WADDELL & REED ADVISORS MUNICIPAL MONEY MARKET 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 the Waddell & Reed Advisors Municipal Money
Market Fund, Inc. (the Fund), 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............................. 2
Investment Strategies, Policies and Practices....... 3
Investment Management and Other Services............ 21
Purchase, Redemption and Pricing of Shares.......... 26
Directors and Officers.............................. 33
Payments to Shareholders............................ 38
Taxes............................................... 39
Portfolio Transactions and Brokerage................ 41
Other Information................................... 44
Appendix A.......................................... 46
Financial Statements................................ 55
Waddell & Reed Advisors Municipal Money Market 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 September 7,
2000.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may, from
time to time, publish the Fund's yield, effective yield and performance
rankings in advertisements and sales materials. Yield information is also
available by calling the Shareholder Servicing Agent at the telephone
number shown on the inside back cover of the Prospectus.
There are two methods by which yield is calculated for a specified
time period for a class of shares of the Fund. The first method, which
results in an amount referred to as the current yield, assumes an account
containing exactly one share of the applicable class at the beginning of
the period. The net asset value (NAV) of this share will be $1.00 except
under extraordinary circumstances. The net change in the value of the
account during the period is then determined by subtracting this beginning
value from the value of the account at the end of the period which will
include all dividends accrued for a share of such class; however, capital
changes are excluded from the calculation, i.e., realized gains and losses
from the sale of securities and unrealized appreciation and depreciation.
However, so that the change will not reflect the capital changes to be
excluded, the dividends used in the yield computation may not be the same
as the dividends actually declared, as certain realized gains and losses
and, under unusual circumstances, unrealized gains and losses (see
Purchase, Redemption and Pricing of Shares), will be taken into account in
the calculation of dividends actually declared. Instead, the dividends used
in the yield calculation will be those which would have been declared if
the capital changes had not affected the dividends.
This net change in the account value is then divided by the value of
the account at the beginning of the period (i.e., normally $1.00 as
discussed above) and the resulting figure (referred to as the base period
return) is then annualized by multiplying it by 365 and dividing it by the
number of days in the period with the resulting current yield figure
carried to at least the nearest hundredth of one percent.
The second method results in a figure referred to as the effective
yield. This represents an annualization of the current yield with dividends
reinvested daily. Effective yield is calculated by compounding the base
period return by adding 1, raising the sum to a power equal to 365 divided
by 7, and subtracting 1 from the result and rounding the result to the
nearest hundredth of one percent according to the following formula:
365/7
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)] - 1
The Fund may also advertise or include in sales material its tax-
equivalent yield, which is calculated by applying the stated income tax
rate to only the net investment income exempt from taxation according to a
standard formula which provides for computation of tax-equivalent yield by
dividing that portion of the Fund's yield which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of
the yield of the Fund that is not tax-exempt.
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.
The Fund may invest in the obligations and instruments listed below.
As a money market fund and in order for the Fund to use the amortized cost
method of valuing its portfolio securities, the Fund must comply with Rule
2a-7 (Rule 2a-7) under the Investment Company Act of 1940, as amended (the
1940 Act). Under Rule 2a-7, investments are limited to those that are U.S.
dollar denominated and that are rated in one of the two highest rating
categories by the requisite nationally recognized statistical rating
organizations(s) (NRSRO(s)) or are comparable unrated securities. See
Appendix A to this SAI for a description of some of these ratings. In
addition, Rule 2a-7 limits investments in securities of any one issuer
(except U.S. Government securities) to no more than 5% of the Fund's total
assets. Investments in securities rated in the second highest rating
category by the requisite NRSRO(s) or comparable unrated securities are
limited to no more than 5% of the Fund's total assets, with investment in
such securities of any one issuer being limited to the greater of 1% of the
Fund's total assets or $1,000,000. In accordance with Rule 2a-7, the Fund
may invest in securities with a remaining maturity of not more than 397
calendar days. See discussion under Determination of Offering Price.
Specific Securities and Investment Practices
Municipal Bonds
Municipal bonds are issued by a wide range of state and local
governments, agencies and authorities for various public purposes. The two
main kinds of municipal bonds are general obligation bonds and revenue
bonds. For general obligation bonds, the issuer has pledged its full faith,
credit and taxing power for the payment of principal and interest. Revenue
bonds are payable only from specific sources; these may include revenues
from a particular facility or class of facilities or special tax or other
revenue source.
A special class of municipal bonds issued by state and local
government authorities and agencies are industrial development bonds
(IDBs), which are also generally referred to as private activity bonds
(PABS). The Fund may purchase IDBs and PABs only if the interest on them is
free from Federal income taxation, although such interest may be an item of
tax preference for purposes of the Federal alternative minimum tax. In
general, IDBs and PABS are revenue bonds and are issued by or on behalf of
public authorities to obtain funds to finance privately operated facilities
such as for energy and pollution control. IDBs and PABs are also used to
finance public facilities such as airports and mass transit systems. The
credit quality of IDBs and PABs is usually directly related to the credit
standing of the user of the facilities being financed. The Fund may invest
an unlimited percentage of its assets in municipal bonds that are IDBs or
PABs.
Municipal leases and participation interests therein are another type
of municipal bond (collectively, lease obligations). These obligations,
which may take the form of a lease, an installment purchase, or a
conditional sale contract, are issued by state and local governments and
authorities to acquire land and a variety of equipment and facilities. The
factors to be considered in determining whether or not any rated municipal
lease obligations are liquid include (1) the frequency of trades and quotes
for the obligations, (2) the number of dealers willing to purchase or sell
the security and the number of other potential buyers, (3) the willingness
of dealers to undertake to make a market in the securities, (4) the nature
of marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer,
(5) the likelihood that the marketability of the obligation will be
maintained through the time the instrument is held, (6) the credit quality
of the issuer and the lessee, and (7) the essentiality to the lessee of the
property covered by the lease. Unrated municipal lease obligations are
considered illiquid.
The Fund does not intend to hold municipal lease obligations directly
as a lessor of the property, but may from time to time purchase a
participation interest in a municipal obligation from a bank or other third
party. A participation interest gives the Fund a specified, undivided
interest in the obligation in proportion to its purchased interest in the
total amount of the obligation. Municipal leases frequently have risks
distinct from those associated with general obligation or revenue bonds.
State constitutions and statutes set forth requirements that states or
municipalities must meet to incur debt, including voter referenda, interest
rate limits or public sale requirements. Leases, installment purchases or
conditional sale contracts have evolved as means for governmental issuers
to acquire property and equipment without being required to meet these
constitutional and statutory requirements. Many leases and contracts
include non-appropriation clauses providing that the governmental issuer
has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the legislative body on a
yearly or other periodic basis. Non-appropriation clauses free the issuer
from debt issuance limitations. In determining the liquidity of a municipal
lease obligation, WRIMCO will differentiate between direct interests in
municipal leases and municipal lease-backed securities, the latter of which
may take the form of a lease-backed revenue bond, a tax-exempt asset-backed
security or any other investment structure using a municipal lease-purchase
agreement as its base. See Asset-Backed Securities. While the former may
present liquidity issues, the latter are based on a well established method
of securing payment of a municipal lease obligation.
WRIMCO and the Fund rely on the opinion of bond counsel for the issuer
in determining whether obligations are municipal bonds. If a court holds
that an obligation held by the Fund is not a municipal bond (with the
result that the interest thereon is taxable), the Fund will sell the
obligation as soon as possible, but it might incur a loss upon such sale.
Now or in the future, Standard & Poor's (S&P), Moody's and other
NRSROs may use different rating designations for municipal bonds depending
on their maturities on issuance or other characteristics. For example,
Moody's now rates the top four categories of municipal notes (i.e.,
municipal bonds generally with a maturity at the time of issuance ranging
from six months to three years) as MIG 1, MIG 2, MIG 3 and MIG 4.
The value of the obligations and instruments in which the Fund invests
will fluctuate depending in large part on changes in prevailing interest
rates. If these rates go up after the Fund buys an obligation or
instrument, its value may go down; if these rates go down, its value may go
up. Changes in value and yield based on changes in prevailing interest
rates may have different effects on short-term debt obligations than on
long-term obligations. Long-term obligations (which often have higher
yields) may fluctuate in value more than short-term ones. Changes in
interest rates will be more quickly reflected in the yield of a portfolio
of short-term obligations than in the yield of a portfolio of long-term
obligations.
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) fixed time deposits subject to withdrawal penalties other than
overnight deposits;
(3) securities for which market quotations are not readily available;
and
(4) restricted securities not determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors.
Illiquid investments do not include any obligations payable at
principal amount plus accrued interest on demand or within seven days after
demand.
If through a change in values, net assets, or other circumstances, the
Fund were in a position where more than 10% of its net assets were invested
in illiquid securities, it would seek to take appropriate steps to protect
liquidity.
Indexed Securities
Subject to the requirements of Rule 2a-7, the Fund may purchase
securities the values of which varies in relation to the value of financial
indicators such as other securities, securities indices or interest rates,
as long as the indexed securities are U.S. dollar denominated. 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 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. Indexed securities may be positively or negatively indexed;
that is, their maturity value may increase when the specified index value
increases, or their maturity value may decline when the index increases.
Recent issuers of indexed securities have included banks, corporations, and
certain U.S. Government agencies.
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 and/or U.S. Government
Obligations, at least equal in value to the market value of the securities
lent on each day 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 both types of collateral. The second method is to receive
interest on the investment of the cash collateral or to receive interest on
the U.S. Government Obligations used as collateral. Part of the interest
received in either case may be shared with the borrower.
The Fund will make loans only under rules of the New York Stock
Exchange (the NYSE), which presently require the borrower to give the
securities back to the Fund within five business days after the Fund gives
notice to do so. The Fund may pay reasonable finder's, administrative and
custodian fees in connection with loans of securities.
Some, but not all, of the Fund's 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 how the Fund may invest cash collateral.
There may be risks of delay in receiving additional collateral from
the borrower if the market value of the securities loaned increases, risks
of delay in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially.
Limited Investment in Other Debt Securities
All of the Fund's invested assets, other than cash or receivables,
must be invested in municipal obligations, except that a limited amount of
assets may be invested in specified debt securities that are referred to in
the Prospectus as taxable obligations and in repurchase agreements (see
discussion below). Except when the Fund is taking a defensive position, the
Fund may invest in taxable obligations only if, after any such investment,
not more than 20% of its total assets would consist of taxable obligations.
The Fund may invest in any taxable obligations permitted by Rule 2a-7 of
the Investment Company Act of 1940, as amended (1940 Act).
Taxable 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. The Fund may
invest in money market instruments, including the following:
Bank Obligations and Instruments Secured Thereby: Subject to
the limitations described above, time deposits, certificates of deposit,
bankers' acceptances and other bank obligations if they are obligations of
a bank subject to regulation by the U.S. Government (including obligations
issued by foreign branches of these banks) or obligations issued by a
foreign bank having total assets equal to at least U.S. $500,000,000, and
instruments secured by any such obligation; in this SAI, a bank includes
commercial banks and savings and loan associations. Time deposits are
monies kept on deposit with U.S. banks or other U.S. financial institutions
for a stated period of time at a fixed rate of interest. At present, bank
time deposits are not considered by the Board of Directors or WRIMCO to be
readily marketable. There may be penalties for the early withdrawal of such
time deposits, in which case, the yield of these investments will be
reduced.
Commercial Paper Obligations Including Variable Amount Master
Demand Notes: Commercial paper rated in one of the two highest ratings
as assigned by an NRSRO or, if not rated, of comparable quality and issued
by a corporation in whose debt obligations the Fund may invest. S&P,
Moody's and Fitch are among the NRSROs under Rule 2a-7. See Appendix A for
a description of some of these ratings.
Corporate Debt Obligations: Corporate debt obligations if they
are rated at least A or its equivalent by an NRSRO. See Appendix A for a
description of some of these debt ratings.
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 invest in mortgage-backed securities as long as WRIMCO
determines that it is consistent with the Fund's goal and investment
policies and subject to the requirements of Rule 2a-7. The Fund may
purchase mortgage-backed securities issued by both government and non-
government entities such as banks, mortgage lenders, or other financial
institutions.
The yield characteristics of mortgage-backed securities differ from
those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently and that principal
may be prepaid at any time because the underlying mortgage loans generally
may be prepaid at any time. As a result, if the Fund purchases these
securities at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity while a prepayment rate that is slower than
expected will have the opposite effect of increasing yield to maturity.
Conversely, if the Fund purchases these securities at a discount, faster
than expected prepayments will increase, while slower than expected
prepayments will reduce, yield to maturity. Accelerated prepayments on
securities purchased by the Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time
the principal is repaid in full.
Timely payment of principal and interest on pass-through securities of
Ginnie Mae (but not those of Freddie Mac or Fannie Mae) is guaranteed by
the full faith and credit of the United States. This is not a guarantee
against market decline of the value of these securities or shares of the
Fund. It is possible that the availability and marketability (i.e.,
liquidity) of these securities could be adversely affected by actions of
the U.S. Government to tighten the availability of its credit.
Stripped Mortgage-Backed Securities. The Fund may invest in
stripped securities as long as WRIMCO determines that it is consistent with
the Fund's goal and investment policies and subject to the requirements of
Rule 2a-7. 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 securing the debt are not
first lien mortgage loans or interests therein, but include assets such as
motor vehicle installment sales contracts, other installment sale
contracts, home equity loans, leases of various types of real and personal
property and receivables from revolving credit (credit card) agreements.
Such assets are securitized through the use of trusts or special purpose
corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter
of credit or pool insurance policy issued by a financial institution
unaffiliated with the issuer, or other credit enhancements may be present.
The value of asset-backed securities may also depend on the
creditworthiness of the servicing agent for the loan pool, the originator
of the loans or the financial institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed
Securities. The yield characteristics of mortgage-backed and asset-
backed securities differ from those of traditional debt securities. Among
the major differences are that interest and principal payments are made
more frequently, usually monthly, and that principal may be prepaid at any
time because the underlying mortgage loans or other obligations generally
may be prepaid at any time. Prepayments on a pool of mortgage loans are
influenced by a variety of economic, geographic, social and other factors,
including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to
prepayments on asset-backed securities, but the receivables underlying
asset-backed securities generally are of a shorter maturity and thus are
likely to experience substantial prepayments. Such securities, however,
often provide that for a specified time period the issuers will replace
receivables in the pool that are repaid with comparable obligations. If the
issuer is unable to do so, repayment of principal on the asset-backed
securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to 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.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. The
Fund will not enter into a repurchase transaction that will cause more than
10% of its net assets to be invested in illiquid investments, which include
repurchase agreements not terminable within seven days. See Illiquid
Investments. A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a commercial bank or broker-
dealer) agrees, at the time of purchase, that it will repurchase the
security at a specified time and price. The amount by which the resale
price is greater than the purchase price reflects an agreed-upon market
interest rate effective for the period of the agreement. The return on the
securities subject to the repurchase agreement may be more or less than the
return on the repurchase agreement.
If the Fund engages in repurchase agreements, they will typically be
overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is
that the Fund may suffer a loss if the seller fails to pay the agreed-upon
amount on the delivery date and that amount is greater than the resale
price of the underlying securities and other collateral held by the Fund.
In the event of bankruptcy or other default by the seller, there may be
possible delays or expenses in liquidating the underlying securities or
other collateral, decline in their value and loss of interest. The return
on such collateral may be more or less than that from the repurchase
agreement. The Fund's repurchase agreements will be structured so as to
fully collateralize the loans. In other words, the value of the underlying
securities, which will be held by the Fund's custodian bank or by a third
party that qualifies as a custodian under Section 17(f) of the 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 resold in privately negotiated transactions, pursuant to
an exemption from registration under the Securities Act of 1933, as amended
(1933 Act), or in a registered public offering. For example, the Fund may
purchase commercial paper that is issued in reliance on the so-called
private placement exemption from registration that is afforded by Section
4(2) (Section 4(2) paper) of the 1933 Act. Section 4(2) paper is normally
resold to other institutional investors through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity.
Where registration of a security 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., Section 4(2) paper,
may be determined to be liquid in accordance with guidelines adopted by the
Board of Directors. See Illiquid Investments.
These restricted securities will be valued in the same manner that
other commercial paper held by the Fund is valued. See Portfolio Valuation.
The Fund does not anticipate adjusting for any diminution in value of these
securities on account of their restrictive feature if there exists an
active market which creates liquidity and actual market quotations for
these restricted securities are available. In the event that there should
cease to be an active market for these securities or actual market
quotations become unavailable, they will be valued at fair value as
determined in good faith by the Board of Directors.
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.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase municipal bonds on a when-issued or delayed-
delivery basis or sell them on a delayed-delivery basis. In either case,
payment and delivery for the bonds take place at a future date. The bonds
so purchased or sold by the Fund are subject to market fluctuation; their
value may be less or more when delivered than the purchase price paid or
received. When purchasing bonds 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 municipal bonds on a when-issued or delayed-delivery basis, it
will record the transaction and thereafter reflect the value of the bonds
in determining its NAV per share. When the Fund sells a municipal bond on a
delayed-delivery basis, the Fund does not participate in further gains or
losses with respect to the bond. When the Fund makes a commitment to sell
municipal bonds on a delayed basis, it will record the transaction and
thereafter value the bonds at the sales price in determining the Fund's NAV
per share. If the other party to a delayed-delivery transaction fails to
deliver or pay for the bonds, the Fund could miss a favorable price or
yield opportunity, or could suffer a loss.
Ordinarily the Fund purchases municipal bonds on a when-issued or
delayed-delivery basis with the intention of actually taking delivery of
the bonds. However, before the bonds are delivered to the Fund and before
it has paid for them (the settlement date), the Fund could sell the bonds
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 bonds.
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 zero coupon
bonds of municipal and corporate issuers, stripped U.S. Treasury notes and
bonds 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 (and include the
accrued OID on a taxable security as income) each year, even though the
holder may receive no interest payment on the security during the year.
Because the Fund annually must distribute substantially all of its taxable
income and net tax-exempt income, including any tax-exempt OID, to continue
to qualify for treatment as a regulated investment company (RIC), 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 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. The Fund may realize capital gains or losses from those sales,
which would increase or decrease its taxable income and or net capital
gains.
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 security 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 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) Buy commodities or commodity contracts, voting securities, any
mineral related programs or leases, or oil or gas leases;
(2) Buy real estate nor any nonliquid interest in real estate
investment trusts; however, the Fund may buy obligations or
instruments that it may otherwise buy even though the issuer
invests in real estate or interests in real estate;
(3) With respect to 75% of its total assets, invest in the securities
on any issuer if, immediately after such investment, more than 5%
of the total assets of the fund (taken at current value) would be
invested in the securities of such issuer; provided that this
limitation does not apply to obligations issued or guaranteed as
to interest or principal by the U.S. government or its agencies
or instrumentalities.
(4) 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, except that U.S. Government obligations, bank
obligations and instruments and municipal obligations are not
included in this limit. Industrial development bonds of similar
type projects are viewed as securities in an industry for
purposes of the Fund's concentration limitation;
(5) Make loans other than certain limited types of loans described
herein; the Fund can buy debt securities and other obligations
consistent with its goal and its other investment policies and
restrictions; it can also lend its portfolio securities to the
extent allowed, and in accordance with the requirements, under
the 1940 Act and enter into repurchase agreements;
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.
(6) Invest for the purpose of exercising control or management of
other companies;
(7) Participate on a joint, or a joint and several, basis in any
trading account in any securities;
(8) Sell securities short or buy securities on margin; also, the Fund
may not engage in arbitrage transactions;
(9) Engage in the underwriting of securities of other issuers;
(10) Borrow to increase income, except to meet redemptions so it will
not have to sell portfolio securities for this purpose. The Fund
may borrow money from banks as a temporary measure or for
extraordinary or emergency purposes but only up to 10% of its
total assets. It can mortgage or pledge its assets in connection
with such borrowing but only up to the lesser of the amounts
borrowed or 5% of the value of the Fund's total assets; or
(11) Issue senior securities.
The following investment restrictions are not fundamental and may
be changed by the Board of Directors without shareholder approval:
(1) The Fund may not purchase the securities of any one issuer (other
than U.S. Government securities) if, as a result of such
purchase, more than 5% of its total assets would be invested in
the securities of any one issuer, as determined in accordance
with Rule 2a-7, provided, however, the Fund may invest up to 25%
of its total assets in first tier securities of a single issuer
for a period of up to three business days after the purchase. The
Fund may rely on this exception only as to one issuer at a time.
The Fund may not invest more than 5% of its total assets in
securities rated in the second highest rating category by the
requisite rating organization(s) or comparable unrated
securities, with investments in such securities of any one issuer
(except U.S. Government securities) limited to the greater of 1%
of the Fund's total assets or $1,000,000, as determined in
accordance with Rule 2a-7.
(2) The Fund may not purchase a security if, as a result, more than
10% of its net assets would consist of illiquid investments.
(3) The Fund will not invest in any security whose interest rate or
principal amount to be repaid, or timing of repayments, varies or
floats with the value of a foreign currency, the rate of interest
payable on foreign currency borrowings, or with any interest rate
or currency other than U.S. dollars.
(4) The Fund does not intend to purchase IDBs or PABs that finance
facilities of nongovernmental users if, as a result, more than
25% of its total assets would be invested in issuers in any one
industry or in any one state.
The method of determining who is an issuer for purposes of the 5%
limitation in fundamental restriction (3) and operating restriction (1) is
non-fundamental. In particular, in applying this limitation:
(a) For municipal bonds created by a particular government but backed
only by the assets and revenues of a subdivision of that
government, such as an agency, instrumentality, authority or
other subdivision, the Fund considers such subdivision to be the
issuer.
(b) For IDBs and PABs, the nongovernmental user of facilities
financed by them is considered a separate issuer and the security
is deemed to be a conduit security:
Conduit Security means a security issued by a Municipal
Issuer (a state or territory of the United States, including the
District of Columbia, or any political subdivision or public
instrumentality of a state or territory of the United States)
involving an arrangement or agreement entered into, directly or
indirectly, with a person other than a Municipal Issuer, which
provides for or secures repayment of the security. In other
words, securities issued to finance non-governmental private
projects whereby the ultimate obligor is not a governmental
entity shall be deemed to be issued by the person ultimately
responsible for the payment of interest and principal on the
security.
(c) The Fund considers a guarantee of a municipal bond to be a
separate security that would be given a value and included in the
limitation if the value of all municipal bonds issued and/or
guaranteed by the same guarantor and owned by the Fund exceeds
10% of the value of the Fund's total assets (guarantees that are
considered to be government securities as defined in the 1940 Act
are excluded from the 10% limitation).
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
In general, the Fund purchases investments with the expectation of
holding them to maturity. However, the Fund may engage in short-term
trading to attempt to take advantage of short-term market variations. The
Fund may also sell securities prior to maturity to meet redemptions or as a
result of a revised management evaluation of the issuer. The Fund has high
portfolio turnover due to the short maturities of its investments, but this
should not affect its NAV or income, as brokerage commissions are not
usually paid on the investments which the Fund makes. In the usual
calculation of portfolio turnover, securities of the type in which the Fund
invests are excluded. Consequently, the high turnover which it will have is
not comparable to the turnover rates of most investment companies.
Portfolio Valuation
Under Rule 2a-7, the Fund is permitted to use the amortized cost
method for valuing its portfolio securities provided it meets certain
conditions. See Purchase, Redemption and Pricing of Shares. As a general
matter, the primary conditions imposed under Rule 2a-7 relating to the
Fund's portfolio investments are that the Fund must (1) not maintain a
dollar-weighted average portfolio maturity in excess of 90 days, (2) limit
its investments, including repurchase agreements, to those instruments
which are U.S. dollar denominated and which WRIMCO, pursuant to guidelines
established by the Fund's Board of Directors, determines present minimal
credit risks and which are rated in one of the two highest rating
categories by the NRSRO(s), as defined in Rule 2a-7 or, in the case of any
instrument that is not rated, of comparable quality as determined by the
Fund's Board of Directors, (3) limit its investments in the securities of
any one issuer (except U.S. Government securities) to no more than 5% of
its assets, (4) limit its investments in securities rated in the second
highest rating category by the requisite NRSRO(s) or comparable unrated
securities to no more than 5% of its assets, (5) limit its investments in
the securities of any one issuer which are rated in the second highest
rating category by the requisite NRSRO(s) or comparable unrated securities
to the greater of 1% of its assets or $1,000,000, and (6) limit its
investments to securities with a remaining maturity of not more than 397
days. Rule 2a-7 sets forth the method by which the maturity of a security
is determined.
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, W&R Target Funds, Inc. and W&R Funds, Inc. since each company's
inception. 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
shares, the Fund pays the Agent a monthly fee of $1.75 for each shareholder
account which was in existence at any time during the prior month, and $.75
for each shareholder check it processes. For Class B and Class C shares,
the Fund pays the agent a monthly fee of $1.75 for each account which was
in existence during any portion of the immediately preceding 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
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Fund
------------------------- ------------------
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
Plus, 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.
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.
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.
Distribution Arrangement
Waddell & Reed, Inc. (the Distributor) acts as principal underwriter
and distributor of the Fund's shares pursuant to an underwriting agreement
(Agreement). The Agreement requires the Distributor to use its best efforts
to sell the shares of the Fund but is not exclusive, and permits and
recognizes that the Distributor also distributes shares of other investment
companies and other securities. Shares are sold on a continuous basis.
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.
These and other expenses of Waddell & Reed, Inc. are not covered by
any sales charge on Class A shares of the Fund. The contingent deferred
sales charge (CDSC), if any, imposed on Class B shares or Class C shares is
designed to compensate Waddell & Reed, Inc. for distribution of these
shares. A major portion of the CDSC for these shares is paid to Waddell &
Reed, Inc.'s financial advisors and managers. Waddell & Reed, Inc. may
compensate its financial advisors as to purchases for which there is no
sales or deferred sales charge.
The Agreement recognizes that the Fund may adopt a Distribution and
Service Plan (the Plan) pursuant to Rule 12b-1 under the 1940 Act. Under
the Plans adopted by the Fund with respect to Class B and Class C shares,
respectively, the Fund pays the Distributor daily a distribution fee not to
exceed, on an annual basis, 0.75% of the net assets of the affected class
and a service fee not to exceed, on an annual basis, 0.25% of the net
assets of the affected class.
The Distributor offers Class A, Class B and Class C shares of the Fund
through its registered representatives and sales managers (collectively,
sales force). In distributing shares through its sales force, the
Distributor may pay commissions and/or incentives to the sales force at or
about the time of sale and will incur other expenses including for
prospectuses, sales literature, advertisements, sales office maintenance,
processing of orders and general overhead with respect to its efforts to
distribute the Fund's shares. Each Plan and the Agreement contemplate that
the Distributor may be compensated for these distribution efforts with
respect to the shares of the affected class through the distribution fee.
The sales force may be paid continuing compensation based on the value of
the shares of the affected class held by shareholders to whom the member of
the sales force is assigned to provide personal services and maintain
shareholder accounts, and the Distributor or its subsidiary, Waddell & Reed
Services Company, may also provide services to these shareholders through
telephonic means and written communications.
The only Directors or interested persons, as defined in the 1940 Act,
of the Fund who have a direct or indirect financial interest in the
operation of a Plan are the officers and Directors who are also officers of
either Waddell & Reed, Inc. or its affiliate(s) or who are shareholders of
Waddell & Reed Financial, Inc., the indirect parent company of Waddell &
Reed, Inc. Each Plan is anticipated to benefit the Fund and its
shareholders of the affected class through Waddell & Reed, Inc.'s
activities not only to distribute the shares of the affected class but
also to provide personal services to shareholders of that class and thereby
promote the maintenance of their accounts with the Fund. The Fund
anticipates that shareholders of a particular class may benefit to the
extent that Waddell & Reed's activities are successful in increasing the
assets of the Fund, through increased sales or reduced redemptions, or a
combination of these, and reducing a shareholder's share of Fund and class
expenses. Increased Fund assets may also provide greater resources with
which to pursue the 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 Plan will provide Waddell & Reed, Inc. with
greater resources to make the financial commitments necessary to continue
to improve the quality and level of services to the Fund and the
shareholders of the affected class.
To the extent that Waddell & Reed, Inc. incurs expenses for which
compensation may be made under the Plan 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 Plan 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. 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 affiliates) may pay
Legend 1.00% of net assets invested; 2) for the purchase of Class B shares,
Waddell & Reed, Inc. (or its affiliates) may pay Legend 4.00% of net assets
invested; 3) for the purchase of Class C shares, Waddell & Reed, Inc. (or
its affiliates) 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 Plan or any
agreement referred to in the Plan (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 auditors, audits the Fund's
financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The value of each share of a class of the Fund is the NAV of the
applicable class. The Fund is designed so that the value of each share of
each class of the Fund (the NAV per share) will remain fixed at $1.00 per
share except under extraordinary circumstances, although this may not
always be possible. This NAV per share is what you pay for shares and what
you receive when you redeem them prior to the application of the CDSC, if
any, to Class B and Class C shares.
The NAV per share is ordinarily computed once each day that the NYSE
is open for trading as of the close of the regular session of the NYSE
(ordinarily, 4:00 p.m. Eastern time). The NYSE annually announces the days
on which it will not be open for trading. The most recent announcement
indicates that it will not be open on the following days: New Years 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 Fund operates under Rule 2a-7 which permits it to value its
portfolio on the basis of amortized cost. The amortized cost method of
valuation is accomplished by valuing a security at its cost and thereafter
assuming a constant amortization rate to maturity of any discount or
premium, and does not reflect the impact of fluctuating interest rates on
the market value of the security. This method does not take into account
unrealized gains or losses.
While the amortized cost method provides some degree of certainty in
valuation, there may be periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would receive if
it sold the instrument. During periods of declining interest rates, the
daily yield on the Fund's shares may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all
of its portfolio instruments and changing its dividends based on these
changing prices. Thus, if the use of amortized cost by the Fund resulted in
a lower aggregate portfolio value on a particular day, a prospective
investor in the Fund's shares would be able to obtain a somewhat higher
yield than would result from investment in such a fund, and existing
investors in the Fund's shares would receive less investment income. The
converse would apply in a period of rising interest rates.
Under Rule 2a-7, the Fund's Board of Directors must establish
procedures designed to stabilize, to the extent reasonably possible, the
Fund's price per share as computed for the purpose of sales and redemptions
at $1.00. Such procedures must include review of the Fund's portfolio
holdings by the Board at such intervals as it may deem appropriate and at
such intervals as are reasonable in light of current market conditions to
determine whether the Fund's NAV calculated by using available market
quotations (see below) deviates from the per share value based on amortized
cost.
For the purpose of determining whether there is any deviation between
the value of the Fund's portfolio based on amortized cost and that
determined on the basis of available market quotations, if there are
readily available market quotations, investments are valued at the mean
between the bid and asked prices. If such market quotations are not
available, the investments will be valued at their fair value as determined
in good faith under procedures established by and under the general
supervision and responsibility of the Fund's Board of Directors, including
being valued at prices based on market quotations for investments of
similar type, yield and duration.
Under Rule 2a-7, if the extent of any deviation between the NAV per
share based upon available market quotations (see above) and the NAV per
share based on amortized cost exceeds one-half of 1%, the Board must
promptly consider what action, if any, will be initiated. When the Board
believes that the extent of any deviation may result in material dilution
or other unfair results to investors or existing shareholders, it is
required to take such action as it deems appropriate to eliminate or reduce
to the extent reasonably practicable such dilution or unfair results. Such
actions could include the sale of portfolio securities prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity,
withholding dividends or payment of distributions from capital or capital
gains, redemptions of shares in kind, or establishing a NAV per share using
available market quotations.
The procedures which the Fund's Board of Directors has adopted include
changes in the dividends payable by the Fund under specified conditions, as
further described under Taxes and Payments to Shareholders. The purpose of
this portion of the procedures is to provide for the automatic taking of
one of the actions which the Board of Directors might take should it
otherwise be required to consider taking appropriate action.
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 $50
minimum initial investment pertains to certain 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 $25 minimum initial investment
pertains to purchases made through payroll deduction for or by employees of
Waddell & Reed, Inc., WRIMCO, their affiliates. With the exception of
automatic withdrawals from a shareholder's bank account, a shareholder may
make subsequent investments of any amount. See Exchanges.
How to Open an Account
If you are purchasing Class A shares, you can make an initial
investment of $500 or more in any of the following ways:
(Class B and Class C shares may be purchased by mail only)
1) By Mail. Complete an application form and mail it to
Waddell & Reed, Inc. at the address indicated on the form. Accompany the
form with a check, money order, Federal Reserve draft or other negotiable
bank draft payable to Waddell & Reed, Inc.
2) By Wire (Class A shares). (a) Telephone Waddell & Reed,
Inc. (toll-free phone number on the inside back cover of the Prospectus)
and provide the account registration, address and social security or tax
identification number, the amount being wired, the name of the wiring bank
and the name and telephone number of the person to be contacted in
connection with the order. You will then be provided with an order number;
(b) instruct your bank to wire by the Federal Reserve Wire Order System the
specified amount, along with the order number and registration to the UMB
Bank, n.a.; ABA Number 101000695, for the account of Waddell & Reed Number
9800007978, Special Account for Exclusive Benefit of Customers FBO Customer
Name and Account Number; (c) complete an application form and mail it to
Waddell & Reed, Inc.
3) Through Broker-dealers. You may, if you wish, purchase your
shares through registered broker-dealers, which may charge their customers
a fee for this service. There is no such fee for investments made by mail
or wire, as described above, or for additional investments made by mail or
wire. No such service fee will be charged for shares purchased through
Waddell & Reed, Inc.
How to Make Additional Investments
You may make additional investments in Class A shares in any amount
through broker-dealers as described above or in either of the following
ways:
(Additional investments in Class B and Class C shares may be made only by
mail)
1) By Mail. Mail a check, money order, Federal Reserve draft
or other negotiable bank draft payable to Waddell & Reed, Inc. at P.O. Box
29217, Shawnee Mission, Kansas 66201-9217, accompanied by either (i) the
detachable form which accompanies the confirmation of a prior purchase by
you, or (ii) a letter stating your account number, registration, the
particular class and stating that you wish the enclosed check, etc. to be
used for the purchase of the stated shares of Waddell & Reed Advisors Cash
Management, Inc.
2) By Wire (Class A shares). Instruct your bank to wire the
specified amount along with the account number and registration to the UMB
Bank, n.a.; ABA Number 101000695, for the account of Waddell & Reed Number
9800007978, Special Account for Exclusive Benefit of Customers FBO Customer
Name and Account Number.
Purchase of the Fund's shares are effective after (1) one of the
methods for purchasing the Fund's shares indicated above has been properly
completed and (2) UMB Bank, n.a. (the Bank) has Federal funds available to
it. Federal funds are monies of a member bank with the Federal Reserve
System held in deposit at a Federal Reserve Bank. They represent
immediately available cash. If payment is made by check or otherwise than
in Federal funds, it will be necessary to convert investors' payments into
Federal funds, and orders for the purchase of the Fund's shares, if
accepted by Waddell & Reed, Inc., will become effective on the day Federal
funds are received for value by the Bank; this is normally anticipated to
be two business days following receipt of payment by Waddell & Reed, Inc.
The Fund's shares are issued at their NAV next determined after the
effectiveness of the purchase (i.e., at $1.00 per share except under
extraordinary circumstances as described above).
If you wish to insure that shares will be issued on the same day on
which your payment is made, you should (1) place your order by wire so that
it will be received by the Bank prior to 3:00 p.m. Kansas City time, and
(2) before wiring the order, phone Waddell & Reed, Inc. at the number on
the inside back cover of the Prospectus to make sure that the wire order as
described above is properly identified. See Payments to Shareholders --
General for information regarding dividend payment.
Waddell & Reed, Inc. has the right not to accept any purchase order
for the Fund's shares. Certificates are not issued for any class.
Flexible Withdrawal Service
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service (the Service) regular monthly, quarterly, semiannual or
annual payments by redeeming shares on an ongoing basis. Class B or Class C
shares redeemed under the Service are not subject to a CDSC. Applicable
forms to start the Service are available through Waddell & Reed Services
Company.
The maximum amount of the withdrawal for monthly, quarterly,
semiannual and annual withdrawals is 2%, 6%, 12% and 24% respectively of
the value of your account at the time the Service is established. The
withdrawal proceeds are not subject to the deferred sales charge, but only
within these percentage limitations. The minimum withdrawal is $50. The
Service, and this exclusion from the deferred sales charge, does not apply
to a one-time withdrawal.
If you own Class A, Class B or Class C shares, to qualify for the
Service you must have invested at least $10,000 in shares which you still
own of any of the funds in the Waddell & Reed Advisors Funds; or, you must
own Class A, Class B or Class C shares having a value of at least $10,000.
The value for this purpose is the value at the offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to one-
twelfth of a percentage of the value of the shares in the Account (you
select the percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least five
shares).
Shares are redeemed on the 20th day of the month in which the payment
is to be made (or on the prior business day if the 20th is not a business
day). Payments are made within five days of the redemption.
The dividends and distributions on shares of a class you have made
available for the Service are paid in additional shares of the Fund of the
same class as that with respect to which they were paid. All payments under
the Service are made by redeeming shares in your account, which may involve
a gain or loss for tax purposes. To the extent that payments exceed
dividends and distributions, the number of shares you own will decrease.
When all of the shares in your account are redeemed, you will not receive
any further payments. Thus, the payments are not an annuity, an income or
return on your investment.
You may, at any time, change the manner in which you have chosen to
have shares redeemed; you can change to any one of the other choices
originally available to you. You may, at any time, redeem part or all of
the shares in your account; if you redeem all of the shares, the Service is
terminated. The Fund can also terminate the Service by notifying you in
writing.
After the end of each calendar year, information on shares redeemed
will be sent to you to assist you in completing your Federal income tax
return.
Exchanges
Class A Share Exchanges
You may exchange Class A shares of the Fund which you have acquired by
exchange for Class A shares of one or more other funds in the Waddell &
Reed Advisors Funds or W&R Funds, Inc. (whose shares are sold with a sales
charge) and any shares received in payment of dividends on those Class A
shares of the Fund for Class A shares of any of the other funds in the
Waddell & Reed Advisors Funds or W&R Funds, Inc.
In addition, you may specify a dollar amount of Class A shares of the
Fund to be automatically exchanged each month into Class A shares of any
other fund in the Waddell & Reed Advisors Funds, provided you already own
shares of the fund. The shares which you designate for automatic exchange
into any fund must be worth at least $100, which may be allocated among
funds in the Waddell & Reed Advisors Funds, provided each fund receives a
value of at least $25.
Class B and Class C Share Exchanges
You may exchange Class B or Class C shares of the Fund for
corresponding shares of another fund in the Waddell & Reed Advisors Funds
and/or W&R Funds, Inc. without charge.
You must specify a dollar amount of Class B or Class C shares of the
Fund to be automatically exchanged each month into Class B or Class C
shares of any other fund in the Waddell & Reed Advisors Funds. The shares
which you designate for automatic exchange into any fund must be worth at
least $100, which may be allocated among funds in the Waddell & Reed
Advisors Funds, provided each fund receives a value of at least $25.
The redemption of the Fund's Class B or 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.
General Exchange Information
When you exchange shares, the total shares you receive will have the
same aggregate NAV as the 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 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.
Redemptions
The Prospectus gives information as to expedited and regular
redemption procedures. Redemptions of Class A shares by telephone or fax
must be equal to at least $1,000.00. Redemption payments are made within
seven days from receipt of request unless delayed because of certain
emergency conditions determined by the Securities and Exchange Commission,
when the NYSE is closed other than for weekends or holidays, or when
trading on the NYSE is restricted. Payment is made in cash, although under
extraordinary conditions redemptions may be made in portfolio securities.
Payment for redemption of shares of the Fund may be made in portfolio
securities when the Fund's Board of Directors determines that conditions
exist making cash payments undesirable. 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 B or Class C shares you redeem
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 shares and once as to Class C shares of the
Fund. For purposes of determining future deferred sales charges, the
reinvestment will be treated as a new investment.
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 $250. The
Board intends to compel redemptions of accounts, except for retirement plan
accounts, in which the total NAV is less than $250. Shareholders have 60
days from the date on which the NAV falls below $250 to bring the NAV above
$250 in order to avoid mandatory redemption. A shareholder may also avoid
mandatory redemption by initiating a transaction which either increases or
decreases the NAV of the account. A dividend payment does not constitute a
shareholder initiated transaction for the purpose of avoiding mandatory
redemption.
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.
Mira Stevovich
Vice President and Assistant Treasurer of the Fund, Vice President of
other funds in the Fund Complex and Assistant Treasurer of all Funds in the
Fund complex; Vice President of WRIMCO. Date of birth: July 30, 1953.
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 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. 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 fund's 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 48,750
John A. Dillingham 0 48,750
David P. Gardner 0 48,750
Linda K. Graves 0 48,750
Joseph Harroz, Jr. 0 48,750
John F. Hayes 0 48,750
Glendon E. Johnson 0 48,750
William T. Morgan 0 48,750
Ronald C. Reimer 0 48,750
Frank J. Ross, Jr. 0 48,750
Eleanor B. Schwartz 0 48,750
Frederick Vogel III 0 48,750
*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 September 30, 2001.
The officers are paid by WRIMCO or its affiliates.
PAYMENTS TO SHAREHOLDERS
General
There are two 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 interest and earned discount on the securities the Fund
holds, less expenses (which will vary by class) and amortization of any
premium. 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 are expected to be short-term capital gains.
Under the procedures that the Fund's Board of Directors has adopted
relating to amortized cost valuation, the calculation of the daily dividend
of a class will change from that indicated above under certain
circumstances. If on any day there is a deviation of .3 of 1% or more
between the NAV of a share of a class of the Fund computed on the amortized
cost basis and that computed on an available market price basis, the amount
of the deviation will be added to or subtracted from the dividend for that
class for that day if necessary to reduce the per-share value to within .3
of 1% of $1.00.
If on any day there is insufficient net income to absorb any such
reduction, the Fund's Board of Directors would be required under Rule 2a-7
to consider taking other action if the deviation after eliminating the
dividend for that day exceeds one-half of 1%. See Determination of Offering
Price. One of the actions that the Board of Directors might take could be
the elimination or reduction of dividends for more than one day.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (1) you want
cash for your dividends and/or distributions or (2) you want your dividends
and/or distributions paid in shares of the Fund of the same class as that
with respect to which they were paid. However, a total dividend and/or
distribution amount less than five dollars will be automatically paid in
shares of the Fund of the same class as that with respect to which they
were paid. You can change your instructions at any time. If you give no
instructions, your dividends and distributions will be paid in shares of
the Fund of the same class as that with respect to which they were paid.
All payments in shares are at NAV without any sales charge. The NAV used
for this purpose is that computed as of the record date for the dividend or
distribution, although this could be changed by the Board of Directors.
Even if you receive dividends and distributions 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 intends to qualify 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 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 paid by the Fund will qualify as exempt-interest dividends,
and thus will be excludable from shareholders' gross income, if the Fund
satisfies the additional requirement that, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is excludable from gross income under
section 103(a); the Fund intends to continue to satisfy this requirement.
The aggregate dividends excludable from all shareholders' gross income may
not exceed the Fund's net tax-exempt income. The Fund uses the average
annual method to determine the exempt income portion of each distribution,
and the percentage of income designated as tax-exempt for any particular
distribution may be substantially different from the percentage of the
Fund's income that was tax-exempt during the period covered by the
distribution. The treatment of dividends from the Fund under state and
local income tax laws may differ from the treatment thereof under the Code.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income
(including income from tax-exempt sources such as the Fund) plus 50% of
their benefits exceeds certain base amounts. Exempt-interest dividends from
the Fund still are tax-exempt to the extent described above; they are only
included in the calculation of whether a recipient's income exceeds the
established amounts.
If the Fund invests in any instruments that generate taxable income,
under the circumstances described in the Prospectus, distributions of the
interest earned thereon will be taxable to shareholders as ordinary income
to the extent of the Fund's earnings and profits. Moreover, if the Fund
realizes capital gains as a result of market transactions, any distribution
of the gains will be taxable to shareholders. There also may be collateral
Federal income tax consequences regarding the receipt of tax-exempt
dividends by shareholders such as S corporations, financial institutions
and property and casualty insurance companies. Any shareholder that falls
into any of these categories should consult its tax adviser concerning its
investment in Fund shares.
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.
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. Purchases are made directly from issuers or from underwriters,
dealers or banks. Purchases from underwriters include a commission or
concession paid by the issuer to the underwriter. Purchases from dealers
will include the spread between the bid and the asked price. 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 Fund has not effected transactions
through brokers and does not anticipate doing so. 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, subject to certain exceptions.
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 brokers-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 is expected to allocate
orders to brokers or dealers consistent with the interests and policies of
the Fund. Subject to review by the Board of Directors, such policies
include the selection of brokers or dealers which provide execution and/or
research services and other services including pricing or quotation
services directly or through others (research and brokerage services). If
the execution and price offered by more than one dealer are comparable, the
order may be allocated to a dealer which has provided such services
considered by WRIMCO to be useful or desirable for its investment
management of the Fund and/or the other funds and accounts over which
WRIMCO has investment discretion.
Research and brokerage services are, in general, defined by reference
to Section 28(e) of the Securities Exchange Act of 1934 as including (1)
advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or
selling securities and the availability of securities and purchasers or
sellers, (2) furnishing analyses and reports, or (3) effecting securities
transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Investment discretion is, in general,
defined as having authorization to determine what securities shall be
purchased or sold for an account, or making those decisions even though
someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than the commission another qualified
broker would charge for effecting comparable transactions if a good faith
determination is made by WRIMCO that the commission is reasonable in
relation to the research or brokerage services provided.
Subject to the foregoing considerations, WRIMCO may also consider
sales of the Fund as a factor in the selection of broker-dealers to execute
portfolio transactions. No allocation of brokerage or principal business is
made to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful
only to one or more of the other advisory accounts of WRIMCO and investment
research received for the commissions of those other accounts may be useful
both to the Fund and one or more of such other accounts. To the extent that
electronic or other products provided by such brokers to assist WRIMCO in
making investment management decisions are used for administration or other
non-research purposes, a reasonable allocation of the cost of the product
attributable to its non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party at
the instance of a broker or dealer) 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, 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 three classes of shares: Class A, Class B and Class
C. Each class represents an interest in the same assets of the Fund and
differs as follows: each class of shares has exclusive voting rights on
matters appropriately limited to that class; Class B and Class C shares are
subject to a CDSC and to an ongoing distribution and service fee; Class B
shares that have been held by a shareholder for eight years will convert
automatically, 8 years after the month in which the shares were purchased,
to Class A shares of the Fund, and such conversion will be made, without
charge or fee, on the basis of the relative NAVs of the two classes; 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 and Class C shares are
expected to be lower than for Class A 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 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 November 28, 2000, Waddell & Reed, Inc. purchased for investment
100,000 shares of the Fund at a NAV of $1.00 per share. As of the date of
this SAI, it was the sole shareholder of the Fund.
APPENDIX A
The following are descriptions of some of the ratings of securities
which the Fund may use. The Fund may also use ratings provided by other
nationally recognized statistical rating organizations in determining the
securities eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment of creditworthiness may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to
pay interest and repay principal is very strong, and debt rated AA differs
from AAA issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace periods. The D rating will also be
used upon a filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of
credit quality, the ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
NR -- Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the
top four categories (AAA, AA, A, BBB, commonly known as investment grade
ratings) are generally regarded as eligible for bank investment. In
addition, the laws of various states governing legal investments may impose
certain rating or other standards for obligations eligible for investment
by savings banks, trust companies, insurance companies and fiduciaries
generally.
Moody's. A brief description of the applicable Moody's rating
symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as gilt edge. Interest payments are protected by a large or by
an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuations of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol 1 following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF PREFERRED STOCK RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
An S&P preferred stock rating is an assessment of the capacity and
willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from
a bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore,
to reflect this difference, the preferred stock rating symbol will normally
not be higher than the debt rating symbol assigned to, or that would be
assigned to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA -- This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-
quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues
rated AAA.
A -- An issue rated A is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions.
BBB -- An issue rated BBB is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to
make payments for a preferred stock in this category than for issues in the
'A' category.
BB, B, CCC -- Preferred stock rated BB, B, and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay preferred stock obligations. BB indicates the lowest degree of
speculation and CCC the highest degree of speculation. While such issues
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC -- The rating CC is reserved for a preferred stock issue in arrears
on dividends or sinking fund payments but that is currently paying.
C -- A preferred stock rated C is a non-paying issue.
D -- A preferred stock rated D is a non-paying issue with the issuer
in default on debt instruments.
NR -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
Plus (+) or minus (-) -- To provide more detailed indications of
preferred stock quality, the rating from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
A preferred stock rating is not a recommendation to purchase, sell or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended or withdrawn as a result
of changes in, or unavailability of, such information or based on other
circumstances.
Moody's. Because of the fundamental differences between
preferred stocks and bonds, a variation of Moody's familiar bond rating
symbols is used in the quality ranking of preferred stock. The symbols are
designed to avoid comparison with bond quality in absolute terms. It should
always be borne in mind that preferred stock occupies a junior position to
bonds within a particular capital structure and that these securities are
rated within the universe of preferred stocks.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each
rating classification; the modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Preferred stock rating symbols and their definitions are as follows:
aaa -- An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well-maintained in the
foreseeable future.
a -- An issue which is rated a is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than
in the aaa and aa classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa -- An issue which is rated baa is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over
any great length of time.
ba -- An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and
asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks in
this class.
b -- An issue which is rated b generally lacks the characteristics of
a desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa -- An issue which is rated caa is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
ca -- An issue which is rated ca is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payments.
c -- This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Standard & Poor's, a division of The McGraw Hill Companies,
Inc. commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. Issuers rated A are
further referred to by use of numbers 1, 2 and 3 to indicate the relative
degree of safety. Issues assigned an A rating (the highest rating) are
regarded as having the greatest capacity for timely payment. An A-1
designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. An A-2 rating
indicates that capacity for timely payment is satisfactory; however, the
relative degree of safety is not as high as for issues designated A-1.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's employs the designations of
Prime 1, Prime 2 and Prime 3, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers. Issuers rated
Prime 1 have a superior capacity for repayment of short-term promissory
obligations and repayment capacity will normally be evidenced by (1)
lending market positions in well established industries; (2) high rates of
return on Funds employed; (3) conservative capitalization structures with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash
generation; and (5) well established access to a range of financial markets
and assured sources of alternate liquidity. Issuers rated Prime 2 also have
a strong capacity for repayment of short-term promissory obligations as
will normally be evidenced by many of the characteristics described above
for Prime 1 issuers, but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation; capitalization
characteristics, while still appropriate, may be more affected by external
conditions; and ample alternate liquidity is maintained.
Fitch-National Short-term Credit Ratings
F1-Indicates the strongest capacity for timely payment of financial
commitments relative to other issuers or issues in the same country. Under
Fitch's national rating scale, this rating is assigned to the best credit
risk relative to all others in the same country and is normally assigned to
all financial commitments issued or guaranteed by the government. Where the
credit risk is particularly strong, a + is added to the assigned rating.
F2-Indicates a satisfactory capacity for timely payment of financial
commitments relative other issuers in the same country. However, the margin
of safety is not as great as in the case of the higher ratings.
F3-Indicates an adequate capacity for timely payment of financial
commitments relative to other issuers or issues in the same country.
However, such capacity is more susceptible to near-term adverse changes
than for financial commitments in higher rated categories.
B-Indicates an uncertain capacity for timely payment of financial
commitments relative to other issuers or issues in the same country. Such
capacity is highly susceptible to near-term adverse changes in financial
and economic conditions.
C-Indicates a highly uncertain capacity for timely payment of
financial commitments relative to other issues in the same country.
Capacity or meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D-Indicates actual or imminent payment default.
Notes to Short-term national rating:
+ or - may be appended to a national rating to denote relative status
within a major rating category. Such suffixes are not added to Short-term
national ratings other than F1.
Ratings Watch: Ratings are placed on Rating Watch to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as Positive, indicating a
potential upgrade, Negative, for a potential downgrade, or Evolving, if
ratings may be raised, lowered or maintained. Rating Watch is typically
resolved over a relatively short period.
WADDELL & REED ADVISORS MUNICIPAL MONEY MARKET FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 28, 2000
ASSETS
Cash held by the Custodian ...................... $100,000
Prepaid registration fees and offering costs .... 52,000
--------
Total assets................................... 152,000
--------
LIABILITIES
Liabilities and accrued expenses ................ (52,000)
--------
NET ASSETS................................. $100,000
========
NET ASSETS
$0.001 par value capital stock
Capital stock.................................. $ 100
Additional paid-in capital..................... 99,900
--------
Net assets applicable to outstanding units
of capital.................................. $100,000
========
Net asset value per share (net assets divided
by shares outstanding)
Class A ......................................... $1.00
Capital shares outstanding
Class A ......................................... 100,000
Capital shares authorized........................ 1,000,000,000
55
WADDELL & REED ADVISORS MUNICIPAL MONEY MARKET FUND, INC.
NOTE TO FINANCIAL STATEMENT
NOVEMBER 28, 2000
NOTE 1 -- Organization
Waddell & Reed Advisors Municipal Money Market Fund, Inc. (the
"Fund"), a Maryland corporation, was organized on September 7, 2000, and
has been inactive since that date 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.
Waddell & Reed Investment Management Company, investment manager to
the Fund, and Waddell & Reed Services Company, shareholder servicing agent
and accounting services agent for the Fund, are each wholly owned
subsidiaries of Waddell & Reed, Inc. ("W&R"). 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.
On November 28, 2000, W&R purchased for investment 100,000 Class A
shares of the Fund at their net asset value of $1.00 per share.
Prepaid registration fees and offering costs will be amortized over a
twelve-month period beginning with the commencement of operations of the
Fund. Prepaid offering costs consist of legal and printing fees related to
the initial registration statement. W&R, on behalf of the Fund, will incur
organization costs estimated at $9,000.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,
Waddell & Reed Advisors Municipal Money Market Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Waddell & Reed Advisors Municipal Money Market Fund, Inc. (the "Fund") as
of November 28, 2000. This financial statement is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this
financial statement 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 statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statement. 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 statement of assets and liabilities presents fairly,
in all material respects, the financial position of Waddell & Reed Advisors
Municipal Money Market Fund, Inc. as of November 28, 2000 in conformity
with accounting principles generally accepted in the United States of
America.
/s/Deloitte & Touche LLP
-----------------------
Deloitte & Touche LLP
Kansas City, Missouri
November 30, 2000
57
