WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
December 15, 2000
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the SAI) is not a
prospectus. Investors should read this SAI in conjunction with the
prospectus (Prospectus) for Waddell & Reed Advisors Tax-Managed Equity
Fund, Inc. (the Fund), formerly, United Tax-Managed Equity Fund, Inc.,
dated December 15, 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.............................
Investment Strategies, Policies and Practices.......
Investment Management and Other Services............
Purchase, Redemption and Pricing of Shares..........
Directors and Officers..............................
Payments to Shareholders............................
Taxes...............................................
Portfolio Transactions and Brokerage................
Other Information...................................
Financial Statements................................
Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. is a mutual
fund; an investment that pools shareholders' money and invests it toward a
specified goal. In technical terms, the Fund is an open-end, diversified
management company organized as a Maryland corporation on November 30,
1999. Prior to June 30, 2000, the Fund was known as United Tax-Managed
Equity Fund, Inc.
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 (NAV) 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 cumulative total return quotation for Class A shares with the
maximum sales load deducted as of June 30, 2000, which is the most recent
balance sheet included in this SAI, for the period since class inception on
March 31, 2000 to June 30, 2000 was -0.10%.
The cumulative total return quotation for Class A shares without sales
load deducted as of June 30, 2000, which is the most recent balance sheet
included in this SAI, for the period since class inception on March 31,
2000 to June 30, 2000 was 6.00%.
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 March 31, 2000 to June 30, 2000 was 0.60%.
The cumulative total return quotation for Class B shares without 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 March 31, 2000 to June 30, 2000 was 5.60%.
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 March 31, 2000 to June 30, 2000 was 4.60%.
The cumulative total return quotation for Class C shares without 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 March 31, 2000 to June 30, 2000 was 5.60%.
The cumulative total return quotation for Class Y shares as of June
30, 2000, which is the most recent balance sheet included in this SAI, for
the period since class inception on April 19, 2000 was 5.26%.
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 may also, from time to time, publish
in advertisements or sales material its 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.
Tax-Managed Investing. Taxes are a major influence on the net
returns that investors receive on their taxable investments. There are four
components of the returns of an equity mutual fund--price appreciation,
distributions of investment income and distributions of realized net short-
term and long-term capital gains--which are treated differently for federal
income tax purposes. Distributions of a fund's net investment income and
net realized short-term gains (on stocks held less than 12 months) are
taxed as ordinary income, at federal rates as high as 39.6%. Distributions
of realized net long-term gains (on stocks held at least 12 months) are
taxed at federal rates up to 20%. Returns derived from fund share price
appreciation are untaxed until the shareholder redeems. Upon redemption, a
capital gain or loss equal to the difference between the net proceeds of
the redemption and the shareholder's adjusted tax basis is realized.
The Fund is similar to retirement planning products such as variable
annuities and individual retirement accounts (IRAs) in that they are
vehicles for long-term, tax-managed investing. As a mutual fund, however,
the Fund avoids a number of structural disadvantages inherent in a variable
annuity--including the limitations and penalties on early withdrawals, the
taxing of all income and gain upon withdrawal at ordinary income rates, and
the inability to gain a step up in basis at death. Variable annuities offer
tax-free exchanges and a death benefit, which are not offered by the Fund.
Eligibility to invest in IRAs and annual contributions to IRAs are limited.
However, in contrast to Fund purchases and distributions, contributions to
IRAs may be made from pre-tax dollars and distributions from Roth IRAs are
not taxed if certain requirements are met.
An analysis of long-term hypothetical returns achievable from a tax-
managed equity fund that achieves returns predominately from unrealized
gains compared to a conventional equity mutual fund and a variable annuity
can illustrate the fundamental soundness of a tax-managed equity fund
investment. Assuming identical annual pre-tax returns, over a holding
period of several years a tax-managed fund can generate liquidation
proceeds higher than a conventional managed equity mutual fund and a
variable annuity. If the investments are passed into an estate (thereby
triggering a step-up in basis), the relative performance advantage of a
tax-managed fund compared to a conventional fund or to a variable annuity
can be substantial, again assuming equivalent annual returns before taxes.
Of course, actual returns achieved by long-term investors in the Fund
cannot be predicted.
Securities - General
The Fund may invest in securities including common stock, preferred
stock, debt securities and convertible securities. Although common stocks
and other equity securities have a history of long-term growth in value,
their prices tend to fluctuate in the short term, particularly those of
smaller companies. The Fund may invest in preferred stock rated in any
rating category of the established rating services or, if unrated, judged
by WRIMCO to be of equivalent quality. Debt securities have varying levels
of sensitivity to changes in interest rates and varying degrees of quality.
As a general matter, however, when interest rates rise, the values of
fixed-rate securities fall and, conversely, when interest rates fall, the
values of fixed-rate debt securities rise. Similarly, long-term bonds are
generally more sensitive to interest rate changes than short-term bonds.
Lower quality debt securities (commonly called junk bonds and rated BB
and lower by Standard & Poor's (S&P) or Ba and lower by Moody's) 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 S&P and D by Moody's). Debt securities
rated D by S&P or D 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.
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
As a temporary measure for extraordinary or emergency purposes, the
Fund may borrow only from banks and only up to 5% of its total assets. In
general, the Investment Company Act of 1940, as amended (the 1940 Act),
requires that the value of the Fund's assets, less its liabilities other
than borrowings, be equal to at least 300% of all borrowings including the
proposed borrowing. If the value of the Fund's assets so computed should
fail to meet the 300% asset coverage requirement, it is required within
three days to reduce its bank debt to the extent necessary to meet that
requirement and may have to sell a portion of its investments at a time
when independent investment judgment would not dictate such sale.
Interest on money borrowed is an expense the Fund would not otherwise
incur, so that it may have reduced net investment income during periods of
outstanding borrowings.
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. 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) restricted securities not determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors;
(3) non-government stripped fixed-rate mortgage-backed securities;
(4) bank deposits, unless they are payable at principal amount plus
accrued interest on demand or within seven days after demand;
(5) over-the-counter (OTC) options and their underlying collateral;
(6) securities for which market quotations are not readily
available; and
(7) securities involved in swaps, caps, 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 15% 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 indexes, currencies,
precious metals or other commodities, or other financial indicators.
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. 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 New York Stock Exchange (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
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 as
long as WRIMCO determines they are consistent with the Fund's goals and
investment policies.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities are created when a U.S. Government agency or a financial
institution separates the interest and principal components of a mortgage-
backed security and sells them as individual securities. The holder of the
principal-only security (PO) receives the principal payments made by the
underlying mortgage-backed security, while the holder of the interest-only
security (IO) receives interest payments from the same underlying security.
For example, IO classes are entitled to receive all or a portion of
the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments,
then the total amount of interest allocable to the IO class, and therefore
the yield to investors, generally will be reduced. In some instances, an
investor in an IO may fail to recoup all of the investor's initial
investment, even if the security is guaranteed by the U.S. Government or
considered to be of the highest quality. Conversely, PO classes are
entitled to receive all or a portion of the principal payments, but none of
the interest, from the underlying mortgage assets. PO classes are purchased
at substantial discounts from par, and the yield to investors will be
reduced if principal payments are slower than expected. IOs, POs and other
CMOs involve special risks, and evaluating them requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or
interests therein, but include assets such as motor vehicle installment
sales contracts, other installment sale contracts, home equity loans,
leases of various types of real and personal property and receivables from
revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts or special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to a certain
amount and for a certain time period by a letter of credit or pool
insurance policy issued by a financial institution unaffiliated with the
issuer, or other credit enhancements may be present. The value of asset-
backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans or the financial
institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed
Securities. The yield characteristics of mortgage-backed and asset-
backed securities differ from those of traditional debt securities. Among
the major differences are that interest and principal payments are made
more frequently, usually monthly, and that principal may be prepaid at any
time because the underlying mortgage loans or other obligations generally
may be prepaid at any time. Prepayments on a pool of mortgage loans are
influenced by a variety of economic, geographic, social and other factors,
including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to
prepayments on asset-backed securities, but the receivables underlying
asset-backed securities generally are of a shorter maturity and thus are
likely to experience substantial prepayments. Such securities, however,
often provide that for a specified time period the issuers will replace
receivables in the pool that are repaid with comparable obligations. If the
issuer is unable to do so, repayment of principal on the asset-backed
securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to certificate holders 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 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 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 indexes, 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 goals 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 indexes will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts
available will not match the Fund's current or anticipated investments
exactly. The Fund may invest in options and futures contracts based on
securities with different issuers, maturities, or other characteristics
from the securities in which it typically invests, which involves a risk
that the options or futures position will not track the performance of the
Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors
as current and anticipated short-term interest rates, changes in volatility
of the underlying instrument, and the time remaining until expiration of
the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options
and futures markets and the securities markets, from structural differences
in how options and futures and securities are traded, or from imposition of
daily price fluctuation limits or trading halts. The Fund may purchase or
sell options and futures contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to attempt to
compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price
changes in the Fund's options or futures positions are poorly correlated
with its other investments, the positions may fail to produce anticipated
gains or result in losses that are not offset by gains in other
investments.
(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable
price movements. However, such strategies can also reduce opportunity for
gain by offsetting the positive effect of favorable price movements. For
example, if the Fund entered into a short hedge because WRIMCO projected a
decline in the price of a security in the Fund's portfolio, and the price
of that security increased instead, the gain from that increase might be
wholly or partially offset by a decline in the price of the Financial
Instrument. Moreover, if the price of the Financial Instrument declined by
more than the increase in the price of the security, the Fund could suffer
a loss. In either such case, the Fund would have been in a better position
had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets
as cover, maintain accounts or make margin payments when it takes positions
in Financial Instruments involving obligations to third parties (i.e.,
Financial Instruments other than purchased options). If the Fund were
unable to close out its positions in such Financial Instruments, it might
be required to continue to maintain such assets or accounts or make such
payments until the position expired or matured. These requirements might
impair the Fund's ability to sell a portfolio security or make an
investment at a time when it would otherwise be favorable to do so, or
require that the Fund sell a portfolio security at a disadvantageous time.
(5) The Fund's ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a market, the ability
and willingness of the other party to the transaction (the counterparty) to
enter into a transaction closing out the position. Therefore, there is no
assurance that any position can be closed out at a time and price that is
favorable to the Fund.
Cover. Transactions using Financial Instruments, other than
purchased options, expose the Fund to an obligation to another party. The
Fund will comply with SEC guidelines regarding cover for these instruments
and will, if the guidelines so require, set aside cash or liquid assets in
an account with its custodian in the prescribed amount as determined daily.
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 an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a
large portion of the Fund's assets to cover or accounts could impede
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Options. A call option gives the purchaser the right to buy,
and obligates the writer to sell, the underlying investment at the agreed-
upon price during the option period. A put option gives the purchaser the
right to sell, and obligates the writer to buy, the underlying investment
at the agreed-upon price during the option period. Purchasers of options
pay an amount, known as a premium, to the option writer in exchange for the
right under the option contract.
The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or call
options can enable the Fund to enhance income or yield by reason of the
premiums paid by the purchasers of such options. However, if the market
price of the security underlying a put option declines to less than the
exercise price of the option, minus the premium received, the Fund would
expect to suffer a loss.
Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the
security or currency appreciates to a price higher than the exercise price
of the call option, it can be expected that the option will be exercised
and the Fund will be obligated to sell the security or currency at less
than its market value. If the call option is an OTC option, the securities
or other assets used as cover would be considered illiquid to the extent
described under Illiquid Investments.
Writing put options can serve as a limited long hedge because
increases in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the
security or currency depreciates to a price lower than the exercise price
of the put option, it can be expected that the put option will be exercised
and the Fund will be obligated to purchase the security or currency at more
than its market value. If the put option is an OTC option, the securities
or other assets used as cover would be considered illiquid to the extent
described under Illiquid Investments.
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of
the underlying investment, the historical price volatility of the
underlying investment and general market conditions. Options that expire
unexercised have no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, the Fund may terminate a position in a
put or call option it had purchased by writing an identical put or call
option; this is known as a closing sale transaction. Closing transactions
permit the Fund to realize profits or limit losses on an option position
prior to its exercise or expiration.
A type of put that the Fund may purchase is an optional delivery
standby commitment, which is entered into by parties selling debt
securities to the Fund. An optional delivery standby commitment gives the
Fund the right to sell the security back to the seller on specified terms.
This right is provided as an inducement to purchase the security.
Risks of Options on Securities. Options offer large amounts of
leverage, which will result in the Fund's net asset value being more
sensitive to changes in the value of the related instrument. The Fund may
purchase or write both exchange-traded and OTC options. Exchange-traded
options in the United States are issued by a clearing organization
affiliated with the exchange on which the option is listed that, in effect,
guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its counterparty
(usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when the Fund purchases an OTC option, it relies on the
counterparty from whom it purchased the option to make or take delivery of
the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the
Fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in exchange-
listed options depends on the existence of a liquid market. However, there
can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating
directly with the counterparty, or by a transaction in the secondary market
if any such market exists. There can be no assurance that the Fund will in
fact be able to close out an OTC option position at a favorable price prior
to expiration. In the event of insolvency of the counterparty, the Fund
might be unable to close out an OTC option position at any time prior to
its expiration.
If the Fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any
profit. The inability to enter into a closing purchase transaction for a
covered call option written by the Fund could cause material losses because
the Fund would be unable to sell the investment used as cover for the
written option until the option expires or is exercised.
Options On Indexes. Puts and calls on indexes 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 (the multiplier), which determines the
total dollar value for each point of such difference. When the Fund buys a
call on an index, it pays a premium and has the same rights as to such call
as are indicated above. When the Fund buys a put on an index, it pays a
premium and has the right, prior to the expiration date, to require the
seller of the put, upon the Fund's exercise of the put, to deliver to the
Fund an amount of cash if the closing level of the index upon which the put
is based is less than the exercise price of the put, which amount of cash
is determined by the multiplier, as described above for calls. When the
Fund writes a put on an index, it receives a premium and the purchaser of
the put has the right, prior to the expiration date, to require the Fund to
deliver to it an amount of cash equal to the difference between the closing
level of the index and the exercise price times the multiplier if the
closing level is less than the exercise price.
Risks of Options on Indexes. The risks of investment in options
on indexes 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 contracts or call options on futures contracts 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 indexes.
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 contract strategies can be used to manage the
average duration of the Fund's fixed-income portfolio. If WRIMCO wishes to
shorten the average duration of the Fund's fixed-income portfolio, the Fund
may sell a debt futures contract or a call option thereon, or purchase a
put option on that futures contract. If WRIMCO wishes to lengthen the
average duration of the Fund's fixed-income portfolio, the Fund may buy a
debt futures contract or a call option thereon, or sell a put option
thereon.
No price is paid upon entering into a futures contract. Instead, at
the inception of a futures contract the Fund is required to deposit initial
margin in an amount generally equal to 10% or less of the contract value.
Margin must also be deposited when writing a call or put option on a
futures contract, in accordance with applicable exchange rules. Unlike
margin in securities transactions, initial margin on futures contracts does
not represent a borrowing, but rather is in the nature of a performance
bond or good-faith deposit that is returned to the Fund at the termination
of the transaction if all contractual obligations have been satisfied.
Under certain circumstances, such as periods of high volatility, the Fund
may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in
the future by regulatory action.
Subsequent variation margin payments are made to and from the futures
broker daily as the value of the futures position varies, a process known
as marking-to-market. Variation margin does not involve borrowing, but
rather represents a daily settlement of the Fund's obligations to or from a
futures broker. When the Fund purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when the
Fund purchases or sells a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Fund has
insufficient cash to meet daily variation margin requirements, it might
need to sell securities at a time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions
on options, by selling or purchasing, respectively, an instrument identical
to the instrument purchased or sold. Positions in futures and options on
futures may be closed only on an exchange or board of trade that provides a
secondary market. However, there can be no assurance that a liquid
secondary market will exist for a particular contract at a particular time.
In such event, it may not be possible to close a futures contract or
options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once
that limit is reached, no trades may be made that day at a price beyond the
limit. Daily price limits do not limit potential losses because prices
could move to the daily limit for several consecutive days with little or
no trading, thereby preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option
on a futures position due to the absence of a liquid secondary market or
the imposition of price limits, it could incur substantial losses. The Fund
would continue to be subject to market risk with respect to the position.
In addition, except in the case of purchased options, the Fund would
continue to be required to make daily variation margin payments and might
be required to maintain the position being hedged by the futures contract
or option or to maintain cash or 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 differences in the natures of those
markets, are subject to the following factors which may create distortions.
First, all participants in the futures market are subject to margin deposit
and maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the cash
and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus producing
distortion. Third, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation
by speculators in the futures market may cause temporary price distortions.
Due to the possibility of distortion, a correct forecast of general
interest rate, currency exchange rate or stock market trends by WRIMCO may
still not result in a successful transaction. WRIMCO may be incorrect in
its expectations as to the extent of various interest rate, currency
exchange rate or stock market movements or the time span within which the
movements take place.
Index Futures. The risk of imperfect correlation between
movements in the price of an index futures and movements in the price of
the securities that are the subject of the hedge increases as the
composition of the Fund's portfolio diverges from the securities included
in the applicable index. The price of the index futures may move more than
or less than the price of the securities being hedged. If the price of the
index futures moves less than the price of the securities that are the
subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction,
the Fund would be in a better position than if it had not hedged at all. If
the price of the securities being hedged has moved in a favorable
direction, this advantage will be partially offset by the futures contract.
If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of
the securities that are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of the securities being
hedged and movements in the price of the index futures, the Fund may buy or
sell index futures in a greater dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the prices of 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 indexes 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
an account.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible because the
value of such securities, measured in the foreign currency, will change
after the forward currency contract has been established. Thus, the Fund
might need to purchase or sell foreign currencies in the spot (cash) market
to the extent such foreign currencies are not covered by forward currency
contracts. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the flexibility to enter into such forward currency
contracts when it determines that the best interests of the Fund will be
served.
Successful use of forward currency contracts depends on WRIMCO's skill
in analyzing and predicting currency values. Forward currency contracts may
substantially change the Fund's exposure to changes in currency exchange
rates and could result in losses to the Fund if currencies do not perform
as WRIMCO anticipates. There is no assurance that WRIMCO's use of forward
currency contracts will be advantageous to the Fund or that WRIMCO will
hedge at an appropriate time.
Combined Positions. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a
futures contract. Another possible combined position would involve writing
a call option at one strike price and buying a call option at a lower
price, in order to reduce the risk of the written call option in the event
of a substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Turnover. The Fund's options and futures activities may affect
its turnover rate and brokerage commission payments. The exercise of calls
or puts written by the Fund, and the sale or purchase of futures contracts,
may cause it to sell or purchase related investments, thus increasing its
turnover rate. Once the Fund has received an exercise notice on an option
it has written, it cannot effect a closing transaction in order to
terminate its obligation under the option and must deliver or receive the
underlying securities at the exercise price. The exercise of puts purchased
by the Fund may also cause the sale of related investments, also increasing
turnover; although such exercise is within the Fund's control, holding a
protective put might cause it to sell the related investments for reasons
that would not exist in the absence of the put. The Fund will pay a
brokerage commission each time it buys or sells a put or call or purchases
or sells a futures contract. Such commissions may be higher than those that
would apply to direct purchases or sales.
Swaps, Caps, Floors and Collars. The Fund may enter into swaps,
caps, floors and collars to preserve a return or a spread on a particular
investment or portion of its portfolio, to protect against any increase in
the price of securities the Fund anticipates purchasing at a later date or
to attempt to enhance yield. Swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive cash flows
on a notional principal amount, e.g., an exchange of floating rate payments
for fixed-rate payments. The purchase of a cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined value, to receive
payments on a notional principal amount from the party selling the cap. The
purchase of a floor entitles the purchaser, to the extent that a specified
index falls below a predetermined value, to receive payments on a notional
principal amount from the party selling the floor. A collar combines
elements of buying a cap and selling a floor.
Swap agreements, including caps, floors and collars, can be
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors. Depending on their
structure, swap agreements may increase or decrease the overall volatility
of the Fund's investments and its share price and yield because, and to the
extent, these agreements affect the Fund's exposure to long- or short-term
interest rates (in the United States or abroad), foreign currency values,
mortgage-backed security values, corporate borrowing rates or other factors
such as security prices or inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to
exchange payments in U.S. dollars for payments in foreign currency, the
swap agreement would tend to decrease the Fund's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Caps and floors have an effect similar to buying or writing options.
The creditworthiness of firms with which the Fund enters into swaps,
caps or floors will be monitored by WRIMCO. If a firm's creditworthiness
declines, the value of the agreement would be likely to decline,
potentially resulting in losses. If a default occurs by the other party to
such transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction.
The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap will be accrued on a daily basis
and an amount of cash or liquid assets having an aggregate net asset value
at least equal to the accrued excess will be maintained in an account with
the Fund's custodian that satisfies the requirements of the Investment
Company Act of 1940, as amended (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
15% 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 and 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 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 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 ten
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. Other securities, such as securities issued by Fannie
Mae, are supported only by the credit of the instrumentality and by a pool
of mortgage assets. If the securities are not backed by the full faith and
credit of the United States, the owner of the securities must look
principally to the agency issuing the obligation for repayment and may not
be able to assert a claim against the United States in the event that the
agency or instrumentality does not meet its commitment.
U.S. Government securities may include mortgage-backed securities
issued by U.S. Government agencies or instrumentalities including, but not
limited to, Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed
securities include pass-through securities, participation certificates and
collateralized mortgage obligations. See Mortgage-Backed and Asset-Backed
Securities. Timely payment of principal and interest on Ginnie Mae pass-
throughs is guaranteed by the full faith and credit of the United States.
Freddie Mac and Fannie Mae are both instrumentalities of the U.S.
Government, but their obligations are not backed by the full faith and
credit of the United States. It is possible that the availability and the
marketability (i.e., liquidity) of the securities discussed in this section
could be adversely affected by actions of the U.S. Government to tighten
the availability of its credit.
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 specified prices
valid for a specific period of time. The 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 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 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 securities in determining its net asset value per share. When the
Fund sells securities on a delayed-delivery basis, the Fund does not
participate in further gains or losses with respect to the securities. 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
sale 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 interest in real estate
investment trusts; however, the Fund may buy obligations or
instruments which it may otherwise buy even though the issuer
invests in real estate or interests in real estate;
(3) Buy shares of other investment companies which 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, by engaging in
repurchase agreements with respect to portfolio securities;
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) Participate on a joint, or a joint and several, basis in any
trading account in any securities;
(6) 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;
(7) Engage in the underwriting of securities, that is, the selling of
securities for others;
(8) 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 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 would exceed 5% of the value of the
Fund's total assets, or (b) the Fund would own 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;
(9) Issue senior securities; or
(10) Borrow money except that, as a temporary measure for
extraordinary or emergency purposes and not for investment
purposes, the Fund may borrow from banks up to 5% of the value 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.
The following investment restrictions are not fundamental and may
be changed by the Board of Directors without shareholder approval:
(1) At least 65% of the Fund's total assets will be invested during
normal market conditions in equity securities.
(2) The Fund does not intend to invest in non-investment grade debt
securities if, as a result of such investment, more than 5% of
its total assets would consist of such investments.
(3) The Fund may not purchase a security if, as a result, more than
15% of its net assets would consist of illiquid investments.
(4) The Fund does not currently intend to invest more than 25% of its
total assets in foreign securities.
(5) The Fund does not currently intend to invest more than 5% of its
total assets in the securities of other investment companies.
(6) To the extent that the Fund enters into futures contracts,
options on futures contracts and options on foreign currencies
traded on a CFTC-regulated exchange, in each case other than for
bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish those
positions (excluding the amount by which options are in-the-money
at the time of purchase) will not exceed 5% of the liquidation
value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any contracts the
Fund has entered into. (In general, a call option on a futures
contract is in-the-money if the value of the underlying futures
contract exceeds the strike, i.e., exercise, price of the call; a
put option on a futures contract is in-the-money if the value of
the underlying futures contract is exceeded by the strike price
of the put.) This policy does not limit to 5% the percentage of
the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
An investment policy or limitation that states a maximum percentage of
the Fund's assets that may be so invested or prescribes quality standards
is typically applied immediately after, and based on, the Fund's
acquisition of an asset. Accordingly, a subsequent change in the asset's
value, net assets, or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment
policies and limitations.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year
and dividing it by the monthly average of the market value of such
securities during the year, excluding certain short-term securities. The
Fund cannot accurately predict its portfolio turnover rate, but it is
anticipated that the annual turnover rate will generally be lower than that
of most other equity mutual funds, except to the extent the Fund sells
securities in order to generate capital losses to offset realized capital
gains. Selling securities to generate capital losses will increase the
Fund's turnover rate and result in more transaction costs incurred by the
Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the Management
Agreement) with WRIMCO. Under the Management Agreement, WRIMCO is employed
to supervise the investments of the Fund and provide investment advice to
the Fund. The address of WRIMCO 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), W&R Target Funds, Inc.
(formerly, Target/United Funds, Inc.) and W&R Funds, Inc. (formerly,
Waddell & Reed Funds, Inc.) since 1940 or each company's inception date,
whichever is 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 Fund accrues and pays this fee daily. For purposes of calculating
the daily fee, the Fund does not include money owed to it by Waddell &
Reed, Inc. for shares which it has sold but not yet paid the Fund.
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 $1.3375 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
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 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.
As described in the Prospectus, Waddell & Reed, Inc. reallows to
selling broker-dealers a portion of the sales charge paid for purchases of
Class A shares. A major portion of the sales charge for Class A shares and
the contingent deferred sales charge (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 sales 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 costs for
prospectuses, sales literature, advertisements, sales office maintenance,
processing of orders and general overhead with respect to its efforts to
distribute the Fund's shares. The Class A Plan permits Waddell & Reed, Inc.
to receive reimbursement for these Class A-related distribution activities
through the distribution fee, subject to the limit contained in the Plan.
The Class A Plan also 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, and other third
parties, who may regularly sell Class A shares of the Fund, and other third
parties, for providing shareholder services and/or maintaining shareholder
accounts with respect to Class A shares.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for, either directly or through others,
providing personal services to shareholders of that class and/or
maintaining shareholder accounts for that class and a distribution fee of
up to 0.75% of the average daily net assets of the class to compensate
Waddell & Reed, Inc. for, either directly or through others, distributing
the shares of that class. The Class B Plan and the Class C Plan each permit
Waddell & Reed, Inc. to receive compensation, through the distribution and
service fee, respectively, for its distribution activities for that class,
which are similar to the distribution activities described with respect to
the Class A Plan, and for its activities in providing personal services to
shareholders of that class and/or maintaining shareholder accounts of that
class, which are similar to the corresponding activities for which it is
entitled to reimbursement under the Class A Plan.
The only Directors or interested persons, as defined in the 1940 Act,
of the Fund who have a direct or indirect financial interest in the
operation of the Plans 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 goals 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 Plans 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.
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.
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 Plans or any
agreement referred to in the Plans (hereafter, the Plan Directors).
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 accountant, audits the Fund's
financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The NAV of each class of the shares of the Fund is the value of the
assets of that class, less the class's liabilities, divided by the total
number of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined NAV plus
the sales charge described in the Prospectus. The sales charge is paid to
Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of June
30, 2000, which is the most recent balance sheet included in this SAI, was
as follows:
NAV per Class A share (Class A
net assets divided by Class A shares
outstanding) .............................. $10.60
Add: selling commission (5.75% of offering
price) .................................... 0.65
-----
Maximum offering price per Class A share
(Class A NAV divided by 94.25%) ........... $11.25
=====
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 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 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 of 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 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
that the cost of the closing transaction.
Optional delivery standby commitments are valued at fair value under
the general supervision and responsibility of the Fund's Board of
Directors. They are accounted for in the same manner as exchange-listed
puts.
Minimum Initial and Subsequent Investments
For Class A, Class B and Class C shares, initial investments must be
at least $500 with the exceptions described in this paragraph. A $100
minimum initial investment pertains to certain exchanges of shares from
another fund in the Waddell & Reed Advisors Funds or W&R Funds, Inc. A $50
minimum initial investment pertains to purchases for certain retirement
plan accounts and to accounts for which an investor has arranged, at the
time of initial investment, to make subsequent purchases for the account by
having regular monthly withdrawals of $25 or more made from a bank account.
A minimum initial investment of $25 is applicable to purchases made through
payroll deduction for or by employees of Waddell & Reed, Inc., WRIMCO, or
their affiliates. Except with respect to certain exchanges and automatic
withdrawals from a bank account, a shareholder may make subsequent
investments of any amount.
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 Gift to Minors
Act (UGMA) account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account (IRA), salary reduction plan account
under Section 457 of the Internal Revenue Code of 1986, as amended
(the Code), provided that such purchases are subject to a sales charge
(see Net Asset Value Purchases), tax-sheltered annuity account (TSA)
or Keogh plan account, provided that the individual and spouse are the
only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or
her spouse is the settlor (the person who establishes the trust).
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
of Class A shares is made in that account or in any account eligible for
grouping with that account, the additional purchase is combined with the
NAV of the existing account as of the date the new purchase is accepted by
Waddell & Reed, Inc. for the purpose of determining the availability of a
reduced sales charge.
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.
The minimum initial investment under an LOI is 5% of the dollar amount
which must be invested under the LOI. An amount equal to 5% of the purchase
required under the LOI will be held in escrow. If a purchaser does not,
during the period covered by the LOI, invest the amount required to qualify
for the reduced sales charge under the terms of the LOI, he or she will be
responsible for payment of the sales charge applicable to the amount
actually invested. The additional sales charge owed on purchases of Class A
shares made under an LOI which is not completed will be collected by
redeeming part of the shares purchased under the LOI and held in escrow
unless the purchaser makes payment of this amount to Waddell & Reed, Inc.
within 20 days of Waddell & Reed, Inc.'s request for payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower
than that available under the LOI, the lower sales charge will apply.
An LOI does not bind the purchaser to buy, or Waddell & Reed, Inc. to
sell, the shares covered by the LOI.
With respect to LOIs for $2,000,000 or purchases otherwise qualifying
for no sales charge under the terms of the LOI, the initial investment must
be at least $200,000, 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 an SEP where the
employer has elected to have all purchases under the SEP grouped.
Other Funds in the Waddell & Reed Advisors Funds and W&R Funds,
Inc.
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the Waddell &
Reed Advisors Funds and the W&R Funds, Inc. subject to a sales charge. A
purchase of Class A shares, or Class A shares held, in any of the funds in
the Waddell & Reed Advisors Funds and/or the W&R Funds, Inc. subject to a
sales charge will be treated as an investment in the Fund in determining
the applicable sales charge. For these purposes, Class A shares of Waddell
& Reed Advisors Cash Management, Inc., Waddell & Reed Advisors Municipal
Money Market Fund, 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. 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. 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. 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 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 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.
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 for the Class A shares.
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.
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.
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 exceptions and special rules apply. Class A shares of any 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 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. or Class A shares of Waddell & Reed Advisors Municipal
Money Market Fund, 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. or Waddell & Reed Advisors Municipal
Money Market Fund, 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. or Waddell & Reed Advisors Municipal
Money Market Fund, 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. or Waddell & Reed Advisors Municipal
Money Market Fund, 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. or Waddell & Reed Advisors Municipal
Money Market Fund, Inc. automatically exchanged each month into Class C
shares of the Fund or any other fund in the Waddell & Reed Advisors Funds,
provided you already own Class C shares of the fund. The shares of Waddell
& Reed Advisors Cash Management, Inc. or Waddell & Reed Advisors Municipal
Money Market Fund, 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 W&R Funds, Inc. or for
Class A shares of Waddell & Reed Advisors Cash Management, Inc. or Class A
shares of Waddell & Reed Advisors Municipal Money Market Fund, Inc.
General Exchange Information
When you exchange shares, the total shares you receive will have the
same aggregate NAV as the total shares you exchange. The relative values
are those next figured after your exchange request is received in good
order.
These exchange rights and other exchange rights concerning the other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc., can in
most instances be eliminated or modified at any time and any such exchange
may not be accepted.
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 exceed 24% of the account value
annually. 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 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 the 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 an account are redeemed, you will not receive any
further payments. Thus, the payments are not an annuity, an income or a
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.
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 redemptions 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 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 of the Fund is stated below. Each of the persons listed through
and including Mr. Vogel is a member of the Fund's Board of Directors. The
other persons are officers of the Fund but are not members of the Board of
Directors. For purposes of this section, the term Fund Complex includes
each of the registered investment companies in the Waddell & Reed Advisors
Funds, W&R 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 the Fund's officers is also an officer of one or more of the
funds in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors, Chief
Executive Officer and Director of Waddell & Reed Financial, Inc.;
President, Chairman of the Board of Directors, Director and Chief Executive
Officer of Waddell & Reed Financial Services, Inc.; Chairman of the Board
of Directors and Director of WRIMCO, Waddell & Reed, Inc. and Waddell &
Reed Services Company; formerly, President of each of the funds in the Fund
Complex; formerly, Chairman of the Board of Directors of Waddell & Reed
Asset Management Company, a former affiliate of Waddell & Reed Financial,
Inc. Date of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law;
Director, AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President of JoDill Corp., an agricultural company; President and
Director of Dillingham Enterprises Inc.; formerly, Director and consultant,
McDougal Construction Company; formerly, Instructor at Central Missouri
State University; formerly, Member of the Board of Police Commissioners,
Kansas City, Missouri; formerly, Senior Vice President-Sales and Marketing
of Garney Companies, Inc., a specialty utility contractor. Date of birth:
January 9, 1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e
Eccles Foundation; Director of First Security Corp., a bank holding
company, and Director of Fluor Corp., a company with interests in coal;
formerly, President of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, Partner, Levy and Craig, P.C., a law
firm. Date of birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of Oklahoma;
Adjunct Professor of Law at the University of Oklahoma College of Law;
Managing Member, Harroz Investments, L.L.C.; formerly, Vice President for
Executive Affairs of the University of Oklahoma; formerly, Attorney with
Crowe & Dunlevy, a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a
law firm; formerly, President of Gilliland & Hayes, P.A.; formerly,
Director of Central Properties, Inc. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Executive Vice President, Chief Operating
Officer and Director of Waddell & Reed Financial, Inc.; Executive Vice
President, Chief Operating Officer, Director and Treasurer of Waddell &
Reed Financial Services, Inc.; Executive Vice President, Principal
Financial Officer, Director and Treasurer of WRIMCO; President, Chief
Executive Officer, Principal Financial Officer, Director and Treasurer of
Waddell & Reed, Inc.; Director and Treasurer of Waddell & Reed Services
Company; Chairman of the Board of Directors, Chief Executive Officer,
President and Director of Fiduciary Trust Company of New Hampshire, an
affiliate of Waddell & Reed, Inc.; Director of Legend Group Holdings, LLC,
Legend Advisory Corporation, Legend Equities Corporation, Advisory Services
Corporation, The Legend Group, Inc. and LEC Insurance Agency, Inc.,
affiliates of Waddell & Reed Financial, 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.
Cynthia P. Prince-Fox
Vice President of the Fund and three other funds in the Fund Complex;
Vice President of WRIMCO; Vice President of and Portfolio Manager for
Austin, Calvert & Flavin, an affiliate of WRIMCO; formerly, Vice President
of Waddell & Reed Asset Management Company. Date of birth: January 11,
1959.
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.
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 an annual base fee of $48,000 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.
It is anticipated that the Fund's Directors will receive 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 0 65,000
John A. Dillingham 0 65,000
David P. Gardner 0 65,000
Linda K. Graves 0 65,000
Joseph Harroz, Jr. 0 65,000
John F. Hayes 0 65,000
Glendon E. Johnson 0 65,000
William T. Morgan 0 65,000
Ronald C. Reimer 0 65,000
Frank J. Ross, Jr. 0 65,000
Eleanor B. Schwartz 0 65,000
Frederick Vogel III 0 65,000
*For the current fiscal year, the Directors have agreed to not allocate
any portion of their total compensation to the Fund.
**No pension or retirement benefits have been accrued as a part of Fund
expenses. This information is based on fees to be earned during the
Fund's fiscal year ending December 31, 2000.
The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of November 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
November 30, 2000, regarding the ownership of the Fund's shares.
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
------------------- ----- ------------ -------
Waddell & Reed Inc Class A 500,000 11.13%
Attn: Ty Towery
P O Box 29217
Shawnee Mission KS 66201-9217
George M Dempsey & Class C 19,724 6.53%
Onolee J Dempsey Jtn Ros
921 Church St
Troupsburg NY 14885
Lois Patricia Yanez Class C 17,893 5.92%
Ernesto Yanez Jt Wros
8173 Presidio Dr
Cupertino CA 95014-4027
Larry L Clary (TOD) Class C 71,311 23.60%
4418 Dawson
North Little Rock AR 72116-7037
Wallace Owens Jrf T/O/D Class Y 1,423 92.10%
Bertha Gates
RR 6 Box 782
Guthrie OK 73044-9806
Peter G Kessler & Class Y 122 7.90%
Terese M Kessler Jtn Ros
P O Box 820
Cottage Grove OR 97424-0034
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is
derived from the dividends, interest and earned discount on the securities
the Fund holds less expenses (which will vary by class). The second source
is net realized capital gains, which are derived from the proceeds received
from the Fund's sale of securities at a price higher than the Fund's tax
basis (usually cost) in such securities, less losses from sales of
securities at a price lower than the Fund's basis therein; these gains can
be either long-term or short-term, depending on how long the Fund has owned
the securities before it sells them. The third source is net realized gains
from foreign currency transactions. The payments made to shareholders from
net investment income, net short-term capital gains and net realized gains
from certain foreign currency transactions are called dividends.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may
not have such gains, depending on whether securities are sold and at what
price. If the Fund has net capital gains, it will pay distributions once
each year, in the latter part of the fourth calendar quarter, except to the
extent it has net capital losses carried over from a prior year or years to
offset the gains.
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 Directors.
Even if you receive dividends and distributions on 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 even if they are
paid by the Fund during the following January. Accordingly, those dividends
and distributions will be taxed to the shareholders for the year in which
that December 31 falls.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of short-term,
capital loss to the extent of any distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before
the record date for a dividend or distribution, the investor will receive
some portion of the purchase price back as a taxable dividend or
distribution.
The Fund will be subject to a nondeductible 4% excise tax (Excise Tax)
to the extent it fails to distribute, by the end of any calendar year,
substantially all of its ordinary income for that year and capital 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 gain -- 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 gain 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 gain. If the Fund enters into a closing purchase transaction,
it will have a short-term capital gain or loss based on the difference
between the premium it receives for the option it wrote and the premium it
pays for the option it buys. If an option written by the Fund lapses
without being exercised, the premium it received also will be a short-term
capital gain. If such an option is exercised and the Fund thus sells the
securities subject to the option, the premium the Fund 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. 60% 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 are 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 to 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 and are
permissible 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 Fund shares as a factor in the selection of broker-dealers to
execute portfolio transactions. No allocation of brokerage or principal
business is made to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful
only to one or more of the other advisory accounts of WRIMCO, and
investment research received for the commissions of those other accounts
may be useful both to the Fund and one or more of such other accounts. To
the extent that electronic or other products provided by such brokers to
assist WRIMCO in making investment management decisions are used for
administration or other non-research purposes, a reasonable allocation of
the cost of the product attributable to its non-research use is made and
this cost is paid 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.
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 its 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 CDSC; 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 NAV 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 time which 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.
Initial Investment and Organizational Expenses
On March 2, 2000, Waddell & Reed, Inc. purchased for investment 10,000
Class A shares of the Fund at a NAV of $10.00 per share.
THE INVESTMENTS OF
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
JUNE 30, 2000
Shares Value
COMMON STOCKS
Business Services - 16.18%
Amdocs Limited* ......................... 4,500 $ 345,375
CheckFree Holdings Corporation* ......... 7,500 387,422
Citrix Systems, Inc.* ................... 14,000 265,562
Clear Channel Communications, Inc.* ..... 3,500 262,500
GO.com* ................................. 15,500 185,031
Intuit Inc.* ............................ 1,700 70,231
Microsoft Corporation* .................. 5,200 415,838
Oracle Corporation* ..................... 2,500 210,078
Siebel Systems, Inc.* ................... 1,900 310,828
Veritas Software Corp.* ................. 2,900 327,609
Total.................................. 2,780,474
Chemicals and Allied Products - 12.28%
Amgen Inc.* ............................. 2,400 168,675
Forest Laboratories, Inc.* .............. 3,200 323,200
Merck & Co., Inc. ....................... 2,700 206,888
Pfizer Inc. ............................. 4,400 211,200
Pharmacyclics, Inc.* .................... 3,900 237,534
QLT Inc.* ............................... 4,600 357,219
Schering-Plough Corporation ............. 3,200 161,600
Smith International, Inc.* .............. 6,100 444,156
Total.................................. 2,110,472
Communication - 4.49%
AT&T Wireless Group* .................... 10,000 278,750
Nextel Communications, Inc.* ............ 4,800 293,550
SBC Communications Inc. ................. 4,600 198,950
Total.................................. 771,250
Electronic and Other Electric Equipment - 4.80%
Intel Corporation ....................... 2,300 307,409
LSI Logic Corporation* .................. 3,900 211,088
Nortel Networks Corporation ............. 4,500 307,125
Total.................................. 825,622
Food Stores - 1.09%
Kroger Co. (The)* ....................... 8,500 187,531
General Merchandise Stores - 4.40%
Kohl's Corporation* ..................... 6,500 361,563
Target Corporation ...................... 6,800 394,400
Total.................................. 755,963
Health Services - 1.98%
HCA - The Healthcare Company ............ 11,200 340,200
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
JUNE 30, 2000
Shares Value
COMMON STOCKS (Continued)
Industrial Machinery and Equipment - 6.06%
Cisco Systems, Inc.* .................... 6,100 $ 387,541
EMC Corporation* ........................ 4,600 353,912
Hewlett-Packard Company ................. 2,400 299,700
Total.................................. 1,041,153
Instruments and Related Products - 1.47%
Agilent Technologies, Inc.* ............. 915 67,508
Medtronic, Inc. ......................... 3,700 184,306
Total.................................. 251,814
Insurance Carriers - 1.64%
American International Group, Inc. ...... 2,400 282,000
Motion Pictures - 1.59%
Time Warner Incorporated ................ 3,600 273,600
Oil and Gas Extraction - 3.49%
Apache Corporation ...................... 7,000 411,688
Burlington Resources Incorporated ....... 4,900 187,425
Total.................................. 599,113
Petroleum and Coal Products - 0.91%
Exxon Mobil Corporation ................. 2,000 157,000
Transportation by Air - 2.12%
Northwest Airlines Corporation,
Class A*............................... 12,000 364,500
TOTAL COMMON STOCKS - 62.50% $10,740,692
(Cost: $9,939,860)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Food and Kindred Products - 4.07%
General Mills, Inc.,
6.5288%, Master Note................... $700 700,000
Nondepository Institutions - 4.07%
Paccar Financial Corp.,
6.57%, Master Note..................... 700 700,000
Total Commercial Paper - 8.14% 1,400,000
See Notes to Schedule of Investments on page .
THE INVESTMENTS OF
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
JUNE 30, 2000
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (continued)
Repurchase Agreement - 26.87%
J.P. Morgan Securities Inc., 6.2% Repurchase
Agreement dated 6-30-00, to be
repurchased at $4,619,385 on
7-3-00**............................... $4,617 $ 4,617,000
TOTAL SHORT-TERM SECURITIES - 35.01% $ 6,017,000
(Cost: $6,017,000)
TOTAL INVESTMENT SECURITIES - 97.51% $16,757,692
(Cost: $15,956,860)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 2.49% 427,402
NET ASSETS - 100.00% $17,185,094
Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.
**Collateralized by $4,012,000 U.S. Treasury Notes, 7.5% due 11-15-2024;
market value and accrued interest aggregate $4,713,684.
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.
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000
(In Thousands, Except for Per Share Amounts)
Assets
Investment securities - at value
(Notes 1 and 4).................................. $16,758
Cash ............................................ 1
Receivables:
Fund shares sold................................. 371
Dividends and interest........................... 7
Prepaid registration fees ......................... 59
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Total assets ................................... 17,196
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Liabilities
Accrued service fee (Note 3) ...................... 2
Accrued accounting services fee (Note 3) .......... 1
Accrued distribution fee (Note 3) ................. 1
Accrued transfer agency and dividend
disbursing (Note 3).............................. 1
Other ............................................ 6
-------
Total liabilities .............................. 11
-------
Total net assets.............................. $17,185
=======
Net Assets
$0.001 par value capital stock
Capital stock.................................... $ 2
Additional paid-in capital....................... 16,437
Accumulated undistributed income (loss):
Accumulated undistributed net investment income.. 67
Accumulated undistributed net realized loss
on investment transactions ..................... (122)
Net unrealized appreciation in value of
investments .................................... 801
-------
Net assets applicable to outstanding
units of capital.............................. $17,185
=======
Net asset value per share (net assets divided
by shares outstanding)
Class A ........................................... $10.60
Class B ........................................... $10.56
Class C ........................................... $10.56
Class Y ........................................... $10.60
Capital shares outstanding
Class A ........................................... 1,408
Class B ........................................... 147
Class C ........................................... 66
Class Y ........................................... 2
Capital shares authorized......................... 1,000,000
See notes to financial statements.
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
STATEMENT OF OPERATIONS
For the Period Ended JUNE 30, 2000
(In Thousands)
Investment Income
Income (Note 1B):
Interest and amortization........................ $ 89
Dividends........................................ 4
----
Total income ................................... 93
----
Expenses (Note 3):
Investment management fee........................ 18
Registration fees................................ 8
Service fee:
Class A ....................................... 3
Class B ....................................... 1
Class C ....................................... ---*
Audit fees....................................... 3
Distribution fee:
Class A....................................... 1
Class B....................................... 1
Class C....................................... 1
Transfer agency and dividend disbursing:
Class A....................................... 2
Class B....................................... ---*
Class C....................................... ---*
Accounting services fee.......................... 2
Custodian fees................................... 2
Legal fees....................................... 2
Shareholder servicing - Class Y.................. ---*
----
Total .......................................... 44
Less expenses in excess of voluntary waiver of
management fee (Note 3)....................... (18)
----
Total expenses................................ 26
----
Net investment income ....................... 67
----
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 4)
Realized net loss on securities ................... (122)
Unrealized appreciation in value of investments
during the period................................ 801
----
Net gain on investments.......................... 679
---
Net increase in net assets resulting from
operations.................................... $746
====
*Not shown due to rounding.
See notes to financial statements.
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period from MARCH 31, 2000* through JUNE 30, 2000
(In Thousands)
Increase in Net Assets
Operations:
Net investment income............. $ 67
Realized net loss on investments.. (122)
Unrealized appreciation........... 801
-------
Net increase in net assets
resulting from operations...... 746
-------
Distributions to shareholders from (Note 1E):**
Net investment income:
Class A ---
Class B ---
Class C ---
Class Y ---
Realized gains on securities transactions:
Class A ---
Class B ---
Class C ---
Class Y ---
-------
---
-------
Capital share transactions
(Note 5).......................... 16,339
-------
Total increase ............... 17,085
Net Assets
Beginning of period ................ 100
-------
End of period, including undistributed
net investment income of $67...... $17,185
=======
*Commencement of operations.
**See "Financial Highlights" on pages - .
See notes to financial statements.
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
For the
period from
3/31/00*
through
6/30/00
--------
Net asset value,
beginning of
period ............ $10.00
------
Income from investment
operations:
Net investment
income........... 0.04
Net realized and
unrealized gain
on investments... 0.56
------
Total from investment
operations ....... 0.60
------
Less distributions:
From net investment
income........... (0.00)
From capital gains (0.00)
------
Total distributions (0.00)
------
Net asset value,
end of period ..... $10.60
======
Total return**...... 6.00%
Net assets, end of
period (in
millions) ......... $15
Ratio of expenses
to average net
assets ............ 0.84%***
Ratio of net investment
income to average
net assets ........ 2.50%***
Portfolio turnover
rate .............. 4.41%
*Commencement of operations.
**Total return calculated without taking into account the sales load
deducted on an initial purchase.
***Annualized.
See notes to financial statements.
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS
Class B Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
For the
period from
3/31/00*
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... 0.54
------
Total from investment
operations ....... 0.56
------
Less distributions:
From net investment
income........... (0.00)
From capital gains (0.00)
------
Total distributions (0.00)
------
Net asset value,
end of period ..... $10.56
======
Total return........ 5.60%
Net assets, end of
period (in
millions) ......... $1
Ratio of expenses
to average net
assets ............ 1.88%**
Ratio of net investment
income to average
net assets ........ 1.34%**
Portfolio turnover
rate .............. 4.41%
*Commencement of operations.
**Annualized.
See notes to financial statements.
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS
Class C Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
For the
period from
3/31/00*
through
6/30/00
--------
Net asset value,
beginning of
period ............ $10.00
------
Income from investment
operations:
Net investment
income........... 0.01
Net realized and
unrealized gain
on investments... 0.55
------
Total from investment
operations ....... 0.56
------
Less distributions:
From net investment
income........... (0.00)
From capital gains (0.00)
------
Total distributions (0.00)
------
Net asset value,
end of period ..... $10.56
======
Total return*....... 5.60%
Net assets, end of
period (in
millions) ......... $1
Ratio of expenses
to average net
assets ............ 1.97%**
Ratio of net investment
income to average
net assets ........ 1.22%**
Portfolio turnover
rate .............. 4.41%
*Commencement of operations.
**Annualized.
See notes to financial statements.
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout The Period:
For the
period from
4/19/00*
through
6/30/00
--------
Net asset value,
beginning of
period ............ $10.07
------
Income from investment
operations:
Net investment
income........... 0.00
Net realized and
unrealized gain
on investments... 0.53
------
Total from investment
operations ....... 0.53
------
Less distributions:
From net investment
income........... (0.00)
From capital gains (0.00)
------
Total distributions (0.00)
------
Net asset value,
end of period ..... $10.60
======
Total return........ 5.26%
Net assets, end of
period (in
thousands) ........ $16
Ratio of expenses
to average net
assets ............ 2.02%**
Ratio of net investment
income to average
net assets ........ 0.67%**
Portfolio turnover
rate .............. 4.41%***
*Commencement of operations.
**Annualized.
***For the period from March 31, 2000 through June 30, 2000.
See notes to financial statements.
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1 -- Significant Accounting Policies
Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. (the "Fund"),
formerly United Tax-Managed Equity 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.
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.
F. Repurchase agreements -- Repurchase agreements are collateralized by
the value of the resold securities which, during the entire period of
the agreement, remains at least equal to the value of the loan,
including accrued interest thereon. The collateral for the repurchase
agreement is held by the Fund's custodian bank.
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 November 30, 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 March 31, 2000 (the date of the initial public offering).
On March 2, 2000, 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 $63,905 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: 0.65% 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.
However, WRIMCO has voluntarily agreed to waive its management fee on any
day if the Fund's net assets are less than $25 million, subject to WRIMCO's
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 $205,979. During the period ended June 30, 2000, no deferred sales
charges were collected. With respect to Class A, Class B and Class C
shares, W&R paid sales commissions of $155,927 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 $10,354,856 while
proceeds from maturities and sales aggregated $292,912. Purchases of short-
term securities aggregated $357,239,000 while proceeds from maturities and
sales aggregated $351,222,000. No U.S. Government obligations were
purchased or sold during the period.
For Federal income tax purposes, cost of investments owned at June 30,
2000 was $15,956,860, resulting in net unrealized appreciation of $800,832,
of which $1,193,669 related to appreciated securities and $392,837 related
to depreciated securities.
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
period
ended
June 30,
2000
------------
Shares issued from sale
of shares:
Class A ............. 1,416
Class B ............. 147
Class C ............. 66
Class Y ............. 2
Shares redeemed:
Class A ............. (18)
Class B ............. ---
Class C ............. ---
Class Y ............. ---
-----
Increase in
outstanding capital
shares .............. 1,613
=====
Value issued from sale
of shares:
Class A ............. $14,334
Class B ............. 1,504
Class C ............. 665
Class Y ............. 16
Value redeemed:
Class A ............. (180)
Class B ............. ---
Class C ............. ---
Class Y ............. ---
-------
Increase in
outstanding capital . $16,339
=======
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Waddell & Reed Advisors Tax-Managed Equity Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Waddell & Reed Advisors Tax-
Managed Equity Fund, Inc. (formerly United Tax-Managed Equity Fund, Inc.)
(the "Fund"), as of June 30, 2000, and the related statements of operations
and changes in net assets for the period March 31, 2000 (inception) through
June 30, 2000, and the financial highlights for the period March 31, 2000
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 Tax-Managed Equity 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.
/s/Deloitte & Touche LLP
-------------------------------
Deloitte & Touche LLP
Kansas City, Missouri
August 4, 2000
