset Management Company, a former affiliate of Waddell & Reed Financial,
Inc. Date of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund Complex;
President, Chief Investment Officer, Treasurer and Director of Waddell & Reed
Financial, Inc.; Vice President, Chief Investment Officer and Director of
Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; formerly, President, Chief Executive Officer, Chief Investment Officer
and Director of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. Date of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and subsidiaries. Date of birth: February 19, 1924.
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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; formerly, Director
of Waddell & Reed Asset Management Company and United Investors Life Insurance
Company, affiliates of Waddell & Reed, Inc. Date of birth: April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director of Network Rehabilitation Services; formerly, Employment
Counselor and Director of McCue-Parker Center. Date of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm. Date of
birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Professor of Business Administration, University of Missouri-Kansas City;
formerly, Chancellor, University of Missouri-Kansas City. Date of birth: January
1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
Helge K. Lee
Vice President, Secretary and General Counsel of the Fund and each of the
other funds in the Fund Complex; Secretary and General Counsel of Waddell & Reed
Financial, Inc.; Vice President, Secretary, General Counsel and Director of
Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary and
General Counsel of WRIMCO and Waddell & Reed, Inc.; Senior Vice President,
Secretary, General Counsel and Director of Waddell & Reed Services Company;
formerly, Executive Vice President, Secretary and Chief Compliance Officer of
LGT Asset Management, Inc. and affiliates; formerly, Senior Vice President,
General Counsel and Secretary of Strong Capital Management, Inc. and affiliates.
Date of birth: March 30, 1946.
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Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund and
each of the other funds in the Fund Complex; Vice President of Waddell & Reed
Services Company. Date of birth: July 18, 1942.
Michael L. Avery
Vice President of the Fund and three other funds in the Fund Complex;
Senior Vice President of the Manager; 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 has no
authority or responsibility with respect to 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 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 a total of $48,000 per year, plus $2,500 for
each meeting of the Board of Directors attended plus reimbursement of expenses
of attending such meeting and $500 for each committee meeting attended which is
not in conjunction with a Board of Directors meeting, other than Directors who
are affiliates of Waddell & Reed, Inc. The fees to the Directors who receive
them are divided among the funds in the United Group, Target/United Funds, Inc.
and Waddell & Reed Funds, Inc. based on their relative size. During the Fund's
fiscal year ended September 30, 1998, the Fund's Directors received the
following fees for service as a director:
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Compensation Table
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 76 56,000
John A. Dillingham 76 56,000
David P. Gardner 0 0
Linda K. Graves 76 56,000
Joseph Harroz, Jr. 0 0
John F. Hayes 76 56,000
Glendon E. Johnson 75 55,000
William T. Morgan 76 56,000
Ronald C. Reimer 0 0
Frank J. Ross, Jr. 76 56,000
Eleanor B. Schwartz 76 56,000
Frederick Vogel III 76 56,000
*No pension or retirement benefits have been accrued as a part of Fund expenses.
Mr. Gardner was elected as a Director on August 19, 1998. 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, 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 , 1999, regarding the ownership of
the Fund's shares.
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
- ------------------- ----- ------------ -------
Waddell & Reed
Financial, Inc. Class Y %
Savings & Investment Plan
6300 Lamar Avenue
Overland Park KS 66201
Torchmark Corporation Class Y
Savings & Investment Plan
2001 Third Avenue South
Birmingham AL 35233
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PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is derived
from the dividends, interest and earned discount on the securities the Fund
holds, less expenses (which will vary by class). The second source is net
realized capital gains, which are derived from the proceeds received from the
Fund's sale of securities at a price higher than the Fund's tax basis (usually
cost) in such securities, less losses from sales of securities at a price lower
than the Fund's basis therein; these gains can be either long-term or
short-term, depending on how long the Fund has owned the securities before it
sells them. The third source is net realized gains from foreign currency
transactions. The payments made to shareholders from net investment income, net
short-term capital gains, and net realized gains from certain foreign currency
transactions are called dividends.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may not
have such gains, depending on whether securities are sold and at what price. If
the Fund has net capital gains, it will pay distributions once each year, in the
latter part of the fourth calendar quarter, except to the extent it has net
capital losses 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, however, a total dividend and/or
distribution amount less than ten dollars will be automatically paid in shares
of the Fund of the same class as that with respect to which they were paid (ii)
you want your dividends and distributions paid in shares of the Fund of the same
class as that with respect to which they were paid or (iii) you want cash for
your dividends, however, a total dividend amount less than ten dollars will be
automatically paid in shares of the Fund of the same class as that with respect
to which it was paid and want your distributions paid in shares of the Fund of
the same class as that with respect to
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which they were paid. You can change your instructions at any time. If you give
no instructions, your dividends and distributions will be paid in shares of the
Fund of the same class as that with respect to which they were paid. All
payments in Fund shares are at net asset value without any sales charge. The net
asset value used for this purpose is that computed as of the record date for the
dividend or distribution, although this could be changed by the Board of
Directors.
Even if you get dividends and distributions on Fund shares in cash, you can
thereafter reinvest them (or distributions only) in shares of the Fund at net
asset value (i.e., with no sales charge) next determined after receipt by
Waddell & Reed, Inc. of the amount clearly identified as a reinvestment. The
reinvestment must be within 45 days after the payment.
TAXES
General
The Fund has qualified for treatment as a regulated investment company
("RIC") under the Code, so that it is relieved of Federal income tax on that
part of its investment company taxable income (consisting generally of net
investment income, net short-term capital gains and net gains from certain
foreign currency transactions) that is distributed to its shareholders. To
continue to qualify as a RIC, the Fund must distribute to its shareholders for
each taxable year at least 90% of the sum 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
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satisfy the 50% Diversification Requirement for any quarter. The Fund intends to
manage its portfolio so as to avoid failing to satisfy those requirements for
these reasons.
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 gain (the excess of
net long-term capital gain over net short-term capital loss), 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 October, November or
December of any year and payable to its shareholders of record on a date in one
of those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if they are paid by the Fund during the
following January. Accordingly, those dividends and distributions will be taxed
to the shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any distributions received on those shares. Investors also should
be aware that if shares are purchased shortly before the record date for a
dividend or distribution, the investor will receive some portion of the purchase
price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gains net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
It is the Fund's policy to pay sufficient dividends and distributions each year
to avoid imposition of the Excise Tax. The Fund may defer into the next calendar
year net capital losses incurred between November 1 and the end of the current
calendar year.
Income from Foreign Securities
Dividends and interest received, 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.
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The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation -- other than a "controlled foreign
corporation" (i.e., a foreign corporation in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which the Fund is a U.S. shareholder --that, in general,
meets either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for
the production of, passive income. Under certain circumstances, the Fund will be
subject to Federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on disposition of the stock (collectively
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gains -- which
probably would have to be distributed by the Fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if those earnings and
gains were not distributed to the Fund by the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
The Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years. The Fund's adjusted basis in each PFIC's stock with respect
to which it makes this election will be adjusted to reflect the amounts of
income included and deductions taken under the election. Regulations proposed in
1992 provided a similar election with respect to the stock of certain PFICs.
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Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of a debt security denominated in foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest, dividends or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally are treated
as ordinary income or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its shareholders.
Income from Options, Futures and Forward Currency Contracts and Foreign
Currencies
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses the Fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures contracts and forward currency contracts derived by the Fund
with respect to its business of investing in securities or foreign currencies
will qualify as permissible income under the Income Requirement.
Any income the Fund earns from writing options is treated as short-term
capital gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being exercised,
the premium it received also will be a short-term capital gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund received will be added to the exercise price to
determine the gains or losses on the sale.
Certain options, 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
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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. That 60% portion
will qualify for the 20% (10% for taxpayers in the 15% marginal tax bracket)
maximum tax rate on net capital gains enacted by the Taxpayer Relief Act of
1997. Section 1256 contracts also may be marked-to-market for purposes of the
Excise Tax and other purposes. The Fund may need to distribute any
mark-to-market gains to its shareholders to satisfy the Distribution Requirement
and/or avoid imposition of the Excise Tax, even though it may not have closed
the transactions and received cash to pay the distributions.
Code section 1092 (dealing with straddles) may also affect the taxation of
options and futures contracts in which the Fund may invest. That section defines
a "straddle" as offsetting positions with respect to personal property; for
these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. The regulations under section
1092 also provide certain "wash sale" rules, that apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If 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 same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward currency contract entered into by the
Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.
Zero Coupon and Payment-in-Kind Securities
The Fund may acquire zero coupon or other securities issued with OID. As a
holder of those securities, the Fund must include
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in its income the portion of the OID that accrues on the securities during the
taxable year, even if the Fund receives no corresponding payment on the
securities during the year. Similarly, the Fund must include in its gross income
securities it receives as "interest" on payment-in-kind securities. Because the
Fund annually must distribute substantially all of its investment company
taxable income, including any accrued OID and other non-cash income, to satisfy
the Distribution Requirement and avoid imposition of the Excise Tax, it may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
will be made from the Fund's cash assets or from the proceeds of sales of
portfolio securities, if necessary. The Fund may realize capital gains or losses
from those sales, which would increase or decrease its investment company
taxable income and/or net capital gains.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Investment
Management Agreement between the Fund and WRIMCO is to arrange the purchase and
sale of securities for the portfolio of the Fund. Transactions in securities
other than those for which an exchange is the primary market are generally done
with dealers acting as principals or market makers. Brokerage commissions are
paid primarily for effecting transactions in securities traded on an exchange
and otherwise only if it appears likely that a better price or execution can be
obtained. The individual who manages the Fund may manage other Funds or advisory
accounts with similar investment objectives. It can be anticipated that 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. Transactions effected pursuant
to such combined orders are averaged as to price and allocated in accordance
with the purchase or sale orders actually placed for each Fund or advisory
account, except where the combined order is not filled completely. In this case,
WRIMCO will ordinarily allocate the transaction pro rata based on the orders
placed. Sharing in large transactions could affect the price 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
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policies include the selection of brokers which provide execution and/or
research services and other services, including pricing or quotation services
directly or through others ("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 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.
76
<PAGE>
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,
1998, 1997 and 1996, it paid brokerage commissions of $43,500, $45,466 and
$54,643, respectively. This figure does not include principal transactions or
spreads or concessions on principal transactions, i.e., those in which the Fund
sells securities to a broker-dealer firm or buys from a broker-dealer firm
securities owned by it.
During the Fund's fiscal year ended September 30, 1998, the transactions,
other than principal transactions, which were directed to broker-dealers who
provided research as well as execution totaled $16,639,319 on which $23,572 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 pertaining
to 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; 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 four 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
77
<PAGE>
approval of a new investment advisory agreement or a change in fundamental
investment policy, which require shareholder approval will be presented to
shareholders at a meeting called by the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon receipt
by 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 net asset value of $5.00 per share.
The Fund's organizational expenses in the amount of $48,800 have been
advanced by Waddell & Reed, Inc. and are an obligation to be paid by the Fund.
These expenses are being amortized over the 60-month period following the date
of the initial public offering of the Fund's shares. In the event that all or
part of Waddell & Reed, Inc.'s initial investment in the Fund's shares is
redeemed prior to the full reimbursement of the organizational expenses, the
Fund's obligation to make reimbursement will cease.
78
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities which
the Fund may use. The Fund may also use ratings provided by other nationally
recognized statistical rating organizations in determining the securities
eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. 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
79
<PAGE>
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.
80
<PAGE>
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
81
<PAGE>
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
82
<PAGE>
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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<PAGE>
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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<PAGE>
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.
85
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS
Business Services - 3.69%
Microsoft Corporation* ................................................. 11,200 $ 1,003,450
Teradyne, Inc.* ........................................................ 6,100 332,831
Total ............................................................... 1,336,281
Chemicals and Allied Products - 10.07%
Bristol-Myers Squibb Company ........................................... 9,300 598,106
du Pont (E.I.) de Nemours and Company .................................. 9,300 539,981
Forest Laboratories, Inc.* ............................................. 6,900 388,988
Merck & Co., Inc. ...................................................... 6,400 513,200
Pharmacia & Upjohn, Inc. ............................................... 6,600 411,675
Procter & Gamble Company (The) ......................................... 5,900 577,831
Warner-Lambert Company ................................................. 9,300 615,544
Total ............................................................... 3,645,325
Communication - 4.92%
Bell Atlantic Corporation .............................................. 8,900 460,019
Clear Channel Communications, Inc.* .................................... 7,000 469,437
Cox Communications, Inc., Class A* ..................................... 6,100 461,313
TCA Cable TV, Inc. ..................................................... 9,000 391,219
Total ............................................................... 1,781,988
Eating and Drinking Places - 1.26%
Wendy's International, Inc. ............................................ 16,000 455,000
Electronic and Other Electric Equipment - 6.43%
Gemstar International Group Limited* ................................... 6,100 458,263
Analog Devices, Inc.* .................................................. 12,900 383,775
EchoStar Communications Corporation, Class A* .......................... 6,200 505,300
Intel Corporation ...................................................... 5,300 630,037
Micron Technology, Inc.* ............................................... 7,300 352,225
Total ............................................................... 2,329,600
Fabricated Metal Products - 2.01%
Fortune Brands, Inc. ................................................... 13,300 514,544
Newell Rubbermaid Inc. ................................................. 4,500 213,750
Total ............................................................... 728,294
Food and Kindred Products - 1.44%
Ralston-Ralston Purina Group ........................................... 19,500 520,406
Industrial Machinery and Equipment - 2.12%
Applied Materials, Inc.* ............................................... 6,500 401,172
Case Corporation ....................................................... 14,500 367,937
Total ............................................................... 769,109
</TABLE>
See Notes to Schedule of Investments on page ___.
1
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Instruments and Related Products - 4.56%
Baxter International Inc. .............................................. 5,600 $ 369,600
Guidant Corporation .................................................... 6,600 399,300
KLA-Tencor Corporation* ................................................ 6,600 320,719
Raytheon Company, Class B .............................................. 9,600 562,800
Total ............................................................... 1,652,419
Motion Pictures - 2.67%
AT&T Corp. - Liberty Media Group, Class A* ............................. 7,800 410,475
Time Warner Incorporated ............................................... 7,800 554,288
Total ............................................................... 964,763
Primary Metal Industries - 1.03%
USX Corporation - U.S. Steel Group ..................................... 15,800 371,300
Stone, Clay and Glass Products - 1.44%
Gentex Corporation* .................................................... 24,100 519,656
Transportation by Air - 2.52%
Northwest Airlines Corporation, Class A*................................ 13,500 375,047
Southwest Airlines Co. ................................................. 17,800 538,450
Total ............................................................... 913,497
Transportation Equipment - 4.15%
Ford Motor Company ..................................................... 6,300 357,525
General Motors Corporation ............................................. 6,200 538,625
Newport News Shipbuilding Inc. ......................................... 19,100 605,231
Total ............................................................... 1,501,381
Trucking and Warehousing - 1.38%
CNF Transportation Inc. ................................................ 13,200 499,125
Wholesale Trade -- Durable Goods - 1.16%
Johnson & Johnson ...................................................... 4,500 421,594
Wholesale Trade -- Nondurable Goods - 0.96%
U.S. Foodservice* ...................................................... 7,500 348,750
TOTAL COMMON STOCKS - 51.81% $18,758,488
(Cost: $16,425,050)
</TABLE>
See Notes to Schedule of Investments on page ___.
2
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITY - 1.29%
Petroleos Mexicanos (Daily Adjusted
Yield Securities (DAYS)),
9.8569%, 7-15-2005 .................................................. $ 500 $ 466,250
(Cost: $462,500)
UNITED STATES GOVERNMENT SECURITIES Federal Home Loan Banks:
6.2%, 2-27-2004 ..................................................... 500 499,960
6.02%, 3-30-2006 .................................................... 500 491,405
United States Treasury:
5.625%, 12-31-2002 .................................................. 6,250 6,340,812
5.875%, 11-15-2005 .................................................. 350 359,625
6.125%, 8-15-2007 ................................................... 5,500 5,757,785
5.625%, 5-15-2008 ................................................... 3,000 3,053,910
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 45.58% $16,503,497
(Cost: $16,626,995)
TOTAL SHORT-TERM SECURITIES - 1.27% $ 461,000
(Cost: $461,000)
TOTAL INVESTMENT SECURITIES - 99.95% $36,189,235
(Cost: $33,975,545)
CASH AND OTHER ASSETS, NET OF
LIABILITIES - 0.05% 18,264
NET ASSETS - 100.00% $36,207,499
</TABLE>
Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 4 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
3
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999
(In Thousands, Except for Per Share Amounts)
Assets
Investment securities -- at value
(Notes 1 and 4) ........................................ $ 36,189
Receivables:
Dividends and interest ................................. 220
Fund shares sold ....................................... 7
Unamortized organization expenses (Note 2) ................ 10
Prepaid insurance premium ................................. 1
-----------
Total assets ......................................... 36,427
-----------
Liabilities
Payable to Fund shareholders .............................. 116
Due to custodian .......................................... 51
Accrued transfer agency and dividend
disbursing (Note 3) .................................... 13
Organization expenses payable (Note 2) .................... 10
Accrued service fee (Note 3) .............................. 7
Accrued accounting services fee (Note 3) .................. 2
Accrued distribution fee (Note 3) ......................... 1
Accrued management fee (Note 3) ........................... 1
Other liabilities ......................................... 19
-----------
Total liabilities .................................... 220
-----------
Total net assets .................................. $ 36,207
===========
Net Assets
$0.01 par value capital stock
Capital stock .......................................... $ 65
Additional paid-in capital ............................. 34,561
Accumulated undistributed income (loss):
Accumulated undistributed net investment
loss ................................................. (3)
Accumulated undistributed net realized loss on
investment transactions .............................. (630)
Net unrealized appreciation in value of
investments .......................................... 2,214
-----------
Net assets applicable to outstanding
units of capital .................................. $ 36,207
===========
Net asset value per share (net assets divided
by shares outstanding)
Class A ................................................... $5.56
Class Y ................................................... $5.56
Capital shares outstanding
Class A ................................................... 6,470
Class Y ................................................... 44
Capital shares authorized .................................... 1,000,000
See notes to financial statements.
4
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended MARCH 31, 1999
(In Thousands)
Investment Income
Income (Note 1B):
Interest and amortization ................................... $ 578
Dividends ................................................... 66
-----
Total income .............................................. 644
-----
Expenses (Notes 2 and 3):
Investment management fee ................................... 121
Transfer agency and dividend disbursing - Class A ........... 51
Service fee - Class A ....................................... 40
Registration fees ........................................... 19
Accounting services fee ..................................... 10
Audit fees .................................................. 8
Amortization of organization expenses ....................... 5
Distribution fee - Class A .................................. 5
Custodian fees .............................................. 3
Legal fees .................................................. 3
Other ....................................................... 32
-----
Total expenses ............................................ 297
-----
Net investment income .................................. 347
-----
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 4)
Realized net loss on securities ................................ (554)
Realized net loss on foreign currency
transactions ................................................ (1)
-----
Realized net loss on investments ............................ (555)
Unrealized appreciation in value of investments
during the period ........................................... 739
-----
Net gain on investments ................................... 184
-----
Net increase in net assets resulting
from operations ..................................... $ 531
=====
See notes to financial statements.
5
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the six For the fiscal
months ended year ended
March 31, September 30,
1999 1998
-------- --------
<S> <C> <C>
Increase in Net Assets
Operations:
Net investment income ............................................ $ 347 $ 738
Realized net gain (loss)
on investments ................................................. (555) 2,284
Unrealized appreciation
(depreciation) ................................................. 739 (751)
-------- --------
Net increase in net assets
resulting from operations ................................... 531 2,271
-------- --------
Distributions to shareholders from (Note 1E):* Net investment income:
Class A ........................................................ (375) (833)
Class Y ........................................................ (3) (10)
Realized gains on securities transactions:
Class A ........................................................ (1,477) (2,183)
Class Y ........................................................ (10) (28)
-------- --------
(1,865) (3,054)
Capital share transactions: ......................................... -- --
Proceeds from sale of shares:
Class A (1,227,850 and 1,316,486
shares, respectively) ....................................... 6,898 7,660
Class Y (29,331 and 14,599
shares, respectively) ....................................... 162 85
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (336,965 and 552,747
shares, respectively) ....................................... 1,841 2,995
Class Y (2,423 and 7,024
shares, respectively) ....................................... 13 38
Payments for shares redeemed:
Class A (776,464 and 901,720
shares, respectively) ....................................... (4,319) (5,234)
Class Y (29,711 and 33,384
shares, respectively) ....................................... (165) (193)
-------- --------
Net increase in net assets
resulting from capital
share transactions ....................................... 4,430 5,351
-------- --------
Total increase ........................................... 3,096 4,568
Net Assets
Beginning of period ................................................. 33,111 28,543
-------- --------
End of period, including undistributed
net investment income (loss) of $(3)
and $29, respectively ............................................ 36,207 33,111
======== ========
</TABLE>
*See "Financial Highlights" on pages ___ - ___.
See notes to financial statements.
6
<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
For the period
six For the fiscal year from
months ended September 30, 3/9/95*
ended -------------------------------------------- through
3/31/99 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 ..................... 0.05 0.15 0.16 0.15 0.07
Net realized and
unrealized gain (loss)
on investments ............. 0.03 0.28 0.74 (0.17) 0.40
---------- ---------- ---------- ---------- ----------
Total from investment
operations .................... 0.08 0.43 0.90 (0.02) 0.47
---------- ---------- ---------- ---------- ----------
Less distributions:
From net investment
income ..................... (0.06) (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 .............. (0.30) (0.64) (0.15) (0.16) (0.05)
---------- ---------- ---------- ---------- ----------
Net asset value,
end of period ................. $ 5.56 $ 5.78 $ 5.99 $ 5.24 $ 5.42
========== ========== ========== ========== ==========
Total return** ................... 1.51% 7.89% 17.46% -0.49% 9.42%
Net assets, end of period
(000 omitted) ................. $ 35,963 $ 32,868 $ 28,221 $ 31,828 $ 22,248
Ratio of expenses to
average net assets ............ 1.70%*** 1.62% 1.70% 1.68% 1.64%***
Ratio of net investment
income to average net
assets ........................ 1.98%*** 2.45% 2.87% 2.93% 3.71%***
Portfolio
turnover rate ................. 79.31% 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.
7
<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 For the
six For the fiscal year period
months ended September 30, from 9/27/95*
ended --------------------------------------------- through
3/31/99 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 ..................... 0.07 0.16 0.17 0.16 0.00
Net realized and
unrealized gain
(loss) on
investments ................ 0.02 0.29 0.75 (0.17) 0.01
------- ------- ------- ------- -------
Total from investment
operations .................... 0.09 0.45 0.92 (0.01) 0.01
------- ------- ------- ------- -------
Less distributions:
From net investment
income ..................... (0.07) (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 .............. (0.31) (0.66) (0.17) (0.17) (0.00)
------- ------- ------- ------- -------
Net asset value,
end of period ................. $ 5.56 $ 5.78 $ 5.99 $ 5.24 $ 5.42
======= ======= ======= ======= =======
Total return ..................... 1.67% 8.26% 17.93% -0.21% 0.18%
Net assets, end of
period (000
omitted) ...................... $ 244 $ 243 $ 322 $ 330 $ 3
Ratio of expenses
to average net
assets ........................ 1.30%** 1.37% 1.28% 1.29% 0.00%
Ratio of net
investment income
to average net
assets ........................ 2.37%** 2.79% 3.29% 3.43% 0.00%
Portfolio
turnover rate ................. 79.31% 230.09% 173.88% 91.06% 9.32%***
</TABLE>
*Commencement of operations.
**Annualized.
***Rate is for the period from March 9, 1995 through September 30, 1995.
See notes to financial statements.
8
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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
9
<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.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Organization
The Fund, a Maryland corporation, was organized on August 25, 1994 and was
inactive (except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and the registration
of its shares under the Securities Act of 1933) until March 9, 1995 (the date of
the initial public offering).
On February 23, 1995, Waddell & Reed, Inc. ("W&R") purchased for investment
20,000 shares of the Fund at their net asset value of $5.00 per share.
The Fund's organizational expenses in the amount of $49,530 were advanced
to the Fund by W&R and are an obligation to be paid by it. These expenses are
being amortized and are payable evenly over 60 months following the date of the
initial public offering. In the event that all or a part of W&R's initial
investment in the Fund's shares is redeemed prior to the full reimbursement of
these organizational expenses, the Fund's obligation to make further
reimbursement will cease.
NOTE 3 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is computed
daily based on the net asset value at the close of business. The fee consists of
two elements: (i) a "Specific" fee computed on net asset value as of the close
of business each day at the annual rate of .30% of net assets and (ii) a "Group"
fee computed each day on the combined net asset values of all of the funds in
the United Group of mutual funds (approximately $21.5 billion of combined net
assets at March 31, 1999) at annual rates of .51% of the first $750 million of
combined net assets, .49% on that amount between $750 million and $1.5 billion,
.47% between $1.5 billion and $2.25 billion, .45% between $2.25 billion and $3
billion, .43% between $3 billion and $3.75 billion, .40% between $3.75 billion
and $7.5 billion, .38% between $7.5 billion and $12 billion, and .36% of that
amount over $12 billion. The Fund accrues and pays this fee daily.
10
<PAGE>
Pursuant to assignment of the Investment Management Agreement between the
Fund and W&R, Waddell & Reed Investment Management Company ("WRIMCO"), a wholly
owned subsidiary of W&R, serves as the Fund's investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
For Class A shares, the Fund also pays WARSCO a monthly per account charge
for transfer agency and dividend disbursement services of $1.3125 for each
shareholder account which was in existence at any time during the prior month,
plus $0.30 for each account on which a dividend or distribution of cash or
shares had a record date in that month. With respect to Class Y shares, the Fund
pays WARSCO a monthly fee at an annual rate of .15% of the average daily net
assets of the class for the preceding month. The Fund also reimburses W&R and
WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross sales
commissions for Class A shares (which are not an expense of the Fund) of
$223,387, out of which W&R paid sales commissions of $128,498 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 $668, which are included in other
expenses.
11
<PAGE>
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 $26,751,029 while proceeds from maturities and
sales aggregated $16,981,151. Purchases of short-term securities and U.S.
Government securities aggregated $27,330,899 and $7,945,352, respectively.
Proceeds from maturities and sales of short-term securities and U.S. Government
securities aggregated $32,793,773 and $8,521,499, respectively.
For Federal income tax purposes, cost of investments owned at March 31,
1999 was $33,975,545, resulting in net unrealized appreciation of $2,213,690, of
which $2,623,128 related to appreciated securities and $409,438 related to
depreciated securities.
NOTE 5 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $2,287,537 during its fiscal year ended September 30, 1998, which has been
distributed to the Fund's shareholders.
NOTE 6 -- Multiclass Operations
On September 12, 1995, the Fund was authorized to offer two classes of
shares, Class A and Class Y, each of which has equal rights as to assets and
voting privileges. Class Y shares are not subject to a sales charge on
purchases; they are not subject to a Rule 12b-1 Distribution and Service Plan
and have a separate transfer agency and dividend disbursement services fee
structure. A comprehensive discussion of the terms under which shares of either
class are offered is contained in the Prospectus and the Statement of Additional
Information for the Fund.
Income, non-class specific expenses and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
12
<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 March 31, 1999, and the related statement of operations for the six-month
period then ended, the statements of changes in net assets for the six-month
period then ended and the fiscal year ended September 30, 1998, and the
financial highlights for the six-month period ended March 31, 1999 and for each
of the four fiscal periods in the period ended September 30, 1998. 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 March
31, 1999, by correspondence with the custodian. 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 March 31, 1999, the results of its operations
for the six-month period then ended, the changes in its net assets for the
six-month period then ended and the fiscal year ended September 30, 1998, and
the financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
May 7, 1999
13
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS
Business Services - 0.90%
Cerner Corporation* .................................................... 11,100 $ 296,578
Chemicals and Allied Products - 7.34%
Lilly (Eli) and Company ................................................ 9,300 728,306
Merck & Co., Inc. ...................................................... 2,700 349,819
Monsanto Company ....................................................... 11,500 648,312
Warner-Lambert Company ................................................. 9,300 702,150
Total ............................................................... 2,428,587
Communication - 3.29%
Cox Communications, Inc., Class A* ..................................... 6,100 333,213
MediaOne Group, Inc.* .................................................. 7,600 337,725
SBC Communications Inc. ................................................ 9,450 419,934
Total ............................................................... 1,090,872
Electric, Gas and Sanitary Services - 3.34%
Allied Waste Industries, Inc. New* ..................................... 24,400 571,112
Duke Energy Corp. ...................................................... 8,100 536,119
Total ............................................................... 1,107,231
General Merchandise Stores - 0.83%
Wal-Mart Stores, Inc. .................................................. 5,000 273,125
Health Services - 1.25%
Quorum Health Group, Inc.* ............................................. 10,000 162,500
Tenet Healthcare Corporation* .......................................... 8,700 250,125
Total ............................................................... 412,625
Instruments and Related Products - 1.07%
Medtronic, Inc. ........................................................ 6,100 353,038
Metal Mining - 1.64%
Barrick Gold Corporation ............................................... 9,450 189,000
Homestake Mining Company ............................................... 14,175 171,872
Newmont Mining Corporation ............................................. 7,560 183,330
Total ............................................................... 544,202
Miscellaneous Retail - 0.86%
Costco Companies, Inc.* ................................................ 6,000 284,250
Motion Pictures - 1.03%
Time Warner Incorporated ............................................... 3,900 341,494
Nondepository Institutions - 1.66%
Fannie Mae ............................................................. 8,600 552,550
</TABLE>
See Notes to Schedule of Investments on page ___.
14
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS (Continued)
Real Estate - 1.06%
ElderTrust ............................................................. 24,100 $ 352,462
TOTAL COMMON STOCKS - 24.27% $ 8,037,014
(Cost: $6,943,596)
Principal
Amount in
Thousands Value
<S> <C> <C>
CORPORATE DEBT SECURITY - 1.57%
Industrial Machinery and Equipment
Tyco International Ltd.,
6.5%, 11-1-2001 ..................................................... $ 500 $ 518,405
(Cost: $495,988)
UNITED STATES GOVERNMENT SECURITIES Federal Home Loan Banks:
6.38%, 4-29-2003 .................................................... 500 500,545
6.2%, 2-27-2004 ..................................................... 500 500,445
6.225%, 2-27-2004 ................................................... 500 502,345
6.57%, 2-11-2005 .................................................... 500 502,890
6.245%, 9-22-2005 ................................................... 500 502,580
6.02%, 3-30-2006 .................................................... 500 501,405
6.75%, 2-5-2008 ..................................................... 500 502,655
6.75%, 2-12-2008 .................................................... 500 502,810
Federal Home Loan Mortgage Corporation,
6.5%, 2-15-2023 (Interest only) ..................................... 5,000 729,900
United States Treasury:
5.625%, 12-31-2002 .................................................. 7,250 7,603,438
6.125%, 8-15-2007 ................................................... 5,000 5,596,850
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 54.20% $17,945,863
(Cost: $17,586,413)
SHORT-TERM SECURITIES
Engineering and Management Services - 3.62%
Halliburton Co.,
5.52%, 10-16-98 ..................................................... 1,200 1,197,240
Fabricated Metal Products - 5.69%
Danaher Corporation,
5.3438%, Master Note ................................................ 389 389,000
Snap-On Inc.,
5.51%, 10-15-98 ..................................................... 1,500 1,496,786
Total ............................................................... 1,885,786
</TABLE>
See Notes to Schedule of Investments on page ___.
15
<PAGE>
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
SHORT-TERM SECURITIES (Continued)
Food and Kindred Products - 1.65%
General Mills, Inc.,
5.1988%, Master Note ................................................ $ 547 $ 547,000
Personal Services - 6.84%
Block Financial Corp.,
5.48%, 10-30-98 ..................................................... 2,275 2,264,957
TOTAL SHORT-TERM SECURITIES - 17.80% $ 5,894,983
(Cost: $5,894,983)
TOTAL INVESTMENT SECURITIES - 97.84% $32,396,265
(Cost: $30,920,980)
CASH AND OTHER ASSETS, NET OF
LIABILITIES - 2.16% 714,386
NET ASSETS - 100.00% $33,110,651
</TABLE>
Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 4 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
16
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
(In Thousands, Except for Per Share Amounts)
Assets
Investment securities -- at value
(Notes 1 and 4) ........................................ $ 32,396
Cash ...................................................... 2
Receivables:
Investment securities sold ............................. 430
Dividends and interest ................................. 227
Fund shares sold ....................................... 143
Unamortized organization expenses (Note 2) ................ 15
Prepaid insurance premium ................................. 1
----------
Total assets ......................................... 33,214
----------
Liabilities
Payable to Fund shareholders .............................. 70
Organization expenses payable ............................. 15
Accrued transfer agency and dividend
disbursing (Note 3) .................................... 8
Accrued service fee (Note 3) .............................. 6
Accrued accounting services fee (Note 3) .................. 2
Accrued management fee (Note 3) ........................... 1
Other liabilities ......................................... 1
----------
Total liabilities .................................... 103
----------
Total net assets .................................. $ 33,111
==========
Net Assets
$0.01 par value capital stock
Capital stock .......................................... $ 57
Additional paid-in capital ............................. 30,139
Accumulated undistributed income:
Accumulated undistributed net investment
income ............................................... 29
Accumulated undistributed net realized gain on
investment transactions .............................. 1,411
Net unrealized appreciation in value of
investments .......................................... 1,475
----------
Net assets applicable to outstanding
units of capital .................................. $ 33,111
==========
Net asset value per share (net assets divided
by shares outstanding)
Class A ................................................... $5.78
Class Y ................................................... $5.78
Capital shares outstanding
Class A ................................................... 5,682
Class Y ................................................... 42
Capital shares authorized .................................... 1,000,000
See notes to financial statements.
17
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1998
(In Thousands)
Investment Income
Income (Note 1B):
Interest and amortization ................................ $ 1,100
Dividends ................................................ 125
-------
Total income ........................................... 1,225
-------
Expenses (Notes 2 and 3):
Investment management fee ................................ 208
Transfer agency and dividend disbursing - Class A ........ 82
Service fee - Class A .................................... 72
Registration fees ........................................ 29
Accounting services fee .................................. 20
Audit fees ............................................... 12
Amortization of organization expenses .................... 10
Custodian fees ........................................... 7
Legal fees ............................................... 3
Distribution fee - Class A ............................... 1
Other .................................................... 43
-------
Total expenses ......................................... 487
-------
Net investment income ............................... 738
-------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 4)
Realized net gain on securities ............................. 2,287
Realized net loss on foreign currency
transactions ............................................. (3)
-------
Realized net gain on investments ......................... 2,284
Unrealized depreciation in value of investments
during the period ........................................ (751)
-------
Net gain on investments ................................ 1,533
-------
Net increase in net assets resulting
from operations .................................. $ 2,271
=======
See notes to financial statements.
18
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the fiscal year
ended September 30,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income ........................................... $ 738 $ 842
Realized net gain on investments ................................ 2,284 1,689
Unrealized appreciation
(depreciation) ................................................ (751) 2,056
-------- --------
Net increase in net assets
resulting from operations .................................. 2,271 4,587
-------- --------
Distributions to shareholders from(Note 1E):* Net investment income:
Class A ....................................................... (833) (791)
Class Y ....................................................... (10) (11)
Realized gains on securities transactions:
Class A ....................................................... (2,183) --
Class Y ....................................................... (28) --
-------- --------
(3,054) (802)
Capital share transactions: ........................................... -- --
Proceeds from sale of shares:
Class A (1,316,486 and 667,368
shares, respectively) ...................................... 7,660 3,651
Class Y (14,599 and 33,050
shares, respectively) ...................................... 85 179
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (552,747 and 143,389
shares, respectively) ...................................... 2,995 786
Class Y (7,024 and 1,949
shares, respectively) ...................................... 38 11
Payments for shares redeemed:
Class A (901,720 and 2,170,564
shares, respectively) ...................................... (5,234) (11,786)
Class Y (33,384 and 44,348
shares, respectively) ...................................... (193) (241)
-------- --------
Net increase (decrease) in net
assets resulting from capital
share transactions ...................................... 5,351 (7,400)
-------- --------
Total increase (decrease) ............................... 4,568 (3,615)
Net Assets
Beginning of period ................................................ 28,543 32,158
-------- --------
End of period, including undistributed
net investment income of $29
and $137, respectively .......................................... $ 33,111 $ 28,543
======== ========
</TABLE>
*See "Financial Highlights" on pages ___ - ___.
See notes to financial statements.
19
<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
1998 1997 1996 9/30/95
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period ........... $ 5.99 $ 5.24 $ 5.42 $ 5.00
---------- ---------- ---------- ----------
Income from investment operations:
Net investment
income ..................... 0.15 0.16 0.15 0.07
Net realized and
unrealized gain (loss)
on investments ............. 0.28 0.74 (0.17) 0.40
---------- ---------- ---------- ----------
Total from investment
operations .................... 0.43 0.90 (0.02) 0.47
---------- ---------- ---------- ----------
Less distributions:
From net investment
income ..................... (0.17) (0.15) (0.15) (0.05)
From capital gains ............ (0.47) (0.00) (0.00) (0.00)
In excess of capital
gains ...................... (0.00) (0.00) (0.01) (0.00)
---------- ---------- ---------- ----------
Total distributions .............. (0.64) (0.15) (0.16) (0.05)
---------- ---------- ---------- ----------
Net asset value,
end of period ................. $ 5.78 $ 5.99 $ 5.24 $ 5.42
========== ========== ========== ==========
Total return** ................... 7.89% 17.46% -0.49% 9.42%
Net assets, end of period
(000 omitted) ................. $ 32,868 $ 28,221 $ 31,828 $ 22,248
Ratio of expenses to
average net assets ............ 1.62% 1.70% 1.68% 1.64%***
Ratio of net investment
income to average net
assets ........................ 2.45% 2.87% 2.93% 3.71%***
Portfolio
turnover rate ................. 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.
20
<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
For the fiscal year period
ended September 30, from 9/27/95*
-------------------------------------- through
1998 1997 1996 9/30/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 5.99 $ 5.24 $ 5.42 $ 5.41
-------- -------- -------- --------
Income from investment
operations:
Net investment
income ......... 0.16 0.17 0.16 0.00
Net realized and
unrealized gain
(loss) on
investments .... 0.29 0.75 (0.17) 0.01
-------- -------- -------- --------
Total from investment
operations ........ 0.45 0.92 (0.01) 0.01
-------- -------- -------- --------
Less distributions:
From net investment
income ......... (0.19) (0.17) (0.16) (0.00)
From capital gains (0.47) (0.00) (0.00) (0.00)
In excess of
capital gains .. (0.00) (0.00) (0.01) (0.00)
-------- -------- -------- --------
Total distributions .. (0.66) (0.17) (0.17) (0.00)
-------- -------- -------- --------
Net asset value,
end of period ..... $ 5.78 $ 5.99 $ 5.24 $ 5.42
======== ======== ======== ========
Total return ......... 8.26% 17.93% -0.21% 0.18%
Net assets, end of
period (000
omitted) .......... $ 243 $ 322 $ 330 $ 3
Ratio of expenses
to average net
assets ............ 1.37% 1.28% 1.29% 0.00%
Ratio of net
investment income
to average net
assets ............ 2.79% 3.29% 3.43% 0.00%
Portfolio
turnover rate ..... 230.09% 173.88% 91.06% 9.32%**
</TABLE>
*Commencement of operations.
**Annualized.
See notes to financial statements.
21
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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
22
<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 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, 1998, $3,615 was reclassified between accumulated
undistributed net investment income and accumulated net realized gain on
investment transactions.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Organization
The Fund, a Maryland corporation, was organized on August 25, 1994 and was
inactive (except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and the registration
of its shares under the Securities Act of 1933) until March 9, 1995 (the date of
the initial public offering).
On February 23, 1995, Waddell & Reed, Inc. ("W&R") purchased for investment
20,000 shares of the Fund at their net asset value of $5.00 per share.
The Fund's organizational expenses in the amount of $49,530 were advanced
to the Fund by W&R and are an obligation to be paid by it. These expenses are
being amortized and are payable evenly over 60 months following the date of the
initial public offering. In the event that all or a part of W&R's initial
investment in the Fund's shares is redeemed prior to the full reimbursement of
these organizational expenses, the Fund's obligation to make further
reimbursement will cease.
NOTE 3 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is computed
daily based on the net asset value at the close of business. The fee consists of
two elements: (i) a "Specific" fee computed on net asset value as of the close
of business each day at the annual rate of .30% of net assets and (ii) a "Group"
fee computed each day on the combined net asset values of all of the funds in
the United Group of mutual funds (approximately $18.9 billion of combined net
assets at September 30, 1998) at annual rates of .51% of the first $750 million
of combined net assets, .49% on that amount between $750 million and $1.5
billion, .47% between $1.5 billion and $2.25 billion, .45% between $2.25 billion
and $3 billion, .43% between $3 billion and $3.75 billion, .40% between $3.75
billion and $7.5 billion, .38% between $7.5 billion and $12 billion, and .36% of
that amount over $12 billion. The Fund accrues and pays this fee daily.
23
<PAGE>
Pursuant to assignment of the Investment Management Agreement between the
Fund and W&R, Waddell & Reed Investment Management Company ("WRIMCO"), a wholly
owned subsidiary of W&R, serves as the Fund's investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
For Class A shares, the Fund also pays WARSCO a monthly per account charge
for transfer agency and dividend disbursement services of $1.3125 for each
shareholder account which was in existence at any time during the prior month,
plus $0.30 for each account on which a dividend or distribution of cash or
shares had a record date in that month. With respect to Class Y shares, the Fund
pays WARSCO a monthly fee at an annual rate of .15% of the average daily net
assets of the class for the preceding month. The Fund also reimburses W&R and
WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received gross sales
commissions for Class A shares (which are not an expense of the Fund) of
$215,190, out of which W&R paid sales commissions of $123,799 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.
24
<PAGE>
The Fund paid Directors' fees of $1,037, 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 $30,915,964 while proceeds from maturities and
sales aggregated $47,605,656. Purchases of short-term securities and U.S.
Government securities aggregated $84,781,593 and $23,274,269, respectively.
Proceeds from maturities and sales of short-term securities and U.S. Government
securities aggregated $80,959,342 and $7,516,406, respectively.
For Federal income tax purposes, cost of investments owned at September 30,
1998 was $30,920,980, resulting in net unrealized appreciation of $1,475,285, of
which $1,852,884 related to appreciated securities and $377,599 related to
depreciated securities.
NOTE 5 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $2,287,537 during its fiscal year ended September 30, 1998, of which a
portion was paid to shareholders during the period ended September 30, 1998.
Remaining net capital gains will be distributed to the Fund's shareholders.
NOTE 6 -- Multiclass Operations
On September 12, 1995, the Fund was authorized to offer two classes of
shares, Class A and Class Y, each of which has equal rights as to assets and
voting privileges. Class Y shares are not subject to a sales charge on
purchases; they are not subject to a Rule 12b-1 Distribution and Service Plan
and have a separate transfer agency and dividend disbursement services fee
structure. A comprehensive discussion of the terms under which shares of either
class are offered is contained in the Prospectus and the Statement of Additional
Information for the Fund.
Income, non-class specific expenses and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
25
<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, 1998, and the related statements of operations for the fiscal
year then ended and changes in net assets for each of the fiscal years in the
two-year period then ended, and the financial highlights for the periods
presented. 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 at
September 30, 1998 by correspondence with the custodian. 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of United Asset
Strategy Fund, Inc. as of September 30, 1998, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 6, 1998
26
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
<PAGE>
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 attached hereto as EX-99.B(a)assuppbc
(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 attached hereto as EX-99.B(b)asbylaw2
(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, attached hereto as EX-99.B(d)asimafee
(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, filed by EDGAR on December 1, 1998
as EX-99.B8-asca to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A*
(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, attached hereto as EX-99.B(h)asssacom
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*
<PAGE>
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 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*
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*
(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.B11-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 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 attached hereto as
EX-99.B(m)asdspb
Distribution and Service Plan for Class C shares attached hereto as
EX-99.B(m)asdspc
(n) Not applicable
(o) Multiple Class Plan, as amended, attached hereto as EX-99.B(o)-asmcp
<PAGE>
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 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
<PAGE>
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 Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Retirement Shares, 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.
30. Undertakings
------------
Not applicable
- ---------------------------------
*Incorporated herein by reference
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED
FUNDS, INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND,
INC., UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC.,
TARGET/UNITED FUNDS, INC. AND WADDELL & REED FUNDS, INC. (each hereinafter
called the "Corporation"), and certain directors and officers for the
Corporation, do hereby constitute and appoint KEITH A. TUCKER, ROBERT L.
HECHLER, 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: May 19, 1999 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
<TABLE>
<S> <C> <C>
/s/Keith A. Tucker Chairman of the Board May 19, 1999
- ---------------------- ------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal May 19, 1999
- ---------------------- Financial Officer and ------------
Robert L. Hechler Director
/s/Henry J. Herrmann Vice President and May 19, 1999
- ---------------------- Director ------------
Henry J. Herrmann
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Theodore W. Howard Vice President, Treasurer May 19, 1999
- ---------------------- and Principal Accounting ------------
Theodore W. Howard Officer
/s/James M. Concannon Director May 19, 1999
- ---------------------- ------------
James M. Concannon
/s/John A. Dillingham Director May 19, 1999
- ---------------------- ------------
John A. Dillingham
/s/David P. Gardner Director May 19, 1999
- ---------------------- ------------
David P. Gardner
/s/Linda K. Graves Director May 19, 1999
- ---------------------- ------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director May 19, 1999
- ---------------------- ------------
Joseph Harroz, Jr.
/s/John F. Hayes Director May 19, 1999
- ---------------------- ------------
John F. Hayes
/s/Glendon E. Johnson Director May 19, 1999
- ---------------------- ------------
Glendon E. Johnson
/s/William T. Morgan Director May 19, 1999
- ---------------------- ------------
William T. Morgan
/s/Ronald C. Reimer Director May 19, 1999
- ---------------------- ------------
Ronald C. Reimer
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Frank J. Ross, Jr. Director May 19, 1999
- ---------------------- ------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director May 19, 1999
- ---------------------- ------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director May 19, 1999
- ---------------------- ------------
Frederick Vogel III
</TABLE>
Attest:
/s/Kristen A. Richards
- --------------------------------
Kristen A. Richards
Assistant Secretary
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment pursuant to
Rule 485(a) of the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Overland Park, and State of Kansas, on
the 2nd day of July, 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.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C> <C>
/s/Keith A. Tucker* Chairman of the Board July 2, 1999
- ---------------------- ------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal July 2, 1999
- ---------------------- Financial Officer and ------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and July 2, 1999
- ---------------------- Director ------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer July 2, 1999
- ---------------------- and Principal Accounting ------------
Theodore W. Howard Officer
/s/James M. Concannon* Director July 2, 1999
- ---------------------- ------------
James M. Concannon
/s/John A. Dillingham* Director July 2, 1999
- ---------------------- ------------
John A. Dillingham
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/David P. Gardner* Director July 2, 1999
- ---------------------- ------------
David P. Gardner
/s/Linda K. Graves* Director July 2, 1999
- ---------------------- ------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director July 2, 1999
- ---------------------- ------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director July 2, 1999
- ---------------------- ------------
John F. Hayes
/s/Glendon E. Johnson Director July 2, 1999
- ---------------------- ------------
Glendon E. Johnson
/s/William T. Morgan* Director July 2, 1999
- ---------------------- ------------
William T. Morgan
/s/Ronald C. Reimer* Director July 2, 1999
- ---------------------- ------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director July 2, 1999
- ---------------------- ------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director July 2, 1999
- ---------------------- ------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director July 2, 1999
- ---------------------- ------------
Frederick Vogel III
</TABLE>
<PAGE>
*By
Helge K. Lee
Attorney-in-Fact
ATTEST:
Kristen A. Richards
Assistant Secretary
EX-99.B(a)assuppbc
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
UNITED ASSET STRATEGY FUND, INC.
United Asset Strategy Fund, Inc. (the "Corporation"), a Maryland
corporation, having its principal office in Baltimore, Maryland, hereby
certifies to the State Department of Assessments and Taxation of
Maryland that:
FIRST: Pursuant to the authority vested in the Board of Directors of the
Corporation by Article FIFTH of the Articles of Incorporation of the
Corporation, the Board of Directors has heretofore duly designated, in
accordance with Maryland General Corporation Law, the aggregate number of shares
of capital stock which the Corporation is authorized to issue at One Billion
(1,000,000,000) shares of capital stock, (par value $0.01 per share), amounting
in the aggregate to a par value of Ten Million Dollars ($10,000,000.00).
SECOND: Pursuant to the authority vested in the Board of Directors of the
Corporation by Article FIFTH of the Articles of Incorporation of the
Corporation, the Board of Directors, in accordance with Maryland General
Corporation Law, now duly designates and classifies the capital stock of the
Corporation among the classes of the Corporation as follows:
<TABLE>
<S> <C>
Class A 500,000,000 shares
Class Y 300,000,000 shares
Class B 100,000,000 shares
Class C 100,000,000 shares
</TABLE>
The aggregate number of shares of all classes of stock of the Corporation
remains at One Billion (1,000,000,000) shares of capital stock, the par value
remains $0.01 per share, and the aggregate par value of all authorized stock
remains Ten Million Dollars ($10,000,000.00).
THIRD: The capital stock of the Corporation is divided into classes and
there are no changes in the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption as shares of capital stock as set forth in the
Corporation's Articles of Incorporation and Articles Supplementary thereto,
except as follows:
(1) The capital stock of Class A shares shall be subject to fees,
including a front-end sales load and a Rule 12b-1 fee, as
determined by the Board of Directors of the Corporation from time
to time;
<PAGE>
(2) The capital stock of the Class Y shares shall not be subject to
either a front-end or contingent deferred sales charge or Rule
12b-1 fees and is subject to a shareholder servicing fee which
differs from that of the Class A shares;
(3) To the extent not otherwise set forth in the Corporation's
Articles of Incorporation, each Class or Series of the
Corporation shall have such preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption as shares
of capital stock as are determined by the Corporation's Board of
Directors and described in the Corporation's registration
statement under the Securities Act of 1933 ("1933 Act") or any
amendment thereto or any supplement to a prospectus or statement
of additional information contained therein.
FOURTH: The Corporation is registered with the Securities and
Exchange Commission as an open-end investment company under the
Investment Company Act of 1940, as amended.
IN WITNESS WHEREOF, the undersigned Vice President of the Corporation
hereby executes these Articles Supplementary on behalf of the Corporation this
30th day of June, 1999.
-----------------------------------
Helge K. Lee, Vice President
Attest:
----------------------------
Kristen A. Richards
Assistant Secretary
The undersigned, Vice President of United Asset Strategy Fund, Inc. who
executed on behalf said Corporation the foregoing Articles Supplementary, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said Corporation, the foregoing Articles Supplementary to be the act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
UNITED ASSET STRATEGY FUND, INC.
By:
--------------------------------
Helge K. Lee, Vice President
EX-99.B(b)asbylaw2
AMENDMENT TO BYLAWS
RESOLVED, That the Bylaws of each of United Funds, Inc., United Asset
Strategy Fund, Inc., United Cash Management, Inc., United Continental Income
Fund, Inc., United Gold & Government Fund, Inc., United Government Securities
Fund, Inc., United High Income Fund, Inc., United High Income Fund II, Inc.,
United International Growth Fund, Inc., United Municipal Bond Fund, Inc., United
Municipal High Income Fund, Inc., United New Concepts Fund, Inc., United
Retirement Shares, Inc., United Vanguard Fund, Inc., Target/United Funds, Inc.
and Waddell & Reed Funds, Inc. are amended by substitution of the following for
the initial paragraph of Article I, Section 7, regarding voting and inspectors;
and, with respect to United Asset Strategy Fund, Inc., United Retirement Shares,
Inc. and Waddell & Reed Funds, Inc., for Article II, Section 2, regarding voting
and proxies:
At all meetings of the stockholders, every stockholder of record entitled
to vote thereat shall be entitled to vote either in person or by proxy,
which term shall include proxies provided by such stockholder, or his duly
authorized attorney, through written, electronic, telephonic,
computerized, facsimile, telecommunications, telex or oral communication
or by any other form of communication, each pursuant to such voting
procedures and through such systems as are authorized by the Board of
Directors or one or more executive officers of the Corporation. No proxy
which is dated or, if otherwise provided as permitted by these Bylaws and
applicable Maryland law, provided more than three months before the
meeting at which it is offered shall be accepted, unless such proxy shall,
on its face, name or, if otherwise provided as permitted by these Bylaws
and applicable Maryland law, provide a longer period for which it is to
remain in force.
I certify that I am Assistant Secretary of each of the following
Corporations, and as such officer, have custody of the minute books of the
Corporations, and that the foregoing resolutions are true and correct
resolutions duly passed by the Board of Directors of each of the following
Corporations at a meeting held on February 10, 1999.
United Funds, Inc.
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Gold & Government Fund, Inc.
United Government Securities Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United International Growth Fund, Inc.
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United New Concepts Fund, Inc.
United Retirement Shares, Inc.
United Vanguard Fund, Inc.
Target/United Funds, Inc.
Waddell & Reed Funds, Inc.
-------------------------------------------
Kristen A. Richards, Assistant Secretary
Dated this 10th day of February, 1999.
EX-99.B(d)asimafee
EXHIBIT A TO INVESTMENT MANAGEMENT AGREEMENT
UNITED ASSET STRATEGY FUND, INC.
FEE SCHEDULE
A cash fee computed each day on net asset value for the Fund at the annual rates
listed below:
<TABLE>
<CAPTION>
Net Assets Fee
- ---------- ---
<S> <C>
Up to $1 billion 0.70% of net assets
Over $1 billion and up to $2 billion 0.65% of net assets
Over $2 billion and up to $3 billion 0.60% of net assets
Over $3 billion 0.55% of net assets
</TABLE>
As Amended and Effective June 30, 1999.
EX-99.B(h)asssacom
EXHIBIT B
COMPENSATION
Class A Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class B Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class C Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class Y Shares
An amount payable on the first day of each month equal to 1/12 of .15 of 1% of
the average daily net assets of the Class for the preceding month.
EX-99.B(i)aslegopn
July 2, 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. 8
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,
Helge K. Lee
General Counsel
HKL/fr
EX-99.B(j)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 8 to
Registration Statement No. 33-55753 of United Asset Strategy Fund, Inc. on
Form N-1A of our reports dated November 6, 1998 and May 7, 1999 appearing
in the Prospectus, which is part of such Registration Statement, and to the
reference to us under the caption "Financial Highlights" in such
Prospectus.
Deloitte & Touche LLP
Kansas City, Missouri
June 30, 1999
EX-99.B(m)asdspb
DISTRIBUTION AND SERVICE PLAN
FOR CLASS B SHARES
(Adopted on February 10, 1999)
This Plan is adopted by United Asset Strategy Fund, Inc. (the "Fund"), pursuant
to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act")
to provide for payment by the Fund of certain expenses in connection with the
distribution of the Fund's Class B shares, provision of personal services to the
Fund's Class B shareholders and/or maintenance of its Class B shareholder
accounts. Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R")
which serves as the principal underwriter for the Fund under the terms of the
Underwriting Agreement pursuant to which W&R offers and sells the shares of the
Fund.
Distribution Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.75 of 1% of the Fund's average net assets of its Class B shares as a
"distribution fee" to finance the distribution of the Fund's Class B shares
payable to W&R daily or at such other intervals as the board of directors may
determine.
Service Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.25 of 1% of the Fund's average net assets of its Class B shares as a "service
fee" to finance shareholder servicing by W&R or its affiliated companies to
encourage and foster the maintenance of shareholder accounts of the Fund's Class
B shares. The amounts shall be payable to W&R daily or at such other intervals
as the board of directors may determine.
NASD Definition
For purposes of this Plan, the "distribution fee" may be considered as a sales
charge that is deducted from the Class B net assets of the Fund and does not
include the service fee. The "service fee" shall be considered a payment made by
the Fund for personal service and/or maintenance of Class B shareholder
accounts, as such is now defined by the National Association of Securities
Dealers, Inc. ("NASD"), provided, however, if the NASD adopts a definition of
"service fee" for purposes of Rule 2830 of the NASD Conduct Rules that differs
from the definition of "service fee" as presently used, or if the NASD adopts a
related definition intended to define the
<PAGE>
same concept, the definition of "service fee" as used herein shall be
automatically amended to conform to the NASD definition.
Quarterly Reports
W&R shall provide to the board of directors of the Fund and the board of
directors shall review at least quarterly a written report of the amounts so
expended of the distribution fee and/or service fee paid or payable to it under
this Plan and the purposes for which such expenditures were made.
Approval of Plan
This Plan shall become effective when it has been approved by a vote of the
board of directors of the Fund and of the directors who are not interested
persons of the Fund and have no direct or indirect financial interest in the
operation of the Plan or any agreement related to this Plan (other than as
directors or shareholders of the Fund) ("independent directors") cast in person
at a meeting called for the purposes of voting on such Plan.
Continuance
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the directors,
including the independent directors, as specified hereinabove for the adoption
of the Plan by the directors and independent directors.
Director Continuation
In considering whether to adopt, continue or implement this Plan, the directors
shall have a duty to request and evaluate, and W&R shall have a duty to furnish,
such information as may be reasonably necessary to an informed determination of
whether this Plan should be adopted, implemented or continued.
Termination
This Plan may be terminated at any time by a vote of a majority of the
independent directors of the Fund or by a vote of the majority of the
outstanding Class B voting securities of the Fund without penalty. On
termination, the payment of all distribution fees and service fees shall cease,
and the Fund shall have no obligation to W&R to reimburse it for any cost or
expenditure it has made or may make to distribute the Class B shares or service
Class B shareholder accounts.
2
<PAGE>
Amendments
This Plan may not be amended to increase materially the amount to be spent for
distribution of Class B shares, personal service and/or maintenance of
shareholder accounts without approval of the Class B shareholders, and all
material amendments of this Plan must be approved in the manner prescribed for
the adoption of the Plan as provided hereinabove. The distribution and service
fees may be reduced by action of the board of directors without shareholder
approval.
Directors
While this Plan is in effect, the selection and nomination of the directors who
are not interested persons of the Fund shall be committed to the discretion of
the directors who are not interested persons of the Fund.
Records
Copies of this Plan, the Underwriting Agreement and reports made pursuant to
this Plan shall be preserved as provided in Rule 12b-1(f) under the Act.
3
EX-99.B(m)asdspc
DISTRIBUTION AND SERVICE PLAN
FOR CLASS C SHARES
(Adopted on February 10, 1999)
This Plan is adopted by United Asset Strategy Fund, Inc. (the "Fund"), pursuant
to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act")
to provide for payment by the Fund of certain expenses in connection with the
distribution of the Fund's Class C shares, provision of personal services to the
Fund's Class C shareholders and/or maintenance of its Class C shareholder
accounts. Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R")
which serves as the principal underwriter for the Fund under the terms of the
Underwriting Agreement pursuant to which W&R offers and sells the shares of the
Fund.
Distribution Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.75 of 1% of the Fund's average net assets of its Class C shares as a
"distribution fee" to finance the distribution of the Fund's Class C shares
payable to W&R daily or at such other intervals as the board of directors may
determine.
Service Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.25 of 1% of the Fund's average net assets of its Class C shares as a "service
fee" to finance shareholder servicing by W&R or its affiliated companies to
encourage and foster the maintenance of shareholder accounts of the Fund's Class
C shares. The amounts shall be payable to W&R daily or at such other intervals
as the board of directors may determine.
NASD Definition
For purposes of this Plan, the "distribution fee" may be considered as a sales
charge that is deducted from the Class C net assets of the Fund and does not
include the service fee. The "service fee" shall be considered a payment made by
the Fund for personal service and/or maintenance of Class C shareholder
accounts, as such is now defined by the National Association of Securities
Dealers, Inc. ("NASD"), provided, however, if the NASD adopts a definition of
"service fee" for purposes of Rule 2830 of the NASD Conduct Rules that differs
from the definition of "service fee" as presently used, or if the NASD adopts a
related definition intended to define the
<PAGE>
same concept, the definition of "service fee" as used herein shall be
automatically amended to conform to the NASD definition.
Quarterly Reports
W&R shall provide to the board of directors of the Fund and the board of
directors shall review at least quarterly a written report of the amounts so
expended of the distribution fee and/or service fee paid or payable to it under
this Plan and the purposes for which such expenditures were made.
Approval of Plan
This Plan shall become effective when it has been approved by a vote of the
board of directors of the Fund and of the directors who are not interested
persons of the Fund and have no direct or indirect financial interest in the
operation of the Plan or any agreement related to this Plan (other than as
directors or shareholders of the Fund) ("independent directors") cast in person
at a meeting called for the purposes of voting on such Plan.
Continuance
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the directors,
including the independent directors, as specified hereinabove for the adoption
of the Plan by the directors and independent directors.
Director Continuation
In considering whether to adopt, continue or implement this Plan, the directors
shall have a duty to request and evaluate, and W&R shall have a duty to furnish,
such information as may be reasonably necessary to an informed determination of
whether this Plan should be adopted, implemented or continued.
Termination
This Plan may be terminated at any time by a vote of a majority of the
independent directors of the Fund or by a vote of the majority of the
outstanding Class C voting securities of the Fund without penalty. On
termination, the payment of all distribution fees and service fees shall cease,
and the Fund shall have no obligation to W&R to reimburse it for any cost or
expenditure it has made or may make to distribute the Class C shares or service
Class C shareholder accounts.
2
<PAGE>
Amendments
This Plan may not be amended to increase materially the amount to be spent for
distribution of Class C shares, personal service and/or maintenance of
shareholder accounts without approval of the Class C shareholders, and all
material amendments of this Plan must be approved in the manner prescribed for
the adoption of the Plan as provided hereinabove. The distribution and service
fees may be reduced by action of the board of directors without shareholder
approval.
Directors
While this Plan is in effect, the selection and nomination of the directors who
are not interested persons of the Fund shall be committed to the discretion of
the directors who are not interested persons of the Fund.
Records
Copies of this Plan, the Underwriting Agreement and reports made pursuant to
this Plan shall be preserved as provided in Rule 12b-1(f) under the Act.
3
EX-99.B(o)asmcp
UNITED ASSET STRATEGY FUND, INC.
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
This Multiple Class Plan ("Plan") pursuant to Rule 18f-3 under the
Investment Company Act of 1940, as amended ("1940 Act"), sets forth the multiple
class structure for United Asset Strategy Fund, Inc. ("Fund"). This multiple
class structure was approved by the Board of Directors of United Asset Strategy
Fund, Inc. on February 8, 1995, under an order of exemption issued by the
Securities and Exchange Commission on January 11, 1995. Subsequent to such
approval, Rule 18f-3 under the 1940 Act was adopted. It was determined that the
Fund operate under Rule 18f-3, and this Plan was adopted pursuant to Rule 18f-3.
This Plan describes the classes of shares of stock of the Fund -- Class A shares
and Class Y shares -- offered to the public on or after September 12, 1995
("Implementation Date").
General Description of the Classes:
Class A Shares. Class A shares will be sold to the general public subject
to an initial sales charge. The maximum sales charge is 5.75% of the amount
invested and declines to 0% based on discounts for volume purchases. The initial
sales charge is waived for certain eligible purchasers.
Class A shares also will be subject to a service fee charged pursuant to a
Service Plan adopted pursuant to Rule 12b-1 under the 1940 Act ("Rule 12b-1")
that provides for a maximum fee of .25% of the average annual net assets of the
Class A shares of the Fund. All of the shares of the Fund issued pursuant to a
Fund prospectus effective prior to the Implementation Date and that are
outstanding on the Implementation Date will be designated as Class A shares.
Class B Shares. Class B shares will be sold subject to a contingent
deferred sales charge, which will be imposed on redemption proceeds. The maximum
contingent deferred sales charge will be 5.0% and will decline 1% per year after
the first full calendar year after investment to 0% after seven years, as
follows: in the first year, the contingent deferred sales charge will be 5%; in
the second year, 4%; in the third and fourth years, 3%; in the fifth year, 2%;
in the sixth year, 1%; and in the seventh year, 0%. Class B shares will also be
subject to distribution and service fees charged pursuant to a Distribution and
Service Plan adopted pursuant to Rule 12b-1 that provides for a maximum service
fee of 0.25% and a maximum distribution fee of 0.75% of the average annual net
assets of
<PAGE>
the Class B shares of the Fund. Class B shares convert automatically into Class
A shares in the eighth year held.
Class C Shares. Class C shares will be sold without an initial sales
charge and will be subject to a contingent deferred sales charge of 1% if the
shares are redeemed within twelve months of purchase. Class C shares will be
subject to distribution and service fees charged pursuant to a Distribution and
Service Plan adopted pursuant to Rule 12b-1 that provides for a maximum service
fee of 0.25% and a maximum distribution fee of 0.75% of the average annual net
assets of the Class C shares of the Fund.
Class Y Shares. Class Y shares will be sold without an initial sales
charge and without a Rule 12b-1 fee. Class Y shares are designed for
institutional investors and will be available for purchase by: (i) participants
of employee benefit plans established under section 403(b) or section 457, or
qualified under section 401, including 401(k) plans, of the Internal Revenue
Code of 1986 ("Code"), when the plan has 100 or more eligible employees and
holds the shares in an omnibus account on the Fund's records; (ii) 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; (iii) government entities or authorities and corporations whose
investment within the first twelve months after initial investment is $10
million or more; and (iv) certain retirement plans and trusts for employees and
sales representatives of Waddell & Reed, Inc. and its affiliates.
Expense Allocations of Each Class:
In addition to the difference with respect to 12b-1 fees, Class A, Class B
and Class C shares differ from Class Y shares of the Fund with respect to the
applicable shareholder servicing fees. Class A, Class B and Class C shares,
respectively, pay a monthly shareholder servicing fee of $1.0208 for each Class
A, Class B or Class C shareholder account which was in existence during the
prior month, plus $0.30 for each Class A, Class B or Class C account on which a
dividend or distribution had a record date in that month. Class Y shares pay a
monthly shareholder servicing fee equal to one-twelfth of .15 of 1% of the
average daily net Class Y assets for the preceding month.
Each Class may also pay a different amount of the following other
expenses:
(a) stationery, printing, postage and delivery expenses related to
preparing and distributing materials
<PAGE>
such as shareholder reports, prospectuses, and proxy statements to current
shareholders of a specific Class of shares;
(b) Blue Sky registration fees incurred by a specific Class of
shares;
(c) SEC registration fees incurred by a specific Class of shares;
(d) expenses of administrative personnel and services required to
support the shareholders of a specific Class of shares;
(e) Directors' fees or expenses incurred as a result of issues
relating to a specific Class of shares;
(f) accounting expenses relating solely to a specific Class of
shares;
(g) auditors' fees, litigation expenses, and legal fees and expenses
relating to a specific Class of shares; and
(h) expenses incurred in connection with shareholders meetings as a
result of issues relating to a specific Class of shares.
These expenses may, but are not required to, be directly attributed and
charged to a particular Class. The shareholder servicing fees and other expenses
listed above that are attributed and charged to a particular Class are borne on
a pro rata basis by the outstanding shares of that Class.
Certain expenses that may be attributable to the Fund, but not a
particular Class, are allocated based on the relative daily net assets of that
Class.
Exchange Privileges:
Class A shares of the Fund may be exchanged for Class A shares of any
other fund in the United Group of Mutual Funds.
Class B shares of the Fund may be exchanged for Class B shares of any
other fund in the United Group of Mutual Funds.
Class C shares of the Fund may be exchanged for Class C shares of any
other fund in the United Group of Mutual Funds.
Class Y shares of the Fund may be exchanged for Class Y shares of any
other fund in the United Group of Mutual Funds.
These exchange privileges may be modified or terminated by the Fund, and
exchanges may only be made into funds that are legally registered for sale in
the investor's state of residence.
<PAGE>
Additional Information:
This Plan is qualified by and subject to the terms of the then current
prospectus for the applicable Class after the Implementation Date; provided,
however, that none of the terms set forth in any such prospectus shall be
inconsistent with the terms of the Classes contained in this Plan. The
prospectus for each Class contains additional information about that Class and
the Fund's multiple class structure.
Adopted: July 14, 1995
As amended: December 6, 1995, Effective: December 31, 1995
As amended: February 10, 1999, Effective: September 1, 1999
