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WADDELL & REED ADVISORS MUNICIPAL BOND 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 Bond 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.
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TABLE OF CONTENTS
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Performance Information ................................... 2
Investment Strategies, Policies and Practices ............. 5
Investment Management and Other Services .................. 35
Purchase, Redemption and Pricing of Shares ................ 39
Directors and Officers .................................... 51
Payments to Shareholders .................................. 58
Taxes ..................................................... 59
Portfolio Transactions and Brokerage ...................... 64
Other Information ......................................... 66
Appendix A ................................................ 68
Financial Statements ...................................... 74
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Waddell & Reed Advisors Municipal Bond 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 29, 1976. Prior to June
30, 2000, the Fund was known as United Municipal Bond Fund, Inc.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may, from
time to time, publish the Fund's total return information, yield information
and/or performance rankings in advertisements and sales materials.
TOTAL RETURN
Total return is the overall change in the value of an investment over a
given period of time. An average annual total return quotation is computed by
finding the average annual compounded rates of return over the one-, five-, and
ten-year periods that would equate the initial amount invested to the ending
redeemable value. Standardized total return information is calculated by
assuming an initial $1,000 investment and, for Class A shares, deducting the
maximum sales load of 4.25%. All dividends and distributions are assumed to be
reinvested in shares of the applicable class at net asset value (NAV) for the
class as of the day the dividend or distribution is paid. No sales load is
charged on reinvested dividends or distributions on Class A shares. The formula
used to calculate the total return for a particular class of the Fund is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000
investment for the periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to
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have been invested. If the sales charge applicable to Class A shares were
reflected, it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of
September 30, 2000, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
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With Without
Sales Load Sales Load
Deducted Deducted
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One year period from October 1, 1999 to
September 30, 2000: -0.19% 4.24%
Five-year period from October 1, 1995 to
September 30, 2000: 4.26% 5.17%
Ten-year period from October 1, 1990 to
September 30, 2000: 6.89% 7.36%
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Prior to January 21, 1996, the Fund offered only one class of shares to
the public. Shares outstanding on that date were designated as Class A shares.
Since that date, Class Y shares of the Fund have been available to certain
institutional investors.
The cumulative total return quotation for Class B shares with the
maximum deferred sales charge deducted as of September 30, 2000, which is the
most recent balance sheet included in this SAI, for the period since class
inception on October 5, 1999 to September 30, 2000 was -1.35%.
The cumulative total return quotation for Class B shares without the
maximum deferred sales charge deducted as of September 30, 2000, which is the
most recent balance sheet included in this SAI, for the period since class
inception on October 5, 1999 to September 30, 2000 was 3.56%.
The cumulative total return quotation for Class C shares with the
maximum deferred sales charge deducted as of September 30, 2000, which is the
most recent balance sheet included in this SAI, for the period since class
inception on October 7, 1999 to September 30, 2000 was 2.58%.
The cumulative total return quotation for Class C shares without the
maximum deferred sales charge deducted as of September 30, 2000, which is the
most recent balance sheet included in this SAI, for the period since class
inception on October 7, 1999 to September 30, 2000 was 3.56%.
The average annual total return quotation for Class Y shares as of
September 30, 2000, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
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One-year period from October 1, 1999 to
September 30, 2000: 4.32%
Period from December 30, 1998* to
September 30, 2000: 0.55%
*Commencement of operations.
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The Fund may also quote unaveraged or cumulative total return for a
class which reflects the change in value of an investment in that class over a
stated period of time. Cumulative total returns will be calculated according to
the formula indicated above but without averaging the rate for the number of
years in the period.
YIELD
Yield refers to the income generated by an investment in the Fund over
a given period of time. A yield quoted for a class of the Fund is computed by
dividing the net investment income per share of that class earned during the
period for which the yield is shown by the maximum offering price per share of
that class on the last day of that period according to the following formula:
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Yield = 2 ((((a - b)/cd)+1) -1)
Where with respect to a particular class of the Fund:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares of the class
outstanding during the period that were entitled to
receive dividends.
d = the maximum offering price per share of the class on
the last day of the period.
The yield for Class A shares of the Fund computed according to the
formula for the 30-day period ended on September 30, 2000, the date of the most
recent balance sheet included in this SAI, is 4.93%. The yield for Class B
shares of the Fund computed according to the formula for the 30-day period ended
on September 30, 2000, the date of the most recent balance sheet included in
this SAI, is 4.06%. The yield for Class C shares of the Fund computed according
to the formula for the 30-day period ended on September 30, 2000, the date of
the most recent balance sheet included in this SAI, is 4.10%. The yield for
Class Y shares of the Fund computed according to the formula for the 30-day
period ended on September 30, 2000, the date of the most recent balance sheet
included in this SAI, is 5.09%.
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
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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.
The tax-equivalent yield for Class A shares computed according to the
formula for the 30-day period ended on September 30, 2000, the date of the most
recent balance sheet included in this SAI, is 5.73%, 6.69%, 6.96%, 7.48% and
7.90% for marginal tax brackets of 15%, 28%, 31%, 36% and 39.6%, respectively.
The tax-equivalent yield for Class B shares for the 30-day period ended on
September 30, 2000 is 4.72%, 5.51%, 5.73%, 6.15% and 6.50% for marginal tax
brackets of 15%, 28%, 31%, 36% and 39.6%, respectively. The tax-equivalent yield
for Class C shares for the 30-day period ended on September 30, 2000 is 4.77%,
5.57%, 5.79%, 6.22% and 6.57% for marginal tax brackets of 15%, 28%, 31%, 36%
and 39.6%, respectively. The tax-equivalent yield for Class Y shares for the
30-day period ended on September 30, 2000 is 5.91%, 6.90%, 7.18%, 7.70% and
8.14% for marginal tax brackets of 15%, 28%, 31%, 36% and 39.6%, respectively.
Change in yields primarily reflect different interest rates received by
the Fund as its portfolio securities change. Yield is also affected by portfolio
quality, portfolio maturity, type of securities held and operating expenses of
the applicable class.
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
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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.
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 is 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).
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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 has not held and 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.
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Municipal bonds vary widely as to their interest rates, degree of
security and maturity. Bonds are selected on the basis of quality, yield and
diversification. Factors that affect the yield on municipal bonds include
general money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation and the nature of the issue.
Lower-rated bonds usually, but not always, have higher yields than similar but
higher-rated bonds.
Medium- or lower-rated municipal securities are frequently traded only
in markets where the number of potential purchasers and sellers, if any, is very
limited. This factor may have the effect of limiting the availability of the
securities for purchase by the Fund and may also limit the ability of the Fund
to sell such securities at their fair value either to meet redemption requests
or in response to changes in the economy or the financial markets.
Lower-quality debt securities (commonly called junk bonds) are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than high-quality securities and may decline
significantly in periods of general economic difficulty. The market for
lower-rated debt securities may be thinner and less active than that for
higher-rated debt securities, which can adversely affect the prices at which the
former are sold. Adverse publicity and changing investor perceptions may
decrease the values and liquidity of lower-rated debt securities, especially in
a thinly traded market. Valuation becomes more difficult and judgment plays a
greater role in valuing lower-rated debt securities than with respect to
securities for which more external sources of quotations and last sale
information are available. Since the risk of default is higher for lower-rated
debt securities, WRIMCO's research and credit analysis are an especially
important part of managing securities of this type held by the Fund. WRIMCO
continuously monitors the issuers of lower-rated debt securities in the Fund's
portfolio in an attempt to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments. The Fund may
choose, at its expense or in conjunction with others, to pursue litigation or
otherwise to exercise its rights as a security holder to seek to protect the
interests of security holders if it determines this to be in the best interest
of the Fund's shareholders.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. See Appendix A for a description of bond ratings.
Now or in the future, Standard & Poor's (S&P), and Moody's may use
different rating designations for municipal bonds
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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. Municipal bonds purchased by
the Fund comply with the 80% requirement discussed in the Prospectus if they are
within the top four rating designations of S&P or Moody's for the type of
municipal bond in question or are of equivalent ratings as determined by WRIMCO.
Credit ratings for individual securities may change from time to time, and the
Fund is not required to dispose of any municipal bond if its rating falls below
the rating required for its purchase, nor does such a fall in rating affect the
amount of unrated municipal bonds which the Fund may buy.
BONDS BACKED BY GENERATING PLANTS REVENUE
From time to time the Fund may have varying but substantial portions of
its assets invested in municipal bonds of Public Power Agencies and in Pollution
Control Revenue Bonds. The interest on both types of bonds is paid by revenues
from generating plants. The Fund may invest any portion of its assets in these
bonds, and it is expected that there may be times, depending on economic
conditions in the industry or the relative attractiveness of other municipal
bonds, when more than 25% of its total assets will be so invested.
Certain problems facing the generating industry in general may or may
not affect its ability to meet obligations on bonds. These problems include the
effects of (1) inflation on financing large construction programs, (2) cost
increases and delays arising out of environmental considerations, (3)
limitations of available capital on the ability to issue additional debt, (4)
the effect of shortages and high prices of fuel on operations and profits, and
(5) the effect of energy conservation on sales. Problems of these types
generally affect the values of and the dividends paid on utility common stocks
rather than the ability to pay bond obligations.
DEFENSIVE STRATEGIES AND TEMPORARY INVESTMENTS
To shorten the average maturity of its portfolio, the Fund may buy
municipal bonds that are payable in a relatively short time. This could be
either because they were so payable when they were first issued or because they
will mature shortly after purchase.
Another reason for buying either these short-term municipal bonds or
taxable obligations (up to the 10% limitation on taxable obligations described
in the Prospectus) during normal market conditions is to keep assets at work
until appropriate investments in longer-term municipal bonds can be made or in
order to have cash available to pay for redemptions.
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Short-term municipal bonds or taxable obligations purchased for
defensive purposes will be held for as long as WRIMCO believes a temporary
defensive posture should be maintained. When bought during normal conditions,
they will be held until appropriate investments in longer-term municipal bonds
are made or until they are sold to meet redemptions.
LIMITED INVESTMENT IN OTHER DEBT SECURITIES
All of the Fund's invested assets, other than cash or receivables, must
be invested in municipal bonds, 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 and certain derivative
instruments (see discussion below). The Fund may invest in taxable obligations
only if, after any such investment, not more than 10% of its total assets would
consist of taxable obligations. The only taxable obligations that the Fund may
purchase are (1) obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities (U.S. Government securities), (2) bank obligations
of domestic banks or savings and loan associations that are subject to
regulation by the U.S. Government (which obligations may include certificates of
deposit, letters of credit and acceptances), (3) commercial paper and (4) any of
the foregoing obligations subject to repurchase agreements. The taxable
commercial paper the Fund may buy must, at the time of purchase, be rated at
least A by S&P or Moody's. See Appendix A for a description of these ratings.
BORROWING
The Fund may borrow money, but only from banks and for emergency or
extraordinary purposes. If the Fund does borrow, its share price may be subject
to greater fluctuation until the borrowing is paid off.
ILLIQUID INVESTMENTS
Illiquid investments are investments that cannot be sold or otherwise
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Investments currently
considered to be illiquid include:
(1) repurchase agreements not terminable within seven days;
(2) restricted securities not determined to be liquid pursuant
to guidelines established by the Fund's Board of Directors;
(3) non-government stripped fixed-rate mortgage-backed securities;
(4) bank deposits, unless they are payable at principal amount
plus accrued interest on demand or within seven days after
demand;
(5) over-the-counter (OTC) options and their underlying
collateral;
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(6) securities for which market quotations are not readily
available; and
(7) securities involved in swaps, caps, floor and collar
transactions.
The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
If through a change in values, net assets, or other circumstances, the
Fund were in a position where more than 10% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
INDEXED SECURITIES
The Fund may purchase securities the value of which varies in relation
to the value of other securities, securities indexes or other financial
indicators, subject to its operating policy regarding derivative instruments.
Indexed securities typically, but not always, are debt securities or deposits
whose value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. The performance of indexed securities depends to a
great extent on the performance of the security 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.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government agencies. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
MONEY MARKET INSTRUMENTS
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government Securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
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MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct
or indirect participations in, or are secured by and payable from, mortgage
loans secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as CMOs. Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of the
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund may
invest include mortgage-backed securities issued or guaranteed as to the payment
of principal and interest (but not as to market value) by Ginnie Mae, Fannie Mae
or Freddie Mac. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities. Payments of principal and interest (but not the market value)
of such private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or
indirectly, by the U.S. Government or one of its agencies or instrumentalities,
or they may be issued without any government guarantee of the underlying
mortgage assets but with some form of non-government credit enhancement. These
credit enhancements do not protect investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage lenders or other
financial institutions. Other types of mortgage-backed securities will likely be
developed in the future, and the Fund may invest in them as long as WRIMCO
determines they are consistent with the Fund's goals and investment policies.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed
securities are created when a U.S. Government agency or a financial institution
separates the interest and principal components of a mortgage-backed security
and sells them as individual securities. The holder of the principal-only
security (PO) receives the principal payments made by the underlying
mortgage-backed security, while the holder of the interest-only security (IO)
receives interest payments from the same underlying security.
For example, IO classes are entitled to receive all or a portion of the
interest, but none (or only a nominal amount) of the principal payments, from
the underlying mortgage assets. If the mortgage assets underlying an IO
experience greater than
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anticipated principal prepayments, then the total amount of interest allocable
to the IO class, and therefore the yield to investors, generally will be
reduced. In some instances, an investor in an IO may fail to recoup all of the
investor's initial investment, even if the security is guaranteed by the U.S.
Government or considered to be of the highest quality. Conversely, PO classes
are entitled to receive all or a portion of the principal payments, but none of
the interest, from the underlying mortgage assets. PO classes are purchased at
substantial discounts from par, and the yield to investors will be reduced if
principal payments are slower than expected. IOs, POs and other CMOs involve
special risks, and evaluating them requires special knowledge.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans or the financial
institution providing the credit enhancement.
SPECIAL CHARACTERISTICS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so,
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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
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may be reduced. These changes can result in volatility in the market value and
in some instances reduced liquidity, of the CMO class.
OPTIONS, FUTURES AND OTHER STRATEGIES
GENERAL. WRIMCO may use certain options, futures contracts (sometimes
referred to as futures), options on futures contracts, forward currency
contracts, swaps, caps, floors, collars, indexed securities and other derivative
instruments (collectively, Financial Instruments) to attempt to enhance income
or yield or to attempt to hedge the Fund's investments. The strategies described
below may be used in an attempt to manage the risks of the Fund's investments
that can affect fluctuation in its net asset value.
Generally, the Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, the Fund will only purchase or sell
a particular Financial Instrument if the Fund is authorized to invest in the
type of asset by which the return on, or value of, the Financial Instrument is
primarily measured.
Hedging strategies can be broadly categorized as short hedges and long
hedges. A short hedge is a purchase or sale of a Financial Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge, the Fund takes
a position in a Financial Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that the Fund intends to acquire.
Thus, in a long hedge, the Fund takes a position in a Financial Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Financial Instruments on indexes, in
contrast, generally are used to attempt to hedge against price movements in
market sectors in which the Fund has invested or expects to
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invest. Financial Instruments on debt securities may be used to hedge either
individual securities or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations
of the Securities and Exchange Commission (the SEC), the several exchanges upon
which they are traded and the Commodity Futures Trading Commission (the CFTC).
In addition, the Fund's ability to use Financial Instruments will be limited by
tax considerations. See Taxes.
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These new opportunities may
become available as WRIMCO develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or
other techniques are developed. WRIMCO may utilize these opportunities to the
extent that they are consistent with the Fund's goals and permitted by the
Fund's investment limitations and applicable regulatory authorities. The Fund
might not use any of these strategies, and there can be no assurance that any
strategy used will succeed. The Fund's Prospectus or SAI will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in the Prospectus.
SPECIAL RISKS. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities, currency and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy will succeed, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Financial Instrument and price movements of the
investments being hedged. For example, if the value of a Financial Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indexes will depend on the degree of correlation between price
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movements in the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match the Fund's current or anticipated investments exactly. The Fund
may invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Financial Instrument. Moreover, if the price of the
Financial Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets
as cover, maintain accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If the Fund were
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unable to close out its positions in such Financial Instruments, it
might be required to continue to maintain such assets or accounts or make such
payments until the position expired or matured. These requirements might impair
the Fund's ability to sell a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time.
(5) The Fund's ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction (the counterparty) to enter
into a transaction closing out the position. Therefore, there is no assurance
that any position can be closed out at a time and price that is favorable to the
Fund.
COVER. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will comply
with SEC guidelines regarding cover for these instruments and will, if the
guidelines so require, set aside cash or liquid assets in an account with its
custodian in the prescribed amount as determined daily. The Fund will not enter
into any such transactions unless it owns either (1) an offsetting (covered
position in securities, currencies or other options, futures contracts or
forward contracts, or (2) cash and liquid assets with a value, marked-to-market
daily, sufficient to cover its potential obligations to the extent not covered
as provided in (1) above.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover or accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon price
during the option period. A put option gives the purchaser the right to sell,
and obligates the writer to buy, the underlying investment at the agreed-upon
price during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or call options
can enable the Fund to enhance income or yield by reason of the premiums paid by
the purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the Fund would expect to suffer a loss.
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Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security or
currency appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Fund will
be obligated to sell the security or currency at less than its market value. If
the call option is an OTC option, the securities or other assets used as cover
would be considered illiquid to the extent described under Illiquid Investments.
Writing put options can serve as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be obligated
to purchase the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under Illiquid Investments.
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
A type of put that the Fund may purchase is an optional delivery
standby commitment, which is entered into by parties selling debt securities to
the Fund. An optional delivery standby commitment gives the Fund the right to
sell the security back to the seller on specified terms. This right is provided
as an inducement to purchase the security.
RISKS OF OPTIONS ON SECURITIES. Options offer large amounts of
leverage, which will result in the Fund's net asset value being more sensitive
to changes in the value of the related instrument. The Fund may purchase or
write both exchange-traded and OTC options. Exchange-traded options in the
United States are issued by a clearing organization affiliated with the
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exchange on which the option is listed that, in effect, guarantees completion of
every exchange-traded option transaction. In contrast, OTC options are contracts
between the Fund and its counterparty (usually a securities dealer or a bank)
with no clearing organization guarantee. Thus, when the Fund purchases an OTC
option, it relies on the counterparty from whom it purchased the option to make
or take delivery of the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating directly
with the counterparty, or by a transaction in the secondary market if any such
market exists. There can be no assurance that the Fund will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, the Fund might be unable to close
out an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
OPTIONS ON INDEXES. Puts and calls on indexes are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple (the multiplier),
which determines the total dollar value for each point of such difference. When
the Fund buys a call on an index, it pays a premium and has the same rights as
to such call as are indicated above. When the Fund buys a put on an index, it
pays a premium and has the right, prior to the expiration date, to require the
seller of the put, upon the Fund's exercise of the put, to deliver to the Fund
an amount of cash if the closing level of the index upon which the put is based
is less than the exercise price of the put, which amount of cash is determined
by the multiplier, as described above for calls. When the Fund writes a put on
an index, it receives a premium and the purchaser
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of the put has the right, prior to the expiration date, to require the Fund to
deliver to it an amount of cash equal to the difference between the closing
level of the index and the exercise price times the multiplier if the closing
level is less than the exercise price.
RISKS OF OPTIONS ON INDEXES. The risks of investment in options on
indexes may be greater than options on securities. Because index options are
settled in cash, when the Fund writes a call on an index it cannot provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. The Fund can offset some of the risk of writing a call
index option by holding a diversified portfolio of securities similar to those
on which the underlying index is based. However, the Fund cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same securities as
underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the timing risk inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as a common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
timing risk is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference
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between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size and
strike price, the terms of OTC options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Fund great flexibility to
tailor the option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
Generally, OTC foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The purchase of
futures contracts or call options on futures contracts can serve as a long
hedge, and the sale of futures or the purchase of put options on futures can
serve as a short hedge. Writing call options on futures contracts can serve as a
limited short hedge, using a strategy similar to that used for writing call
options on securities or indexes. Similarly, writing put options on futures
contracts can serve as a limited long hedge. Futures contracts and options on
futures contracts can also be purchased and sold to attempt to enhance income or
yield.
In addition, futures contract strategies can be used to manage the
average duration of the Fund's fixed-income portfolio. If WRIMCO wishes to
shorten the average duration of the Fund's fixed-income portfolio, the Fund may
sell a debt futures contract or a call option thereon, or purchase a put option
on that futures contract. If WRIMCO wishes to lengthen the average duration of
the Fund's fixed-income portfolio, the Fund may buy a debt futures contract or a
call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit initial margin
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial
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margin payment, and initial margin requirements might be increased generally in
the future by regulatory action.
Subsequent variation margin payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
marking-to-market. Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on
a futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option or to maintain cash or
liquid assets in an account.
RISKS OF FUTURES CONTRACTS AND OPTIONS THEREON. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to differences in the natures of those markets, are subject to the
following factors which may create distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit
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requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest rate, currency exchange rate or stock market trends by WRIMCO
may still not result in a successful transaction. WRIMCO may be incorrect in its
expectations as to the extent of various interest rate, currency exchange rate
or stock market movements or the time span within which the movements take
place.
INDEX FUTURES. The risk of imperfect correlation between movements in
the price of an index futures and movements in the price of the securities that
are the subject of the hedge increases as the composition of the Fund's
portfolio diverges from the securities included in the applicable index. The
price of the index futures may move more than or less than the price of the
securities being hedged. If the price of the index futures moves less than the
price of the securities that are the subject of the hedge, the hedge will not be
fully effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of the securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indexes on which the futures contracts are based.
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Where index futures are purchased to hedge against a possible increase
in the price of securities before the Fund is able to invest in them in an
orderly fashion, it is possible that the market may decline instead. If the Fund
then concludes not to invest in them at that time because of concern as to
possible further market decline or for other reasons, it will realize a loss on
the futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
COMBINED POSITIONS. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
TURNOVER. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate. Once
the Fund has received an exercise notice on an option it has written, it cannot
effect a closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
SWAPS, CAPS, FLOORS AND COLLARS. The Fund may enter into swaps, caps,
floors and collars to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive cash flows on a notional
principal amount, e.g., an exchange of floating rate payments for fixed-rate
payments. The purchase of a cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined value, to receive payments on a notional
principal amount from the party selling the cap. The purchase of a floor
entitles the purchaser, to the extent that a specified index
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falls below a predetermined value, to receive payments on a notional principal
amount from the party selling the floor. A collar combines elements of buying a
cap and selling a floor.
Swap agreements, including caps, floors and collars, can be
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors. Depending on their structure,
swap agreements may increase or decrease the overall volatility of the Fund's
investments and its share price and yield because, and to the extent, these
agreements affect the Fund's exposure to long- or short-term interest rates (in
the United States or abroad), foreign currency values, mortgage-backed security
values, corporate borrowing rates or other factors such as security prices or
inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. Caps and floors have an effect similar to
buying or writing options.
The creditworthiness of firms with which the Fund enters into swaps,
caps or floors will be monitored by WRIMCO. If a firm's creditworthiness
declines, the value of the agreement would be likely to decline, potentially
resulting in losses. If a default occurs by the other party to such transaction,
the Fund will have contractual remedies pursuant to the agreements related to
the transaction.
The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap will be accrued on a daily basis and
an amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the Investment Company Act of 1940,
as amended (the 1940 Act). The Fund will also establish and maintain such
account with respect to its total obligations under any swaps that are not
entered into on a net basis and with respect to any caps or floors that are
written by the Fund. WRIMCO and the Fund believe that such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to the Fund's borrowing restrictions. The Fund understands
that the position of the SEC is that assets involved in swap transactions are
illiquid and are, therefore, subject to the limitations on investing in illiquid
securities.
REPURCHASE AGREEMENTS
The Fund may purchase securities subject to repurchase agreements. The
Fund will not enter into a repurchase transaction that will cause more than 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
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<PAGE>
commercial bank or broker-dealer) agrees, at the time of purchase, that it will
repurchase the security at a specified time and price. The amount by which the
resale price is greater than the purchase price reflects an agreed-upon market
interest rate effective for the period of the agreement. The return on the
securities subject to the repurchase agreement may be more or less than the
return on the repurchase agreement.
The majority of the repurchase agreements in which the Fund will engage are
overnight transactions, and the delivery pursuant to the resale typically will
occur within one to five days of the purchase. The primary risk is that the Fund
may suffer a loss if the seller fails to pay the agreed-upon amount on the
delivery date and that amount is greater than the resale price of the underlying
securities and other collateral held by the Fund. In the event of bankruptcy or
other default by the seller, there may be possible delays and expenses in
liquidating the underlying securities or other collateral, decline in their
value and loss of interest. The return on such collateral may be more or less
than that from the repurchase agreement. The Fund's repurchase agreements will
be structured so as to fully collateralize the loans. In other words, the value
of the underlying securities, which will be held by the Fund's custodian bank or
by a third party that qualifies as a custodian under section 17(f) of the 1940
Act, is and, during the entire term of the agreement, will remain at least equal
to the value of the loan, including the accrued interest earned thereon.
Repurchase agreements are entered into only with those entities approved by
WRIMCO.
RESTRICTED SECURITIES
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, or in a registered
public offering. Where registration is required, the Fund may be obligated to
pay all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
There are risks associated with investment in restricted securities in
that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities in
which the Fund seeks to invest need not be listed or admitted to trading on a
foreign or domestic exchange and may be less liquid than listed securities.
Certain restricted securities, e.g., Rule 144A securities, may be determined to
be liquid in accordance with
27
<PAGE>
guidelines adopted by the Board of Directors. See Illiquid Investments.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities (U.S. Government securities) are high quality debt
instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date they
are issued), Treasury Notes (which have maturities of one to ten years) and
Treasury Bonds (which generally have maturities of more than ten years). All
such Treasury securities are backed by the full faith and credit of the United
States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Fannie Mae (also known as the Federal National Mortgage Association), Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association (Ginnie Mae), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation (Freddie Mac), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Other securities, such as securities issued by Fannie Mae, are
supported only by the credit of the instrumentality and by a pool of mortgage
assets. If the securities are not backed by the full faith and credit of the
United States, the owner of the securities must look principally to the agency
issuing the obligation for repayment and may not be able to assert a claim
against the United States in the event that the agency or instrumentality does
not meet its commitment.
U.S. Government securities may include mortgage-backed securities
issued by U.S. Government agencies or instrumentalities including, but not
limited to, Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed
securities include pass-through securities, participation certificates and
collateralized mortgage obligations. See Mortgage-Backed and Asset-Backed
Securities. Timely payment of principal and interest on Ginnie Mae pass-throughs
is guaranteed by the full faith and credit of the United States. Freddie Mac and
Fannie Mae are both instrumentalities of the U.S. Government, but their
obligations are not backed by the full faith and credit of the United States. It
is possible that the availability and the marketability (i.e., liquidity) of the
securities discussed in
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<PAGE>
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 in which it may invest on a
when-issued or delayed-delivery basis or sell them on a delayed-delivery basis.
In either case payment and delivery for the bonds take place at a future date.
The bonds so purchased or sold are subject to market fluctuation; their value
may be less or more when delivered than the purchase price paid or received.
When purchasing 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 bonds in determining its net asset value per
share. When the Fund sells municipal bonds on a delayed-delivery basis, the Fund
does not participate in further gains or losses with respect to the bonds. When
the Fund makes a commitment to sell municipal bonds on a delayed-delivery basis,
it will record the transaction and thereafter value the bonds at the sale price
in determining the Fund's net asset value per share. If the other party to a
delayed-delivery transaction fails to deliver or pay for the 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.
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<PAGE>
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.
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<PAGE>
INVESTMENT RESTRICTIONS AND LIMITATIONS
Certain of the Fund's investment restrictions, policies and other
limitations are described in the Prospectus and this SAI. The following are the
Fund's fundamental investment limitations set forth in their entirety, which,
like the Fund's goal and types of securities in which the Fund may invest,
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) Make any investments other than in the municipal bonds and in
the taxable obligations, options, futures contracts and other
financial instruments described in the Prospectus. Further,
such municipal bonds and taxable obligations are subject to
the percentage limitations and the quality restrictions
described in the Prospectus. Thus, the Fund may not purchase
any voting securities; purchase or sell physical commodities;
however, this policy shall not prevent the Fund from
purchasing and selling futures contracts, options, forward
contracts, swaps, caps, floors, collars and other Financial
Instruments; or purchase any real estate or interests in real
estate investment trusts or any investment company securities;
(2) Lend money or other assets; the Fund may, however, buy debt
securities and other obligations consistent with its goal and
other investment policies and restrictions;
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.
(3) Invest for the purpose of exercising control or management of
other companies;
(4) Sell securities short (unless it owns or has the right to
obtain securities equivalent in kind and amount to the
securities sold short) or purchase securities on margin,
except that (1) this policy does not prevent the Fund from
entering into short positions in foreign currency, futures
contracts, options, forward contracts, swaps, caps, floors,
collars and other financial instruments, (2) the Fund may
obtain such short-term credits as are necessary for the
clearance of transactions, and (3) the Fund may make margin
payments in connection with futures contracts, options,
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<PAGE>
forward contracts, swaps, caps, floors, collars, and other
financial instruments;
(5) Participate on a joint, or a joint and several basis, in any
trading account in securities;
(6) Engage in the underwriting of securities, that is, the
selling of securities for others;
(7) With respect to 75% of its total assets, purchase securities
of any one issuer (other than cash items and Government
securities as defined in the 1940 Act), if immediately after
and as a result of such purchase, the value of the holdings of
the Fund in the securities of such issuer exceeds 5% of the
value of the Fund's total assets;
(8) Purchase securities of issuers in any one industry except
for municipal bonds and U.S. Government securities if more
than 25% of the value of its total assets would then be
invested in issuers in that industry; or
(9) issue senior securities.
THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL AND MAY BE
CHANGED BY THE BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL:
(1) The Fund does not intend to invest more than 5% of its total
assets in U.S. Government securities.
(2) The Fund may not purchase a security if, as a result, more
than 10% of its net assets would consist of illiquid
securities.
(3) The Fund does not intend to purchase IDBs or PABs that finance
facilities (other than utilities) of nongovernmental users if,
as a result, more than 25% of its total assets would be
invested in issuers in any one industry.
(4) To the extent that the Fund enters into futures contracts,
options on futures contracts or options on foreign currencies
traded on a CFTC-regulated exchange, in each case other than
for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish
those positions (excluding the amount by which options are
in-the-money at the time of purchase) will not exceed 5% of
the liquidation value of the Fund's portfolio, after taking
into account unrealized profits and unrealized losses on any
contracts the Fund has entered into. (In general, a call
option on a futures contract is in-the-
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<PAGE>
money if the value of the underlying futures contract exceeds
the strike, i.e., exercise, price of the call; a put option on
a futures contract is in-the-money if the value of the
underlying futures contract is exceeded by the strike price of
the put.) This policy does not limit to 5% the percentage of
the Fund's total assets that are at risk in futures contracts
and options on futures contracts.
THE METHOD OF DETERMINING WHO IS AN ISSUER FOR PURPOSES OF THE 5%
LIMITATION IN FUNDAMENTAL RESTRICTION (9) 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
(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 created by
the guarantor and owned by the Fund exceeds 10% of the value
of the Fund's total assets.
An investment policy or limitation that states a maximum percentage of
the Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year and
dividing it by the monthly average of the market value of such securities during
the year, excluding certain short-term securities. The Fund's turnover rate may
vary greatly from year to year as well as within a particular year and may be
affected by cash requirements for the redemption of its shares.
The Fund's portfolio turnover rate for the fiscal years ended September
30, 2000 and 1999 was 15.31% and 30.93%, respectively.
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<PAGE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
THE MANAGEMENT AGREEMENT
The Fund has an Investment Management Agreement (the Management
Agreement) with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly owned subsidiary of Waddell & Reed, Inc.
Under the Management Agreement, WRIMCO is employed to supervise the investments
of the Fund and provide investment advice to the Fund. The address of WRIMCO and
Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits WRIMCO, or an affiliate of WRIMCO, to
enter into a separate agreement for transfer agency services (Shareholder
Servicing Agreement) and a separate agreement for accounting services
(Accounting Services Agreement) with the Fund. The Management Agreement contains
detailed provisions as to the matters to be considered by the Fund's Board of
Directors prior to approving any Shareholder Servicing Agreement or Accounting
Services Agreement.
WADDELL & REED FINANCIAL, INC.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company, which is a wholly owned subsidiary of Waddell & Reed
Financial, Inc., a publicly held company. The address of these companies is 6300
Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
WRIMCO and its predecessors have served as investment manager to each
of the registered investment companies in the Waddell & Reed Advisors Funds
(formerly, the United Group of Mutual Funds), W&R Target Funds, Inc. (formerly,
Target/United Funds, Inc.) and W&R Funds, Inc. (formerly, Waddell & Reed Funds,
Inc.) since 1940 or each company's inception date, whichever is later. Waddell &
Reed, Inc. serves as principal underwriter for the investment companies in the
Waddell & Reed Advisors Funds and W&R Funds, Inc. and acts as principal
underwriter and distributor for variable life insurance and variable annuity
policies for which W&R Target Funds, Inc. is the underlying investment vehicle.
SHAREHOLDER SERVICES
Under the Shareholder Servicing Agreement entered into between the Fund
and Waddell & Reed Services Company (the Agent), a subsidiary of Waddell & Reed,
Inc., the Agent performs
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<PAGE>
shareholder servicing functions, including the maintenance of shareholder
accounts, the issuance, transfer and redemption of shares, distribution of
dividends and payment of redemptions, the furnishing of related information to
the Fund and handling of shareholder inquiries. A new Shareholder Servicing
Agreement, or amendments to the existing one, may be approved by the Fund's
Board of Directors without shareholder approval.
ACCOUNTING SERVICES
Under the Accounting Services Agreement entered into between the Fund and the
Agent, the Agent provides the Fund with bookkeeping and accounting services and
assistance, including maintenance of the Fund's records, pricing of the Fund's
shares, preparation of prospectuses for existing shareholders, preparation of
proxy statements and certain shareholder reports. A new Accounting Services
Agreement, or amendments to an existing one, may be approved by the Fund's Board
of Directors without shareholder approval.
PAYMENTS BY THE FUND FOR MANAGEMENT, ACCOUNTING AND SHAREHOLDER SERVICES
Under the Management Agreement, for WRIMCO's management services, the
Fund pays WRIMCO a fee as described in the Prospectus. The management fees paid
by the Fund to WRIMCO during the Fund's fiscal years ended September 30, 2000,
1999 and 1998 were $4,065,041, $4,196,083 and $4,183,289, respectively.
For purposes of calculating the daily fee, the Fund does not include
money owed to it by Waddell & Reed, Inc. for shares which it has sold but not
yet paid the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement, with respect to Class A,
Class B and Class C shares the Fund pays the Agent, effective September 1, 2000,
a monthly fee of $1.6125 for each shareholder account that was in existence at
any time during the prior month. For Class Y shares, the Fund pays the agent a
monthly fee equal to one-twelfth of .15 of 1% of the average daily net assets of
that class for the preceding month. Prior to September 1, 2000, with respect to
Class A, Class B and Class C shares, the Fund paid the Agent a monthly fee of
$1.3125 for each shareholder account that was in existence at any time during
the prior month, plus $0.30 for each account on which a dividend or
distribution, of cash or shares, had a record date in that month. The Fund also
pays certain out-of-pocket expenses of the Agent, including long distance
telephone communications costs; microfilm and storage costs for certain
documents; forms, printing and mailing costs; charges of any sub-agent used by
Agent in performing services under the Shareholder Servicing Agreement; and
costs of legal and special services not provided by Waddell & Reed, Inc., WRIMCO
or the Agent.
35
<PAGE>
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 (as
amended September 1, 2000).
<TABLE>
<CAPTION>
ACCOUNTING SERVICES FEE
Average Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Fund
------------------------- ------------------
<S> <C>
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
</TABLE>
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.
Prior to September 1, 2000, the Accounting Services Fee structure was:
<TABLE>
<CAPTION>
ACCOUNTING SERVICES FEE
Average Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Fund
------------------------- ------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
Fees paid to the Agent for accounting services for the fiscal years
ended September 30, 2000, 1999 and 1998 were $83,565, $85,000 and $86,250,
respectively.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement are
described above. Waddell & Reed, Inc. and
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<PAGE>
affiliates pay the Fund's Directors and officers who are affiliated with WRIMCO
and its affiliates. The Fund pays the fees and expenses of the Fund's other
Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares and
thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The dollar amount of underwriting
commissions for Class A shares for the fiscal years ended September 30, 2000,
1999 and 1998 were $393,458, $993,053 and $1,153,458, respectively. For the
fiscal year ended September 30, 2000, the dollar amount of underwriting
commissions for Class B shares was $204, and for Class C shares was $21. The
amounts retained by Waddell & Reed, Inc. for each fiscal year were, in the
aggregate, $4139,058, $421,925 and $489,470, respectively.
As described in the Prospectus, Waddell & Reed, Inc. reallows to
selling broker-dealers a portion of the sales charge paid for purchases of Class
A shares. A major portion of the sales charge for Class A shares and the
contingent deferred sales charge (CDSC) for Class B and Class C shares and for
certain Class A shares may be paid to financial advisors and managers of Waddell
& Reed, Inc. and selling broker-dealers. Waddell & Reed, Inc. may compensate its
financial advisors as to purchases for which there is no sales or deferred
charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under the Distribution and Service Plan (the Plan) for Class A shares
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay
Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed 0.25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with, either directly or through others, the distribution
of the Class A shares, the provision of personal services to Class A
shareholders and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its financial
advisors, registered representatives and sales managers (collectively, the sales
force) and through other broker-dealers, banks and other appropriate
intermediaries. In distributing
37
<PAGE>
shares through its sales force, Waddell & Reed, Inc. will pay commissions and
incentives to the sales force at or about the time of sale and will incur other
expenses including costs for prospectuses, sales literature, advertisements,
sales office maintenance, processing of orders and general overhead with respect
to its efforts to distribute the Fund's shares. The Class A Plan permits Waddell
& Reed, Inc. to receive reimbursement for these Class A-related distribution
activities through the distribution fee, subject to the limit contained in the
Plan. The Class A Plan also permits Waddell & Reed, Inc. to be reimbursed for
amounts it expends in compensating, training and supporting registered financial
advisors, sales managers and/or other appropriate personnel in providing
personal services to Class A shareholders of the Fund and/or maintaining Class A
shareholder accounts; increasing services provided to Class A shareholders of
the Fund by office personnel located at field sales offices; engaging in other
activities useful in providing personal service to Class A shareholders of the
Fund and/or maintenance of Class A shareholder accounts; and in compensating
broker-dealers, and other third parties, who may regularly sell Class A shares
of the Fund, and other third parties, for providing shareholder services and/or
maintaining shareholder accounts with respect to Class A shares. Service fees
and distribution fees in the amounts of $1,775,198 and $82,411, respectively,
were paid (or accrued) by the Fund under the Class A Plan for the fiscal year
ended September 30, 2000.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for, either directly or through others,
providing personal services to shareholders of that class and/or maintaining
shareholder accounts for that class and a distribution fee of up to 0.75% of the
average daily net assets of the class to compensate Waddell & Reed, Inc. for,
either directly or through others, distributing the shares of that class. The
Class B Plan and the Class C Plan each permit Waddell & Reed, Inc. to receive
compensation, through the distribution and service fee, respectively, for its
distribution activities for that class, which are similar to the distribution
activities described with respect to the Class A Plan, and for its activities in
providing personal services to shareholders of that class and/or maintaining
shareholder accounts of that class, which are similar to the corresponding
activities for which it is entitled to reimbursement under the Class A Plan.
Service fees and distribution fees in the amounts of $1,110 and $3,283,
respectively, were paid (or accrued) by the Fund under the Class B Plan for the
fiscal year ended September 30, 2000. Service fees and distribution fees in the
amounts of $637 and $1,901, respectively, were paid (or accrued) by the Fund
under the Class C Plan for the fiscal year ended September 30, 2000.
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<PAGE>
The only Directors or interested persons, as defined in the 1940 Act,
of the Fund who have a direct or indirect financial interest in the operation of
the Plans are the officers and Directors who are also officers of either Waddell
& Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. Each Plan
is anticipated to benefit the Fund and its shareholders of the affected class
through Waddell & Reed, Inc.'s activities not only to distribute the shares of
the affected class but also to provide personal services to shareholders of that
class and thereby promote the maintenance of their accounts with the Fund. The
Fund anticipates that shareholders of a particular class may benefit to the
extent that Waddell & Reed's activities are successful in increasing the assets
of the Fund, through increased sales or reduced redemptions, or a combination of
these, and reducing a shareholder's share of Fund and class expenses. Increased
Fund assets may also provide greater resources with which to pursue the goals of
the Fund. Further, continuing sales of shares may also reduce the likelihood
that it will be necessary to liquidate portfolio securities, in amounts or at
times that may be disadvantageous to the Fund, to meet redemption demands. In
addition, the Fund anticipates that the revenues from the Plans will provide
Waddell & Reed, Inc. with greater resources to make the financial commitments
necessary to continue to improve the quality and level of services to the Fund
and the shareholders of the affected class.
To the extent that Waddell & Reed, Inc. incurs expenses for which
reimbursement or compensation may be made under the Plans that relate to
distribution and service activities also involving another fund in the Waddell &
Reed Advisors Funds or W&R Funds, Inc., Waddell & Reed, Inc. typically
determines the amount attributable to the Fund's expenses under the Plans on the
basis of a combination of the respective classes' relative net assets and number
of shareholder accounts.
As noted above, Class A shares, Class B shares and Class C shares are
offered through Waddell & Reed, Inc. and other broker-dealers. In addition to
the dealer reallowance that may be applicable to Class A share purchases, as
described in the Prospectus, Waddell & Reed, Inc. may pay such broker-dealers a
portion of the fees it receives under the respective Plans as well as other
compensation in connection with the distribution of Fund shares, including the
following: 1) for the purchase of Class A shares purchased at NAV by clients of
Legend Equities Corporation (Legend), Waddell & Reed, Inc. (or its affiliate)
may pay Legend 1.00% of net assets invested; 2) for the purchase of Class B
shares, Waddell & Reed, Inc. (or its affiliate) may pay Legend 4.00% of net
assets invested; 3) for the purchase of Class C shares, Waddell & Reed, Inc. (or
its affiliate) may pay Legend 1.00% of net assets invested.
Each Plan was approved by the Fund's Board of Directors, including the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the
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<PAGE>
operations of the Plans or any agreement referred to in the Plans (hereafter,
the Plan Directors). The Class A Plan was also approved by the affected
shareholders of the Fund.
Among other things, each Plan provides that (1) Waddell & Reed, Inc.
will provide to the Directors of the Fund at least quarterly, and the Directors
will review, a report of amounts expended under the Plan and the purposes for
which such expenditures were made, (2) the Plan will continue in effect only so
long as it is approved at least annually, and any material amendments thereto
will be effective only if approved, by the Directors including the Plan
Directors acting in person at a meeting called for that purpose, (3) amounts to
be paid by the Fund under the Plan may not be materially increased without the
vote of the holders of a majority of the outstanding shares of the affected
class of the Fund, and (4) while the Plan remains in effect, the selection and
nomination of the Directors who are Plan Directors will be committed to the
discretion of the Plan Directors.
CUSTODIAL AND AUDITING SERVICES
The Fund's Custodian is UMB Bank, n.a., 928 Grand Boulevard, Kansas
City, Missouri. In general, the Custodian is responsible for holding the Fund's
cash and securities. Deloitte & Touche LLP, 1010 Grand Boulevard, Kansas City,
Missouri, the Fund's independent auditors, audits the Fund's financial
statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DETERMINATION OF OFFERING PRICE
The NAV of each class of the shares of the Fund is the value of the
assets of that class, less that class's liabilities, divided by the total number
of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined NAV plus
the sales charge described in the Prospectus. The sales charge is paid to
Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of September
30, 2000, which is the most recent balance sheet included in this SAI, was as
follows:
<TABLE>
<S> <C>
NAV per Class A share (Class
A net assets divided by Class A shares
outstanding) ................................ $6.75
Add: selling commission (4.25% of offering
price) ...................................... 0.30
-----
Maximum offering price per Class A share
(Class A NAV divided by 95.75%).............. $7.05
=====
</TABLE>
The offering price of a Class A share is its NAV next
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<PAGE>
calculated following acceptance of a purchase order plus the sales charge, as
applicable. The offering price of a Class B, Class C or Class Y share is its NAV
next calculated following acceptance of a purchase order. The number of shares
you receive for your purchase depends on the next offering price after Waddell &
Reed, Inc. or an authorized third party receives and accepts your order at its
principal business office. You will be sent a confirmation after your purchase
which will indicate how many shares you have purchased. Shares are normally
issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the
Fund may determine to discontinue offering Fund shares for purchase.
The NAV and offering price per share are computed once on each day that
the NYSE is open for trading as of the later of the close of the regular session
of the NYSE or the close of the regular session of any domestic securities or
commodities exchange on which an option or futures contract held by the Fund is
traded. The NYSE annually announces the days on which it will not be open for
trading. The most recent announcement indicates that the NYSE will not be open
on the following days: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. However, it is possible that the NYSE may close on other
days. The NAV will change every business day, since the value of the assets and
the number of shares outstanding change every business day.
The Board of Directors has decided to use the prices provided by an
independent pricing service to value municipal bonds. The Board of Directors
believes that such a service does quote the securities' fair value. The Board of
Directors, however, may hereafter determine to use another service or use the
bid price quoted by dealers if it should determine that such service or quotes
more accurately reflect the fair value of municipal bonds held by the Fund.
Short-term debt securities are valued at amortized cost, which
approximates market value. Securities or other assets that are not valued by
either of the foregoing methods and for which market quotations are not readily
available would be valued by appraisal 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.
Puts, calls and futures contracts purchased and held by the Fund are
valued at the last sales price thereof on the securities or commodities
exchanges on which they are traded, or, if there are no transactions, at the
mean between bid and asked prices. Ordinarily, the close of the regular session
for options trading on national securities exchanges is 4:10 p.m. Eastern time
and the close of the regular session of commodities exchanges is 4:15 p.m.
Eastern time. Futures contracts will be valued with
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<PAGE>
reference to established futures exchanges. The value of a futures contract
purchased by the Fund will be either the closing price of that contract or the
bid price. Conversely, the value of a futures contract sold by the Fund will be
either the closing price or the asked price.
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
For Class A, Class B and Class C shares, initial investments must be at
least $500 with the exceptions described in this paragraph. A $100 minimum
initial investment pertains to certain exchanges of shares from another fund in
the Waddell & Reed Advisors Funds or W&R Funds, Inc. A $50 minimum initial
investment pertains to purchases for which an investor has arranged, at the time
of initial investment, to make subsequent purchases for the account by having
regular monthly withdrawals of $25 or more made from a bank account. A minimum
initial investment of $25 is applicable to purchases made through payroll
deduction for or by employees of Waddell & Reed, Inc., WRIMCO, or their
affiliates. Except with respect to certain exchanges and automatic withdrawals
from a bank account, a shareholder may make subsequent investments of any
amount.
For Class Y shares, investments by government entities or authorities
or by corporations must total at least $10 million within the first twelve
months after initial investment. There is no initial investment minimum for
other Class Y investors.
REDUCED SALES CHARGES (APPLICABLE TO CLASS A SHARES ONLY)
ACCOUNT GROUPING
Large purchases of Class A shares are subject to lower sales charges.
The schedule of sales charges appears in the Prospectus. For the purpose of
taking advantage of the lower sales charges available for large purchases, a
purchase in any of categories 1 through 7 listed below made by an individual or
deemed to be made by an individual may be grouped with purchases in any other of
these categories. References to purchases in an Individual Retirement Account
(IRA) or other tax-advantage plan (for which investments in the Fund would not
be appropriate) are made only to illustrate how purchases of Fund shares may be
grouped with purchases made in shares of other funds in the Waddell & Reed
Advisors Funds.
1. Purchases by an individual for his or her own account (includes
purchases under the Waddell & Reed Advisors Funds Revocable Trust
Form);
2. Purchases by that individual's spouse purchasing for his or her own
account (includes Waddell & Reed Advisors Funds Revocable Trust Form
of spouse);
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<PAGE>
3. Purchases by that individual or his or her spouse in their joint
account;
4. Purchases by that individual or his or her spouse for the account of
their child under age 21;
5. Purchase by any custodian for the child of that individual or spouse
in a Uniform Transfers to Minors Act (UTMA) or Uniform Gift to Minors
Act (UGMA) account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account (IRA), salary reduction plan account
under Section 457 of the Internal Revenue Code of 1986, as amended (the
Code), provided that such purchases are subject to a sales charge (see
Net Asset Value Purchases), tax-sheltered annuity account (TSA) or
Keogh plan account, provided that the individual and spouse are the
only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or
her spouse is the settlor (the person who establishes the trust).
For the foregoing categories, an individual's domestic partner is
treated as his or her spouse.
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother
has an account in her own name; A's father has an account in
his own name; the UGMA account may be grouped with A's
father's account but may not be grouped with Grandmother's
account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase
made in the trust account is eligible for grouping with an IRA
account of W, H's wife;
C. H's will provides for the establishment of a trust for the
benefit of his minor children upon H's death; his bank is
named as trustee; upon H's death, an account is established in
the name of the bank, as trustee; a purchase in the account
may be grouped with an account held by H's wife in her own
name.
D. X establishes a trust naming herself as trustee and R, her
son, as successor trustee and R and S as beneficiaries; upon
X's death, the account is transferred to R as trustee; a
purchase in the account may not be grouped with R's individual
account. (If X's spouse, Y, was successor trustee, this
purchase could be grouped with Y's individual account.)
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<PAGE>
Account grouping as described above is available under the following
circumstances.
ONE-TIME PURCHASES
A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $100,000; at
the same time, H's parents open up three UGMA accounts for H
and W's three minor children and invest $100,000 in each
child's name; the combined purchases of Class A shares are
subject to a reduced sales load applicable to a purchase of
$300,000 provided that Waddell & Reed, Inc. is advised that
the purchases are entitled to grouping.
RIGHTS OF ACCUMULATION
If Class A shares are held in any account and an additional purchase of
Class A shares is made in that account or in any account eligible for grouping
with that account, the additional purchase is combined with the NAV of the
existing account as of the date the new purchase is accepted by Waddell & Reed,
Inc. for the purpose of determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund
three years ago. His account has a NAV of $100,000. His wife,
W, now wishes to invest $15,000 in Class A shares of the Fund.
W's purchase will be combined with H's existing account and
will be entitled to the reduced sales charge applicable to a
purchase in excess of $100,000. H's original $100,000 purchase
was subject to a full sales charge and the reduced charge does
not apply retroactively to that purchase.
In order to be entitled to Rights of Accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account(s) with which the purchase may be combined.
LETTER OF INTENT
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Letter of Intent (LOI). By signing an LOI form,
which is available from Waddell & Reed, Inc., the purchaser indicates an
intention to invest, over a 13-month period, a dollar amount which is sufficient
to qualify
44
<PAGE>
for a reduced sales charge. The 13-month period begins on the date the first
purchase made under the LOI is accepted by Waddell & Reed, Inc. Each purchase
made from time to time under the LOI is treated as if the purchaser were buying
at one time the total amount which he or she intends to invest. The sales charge
applicable to all purchases of Class A shares made under the terms of the LOI
will be the sales charge in effect on the beginning date of the 13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under an LOI, the investor's Rights of
Accumulation (see above) will be taken into account; that is, Class A shares
already held in the same account in which the purchase is being made or in any
account eligible for grouping with that account, as described above, will be
included.
Example: H signs an LOI indicating his intent to invest in his own name
a dollar amount sufficient to entitle him to purchase Class A
shares at the sales charge applicable to a purchase of
$300,000. H has an UGMA account for his child and the Class A
shares held in the account have a NAV as of the date the LOI
is accepted by Waddell & Reed, Inc. of $50,000; H's wife, W,
has an account in her own name invested in another fund in the
Waddell & Reed Advisors Funds which charges the same sales
load as the Fund, with a NAV as of the date of acceptance of
the LOI of $75,000; H needs to invest $175,000 in Class A
shares over the 13-month period in order to qualify for the
reduced sales load applicable to a purchase of $300,000.
A copy of the LOI signed by a purchaser will be returned to the
purchaser after it is accepted by Waddell & Reed, Inc. and will set forth the
dollar amount of Class A shares which must be purchased within the 13-month
period in order to qualify for the reduced sales charge.
The minimum initial investment under an LOI is 5% of the dollar amount
which must be invested under the LOI. An amount equal to 5% of the purchase
required under the LOI will be held in escrow. If a purchaser does not, during
the period covered by the LOI, invest the amount required to qualify for the
reduced sales charge under the terms of the LOI, he or she will be responsible
for payment of the sales charge applicable to the amount actually invested. The
additional sales charge owed on purchases of Class A shares made under an LOI
which is not completed will be collected by redeeming part of the shares
purchased under the LOI and held in escrow unless the purchaser makes payment of
this amount to Waddell & Reed, Inc. within 20 days of Waddell & Reed, Inc.'s
request for payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a
45
<PAGE>
sales charge lower than that available under the LOI, the lower sales charge
will apply.
An LOI does not bind the purchaser to buy, or Waddell & Reed, Inc. to
sell, the shares covered by the LOI.
With respect to LOIs for $2,000,000 or purchases otherwise qualifying
for no sales charge under the terms of the LOI, the initial investment must be
at least $200,000, and the value of any shares redeemed during the 13-month
period which were acquired under the LOI will be deducted in computing the
aggregate purchases under the LOI.
OTHER FUNDS IN THE WADDELL & REED ADVISORS FUNDS AND W&R FUNDS, INC.
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the Waddell & Reed
Advisors Funds and the W&R Funds, Inc. subject to a sales charge. A purchase of
Class A shares, or Class A shares held, in any of the funds in the Waddell &
Reed Advisors Funds and/or the W&R Funds, Inc. subject to a sales charge will be
treated as an investment in the Fund in determining the applicable sales charge.
For these purposes, Class A shares of Waddell & Reed Advisors Cash Management,
Inc., Waddell & Reed Advisors Municipal Money Market Fund, Inc. or W&R Funds,
Inc. Money Market Fund that were acquired by exchange of another Waddell & Reed
Advisors Fund or W&R Funds, Inc. Class A shares on which a sales charge was
paid, plus the shares paid as dividends on those acquired shares, are also taken
into account.
NET ASSET VALUE PURCHASES OF CLASS A SHARES
Class A shares of the Fund may be purchased at NAV by the Directors and
officers of the Fund or of any affiliated entity of Waddell & Reed, Inc.,
employees of Waddell & Reed, Inc. or of any of its affiliates, financial
advisors of Waddell & Reed, Inc. and the spouse, children, parents, children's
spouses and spouse's parents of each such Director, officer, employee and
financial advisor. Child includes stepchild; parent includes stepparent. Trusts
under which the grantor and the trustee or a co-trustee are each an eligible
purchaser are also eligible for NAV purchases of Class A shares. A custodian
under the UGMA or UTMA purchasing for the child or grandchild of any employee or
financial advisor may purchase Class A shares at NAV whether or not the
custodian himself is an eligible purchaser. Employees includes retired
employees. A retired employee is an individual separated from service from
Waddell & Reed, Inc., or from an affiliated company with a vested interest in
any Employee Benefit plan sponsored by Waddell & Reed, Inc. or any of its
affiliated companies. Financial advisors includes retired financial advisors. A
retired financial advisor is any financial advisor who was, at the time of
separation from service from Waddell & Reed, Inc., a Senior Financial Advisor. A
custodian under UGMA or UTMA purchasing for the child or grandchild of any
employee or
46
<PAGE>
financial advisor may purchase Class A shares at NAV whether or not the
custodian himself is an eligible purchaser.
Until March 31, 2001, Class A shares may also be purchased at NAV by
persons who are clients of Legend if the purchase is made with the proceeds of
the redemption of shares of a mutual fund which is not within the Waddell & Reed
Advisors Funds or W&R Funds, Inc. and the purchase is made within 60 days of
such redemption.
Shares may also be issued at NAV in a merger, acquisition or exchange
offer made pursuant to a plan of reorganization to which the Fund is a party.
REASONS FOR DIFFERENCES IN THE PUBLIC OFFERING PRICE OF CLASS A SHARES
As described herein and in the Prospectus, there are a number of
instances in which the Fund's Class A shares are sold or issued on a basis other
than at the maximum public offering price, that is, the NAV plus the highest
sales charge. Some of these instances relate to lower or eliminated sales
charges for larger purchases of Class A shares, whether made at one time or over
a period of time as under an LOI or Rights of Accumulation. See the table of
sales charges in the Prospectus for the Class A shares. The reasons for these
quantity discounts are, in general, that (1) they are traditional and have long
been permitted in the industry and are therefore necessary to meet competition
as to sales of shares of other funds having such discounts, (2) certain quantity
discounts are required by rules of the National Association of Securities
Dealers, Inc. (as is elimination of sales charges on the reinvestment of
dividends and distributions), and (3) they are designed to avoid an unduly large
dollar amount of sales charge on substantial purchases in view of reduced
selling expenses. Quantity discounts are made available to certain related
persons for reasons of family unity and to provide a benefit to tax-exempt plans
and organizations.
In general, the reasons for the other instances in which there are reduced or
eliminated sales charges for Class A shares are as follows. Exchanges at NAV are
permitted because a sales charge has already been paid on the shares exchanged.
Sales of Class A shares without a sales charge are permitted to Directors,
officers and certain others due to reduced or eliminated selling expenses and
since such sales may aid in the development of a sound employee organization,
encourage responsibility and interest in the Waddell & Reed Advisors Funds and
an identification with its aims and policies. Limited reinvestments of
redemptions of Class A shares at no sales charge are permitted to attempt to
protect against mistaken or not fully informed redemption decisions. Class A
shares may be issued at no sales charge in plans of reorganization due to
reduced or eliminated sales expenses and since, in some cases, such issuance is
exempted in the 1940 Act from the otherwise applicable restrictions as to what
sales charge must be imposed. Reduced or
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<PAGE>
eliminated sales charges may also be used for certain short-term promotional
activities by Waddell & Reed, Inc. In no case in which there is a reduced or
eliminated sales charge are the interests of existing Class A shareholders
adversely affected since, in each case, the Fund receives the NAV per share of
all shares sold or issued.
EXCHANGES FOR SHARES OF OTHER FUNDS IN THE WADDELL & REED ADVISORS FUNDS AND W&R
FUNDS, INC.
CLASS A SHARE EXCHANGES
Once a sales charge has been paid on shares of a fund in the Waddell &
Reed Advisors Funds or the W&R Funds, Inc., these shares and any shares added to
them from dividends or distributions paid in shares may be freely exchanged for
Class A shares of another fund in the Waddell & Reed Advisors Funds or the W&R
Funds, Inc. The shares you exchange must be worth at least $100 or you must
already own shares of the fund in the Waddell & Reed Advisors Funds or the W&R
Funds, Inc. into which you want to exchange.
You may exchange Class A shares you own in another fund in the Waddell
& Reed Advisors Funds or the W&R Funds, Inc. for Class A shares of the Fund
without charge if (1) a sales charge was paid on these shares, or (2) the shares
were received in exchange for shares for which a sales charge was paid, or (3)
the shares were acquired from reinvestment of dividends and distributions paid
on such shares. There may have been one or more such exchanges so long as a
sales charge was paid on the shares originally purchased. Also, shares acquired
without a sales charge because the purchase was $2 million or more will be
treated the same as shares on which a sales charge was paid.
Shares of Waddell & Reed Advisors Municipal Bond Fund, Inc., Waddell &
Reed Advisors Government Securities Fund, Inc., Waddell & Reed Advisors
Municipal High Income Fund, Inc. (formerly, United Municipal Bond Fund, Inc.,
United Government Securities Fund, Inc. and United Municipal High Income Fund,
Inc., respectively), W&R Funds, Inc. Municipal Bond Fund and W&R Funds, Inc.
Limited-Term Bond Fund (formerly, Waddell & Reed Funds, Inc.) are the exceptions
and special rules apply. Class A shares of any of these funds may be exchanged
for Class A shares of the Fund only if (1) you received those shares as a result
of one or more exchanges of shares on which a maximum sales charge was
originally paid (currently, 5.75%), or (2) the shares have been held from the
date of original purchase for at least six months.
Subject to the above rules regarding sales charges, you may have a
specific dollar amount of Class A shares of Waddell & Reed Advisors Cash
Management, Inc. or Class A shares of Waddell & Reed Advisors Municipal Money
Market Fund, Inc. automatically exchanged each month into Class A shares of the
Fund or any other fund in the Waddell & Reed Advisors Funds, provided you
already
48
<PAGE>
own Class A shares of the fund. The shares of Waddell & Reed Advisors Cash
Management, Inc. or Waddell & Reed Advisors Municipal Money Market Fund, Inc.
which you designate for automatic exchange must be worth at least $100, which
may be allocated among the Class A shares of different funds in the Waddell &
Reed Advisors Funds so long as each fund receives a value of at least $25.
Minimum initial investment and minimum balance requirements apply to such
automatic exchange service.
You may redeem your Class A shares of the Fund and use the proceeds to
purchase Class Y shares of the Fund if you meet the criteria for purchasing
Class Y shares.
CLASS B SHARE EXCHANGES
You may exchange Class B shares of the Fund for Class B shares of other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc. without
charge.
The redemption of the Fund's Class B shares as part of an exchange is
not subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class B shares of Waddell &
Reed Advisors Cash Management, Inc. or Waddell & Reed Advisors Municipal Money
Market Fund, Inc. automatically exchanged each month into Class B shares of the
Fund or any other fund in the Waddell & Reed Advisors Funds, provided you
already own Class B shares of the fund. The shares of Waddell & Reed Advisors
Cash Management, Inc. or Waddell & Reed Advisors Municipal Money Market Fund,
Inc. which you designate for automatic exchange must be worth at least $100,
which may be allocated among different Funds so long as each Fund receives a
value of at least $25. Minimum initial investment and minimum balance
requirements apply to such automatic exchange service.
CLASS C SHARE EXCHANGES
You may exchange Class C shares of the Fund for Class C shares of other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc. without
charge.
The redemption of the Fund's Class C shares as part of an exchange is
not subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class C shares of Waddell &
Reed Advisors Cash Management, Inc. or Waddell & Reed Advisors Municipal Money
Market Fund, Inc. automatically
49
<PAGE>
exchanged each month into Class C shares of the Fund or any other fund in the
Waddell & Reed Advisors Funds, provided you already own Class C shares of the
fund. The shares of Waddell & Reed Advisors Cash Management, Inc. or Waddell &
Reed Advisors Municipal Money Market Fund, Inc. which you designate for
automatic exchange must be worth at least $100, which may be allocated among
different Funds so long as each Fund receives a value of at least $25. Minimum
initial investment and minimum balance requirements apply to such automatic
exchange service.
CLASS Y SHARE EXCHANGES
Class Y shares of the Fund may be exchanged for Class Y shares of any
other fund in the Waddell & Reed Advisors Funds or W&R Funds, Inc. or for Class
A shares of Waddell & Reed Advisors Cash Management, Inc. or Class A shares of
Waddell & Reed Advisors Municipal Money Market Fund, Inc.
GENERAL EXCHANGE INFORMATION
When you exchange shares, the total shares you receive will have the
same aggregate NAV as the total shares you exchange. The relative values are
those next figured after your exchange request is received in good order.
These exchange rights and other exchange rights concerning the other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc., can in most
instances be eliminated or modified at any time and any such exchange may not be
accepted.
FLEXIBLE WITHDRAWAL SERVICE FOR CLASS A, CLASS B AND CLASS C SHAREHOLDERS
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service ( the Service) regular monthly, quarterly, semiannual or
annual payments by redeeming on an ongoing basis Class A, Class B or Class C
shares that you own of the Fund or of any of the funds in the Waddell & Reed
Advisors Funds or W&R Funds, Inc. It would be a disadvantage to an investor to
make additional purchases of Class A shares while the Service is in effect
because it would result in duplication of sales charges. Class B and Class C
shares, and certain Class A shares to which the CDSC otherwise applies, that are
redeemed under the Service are not subject to a CDSC provided the amount
withdrawn does not exceed 24% of the account value annually. Applicable forms to
start the Service are available through Waddell & Reed Services Company.
The maximum amount of the withdrawal for monthly, quarterly, semiannual
and annual withdrawals is 2%, 6%, 12% and 24% respectively of the value of your
account at the time the Service is established. The withdrawal proceeds are not
subject to the deferred sales charge, but only within these percentage
limitations. The minimum withdrawal is $50. The Service, and
50
<PAGE>
this exclusion from the deferred sales charge, do not apply to a one-time
withdrawal.
To qualify for the Service, you must have invested at least $10,000 in
Class A, Class B or Class C shares which you still own of any of the funds in
the Waddell & Reed Advisors Funds or W&R Funds, Inc.; or, you must own Class A,
Class B or Class C shares having a value of at least $10,000. The value for this
purpose is the value at the current offering price.
You can choose to have shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to
one-twelfth of a percentage of the value of the shares in the
Account; (you select the percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least
five shares).
Shares are redeemed on the 20th day of the month in which the payment
is to be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
Retirement plan accounts may be subject to a fee imposed by the Plan
Custodian for use of the Service.
The dividends and distributions on shares of a class you have made
available for the Service are paid in additional shares of that class. All
payments under the Service are made by redeeming shares, which may involve a
gain or loss for tax purposes. To the extent that payments exceed dividends and
distributions, the number of shares you own will decrease. When all of the
shares in an account are redeemed, you will not receive any further payments.
Thus, the payments are not an annuity, an income or a return on your investment.
You may, at any time, change the manner in which you have chosen to
have shares redeemed to any of the other choices originally available to you.
You may, at any time, redeem part or all of the shares in your account; if you
redeem all of the shares, the Service is terminated. The Fund can also terminate
the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed
will be sent to you to assist you in completing your Federal income tax return.
51
<PAGE>
REDEMPTIONS
The Prospectus gives information as to redemption procedures.
Redemption payments are made within seven days from receipt of request, unless
delayed because of emergency conditions determined by the SEC, when the NYSE is
closed other than for weekends or holidays, or when trading on the NYSE is
restricted. Payment is made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities. Payment for redemptions of
shares of the Fund may be made in portfolio securities when the Fund's Board of
Directors determines that conditions exist making cash payments undesirable.
Securities used for payment of redemptions are valued at the value used in
figuring NAV. There would be brokerage costs to the redeeming shareholder in
selling such securities. The Fund, however, has elected to be governed by Rule
18f-1 under the 1940 Act, pursuant to which it is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of its NAV during any 90-day
period for any one shareholder.
REINVESTMENT PRIVILEGE
The Fund offers a one-time reinvestment privilege that allows you to
reinvest all or part of any amount of Class A shares you redeem from the Fund by
sending to the Fund the amount you wish to reinvest. The amount you return will
be reinvested in Class A shares at the NAV next calculated after the Fund
receives the returned amount. Your written request to reinvest and the amount to
be reinvested must be received within 45 days after your redemption request was
received, and the Fund must be offering Class A shares at the time your
reinvestment request is received. You can do this only once as to Class A shares
of the Fund. You do not use up this privilege by redeeming Class A shares to
invest the proceeds at NAV in a Keogh plan or an IRA.
There is also a reinvestment privilege for Class B and Class C shares
and, where applicable, certain Class A shares under which you may reinvest all
or part of any amount of the shares you redeemed and have the corresponding
amount of the deferred sales charge, if any, which you paid restored to your
account by adding the amount of that charge to the amount you are reinvesting in
shares of the same class. If Fund shares of that class are then being offered,
you can put all or part of your redemption payment back into such shares at the
NAV next calculated after you have returned the amount. Your written request to
do this must be received within 45 days after your redemption request was
received. You can do this only once as to Class B, Class C and Class A shares of
the Fund. For purposes of determining future deferred sales charges, the
reinvestment will be treated as a new investment.
52
<PAGE>
MANDATORY REDEMPTION OF CERTAIN SMALL ACCOUNTS
The Fund has the right to compel the redemption of shares held under
any account or any plan if the aggregate NAV of such shares (taken at cost or
value as the Board of Directors may determine) is less than $500. The Board of
Directors has no intent to compel redemptions in the foreseeable future. If it
should elect to compel redemptions, shareholders who are affected will receive
prior written notice and will be permitted 60 days to bring their accounts up to
the minimum before this redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors. The majority of the
Directors are not affiliated with Waddell & Reed, Inc.
The principal occupation during the past five years of each Director
and officer of the Fund is stated below. Each of the persons listed through and
including Mr. Vogel is a member of the Fund's Board of Directors. The other
persons are officers of the Fund but are not members of the Board of Directors.
For purposes of this section, the term Fund Complex includes each of the
registered investment companies in the Waddell & Reed Advisors Funds, W&R Target
Funds, Inc. and W&R Funds, Inc. Each of the Fund's Directors is also a Director
of each of the other funds in the Fund Complex and each of the Fund's officers
is also an officer of one or more of the funds in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer and Director of Waddell & Reed Financial, Inc.; President, Chairman of
the Board of Directors, Director and Chief Executive Officer of Waddell & Reed
Financial Services, Inc.; Chairman of the Board of Directors and Director of
WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of each of the funds in the Fund Complex; formerly, Chairman of the
Board of Directors of Waddell & Reed Asset Management Company, a former
affiliate of Waddell & Reed Financial, Inc. Date of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law;
Director, AmVestors CBO II Inc. Date of birth: October 2, 1947.
53
<PAGE>
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.
54
<PAGE>
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.
55
<PAGE>
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.
56
<PAGE>
BRYAN J. BAILEY
Bryan J. Bailey is Vice President of the Fund and one other Fund in the
Fund Complex and Vice President of WRIMCO; formerly, Assistant Portfolio Manager
for investment companies managed by WRIMCO. Date of birth: April 17, 1963.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217,
Shawnee Mission, Kansas 66201-9217 unless a different address is given.
The Directors who may be deemed to be interested persons as defined in
the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc., or of its manager,
WRIMCO, are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, whereby an incumbent Director who has attained the age of 70 may, or
if elected on or after May 31, 1993 and has attained the age of 75 must, resign
his or her position as Director and, unless he or she elects otherwise, will
serve as Director Emeritus provided the Director has served as a Director of the
Funds for at least five years which need not have been consecutive. A Director
Emeritus receives fees in recognition of his or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but he or she
has no authority or responsibility with respect to the management of the Fund.
Messrs. Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey
and Paul S. Wise retired as Directors of the Fund and of each of the funds in
the Fund Complex, and each serves as Director Emeritus.
The funds in the Waddell & Reed Advisors Funds, W&R Target Funds, Inc.
and W&R Funds, Inc. pay to each Director, effective October 1, 1999, an annual
base fee of $50,000, plus $3,000 for each meeting of the Board of Directors
attended and effective January 1, 2000, an annual base fee of $52,000 plus
$3,250 for each meeting of the Board of Directors attended, plus reimbursement
of expenses for attending such meeting and $500 for each committee meeting
attended which is not in conjunction with a Board of Directors meeting, other
than Directors who are affiliates of Waddell & Reed, Inc. (prior to October 1,
1999, the funds in the Waddell & Reed Advisors Funds, W&R Target Funds, Inc. and
Waddell & Reed Funds, Inc. paid to each Director an annual base fee of $48,000
plus $2,500 for each meeting of the Board of Directors attended). The fees to
the Directors are divided among the funds in the Waddell & Reed Advisors Funds,
W&R Target Funds, Inc. and W&R Funds, Inc. based on the funds' relative size.
During the Fund's fiscal year ended September 30, 2000, the Fund's Directors
received the following fees for service as a director:
57
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
-------- ------------ ------------
<S> <C> <C>
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 1,663 63,500
John A. Dillingham 1,663 63,500
David P. Gardner 1,663 63,500
Linda K. Graves 1,663 63,500
Joseph Harroz, Jr. 1,663 63,500
John F. Hayes 1,663 63,500
Glendon E. Johnson 1,663 63,500
William T. Morgan 1,663 63,500
Ronald C. Reimer 1,590 60,250
Frank J. Ross, Jr. 1,663 63,500
Eleanor B. Schwartz 1,663 63,500
Frederick Vogel III 1,663 63,500
</TABLE>
*No pension or retirement benefits have been accrued as a part of Fund expenses.
The officers are paid by WRIMCO or its affiliates.
SHAREHOLDINGS
As of November 30, 2000, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. The following
table sets forth information with respect to the Fund, as of November 30, 2000,
regarding the ownership of the Fund's shares.
<TABLE>
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
------------------- ----- ------------ -------
<S> <C> <C> <C>
</TABLE>
James D Kuhlmann Jr & Class B 23,881 11.48%
Patricia M Kuhlmann. Co-ttee
U/A dtd September 16, 1988
Kuhlmann Living Trust
P 0 Box 36804
Las Vegas NV 89133-6804
Betty W Taliaferro (TOD) Class B 15,861 7.62%
9104 Roe Ave
Prairie Village KS 66207-2603
Mildred S Boylan Tr Class B 10,624 5.11%
U/A dtd 12/17/1999
Mildred S Boylan Rev Living Tr
3747 S 19th Rd
Bozeman MT 59718-7869
Earline Nelson (TOD) Class B 11,639 5.59%
2804 SW 10th St
Lees Summit Mo 64081-2375
Albert R Arieta & Class C 22,380 20.98%
Manuelita E Arieta Jtn Ros
P 0 Box 481
Arnold CA 95223-0481
Randy J Dircks & Class C 6,307 5.91%
Kathryn M Holipitza Jtn Ros
109 Jennifer Dr
Chester NH 03036-4121
Elisabeth M Lawrence & Class C 8,603 8.06%
Paul E Lawrence Jtn Ros
7512 Tempo Terr
Fridley MN 55432-3227
Randy Mueller & Class C 5,749 5.39%
Lori Mueller Jtn Ros
79 Spanish Moss Ct
Mandeville LA 70471-7273
Mildred A Seto (TOD) Class C 14,814 13.88%
Riddle Village
309 Lexington Bldg
Media PA 19063
Johanna G Beal (TOD) Class C 5,676 5.32%
80 Grove St Apt 610
Melrose MA 02176-4639
Super Cash Investment Class Y 1,549,383 99.98%
Portfolio LP
A Partnership
1001 N US Highway 1 Ste 800
Jupiter FL 33477-4407
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
58
<PAGE>
discount on the securities the Fund holds, less expenses (which will vary by
class). The second source is net realized capital gains, which are derived from
the proceeds received from the Fund's sale of securities at a price higher than
the Fund's tax basis (usually cost) in such securities, less losses from sales
of securities at a price lower than the Fund's basis therein; these gains can be
either long-term or short-term, depending on how long the Fund has owned the
securities before it sells them. The payments made to shareholders from net
investment income and net short-term capital gains are called dividends.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may not
have such gain, depending on whether securities are sold and at what price. If
the Fund has net capital gains, it will pay distributions once each year, in the
latter part of the fourth calendar quarter, except to the extent it has net
capital losses carried over from a prior year or years to offset the gains.
CHOICES YOU HAVE ON YOUR DIVIDENDS AND DISTRIBUTIONS
On your application form, you can give instructions that (1) you want
cash for your dividends and/or distributions or (2) you want your dividends
and/or distributions paid in shares of the Fund of the same class as that with
respect to which they were paid. However, a total dividend and/or distribution
amount less than five dollars will be automatically paid in shares of the Fund
of the same class as that with respect to which they were paid. You can change
your instructions at any time. If you give no instructions, your dividends and
distributions will be paid in shares of the Fund of the same class as that with
respect to which they were paid. All payments in shares are at NAV without any
sales charge. The NAV used for this purpose is that computed as of the record
date for the dividend or distribution, although this could be changed by the
Directors.
Even if you receive dividends and distributions on Class A shares in
cash, you can thereafter reinvest them (or distributions only) in Class A shares
of the Fund at NAV (i.e., no sales charge) next calculated after receipt by
Waddell & Reed, Inc., of the amount clearly identified as a reinvestment. The
reinvestment must be within 45 days after the payment.
TAXES
The Fund has qualified since inception for treatment as a 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 taxable net
investment income and net short-term capital gains that it distributes to its
shareholders. To continue to qualify for treatment as a RIC, the Fund must
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<PAGE>
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income plus its net interest income excludable from
gross income under Section 103(a) of the Code (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 shareholder would treat all distributions out of its
earnings and profits, including distributions that otherwise would be
exempt-interest dividends described in the following paragraph and distributions
of net capital gains, as taxable 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.
60
<PAGE>
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 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 reported by, and (except for exempt-interest dividends) 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 disallowed to the extent of any exempt-interest dividends
received on those shares and any balance of the loss that is not disallowed 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 taxable 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 (taxable) 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 Fund's policy to pay sufficient taxable
dividends and distributions each year to avoid imposition of the Excise Tax.
61
<PAGE>
INCOME FROM OPTIONS AND FUTURES CONTRACTS
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the amount, character and timing of recognition of the gains
and losses the Fund realizes in connection therewith. Gains from options and
futures contracts derived by the Fund with respect to its business of investing
in securities will qualify as permissible income under the Income Requirement.
Any income the Fund earns from writing options is treated as short-term
capital gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being exercised,
the premium it receives also will be a short-term capital gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund received will be added to the exercise price to
determine the gain or loss on the sale.
Certain options and futures contracts in which the Fund may invest may
be section 1256 contracts. Section 1256 contracts held by the Fund at the end of
its taxable year, other than contracts subject to a mixed straddle election made
by the Fund, are marked-to-market (that is, treated as sold at that time for
their fair market value) for Federal income tax purposes, with the result that
unrealized gains or losses are treated as though they were realized. Sixty
percent of any net gains or losses recognized on these deemed sales, and 60% of
any net realized gains or losses from any actual sales of section 1256
contracts, are treated as long-term capital gains or losses, and the balance is
treated as short-term capital gains or losses. Section 1256 contracts also may
be marked-to-market for purposes of the Excise Tax and other purposes. The Fund
may need to distribute any mark-to-market gains to its shareholders to satisfy
the Distribution Requirement and/or avoid imposition of the Excise Tax, even
though it may not have closed the transactions and received cash to pay the
distributions.
Code section 1092 (dealing with straddles) may also affect the taxation
of options and futures contracts in which the Fund may invest. That section
defines a straddle as offsetting positions with respect to personal property;
for these purposes, options, futures contracts and forward currency contracts
are personal property. Section 1092 generally provides that any loss from the
disposition of a position in a straddle may be deducted only to the extent the
loss exceeds the unrealized gain on the offsetting position(s) of the straddle.
In addition, these rules may postpone the recognition of a loss that would
otherwise be recognized under the mark-to-market rules discussed above. The
regulations under section 1092 also provide certain wash sale rules, which apply
to transactions where a position is sold at a
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<PAGE>
loss and a new offsetting position is acquired within a prescribed period, and
short sale rules applicable to straddles. If the Fund makes certain elections,
the amount, character and timing of the recognition of gains and losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. Because only a few of the regulations implementing the
straddle rules have been promulgated, the tax consequences of straddle
transactions to the Fund are not entirely clear.
If the Fund has an appreciated financial position -- generally, an
interest (including an interest through an option, futures contract or short
sale) with respect to any debt instrument (other than straight debt) or
partnership interest the fair market value of which exceeds its adjusted basis
-- and enters into a constructive sale of the position, the Fund will be treated
as having made an actual sale thereof, with the result that gain will be
recognized at that time. A constructive sale generally consists of a short sale,
an offsetting notional principal contract or futures contract entered into by
the Fund or a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a short
sale such a contract, acquisition of the underlying property or substantially
identical property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction during any taxable year that otherwise would
be treated as a constructive sale if the transaction is closed within 30 days
after the end of that year and the Fund holds the appreciated financial position
unhedged for 60 days after that closing (i.e., at no time during that 60-day
period is the Fund's risk of loss regarding that position reduced by reason of
certain specified transactions with respect to substantially identical or
related property, such as having an option to sell, being contractually
obligated to sell, making a short sale, or granting an option to buy
substantially identical stock or securities).
ZERO COUPON SECURITIES
The Fund may acquire zero coupon or other securities issued with OID.
As a holder of those securities, the Fund must account for the OID that accrues
on such tax-exempt securities, and must include in its income the OID that
accrues on such taxable securities during the taxable year, even if the Fund
receives no corresponding payment on the securities during the year. Because the
Fund annually must distribute substantially all of its investment company
taxable income and net tax-exempt income, including any accrued OID, to satisfy
the Distribution Requirement and (with respect to taxable income) avoid
imposition of the Excise Tax, it may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from the Fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. The
Fund may realize capital
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<PAGE>
gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio of
the Fund. 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 asked prices. Brokerage commissions are paid primarily for
effecting transactions in securities traded on an exchange and otherwise only if
it appears likely that a better price or execution can be obtained. The
individual who manages the Fund may manage other advisory accounts with similar
investment objectives. It can be anticipated that the manager will frequently
place concurrent orders for all or most of the 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
price may be available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is authorized
to engage broker-dealers (brokers) which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek best execution
(prompt and reliable execution
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<PAGE>
at the best price obtainable) for reasonable and competitive commissions or
spreads, as applicable. The Fund has not effected transactions through brokers
and does not anticipate doing so. However, if WRIMCO were to effect brokerage
transactions, it need not seek competitive commission bidding but is expected to
minimize the commissions paid to the extent consistent with the interests and
policies of the Fund. Subject to review by the Board of Directors, such policies
include the selection of brokers which provide execution and/or research
services and other services, including pricing or quotation services directly or
through others (research and brokerage services) considered by WRIMCO to be
useful or desirable for its investment management of the Fund and/or the other
funds and accounts over which WRIMCO has investment discretion.
Research and brokerage services are, in general, defined by reference
to Section 28(e) of the Securities Exchange Act of 1934 as including (1) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers; (2) furnishing
analyses and reports; or (3) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
Investment discretion is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than the commission another qualified broker
would charge for effecting comparable transactions if a good faith determination
is made by WRIMCO that the commission is reasonable in relation to the research
or brokerage services provided. Subject to the foregoing considerations, WRIMCO
may also consider sales of Fund shares as a factor in the selection of
broker-dealers to execute portfolio transactions. No allocation of brokerage or
principal business is made to provide any other benefits to WRIMCO.
The investment research provided by a particular broker may be useful
only to one or more of the other advisory accounts of WRIMCO and investment
research received for the commissions of those other accounts may be useful both
to the Fund and one or more of such other accounts. To the extent that
electronic or other products provided by such brokers to assist WRIMCO in making
investment management decisions are used for administration or other
non-research purposes, a reasonable allocation of the cost of the product
attributable to its non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party at the
request of a broker) includes information on particular companies and industries
as well as market, economic or institutional activity areas. It serves to
broaden the scope and supplement the research activities of WRIMCO; serves to
make
65
<PAGE>
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 four classes of its shares: Class A, Class B, Class C
and Class Y. Each class represents an interest in the same assets of the Fund
and differ as follows: each class of shares has exclusive voting rights on
matters appropriately limited to that class; Class A shares are subject to an
initial sales charge and to an ongoing distribution and/or service fee and
certain Class A shares are subject to a CDSC; Class B and Class C are subject to
a CDSC and to ongoing distribution and service fees; Class B shares that have
been held by a shareholder for eight years will convert, automatically, eight
years after the month in which the shares were purchased, to Class A shares of
the Fund, and such conversion will be made, without charge or fee, on the basis
of the relative NAV of the two classes; and Class Y shares, which are designated
for institutional investors, have no sales charge nor ongoing distribution
and/or service fee; each class may bear differing amounts of certain
class-specific expenses; and each class has a separate exchange privilege. The
Fund does not anticipate that there will be any conflicts between the interests
of holders of the different classes of shares of the Fund by virtue of those
classes. On an ongoing basis, the Board of Directors will consider whether any
such conflict exists and, if so, take appropriate action. Each share of the Fund
is entitled to equal voting, dividend, liquidation and redemption rights, except
that due to the differing expenses borne by the four classes, dividends and
liquidation proceeds of Class B shares and Class C shares are expected to be
lower than for Class A shares, which in turn are expected to be lower than for
Class Y shares of the Fund. Each fractional share of a class has the same
rights, in proportion, as a full share of that class. Shares are fully paid and
nonassessable when purchased.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new investment
advisory agreement or a change in a fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the
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<PAGE>
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.
67
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities
that 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 or municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment of creditworthiness may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
A brief description of the applicable S&P rating symbols and their
meanings follow:
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to
pay interest and repay principal is very strong, and debt rated AA differs from
AAA issues only in small degree.
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<PAGE>
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
69
<PAGE>
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
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<PAGE>
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 MUNICIPAL NOTE RATINGS
An S&P note rating reflects the liquidity factors and market access
risks unique to notes. Notes maturing in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years
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<PAGE>
will most likely receive a long-term debt rating. The following criteria will be
used in making that assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note). --Source of
Payment (the more the issue depends on the market for its refinancing, the more
likely it is to be treated as a note.)
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings - Moody's ratings for state and
municipal short-term obligations will be designated Moody's Investment Grade
(MIG). This distinction is in recognition of the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the borrower
are uppermost in importance in short-term borrowing, while various factors of
major importance in bond risk are of lesser importance over the short run.
Rating symbols and their meanings follow:
MIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3 -- This designation denotes favorable quality. All security
elements are accounted for but this is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4 -- This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
An S&P 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
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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. Issues
rated A-3 have adequate capacity for timely payment; however, they are more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations. Issues rated B are regarded as having only
speculative capacity for timely payment. A C rating is assigned to short-term
debt obligations with a doubtful capacity for payment. Debt rated D is in
payment default, which occurs when interest payments or principal payments are
not made on the date due, even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such grace period.
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. Issuers rated Prime 3
have an acceptable capacity for repayment of short-term promissory obligations,
as will normally be evidenced by many of the characteristics above for Prime 1
issuers, but to a lesser degree. The effect of industry characteristics and
market composition may be more pronounced; variability in earnings and
profitability may result in changes in the level of debt protection measurements
and requirement for relatively high financial leverage; and adequate alternate
liquidity is maintained.
73
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS
ALABAMA - 0.24%
BMC Special Care Facilities Financing
Authority of the City of Montgomery,
Revenue Bonds, Series 1998-B (Baptist
Health),
4.875%, 11-15-18 .................................................... $ 2,000 $ 1,787,500
ALASKA - 3.32%
City of Valdez, Alaska, Marine
Terminal Revenue Refunding Bonds
(BP Pipelines (Alaska) Inc. Project),
Series 1993A,
5.85%, 8-1-25 ....................................................... 17,650 17,473,500
State of Alaska, International Airports
System Revenue Bonds, Series 1999A,
5.0%, 10-1-19 ....................................................... 3,000 2,703,750
Alaska Housing Finance Corporation,
Housing Development Bonds, 1997
Series B (AMT),
5.8%, 12-1-29 ....................................................... 2,390 2,327,263
Alaska Energy Authority, Power Revenue
Refunding Bonds, Fifth Series (Bradley
Lake Hydroelectric Project),
5.0%, 7-1-21 ........................................................ 2,350 2,141,437
Total ............................................................... 24,645,950
CALIFORNIA - 8.88%
California Statewide Communities Development Authority:
Special Facilities Lease Revenue Bonds,
1997 Series A (United Air Lines, Inc. - San
Francisco International Airport Projects),
5.7%, 10-1-33 ....................................................... 20,900 18,940,625
Hospital Revenue Certificates of Participation,
Series 1992, Cedars-Sinai Medical Center,
6.5%, 8-1-12 ........................................................ 5,200 5,687,500
Hospital Refunding Revenue Certificates of
Participation, Series 1993, Cedars-Sinai Medical
Center, Inverse Floating Rate Securities (INFLOS),
6.342%, 11-1-15 (A) ................................................. 3,300 3,172,125
East Bay Municipal Utility District (Alameda
and Contra Costa Counties, California),
Wastewater System Subordinated Revenue
Refunding Bonds, Series 1993B-2,
Inverse Floating Securities:
6.52%, 6-1-20 (A) ................................................... 7,250 7,240,938
6.42%, 6-1-13 (A) ................................................... 5,450 5,627,125
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
1
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Southern California Public Power Authority:
Multiple Project Revenue Bonds, 1989 Series,
6.75%, 7-1-12 ....................................................... $ 3,455 $ 4,025,075
Mead-Adelanto Project Revenue Bonds,
1994 Series A,
Special Linked Auction Rate Securities
(ACES) and Inverse Floaters,
5.01%, 7-1-15 ....................................................... 2,800 2,775,500
Mead-Phoenix Project Revenue Bonds, 1994 Series A
Special Linked Auction Rate Securities
(ACES) and Inverse Floaters,
5.01%, 7-1-15 ....................................................... 2,600 2,577,250
Transmission Agency of Northern California,
California-Oregon Transmission Project
Revenue Bonds, 1990 Series A,
7.0%, 5-1-13 ........................................................ 5,500 6,641,250
California Rural Home Mortgage Finance Authority,
Single Family Mortgage Revenue Bonds
(Mortgage-Backed Securities Program):
1997 Series C,
6.75%, 3-1-29 ....................................................... 2,050 2,260,125
1998 Series B,
6.35%, 12-1-29 ...................................................... 1,940 2,039,425
Foothill/Eastern Transportation Corridor Agency,
Toll Road Refunding Revenue Bonds, Series 1999,
Capital Appreciation Bonds,
0.0%, 1-15-17 ....................................................... 7,500 2,990,625
Delta Counties Home Mortgage Finance Authority
(California), Single Family Mortgage Revenue
Bonds (Mortgage-Backed Securities Program),
1998 Series A,
5.2%, 12-1-14 ....................................................... 1,865 1,841,687
Total ............................................................... 65,819,250
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
2
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
COLORADO - 2.40%
Colorado Housing and Finance Authority,
Single Family Program Senior and Subordinate
Bonds:
1997 Series C-2 Senior Bonds,
6.875%, 11-1-28 ..................................................... $ 2,500 $ 2,662,500
1999 Series A-2 Senior Bonds,
6.45%, 4-1-30 ....................................................... 2,185 2,275,131
1999 Series C-2 Senior Bonds,
7.05%, 4-1-31 ....................................................... 2,000 2,177,500
1997 Series A-2 Senior Bonds,
7.25%, 5-1-27 ....................................................... 1,710 1,863,900
2000 Series D-2 Senior Bonds,
6.9%, 4-1-29 ........................................................ 1,500 1,631,250
2000 Series B-3 Senior Bonds,
6.7%, 10-1-16 ....................................................... 1,000 1,088,750
2000 Series D-3 Senior Bonds,
6.75%, 4-1-32 ....................................................... 1,000 1,088,750
1998 Series A-3,
6.5%, 5-1-16 ........................................................ 1,000 1,056,250
City and County of Denver, Colorado,
Airport System Revenue Bonds,
Series 1996D,
5.5%, 11-15-25 ...................................................... 2,000 1,937,500
Highlands Ranch Metropolitan District No. 3,
Douglas County, Colorado, General
Obligation Bonds, Series 1999,
5.3%, 12-1-19 ....................................................... 1,250 1,137,500
University of Colorado Hospital Authority,
Revenue Bonds, Series 1999A,
5.0%, 11-15-19 ...................................................... 1,000 908,750
Total ............................................................... 17,827,781
CONNECTICUT - 2.60%
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-14 ........................................................ 13,700 12,004,625
Bristol Resource Recovery Facility Operating
Committee, Solid Waste Revenue Refunding
Bonds (Ogden Martin Systems of Bristol,
Inc. Project - 1995 Series),
6.5%, 7-1-14 ........................................................ 7,000 7,271,250
Total ............................................................... 19,275,875
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
3
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
FLORIDA - 0.79%
Housing Finance Authority of Lee County, Florida,
Single Family Mortgage Revenue Bonds:
Series 1998A, Subseries 6,
6.45%, 3-1-31 ....................................................... $ 2,175 $ 2,281,031
Series 1999A, Subseries 2,
5.0%, 9-1-30 ........................................................ 1,495 1,444,544
City of Miami, Florida, Health Facilities
Authority, Health Facilities Revenue Refunding
Bonds (Mercy Hospital Project), Series 1994A,
Inverse Floating Rate Security (INFLOS),
5.97%, 8-15-15 (A) .................................................. 2,200 2,139,500
Total ............................................................... 5,865,075
GEORGIA - 4.06%
Municipal Electric Authority of Georgia:
Project One Special Obligation Bonds,
Fifth Crossover Series,
6.4%, 1-1-13 ........................................................ 15,500 17,263,125
General Power Revenue Bonds,
1992B Series,
8.25%, 1-1-11 ....................................................... 8,700 10,951,125
Private Colleges and Universities Authority,
Revenue and Refunding Bonds (Mercer University
Project), Tax-Exempt Series 1999A,
5.25%, 10-1-20 ...................................................... 2,000 1,865,000
Total ............................................................... 30,079,250
HAWAII - 0.49%
Department of Budget and Finance of the State
of Hawaii, Special Purpose Revenue Bonds (Citizens
Utilities Company Project), Series 1991, Linked
Residual Interest Bonds (RIBS) and Select
Auction Variable Rate Securities (SAVRS),
6.5%, 11-1-21 ....................................................... 3,500 3,605,070
IDAHO - 0.92%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.),
6.632%, 2-15-21 ..................................................... 6,000 6,825,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
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<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
ILLINOIS - 2.62%
City of Chicago, Collateralized Single Family
Mortgage Revenue Bonds:
Series 1998C-1,
6.3%, 9-1-29 ........................................................ $ 3,980 $ 4,179,000
Series 1998A-1,
6.45%, 9-1-29 ....................................................... 2,480 2,635,000
Series 1999A,
6.35%, 10-1-30 ...................................................... 2,500 2,596,875
Series 1999C,
7.05%, 10-1-30 ...................................................... 2,000 2,147,500
Series 1997-B,
6.95%, 9-1-28 ....................................................... 1,740 1,842,225
Series 2000C,
7.0%, 3-1-32 ........................................................ 1,000 1,092,500
Illinois Health Facilities Authority, Revenue Bonds:
Series 1997A (Victory Health Services),
5.375%, 8-15-16 ..................................................... 3,000 2,658,750
Series 1999 (Alexian Brothers Health System),
5.0%, 1-1-19 ........................................................ 1,500 1,366,875
School District Number 116, Champaign County,
Illinois (Urbana), General Obligation School
Building Bonds, Series 1999C,
0.0%, 1-1-12 ........................................................ 1,695 904,706
Total ............................................................... 19,423,431
INDIANA - 5.15%
Indiana State Office Building Commission,
Capitol Complex Revenue Bonds:
Series 1990B (State Office Building I Facility),
7.4%, 7-1-15 ........................................................ 8,000 9,590,000
Series 1990A (Senate Avenue Parking Facility),
7.4%, 7-1-15 ........................................................ 4,775 5,700,156
Indiana Transportation Finance Authority,
Highway Revenue Bonds, Series 1990A,
7.25%, 6-1-15 ....................................................... 9,000 10,620,000
Indianapolis Airport Authority,
Special Facility Revenue Bonds, Series 1995 A
(United Air Lines, Inc., Indianapolis
Maintenance Center Project),
6.5%, 11-15-31 ...................................................... 10,850 10,416,000
Indiana Health Facility Financing Authority,
Hospital Revenue Bonds, Series 1999A
(Deaconess Hospital Obligated Group),
5.75%, 3-1-19 ....................................................... 2,000 1,835,000
Total ............................................................... 38,161,156
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
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<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
KANSAS - 1.58%
Sedgwick County, Kansas and Shawnee County, Kansas, Single Family Mortgage
Revenue Bonds (Mortgage-Backed Securities Program):
1998 Series A-1 (AMT),
6.5%, 12-1-22 ....................................................... $ 7,760 $ 8,274,100
1999 Series A-1 (AMT),
6.875%, 12-1-26 ..................................................... 1,990 2,139,250
Unified School District No. 204, Wyandotte
County, Kansas (Bonner Springs - Edwardsville),
General Obligation Improvement and Refunding
Bonds, Series 2000A,
5.2%, 9-1-13 ........................................................ 1,305 1,311,525
Total ............................................................... 11,724,875
KENTUCKY - 0.07%
County of Jefferson, Kentucky, Insured
Hospital Revenue Bonds, Series 1992 (Alliant
Health System, Inc. Project), Inverse Floaters,
8.52%, 10-23-14 (A) ................................................. 500 540,000
LOUISIANA - 0.77%
Parish of East Baton Rouge, State of
Louisiana, Refunding Revenue Bonds
(Georgia-Pacific Corporation Project),
Series 1998,
5.35%, 9-1-11 ....................................................... 3,000 2,782,500
Louisiana Public Facilities Authority,
Hospital Revenue and Refunding Bonds
(Pendleton Memorial Methodist Hospital
Project), Series 1998,
5.25%, 6-1-17 ....................................................... 2,000 1,550,000
Parish of Webster, Louisiana, Pollution
Control Revenue Refunding Bonds,
1998 Series B (Non-AMT),
5.2%, 3-1-13 ........................................................ 1,435 1,348,900
Total ............................................................... 5,681,400
MASSACHUSETTS - 1.68%
City of Quincy, Massachusetts, Revenue Refunding
Bonds, Quincy Hospital Issue, Series 1993,
Inverse Floating Rate Security (INFLOS),
5.904%, 1-15-11 (A) ................................................. 5,700 5,778,375
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
6
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS (CONTINUED)
Massachusetts Housing Finance Agency,
Single Family Housing Revenue Bonds,
Series 57 (AMT),
5.6%, 6-1-30 ........................................................ $ 4,540 $ 4,313,000
Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue Bonds,
1993 Series A, ... Inverse Floating Rate
Security (INFLOS),
6.27%, 7-1-18 (A) ................................................... 2,500 2,340,625
Total ............................................................... 12,432,000
MICHIGAN - 2.29%
Michigan Strategic Fund:
Limited Obligation Refunding Revenue Bonds,
The Detroit Edison Company Pollution Control
Bonds Project, Collateralized Series 1991 AA,
6.95%, 5-1-11 ....................................................... 8,000 9,340,000
Limited Obligation Revenue Bonds, WMX
Technologies, Inc. Project, Series 1993,
6.0%, 12-1-13 ....................................................... 4,000 3,630,000
City of Detroit, Michigan, Sewage Disposal
System Revenue and Revenue Refunding Bonds,
Series 1993-A, Inverse Floating Rate Security
(INFLOS),
6.637%, 7-1-23 (A) .................................................. 2,600 2,554,500
Michigan State Hospital Finance Authority,
Hospital Revenue Bonds (The Detroit Medical
Center Obligated Group), Series 1998A,
5.125%, 8-15-18 ..................................................... 2,000 1,430,000
Total ............................................................... 16,954,500
MINNESOTA - 0.79%
City of Rochester, Minnesota, Health
Care Facilities Revenue Bonds (Mayo
Foundation/Mayo Medical Center),
Series 1992D, Floating Inverse
Rate Securities (FIRS),
7.011%, 11-15-09 (A) ................................................ 4,500 4,871,250
HealthSystem Minnesota, The Healthcare
Network, City of St. Louis Park,
Minnesota, Health Care Facilities Revenue
Bonds (HealthSystem Minnesota Obligated
Group), Series 1993, Inverse Floater,
4.907%, 7-1-13 (A) .................................................. 1,000 986,250
Total ............................................................... 5,857,500
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
7
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
MISSISSIPPI - 2.84%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control
Refunding Revenue Bonds (Weyerhaeuser
Company Project), Series 1992B,
6.7%, 4-1-22 ........................................................ $11,000 $ 11,962,500
Mississippi Higher Education Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1996-C:
6.75%, 9-1-14 ....................................................... 5,500 5,568,750
6.7%, 9-1-12 ........................................................ 1,470 1,486,537
Mississippi Home Corporation, Single Family
Mortgage Revenue Bonds, Series 1999A,
6.3%, 6-1-31 ........................................................ 1,995 2,044,875
Total ............................................................... 21,062,662
MISSOURI - 1.98%
Health and Educational Facilities Authority
of the State of Missouri, Health Facilities
Revenue Bonds:
Barnes-Jewish, Inc./Christian Health
Services, Series 1993A,
6.0%, 5-15-11 ....................................................... 3,000 3,165,000
Lake of the Ozarks General Hospital, Inc.,
Series 1998,
5.1%, 2-15-18 ....................................................... 2,220 2,036,850
Freeman Health System Project, Series 1998,
5.25%, 2-15-18 ...................................................... 2,460 2,029,500
Missouri Housing Development Commission,
Single Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1997 Series C-1 (Non-AMT),
6.55%, 9-1-28 ....................................................... 1,960 2,080,050
1998 Series D-2 (AMT),
6.3%, 3-1-29 ........................................................ 1,145 1,176,487
1998 Series B-2 (AMT),
6.4%, 3-1-29 ........................................................ 950 997,500
1997 Series A-2 (AMT),
7.3%, 3-1-28 ........................................................ 840 922,950
Missouri Higher Education Loan Authority
(A Public Instrumentality and Body
Corporate and Politic of the State of
Missouri), Student Loan Revenue Bonds,
Subordinate Series 1994A,
5.45%, 2-15-09 ...................................................... 1,500 1,458,750
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
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<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
MISSOURI (CONTINUED)
The Industrial Development Authority of the
County of Taney, Missouri, Hospital Revenue
Bonds (The Skaggs Community Hospital Association),
Series 1998,
5.3%, 5-15-18 ....................................................... $ 1,000 $ 832,500
Total ............................................................... 14,699,587
MONTANA - 0.44%
Montana Higher Education Student Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1998-B,
5.5%, 12-1-31 ....................................................... 3,500 3,263,750
NEBRASKA - 2.10%
Nebraska Higher Education Loan Program, Inc.,
1993-2 Series A-6 Junior Subordinate Bonds,
6.4%, 6-1-13 ........................................................ 14,500 15,533,125
NEVADA - 1.26% Clark County, Nevada:
Industrial Development Refunding Revenue
Bonds (Nevada Power Company Project),
Series 1995B,
5.9%, 10-1-30 ....................................................... 5,500 4,915,625
Industrial Development Revenue Bonds (Nevada
Power Company Project), Series 1997A,
5.9%, 11-1-32 ....................................................... 2,000 1,785,000
Nevada Housing Division, Single Family
Mortgage Bonds:
1998 Series A-1 Mezzanine Bonds,
5.35%, 4-1-16 ....................................................... 1,905 1,854,994
1996 Series C Subordinate Bonds,
6.35%, 4-1-09 ....................................................... 775 807,937
Total ............................................................... 9,363,556
NEW HAMPSHIRE - 2.45%
State of New Hampshire, Turnpike System Revenue
Bonds, 1994 Series C, Linked Select Auction
Variable Rate Securities (SAVRS) and Residual
Interest Bonds (RIBS),
5.226%, 2-1-24 ...................................................... 20,000 18,200,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
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<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY - 0.12%
New Jersey Health Care Facilities Financing
Authority, Revenue Bonds, Englewood Hospital
and Medical Center Issue, Series 1994,
6.75%, 7-1-24 ....................................................... $ 1,000 $ 913,750
NEW MEXICO - 1.06%
New Mexico Hospital Equipment Loan Council,
Hospital Revenue Bonds (Memorial Medical
Center, Inc. Project), Series 1998,
5.5%, 6-1-28 ........................................................ 5,750 4,542,500
New Mexico Educational Assistance Foundation,
Student Loan Program Bonds:
Second Subordinate 1996 Series A-3,
6.75%, 11-1-08 ...................................................... 2,175 2,245,688
Second Subordinate 1995 Series A-3,
6.6%, 11-1-10 ....................................................... 1,105 1,095,331
Total ............................................................... 7,883,519
NEW YORK - 3.10%
New York State Medical Care Facilities Finance Agency,
Mental Health Services Facilities Improvement
Revenue Bonds, 1993 Series F Refunding,
5.375%, 2-15-14 ..................................................... 9,750 9,737,813
The City of New York, General Obligation Bonds,
Fiscal 1994 Series C, Inverse Floaters,
18.24%, 9-30-03 (B) ................................................. 3,250 4,155,938
Dormitory Authority of the State of New York:
State University Educational Facilities,
Revenue Bonds, Series 1990B,
7.5%, 5-15-11 ....................................................... 2,000 2,325,000
Nyack Hospital, Revenue Bonds, Series 1996,
6.25%, 7-1-13 ....................................................... 1,000 990,000
New York State Urban Development Corporation,
Correctional Capital Facilities Revenue Bonds,
1993A Refunding Series,
5.25%, 1-1-14 ....................................................... 3,000 3,018,750
New York City Transitional Finance Authority,
Future Tax Secured Bonds, Fiscal 1999 Series C
Tax-Exempt Bonds,
5.0%, 5-1-19 ........................................................ 3,000 2,752,500
Total ............................................................... 22,980,001
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
10
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA - 2.59%
County of Cumberland, North Carolina, Hospital
Facility Revenue Bonds (Cumberland County
Hospital System, Inc.), Series 1999:
5.25%, 10-1-14 ...................................................... $ 4,830 $ 4,588,500
5.25%, 10-1-19 ...................................................... 2,500 2,240,625
5.25%, 10-1-11 ...................................................... 1,200 1,185,000
The Columbus County Industrial Facilities
and Pollution Control Financing Authority
(North Carolina), Environmental Improvement
Revenue Bonds, 1996 Series A,
5.85%, 12-1-20 ...................................................... 5,000 4,762,500
North Carolina Medical Care Commission,
Hospital Revenue Bonds:
Gaston Health Care, Series 1998,
5.0%, 2-15-19 ....................................................... 2,500 2,196,875
Halifax Regional Medical Center, Series 1998,
5.0%, 8-15-18 ....................................................... 2,170 1,727,863
Rex Healthcare, Series 1998,
5.0%, 6-1-17 ........................................................ 750 697,500
The Martin County Industrial Facilities and
Pollution Control Financing Authority (North
Carolina), Solid Waste Disposal Revenue Bonds
(Weyerhaeuser Company Project), Series 1993,
5.65%, 12-1-23 ...................................................... 2,000 1,837,500
Total ............................................................... 19,236,363
NORTH DAKOTA - 0.73%
City of Fargo, North Dakota, Health System
Revenue Bonds (Meritcare Obligated Group),
Series 1996A,
5.55%, 6-1-16 ....................................................... 2,350 2,347,062
County of Burleigh, North Dakota, Healthcare
Revenue Refunding Bonds, Series 1999
(Medcenter One, Inc.),
5.25%, 5-1-13 ....................................................... 1,800 1,791,000
State of North Dakota, North Dakota Housing
Finance Agency, Housing Finance Program Bonds,
Home Mortgage Finance Program, 1998 Series A,
5.25%, 7-1-18 ....................................................... 1,335 1,258,238
Total ............................................................... 5,396,300
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
11
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
OHIO - 0.74%
County of Erie, Ohio, Franciscan Services Corporation, Revenue Refunding
Bonds, Series 1993 A (Providence Hospital, Inc.),
6.0%, 1-1-13 ........................................................ $ 4,000 $ 3,965,000
State of Ohio, Air Quality Development Revenue
Bonds (Columbus Southern Power Company
Project), Series 1985 B,
6.25%, 12-1-20 ...................................................... 1,500 1,501,875
Total ............................................................... 5,466,875
OKLAHOMA - 0.77%
Oklahoma Housing Finance Agency, Single
Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series B, Subseries B-2 (AMT),
7.625%, 9-1-26 ...................................................... 4,385 4,768,688
1996 Series A,
7.05%, 9-1-26 ....................................................... 880 931,700
Total ............................................................... 5,700,388
OREGON - 0.94%
State of Oregon, Housing and Community Services Department, Mortgage Revenue
Bonds, Single-Family Mortgage Program:
1992 Series B,
6.875%, 7-1-28 ...................................................... 3,990 4,134,638
1996 Series D,
6.375%, 7-1-27 ...................................................... 2,785 2,844,181
Total ............................................................... 6,978,819
PENNSYLVANIA - 3.44%
City of Philadelphia, Pennsylvania, Water
and Wastewater Revenue Bonds, Series 1993,
Inverse Rate Securities,
6.52%, 6-15-12 (A) .................................................. 7,100 7,428,375
Allegheny County Hospital Development Authority
(Pennsylvania), UPMC Health System Revenue
Refunding Bonds, Series 1999B,
5.0%, 12-15-17 ...................................................... 5,000 4,550,000
The Philadelphia Parking Authority, Airport
Parking Revenue Bonds, Series of 1999,
5.25%, 9-1-20 ....................................................... 3,000 2,868,750
City of Philadelphia, Pennsylvania, General
Obligation Bonds, Series 1998:
4.75%, 3-15-17 ...................................................... 1,615 1,455,519
4.75%, 3-15-18 ...................................................... 1,000 895,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
12
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
Pennsylvania Intergovernmental Cooperation
Authority, Special Tax Revenue Refunding
Bonds (City of Philadelphia Funding Program),
Series of 1999,
5.0%, 6-15-21 ....................................................... $ 2,500 $ 2,271,875
Pennsylvania Higher Education Assistance Agency,
Student Loan Revenue Bonds, Fixed Rate Bonds,
1991 Series C,
7.15%, 9-1-21 ....................................................... 2,190 2,269,869
Falls Township Hospital Authority, Refunding
Revenue Bonds, The Delaware Valley Medical Center
Project (FHA Insured Mortgage), Series 1992,
7.0%, 8-1-22 ........................................................ 2,000 2,110,000
Pennsylvania Higher Educational Facilities Authority,
Revenue Bonds (Thomas Jefferson University),
1999 Series A,
5.0%, 7-1-19 ........................................................ 1,750 1,629,688
Total ............................................................... 25,479,076
SOUTH CAROLINA - 1.85%
South Carolina Jobs - Economic Development
Authority, Hospital Revenue Refunding and
Improvement Bonds (South Carolina Baptist
Hospital), Series 1993D, Intermediate Longs,
Inverse Floating Securities,
6.22%, 8-1-21 (A) ................................................... 14,550 13,713,375
TENNESSEE - 1.06%
TheHealth and Educational Facilities Board of the Metropolitan Government of
Nashville and Davidson County, Tennessee:
Multi-Modal Interchangeable Rate, Health Facility
Revenue Bonds (Richland Place, Inc. Project),
Series 1993,
5.5%, 5-1-23 ........................................................ 2,825 2,644,906
Health Facility Revenue Refunding Bonds (Open
Arms Developmental Centers Project), Series 1998,
5.1%, 8-1-16 ........................................................ 2,745 2,556,281
Volunteer State Student Funding Corporation,
Educational Loan Revenue Bonds,
Junior Subordinate Series 1993C Bonds,
5.85%, 12-1-08 ...................................................... 2,700 2,666,250
Total ............................................................... 7,867,437
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
13
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
TEXAS - 7.91%
AllianceAirport Authority, Inc.,
Special Facilities Revenue Bonds,
Series 1991 (American Airlines, Inc.
Project),
7.0%, 12-1-11 ....................................................... $14,400 $ 15,462,000
Dallas-Fort Worth International Airport, Facility
Improvement Corporation, American Airlines,
Inc., Revenue Refunding Bonds, Series 2000B,
6.05%, 5-1-29 ....................................................... 9,500 9,547,500
Trinity River Authority of Texas (Tarrant
County Water Project), Improvement and Refunding
Revenue Bonds, Series 1999,
5.25%, 2-1-20 ....................................................... 7,415 7,072,056
Amarillo Health Facilities Corporation,
Hospital Revenue Bonds (Baptist St. Anthony's
Hospital Corporation Project), Series 1998,
5.5%, 1-1-15 ........................................................ 6,320 6,383,200
City of Austin, Texas, Subordinate Lien
Revenue Refunding Bonds, Series 1998,
5.25%, 5-15-19 ...................................................... 5,000 4,868,750
Texas Department of Housing and Community Affairs, Single Family Mortgage
Revenue Bonds, 1997 Series D (AMT) TEAMS Structure:
5.65%, 3-1-29 ....................................................... 2,500 2,396,875
5.7%, 9-1-29 ........................................................ 1,500 1,438,125
Gulf Coast Waste Disposal Authority,
Multi-Modal Interchangeable Rate Revenue
Bonds (Champion International Corporation
Project), Series 1992A,
6.875%, 12-1-28 ..................................................... 3,220 3,240,125
Lufkin Health Facilities Development
Corporation, Health System Revenue and
Refunding Bonds (Memorial Health System
of East Texas), Series 1995,
6.875%, 2-15-26 ..................................................... 2,960 2,767,600
City of Houston, Texas, Airport System,
Special Facilities Revenue Bonds
(Continental Airlines, Inc. Terminal
Improvement Projects), Series 1997B,
6.125%, 7-15-17 ..................................................... 2,850 2,593,500
Midland County Hospital District, Hospital
Revenue Refunding Bonds, Series 1997,
5.375%, 6-1-16 ...................................................... 2,000 1,952,500
Collin County Housing Finance Corporation,
Student Housing Revenue Bonds (Collin
County Community College District Foundation,
Inc. Project), Series 1998A,
5.25%, 6-1-31 ....................................................... 1,000 886,250
Total ............................................................... 58,608,481
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
14
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
UTAH - 4.50%
Tooele County, Utah, Hazardous Waste Treatment
Revenue Bonds (Union Pacific Corporation/
USPCI, Inc. Project), Series A,
5.7%, 11-1-26 ....................................................... $38,200 $ 33,377,250
WASHINGTON - 8.86%
Washington Public Power Supply System:
Nuclear Project No. 3, Refunding Revenue Bonds:
Series 1989B,
7.125%, 7-1-16 ...................................................... 20,750 24,121,875
Series 1993C, Inverse Floating Rate Security,
5.771%, 7-1-12 (A) .................................................. 7,000 6,956,250
Nuclear Project No. 1, Refunding Revenue Bonds:
Series 1989B,
7.125%, 7-1-16 ...................................................... 8,200 9,532,500
Series 1993A, Inverse Floating Rate Security,
6.82%, 7-1-11 (A) ................................................... 7,500 8,193,750
Nuclear Project No. 2, Refunding Revenue
Bonds, Series 1994A, Inverse Floating Rate
Securities,
5.771%, 7-1-12 (A) .................................................. 2,500 2,506,250
State of Washington, Various Purpose General
Obligation Bonds, Series 1990A,
6.75%, 2-1-15 ....................................................... 4,995 5,694,300
Public Utility District No. 1 of Douglas County,
Washington, Wells Hydroelectric Revenue Bonds,
Series of 1965,
3.7%, 9-1-18 ........................................................ 3,945 3,382,837
Pilchuck Development Public Corporation (State
of Washington), Special Facilities Airport
Revenue Bonds, Series 1993 (TRAMCO, INC. Project),
6.0%, 8-1-23 ........................................................ 3,500 3,351,250
Housing Authority of the City of Seattle,
Low-Income Housing Assistance Revenue Bonds,
1995 (GNMA Collateralized Mortgage
Loan - Kin On Project),
7.4%, 11-20-36 ...................................................... 1,750 1,953,438
Total ............................................................... 65,692,450
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
15
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
WEST VIRGINIA - 0.75%
Braxton County, West Virginia, Solid Waste
Disposal Revenue Bonds (Weyerhaeuser Company
Project), Series 1995A,
6.5%, 4-1-25 ........................................................ $ 3,500 $ 3,535,000
The County Commission of Monongalia County, West
Virginia, Pollution Control Revenue Bonds (The
Potomac Edison Company Fort Martin Station Project),
1993 Series B,
5.95%, 4-1-13 ....................................................... 2,000 2,042,500
Total ............................................................... 5,577,500
WISCONSIN - 1.14%
Wisconsin Public Power Incorporated SYSTEM
(The), Power Supply System Revenue Bonds,
Series 1993B-2, Yield Curve Notes (YCNs),
6.183%, 7-1-14 (A) .................................................. 5,500 5,520,625
Wisconsin Housing and Economic Development
Authority, Home Ownership Revenue Bonds,
1997 Series H,
5.75%, 9-1-28 ....................................................... 3,000 2,906,250
Total ............................................................... 8,426,875
TOTAL MUNICIPAL BONDS - 89.28% $661,926,752
(Cost: $666,611,920)
</TABLE>
<TABLE>
<CAPTION> NUMBER OF
CONTRACTS
----------
<S> <C> <C>
OPTION - 0.22%
December 96 Put Options on 2000
Treasury Bond Futures ............................................... 4,100 $ 1,601,562
(Cost: $2,339,209)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
----------
<S> <C> <C>
SHORT-TERM SECURITIES
COMMERCIAL PAPER
ELECTRIC, GAS AND SANITARY SERVICES - 0.71%
Reliant Energy Inc.,
7.0%, 10-2-00 ....................................................... 5,270 5,268,975
FOOD AND KINDRED PRODUCTS - 0.18%
General Mills, Inc.,
6.67%, Master Note .................................................. 1,302 1,302,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
16
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
SHORT-TERM SECURITIES (CONTINUED)
COMMERCIAL PAPER (CONTINUED)
MISCELLANEOUS RETAIL - 0.86%
Toys "R" Us Inc.,
6.72%, 11-3-00 ...................................................... $ 6,400 $ 6,360,576
PAPER AND ALLIED PRODUCTS - 0.40%
Westvaco Corp.,
6.7%, 11-16-00 ...................................................... 3,000 2,974,317
TOTAL COMMERCIAL PAPER - 2.15% 15,905,868
MUNICIPAL OBLIGATIONS
CALIFORNIA - 1.95%
City of Azusa, California, Multifamily
Housing Revenue Refunding Bonds (Pacific
Glen Apartments Project), Series 1994
(Federal National Mortgage Association),
4.5%, 10-5-00 ................................................... 5,000 5,000,000
California Pollution Control Financing Authority,
Pollution Control Refunding Revenue Bonds (Pacific
Gas and Electric Company), 1996 Series E Bonds
(Morgan Guaranty Trust Company of New York),
5.0%, 10-2-00 ................................................... 9,500 9,500,000
Total ........................................................... 14,500,000
DISTRICT OF COLUMBIA - 0.33%
District of Columbia (Washington D.C.),
General Obligation Variable Rate General Fund Recovery Bonds, Series 1991B
Subseries B-2 (Bank of America, N.A.),
5.6%, 10-2-00 ................................................... 2,500 2,500,000
ILLINOIS - 0.75%
Illinois Health Facilities Authority, Variable
Rate Demand Revenue Bonds, Series 1995
(Northwest Community Hospital), (First National
Bank of Chicago),
5.85%, 10-4-00 .................................................. 1,285 1,285,000
City of Naperville, Illinois, Variable/Fixed Rate
Demand Revenue Bonds, Series 1999 (Heritage YMCA
Group, Inc.), (Harris Trust and Savings Bank),
5.85%, 10-4-00 .................................................. 4,300 4,300,000
Total ........................................................... 5,585,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
17
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
---------- ------------
<S> <C> <C>
SHORT-TERM SECURITIES (CONTINUED)
COMMERCIAL PAPER (CONTINUED)
MONTANA - 0.22%
Montana Health Facility Authority,
Health Care Revenue Bonds (Pooled
Loan Program), 1985 Series A (Norwest Bank
Minnesota, National Association),
5.7%, 10-5-00 ................................................... $1,625 $1,625,000
NEW YORK - 1.04%
Port Authority New York and New Jersey (The),
Versatile Structure Obligations, Series 3
(Morgan Guaranty Trust Company of New York),
5.45%, 10-2-00 .................................................. 7,700 7,700,000
NORTH DAKOTA - 0.48%
City of Fargo, North Dakota, Commercial
Development Revenue Bonda ("Cass Oil Co."
Project), Series 1984 (U.S. Bank, N.A.)
5.75%, 10-5-00 .................................................. 3,600 3,600,000
SOUTH CAROLINA - 1.43%
University of South Carolina School of Medicine Educational Trust (The), Tax
Exempt Adjustable Mode Healthcare Facilities Revenue Bonds, Series 2000
(Wachovia Bank, N.A.),
4.20%, 10-5-00 .................................................. 10,600 10,600,000
WASHINGTON - 1.09%
Housing Authority of the City of
Seattle, Low-Income Housing & Assistance
Revenue Bonds, 1994 (Bayview Manor Project),
(Variable Rate Demand Bonds),(U.S. Bank of
Washington, National Association),
5.65%, 10-5-00 .................................................. 2,550 2,550,000
Washington Health Care Facilities Authority,
Variable Rate Demand Revenue Bonds (Fred
Hutchinson Cancer Research Center, Seattle),
Series 1991B (Morgan Guaranty Trust Company
of New York),
5.55%, 10-2-00 .................................................. 4,050 4,050,000
Washington Health Care Facilities Authority,
Variable Rate Demand Revenue Bonds (Fred
Hutchinson Cancer Research Center, Seattle),
Series 1991B, (Banc of America Securities LLC),
5.55%, 10-2-00 .................................................. 1,400 1,400,000
Total ........................................................... 8,000,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
18
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
---------- ------------
SHORT-TERM SECURITIES (CONTINUED)
COMMERCIAL PAPER (CONTINUED)
WISCONSIN - 0.19%
Redevelopment Authority of the City of Milwaukee (Wisconsin), Variable Rate
Demand Revenue Bonds, Series 1999 (Wisconsin Humane Society, Inc.
Project), (U.S. Bank, N.A.),
5.7%, 10-5-00 ................................................... $1,400 $ 1,400,000
TOTAL MUNICIPAL OBLIGATIONS - 7.48% 55,510,000
TOTAL SHORT-TERM SECURITIES - 9.63% $ 71,415,868
(Cost: $71,415,868)
TOTAL INVESTMENT SECURITIES - 99.13% $734,944,182
(Cost: $740,366,997)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.87% 6,431,010
NET ASSETS - 100.00% $741,375,192
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
(A) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at September 30, 2000.
(B) The interest rate is subject to change periodically and inversely based
upon prevailing market rates with a leverage factor of three. The
interest rate shown is the rate in effect at September 30, 2000.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
19
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Investment securities--at value (Notes 1 and 3) ..................................... $734,944
Cash ................................................................................ 3
Receivables:
Interest ......................................................................... 10,372
Fund shares sold ................................................................. 330
Prepaid insurance premium ........................................................... 29
--------
Total assets ................................................................... 745,678
--------
LIABILITIES
Payable to Fund shareholders ........................................................ 2,953
Payable for investment securities purchased.......................................... 1,090
Accrued service fee (Note 2) ........................................................ 139
Accrued transfer agency and dividend
disbursing (Note 2) .............................................................. 62
Accrued management fee (Note 2) ..................................................... 21
Accrued distribution fee (Note 2) ................................................... 15
Accrued accounting services fee (Note 2)............................................. 7
Other ............................................................................... 16
--------
Total liabilities .............................................................. 4,303
--------
Total net assets ............................................................ $741,375
========
NET ASSETS
$0.001 par value capital stock
Capital stock .................................................................... $ 110
Additional paid-in capital ....................................................... 761,440
Accumulated undistributed income (loss):
Accumulated undistributed net investment income .................................. 617
Accumulated undistributed net realized loss on
investment transactions ........................................................ (11,338)
Distributions in excess of net realized loss on
investment transactions ........................................................ (4,031)
Net unrealized depreciation in value of
investments .................................................................... (5,423)
--------
Net assets applicable to outstanding units
of capital .................................................................. $741,375
========
Net asset value per share (net assets divided
by shares outstanding)
Class A .......................................................................... $6.75
Class B .......................................................................... $6.74
Class C .......................................................................... $6.74
Class Y .......................................................................... $6.75
Capital shares outstanding
Class A .......................................................................... 109,636,564
Class B .......................................................................... 157,353
Class C .......................................................................... 85,501
Class Y .......................................................................... 300
Capital shares authorized .............................................................. 600,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest and amortization (Note 1B) ................................................. $48,118
-------
Expenses (Note 2):
Investment management fee ........................................................ 4,065
Service fee:
Class A......................................................................... 1,775
Class B......................................................................... 1
Class C......................................................................... 1
Transfer agency and dividend disbursing:
Class A......................................................................... 728
Class B......................................................................... 1
Class C......................................................................... 1
Distribution fee:
Class A......................................................................... 82
Class B......................................................................... 3
Class C......................................................................... 2
Accounting services fee .......................................................... 84
Custodian fees ................................................................... 29
Audit fees ....................................................................... 22
Legal fees ....................................................................... 12
Shareholder servicing - Class Y .................................................. 5
Other ............................................................................ 181
-------
Total expenses ................................................................. 6,992
-------
Net investment income ....................................................... 41,126
-------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTES 1 AND 3)
Realized net loss on securities ..................................................... (4,463)
Realized net gain on put options purchased .......................................... 76
Realized net loss on futures contracts closed ....................................... (6,472)
-------
Realized net loss on investments ................................................. (10,859)
-------
Net unrealized appreciation in value of
securities during the period ..................................................... 2
Net unrealized depreciation in value of
options during the period ........................................................ (738)
-------
Net unrealized depreciation in value of
investments during the period................................................... (736)
-------
Net loss on investments ........................................................ (11,595)
-------
Net increase in net assets resulting
from operations .......................................................... $29,531
=======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED SEPTEMBER 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
DECREASE IN NET ASSETS
Operations:
Net investment income......................................... $41,126 $47,065
Realized net gain (loss) on
investments ................................................ (10,859) 9,001
Unrealized depreciation ...................................... (736) (86,742)
-------- --------
Net increase (decrease) in net assets
resulting from operations ............................... 29,531 (30,676)
-------- --------
Distributions to shareholders (Note 1D):*
From net investment income:
Class A .................................................... (41,036) (47,791)
Class B .................................................... (18) ---
Class C .................................................... (11) ---
Class Y .................................................... (145) ---**
From realized gains on securities transactions:
Class A .................................................... (5,032) (14,339)
Class B .................................................... (1) ---
Class C .................................................... (1) ---
Class Y .................................................... ---* ---
In excess of realized gains on securities transactions:
Class A .................................................... (4,030) ---
Class B .................................................... (1) ---
Class C .................................................... ---* ---
Class Y .................................................... ---* ---
-------- --------
(50,275) (62,130)
-------- --------
Capital share transactions
(Note 7) ..................................................... (111,963) (30,001)
-------- --------
Total decrease ....................................... (132,707) (122,807)
NET ASSETS
Beginning of period ............................................. 874,082 996,889
-------- --------
End of period, including undistributed
net investment income of $617 and
$701, respectively ........................................... $741,375 $874,082
======== ========
</TABLE>
*See "Financial Highlights" on pages - .
**Not shown due to rounding.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30,
-----------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $6.90 $7.63 $7.47 $7.32 $7.25
------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment
income ....................... 0.35 0.36 0.37 0.38 0.39
Net realized and
unrealized gain
(loss) on
investments .................. (0.08) (0.61) 0.25 0.30 0.12
------ ------ ------ ------ ------
Total from investment
operations ...................... 0.27 (0.25) 0.62 0.68 0.51
------ ------ ------ ------ ------
Less distributions:
From net investment
income ....................... (0.35) (0.37) (0.37) (0.37) (0.39)
From capital gains .............. (0.03) (0.11) (0.09) (0.16) (0.05)
In excess of capital
gains ........................ (0.04) (0.00) (0.00) (0.00) (0.00)
------ ------ ------ ------ ------
Total distributions ................ (0.42) (0.48) (0.46) (0.53) (0.44)
------ ------ ------ ------ ------
Net asset value,
end of period ................... $6.75 $6.90 $7.63 $7.47 $7.32
====== -===== ====== ====== ======
Total return* ...................... 4.24% -3.46% 8.67% 9.77% 7.16%
Net assets, end of
period (in
millions) ....................... $739 $874 $997 $994 $997
Ratio of expenses to
average net assets............... 0.89% 0.79% 0.72% 0.67% 0.68%
Ratio of net investment
income to average
net assets ...................... 5.23% 4.98% 4.95% 5.14% 5.23%
Portfolio
turnover rate ................... 15.31% 30.93% 50.65% 47.24% 74.97%
</TABLE>
*Total return calculated without taking into account the sales load deducted
on an initial purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS B SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
10-5-99*
THROUGH
9-30-00
--------
<S> <C>
Net asset value,
beginning of period ...................................... $6.87
------
Income from investment operations:
Net investment income .................................... 0.28
Net realized and
unrealized loss
on investments ........................................ (0.05)
------
Total from investment
operations ............................................... 0.23
------
Less distributions:
From net investment
income ................................................ (0.29)
From capital gains ....................................... (0.03)
In excess of capital
gains ................................................. (0.04)
------
Total distributions ......................................... (0.36)
------
Net asset value,
end of period ............................................ $6.74
======
Total return ................................................ 3.56%
Net assets, end of
period (in millions) ..................................... $1
Ratio of expenses to
average net assets ....................................... 1.86%**
Ratio of net investment
income to average
net assets ............................................... 4.17%**
Portfolio turnover
rate ..................................................... 15.31%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the fiscal year ended September 30, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS C SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
10-7-99*
THROUGH
9-30-00
--------
<S> <C>
Net asset value,
beginning of period ...................................... $6.87
------
Income from investment operations:
Net investment income .................................... 0.29
Net realized and
unrealized loss
on investments ........................................ (0.06)
------
Total from investment
operations ............................................... 0.23
------
Less distributions:
From net investment
income ................................................ (0.29)
From capital gains ....................................... (0.03)
In excess of capital
gains ................................................. (0.04)
------
Total distributions ......................................... (0.36)
------
Net asset value,
end of period ............................................ $6.74
======
Total return ................................................ 3.56%
Net assets, end of
period (in millions) ..................................... $1
Ratio of expenses to
average net assets ....................................... 1.84%**
Ratio of net investment
income to average
net assets ............................................... 4.18%**
Portfolio turnover
rate ..................................................... 15.31%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the fiscal year ended September 30, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS Y SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD
FISCAL FROM
YEAR 12-30-98*
ENDED THROUGH
9-30-00 9-30-99
------- ---------
<S> <C> <C>
Net asset value,
beginning of period......... $6.90 $7.41
----- -----
Income (loss) from investment
operations:
Net investment
income ....................... 0.36** 0.28
Net realized and
unrealized loss
on investments ............... (0.08)** (0.51)
----- -----
Total from investment
operations ...................... 0.28 (0.23)
----- -----
Less distributions
From net investment
income ....................... (0.36) (0.28)
From capital gains .............. (0.03) (0.00)
In excess of capital
gains ........................ (0.04) (0.00)
----- -----
Total distributions................. (0.43) (0.28)
----- -----
Net asset value,
end of period ................... $6.75 $6.90
===== =====
Total return ....................... 4.32% -3.21%
Net assets, end of
period (000 omitted) ............ $2 $2
Ratio of expenses
to average net
assets .......................... 0.71% 0.67%***
Ratio of net
investment income
to average net
assets .......................... 5.38% 5.08%***
Portfolio
turnover rate ................... 15.31% 30.93%****
</TABLE>
*Commencement of operations.
**Based on average weekly shares outstanding.
***Annualized.
****For the fiscal year ended September 30, 1999.
26
<PAGE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Waddell & Reed Advisors Municipal Bond Fund, Inc. (the "Fund"), formerly
United Municipal Bond Fund, Inc., is registered under the Investment Company
Act of 1940 as a diversified, open-end management investment company. Its
investment objective is to provide income not subject to Federal income tax.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in
the United States of America.
A. Security valuation -- Municipal bonds and the taxable obligations in
the Fund's investment portfolio are not listed or traded on any
securities exchange. Therefore, municipal bonds are valued using a
pricing system provided by a pricing service or dealer in bonds.
Short-term debt securities, whether taxable or nontaxable, are valued
at amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the
Internal Revenue Code) and premiums on the purchase of bonds are
amortized for both financial and tax reporting purposes over the
remaining lives of the bonds. Interest income is recorded on the
accrual basis. See Note 3 -- Investment Security Transactions.
C. Federal income taxes -- The Fund intends to distribute all of its net
investment income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code. The Fund intends to pay distributions as
required to avoid imposition of excise tax. Accordingly, provision has
not been made for Federal income taxes. In addition, the Fund intends
to meet requirements of the Internal Revenue Code which will permit it
to pay dividends from net investment income, substantially all of which
will be exempt from Federal income tax. See Note 4 -- Federal Income
Tax Matters.
D. Dividends and distributions -- Dividends and distributions to
shareholders are recorded by the Fund on the business day following
record date. Net investment income dividends and capital gains
distributions are determined in accordance with income tax regulations
which may differ from accounting principles generally accepted in the
United States of America. These differences are due to differing
treatments for items such
28
<PAGE>
as deferral of wash sales and post-October losses, net operating
losses and expiring capital loss carryovers.
E. Futures -- See Note 5 -- Futures.
F. Options -- See Note 6 -- Options.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
NOTE 2 -- INVESTMENT MANAGEMENT AND PAYMENTS TO AFFILIATED PERSONS
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
is payable by the Fund at the annual rate of 0.525% of net assets up to $500
million, 0.50% of net assets over $500 million and up to $1 billion, 0.45% of
net assets over $1 billion and up to $1.5 billion, and 0.40% of net assets
over $1.5 billion. The Fund accrues and pays the fee daily.
Pursuant to assignment of the Investment Management Agreement between
the Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment
Management Company ("WRIMCO"), a wholly owned subsidiary of W&R, serves as
the Fund's investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Fund and pricing daily the value of shares of the Fund. For
these services, the Fund pays WARSCO a monthly fee of one-twelfth of the
annual fee shown in the following table.
<TABLE>
<CAPTION>
ACCOUNTING SERVICES FEE
AVERAGE
NET ASSET LEVEL ANNUAL FEE
(ALL DOLLARS IN MILLIONS) RATE FOR EACH LEVEL
------------------------- -------------------
<S> <C>
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
</TABLE>
29
<PAGE>
In addition, for each class of shares in excess of one, the Fund pays
WARSCO a monthly per-class fee equal to 2.5% of the monthly base fee.
Prior to September 1, 2000, the Accounting Services Agreement was as
shown in the following table.
<TABLE>
<CAPTION>
ACCOUNTING SERVICES FEE
AVERAGE
NET ASSET LEVEL ANNUAL FEE
(ALL DOLLARS IN MILLIONS) RATE FOR EACH LEVEL
------------------------- -------------------
<S> <C>
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
</TABLE>
For Class A, Class B and Class C shares, the Fund pays WARSCO a monthly
per account charge for transfer agency and dividend disbursement services of
$1.6125 for each shareholder account which was in existence at any time
during the prior month. With respect to Class Y shares, the Fund pays WARSCO
a monthly fee at an annual rate of 0.15% of the average daily net assets of
the class for the preceding month. The Fund also reimburses W&R and WARSCO
for certain out-of-pocket costs.
Prior to September 1, 2000, for Class A, Class B and Class C shares, the
Fund paid WARSCO a monthly per account charge for transfer agency and
dividend disbursement services of $1.3125 for each shareholder account which
was in existence at any time during the prior month, plus $0.30 for each
account on which a dividend or distribution of cash or shares had a record
date in that month.
As principal underwriter for the Fund's shares, W&R received gross sales
commissions for Class A shares (which are not an expense of the Fund) of
$393,458. During the period ended September 30, 2000, W&R received $204 and
$21 in deferred sales charges for Class B shares and Class C shares,
respectively. With respect to Class A, Class B and Class C shares, W&R paid
sales commissions of $254,400 and all expenses in connection with the sale of
Fund shares, except for registration fees and related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the
Fund may pay monthly a distribution and/or service fee to W&R in an amount
not to exceed 0.25% of the Fund's Class A average annual net assets. The fee
is to be paid to reimburse W&R for amounts it expends in connection with the
distribution of the Class A shares
30
<PAGE>
and/or provision of personal services to Fund shareholders and/or maintenance
of shareholder accounts.
Under the Distribution and Service Plan adopted by the Fund for Class B
and Class C shares, respectively, the Fund may pay W&R, on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate W&R for providing services to shareholders of that class and/or
maintaining shareholder accounts for that class and a distribution fee of up
to 0.75% of the average daily net assets of the class to compensate W&R for
distributing the shares of that class. The Class B Plan and the Class C Plan
each permit W&R to receive compensation, through the distribution and service
fee, respectively, for its distribution activities for that class, which are
similar to the distribution activities described with respect to the Class A
Plan, and for its activities in providing personal services to shareholders
of that class and/or maintaining shareholder accounts of that class, which
are similar to the corresponding activities for which it is entitled to
reimbursement under the Class A Plan.
The Fund paid Directors' fees of $26,000, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding
company, and a direct subsidiary of Waddell & Reed Financial Services, Inc.,
a holding company.
NOTE 3 -- INVESTMENT SECURITY TRANSACTIONS
Purchases of investment securities, other than U.S. Government and
short-term securities, aggregated $108,829,770 while proceeds from maturities
and sales aggregated $271,281,123. Purchases of options aggregated
$11,714,273 while proceeds from options aggregated $9,451,688. Purchases of
short-term securities aggregated $1,713,425,745 while proceeds from
maturities and sales aggregated $1,678,257,395. No long-term U.S. Government
securities were bought or sold during the period ended September 30, 2000.
For Federal income tax purposes, cost of investments owned at September
30, 2000 was $744,479,023, resulting in net unrealized depreciation of
$9,534,841, of which $19,231,934 related to appreciated securities and
$28,766,775 related to depreciated securities.
NOTE 4 -- FEDERAL INCOME TAX MATTERS
For Federal income tax purposes, the Fund realized capital gain net
income of $245,103 during its fiscal year ended September 30, 2000, which
included the effect of certain losses deferred into the next fiscal year (see
discussion below). A portion of capital gain net income was paid to Fund
shareholders. Remaining capital gain net income will be distributed to the
Fund's shareholders.
31
<PAGE>
Internal Revenue Code regulations permit the Fund to defer into its next
fiscal year net capital losses or net long-term capital losses incurred
between each November 1 and the end of its fiscal year ("post-October
losses"). From November 1, 1999 through September 30, 2000, the Fund incurred
net capital losses of $11,322,610, which has been deferred to the fiscal year
ending September 30, 2001.
NOTE 5 -- FUTURES
The Fund may engage in buying and selling interest rate futures
contracts, but only Debt Futures and Municipal Bond Index Futures. Upon
entering into a futures contract, the Fund is required to deposit, in a
segregated account, an amount of cash or U.S. Treasury Bills equal to a
varying specified percentage of the contract amount. This amount is known as
the initial margin. Subsequent payments ("variation margins") are made or
received by the Fund each day, dependent on the daily fluctuations in the
value of the underlying debt security or index. These changes in the
variation margins are recorded by the Fund as unrealized gains or losses.
Upon the closing of the contracts, the cumulative net change in the variation
margin is recorded as realized gain or loss. The Fund uses futures to attempt
to reduce the overall risk of its investments.
NOTE 6 -- OPTIONS
Options purchased by the Fund are accounted for in the same manner as
marketable portfolio securities. The cost of portfolio securities acquired
through the exercise of call options is increased by the premium paid to
purchase the call. The proceeds from securities sold through the exercise of
put options are decreased by the premium paid to purchase the put. The Fund
uses options to attempt to reduce the overall risk of its investments.
NOTE 7 -- MULTICLASS OPERATIONS
The Fund is authorized to offer four classes of shares, Class A, Class
B, Class C and Class Y, each of which have equal rights as to assets and
voting privileges. Class Y shares are not subject to a sales charge on
purchases, are not subject to a Rule 12b-1 Distribution and Service Plan and
are subject to a separate transfer agency and dividend disbursement services
fee structure. A comprehensive discussion of the terms under which shares of
each class are offered is contained in the Prospectus and the Statement of
Additional Information for the Fund.
Income, non-class specific expenses, and realized and unrealized gains
and losses are allocated daily to each class of shares based on the value of
their relative net assets as of the beginning of each day adjusted for the
prior day's capital share activity.
Transactions in capital stock are summarized below. Amounts are in
thousands.
32
<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED SEPTEMBER 30,
----------------------------------
2000 1999
--------- --------
<S> <C> <C>
Shares issued from sale of shares:
Class A ................................. 8,242 25,267
Class B ................................. 175 ---
Class C ................................. 86 ---
Class Y ................................. 3,935 ---*
Shares issued from reinvestment
of dividends and/or capital gains
distribution:
Class A ................................. 6,136 7,013
Class B ................................. 2 ---
Class C ................................. 2 ---
Class Y ................................. 22 ---*
Shares redeemed:
Class A ................................. (31,337) (36,372)
Class B ................................. (20) ---
Class C ................................. (2) ---
Class Y ................................. (3,957) ---
--------- --------
Decrease in outstanding
capital shares.............................. (16,716) (4,092)
========= ========
Value issued from sale of shares:
Class A ................................. $54,649 $185,060
Class B ................................. 1,165 ---
Class C ................................. 574 ---
Class Y ................................. 25,848 2
Value issued from reinvestment
of dividends and/or capital gains
distribution:
Class A ................................. 40,755 51,386
Class B ................................. 17 ---
Class C ................................. 12 ---
Class Y ................................. 145 ---*
Value redeemed:
Class A ................................. (208,374) (266,449)
Class B ................................. (132) ---
Class C ................................. (16) ---
Class Y ................................. (26,606) ---
--------- --------
Decrease in outstanding
capital ................................. $(111,963) $(30,001)
========= ========
</TABLE>
*Not shown due to rounding.
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Waddell & Reed Advisors Municipal Bond Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Waddell & Reed Advisors Municipal
Bond Fund, Inc. (formerly United Municipal Bond Fund, Inc.) (the "Fund") as
of September 30, 2000, and the related statement of operations for the fiscal
year then ended, the statements of changes in net assets for each of the two
fiscal years in the period then ended, and the financial highlights for each
of the five fiscal years in the period then ended. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30,
2000, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Waddell & Reed Advisors Municipal Bond Fund, Inc. as of September 30, 2000,
the results of its operations for the fiscal year then ended, the changes in
its net assets for each of the two fiscal years in the period then ended, and
the financial highlights for each of the five fiscal years in the period then
ended in conformity with accounting principles generally accepted in the
United States of America.
/s/Deloitte & Touche LLP
-------------------------------
Deloitte & Touche LLP
Kansas City, Missouri
November 3, 2000
34
