File No. 811-2263
File No. 2-42885
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ______
Post-Effective Amendment No. ______
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 36
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
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(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
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(Name and Address of Agent for Service)
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DECLARATION REQUIRED BY RULE 24f-2 (a) (1)
The issuer has registered an indefinite amount of its securities
under the Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice
for the Registrant's fiscal year ended June 30, 2000, was filed on
September 27, 2000.
The Investment Principles of the Funds
Investment Goals, Principal Strategies and Other Investments
Waddell & Reed Advisors Retirement Shares
The goal of this Fund is to provide the highest long-term total investment
return as is, in WRIMCO's opinion, consistent with reasonable safety of
capital. The Fund seeks to achieve its goal through a diversified portfolio
under a fully managed investment policy. Under this approach, the Fund will
invest substantially all of its assets in common stock and debt securities
of U.S. and foreign issuers. The Fund may also invest in preferred stock
and convertible securities. The Fund may invest varying proportions of its
assets in all of these securities, depending on WRIMCO's analysis of what
types of securities, or what proportions, are likely to achieve the Fund's
goal. There is no guarantee that the Fund will achieve its goal.
Since the Fund's goal is long-term total investment return, WRIMCO does not
attempt to make quick shifts between the type of securities to take
advantage of what it considers to be short-term market or economic trends,
but rather attempts to find investment opportunities based on its analysis
of long-term prospects for capital growth, capital stability and income.
The Fund may invest a limited portion of its assets (no more than 10% of
its total assets) in non-investment grade debt securities. Also, the Fund
can invest, to a limited extent, in foreign securities.
When WRIMCO believes that a temporary defensive position is desirable, the
Fund may invest up to all of its assets in cash or money market
instruments. By taking a temporary defensive position, the Fund may not
achieve its investment objective.
All Funds
Each Fund may also invest in and use other types of instruments in seeking
to achieve its goal(s). For example, each Fund is permitted to invest in
options, futures contracts, asset-backed securities and other derivative
instruments if it is permitted to invest in the type of asset by which the
return on, or value of, the derivative is measured.
You will find more information about each Fund's permitted investments and
strategies, as well as the restrictions that apply to them, in its
Statement of Additional Information ("SAI").
Risk Considerations of Principal Strategies
and Other Investments
Risks exist in any investment. Each Fund is subject to equity risk and
other market risk, financial risk and, in some cases, prepayment risk.
* Market risk is the possibility of a change in the price of the security.
The prices of common stocks and other equity securities generally
fluctuate more than those of other investments. The Fund may lose a
substantial part, or even all, of its investment in a company's stock.
Growth stocks may experience greater price volatility than value stocks.
To the extent the Fund invests in fixed income securities, the price of
a fixed income security may be affected by changes in interest rates.
Bonds with longer maturities are more interest-rate sensitive. For
example, if interest rates increase, the value of a bond with a longer
maturity is more likely to decrease. Because of market risk, the share
price of the Fund will likely change as well.
* Financial risk is based on the financial situation of the issuer of the
security. To the extent a Fund invests in debt securities, the Fund's
financial risk depends on the credit quality of the underlying
securities in which it invests. For an equity investment, a Fund's
financial risk may depend, for example, on the earnings performance of
the company issuing the stock.
* Prepayment risk is the possibility that, during periods of falling
interest rates, a debt security with a high stated interest rate will be
prepaid before its expected maturity date.
Notwithstanding Tax-Managed Equity Fund's use of tax management investment
strategies, this Fund may have taxable income and may realize taxable
capital gains from time to time. In addition, investors purchasing Fund
shares when the Fund has large accumulated capital gains could receive a
significant part of the purchase price of their shares back as a taxable
capital gain distribution. Over time, securities with unrealized gains may
comprise a substantial portion of the Fund's assets. As well, state or
Federal tax laws or regulations may be amended at any time which could
include adverse changes to applicable tax rates or capital gains holding
periods.
Certain types of each Fund's authorized investments and strategies (such as
foreign securities, junk bonds and derivative instruments) involve special
risks. Depending on how much a Fund invests or uses these strategies, these
special risks may become significant. For example, foreign investments may
subject a Fund to restrictions on receiving the investment proceeds from a
foreign country, foreign taxes, and potential difficulties in enforcing
contractual obligations, as well as fluctuations in foreign currency values
and other developments that may adversely affect a foreign country. Junk
bonds pose a greater risk of nonpayment of interest or principal than
higher-rated bonds. Derivative instruments may expose a Fund to greater
volatility than an investment in a more traditional stock, bond or other
security.
Because each Fund owns different types of investments, its performance will
be affected by a variety of factors. The value of a Fund's investments and
the income it generates will vary from day to day, generally reflecting
changes in interest rates, market conditions and other company and economic
news. Performance will also depend on WRIMCO's skill in selecting
investments.
Retirement Shares may actively trade securities in seeking to achieve its
goal. Doing so may increase transaction costs (which may reduce
performance) and increase distributions paid by the Fund which may increase
your taxable income.
Your Account
Choosing a Share Class
Each Fund offers four classes of shares: Class A, Class B, Class C and
Class Y. Each class has its own sales charge, if any, and expense
structure. The decision as to which class of shares is best suited to your
needs depends on a number of factors that you should discuss with your
financial advisor. Some factors to consider are how much you plan to invest
and how long you plan to hold your investment. If you are investing a
substantial amount and plan to hold your shares for a long time, Class A
shares may be the most appropriate for you. Class B and Class C shares are
not available for investments of $2 million or more. If you are investing a
lesser amount, you may want to consider Class B shares (if investing for at
least seven years) or Class C shares (if investing for less than seven
years). Class Y shares are designed for institutional investors and others
investing through certain intermediaries, as described below.
Since your objectives may change over time, you may want to consider
another class when you buy additional Fund shares. All of your future
investments in a Fund will be made in the class you select when you open
your account, unless you inform the Fund otherwise, in writing, when you
make a future investment.
General Comparison of Class A, Class B and Class C Shares
Class A Class B Class C
* Initial sales * No initial sales * No initial sales
charge charge charge
* No deferred sales * Deferred sales * A 1% deferred
charge[1] charge on shares sales charge on
you sell within shares you sell
six years after within twelve
purchase months after
purchase
* Maximum * Maximum * Maximum
distribution and distribution and distribution and
service (12b-1) service (12b-1) service (12b-1)
fees of 0.25% fees of 1.00% fees of 1.00%
* For an investment * Converts to Class * Does not convert
of $2 million or A shares 8 years to Class A
more, only Class after the month shares, so annual
A shares are in which the expenses do not
available shares were decrease
purchased, thus
reducing future
annual expenses
* For an investment
of $300,000 or
more, your
financial advisor
typically will
recommend
purchase of Class
A shares due to a
reduced sales
charge and lower
annual expenses
[1]A 1% CDSC may apply to purchases of $2 million or more of Class A shares
that are redeemed within twelve months of purchase.
Each Fund has adopted a Distribution and Service Plan ("Plan") pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended, for each
of its Class A, Class B and Class C shares other than Cash Management Class
A. Under the Class A Plan, a Fund may pay Waddell & Reed, Inc. a fee of up
to 0.25%, on an annual basis, of the average daily net assets of the Class
A shares. This fee is to reimburse Waddell & Reed, Inc. for the amounts it
spends for distributing the Fund's Class A shares, providing service to
Class A shareholders and/or maintaining Class A shareholder accounts. Under
the Class B Plan and the Class C Plan, each Fund may pay Waddell & Reed,
Inc., on an annual basis, a service fee of up to 0.25% of the average daily
net assets of the class to compensate Waddell & Reed, Inc. for providing
service to shareholders of that class and/or maintaining shareholder
accounts for that class and a distribution fee of up to 0.75% of the
average daily net assets of the class to compensate Waddell & Reed, Inc.
for distributing shares of that class. Because a class's fees are paid out
of the assets of that class on an ongoing basis, over time these fees will
increase the cost of your investment and may cost you more than paying
other types of sales charges.
Class A shares are subject to an initial sales charge when you buy them,
based on the amount of your investment, according to the table below. Class
A shares pay an annual 12b-1 fee of up to 0.25% of average Class A net
assets. The ongoing expenses of this class are lower than those for Class B
or Class C shares and higher than those for Class Y shares.
Sales
Sales Charge Reallowance
Charge as to Dealers
as Approx. as
Percent Percent Percent
of of of
Size of Offering Amount Offering
Purchase Price Invested Price
-------- -------- ------- --------
Under
$100,000 5.75% 6.10% 5.00%
$100,000
to less
than
$200,000 4.75 4.99 4.00
$200,000
to less
than
$300,000 3.50 3.63 2.80
$300,000
to less
than
$500,000 2.50 2.56 2.00
$500,000
to less
than
$1,000,000 1.50 1.52 1.20
$1,000,000
to less
than
$2,000,000 1.00 1.01 0.75
$2,000,000
and over 0.00[1] 0.00[1] 0.50
[1]No sales charge is payable at the time of purchase on investments
of $2 million or more, although for such investments the Fund may
impose a CDSC of 1.00% on certain redemptions made within twelve
months of the purchase. The CDSC is assessed on an amount equal to
the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases
in net asset value above the initial purchase price.
Waddell & Reed, Inc. and its affiliate(s) may pay additional compensation
from its own resources to securities dealers based upon the value of shares
of the Fund owned by the dealer for its own account or for its customers.
Waddell & Reed, Inc. may also provide compensation from its own resources
to securities dealers with respect to the other shares of the Fund
purchased by customers of such dealers without payment of a sales charge.
Sales Charge Reductions and Waivers
Lower sales charges are available by:
* Combining additional purchases of Class A shares of any of the funds in
the Waddell & Reed Advisors Funds and/or the W&R Funds except shares of
Waddell & Reed Advisors Cash Management (formerly United Cash
Management) or Class A shares of W&R Funds Money Market Fund unless
acquired by exchange for Class A shares on which a sales charge was paid
(or as a dividend or distribution on such acquired shares), with the net
asset value ("NAV") of Class A shares already held ("Rights of
Accumulation");
* Grouping all purchases of Class A shares, except shares of Waddell &
Reed Advisors Cash Management or W&R Funds Money Market Fund, made
during a thirteen-month period ("Letter of Intent"); and
* Grouping purchases by certain related persons.
Additional information and applicable forms are available from your
financial advisor.
Waivers for Certain Investors
Class A shares may be purchased at NAV by:
* The Directors and officers of the Fund or of any affiliated entity of
Waddell & Reed, Inc., employees of Waddell & Reed, Inc., employees of
its affiliates, financial advisors of Waddell & Reed, Inc. and the
spouse, children, parents, children's spouses and spouse's parents of
each;
* Certain retirement plans and certain trusts for these persons; and
* Until March 31, 2001, 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 or W&R
Funds and the purchase is made within 60 days of such redemption.
You will find more information in the SAI about sales charge reductions and
waivers.
Contingent Deferred Sales Charge. A CDSC may be assessed against your
redemption amount of Class B or Class C shares or certain Class A shares
and paid to Waddell & Reed, Inc. (the "Distributor"), as further described
below. The purpose of the CDSC is to compensate the Distributor for the
costs incurred by it in connection with the sale of the Fund's Class B or
Class C shares or with Class A investments of $2 million or more at NAV.
The CDSC will not be imposed on shares representing payment of dividends or
other distributions or on amounts which represent an increase in the value
of a shareholder's account resulting from capital appreciation above the
amount paid for the shares purchased during the CDSC period. For Class B,
the date of redemption is measured in calendar months from the month of
purchase. Solely for purposes of determining the number of months or years
from the time of any payment for the purchase of shares, all payments
during a month are totaled and deemed to have been made on the first day of
the month. The CDSC is applied to the lesser of amount invested or
redemption value.
To keep your CDSC as low as possible, each time you place a request to
redeem shares, the Fund assumes that a redemption is made first of shares
not subject to a deferred sales charge (including shares which represent
appreciation on shares held, reinvested dividends and distributions), and
then of shares that represent the lowest sales charge.
Unless instructed otherwise, a Fund, when requested to redeem a specific
dollar amount, will redeem additional shares of the applicable class that
are equal in value to the CDSC. For example, should you request a $1,000
redemption and the applicable CDSC is $27, the Fund will redeem shares
having an aggregate NAV of $1,027, absent different instructions.
Class B shares are not subject to an initial sales charge when you buy
them. However, you may pay a CDSC if you sell your Class B shares within
six years of their purchase, based on the table below. Class B shares pay
an annual 12b-1 service fee of up to 0.25% of average net assets and a
distribution fee of up to 0.75% of average net assets. Over time, these
fees will increase the cost of your investment and may cost you more than
if you had purchased Class A shares. Class B shares and any dividends and
distributions paid in such shares, automatically convert to Class A shares
eight years after the end of the month in which the shares were purchased.
Such conversion will be on the basis of the relative net asset values per
share, without the imposition of any sales load, fee or other charge. The
Class A shares have lower ongoing expenses.
The Fund will redeem your Class B shares at their NAV next calculated after
receipt of a written request for redemption in good order, subject to the
CDSC discussed below.
Contingent Deferred Sales
Charge on Shares Sold within
Year As % of Amount Subject to Charge
1 5.0%
2 4.0%
3 3.0%
4 3.0%
5 2.0%
6 1.0%
7+ 0.0%
In the table, a "year" is a 12-month period. In applying the sales charge,
all purchases are considered to have been made on the first day of the
month in which the purchase was made.
For example, if a shareholder opens an account on July 14, 2000, then
redeems all Class B shares on July 12, 2001, the shareholder will pay a
CDSC of 4%, the rate applicable to redemptions made within the second year
of purchase. All Class B purchases made prior to July 1, 2000, will be
automatically accelerated to the revised method of calculating the CDSC.
Any purchase made in 1999 will be deemed to have been made on December 1,
1998. Any purchase made from January 1, 2000 to June 30, 2000 will be
deemed to have been made on December 1, 1999.
Class C shares are not subject to an initial sales charge when you buy
them, but if you sell your Class C shares within twelve months after
purchase, you will pay a 1% CDSC. For purposes of the CDSC, purchases of
Class C shares within a month will be considered as being purchased on the
first day of the month. Class C shares pay an annual 12b-1 service fee of
up to 0.25% of average net assets and a distribution fee of up to 0.75% of
average net assets. Over time, these fees will increase the cost of your
investment and may cost you more than if you had purchased Class A shares.
Class C shares do not convert to any other class.
For Class C shares, the CDSC will be applied to the lesser of amount
invested or redemption value of shares that have been held for twelve
months or less.
The CDSC will not apply in the following circumstances:
* redemptions of shares requested within one year of the shareholder's
death or disability, provided the Fund is notified of the death or
disability at the time of the request and furnished proof of such event
satisfactory to the Distributor.
* redemptions of shares made to satisfy required minimum distributions
after age 70 1/2 from a qualified retirement plan, a required minimum
distribution from an individual retirement account, Keogh plan or
custodial account under section 403(b)(7) of the Internal Revenue Code
of 1986, as amended ("Code"), a tax-free return of an excess
contribution, or that otherwise results from the death or disability of
the employee, as well as in connection with redemptions by any tax-
exempt employee benefit plan for which, as a result of a subsequent law
or legislation, the continuation of its investment would be improper.
* redemptions of shares purchased by current or retired Directors of the
Fund, and Directors of affiliated companies, current or retired officers
or employees of the Fund, WRIMCO, the Distributor or their affiliated
companies, financial advisors of Waddell & Reed, Inc., and by the
members of immediate families of such persons.
* redemptions of shares made pursuant to a shareholder's participation in
any systematic withdrawal service adopted for a Fund. (The service and
this exclusion from the CDSC do not apply to a one-time withdrawal.)
* redemptions the proceeds of which are reinvested within forty-five days
in shares of the same class of the Fund as that redeemed.
* the exercise of certain exchange privileges.
* redemptions effected pursuant to each Fund's right (other than
Continental Income Fund) to liquidate a shareholder's shares if the
aggregate NAV of those shares is less than $500.
* redemptions effected by another registered investment company by virtue
of a merger or other reorganization with a Fund or by a former
shareholder of such investment company of Class B or Class C shares of a
Fund acquired pursuant to such reorganization.
These exceptions may be modified or eliminated by a Fund at any time
without prior notice to shareholders, except with respect to redemptions
effected pursuant to the Fund's right to liquidate a shareholder's shares,
which requires certain notice.
Class Y shares are not subject to a sales charge or annual 12b-1 fees.
Class Y shares are only available for purchase by:
* participants of employee benefit plans established under section 403(b)
or section 457, or qualified under section 401 of the Code, including
401(k) plans, when the plan has 100 or more eligible employees and holds
the shares in an omnibus account on the Fund's records;
* banks, trust institutions, investment fund administrators and other
third parties investing for their own accounts or for the accounts of
their customers where such investments for customer accounts are held
in an omnibus account on the Fund's records;
* government entities or authorities and corporations whose investment
within the first twelve months after initial investment is $10 million
or more; and
* certain retirement plans and trusts for employees and financial advisors
of Waddell & Reed, Inc. and its affiliates.
Ways to Set Up Your Account
The different ways to set up (register) your account are listed below.
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Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or
more owners (tenants).
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Business or Organization
For investment needs of corporations, associations, partnerships,
institutions or other groups
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Retirement Plans
To shelter your retirement savings from income taxes
Retirement plans allow individuals to shelter investment income and capital
gains from current income taxes. In addition, contributions to these
accounts (other than Roth IRAs and Education IRAs) may be tax-deductible.
* Individual Retirement Accounts (IRAs) allow a certain individual under
age 70 1/2, with earned income, to invest up to $2,000 per tax year. The
maximum for an investor and his or her spouse is $4,000 ($2,000 for each
spouse) or, if less, the couple's combined earned income for the taxable
year.
* IRA Rollovers retain special tax advantages for certain distributions
from employer-sponsored retirement plans.
* Roth IRAs allow certain individuals to make nondeductible contributions
up to $2,000 per year. The maximum annual contribution for an investor
and his or her spouse is $4,000 ($2,000 for each spouse) or, if less,
the couple's combined earned income for the taxable year. Withdrawals of
earnings may be tax free if the account is at least five years old and
certain other requirements are met.
* Education IRAs are established for the benefit of a minor, with
nondeductible contributions up to $500 per year, and permit tax-free
withdrawals to pay the higher education expenses of the beneficiary.
* Simplified Employee Pension Plans (SEP-IRAs) provide business owners or
those with self-employed income (and their eligible employees) with many
of the same advantages as a Profit Sharing Plan, but with fewer
administrative requirements.
* Savings Incentive Match Plans for Employees (SIMPLE Plans) can be
established by small employers to contribute to and allow their
employees to contribute a portion of their wages pre-tax to retirement
accounts. This plan-type generally involves fewer administrative
requirements than 401(k) or other qualified plans.
* Keogh Plans allow self-employed individuals to make tax-deductible
contributions for themselves of up to 25% of their annual earned income,
with a maximum of $30,000 per year.
* Pension and Profit-Sharing Plans, including 401(k) Plans, allow
corporations and nongovernmental tax-exempt organizations of all sizes
and/or their employees to contribute a percentage of the employees'
wages or other amounts on a tax-deferred basis. These accounts need to
be established by the administrator or trustee of the plan.
* 403(b) Custodial Accounts are available to employees of public school
systems, churches and certain types of charitable organizations.
* 457 Accounts allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation
on a tax-deferred basis.
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Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain
tax benefits. An individual can give up to $10,000 a year per child free of
Federal transfer tax consequences. Depending on state laws, you can set up
a custodial account under the Uniform Transfers to Minors Act ("UTMA") or
the Uniform Gifts to Minors Act ("UGMA").
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Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may
use a trust form made available by Waddell & Reed. Contact your financial
advisor for the form.
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Buying Shares
You may buy shares of each of the Funds through Waddell & Reed, Inc. and
its financial advisors or through advisors of Legend. To open your account
you must complete and sign an application. Your financial advisor can help
you with any questions you might have.
To purchase any class of shares by check, make your check payable to
Waddell & Reed, Inc. Mail the check, along with your completed application,
to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
To purchase Class Y shares by wire, you must first obtain an account number
by calling 800-366-2520, then mail a completed application to Waddell &
Reed, Inc., at the above address, or fax it to 913-236-5044. Instruct your
bank to wire the amount you wish to invest, along with the account number
and registration, to UMB Bank, n.a., ABA Number 101000695, for the account
of Waddell & Reed Number 9800007978, Special Account for Exclusive Benefit
of Customers FBO Customer Name and Account Number.
You may also buy Class Y shares of a Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you
a fee. These firms may have additional requirements regarding the purchase
of Class Y shares.
The price to buy a Fund share is its offering price, which is calculated
every business day.
The offering price of a share (the price to buy one share of a particular
class) is the next NAV calculated per share of that class plus, for Class A
shares, the sales charge shown in the tables.
In the calculation of a Fund's NAV:
* The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
* Bonds are generally valued according to prices quoted by an independent
pricing service.
* Short-term debt securities are valued at amortized cost, which
approximates market value.
* Other investment assets for which market prices are unavailable are
valued at their fair value by or at the direction of the Board of
Directors.
Each Fund is open for business each day the New York Stock Exchange (the
"NYSE") is open. The Funds normally calculate their NAVs as of the close of
business of the NYSE, normally 4 p.m. Eastern time, except that an option
or futures contract held by a Fund may be priced at the close of the
regular session of any other securities exchange on which that instrument
is traded.
The Funds may invest in securities listed on foreign exchanges which may
trade on Saturdays or on U.S. national business holidays when the NYSE is
closed. Consequently, the NAV of Fund shares may be significantly affected
on days when a Fund does not price its shares and when you are not able to
purchase or redeem a Fund's shares. Similarly, if an event materially
affecting the value of foreign investments or foreign currency exchange
rates occurs prior to the close of business of the NYSE but after the time
their values are otherwise determined, such investments or exchange rates
may be valued at their fair value as determined in good faith by or under
the direction of each Fund's Board of Directors.
When you place an order to buy shares, your order will be processed at the
next offering price calculated after your order is received and accepted.
Note the following:
* All of your purchases must be made in U.S. dollars.
* If you buy shares by check, and then sell those shares by any method
other than by exchange to another fund in the Waddell & Reed Advisors
Funds and/or the W&R Funds, the payment may be delayed for up to ten
days to ensure that your previous investment has cleared.
* The Funds do not issue certificates representing Class B, Class C or
Class Y shares. Asset Strategy Fund and Tax-Managed Equity Fund do not
issue certificates representing any class of shares.
* If you purchase shares of a Fund from certain broker-dealers, banks or
other authorized third parties, the Fund will be deemed to have received
your purchase order when that third party (or its designee) has received
your order. Your order will receive the offering price next calculated
after the order has been received in proper form by the authorized third
party (or its designee). You should consult that firm to determine the
time by which it must receive your order for you to purchase shares of a
Fund at that day's price.
When you sign your account application, you will be asked to certify that
your Social Security or other taxpayer identification number is correct and
whether you are subject to backup withholding for failing to report income
to the Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Funds reserve the right to
discontinue offering Fund shares for purchase.
Minimum Investments
For Class A, Class B and Class C:
To Open an Account $500 (per Fund)
For certain exchanges $100 (per Fund)
For certain retirement accounts and accounts opened with Automatic Investment
Service $50 (per Fund)
For certain retirement accounts and accounts opened through payroll deductions
for or by employees of WRIMCO, Waddell & Reed, Inc. and their affiliates $25
(per Fund)
To Add to an Account Any amount
For certain exchanges $100 (per Fund)
For Automatic Investment Service $25 (per Fund)
For Class Y:
To Open an Account
For a government entity or authority or for a corporation
$10 million
(within first
twelve months)
For other investors Any amount
To Add to an Account Any amount
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed, Inc.
Mail the check to Waddell & Reed, Inc., along with:
* the detachable form that accompanies the confirmation of a prior
purchase or your year-to-date statement; or
* a letter stating your account number, the account registration, the Fund
and the class of shares that you wish to purchase.
To add to your Class Y account by wire: Instruct your bank to wire the
amount you wish to invest, along with the account number and registration,
to UMB Bank, n.a., ABA Number 101000695, for the account of Waddell & Reed
Number 9800007978, Special Account for Exclusive Benefit of Customers FBO
Customer Name and Account Number.
If you purchase shares of the Funds from certain broker-dealers, banks or
other authorized third parties, additional purchases may be made through
those firms.
Selling Shares
You can arrange to take money out of your Fund account at any time by
selling (redeeming) some or all of your shares.
The redemption price (price to sell one share of a particular class of a
Fund) is the NAV per share of that Fund class, subject to any CDSC
applicable to Class A, Class B or Class C shares.
To sell shares by written request: Complete an Account Service Request
form, available from your financial advisor, or write a letter of
instruction with:
* the name on the account registration;
* the Fund's name;
* the Fund account number;
* the dollar amount or number, and the class, of shares to be redeemed;
and
* any other applicable requirements listed in the table below.
Deliver the form or your letter to your financial advisor, or mail it to:
Waddell & Reed Services Company
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed Services Company will send a
check to the address on the account.
To sell Class Y shares by telephone or fax: If you have elected this
method in your application or by subsequent authorization, call 888-
WADDELL, or fax your request to 913-236-1599, and give your instructions to
redeem Class Y shares and make payment by wire to your predesignated bank
account or by check to you at the address on the account.
When you place an order to sell shares, your shares will be sold at the
next NAV calculated, subject to any applicable CDSC, after receipt of a
written request for redemption in good order by Waddell & Reed Services
Company at the address listed above. Note the following:
* If more than one person owns the shares, each owner must sign the
written request.
* If you hold a certificate, it must be properly endorsed and sent to the
Fund.
* If you recently purchased the shares by check, a Fund may delay payment
of redemption proceeds. You may arrange for the bank upon which the
purchase check was drawn to provide to the Fund telephone or written
assurance that the check has cleared and been honored. If you do not,
payment of the redemption proceeds on these shares will be delayed until
the earlier of 10 days or the date the Fund can verify that your
purchase check has cleared and been honored.
* Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the
NYSE is restricted or as permitted by the Securities and Exchange
Commission.
* Payment is normally made in cash, although under extraordinary
conditions redemptions may be made in portfolio securities when a Fund's
Board of Directors determines that conditions exist making cash payments
undesirable. A Fund is obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1% of its NAV during any 90-day period for any
one shareholder.
* If you purchased shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms,
some of which may charge you a fee and may have additional requirements
to sell Fund shares. The Fund will be deemed to have received your order
to sell shares when that firm (or its designee) has received your order.
Your order will receive the NAV of the applicable Class subject to any
applicable CDSC next calculated after the order has been received in
proper form by the authorized firm (or its designee). You should consult
that firm to determine the time by which it must receive your order for
you to sell shares at that day's price.
Special Requirements for Selling Shares
Account Type Special Requirements
Individual or The written instructions must
Joint Tenant be signed by all persons
required to sign for
transactions, exactly as their
names appear on the account.
Sole The written instructions must
Proprietorship be signed by the individual
owner of the business.
UGMA, UTMA The custodian must sign the
written instructions
indicating capacity as
custodian.
Retirement The written instructions must
Account be signed by a properly
authorized person.
Trust The trustee must sign the
written instructions
indicating capacity as
trustee. If the trustee's name
is not in the account
registration, provide a
currently certified copy of
the trust document.
Business or At least one person authorized
Organization by corporate resolution to act
on the account must sign the
written instructions.
Conservator, The written instructions must
Guardian or be signed by the person
Other Fiduciary properly authorized by court
order to act in the particular
fiduciary capacity.
A Fund may require a signature guarantee in certain situations such as:
* a redemption request made by a corporation, partnership or fiduciary;
* a redemption request made by someone other than the owner of record; or
* the check is made payable to someone other than the owner of record.
This requirement is to protect you and Waddell & Reed from fraud. You can
obtain a signature guarantee from most banks and securities dealers, but
not from a notary public.
Each Fund (other than Continental Income Fund) reserves the right to redeem
at NAV all of your Fund shares in your account if their aggregate NAV is
less than $500. The Fund will give you notice and a 60-day opportunity to
purchase a sufficient number of additional shares to bring the aggregate
NAV of your shares to $500.
You may reinvest, without charge, all or part of the amount of Class A
shares of a Fund you redeemed by sending to the Fund the amount you want to
reinvest. The reinvested amounts must be received by the Fund within forty-
five days after the date of your redemption. You may do this only once with
Class A shares of a Fund.
The CDSC will not apply to the proceeds of Class A (as applicable), Class B
or Class C shares of a Fund which are redeemed and then reinvested in Class
A, Class B or Class C shares of the Fund within forty-five days after such
redemption. The Distributor will, with your reinvestment, restore an amount
equal to the deferred sales charge attributable to the amount reinvested by
adding the deferred sales charge amount to your reinvestment. For purposes
of determining future deferred sales charges, the reinvestment will be
treated as a new investment. You may do this only once as to Class A shares
of a Fund, once as to Class B shares of a Fund and once as to Class C
shares of a Fund.
Payments of principal and interest on loans made pursuant to a 401(a)
qualified plan (if such loans are permitted by the plan) may be reinvested,
without payment of a sales charge, in Class A shares of any Waddell & Reed
Advisors Fund in which the plan may invest.
Telephone Transactions
The Funds and their agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. Each
Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If a Fund fails to do so, the Fund
may be liable for losses due to unauthorized or fraudulent instructions.
Current procedures relating to instructions communicated by telephone
include tape recording instructions, requiring personal identification and
providing written confirmations of transactions effected pursuant to such
instructions.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your
account.
Personal Service
Your local financial advisor is available to provide personal service.
Additionally, a toll-free call, 800-366-5465, connects you to a Client
Services Representative or our automated customer telephone service. During
normal business hours, our Client Services staff is available to answer
your questions or update your account records. At almost any time of the
day or night, you may access your account information from a touch-tone
phone, or from our web site, www.waddell.com, to:
* Obtain information about your accounts;
* Obtain price information about other funds in the Waddell & Reed
Advisors Funds and W&R Funds; or
* Request duplicate statements.
Reports
Statements and reports sent to you include the following:
* confirmation statements (after every purchase, other than those
purchases made through Automatic Investment Service, and after every
exchange, transfer or redemption)
* year-to-date statements (quarterly)
* annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports of the Funds may be mailed to your household, even if you have more
than one account with a Fund. Call the telephone number listed for Client
Services if you need additional copies of annual or semiannual reports or
account information.
Exchanges
You may sell your shares and buy shares of the same Class of another Fund
in the Waddell & Reed Advisors Funds or in W&R Funds without the payment of
an additional sales charge if you buy Class A shares or payment of a CDSC
when you exchange Class B or Class C shares. For Class B and Class C shares
or Class A shares to which the CDSC would otherwise apply the time period
for the deferred sales charge will continue to run. In addition, exchanging
Class Y shareholders in the Waddell & Reed Advisors Funds may buy Class A
shares of Waddell & Reed Advisors Cash Management
You may exchange only into funds that are legally permitted for sale in
your state of residence. Note that exchanges out of a Fund may have tax
consequences for you. Before exchanging into a fund, read its prospectus.
The Funds reserve the right to terminate or modify these exchange
privileges at any time, upon notice in certain instances.
Automatic Transactions for Class A, Class B and Class C Shareholders
Flexible Withdrawal Service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund
account, or between fund accounts, automatically. While Regular Investment
Plans do not guarantee a profit and will not protect you against loss in a
declining market, they can be an excellent way to invest for retirement, a
home, educational expenses and other long-term financial goals.
Certain restrictions and fees imposed by the plan custodian may also apply
for retirement accounts. Speak with your financial advisor for more
information.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Fund account
Minimum Amount Minimum Frequency
$25 (per Fund) Monthly
Funds Plus Service
To move money from Waddell & Reed Advisors Cash Management to a Fund
whether in the same or a different account in the same class
Minimum Amount Minimum Frequency
$100 (per Fund) Monthly
Distributions and Taxes
Distributions
Each Fund distributes substantially all of its net investment income and
net capital gains to its shareholders each year.
Usually, a Fund distributes net investment income at the following times:
Asset Strategy Fund, Continental Income Fund, Income Fund and Retirement
Shares, quarterly in March, June, September and December; Tax-Managed
Equity Fund, annually in December. Net capital gains (and any net gains
from foreign currency transactions) usually are distributed in December.
Distribution Options. When you open an account, specify on your application
how you want to receive your distributions. Each Fund offers two options:
1. Share Payment Option. Your dividends, capital gains and other
distributions with respect to a class will be automatically paid in
additional shares of the same class of the Fund. If you do not indicate
a choice on your application, you will be assigned this option.
2. Cash Option. You will be sent a check for your dividends, capital gains
and other distributions if the total distribution is equal to or greater
than five dollars. If the distribution is less than five dollars, it
will be automatically paid in additional shares of the same class of the
Fund.
For retirement accounts, all distributions are automatically paid in
additional shares.
Taxes
As with any investment, you should consider how your investment in a Fund
will be taxed. If your account is not a tax-deferred retirement account (or
you are not otherwise exempt from income tax), you should be aware of the
following tax implications:
Taxes on distributions. Dividends from a Fund's investment company taxable
income (which includes net short-term gains), if any, generally are taxable
to you as ordinary income whether received in cash or paid in additional
Fund shares. Distributions of a Fund's net capital gains, when designated
as such, are taxable to you as long-term capital gains, whether received in
cash or paid in additional Fund shares and regardless of the length of time
you have owned your shares. For Federal income tax purposes, your long-term
capital gains generally are taxed at a maximum rate of 20%.
Each Fund notifies you after each calendar year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that
year.
A portion of the dividends paid by a Fund, whether received in cash or paid
in additional Fund shares, may be eligible for the dividends received
deduction allowed to corporations. The eligible portion may not exceed the
aggregate dividends received by a Fund from U.S. corporations. However,
dividends received by a corporate shareholder and deducted by it pursuant
to the dividends received deduction are subject indirectly to the Federal
alternative minimum tax.
Withholding. Each Fund must withhold 31% of all dividends, capital gains
and other distributions and redemption proceeds payable to individuals and
certain other noncorporate shareholders who do not furnish the Fund with a
correct taxpayer identification number. Withholding at that rate from
dividends, capital gains and other distributions also is required for
shareholders subject to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in a
taxable gain or loss to you, depending on whether the redemption proceeds
are more or less than what you paid for the redeemed shares (which normally
includes any sales charge paid). An exchange of Fund shares for shares of
any other fund in the Waddell & Reed Advisors Funds or W&R Funds generally
will have similar tax consequences. However, special rules apply when you
dispose of a Fund's Class A shares through a redemption or exchange within
ninety days after your purchase and then reacquire Class A shares of that
Fund or acquire Class A shares of another fund in the Waddell & Reed
Advisors Funds without paying a sales charge due to the forty-five day
reinvestment privilege or exchange privilege. See "Your Account." In these
cases, any gain on the disposition of the original Fund shares will be
increased, or loss decreased, by the amount of the sales charge you paid
when those shares were acquired, and that amount will increase the adjusted
basis of the shares subsequently acquired. In addition, if you purchase
shares of a Fund within thirty days before or after redeeming other shares
of the Fund (regardless of class) at a loss, part or all of that loss will
not be deductible and will increase the basis of the newly purchased
shares.
State and local income taxes. The portion of the dividends paid by each
Fund attributable to interest earned on U.S. Government securities
generally is not subject to state and local income taxes, although
distributions by any Fund to its shareholders of net realized gains on the
sale of those securities are fully subject to those taxes. You should
consult your tax adviser to determine the taxability of dividends and other
distributions by the Funds in your state and locality.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting each Fund and its shareholders; you will
find more information in the Fund's SAI. There may be other Federal, state
or local tax considerations applicable to a particular investor. You are
urged to consult your own tax adviser.
The Management of the Funds
Portfolio Management
Each Fund is managed by WRIMCO, subject to the authority of each Fund's
Board of Directors. WRIMCO provides investment advice to each of the Funds
and supervises each Fund's investments. WRIMCO and/or its predecessors have
served as investment manager to each of the registered investment companies
in the Waddell & Reed Advisors Funds, W&R Funds and Target/United Funds
since the inception of each company. WRIMCO is located at 6300 Lamar
Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
Michael L. Avery is primarily responsible for the management of the equity
portion of the Asset Strategy Fund. Mr. Avery has managed the equity
portion of the Fund since January 1997. He is Senior Vice President of
WRIMCO, Vice President of the Fund and Vice President of other investment
companies for which WRIMCO serves as investment manager. From March 1995 to
March 1998, Mr. Avery was Vice President of, and Director of Research for,
Waddell & Reed Asset Management Company, a former affiliate of WRIMCO. Mr.
Avery has served as the portfolio manager for investment companies managed
by WRIMCO since February 1, 1994, has served as the Director of Research
for WRIMCO and its predecessors since August 1987, and has been an employee
of such since June 1981.
Daniel J. Vrabac is primarily responsible for the management of the fixed-
income portion of the Asset Strategy Fund. Mr. Vrabac has managed the
fixed-income portion of the Fund since January 1997. He is Vice President
of the Fund and Vice President of other investment companies for which
WRIMCO serves as investment manager. From May 1994 to March 1998, Mr.
Vrabac was Vice President of, and a portfolio manager for, Waddell & Reed
Asset Management Company. Mr. Vrabac has been an employee of WRIMCO since
May 1994.
Cynthia P. Prince-Fox is primarily responsible for the management of the
Continental Income Fund and the Tax-Managed Equity Fund. Ms. Prince-Fox has
held her Fund responsibilities for Continental Income Fund since February
1993, and for Tax-Managed Equity Fund since the inception of the Fund. She
is Vice President of WRIMCO and Vice President of both Funds. From January
1993 to March 1998, Ms. Prince-Fox was Vice President of, and a portfolio
manager for, Waddell & Reed Asset Management Company. Ms. Prince-Fox is a
Vice President and Portfolio Manager for Austin, Calvert & Flavin, Inc., an
affiliate of WRIMCO. Ms. Prince-Fox has served as the portfolio manager for
investment companies managed by WRIMCO since January 1993. From 1983 to
January, 1993 Ms. Prince-Fox served as an investment analyst for WRIMCO and
its predecessors.
James D. Wineland is primarily responsible for the management of the Income
Fund. Mr. Wineland has held his Fund responsibilities since July 1, 1997.
He is Vice President of WRIMCO, Vice President of the Fund and Vice
President of other investment companies for which WRIMCO serves as
investment manager. From March 1995 to March 1998, Mr. Wineland was Vice
President of, and a portfolio manager for, Waddell & Reed Asset Management
Company. Mr. Wineland has served as the portfolio manager for investment
companies managed by WRIMCO and its predecessors since January 1988 and has
been an employee of such since November 1984.
Charles W. Hooper, Jr. is primarily responsible for the management of the
Retirement Shares. Mr. Hooper has held his Fund responsibilities since
April 1999. He is Vice President of WRIMCO and Vice President of the Fund.
From August 1987 to December 1991, Mr. Hooper served as the portfolio
manager for another investment company managed by WRIMCO. From October 1984
to December 1991, Mr. Hooper was Vice President of, and a portfolio manager
for, Waddell & Reed Asset Management Company. From December 1991 to July
1996, Mr. Hooper was a portfolio manager for Founders Asset Management
Company, and from July 1996 to April 1999, Mr. Hooper was the Chief
Investment Officer for Owen Joseph.
Other members of WRIMCO's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to a Fund's investments.
Management Fee
Like all mutual funds, the Funds pay fees related to their daily
operations. Expenses paid out of each Fund's assets are reflected in its
share price or dividends; they are neither billed directly to shareholders
nor deducted from shareholder accounts.
Each Fund pays a management fee to WRIMCO for providing investment advice
and supervising its investments. Each Fund also pays other expenses, which
are explained in the SAI.
The management fee is payable at the annual rates of:
for Asset Strategy Fund, 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.
Management fees for the Fund as a percent of the Fund's net assets for the
fiscal year ended September 30, 1999 were 0.69%;
for Continental Income Fund, 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.
Management fees for the Fund as a percent of the Fund's net assets for the
fiscal year ended March 31, 2000 were 0.66%;
for Income Fund, 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, 0.55% of net assets over $3 billion and up to $6
billion, and 0.50% of net assets over $6 billion. Management fees for the
Fund as a percent of the Fund's net assets for the fiscal year ended
December 31, 1999 were 0.56%;
for Retirement Shares, 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.
Management fees for the Fund as a percent of the Fund's net assets for the
fiscal year ended June 30, 2000 were 0.69%; and
for Tax-Managed Equity Fund, 0.65% of net assets up to $1 billion, 0.60% of
net assets over $1 billion and up to $2 billion, 0.55% of net assets over
$2 billion and up to $3 billion, and 0.50% of net assets over $3 billion.
WRIMCO has voluntarily agreed to waive its management fee for any day that
a Fund's net assets are less than $25 million, subject to WRIMCO's right to
change or modify this waiver.
WADDELL & REED ADVISORS FUNDS
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
928 Grand Boulevard 6300 Lamar Avenue
Kansas City, Missouri 64141 P. O. Box 29217
Shawnee Mission, Kansas
Legal Counsel 66201-9217
Kirkpatrick & Lockhart LLP 913-236-2000
1800 Massachusetts Avenue, N.W. 888-WADDELL
Washington, D. C. 20036
Independent Auditors Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Boulevard Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment 913-236-2000
Management Company 888-WADDELL
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
913-236-2000 6300 Lamar Avenue
888-WADDELL P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
October 31, 2000
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a
prospectus. Investors should read this SAI in conjunction with a prospectus
("Prospectus") for the Class A, Class B, Class C and Class Y shares of
Waddell & Reed Advisors Retirement Shares, Inc.SM (the "Fund"), formerly,
United Retirement Shares, 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............ 38
Purchase, Redemption and Pricing of Shares.......... 43
Directors and Officers.............................. 60
Payments to Shareholders............................ 67
Taxes............................................... 68
Portfolio Transactions and Brokerage................ 72
Other Information................................... 75
Appendix A.......................................... 77
Financial Statements................................ 81
Waddell & Reed Advisors Retirement Shares, 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 December 3, 1971.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may, from
time to time, publish the Fund's total return information and/or
performance rankings 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. An average annual total return quotation is
computed by finding the average annual compounded rates of return over the
one-, five-, and ten-year periods that would equate the initial amount
invested to the ending redeemable value. 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, the 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
June 30, 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 July 1, 1999 to
June 30, 2000: 35.29% 43.54%
Five-year period from July 1, 1995 to
June 30, 2000: 18.55% 19.96%
Ten-year period from July 1, 1990 to
June 30, 2000: 14.81% 15.49%
Prior to October 7, 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 B, Class C and Class Y shares of the Fund
have become available.
The cumulative total return quotation for Class B shares with the
maximum deferred sales charge deducted as of June 30, 2000, which is the
most recent balance sheet included in this SAI, for the period since class
inception on October 4, 1999 to June 30, 2000 was 33.28%.
The cumulative total return quotation for Class B shares without the
maximum deferred sales charge deducted as of June 30, 2000 for the period
since class inception on October 4, 1999 to June 30, 2000 was 38.28%.
The cumulative total return quotation for Class C shares with the
maximum deferred sales charge deducted as of June 30, 2000, which is the
most recent balance sheet included in this SAI, for the period since class
inception on October 4, 1999 to June 30, 2000 was 37.28%.
The cumulative total return quotation for Class C shares without the
maximum deferred sales charge deducted as of June 30, 2000 for the period
since class inception on October 4, 1999 to June 30, 2000 was 38.28%.
The average annual total return quotations for Class Y shares as of
June 30, 2000, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
Period from July 1, 1999 to
June 30, 2000: 43.75%
Period from February 27, 1996* to
June 30, 2000: 20.15%
*Date of inception.
The Fund may also quote unaveraged or cumulative total return for a
class which reflects the change in value of an investment in that class
over a stated period of time. Cumulative total returns will be calculated
according to the formula indicated above but without averaging the rate for
the number of years in 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 and Limitations" for a listing of the
fundamental and non-fundamental (e.g., operating) investment restrictions
and policies of the Fund.
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 shorter-term bonds.
Lower quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices
of these securities may fluctuate more than high-quality securities and may
decline significantly in periods of general economic difficulty. The market
for lower-rated debt securities may be thinner and less active than that
for higher-rated debt securities, which can adversely affect the prices at
which the former are sold. Adverse publicity and changing investor
perceptions may decrease the values and liquidity of lower-rated debt
securities, especially in a thinly traded market. Valuation becomes more
difficult and judgment plays a greater role in valuing lower-rated debt
securities than with respect to securities for which more external sources
of quotations and last sale information are available. Since the risk of
default is higher for lower-rated debt securities, WRIMCO's research and
credit analysis are an especially important part of managing securities of
this type held by the Fund. WRIMCO continuously monitors the issuers of
lower-rated debt securities in the Fund's portfolio in an attempt to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. The Fund may choose, at its
expense or in conjunction with others, to pursue litigation or otherwise
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 Standard & Poor's ("S&P") and C by
Moody's). Debt securities rated D by S&P or C by Moody's 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 Moody's 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
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 objectives.
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
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.
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 securities 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 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, as
described in the Prospectus and this SAI. The Fund may incur a transaction
charge in connection with the exchange of currency. Currency conversion
involves dealer spreads and other costs, although commissions are not
usually charged. See "Options, Futures and Other Strategies - Forward
Currency Contracts."
Illiquid Investments
Illiquid investments are investments that cannot be sold or otherwise
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Investments currently
considered to be illiquid include:
(1) repurchase agreements not terminable within seven days;
(2) securities for which market quotations are not readily available;
(3) over-the-counter ("OTC") options and their underlying collateral;
(4) bank deposits, unless they are payable at principal plus accrued
interest on demand or within seven days after demand;
(5) non-government stripped fixed-rate mortgage-backed securities;
(6) restricted securities not determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors; and
(7) securities involved in swap, cap, floor and collar transactions.
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 10% of its net assets were invested
in illiquid securities, it would seek to take appropriate steps to protect
liquidity.
Indexed Securities
Indexed securities are securities the value of which varies in
relation to the value of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators,
subject to its operating policy regarding derivative instruments. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. The performance of indexed securities depends to a
great extent on the performance of the security, currency or other
instrument to which they are indexed and may also be influenced by interest
rate changes in the United States and abroad. At the same time, indexed
securities are subject to the credit risks associated with the issuer of
the security and their values may decline substantially if the issuer's
creditworthiness deteriorates. Indexed securities may be more volatile than
the underlying 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. Certain indexed
securities that are not traded on an established market may be deemed
illiquid.
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.
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 loans 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 lent securities exceeds the value of the collateral, the
borrower must add more collateral so that it at least equals the market
value of the securities 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 do not cover the present rules, which may be changed without
shareholder vote, as to (1) whom securities may be loaned, (2) the
investment of cash collateral, or (3) voting rights.
There may be risks of delay in receiving additional collateral from
the borrower if the market value of the securities loaned increases, risks
of delay in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially.
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.
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.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets securing the debt 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.
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 Securities and Exchange Commission (the "SEC"), the several
exchanges upon which they are traded and the Commodity Futures Trading
Commission (the "CFTC"). In addition, the Fund's ability to use Financial
Instruments will be limited by tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below,
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, 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 ("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. 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.
Assets used as cover or held in a segregated 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 or to
segregated 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 an offsetting 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 an offsetting closing transaction
for an option it had purchased, it would have to exercise the option to
realize any profit. The inability to enter into an offsetting 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 Stock Indexes. 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 stock 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 Stock Indexes. The risks of investment in options
on stock 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 a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as
of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the
exercise date is borne by the exercising holder. In contrast, even if the
writer of an index call holds securities that exactly match the composition
of the underlying index, it will not be able to satisfy its assignment
obligations by delivering those securities against payment of the exercise
price. Instead, it will be required to pay cash in an amount based on the
closing index value on the exercise date. By the time it learns that it has
been assigned, the index may have declined, with a corresponding decline in
the value of its portfolio. This "timing risk" is an inherent limitation on
the ability of index call writers to cover their risk exposure by holding
securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the
level of the underlying index may subsequently change. If such a change
causes the exercised option to fall out-of-the-money, the Fund will be
required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the
assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size
and strike price, the terms of OTC options (options not traded on
exchanges) generally are established through negotiation with the other
party to the option contract. While this type of arrangement allows the
Fund great flexibility to tailor the option to its needs, OTC options
generally involve greater risk than exchange-traded options, which are
guaranteed by the clearing organization of the exchanges where they are
traded.
Generally, OTC foreign currency options used by the Fund are European-
style options. This means that the option is only exercisable immediately
prior to its expiration. This is in contrast to American-style options,
which are exercisable at any time prior to the expiration date of the
option.
Futures Contracts and Options on Futures Contracts. The purchase of
futures or call options on futures can serve as a long hedge, and the sale
of futures or the purchase of put options on futures can serve as a short
hedge. Writing call options on futures contracts can serve as a limited
short hedge, using a strategy similar to that used for writing call options
on securities or indices. Similarly, writing put options on futures
contracts can serve as a limited long hedge. Futures contracts and options
on futures contracts can also be purchased and sold to attempt to enhance
income or yield.
In addition, futures strategies can be used to manage the average
duration of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten
the average duration of the Fund's fixed-income portfolio, the Fund may
sell a debt futures contract or a call option thereon, or purchase a put
option on that futures contract. If WRIMCO wishes to lengthen the average
duration of the Fund's fixed-income portfolio, the Fund may buy a debt
futures contract or a call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at
the inception of a futures contract the Fund is required to deposit
"initial margin" in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call or put
option on a futures contract, in accordance with applicable exchange rules.
Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility,
the Fund may be required by an exchange to increase the level of its
initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the
futures broker daily as the value of the futures position varies, a process
known as "marking-to-market." Variation margin does not involve borrowing,
but rather represents a daily settlement of the Fund's obligations to or
from a futures broker. When the Fund purchases an option on a future, the
premium paid plus transaction costs is all that is at risk. In contrast,
when the Fund purchases or sells a futures contract or writes a call or put
option thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Fund has
insufficient cash to meet daily variation margin requirements, it might
need to sell securities at a time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions
in 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 futures contract
or option or to maintain liquid assets in an 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 the 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 future and movements in the price of the securities
that are the subject of the hedge increases as the composition of the
Fund's portfolio diverges from the securities included in the applicable
index. The price of the index futures may move more than or less than the
price of the securities being hedged. If the price of the index future
moves less than the price of the securities that are the subject of the
hedge, the hedge will not be fully effective but, if the price of the
securities being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction,
this advantage will be partially offset by the futures contract. If the
price of the futures contract moves more than the price of the 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
such securities being hedged if the historical volatility of the prices of
the 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 values 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 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
a segregated 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 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 account 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.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. The
Fund will not enter into a repurchase transaction that will cause more than
10% of its net assets to be invested in illiquid investments, which include
repurchase agreements not terminable within seven days. See "Illiquid
Investments." 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 agreements 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 (the "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.
Restricted Securities
Restricted securities are securities that are subject to legal or
contractual restrictions 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 would be desirable. Restricted
securities that are traded in foreign markets are often subject to
restrictions that prohibit resale to U.S. persons or entities or permit
sales only to foreign broker-dealers who agree to limit their resale to
such persons or entities. The buyer of such securities must enter into an
agreement that, usually for a limited period of time, it will resell such
securities subject to such restrictions. 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."
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 the 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.
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.
Warrants and Rights
Warrants are options to purchase equity securities at a specified
price 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
security might be. They are also generally less liquid than an investment
in the underlying shares.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase any securities in which it may invest 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-delivery 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.
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.
The 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.
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:
(1) Purchase or sell physical commodities; 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;
(2) Buy real estate nor any nonliquid interests in real estate
investment trusts which includes investments in oil, gas and
other mineral leases and real estate limited partnerships;
(3) Buy shares of other investment companies that redeem their
shares. The Fund can buy shares of investment companies that do
not redeem their shares if it does it in a regular transaction in
the open market and then does not have more than one tenth (i.e.,
10%) of its total assets in these shares. The Fund may also buy
these shares as part of a merger or consolidation;
(4) Lend money or other assets, other than through certain limited
types of loans described herein; the Fund can buy debt securities
and other obligations consistent with its goal and its other
investment policies and restrictions; it can also lend its
portfolio securities to the extent allowed, and in accordance
with the requirements, under the 1940 Act and enter into
repurchase agreements except as indicated above (see "Repurchase
Agreements" above);
The following interpretation applies to, but is not part of, this
fundamental restriction: the Fund's investments in master notes
and similar instruments will not be considered to be the making of
a loan.
(5) Invest for the purpose of exercising control or management of
other companies;
(6) Participate on a joint, or a joint and several, basis in any
trading account in any securities;
(7) 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 (1) 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, (2) the Fund may obtain such short-term
credits as are necessary for the clearance of transactions, and
(3) the Fund may make margin payments in connection with futures
contracts, options, forward contracts, swaps, caps, floors,
collars and other financial instruments;
(8) Engage in the underwriting of securities, that is, the selling of
securities for others;
(9) Borrow for investment purposes, that is, to purchase securities.
The Fund may borrow money from banks as a temporary measure or
for extraordinary or emergency purposes but only up to 5% of its
total assets. The Fund may not pledge its assets in connection
with any permitted borrowings; however, this policy does not
prevent the Fund from pledging its assets in connection with its
purchase and sale of futures contracts, options, forward currency
contracts, swaps, caps, collars, floors and other financial
instruments;
(10) With respect to 75% of its total assets, purchase securities of
any one issuer (other than cash items and "Government securities"
as defined in the Investment Company Act of 1940 (the "1940
Act")), if immediately after and as a result of such purchase,
(a) the value of the holdings of the Fund in the securities of
such issuer exceeds 5% of the value of the Fund's total assets,
or (b) the Fund owns more than 10% of the outstanding voting
securities of such issuer; or buy the securities of companies in
any one industry if more than 25% of the Fund's total assets
would then be in companies in that industry; or
(11) Issue senior securities.
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval:
(1) The Fund does not intend to invest in non-investment grade debt
if, as a result of such investment, more than 10% of its total
assets would consist of such investments.
(2) The Fund may not invest more than 10% of its total assets in
foreign securities.
(3) The Fund may not purchase a security if, as a result, more than
10% of its net assets would consist of illiquid investments.
(4) The Fund does not currently intend to invest more than 5% of its
total assets in the securities of other investment companies.
(5) 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 the securities of business enterprises that,
including predecessors, have a record of less than three years of
continuous operation. This restriction does not apply to any
obligations issued or guaranteed by the U.S. government or a
state or local government authority, or their respective
instrumentalities, or to collateralized mortgage obligations,
other mortgage-related securities, asset-backed securities,
indexed securities or OTC derivative instruments.
(6) 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 total 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 June 30, 2000 was 315.62%, while the
rate for the remainder of the portfolio was 185.04%. The Fund's overall
portfolio turnover rates for the fiscal years ended June 30, 2000 and 1999
were 295.37% and 122.58%%, respectively. The significant increase in
turnover is primarily due to a change in the portfolio manager. Charles
Hooper, Jr. took over the management of this Fund in April, 1999 and
expects to continue to manage the Fund in such a manner that the turnover
rate will be at this level.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned
the Management Agreement and all related investment management duties (and
related professional staff) to WRIMCO, a wholly owned subsidiary of Waddell
& Reed, Inc. 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 and Waddell & Reed, Inc. is 6300 Lamar Avenue,
P.O. Box 29217, Shawnee Mission, Kansas 66201-9217. Waddell & Reed, Inc.
is the Fund's underwriter.
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.
WRIMCO 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), to W&R Target Funds, Inc.
(formerly, Target/United Funds, Inc.) and to W&R Funds, Inc. (formerly,
Waddell & Reed Funds, Inc.) since 1940 or the company's inception date,
whichever was later. Waddell & Reed, Inc. serves as principal underwriter
for 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 W&R Target 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, for WRIMCO's management services, the
Fund pays WRIMCO a fee as described in the Prospectus.
The management fees paid to WRIMCO during the fiscal years ended June
30, 2000, 1999 and 1998 were $7,900,207, $4,420,589 and $4,229,070,
respectively.
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. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, with respect to Class A,
Class B and Class C shares, effective September 1, 2000 the Fund pays the
Agent a monthly fee of $1.4125 for each shareholder account that was in
existence at any time during the prior 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. Prior to
September 1, 2000, with respect to Class A, Class B and Class C shares, the
Fund paid 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. The Fund also pays certain out-of-pocket
expenses of the Agent, including long distance telephone communications
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
(as of September 1, 2000)
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 11,000
From $ 25 to $ 50 $ 22,000
From $ 50 to $ 100 $ 33,000
From $ 100 to $ 200 $ 44,000
From $ 200 to $ 350 $ 55,000
From $ 350 to $ 550 $ 66,000
From $ 550 to $ 750 $ 77,000
From $ 750 to $1,000 $ 93,500
$1,000 and Over $110,000
In addition, for each class of shares in excess of one, the Fund
pays the Agent a monthly per-class fee equal to 2.5% of the monthly base
fee.
Accounting Services Fee
(Prior to September 1, 2000)
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
Fees paid to the Agent for the fiscal years ended June 30, 2000, 1999
and 1998 were $95,000, $85,000 and $80,000, respectively.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for 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 affiliates also 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. Waddell & Reed, Inc. is not required to sell any
particular number of shares, and thus sells shares only for purchase orders
received. Under this 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 prospectus furnished to it by the
Fund. The dollar amounts of underwriting commissions for Class A shares for
the fiscal years ended June 30, 2000, 1999 and 1998 were $3,253,764,
$2,706,305 and $3,494,973, respectively. For the fiscal year ended June 30,
2000, the dollar amount of underwriting commissions for Class B shares was
$5,953, and for Class C shares was $1,002. The amounts retained by Waddell
& Reed, Inc. for each fiscal year were, in the aggregate, $385,221,
$1,136,635 and $1,471,735, 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 charges ("CDSC") for Class B and Class C
shares and for certain Class A shares may be paid to financial advisors and
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., the principal underwriter for the Fund,
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 (collectively, the
"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 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 permits Waddell & Reed, Inc. to 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 maintainingshareholder accounts with respect to
Class A shares. Fees paid (or accrued) as distribution fees and service
fees by the Fund under the Class A Plan for the fiscal year ended June 30,
2000 were $163,466 and $2,450,467, respectively.
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 is it
entitled to reimbursement under the Class A Plan. Fees paid (or accrued) as
distribution fees and service fees by the Fund under the Class B Plan for
the fiscal year ended June 30, 2000 were $67,145 and $22,689, respectively.
Fees paid (or accrued) as distribution fees and service fees by the Fund
under the Class C Plan for the fiscal year ended June 30, 2000 were $14,140
and $4,800, respectively.
To the extent that Waddell & Reed, Inc. incurs expenses for which
reimbursement or compensation may be made under the Plans that relate to
distribution and service 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 Plans on the basis of a combination of the respective classes' relative
net assets and number of shareholder accounts.
As noted above, Class A shares, Class B shares and Class C shares are
offered through Waddell & Reed, Inc. and other broker-dealers. In addition
to the dealer reallowance that may be applicable to Class A share
purchases, as described in the Prospectus, Waddell & Reed, Inc. may pay
such broker-dealers a portion of the fees it receives under the respective
Plans as well as other compensation in connection with the distribution of
Fund shares, including the following: 1) for the purchase of Class A shares
purchased at NAV by clients of Legend Equities Corporation ("Legend"),
Waddell & Reed, Inc. (or its affiliate) may pay Legend 1.00% of net assets
invested; 2) for the purchase of Class B shares, Waddell & Reed, Inc. (or
its affiliate) may pay Legend 4.00% of net assets invested; 3) for the
purchase of Class C shares, Waddell & Reed, Inc. (or its affiliate) may pay
Legend 1.00% of net assets invested.
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 the affected
shareholders of the Fund.
Among other things, each Plan provides that (1) 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, (2) 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, (3) 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 (4) 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 Fund's Custodian 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 liabilities of that class,
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 June
30, 2000, which is the most recent balance sheet included in this SAI, was
as follows:
Net asset value per Class A share (Class A
net assets divided by Class A shares
outstanding) .............................. $12.05
Add: selling commission (5.75% of offering
price) .................................... .72
-----
Maximum offering price per Class A share
(Class A NAV divided by 94.25%) ........... $12.58
=====
The offering price of a Class A share is its NAV next calculated
following acceptance of a purchase order plus the sales charge as
applicable. 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. Shares are normally issued for cash only.
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
domestic 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 the NYSE 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 assets and the number of
shares outstanding change every business day.
The securities in the portfolio of the Fund, except as otherwise
noted, that are 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 that
is the mean between the closing bid and asked prices. Other securities that
are traded over-the-counter are priced using the Nasdaq Stock Market, which
provides information on bid and asked prices quoted by major dealers in
such stocks. Bonds, other than convertible bonds, are valued using a third-
party pricing system. Convertible bonds are valued using this pricing
system only on days when there is no sale reported. Short-term debt
securities are valued at amortized cost, which approximates market. When
market quotations are not readily available, securities and other assets
are valued at fair value as determined in good faith under procedures
established by, and under the general supervision and responsibility of,
the Fund's Board of Directors.
Puts, calls and futures contracts purchased and held by the Fund are
valued at the last sales price thereof on the securities or commodities
exchanges on which they are traded, or, if there are no transactions, at
the mean between bid and asked prices. Ordinarily, the close of the regular
session for options 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 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" (that is, treated as
sold for its fair market value) 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 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, investments will be valued at their fair value as determined
in good faith by or under the direction of the Board of Directors. The
foreign currency exchange transactions of the Fund conducted on a spot
(that is, cash) basis are valued at the spot rate for purchasing or selling
currency prevailing on the foreign exchange market. This rate under normal
market conditions differs from the prevailing exchange rate in 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 by or for employees of Waddell & Reed, Inc., WRIMCO,
their affiliates or certain retirement plan accounts for such employees.
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
Large purchases of Class A shares are subject to lower sales charges.
The schedule of sales charges appears in the Prospectus. For the purpose of
taking advantage of the lower sales charges available for large purchases,
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 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. Purchase 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"), tax-sheltered annuity account ("TSA") or Keogh plan
account, provided that such purchases are subject to a sales charge
(see "Net Asset Value Purchases"), 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).
For the foregoing categories, an individual's domestic partner is
treated as his or her spouse.
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother has
an account in her own name; A's father has an account in his own
name; the UGMA account may be grouped with A's father's account
but may not be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made
in the trust account is eligible for grouping with an IRA account
of W, H's wife;
C. H's will provides for the establishment of a trust for the
benefit of his minor children upon H's death; his bank is named
as trustee; upon H's death, an account is established in the name
of the bank, as trustee; a purchase in the account may be grouped
with an account held by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son,
as successor trustee and R and S as beneficiaries; upon X's
death, the account is transferred to R as trustee; a purchase in
the account may not be grouped with R's individual account. (If
X's spouse, Y, was successor trustee, this purchase could be
grouped with Y's individual account.)
All purchases of Class A shares made for a participant in a multi-
participant Keogh plan may be grouped only with other purchases made under
the same plan; a multi-participant Keogh plan is defined as a plan in which
there is more than one participant where one or more of the participants is
other than the spouse of the owner/employer.
Example A: 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 B: 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 "qualified" employee
benefit plan of an incorporated business will be grouped. A "qualified"
employee benefit plan is established pursuant to Section 401 of the Code.
All qualified employee benefit plans of any one employer or affiliated
employers will also be grouped. An affiliate is defined as an employer that
directly, or indirectly, controls or is controlled by or is under control
with another employer. All qualified employee benefit plans of an employer
who is a franchisor and those of its franchisee(s) may also be grouped.
Example: 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.
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 in
"Account Grouping."
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.
Example: H and W open an account in the Fund and invest $75,000; at the
same time, H's parents open up three UGMA accounts for H and W's
three minor children and invest $10,000 in each child's name; the
combined purchase of $105,000 of Class A shares is subject to a
reduced sales load of 4.75% provided that Waddell & Reed, Inc. is
advised that the purchases are entitled to grouping.
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 of Class A shares 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.
Example: H is a current Class A shareholder who invested in the Fund three
years ago. His account has a NAV of $80,000. His wife, W, now
wishes to invest $20,000 in Class A shares of the Fund. W's
purchase will be combined with H's existing account and will be
entitled to a reduced sales charge of 4.75%. H's original
purchase was subject to a full sales charge and the reduced
charge does not apply retroactively to that purchase.
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 a Letter of Intent ("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.
Example: H signs an LOI indicating his intent to invest in his own name a
dollar amount sufficient to entitle him to purchase Class A
shares at the sales charge applicable to a purchase of $100,000.
H has an IRA account and the Class A shares held under the IRA in
the Fund have a NAV as of the date the LOI is accepted by Waddell
& Reed, Inc. of $15,000; H's wife, W, has an account in her own
name invested in another fund in the Waddell & Reed Advisors
Funds which charges the same sales load as the Fund, with a NAV
as of the date of acceptance of the LOI of $10,000; H needs to
invest $75,000 in Class A shares over the 13-month period in
order to qualify for the reduced sales load applicable to a
purchase of $100,000.
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 an LOI 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, and 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.
LOIs are not available for purchases made under a SEP where the
employer has elected to have all purchases under the SEP grouped.
Other Funds in the 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 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" includes 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.
"Financial advisors" includes retired financial advisors. A "retired
financial advisor" is any financial advisor who was, at the time of
separation from service from Waddell & Reed, Inc., a Senior Financial
Advisor. A custodian under the 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 the 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, the 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 (1) 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, (2)
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 (3) 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 in 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.
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 or W&R Funds, Inc. It would be a disadvantage
to an investor to make additional purchases of Class A shares while the
Service is in effect because it would result in duplication of sales
charges. Class B and Class C shares and certain Class A shares to which the
CDSC otherwise applies that are redeemed under the Service are not subject
to a CDSC provided the amount withdrawn does not, annually, exceed 24% of
the account value. 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, do 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 W&R Funds, Inc.; 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 the Service.
If you have a share certificate for the shares you want to make
available for this Service, you must enclose the certificate with the form
initiating the 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, an income or
return on your investment.
You may, at any time, change the manner in which you have chosen to
have shares redeemed to any of the other choices originally available to
you. You 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.
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 shares of a fund in the Waddell &
Reed Advisors Funds or the W&R Funds, Inc., these shares and any shares
added to them from dividends or distributions paid in shares may be freely
exchanged 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 the 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 (1) a sales charge was paid on these shares, or (2) the
shares were received in exchange for shares for which a sales charge was
paid, or (3) the shares were acquired from reinvestment of dividends and
distributions paid on such shares. There may have been 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.
Shares of Waddell & Reed Advisors Municipal Bond Fund, Inc., Waddell &
Reed Advisors Government Securities Fund, Inc., Waddell & Reed Advisors
Municipal High Income Fund, Inc. (formerly, United Municipal Bond Fund,
Inc., United Government Securities Fund, Inc. and United Municipal High
Income Fund, Inc., respectively), W&R Funds, Inc. Municipal Bond Fund and
W&R Funds, Inc. Limited-Term Bond Fund (formerly, Waddell & Reed Funds,
Inc.) are the exception and special rules apply. Class A shares of these
funds may be exchanged for Class A shares of the Fund only if (1) 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 (2)
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 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 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 a Fund or any other fund in the Waddell & Reed Advisors
Funds, provided you already own Class C 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 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 the W&R Funds, Inc., 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 written 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 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 eligible
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 an employer-sponsored
retirement plan or if, notwithstanding that the investor or one or both
spouses so participate, their adjusted gross income does not exceed certain
levels. A married investor who is not an active participant, who files
jointly with his or her spouse and whose combined adjusted gross income
does not exceed $150,000 is not affected by his or her 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 having eligible earned income, and 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).
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.
In addition, for an investor whose adjusted gross income does not
exceed $100,000 (and who is not a married person 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 up to $500 to an Education IRA (or to each of multiple Education
IRAs), 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 certain
members 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, subject to certain annual
maximums, per year for each employee.
Savings Incentive Match Plans for Employees (SIMPLE Plans). An
employer with 100 or fewer eligible 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 (up to 3% of an employee's compensation) or
may contribute to all eligible employees 2% of their compensation, whether
or not they defer salary to their retirement plans. SIMPLE plans involve
fewer administrative requirements, generally, than traditional 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, church 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)(7) 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 for weekends or 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.
Payment for redemption of shares of the Fund may be made in portfolio
securities when the Fund's Board of Directors determines that conditions
exist making cash payments undesirable. Redemptions made in securities will
be made only in readily marketable securities. Securities used for payment
of redemptions are valued at the value used in figuring 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.
Reinvestment Privilege
The Fund offers a one-time reinvestment privilege that allows you to
reinvest without charge all or part of any amount of Class A shares you
redeem from the Fund by sending to the Fund the amount 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 45 days after your redemption request was received, and the
Fund must be offering Class A shares at the time your reinvestment request
is received. You can do this only once as to Class A shares of the Fund.
You do not use up this privilege by redeeming Class A 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
and, where applicable, certain Class A shares under which you may reinvest
all or part of any amount of the 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 shares of the same class. If Fund shares of that
class are then being offered, you can put all or part of your redemption
payment back into such shares at the NAV next calculated after you have
returned the amount. Your written request to do this must be received
within 45 days after your redemption request was received. You can do this
only once as to Class B, Class C and Class A 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 shares to invest the proceeds at NAV in a Keogh plan or an IRA.
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 this 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. It 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 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 Target Funds, Inc. and W&R Funds, Inc. Each of the Fund's
Directors is also a Director of each of the other funds in the Fund Complex
and each of its 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, Shalton & Welte, 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.
Charles W. Hooper, Jr.
Vice President of the Fund and Vice President of WRIMCO. Formerly,
portfolio manager with Founders Asset Management Company; formerly, Chief
Investment Officer for Owen Joseph. Date of birth: July 29, 1945.
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 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, W&R Target 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, W&R Target Funds, Inc. and W&R Funds, Inc. paid to each
Director and annual base fee of $48,000 per year, plus $2,500 for each
meeting of the Board of Directors attended). The fees to the Directors are
divided among the funds in the Waddell & Reed Advisors Funds, W&R Target
Funds, Inc. and W&R Funds, Inc. based on the funds' relative size.
During the Fund's fiscal year ended June 30, 2000, 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 2,234 62,250
John A. Dillingham 2,234 62,250
David P. Gardner 2,234 62,250
Linda K. Graves 2,234 62,250
Joseph Harroz, Jr. 2,234 62,250
John F. Hayes 2,234 62,250
Glendon E. Johnson 2,234 62,250
William T. Morgan 2,234 62,250
Ronald C. Reimer 2,234 62,250
Frank J. Ross, Jr. 2,234 62,250
Eleanor B. Schwartz 2,234 62,250
Frederick Vogel III 2,234 62,250
*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 September 30, 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
September 30, 2000, regarding the beneficial ownership of the classes of
the Fund's shares.
Name and Address Shares owned
of Record or Beneficially
Beneficial Owner Class or of Record Percent
------------------- ----- ------------ -------
Kenneburt & Co. Class Y 326,384 40.41%
P. O Box 11426
Birmingham AL 35202-1426
Compass Bank Tr Class Y 198,419 24.57%
Profit Sharing Plan
FBO Torchmark Corp
Savings & Investment Plan
Attn: Wayne Laugevin
15 20th St S Fl 8
Birmingham AL 35233-2000
Waddell & Reed Class Y 69,236 8.57%
Financial, Inc.
401(k) and Thrift Plan
6300 Lamar Avenue
Overland Park KS 66201
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 applicable net capital losses carried over from a prior year
or years to offset the gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (1) you want
cash for your dividends and/or distributions, or (2) you want your
dividends and/or 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 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 of Class A shares in
cash, you can thereafter reinvest them (or distributions only) in Class A
shares of the Fund at NAV (i.e., no sales charge) next calculated after
receipt by Waddell & Reed, Inc. of the amount clearly identified as a
reinvestment. The reinvestment must be within 45 days after the payment.
TAXES
General
The Fund has qualified 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 contracts 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.
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 requalifying for RIC
treatment.
Dividends and distributions declared by the Fund in October, November
or December of any year and payable to its shareholders of record on a date
in any of those months are deemed to have been paid by the Fund and
received by the shareholders on December 31 of that year if they are paid
by the Fund during the following January. Accordingly, those dividends and
distributions will be taxed to the shareholders for the year in which that
December 31 falls.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of short-term,
capital loss to the extent of any distributions received on those shares.
Investors should also 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
gain 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 and option income 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 gains. If the Fund enters into a closing purchase transaction,
it will have a short-term capital gain or loss based on the difference
between the premium it receives for the option it wrote and the premium it
pays for the option it buys. If an option written by the Fund 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 receives will be
added to the exercise price to determine the gain or loss 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) also may 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 the holder of those securities, the Fund must include in its income 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, in order 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 Management
Agreement 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
advisory accounts with similar investment objectives. It can be anticipated
that the manager will frequently place concurrent orders for all or most
accounts for which the manager has responsibility or WRIMCO may otherwise
combine orders for the Fund with those of other funds in the Waddell & Reed
Advisors Funds, W&R Target Funds, Inc. and 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 (1)
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, (2) furnishing analyses and reports, or (3) 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 or brokerage services provided. Subject to the
foregoing considerations, WRIMCO may also consider sales of shares of the
Fund 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 June 30, 2000, 1999 and 1998, it
paid brokerage commissions of $4,072,270, $1,529,589 and $721,927,
respectively. These figures do 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 June 30, 2000, the transactions,
other than principal transactions, which were directed to broker-dealers
who provided research services as well as execution totaled $3,066,934,896
on which $3,319,708 in brokerage commissions were paid. These transactions
were allocated to these broker-dealers by the internal allocation
procedures described above.
As of June 30, 2000, the Fund owned securities of Bank of America
Corporation, The Chase Manhattan Corporation and Morgan Stanley, Dean
Witter, Discover & Co. in the amounts of $16,125,000, $13,818,750 and
$10,406,250, respectively. Bank of America Corporation, The Chase Manhattan
Corporation and Morgan Stanley, Dean Witter, Discover & Co. are regular
brokers of the Fund.
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 Shares of the Fund
The Fund offers four classes of shares: Class A, Class B, Class C and
Class Y. Each class represents an 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 CDSC and to ongoing
distribution and service fees; Class B shares that have been held by a
shareholder for eight years will convert, automatically, eight years after
the month in which the shares were purchased, to Class A shares of the
Fund, and such conversion will be made, without charge or fee, on the basis
of the relative NAVs of the two classes; and Class Y shares, which are
designated for institutional investors, have no sales charge nor ongoing
distribution and/or service fee. Each class may bear differing amounts of
certain class-specific expenses; and each class has a separate exchange
privilege. The Fund does not anticipate that there will be any conflicts
between the interests of holders of the different classes of shares of the
Fund by virtue of those classes. On an ongoing basis, the Board of
Directors will consider whether any such conflict exists and, if so, take
appropriate action. Each share of the Fund is entitled to equal voting,
dividend, liquidation and redemption rights, except that due to the
differing expenses borne by the four classes, dividends and liquidation
proceeds of Class B shares and Class C shares are expected to be lower than
for Class A shares, which in turn are expected to be lower than for Class Y
shares of the Fund. Each fractional share of a class has the same rights,
in proportion, as a full share of that class. Shares are fully paid and
nonassessable when purchased.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the 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.
APPENDIX A
DESCRIPTION OF BOND RATINGS
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.
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. A
Standard & Poor's ("S&P") corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment of creditworthiness may take into consideration
obligors such as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to
pay interest and repay principal is very strong, and debt rated AA differs
from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the
applicable grace period has not expired, unless Standard & Poor's 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. A brief description of the applicable Moody's 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.
THE INVESTMENTS OF
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
JUNE 30, 2000
Shares Value
COMMON STOCKS
Amusement and Recreation Services - 0.60%
Westwood One, Inc.* ..................... 250,000 $ 8,531,250
Building Materials and Garden Supplies - 1.77%
Home Depot, Inc. (The) .................. 300,000 14,981,250
Lowe's Companies, Inc. .................. 250,000 10,265,625
Total.................................. 25,246,875
Business Services - 6.93%
America Online, Inc.* ................... 250,000 13,187,500
BroadVision, Inc.* ...................... 300,000 15,215,625
Clear Channel Communications, Inc.* ..... 225,000 16,875,000
GO.com* ................................. 550,000 6,565,625
International FiberCom, Inc.* ........... 350,000 8,914,063
Oracle Corporation* ..................... 150,000 12,604,687
Pilot Network Services, Inc.* ........... 400,000 5,975,000
S1 Corporation* ......................... 325,000 7,586,719
SunGard Data Systems, Inc.* ............. 375,000 11,625,000
Total.................................. 98,549,219
Chemicals and Allied Products - 8.09%
American Home Products Corporation ...... 550,000 32,312,500
Bristol-Myers Squibb Company ............ 200,000 11,650,000
Dow Chemical Company (The) .............. 300,000 9,056,250
Forest Laboratories, Inc.* .............. 125,000 12,625,000
Merck & Co., Inc. ....................... 150,000 11,493,750
Pfizer Inc. ............................. 475,000 22,800,000
Schering-Plough Corporation ............. 300,000 15,150,000
Total.................................. 115,087,500
Communication - 7.57%
BellSouth Corporation ................... 250,000 10,656,250
Qwest Communications International Inc.* 200,000 9,937,500
SBC Communications Inc. ................. 400,000 17,300,000
Sinclair Broadcast Group, Inc.* ......... 700,000 7,678,125
Sprint Corporation - FON Group .......... 300,000 15,300,000
Sprint Corporation - PCS Group* ......... 200,000 11,900,000
USA Networks, Inc.* ..................... 900,000 19,490,625
Viacom Inc., Class B* ................... 225,000 15,342,188
Total.................................. 107,604,688
Depository Institutions - 2.11%
Bank of America Corporation ............. 375,000 16,125,000
Chase Manhattan Corporation (The) ....... 300,000 13,818,750
Total.................................. 29,943,750
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
JUNE 30, 2000
Shares Value
COMMON STOCKS (Continued)
Electronic and Other Electric Equipment - 23.10%
Amphenol Corporation, Class A* .......... 325,000
$ 21,510,937
Analog Devices, Inc.* ................... 175,000 13,300,000
Glenayre Technologies, Inc.* ............ 800,000 8,425,000
Harman International Industries,
Incorporated........................... 225,000 13,725,000
Intel Corporation ....................... 200,000 26,731,250
JDS Uniphase Corporation* ............... 150,000 17,976,563
Jabil Circuit, Inc.* .................... 350,000 17,368,750
LSI Logic Corporation* .................. 400,000 21,650,000
Maxim Integrated Products, Inc.* ........ 225,000 15,278,906
Maytag Corporation ...................... 400,000 14,750,000
Micron Technology, Inc.* ................ 340,000 29,941,250
National Semiconductor Corporation* ..... 125,000 7,093,750
Nokia Corporation, Series A, ADR ........ 150,000 7,490,625
Nortel Networks Corporation ............. 150,000 10,237,500
PMC - Sierra Inc.* ...................... 150,000 26,648,437
Rambus Inc.* ............................ 300,000 30,900,000
Sanmina Corporation* .................... 175,000 14,957,031
Solectron Corporation* .................. 400,000 16,750,000
Texas Instruments Incorporated .......... 200,000 13,737,500
Total.................................. 328,472,499
Engineering and Management Services - 0.92%
marchFIRST, Inc.* ....................... 275,000 5,027,344
Tetra Tech, Inc.* ....................... 350,000 8,017,187
Total.................................. 13,044,531
Food Stores - 0.62%
Kroger Co. (The)* ....................... 400,000 8,825,000
Furniture and Home Furnishings Stores - 0.58%
Circuit City Stores, Inc. -
Circuit City Group..................... 250,000 8,296,875
General Merchandise Stores - 1.60%
BJ's Wholesale Club, Inc.* .............. 250,000 8,250,000
Target Corporation ...................... 250,000 14,500,000
Total.................................. 22,750,000
Health Services - 0.46%
Health Management Associates, Inc.,
Class A*............................... 500,000 6,531,250
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
JUNE 30, 2000
Shares Value
COMMON STOCKS (Continued)
Industrial Machinery and Equipment - 8.65%
Apple Computer, Inc.* ................... 300,000
$ 15,703,125
Applied Materials, Inc.* ................ 200,000 18,131,250
Cisco Systems, Inc.* .................... 350,000 22,235,938
Cooper Cameron Corporation* ............. 175,000 11,550,000
Dell Computer Corporation* .............. 400,000 19,737,500
EMC Corporation* ........................ 200,000 15,387,500
Lam Research Corporation* ............... 175,000 6,567,969
Sun Microsystems, Inc.* ................. 150,000 13,645,312
Total.................................. 122,958,594
Instruments and Related Products - 1.04%
Guidant Corporation* .................... 300,000 14,850,000
Insurance Agents, Brokers & Service - 0.98%
Hartford Financial Services
Group Inc. (The)....................... 250,000 13,984,375
Insurance Carriers - 0.76%
Lincoln National Corporation ............ 300,000 10,837,500
Lumber and Wood Products - 0.60%
Weyerhaeuser Company .................... 200,000 8,600,000
Motion Pictures - 0.60%
AT&T Corp. - Liberty Media Group, Class A* 350,000 8,487,500
Nondepository Institutions - 1.73%
Freddie Mac ............................. 350,000 14,175,000
Morgan Stanley, Dean Witter,
Discover & Co.......................... 125,000 10,406,250
Total.................................. 24,581,250
Oil and Gas Extraction - 8.21%
Anadarko Petroleum Corporation .......... 450,000 22,190,625
Apache Corporation ...................... 325,000 19,114,062
Burlington Resources Incorporated ....... 600,000 22,950,000
Kerr-McGee Corporation .................. 300,000 17,681,250
Santa Fe International Corporation ...... 250,000 8,734,375
Schlumberger Limited .................... 350,000 26,118,750
Total.................................. 116,789,062
Paper and Allied Products - 1.00%
Packaging Corporation of America* ....... 650,000 6,581,250
Smurfit-Stone Container Corporation* .... 600,000 7,706,250
Total.................................. 14,287,500
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
JUNE 30, 2000
Shares Value
COMMON STOCKS (Continued)
Petroleum and Coal Products - 0.87%
Royal Dutch Petroleum Company,
NY Shares.............................. 200,000 $ 12,312,500
Primary Metal Industries - 0.82%
Alcoa Incorporated ...................... 400,000 11,600,000
Real Estate - 0.60%
FrontLine Capital Group* ................ 400,000 8,537,500
Security and Commodity Brokers - 0.89%
Charles Schwab Corporation (The) ........ 375,000 12,609,375
Transportation by Air - 1.56%
Northwest Airlines Corporation,
Class A*............................... 300,000 9,112,500
UAL Corporation* ........................ 225,000 13,092,188
Total.................................. 22,204,688
Transportation Equipment - 1.41%
Boeing Company (The) .................... 250,000 10,453,125
Harley-Davidson, Inc. ................... 250,000 9,625,000
Total.................................. 20,078,125
Wholesale Trade - Durable Goods - 1.46%
Avnet, Inc. ............................. 350,000 20,737,500
TOTAL COMMON STOCKS - 85.53% $1,216,338,906
(Cost: $1,036,506,530)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Chemicals and Allied Products- 1.37%
du Pont (E.I.) de Nemours and Company:
6.75%, 10-15-04........................ $10,000 9,850,500
6.875%, 10-15-09....................... 10,000 9,719,000
Total.................................. 19,569,500
Communication - 3.03%
Bell Atlantic Financial Services, Inc.,
7.6%, 3-15-07.......................... 10,000 9,979,600
Bell Telephone Company of Pennsylvania (The),
8.35%, 12-15-30........................ 3,000 3,128,370
Deutsche Telekom International Finance B.V.,
8.25%, 6-15-30......................... 28,000 28,525,000
Southwestern Bell Telephone Company,
5.77%, 10-14-03........................ 1,500 1,427,445
Total.................................. 43,060,415
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
JUNE 30, 2000
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Depository Institutions - 0.16%
Wachovia Corporation,
6.25%, 8-4-08.......................... $ 2,500 $ 2,256,200
Electric, Gas and Sanitary Services - 0.07%
California Infrastructure and Economic
Development Bank, Special Purpose
Trust PG&E-1,
6.42%, 9-25-08......................... 1,000 971,410
Food and Kindred Products - 0.34%
Coca-Cola Enterprises Inc.,
6.7%, 10-15-36......................... 5,000 4,885,250
Health Services - 0.45%
Columbia/HCA Healthcare Corporation,
6.91%, 6-15-05......................... 7,000 6,352,500
Industrial Machinery and Equipment - 0.17%
Tyco International Group S.A.,
6.375%, 6-15-05........................ 2,500 2,384,825
Nondepository Institutions - 4.50%
Ford Motor Credit Company:
6.7%, 7-16-04.......................... 22,000 21,314,920
7.375%, 10-28-09....................... 20,000 19,345,400
General Electric Capital Corporation:
7.5%, 5-15-05.......................... 20,000 20,205,200
8.3%, 9-20-09.......................... 3,000 3,221,040
Total.................................. 64,086,560
Transportation by Air - 0.26%
Southwest Airlines Co.,
7.875%, 9-1-07......................... 3,650 3,650,256
United States Postal Service - 0.15%
Postal Square Limited Partnership,
8.95%, 6-15-22 ........................ 1,842 2,153,119
TOTAL CORPORATE DEBT SECURITIES -10.50% $149,370,035
(Cost: $150,093,620)
OTHER GOVERNMENT SECURITY - 0.21%
Supranational
International Bank for Reconstruction and
Development,
9.25%, 7-15-17......................... 2,500 $ 3,005,375
(Cost: $2,498,327)
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
JUNE 30, 2000
Principal
Amount in
Thousands Value
UNITED STATES GOVERNMENT SECURITIES
Federal National Mortgage Association,
6.51%, 5-6-08.......................... $ 7,500
$ 7,061,700
Government National Mortgage Association,
6.5%, 8-15-28.......................... 12,444 11,810,599
National Archives Facility Trust,
8.5%, 9-1-19........................... 4,081 4,493,009
United States Treasury,
6.25%, 2-15-07......................... 10,000 10,007,800
TOTAL UNITED STATES GOVERNMENT
SECURITIES - 2.35% $ 33,373,108
(Cost: $33,906,636)
TOTAL SHORT-TERM SECURITIES - 3.40% $ 48,387,002
(Cost: $48,387,002)
TOTAL INVESTMENT SECURITIES - 101.99% $1,450,474,426
(Cost: $1,271,392,115)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (1.99%) (28,246,423)
NET ASSETS - 100.00% $1,422,228,003
Notes to Schedule of Investments
*No dividends were paid during the preceding 12 months.
See Note 1 to financial statements for security valuation and other
significant accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000
(In Thousands, Except for Per Share Amounts)
Assets
Investment securities -- at value
(Notes 1 and 3).................................. $1,450,474
Cash ........................................... 1
Receivables:
Investment securities sold....................... 22,659
Dividends and interest........................... 3,081
Fund shares sold................................. 2,175
Prepaid insurance premium ......................... 9
----------
Total assets ................................... 1,478,399
----------
Liabilities
Payable for investment securities purchased ....... 53,915
Payable to Fund shareholders ...................... 1,738
Accrued service fee (Note 2) ...................... 252
Accrued transfer agency and
dividend disbursing (Note 2)..................... 165
Accrued distribution fee (Note 2) ................. 44
Accrued management fee (Note 2) ................... 26
Accrued accounting services fee (Note 2) .......... 8
Accrued shareholder servicing -- Class Y (Note 2) . 1
Other ............................................ 22
----------
Total liabilities .............................. 56,171
----------
Total net assets.............................. $1,422,228
==========
Net Assets
$1.00 par value capital stock:
Capital stock.................................... $ 118,036
Additional paid-in capital....................... 829,670
Accumulated undistributed income:
Accumulated undistributed net investment income.. 1,827
Accumulated undistributed net realized
gain on investment transactions ................ 293,613
Net unrealized appreciation in value of
investments .................................... 179,082
----------
Net assets applicable to outstanding
units of capital.............................. $1,422,228
==========
Capital shares outstanding:
Class A ........................................... 114,250
Class B ........................................... 2,394
Class C ........................................... 493
Class Y ........................................... 899
Capital shares authorized........................... 300,000
Net asset value per share (net assets divided
by shares outstanding):
Class A ........................................... $12.05
Class B ........................................... $12.00
Class C ........................................... $12.00
Class Y ........................................... $12.05
See notes to financial statements.
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended JUNE 30, 2000
(In Thousands)
Investment Income
Income (Note 1B):
Interest and amortization........................ $11,980
Dividends........................................ 6,773
--------
Total income ................................... 18,753
--------
Expenses (Note 2):
Investment management fee........................ 7,900
Service fee:
Class A ........................................ 2,450
Class B ........................................ 23
Class C ........................................ 5
Transfer agency and dividend disbursing:
Class A ........................................ 1,506
Class B ........................................ 30
Class C ........................................ 7
Distribution fee:
Class A ........................................ 163
Class B ........................................ 67
Class C ........................................ 14
Accounting services fee.......................... 95
Custodian fees................................... 49
Legal fees....................................... 14
Audit fees....................................... 13
Shareholder servicing -- Class Y................. 13
Other............................................ 228
--------
Total expenses ................................. 12,577
--------
Net investment income......................... 6,176
--------
Realized and Unrealized Gain on
Investments (Notes 1 and 3)
Realized net gain on investments .................. 363,878
Unrealized appreciation in value of investments
during the period................................ 33,900
--------
Net gain on investments.......................... 397,778
--------
Net increase in net assets resulting
from operations............................... $403,954
========
See notes to financial statements.
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
STATEMENT OF CHANGES IN NET ASSETS
(In Thousands)
For the fiscal year ended
June 30,
-------------------------
2000 1999
Increase in Net Assets ------------ -----------
Operations:
Net investment income................ $ 6,176 $ 16,688
Realized net gain on investments..... 363,878 89,889
Unrealized appreciation
(depreciation) ..................... 33,900 (5,039)
---------- --------
Net increase in net assets
resulting from operations......... 403,954 101,538
---------- --------
Distributions to shareholders from (Note 1E):*
Net investment income:
Class A ............................ (5,913) (15,950)
Class B ............................ --- ---
Class C ............................ --- ---
Class Y ............................ (69) (74)
Realized gains on securitiestransactions:
Class A ............................ (157,339) (32,461)
Class B ............................ (576) ---
Class C ............................ (113) ---
Class Y ............................ (1,368) (138)
---------- --------
(165,378) (48,623)
---------- --------
Capital share transactions (Note 5) ... 290,316 12,084
---------- --------
Total increase.................... 528,892 64,999
Net Assets
Beginning of period ................... 893,336 828,337
---------- --------
End of period, including undistributed
net investment income of $1,827
and $1,633, respectively............. $1,422,228 $893,336
========== ========
*See "Financial Highlights" on pages - .
See notes to financial statements.
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the fiscal year ended June 30,
------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Net asset value,
beginning of
period ............ $ 9.84 $9.28 $9.14 $8.72 $8.26
------ ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... 0.06 0.19 0.24 0.27 0.26
Net realized and
unrealized gain
on investments... 3.92 0.92 0.99 1.08 0.94
------ ----- ----- ----- -----
Total from investment
operations ........ 3.98 1.11 1.23 1.35 1.20
------ ----- ----- ----- -----
Less distributions:
From net investment
income........... (0.06) (0.18) (0.25) (0.27) (0.27)
From capital gains (1.71) (0.37) (0.84) (0.66) (0.47)
------ ----- ----- ----- -----
Total distributions. (1.77) (0.55) (1.09) (0.93) (0.74)
------ ----- ----- ----- -----
Net asset value,
end of period ..... $12.05 $9.84 $9.28 $9.14 $8.72
====== ===== ===== ===== =====
Total return*....... 43.54% 12.75% 14.45% 16.70% 14.93%
Net assets, end of
period (in millions) $1,377 $890 $825 $716 $607
Ratio of expenses to
average net assets 1.10% 0.99% 0.93% 0.92% 0.89%
Ratio of net
investment income
to average net
assets ............ 0.55% 2.04% 2.57% 3.12% 3.01%
Portfolio turnover
rate .............. 295.37% 122.58% 53.52% 39.55% 42.05%
*Total return calculated without taking into account the sales load
deducted on an initial purchase.
See notes to financial statements.
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
FINANCIAL HIGHLIGHTS
Class B Shares
For a Share of Capital Stock Outstanding Throughout The Period:
For the
period
from
10/4/99*
through
6/30/00
-------
Net asset value,
beginning of period $10.12
------
Income from investment
operations:
Net investment loss (0.01)
Net realized and
unrealized gain
on investments... 3.60
------
Total from investment
operations ........ 3.59
------
Less distributions:
From net investment
income........... (0.00)
From capital gains (1.71)
------
Total distributions. (1.71)
------
Net asset value,
end of period ..... $12.00
======
Total return........ 38.28
Net assets, end of
period (in
millions) ......... $28
Ratio of expenses to
average net assets 2.05%**
Ratio of net investment
loss to average
net assets ........ -0.42%**
Portfolio turnover
rate .............. 295.37%**
*Commencement of operations.
**Annualized.
See notes to financial statements.
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
FINANCIAL HIGHLIGHTS
Class C Shares
For a Share of Capital Stock Outstanding Throughout The Period:
For the
period
from
10/4/99*
through
6/30/00
-------
Net asset value,
beginning of period $10.12
-----
Income from investment
operations:
Net investment loss (0.01)
Net realized and
unrealized gain
on investments... 3.60
-----
Total from investment
operations ........ 3.59
-----
Less distributions:
From net investment
income........... (0.00)
From capital gains (1.71)
-----
Total distributions. (1.71)
-----
Net asset value,
end of period ..... $12.00
=====
Total return........ 38.28%
Net assets, end of
period (in
millions) ......... $6
Ratio of expenses to
average net assets 2.07%**
Ratio of net investment
loss to average
net assets ........ -0.44%**
Portfolio turnover
rate .............. 295.37%**
*Commencement of operations.
**Annualized.
See notes to financial statements.
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the
period
For the fiscal from
year ended June 30, 2/27/96*
----------------------------- through
2000 1999 1998 1997 6/30/96
------ ------ ------ ------ -------
Net asset value,
beginning of period $ 9.85 $9.28 $9.14 $8.72 $8.68
------ ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... 0.10 0.20 0.25 0.29 0.10
Net realized and
unrealized gain
on investments... 3.89 0.94 0.99 1.07 0.06
------ ----- ----- ----- -----
Total from investment
operations ........ 3.99 1.14 1.24 1.36 .16
------ ----- ----- ----- -----
Less distributions:
From net investment
income ........... (0.08) (0.20) (0.26) (0.28) (0.12)
From capital gains (1.71) (0.37) (0.84) (0.66) (0.00)
------ ----- ----- ----- -----
Total distributions. (1.79) (0.57) (1.10) (0.94) (0.12)
------ ----- ----- ----- -----
Net asset value,
end of period ..... $12.05 $9.85 $9.28 $9.14 $8.72
====== ===== ===== ===== =====
Total return........ 43.75% 13.11% 14.62% 16.87% 1.91%
Net assets, end of
period (in
millions) ......... $11 $3 $3 $3 $2
Ratio of expenses
to average net
assets ............ 0.88% 0.75% 0.79% 0.78% 0.71%**
Ratio of net
investment income
to average net
assets ............ 0.75% 2.32% 2.71% 3.28% 3.36%**
Portfolio
turnover rate ..... 295.37% 122.58% 53.52% 39.55% 42.05%**
*Commencement of operations.
**Annualized.
See notes to financial statements.
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1 -- Significant Accounting Policies
Waddell & Reed Advisors Retirement Shares, Inc. (the "Fund"), formerly
United Retirement Shares, Inc., is registered under the Investment Company
Act of 1940 as a diversified, open-end management investment company. Its
investment objective is to provide the highest long-term total investment
return as is, in the opinion of management, consistent with reasonable
safety of capital. 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. 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. Original issue discount (as defined in
the Internal Revenue Code), premiums on the purchase of bonds and
post-1984 market discount are amortized for both financial and tax
reporting purposes. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. See Note 3 --
Investment Securities 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 4 -- 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 -- 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 this fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("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 $3,253,764. During the period ended June 30, 2000, W&R received $5,953
and $1,002 in deferred sales charges for Class B shares and Class C shares,
respectively. With respect to Class A, Class B and Class C shares, W&R paid
sales commissions of $2,875,497 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 0.25% 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.
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 is it entitled to reimbursement
under the Class A Plan.
The Fund paid Directors' fees of $35,182, 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 3 -- Investment Securities Transactions
Purchases of investment securities, other than U.S. Government
obligations and short-term securities, aggregated $3,207,374,466 while
proceeds from maturities and sales aggregated $3,012,814,199. Purchases of
short-term and U.S. Government securities aggregated $2,922,490,448 and
$189,237,275, respectively. Proceeds from maturities and sales of short-
term and U.S. Government securities aggregated $2,890,443,805 and
$252,505,714, respectively.
For Federal income tax purposes, cost of investments owned at June 30,
2000 was $1,271,883,736, resulting in net unrealized appreciation of
$178,590,690, of which $236,484,521 related to appreciated securities and
$57,893,831 related to depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $364,205,179 during its fiscal year ended June 30, 2000, of which a
portion was paid to shareholders during the period ended June 30, 2000.
Remaining capital gain net income will be distributed to the Fund's
shareholders.
NOTE 5 -- 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 fiscal
year ended June 30,
--------------------------
2000 1999
------------ ------------
Shares issued from sale
of shares:
Class A ............. 20,241 10,309
Class B ............. 2,413 ---
Class C ............. 502 ---
Class Y ............. 728 230
Shares issued fromreinvestment
of dividends and/or capital gains
distribution:
Class A ............. 15,696 5,446
Class B ............. 56 ---
Class C ............. 11 ---
Class Y ............. 86 24
Shares redeemed:
Class A ............. (12,091) (14,310)
Class B ............. (75) ---
Class C ............. (20) ---
Class Y ............. (254) (243)
---------- ----------
Increase in outstanding
capital shares ...... 27,293 1,456
========== ==========
Value issued from sale
of shares:
Class A ............. $222,569 $ 93,629
Class B ............. 27,172 ---
Class C ............. 5,630 ---
Class Y ............. 7,680 2,066
Value issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ............. 161,642 48,028
Class B ............. 576 ---
Class C ............. 113 ---
Class Y ............. 885 212
Value redeemed:
Class A ............. (132,076) (129,651)
Class B ............. (860) ---
Class C ............. (234) ---
Class Y ............. (2,781) (2,200)
-------- --------
Increase in outstanding
capital ............. $290,316 $ 12,084
======== ========
NOTE 6 -- Securities Loaned
On June 30, 2000 there were no securities outstanding on loan. If
securities were on loan, however, the aggregate amount of such loans must
be secured by 100% of the market value of the securities loaned. The Fund
derives income from its securities lending activities. These arrangements
may be terminated by the borrower or the Fund upon proper notice. In the
event the borrower fails to deliver the securities within five business
days, the Fund has the right to use the collateral to purchase similar or
other securities. During the period ended June 30, 2000, the Fund derived
approximately $93,150 of income, net of related expenses, from its security
lending activity.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Waddell & Reed Advisors Retirement Shares, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Waddell & Reed Advisors
Retirement Shares, Inc. (formerly United Retirement Shares, Inc.) (the
"Fund") as of June 30, 2000, 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 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 June 30, 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 Waddell & Reed Advisors Retirement Shares, Inc. as of June 30, 2000, 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 accounting principles generally
accepted in the United States of America.
/s/Deloitte & Touche LLP
-----------------------
Deloitte & Touche LLP
Kansas City, Missouri
August 4, 2000
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits: Waddell & Reed Advisors Retirement Shares, Inc.
(a) Articles of Incorporation, as amended, filed by EDGAR on
September 28, 1998 as EX-99.B1-charter to Post-Effective
Amendment No. 49 to the Registration Statement on Form N-1A*
Articles Supplementary, filed by EDGAR on August 7, 1995 as
EX-99.B1-rsarsupa to Post-Effective Amendment No. 45 to the
Registration Statement on Form N-1A*
Articles Supplementary filed by EDGAR on July 2, 1999 as EX-
99.B(a)rsartsup to Post-Effective Amendment No. 50 to the
Registration Statement on Form N-1A*
Articles Supplementary filed by EDGAR on June 30, 2000 as
EX-99.B(a)rsartsup1 to Post-Effective Amendment No. 52 to
the Registration Statement on Form N-1A*
Articles of Amendment filed by EDGAR on June 30, 2000 as EX-
99.B(a)rsartsup2 to Post-Effective Amendment No. 52 to the
Registration Statement on Form N-1A*
(b) Bylaws, as amended, filed by EDGAR on September 26, 1996 as
EX-99.B2-rsbylaw to Post-Effective Amendment No. 46 to the
Registration Statement on Form N-1A*
Amendment to Bylaws filed by EDGAR on July 2, 1999 as EX-
99.B(b)rsbylaw2 to Post-Effective Amendment No. 50 to the
Registration Statement on Form N-1A*
Amendment to Bylaws attached hereto as EX-99.B(b)rsbylaw
(c) Not applicable
(d) Investment Management Agreement, as amended, filed by EDGAR
on August 7, 1995 as EX-99.B(d)-rsima to Post-Effective
Amendment No. 45 to the Registration Statement on Form N-1A*
Assignment of the Investment Management Agreement filed by
EDGAR on August 7, 1995 as EX-99.B5-rsassign to Post-
Effective Amendment No. 45 to the Registration Statement on
Form N-1A*
Fee Schedule (Exhibit A) to the Investment Management
Agreement, as amended, filed by EDGAR on July 2, 1999 as EX-
99.B(d)rsimafee to Post-Effective Amendment No. 50 to the
Registration Statement on Form N-1A*
(e) Underwriting Agreement filed by EDGAR on August 7, 1995 as
EX-99.B6-rsua to Post-Effective Amendment No. 45 to the
Registration Statement on Form N-1A*
(f) Not applicable
(g) Custodian Agreement, as amended, filed by EDGAR on July 2,
1999 as EX-99.B(g)-rsca to Post-Effective Amendment No. 50
to the Registration Statement on Form N-1A*
Custodian Agreement, as amended, filed by EDGAR on June 30,
2000 as EX-99.B(g)rsca to Post-Effective Amendment No. 52 to
the Registration Statement on Form N-1A*
(h) Accounting Services Agreement, filed by EDGAR on August 7,
1995 as EX-99.B9-rsasa to Post-Effective Amendment No. 45 to
the Registration Statement on Form N-1A*
Amendment to Accounting Services Agreement attached hereto
as EX-99.B(h)rsasaamend
Class Y Letter of Understanding filed by EDGAR on September
26, 1996 as EX-99.B9-rslou to Post-Effective Amendment No.
46 to the Registration Statement on Form N-1A*
Shareholder Servicing Agreement, filed by EDGAR on September
28, 1998 as EX-99.B(9)-rsssa to Post-Effective Amendment No.
49 to the Registration Statement on Form N-1A*
Compensation Table (Exhibit B) to the Shareholder Servicing
Agreement, as amended, filed by EDGAR on July 2, 1999 as EX-
99.B(h)rsssacom to Post-Effective Amendment No. 50 to the
Registration Statement on Form N-1A*
Compensation Table (Exhibit B) to the Shareholder Servicing
Agreement, as amended, attached hereto as EX-
99.B(h)rsssacomp
Fidelity Bond Coverage (Exhibit C) to the Shareholder
Servicing Agreement, as amended, attached hereto as EX-
99.B(h)rsssafidbd
(i) Not applicable
(j) Not applicable
(k) Not applicable
(l) Not applicable
(m) Distribution and Service Plan, as restated, filed by EDGAR
on September 26, 1997 as EX-99.B15-rsspca to Post-Effective
Amendment No. 48 to the Registration Statement on Form N-1A*
Service Agreement, filed by EDGAR on August 7, 1995 as EX-
99.B15-rssa to Post-Effective Amendment No. 45 to the
Registration Statement on Form N-1A*
Amendment to Service Agreement, filed by EDGAR on September
28, 1994 as Exhibit (b)(15) to Post-Effective Amendment No.
43 to Registration Statement on Form N-1A*
Amendment to Service Agreement, filed by EDGAR on August 7,
1995 as EX-99.B15-rssaa to Post-Effective Amendment No. 45
to the Registration Statement on Form N-1A*
Distribution and Service Plan for Class B shares filed by
EDGAR on July 2, 1999 as EX-99.B(m)rsdspb to Post-
Effective Amendment No. 50 to the Registration Statement
on Form N-1A*
Distribution and Service Plan for Class C shares filed by
EDGAR on July 2, 1999 as EX-99.B(m)rsdspc to Post-
Effective Amendment No. 50 to the Registration Statement
on Form N-1A*
(n) Not applicable
(o) Multiple Class Plan filed by EDGAR on August 7, 1995 as
EX-99.B18-rsmcp to Post-Effective Amendment No. 45 to the
Registration Statement on Form N-1A*
Multiple Class Plan, as amended, filed by EDGAR on
September 26, 1996 as EX-99.B18-rsmcp to Post-Effective
Amendment No. 46 to the Registration Statement on Form N-
1A*
Multiple Class Plan, as amended, filed by EDGAR on July 2,
1999 as EX-99.B(O)rsmcp to Post-Effective Amendment No. 50
to the Registration Statement on Form N-1A*
Multiple Class Plan, as amended, filed by EDGAR on June
30, 2000 as EX-99.B(o)rsmcp to Post-Effective Amendment
No. 52 to the Registration Statement on Form N-1A*
(p) Code of Ethics filed by EDGAR on June 30, 2000 as EX-
99.B(p)rscode to Post-Effective Amendment No. 52 to the
Registration Statement on Form N-1A*
Code of Ethics, as revised, attached hereto as EX-
99.B(p)rscode
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Article TENTH Section 10.2 of the Articles of
Incorporation, as amended, filed on September 28, 1998 as EX-99.B1-
charter to Post-Effective Amendment No. 49 to the Registration
Statement on Form N-1A*; Article IX of the Bylaws, as amended,
attached hereto as EX-99.B(b)rsbylaw and to Article IV of the
Underwriting Agreement, filed by EDGAR on August 7, 1995 as EX-99.B6-
rsua to Post-Effective Amendment No. 45 to the Registration Statement
on Form N-1A*, each of which provide indemnification. Also refer to
Section 2-418 of the Maryland General Corporation Law regarding
indemnification of directors, officers and employees and agents.
Registrant undertakes to carry out all indemnification provisions of
its Articles of Incorporation, Bylaws, and the above-described
contracts in accordance with the Investment Company Act Release No.
11330 (September 4, 1980) and successor releases.
Insofar as indemnification for liability arising under the 1933 Act,
as amended, may be provided to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment of the Registrant of expenses incurred or paid
by a director, officer of controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
26. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company ("WRIMCO") is the
investment manager of the Registrant. Under the terms of an Investment
Management Agreement between Waddell & Reed, Inc. and the Registrant,
Waddell & Reed, Inc. is to provide investment management services to
the Registrant. Waddell & Reed, Inc. assigned its investment
management duties under this agreement to WRIMCO on January 8, 1992.
WRIMCO is a corporation which is not engaged in any business other
than the provision of investment management services to those
registered investment companies described in Part A and Part B of this
Post-Effective Amendment and to other investment advisory clients.
Each director and executive officer of WRIMCO has had as his sole
business, profession, vocation or employment during the past two years
only his duties as an executive officer and/or employee of WRIMCO or
its predecessors, except as to persons who are directors and/or
officers of the Registrant and have served in the capacities shown in
the Statement of Additional Information of the Registrant. The address
of the officers is 6300 Lamar Avenue, Shawnee Mission, Kansas 66202-
4200.
As to each director and officer of WRIMCO, reference is made to the
Prospectus and SAI of this Registrant.
27. Principal Underwriter
---------------------
(a) Waddell & Reed, Inc. is the principal underwriter of the
Registrant. It is also the principal underwriter to the following
investment companies:
Waddell & Reed Advisors Funds, Inc.
Waddell & Reed Advisors International Growth Fund, Inc.
Waddell & Reed Advisors Continental Income Fund, Inc.
Waddell & Reed Advisors Vanguard Fund, Inc.
Waddell & Reed Advisors Municipal Bond Fund, Inc.
Waddell & Reed Advisors High Income Fund, Inc.
Waddell & Reed Advisors Cash Management, Inc.
Waddell & Reed Advisors Government Securities Fund, Inc.
Waddell & Reed Advisors New Concepts Fund, Inc.
Waddell & Reed Advisors Municipal High Income Fund, Inc.
Waddell & Reed Advisors Global Bond Fund, Inc.
Waddell & Reed Advisors Asset Strategy Fund, Inc.
Waddell & Reed Advisors Small Cap Fund, Inc.
Waddell & Reed Advisors Tax-Managed Equity Fund, Inc.
W&R Funds, Inc.
Advantage I
Advantage II
Advantage Plus
Advantage Gold
(b) The information contained in the underwriter's application on
Form BD as filed on October 13, 2000 SEC No. 8-27030, under the
Securities Exchange Act of 1934, is herein incorporated by
reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or
any affiliated person of such affiliated person.
28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant,
each of whose business address is Post Office Box 29217, Shawnee
Mission, Kansas 66201-9217.
29. Management Services
-------------------
There is no service contract other than as discussed in Part A and B
of this Post-Effective Amendment and listed in response to items
23.(h) and 23.(m) hereof.
30. Undertakings
-----------
Not applicable
---------------------------------
*Incorporated herein by reference
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, WADDELL
& REED ADVISORS ASSET STRATEGY FUND, INC., WADDELL & REED ADVISORS CASH
MANAGEMENT, INC., WADDELL & REED ADVISORS CONTINENTAL INCOME FUND, INC.,
WADDELL & REED ADVISORS FUNDS, INC., WADDELL & REED ADVISORS GOVERNMENT
SECURITIES FUND, INC., WADDELL & REED ADVISORS HIGH INCOME FUND, INC.,
WADDELL & REED ADVISORS GLOBAL BOND FUND, INC., WADDELL & REED ADVISORS
INTERNATIONAL GROWTH FUND, INC., WADDELL & REED ADVISORS MUNICIPAL BOND
FUND, INC., WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.,
WADDELL & REED ADVISORS MUNICIPAL MONEY MARKET FUND, INC., WADDELL & REED
ADVISORS NEW CONCEPTS FUND, INC., WADDELL & REED ADVISORS RETIREMENT
SHARES, INC., WADDELL & REED ADVISORS SMALL CAP FUND, INC., WADDELL & REED
ADVISORS TAX-MANAGED EQUITY FUND, INC., WADDELL & REED ADVISORS VALUE FUND,
INC., WADDELL & REED ADVISORS VANGUARD FUND, INC., W&R TARGET FUNDS, INC.
AND W&R FUNDS, INC. (each hereinafter called the "Corporation"), and
certain directors and officers for the Corporation, do hereby constitute
and appoint KEITH A. TUCKER, ROBERT L. HECHLER, DANIEL C. SCHULTE and
KRISTEN A. RICHARDS, and each of them individually, their true and lawful
attorneys and agents to take any and all action and execute any and all
instruments which said attorneys and agents may deem necessary or advisable
to enable each Corporation to comply with the Securities Act of 1933 and/or
the Investment Company Act of 1940, as amended, and any rules, regulations,
orders or other requirements of the United States Securities and Exchange
Commission thereunder, in connection with the registration under the
Securities Act of 1933 and/or the Investment Company Act of 1940, as
amended, including specifically, but without limitation of the foregoing,
power and authority to sign the names of each of such directors and
officers in his/her behalf as such director or officer as indicated below
opposite his/her signature hereto, to any Registration Statement and to any
amendment or supplement to the Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 and/or
the Investment Company Act of 1940, as amended, and to any instruments or
documents filed or to be filed as a part of or in connection with such
Registration Statement or amendment or supplement thereto; and each of the
undersigned hereby ratifies and confirms all that said attorneys and agents
shall do or cause to be done by virtue hereof.
Date: August 16, 2000 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
/s/Keith A. Tucker Chairman of the Board August 16, 2000
------------------- -----------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal August 16, 2000
-------------------- Financial Officer and -----------------
Robert L. Hechler Director
/s/Henry J. Herrmann Vice President and August 16, 2000
-------------------- Director -----------------
Henry J. Herrmann
/s/Theodore W. Howard Vice President, Treasurer August 16, 2000
-------------------- and Principal Accounting -----------------
Theodore W. Howard Officer
/s/James M. Concannon Director August 16, 2000
-------------------- -----------------
James M. Concannon
/s/John A. Dillingham Director August 16, 2000
-------------------- -----------------
John A. Dillingham
/s/David P. Gardner Director August 16, 2000
------------------- -----------------
David P. Gardner
/s/Linda K. Graves Director August 16, 2000
-------------------- -----------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director August 16, 2000
-------------------- -----------------
Joseph Harroz, Jr.
/s/John F. Hayes Director August 16, 2000
-------------------- -----------------
John F. Hayes
/s/Glendon E. Johnson Director August 16, 2000
-------------------- -----------------
Glendon E. Johnson
/s/William T. Morgan Director August 16, 2000
-------------------- -----------------
William T. Morgan
/s/Ronald C. Reimer Director August 16, 2000
-------------------- -----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr. Director August 16, 2000
-------------------- -----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director August 16, 2000
-------------------- -----------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director August 16, 2000
-------------------- -----------------
Frederick Vogel III
Attest:
/s/Kristen A. Richards
--------------------------------
Kristen A. Richards
Secretary
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant certifies that it meets all of the requirements for
effectiveness of this Post-Effective Amendment, and has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Overland Park, and State of
Kansas, on the 30th day of October, 2000.
WADDELL & REED ADVISORS RETIREMENT SHARES, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Investment Company Act of 1940,
this Post-Effective Amendment has been signed below by the following
persons in the capacities and on the date indicated.
Signatures Title
---------- -----
/s/Keith A. Tucker* Chairman of the Board October 30, 2000
---------------------- ----------------
Keith A. Tucker
/s/Robert L. Hechler* President October 30, 2000
---------------------- Principal Financial Officer ----------------
Robert L. Hechler and Director
/s/Henry J. Herrmann* Vice President and Director October 30, 2000
---------------------- ----------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer October 30, 2000
---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon* Director October 30, 2000
------------------- ----------------
James M. Concannon
/s/John A. Dillingham* Director October 30, 2000
------------------- ----------------
John A. Dillingham
/s/David P. Gardner* Director October 30, 2000
------------------- ----------------
David P. Gardner
/s/Linda K. Graves* Director October 30, 2000
------------------- ----------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director October 30, 2000
------------------- ----------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director October 30, 2000
------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson* Director October 30, 2000
------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director October 30, 2000
------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer* Director October 30, 2000
------------------- ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director October 30, 2000
------------------- ----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz* Director October 30, 2000
------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director October 30, 2000
------------------- ----------------
Frederick Vogel III
*By/s/Kristen A. Richards
------------------------
Kristen A. Richards
Attorney-in-Fact
ATTEST:/s/Daniel C. Schulte
---------------------------
Daniel C. Schulte
Assistant Secretary
