WADDELL & REED ADVISORS ASSET STRATEGY FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
June 30, 2000
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 Waddell & Reed Advisors Asset
Strategy Fund, Inc. (the "Fund"), formerly, United Asset Strategy
Fund, Inc., dated June 30, 2000, which may be obtained from the
Fund or its underwriter, Waddell & Reed, Inc., at the address or
telephone number shown above.
TABLE OF CONTENTS
Performance Information ............................ 2
Investment Strategies, Policies and Practices....... 4
Investment Management and Other Services ........... 42
Purchase, Redemption and Pricing of Shares ......... 47
Directors and Officers ............................. 62
Payments to Shareholders ........................... 69
Taxes .............................................. 71
Portfolio Transactions and Brokerage ............... 76
Other Information .................................. 78
Appendix A.......................................... 80
Financial Statements ............................... 87
Waddell & Reed Advisors 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, 2000, which is the most recent balance sheet included in
this SAI, for the periods shown were as follows:
With Without
Sales LoadSales Load
Deducted Deducted
One-year period from April 1, 1999
to March 31, 2000: 31.47% 39.49%
Five year period from April 1, 1995 to
March 31, 2000: 12.90% 14.24%
Period from March 9, 1995* to
March 31, 2000: 12.81% 14.14%
*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 cumulative total return quotation for Class B shares with the
maximum deferred sales charge deducted as of March 31, 2000, which is
the most recent balance sheet included in this SAI, for the period
since class inception on October 4, 1999 to March 31, 2000 was 25.34%.
The cumulative total return quotation for Class B shares without
the maximum deferred sales charge deducted as of March 31, 2000, which
is the most recent balance sheet included in this SAI, for the period
since class inception on October 4, 1999 to March 31, 2000 was 30.34%.
The cumulative total return quotation for Class C shares with the
maximum deferred sales charge deducted as of March 31, 2000, which is
the most recent balance sheet included in this SAI, for the period
since class inception on October 4, 1999 to March 31, 2000 was 30.08%.
The cumulative total return quotation for Class C shares without
the maximum deferred sales charge deducted as of March 31, 2000, which
is the most recent balance sheet included in this SAI, for the period
since class inception on October 4, 1999 to March 31, 2000 was 31.01%.
The average annual total return quotations for Class Y shares as
of March 31, 2000, which is the most recent balance sheet included in
this SAI, for the periods shown were as follows:
One-year period from April 1, 1999 to
March 31, 2000: 39.87%
Period from September 27, 1995* to
March 31, 2000: 14.22%
*Commencement of operations.
Calculation of cumulative total return is not subject to a
prescribed formula. The cumulative total return for a class for a
specific period is calculated by first taking a hypothetical initial
investment in Fund shares on the first day of the period and computing
the "redeemable value" of that investment at the end of the period.
The cumulative total return percentage is then determined by
subtracting the initial investment from the redeemable value and
dividing the remainder by the initial investment and expressing the
result as a percentage. The calculation assumes that all income and
capital gains distributions of the class have been reinvested at net
asset value on the reinvestment dates during the period. Cumulative
total return may also be shown as the increased dollar value of the
hypothetical investment in the class over the period.
Performance Rankings and Other Information
Waddell & Reed, Inc. or the Fund also may from time to time
publish in advertisements or sales material performance rankings as
published by recognized independent mutual fund statistical services
such as Lipper Analytical Services, Inc., or by publications of
general interest such as Forbes, Money, The Wall Street Journal,
Business Week, Barron's, Fortune or Morningstar Mutual Fund Values.
Each class of the Fund may also compare its performance to that of
other selected mutual funds or selected recognized market indicators
such as the Standard & Poor's 500 Composite Stock Price Index and the
Dow Jones Industrial Average. Performance information may be quoted
numerically or presented in a table, graph or other illustration. In
connection with a ranking, the Fund may provide additional
information, such as the particular category to which it related, the
number of funds in the category, the criteria upon which the ranking
is based, and the effect of sales charges, fee waivers and/or expense
reimbursements.
Performance information for the Fund may be accompanied by
information about market conditions and other factors that affected
the Fund's performance for the period(s) shown.
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 and/or
value potential. Securities in the stock class may include common
stocks, fixed-rate preferred stocks (including convertible preferred
stocks), warrants, rights, depositary receipts, securities of closed-
end investment companies, and other equity securities issued by
companies of any size, located anywhere in the world.
The short-term class includes all types of domestic and foreign
securities and money market instruments with remaining maturities of
three years or less. WRIMCO seeks to maximize total return within the
short-term asset class by taking advantage of yield differentials
between different instruments, issuers and currencies. Short-term
instruments may include: corporate debt securities, such as
commercial paper and notes; government securities issued by U.S. or
foreign governments or their agencies or instrumentalities; bank
deposits and other financial institution obligations; repurchase
agreements involving any type of security; and other similar short-
term instruments. These instruments may be denominated in U.S.
dollars or foreign currency.
The bond class includes all varieties of domestic and foreign
fixed-income securities with maturities greater than three years.
WRIMCO seeks to maximize total return within the bond class by
adjusting the Fund's investments in securities with different credit
qualities, maturities, and coupon or dividend rates, and by seeking to
take advantage of yield differentials between securities. Securities
in this class may include bonds, notes, adjustable-rate preferred
stocks, convertible bonds, mortgage-related and asset-backed
securities, domestic and foreign government and government agency
securities, zero coupon securities, and other intermediate and long-
term securities. As with the short-term class, these securities may
be denominated in U.S. dollars or foreign currency.
WRIMCO intends to take advantage of yield differentials by
considering the purchase or sale of instruments when differentials on
spreads between various grades and maturities of such instruments
approach extreme levels relative to long-term norms.
In making asset allocation decisions, WRIMCO typically evaluates
projections of risk, market conditions, economic conditions,
volatility, yields, and returns. As a temporary defensive measure,
WRIMCO may invest up to all of the Fund's assets in (i) money market
instruments rated A-1 by Standard & Poor's ("S&P"), or Prime 1 by
Moody's Investors Service, Inc. ("MIS"), or unrated securities judged
by WRIMCO to be of equivalent quality, or (ii) precious metals.
Securities - General
The Fund may invest in securities including common stock,
preferred stock, debt securities and convertible securities. Although
common stocks and other equity securities have a history of long-term
growth in value, their prices tend to fluctuate in the short-term,
particularly those of smaller companies. The Fund may invest in
preferred stock rated in any rating category of the established rating
services or, if unrated, judged by WRIMCO to be of equivalent quality.
Debt securities have varying levels of sensitivity to changes in
interest rates and varying degrees of quality. As a general matter,
however, when interest rates rise, the values of fixed-rate securities
fall and, conversely, when interest rates fall, the values of fixed-
rate debt securities rise. Similarly, long-term bonds are generally
more sensitive to interest rate changes than short-term bonds.
Lower quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or
price changes due to changes in the issuer's creditworthiness. The
market prices of these securities may fluctuate more than high-quality
securities and may decline significantly in periods of general
economic difficulty. The market for lower-rated debt securities may
be thinner and less active than that for higher-rated debt securities,
which can adversely affect the prices at which the former are sold.
Adverse publicity and changing investor perceptions may decrease the
values and liquidity of lower-rated debt securities, especially in a
thinly traded market. Valuation becomes more difficult and judgment
plays a greater role in valuing lower-rated debt securities than with
respect to securities for which more external sources of quotations
and last sale information are available. Since the risk of default is
higher for lower-rated debt securities, WRIMCO's research and credit
analysis are an especially important part of managing securities of
this type held by the Fund. WRIMCO continuously monitors the issuers
of lower-rated debt securities in the Fund's portfolio in an attempt
to determine if the issuers will have sufficient cash flow and profits
to meet required principal and interest payments. The Fund may
choose, at its expense or in conjunction with others, to pursue
litigation or otherwise to exercise its rights as a security holder to
seek to protect the interests of security holders if it determines
this to be in the best interest of the Fund's shareholders.
The Fund may invest in debt securities rated in any rating
category of the established rating services, including securities
rated in the lowest category (securities rated D by S&P and C by MIS).
Debt securities rated D by S&P or C by MIS are in payment default or
are regarded as having extremely poor prospects of ever attaining any
real investment standing. Debt securities rated at least BBB by S&P
or Baa by MIS are considered to be investment grade debt securities.
Securities rated BBB or Baa may have speculative characteristics. In
addition, the Fund will treat unrated securities judged by WRIMCO to
be of equivalent quality to a rated security as having that rating.
While credit ratings are only one factor WRIMCO relies on in
evaluating high-yield debt securities, certain risks are associated
with credit ratings. Credit ratings evaluate the safety of principal
and interest payments, not market value risk. Credit ratings for
individual securities may change from time to time, and the Fund may
retain a portfolio security whose rating has been changed.
The Fund may purchase debt securities whose principal amount at
maturity is dependent upon the performance of a specified equity
security. The issuer of such debt securities, typically an investment
banking firm, is unaffiliated with the issuer of the equity security
to whose performance the debt security is linked. Equity-linked debt
securities differ from ordinary debt securities in that the principal
amount received at maturity is not fixed, but is based on the price of
the linked equity security at the time the debt security matures. The
performance of equity-linked debt securities depends primarily on the
performance of the linked equity security and may also be influenced
by interest rate changes. In addition, although the debt securities
are typically adjusted for diluting events such as stock splits, stock
dividends and certain other events affecting the market value of the
linked equity security, the debt securities are not adjusted for
subsequent issuances of the linked equity security for cash. Such an
issuance could adversely affect the price of the debt security. In
addition to the equity risk relating to the linked equity security,
such debt securities are also subject to credit risk with regard to
the issuer of the debt security. In general, however, such debt
securities are less volatile than the equity securities to which they
are linked.
The Fund may invest in convertible securities. A convertible
security is a bond, debenture, note, preferred stock or other security
that may be converted into or exchanged for a prescribed amount of
common stock of the same or different issuer within a particular
period of time at a specified price or formula. Convertible
securities generally have higher yields than common stocks of the same
or similar issuers, but lower yields than comparable nonconvertible
securities, are less subject to fluctuation in value than the
underlying stock because they have fixed income characteristics, and
provide the potential for capital appreciation if the market price of
the underlying common stock increases.
The value of a convertible security is influenced by changes in
interest rates, with investment value declining as interest rates
increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on
the convertible security's investment value.
A convertible security may be subject to redemption at the option
of the issuer at a price established in the security's offering
document. If a convertible security held by the Fund is called for
redemption, the Fund will be required to convert it into the
underlying common stock, sell it to a third party or permit the issuer
to redeem the security. Convertible securities are typically issued
by smaller capitalized companies whose stock prices may be volatile.
Thus, any of these actions could have an adverse effect on the Fund's
ability to achieve its investment objective.
The Fund may also invest in a type of convertible preferred stock
that pays a cumulative, fixed dividend that is senior to, and expected
to be in excess of, the dividends paid on the common stock of the
issuer. At the mandatory conversion date, the preferred stock is
converted into not more than one share of the issuer's common stock at
the "call price" that was established at the time the preferred stock
was issued. If the price per share of the related common stock on the
mandatory conversion date is less than the call price, the holder of
the preferred stock will nonetheless receive only one share of common
stock for each share of preferred stock (plus cash in the amount of
any accrued but unpaid dividends). At any time prior to the mandatory
conversion date, the issuer may redeem the preferred stock upon
issuing to the holder a number of shares of common stock equal to the
call price of the preferred stock in effect on the date of redemption
divided by the market value of the common stock, with such market
value typically determined one or two trading days prior to the date
notice of redemption is given. The issuer must also pay the holder of
the preferred stock cash in an amount equal to any accrued but unpaid
dividends on the preferred stock. This convertible preferred stock is
subject to the same market risk as the common stock of the issuer,
except to the extent that such risk is mitigated by the higher
dividend paid on the preferred stock. The opportunity for equity
appreciation afforded by an investment in such convertible preferred
stock, however, is limited, because in the event the market value of
the issuer's common stock increases to or above the call price of the
preferred stock, the issuer may (and would be expected to) call the
preferred stock for redemption at the call price. This convertible
preferred stock is also subject to credit risk with regard to the
ability of the issuer to pay the dividend established upon issuance of
the preferred stock. Generally, convertible preferred stock is less
volatile than the related common stock of the issuer.
Specific Securities and Investment Practices
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities ("U.S. Government securities") are high
quality debt instruments issued or guaranteed as to principal or
interest by the U.S. Treasury or an agency or instrumentality of the
U.S. Government. These securities include Treasury Bills (which
mature within one year of the date they are issued), Treasury Notes
(which have maturities of one to ten years) and Treasury Bonds (which
generally have maturities of more than 10 years). All such Treasury
securities are backed by the full faith and credit of the United
States.
U.S. Government agencies and instrumentalities that issue or
guarantee securities include, but are not limited to, the Federal
Housing Administration, Fannie Mae (also known as the Federal National
Mortgage Association), Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government
National Mortgage Association ("Ginnie Mae"), General Services
Administration, Central Bank for Cooperatives, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm
Credit Banks, Maritime Administration, the Tennessee Valley Authority,
the Resolution Funding Corporation and the Student Loan Marketing
Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and
credit of the United States. Some, such as securities issued by the
Federal Home Loan Banks, are backed by the right of the agency or
instrumentality to borrow from the Treasury. Others, such as
securities issued by Fannie Mae, are supported only by the credit of
the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United
States, the owner of the securities must look principally to the
agency issuing the obligation for repayment and may not be able to
assert a claim against the United States in the event that the agency
or instrumentality does not meet its commitment.
U.S. Government securities may include mortgage-backed securities
issued by U.S. Government agencies or instrumentalities including, but
not limited to, Ginnie Mae, Freddie Mac and Fannie Mae. These
mortgage-backed securities include pass-through securities,
participation certificates and collateralized mortgage obligations.
See "Mortgage-Backed and Asset-Backed Securities." Timely payment of
principal and interest on Ginnie Mae pass-throughs is guaranteed by
the full faith and credit of the United States. Freddie Mac and
Fannie Mae are both instrumentalities of the U.S. Government, but
their obligations are not backed by the full faith and credit of the
United States. It is possible that the availability and the
marketability (i.e., liquidity) of the securities discussed in this
section could be adversely affected by actions of the U.S. Government
to tighten the availability of its credit.
Money Market Instruments
Money market instruments are high-quality, short-term debt
instruments that present minimal credit risk. They may include U.S.
Government securities, commercial paper and other short-term corporate
obligations, and certificates of deposit and other financial
institution obligations. These instruments may carry fixed or
variable interest rates.
Zero Coupon Securities
Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payment of interest prior to maturity or
that specify a future date when the securities begin to pay current
interest; instead, they are sold at a deep discount from their face
value and are redeemed at face value when they mature. Because zero
coupon securities do not pay current income, their prices can be very
volatile when interest rates change and generally are subject to
greater price fluctuations in response to changing interest rates than
prices of comparable maturities that make current distributions of
interest in cash.
The Fund may invest in zero coupon securities that are "stripped"
U.S. Treasury notes and bonds, zero coupon bonds of corporate issuers
and other securities that are issued with original issue discount
("OID"). The Federal tax law requires that a holder of a security
with OID accrue a ratable portion of the OID on the security as income
each year, even though the holder may receive no interest payment on
the security during the year. Accordingly, although the Fund will
receive no payments on its zero coupon securities prior to their
maturity or disposition, it will have current income attributable to
those securities and includable in the dividends paid to its
shareholders. Those dividends will be paid from the Fund's cash
assets or by liquidation of portfolio securities, if necessary, at a
time when the Fund otherwise might not have done so.
A broker-dealer creates a derivative zero by separating the
interest and principal components of a U.S. Treasury security and
selling them as two individual securities. CATS (Certificates of
Accrual on Treasury Securities), TIGRs (Treasury Investment Growth
Receipts), and TRs (Treasury Receipts) are examples of derivative
zeros.
A Federal Reserve Bank creates STRIPS (Separate Trading of
Registered Interest and Principal of Securities) by separating the
interest and principal components of an outstanding U.S. Treasury bond
and selling them as individual securities. Bonds issued by the
Resolution Funding Corporation (REFCORP) and the Financing Corporation
(FICO) can also be separated in this fashion. Original issue zeros
are zero coupon securities originally issued by the U.S. government, a
government agency, or a corporation in zero coupon form.
Mortgage-Backed and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent
direct or indirect participations in, or are secured by and payable
from, mortgage loans secured by real property and include single- and
multi-class pass-through securities and collateralized mortgage
obligations. Multi-class pass-through securities and collateralized
mortgage obligations are collectively referred to in this SAI as
"CMOs." Some CMOs are directly supported by other CMOs, which in turn
are supported by mortgage pools. Investors typically receive payments
out of the interest and principal on the underlying mortgages. The
portions of the payments that investors receive, as well as the
priority of their rights to receive payments, are determined by the
specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund
may invest include mortgage-backed securities issued or guaranteed as
to the payment of principal and interest (but not as to market value)
by Ginnie Mae, Fannie Mae or Freddie Mac. Other mortgage-backed
securities are issued by private issuers, generally originators of and
investors in mortgage loans, including savings associations, mortgage
bankers, commercial banks, investment bankers and special purpose
entities. Payments of principal and interest (but not the market
value) of such private mortgage-backed securities may be supported by
pools of mortgage loans or other mortgage-backed securities that are
guaranteed, directly or indirectly, by the U.S. Government or one of
its agencies or instrumentalities, or they may be issued without any
government guarantee of the underlying mortgage assets but with some
form of non-government credit enhancement. These credit enhancements
do not protect investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage
lenders, or other financial institutions. Other types of mortgage-
backed securities will likely be developed in the future, and the Fund
may invest in them if WRIMCO determines they are consistent with the
Fund's goal and investment policies.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities are created when a U.S. Government agency or a financial
institution separates the interest and principal components of a
mortgage-backed security and sells them as individual securities. The
holder of the "principal-only" security ("PO") receives the principal
payments made by the underlying mortgage-backed security, while the
holder of the "interest-only" security ("IO") receives interest
payments from the same underlying security.
For example, interest-only ("IO") classes are entitled to receive
all or a portion of the interest, but none (or only a nominal amount)
of the principal payments, from the underlying mortgage assets. If
the mortgage assets underlying an IO experience greater than
anticipated principal prepayments, then the total amount of interest
allocable to the IO class, and therefore the yield to investors,
generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if
the security is guaranteed by the U.S. Government or considered to be
of the highest quality. Conversely, principal-only ("PO") classes are
entitled to receive all or a portion of the principal payments, but
none of the interest, from the underlying mortgage assets. PO classes
are purchased at substantial discounts from par, and the yield to
investors will be reduced if principal payments are slower than
expected. IOs, POs and other CMOs involve special risks, and
evaluating them requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed
above. However, the underlying assets are not first lien mortgage
loans or interests therein, but include assets such as motor vehicle
installment sales contracts, other installment sale contracts, home
equity loans, leases of various types of real and personal property
and receivables from revolving credit (credit card) agreements. Such
assets are securitized through the use of trusts or special purpose
corporations. Payments or distributions of principal and interest may
be guaranteed up to a certain amount and for a certain time period by
a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements
may be present. The value of asset-backed securities may also depend
on the creditworthiness of the servicing agent for the loan pool, the
originator of the loans, or the financial institution providing the
credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed
Securities. The yield characteristics of mortgage-backed and asset-
backed securities differ from those of traditional debt securities.
Among the major differences are that interest and principal payments
are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans or other
obligations generally may be prepaid at any time. Prepayments on a
pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in
the mortgaged properties and servicing decisions. Generally, however,
prepayments on fixed-rate mortgage loans will increase during a period
of falling interest rates and decrease during a period of rising
interest rates. Similar factors apply to prepayments on asset-backed
securities, but the receivables underlying asset-backed securities
generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that
for a specified time period the issuers will replace receivables in
the pool that are repaid with comparable obligations. If the issuer
is unable to do so, repayment of principal on the asset-backed
securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than
the interest rates paid on the mortgages included in the underlying
pool due to the annual fees paid to the servicer of the mortgage pool
for passing through monthly payments to certificateholders and to any
guarantor, and due to any yield retained by the issuer. Actual yield
to the holder may vary from the coupon rate, even if adjustable, if
the mortgage-backed securities are purchased or traded in the
secondary market at a premium or discount. In addition, there is
normally some delay between the time the issuer receives mortgage
payments from the servicer and the time the issuer makes the payments
on the mortgage-backed securities, and this delay reduces the
effective yield to the holder of such securities.
Yields on pass-through securities are typically quoted by
investment dealers and vendors based on the maturity of the underlying
instruments and the associated average life assumption. The average
life of pass-through pools varies with the maturities of the
underlying mortgage loans. A pool's term may be shortened by
unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely,
it is not possible to predict accurately the average life of a
particular pool. In the past, a common industry practice has been to
assume that prepayments on pools of fixed-rate 30-year mortgages would
result in a 12-year average life for the pool. At present, mortgage
pools, particularly those with loans with other maturities or
different characteristics, are priced on an assumption of average life
determined for each pool. In periods of declining interest rates, the
rate of prepayment tends to increase, thereby shortening the actual
average life of a pool of mortgage-related securities. Conversely, in
periods of rising interest rates, the rate of prepayment tends to
decrease, thereby lengthening the actual average life of the pool.
Changes in the rate or "speed" of these payments can cause the value
of the mortgage-backed securities to fluctuate rapidly. However,
these effects may not be present, or may differ in degree, if the
mortgage loans in the pools have adjustable interest rates or other
special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ
from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S.
Government mortgage-backed securities. CMO classes may be
specifically structured in a manner that provides any of a wide
variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change,
however, and especially during periods of rapid or unanticipated
changes in market interest rates, the attractiveness of some CMO
classes and the ability of the structure to provide the anticipated
investment characteristics may be reduced. These changes can result
in volatility in the market value and in some instances reduced
liquidity of the CMO class.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and
may carry rights that permit holders to demand payment of the unpaid
principal balance plus accrued interest from the issuers or certain
financial intermediaries on dates prior to their stated maturities.
Floating rate securities have interest rates that change whenever
there is a change in a designated base rate while variable rate
instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market
value for the instrument that approximates its par value.
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 be
treated as short-term instruments, bonds, stocks or as a separate
asset class for purposes of the Fund's investment allocations,
depending on the individual characteristics of the securities.
Certain indexed securities that are not traded on an established
market may be deemed illiquid.
Loans and Other Direct Debt Instruments
Direct debt instruments are interests in amounts owed by a
corporate, governmental, or other borrower to lenders or lending
syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables), or to other parties.
Direct debt instruments are subject to the Fund's policies regarding
the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of
principal and interest. Direct debt instruments may not be rated by
any nationally recognized rating service. If the Fund does not
receive scheduled interest or principal payments on such indebtedness,
the Fund's share price could be adversely affected. Loans that are
fully secured offer the Fund more protections than an unsecured loan
in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from
a secured loan would satisfy the borrower's obligation, or that the
collateral could be liquidated. Indebtedness of borrowers whose
creditworthiness is poor involves substantially greater risks, and may
be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay off their indebtedness, or may pay only a
small fraction of the amount owed. Direct indebtedness of developing
countries also involves a risk that the governmental entities
responsible for the repayment of the debt may be unable, or unwilling,
to pay interest and principal when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional
risks to the Fund. Direct debt instruments may also involve a risk of
insolvency of the lending bank or other intermediary. Direct debt
instruments that are not in the form of securities may offer less
legal protection to the Fund in the event of fraud or
misrepresentation. In the absence of definitive regulatory guidance,
the Fund relies on WRIMCO's research in an attempt to avoid situations
where fraud or misrepresentation could adversely affect the Fund.
A loan is often administered by a bank or other financial
institution that acts as agent for all holders. The agent administers
the terms of the loan, as specified in the loan agreement. Unless,
under the terms of the loan or other indebtedness, the Fund has direct
recourse against the borrower, 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 form, are foreign receipts evidencing a similar
arrangement and are designed for use by non-U.S. investors and traders
in non-U.S. markets. Global depositary receipts are designed to
facilitate the trading of foreign issuers by U.S. and non-U.S.
investors and traders.
WRIMCO believes that there are investment opportunities as well
as risks in investing in foreign securities. Individual foreign
economies may differ favorably or unfavorably from the U.S. economy or
each other in such matters as gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance
of payments position. Individual foreign companies may also differ
favorably or unfavorably from domestic companies in the same industry.
Foreign currencies may be stronger or weaker than the U.S. dollar or
than each other. Thus, the value of securities denominated in or
indexed to foreign currencies, and of dividends and interest from such
securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. WRIMCO believes
that the Fund's ability to invest a substantial portion of its assets
abroad might enable it to take advantage of these differences and
strengths where they are favorable.
However, foreign securities and foreign currencies involve
additional significant risks, apart from the risks inherent in U.S.
investments. Foreign securities markets generally have less trading
volume and less liquidity than U.S. markets, and prices on some
foreign markets can be highly volatile. Many foreign countries lack
uniform accounting and disclosure standards comparable to those
applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial conditions and
operations. In addition, the costs of foreign investing, including
withholding taxes, brokerage commissions and custodial costs, are
generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers and securities markets may be
subject to less government supervision. Foreign security trading
practices, including those involving the release of assets in advance
of payment, may involve increased risks in the event of a failed trade
or the insolvency of a broker-dealer, and may involve substantial
delays. It may also be difficult to enforce legal rights in foreign
countries.
Investing abroad also involves different political and economic
risks. Foreign investments may be affected by actions of foreign
governments adverse to the interests of U.S. investors, including the
possibility of expropriation or nationalization of assets,
confiscatory taxation, restrictions on U.S. investment or on the
ability to repatriate assets or convert currency into U.S. dollars or
other government intervention. There may be greater possibility of
default by foreign governments or government-sponsored enterprises.
Investments in foreign countries also involve a risk of local
political, economic, or social instability, military action or unrest,
or adverse diplomatic developments. There is no assurance that WRIMCO
will be able to anticipate these potential events or counter their
effects.
The considerations noted above generally are intensified in
developing countries. A developing country is a nation that, in
WRIMCO's opinion, is likely to experience long-term gross domestic
product growth above that expected to occur in the United States, the
United Kingdom, France, Germany, Italy, Japan and Canada. Developing
countries may have relatively unstable governments, economies based on
only a few industries and securities markets that trade a small number
of securities.
Certain foreign securities impose restrictions on transfer within
the United States or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less
liquid than foreign securities of the same class that are not subject
to such restrictions.
The Fund could also be adversely affected by the conversion of
certain European currencies into the euro. This conversion, which is
underway, is scheduled to be completed in 2002. However, problems
with the conversion process and delays could increase volatility in
world capital markets and affect European capital markets in
particular.
The Fund may purchase and sell foreign currency and invest in
foreign currency deposits, and may enter into forward currency
contracts. The Fund may incur a transaction charge in connection with
the exchange of currency. Currency conversion involves dealer spreads
and other costs, although commissions are not usually charged. See
"Options, Futures and Other Strategies - Forward Currency Contracts."
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual restriction on resale. However, restricted securities
generally can be sold in privately negotiated transactions, pursuant
to an exemption from registration under the Securities Act of 1933, as
amended, or in a registered public offering. Where registration is
required, the Fund may be obligated to pay all or part of the
registration expense and a considerable period may elapse between the
time it decides to seek registration and the time the Fund may be
permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than
prevailed when it decided to seek registration of the security.
There are risks associated with investment in restricted
securities in that there can be no assurance of a ready market for
resale. Also, the contractual restrictions on resale might prevent
the Fund from reselling the securities at a time when such sale might
be desirable. Restricted securities in which the Fund seeks to invest
need not be listed or admitted to trading on a foreign or domestic
exchange and may be less liquid than listed securities. Certain
restricted securities, e.g., Rule 144A securities, may be determined
to be liquid in accordance with guidelines adopted by the Board of
Directors. See "Illiquid Investments".
Lending Securities
Securities loans may be made on a short-term or long-term basis
for the purpose of increasing the Fund's income. If the Fund lends
securities, the borrower pays the Fund an amount equal to the
dividends or interest on the securities that the Fund would have
received if it had not lent the securities. The Fund also receives
additional compensation. Under the Fund's current securities lending
procedures, the Fund may lend securities only to broker-dealers and
financial institutions deemed creditworthy by WRIMCO.
Any securities loan that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines").
At the time of each loan, the Fund must receive collateral equal to no
less than 100% of the market value of the securities loaned. Under
the present Guidelines, the collateral must consist of cash, U.S.
Government securities or bank letters of credit, at least equal in
value to the market value of the securities lent on each day that the
loan is outstanding. If the market value of the securities lent
exceeds the value of the collateral, the borrower must add more
collateral so that it at least equals the market value of the
securities lent. If the market value of the securities decreases, the
borrower is entitled to return of the excess collateral.
There are two methods of receiving compensation for making loans.
The first is to receive a negotiated loan fee from the borrower. This
method is available for all three types of collateral. The second
method, which is not available when letters of credit are used as
collateral, is for the Fund to receive interest on the investment of
the cash collateral or to receive interest on the U.S. Government
securities used as collateral. Part of the interest received in
either case may be shared with the borrower.
The letters of credit that the Fund may accept as collateral are
agreements by banks (other than the borrowers of the Fund's
securities), entered into at the request of the borrower and for its
account and risk, under which the banks are obligated to pay to the
Fund, while the letter is in effect, amounts demanded by the Fund if
the demand meets the terms of the letter. The Fund's right to make
this demand secures the borrower's obligations to it. The terms of
any such letters and the creditworthiness of the banks providing them
(which might include the Fund's custodian bank) must be satisfactory
to the Fund. The Fund will make loans only under rules of the NYSE,
which presently require the borrower to give the securities back to
the Fund within five business days after the Fund gives notice to do
so. If the Fund loses its voting rights on securities loaned, it will
have the securities returned to it in time to vote them if a material
event affecting the investment is to be voted on. The Fund may pay
reasonable finder's, administrative and custodian fees in connection
with loans of securities.
Some, but not all, of these rules are necessary to meet
requirements of certain laws relating to securities loans. These
rules will not be changed unless the change is permitted under these
requirements. These requirements, however, do not cover the present
rules, which may be changed without shareholder vote, as to: (i) whom
securities may be loaned, (ii) the investment of cash collateral, or
(iii) voting rights.
There may be risks of delay in receiving additional collateral
from the borrower if the market value of the securities loaned
increases, as well as risks of delay in recovering the securities
loaned or even loss of rights in the collateral should the borrower of
the securities fail financially.
Repurchase Agreements
A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a commercial bank or
broker-dealer) agrees, at the time of purchase, that it will
repurchase the security at a specified time and price. The amount by
which the resale price is greater than the purchase price reflects an
agreed-upon market interest rate effective for the period of the
agreement. The return on the securities subject to the repurchase
agreement may be more or less than the return on the repurchase
agreement.
The majority of the repurchase transactions in which the Fund
will engage are overnight transactions, and the delivery pursuant to
the resale typically will occur within one to five days of the
purchase. The primary risk is that the Fund may suffer a loss if the
seller fails to pay the agreed-upon amount on the delivery date and
that amount is greater than the resale price of the underlying
securities and other collateral held by the Fund. In the event of
bankruptcy or other default by the seller, there may be possible
delays or expenses in liquidating 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.
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.
Investment Company Securities
The Fund may purchase securities of closed-end investment
companies. As a shareholder in an investment company, the Fund would
bear its pro rata share of that investment company's expenses, which
could result in duplication of certain fees, including management and
administrative fees.
Precious Metals
The ability of the Fund to purchase and hold precious metals such
as gold, silver and platinum may allow it to benefit from a potential
increase in the price of precious metals or stability in the price of
such metals at a time when the value of securities may be declining.
For example, during periods of declining stock prices, the price of
gold may increase or remain stable, while the value of the stock
market may be subject to a general decline.
Precious metals prices are affected by various factors, such as
economic conditions, political events and monetary policies. As a
result, the price of gold, silver or platinum may fluctuate widely.
The sole source of return to the Fund from such investments will be
gains realized in sales; a negative return will be realized if the
metal is sold at a loss. Investments in precious metals do not
provide a yield. The Fund's direct investment in precious metals is
limited by tax considerations. See "Taxes" for a more detailed
discussion of the tax implications of investments in precious metals.
Illiquid Investments
Illiquid investments are investments that cannot be sold or
disposed of in the ordinary course of business within seven days at
approximately the prices at which they are valued. Investments
currently considered to be illiquid include:
(i) repurchase agreements not terminable within seven days;
(ii) securities for which market quotations are not readily
available;
(iii) securities involved in swap, cap, floor and collar
transactions;
(iv) bank deposits, unless they are payable at principal amount
plus accrued interest on demand or within seven days after
demand;
(v) non-government stripped fixed-rate mortgage-backed
securities;
(vi) direct debt instruments;
(vii) restricted securities not determined to be liquid pursuant
to guidelines established by the Fund's Board of Directors;
and
(viii) over-the-counter ("OTC") options and their underlying
collateral.
The assets used as cover for OTC options written by the Fund will
be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in
the option agreement. The cover for an OTC option written subject to
this procedure would be considered illiquid only to the extent that
the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
If through a change in values, net assets, or other
circumstances, the Fund were in a position where more than 15% of its
net assets were invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.
Options, Futures and Other Strategies
General. WRIMCO may use certain options, futures contracts
(sometimes referred to as "futures"), options on futures contracts,
forward currency contracts, swaps, caps, floors, collars, indexed
securities and other derivative instruments (collectively, "Financial
Instruments") to attempt to enhance the Fund's income or yield or to
attempt to hedge the Fund's investments. The strategies described
below may be used in an attempt to manage the Fund's foreign currency
exposure as well as other risks of the Fund's investments that can
affect fluctuation in its net asset value.
Generally, the Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, the Fund will only
purchase or sell a particular Financial Instrument if the Fund is
authorized to invest in the type of asset by which the return on, or
value of, the Financial Instrument is primarily measured. Since the
Fund is authorized to invest in foreign securities, it may purchase
and sell foreign currency derivatives.
Hedging strategies can be broadly categorized as "short hedges"
and "long hedges." A short hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential declines in
the value of one or more investments held in the Fund's portfolio.
Thus, in a short hedge the Fund takes a position in a Financial
Instrument whose price is expected to move in the opposite direction
of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential increases
in the acquisition cost of one or more investments that the Fund
intends to acquire. Thus, in a long hedge, the Fund takes a position
in a Financial Instrument whose price is expected to move in the same
direction as the price of the prospective investment being hedged. A
long hedge is sometimes referred to as an anticipatory hedge. In an
anticipatory hedge transaction, the Fund does not own a corresponding
security and, therefore, the transaction does not relate to a security
the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the
security it anticipated purchasing, the effect on the Fund's portfolio
is the same as if the transaction were entered into for speculative
purposes.
Financial Instruments on securities generally are used to attempt
to hedge against price movements in one or more particular securities
positions that the Fund owns or intends to acquire. Financial
Instruments on indices, in contrast, generally are used to attempt to
hedge against price movements in market sectors in which the Fund has
invested or expects to invest. Financial Instruments on debt
securities may be used to hedge either individual securities or broad
debt market sectors.
The use of Financial Instruments is subject to applicable
regulations of the SEC, the several exchanges upon which they are
traded and the Commodity Futures Trading Commission (the "CFTC"). In
addition, the Fund's ability to use Financial Instruments may be
limited by tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described
below, WRIMCO expects to discover additional opportunities in
connection with Financial Instruments and other similar or related
techniques. These new opportunities may become available as WRIMCO
develops new techniques, as regulatory authorities broaden the range
of permitted transactions and as new Financial Instruments or other
techniques are developed. WRIMCO may utilize these opportunities to
the extent that they are consistent with the Fund's goal and permitted
by the Fund's investment limitations and applicable regulatory
authorities. The Fund might not use any of these strategies, and
there can be no assurance that any strategy used will succeed. The
Fund's Prospectus or SAI will be supplemented to the extent that new
products or techniques involve materially different risks than those
described below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In
general, these techniques may increase the volatility of the Fund and
may involve a small investment of cash relative to the magnitude of
the risk assumed. Risks pertaining to particular Financial
Instruments are described in the sections that follow.
(1) Successful use of most Financial Instruments depends upon
WRIMCO's ability to predict movements of the overall securities,
currency and interest rate markets, which requires different skills
than predicting changes in the prices of individual securities. There
can be no assurance that any particular strategy will succeed, and use
of Financial Instruments could result in a loss, regardless of whether
the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no
correlation, between price movements of a Financial Instrument and
price movements of the investments being hedged. For example, if the
value of a Financial Instrument used in a short hedge increased by
less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur
due to factors unrelated to the value of the investments being hedged,
such as speculative or other pressures on the markets in which
Financial Instruments are traded. The effectiveness of hedges using
Financial Instruments on indices will depend on the degree of
correlation between price movements in the index and price movements
in the securities being hedged.
Because there are a limited number of types of exchange-traded
options and futures contracts, it is likely that the standardized
contracts available will not match the Fund's current or anticipated
investments exactly. The Fund may invest in options and futures
contracts based on securities with different issuers, maturities or
other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of
their underlying instruments, even if the underlying instruments match
the Fund's investments well. Options and futures prices are affected
by such factors as current and anticipated short-term interest rates,
changes in volatility of the underlying instrument, and the time
remaining until expiration of the contract, which may not affect
security prices the same way. Imperfect correlation may also result
from differing levels of demand in the options and futures markets and
the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell
options and futures contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to
attempt to compensate for differences in volatility between the
contract and the securities, although this may not be successful in
all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses
that are not offset by gains in other investments.
(3) If successful, the above-discussed strategies can reduce
risk of loss by wholly or partially offsetting the negative effect of
unfavorable price movements. However, such strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable
price movements. For example, if the Fund entered into a short hedge
because WRIMCO projected a decline in the price of a security in the
Fund's portfolio, and the price of that security increased instead,
the gain from that increase might be wholly or partially offset by a
decline in the price of the Financial Instrument. Moreover, if the
price of the Financial Instrument declined by more than the increase
in the price of the security, the Fund could suffer a loss. In either
such case, the Fund would have been in a better position had it not
attempted to hedge at all.
(4) As described below, the Fund might be required to maintain
assets as "cover," maintain accounts or make margin payments when it
takes positions in Financial Instruments involving obligations to
third parties (i.e., Financial Instruments other than purchased
options). If the Fund were unable to close out its positions in such
Financial Instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the Fund's
ability to sell a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or require that the
Fund sell a portfolio security at a disadvantageous time.
(5) The Fund's ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of
a liquid secondary market or, in the absence of such a market, the
ability and willingness of the other party to the transaction (the
"counterparty") to enter into a transaction closing out the position.
Therefore, there is no assurance that any position can be closed out
at a time and price that is favorable to the Fund.
Cover. Transactions using Financial Instruments, other than
purchased options, expose the Fund to an obligation to another party.
The Fund will comply with SEC guidelines regarding cover for these
instruments and will, if the guidelines so require, set aside cash or
liquid assets in an account with its custodian in the prescribed
amount as determined daily.
Assets used as cover or held in an account cannot be sold while
the position in the corresponding Financial Instrument is open, unless
they are replaced with other appropriate assets. As a result, the
commitment of a large portion of the Fund's assets to cover accounts
could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
Options. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-
upon price during the option period. A put option gives the purchaser
the right to sell, and obligates the writer to buy, the underlying
investment at the agreed-upon price during the option period.
Purchasers of options pay an amount, known as a premium, to the option
writer in exchange for the right under the option contract.
The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or
call options can enable the Fund to enhance income or yield by reason
of the premiums paid by the purchasers of such options. However, if
the market price of the security underlying a put option declines to
less than the exercise price of the option, minus the premium
received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if
the security or currency appreciates to a price higher than the
exercise price of the call option, it can be expected that the option
will be exercised and the Fund will be obligated to sell the security
or currency at less than its market value. If the call option is an
OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid
Investments."
Writing put options can serve as a limited long hedge because
increases in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if
the security or currency depreciates to a price lower than the
exercise price of the put option, it can be expected that the put
option will be exercised and the Fund will be obligated to purchase
the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover
would be considered illiquid to the extent described under "Illiquid
Investments."
The value of an option position will reflect, among other things,
the current market value of the underlying investment, the time
remaining until expiration, the relationship of the exercise price to
the market price of the underlying investment, the historical price
volatility of the underlying investment and general market conditions.
Options that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under
an option by entering into a closing transaction. For example, the
Fund may terminate its obligation under a call or put option that it
had written by purchasing an identical call or put option; this is
known as a closing purchase transaction. Conversely, the Fund may
terminate a position in a put or call option it had purchased by
writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize
profits or limit losses on an option position prior to its exercise or
expiration.
A type of put that the Fund may purchase is an "optional delivery
standby commitment," which is entered into by parties selling debt
securities to the Fund. An optional delivery standby commitment gives
the Fund the right to sell the security back to the seller on
specified terms. This right is provided as an inducement to purchase
the security.
Risks of Options on Securities. Options offer large amounts of
leverage, which will result in the Fund's net asset value being more
sensitive to changes in the value of the related instrument. The Fund
may purchase or write both exchange-traded and OTC options. Exchange-
traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is
listed that, in effect, guarantees completion of every exchange-traded
option transaction. In contrast, OTC options are contracts between
the Fund and its counterparty (usually a securities dealer or a bank)
with no clearing organization guarantee. Thus, when the Fund
purchases an OTC option, it relies on the counterparty from whom it
purchased the option to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counterparty
to do so would result in the loss of any premium paid by the Fund as
well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market.
However, there can be no assurance that such a market will exist at
any particular time. Closing transactions can be made for OTC options
only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. There
can be no assurance that the Fund will in fact be able to close out an
OTC option position at a favorable price prior to expiration. In the
event of insolvency of the counterparty, the Fund might be unable to
close out an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an
option it had purchased, it would have to exercise the option to
realize any profit. The inability to enter into a closing purchase
transaction for a covered call option written by the Fund could cause
material losses because the Fund would be unable to sell the
investment used as cover for the written option until the option
expires or is exercised.
Options on Indices. Puts and calls on indices are similar to
puts and calls on securities or futures contracts except that all
settlements are in cash and gain or loss depends on changes in the
index in question rather than on price movements in individual
securities or futures contracts. When the Fund writes a call on an
index, it receives a premium and agrees that, prior to the expiration
date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the
index upon which the call is based is greater than the exercise price
of the call. The amount of cash is equal to the difference between
the closing price of the index and the exercise price of the call
times a specified multiple ("multiplier"), which determines the total
dollar value for each point of such difference. When the Fund buys a
call on an index, it pays a premium and has the same rights as to such
call as are indicated above. When the Fund buys a put on an index, it
pays a premium and has the right, prior to the expiration date, to
require the seller of the put, upon the Fund's exercise of the put, to
deliver to the Fund an amount of cash if the closing level of the
index upon which the put is based is less than the exercise price of
the put, which amount of cash is determined by the multiplier, as
described above for calls. When the Fund writes a put on an index, it
receives a premium and the purchaser of the put has the right, prior
to the expiration date, to require the Fund to deliver to it an amount
of cash equal to the difference between the closing level of the index
and the exercise price times the multiplier if the closing level is
less than the exercise price.
Risks of Options on Indices. The risks of investment in options
on indices may be greater than options on securities. Because index
options are settled in cash, when the Fund writes a call on an index
it cannot provide in advance for its potential settlement obligations
by acquiring and holding the underlying securities. The Fund can
offset some of the risk of writing a call index option by holding a
diversified portfolio of securities similar to those on which the
underlying index is based. However, the Fund cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same
securities as underlie the index and, as a result, bears a risk that
the value of the securities held will vary from the value of the
index.
Even if the Fund could assemble a portfolio that exactly
reproduced the composition of the underlying index, it still would not
be fully covered from a risk standpoint because of the "timing risk"
inherent in writing index options. When an index option is exercised,
the amount of cash that the holder is entitled to receive is
determined by the difference between the exercise price and the
closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn
that the Fund has been assigned until the next business day at the
earliest. The time lag between exercise and notice of assignment
poses no risk for the writer of a covered call on a specific
underlying security, such as common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value
as of a fixed time in the past. So long as the writer already owns
the underlying security, it can satisfy its settlement obligations by
simply delivering it, and the risk that its value may have declined
since the exercise date is borne by the exercising holder. In
contrast, even if the writer of an index call holds securities that
exactly match the composition of the underlying index, it will not be
able to satisfy its assignment obligations by delivering those
securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on
the exercise date. By the time it learns that it has been assigned,
the index may have declined, with a corresponding decline in the value
of its portfolio. This "timing risk" is an inherent limitation on the
ability of index call writers to cover their risk exposure by holding
securities positions.
If the Fund has purchased an index option and exercises it before
the closing index value for that day is available, it runs the risk
that the level of the underlying index may subsequently change. If
such a change causes the exercised option to fall out-of-the-money,
the Fund will be required to pay the difference between the closing
index value and the exercise price of the option (times the applicable
multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are
standardized with respect to the underlying instrument, expiration
date, contract size, and strike price, the terms of OTC options
(options not traded on exchanges) generally are established through
negotiation with the other party to the option contract. While this
type of arrangement allows the Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing
organization of the exchanges where they are traded. 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.
Generally, OTC foreign currency options used by the Fund are
European-style options. This means that the option is only
exercisable immediately prior to its expiration. This is in contrast
to American-style options, which are exercisable at any time prior to
the expiration date of the option.
Futures Contracts and Options on Futures Contracts. The purchase
of futures or call options on futures can serve as a long hedge, and
the sale of futures or the purchase of put options on futures can
serve as a short hedge. Writing call options on futures contracts can
serve as a limited short hedge, using a strategy similar to that used
for writing call options on securities or indices. Similarly, writing
put options on futures contracts can serve as a limited long hedge.
Futures contracts and options on futures contracts can also be
purchased and sold to attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average
duration of the Fund's fixed-income portfolio. If WRIMCO wishes to
shorten the average duration of the Fund's fixed-income portfolio, the
Fund may sell a debt futures contract or a call option thereon, or
purchase a put option on that futures contract. If WRIMCO wishes to
lengthen the average duration of the Fund's fixed-income portfolio,
the Fund may buy a debt futures contract or a call option thereon, or
sell a put option thereon.
No price is paid upon entering into a futures contract. Instead,
at the inception of a futures contract the Fund is required to deposit
"initial margin" in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call or
put option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather
is in the nature of a performance bond or good-faith deposit that is
returned to the Fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the Fund may be
required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally
in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the
futures broker daily as the value of the futures position varies, a
process known as "marking-to-market." Variation margin does not
involve borrowing, but rather represents a daily settlement of the
Fund's obligations to or from a futures broker. When the Fund
purchases an option on a future, the premium paid plus transaction
costs is all that is at risk. In contrast, when the Fund purchases or
sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in
the event of adverse price movements. If the Fund has insufficient
cash to meet daily variation margin requirements, it might need to
sell securities at a time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on
futures can enter into offsetting closing transactions, similar to
closing transactions on options, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or
sold. Positions in futures and options on futures may be closed only
on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will
exist for a particular contract at a particular time. In such event,
it may not be possible to close a futures contract or options
position.
Under certain circumstances, futures exchanges may establish
daily limits on the amount that the price of a futures contract or an
option on a futures contract can vary from the previous day's
settlement price; once that limit is reached, no trades may be made
that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an
option on a futures position due to the absence of a liquid secondary
market or the imposition of price limits, it could incur substantial
losses. The Fund would continue to be subject to market risk with
respect to the position. In addition, except in the case of purchased
options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or
securities in a segregated account.
Risks of Futures Contracts and Options Thereon. The ordinary
spreads between prices in the cash and futures markets (including the
options on futures market), due to differences in the natures of those
markets, are subject to the following factors, which may create
distortions. First, all participants in the futures market are
subject to margin deposit and maintenance requirements. Rather than
meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort
the normal relationship between the cash and futures markets. Second,
the liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery.
To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators
in the futures market may cause temporary price distortions. Due to
the possibility of distortion, a correct forecast of general interest
rate, currency exchange rate or stock market trends by WRIMCO may
still not result in a successful transaction. WRIMCO may be incorrect
in its expectations as to the extent of various interest rate,
currency exchange rate or stock market movements or the time span
within which the movements take place.
Index Futures. The risk of imperfect correlation between
movements in the price of an index futures and movements in the price
of the securities that are the subject of the hedge increases as the
composition of the Fund's portfolio diverges from the securities
included in the applicable index. The price of the index futures may
move more than or less than the price of the securities being hedged.
If the price of the index futures moves less than the price of the
securities that are the subject of the hedge, the hedge will not be
fully effective but, if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better
position than if it had not hedged at all. If the price of the
securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the futures contract. If the
price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the
futures contract that will not be completely offset by movements in
the price of the securities that are the subject of the hedge. To
compensate for the imperfect correlation of movements in the price of
the securities being hedged and movements in the price of the index
futures, the Fund may buy or sell index futures in a greater dollar
amount than the dollar amount of the securities being hedged if the
historical volatility of the prices of such securities being hedged is
more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has
sold index futures contracts to hedge against decline in the market,
the market may advance and the value of the securities held in the
portfolio may decline. If this occurred, the Fund would lose money on
the futures contract and also experience a decline in value of its
portfolio securities. However, while this could occur for a very
brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same
direction as the market indices on which the futures contracts are
based.
Where index futures are purchased to hedge against a possible
increase in the price of securities before the Fund is able to invest
in them in an orderly fashion, it is possible that the market may
decline instead. If the Fund then concludes not to invest in them at
that time because of concern as to possible further market decline or
for other reasons, it will realize a loss on the futures contract that
is not offset by a reduction in the price of the securities it had
anticipated purchasing.
Foreign Currency Hedging Strategies -- Special Considerations.
The Fund may use options and futures contracts on foreign currencies
(including the euro), as described above, and forward currency
contracts, as described below, to attempt to hedge against movements
in the values of the foreign currencies in which the Fund's securities
are denominated or to attempt to enhance income or yield. Currency
hedges can protect against price movements in a security that the Fund
owns or intends to acquire that are attributable to changes in the
value of the currency in which it is denominated. Such hedges do not,
however, protect against price movements in the securities that are
attributable to other causes.
The Fund might seek to hedge against changes in the value of a
particular currency when no Financial Instruments on that currency are
available or such Financial Instruments are more expensive than
certain other Financial Instruments. In such cases, the Fund may seek
to hedge against price movements in that currency by entering into
transactions using Financial Instruments on another currency or a
basket of currencies, the value of which WRIMCO believes will have a
high degree of positive correlation to the value of the currency being
hedged. The risk that movements in the price of the Financial
Instrument will not correlate perfectly with movements in the price of
the currency subject to the hedging transaction is magnified when this
strategy is used.
The value of Financial Instruments on foreign currencies depends
on the value of the underlying currency relative to the U.S. dollar.
Because foreign currency transactions occurring in the interbank
market might involve substantially larger amounts than those involved
in the use of such Financial Instruments, the Fund could be
disadvantaged by having to deal in the odd lot market (generally
consisting of transactions of less than $1 million) for the underlying
foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for
foreign currencies or any regulatory requirement that quotations
available through dealers or other market sources be firm or revised
on a timely basis. Quotation information generally is representative
of very large transactions in the interbank market and thus might not
reflect odd-lot transactions where rates might be less favorable. The
interbank market in foreign currencies is a global, round-the-clock
market. To the extent the U.S. options or futures markets are closed
while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the
underlying markets that cannot be reflected in the markets for the
Financial Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies
might be required to take place within the country issuing the
underlying currency. Thus, the Fund might be required to accept or
make delivery of the underlying foreign currency in accordance with
any U.S. or foreign regulations regarding the maintenance of foreign
banking arrangements by U.S. residents and might be required to pay
any fees, taxes and charges associated with such delivery assessed in
the issuing country.
Forward Currency Contracts. The Fund may enter into forward
currency contracts to purchase or sell foreign currencies for a fixed
amount of U.S. dollars or another foreign currency. A forward
currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of
days (term) from the date of the forward currency contract agreed upon
by the parties, at a price set at the time of the forward currency
contract. These forward currency contracts are traded directly
between currency traders (usually large commercial banks) and their
customers.
Such transactions may serve as long hedges; for example, the Fund
may purchase a forward currency contract to lock in the U.S. dollar
price of a security denominated in a foreign currency that the Fund
intends to acquire. Forward currency contract transactions may also
serve as short hedges; for example, the Fund may sell a forward
currency contract to lock in the U.S. dollar equivalent of the
proceeds from the anticipated sale of a security, dividend or interest
payment denominated in a foreign currency.
The Fund may also use forward currency contracts to hedge against
a decline in the value of existing investments denominated in foreign
currency. For example, if the Fund owned securities denominated in
euros, it could enter into a forward currency contract to sell euros
in return for U.S. dollars to hedge against possible declines in the
euro's value. Such a hedge, sometimes referred to as a "position
hedge," would tend to offset both positive and negative currency
fluctuations, but would not offset changes in security values caused
by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the euro. This type
of hedge, sometimes referred to as a "proxy hedge," could offer
advantages in terms of cost, yield or efficiency, but generally would
not hedge currency exposure as effectively as a simple hedge into U.S.
dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged
securities are denominated.
The Fund also may use forward currency contracts to attempt to
enhance income or yield. The Fund could use forward currency
contracts to increase its exposure to foreign currencies that WRIMCO
believes might rise in value relative to the U.S. dollar, or shift its
exposure to foreign currency fluctuations from one country to another.
For example, if the Fund owned securities denominated in a foreign
currency and WRIMCO believed that currency would decline relative to
another currency, it might enter into a forward currency contract to
sell an appropriate amount of the first foreign currency, with payment
to be made in the second foreign currency.
The cost to the Fund of engaging in forward currency contracts
varies with factors such as the currency involved, the length of the
contract period and the market conditions then prevailing. Because
forward currency contracts are usually entered into on a principal
basis, no fees or commissions are involved. When the Fund enters into
a forward currency contract, it relies on the counterparty to make or
take delivery of the underlying currency at the maturity of the
contract. Failure by the counterparty to do so would result in the
loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing
transactions, similar to closing transactions on futures contracts, by
selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Secondary markets generally do not
exist for forward currency contracts, with the result that closing
transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no
assurance that the Fund will in fact be able to close out a forward
currency contract at a favorable price prior to maturity. In
addition, in the event of insolvency of the counterparty, the Fund
might be unable to close out a forward currency contract at any time
prior to maturity. In either event, the Fund would continue to be
subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities
denominated in the foreign currency or to maintain cash or liquid
assets in an account.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible
because the value of such securities, measured in the foreign
currency, will change after the forward currency contract has been
established. Thus, the Fund might need to purchase or sell foreign
currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The
projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.
Normally, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made
with regard to overall diversification strategies. However, WRIMCO
believes that it is important to have the flexibility to enter into
such forward currency contracts when it determines that the best
interests of the Fund will be served.
Successful use of forward currency contracts depends on WRIMCO's
skill in analyzing and predicting currency values. Forward currency
contracts may substantially change the Fund's exposure to changes in
currency exchange rates and could result in losses to the Fund if
currencies do not perform as WRIMCO anticipates. There is no
assurance that WRIMCO's use of forward currency contracts will be
advantageous to the Fund or that WRIMCO will hedge at an appropriate
time.
Combined Positions. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its
overall position. For example, the Fund may purchase a put option and
write a call option on the same underlying instrument, in order to
construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined
position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of
the written call option in the event of a substantial price increase.
Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open
and close out.
Turnover. The Fund's options and futures activities may affect
its turnover rate and brokerage commission payments. The exercise of
calls or puts written by the Fund, and the sale or purchase of futures
contracts, may cause it to sell or purchase related investments, thus
increasing its turnover rate. Once the Fund has received an exercise
notice on an option it has written, it cannot effect a closing
transaction in order to terminate its obligation under the option and
must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the
sale of related investments, also increasing turnover; although such
exercise is within the Fund's control, holding a protective put might
cause it to sell the related investments for reasons that would not
exist in the absence of the put. The Fund will pay a brokerage
commission each time it buys or sells a put or call or purchases or
sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
Swaps, Caps, Floors and Collars. The Fund may enter into swaps,
caps, floors and collars to preserve 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 on a notional
principal amount, e.g., an exchange of floating rate payments for
fixed-rate payments. The purchase of a cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined value, to
receive payments on a notional principal amount from the party selling
the cap. The purchase of a floor entitles the purchaser, to the
extent that a specified index falls below a predetermined value, to
receive payments on a notional principal amount from the party selling
the floor. A collar combines elements of buying a cap and selling a
floor.
Swap agreements, including caps, floors and collars, can be
individually negotiated and structured to include exposure to a
variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease
the overall volatility of the Fund's investments and its share price
and yield because, and to the extent, these agreements affect the
Fund's exposure to long- or short-term interest rates (in the United
States or abroad), foreign currency values, mortgage-backed security
values, corporate borrowing rates or other factors such as security
prices or inflation rates.
Swap agreements will tend to shift the Fund's investment exposure
from one type of investment to another. For example, if the Fund
agrees to exchange payments in U.S. dollars for payments in foreign
currency, the swap agreement would tend to decrease the Fund's
exposure to U.S. interest rates and increase its exposure to foreign
currency and interest rates. Caps and floors have an effect similar
to buying or writing options.
The creditworthiness of firms with which the Fund enters into
swaps, caps or floors will be monitored by WRIMCO. If a firm's
creditworthiness declines, the value of the agreement would be likely
to decline, potentially resulting in losses. If a default occurs by
the other party to such transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction.
The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each swap will be accrued on a
daily basis and an amount of cash or liquid assets having an aggregate
net asset value at least equal to the accrued excess will be
maintained in an account with the Fund's custodian that satisfies the
requirements of the 1940 Act. The Fund will also establish and
maintain such accounts with respect to its total obligations under any
swaps that are not entered into on a net basis and with respect to any
caps or floors that are written by the Fund. WRIMCO and the Fund
believe that such obligations do not constitute senior securities
under the 1940 Act and, accordingly, will not treat them as being
subject to the Fund's borrowing restrictions. The Fund understands
that the position of the SEC is that assets involved in swap
transactions are illiquid and are, therefore, subject to the
limitations on investing in illiquid securities.
Borrowing
The Fund may borrow money, but only from banks and for emergency
or extraordinary purposes. If the Fund does borrow, its share price
may be subject to greater fluctuation until the borrowing is paid off.
Investment Restrictions and Limitations
Certain of the Fund's investment restrictions and other
limitations are described in this SAI. The following are the Fund's
fundamental investment limitations set forth in their entirety, which,
like the Fund's goal, cannot be changed without shareholder approval.
For this purpose, shareholder approval means the approval, at a
meeting of Fund shareholders, by the lesser of (1) the holders of 67%
or more of the Fund's shares represented at the meeting, if more than
50% of the Fund's outstanding shares are present in person or by proxy
or (2) more than 50% of the Fund's outstanding shares. The Fund may
not:
(i) With respect to 75% of the Fund's total assets, purchase the
securities of any issuer (other than obligations issued or
guaranteed by the United States government, or any of its
agencies or instrumentalities) if, as a result thereof, (a)
more than 5% of the Fund's total assets would be invested in
the securities of such issuer, or (b) the Fund would hold
more than 10% of the outstanding voting securities of such
issuer;
(ii) Issue bonds or any other class of securities preferred over
shares of the Fund in respect of the Fund's assets or
earnings, provided that the Fund may issue additional series
and classes of shares in accordance with its Articles of
Incorporation;
(iii) Sell securities short (unless it owns or has the right to
obtain securities equivalent in kind and amount to the
securities sold short) or purchase securities on margin,
except that (a) this policy does not prevent the Fund from
entering into short positions in foreign currency, futures
contracts, options, forward contracts, swaps, caps, floors,
collars and other financial instruments, (b) the Fund may
obtain such short-term credits as are necessary for the
clearance of transactions, and (c) the Fund may make margin
payments in connection with futures contracts, options,
forward contracts, swaps, caps, floors and collars, other
financial instruments;
(iv) Borrow money, except that the Fund may borrow money for
emergency or extraordinary purposes (not for leveraging or
investment) in an amount not exceeding 33 1/3% of the value
of its total assets (less liabilities other than
borrowings). Any borrowings that come to exceed 33 1/3% of
the value of the Fund's total assets by reason of a decline
in net assets will be reduced within three days to the
extent necessary to comply with the 33 1/3% limitation. For
purposes of this limitation, "three days" means three days,
exclusive of Sundays and holidays;
(v) Underwrite securities issued by others, except to the extent
that the Fund may be deemed to be an underwriter within the
meaning of the 1933 Act in the disposition of restricted
securities;
(vi) Purchase the securities of any issuer (other than
obligations issued or guaranteed by the United States
government or any of its agencies or instrumentalities) if,
as a result, more than 25% of the Fund's total assets (taken
at current value) would be invested in the securities of
issuers having their principal business activities in the
same industry;
(vii) Invest in real estate limited partnerships or purchase or
sell real estate unless acquired as a result of ownership of
securities (but this shall not prevent the Fund from
purchasing and selling securities issued by companies or
other entities or investment vehicles that deal in real
estate or interests therein, nor shall this prevent the Fund
from purchasing interests in pools of real estate mortgage
loans);
(viii) Purchase or sell physical commodities, except that the Fund
may purchase and sell precious metals for temporary
defensive purposes; however, this policy shall not prevent
the Fund from purchasing and selling foreign currency,
futures contracts, options, forward contracts, swaps, caps,
floors, collars and other financial instruments;
(ix) Make loans, except (a) by lending portfolio securities to
the extent allowed, and in accordance with the requirements,
under the 1940 Act; (b) through the purchase of debt
securities and other obligations consistent with its goal
and its other investment policies and restrictions; and (c)
by engaging in repurchase agreements with respect to
portfolio securities;
(x) Participate on a joint, or a joint and several, basis in any
trading account in any securities; or
(xi) Issue senior securities.
The following investment limitations are not fundamental and may
be changed by the Board of Directors without shareholder approval.
(i) The Fund may not invest more than 35% of its total assets in
debt securities rated below BBB by S&P or below Baa by MIS
and unrated securities judged by WRIMCO to be of equivalent
quality.
(ii) The Fund does not currently intend to invest in money market
instruments rated below the highest rating category by S&P
or MIS, or judged by WRIMCO to be of equivalent quality;
provided, however, that the Fund may invest in a money
market instrument rated below the highest rating category by
S&P or MIS if such instrument is subject to a letter of
credit or similar unconditional credit enhancement that is
rated A-1 by S&P or Prime 1 by MIS.
(iii) Under normal conditions, the Fund intends to limit its
investments in foreign securities to no more than 50% of its
total assets.
(iv) The Fund does not currently intend to purchase a security
if, as a result, more than 15% of its net assets would be
invested in illiquid investments.
(v) The Fund will not purchase any security while borrowings
representing more than 5% of its total assets are
outstanding.
(vi) The Fund does not currently intend to (a) purchase
securities of other investment companies, except in the open
market where no commission except the ordinary broker's
commission is paid and if, as a result of such purchase, the
Fund does not have more than 10% of its total assets
invested in such securities, or (b) purchase or retain
securities issued by other open-end investment companies.
Limitations (a) and (b) do not apply to securities received
as dividends, through offers of exchange, or as a result of
a reorganization, consolidation or merger.
(vii) The Fund does not currently intend to purchase the
securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political
subdivisions thereof) if, as a result, more than 5% of its
total assets would be invested in securities of business
enterprises that, including predecessors, have a record of
less than three years of continuous operation. This
restriction does not apply to any obligations issued or
guaranteed by the U.S. government, or a state or local
government authority, or their respective agencies or
instrumentalities, or to collateralized mortgage
obligations, other mortgage-related securities, asset-backed
securities, indexed securities or OTC derivative
instruments.
(viii) The Fund does not currently intend to lend assets other than
securities to other parties, except by acquiring loans, loan
participations, or other forms of direct debt instruments.
(This limitation does not apply to purchases of debt
securities or to repurchase agreements.)
(ix) The Fund does not currently intend to invest in oil,
gas, or other mineral exploration or development programs or
leases.
(x) To the extent that the Fund enters into futures
contracts, options on futures contracts or options on
foreign currencies traded on a CFTC-regulated exchange, in
each case other than for bona fide hedging purposes (as
defined by the CFTC), the aggregate initial margin and
premiums required to establish those positions (excluding
the amount by which options are "in-the-money" at the time
of purchase) will not exceed 5% of the liquidation value of
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.
An investment policy or limitation that states a maximum
percentage of the Fund's assets that may be so invested or prescribes
quality standards is typically applied immediately after, and based
on, the Fund's acquisition of an asset. Accordingly, a subsequent
change in the asset's value, net assets, or other circumstances will
not be considered when determining whether the investment complies
with the Fund's investment policies and limitations.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed
by taking the lesser of purchases or sales of portfolio securities for
a year and dividing it by the monthly average of the market value of
such securities during the year, excluding certain short-term
securities. The Fund's turnover rate may vary greatly from year to
year as well as within a particular year and may be affected by cash
requirements for the redemption of its shares.
The portfolio turnover rate for the common stock portion of the
Fund's portfolio for the fiscal year ended September 30, 1999, was
217.03%, while the rate for the remainder of the portfolio was
136.27%. The Fund's overall portfolio turnover was 176.63% for the
fiscal year ended September 30, 1999 and 230.09% for the fiscal year
ended September 30, 1998.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with WRIMCO. Under the Management Agreement, WRIMCO is
employed to supervise the investments of the Fund and provide
investment advice to the Fund. The address of WRIMCO is 6300 Lamar
Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
The Management Agreement permits WRIMCO, or an affiliate of
WRIMCO, to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement
for accounting services ("Accounting Services Agreement") with the
Fund. The Management Agreement contains detailed provisions as to the
matters to be considered by the Fund's Board of Directors prior to
approving any Shareholder Servicing Agreement or Accounting Services
Agreement.
Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc.
Waddell & Reed, Inc. is a wholly owned subsidiary of Waddell & Reed
Financial Services, Inc., a holding company, which is a wholly owned
subsidiary of Waddell & Reed Financial, Inc., a publicly held company.
The address of these companies is 6300 Lamar Avenue, P.O. Box 29217,
Shawnee Mission, Kansas 66201-9217.
Waddell & Reed, Inc. and its predecessors have served as
investment manager to each of the registered investment companies in
the Waddell & Reed Advisors Funds (formerly, 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 W&R Funds, Inc. (formerly, 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 Waddell & Reed Advisors Funds and W&R 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, preparation of
prospectuses for existing shareholders, preparation of proxy
statements and certain shareholder reports. A new Accounting Services
Agreement, or amendments to an existing one, may be approved by the
Fund's Board of Directors without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder
Services
Under the Management Agreement, as compensation for WRIMCO's
management services, the Fund pays WRIMCO a fee as described in the
Prospectus. The management fees paid by the Fund to WRIMCO for the
fiscal years ended September 30, 1999, 1998 and 1997 were $270,508,
$208,147 and $205,329, respectively.
The Fund accrues and pays this fee daily. For purposes of
calculating the daily fee the Fund does not include money owed to it
by Waddell & Reed, Inc. for shares which it has sold but not yet paid
to the Fund.
Under the Shareholder Servicing Agreement, with respect to Class
A, Class B and Class C shares the Fund pays the Agent a monthly fee of
$1.3125 for each shareholder account that was in existence at any time
during the prior month, plus $0.30 for each account on which a
dividend or distribution, of cash or shares, had a record date in that
month. For Class Y shares, the Fund pays the Agent a monthly fee
equal to one-twelfth of .15 of 1% of the average daily net assets of
that class for the preceding month. The Fund also pays certain out-
of-pocket expenses of the Agent, including long distance telephone
communication costs; microfilm and storage costs for certain
documents; forms, printing and mailing costs; charges of any sub-agent
used by Agent in performing services under the Shareholder Servicing
Agreement; and costs of 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, 1999, 1998 and 1997 were $20,000, $20,000
and $20,000, respectively.
Since the Fund pays a management fee for investment supervision
and an accounting services fee for the accounting services as
discussed above, WRIMCO and the Agent, respectively, pay all of their
own expenses in providing these services. Amounts paid by the Fund
under the Shareholder Servicing Agreement are described above.
Waddell & Reed, Inc. and its affiliates pay the Fund's Directors and
officers who are affiliated with WRIMCO and its affiliates. The Fund
pays the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the
Management Agreement, Shareholder Servicing Agreement and Accounting
Services Agreement, acts as the Fund's underwriter, i.e., sells its
shares on a continuous basis. It is not required to sell any
particular number of shares and thus sells shares only for purchase
orders received. Under this Underwriting Agreement, Waddell & Reed,
Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of
printing the prospectuses furnished to it by the Fund. The aggregate
dollar amount of underwriting commissions for Class A shares for the
fiscal years ended September 30, 1999, 1998 and 1997 were $335,001,
$215,190 and $154,700, respectively. The amount retained by Waddell &
Reed, Inc. for each period was $142,111, $91,391 and $67,976,
respectively.
As described in the Prospectus, Waddell & Reed, Inc. reallows to
selling broker-dealers a portion of the sales charge paid for
purchases of Class A shares. A major portion of the sales charge for
Class A shares and the contingent deferred sales charge for Class B
and Class C shares and for certain Class A shares may be paid to
financial advisors and sales managers of Waddell & Reed, Inc. and
selling broker-dealers. 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, either directly or through others, the
distribution of the Class A shares, the provision of personal services
to Class A shareholders and/or maintenance of Class A shareholder
accounts.
Waddell & Reed, Inc. offers the Fund's shares through its
financial advisors, registered representatives and sales managers
("sales force") and through other broker-dealers, banks and other
appropriate intermediaries. 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 $87,938 and
$8,300, respectively, were paid (or accrued) by the Fund under the
Class A Plan for the fiscal year ended September 30, 1999. To the
extent that Waddell & Reed, Inc. incurs expenses for which
reimbursement may be made under the Plan that relate to distribution
activities also involving another fund in the Waddell & Reed Advisors
Funds or W&R 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, either
directly or through others, providing personal 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, either
directly or through others, distributing the shares of that class.
The Class B Plan and the Class C Plan each permit Waddell & Reed, Inc.
to receive compensation, through the distribution and service fee,
respectively, for its distribution activities for that class, which
are similar to the distribution activities described with respect to
the Class A Plan, and for its activities in providing personal
services to shareholders of that class and/or maintaining shareholder
accounts of that class, which are similar to the corresponding
activities for which it is entitled to reimbursement under the Class A
Plan.
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 shares may also reduce
the likelihood that it will be necessary to liquidate portfolio
securities, in amounts or at times that may be disadvantageous to the
Fund, to meet redemption demands. In addition, the Fund anticipates
that the revenues from the Plan will provide Waddell & Reed, Inc. with
greater resources to make the financial commitments necessary to
continue to improve the quality and level of services to the Fund and
the shareholders of the affected class. Each Plan was approved by the
Fund's Board of Directors, including the Directors who are not
interested persons of the Fund and who have no direct or indirect
financial interest in the operations of the Plan or any agreement
referred to in the Plan (hereafter, the "Plan Directors"). The Class
A Plan was also approved by Waddell & Reed, Inc. as the sole
shareholder of the affected shares of the Fund at the time.
Among other things, each Plan provides that (i) Waddell & Reed,
Inc. will provide to the Directors of the Fund at least quarterly, and
the Directors will review, a report of amounts expended under the Plan
and the purposes for which such expenditures were made, (ii) the Plan
will continue in effect only so long as it is approved at least
annually, and any material amendments thereto will be effective only
if approved, by the Directors including the Plan Directors acting in
person at a meeting called for that purpose, (iii) amounts to be paid
by the Fund under the Plan may not be materially increased without the
vote of the holders of a majority of the outstanding shares of the
affected class of the Fund, and (iv) while the Plan remains in effect,
the selection and nomination of the Directors who are Plan Directors
will be committed to the discretion of the Plan Directors.
Custodial and Auditing Services
The custodian for the Fund is UMB Bank, n.a., 928 Grand
Boulevard, Kansas City, Missouri. In general, the custodian is
responsible for holding the Fund's cash and securities. Deloitte &
Touche LLP, 1010 Grand Boulevard, 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 ("NAV") of each class of the shares of the
Fund is the value of the assets of that class, less the class's
liabilities, divided by the total number of outstanding shares of that
class.
Class A shares of the Fund are sold at their next determined NAV
plus the sales charge described in the Prospectus. The sales charge
is paid to Waddell & Reed, Inc., the Fund's underwriter. The price
makeup as of March 31, 2000, which is the most recent balance sheet
included in this SAI, was as follows:
NAV per Class A share (Class A
net assets divided by Class A shares
outstanding) ............................. $7.47
Add: selling commission (5.75% of offering
price) ................................... .46
-----
Maximum offering price per Class A share
(Class A NAV divided by 94.25%) ........... $7.93
=====
The offering price of a Class A share is its NAV next calculated
following acceptance of a purchase order plus the sales charge
described in the Prospectus. The offering price of a Class B, Class C
or a Class Y share is its NAV next calculated following acceptance of
a purchase order.
The number of shares you receive for your purchase depends on the
next offering price after Waddell & Reed, Inc. or an authorized third
party receives and accepts your order at its principal business
office. You will be sent a confirmation after your purchase which
will indicate how many shares you have purchased.
Waddell & Reed, Inc. need not accept any purchase order, and it
or the Fund may determine to discontinue offering Fund shares for
purchase.
The NAV and offering price per share are ordinarily computed once
on each day that the NYSE is open for trading, as of the later of the
close of the regular session of the NYSE or the close of the regular
session of any other securities or commodities exchange on which an
option or futures contract held by the Fund is traded. The NYSE
annually announces the days on which it will not be open for trading.
The most recent announcement indicates that it will not be open on the
following days: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. However, it is possible that
the NYSE may close on other days. The NAV will change every business
day, since the value of the Fund's assets and the number of shares
outstanding changes every business day.
The securities in the portfolio of the Fund, except as otherwise
noted, listed or traded on a stock exchange, are valued on the basis
of the last sale on that day or, lacking any sales, at a price which
is the mean between the closing bid and asked prices. Other
securities that are traded OTC are priced using the Nasdaq Stock
Market, which provides information on bid and asked prices quoted by
major dealers in such stocks. Bonds, other than convertible bonds,
are valued using a third-party pricing system. Convertible bonds are
valued using this pricing system only on days when there is no sale
reported. Short-term debt securities are valued at amortized cost,
which approximates market. When market quotations are not readily
available, securities and other assets are valued at fair value as
determined in good faith under procedures established by, and under
the general supervision and responsibility of, the Fund's Board of
Directors.
Options and futures contracts purchased and held by the Fund are
valued at the last sales price on the securities or commodities
exchanges on which they are traded, or, if there are no transactions,
at the mean between bid and asked prices. Ordinarily, the close of
the regular session for option trading on national securities
exchanges is 4:10 p.m. Eastern time and the close of the regular
session for commodities exchanges is 4:15 p.m. Eastern time. Futures
contracts will be valued with reference to established futures
exchanges. The value of a futures contract purchased by the Fund will
be either the closing price of that contract or the bid price.
Conversely, the value of a futures contract sold by the Fund will be
either the closing price or the asked price.
When the Fund writes a put or call, an amount equal to the
premium received is included in the Fund's Statement of Assets and
Liabilities as an asset, and an equivalent deferred credit is included
in the liability section. The deferred credit is marked-to-market to
reflect the current market value of the put or call. If a call the
Fund wrote is exercised, the proceeds received on the sale of the
related investment are increased by the amount of the premium the Fund
received. If the Fund exercised a call it purchased, the amount paid
to purchase the related investment is increased by the amount of the
premium paid. If a put written by the Fund is exercised, the amount
that the Fund pays to purchase the related investment is decreased by
the amount of the premium it received. If the Fund exercises a put it
purchased, the amount the Fund receives from the sale of the related
investment is reduced by the amount of the premium it paid. If a put
or call written by the Fund expires, it has a gain in the amount of
the premium; if it enters into a closing purchase transaction, it will
have a gain or loss depending on whether the premium was more or less
than the cost of the closing transaction.
Foreign currency exchange rates are generally determined prior to
the close of the trading of the regular session of the NYSE.
Occasionally, events affecting the value of foreign investments and
such exchange rates occur between the time at which they are
determined and the close of the regular session of trading on the
NYSE, which events will not be reflected in a computation of the
Fund's NAV on that day. If events materially affecting the value of
such investments or currency exchange rates occur during such time
period, the investments will be valued at their fair value as
determined in good faith under procedures established by and under the
general supervision and responsibility of the Board of Directors. The
foreign currency exchange transactions of the Fund conducted on a spot
basis are valued at the spot rate for purchasing or selling currency
prevailing on the foreign exchange market. Under normal market
conditions, this rate differs from the prevailing exchange rate by an
amount generally less than one-tenth of one percent due to the costs
of converting from one currency to another.
Optional delivery standby commitments are valued at fair value
under the general supervision and responsibility of the Fund's Board
of Directors. They are accounted for in the same manner as exchange-
listed puts.
Minimum Initial and Subsequent Investments
For Class A, Class B and Class C shares, initial investments must
be at least $500 with the exceptions described in this paragraph. A
$100 minimum initial investment pertains to certain exchanges of
shares from another fund in the Waddell & Reed Advisors Funds or W&R
Funds, Inc. 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 Waddell & Reed
Advisors Funds and W&R Funds, Inc."
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 Waddell & Reed Advisors Funds Revocable Trust
Form);
2. Purchases by that individual's spouse purchasing for his or her
own account (includes purchases under the Waddell & Reed Advisors
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 Transfers to Minors Act ("UTMA") or Uniform
Gifts to Minors Act ("UGMA") account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), salary reduction plan
account under Section 457 of the Internal Revenue Code of 1986,
as amended (the "Code"), provided that such purchases are subject
to a sales charge (see "Net Asset Value Purchases"), tax-
sheltered annuity account ("TSA") or Keogh plan account, provided
that the individual and spouse are the only participants in the
Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his
or her spouse is the settlor (the person who establishes the
trust).
All purchases of Class A shares made under a "qualified" plan --
either an employee benefit plan of an incorporated business or, for an
unincorporated business, a Keogh plan in which there is more than one
participant where one or more of the participants is other than the
spouse of the owner/employer will be grouped. A "qualified" plan is
established pursuant to Section 401 of the Code. All qualified plans
of any one employer or affiliated employers will also be grouped. An
affiliate is defined as an employer that directly, or indirectly,
controls or is controlled by or is under control with another
employer. All qualified employee benefit plans of an employer who is
a franchisor and those of its franchisee(s) may also be grouped.
For the foregoing categories, an individual's domestic partner is
treated as his or her spouse.
Example A: Corporation X sets up a defined benefit plan; its
subsidiary, Corporation Y, sets up a 401(k) plan; all
contributions made under both plans will be grouped.
Example B: H has established a Keogh plan; he and his wife W are the
only participants in the plan; they may group their
purchases made under the plan with any purchases in
categories 1 through 7 above.
Example C: H has established a Keogh plan; his wife, W, is a
participant and they have hired one or more employees who
also become participants in the plan; H and W may not
combine any purchases made under the plan with any
purchases in categories 1 through 7 above; however, all
purchases made under the plan for H, W or any other
employee will be combined.
All purchases of Class A shares made under a simplified employee
pension plan ("SEP"), payroll deduction plan or similar arrangement
adopted by an employer or affiliated employers (as defined above) may
be grouped provided that the employer elects to have all such
purchases grouped at the time the plan is set up. If the employer
does not make such an election, the purchases made by individual
employees under the plan may be grouped with the other accounts of the
individual employees described above.
Account grouping as described above is available under the
following circumstances.
One-time Purchases
A one-time purchase of Class A shares in accounts eligible for
grouping may be combined for purposes of determining the availability
of a reduced sales charge. In order for an eligible purchase to be
grouped, the investor must advise Waddell & Reed, Inc. at the time the
purchase is made that it is eligible for grouping and identify the
accounts with which it may be grouped.
Rights of Accumulation
If Class A shares are held in any account and an additional
purchase is made in that account or in any account eligible for
grouping with that account, the additional purchase is combined with
the NAV of the existing account as of the date the new purchase is
accepted by Waddell & Reed, Inc. for the purpose of determining the
availability of a reduced sales charge.
In order to be entitled to Rights of Accumulation, the purchaser
must inform Waddell & Reed, Inc. that the purchaser is entitled to a
reduced charge and provide Waddell & Reed, Inc. with the name and
number of the existing account(s) with which the purchase may be
combined.
Letter of Intent
The benefit of a reduced sales charge for larger purchases of
Class A shares is also available under an LOI. By signing an LOI
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
LOI is accepted by Waddell & Reed, Inc. Each purchase made from time
to time under the LOI 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 LOI 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 an LOI, 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 LOI 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 LOI
only if the contractual plan has been completed.
The minimum initial investment under an LOI is 5% of the dollar
amount which must be invested under the LOI. An amount equal to 5% of
the purchase required under the LOI will be held "in escrow." If a
purchaser does not, during the period covered by the LOI, invest the
amount required to qualify for the reduced sales charge under the
terms of the LOI, 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
an LOI which is not completed will be collected by redeeming part of
the shares purchased under the LOI 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 LOI, the lower sales charge
will apply.
An LOI does not bind the purchaser to buy, or Waddell & Reed,
Inc. to sell, the shares covered by the LOI.
With respect to LOIs for $2,000,000 or purchases otherwise
qualifying for no sales charge under the terms of the LOI, the initial
investment must be at least $200,000.
The value of any shares redeemed during the 13-month period which
were acquired under the LOI will be deducted in computing the
aggregate purchases under the LOI.
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 Waddell & Reed Advisors Funds and W&R Funds,
Inc.
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 Waddell & Reed Advisors Funds and the W&R Funds, Inc. subject to a
sales charge. A purchase of Class A shares, or Class A shares held,
in any of the funds in the Waddell & Reed Advisors Funds and/or the
W&R Funds, Inc. 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 Waddell & Reed Advisors Cash
Management, Inc. (formerly, United Cash Management, Inc.) or W&R
Funds, Inc. Money Market Fund that were acquired by exchange of
another Waddell & Reed Advisors Fund or W&R Funds, Inc. Class A shares
on which a sales charge was paid, plus the shares paid as dividends on
those acquired shares, are also taken into account.
Net Asset Value Purchases of Class A Shares
Class A shares of the Fund may be purchased at NAV by the
Directors and officers of the Fund or of any affiliated entity of
Waddell & Reed, Inc., employees of Waddell & Reed, Inc. or of any of
its affiliates, financial advisors of Waddell & Reed, Inc. and the
spouse, children, parents, children's spouses and spouse's parents of
each such Director, officer, employee and financial advisor. "Child"
includes stepchild; "parent" includes stepparent. Purchases of Class
A shares in an IRA sponsored by Waddell & Reed, Inc. established for
any of these eligible purchasers may also be at NAV. Purchases of
Class A shares in any tax-qualified retirement plan under which the
eligible purchaser is the sole participant may also be made at NAV.
Trusts under which the grantor and the trustee or a co-trustee are
each an eligible purchaser are also eligible for NAV purchases of
Class A shares. "Employees" include retired employees. A "retired
employee" is an individual separated from service from Waddell & Reed,
Inc., or from an affiliated company, with a vested interest in any
Employee Benefit Plan sponsored by Waddell & Reed, Inc. or any of its
affiliated companies. "Employees" also include individuals who, on
November 6, 1998, were employees (including retired employees) of a
company that on that date was an affiliate of Waddell & Reed, Inc.
"Financial advisors" include retired financial advisors. A "retired
financial advisor" is any financial advisor who was, at the time of
separation from service from Waddell & Reed, Inc., a Senior Financial
Advisor. A custodian under UGMA or UTMA purchasing for the child or
grandchild of any employee or financial advisor may purchase Class A
shares at NAV whether or not the custodian himself is an eligible
purchaser.
Until March 31, 2001, Class A shares may also be purchased at NAV
by persons who are clients of Legend Equities Corporation ("Legend")
if the purchase is made with the proceeds of the redemption of shares
of a mutual fund which is not within the Waddell & Reed Advisors Funds
or W&R Funds, Inc. and the purchase is made within 60 days of such
redemption.
Purchases of Class A shares in a 401(k) plan having 100 or more
eligible employees and purchases of Class A shares in a 457 plan
having 100 or more eligible employees, and the shares are held in
individual plan participant accounts on the Fund's records, may be
made at NAV.
Shares may also be issued at NAV in a merger, acquisition or
exchange offer made pursuant to a plan of reorganization to which the
Fund is a party.
Reasons for Differences in Public Offering Price of Class A shares
As described herein and in the Prospectus, there are a number of
instances in which the Fund's Class A shares are sold or issued on a
basis other than at the maximum public offering price, that is, NAV
plus the highest sales charge. Some of these instances relate to
lower or eliminated sales charges for larger purchases of Class A
shares, whether made at one time or over a period of time as under an
LOI or Rights of Accumulation. See the table of sales charges in the
Prospectus. The reasons for these quantity discounts are, in general,
that (i) they are traditional and have long been permitted in the
industry and are therefore necessary to meet competition as to sales
of shares of other funds having such discounts, (ii) certain quantity
discounts are required by rules of the National Association of
Securities Dealers, Inc. (as is elimination of sales charges on the
reinvestment of dividends and distributions), and (iii) they are
designed to avoid an unduly large dollar amount of sales charge on
substantial purchases in view of reduced selling expenses. Quantity
discounts are made available to certain related persons for reasons of
family unity and to provide a benefit to tax-exempt plans and
organizations.
In general, the reasons for the other instances in which there
are reduced or eliminated sales charges for Class A shares are as
follows. Exchanges at NAV are permitted because a sales charge has
already been paid on the shares exchanged. Sales of Class A shares
without a sales charge are permitted to Directors, officers and
certain others due to reduced or eliminated selling expenses and since
such sales may aid in the development of a sound employee
organization, encourage responsibility and interest in the Waddell &
Reed Advisors Funds and an identification with its aims and policies.
Limited reinvestments of redemptions of Class A shares at no sales
charge are permitted to attempt to protect against mistaken or not
fully informed redemption decisions. Class A shares may be issued at
no sales charge in plans of reorganization due to reduced or
eliminated sales expenses and since, in some cases, such issuance is
exempted by the 1940 Act from the otherwise applicable restrictions as
to what sales charge must be imposed. Reduced or eliminated sales
charges may also be used for certain short-term promotional activities
by Waddell & Reed, Inc. In no case in which there is a reduced or
eliminated sales charge are the interests of existing Class A
shareholders adversely affected since, in each case, the Fund receives
the NAV per share of all shares sold or issued.
Reinvestment Privilege
The Fund offers a one-time reinvestment privilege that allows you
to reinvest without charge all or part of any amount you redeem from
the Fund by sending to the Fund the amount of Class A shares that you
wish to reinvest. The amount you return will be reinvested in Class A
shares at the NAV next calculated after the Fund receives the returned
amount. Your written request to reinvest and the amount to be
reinvested must be received within forty-five days after your
redemption request was received, and the Fund must be offering Class A
shares of the Fund at the time your reinvestment request is received.
You can do this only once as to Class A shares of the Fund; however,
you do not use up this privilege by redeeming shares to invest the
proceeds at NAV in a Keogh plan or an IRA.
There is also a reinvestment privilege for Class B and Class C
shares under which you may reinvest all or part of any amount of Class
B or Class C shares you redeemed and have the corresponding amount of
the deferred sales charge, if any, which you paid restored to your
account by adding the amount of that charge to the amount you are
reinvesting in Class B or Class C shares, as applicable. If Class B
or Class C shares of the Fund are then being offered, you can put all
or part of your redemption payment back into the Class B or Class C
shares of the Fund at the NAV next calculated after you have returned
the amount. Your written request to do this must be received within
forty-five days after your redemption request was received. You can
do this only once as to Class B shares of the Fund and only once as to
Class C shares of the Fund. For purposes of determining future
deferred sales charges, the reinvestment will be treated as a new
investment. You do not use up this privilege by redeeming Class B or
Class C shares to invest the proceeds at NAV in a Keogh plan or an
IRA.
Exchanges for Shares of Other Funds in the Waddell & Reed Advisors
Funds and W&R Funds, Inc.
Class A Share Exchanges
Once a sales charge has been paid on Class A shares of a fund in
the Waddell & Reed Advisors Funds or the W&R Funds, Inc., 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 Waddell & Reed Advisors Funds or the W&R Funds,
Inc. The shares you exchange must be worth at least $100 or you must
already own shares of the fund in the Waddell & Reed Advisors Funds or
W&R Funds, Inc. into which you want to exchange.
You may exchange Class A shares you own in another fund in the
Waddell & Reed Advisors Funds or the W&R Funds, Inc. for Class A
shares of the Fund without charge if (i) the shares of the fund you
are exchanging from are subject to a full sales charge and a sales
charge was paid on these shares, or (ii) the shares were received in
exchange for shares of a fund that are subject to a full sales charge
and for which a sales charge was paid, or (iii) the shares were
acquired from payment of dividends and distributions paid on shares
subject to a full sales charge and for which a sales charge was paid.
The shares you are exchanging may have been involved in one or more
such exchanges so long as a sales charge was paid on the shares
originally purchased. Also, shares acquired without a sales charge
because the purchase was $2 million or more will be treated the same
as shares on which a sales charge was paid.
Class A shares of funds subject to a reduced sales charge
(Waddell & Reed Advisors Municipal Bond Fund, Inc., Waddell & Reed
Advisors Government Securities Fund, Inc. and Waddell & Reed Advisors
Municipal High Income Fund, Inc.) may be exchanged for Class A shares
of the Fund only if (i) you received those shares as a result of one
or more exchanges of shares on which a maximum sales charge was
originally paid (currently 5.75%), or (ii) the shares have been held
from the date of the original purchase for at least six months.
Subject to the above rules regarding sales charges, you may have
a specific dollar amount of Class A shares of Waddell & Reed Advisors
Cash Management, Inc. automatically exchanged each month into Class A
shares of the Fund or any other fund in the Waddell & Reed Advisors
Funds, provided you already own Class A shares of the fund. The
shares of Waddell & Reed Advisors Cash Management, Inc. which you
designate for automatic exchange must be worth at least $100, which
may be allocated among the Class A shares of different funds in the
Waddell & Reed Advisors Funds so long as each fund receives a value of
at least $25. Minimum initial investment and minimum balance
requirements apply to such automatic exchange service. 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 Waddell & Reed Advisors Funds and/or W&R Funds,
Inc. 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
Waddell & Reed Advisors Cash Management, Inc. automatically exchanged
each month into Class B shares of the Fund or any other fund in the
Waddell & Reed Advisors Funds, provided you already own Class B shares
of a fund. The shares of Waddell & Reed Advisors Cash Management,
Inc. which you designate for automatic exchange must be worth at least
$100, which may be allocated among different funds so long as each
fund receives a value of at least $25. Minimum initial investment and
minimum balance requirements apply to such automatic exchange service.
Class C Share Exchanges
You may exchange Class C shares of the Fund for Class C shares of
other funds in the Waddell & Reed Advisors Funds and/or W&R Funds,
Inc. without charge.
The redemption of the Fund's Class C shares as part of an
exchange is not subject to the deferred sales charge. For purposes of
computing the deferred sales charge, if any, applicable to the
redemption of the shares acquired in the exchange, those acquired
shares are treated as having been purchased when the original redeemed
shares were purchased.
You may have a specific dollar amount of Class C shares of
Waddell & Reed Advisors Cash Management, Inc. automatically exchanged
each month into Class C shares of the Fund or any other fund in the
Waddell & Reed Advisors Funds, provided you already own Class C shares
of a fund. The shares of Waddell & Reed Advisors Cash Management,
Inc. which you designate for automatic exchange must be worth at least
$100, which may be allocated among different funds so long as each
fund receives a value of at least $25. Minimum initial investment and
minimum balance requirements apply to such automatic exchange service.
Class Y Share Exchanges
Class Y shares of the Fund may be exchanged for Class Y shares of
any other fund in the Waddell & Reed Advisors Funds or for Class A
shares of Waddell & Reed Advisors Cash Management, Inc.
General Exchange Information
When you exchange shares, the total shares you receive will have
the same aggregate NAV as the total shares you exchange. The relative
values are those next figured after your exchange request is received
in good order.
These exchange rights and other exchange rights concerning the
other funds in the Waddell & Reed Advisors Funds and/or W&R Funds,
Inc. can, in most instances, be eliminated or modified at any time,
upon notice in certain circumstances, and any such exchange may not be
accepted.
Retirement Plans
Your account may be set up as a funding vehicle for a retirement
plan. For individual taxpayers meeting certain requirements, Waddell
& Reed, Inc. offers model or prototype documents for the following
retirement plans. All of these plans involve investment in shares of
the Fund (or shares of certain other funds in the Waddell & Reed
Advisors Funds or W&R Funds, Inc.).
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 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 (or
to any combination of Roth and traditional IRAs). 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 $25,500,
whichever is less, per year for each employee.
Savings Incentive Match Plans for Employees (SIMPLE Plans). An
employer with 100 or fewer employees who does not sponsor another
active retirement plan may sponsor a SIMPLE plan to contribute to its
employees' retirement accounts. A SIMPLE plan can be funded by either
an IRA or a 401(k) plan. In general, an employer can choose to match
employee contributions dollar-for-dollar (generally, up to 3% of the
employee's compensation) or may contribute to all eligible employees
2% of their compensation, whether or not they defer salary to their
SIMPLE plans. SIMPLE plans involve fewer administrative requirements,
generally, than 401(k) or other qualified plans.
Keogh Plans. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money
purchase plan or a profit-sharing plan. As a general rule, an
investor under a defined contribution Keogh plan can contribute each
year up to 25% of his or her annual earned income, with an annual
maximum of $30,000.
457 Plans. If an investor is an employee of a state or local
government or of certain types of charitable organizations, he or she
may be able to enter into a deferred compensation arrangement in
accordance with Section 457 of the Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is
an employee of a public school system or of certain types of
charitable organizations, he or she may be able to enter into a
deferred compensation arrangement through a custodian account under
Section 403(b) of the Code. Some organizations have adopted Title I
plans, which are funded by employer contributions in addition to
employee deferrals.
Pension and Profit-Sharing Plans, including 401(k) Plans. With a
401(k) plan, employees can make tax-deferred contributions into a plan
to which the employer may also contribute, usually on a matching
basis. An employee may defer each year up to 25% of compensation,
subject to certain annual maximums, which may be increased each year
based on cost-of-living adjustments.
More detailed information about these arrangements and applicable
forms are available from Waddell & Reed, Inc. These plans may involve
complex tax questions as to premature distributions and other matters.
Investors should consult their tax adviser or pension consultant.
Redemptions
The Prospectus gives information as to redemption procedures.
Redemption payments are made within seven days from receipt of
request, unless delayed because of emergency conditions determined by
the SEC, when the NYSE is closed (other than on weekends and holidays)
or when trading on the NYSE is restricted. Payment is made in cash,
although under extraordinary conditions redemptions may be made in
portfolio securities. Redemptions may be made in portfolio securities
if the Fund's Board of Directors decides that conditions exist making
cash payments undesirable. The securities would be valued at the
value used in determining NAV. There would be brokerage costs to the
redeeming shareholder in selling such securities. The Fund, however,
has elected to be governed by Rule 18f-1 under the 1940 Act, pursuant
to which it is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of its NAV during any 90-day period for any
one shareholder.
Flexible Withdrawal Service For Class A, Class B and Class C
Shareholders
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service (the "Service") regular monthly, quarterly,
semiannual or annual payments by redeeming on an ongoing basis Class
A, Class B or Class C shares that you own of the Fund or of any of the
funds in the Waddell & Reed Advisors Funds. It would be a
disadvantage to an investor to make additional purchases of shares
while a withdrawal program is in effect because it would result in
duplication of sales charges. Class B and Class C shares redeemed
under the Service are not subject to a CDSC. Applicable forms to start
the Service are available through Waddell & Reed Services Company.
The maximum amount of the withdrawal for monthly, quarterly,
semiannual and annual withdrawals is 2%, 6%, 12% and 24% respectively
of the value of your account at the time the Service is established.
The withdrawal proceeds are not subject to the deferred sales charge,
but only within these percentage limitations. The minimum withdrawal
is $50. The Service, and this exclusion from the deferred sales
charge, does not apply to a one-time withdrawal.
To qualify for the Service, you must have invested at least
$10,000 in Class A, Class B or Class C shares which you still own of
any of the Funds in the Waddell & Reed Advisors Funds; or, you must
own Class A, Class B or Class C shares having a value of at least
$10,000. The value for this purpose is the value at the current
offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or
more;
2. a monthly payment, which will change each month, equal to
one-twelfth of a percentage of the value of the shares in the
account (you select the percentage); or
3. a monthly or quarterly payment, which will change each month
or quarter, by redeeming a number of shares fixed by you
(at least five shares).
Shares are redeemed on the 20th day of the month in which the
payment is to be made, or on the prior business day if the 20th is not
a business day. Payments are made within five days of the redemption.
Retirement plan accounts may be subject to a fee imposed by the
plan custodian for use of their service.
The dividends and distributions on shares of a class you have
made available for the Service are paid in additional shares of that
class. All payments under the Service are made by redeeming shares,
which may involve a gain or loss for tax purposes. To the extent that
payments exceed dividends and distributions, the number of shares you
own will decrease. When all of the shares in your account are
redeemed, you will not receive any further payments. Thus, the
payments are not an annuity, income or return on your investment.
You may at any time change the manner in which you have chosen to
have shares redeemed to any of the other choices originally available
to you. You may at any time redeem part or all of the shares in your
account; if you redeem all of the shares, the Service is terminated.
The Fund can also terminate the Service by notifying you in writing.
After the end of each calendar year, information on shares
redeemed will be sent to you to assist you in completing your Federal
income tax return.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to compel the redemption of shares held
under any account or any plan if the aggregate NAV of such shares
(taken at cost or value as the Board of Directors may determine) is
less than $500. The Board of Directors has no intent to compel
redemptions in the foreseeable future. If it should elect to compel
redemptions, shareholders who are affected will receive prior written
notice and will be permitted 60 days to bring their accounts up to the
minimum before the redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside
organizations selected by the Board of Directors. The Board of
Directors has responsibility for establishing broad corporate policies
for the Fund and for overseeing overall performance of the selected
experts. The Board has the benefit of advice and reports from
independent counsel and independent auditors. The majority of the
Directors are not affiliated with Waddell & Reed, Inc.
The principal occupation during the past five years of each
Director and officer of the Fund is stated below. Each of the persons
listed through and including Mr. Vogel is a member of the Fund's Board
of Directors. The other persons are officers of the Fund but are not
members of the Board of Directors. For purposes of this section, the
term "Fund Complex" includes each of the registered investment
companies in the Waddell & Reed Advisors Funds, W&R 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.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the
other funds in the Fund Complex; Chairman of the Board of Directors,
Chief Executive Officer and Director of Waddell & Reed Financial,
Inc.; President, Chairman of the Board of Directors, Director and
Chief Executive Officer of Waddell & Reed Financial Services, Inc.;
Chairman of the Board of Directors and Director of WRIMCO, Waddell &
Reed, Inc. and Waddell & Reed Services Company; formerly, President of
each of the funds in the Fund Complex; formerly, Chairman of the Board
of Directors of Waddell & Reed Asset Management Company, a former
affiliate of Waddell & Reed Financial, Inc. Date of birth:
February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law;
Director, AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President of JoDill Corp., an agricultural company; President and
Director of Dillingham Enterprises Inc.; formerly, Director and
consultant, McDougal Construction Company; formerly, Instructor at
Central Missouri State University; formerly, Member of the Board of
Police Commissioners, Kansas City, Missouri; formerly, Senior Vice
President-Sales and Marketing of Garney Companies, Inc., a specialty
utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores
Dor'e Eccles Foundation; Director of First Security Corp., a bank
holding company, and Director of Fluor Corp., a company with interests
in coal; formerly, President of Hewlett Foundation. Date of birth:
March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, 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 at the University of
Oklahoma; Adjunct Professor of Law at the University of Oklahoma
College of Law; Managing Member, Harroz Investments, L.L.C.; formerly,
Vice President for Executive Affairs of the University of Oklahoma;
formerly, Attorney with Crowe & Dunlevy, a law firm. Date of birth:
January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Chairman of the Board of Directors, Gilliland & Hayes,
P.A., a law firm; formerly, President of Gilliland & Hayes, P.A.;
formerly, Director of Central Properties, Inc. Date of birth:
December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of
the other funds in the Fund Complex; Executive Vice President, Chief
Operating Officer and Director of Waddell & Reed Financial, Inc.;
Executive Vice President, Chief Operating Officer, Director and
Treasurer of Waddell & Reed Financial Services, Inc.; Executive Vice
President, Principal Financial Officer, Director and Treasurer of
WRIMCO; President, Chief Executive Officer, Principal Financial
Officer, Director and Treasurer of Waddell & Reed, Inc.; Director and
Treasurer of Waddell & Reed Services Company; Chairman of the Board of
Directors, Chief Executive Officer, President and Director of
Fiduciary Trust Company of New Hampshire, an affiliate of Waddell &
Reed, Inc.; Director of Legend Group Holdings, LLC, Legend Advisory
Corporation, Legend Equities Corporation, Advisory Services
Corporation, The Legend Group, Inc. and LEC Insurance Agency, Inc.;
formerly, Vice President of each of the funds in the Fund Complex;
formerly, Director and Treasurer of Waddell & Reed Asset Management
Company; formerly, President of Waddell & Reed Services Company. Date
of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the
Fund Complex; President, Chief Investment Officer, and Director of
Waddell & Reed Financial, Inc.; Executive Vice President, Chief
Investment Officer and Director of Waddell & Reed Financial Services,
Inc.; Director of Waddell & Reed, Inc.; President, Chief Executive
Officer, Chief Investment Officer and Director of WRIMCO; Chairman of
the Board of Directors of Austin, Calvert & Flavin, Inc., an affiliate
of WRIMCO; formerly, President, Chief Executive Officer, Chief
Investment Officer and Director of Waddell & Reed Asset Management
Company. Date of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John
Alden Financial Corporation and its subsidiaries. Date of birth:
February 19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and
President of each of the funds in the Fund Complex then in existence.
(Mr. Morgan retired as Chairman of the Board of Directors and
President of the funds in the Fund Complex then in existence on April
30, 1993); formerly, President, Director and Chief Executive Officer
of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman of the Board of
Directors of Waddell & Reed Services Company. Date of birth: April
27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of
Kansas City; Director and Vice President of Network Rehabilitation
Services; Board Member, Member of Executive Committee and Finance
Committee of Truman Medical Center; formerly, Employment Counselor and
Director of McCue-Parker Center. Date of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm;
Director of Columbian Bank and Trust. Date of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
Professor of Business Administration, University of Missouri-
Kansas City; formerly, Chancellor, University of Missouri-Kansas City.
Date of birth: January 1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
Daniel C. Schulte
Vice President, Assistant Secretary and General Counsel of the
Fund and each of the other funds in the Fund Complex; Vice President,
Secretary and General Counsel of Waddell & Reed Financial, Inc.;
Senior Vice President, Secretary and General Counsel of Waddell & Reed
Financial Services Company, Waddell & Reed, Inc., WRIMCO and Waddell &
Reed Services Company; Secretary and Director of Fiduciary Trust
Company of New Hampshire, an affiliate of Waddell & Reed, Inc.;
formerly, Assistant Secretary of Waddell & Reed Financial, Inc.;
formerly, an attorney with Klenda, Mitchell, Austerman & Zuercher,
L.L.C. Date of birth: December 8, 1965.
Kristen A. Richards
Vice President, Secretary and Associate General Counsel of the
Fund and each of the other funds in the Fund Complex; Vice President
and Associate General Counsel of WRIMCO; formerly, Assistant Secretary
of the Fund and each of the other funds in the Fund Complex; formerly,
Compliance Officer of WRIMCO. Date of birth: December 2, 1967.
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 two other funds in the Fund
Complex; Senior Vice President of WRIMCO; formerly, Vice President of
Waddell & Reed Asset Management Company; formerly, Vice President of
Waddell & Reed, Inc. Date of birth: September 15, 1953.
Daniel J. Vrabac
Vice President of the Fund and two other funds in the Fund
Complex; formerly, Vice President of Waddell & Reed Asset Management
Company. Date of birth: July 24, 1954.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217,
Shawnee Mission, Kansas 66201-9217 unless a different address is
given.
The Directors who may be deemed to be "interested persons" as
defined in the 1940 Act of the Fund's underwriter, Waddell & Reed,
Inc., or of its manager, WRIMCO, are indicated as such by an asterisk.
The Board of Directors has created an honorary position of
Director Emeritus, whereby an incumbent Director who has attained the
age of 70 may, or if elected on or after May 31, 1993 and has attained
the age of 75 must, resign his or her position as Director and, unless
he or she elects otherwise, will serve as Director Emeritus provided
the Director has served as a Director of the Funds for at least five
years which need not have been consecutive. A Director Emeritus
receives fees in recognition of his or her past services whether or
not services are rendered in his or her capacity as Director Emeritus,
but he or she has no authority or responsibility with respect to the
management of the Fund. Messrs. Henry L. Bellmon, Jay B. Dillingham,
Doyle Patterson, Ronald K. Richey and Paul S. Wise retired as
Directors of the Fund and of each of the funds in the Fund Complex,
and each serves as Director Emeritus.
The funds in the Waddell & Reed Advisors Funds, Target/United
Funds, Inc. and W&R Funds, Inc. pay to each Director, effective
October 1, 1999, an annual base fee of $50,000, plus $3,000 for each
meeting of the Board of Directors attended and effective January 1,
2000, an annual base fee of $52,000 plus $3,250 for each meeting of
the Board of Directors attended, plus reimbursement of expenses for
attending such meeting and $500 for each committee meeting attended
which is not in conjunction with a Board of Directors meeting, other
than Directors who are affiliates of Waddell & Reed, Inc. (prior to
October 1, 1999, the funds in the Waddell & Reed Advisors Funds,
Target/United Funds, Inc. and W&R Funds, Inc. paid to each Director an
annual base fee of $48,000 plus $2,500 for each meeting of the Board
of Directors attended plus reimbursement of expenses of attending such
meeting and $500 for each committee meeting attended). The fees to the
Directors are divided among the funds in theWaddell & Reed Advisors
Funds, Target/United Funds, Inc. and W&R Funds, Inc. based on the
funds' relative size. During the Fund's fiscal year ended September
30, 1999, the Fund's Directors received the following fees for service
as a director:
Compensation Table
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 585 59,000
John A. Dillingham 585 59,000
David P. Gardner 582 56,500
Linda K. Graves 585 59,000
Joseph Harroz, Jr. 582 56,500
John F. Hayes 585 59,000
Glendon E. Johnson 586 59,500
William T. Morgan 585 59,000
Ronald C. Reimer 582 56,500
Frank J. Ross, Jr. 585 59,000
Eleanor B. Schwartz 586 59,500
Frederick Vogel III 586 59,500
*No pension or retirement benefits have been accrued as a part of Fund
expenses.
The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of May 31, 2000, 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
May 31, 2000, regarding the ownership of the Fund's shares.
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
------------------- ----- ------------ -------
Suzane M Mackie Tr Class C 7,553 5.55%
U/A 03/29/1999
Suzanne M Mackie Rev Trust
876 Woodridge Hills Dr
Brighton MI 48116-2402
Gerald F Batkiewicz & Class C 7,078 5.20%
Beverly G Batkiewicz Jtn Ros
11581 Zachary Ln
Osseo MN 55369-9213
Waddell & Reed
Financial, Inc. Class Y 59,438 78.08%
401(k) and Thrift Plan
6300 Lamar Avenue
Overland Park KS 66201
Compass Bank Tr Class Y 12,509 16.43%
Profit Sharing Plan
FBO Torchmark Corp
Savings & Investment Plan
Attn: Wayne Laugevin
15 20th St S Fl 8
Birmingham AL 35233-2000
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 Waddell & Reed Advisors Gold &
Government Fund, Inc., the Fund's use of which will be subject to
certain limitations.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you
want cash for your dividends and distributions, (ii) you want your
dividends and distributions paid in shares of the Fund of the same
class as that with respect to which they were paid or (iii) you want
cash for your dividends and want your distributions paid in shares of
the Fund of the same class as that with respect to which they were
paid. However, a total dividend and/or distribution amount less than
five dollars will be automatically paid in shares of the Fund of the
same class as that with respect to which they were paid. You can
change your instructions at any time. If you give no instructions,
your dividends and distributions will be paid in shares of the Fund of
the same class as that with respect to which they were paid. All
payments in Fund shares are at NAV without any sales charge. The NAV
used for this purpose is that computed as of the record date for the
dividend or distribution, although this could be changed by the Board
of Directors.
Even if you receive dividends and distributions on Fund shares in
cash, you can thereafter reinvest them (or distributions only) in
shares of the Fund at NAV (i.e., with no sales charge) next calculated
after receipt by Waddell & Reed, Inc. of the amount clearly identified
as a reinvestment. The reinvestment must be within forty-five days
after the payment.
TAXES
General
The Fund has qualified since inception for treatment as a
regulated investment company ("RIC") under the Code, so that it is
relieved of Federal income tax on that part of its investment company
taxable income (consisting generally of net investment income, net
short-term capital gains and net gains from certain foreign currency
transactions) that it distributes to its shareholders. To continue to
qualify for treatment as a RIC, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment
company taxable income ("Distribution Requirement") and must meet
several additional requirements. These requirements include the
following: (1) the Fund must derive at least 90% of its gross income
each taxable year from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of
securities or foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income
Requirement"); (2) at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities that are limited, in
respect of any one issuer, to an amount that does not exceed 5% of the
value of the Fund's total assets and that does not represent more than
10% of the issuer's outstanding voting securities ("50%
Diversification Requirement"); and (3) at the close of each quarter of
the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
Investments in precious metals would have adverse tax
consequences for the Fund and its shareholders if it either (1)
derived more than 10% of its gross income in any taxable year from the
disposition of precious metals and from other income that does not
qualify under the Income Requirement or (2) held precious metals in
such quantities that the Fund failed to satisfy the 50%
Diversification Requirement for any quarter. The Fund intends to
continue to manage its portfolio so as to avoid failing to satisfy
those requirements for these reasons.
If the Fund failed to qualify for treatment as a RIC for any
taxable year, (a) it would be taxed as an ordinary corporation on the
full amount of its taxable income for that year (even if it
distributed that income to its shareholders) and (b) the shareholders
would treat all distributions out of its earnings and profits,
including distributions of net capital gains, as dividends (that is,
ordinary income). In addition, the Fund could be required to
recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before qualifying for RIC treatment.
Dividends and distributions declared by the Fund in December of
any year and payable to its shareholders of record on a date in that
month are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if they are paid by the Fund
during the following January. Accordingly, those dividends and
distributions will be taxed to the shareholders for the year in which
that December 31 falls.
If Fund shares are sold at a loss after being held for six months
or less, the loss will be treated as a long-term, instead of short-
term, capital loss to the extent of any distributions received on
those shares. Investors also should be aware that if shares are
purchased shortly before the record date for a dividend or
distribution, the investor will receive some portion of the purchase
price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax
("Excise Tax") to the extent it fails to distribute, by the end of any
calendar year, substantially all of its ordinary income for that year
and capital gains net income for the one-year period ending on October
31 of that year, plus certain other amounts. For these purposes, the
Fund may defer into the next calendar year net capital losses incurred
between November 1 and the end of the current calendar year. It is
the policy of the Fund to pay sufficient dividends and distributions
each year to avoid imposition of the Excise Tax.
Income from Foreign Securities
Dividends and interest received and gains realized, by the Fund,
may be subject to income, withholding or other taxes imposed by
foreign countries and U.S. possessions ("foreign taxes") that would
reduce the yield and/or total return on its securities. Tax
conventions between certain countries and the United States may reduce
or eliminate foreign taxes, however, and many foreign countries do not
impose taxes on capital gains in respect of investments by foreign
investors.
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is any foreign corporation (with certain
exceptions) that, in general, meets either of the following tests:
(1) at least 75% of its gross income is passive or (2) an average of
at least 50% of its assets produce, or are held for the production of,
passive income. Under certain circumstances, the Fund will be subject
to Federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain on disposition of the
stock (collectively "PFIC income"), plus interest thereon, even if the
Fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent it distributes that income to its
shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax
and interest obligation, the Fund will be required to include in
income each year its pro rata share of the QEF's annual ordinary
earnings and net capital gains -- which probably would have to be
distributed by the Fund to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax -- even if those earnings and gains
were not distributed to the Fund by the QEF. In most instances it
will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary
income each taxable year the excess, if any, of the fair market value
of a PFIC's stock over the Fund's adjusted basis therein as of the end
of that year. Pursuant to the election, the Fund also may deduct (as
an ordinary, not capital, loss) the excess, if any, of its adjusted
basis in PFIC stock over the fair market value thereof as of the
taxable year-end, but only to the extent of any net mark-to-market
gains with respect to that stock included by the Fund for prior
taxable years under the election (and under regulations proposed in
1992 that provided a similar election with respect to the stock of
certain PFICs). The Fund's adjusted basis in each PFIC's stock with
respect to which it makes this election will be adjusted to reflect
the amounts of income included and deductions taken under the
election.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies,
including forward currency contracts, (2) on the disposition of each
debt security denominated in a foreign currency that are attributable
to fluctuations in the value of the foreign currency between the date
of acquisition of the security and the date of disposition, and (3)
that are attributable to fluctuations in exchange rates that occur
between the time the Fund accrues interest, dividends or other
receivables, or expenses or other liabilities, denominated in a
foreign currency and the time the Fund actually collects the
receivables or pays the liabilities, generally are treated as ordinary
income or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of
the Fund's investment company taxable income to be distributed to its
shareholders as ordinary income, rather than affecting the amount of
its net capital gain.
Income from Options, Futures and Forward Currency Contracts and
Foreign Currencies
The use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for
income tax purposes the amount, character and timing of recognition of
the gains and losses the Fund realizes in connection therewith. Gains
from the disposition of foreign currencies (except certain gains that
may be excluded by future regulations), and gains from options,
futures contracts and forward currency contracts derived by the Fund
with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income
Requirement.
Any income the Fund earns from writing options is treated as
short-term capital gain. If the Fund enters into a closing purchase
transaction, it will have a short-term capital gain or loss based on
the difference between the premium it receives for the option it wrote
and the premium it pays for the option it buys. If an option written
by the Fund lapses without being exercised, the premium it received
also will be a short-term capital gain. If such an option is
exercised and the Fund thus sells the securities subject to the
option, the premium the Fund received will be added to the exercise
price to determine the gains or losses on the sale.
Certain options, futures contracts and forward currency contracts
in which the Fund may invest may be "section 1256 contracts." Section
1256 contracts held by the Fund at the end of its taxable year, other
than contracts subject to a "mixed straddle" election made by the
Fund, are "marked-to-market" (that is, treated as sold at that time
for their fair market value) for Federal income tax purposes, with the
result that unrealized gains or losses are treated as though they were
realized. Sixty percent of any net gains or losses recognized on
these deemed sales, and 60% of any net realized gains or losses from
any actual sales of section 1256 contracts, are treated as long-term
capital gains or losses, and the balance is treated as short-term
capital gains or losses. Section 1256 contracts also may be marked-
to-market for purposes of the Excise Tax and other purposes. The Fund
may need to distribute any mark-to-market gains to its shareholders to
satisfy the Distribution Requirement and/or avoid imposition of the
Excise Tax, even though it may not have closed the transactions and
received cash to pay the distributions.
Code section 1092 (dealing with straddles) may also affect the
taxation of options and futures contracts in which the Fund may
invest. That section defines a "straddle" as offsetting positions
with respect to personal property; for these purposes, options,
futures contracts and forward currency contracts are personal
property. Section 1092 generally provides that any loss from the
disposition of a position in a straddle may be deducted only to the
extent the loss exceeds the unrealized gain on the offsetting
position(s) of the straddle. In addition, these rules may postpone
the recognition of loss that would otherwise be recognized under the
mark-to-market rules discussed above. The regulations under section
1092 also provide certain "wash sale" rules, which apply to
transactions where a position is sold at a loss and a new offsetting
position is acquired within a prescribed period, and "short sale"
rules applicable to straddles. If the Fund makes certain elections,
the amount, character and timing of the recognition of gains and
losses from the affected straddle positions will be determined under
rules that vary according to the elections made. Because only a few
of the regulations implementing the straddle rules have been
promulgated, the tax consequences of straddle transactions to the Fund
are not entirely clear.
If the Fund has an appreciated financial position -- generally,
an interest (including an interest through an option, futures or
forward currency contract or short sale) with respect to any stock,
debt instrument (other than "straight debt") or partnership interest
the fair market value of which exceeds its adjusted basis -- and
enters into a "constructive sale" of the position, the Fund will be
treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally
consists of a short sale, an offsetting notional principal contract or
futures or forward currency contract entered into by the Fund or a
related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is
itself a short sale or such a contract, acquisition of the underlying
property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any
transaction during any taxable year that otherwise would be treated as
a constructive sale if the transaction is closed within 30 days after
the end of that year and the Fund holds the appreciated financial
position unhedged for 60 days after that closing (i.e., at no time
during that 60-day period is the Fund's risk of loss regarding that
position reduced by reason of certain specified transactions with
respect to substantially identical or related property, such as having
an option to sell, being contractually obligated to sell, making a
short sale, or granting an option to buy substantially identical stock
or securities).
Zero Coupon and Payment-in-Kind Securities
The Fund may acquire zero coupon or other securities issued with
OID. As a holder of those securities, the Fund must include in its
income the portion of the OID that accrues on the securities during
the taxable year, even if the Fund receives no corresponding payment
on the securities during the year. Similarly, the Fund must include
in its gross income securities it receives as "interest" on payment-
in-kind securities. Because the Fund annually must distribute
substantially all of its investment company taxable income, including
any accrued OID and other non-cash income, to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax, it may be required
in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those
distributions will be made from the Fund's cash assets or from the
proceeds of sales of portfolio securities, if necessary. The Fund may
realize capital gains or losses from those sales, which would increase
or decrease its investment company taxable income and/or net capital
gain.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Investment
Management Agreement between the Fund and WRIMCO is to arrange the
purchase and sale of securities for the portfolio of the Fund.
Transactions in securities other than those for which an exchange is
the primary market are generally effected with dealers acting as
principals or market makers. Brokerage commissions are paid primarily
for effecting transactions in securities traded on an exchange and
otherwise only if it appears likely that a better price or execution
can be obtained. The individual who manages the Fund may manage other
Funds or advisory accounts with similar investment objectives. It can
be anticipated that WRIMCO may otherwise combine orders for the Fund
with those of other funds in the Waddell & Reed Advisors Funds,
Target/United Funds, Inc. or W&R Funds, Inc. or other accounts for
which it has investment discretion, including accounts affiliated with
WRIMCO. WRIMCO, at its discretion, may aggregate such orders. Under
current written procedures, transactions effected pursuant to such
combined orders are averaged as to price and allocated in accordance
with the purchase or sale orders actually placed for each Fund or
advisory account, except where the combined order is not filled
completely. In this case, for a transaction not involving an initial
public offering (_IPO_), WRIMCO will ordinarily allocate the
transaction pro rata based on the orders placed, subject to certain
variances provided for in the written procedures. For a partially
filled IPO order, subject to certain variances specified in the
written procedures, WRIMCO generally allocates the shares as follows:
the IPO shares are initially allocated pro rata among the included
funds and/or advisory accounts grouped according to investment
objective, based on relative total assets of each group; and the
shares are then allocated within each group pro rata based on relative
total assets of the included funds and/or advisory accounts, except
that (a) within a group having a small cap-related investment
objective, shares are allocated on a rotational basis after taking
into account the impact of the anticipated initial gain on the value
of the included fund or advisory account and (b) within a group having
a mid-cap-related investment objective, shares are allocated based on
the portfolio manager's judgment, including but not limited to such
factors as the fund's or advisory account's investments strategies and
policies, cash availability, any minimum investment policy, liquidity,
anticipated term of the investment and current securities positions.
In all cases, WRIMCO seeks to implement its allocation procedures
to achieve a fair and equitable allocation of securities among its
funds and other advisory accounts. Sharing in large transactions
could affect the price the Fund pays or receives or the amount it buys
or sells. As well, a better negotiated commission may be available
through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is
authorized to engage broker-dealers ("brokers") which, in its best
judgment based on all relevant factors, will implement the policy of
the Fund to seek "best execution" (prompt and reliable execution at
the best price obtainable) for reasonable and competitive commissions.
WRIMCO need not seek competitive commission bidding but is expected to
minimize the commissions paid to the extent consistent with the
interests and policies of the Fund. Subject to review by the Board of
Directors, such policies include the selection of brokers which
provide execution and/or research services and other services,
including pricing or quotation services directly or through others
("research and brokerage services") considered by WRIMCO to be useful
or desirable for its investment management of the Fund and/or the
other Funds and accounts over which WRIMCO has investment discretion.
Research and brokerage services are, in general, defined by
reference to Section 28(e) of the Securities Exchange Act of 1934 as
including (i) advice, either directly or through publications or
writings, as to the value of securities, the advisability of investing
in, purchasing or selling securities and the availability of
securities and purchasers or sellers; (ii) furnishing analyses and
reports; or (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and
custody). "Investment discretion" is, in general, defined as having
authorization to determine what securities shall be purchased or sold
for an account, or making those decisions even though someone else has
responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than the commission another qualified
broker would charge for effecting comparable transactions if a good
faith determination is made by WRIMCO that the commission is
reasonable in relation to the research and brokerage services
provided. Subject to the foregoing considerations WRIMCO may also
consider sales of Fund shares as a factor in the selection of broker-
dealers to execute portfolio transactions. No allocation of brokerage
or principal business is made to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be
useful only to one or more of the other advisory accounts of WRIMCO
and investment research received for the commissions of those other
accounts may be useful both to the Fund and one or more of such other
accounts. To the extent that electronic or other products provided by
such brokers to assist WRIMCO in making investment management
decisions are used for administration or other non-research purposes,
a reasonable allocation of the cost of the product attributable to its
non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party
at the request of a broker) includes information on particular
companies and industries as well as market, economic or institutional
activity areas. It serves to broaden the scope and supplement the
research activities of WRIMCO; serves to make available additional
views for consideration and comparisons; and enables WRIMCO to obtain
market information on the price of securities held in the Fund's
portfolio or being considered for purchase. The Fund may also use its
brokerage to pay for pricing or quotation services to value
securities.
During the Fund's fiscal years ended September 30, 1999, 1998 and
1997, it paid brokerage commissions of $87,109, $43,500 and $45,466,
respectively. This figure does not include principal transactions or
spreads or concessions on principal transactions, i.e., those in which
the Fund sells securities to a broker-dealer firm or buys from a
broker-dealer firm securities owned by it.
During the Fund's fiscal year ended September 30, 1999, the
transactions, other than principal transactions, which were directed
to broker-dealers who provided research services as well as execution
totaled $28,576,509 on which $52,198 in brokerage commissions were
paid. These transactions were allocated to these broker-dealers by
the internal allocation procedures described above.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of
Ethics under Rule 17j-1 of the 1940 Act that permits their respective
directors, officers and employees to invest in securities, including
securities that may be purchased or held by the Fund. The Code of
Ethics subjects covered personnel to certain restrictions that include
prohibited activities, pre-clearance requirements and reporting
obligations.
OTHER INFORMATION
The Fund offers four classes of shares: Class A, Class B, Class
C and Class Y. Each class represents interest in the same assets of
the Fund and differ as follows: each class of shares has exclusive
voting rights on matters appropriately limited to that class; Class A
shares are subject to an initial sales charge and to an ongoing
distribution and/or service fee and certain Class A shares are subject
to a contingent deferred sales charge; Class B and Class C are subject
to a contingent deferred sales charge and to ongoing distribution and
service fees; Class B shares converts to Class A shares eight years
after the month in which the shares were purchased; and Class Y
shares, which are designated for institutional investors, have no
sales charge nor ongoing distribution and/or service fee. Each class
may bear differing amounts of certain class-specific expenses and each
class has a separate exchange privilege. The Fund does not anticipate
that there will be any conflicts between the interests of holders of
the different classes of shares of the Fund by virtue of those
classes. On an ongoing basis, the Board of Directors will consider
whether any such conflict exists and, if so, take appropriate action.
Each share of the Fund is entitled to equal voting, dividend,
liquidation and redemption rights, except that due to the differing
expenses borne by the classes, dividends and liquidation proceeds of
Class B shares and Class C shares are expected to be lower than for
Class A shares, which in turn are expected to be lower than for Class
Y shares of the Fund. Each fractional share of a class has the same
rights, in proportion, as a full share of that class. Shares are
fully paid and nonassessable when purchased.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new
investment advisory agreement or a change in a fundamental investment
policy, which require shareholder approval 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.
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 adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for debt in this category than in
higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded
as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt
will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse
conditions.
BB -- Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The BB rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability
to default, and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B- rating.
CC -- The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating.
The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no
interest is being paid.
D -- Debt rated D is in payment default. It is used when
interest payments or principal payments are not made on a due date
even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace periods.
The D rating will also be used upon a filing of a bankruptcy petition
if debt service payments are jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of
credit quality, the ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
NR -- Indicates that no public rating has been requested, that
there is insufficient information on which to base a rating, or that
S&P does not rate a particular type of obligation as a matter of
policy.
Debt Obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and related
uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in
the top four categories (AAA, AA, A, BBB, commonly known as
"investment grade" ratings) are generally regarded as eligible for
bank investment. In addition, the laws of various states governing
legal investments may impose certain rating or other standards for
obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the
applicable MIS rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected
by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Some
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
NOTE: Bonds within the above categories which possess the
strongest investment attributes are designated by the symbol "1"
following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate
and thereby not well safeguarded during good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger
with respect to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
DESCRIPTION OF PREFERRED STOCK RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
An S&P preferred stock rating is an assessment of the capacity and
willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs
from a bond rating inasmuch as it is assigned to an equity issue,
which issue is intrinsically different from, and subordinated to, a
debt issue. Therefore, to reflect this difference, the preferred
stock rating symbol will normally not be higher than the debt rating
symbol assigned to, or that would be assigned to, the senior debt of
the same issuer.
The preferred stock ratings are based on the following
considerations:
1. Likelihood of payment - capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any
applicable sinking fund requirements in accordance with the terms
of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA -- This is the highest rating that may be assigned by S&P to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-
quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues
rated AAA.
A -- An issue rated A is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions.
BBB -- An issue rated BBB is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened
capacity to make payments for a preferred stock in this category than
for issues in the 'A' category.
BB, B, CCC -- Preferred stock rated BB, B, and CCC are regarded,
on balance, as predominantly speculative with respect to the issuer's
capacity to pay preferred stock obligations. BB indicates the lowest
degree of speculation and CCC the highest degree of speculation.
While such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CC -- The rating CC is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments but that is currently
paying.
C -- A preferred stock rated C is a non-paying issue.
D -- A preferred stock rated D is a non-paying issue with the
issuer in default on debt instruments.
NR -- This indicates that no rating has been requested, that
there is insufficient information on which to base a rating, or that
S&P does not rate a particular type of obligation as a matter of
policy.
Plus (+) or minus (-) -- To provide more detailed indications of
preferred stock quality, the rating from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
A preferred stock rating is not a recommendation to purchase,
sell or hold a security inasmuch as it does not comment as to market
price or suitability for a particular investor. The ratings are based
on current information furnished to S&P by the issuer or obtained by
S&P from other sources it considers reliable. S&P does not perform an
audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability
of, such information or based on other circumstances.
Moody's Investors Service, Inc. Because of the fundamental
differences between preferred stocks and bonds, a variation of MIS'
familiar bond rating symbols is used in the quality ranking of
preferred stock. The symbols are designed to avoid comparison with
bond quality in absolute terms. It should always be borne in mind
that preferred stock occupies a junior position to bonds within a
particular capital structure and that these securities are rated
within the universe of preferred stocks.
Note: MIS applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
Preferred stock rating symbols and their definitions are as
follows:
aaa -- An issue which is rated aaa is considered to be a top-
quality preferred stock. This rating indicates good asset protection
and the least risk of dividend impairment within the universe of
preferred stocks.
aa -- An issue which is rated aa is considered a high-grade
preferred stock. This rating indicates that there is a reasonable
assurance the earnings and asset protection will remain relatively
well-maintained in the foreseeable future.
a -- An issue which is rated a is considered to be an upper-
medium grade preferred stock. While risks are judged to be somewhat
greater than in the aaa and aa classification, earnings and asset
protection are, nevertheless, expected to be maintained at adequate
levels.
baa -- An issue which is rated baa is considered to be a medium-
grade preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
ba -- An issue which is rated ba is considered to have
speculative elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b -- An issue which is rated b generally lacks the
characteristics of a desirable investment. Assurance of dividend
payments and maintenance of other terms of the issue over any long
period of time may be small.
caa -- An issue which is rated caa is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
ca -- An issue which is rated ca is speculative in a high degree
and is likely to be in arrears on dividends with little likelihood of
eventual payments.
c -- This is the lowest rated class of preferred or preference
stock. Issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
MARCH 31, 2000
Troy
Ounces Value
BULLION - 1.76%
Gold ................................... 4,411 $1,228,139
(Cost: $1,292,658)
Shares
COMMON STOCKS
Amusement and Recreation Services - 0.99%
Walt Disney Company (The) .............. 16,800 695,100
Business Services - 5.07%
Clear Channel Communications, Inc.* .... 14,000 966,875
Microsoft Corporation* ................. 8,600 916,169
Oracle Corporation* .................... 12,400 966,812
Shared Medical Systems Corporation ..... 13,400 695,125
Total ................................. 3,544,981
Chemicals and Allied Products - 16.44%
American Home Products Corporation ..... 18,200 975,975
Biogen, Inc.* .......................... 9,100 635,294
Bristol-Myers Squibb Company ........... 12,300 710,325
Dial Corporation (The) ................. 62,800 863,500
Forest Laboratories, Inc.* ............. 18,700 1,580,150
IntraBiotics Pharmaceuticals, Inc.* .... 23,300 350,228
Lilly (Eli) and Company ................ 13,700 863,100
Merck & Co., Inc. ...................... 8,100 503,213
Pharmacia & Upjohn, Inc. ............... 20,800 1,071,200
Pharmacyclics, Inc.* ................... 14,000 779,187
Procter & Gamble Company (The) ......... 11,500 646,875
Schering-Plough Corporation ............ 21,300 782,775
Smith International, Inc.* ............. 10,600 821,500
Warner-Lambert Company ................. 9,300 906,750
Total ................................. 11,490,072
Coal Mining - 0.98%
CONSOL Energy Inc. ..................... 65,000 686,563
Communication - 1.38%
EchoStar Communications Corporation,
Class A* .............................. 12,200 963,800
Depository Institutions - 2.11%
Bank of America Corporation ............ 14,300 749,856
U. S. Bancorp. ......................... 33,200 726,250
Total ................................. 1,476,106
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
MARCH 31, 2000
Shares Value
COMMON STOCKS (Continued)
Eating and Drinking Places - 2.61%
Papa John's International, Inc.* ....... 33,300 $1,099,941
Wendy's International, Inc. ............ 35,800 722,712
Total ................................. 1,822,653
Electronic and Other Electric Equipment - 9.41%
Analog Devices, Inc.* .................. 9,810 790,318
Intel Corporation ...................... 8,200 1,080,863
JDS Uniphase Corporation* .............. 5,700 687,028
LSI Logic Corporation* ................. 13,300 965,912
Maxim Integrated Products, Inc.* ....... 12,800 910,000
Nortel Networks Corporation ............ 7,150 900,900
Rambus Inc.* ........................... 1,800 528,469
Samsung Electronics (A) ................ 2,350 712,282
Total ................................. 6,575,772
Fabricated Metal Products - 0.97%
Parker Hannifin Corporation ............ 16,500 681,656
Food and Kindred Products - 1.29%
American Italian Pasta Company, Class A* 36,700 903,738
Food Stores - 1.19%
Kroger Co. (The)* ...................... 47,200 828,950
General Merchandise Stores - 3.13%
BJ's Wholesale Club, Inc.* ............. 27,200 1,050,600
Target Corporation ..................... 15,200 1,136,200
Total ................................. 2,186,800
Health Services - 1.02%
Columbia/HCA Healthcare Corporation .... 28,100 711,281
Holding and Other Investment Offices - 1.21%
ABB Ltd. (A)* .......................... 3,700 436,368
"Shell" Transport and Trading
Company, p.l.c. (The), ADR ............ 8,400 412,125
Total ................................. 848,493
Industrial Machinery and Equipment - 3.43%
Cooper Cameron Corporation* ............ 11,400 762,375
Illinois Tool Works, Inc. .............. 11,800 651,950
Ingersoll-Rand Company ................. 15,100 668,175
Invensys plc (A) ....................... 70,000 312,032
Total ................................. 2,394,532
Instruments and Related Products - 2.22%
Beckman Coulter, Inc. .................. 14,000 898,625
PE Corporation - PE Biosystems Group ... 6,800 656,200
Total ................................. 1,554,825
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
MARCH 31, 2000
Shares Value
COMMON STOCKS (Continued)
Insurance Carriers - 2.18%
American International Group, Inc. ..... 6,650 $ 728,175
CIGNA Corporation ...................... 10,500 795,375
Total ................................. 1,523,550
Leather and Leather Products - 0.93%
Kenneth Cole Productions, Inc., Class A* 16,500 647,625
Lumber and Wood Products - 0.98%
Weyerhaeuser Company ................... 12,000 684,000
Metal Mining - 2.88%
Homestake Mining Company ............... 160,400 962,400
Newmont Mining Corporation ............. 46,800 1,050,075
Total ................................. 2,012,475
Motion Pictures - 1.87%
AT&T Corp. - Liberty Media Group,
Class A* .............................. 22,000 1,303,500
Nondepository Institutions - 2.14%
Fannie Mae ............................. 12,900 728,044
Freddie Mac ............................ 17,400 768,862
Total ................................. 1,496,906
Oil and Gas Extraction - 3.79%
Burlington Resources Incorporated ...... 14,100 521,700
Schlumberger Limited ................... 9,300 711,450
Transocean Sedco Forex Inc. ............ 16,419 842,500
USX Corporation - Marathon Group ....... 22,100 575,981
Total ................................. 2,651,631
Paper and Allied Products - 3.28%
Bowater Incorporated ................... 14,900 795,288
International Paper Company ............ 17,800 760,950
Smurfit-Stone Container Corporation* ... 43,200 733,050
Total ................................. 2,289,288
Petroleum and Coal Products - 2.66%
Exxon Mobil Corporation ................ 7,000 544,688
Lyondell Chemical Company .............. 50,400 743,400
Texaco Inc. ............................ 10,600 568,425
Total ................................. 1,856,513
Primary Metal Industries - 2.12%
Ak Steel Holding Corporation ........... 68,900 714,838
Reynolds Metals Company ................ 11,500 769,062
Total ................................. 1,483,900
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
MARCH 31, 2000
Shares Value
COMMON STOCKS (Continued)
Transportation Equipment - 1.42%
Gentex Corporation* .................... 26,750 $ 990,586
Wholesale Trade -- Nondurable Goods - 1.28%
Cardinal Health, Inc. .................. 19,500 894,562
TOTAL COMMON STOCKS - 78.98% $55,199,858
(Cost: $45,013,332)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Fabricated Metal Products - 0.69%
Crown Cork & Seal Company, Inc.,
7.125%, 9-1-02 ........................ $500 482,860
Primary Metal Industries - 0.36%
Ispat Mexicana, S.A. de C.V.,
10.375%, 3-15-01 (B)................... 250 248,125
TOTAL CORPORATE DEBT SECURITIES - 1.05% $ 730,985
(Cost: $745,192)
OTHER GOVERNMENT SECURITY - 0.61%
Argentina
Republic of Argentina (The),
0.0%, 10-15-01 ........................ 500 $ 427,500
(Cost: $435,023)
UNITED STATES GOVERNMENT SECURITY - 4.97%
United States Treasury,
5.625%, 12-31-02 ...................... 3,550 $ 3,475,130
(Cost: $3,536,048)
Number of
Contracts
OPTIONS
Analog Devices, Inc., June 2000 Put Options,
Expires 6-17-00 ....................... 204 3,188
Applied Materials, Inc., May 2000 Put Options,
Expires 4-22-00 ....................... 106 1,325
Applied Micro Circuits Corporation, May 2000
Put Options, Expires 5-20-00 .......... 64 1,800
AT&T Corp. - Liberty Media Group, Class A, April 2000
Put Options, Expires 4-22-00........... 220 1,375
Clear Channel Communications, Inc., April 2000
Put Options, Expires 4-22-00 .......... 70 14,875
DoubleClick Inc., April 2000 Put Options,
Expires 4-22-00 ....................... 48 3,750
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
MARCH 31, 2000
Number of
Contracts Value
OPTIONS (Continued)
EchoStar Communications Corporation, Class A,
June 2000 Put Options, Expires 6-17-00. 122 $ 762
JDS Uniphase Corporation, June 2000 Put
Options, Expires 6-17-00 .............. 104 22,750
Maxim Integrated Products, Inc., May 2000
Put Options, Expires 5-20-00 .......... 128 800
Microsoft Corporation, April 2000 Put Options,
Expires 4-22-00 ....................... 86 2,687
Nortel Networks Corporation, June 2000 Put Options,
Expires 6-17-00 ....................... 72 4,050
Oracle Corporation, June 2000 Put Options,
Expires 6-17-00 ....................... 144 2,700
Rambus Inc., May 2000 Put Options,
Expires 5-20-00 ....................... 78 8,775
TMP Worldwide Inc., June 2000 Put Options,
Expires 6-17-00 ....................... 86 8,063
Teradyne, Inc., April 2000 Put Options,
Expires 4-22-00 ....................... 124 5,425
Time Warner Incorporated, June 2000 Put Options,
Expires 6-17-00 ....................... 84 1,575
Yahoo! Inc., April 2000 Put Options,
Expires 4-22-00 ....................... 26 3,250
TOTAL OPTIONS - 0.12% $87,150
(Cost: $558,224)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Fabricated Metal Products - 0.11%
Danaher Corporation,
6.1325%, Master Note .................. $ 79 79,000
Food and Kindred Products - 6.16%
General Mills, Inc.,
5.9875%, Master Note .................. 4,302 4,302,000
Instruments and Related Products - 4.29%
Snap-on Incorporated,
6.01%, 4-10-00 ........................ 3,000 2,995,493
Nondepository Institutions - 3.42%
PACCAR Financial Corp.,
6.0329%, Master Note .................. 2,395 2,395,000
TOTAL SHORT-TERM SECURITIES - 13.98% $ 9,771,493
(Cost: $9,771,493)
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
MARCH 31, 2000
Value
TOTAL INVESTMENT SECURITIES - 101.47% $70,920,255
(Cost: $61,351,970)
LIABILITIES, NET OF
CASH AND OTHER ASSETS - (1.47%) (1,027,604)
NET ASSETS - 100.00% $69,892,651
Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside the United States.
(B) Security was purchased pursuant to Rule 144A under the Securities
Act of 1933 and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At
March 31, 2000, the value of this security amounted to $248,125
or 0.36% of net assets.
See Note 1 to financial statements for security valuation and other
significant accounting policies concerning investments.
See Note 4 to financial statements for cost and unrealized
appreciation and depreciation of investments owned for Federal
income tax purposes.
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2000
(In Thousands, Except for Per Share Amounts)
Assets
Investment securities -- at value
(Notes 1 and 4) ................................. $70,920
Cash ............................................ 2
Receivables:
Investment securities sold ...................... 2,187
Fund shares sold ................................ 386
Dividends and interest .......................... 101
Prepaid insurance premium ........................ 10
-------
Total assets .................................. 73,606
-------
Liabilities
Payable for investment securities purchased ...... 3,539
Payable to Fund shareholders ..................... 114
Accrued transfer agency and dividend
disbursing (Note 3) ............................. 30
Accrued service fee (Note 3) ..................... 12
Accrued accounting services fee (Note 3) ......... 3
Accrued management fee (Note 3) .................. 1
Other liabilities ................................ 14
-------
Total liabilities ............................. 3,713
-------
Total net assets ............................. $69,893
=======
Net Assets
$0.01 par value capital stock
Capital stock ................................... $ 94
Additional paid-in capital ...................... 51,538
Accumulated undistributed income:
Accumulated undistributed net investment income 40
Accumulated undistributed net realized gain on
investment transactions ....................... 8,653
Net unrealized appreciation in value of
investments ................................... 9,568
-------
Net assets applicable to outstanding
units of capital ............................. $69,893
=======
Net asset value per share (net assets divided
by shares outstanding)
Class A .......................................... $7.47
Class B .......................................... $7.45
Class C .......................................... $7.45
Class Y .......................................... $7.47
Capital shares outstanding
Class A .......................................... 8,982
Class B .......................................... 250
Class C .......................................... 71
Class Y .......................................... 53
Capital shares authorized .......................... 1,000,000
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended MARCH 31, 2000
(In Thousands)
Investment Income
Income (Note 1B):
Interest and amortization ....................... $ 467
Dividends (net of foreign withholding taxes of $2) 141
-------
Total income .................................. 608
Expenses (Notes 2 and 3): -------
Investment management fee ....................... 196
Transfer agency and dividend disbursing:
Class A ........................................ 140
Class B ........................................ 1
Class C ........................................ ---*
Service fee:
Class A ........................................ 61
Class B ........................................ 1
Class C ........................................ ---*
Registration fees ............................... 29
Accounting services fee ......................... 14
Distribution fee:
Class A ........................................ 8
Class B ........................................ 3
Class C ........................................ 1
Audit fees ...................................... 9
Legal fees ...................................... 7
Custodian fees .................................. 6
Amortization of organization expenses ........... 5
Other ........................................... 43
-------
Total expenses ................................ 524
-------
Net investment income ........................ 84
-------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 4)
Realized net gain on securities .................. 8,821
Realized net loss on foreign currency transactions (1)
Realized net loss on put options .................. (80)
-------
Realized net gain on investments ................ 8,740
-------
Unrealized appreciation in value of securities
during the period ............................... 7,969
Unrealized depreciation in value of options
during the period ............................... (471)
-------
Unrealized appreciation in value of investments
during the period ............................. 7,498
-------
Net gain on investments ....................... 16,238
-------
Net increase in net assets resulting
from operations ............................ $16,322
=======
*Not shown due to rounding.
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(In Thousands) For the six For the fiscal
months ended year ended
March 31, September 30,
2000 1999
Increase in Net Assets --------------------------
Operations:
Net investment income ............ $ 84 $ 605
Realized net gain on investments . 8,740 1,669
Unrealized appreciation .......... 7,498 595
------- -------
Net increase in net assets
resulting from operations ..... 16,322 2,869
------- -------
Distributions to shareholders from (Note 1E):*
Net investment income:
Class A ........................ (100) (627)
Class B ........................ ---** ---
Class C ........................ ---** ---
Class Y ........................ (1) (5)
Realized gains on securities transactions:
Class A ........................ (1,532) (1,478)
Class B ........................ (14) ---
Class C ........................ (4) ---
Class Y ........................ (9) (10)
------- -------
(1,660) (2,120)
------- -------
Capital share transactions
(Note 6) ......................... 6,841 14,530
------- -------
Total increase .............. 21,503 15,279
Net Assets
Beginning of period ............... 48,390 33,111
------- -------
End of period, including undistributed
net investment income of $40
and $58, respectively ............ 69,893 $48,390
======= =======
*See "Financial Highlights" on pages - .
**Not shown due to rounding.
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
For the period
six For the fiscal year from
months ended September 30, 3/9/95*
ended ----------------------------- through
3/31/00 1999 1998 1997 1996 9/30/95
------ ------ ------ ------ ------ -------
Net asset value,
beginning of period $5.82 $5.78 $5.99 $5.24 $5.42 $5.00
----- ----- ----- ----- ----- -----
Income from investment operations:
Net investment
income .......... 0.01 0.09 0.15 0.16 0.15 0.07
Net realized and
unrealized gain (loss)
on investments .. 1.83 0.29 0.28 0.74 (0.17) 0.40
----- ----- ----- ----- ----- -----
Total from investment
operations ....... 1.84 0.38 0.43 0.90 (0.02) 0.47
----- ----- ----- ----- ----- -----
Less distributions:
From net investment
income .......... (0.01) (0.10) (0.17) (0.15) (0.15) (0.05)
From capital gains (0.18) (0.24) (0.47) (0.00) (0.00) (0.00)
In excess of capital
gains ........... (0.00) (0.00) (0.00) (0.00) (0.01) (0.00)
----- ----- ----- ----- ----- -----
Total distributions (0.19) (0.34) (0.64) (0.15) (0.16) (0.05)
----- ----- ----- ----- ----- -----
Net asset value,
end of period .... $7.47 $5.82 $5.78 $5.99 $5.24 $5.42
===== ===== ===== ===== ===== =====
Total return** ..... 32.45% 6.90% 7.89% 17.46% -0.49% 9.42%
Net assets, end of period
(in millions) ..... $67 $48 $33 $28 $32 $22
Ratio of expenses to
average net assets 1.86%***1.90% 1.62% 1.70% 1.68% 1.64%***
Ratio of net investment
income to average net
assets ........... 0.31%***1.55% 2.45% 2.87% 2.93% 3.71%***
Portfolio
turnover rate .... 111.62% 176.63%230.09% 173.88% 91.06% 9.32%
*Commencement of operations.
**Total return calculated without taking into account the sales load
deducted on an initial purchase.
***Annualized.
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
FINANCIAL HIGHLIGHTS
Class B Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
For the
period
from
10/6/99*
through
3/31/00
-------
Net asset value,
beginning of period $5.89
----
Income from investment
operations:
Net investment loss (0.01)
Net realized and
unrealized gain
on investments .. 1.76
----
Total from investment
operations ....... 1.75
----
Less distributions:
From net investment
income .......... (0.01)
From capital gains (0.18)
----
Total distributions (0.19)
----
Net asset value,
end of period .... $7.45
====
Total return ....... 30.34%
Net assets, end of
period (in
millions) ........ $2
Ratio of expenses to
average net assets 2.56%**
Ratio of net investment
loss to average
net assets ....... -0.66%**
Portfolio turnover
rate ............. 111.62%***
*Commencement of operations.
**Annualized.
***For the six months ended March 31, 2000.
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
FINANCIAL HIGHLIGHTS
Class C Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
For the
period
from
10/5/99*
through
3/31/00
-------
Net asset value,
beginning of period $5.86
----
Income from investment
operations:
Net investment loss 0.00
Net realized and
unrealized gain
on investments .. 1.78
----
Total from investment
operations ....... 1.78
----
Less distributions:
From net investment
income .......... (0.01)
From capital gains (0.18)
----
Total distributions (0.19)
----
Net asset value,
end of period .... $7.45
====
Total return ....... 31.01%
Net assets, end of
period (in millions) $1
Ratio of expenses to
average net assets 2.44%**
Ratio of net investment
loss to average
net assets ....... -0.50%**
Portfolio turnover
rate ............. 111.62%***
*Commencement of operations.
**Annualized.
***For the six months ended March 31, 2000.
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
For the period
six For the fiscal year from
months ended September 30, 9/27/95*
ended------------------------------ through
3/31/00 1999 1998 1997 1996 9/30/95
------- -------------- ------ ------ -------
Net asset value,
beginning of period $5.83 $5.78 $5.99 $5.24 $5.42 $5.41
----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income .......... 0.02 0.12 0.16 0.17 0.16 0.00
Net realized and
unrealized gain
(loss) on
investments ..... 1.82 0.28 0.29 0.75 (0.17) 0.01
----- ----- ----- ----- ----- -----
Total from investment
operations ....... 1.84 0.40 0.45 0.92 (0.01) 0.01
----- ----- ----- ----- ----- -----
Less distributions:
From net investment
income .......... (0.02) (0.11) (0.19) (0.17) (0.16) (0.00)
From capital gains (0.18) (0.24) (0.47) (0.00) (0.00) (0.00)
In excess of
capital gains ... (0.00) (0.00) (0.00) (0.00) (0.01) (0.00)
----- ----- ----- ----- ----- -----
Total distributions (0.20) (0.35) (0.66) (0.17) (0.17) (0.00)
----- ----- ----- ----- ----- -----
Net asset value,
end of period .... $7.47 $5.83 $5.78 $5.99 $5.24 $5.42
===== ===== ===== ===== ===== =====
Total return ....... 32.48% 7.35% 8.26% 17.93% -0.21% 0.18%
Net assets, end of
period (000
omitted) ......... $395 $284 $243 $322 $330 $3
Ratio of expenses
to average net
assets ........... 1.60%***1.49% 1.37% 1.28% 1.29% 0.00%
Ratio of net
investment income
to average net
assets ........... 0.56%***1.96% 2.79% 3.29% 3.43% 0.00%
Portfolio
turnover rate ..... 111.62% 176.63%230.09% 173.88% 91.06% 9.32%**
*Commencement of operations.
**Rate is for the period from March 9, 1995 through September 30,
1995.
***Annualized.
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
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 accounting principles generally
accepted in the United States of America.
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
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 accounting
principles generally accepted in the United States of America.
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
accounting principles generally accepted in the United States of
America 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 were an obligation to be paid by it.
These expenses were amortized and paid evenly over 60 months following
the date of the initial public offering.
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 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. The Fund accrues
and pays the fee daily.
Pursuant to assignment of the Investment Management Agreement
between the Fund and W&R, Waddell & Reed Investment Management Company
("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under
the agreement, WARSCO acts as the agent in providing accounting
services and assistance to the Fund and pricing daily the value of
shares of the Fund. For these services, the Fund pays WARSCO a
monthly fee of one-twelfth of the annual fee shown in the following
table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
For Class A, Class B and Class C shares, the Fund 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 0.15% 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 $100,803. With respect to Class A, Class B and Class
C shares, W&R paid sales commissions of $87,817 and all expenses in
connection with the sale of Fund shares, except for registration fees
and related expenses.
A contingent deferred sales charge ("CDSC") may be assessed
against a shareholder's redemption amount of Class B and Class C
shares and is paid to W&R. The purpose of the deferred sales charge
is to compensate W&R for the costs incurred by W&R in connection with
the sale of Fund shares.
With respect to Class B shares, the amount of the CDSC will be
the following percent of the total amount invested during a calendar
year to acquire the shares or the value of the shares redeemed,
whichever is less. Redemption at any time during the first calendar
year of investment, 5%; the second calendar year, 4%; the third
calendar year, 3%; the fourth calendar year, 3%; the fifth calendar
year, 2%; the sixth calendar year, 1% and thereafter, 0%.
If Class C shares are sold within 12 months of buying these
shares, a 1% CDSC will be imposed.
The deferred sales charge will not be imposed on shares
representing payment of dividends or distributions or on amounts which
represent an increase in the value of the shareholder's account
resulting from capital appreciation above the amount paid for shares
purchased during the deferred sales charge period. During the period
ended March 31, 2000, W&R received $185 and $10 in deferred sales
charges from Class B shares and Class C shares, respectively.
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 0.25% of the Fund's average annual net
assets. The fee is to be paid to reimburse W&R for amounts it expends
in connection with the distribution of the Class A shares and/or
provision of personal services to Fund shareholders and/or maintenance
of shareholder accounts.
Under the Distribution and Service Plan adopted by the Fund for
Class B and Class C shares, respectively, the Fund may pay W&R, on an
annual basis, a service fee of up to 0.25% of the average daily net
assets of the class to compensate W&R 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 W&R for distributing the shares
of that class. The Class B Plan and the Class C Plan each permit W&R
to receive compensation, through the distribution and service fee,
respectively, for its distribution activities for that class, which
are similar to the distribution activities described with respect to
the Class A Plan, and for its activities in providing personal
services to shareholders of that class and/or maintaining shareholder
accounts of that class, which are similar to the corresponding
activities for which it is entitled to reimbursement under the Class A
Plan.
The Fund paid Directors' fees of $885, 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 $58,392,374 while proceeds from
maturities and sales aggregated $46,195,646. Purchases of options
aggregated $724,298 while proceeds from options aggregated $86,319.
Purchases of short-term securities and U.S. Government securities
aggregated $67,492,559. Proceeds from maturities and sales of short-
term securities and U.S. Government securities aggregated $62,757,835
and $10,570,437, respectively. Purchases of gold bullion aggregated
$1,292,658.
For Federal income tax purposes, cost of investments owned at
March 31, 2000 was $61,389,958, resulting in net unrealized
appreciation of $9,530,297, of which $11,548,156 related to
appreciated securities and $2,017,859 related to depreciated
securities.
NOTE 5 -- Federal Income Tax Matters
United Gold & Governemtn Fund, Inc. (_UGG_) was merged into the
Fund as of June 30, 1999. At the time of the merger UGG had capital
loss carryovers of $3,550,047 available to offset future gains of the
Fund. These carryovers are limited to $123,386 for the fiscal year
ended September 30, 1999 and $489,523 for each period ending from
September 30, 2000 through 2006.
For Federal income tax purposes, the Fund realized capital gain
net income of $1,636,012 during its fiscal year ended September 30,
1999, which included utilization of $123,386 of UGG's capital loss
carryovers. The capital gain net income has been distributed to the
Fund's shareholders.
NOTE 6 -- Multiclass Operations
The Fund is authorized to offer four classes of shares, Class A,
Class B, Class C and Class Y, each of which have equal rights as to
assets and voting privileges. Class Y shares are not subject to a
sales charge on purchases, are not subject to a Rule 12b-1
Distribution and Service Plan and are subject to a separate transfer
agency and dividend disbursement services fee structure. A
comprehensive discussion of the terms under which shares of each class
are offered is contained in the Prospectus and the Statement of
Additional Information for the Fund.
Income, non-class specific expenses, and realized and unrealized
gains and losses are allocated daily to each class of shares based on
the value of their relative net assets as of the beginning of each day
adjusted for the prior day's capital share activity.
Transactions in capital stock are summarized below. Amounts are
in thousands.
For the For the
six months fiscal year
ended ended
March 31, September 30,
2000 1999
------------ ------------
Shares issued from sale
of shares:
Class A ............ 1,451 3,708
Class B ............. 251 ---
Class C ............. 71 ---
Class Y ............ 6 52
Shares issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ............ 262 380
Class B ............. 2 ---
Class C ............. 1 ---
Class Y ............ 2 3
Shares redeemed:
Class A ............ (996) (1,506)
Class B ............. (3) ---
Class C ............. ---* ---
Class Y ............ (4) (48)
----- -----
Increase in
outstanding capital
shares .............. 1,043 2,589
===== =====
Value issued from sale
of shares:
Class A ............ $9,495 $20,949
Class B ............. 1,645 ---
Class C ............. 472 ---
Class Y ............ 40 292
Value issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ............ 1,615 2,091
Class B ............. 14 ---
Class C ............. 4 ---
Class Y ............ 10 15
Value redeemed:
Class A ............ (6,406) (8,548)
Class B ............. (22) ---
Class C ............. (2) ---
Class Y ............ (24) (269)
------ -------
Increase in outstanding
capital ............ $6,841 $14,530
====== =======
*Not shown due to rounding.
NOTE 7 -- Options
Options purchased by the Fund are accounted for in the same
manner as marketable portfolio securities. The cost of portfolio
securities acquired through the exercise of call options is increased
by the premium paid to purchase the call. The proceeds from
securities sold through the exercise of put options are decreased by
the premium paid to purchase the put.
When the Fund writes (sells) an option, an amount equal to the
premium received by the Fund is recorded as a liability. The amount
of the liability is subsequently adjusted to reflect the current
market value of the option written. The current market value of an
option is the last sales price on the principal exchange on which the
option is traded, or in the absence of transactions, the mean between
the bid and asked prices or at a value supplied by a broker-dealer.
When an option expires on its stipulated expiration date or the Fund
enters into a closing purchase transaction, the Fund realizes a gain
(or loss if the cost of a closing purchase transaction exceeds the
premium received when the call option was sold) and the liability
related to such option is extinguished. When a call option is
exercised, the premium is added to the proceeds from the sale of the
underlying security in determining whether the Fund has realized a
gain or loss. For the Fund, when a put written is exercised, the cost
basis of the securities purchased by the Fund is reduced by the amount
of the premium.
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, 2000, 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, 1999, and the financial highlights for
the six-month period ended March 31, 2000, and for each of the five
fiscal years in the period ended September 30, 1999. 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 auditing standards
generally accepted in the United States of America. 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, 2000, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of United Asset Strategy Fund, Inc. as of March 31,
2000, 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, 1999, and the financial
highlights for the six-month period ended March 31, 2000, and for each
of the five fiscal years in the period ended September 30, 1999, in
conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
Kansas City, Missouri
May 5, 2000
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1999
Shares Value
COMMON STOCKS
Business Services - 4.91%
BMC Software, Inc.* .................... 7,400 $ 529,331
Clear Channel Communications, Inc.* .... 7,000 559,125
Microsoft Corporation* ................. 5,800 525,444
Oracle Corporation* .................... 11,800 537,269
TMP Worldwide Inc.* .................... 3,700 225,353
Total ................................. 2,376,522
Chemicals and Allied Products - 8.91%
American Home Products Corporation ..... 9,100 377,650
Forest Laboratories, Inc.* ............. 9,400 395,975
Johnson & Johnson ...................... 4,500 413,438
Lilly (Eli) and Company ................ 11,000 704,000
Merck & Co., Inc. ...................... 8,100 524,981
Pharmacia & Upjohn, Inc. ............... 8,000 397,000
Schering-Plough Corporation ............ 15,000 654,375
Smith International, Inc.* ............. 5,600 226,800
Warner-Lambert Company ................. 9,300 617,288
Total ................................. 4,311,507
Communication - 1.56%
Cox Communications, Inc., Class A* ..... 8,771 366,189
EchoStar Communications Corporation,
Class A* .............................. 4,300 390,628
Total ................................. 756,817
Depository Institutions - 0.97%
U. S. Bancorp. ......................... 15,500 467,906
Eating and Drinking Places - 1.92%
McDonald's Corporation ................. 11,800 507,400
Wendy's International, Inc. ............ 16,000 422,000
Total ................................. 929,400
Electronic and Other Electric Equipment - 2.91%
Analog Devices, Inc.* .................. 12,900 661,125
Eaton Corporation ...................... 4,300 371,144
JDS Uniphase Corporation* .............. 3,300 375,478
Total ................................. 1,407,747
Fabricated Metal Products - 0.96%
Parker Hannifin Corporation ............ 10,400 466,050
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1999
Shares Value
COMMON STOCKS (Continued)
General Merchandise Stores - 1.86%
BJ's Wholesale Club, Inc.* ............. 16,200 $ 478,913
Dayton Hudson Corporation .............. 7,000 420,437
Total ................................. 899,350
Holding and Other Investment Offices - 1.58%
ABB Ltd. (Sweden) (A)* ................. 3,700 379,753
"Shell" Transport and Trading
Company, p.l.c. (The), ADR ............ 8,400 382,200
Total ................................. 761,953
Industrial Machinery and Equipment - 3.58%
Applied Materials, Inc.* ............... 3,300 256,266
Baker Hughes Incorporated .............. 13,200 382,800
Case Corporation ....................... 6,100 303,856
Cooper Cameron Corporation* ............ 7,000 264,250
SPX Corporation* ....................... 5,800 526,350
Total ................................. 1,733,522
Instruments and Related Products - 3.62%
Beckman Coulter, Inc. .................. 9,800 442,225
CONMED Corporation* .................... 16,600 407,219
KLA-Tencor Corporation* ................ 3,300 214,603
Raytheon Company, Class B .............. 9,600 476,400
Teradyne, Inc.* ........................ 6,000 211,500
Total ................................. 1,751,947
Insurance Carriers - 0.76%
American International Group, Inc. ..... 4,250 369,484
Metal Mining - 5.40%
Barrick Gold Corporation ............... 23,000 500,250
Franco-Nevada Mining Corporation
Limited (A) ........................... 41,598 898,399
Homestake Mining Company ............... 57,500 528,281
Placer Dome Inc. ....................... 46,000 684,250
Total ................................. 2,611,180
Motion Pictures - 1.20%
AT&T Corp. - Liberty Media Group, Class A* 15,600 579,150
Oil and Gas Extraction - 2.39%
Burlington Resources Incorporated ...... 10,000 367,500
Schlumberger Limited ................... 6,300 392,569
Transocean Offshore Incorporated ....... 6,700 205,188
USX Corporation - Marathon Group ....... 6,500 190,125
Total ................................. 1,155,382
Petroleum and Coal Products - 0.39%
Texaco Inc. ............................ 3,000 189,375
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1999
Shares Value
COMMON STOCKS (Continued)
Primary Metal Industries - 0.94%
Phelps Dodge Corporation ............... 8,300 $ 457,019
Transportation by Air - 0.84%
Southwest Airlines Co. ................. 26,700 405,506
Transportation Equipment - 3.73%
Ford Motor Company ..................... 6,300 316,181
General Motors Corporation ............. 6,200 390,212
Gentex Corporation* .................... 26,250 542,227
Lockheed Martin Corporation ............ 17,000 555,688
Total ................................. 1,804,308
Wholesale Trade -- Nondurable Goods - 2.37%
Cardinal Health, Inc. .................. 8,400 457,800
McKesson HBOC, Inc. .................... 8,600 249,400
U.S. Foodservice* ...................... 24,500 441,000
Total ................................. 1,148,200
TOTAL COMMON STOCKS - 50.80% $24,582,325
(Cost: $22,448,759)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Communication - 1.08%
Grupo Televisa, S.A.,
11.375%, 5-15-2003 .................... $ 500 523,750
Fabricated Metal Products - 1.03%
Crown Cork & Seal Company, Inc.,
7.125%, 9-1-2002 ...................... 500 498,610
Finance, Taxation and Monetary Policy - 0.94%
Banco Nacional de Comercio Exterior, S.N.C.,
7.25%, 2-2-2004 ....................... 500 453,750
Petroleum and Coal Products - 0.99%
Petroleos Mexicanos
(Daily Adjusted Yield Securities (DAYS)),
9.52019%, 7-15-2005 ................... 500 477,500
Primary Metal Industries - 0.50%
Ispat Mexicana, S.A. de C.V.,
10.375%, 3-15-2001 (B)................. 250 240,000
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1999
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Stone, Clay and Glass Products - 0.92%
Vicap, S.A. de C.V.,
10.25%, 5-15-2002 ..................... $ 500 $ 447,500
TOTAL CORPORATE DEBT SECURITIES - 5.46% $ 2,641,110
(Cost: $2,649,337)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Banks:
6.2%, 2-27-2004 ....................... 500 487,240
7.15%, 1-20-2005 ...................... 1,000 991,720
7.04%, 2-16-2005 ...................... 1,000 989,370
6.02%, 3-30-2006 ...................... 500 477,810
United States Treasury,
5.625%, 12-31-2002 .................... 11,250 11,204,325
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 29.24% $14,150,465
(Cost: $14,205,453)
SHORT-TERM SECURITIES
Electric, Gas and Sanitary Services - 4.12%
Allegheny Energy Inc.,
5.32%, 10-20-99 ....................... 2,000 1,994,384
Fabricated Metal Products - 4.52%
Danaher Corporation,
5.38%, Master Note .................... 2,187 2,187,000
Food and Kindred Products - 1.65%
General Mills, Inc.,
5.235%, Master Note ................... 795 795,000
TOTAL SHORT-TERM SECURITIES - 10.29% $ 4,976,384
(Cost: $4,976,384)
TOTAL INVESTMENT SECURITIES - 95.79% $46,350,284
(Cost: $44,279,933)
CASH AND OTHER ASSETS, NET OF
LIABILITIES - 4.21% 2,039,632
NET ASSETS - 100.00% $48,389,916
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
UNITED ASSET STRATEGY FUND, INC.
SEPTEMBER 30, 1999
Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside the United States.
(B) Security was purchased pursuant to Rule 144A under the Securities
Act of 1933 and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At
September 30, 1999, the value of this security amounted to
$240,000 or 0.50% of net assets.
See Note 1 to financial statements for security valuation and other
significant accounting policies concerning investments.
See Note 4 to financial statements for cost and unrealized
appreciation and depreciation of investments owned for Federal
income tax purposes.
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
(In Thousands, Except for Per Share Amounts)
Assets
Investment securities -- at value
(Notes 1 and 4) ................................. $46,350
Cash ............................................ 2
Receivables:
Investment securities sold ...................... 2,785
Dividends and interest .......................... 266
Fund shares sold ................................ 38
Prepaid insurance premium ........................ 10
Unamortized organization expenses (Note 2) ....... 5
-------
Total assets .................................. 49,456
-------
Liabilities
Payable from securities purchased ................ 929
Payable to Fund shareholders ..................... 93
Accrued transfer agency and dividend
disbursing (Note 3) ............................. 18
Accrued service fee (Note 3) ..................... 10
Organization expenses payable (Note 2) ........... 5
Accrued accounting services fee (Note 3) ......... 2
Accrued management fee (Note 3) .................. 1
Other liabilities ................................ 8
-------
Total liabilities ............................. 1,066
-------
Total net assets ............................. $48,390
=======
Net Assets
$0.01 par value capital stock
Capital stock ................................... $ 83
Additional paid-in capital ...................... 44,708
Accumulated undistributed income:
Accumulated undistributed net investment income 58
Accumulated undistributed net realized gain on
investment transactions ....................... 1,471
Net unrealized appreciation in value of
investments ................................... 2,070
-------
Net assets applicable to outstanding
units of capital ............................. $48,390
=======
Net asset value per share (net assets divided
by shares outstanding)
Class A .......................................... $5.82
Class Y .......................................... $5.83
Capital shares outstanding
Class A .......................................... 8,264
Class Y .......................................... 49
Capital shares authorized .......................... 1,000,000
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1999
(In Thousands)
Investment Income
Income (Note 1B):
Interest and amortization ....................... $1,195
Dividends ....................................... 150
------
Total income .................................. 1,345
------
Expenses (Notes 2 and 3):
Investment management fee ....................... 271
Transfer agency and dividend disbursing - Class A 156
Service fee - Class A ........................... 88
Registration fees ............................... 51
Legal fees ...................................... 41
Accounting services fee ......................... 20
Audit fees ...................................... 15
Amortization of organization expenses ........... 10
Custodian fees .................................. 9
Distribution fee - Class A ...................... 8
Other ........................................... 71
------
Total expenses ................................ 740
------
Net investment income ........................ 605
------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 4)
Realized net gain on securities .................. 1,671
Realized net loss on foreign currency
transactions .................................... (2)
------
Realized net gain on investments ................ 1,669
Unrealized appreciation in value of investments
during the period ............................... 595
------
Net gain on investments ....................... 2,264
------
Net increase in net assets resulting
from operations ............................ $2,869
======
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands) For the fiscal year
ended September 30,
-----------------------------
1999 1998
Increase (Decrease) in Net Assets -------------- ------------
Operations:
Net investment income ............ $ 605 $ 738
Realized net gain on investments . 1,669 2,284
Unrealized appreciation
(depreciation) ................. 595 (751)
------- -------
Net increase in net assets
resulting from operations ..... 2,869 2,271
------- -------
Distributions to shareholders from (Note 1E):*
Net investment income:
Class A ........................ (627) (833)
Class Y ........................ (5) (10)
Realized gains on securities transactions:
Class A ........................ (1,478) (2,183)
Class Y ........................ (10) (28)
------- -------
(2,120) (3,054)
Capital share transactions: ------- -------
Proceeds from sale of shares and
exchanges of shares (Note 7):
Class A (3,707,930 and 1,316,486
shares, respectively) ......... 20,949 7,660
Class Y (51,985 and 14,599
shares, respectively) ......... 292 85
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (380,250 and 552,747
shares, respectively) ......... 2,091 2,995
Class Y (2,751 and 7,024
shares, respectively) ......... 15 38
Payments for shares redeemed:
Class A (1,506,056 and 901,720
shares, respectively) ......... (8,548) (5,234)
Class Y (47,870 and 33,384
shares, respectively) ......... (269) (193)
------- -------
Net increase in net assets
resulting from capital
share transactions .......... 14,530 5,351
------- -------
Total increase .............. 15,279 4,568
Net Assets
Beginning of period ............... 33,111 28,543
------- -------
End of period, including undistributed
net investment income of $58
and $29, respectively ............ $48,390 $33,111
======= =======
*See "Financial Highlights" on pages - .
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
period
For the fiscal year from
ended September 30, 3/9/95*
----------------------------- through
1999 1998 1997 1996 9/30/95
------ ------ ------ ------ -------
Net asset value,
beginning of period $5.78 $5.99 $5.24 $5.42 $5.00
----- ----- ----- ----- -----
Income from investment operations:
Net investment
income .......... 0.09 0.15 0.16 0.15 0.07
Net realized and
unrealized gain (loss)
on investments .. 0.29 0.28 0.74 (0.17) 0.40
----- ----- ----- ----- -----
Total from investment
operations ....... 0.38 0.43 0.90 (0.02) 0.47
----- ----- ----- ----- -----
Less distributions:
From net investment
income .......... (0.10) (0.17) (0.15) (0.15) (0.05)
From capital gains (0.24) (0.47) (0.00) (0.00) (0.00)
In excess of capital
gains ........... (0.00) (0.00) (0.00) (0.01) (0.00)
----- ----- ----- ----- -----
Total distributions (0.34) (0.64) (0.15) (0.16) (0.05)
----- ----- ----- ----- -----
Net asset value,
end of period .... $5.82 $5.78 $5.99 $5.24 $5.42
===== ===== ===== ===== =====
Total return** ..... 6.90% 7.89% 17.46% -0.49% 9.42%
Net assets, end of period
(000 omitted) .... $48,106$32,868 $28,221$31,828 $22,248
Ratio of expenses to
average net assets 1.90% 1.62% 1.70% 1.68% 1.64%***
Ratio of net investment
income to average net
assets ........... 1.55% 2.45% 2.87% 2.93% 3.71%***
Portfolio
turnover rate .... 176.63%230.09% 173.88% 91.06% 9.32%
*Commencement of operations.
**Total return calculated without taking into account the sales load
deducted on an initial purchase.
***Annualized.
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
period
For the fiscal year from
ended September 30, 9/27/95*
------------------------------ through
1999 1998 1997 1996 9/30/95
-------------- ------ ------ -------
Net asset value,
beginning of period $5.78 $5.99 $5.24 $5.42 $5.41
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income .......... 0.12 0.16 0.17 0.16 0.00
Net realized and
unrealized gain
(loss) on
investments ..... 0.28 0.29 0.75 (0.17) 0.01
----- ----- ----- ----- -----
Total from investment
operations ....... 0.40 0.45 0.92 (0.01) 0.01
----- ----- ----- ----- -----
Less distributions:
From net investment
income .......... (0.11) (0.19) (0.17) (0.16) (0.00)
From capital gains (0.24) (0.47) (0.00) (0.00) (0.00)
In excess of
capital gains ... (0.00) (0.00) (0.00) (0.01) (0.00)
----- ----- ----- ----- -----
Total distributions (0.35) (0.66) (0.17) (0.17) (0.00)
----- ----- ----- ----- -----
Net asset value,
end of period .... $5.83 $5.78 $5.99 $5.24 $5.42
===== ===== ===== ===== =====
Total return ....... 7.35% 8.26% 17.93% -0.21% 0.18%
Net assets, end of
period (000
omitted) ......... $284 $243 $322 $330 $3
Ratio of expenses
to average net
assets ........... 1.49% 1.37% 1.28% 1.29% 0.00%
Ratio of net
investment income
to average net
assets ........... 1.96% 2.79% 3.29% 3.43% 0.00%
Portfolio
turnover rate ..... 176.63%230.09% 173.88% 91.06% 9.32%**
*Commencement of operations.
**Rate is for the period from March 9, 1995 through September 30,
1995.
See notes to financial statements.
UNITED ASSET STRATEGY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1 -- Significant Accounting Policies
United Asset Strategy Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end
management investment company. Its investment objective is to provide
a high total return with reduced risk over the long term through
investments in stocks, bonds and short-term instruments. The
following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Each stock and convertible bond is valued
at the latest sale price thereof on the last business day of the
fiscal period as reported by the principal securities exchange on
which the issue is traded or, if no sale is reported for a stock,
the average of the latest bid and asked prices. Bonds, other
than convertible bonds, are valued using a pricing system
provided by a pricing service or dealer in bonds. Convertible
bonds are valued using this pricing system only on days when
there is no sale reported. Stocks which are traded over-the-
counter are priced using the Nasdaq Stock Market, which provides
information on bid and asked prices quoted by major dealers in
such stocks. Restricted securities and securities for which
market quotations are not readily available are valued at fair
value as determined in good faith under procedures established by
and under the general supervision of the Fund's Board of
Directors. Short-term debt securities are valued at amortized
cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order
to buy or sell is executed). Securities gains and losses are
calculated on the identified cost basis. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on
the accrual basis. See Note 4 -- Investment Security
Transactions.
C. Foreign currency translations -- All assets and liabilities
denominated in foreign currencies are translated into U.S.
dollars daily. Purchases and sales of investment securities and
accruals of income and expenses are translated at the rate of
exchange prevailing on the date of the transaction. For assets
and liabilities other than investments in securities, net
realized and unrealized gains and losses from foreign currency
translations arise from changes in currency exchange rates. The
Fund combines fluctuations from currency exchange rates and
fluctuations in market value when computing net realized and
unrealized gain or loss from investments.
D. Federal income taxes -- It is the Fund's policy to distribute all
of its taxable income and capital gains to its shareholders and
otherwise qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code. In addition, the Fund
intends to pay distributions as required to avoid imposition of
excise tax. Accordingly, provision has not been made for Federal
income taxes. See Note 5 -- Federal Income Tax Matters.
E. Dividends and distributions -- Dividends and distributions to
shareholders are recorded by the Fund on the business day
following record date. Net investment income dividends and
capital gains distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. These differences are due to differing
treatments for items such as deferral of wash sales and post-
October losses, foreign currency transactions, net operating
losses and expiring capital loss carryovers. At September 30,
1999, the Fund reclassified $57,996 between additional paid-in
capital and accumulated undistributed net investment income.
This reclass was due to reorganization expenses incurred through
the merger (see Note 7) that are not deductible for income tax
purposes. Additionally, the Fund reclassified $123,386 between
additional paid-in capital and accumulated undistributed net
realized gain on investment transactions. This reclass was the
result of the utilization of capital loss carryovers that were
transferred from United Gold & Government Fund, Inc. ("UGG")
through the merger. Reported net investment income, net realized
gains and net assets were not affected by these
reclassifications.
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ
from those estimates.
NOTE 2 -- Organization
The Fund, a Maryland corporation, was organized on August 25,
1994 and was inactive (except for matters relating to its organization
and registration as an investment company under the Investment Company
Act of 1940 and the registration of its shares under the Securities
Act of 1933) until March 9, 1995 (the date of the initial public
offering).
On February 23, 1995, Waddell & Reed, Inc. ("W&R") purchased for
investment 20,000 shares of the Fund at their net asset value of $5.00
per share.
The Fund's organizational expenses in the amount of $49,530 were
advanced to the Fund by W&R and are an obligation to be paid by it.
These expenses are being amortized and are payable evenly over 60
months following the date of the initial public offering. In the
event that all or a part of W&R's initial investment in the Fund's
shares is redeemed prior to the full reimbursement of these
organizational expenses, the Fund's obligation to make further
reimbursement will cease.
NOTE 3 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee
is computed daily based on the net asset value at the close of
business. As of June 30, 1999, the fee is payable by the Fund at the
annual rates of: 0.70% of net assets up to $1 billion, 0.65% of net
assets over $1 billion and up to $2 billion, 0.60% of net assets over
$2 billion and up to $3 billion, and 0.55% of net assets over $3
billion. Prior to June 30, 1999, the fee consisted of two elements:
(i) a "Specific" fee computed on net asset value as of the close of
business each day at the annual rate of .30% of net assets and (ii) a
"Group" fee computed each day on the combined net asset values of all
of the funds in the United Group of mutual funds at annual rates of
.51% of the first $750 million of combined net assets, .49% on that
amount between $750 million and $1.5 billion, .47% between $1.5
billion and $2.25 billion, .45% between $2.25 billion and $3 billion,
.43% between $3 billion and $3.75 billion, .40% between $3.75 billion
and $7.5 billion, .38% between $7.5 billion and $12 billion, and .36%
of that amount over $12 billion. The Fund accrues and pays the fee
daily.
Pursuant to assignment of the Investment Management Agreement
between the Fund and W&R, Waddell & Reed Investment Management Company
("WRIMCO"), a wholly owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under
the agreement, WARSCO acts as the agent in providing accounting
services and assistance to the Fund and pricing daily the value of
shares of the Fund. For these services, the Fund pays WARSCO a
monthly fee of one-twelfth of the annual fee shown in the following
table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
For Class A shares, the Fund also pays WARSCO a monthly per
account charge for transfer agency and dividend disbursement services
of $1.3125 for each shareholder account which was in existence at any
time during the prior month, plus $0.30 for each account on which a
dividend or distribution of cash or shares had a record date in that
month. With respect to Class Y shares, the Fund pays WARSCO a monthly
fee at an annual rate of .15% of the average daily net assets of the
class for the preceding month. The Fund also reimburses W&R and
WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received
gross sales commissions for Class A shares (which are not an expense
of the Fund) of $335,001, out of which W&R paid sales commissions of
$192,890 and all expenses in connection with the sale of Fund shares,
except for registration fees and related expenses.
Under a Distribution and Service Plan for Class A shares adopted
by the Fund pursuant to Rule 12b-1 under the Investment Company Act of
1940, the Fund may pay monthly a distribution and/or service fee to
W&R in an amount not to exceed .25% of the Fund's Class A average
annual net assets. The fee is to be paid to reimburse W&R for amounts
it expends in connection with the distribution of the Class A shares
and/or provision of personal services to Fund shareholders and/or
maintenance of shareholder accounts.
The Fund paid Directors' fees of $7,343, which are included in
other expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding
company, and a direct subsidiary of Waddell & Reed Financial Services,
Inc., a holding company.
NOTE 4 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government
and short-term securities, aggregated $52,793,566 while proceeds from
maturities and sales aggregated $38,188,615. Purchases of short-term
securities and U.S. Government securities aggregated $105,927,972 and
$21,446,953, respectively. Proceeds from maturities and sales of
short-term securities and U.S. Government securities aggregated
$106,951,463 and $23,833,121, respectively.
For Federal income tax purposes, cost of investments owned at
September 30, 1999 was $44,368,572, resulting in net unrealized
appreciation of $1,981,712, of which $3,326,680 related to appreciated
securities and $1,344,968 related to depreciated securities.
NOTE 5 -- Federal Income Tax Matters
UGG was merged into the Fund as of June 30, 1999. At the time of
the merger UGG had capital loss carryovers of $3,550,047 available to
offset future gains of the Fund. These carryovers are limited to
$123,386 for the fiscal year ended September 30, 1999 and $489,523 for
each period ending from September 30, 2000 through 2006.
For Federal income tax purposes, the Fund realized capital gain
net income of $1,636,012 during its fiscal year ended September 30,
1999, which included utilization of $123,386 of UGG's capital loss
carryovers. A portion of the capital gain net income of the Fund was
paid to the shareholders during the period ended September 30, 1999.
Remaining capital gain net income will be distributed to the Fund's
shareholders.
NOTE 6 -- Multiclass Operations
The Fund is authorized to offer four classes of shares, Class A,
Class B, Class C and Class Y, each of which have equal rights as to
assets and voting privileges. Only Class A and Class Y shares were
issued during the fiscal year ended September 30, 1999. Class Y
shares are not subject to a sales charge on purchases, are not subject
to a Rule 12b-1 Distribution and Service Plan and are subject to a
separate transfer agency and dividend disbursement services fee
structure. A comprehensive discussion of the terms under which shares
of either class are offered is contained in the Prospectus and the
Statement of Additional Information for the Fund.
Income, non-class specific expenses, and realized and unrealized
gains and losses are allocated daily to each class of shares based on
the value of their relative net assets as of the beginning of each day
adjusted for the prior day's capital share activity.
NOTE 7 -- Acquisition of United Gold & Government Fund, Inc.
On June 30, 1999, the Fund acquired all the net assets of UGG
pursuant to a plan of reorganization approved by UGG shareholders on
June 28, 1999. The acquisition was accomplished by a tax-free
exchange of 1,726,021 shares of the Fund (valued at $10,096,747) for
the 1,859,216 shares of UGG outstanding on June 30, 1999. UGG had net
assets of $10,096,747, including $433,285 of net unrealized
appreciation in value of investments and $15,531,931 of accumulated
net realized losses on investments which were combined with those of
the Fund. The aggregate net assets of the Fund and UGG immediately
before the acquisition were $38,078,327 and $10,096,747, respectively.
The aggregate net assets of the Fund and UGG immediately following the
acquisition were $48,175,074 and $0, respectively. Transactions in
capital stock related to the exchange were as follows:
Shares
Exchanged Value
--------- -----
Class A shares ................. 1,707,548 $ 9,989,154
Class Y shares ................. 18,473 107,593
--------- -----------
Total ......................... 1,726,021 $10,096,747
========= ===========
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Asset Strategy Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of United Asset Strategy Fund,
Inc. (the "Fund") as of September 30, 1999, and the related statement
of operations for the fiscal year then ended, the statements of
changes in net assets for each of the two fiscal years in the period
then ended, and the financial highlights for each of the five fiscal
years in the period then ended. These financial statements and the
financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of September 30, 1999, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of United Asset Strategy Fund, Inc. as of September
30, 1999, the results of its operations for the fiscal year then
ended, the changes in its net assets for each of the two fiscal years
in the period then ended, and the financial highlights for each of the
five fiscal years in the period then ended in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Kansas City, Missouri
November 5, 1999
