<PAGE>
WADDELL & REED ADVISORS
SMALL CAP
FUND,
INC.
ANNUAL
REPORT
-------------
June 30, 2000
<PAGE>
This report is submitted for the general information of the shareholders of
Waddell & Reed Advisors Small Cap Fund, Inc. It is not authorized for
distribution to prospective investors in the Fund unless accompanied with or
preceded by the Waddell & Reed Advisors Small Cap Fund, Inc. current prospectus.
<PAGE>
MANAGERS' LETTER
JUNE 30, 2000
----------------------------------------------------------------
Dear Shareholder:
This report relates to the operation of the Waddell & Reed Advisors Small Cap
Fund, Inc. for the fiscal year ended June 30, 2000. The following discussion,
graphs and tables provide you with information regarding the Fund's performance
since its inception in October 1999.
In a tumultuous time for the stock market overall, and technology stocks in
particular, the Waddell & Reed Advisors Small Cap Fund has performed well since
its inception nearly nine months ago. In fact, over this period, the Fund has
outperformed its benchmark indices, including the Russell 2000 Growth Index and
the Lipper Small-Cap Core Funds Universe Average, as indicated in the chart on
the following page. These indices reflect the performance of the securities
that generally represent the small-companies sector of the stock market and the
universe of funds with similar investment objectives as the Fund, respectively.
The cumulative weight of six interest rate increases by the Federal Reserve
during the past 12 months nearly reversed the strong fourth-quarter gains in the
current leadership sectors of Internet, telecommunications, biotechnology and
Initial Public Offerings. This reversal of fortune is reflected in the negative
returns during the second quarter of -13.3 percent for the Nasdaq and -7.3
percent for the Russell 2000 Growth Index.
Moreover, these declines understate the true damage inflicted. The period with
the highest rate of decline began in early March and stretched into late May of
2000. This year, from the March 10 peak to the May 23 trough, small-cap index
declines measured nearly 40 percent. Thus far this year, only the months of
February and June have shown positive returns; less than half of the stocks
comprising the above indices are in positive territory and less than half of the
sub sectors are in similar position.
Despite these market statistics, results for the Waddell & Reed Advisors Small
Cap Fund declined 4.3 percent in the second quarter of 2000, outpacing the
Russell 2000 Growth Index, which declined 7.32 percent during the quarter. Our
aggressive technology holdings, plus our large cash holdings and our more
"value-oriented" growth stocks -- including Primark and Shared Medical, which
received buyout offers above market - combined to provide a positive return for
the quarter. Thus we were able to retain our strong results of the prior six
months.
Overall, for the first half of 2000, we benefited most from the profits taken in
several individual holdings as they underwent near vertical price rises,
including Rambus and Incyte.
Looking forward, we believe the pressure for further rate hikes is abating. We
believe that this should allow for larger overall gains and more representative
sector gains than experienced so far. We also feel that many of our holdings
now are relatively, if not absolutely, inexpensive. Thank you for your
continuing interest in the Fund and your ongoing confidence in our organization.
Sincerely,
Mark G. Seferovich
Grant P. Sarris
Managers, Waddell & Reed Advisors Small Cap Fund, Inc.
<PAGE>
Comparison of Change in Value of $10,000 Investment in
Waddell & Reed Advisors Small Cap Fund, Inc., Class A Shares,
The Russell 2000 Growth Index and
The Lipper Small-Cap Core Funds Universe Average
Waddell
& Reed Lipper
Advisors Small-Cap
Small Russell Core
Cap 2000 Funds
Fund, Growth Universe
Class A Index Average
--------- --------- ----------
10/04/99 Purchase 9,425 --- ---
10/31/99 9,576 10,000 10,000
12/31/99 11,643 13,008 11,950
03/31/00 13,665 14,212 13,369
06/30/00 13,873 13,171 13,068
===== Waddell & Reed Advisors Small Cap Fund, Inc., Class A Shares* -- $13,873
+++++ Russell 2000 Growth Index -- $13,171
---- Lipper Small-Cap Core Fund Universe Average -- $13,068
*The value of the investment in the Fund is impacted by the ongoing expenses of
the Fund and assumes reinvestment of dividends and distributions.
**Because the Fund commenced operations on a date other than at the end of a
month, and partial month calculations of the performance of the above indexes
(including income) are not available, investment in the indexes was effected
as of November 1, 1999.
Waddell & Reed Advisors Small Cap Fund is a relatively new fund
and a substantial portion of the Fund's returns during the period
is attributable to investments in initial public offerings
(IPO's). No assurance can be given that the Fund will continue
to be able to invest in IPO's to the same extent as it increases
in size and decreases its cash balances available for investment,
or that future IPO's in which the Fund invests will have equally
beneficial impact on performance.
Aggregate Total Return +
Class A Class B Class C Class Y
----------------------------------------------
Period Ended
6/30/00++ 38.73% 41.07% 45.27% 47.75%
+Performance data quoted represents past performance and is based on deduction
of the maximum applicable sales load for each of the periods. Class A shares
carry a maximum front-end sales load of 5.75%. Class B and Class C shares
carry maximum contingent deferred sales charges of 5% and 1%, respectively.
Total returns reflect share price appreciation, including reinvestment of all
income and capital gains distributions. Investment return and principal value
will fluctuate and an investor's shares, when redeemed, may be worth more or
less than their original cost.
++10/4/99 for Class A, Class B, Class C and Class Y shares (the date on which
shares were first acquired by shareholders).
Past performance is not predictive of future performance. Indexes are
unmanaged.
<PAGE>
SHAREHOLDER SUMMARY
-----------------------------------------------------------------
WADDELL & REED ADVISORS SMALL CAP FUND, INC.
PORTFOLIO STRATEGY:
Common Stock in GOAL: To seek growth of
small capitalization capital.
companies. STRATEGY: Invests primarily in
Maximum 10% Foreign common stocks of domestic
Securities and forgeign companies whose market
capitalizations are within the range of
capitalizations of companies included in
the Lipper, Inc. Small Cap category
("small cap stocks"). The Fund will
emphasize relatively new or unseasoned
companies in their early stages of
development or smaller companies
positioned in new or emerging industries
where there is opportunity for rapid
growth.
FOUNDED: 1999
SCHEDULED DIVIDEND FREQUENCY: ANNUALLY (December)
PERFORMANCE SUMMARY - Class A Shares
PER SHARE DATA
For the Period Ended June 30, 2000
----------------------------------
DIVIDEND PAID $0.03
=====
CAPITAL GAINS DISTRIBUTION $0.003
======
NET ASSET VALUE ON
06/30/00 $14.68
10/4/99* 10.00
------
CHANGE PER SHARE $ 4.68
======
*Commencement of operations.
Past performance is not necessarily indicative of future
results.
TOTAL RETURN HISTORY
Aggregate Total Return
---------------------------
With Without
Period Sales Load* Sales Load**
------ ----------- ------------
For the period from 10-4-99***
through 6-30-00 38.73% 47.19%
*Performance data quoted represents past performance and is based on
deduction of 5.75% sales load on the initial purchase.
**Performance data quoted in this column represents past performance without
taking into account the sales load deducted on an initial purchase.
***Commencement of operations.
Investment return and principal value will fluctuate and an investor's shares,
when redeemed, may be worth more or less than their original cost.
<PAGE>
PORTFOLIO HIGHLIGHTS
On June 30, 2000, Waddell & Reed Advisors Small Cap Fund, Inc. had net assets
totaling $343,131,863 invested in a diversified portfolio of:
66.94% Common Stocks
33.06% Cash and Cash Equivalents
As a shareholder of Waddell & Reed Advisors Small Cap Fund, Inc., for every $100
you had invested on June 30, 2000, your Fund owned:
$33.06 Cash and Cash Equivalents
28.34 Services Stocks
21.84 Manufacturing Stocks
9.76 Transportation, Communication, Electric
and Sanitary Services Stocks
5.20 Wholesale and Retail Trade Stocks
1.80 Mining Stocks
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS SMALL CAP FUND, INC.
JUNE 30, 2000
Shares Value
COMMON STOCKS
Automotive Dealers and Service Stations - 0.46%
O'Reilly Automotive, Inc.* ............. 115,800 $ 1,595,869
Business Services - 24.72%
Acxiom Corporation* .................... 308,300 8,613,131
Catalina Marketing Corporation* ........ 5,600 571,200
Cerner Corporation* .................... 332,500 9,050,234
CheckFree Holdings Corporation* ........ 175,000 9,039,844
Dendrite International, Inc.* .......... 312,000 10,403,250
Digital Insight Corporation* ........... 106,400 3,674,125
FactSet Research Systems, Inc. ......... 138,500 3,912,625
Fiserv, Inc.* .......................... 99,400 4,299,050
Getty Images, Inc.* .................... 233,600 8,665,100
GO.com* ................................ 335,800 4,008,612
MemberWorks Incorporated* .............. 104,500 3,504,016
NEON Systems, Inc.* .................... 35,000 662,812
OTG Software, Inc.* .................... 17,300 495,753
Primark Corporation* ................... 213,800 7,964,050
Sanchez Computer Associates, Inc.* ..... 90,000 2,109,375
Transaction Systems Architects, Inc.,
Class A* .............................. 419,100 7,163,991
USINTERNETWORKING, Inc.* ............... 33,525 684,120
Total ................................. 84,821,288
Chemicals and Allied Products - 2.39%
Pharmacyclics, Inc.* ................... 134,400 8,185,800
Communication - 8.48%
Emmis Communications Corporation, Class A* 195,500 8,094,922
Illuminet Holdings, Inc.* .............. 68,200 3,444,100
Intermedia Communications Inc.* ........ 202,000 5,996,875
RCN Corporation* ....................... 123,700 3,135,022
US Unwired Inc., Class A* .............. 72,000 949,500
Western Wireless Corporation,
Class A* .............................. 137,200 7,473,112
Total ................................. 29,093,531
Eating and Drinking Places - 0.86%
Papa John's International, Inc.* ....... 120,000 2,943,750
Educational Services - 1.07%
ITT Educational Services, Inc.* ........ 209,000 3,670,563
Electronic and Other Electric Equipment - 10.03%
Advanced Fibre Communications, Inc.* ... 185,300 8,390,616
Glenayre Technologies, Inc.* ........... 504,800 5,316,175
Rambus Inc.* ........................... 66,400 6,839,200
Sawtek Inc.* ........................... 80,500 4,631,266
Tekelec* ............................... 191,700 9,243,534
Total ................................. 34,420,791
See Notes to Schedule of Investments on page 13.
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS SMALL CAP FUND, INC.
JUNE 30, 2000
Shares Value
COMMON STOCKS (Continued)
Engineering and Management Services - 2.55%
Gene Logic Inc.* ....................... 135,300 $ 4,832,747
MAXIMUS, Inc.* ......................... 177,300 3,922,762
Total ................................. 8,755,509
Food and Kindred Products - 1.70%
American Italian Pasta Company, Class A* 282,100 5,835,944
Instruments and Related Products - 5.08%
Cytyc Corporation* ..................... 65,300 3,483,347
PINNACLE SYSTEMS, INC.* ................ 111,800 2,532,969
VISX, Incorporated* .................... 408,000 11,398,500
Total ................................. 17,414,816
Leather and Leather Products - 0.54%
Kenneth Cole Productions, Inc.,
Class A* .............................. 46,600 1,864,000
Oil and Gas Extraction - 1.80%
Global Industries, Ltd.* ............... 326,900 6,160,022
Stone, Clay and Glass Products - 0.21%
Cabot Microelectronics Corporation* .... 15,600 716,625
Transportation by Air - 1.28%
Midwest Express Holdings, Inc.* ........ 204,400 4,394,600
Transportation Equipment - 1.89%
Gentex Corporation* .................... 258,500 6,478,656
Wholesale Trade -- Durable Goods - 2.31%
MSC Industrial Direct Co., Inc., Class A* 379,100 7,937,406
Wholesale Trade -- Nondurable Goods - 1.57%
Allscripts, Inc.* ...................... 235,000 5,397,656
TOTAL COMMON STOCKS - 66.94% $229,686,826
(Cost: $208,103,634)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Auto Repair, Services and Parking - 2.91%
PHH Corp.,
6.75%, 7-17-00 ........................ $10,000 9,970,000
See Notes to Schedule of Investments on page 13.
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS SMALL CAP FUND, INC.
JUNE 30, 2000
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Chemicals and Allied Products - 3.48%
Pharmacia Corporation,
6.56%, 7-25-00 ........................ $12,000 $ 11,947,520
Communication - 4.65%
Dominion Resources Inc.,
6.84%, 7-11-00 ........................ 12,000 11,977,200
U S WEST Communications Inc.,
6.8%, 7-11-00 ......................... 4,000 3,992,445
Total ................................. 15,969,645
Depository Institutions - 6.69%
Banc One Financial Corp. (Bank One Corporation),
6.58%, 7-7-00 ......................... 11,000 10,987,937
Wells Fargo & Company,
6.52%, 7-12-00 ........................ 12,000 11,976,093
Total ................................. 22,964,030
Electric, Gas and Sanitary Services - 5.52%
Bay State Gas Co.,
6.51%, 7-12-00 ........................ 7,000 6,986,076
Commonwealth Edison Co.,
6.8%, 7-20-00 ......................... 12,000 11,956,933
Total ................................. 18,943,009
Food and Kindred Products - 4.93%
Conagra Inc.,
6.7%, 7-13-00 ......................... 13,000 12,970,967
General Mills, Inc.,
6.5288%, Master Note .................. 3,933 3,933,000
Total ................................. 16,903,967
Food Stores - 2.91%
Albertson's Inc.,
6.55%, 7-7-00 ......................... 10,000 9,989,083
Nondepository Institutions - 0.62%
Paccar Financial Corp.,
6.57%, Master Note .................... 2,116 2,116,000
Security and Commodity Brokers - 0.99%
Merrill Lynch & Co.,
6.58%, 7-17-00 ........................ 3,400 3,390,057
TOTAL SHORT-TERM SECURITIES - 32.70% $112,193,311
(Cost: $112,193,311)
See Notes to Schedule of Investments on page 13.
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS SMALL CAP FUND, INC.
JUNE 30, 2000
Value
TOTAL INVESTMENT SECURITIES - 99.64% $341,880,137
(Cost: $320,296,945)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.36% 1,251,726
NET ASSETS - 100.00% $343,131,863
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 4 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
WADDELL & REED ADVISORS SMALL CAP FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000
(In Thousands)
Assets
Investment securities -- at value (Notes 1 and 4) $341,880
Cash ........................................... 1
Receivables:
Fund shares sold ............................... 2,288
Dividends and interest ......................... 14
Prepaid registration fees ....................... 22
--------
Total assets ................................. 344,205
--------
Liabilities
Payable for investment securities purchased ..... 672
Payable to Fund shareholders ............ ........ 213
Accrued transfer agency and dividend
disbursing (Note 3) ............................ 96
Accrued service fee (Note 3) .................... 47
Accrued distribution fee (Note 3) ............... 21
Accrued management fee (Note 3) ................. 8
Accrued accounting services fee (Note 3) ........ 4
Accrued shareholder servicing - Class Y (Note 3) 2
Other ........................................... 10
--------
Total liabilities ............................ 1,073
--------
Total net assets ............................ $343,132
========
Net Assets
$0.001 par value capital stock
Capital stock .................................. $ 23
Additional paid-in capital ..................... 299,335
Accumulated undistributed income:
Accumulated undistributed net investment income 1,307
Accumulated undistributed net realized gain on
investment transactions ...................... 20,884
Net unrealized appreciation in value
of investments ............................... 21,583
--------
Net assets applicable to outstanding
units of capital ............................ $343,132
========
Capital shares outstanding:
Class A ......................................... 19,541
Class B .......................................... 2,221
Class C ......................................... 679
Class Y ......................................... 955
Capital shares authorized ......................... 1,000,000
Net asset value per share (net assets divided
by shares outstanding):
Class A ......................................... $14.68
Class B .......................................... $14.58
Class C ......................................... $14.60
Class Y ......................................... $14.71
See notes to financial statements.
<PAGE>
WADDELL & REED ADVISORS SMALL CAP FUND, INC.
STATEMENT OF OPERATIONS
For the Period from OCTOBER 4, 1999* through JUNE 30, 2000
(In Thousands)
Investment Income
Income (Note 1B):
Interest and amortization ....................... $3,645
Dividends ....................................... 32
-------
Total income .................................. 3,677
-------
Expenses (Note 3):
Investment management fee ....................... 1,098
Transfer agency and dividend disbursing:
Class A ....................................... 375
Class B ....................................... 75
Class C ....................................... 17
Service fees:
Class A ....................................... 225
Class B ....................................... 27
Class C ....................................... 9
Distribution fee:
Class A ....................................... 50
Class B ....................................... 81
Class C ....................................... 26
Registration fees ............................... 145
Accounting services fee ......................... 28
Shareholder servicing - Class Y ................. 10
Other ........................................... 61
-------
Total ......................................... 2,227
Less expenses in excess of voluntary waiver of
management fee (Note 3) ...................... (10)
-------
Total expenses ............................... 2,217
-------
Net investment income ...................... 1,460
-------
Realized and Unrealized Gain on
Investments (Notes 1 and 4)
Realized net gain on investments ................. 20,905
Unrealized appreciation in value of investments
during the period................................ 21,583
-------
Net gain on investments ......................... 42,488
-------
Net increase in net assets resulting from
operations ................................... $43,948
=======
*Commencement of operations
See notes to financial statements.
<PAGE>
WADDELL & REED ADVISORS SMALL CAP FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period from OCTOBER 4, 1999* through JUNE 30, 2000
(In Thousands)
Increase in Net Assets
Operations:
Net investment income ............... $ 1,460
Realized net gain on investments .... 20,905
Unrealized appreciation ............. 21,583
--------
Net increase in net assets
resulting from operations ........ 43,948
--------
Distributions to shareholders from (Note 1E):**
Net investment income:
Class A ........................... (157)
Class B ........................... (8)
Class C ........................... (3)
Class Y ........................... (14)
Realized gains on securities transactions:
Class A ........................... (18)
Class B ........................... (1)
Class C ........................... (1)
Class Y ........................... (1)
--------
(203)
--------
Capital share transactions (Note 6) .. 299,287
--------
Total increase.................... 343,032
Net Assets
Beginning of period .................. 100
--------
End of period, including undistributed
net investment income of $1,307 ..... $343,132
========
*Commencement of operations.
**See "Financial Highlights" on pages 18 - 21.
See notes to financial statements.
<PAGE>
WADDELL & REED ADVISORS SMALL CAP FUND, INC.
FINANCIAL HIGHLIGHTS
Class A 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 ........... $10.00
------
Income from investment
operations:
Net investment
income .......... 0.09
Net realized and
unrealized gain
on investments .. 4.62
------
Total from investment
operations ...... 4.71
------
Less distributions:
From net investment
income .......... (0.03)
From capital gains (0.00)**
------
Total distributions (0.03)
------
Net asset value,
end of period .... $14.68
======
Total return*** .... 47.19%
Net assets, end of
period (in
millions) ........ $287
Ratio of expenses
to average net
assets ........... 1.61%****
Ratio of net investment
income to average
net assets ....... 1.22%****
Portfolio turnover
rate ............. 36.81%
*Commencement of operations
**A capital gain distribution of $0.0033 was paid to shareholders during this
period.
***Total return calculated without taking into account the sales load deducted
on an initial purchase.
****Annualized.
See notes to financial statements.
<PAGE>
WADDELL & REED ADVISORS SMALL CAP FUND, 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 $10.00
-----
Income from investment
operations:
Net investment income 0.02
Net realized and
unrealized gain
on investments .. 4.58
-----
Total from investment
operations ....... 4.60
-----
Less distributions:
From net investment
income .......... (0.02)
From capital gains (0.00)**
-----
Total distributions (0.02)
-----
Net asset value,
end of period .... $14.58
=====
Total return ....... 46.07%
Net assets, end of
period (in
millions) ........ $32
Ratio of expenses to
average net assets 2.72%***
Ratio of net investment
income to average
net assets ....... 0.08%***
Portfolio turnover
rate ............. 36.81%
*Commencement of operations.
**A capital gain distribution of $0.0033 was paid to shareholders
during this period.
***Annualized.
See notes to financial statements.
<PAGE>
WADDELL & REED ADVISORS SMALL CAP FUND, 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 $10.00
-----
Income from investment
operations:
Net investment income 0.03
Net realized and
unrealized gain
on investments .. 4.59
-----
Total from investment
operations ....... 4.62
-----
Less distributions:
From net investment
income .......... (0.02)
From capital gains (0.00)**
-----
Total distributions (0.02)
-----
Net asset value,
end of period .... $14.60
=====
Total return ....... 46.27%
Net assets, end of
period (in
millions) ........ $10
Ratio of expenses to
average net assets 2.51%***
Ratio of net investment
income to average
net assets ....... 0.29%***
Portfolio turnover
rate ............. 36.81%
*Commencement of operations.
**A capital gain distribution of $0.0033 was paid to shareholders
during this period.
***Annualized.
See notes to financial statements.
<PAGE>
WADDELL & REED ADVISORS SMALL CAP FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y 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 $10.00
-----
Income from investment
operations:
Net investment income 0.14
Net realized and
unrealized gain
on investments .. 4.62
-----
Total from investment
operations ....... 4.76
-----
Less distributions:
From net investment
income .......... (0.05)
From capital gains (0.00)**
-----
Total distributions (0.05)
-----
Net asset value,
end of period .... $14.71
=====
Total return ....... 47.75%
Net assets, end of
period (in
millions) ........ $14
Ratio of expenses to
average net assets 1.15%***
Ratio of net investment
income to average
net assets ....... 1.68%***
Portfolio turnover
rate ............. 36.81%
*Commencement of operations.
**A capital gain distribution of $0.0033 was paid to shareholders
during this period.
***Annualized.
See notes to financial statements.
<PAGE>
WADDELL & REED ADVISORS SMALL CAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1 -- Significant Accounting Policies
Waddell & Reed Advisors Small Cap Fund, Inc. (the "Fund"), formerly United
Small Cap Fund, Inc., is registered under the Investment Company Act of 1940 as
a diversified, open-end management investment company. Its investment objective
is to seek growth 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 4 -- 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 5 - Federal Income Tax
Matters.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the business day following record date. Net
investment income dividends and capital gains distributions are determined
in accordance with income tax regulations which may differ from accounting
principles generally accepted in the United States of America. These
differences are due to differing treatments for items such as deferral of
wash sales and post-October losses, foreign currency transactions, net
operating losses and expiring capital loss carryovers. At June 30, 2000,
$29,443 was reclassified between additional paid-in capital and accumulated
undistributed net investment income. Net investment income, net realized
gains and net assets were not affected by this change.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
NOTE 2 -- Organization
The Fund, a Maryland corporation, was organized on June 3, 1999, and was
inactive (except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and the registration
of its shares under the Securities Act of 1933) until October 4, 1999 (the date
of the initial public offering).
On September 6, 1999, Waddell & Reed, Inc. ("W&R") purchased for
investment 10,000 Class A shares of the Fund at their net asset value of $10.00
per share.
Prepaid registration expenses in the amount of $51,035 were paid by the
Fund and are being amortized over the twelve months following the initial public
offering.
NOTE 3 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee to Waddell & Reed Investment Management Company
("WRIMCO"), the Fund's investment manager and a wholly owned subsidiary of
W&R, 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: 0.85% of net assets up to $1 billion, 0.83% of net assets over
$1 billion and up to $2 billion, 0.80% of net assets over $2 billion and up to
$3 billion, and 0.76% of net assets over $3 billion. However, WRIMCO has agreed
to waive its management fee on any day that the Fund's net assets are less than
$25 million, subject to its right to change or modify this waiver. The Fund
accrues and pays this fee daily.
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
$3,704,977. During the period ended June 30, 2000, W&R received $8,538 and
$4,007 in deferred sales charges for Class B and Class C shares, respectively.
With respect to Class A, Class B and Class C shares, W&R paid sales commissions
of $3,149,191 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 average annual net assets. The fee is to be paid to
reimburse W&R for amounts it expends in connection with the distribution of the
Class A shares and/or provision of personal services to Fund shareholders and/or
maintenance of shareholder accounts.
Under the Distribution and Service Plan adopted by the Fund for Class B and
Class C shares, respectively, the Fund may pay W&R, on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate W&R for providing services to shareholders of that class and/or
maintaining shareholder accounts for that class and a distribution fee of up to
0.75% of the average daily net assets of the class to compensate W&R for
distributing the shares of that class. The Class B Plan and the Class C Plan
each permit W&R to receive compensation, through the distribution and service
fee, respectively, for its distribution activities for that class, which are
similar to the distribution activities described with respect to the Class A
Plan, and for its activities in providing personal services to shareholders of
that class and/or maintaining shareholder accounts of that class, which are
similar to the corresponding activities for which it is entitled to compensation
under the Class A Plan.
The Fund paid no Directors' fees during the period ended June 30, 2000.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
NOTE 4 -- Investment Securities Transactions
Purchases of investment securities, other than U.S. Government obligations
and short-term securities, aggregated $226,764,000 while proceeds from
maturities and sales aggregated $39,566,134. Purchases of short-term securities
aggregated $2,520,791,527 while proceeds from maturities and sales aggregated
$2,411,487,625.
For Federal income tax purposes, cost of investments owned at June 30, 2000
was $320,296,945, resulting in net unrealized appreciation of $21,583,192, of
which $36,946,428 related to appreciated securities and $15,363,236 related to
depreciated securities.
NOTE 5 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $20,905,773 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 6 -- Multiclass Operations
The Fund is authorized to offer four classes of shares, Class A, Class B,
Class C and Class Y, each of which have equal rights as to assets and voting
privileges. Class Y shares are not subject to a sales charge on purchases, are
not subject to a Rule 12b-1 Distribution and Service Plan and are subject to a
separate transfer agency and dividend disbursement services fee structure. A
comprehensive discussion of the terms under which shares of each class are
offered is contained in the Prospectus and the Statement of Additional
Information for the Fund.
Income, non-class specific expenses, and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of their
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
Transactions in capital stock are summarized below. Amounts are in
thousands.
For the
period from
October 4, 1999
through
June 30,
2000
------------
Shares issued from sale
of shares:
Class A ............ 20,753
Class B ............. 2,289
Class C ............. 730
Class Y ............ 1,209
Shares issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ............ 15
Class B ............. 1
Class C ............. ---*
Class Y ............ 1
Shares redeemed:
Class A ............ (1,237)
Class B ............. (69)
Class C ............. (51)
Class Y ............ (255)
------
Increase in
outstanding capital
shares 23,386
======
Value issued from sale
of shares:
Class A ............ $267,576
Class B ............. 29,971
Class C ............. 9,558
Class Y ............ 14,603
Value issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ............ 174
Class B ............. 9
Class C ............. 4
Class Y ............ 15
Value redeemed:
Class A ............ (17,533)
Class B ............. (926)
Class C ............. (701)
Class Y ............ (3,463)
--------
Increase in
outstanding capital $299,287
========
*Not shown due to rounding.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Waddell & Reed Advisors Small Cap Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Waddell & Reed Advisors Small Cap Fund, Inc.
(formerly United Small Cap Fund, Inc.) (the "Fund"), as of June 30, 2000, and
the related statements of operations and changes in net assets for the period
October 4, 1999 (inception) through June 30, 2000, and the financial highlights
for the period October 4, 1999 through June 30, 2000. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Waddell & Reed
Advisors Small Cap Fund, Inc. as of June 30, 2000, the results of its operations
and the changes in its net assets for the period then ended, and the financial
highlights for the period then ended, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
Kansas City, Missouri
August 4, 2000
<PAGE>
INCOME TAX INFORMATION
The amounts of the dividends and long-term capital gains below, multiplied by
the number of shares owned by you on the record dates, will give you the total
amounts to be reported in your Federal income tax return for the years in which
they were received or reinvested.
PER-SHARE AMOUNTS REPORTABLE AS:
--------------------------------------------------------
For Individuals For Corporations
-------------------------------------------------------
Record Ordinary Long-Term Non- Long-Term
Date Total IncomeCapital GainQualifyingQualifyingCapital Gain
----------- ----- ------------------------------------------------
Class A
12-15-99 $0.0313 $0.0313 $0.0000 $0.0009 $0.0304 $0.0000
======= ======= ======= ======= ======= =======
Class B and Class C
12-15-99 $0.0213 $0.0213 $0.0000 $0.0006 $0.0207 $0.0000
======= ======= ======= ======= ======= =======
Class Y
12-15-99 $0.0513 $0.0513 $0.0000 $0.0016 $0.0497 $0.0000
======= ======= ======= ======= ======= =======
CORPORATION DEDUCTIONS -- Under Federal tax law, the amounts reportable as
Qualifying Dividends are eligible for the dividends received deduction in the
year received as provided by Section 243 of the Internal Revenue Code.
The tax status of dividends paid will be reported to you on Form 1099-DIV after
the close of the applicable calendar year.
Shareholders are advised to consult with their tax adviser concerning the tax
treatment of dividends and distributions from the Fund.
<PAGE>
DIRECTORS
Keith A. Tucker, Overland Park, Kansas, Chairman of the Board
James M. Concannon, Topeka, Kansas
John A. Dillingham, Kansas City, Missouri
David P. Gardner, San Mateo, California
Linda K. Graves, Topeka, Kansas
Joseph Harroz, Jr., Norman, Oklahoma
John F. Hayes, Hutchinson, Kansas
Robert L. Hechler, Overland Park, Kansas
Henry J. Herrmann, Overland Park, Kansas
Glendon E. Johnson, Miami, Florida
William T. Morgan, Coronado, California
Ronald C. Reimer, Mission Hills, Kansas
Frank J. Ross, Jr., Kansas City, Missouri
Eleanor B. Schwartz, Kansas City, Missouri
Frederick Vogel III, Milwaukee, Wisconsin
OFFICERS
Robert L. Hechler, President
Henry J. Herrmann, Vice President
Theodore W. Howard, Vice President and Treasurer
Kristen A. Richards, Vice President and Secretary
Grant P. Sarris, Vice President
Daniel C. Schulte, Vice President
Mark G. Seferovich, Vice President
To all traditional IRA Planholders:
As required by law, income tax will automatically be withheld from any
distribution or withdrawal from a traditional IRA unless you make a written
election not to have taxes withheld. The election may be made by submitting
forms provided by Waddell & Reed, Inc. which can be obtained from your Waddell &
Reed representative or by submitting Internal Revenue Service Form W-4P. Once
made, an election can be revoked by providing written notice to Waddell & Reed,
Inc. If you elect not to have tax withheld you may be required to make payments
of estimated tax. Penalties may be imposed by the IRS if withholding and
estimated tax payments are not adequate.
<PAGE>
THE WADDELL & REED ADVISORS GROUP OF MUTUAL FUNDS
Waddell & Reed Advisors Accumulative Fund
Waddell & Reed Advisors Asset Strategy Fund, Inc.
Waddell & Reed Advisors Bond Fund
Waddell & Reed Advisors Cash Management, Inc.
Waddell & Reed Advisors Continental Income Fund, Inc.
Waddell & Reed Advisors Government Securities Fund, Inc.
Waddell & Reed Advisors High Income Fund, Inc.
Waddell & Reed Advisors High Income Fund II, Inc.
Waddell & Reed Advisors Income Fund
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 New Concepts Fund, Inc.
Waddell & Reed Advisors Retirement Shares, Inc.
Waddell & Reed Advisors Science and Technology Fund
Waddell & Reed Advisors Small Cap Fund, Inc.
Waddell & Reed Advisors Tax-Managed Equity Fund, Inc.
Waddell & Reed Advisors Vanguard Fund, Inc.
------------------------------------
FOR MORE INFORMATION:
Contact your representative, or your
local office as listed on your
Account Statement, or contact:
WADDELL & REED
CUSTOMER SERVICE
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
(888)-WADDELL
(888)-923-3355
Our INTERNET address is:
http://www.waddell.com
NUR1018A(6-00)
