<PAGE>
File No. 33-715
File No. 811-4427
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
------
Post-Effective Amendment No. 25
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 25
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
--------------------------------------------------------------------------------
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
--------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Kristen A. Richards, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
--------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
immediately upon filing pursuant to paragraph (b)
-----
X on December 15, 2000 pursuant to paragraph (b)
-----
60 days after filing pursuant to paragraph (a)(1)
-----
on (date) pursuant to paragraph (a)(1)
-----
75 days after filing pursuant to paragraph (a)(2)
-----
on (date) pursuant to paragraph (a)(2) of Rule 485
-----
this post-effective amendment designates a new effective date
-----
for a previously filed post-effective amendment
================================================================================
DECLARATION REQUIRED BY RULE 24f-2(a)(1)
The issuer has registered an indefinite amount of its securities under the
Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for the Registrant's
fiscal year ended September 30, 2000 was filed on or about December 13, 2000.
<PAGE>
PROSPECTUS
DECEMBER 15, 2000
Waddell & Reed Advisors Funds
FIXED INCOME &
MONEY MARKET FUNDS
Bond Fund [GRAPHIC]
Global Bond Fund [GRAPHIC]
Government Securities Fund
High Income Fund
Municipal Bond Fund
Municipal High Income Fund
Municipal Money Market Fund
Cash Management
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
FUNDS' SECURITIES, OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR
ADEQUATE. IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.
[LOGO] WADDELL & REED
FINANCIAL SERVICES -Registered Trademark-
-----------------------------------------
INVESTING. WITH A PLAN-SM-.
<PAGE>
CONTENTS
3 An Overview of the Funds
3 Bond Fund
9 Global Bond Fund
16 Government Securities Fund
21 High Income Fund
27 Municipal Bond Fund
33 Municipal High Income Fund
40 Municipal Money Market Fund
44 Cash Management
49 The Investment Principles of the Funds
62 Your Account
86 The Management of the Funds
89 Financial Highlights
2
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
GOAL
WADDELL & REED ADVISORS
BOND FUND
(FORMERLY UNITED BOND FUND-SM-) SEEKS A REASONABLE RETURN WITH
EMPHASIS ON PRESERVATION OF CAPITAL.
PRINCIPAL STRATEGIES
Bond Fund seeks to achieve its goal by investing primarily in domestic debt
securities usually of investment grade (rated BBB and higher by Standard &
Poor's ("S&P") and Baa and higher by Moody's). The Fund has no limitations
regarding the maturity duration or dollar weighted average of its holdings. In
selecting the debt securities for the Fund's portfolio, Waddell & Reed
Investment Management Company ("WRIMCO"), the Fund's investment manager,
considers yield and relative safety and, in the case of convertible securities,
the possibility of capital growth. The Fund can invest in securities of
companies of any size.
In selecting debt securities for the Fund, WRIMCO may look at many factors.
These include the issuer's past, present and estimated future:
- financial strength
- cash flow
- management
- borrowing requirements
- responsiveness to changes in interest rates and business conditions.
As well, WRIMCO considers the maturity of the obligation and the size or nature
of the bond issue.
3
<PAGE>
In general, in determining whether to sell a security, WRIMCO uses the same type
of analysis that it uses in buying securities. For example, WRIMCO may sell a
holding if the issuer's financial strength weakens and/or the yield and relative
safety of the security declines. WRIMCO may also sell a security to take
advantage of more attractive investment opportunities or to raise cash.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Bond Fund owns different types of securities, a variety of factors can
affect its investment performance, such as:
- prepayment of higher-yielding bonds held by the Fund
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds
- changes in the maturities of bonds owned by the Fund
- WRIMCO's skill in evaluating and managing the interest rate and credit
risks of the Fund's portfolio
- adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST
Bond Fund is designed for investors who primarily seek current income while also
seeking to preserve investment principal. You should consider whether the Fund
fits your particular investment objectives.
4
<PAGE>
--------------------------------------------------------------------------------
PERFORMANCE
BOND FUND
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year over the past ten
calendar years.
- The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year. As of September 30, 2000, the Fund's
fiscal-year end changed from December 31 to September 30.
[CHART]
CHART OF YEAR-BY-YEAR RETURNS
<TABLE>
<CAPTION>
AS OF DECEMBER 31 EACH YEAR (%)
<S> <C>
'90 4.24%
'91 17.76%
'92 7.84%
'93 13.19%
'94 -5.76%
'95 20.50%
'96 3.20%
'97 9.77%
'98 7.27%
'99 -1.08%
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 7.11% (THE
THIRD QUARTER OF 1991) AND THE LOWEST QUARTERLY RETURN WAS -7.37% (THE FIRST
QUARTER OF 1997). THE CLASS A RETURN FOR THE YEAR THROUGH SEPTEMBER 30, 2000 WAS
5.24%.
5
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF BOND FUND -6.77% 6.42% 6.84%
--------------------------------------------------------------------------------
Salomon Brothers Broad
Investment Grade Index -0.83% 7.74% 7.75%
--------------------------------------------------------------------------------
Lipper Corporate Debt Funds
A-Rated Universe Average -2.61% 6.90% 7.30%
--------------------------------------------------------------------------------
CLASS B SHARES OF BOND FUND -4.64%
--------------------------------------------------------------------------------
Salomon Brothers Broad
Investment Grade Index -0.83% 7.74% 7.75% -0.16%
--------------------------------------------------------------------------------
Lipper Corporate Debt Funds
A-Rated Universe Average -2.61% 6.90% 7.30% -0.45%
--------------------------------------------------------------------------------
CLASS C SHARES OF BOND FUND -0.86%
--------------------------------------------------------------------------------
Salomon Brothers Broad
Investment Grade Index -0.83% 7.74% 7.75% -0.16%
--------------------------------------------------------------------------------
Lipper Corporate Debt Funds
A-Rated Universe Average -2.61% 6.90% 7.30% -0.45%
--------------------------------------------------------------------------------
CLASS Y SHARES OF BOND FUND -0.81% 5.93%
--------------------------------------------------------------------------------
Salomon Brothers Broad
Investment Grade Index -0.83% 7.74% 7.75% 6.04%
--------------------------------------------------------------------------------
Lipper Corporate Debt Funds
A-Rated Universe Average -2.61% 6.90% 7.30% 5.09%
--------------------------------------------------------------------------------
</TABLE>
THE INDEX SHOWN IS A BROAD-BASED, SECURITIES MARKET INDEX THAT IS UNMANAGED. THE
LIPPER AVERAGE IS A COMPOSITE OF MUTUAL FUNDS WITH GOALS SIMILAR TO THE GOAL OF
THE FUND.
(1) SINCE SEPTEMBER 9, 1999 FOR CLASS B SHARES, SEPTEMBER 9, 1999 FOR CLASS C
SHARES AND JUNE 19, 1995 FOR CLASS Y SHARES. BECAUSE EACH CLASS COMMENCED
OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND PARTIAL MONTH
CALCULATIONS OF THE PERFORMANCE OF THE ABOVE INDEX ARE NOT AVAILABLE, INDEX
PERFORMANCE IS CALCULATED FROM SEPTEMBER 30, 1999, SEPTEMBER 30, 1999, AND JUNE
30, 1995, RESPECTIVELY.
6
<PAGE>
--------------------------------------------------------------------------------
FEES AND EXPENSES
BOND FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SHAREHOLDER FEES
--------------------------------------------------------------------------------
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED SALES
CHARGE (LOAD)(1)
(AS A PERCENTAGE OF
LESSER OF AMOUNT INVESTED
OR REDEMPTION VALUE) None(2) 5% 1% None
--------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(3)
--------------------------------------------------------------------------------
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.53% 0.53% 0.53% 0.53%
--------------------------------------------------------------------------------
DISTRIBUTION AND
SERVICE (12b-1) FEES 0.25% 1.00% 1.00% None
--------------------------------------------------------------------------------
OTHER EXPENSES 0.28% 0.41% 0.47% 0.20%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.06% 1.94% 2.00% 0.73%
--------------------------------------------------------------------------------
</TABLE>
(1) THE CONTINGENT DEFERRED SALES CHARGE ("CDSC"), WHICH IS IMPOSED ON THE
LESSER OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS B SHARES, DECLINES FROM
5% FOR REDEMPTIONS MADE WITHIN THE FIRST YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS
MADE WITHIN THE SECOND YEAR, TO 3% FOR REDEMPTIONS MADE WITHIN THE THIRD AND
FOURTH YEARS, TO 2% FOR REDEMPTIONS MADE WITHIN THE FIFTH YEAR, TO 1% FOR
REDEMPTIONS MADE WITHIN THE SIXTH YEAR AND TO 0% FOR REDEMPTIONS MADE AFTER THE
SIXTH YEAR. FOR CLASS C SHARES, A 1% CDSC APPLIES TO THE LESSER OF AMOUNT
INVESTED OR REDEMPTION VALUE OF CLASS C SHARES REDEEMED WITHIN TWELVE MONTHS
AFTER PURCHASE. SOLELY FOR PURPOSES OF DETERMINING THE NUMBER OF MONTHS OR YEARS
FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF SHARES, ALL PAYMENTS DURING A
MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON THE FIRST DAY OF THE MONTH.
(2) A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A
SHARES THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3) OTHER EXPENSES AND TOTAL ANNUAL FUND OPERATING EXPENSES HAVE BEEN RESTATED
TO REFLECT THE CHANGE IN ACCOUNTING SERVICES FEES AND SHAREHOLDER SERVICING FEES
EFFECTIVE SEPTEMBER 1, 2000; OTHERWISE EXPENSE RATIOS ARE BASED ON OTHER
FUND-LEVEL EXPENSES FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 2000. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
7
<PAGE>
--------------------------------------------------------------------------------
EXAMPLE
--------------------------------------------------------------------------------
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular class for each time period
specified, (b) your investment has a 5% return each year, and (c) the expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions, your costs would be:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $677 $894 $1,128 $ 1,798
------------------------------------------------------------------------------
Class B Shares $597 $910 $1,149 $ 2,038(1)
------------------------------------------------------------------------------
Class C Shares $203 $626 $1,076 $ 2,324
------------------------------------------------------------------------------
Class Y Shares $ 75 $233 $ 406 $ 906
------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $677 $894 $1,128 $ 1,798
------------------------------------------------------------------------------
Class B Shares $197 $610 $1,049 $ 2,038(1)
------------------------------------------------------------------------------
Class C Shares $203 $626 $1,076 $ 2,324
------------------------------------------------------------------------------
Class Y Shares $ 75 $233 $ 406 $ 906
------------------------------------------------------------------------------
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
8
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
GOALS
WADDELL & REED ADVISORS
GLOBAL BOND FUND, INC.
(FORMERLY UNITED HIGH INCOME FUND II, INC. -SM-) SEEKS, AS A
PRIMARY GOAL, A HIGH LEVEL OF CURRENT INCOME. AS A SECONDARY
GOAL, THE FUND SEEKS CAPITAL GROWTH WHEN CONSISTENT WITH ITS
PRIMARY GOAL.
PRINCIPAL STRATEGIES
Global Bond Fund seeks to achieve its goals by investing primarily in a
diversified portfolio of U.S. dollar-denominated debt securities of foreign and
U.S. issuers. The Fund invests, primarily, in investment grade securities. The
Fund may, however, invest up to 35% of its total assets in lower quality bonds,
commonly called junk bonds, that are rated BB and below by S&P or comparable
ratings issued by any Nationally Recognized Statistical Rating Organization(s)
("NRSRO(s)"), or if unrated, judged by WRIMCO to be of comparable quality. The
Fund will only invest in junk bonds if WRIMCO deems the risks to be consistent
with the Fund's goals. The Fund may invest in bonds of any maturity, although
WRIMCO seeks to focus on the intermediate-term sector (generally, bonds with
maturities ranging between one and ten years).
The Fund invests primarily in issuers of countries that are members of the
Organisation of Economic Co-Operation and Development (OECD). The OECD includes
countries that share the principles of the market economy, pluralist democracy
and respect for human rights. The original 20 members of the OECD are located in
Western countries of Europe and North America. Japan, Australia, New Zealand,
Finland, Mexico, the Czech Republic, Hungary, Poland and Korea have also joined
the OECD. The Fund may invest in securities issued by foreign or U.S.
governments and in foreign or U.S. companies of any size.
The Fund may invest in equity securities of foreign and U.S. issuers to achieve
its secondary goal of capital growth.
WRIMCO may look at a number of factors in selecting securities for the Fund's
portfolio. These include:
- country analysis (economic, legislative/judicial and demographic trends)
9
<PAGE>
- credit analysis of the issuer (financial strength, cash flow, management,
strategy and accounting)
- maturity of the issue
- quality of the issue
- denomination of the issue (e.g. U.S. Dollar, Euro, Yen)
- domicile of the issuer.
In general, in determining whether to sell a debt security, WRIMCO uses the same
type of analysis that it uses in buying debt securities. For example, WRIMCO may
sell a holding if the issuer's financial strength declines to an unacceptable
level or management of the company weakens. As well, WRIMCO may choose to sell
an equity security if the issuer's growth potential has diminished. WRIMCO may
also sell a security to take advantage of more attractive investment
opportunities or to raise cash.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Global Bond Fund owns different types of securities, a variety of
factors can affect its investment performance, such as:
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds
- an increase in interest rates, which may cause the value of a bond held by
the Fund, especially bonds with longer maturities, to decline
- changes in the maturities of bonds owned by the Fund
- changes in foreign exchange rates and foreign currency fluctuations, which
may affect the value of certain securities the Fund holds
- the susceptibility of lower-rated bonds to greater risks of non-payment or
default, price volatility and lack of liquidity compared to higher-rated
bonds
- adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline
- WRIMCO's skill in evaluating and managing the interest rate and credit
risks of the Fund's portfolio.
Investing in foreign securities presents additional risks, such as political or
economic conditions affecting the foreign country. Accounting and disclosure
standards also differ from country to country, which makes obtaining reliable
research information more difficult. There is the possibility that, under
10
<PAGE>
unusual international monetary or political conditions, the Fund's assets might
be more volatile than would be the case with other investments.
Market risk for small or medium sized companies may be greater than that for
large companies. For example, smaller companies may have limited financial
resources, limited product lines or inexperienced management.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST
Global Bond Fund is designed for investors primarily seeking exposure to foreign
market issuers for a portion of their fixed-income holdings, with limited
exposure to foreign currency risk. The Fund is not suitable for all investors.
You should consider whether the Fund fits your particular investment objectives.
11
<PAGE>
PERFORMANCE
GLOBAL BOND FUND
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year over the past ten
calendar years.
- The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
[GRAPH]
CHART OF YEAR-BY-YEAR RETURNS(1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31 EACH YEAR (%)
<S> <C>
'90 -5.29%
'91 31.31%
'92 15.23%
'93 17.39%
'94 -4.07%
'95 16.88%
'96 11.93%
'97 14.97%
'98 2.69%
'99 1.45%
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 11.52% (THE
FIRST QUARTER OF 1991) AND THE LOWEST QUARTERLY RETURN WAS -5.76% (THE THIRD
QUARTER OF 1998). THE CLASS A RETURN FOR THE YEAR THROUGH SEPTEMBER 30, 2000 WAS
-2.62%.
(1) PRIOR TO SEPTEMBER 18, 2000, THE FUND SOUGHT TO ACHIEVE ITS GOALS BY
INVESTING PRIMARILY IN JUNK BONDS, WITH MINIMAL INVESTMENT IN FOREIGN
SECURITIES. ACCORDINGLY, THE PERFORMANCE INFORMATION IN THE BAR CHART AND
PERFORMANCE TABLE FOR PERIODS PRIOR TO THAT DATE REFLECT THE OPERATIONS OF THE
FUND UNDER ITS FORMER INVESTMENT STRATEGIES AND RELATED POLICIES.
12
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
GLOBAL BOND FUND -4.38% 8.11% 9.10%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Market Index 1.73% 9.71% 10.94%
--------------------------------------------------------------------------------
Lipper High Current
Yield Funds Universe Average 4.53% 8.84% 10.03%
--------------------------------------------------------------------------------
CLASS B SHARES OF
GLOBAL BOND FUND -2.55%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Market Index 1.73% 9.71% 10.94% 2.42%
--------------------------------------------------------------------------------
Lipper High Current Yield
Funds Universe Average 4.53% 8.84% 10.03% 2.78%
--------------------------------------------------------------------------------
CLASS C SHARES OF
GLOBAL BOND FUND 1.45%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Market Index 1.73% 9.71% 10.94% 2.42%
--------------------------------------------------------------------------------
Lipper High Current Yield
Funds Universe Average 4.53% 8.84% 10.03% 2.78%
--------------------------------------------------------------------------------
CLASS Y SHARES OF
GLOBAL BOND FUND 1.76% 7.36%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Market Index 1.73% 9.71% 10.94% 7.08%
--------------------------------------------------------------------------------
Lipper High Current Yield
Funds Universe Average 4.53% 8.84% 10.03% 6.48%
--------------------------------------------------------------------------------
</TABLE>
THE INDEX SHOWN IS A BROAD-BASED, SECURITIES MARKET INDEX THAT IS UNMANAGED. THE
LIPPER AVERAGE IS A COMPOSITE OF MUTUAL FUNDS WITH GOALS SIMILAR TO THE GOALS OF
THE FUND AND INVESTMENT STRATEGIES SIMILAR TO THOSE OF THE FUND PRIOR TO
SEPTEMBER 18, 2000.
(1) SINCE OCTOBER 6, 1999 FOR CLASS B SHARES, OCTOBER 6, 1999 FOR CLASS C SHARES
AND FEBRUARY 27, 1996 FOR CLASS Y SHARES. BECAUSE EACH CLASS COMMENCED
OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND PARTIAL MONTH
CALCULATIONS OF THE PERFORMANCE OF THE ABOVE INDEXES (INCLUDING INCOME) ARE NOT
AVAILABLE, INDEX PERFORMANCE IS CALCULATED FROM OCTOBER 31, 1999, OCTOBER 31,
1999, AND FEBRUARY 29, 1996, RESPECTIVELY.
13
<PAGE>
--------------------------------------------------------------------------------
FEES AND EXPENSES
GLOBAL BOND FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SHAREHOLDER FEES
--------------------------------------------------------------------------------
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
--------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(3)
--------------------------------------------------------------------------------
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.63% 0.63% 0.63% 0.63%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.25% 0.99% 0.99% None
--------------------------------------------------------------------------------
OTHER EXPENSES 0.31% 0.47% 0.68% 0.22%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.19% 2.09% 2.30% 0.85%
--------------------------------------------------------------------------------
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE FIRST
YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR, TO 3% FOR
REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR REDEMPTIONS MADE
WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN THE SIXTH YEAR AND TO
0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR CLASS C SHARES, A 1% CDSC
APPLIES TO THE LESSER OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS C SHARES
REDEEMED WITHIN TWELVE MONTHS AFTER PURCHASE. SOLELY FOR PURPOSES OF DETERMINING
THE NUMBER OF MONTHS OR YEARS FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF
SHARES, ALL PAYMENTS DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON
THE FIRST DAY OF THE MONTH.
(2) A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A
SHARES THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3) OTHER EXPENSES AND TOTAL ANNUAL FUND OPERATING EXPENSES HAVE BEEN RESTATED
TO REFLECT THE CHANGE IN ACCOUNTING SERVICES FEES AND SHAREHOLDER SERVICING FEES
EFFECTIVE SEPTEMBER 1, 2000; OTHERWISE EXPENSE RATIOS ARE BASED ON OTHER
FUND-LEVEL EXPENSES FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
14
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular class for each time period
specified, (b) your investment has a 5% return each year, and (c) the expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions, your costs would be:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $689 $931 $1,192 $1,935
--------------------------------------------------------------------------------
Class B Shares $612 $955 $1,224 $2,188(1)
--------------------------------------------------------------------------------
Class C Shares $233 $718 $1,230 $2,636
--------------------------------------------------------------------------------
Class Y Shares $ 87 $271 $ 471 $1,049
--------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $689 $931 $1,192 $1,935
--------------------------------------------------------------------------------
Class B Shares $212 $655 $1,124 $2,188(1)
--------------------------------------------------------------------------------
Class C Shares $233 $718 $1,230 $2,636
--------------------------------------------------------------------------------
Class Y Shares $ 87 $271 $ 471 $1,049
--------------------------------------------------------------------------------
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
15
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
GOAL
WADDELL & REED ADVISORS
GOVERNMENT SECURITIES FUND, INC.
(FORMERLY UNITED GOVERNMENT SECURITIES FUND, INC.-SM-) SEEKS AS
HIGH A CURRENT INCOME AS IS CONSISTENT WITH SAFETY OF PRINCIPAL.
PRINCIPAL STRATEGIES
Government Securities Fund seeks to achieve its goal by investing exclusively in
debt securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government securities"). The Fund invests in a
diversified portfolio of U.S. Government securities, including treasury issues
and mortgage-backed securities. The Fund has no limitations on the range of
maturities of the debt securities in which it may invest.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Government Securities Fund owns different types of fixed-income
instruments, a variety of factors can affect its investment performance, such
as:
- an increase in interest rates, which may cause the value of the Fund's
fixed-income securities, especially bonds with longer maturities, to
decline
- adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline
- prepayment of higher-yielding bonds and mortgage-backed securities
- WRIMCO's skill in evaluating and selecting securities for the Fund.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. As well, not all U.S. Government
securities are backed by the full faith and credit of the United States.
WHO MAY WANT TO INVEST
Government Securities Fund is designed for investors who seek current income and
the relative security of investing in U.S. Government securities. You should
consider whether the Fund fits your particular investment objectives.
16
<PAGE>
--------------------------------------------------------------------------------
PERFORMANCE
GOVERNMENT SECURITIES FUND
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year over the past ten
calendar years.
- The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
[CHART]
<TABLE>
<CAPTION>
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31 EACH YEAR (%)
<S> <C>
'90 7.27%
'91 16.07%
'92 7.54%
'93 9.99%
'94 -3.88%
'95 19.30%
'96 1.77%
'97 9.16%
'98 7.49%
'99 -0.64%
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 6.81% (THE
THIRD QUARTER OF 1991) AND THE LOWEST QUARTERLY RETURN WAS -3.32% (THE FIRST
QUARTER OF 1994). THE CLASS A RETURN FOR THE YEAR THROUGH SEPTEMBER 30, 2000 WAS
6.24%.
17
<PAGE>
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
GOVERNMENT SECURITIES FUND -4.86% 6.27% 6.76%
-------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Mortgage Bond Index -0.59% 7.66% 7.64%
-------------------------------------------------------------------------------
Lipper General U. S.
Government Funds
Universe Average -3.02% 6.50% 6.63%
-------------------------------------------------------------------------------
CLASS B SHARES OF
GOVERNMENT SECURITIES FUND -5.09%
-------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Mortgage Bond Index -0.59% 7.66% 7.64% -0.52%
-------------------------------------------------------------------------------
Lipper General U. S.
Government Funds
Universe Average -3.02% 6.50% 6.63% -0.82%
-------------------------------------------------------------------------------
CLASS C SHARES OF
GOVERNMENT SECURITIES FUND -0.87%
-------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Mortgage Bond Index -0.59% 7.66% 7.64% -0.52%
-------------------------------------------------------------------------------
Lipper General U. S.
Government Funds
Universe Average -3.02% 6.50% 6.63% -0.82%
-------------------------------------------------------------------------------
CLASS Y SHARES OF
GOVERNMENT SECURITIES FUND -0.28% 5.73%
-------------------------------------------------------------------------------
Salomon Brothers Treasury/
Government Sponsored/
Mortgage Bond Index -0.59% 7.66% 7.64% 5.96%
-------------------------------------------------------------------------------
Lipper General U. S.
Government Funds
Universe Average -3.02% 6.50% 6.63% 4.69%
-------------------------------------------------------------------------------
</TABLE>
THE INDEX SHOWN IS A BROAD-BASED, SECURITIES MARKET INDEX THAT IS UNMANAGED. THE
LIPPER AVERAGE IS A COMPOSITE OF MUTUAL FUNDS WITH GOALS SIMILAR TO THE GOAL OF
THE FUND.
(1) SINCE OCTOBER 4, 1999 FOR CLASS B SHARES, OCTOBER 8, 1999 FOR CLASS C SHARES
AND SEPTEMBER 27, 1995 FOR CLASS Y SHARES. BECAUSE EACH CLASS COMMENCED
OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND PARTIAL MONTH
CALCULATIONS OF THE PERFORMANCE OF THE INDEX (INCLUDING INCOME) ARE NOT
AVAILABLE, PERFORMANCE OF THE INDEX IS FROM OCTOBER 31, 1999, OCTOBER 31, 1999
AND SEPTEMBER 30, 1995, RESPECTIVELY.
18
<PAGE>
--------------------------------------------------------------------------------
FEES AND EXPENSES
GOVERNMENT SECURITIES FUND
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE FUND.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SHAREHOLDER FEES
--------------------------------------------------------------------------------
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 4.25% None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
--------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(3)
--------------------------------------------------------------------------------
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.50% 0.50% 0.50% 0.50%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.24% 1.00% 1.00% None
--------------------------------------------------------------------------------
OTHER EXPENSES 0.42% 0.56% 0.60% 0.30%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.16% 2.06% 2.10% 0.80%
--------------------------------------------------------------------------------
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE FIRST
YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR, TO 3% FOR
REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR REDEMPTIONS MADE
WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN THE SIXTH YEAR AND TO
0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR CLASS C SHARES, A 1% CDSC
APPLIES TO THE LESSER OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS C SHARES
REDEEMED WITHIN TWELVE MONTHS AFTER PURCHASE. SOLELY FOR PURPOSES OF DETERMINING
THE NUMBER OF MONTHS OR YEARS FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF
SHARES, ALL PAYMENTS DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON
THE FIRST DAY OF THE MONTH.
(2) A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A
SHARES THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3) OTHER EXPENSES AND TOTAL ANNUAL FUND OPERATING EXPENSES HAVE BEEN RESTATED
TO REFLECT THE CHANGE IN ACCOUNTING SERVICES FEES AND SHAREHOLDER SERVICING FEES
EFFECTIVE SEPTEMBER 1, 2000; OTHERWISE EXPENSE RATIOS ARE BASED ON OTHER
FUND-LEVEL EXPENSES FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 2000. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
19
<PAGE>
--------------------------------------------------------------------------------
EXAMPLE
--------------------------------------------------------------------------------
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular class for each time period
specified, (b) your investment has a 5% return each year, and (c) the expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions, your costs would be:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $538 $778 $1,036 $1,774
--------------------------------------------------------------------------------
Class B Shares $609 $946 $1,208 $2,157(1)
--------------------------------------------------------------------------------
Class C Shares $213 $658 $1,129 $2,431
--------------------------------------------------------------------------------
Class Y Shares $ 82 $255 $ 444 $ 990
--------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $538 $778 $1,036 $1,774
--------------------------------------------------------------------------------
Class B Shares $209 $646 $1,108 $2,157(1)
--------------------------------------------------------------------------------
Class C Shares $213 $658 $1,129 $2,431
--------------------------------------------------------------------------------
Class Y Shares $ 82 $255 $ 444 $ 990
--------------------------------------------------------------------------------
</TABLE>
(1)REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
20
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
GOALS
WADDELL & REED ADVISORS
HIGH INCOME FUND, INC.
(FORMERLY UNITED HIGH INCOME FUND, INC.-SM-) SEEKS, AS A
PRIMARY GOAL, A HIGH LEVEL OF CURRENT INCOME. AS A SECONDARY
GOAL, THE FUND SEEKS CAPITAL GROWTH WHEN CONSISTENT WITH ITS
PRIMARY GOAL.
PRINCIPAL STRATEGIES
High Income Fund seeks to achieve its goals by investing primarily in a
diversified portfolio of high-yield, high-risk, fixed-income securities the
risks of which are, in the judgment of WRIMCO, consistent with the Fund's goals.
The Fund can invest in companies of any size. The Fund invests primarily in the
lower quality bonds, commonly called junk bonds, that are rated BB and below by
S&P or Ba and below by Moody's or, if unrated, deemed by WRIMCO to be of
comparable quality. The Fund may invest an unlimited amount of its total assets
in junk bonds. As well, the Fund may invest in bonds of any maturity.
The Fund may invest up to 20% of its total assets in common stock in order to
seek capital growth. The Fund emphasizes a blend of value and growth in its
selection of common stock. Value stocks are those whose earnings WRIMCO believes
are currently selling below their true worth. Growth stocks are those whose
earnings WRIMCO believes are likely to grow faster than the economy.
WRIMCO may look at a number of factors in selecting securities for the Fund.
These include an issuer's past, current and estimated future:
- financial strength
- cash flow
- management
- borrowing requirements
- responsiveness to changes in interest rates and business conditions.
In general, in determining whether to sell a debt security, WRIMCO uses the same
type of analysis that it uses in buying debt securities. For example, WRIMCO may
sell a holding if the issuer's financial strength declines to an unacceptable
level or management of the company weakens. As well, WRIMCO may choose to sell
an equity security if the issuer's growth potential
21
<PAGE>
has diminished. WRIMCO may also sell a security to take advantage of more
attractive investment opportunities or to raise cash.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because High Income Fund owns different types of securities, a variety of
factors can affect its investment performance, such as:
- the earnings performance, credit quality and other conditions of the
companies whose securities the Fund holds
- the susceptibility of junk bonds to greater risks of non-payment or
default, price volatility and lack of liquidity compared to higher-rated
bonds
- an increase in interest rates, which may cause the value of a bond held by
the Fund, especially bonds with longer maturities, to decline
- changes in the maturities of bonds owned by the Fund
- adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline
- WRIMCO's skill in evaluating and managing the interest rate and credit
risks of the Fund's portfolio.
Market risk for small or medium sized companies may be greater than that for
large companies. For example, smaller companies may have limited financial
resources, limited product lines or inexperienced management.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST
High Income Fund is designed for investors who primarily seek a level of current
income that is higher than is normally available with securities in the higher
rated categories and, secondarily, seek capital growth where consistent with the
goal of income. The Fund is not suitable for all investors. You should consider
whether the Fund fits your particular investment objectives.
22
<PAGE>
PERFORMANCE
HIGH INCOME FUND
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year over the past ten
calendar years.
- The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
[CHART]
<TABLE>
<CAPTION>
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31 EACH YEAR (%)
<S> <C>
'90 -14.97%
'91 37.45%
'92 16.33%
'93 17.69%
'94 -3.66%
'95 17.80%
'96 11.88%
'97 14.32%
'98 3.88%
'99 2.92%
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 12.12% (THE
FIRST QUARTER OF 1991) AND THE LOWEST QUARTERLY RETURN WAS -7.59% (THE THIRD
QUARTER OF 1990). THE CLASS A RETURN FOR THE YEAR THROUGH SEPTEMBER 30, 2000 WAS
-2.53%.
23
<PAGE>
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
HIGH INCOME FUND -3.00% 8.71% 8.93%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Market Index 1.73% 9.71% 10.94%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Composite Index 1.24% 10.39% 11.35%
--------------------------------------------------------------------------------
Lipper High Current Yield Funds
Universe Average 4.53% 8.84% 10.03%
--------------------------------------------------------------------------------
CLASS B SHARES OF
HIGH INCOME FUND -2.38%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Market Index 1.73% 9.71% 10.94% 2.42%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Composite Index 1.24% 10.39% 11.35% 2.70%
--------------------------------------------------------------------------------
Lipper High Current Yield Funds
Universe Average 4.53% 8.84% 10.03% 2.78%
--------------------------------------------------------------------------------
CLASS C SHARES OF
HIGH INCOME FUND 1.62%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Market Index 1.73% 9.71% 10.94% 2.42%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Composite Index 1.24% 10.39% 11.35% 2.70%
--------------------------------------------------------------------------------
Lipper High Current Yield Funds
Universe Average 4.53% 8.84% 10.03% 2.78%
--------------------------------------------------------------------------------
CLASS Y SHARES OF
HIGH INCOME FUND 3.15% 8.17%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Market Index 1.73% 9.71% 10.94% 7.34%
--------------------------------------------------------------------------------
Salomon Brothers High Yield
Composite Index 1.24% 10.39% 11.35% 7.57%
--------------------------------------------------------------------------------
Lipper High Current Yield Funds
Universe Average 4.53% 8.84% 10.03% 7.02%
--------------------------------------------------------------------------------
</TABLE>
THE INDEXES SHOWN ARE BROAD-BASED, SECURITIES MARKET INDEXES THAT ARE UNMANAGED.
THE SALOMON BROTHERS HIGH YIELD MARKET INDEX WILL REPLACE THE SALOMON BROTHERS
HIGH YIELD COMPOSITE INDEX. WRIMCO BELIEVES THAT THE NEW INDEX PROVIDES A MORE
ACCURATE BASIS FOR COMPARING THE FUND'S PERFORMANCE TO THE TYPES OF SECURITIES
IN WHICH THE FUND INVESTS. BOTH INDEXES ARE PRESENTED FOR COMPARISON PURPOSES.
THE LIPPER AVERAGE IS A COMPOSITE OF MUTUAL FUNDS WITH GOALS SIMILAR TO THE
GOALS OF THE FUND.
(1) SINCE OCTOBER 4, 1999 FOR CLASS B SHARES, OCTOBER 4, 1999 FOR CLASS C SHARES
AND JANUARY 4, 1996 FOR CLASS Y SHARES. BECAUSE EACH CLASS COMMENCED OPERATIONS
ON A DATE OTHER THAN AT THE END OF A MONTH, AND PARTIAL MONTH CALCULATIONS OF
THE PERFORMANCE OF THE INDEXES (INCLUDING INCOME) ARE NOT AVAILABLE, INDEX
PERFORMANCE IS FROM OCTOBER 31, 1999, OCTOBER 31, 1999 AND DECEMBER 31, 1995,
RESPECTIVELY.
24
<PAGE>
--------------------------------------------------------------------------------
FEES AND EXPENSES
HIGH INCOME FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SHAREHOLDER FEES
--------------------------------------------------------------------------------
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 5.75% None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
--------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(3)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
MANAGEMENT FEES 0.62% 0.62% 0.62% 0.62%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.24% 1.00% 1.00% None
--------------------------------------------------------------------------------
OTHER EXPENSES 0.22% 0.40% 0.50% 0.20%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.08% 2.02% 2.12% 0.82%
--------------------------------------------------------------------------------
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE FIRST
YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR, TO 3% FOR
REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR REDEMPTIONS MADE
WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN THE SIXTH YEAR AND TO
0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR CLASS C SHARES, A 1% CDSC
APPLIES TO THE LESSER OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS C SHARES
REDEEMED WITHIN TWELVE MONTHS AFTER PURCHASE. SOLELY FOR PURPOSES OF DETERMINING
THE NUMBER OF MONTHS OR YEARS FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF
SHARES, ALL PAYMENTS DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON
THE FIRST DAY OF THE MONTH.
(2) A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A
SHARES THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3) OTHER EXPENSES AND TOTAL ANNUAL FUND OPERATING EXPENSES HAVE BEEN RESTATED
TO REFLECT THE CHANGE IN ACCOUNTING SERVICES FEES AND SHAREHOLDER SERVICING FEES
EFFECTIVE SEPTEMBER 1, 2000; OTHERWISE EXPENSE RATIOS ARE BASED ON OTHER
FUND-LEVEL EXPENSES FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 2000. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
25
<PAGE>
--------------------------------------------------------------------------------
EXAMPLE
--------------------------------------------------------------------------------
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular class for each time period
specified, (b) your investment has a 5% return each year, and (c) the expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions, your costs would be:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $679 $899 $1,136 $1,816
--------------------------------------------------------------------------------
Class B Shares $605 $934 $1,188 $2,104(1)
--------------------------------------------------------------------------------
Class C Shares $215 $664 $1,139 $2,452
--------------------------------------------------------------------------------
Class Y Shares $ 84 $262 $ 455 $1,014
--------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $679 $899 $1,136 $1,816
--------------------------------------------------------------------------------
Class B Shares $205 $634 $1,088 $2,104(1)
--------------------------------------------------------------------------------
Class C Shares $215 $664 $1,139 $2,452
--------------------------------------------------------------------------------
Class Y Shares $ 84 $262 $ 455 $1,014
--------------------------------------------------------------------------------
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
26
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
GOAL
WADDELL & REED ADVISORS
MUNICIPAL BOND FUND, INC.
(FORMERLY UNITED MUNICIPAL BOND FUND, INC.-SM-) SEEKS TO
PROVIDE INCOME THAT IS NOT SUBJECT TO FEDERAL INCOME TAX.
PRINCIPAL STRATEGIES
Municipal Bond Fund seeks to achieve its goal by investing primarily in
tax-exempt municipal bonds, mainly of investment grade. The Fund may invest in
bonds of any maturity. "Municipal bonds" mean obligations the interest on which
is not includable in gross income for Federal income tax purposes. However, a
significant portion of the Fund's municipal bond interest may be subject to the
Federal alternative minimum tax ("AMT"), up to 40% of the dividends paid to
shareholders.
The Fund diversifies its holdings among two main types of municipal bonds:
- general obligation bonds, which are backed by the full faith, credit and
taxing power of the governmental authority, and
- revenue bonds, which are payable only from specific sources, such as the
revenue from a particular project or a special tax. Revenue bonds include
certain private activity bonds ("PABs") and industrial development bonds
("IDBs"), which finance privately operated facilities.
WRIMCO, the Fund's investment manager, may look at a number of factors in
selecting securities for the Fund's portfolio. These include:
- the security's current coupon
- the maturity of the security
- the relative value of the security
- the creditworthiness of the particular issuer or of the private company
involved
- the structure of the security, including whether it has a put or a call
feature.
In general, in determining whether to sell a security, WRIMCO uses the same type
of analysis that is used in buying securities in order to determine whether the
security continues to be a desired investment for the Fund. WRIMCO may also sell
a security to take advantage of more attractive investment opportunities or to
raise cash.
27
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Municipal Bond Fund owns different types of securities, a variety of
factors can affect its investment performance, such as:
- an increase in interest rates, which may cause the value of the Fund's
fixed-income securities, especially bonds with longer maturities, to
decline
- prepayment of asset-backed securities or mortgage-backed securities held by
the Fund ("extraordinary call risk")
- prepayment of higher-yielding bonds when interest rates decline ("optional
call risk")
- changes in the maturities of bonds owned by the Fund
- the credit quality of the issuers whose securities the Fund owns or of the
private companies involved in IDB-financed projects
- the local economic, political or regulatory environment affecting bonds
owned by the Fund
- failure of a bond's interest to qualify as tax-exempt
- legislation affecting the tax status of municipal bond interest
- adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline
- WRIMCO's skill in evaluating and managing the interest rate and credit
risks of the Fund's portfolio.
A significant portion of the Fund's municipal bond interest may subject
investors to the AMT; this would have the effect of reducing the Fund's return
to any such investor.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
WHO MAY WANT TO INVEST
Municipal Bond Fund is designed for investors seeking current income that is
primarily free from Federal income tax, through a diversified portfolio. You
should consider whether the Fund fits your particular investment objectives.
28
<PAGE>
--------------------------------------------------------------------------------
PERFORMANCE
MUNICIPAL BOND FUND
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year over the past ten
calendar years.
- The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
[CHART]
<TABLE>
<CAPTION>
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31 EACH YEAR (%)
<S> <C>
'90 5.63%
'91 13.15%
'92 9.53%
'93 14.30%
'94 -7.14%
'95 20.17%
'96 4.12%
'97 10.23%
'98 5.20%
'99 -5.50%
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 8.87% (THE
FIRST QUARTER OF 1995) AND THE LOWEST QUARTERLY RETURN WAS -6.48% (THE FIRST
QUARTER OF 1994). THE CLASS A RETURN FOR THE YEAR THROUGH SEPTEMBER 30, 2000 WAS
6.68%.
29
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
MUNICIPAL BOND FUND -9.52% 5.60% 6.23%
--------------------------------------------------------------------------------
Lehman Brothers Municipal
Bond Index -2.07% 6.92% 6.89%
--------------------------------------------------------------------------------
Lipper General Municipal
Debt Funds Universe Average -4.63% 5.76% 6.18%
--------------------------------------------------------------------------------
CLASS B SHARES OF
MUNICIPAL BOND FUND -6.88%
--------------------------------------------------------------------------------
Lehman Brothers Municipal
Bond Index -2.07% 6.92% 6.89% 0.30%
--------------------------------------------------------------------------------
Lipper General Municipal
Debt Funds Universe Average -4.63% 5.76% 6.18% -0.03%
--------------------------------------------------------------------------------
CLASS C SHARES OF
MUNICIPAL BOND FUND -3.05%
--------------------------------------------------------------------------------
Lehman Brothers Municipal
Bond Index -2.07% 6.92% 6.89% 0.30%
--------------------------------------------------------------------------------
Lipper General Municipal
Debt Funds Universe Average -4.63% 5.76% 6.18% -0.03%
--------------------------------------------------------------------------------
CLASS Y SHARES OF
MUNICIPAL BOND FUND -5.42% -5.41%
--------------------------------------------------------------------------------
Lehman Brothers Municipal
Bond Index -2.07% 6.92% 6.89% -2.07%
--------------------------------------------------------------------------------
Lipper General Municipal
Debt Funds Universe Average -4.63% 5.76% 6.18% -4.63%
--------------------------------------------------------------------------------
</TABLE>
THE INDEX SHOWN IS A BROAD-BASED, SECURITIES MARKET INDEX THAT IS UNMANAGED. THE
LIPPER AVERAGE IS A COMPOSITE OF MUTUAL FUNDS WITH GOALS SIMILAR TO THE GOAL OF
THE FUND.
(1)SINCE OCTOBER 5, 1999 FOR CLASS B SHARES, OCTOBER 7, 1999 FOR CLASS C SHARES
AND DECEMBER 30, 1998 FOR CLASS Y SHARES. BECAUSE EACH CLASS COMMENCED
OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND PARTIAL MONTH
CALCULATIONS OF THE PERFORMANCE OF THE ABOVE INDEX (INCLUDING INCOME) ARE NOT
AVAILABLE, INDEX PERFORMANCE IS CALCULATED FROM OCTOBER 31, 1999, OCTOBER 31,
1999 AND DECEMBER 31, 1998, RESPECTIVELY.
30
<PAGE>
--------------------------------------------------------------------------------
FEES AND EXPENSES
MUNICIPAL BOND FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SHAREHOLDER FEES
--------------------------------------------------------------------------------
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 4.25% None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED SALES
CHARGE (LOAD)(1)(AS A
PERCENTAGE OF LESSER OF
AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
--------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(3)
--------------------------------------------------------------------------------
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
MANAGEMENT FEES 0.52% 0.52% 0.52% 0.52%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.24% 0.99% 0.98% None
--------------------------------------------------------------------------------
OTHER EXPENSES 0.14% 0.35% 0.33% 0.19%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 0.90% 1.86% 1.83% 0.71%
--------------------------------------------------------------------------------
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE FIRST
YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR, TO 3% FOR
REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR REDEMPTIONS MADE
WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN THE SIXTH YEAR AND TO
0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR CLASS C SHARES, A 1% CDSC
APPLIES TO THE LESSER OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS C SHARES
REDEEMED WITHIN TWELVE MONTHS AFTER PURCHASE. SOLELY FOR PURPOSES OF DETERMINING
THE NUMBER OF MONTHS OR YEARS FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF
SHARES, ALL PAYMENTS DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON
THE FIRST DAY OF THE MONTH.
(2) A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A
SHARES THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3) OTHER EXPENSES AND TOTAL ANNUAL FUND OPERATING EXPENSES HAVE BEEN
RESTATED TO REFLECT THE CHANGE IN ACCOUNTING SERVICES FEES AND SHAREHOLDER
SERVICING FEES EFFECTIVE SEPTEMBER 1, 2000; OTHERWISE EXPENSE RATIOS ARE
BASED ON OTHER FUND-LEVEL EXPENSES FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
2000. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
31
<PAGE>
--------------------------------------------------------------------------------
EXAMPLE
--------------------------------------------------------------------------------
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular class for each time period
specified, (b) your investment has a 5% return each year, and (c) the expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions, your costs would be:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $513 $700 $ 902 $1,486
--------------------------------------------------------------------------------
Class B Shares $589 $885 $1,106 $1,927(1)
--------------------------------------------------------------------------------
Class C Shares $186 $576 $ 990 $2,148
--------------------------------------------------------------------------------
Class Y Shares $ 73 $227 $ 395 $ 883
--------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $513 $700 $ 902 $1,486
--------------------------------------------------------------------------------
Class B Shares $189 $585 $1,006 $1,927(1)
--------------------------------------------------------------------------------
Class C Shares $186 $576 $ 990 $2,148
--------------------------------------------------------------------------------
Class Y Shares $ 73 $227 $ 395 $ 883
--------------------------------------------------------------------------------
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
32
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
GOAL
WADDELL & REED ADVISORS
MUNICIPAL HIGH INCOME FUND, INC.
(FORMERLY UNITED MUNICIPAL HIGH INCOME FUND, INC.-SM-) SEEKS
TO PROVIDE A HIGH LEVEL OF INCOME THAT IS NOT SUBJECT TO
FEDERAL INCOME TAX.
PRINCIPAL STRATEGIES
Municipal High Income Fund seeks to achieve its goal through a diversified
portfolio consisting mainly of tax-exempt municipal bonds. These bonds are rated
primarily in the lower tier of investment grade (BBB by S&P and Baa by Moody's)
or lower, including bonds rated below investment grade, junk bonds (rated BB and
lower by S&P and Ba and lower by Moody's), or, if unrated, judged by WRIMCO to
be of similar quality.
"Municipal bonds" mean obligations the interest on which is not includable in
gross income for Federal income tax purposes. The Fund diversifies its holdings
among two main types of municipal bonds:
- general obligation bonds, which are backed by the full faith, credit and
taxing power of the governmental authority, and
- revenue bonds, which are payable only from specific sources, such as the
revenue from a particular project or a special tax. Revenue bonds, IDBs and
PABs finance privately operated facilities.
WRIMCO may look at a number of factors in selecting securities for the Fund's
portfolio. These include:
- the security's current coupon
- the maturity of the security
- the relative value and market yield of the security
- the creditworthiness of the particular issuer or of the private company
involved
- the structure of the security, including whether it has a put or a call
feature.
In general, in determining whether to sell a security, WRIMCO uses the same type
of analysis that is used in buying securities in order to determine whether the
security continues to be a desired investment for the Fund,
33
<PAGE>
including consideration of the security's current credit quality. As well,
WRIMCO may sell a security to take advantage of more attractive investment
opportunities or to raise cash.
The Fund may invest significantly in IDBs and PABs in general, revenue bonds
payable from similar projects and municipal bonds of issuers located in the same
geographic area.
The Fund typically invests in municipal bonds with remaining maturities of 10 to
30 years.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Municipal High Income Fund owns different types of securities, a variety
of factors can affect its investment performance, such as:
- an increase in interest rates, which may cause the value of the Fund's
fixed-income securities, especially bonds with longer maturities, to
decline
- the credit quality of the issuers whose securities the Fund owns or of the
private companies involved in IDB or PAB financed projects
- changes in the maturities of bonds owned by the Fund
- prepayment of asset-backed securities or other higher-yielding bonds held
by the Fund ("prepayment risk")
- the local economic, political or regulatory environment affecting bonds
owned by the Fund
- failure of a bond's interest to qualify as tax-exempt
- legislation affecting the tax status of municipal bond interest
- adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline
- WRIMCO's skill in evaluating and managing the interest rate and credit
risks of the Fund's portfolio.
A significant portion of the Fund's municipal bond interest may subject
investors to the AMT; this would have the effect of reducing the Fund's return
to any such investor.
As with any mutual fund, the value of the Fund's shares will change, and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
34
<PAGE>
WHO MAY WANT TO INVEST
Municipal High Income Fund is designed for investors seeking current income
through a highly diversified portfolio that is primarily free from Federal
income tax and that is higher than is normally available with securities in the
higher-rated categories. The Fund is not suitable for all investors. You should
consider whether the Fund fits your particular investment objectives.
35
<PAGE>
--------------------------------------------------------------------------------
PERFORMANCE
MUNICIPAL HIGH INCOME FUND
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
- The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year over the past ten
calendar years.
- The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
- The performance table shows average annual total returns for each class and
compares them to the market indicators listed.
- The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
[CHART]
<TABLE>
<CAPTION>
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31 EACH YEAR (%)
<S> <C>
'90 7.19%
'91 11.67%
'92 10.15%
'93 13.19%
'94 -3.12%
'95 16.74%
'96 6.90%
'97 11.77%
'98 6.82%
'99 -5.20%
</TABLE>
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 8.48% (THE
FOURTH QUARTER OF 1998) AND THE LOWEST QUARTERLY RETURN WAS -3.93% (THE FIRST
QUARTER OF 1994). THE CLASS A RETURN FOR THE YEAR THROUGH SEPTEMBER 30, 2000 WAS
4.17%.
36
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF
MUNICIPAL HIGH INCOME FUND -9.22% 6.23% 6.96%
--------------------------------------------------------------------------------
Lehman Brothers Municipal
Bond Index -2.07% 6.92% 6.89%
--------------------------------------------------------------------------------
Lipper High Yield Municipal
Bond Funds Universe Average -4.16% 6.06% 6.14%
--------------------------------------------------------------------------------
CLASS B SHARES OF
MUNICIPAL HIGH INCOME FUND -7.84%
--------------------------------------------------------------------------------
Lehman Brothers Municipal
Bond Index -2.07% 6.92% 6.89% 0.30%
--------------------------------------------------------------------------------
Lipper High Yield Municipal
Bond Funds Universe Average -4.16% 6.06% 6.14% -0.79%
--------------------------------------------------------------------------------
CLASS C SHARES OF
MUNICIPAL HIGH INCOME FUND -4.06%
--------------------------------------------------------------------------------
Lehman Brothers Municipal
Bond Index -2.07% 6.92% 6.89% 0.30%
--------------------------------------------------------------------------------
Lipper High Yield Municipal
Bond Funds Universe Average -4.16% 6.06% 6.14% -0.79%
--------------------------------------------------------------------------------
CLASS Y SHARES OF
MUNICIPAL HIGH INCOME FUND -5.00% -4.46%
--------------------------------------------------------------------------------
Lehman Brothers Municipal
Bond Index -2.07% 6.92% 6.89% -2.07%
--------------------------------------------------------------------------------
Lipper High Yield Municipal
Bond Funds Universe Average -4.16% 6.06% 6.14% -4.16%
-------------------------------------------------------------------------------
</TABLE>
THE INDEX SHOWN IS A BROAD-BASED, SECURITIES MARKET INDEX THAT IS UNMANAGED. THE
LIPPER AVERAGE IS A COMPOSITE OF MUTUAL FUNDS WITH GOALS SIMILAR TO THE GOAL OF
THE FUND.
(1) SINCE OCTOBER 5, 1999 FOR CLASS B SHARES, OCTOBER 8, 1999 FOR CLASS C SHARES
AND DECEMBER 30, 1998 FOR CLASS Y SHARES. BECAUSE EACH CLASS COMMENCED
OPERATIONS ON A DATE OTHER THAN AT THE END OF A MONTH, AND PARTIAL MONTH
CALCULATIONS OF THE PERFORMANCE OF THE ABOVE INDEX (INCLUDING INCOME) ARE NOT
AVAILABLE, INDEX PERFORMANCE IS CALCULATED FROM OCTOBER 31, 1999, OCTOBER 31,
1999 AND DECEMBER 31, 1998, RESPECTIVELY.
37
<PAGE>
--------------------------------------------------------------------------------
FEES AND EXPENSES
MUNICIPAL HIGH INCOME FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SHAREHOLDER FEES
--------------------------------------------------------------------------------
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C CLASS Y
YOUR INVESTMENT) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) 4.25% None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED SALES
CHARGE (LOAD)(1) (AS A
PERCENTAGE OF LESSER OF
AMOUNT INVESTED OR
REDEMPTION VALUE) None(2) 5% 1% None
--------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(3)
--------------------------------------------------------------------------------
(EXPENSES THAT ARE DEDUCTED CLASS A CLASS B CLASS C CLASS Y
FROM FUND ASSETS) SHARES SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.53% 0.53% 0.53% 0.53%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES 0.24% 1.00% 0.98% None
--------------------------------------------------------------------------------
OTHER EXPENSES 0.19% 0.37% 0.37% 0.43%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 0.96% 1.90% 1.88% 0.96%
--------------------------------------------------------------------------------
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE FIRST
YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR, TO 3% FOR
REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR REDEMPTIONS MADE
WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN THE SIXTH YEAR AND TO
0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR CLASS C SHARES, A 1% CDSC
APPLIES TO THE LESSER OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS C SHARES
REDEEMED WITHIN TWELVE MONTHS AFTER PURCHASE. SOLELY FOR PURPOSES OF DETERMINING
THE NUMBER OF MONTHS OR YEARS FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF
SHARES, ALL PAYMENTS DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON
THE FIRST DAY OF THE MONTH.
(2) A 1% CDSC MAY BE IMPOSED ON PURCHASES OF $2 MILLION OR MORE OF CLASS A
SHARES THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
(3) OTHER EXPENSES AND TOTAL ANNUAL FUND OPERATING EXPENSES HAVE BEEN RESTATED
TO REFLECT THE CHANGE IN ACCOUNTING SERVICES FEES AND SHAREHOLDER SERVICING FEES
EFFECTIVE SEPTEMBER 1, 2000; OTHERWISE EXPENSE RATIOS ARE BASED ON OTHER
FUND-LEVEL EXPENSES FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
38
<PAGE>
--------------------------------------------------------------------------------
EXAMPLE
--------------------------------------------------------------------------------
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular class for each time period
specified, (b) your investment has a 5% return each year, and (C) the expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions, your costs would be:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $519 $718 $ 933 $1,553
--------------------------------------------------------------------------------
Class B Shares $593 $897 $ 1,126 $1,975(1)
--------------------------------------------------------------------------------
Class C Shares $191 $591 $ 1,016 $2,201
--------------------------------------------------------------------------------
Class Y Shares $ 98 $306 $ 531 $1,178
--------------------------------------------------------------------------------
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $519 $718 $ 933 $1,553
--------------------------------------------------------------------------------
Class B Shares $193 $597 $ 1,026 $1,975(1)
--------------------------------------------------------------------------------
Class C Shares $191 $591 $ 1,016 $2,201
--------------------------------------------------------------------------------
Class Y Shares $ 98 $306 $ 531 $1,178
--------------------------------------------------------------------------------
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
39
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
GOAL
WADDELL & REED ADVISORS
MUNICIPAL MONEY MARKET FUND, INC.
SEEKS TO PROVIDE MAXIMUM CURRENT INCOME THAT IS CONSISTENT
WITH STABILITY OF PRINCIPAL AND EXEMPT FROM FEDERAL INCOME
TAXES.
PRINCIPAL STRATEGIES
Municipal Money Market Fund seeks to achieve its goal by investing in U.S.
dollar-denominated, short-term, high-quality tax-exempt securities. The Fund
will typically invest at least 80% of its total assets in municipal obligations.
High quality indicates that the securities will be rated in one of the highest
two short-term ratings as assigned by any NRSRO, or if unrated, will be of
comparable quality as determined by WRIMCO. The Fund seeks, as well, to maintain
a net asset value ("NAV") of $1.00 per share. The Fund maintains a
dollar-weighted average maturity of 90 days or less, and the Fund invests only
in securities with a remaining maturity of not more than 397 calendar days.
Interest from the Fund's investments may be subject to the alternative minimum
tax.
"Municipal obligations" mean securities the interest on which is not includable
in gross income for Federal income tax purposes. The Fund diversifies its
holdings among two main types of municipal bonds:
- general obligation bonds, which are backed by the full faith, credit and
taxing power of the governmental authority, and
- revenue bonds, which are payable only from specific sources, such as the
revenue from a particular facility or a special tax. Revenue bonds, IDBs
and PABs finance privately operated facilities.
The Fund may invest significantly in IDBs and PABs in general, revenue bonds
payable from similar projects and municipal bonds of issuers located in the same
geographic area.
40
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Municipal Money Market Fund owns different types of short-term,
tax-exempt securities, a variety of factors can affect its investment
performance, such as:
- an increase in interest rates, which can cause the value of the Fund's
holdings, especially securities with longer maturities, to decline
- the credit quality and other conditions of the issuers whose securities the
Fund holds or of private companies involved in IDB-financed projects
- failure of a security's interest to qualify as tax-exempt
- adverse bond market conditions, sometimes in response to general economic
or industry news, that may cause the prices of the Fund's holdings to fall
as part of a broad market decline
- WRIMCO's skill in evaluating and managing the interest rate and credit
risks of the Fund.
A significant portion of the Fund's municipal obligation interest may subject
investors to the AMT; this would have the effect of reducing the Fund's return
to any such investor.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
WHO MAY WANT TO INVEST
Municipal Money Market Fund is designed for investors who are risk-averse and
seek to preserve principal while earning current income, primarily exempt from
federal income tax, and saving for short-term needs. You should consider whether
the Fund fits your particular investment objectives.
41
<PAGE>
--------------------------------------------------------------------------------
PERFORMANCE
MUNICIPAL MONEY MARKET FUND
The Fund has not been in operation for a full calendar year; therefore, no
performance information is provided in this section.
--------------------------------------------------------------------------------
FEES AND EXPENSES
MUNICIPAL MONEY MARKET FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SHAREHOLDER FEES
--------------------------------------------------------------------------------
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C
YOUR INVESTMENT) SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED
SALES CHARGE (LOAD)(1)
(AS A PERCENTAGE OF LESSER
OF AMOUNT INVESTED OR
REDEMPTION VALUE) None 5% 1%
--------------------------------------------------------------------------------
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE FIRST
YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR, TO 3% FOR
REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR REDEMPTIONS MADE
WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN THE SIXTH YEAR AND TO
0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR CLASS C SHARES, A 1% CDSC
APPLIES TO THE LESSER OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS C SHARES
REDEEMED WITHIN TWELVE MONTHS AFTER PURCHASE. SOLELY FOR PURPOSES OF DETERMINING
THE NUMBER OF MONTHS OR YEARS FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF
SHARES, ALL PAYMENTS DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON
THE FIRST DAY OF THE MONTH.
42
<PAGE>
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(2)
<TABLE>
<CAPTION>
(EXPENSES THAT ARE CLASS A CLASS B CLASS C
DEDUCTED FROM FUND ASSETS) SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C>
MANAGEMENT FEES 0.40% 0.40% 0.40%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES None 1.00% 1.00%
--------------------------------------------------------------------------------
OTHER EXPENSES 0.30% 0.42% 0.44%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 0.70% 1.82% 1.84%
--------------------------------------------------------------------------------
</TABLE>
(2) THE EXPENSES SHOWN FOR MANAGEMENT FEES REFLECT THE MAXIMUM ANNUAL FEE
PAYABLE; HOWEVER, WRIMCO HAS VOLUNTARILY AGREED TO WAIVE ITS INVESTMENT
MANAGEMENT FEE ON ANY DAY IF THE FUND'S NET ASSETS ARE LESS THAN $25 MILLION,
SUBJECT TO WRIMCO'S RIGHT TO CHANGE OR TERMINATE THIS WAIVER. THE EXPENSE RATIOS
FOR OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
--------------------------------------------------------------------------------
EXAMPLE
--------------------------------------------------------------------------------
This example is intended to help you compare the cost of investing in the
shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular class for each
time period specified, (b) your investment has a 5% return each year, and (c)
the expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS
--------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares $ 72 $224
--------------------------------------------------------------------------------
Class B Shares $585 $873
--------------------------------------------------------------------------------
Class C Shares $187 $579
--------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS
--------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares $ 72 $224
--------------------------------------------------------------------------------
Class B Shares $185 $573
--------------------------------------------------------------------------------
Class C Shares $187 $579
--------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
--------------------------------------------------------------------------------
AN OVERVIEW OF THE FUND
GOAL
WADDELL & REED ADVISORS
CASH MANAGEMENT, INC.
(FORMERLY UNITED CASH MANAGEMENT, INC.-SM-) SEEKS MAXIMUM
CURRENT INCOME CONSISTENT WITH STABILITY OF PRINCIPAL.
PRINCIPAL STRATEGIES
Cash Management seeks to achieve its goal by investing in U.S. dollar-
denominated, high-quality money market obligations and instruments. High quality
indicates that the securities will be rated A-1 or A-2 by S&P or Prime-1 or
Prime-2 by Moody's, or if unrated, will be of comparable quality as determined
by WRIMCO. The Fund seeks, as well, to maintain a net asset value ("NAV") of
$1.00 per share. The Fund maintains a dollar-weighted average maturity of 90
days or less, and the Fund invests only in securities with a remaining maturity
of not more than 397 calendar days.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Because Cash Management owns different types of money market obligations and
instruments, a variety of factors can affect its investment performance, such
as:
- an increase in interest rates, which can cause the value of the Fund's
holdings, especially securities with longer maturities, to decline
- the credit quality and other conditions of the issuers whose securities the
Fund holds
- adverse bond market conditions, sometimes in response to general economic
or industry news, that may cause the prices of the Fund's holdings to fall
as part of a broad market decline
- WRIMCO's skill in evaluating and managing the interest rate and credit
risks of the Fund.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
44
<PAGE>
WHO MAY WANT TO INVEST
Cash Management is designed for investors who are risk-averse and seek to
preserve principal while earning current income and saving for short-term needs.
You should consider whether the Fund fits your particular investment objectives.
45
<PAGE>
--------------------------------------------------------------------------------
PERFORMANCE
CASH MANAGEMENT
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing the Fund's average annual total returns for the periods
shown.
- The bar chart presents the average annual total returns for Class A and
shows how performance has varied from year to year over the past ten
calendar years.
- The performance table shows average annual total returns for each class.
- The bar chart and the performance table assume payment of dividends and
other distributions in shares. As with all mutual funds, the Fund's past
performance does not necessarily indicate how it will perform in the
future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
[CHART]
<TABLE>
<CAPTION>
CHART OF YEAR-BY-YEAR RETURNS
AS OF DECEMBER 31 EACH YEAR (%)
<S> <C>
'90 7.77%
'91 5.65%
'92 3.16%
'93 2.38%
'94 3.47%
'95 5.30%
'96 4.74%
'97 4.91%
'98 4.97%
'99 4.61%
</TABLE>
--------------------------------------------------------------------------------
IN THE PERIOD SHOWN IN THE CHART, THE HIGHEST QUARTERLY RETURN WAS 1.93% (THE
SECOND QUARTER OF 1990) AND THE LOWEST QUARTERLY RETURN WAS 0.54% (THE FIRST
QUARTER OF 1994). AS OF DECEMBER 31, 1999, THE 7-DAY YIELD WAS EQUAL TO 5.35%.
YIELDS ARE COMPILED BY ANNUALIZING THE AVERAGE DAILY DIVIDEND PER SHARE DURING
THE TIME PERIOD FOR WHICH THE YIELD IS PRESENTED.
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 (%) 1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS(1)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES OF THE FUND 4.61% 4.91% 4.69%
--------------------------------------------------------------------------------
CLASS B SHARES OF THE FUND -3.79%
--------------------------------------------------------------------------------
CLASS C SHARES OF THE FUND 0.20%
--------------------------------------------------------------------------------
</TABLE>
(1) SINCE SEPTEMBER 9, 1999 FOR CLASS B SHARES AND SEPTEMBER 9, 1999 FOR CLASS C
SHARES.
46
<PAGE>
--------------------------------------------------------------------------------
FEES AND EXPENSES
CASH MANAGEMENT
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SHAREHOLDER FEES
--------------------------------------------------------------------------------
(FEES PAID DIRECTLY FROM CLASS A CLASS B CLASS C
YOUR INVESTMENT) SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C>
MAXIMUM SALES CHARGE
(LOAD) IMPOSED ON
PURCHASES (AS A PERCENTAGE
OF OFFERING PRICE) None None None
--------------------------------------------------------------------------------
MAXIMUM DEFERRED SALES
CHARGE (LOAD)1 (AS A
PERCENTAGE OF LESSER OF
AMOUNT INVESTED OR
REDEMPTION VALUE) None 5% 1%
--------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(2)
--------------------------------------------------------------------------------
(EXPENSES THAT ARE CLASS A CLASS B CLASS C
DEDUCTED FROM FUND ASSETS) SHARES SHARES SHARES
--------------------------------------------------------------------------------
<S> <C> <C> <C>
MANAGEMENT FEES 0.40% 0.40% 0.40%
--------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE
(12b-1) FEES None 1.00% 0.96%
--------------------------------------------------------------------------------
OTHER EXPENSES 0.36% 0.24% 0.36%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 0.76% 1.64% 1.72%
--------------------------------------------------------------------------------
</TABLE>
(1) THE CDSC, WHICH IS IMPOSED ON THE LESSER OF AMOUNT INVESTED OR REDEMPTION
VALUE OF CLASS B SHARES, DECLINES FROM 5% FOR REDEMPTIONS MADE WITHIN THE FIRST
YEAR OF PURCHASE, TO 4% FOR REDEMPTIONS MADE WITHIN THE SECOND YEAR, TO 3% FOR
REDEMPTIONS MADE WITHIN THE THIRD AND FOURTH YEARS, TO 2% FOR REDEMPTIONS MADE
WITHIN THE FIFTH YEAR, TO 1% FOR REDEMPTIONS MADE WITHIN THE SIXTH YEAR AND TO
0% FOR REDEMPTIONS MADE AFTER THE SIXTH YEAR. FOR CLASS C SHARES, A 1% CDSC
APPLIES TO THE LESSER OF AMOUNT INVESTED OR REDEMPTION VALUE OF CLASS C SHARES
REDEEMED WITHIN TWELVE MONTHS AFTER PURCHASE. SOLELY FOR PURPOSES OF DETERMINING
THE NUMBER OF MONTHS OR YEARS FROM THE TIME OF ANY PAYMENT FOR THE PURCHASE OF
SHARES, ALL PAYMENTS DURING A MONTH ARE TOTALED AND DEEMED TO HAVE BEEN MADE ON
THE FIRST DAY OF THE MONTH.
(2) OTHER EXPENSES AND TOTAL ANNUAL FUND OPERATING EXPENSES HAVE BEEN
RESTATED TO REFLECT THE CHANGE IN ACCOUNTING SERVICES FEES EFFECTIVE
SEPTEMBER 1, 2000; OTHERWISE EXPENSE RATIOS ARE BASED ON OTHER FUND-LEVEL
EXPENSES FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 2000. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN.
47
<PAGE>
--------------------------------------------------------------------------------
EXAMPLE
--------------------------------------------------------------------------------
This example is intended to help you compare the cost of investing in the shares
of the Fund with the cost of investing in other mutual funds. The example
assumes that (a) you invest $10,000 in the particular class for each time period
specified, (b) your investment has a 5% return each year, and (c) the expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions, your costs would be:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
IF SHARES ARE REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $ 78 $243 $422 $ 942
--------------------------------------------------------------------------------
Class B Shares $ 567 $817 $992 $1,707(1)
--------------------------------------------------------------------------------
Class C Shares $ 175 $542 $933 $2,030
--------------------------------------------------------------------------------
<CAPTION>
IF SHARES ARE NOT REDEEMED
AT END OF PERIOD: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $ 78 $243 $422 $ 942
--------------------------------------------------------------------------------
Class B Shares $ 167 $517 $892 $1,707(1)
--------------------------------------------------------------------------------
Class C Shares $ 175 $542 $933 $2,030
--------------------------------------------------------------------------------
</TABLE>
(1) REFLECTS ANNUAL OPERATING EXPENSES OF CLASS A AFTER CONVERSION OF CLASS B
SHARES INTO CLASS A SHARES 8 YEARS AFTER THE MONTH IN WHICH THE SHARES WERE
PURCHASED.
48
<PAGE>
--------------------------------------------------------------------------------
THE INVESTMENT PRINCIPLES OF THE FUNDS
INVESTMENT GOALS, PRINCIPAL STRATEGIES AND OTHER INVESTMENTS
WADDELL & REED ADVISORS BOND FUND
The goal of the Fund is a reasonable return with emphasis on preservation of
capital. The Fund seeks to achieve this goal by investing primarily in a
diversified portfolio of debt securities of high quality, and to a lesser
extent, in non-investment grade securities, convertible securities and debt
securities with warrants attached. The Fund may use various techniques (e.g.,
investing in put bonds) to manage the duration of its holdings. As a result, as
interest rates rise, the duration, or price sensitivity to rising interest
rates, of the Fund's holdings will typically decline. There is no guarantee that
the Fund will achieve its goal.
The Fund limits its acquisition of securities so that at least 90% of its total
assets will consist of debt securities. These debt securities primarily include
corporate bonds, mostly of investment grade, and securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities.
The Fund may invest in junk bonds, which are more susceptible to the risk of
non-payment or default, and their prices may be more volatile than higher-rated
bonds.
As well, the Fund may invest in foreign securities, which present additional
risks such as currency fluctuations and political or economic conditions
affecting the foreign country.
When WRIMCO believes that a defensive position is desirable, due to present or
anticipated market or economic conditions, WRIMCO may take a number of actions.
It may sell longer-term bonds and buy shorter-term bonds or money market
instruments.
By taking a temporary defensive position, the Fund may not achieve its
investment objective.
49
<PAGE>
--------------------------------------------------------------------------------
WADDELL & REED ADVISORS GLOBAL BOND FUND
The primary goal of the Global Bond Fund is to earn a high level of current
income. As a secondary goal, the Fund seeks capital growth when consistent with
the primary goal. The Fund seeks to achieve these goals by investing primarily
in a diversified portfolio of U.S. dollar-denominated debt securities of U.S. or
foreign issuers. There is no guarantee that the Fund will achieve its goals.
The Fund primarily owns debt securities; however, the Fund may also own, to a
lesser extent, preferred stock, common stock and convertible securities. The
debt securities may be of any maturity but will primarily be of intermediate
term (generally, maturity ranging between one and ten years) and of investment
grade. The Fund may, however, invest up to 35% of its total assets in debt
securities, typically foreign issues, in the lower rating categories of the
established rating organizations, or unrated securities determined by WRIMCO to
be of comparable quality. Lower quality debt securities, which include junk
bonds, are considered to be speculative and involve greater risk of default or
price changes due to changes in the issuer's creditworthiness.
During normal market conditions, the Fund invests at least 65% of its total
assets in issuers of at least three countries, which may include the U.S. The
Fund generally limits its holdings so that no more than 30% of its total assets
are invested in issuers within a single country outside the U.S. Typically, the
Fund invests no more than 10% of its assets in securities denominated in foreign
currencies.
During normal market conditions, the Fund invests at least 65% of its total
assets in debt securities. The Fund limits its acquisition of common stock so
that no more than 20% of its total assets will consist of common stock, and no
more than 10% of the Fund's total assets will consist of non-dividend-paying
common stock.
When WRIMCO believes that a full or partial temporary defensive position is
desirable, due to present or anticipated market or economic conditions, WRIMCO
may take any one or more of the following steps with respect to the assets in
the Fund's portfolio:
- shorten the average maturity of the Fund's debt holdings
- hold cash or cash equivalents (short-term investments, such as commercial
paper and certificates of deposit) in varying amounts designed for
defensive purposes
50
<PAGE>
By taking a temporary defensive position in any one or more of these manners,
the Fund may not achieve its investment objectives.
WADDELL & REED ADVISORS GOVERNMENT SECURITIES FUND
The goal of the Fund is high current income consistent with safety of principal.
The Fund seeks to achieve its goal by investing exclusively in a diversified
portfolio of U.S. Government securities. U.S. Government securities are
high-quality instruments issued or guaranteed as to principal or interest by the
U.S. Treasury or by an agency or instrumentality of the U.S. Government. There
is no guarantee that the Fund will achieve its goal.
Not all U.S. Government securities are backed by the full faith and credit of
the United States. Some are backed by the right of the issuer to borrow from the
U.S. Treasury; others are backed by the discretionary authority of the U.S.
Government to purchase the agency's obligations, while others are supported only
by the credit of the instrumentality. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. The Fund may invest a significant portion of its assets in
mortgage-backed securities guaranteed by the U.S. Government or one of its
agencies or instrumentalities. The Fund invests in securities of agencies or
instrumentalities only when WRIMCO is satisfied that the credit risk is
acceptable.
Generally, in determining whether to sell a security, WRIMCO uses the same type
of analysis that is used in buying securities of that type. For example, WRIMCO
may sell a security if it believes the security no longer provides significant
income potential or if the safety of the principal is weakened. As well, WRIMCO
may sell a security to take advantage of more attractive investment
opportunities or to raise cash.
When WRIMCO believes that a temporary defensive position is desirable, the Fund
may increase its investments in U.S. Treasury securities and/or increase its
cash position. By taking a temporary defensive position, the Fund may not
achieve its investment objective.
WADDELL & REED ADVISORS HIGH INCOME FUND
The primary goal of the Fund is to earn a high level of current income. As a
secondary goal, the Fund seeks capital growth when consistent with the primary
goal. The Fund seeks to achieve these goals by investing primarily in a
diversified portfolio of high-yield, high-risk, fixed income securities, the
51
<PAGE>
risks of which are, in the judgment of WRIMCO, consistent with the Fund's goals.
There is no guarantee that the Fund will achieve its goals.
The Fund primarily owns debt securities; however, the Fund may also own, to a
lesser degree, preferred stock, common stock and convertible securities. In
general, the high income that the Fund seeks is paid by debt securities in the
lower rating categories of the established rating services or unrated securities
that are determined by WRIMCO to be of comparable quality; these are securities
rated BB or lower by S&P, or Ba or lower by Moody's. Lower-quality debt
securities, which include 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
higher-quality securities and may decline significantly in periods of general
economic difficulty.
The Fund will normally invest at least 80% of its total assets to seek a high
level of current income. The Fund limits its acquisition of common stock so that
no more than 20% of the Fund's total assets will consist of common stock and no
more than 10% of the Fund's total assets will consist of non-dividend-paying
common stock.
The Fund may invest an unlimited amount of its assets in foreign securities. At
this time, however, the Fund intends to invest in foreign securities to a
limited extent.
When WRIMCO believes that a full or partial temporary defensive position is
desirable, due to present or anticipated market or economic conditions, WRIMCO
may take any one or more of the following steps with respect to the assets in
the Fund's portfolio:
- shorten the average maturity of the Fund's debt holdings
- hold cash or cash equivalents (short-term investments, such as commercial
paper and certificates of deposit) in varying amounts designed for
defensive purposes
- emphasize high-grade debt securities.
By taking a temporary defensive position in any one or more of these manners,
the Fund may not achieve its investment objectives.
52
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL BOND FUND
The goal of the Fund is to provide income that is not subject to Federal income
tax. The Fund seeks to achieve this goal by investing principally in a
diversified portfolio of municipal bonds. There is no guarantee that the Fund
will achieve its goal.
As used in this Prospectus, "municipal bonds" mean obligations the interest on
which is not includable in gross income for Federal income tax purposes. The
Fund and WRIMCO rely on the opinion of bond counsel for the issuer in
determining whether obligations are municipal bonds. The Fund anticipates that
not more than 40% of the dividends it will pay to shareholders will be treated
as a tax preference item for AMT purposes.
Municipal bonds are issued by a wide range of state and local governments,
agencies and authorities for various purposes. The two main types 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 project or class of
projects or a special tax or other revenue source. IDBs and PABs are revenue
bonds issued by or on behalf of public authorities to obtain funds to finance
privately operated facilities. The Fund may invest more than 25% of its total
assets in IDBs. Other municipal obligations include lease obligations of
municipal authorities or entities and participations in these obligations.
At least 80% of the Fund's net assets will be invested, during normal market
conditions, in municipal bonds of investment grade.
The Fund may invest up to 10% of its total assets in taxable debt securities
other than municipal bonds. These must be either:
- U.S. Government securities
- obligations of domestic banks and certain savings and loan associations
- commercial paper rated at least A by S&P or Moody's
- any of the foregoing obligations subject to repurchase agreements.
Subject to its policies regarding the amount of Fund assets invested in
municipal bonds and taxable debt securities, the Fund may invest in other types
of securities and use certain other instruments in seeking to achieve the Fund's
goal.
53
<PAGE>
When WRIMCO believes that a temporary defensive position is desirable, it may
take certain steps with respect to up to all of the Fund's assets, including any
one or more of the following:
- shorten the average maturity of the Fund's portfolio
- hold taxable obligations, subject to the limitations stated above
- emphasize debt securities of a higher quality than those the Fund would
ordinarily hold
- hedge exposure to interest rate risk by investing in futures contracts,
options on futures contracts and other similar derivative instruments.
By taking a temporary defensive position, the Fund may not achieve its
investment objective.
Income from taxable obligations, repurchase agreements and derivative
instruments will be subject to Federal income tax. At this time, the Fund has
limited exposure to futures contracts and similar derivative instruments. The
Fund does, and may in the future, hold a significant portion of its assets in
municipal bonds for which the applicable interest rate formula varies inversely
with prevailing interest rates or otherwise may expose the bond to greater
sensitivity to interest rate changes.
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND
The goal of the Fund is to provide a high level of income that is not subject to
Federal income tax. The Fund seeks to achieve this goal by investing in medium
and lower-quality municipal bonds that provide higher yields than bonds of
higher quality. The Fund anticipates that not more than 40% of the dividends it
will pay to shareholders will be treated as a tax preference item for AMT
purposes. There is no guarantee that the Fund will achieve its goal.
Municipal bonds are issued by a wide range of state and local governments,
agencies and authorities for various purposes. The two main types 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 project or class of
projects or a special tax or other revenue sources. IDBs and PABs are revenue
bonds issued by or on behalf of public authorities to obtain funds to finance
privately operated facilities. Other municipal obligations include lease
obligations of municipal authorities or entities and participations in these
obligations.
54
<PAGE>
Under normal market conditions, the Fund will:
- invest substantially in bonds with remaining maturities of 10 to 30 years
- invest at least 80% of its total assets in municipal bonds
- invest at least 75% of its total assets in medium and lower-quality
municipal bonds, which are bonds rated BBB through D by S&P, or Baa
through D by Moody's, or, if unrated, are determined by WRIMCO to be of
comparable quality.
The Fund may invest in higher-quality municipal bonds, and invest less than 75%
of its total assets in medium and lower-quality municipal bonds, at times when
yield spreads are narrow and the higher yields do not justify the increased
risk; and/or when, in the opinion of WRIMCO, there is a lack of medium and
lower-quality securities in which to invest.
The Fund may invest 25% or more of its total assets in IDBs and PABs, in
securities the payment of principal and interest on which is derived from
revenue of similar projects, or in municipal bonds of issuers located in the
same geographic area. The Fund will not, however, have more than 25% of its
total assets in IDBs and PABs issued for any one industry or in any one state.
During normal market conditions, the Fund may invest up to 20% of its total
assets in a combination of taxable obligations and in options, futures contracts
and other taxable derivative instruments. The taxable obligations must be
either:
- U.S. Government securities
- obligations of domestic banks and certain savings and loan associations
- commercial paper rated at least A by S&P or Moody's
- any of the foregoing obligations subject to repurchase agreements.
The Fund may invest in certain derivative instruments if it is permitted to
invest in the type of asset by which the return on, or value of, the derivative
is measured. Income from taxable obligations and certain derivative instruments
will be subject to Federal income tax. At this time, the Fund has limited
exposure to derivative instruments.
At times WRIMCO may believe that a full or partial defensive position is
desirable, temporarily, due to present or anticipated market or economic
conditions that are affecting or could affect the values of municipal bonds.
During such periods, the Fund may invest up to all of its assets in taxable
obligations, which would result in a higher proportion of the Fund's income
55
<PAGE>
(and thus its dividends) being subject to Federal income tax. By taking a
temporary defensive position, the Fund may not achieve its investment objective.
WADDELL & REED ADVISORS MUNICIPAL MONEY MARKET FUND
The goal of the Fund is maximum current income consistent with stability of
principal and exempt from federal income taxes. The Fund seeks to achieve its
goal by investing in a diversified portfolio of high-quality, short-term
tax-exempt securities in accordance with the requirements of Rule 2a-7 under the
Investment Company Act of 1940, as amended (the "1940 Act"). There is no
guarantee that the Fund will achieve its goal.
The Fund typically invests at least 80% of its total assets in municipal
obligations.
As used in this Prospectus, "municipal obligations" mean securities the interest
on which is not includable in gross income for Federal income tax purposes. The
Fund and WRIMCO rely on the opinion of bond counsel for the issuer in
determining whether obligations are municipal bonds. The Fund may invest an
unlimited amount of its assets in securities whose interest may be treated as a
tax preference item for AMT purposes.
Municipal obligations are issued by a wide range of state and local governments,
agencies and authorities for various purposes. The two main types of municipal
obligations 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 a special tax or other revenue source. IDBs and PABs are
revenue bonds issued by or on behalf of public authorities to obtain funds to
finance privately operated facilities. The Fund may invest more than 25% of its
total assets in IDBs; however, the Fund may not invest more than 25% of its
total assets in IDBs of similar type projects.
Other municipal obligations include lease obligations of municipal authorities
or entities and participations in these obligations.
56
<PAGE>
The Fund may invest up to 20% of its total assets in taxable debt securities
other than municipal obligations. These must be either:
- U.S. Government securities
- obligations of domestic banks and certain savings and loan associations
- commercial paper rated at least A or its equivalent by any NRSRO
- any of the foregoing obligations subject to repurchase agreements.
WRIMCO may look at a number of factors in selecting securities for the Fund's
portfolio. These include:
- the credit quality of the particular issuer/guarantor of the security or of
the private company involved
- the maturity of the security
- the relative value of the security.
Generally, in determining whether to sell a security, WRIMCO uses the same
analysis that it uses in buying securities to determine if the security no
longer offers adequate return or does not comply with Rule 2a-7. WRIMCO may also
sell a security to take advantage of more attractive investment opportunities or
to raise cash.
At times WRIMCO may believe that a full or partial defensive position is
desirable, temporarily, due to present or anticipated market or economic
conditions that are affecting or could affect the values of municipal
obligations. During such periods, the Fund may invest up to all of its assets in
short-term taxable obligations which would result in a higher proportion of the
Fund's income (and thus its dividends) being subject to Federal income tax. By
taking a temporary defensive position, the Fund may not achieve its investment
objective.
You will find more information in the Statement of Additional Information
("SAI") about the Fund's valuation procedures.
WADDELL & REED ADVISORS CASH MANAGEMENT
The goal of the Fund is maximum current income consistent with stability of
principal. The Fund seeks to achieve its goal by investing in a diversified
portfolio of high-quality money market instruments in accordance with the
requirements of Rule 2a-7 under the 1940 Act. There is no guarantee that the
Fund will achieve its goal.
57
<PAGE>
The Fund invests only in the following U.S. dollar-denominated money market
obligations and instruments:
- U.S. government obligations (including obligations of U.S. government
agencies and instrumentalities)
- bank obligations and instruments secured by bank obligations, such as
letters of credit
- commercial paper
- corporate debt obligations, including variable amount master demand notes
- Canadian government obligations
- certain other obligations (including municipal obligations) guaranteed as
to principal and interest by a bank in whose obligations the Fund may
invest or a corporation in whose commercial paper the Fund may invest.
The Fund only invests in bank obligations if they are obligations of a bank
subject to regulation by the U.S. Government (including foreign branches of
these banks) or obligations of a foreign bank having total assets of at least
$500 million, and instruments secured by any such obligation.
WRIMCO may look at a number of factors in selecting securities for the Fund's
portfolio. These include:
- the credit quality of the particular issuer or guarantor of the security
- the maturity of the security
- the relative value of the security.
Generally, in determining whether to sell a security, WRIMCO uses the same
analysis that it uses in buying securities to determine if the security no
longer offers adequate return or does not comply with Rule 2a-7. WRIMCO may also
sell a security to take advantage of more attractive investment opportunities or
to raise cash.
You will find more information in the SAI about the Fund's valuation procedures.
58
<PAGE>
ALL FUNDS
Each Fund may also invest in and use other types of instruments in seeking to
achieve its goal(s). For example, each Fund (other than Cash Management or
Municipal Money Market Fund) is permitted to invest in options, futures
contracts, asset-backed securities and other derivative instruments if it is
permitted to invest in the type of asset by which the return on, or value of,
the derivative is measured.
You will find more information about each Fund's permitted investments and
strategies, as well as the restrictions that apply to them, in its SAI.
59
<PAGE>
RISK CONSIDERATIONS OF PRINCIPAL STRATEGIES AND OTHER INVESTMENTS
Risks exist in any investment. Each Fund is subject to market risk, financial
risk and prepayment risk.
- Market risk is the possibility of a change in the price of the security
because of market factors including changes in interest rates. Bonds with
longer maturities are more interest-rate sensitive. For example, if
interest rates increase, the value of a bond with a longer maturity is more
likely to decrease. Because of market risk, the share price of the Fund
(other than Cash Management or Municipal Money Market Fund) will likely
change as well.
- Financial risk is based on the financial situation of the issuer of the
security. For debt securities, the Fund's financial risk depends on the
credit quality of the underlying securities in which it invests. For an
equity investment, a Fund's financial risk may depend, for example, on the
earnings performance of the company issuing the stock.
- Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid
before its expected maturity date.
Certain types of each Fund's authorized investments and strategies, such as
derivative instruments, involve special risks. Lower-quality debt securities 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 higher-quality securities and may
decline significantly in periods of general economic difficulty. Foreign
securities and foreign currencies may involve risks relating to currency
fluctuations, political or economic conditions in the foreign country, and the
potentially less stringent investor protection and disclosure standards of
foreign markets. These factors could make foreign investments, especially those
in developing countries, more volatile.
For IDBs and PABs, their credit quality is generally dependent on the credit
standing of the company involved. To the extent that Municipal Bond Fund,
Municipal High Income Fund or Municipal Money Market Fund invests in municipal
bonds the payment of principal and interest on which is derived from revenue of
similar projects, or in municipal bonds of issuers located in the same
geographic area, each Fund may be more susceptible to the risks associated with
economic, political or regulatory occurrences that might
60
<PAGE>
adversely affect particular projects or areas. Currently, Municipal High Income
Fund invests a significant portion of its assets in IDBs and PABs associated
with healthcare-oriented projects. The risks particular to these types of
projects are construction risk and occupancy risk. You will find more
information in the SAI about the types of projects in which that Fund may invest
from time to time and a discussion of the risks associated with such projects.
Because each Fund owns different types of investments, its performance will be
affected by a variety of factors. The value of a Fund's investments and the
income it generates will vary from day to day, generally reflecting changes in
interest rates, market conditions and other company and economic news.
Performance will also depend on WRIMCO's skill in selecting investments.
61
<PAGE>
--------------------------------------------------------------------------------
YOUR ACCOUNT
CHOOSING A SHARE CLASS
Each Fund offers four classes of shares: Class A, Class B, Class C and Class Y
(except Cash Management and Municipal Money Market Fund do not offer Class Y).
Each class has its own sales charge, if any, and expense structure. The decision
as to which class of shares is best suited to your needs depends on a number of
factors that you should discuss with your financial advisor. Some factors to
consider are how much you plan to invest and how long you plan to hold your
investment. If you are investing a substantial amount and plan to hold your
shares for a long time, Class A shares may be the most appropriate for you.
Class B and Class C shares are not available for investments of $2 million or
more. If you are investing a lesser amount, you may want to consider Class B
shares (if investing for at least seven years) or Class C shares (if investing
for less than seven years). Class Y shares are designed for institutional
investors and others investing through certain intermediaries.
Since your objectives may change over time, you may want to consider another
class when you buy additional Fund shares. All of your future investments in a
Fund will be made in the class you select when you open your account, unless you
inform the Fund otherwise, in writing, when you make a future investment.
62
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
GENERAL COMPARISON OF CLASS A, CLASS B AND CLASS C SHARES
-----------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
-----------------------------------------------------------------------------------------
<S> <C> <C>
- Initial sales charge - No initial sales charge - No initial sales charge
-----------------------------------------------------------------------------------------
- No deferred sales - Deferred sales charge on - A 1% deferred sales
charge(1) shares you sell within six charge on shares you
years after purchase sell within twelve
months after purchase
-----------------------------------------------------------------------------------------
- Maximum distribution - Maximum distribution and - Maximum distribution
and service (12b-1) fees service (12b-1) fees of 1.00% and service (12b-1)
of 0.25% fees of 1.00%
-----------------------------------------------------------------------------------------
- For an investment of - Converts to Class A shares - Does not convert to
$2 million or more, 8 years after the month in Class A shares, so
only Class A shares which the shares were annual expenses do
are available purchased, thus reducing not decrease
future annual expenses
-----------------------------------------------------------------------------------------
- For an investment of
$300,000 or more, your
financial advisor typically
will recommend purchase of
Class A shares due to a reduced
sales charge and lower annual
expenses
----------------------------------------------------------------------------------------
</TABLE>
(1) A 1% CDSC MAY APPLY TO PURCHASES OF $2 MILLION OR MORE OF CLASS A SHARES
THAT ARE REDEEMED WITHIN TWELVE MONTHS OF PURCHASE.
63
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
GENERAL COMPARISON OF CLASS A, CLASS B AND CLASS C SHARES
CASH MANAGEMENT AND MUNICIPAL MONEY MARKET FUND
-----------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
----------------------------------------------------------------------------------------
<S> <C> <C>
- No initial sales charge - No initial sales charge - No initial sales charge
-----------------------------------------------------------------------------------------
- Funds Plus Service - Funds Plus Service - Funds Plus Service
optional required for required for
direct investment direct investment
-----------------------------------------------------------------------------------------
- No distribution and - Deferred sales charge - A 1% deferred sales
service (12b-1) fees on shares you sell charge on shares
within six years you sell within
twelve months
-----------------------------------------------------------------------------------------
- For an investment of - Maximum distribution - Maximum distribution
$2,000,000 or more and service (12b-1) fees and service (12b-1)
only Class A shares of 1.00% fees of 1.00%
are available
-----------------------------------------------------------------------------------------
- Converts to Class A shares - Does not convert to
8 years after the month Class A shares, so
in which the shares were annual expenses
purchased, thus reducing do not decrease
future annual expenses
-----------------------------------------------------------------------------------------
</TABLE>
Effective June 30, 2000, Cash Management Waddell & Reed Money Market C shares
were closed to all investments other than re-invested dividends.
EACH FUND HAS ADOPTED A DISTRIBUTION AND SERVICE PLAN ("Plan") pursuant to Rule
12b-1 under the 1940 Act for each of its Class A, Class B and Class C shares
other than Cash Management Class A and Municipal Money Market Fund Class A.
Under the Class A Plan, a Fund may pay Waddell & Reed, Inc. a fee of up to
0.25%, on an annual basis, of the average daily net assets of the Class A
shares. This fee is to reimburse Waddell & Reed, Inc. for the amounts it spends
for distributing the Fund's Class A shares, providing service to Class A
shareholders and/or maintaining Class A shareholder accounts. Under the Class B
Plan and the Class C Plan, each Fund may pay Waddell & Reed, Inc., on an annual
basis, a service fee of up to 0.25% of the average daily net assets of the class
to compensate Waddell & Reed, Inc. for providing service to shareholders of that
class and/or maintaining shareholder accounts for that class and a distribution
fee of up to 0.75% of the average daily net assets of the class to compensate
Waddell & Reed, Inc. for distributing shares of that class. Because the fees of
a class are paid out of the assets of that class on an ongoing basis, over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
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<PAGE>
CLASS A SHARES are subject to an initial sales charge when you buy them (other
than Cash Management and Municipal Money Market Fund), based on the amount of
your investment, according to the tables below. Class A shares pay an annual
12b-1 fee of up to 0.25% of average Class A net assets. The ongoing expenses of
this class are lower than those for Class B or Class C shares and typically
higher than those for Class Y shares.
BOND FUND
GLOBAL BOND FUND
HIGH INCOME FUND
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SIZE OF PURCHASE
--------------------------------------------------------------------------------
SALES CHARGE REALLOWANCE
AS APPROX. TO DEALERS
SALES CHARGE PERCENT OF AS PERCENT
AS PERCENT OF AMOUNT OF OFFERING
OFFERING PRICE INVESTED PRICE
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Under $100,000 5.75% 6.10% 5.00%
--------------------------------------------------------------------------------
$100,000 to less than $200,000 4.75 4.99 4.00
--------------------------------------------------------------------------------
$200,000 to less than $300,000 3.50 3.63 2.80
--------------------------------------------------------------------------------
$300,000 to less than $500,000 2.50 2.56 2.00
--------------------------------------------------------------------------------
$500,000 to less than $1,000,000 1.50 1.52 1.20
--------------------------------------------------------------------------------
$1,000,000 to less than $2,000,000 1.00 1.01 0.75
--------------------------------------------------------------------------------
$2,000,000 and over 0.00(1) 0.00(1) 0.50
--------------------------------------------------------------------------------
</TABLE>
(1) NO SALES CHARGE IS PAYABLE AT THE TIME OF PURCHASE ON INVESTMENTS OF $2
MILLION OR MORE, ALTHOUGH FOR SUCH INVESTMENTS THE FUND MAY IMPOSE A CDSC OF
1.00% ON CERTAIN REDEMPTIONS MADE WITHIN TWELVE MONTHS OF THE PURCHASE. THE CDSC
IS ASSESSED ON AN AMOUNT EQUAL TO THE LESSER OF THE THEN CURRENT MARKET VALUE OR
THE COST OF THE SHARES BEING REDEEMED. ACCORDINGLY, NO SALES CHARGE IS IMPOSED
ON INCREASES IN NET ASSET VALUE ABOVE THE INITIAL PURCHASE PRICE.
65
<PAGE>
GOVERNMENT SECURITIES FUND
MUNICIPAL BOND FUND
MUNICIPAL HIGH INCOME FUND
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SIZE OF PURCHASE
--------------------------------------------------------------------------------
SALES CHARGE REALLOWANCE
AS APPROX. TO DEALERS
SALES CHARGE PERCENT OF AS PERCENT
AS PERCENT OF AMOUNT OF OFFERING
OFFERING PRICE INVESTED PRICE
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Under $100,000 4.25% 4.44% 3.60%
--------------------------------------------------------------------------------
$100,000 to less than $300,000 3.25 3.36 2.75
--------------------------------------------------------------------------------
$300,000 to less than $500,000 2.50 2.56 2.00
--------------------------------------------------------------------------------
$500,000 to less than $1,000,000 1.50 1.52 1.20
--------------------------------------------------------------------------------
$1,000,000 to less than $2,000,000 1.00 1.01 0.75
--------------------------------------------------------------------------------
$2,000,000 and over 0.00(1) 0.00(1) 0.50
--------------------------------------------------------------------------------
</TABLE>
(1) NO SALES CHARGE IS PAYABLE AT THE TIME OF PURCHASE ON INVESTMENTS OF $2
MILLION OR MORE, ALTHOUGH FOR SUCH INVESTMENTS THE FUND MAY IMPOSE A CDSC OF
1.00% ON CERTAIN REDEMPTIONS MADE WITHIN TWELVE MONTHS OF THE PURCHASE. THE CDSC
IS ASSESSED ON AN AMOUNT EQUAL TO THE LESSER OF THE THEN CURRENT MARKET VALUE OR
THE COST OF THE SHARES BEING REDEEMED. ACCORDINGLY, NO SALES CHARGE IS IMPOSED
ON INCREASES IN NET ASSET VALUE ABOVE THE INITIAL PURCHASE PRICE.
Waddell & Reed, Inc. and its affiliates may pay additional compensation from its
own resources to securities dealers based upon the value of shares of a Fund
owned by the dealer for its own account or for its customers. Waddell & Reed,
Inc. may also provide compensation from its own resources to securities dealers
with respect to shares of the Funds purchased by customers of such dealers
without payment of a sales charge.
SALES CHARGE REDUCTIONS AND WAIVERS
LOWER SALES CHARGES ARE AVAILABLE BY:
- Combining additional purchases of Class A shares of any of the funds in the
Waddell & Reed Advisors Funds and/or the W&R Funds, Inc. except shares of
Waddell & Reed Advisors Cash Management, Waddell & Reed Advisors Municipal
Money Market Fund or Class A shares of W&R Funds, Inc. Money Market Fund
unless acquired by exchange for Class A shares on which a sales charge was
paid (or as a dividend or distribution on such acquired shares), with the
net asset value ("NAV") of Class A shares already held ("Rights of
Accumulation");
- Grouping all purchases of Class A shares, except shares of Cash Management,
Municipal Money Market Fund or W&R Money Market Fund, made during a
thirteen-month period ("Letter of Intent"); and
- Grouping purchases by certain related persons.
66
<PAGE>
Additional information and applicable forms are available from your financial
advisor.
WAIVERS FOR CERTAIN INVESTORS
CLASS A SHARES MAY BE PURCHASED AT NAV BY:
- The Directors and officers of the Fund or of any affiliated entity of
Waddell & Reed, Inc., employees of Waddell & Reed, Inc., employees of its
affiliates, financial advisors of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each
- Certain retirement plans and certain trusts for these persons
- A 401(k) plan or a 457 plan having 100 or more eligible employees, and the
shares are held in individual plan participant accounts on the Fund's
records
- Until March 31, 2001, clients of Legend Equities Corporation ("Legend") if
the purchase is made with the proceeds of the redemption of shares of a
mutual fund which is not within the Waddell & Reed Advisors or W&R Funds,
Inc. and the purchase is made within 60 days of such redemption
- Retirement plan accounts held in the Waddell & Reed Advisors Retirement
Plan, offered and distributed by Nationwide Investment Services Corporation
through Nationwide Trust Company, FSB retirement programs
- Direct Rollovers from the Waddell & Reed Advisors Retirement Plan.
You will find more information in the SAI about sales charge reductions and
waivers.
CONTINGENT DEFERRED SALES CHARGE. A CDSC may be assessed against your redemption
amount of Class B or Class C shares or certain Class A shares and paid to
Waddell & Reed, Inc. (the "Distributor"), as further described below. The
purpose of the CDSC is to compensate the Distributor for the costs incurred by
it in connection with the sale of the Fund's Class B or Class C shares or with
Class A investments of $2 million or more at NAV. The CDSC will not be imposed
on shares representing payment of dividends or other distributions or on amounts
which represent an increase in the value of a shareholder's account resulting
from capital appreciation above the amount paid for shares purchased during the
CDSC period. For Class B, the date of redemption is measured in calendar months
from the month of purchase. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month are totaled and deemed to have been made on the first day of the
month. The CDSC is applied to the lesser of amount invested or redemption value.
67
<PAGE>
To keep your CDSC as low as possible, each time you place a request to redeem
shares, the Fund assumes that a redemption is made first of shares not subject
to a deferred sales charge (including shares which represent appreciation on
shares held, reinvested dividends and distributions), and then of shares that
represent the lowest sales charge.
Unless instructed otherwise, a Fund, when requested to redeem a specific dollar
amount, will redeem additional shares of the applicable class that are equal in
value to the CDSC. For example, should you request a $1,000 redemption and the
applicable CDSC is $27, the Fund will redeem shares having an aggregate NAV of
$1,027, absent different instructions.
CLASS B SHARES are not subject to an initial sales charge when you buy them.
However, you may pay a CDSC if you sell your Class B shares within six years of
their purchase, based on the table below. Class B shares pay an annual 12b-1
service fee of up to 0.25% of average net assets and a distribution fee of up to
0.75% of average net assets. Over time, these fees will increase the cost of
your investment and may cost you more than if you had purchased Class A shares.
Class B shares, and any dividends and distributions paid on such shares,
automatically convert to Class A shares eight years after the end of the month
in which the shares were purchased. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The Class A shares have lower ongoing expenses.
The Fund will redeem your Class B shares at their NAV next calculated after
receipt of a written request for redemption in good order, subject to the CDSC
discussed below.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
CONTINGENT DEFERRED SALES CHARGE
ON SHARES SOLD WITHIN YEAR AS % OF AMOUNT SUBJECT TO CHARGE
--------------------------------------------------------------------------------
<S> <C>
1 5.0%
--------------------------------------------------------------------------------
2 4.0%
--------------------------------------------------------------------------------
3 3.0%
--------------------------------------------------------------------------------
4 3.0%
--------------------------------------------------------------------------------
5 2.0%
--------------------------------------------------------------------------------
6 1.0%
--------------------------------------------------------------------------------
7+ 0.0%
--------------------------------------------------------------------------------
</TABLE>
In the table, a "year" is a 12-month period. In applying the CDSC, all purchases
are considered to have been made on the first day of the month in which the
purchase was made.
68
<PAGE>
For example, if a shareholder opens an account on January 14, 2001, then redeems
all Class B shares on January 12, 2002, the shareholder will pay a CDSC of 4%,
the rate applicable to redemptions made within the second year of purchase. All
Class B purchases made prior to July 1, 2000 will be automatically treated under
the current method of calculating the CDSC. Any purchase made in 1999 will be
deemed to have been made on December 1, 1998. Any purchase made from January 1,
2000 to June 30, 2000 will be deemed to have been made on December 1, 1999.
CLASS C SHARES are not subject to an initial sales charge when you buy them, but
if you sell your Class C shares within twelve months after purchase, you will
pay a 1% CDSC. For purposes of the CDSC, purchases of Class C shares within a
month will be considered as being purchased on the first day of the month. Class
C shares pay an annual 12b-1 service fee of up to 0.25% of average net assets
and a distribution fee of up to 0.75% of average net assets. Over time, these
fees will increase the cost of your investment and may cost you more than if you
had purchased Class A shares. Class C shares do not convert to any other class.
For Class C shares, the CDSC will be applied to the lesser of amount invested or
redemption value of shares that have been held for twelve months or less.
THE CLASS B AND CLASS C CDSC WILL NOT APPLY IN THE FOLLOWING CIRCUMSTANCES:
- redemptions of shares requested within one year of the shareholder's death
or disability, provided the Fund is notified of the death or disability at
the time of the request and furnished proof of such event satisfactory to
the Distributor.
- redemptions of shares made to satisfy required minimum distributions after
age 70 1/2 from a qualified retirement plan, a required minimum
distribution from an individual retirement account, Keogh plan or custodial
account under section 403(b)(7) of the Internal Revenue Code of 1986, as
amended ("Code"), a tax-free return of an excess contribution, or that
otherwise results from the death or disability of the employee, as well as
in connection with redemptions by any tax-exempt employee benefit plan for
which, as a result of a subsequent law or legislation, the continuation of
its investment would be improper.
- redemptions of shares purchased by current or retired Directors of the
Fund, and Directors of affiliated companies, current or retired officers of
the Fund, officers and employees of WRIMCO, the Distributor or their
69
<PAGE>
affiliated companies, financial advisors of Waddell & Reed, Inc. or its
affiliates, and by the members of immediate families of such persons.
- redemptions of shares made pursuant to a shareholder's participation in any
systematic withdrawal service adopted for a Fund. (The service and this
exclusion from the CDSC do not apply to a one-time withdrawal.)
- redemptions the proceeds of which are reinvested within 45 days in shares
of the same class of the Fund as that redeemed.
- the exercise of certain exchange privileges.
- redemptions effected pursuant to each Fund's right (other than High Income
Fund) to liquidate a shareholder's shares if the aggregate NAV of those
shares is less than $500, or $250 for Cash Management and Municipal Money
Market Fund.
- redemptions effected by another registered investment company by virtue of
a merger or other reorganization with a Fund or by a former shareholder of
such investment company of shares of a Fund acquired pursuant to such
reorganization.
These exceptions may be modified or eliminated by a Fund at any time without
prior notice to shareholders, except with respect to redemptions effected
pursuant to the Fund's right to liquidate a shareholder's shares, which requires
certain notice.
CLASS Y SHARES are not subject to a sales charge or annual 12b-1 fees.
Class Y shares are only available for purchase by:
- participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401 of the Code, including 401(k)
plans, when the plan has 100 or more eligible employees and holds the
shares in an omnibus account on the Fund's records;
- banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an
omnibus account on the Fund's records;
- government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more;
and
- certain retirement plans and trusts for employees and financial advisors of
Waddell & Reed, Inc. and its affiliates.
70
<PAGE>
WAYS TO SET UP YOUR ACCOUNT
The different ways to set up (register) your account are listed below.
INDIVIDUAL OR JOINT TENANTS
FOR YOUR GENERAL INVESTMENT NEEDS
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
BUSINESS OR ORGANIZATION
FOR INVESTMENT NEEDS OF CORPORATIONS, ASSOCIATIONS, PARTNERSHIPS, INSTITUTIONS
OR OTHER GROUPS
RETIREMENT PLANS
TO SHELTER YOUR RETIREMENT SAVINGS FROM INCOME TAXES
Retirement plans allow individuals to shelter investment income and capital
gains from current income taxes. In addition, contributions to these accounts
(other than Roth IRAs and Education IRAs) may be tax-deductible.
- INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) allow a certain individual under age
70 1/2, with earned income, to invest up to $2,000 per tax year. The
maximum for an investor and his or her spouse is $4,000 ($2,000 for each
spouse) or, if less, the couple's combined earned income for the taxable
year.
- IRA ROLLOVERS retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
- ROTH IRAS allow certain individuals to make nondeductible contributions up
to $2,000 per year. The maximum annual contribution for an investor and his
or her spouse is $4,000 ($2,000 for each spouse) or, if less, the couple's
combined earned income for the taxable year. Withdrawals of earnings may be
tax free if the account is at least five years old and certain other
requirements are met.
- EDUCATION IRAS are established for the benefit of a minor, with
nondeductible contributions up to $500 per year, and permit tax-free
withdrawals to pay the higher education expenses of the beneficiary.
- SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAS) provide business owners or
those with self-employed income (and their eligible employees) with many of
the same advantages as a Profit Sharing Plan, but with fewer administrative
requirements.
71
<PAGE>
- SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLANS) can be
established by small employers to contribute to and allow their employees
to contribute a portion of their wages pre-tax to retirement accounts. This
plan-type generally involves fewer administrative requirements than 401(k)
or other qualified plans.
- KEOGH PLANS allow self-employed individuals to make tax-deductible
contributions for themselves of up to 25% of their annual earned income,
with a maximum of $30,000 per year.
- PENSION AND PROFIT-SHARING PLANS, INCLUDING 401(k) PLANS, allow
corporations and nongovernmental tax-exempt organizations of all sizes
and/or their employees to contribute a percentage of the employees' wages
or other amounts on a tax-deferred basis. These accounts need to be
established by the administrator or trustee of the plan.
- 403(b) CUSTODIAL ACCOUNTS are available to employees of public school
systems, churches and certain types of charitable organizations.
- 457 ACCOUNTS allow employees of state and local governments and certain
charitable organizations to contribute a portion of their compensation on a
tax-deferred basis.
GIFTS OR TRANSFERS TO A MINOR
TO INVEST FOR A CHILD'S EDUCATION OR OTHER FUTURE NEEDS
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child free of Federal
transfer tax consequences. Depending on state laws, you can set up a custodial
account under the Uniform Transfers to Minors Act ("UTMA") or the Uniform Gifts
to Minors Act ("UGMA").
TRUST
FOR MONEY BEING INVESTED BY A TRUST
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
financial advisor for the form.
BUYING SHARES
YOU MAY BUY SHARES OF EACH OF THE FUNDS through Waddell & Reed, Inc. and its
financial advisors or through advisors of Legend. To open your account you must
complete and sign an application. Your financial advisor can help you with any
questions you might have.
72
<PAGE>
TO PURCHASE ANY CLASS OF SHARES BY CHECK, make your check payable to Waddell &
Reed, Inc. Mail the check, along with your completed application, to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
TO PURCHASE CLASS Y SHARES (AND CLASS A SHARES OF CASH MANAGEMENT AND CLASS A
SHARES OF MUNICIPAL MONEY MARKET FUND) BY WIRE, you must first obtain an account
number by calling 800-366-2520, then mail a completed application to Waddell &
Reed, Inc., at the above address, or fax it to 913-236-5044. Instruct your bank
to wire the amount you wish to invest, along with the account number and
registration, to UMB Bank, n.a., ABA Number 101000695, for the account of
Waddell & Reed Number 9800007978, Special Account for Exclusive Benefit of
Customers FBO Customer Name and Account Number.
You may also buy Class Y shares of a Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements regarding the purchase of
Class Y shares.
THE PRICE TO BUY A FUND SHARE is its offering price, which is calculated every
business day.
The OFFERING PRICE of a share (the price to buy one share of a particular class)
is the next NAV calculated per share of that class plus, for Class A shares, the
sales charge shown in the tables.
In the calculation of a Fund's NAV:
- The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
- Bonds are generally valued according to prices quoted by an independent
pricing service.
- Short-term debt securities are valued at amortized cost, which approximates
market value.
- Other investment assets for which market prices are unavailable are valued
at their fair value by or at the direction of the Fund's Board of
Directors.
73
<PAGE>
EACH FUND IS OPEN FOR BUSINESS each day the New York Stock Exchange (the "NYSE")
is open. The Funds normally calculate their NAVs as of the close of business of
the NYSE, normally 4 p.m. Eastern time, except that an option or futures
contract held by a Fund may be priced at the close of the regular session of any
other securities exchange on which that instrument is traded.
Some of the Funds may invest in securities listed on foreign exchanges which may
trade on Saturdays or on U.S. national business holidays when the NYSE is
closed. Consequently, the NAV of Fund shares may be significantly affected on
days when a Fund does not price its shares and when you are not able to purchase
or redeem a Fund's shares. Similarly, if an event materially affecting the value
of foreign investments or foreign currency exchange rates occurs prior to the
close of business of the NYSE but after the time their values are otherwise
determined, such investments or exchange rates may be valued at their fair value
as determined in good faith by or under the direction of each Fund's Board of
Directors.
WHEN YOU PLACE AN ORDER TO BUY SHARES, your order will be processed at the next
offering price calculated after your order is received and accepted. Note the
following:
- All of your purchases must be made in U.S. dollars.
- If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the Waddell & Reed Advisors Funds
and/or W&R Funds, Inc., the payment may be delayed for up to ten days to
ensure that your previous investment has cleared.
- The Funds do not issue certificates representing Class B, Class C or
Class Y shares. Cash Management and Municipal Money Market Fund do not
normally issue certificates representing any class of shares.
- If you purchase shares of a Fund from certain broker-dealers, banks or
other authorized third parties, the Fund will be deemed to have received
your purchase order when that third party (or its designee) has received
your order. Your order will receive the offering price next calculated
after the order has been received in proper form by the authorized third
party (or its designee). You should consult that firm to determine the time
by which it must receive your order for you to purchase shares of a Fund at
that day's price.
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When you sign your account application, you will be asked to certify that your
Social Security or other taxpayer identification number is correct and whether
you are subject to backup withholding for failing to report income to the
Internal Revenue Service.
Waddell & Reed, Inc. reserves the right to reject any purchase orders, including
purchases by exchange, and it and the Funds reserve the right to discontinue
offering Fund shares for purchase.
MINIMUM INVESTMENTS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
FOR CLASS A, CLASS B AND CLASS C:
--------------------------------------------------------------------------------
<S> <C>
TO OPEN AN ACCOUNT $500 (per Fund)
--------------------------------------------------------------------------------
For certain exchanges $100 (per Fund)
--------------------------------------------------------------------------------
For certain retirement accounts and accounts opened
with Automatic Investment Service $50 (per Fund)
--------------------------------------------------------------------------------
For certain retirement accounts and accounts opened
through payroll deductions for or by employees of
WRIMCO, Waddell & Reed, Inc. and their affiliates $25 (per Fund)
--------------------------------------------------------------------------------
TO ADD TO AN ACCOUNT Any amount
--------------------------------------------------------------------------------
For certain exchanges $100 (per Fund)
--------------------------------------------------------------------------------
For Automatic Investment Service $25 (per Fund)
--------------------------------------------------------------------------------
FOR CLASS Y:
--------------------------------------------------------------------------------
TO OPEN AN ACCOUNT
--------------------------------------------------------------------------------
For a government entity or authority $10 million
or for a corporation (within first twelve months)
--------------------------------------------------------------------------------
For other investors Any amount
--------------------------------------------------------------------------------
TO ADD TO AN ACCOUNT Any amount
--------------------------------------------------------------------------------
</TABLE>
ADDING TO YOUR ACCOUNT
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
TO ADD TO YOUR ACCOUNT, make your check payable to Waddell & Reed, Inc. Mail the
check to Waddell & Reed, Inc., along with:
- the detachable form that accompanies the confirmation of a prior purchase
or your year-to-date statement; or
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<PAGE>
- a letter stating your account number, the account registration, the Fund
and the class of shares that you wish to purchase.
TO ADD TO YOUR CLASS Y ACCOUNT (OR YOUR CLASS A CASH MANAGEMENT OR CLASS A
MUNICIPAL MONEY MARKET FUND ACCOUNT) BY WIRE: Instruct your bank to wire the
amount you wish to invest, along with the account number and registration, to
UMB Bank, n.a., ABA Number 101000695, for the account of Waddell & Reed Number
9800007978, Special Account for Exclusive Benefit of Customers FBO Customer Name
and Account Number.
If you purchase shares of the Funds from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
SELLING SHARES
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares.
The REDEMPTION PRICE (price to sell one share of a particular class of a Fund)
is the NAV per share of that Fund class, subject to any CDSC applicable to Class
A, Class B or Class C shares.
TO SELL SHARES BY WRITTEN REQUEST: Complete an Account Service Request form,
available from your financial advisor, or write a letter of instruction with:
- the name on the account registration;
- the Fund's name;
- the Fund account number;
- the dollar amount or number, and the class, of shares to be redeemed; and
- any other applicable requirements listed in the table below.
Deliver the form or your letter to your financial advisor, or mail it to:
Waddell & Reed Services Company
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed Services Company will send a check
to the address on the account.
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<PAGE>
TO SELL CLASS Y SHARES, CLASS A SHARES OF CASH MANAGEMENT OR CLASS A SHARES OF
MUNICIPAL MONEY MARKET FUND BY TELEPHONE OR FAX: If you have elected this method
in your application or by subsequent authorization, call 888-WADDELL, or fax
your request to 913-236-1599, and give your instructions to redeem shares and
make payment by wire to your predesignated bank account or by check to you at
the address on the account.
TO SELL CLASS A SHARES OF CASH MANAGEMENT, GOVERNMENT SECURITIES OR MUNICIPAL
MONEY MARKET FUND BY CHECK: If you have elected this method in your application
or by subsequent authorization, the Fund will provide you with forms or checks
drawn on UMB Bank, n.a. You may make these checks payable to the order of any
payee in any amount of $250 or more.
WHEN YOU PLACE AN ORDER TO SELL SHARES, your shares will be sold at the next NAV
calculated, subject to any applicable CDSC, after receipt of a written request
for redemption in good order by Waddell & Reed Services Company at the address
listed above. Note the following:
- If more than one person owns the shares, each owner must sign the written
request.
- If you hold a certificate, it must be properly endorsed and sent to the
Fund.
- If you recently purchased the shares by check, the Fund may delay payment
of redemption proceeds. You may arrange for the bank upon which the
purchase check was drawn to provide to the Fund telephone or written
assurance that the check has cleared and been honored. If you do not,
payment of the redemption proceeds on these shares will be delayed until
the earlier of 10 days or the date the Fund can verify that your purchase
check has cleared and been honored.
- Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE
is restricted or as permitted by the Securities and Exchange Commission.
- Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities when a Fund's Board of
Directors determines that conditions exist making cash payments
undesirable. A Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of its NAV during any 90-day period for any one
shareholder.
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<PAGE>
- If you purchased shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms,
some of which may charge you a fee and may have additional requirements to
sell Fund shares. The Fund will be deemed to have received your order to
sell shares when that firm (or its designee) has received your order. Your
order will receive the NAV of the applicable Class subject to any
applicable CDSC next calculated after the order has been received in proper
form by the authorized firm (or its designee). You should consult that firm
to determine the time by which it must receive your order for you to sell
shares at that day's price.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SPECIAL REQUIREMENTS FOR SELLING SHARES
--------------------------------------------------------------------------------
ACCOUNT TYPE SPECIAL REQUIREMENTS
--------------------------------------------------------------------------------
<S> <C>
Individual or Joint Tenant The written instructions must be signed by all
persons required to sign for transactions,
exactly as their names appear on the account.
--------------------------------------------------------------------------------
Sole Proprietorship The written instructions must be signed by the
individual owner of the business.
--------------------------------------------------------------------------------
UGMA, UTMA The custodian must sign the written
instructions indicating capacity as custodian.
--------------------------------------------------------------------------------
Retirement Account The written instructions must be signed by a
properly authorized person.
--------------------------------------------------------------------------------
Trust The trustee must sign the written instructions
indicating capacity as trustee. If the
trustee's name is not in the account
registration, provide a currently certified
copy of the trust document.
--------------------------------------------------------------------------------
Business or Organization At least one person authorized by corporate
resolution to act on the account must sign the
written instructions.
--------------------------------------------------------------------------------
Conservator, Guardian or The written instructions must be signed by the
Other Fiduciary person properly authorized by court order to
act in the particular fiduciary capacity.
--------------------------------------------------------------------------------
</TABLE>
A Fund may require a signature guarantee in certain situations such as:
- a redemption request made by a corporation, partnership or fiduciary
- a redemption request made by someone other than the owner of record
- the check is made payable to someone other than the owner of record.
This requirement is to protect you and Waddell & Reed from fraud. You can obtain
a signature guarantee from most banks and securities dealers, but not from a
notary public.
78
<PAGE>
EACH FUND RESERVES THE RIGHT TO REDEEM at NAV all of your Fund shares (other
than High Income Fund) in your account if their aggregate NAV is less than $500,
or $250 for Cash Management and Municipal Money Market Fund. The Fund will give
you notice and a 60-day opportunity to purchase a sufficient number of
additional shares to bring the aggregate NAV of your shares to $500, or $250 for
Cash Management and Municipal Money Market Fund. Cash Management and Municipal
Money Market Fund may charge a fee of $1.75 per month on all accounts with a NAV
of less than $250, except for retirement plan accounts.
YOU MAY REINVEST, without charge, all or part of the amount of Class A shares of
a Fund you redeemed by sending to the Fund the amount you want to reinvest. The
reinvested amounts must be received by the Fund within 45 days after the date of
your redemption. You may do this only once with Class A shares of a Fund.
The CDSC will not apply to the proceeds of Class A (as applicable), Class B or
Class C shares of a Fund which are redeemed and then reinvested in Class A,
Class B or Class C shares of the Fund within 45 days after such redemption. The
Distributor will, with your reinvestment, restore an amount equal to the
deferred sales charge attributable to the amount reinvested by adding the
deferred sales charge amount to your reinvestment. For purposes of determining
future deferred sales charges, the reinvestment will be treated as a new
investment. You may do this only once as to Class A shares of a Fund, once as to
Class B shares of a Fund and once as to Class C shares of a Fund.
Payments of principal and interest on loans made pursuant to a 401(a) qualified
plan (if such loans are permitted by the plan) may be reinvested, without
payment of a sales charge, in Class A shares of any of the Waddell & Reed
Advisors Funds in which the plan may invest.
TELEPHONE TRANSACTIONS
The Funds and their agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. Each Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If a Fund fails to do so, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. Current procedures
relating to instructions communicated by telephone include tape recording
instructions, requiring personal identification and providing written
confirmations of transactions effected pursuant to such instructions.
79
<PAGE>
SHAREHOLDER SERVICES
Waddell & Reed provides a variety of services to help you manage your account.
PERSONAL SERVICE
Your local financial advisor is available to provide personal service.
Additionally, a toll-free call, 888-WADDELL, connects you to a Client Services
Representative or our automated customer telephone service. During normal
business hours, our Client Services staff is available to answer your questions
or update your account records. At almost any time of the day or night, you may
access your account information from a touch-tone phone, or from our web site,
www.waddell.com, to:
- Obtain information about your accounts
- Obtain price information about other funds in the Waddell & Reed Advisors
Funds or W&R Funds, Inc.
- Obtain a Fund's prospectus
- Request duplicate statements.
REPORTS
Statements and reports sent to you include the following:
- confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange,
transfer or redemption)
- year-to-date statements (quarterly)
- annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent annual and semiannual
reports of the Funds may be mailed to your household, even if you have more than
one account with a Fund. Call the telephone number listed for Client Services if
you need additional copies of annual or semiannual reports or account
information.
EXCHANGES
You may sell your shares and buy shares of the same Class of another Fund in the
Waddell & Reed Advisors Funds or in W&R Funds, Inc. without the payment of an
additional sales charge if you buy Class A shares or payment of a CDSC when you
exchange Class B or Class C shares. For Class B and Class C shares or Class A
shares to which the CDSC would otherwise apply, the time period for the deferred
sales charge will continue to run. In addition, exchanging Class Y shareholders
in the Waddell & Reed Advisors Funds may buy Class A shares of
80
<PAGE>
Waddell & Reed Advisors Cash Management or Waddell & Reed Advisors Municipal
Money Market Fund.
You may exchange any Class A shares of the Government Securities, Municipal Bond
and Municipal High Income Funds that you have held for at least six months and
any Class A shares of these Funds acquired as payment of a dividend or
distribution for Class A shares of any other fund in the Waddell & Reed Advisors
Funds. You may exchange any Class A shares of the Government Securities,
Municipal Bond and Municipal High Income Funds that you have held for less than
six months only for Class A shares of Government Securities, Municipal Bond,
Municipal High Income, Cash Management and Municipal Money Market Fund.
You may exchange only into funds that are legally permitted for sale in your
state of residence. Note that exchanges out of a Fund may have tax consequences
for you. Before exchanging into a fund, read its prospectus.
THE FUNDS RESERVE THE RIGHT to terminate or modify these exchange privileges at
any time, upon notice in certain instances.
AUTOMATIC TRANSACTIONS FOR CLASS A, CLASS B AND CLASS C SHAREHOLDERS
Flexible withdrawal service lets you set up ongoing monthly, quarterly,
semiannual or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund account, or
between fund accounts, automatically. While Regular Investment Plans do not
guarantee a profit and will not protect you against loss in a declining market,
they can be an excellent way to invest for retirement, a home, educational
expenses and other long-term financial goals.
Certain restrictions and fees imposed by the plan custodian may also apply for
retirement accounts. Speak with your financial advisor for more information.
--------------------------------------------------------------------------------
REGULAR INVESTMENT PLANS
--------------------------------------------------------------------------------
AUTOMATIC INVESTMENT SERVICE
TO MOVE MONEY FROM YOUR BANK ACCOUNT TO AN EXISTING FUND ACCOUNT
MINIMUM AMOUNT MINIMUM FREQUENCY
$25 (per Fund) Monthly
--------------------------------------------------------------------------------
FUNDS PLUS SERVICE
TO MOVE MONEY FROM WADDELL & REED ADVISORS CASH MANAGEMENT OR WADDELL & REED
ADVISORS MUNICIPAL MONEY MARKET FUND TO A FUND WHETHER IN THE SAME OR A
DIFFERENT ACCOUNT IN THE SAME CLASS
MINIMUM AMOUNT MINIMUM FREQUENCY
$100 (per Fund) Monthly
--------------------------------------------------------------------------------
81
<PAGE>
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Each Fund distributes substantially all of its net investment income and net
capital gains to its shareholders each year.
Usually, a Fund distributes net investment income at the following times: Bond
Fund, High Income Fund and Municipal Bond Fund, monthly; Cash Management,
Government Securities Fund, Municipal High Income Fund, Municipal Money Market
Fund and Global Bond Fund, daily and paid monthly. Dividends declared for a
particular day are paid to shareholders of record on the prior business day.
However, dividends declared for Saturday and Sunday are paid to shareholders of
record on the preceding Thursday. Net capital gains (and any net gains from
foreign currency transactions) usually are distributed in December.
DISTRIBUTION OPTIONS. When you open an account, specify on your application how
you want to receive your distributions. Each Fund offers two options:
1. SHARE PAYMENT OPTION. Your dividends, capital gains and other distributions
with respect to a class will be automatically paid in additional shares of
the same class of the Fund. If you do not indicate a choice on your
application, you will be assigned this option.
2. CASH OPTION. You will be sent a check for your dividends, capital gains and
other distributions if the total distribution is equal to or greater than
five dollars. If the distribution is less than five dollars, it will be
automatically paid in additional shares of the same class of the Fund.
For retirement accounts, all distributions are automatically paid in additional
shares.
TAXES
As with any investment, you should consider how your investment in a Fund will
be taxed. If your account is not a tax-deferred retirement account (or you are
not otherwise exempt from income tax), you should be aware of the following tax
implications:
TAXES ON DISTRIBUTIONS. Distributions by Municipal Bond Fund, Municipal High
Income Fund or Municipal Money Market Fund that are designated by it as exempt
interest dividends generally may be excluded by you from your gross income for
Federal income tax purposes. Dividends from a Fund's investment company taxable
income (which includes net short-term gains), if
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<PAGE>
any, generally are taxable to you as ordinary income whether received in cash or
paid in additional Fund shares. Distributions of a Fund's net capital gains,
when designated as such, are taxable to you as long-term capital gains, whether
received in cash or paid in additional Fund shares and regardless of the length
of time you have owned your shares. For Federal income tax purposes, your
long-term capital gains generally are taxed at a maximum rate of 20%.
Each Fund notifies you after each calendar year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that year.
A portion of the dividends paid by a Fund, whether received in cash or paid in
additional Fund shares, may be eligible for the dividends received deduction
allowed to corporations. The eligible portion may not exceed the aggregate
dividends received by a Fund from U.S. corporations. However, dividends received
by a corporate shareholder and deducted by it pursuant to the dividends received
deduction are subject indirectly to the Federal AMT.
Exempt-interest dividends paid by the Municipal Bond Fund, Municipal High Income
Fund and Municipal Money Market Fund may be subject to state and local income
tax. In addition, a portion of those dividends is expected to be attributable to
interest on certain bonds that must be treated by you as a "tax preference item"
for purposes of calculating your liability, if any, for the AMT; the Municipal
Bond and Municipal High Income Funds anticipate that the AMT portion of each
Fund will not be more than 40% of the dividends it will pay to its shareholders.
The Funds will provide you with information concerning the amount of
distributions that must be treated as a tax preference item after the end of
each calendar year.
Shareholders who may be subject to the AMT should consult with their tax
advisers concerning investment in the Funds. Shareholders in Municipal Bond
Fund, Municipal High Income Fund and Municipal Money Market Fund are notified
that entities or other persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by PABs should consult their tax
advisers before purchasing shares of these Funds because, for users of certain
of these facilities, the interest on PABs is not exempt from Federal income tax.
For these purposes, the term "substantial user" is defined generally to include
a "non-exempt person" who regularly uses in trade or business a part of a
facility financed from the proceeds of PABs.
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<PAGE>
WITHHOLDING. Each Fund must withhold 31% of all dividends, capital gains and
other distributions and redemption proceeds payable to individuals and certain
other noncorporate shareholders who do not furnish the Fund with a correct
taxpayer identification number. Withholding at that rate from dividends, capital
gains and other distributions also is required for shareholders subject to
backup withholding.
TAXES ON TRANSACTIONS. Your redemption of Fund shares will result in a taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than what you paid for the redeemed shares (which normally includes any
sales charge paid). If you have a gain on a redemption of Fund shares, the
entire gain will be taxable even though a portion of the gain may represent
municipal bond interest earned by the Fund but not yet paid out as a dividend.
If the redemption is not made until after record date, however, that interest
will be received by you as a dividend that is tax-exempt rather than as part of
a taxable gain.
An exchange of Fund shares for shares of any other fund in the Waddell & Reed
Advisors Funds or W&R Funds, Inc. generally will have similar tax consequences.
However, special rules apply when you dispose of a Fund's Class A shares through
a redemption or exchange within 90 days after your purchase and then reacquire
Class A shares of that Fund or acquire Class A shares of another fund in the
Waddell & Reed Advisors Funds without paying a sales charge due to the 45 day
reinvestment privilege or exchange privilege. See "Your Account." In these
cases, any gain on the disposition of the original Fund shares will be
increased, or loss decreased, by the amount of the sales charge you paid when
those shares were acquired, and that amount will increase the adjusted basis of
the shares subsequently acquired. In addition, if you purchase shares of a Fund
within 30 days before or after redeeming other shares of the Fund (regardless of
class) at a loss, part or all of that loss will not be deductible and will
increase the basis of the newly purchased shares.
For Municipal Bond Fund, Municipal High Income Fund and Municipal Money Market
Fund, interest on indebtedness incurred or continued to purchase or carry shares
of the Fund will not be deductible for Federal income tax purposes to the extent
the Fund's distributions consist of exempt-interest dividends. Proposals may be
introduced before Congress for the purpose of restricting or eliminating the
Federal income tax exemption for interest on municipal bonds. If such a proposal
were enacted, the availability of municipal bonds for investment by the Fund and
the value of the portfolios would be affected. In that event, the Funds may
decide to reevaluate their investment goal and policies.
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STATE AND LOCAL INCOME TAXES. The portion of the dividends paid by each Fund
attributable to interest earned on U.S. Government securities generally is not
subject to state and local income taxes, although distributions by any Fund to
its shareholders of net realized gains on the sale of those securities are fully
subject to those taxes. You should consult your tax adviser to determine the
taxability of dividends and other distributions by the Funds in your state and
locality.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting each Fund and its shareholders; you will find
more information in each Fund's SAI. There may be other Federal, state or local
tax considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
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<PAGE>
--------------------------------------------------------------------------------
THE MANAGEMENT OF THE FUNDS
PORTFOLIO MANAGEMENT
Each Fund is managed by WRIMCO, subject to the authority of each Fund's Board of
Directors. WRIMCO provides investment advice to each of the Funds and supervises
each Fund's investments. WRIMCO and/or its predecessors have served as
investment manager to each of the registered investment companies in the Waddell
& Reed Advisors Funds, W&R Funds, Inc. and W&R Target Funds, Inc. since the
inception of each company. WRIMCO is located at 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
James C. Cusser is primarily responsible for the management of the Bond Fund and
the Government Securities Fund. Mr. Cusser has held his Fund responsibilities
since September 1992 for Bond Fund and since January 1997 for Government
Securities Fund. He is Senior Vice President of WRIMCO, Vice President of the
Funds and Vice President of other investment companies for which WRIMCO serves
as investment manager. Mr. Cusser has served as the portfolio manager for the
Funds and other investment companies managed by WRIMCO and has been an employee
of WRIMCO since August 1992.
Daniel J. Vrabac is primarily responsible for the management of the Global Bond
Fund. Mr. Vrabac has held his Fund responsibilities since September 2000. He is
Senior Vice President of WRIMCO, Vice President of the Fund and Vice President
of other investment companies for which WRIMCO serves as investment manager. Mr.
Vrabac is also Head of Fixed Income for WRIMCO. From May 1994 to March 1998, Mr.
Vrabac was Vice President of, and a portfolio manager for, Waddell & Reed Asset
Management Company, a former affiliate of WRIMCO. Mr. Vrabac has served as a
portfolio manager with, and has been an employee of, WRIMCO since May 1994.
Louise D. Rieke is primarily responsible for the management of the High Income
Fund. Ms. Rieke has held her Fund responsibilities since January 1990. She is
Senior Vice President of WRIMCO, Vice President of the Fund and Vice President
of other investment companies for which WRIMCO serves as investment manager.
From November 1985 to March 1998, Ms. Rieke was Vice President of, and a
portfolio manager for, Waddell & Reed Asset Management Company. Ms. Rieke has
served as the portfolio manager for investment companies managed by WRIMCO and
its predecessor since July 1986 and has been an employee of such since May 1971.
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<PAGE>
Bryan J. Bailey is primarily responsible for the management of the Municipal
Bond Fund. Mr. Bailey has held his Fund responsibilities since June 2000. He is
Vice President of WRIMCO and Vice President of the Fund. Mr. Bailey has served
as the Assistant Portfolio Manager for investment companies managed by WRIMCO
since January 1999 and has been an employee of WRIMCO since July 1993.
Mark Otterstrom is primarily responsible for the management of the Municipal
High Income Fund. Mr. Otterstrom has held his Fund responsibilities since June
2000. He is Vice President of WRIMCO and Vice President of the Fund. Mr.
Otterstrom has served as the Assistant Portfolio Manager for investment
companies managed by WRIMCO and its predecessor since January 1995 and has been
an employee of such since May 1987.
Mira Stevovich is primarily responsible for the management of Cash Management
and the Municipal Money Market Fund. Ms. Stevovich has held her Fund
responsibilities for Cash Management since May 1998 and for Municipal Money
Market Fund since its inception. She is Vice President of WRIMCO, Vice President
and Assistant Treasurer of the Funds and Vice President and Assistant Treasurer
of other investment companies for which WRIMCO serves as investment manager. Ms.
Stevovich has served as the Assistant Portfolio Manager for investment companies
managed by WRIMCO and its predecessors since January 1989 and has been an
employee of such since March 1987.
Other members of WRIMCO's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to a Fund's investments.
MANAGEMENT FEE
Like all mutual funds, the Funds pay fees related to their daily operations.
Expenses paid out of each Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
Each Fund pays a management fee to WRIMCO for providing investment advice and
supervising its investments. Each Fund also pays other expenses, which are
explained in the SAI.
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The management fee is payable at the annual rates of:
- for Bond Fund, 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.
Management fees for the Fund as a percent of the Fund's net assets for the
fiscal period ended September 30, 2000 were 0.53%
- for Global Bond Fund, 0.625% of net assets up to $500 million, 0.60% of net
assets over $500 million and up to $1 billion, 0.55% of net assets over $1
billion and up to $1.5 billion, and 0.50% of net assets over $1.5 billion.
Management fees for the Fund as a percent of the Fund's net assets for the
fiscal year ended September 30, 2000 were 0.63%
- for Government Securities Fund, 0.50% of net assets up to $500 million,
0.45% of net assets over $500 million and up to $1 billion, 0.40% of net
assets over $1 billion and up to $1.5 billion, and 0.35% of net assets over
$1.5 billion. Management fees for the Fund as a percent of the Fund's net
assets for the fiscal period ended September 30, 2000 were 0.50%
- for High Income Fund, 0.625% of net assets up to $500 million, 0.60% of net
assets over $500 million and up to $1 billion, 0.55% of net assets over $1
billion and up to $1.5 billion, and 0.50% of net assets over $1.5 billion.
Management fees for the Fund as a percent of the Fund's net assets for the
fiscal period ended September 30, 2000 were 0.62%
- for Municipal Bond Fund, 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. Management fees for the Fund as a percent of the Fund's net assets
for the fiscal year ended September 30, 2000 were 0.52%
- for Municipal High Income Fund, 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. Management fees for the Fund as a percent of the Fund's net
assets for the fiscal year ended September 30, 2000 were 0.53%
- for Municipal Money Market Fund at the annual rate of 0.40% of net assets
- for Cash Management at the annual rate of 0.40% of net assets. Management
fees for the Fund as a percent of the Fund's net assets for the fiscal
period ended September 30, 2000 were 0.40%.
WRIMCO has voluntarily agreed to waive its management fee for any day that a
Fund's net assets are less than $25 million, subject to WRIMCO's right to change
or modify this waiver.
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FINANCIAL HIGHLIGHTS
The following information is to help you understand the financial performance of
each Fund's Class A, Class B, Class C and Class Y, as applicable, shares for the
fiscal periods shown. Certain information reflects financial results for a
single Fund share. "Total return" shows how much your investment would have
increased (or decreased) during each period, assuming reinvestment of all
dividends and distributions.
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BOND FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' reports, along with the Fund's financial statements for the fiscal
periods ended September 30, 2000 and June 30, 2000 and the fiscal year ended
December 31, 1999, are included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE
FISCAL PERIOD FOR THE FISCAL YEAR ENDED DECEMBER 31,
ENDED ------------------------------------------------------
9/30/00 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------
CLASS A PER-SHARE DATA
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $5.97 $6.39 $6.32 $6.14 $6.34 $5.62
---------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.27 0.35 0.38 0.39 0.39 0.40
Net realized and
unrealized gain
(loss) on investments 0.04 (0.42) 0.07 0.19 (0.20) 0.72
---------------------------------------------------------------------------------------------------
Total from investment
operations 0.31 (0.07) 0.45 0.58 0.19 1.12
---------------------------------------------------------------------------------------------------
Less distributions from
net investment income (0.27) (0.35) (0.38) (0.40) (0.39) (0.40)
---------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.01 $5.97 $6.39 $6.32 $6.14 $6.34
--------------------------------------------------------------------------------------------------
CLASS A RATIOS/SUPPLEMENTAL DATA
---------------------------------------------------------------------------------------------------
Total return(2) 5.24% -1.08% 7.27% 9.77% 3.20% 20.50%
Net assets, end of
period (in millions) $493 $501 $551 $524 $519 $563
Ratio of expenses to
average net assets 1.02%(3) 0.95% 0.84% 0.77% 0.77% 0.74%
Ratio of net investment
income to average
net assets 6.00%(3) 5.72% 5.88% 6.34% 6.34% 6.54%
Portfolio turnover rate 23.21% 34.12% 33.87% 35.08% 55.74% 66.38%
---------------------------------------------------------------------------------------------------
</TABLE>
(1) ON JUNE 17, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
(2) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
(3) ANNUALIZED.
90
<PAGE>
--------------------------------------------------------------------------------
BOND FUND
For a Class B share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL PERIOD PERIOD FROM
ENDED 9/9/99(1) THROUGH
9/30/00 12/31/99
--------------------------------------------------------------------------------
CLASS B PER-SHARE DATA
--------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $5.97 $6.05
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.23 0.10
Net realized and unrealized gain (loss) on investments 0.04 (0.08)
--------------------------------------------------------------------------------
Total from investment operations 0.27 0.02
--------------------------------------------------------------------------------
Less distributions from net investment income (0.23) (0.10)
--------------------------------------------------------------------------------
Net asset value, end of period $6.01 $5.97
--------------------------------------------------------------------------------
CLASS B RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return 4.56% 0.30%
Net assets, end of period (in millions) $ 7 $ 2
Ratio of expenses to average net assets 1.90%(2) 1.91%(2)
Ratio of net investment income to average net assets 5.12%(2) 4.93%(2)
Portfolio turnover rate 23.21% 34.12%(2)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
91
<PAGE>
--------------------------------------------------------------------------------
BOND FUND
For a Class C share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL PERIOD PERIOD FROM
ENDED 9/9/99(1) THROUGH
9/30/00 12/31/99
--------------------------------------------------------------------------------
CLASS C PER-SHARE DATA
--------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $5.96 $6.05
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.22 0.10
Net realized and unrealized gain (loss)
on investments 0.05 (0.09)
--------------------------------------------------------------------------------
Total from investment operations 0.27 0.01
--------------------------------------------------------------------------------
Less distributions from net investment income (0.22) (0.10)
--------------------------------------------------------------------------------
Net asset value, end of period $6.01 $5.96
--------------------------------------------------------------------------------
CLASS C RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return 4.64% 0.13%
Net assets, end of period (in thousands) $1,382 $ 289
Ratio of expenses to average net assets 1.95%(2) 1.98%(2)
Ratio of net investment income to
average net assets 5.07%(2) 4.87%(2)
Portfolio turnover rate 23.21% 34.12%(2)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
92
<PAGE>
--------------------------------------------------------------------------------
BOND FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE FISCAL YEAR FOR THE
FISCAL PERIOD ENDED DECEMBER 31, PERIOD FROM
ENDED ----------------------------------------- 6/19/95(1) THROUGH
9/30/00 1999 1998 1997 1996 12/31/95
-------------------------------------------------------------------------------------------------------
CLASS Y PER-SHARE DATA
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $5.97 $6.39 $6.32 $6.14 $6.34 $6.11
-------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment
income 0.28 0.40 0.39 0.42 0.40 0.21
Net realized and
unrealized gain (loss)
on investments 0.04 (0.45) 0.07 0.17 (0.20) 0.22
-------------------------------------------------------------------------------------------------------
Total from investment
operations 0.32 (0.05) 0.46 0.59 0.20 0.43
-------------------------------------------------------------------------------------------------------
Less distributions
from net investment
income (0.28) (0.37) (0.39) (0.41) (0.40) (0.20)
-------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.01 $5.97 $6.39 $6.32 $6.14 $6.34
-------------------------------------------------------------------------------------------------------
CLASS Y RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------
Total return 5.47% -0.81% 7.54% 9.91% 3.35% 7.20%
Net assets, end of
period (in millions) $3 $2 $6 $5 $12 $3
Ratio of expenses to
average net assets 0.72%(2) 0.69% 0.61% 0.64% 0.62% 0.63%(2)
Ratio of net
investment income
to average net assets 6.30%(2) 6.00% 6.10% 6.48% 6.52% 6.41%(2)
Portfolio turnover
rate 23.21% 34.12% 33.87% 35.08% 55.74% 66.38%(2)
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
93
<PAGE>
--------------------------------------------------------------------------------
GLOBAL BOND FUND (FORMERLY HIGH INCOME FUND II)
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended September 30, 2000, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------
CLASS A PER-SHARE DATA
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $3.88 $4.12 $4.42 $4.14 $4.03
-------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.33 0.35 0.37 0.36 0.35
Net realized and unrealized
gain (loss) on investments (0.32) (0.24) (0.30) 0.28 0.11
-------------------------------------------------------------------------------------------------------
Total from investment
operations 0.01 0.11 0.07 0.64 0.46
-------------------------------------------------------------------------------------------------------
Less dividends declared
from net investment income (0.33) (0.35) (0.37) (0.36) (0.35)
-------------------------------------------------------------------------------------------------------
Net asset value,
end of period $3.56 $3.88 $4.12 $4.42 $4.14
-------------------------------------------------------------------------------------------------------
CLASS A RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------
Total return(2) 0.21% 2.66% 1.22% 16.20% 11.90%
Net assets, end of
period (in millions) $297 $371 $416 $407 $368
Ratio of expenses to
average net assets 1.16% 1.06% 0.96% 0.93% 0.95%
Ratio of net investment
income to average net assets 8.79% 8.60% 8.26% 8.54% 8.60%
Portfolio turnover rate 53.79% 46.17% 58.85% 64.38% 55.64%
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) ON JANUARY 12, 1996, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
PRIOR TO SEPTEMBER 18, 2000, THE FUND'S PRINCIPAL INVESTMENT STRATEGIES
INVOLVED INVESTING PRIMARILY IN JUNK BONDS, WITH MINIMAL INVESTMENT IN
FOREIGN SECURITIES. ALL INFORMATION FOR PERIODS PRIOR TO THAT DATE REFLECTS
THE OPERATION OF THE FUND UNDER ITS FORMER INVESTMENT STRATEGY.
(2) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
94
<PAGE>
--------------------------------------------------------------------------------
GLOBAL BOND FUND
For a Class B share outstanding throughout the period(1):
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/6/99(2) THROUGH
9/30/00
-----------------------------------------------------------------------------------
CLASS B PER-SHARE DATA
-----------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $3.88
-----------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.29
Net realized and unrealized loss on investments (0.32)
-----------------------------------------------------------------------------------
Total from investment operations (0.03)
-----------------------------------------------------------------------------------
Less dividends declared from net investment income (0.29)
-----------------------------------------------------------------------------------
Net asset value, end of period $3.56
-----------------------------------------------------------------------------------
CLASS B RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------
Total return -0.87%
Net assets, end of period (in millions) $2
Ratio of expenses to average net assets 2.06%(3)
Ratio of net investment income to average net assets 7.87%(3)
Portfolio turnover rate 53.79%(4)
</TABLE>
(1) PRIOR TO SEPTEMBER 18, 2000, THE FUND'S PRINCIPAL INVESTMENT STRATEGIES
INVOLVED INVESTING PRIMARILY IN JUNK BONDS, WITH MINIMAL INVESTMENT IN
FOREIGN SECURITIES. ALL INFORMATION PRIOR TO THAT DATE REFLECTS THE
OPERATION OF THE FUND UNDER ITS FORMER INVESTMENT STRATEGY.
(2) COMMENCEMENT OF OPERATIONS.
(3) ANNUALIZED.
(4) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000.
95
<PAGE>
--------------------------------------------------------------------------------
GLOBAL BOND FUND
For a Class C share outstanding throughout the period(1):
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/6/99(2) THROUGH
9/30/00
-----------------------------------------------------------------------------------
CLASS C PER-SHARE DATA
-----------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $3.88
-----------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.29
Net realized and unrealized loss on investments (0.32)
-----------------------------------------------------------------------------------
Total from investment operations (0.03)
-----------------------------------------------------------------------------------
Less dividends declared from net investment income (0.29)
-----------------------------------------------------------------------------------
Net asset value, end of period $3.56
-----------------------------------------------------------------------------------
CLASS C RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------
Total return -0.95%
Net assets, end of period (in thousands) $242
Ratio of expenses to average net assets 2.14%(3)
Ratio of net investment income to average net assets 7.78%(3)
Portfolio turnover rate 53.79%(4)
-----------------------------------------------------------------------------------
</TABLE>
(1) PRIOR TO SEPTEMBER 18, 2000, THE FUND'S PRINCIPAL INVESTMENT STRATEGIES
INVOLVED INVESTING PRIMARILY IN JUNK BONDS, WITH MINIMAL INVESTMENT IN
FOREIGN SECURITIES. ALL INFORMATION PRIOR TO THAT DATE REFLECTS THE
OPERATION OF THE FUND UNDER ITS FORMER INVESTMENT STRATEGY.
(2) COMMENCEMENT OF OPERATIONS.
(3) ANNUALIZED.
(4) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000.
96
<PAGE>
--------------------------------------------------------------------------------
GLOBAL BOND FUND
For a Class Y share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR FOR THE
ENDED SEPTEMBER 30, PERIOD FROM
----------------------------------------------- 2/27/96(2) THROUGH
2000 1999 1998 1997 9/30/96
-------------------------------------------------------------------------------------------------------
CLASS Y PER-SHARE DATA
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $3.88 $4.12 $4.42 $4.14 $4.15
-------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.34 0.36 0.37 0.37 0.21
Net realized and
unrealized gain (loss)
on investments (0.32) (0.24) (0.30) 0.28 (0.01)
-------------------------------------------------------------------------------------------------------
Total from investment
operations 0.02 0.12 0.07 0.65 0.20
-------------------------------------------------------------------------------------------------------
Less dividends declared
from net investment income (0.34) (0.36) (0.37) (0.37) (0.21)
-------------------------------------------------------------------------------------------------------
Net asset value, end of period $3.56 $3.88 $4.12 $4.42 $4.14
-------------------------------------------------------------------------------------------------------
CLASS Y RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------
Total return 0.53% 2.95% 1.38% 16.38% 5.00%
Net assets, end of
period (in millions) $3 $3 $2 $2 $2
Ratio of expenses
to average net assets 0.84% 0.77% 0.79% 0.77% 0.77%(3)
Ratio of net investment
income to average net assets 9.12% 8.89% 8.43% 8.69% 8.83%(3)
Portfolio turnover rate 53.79% 46.17% 58.85% 64.38% 55.64%(3)
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) PRIOR TO SEPTEMBER 18, 2000, THE FUND'S PRINCIPAL INVESTMENT STRATEGIES
INVOLVED INVESTING PRIMARILY IN JUNK BONDS, WITH MINIMAL INVESTMENT IN
FOREIGN SECURITIES. ALL INFORMATION FOR PERIODS PRIOR TO THAT DATE REFLECTS
THE OPERATION OF THE FUND UNDER ITS FORMER INVESTMENT STRATEGY.
(2) COMMENCEMENT OF OPERATIONS.
(3) ANNUALIZED.
97
<PAGE>
--------------------------------------------------------------------------------
GOVERNMENT SECURITIES FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal
period ended September 30, 2000, is included in the Fund's SAI, which is
available upon request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE FOR THE FISCAL YEAR ENDED MARCH 31,
FISCAL PERIOD --------------------------------------------------------------
ENDED 9/30/00 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------
CLASS A PER-SHARE DATA
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $5.22 $5.43 $5.46 $5.19 $5.32 $5.13
-------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income 0.15 0.31 0.32 0.33 0.33 0.34
Net realized and
unrealized gain (loss)
on investments 0.05 (0.21) (0.03) 0.27 (0.13) 0.19
-------------------------------------------------------------------------------------------------------
Total from investment
operations 0.20 0.10 0.29 0.60 0.20 0.53
-------------------------------------------------------------------------------------------------------
Less dividends declared
from net investment
income (0.15) (0.31) (0.32) (0.33) (0.33) (0.34)
-------------------------------------------------------------------------------------------------------
Net asset value,
end of period $5.27 $5.22 $5.43 $5.46 $5.19 $5.32
-------------------------------------------------------------------------------------------------------
CLASS A RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------
Total return(2) 3.97% 1.82% 5.44% 11.84% 3.75% 10.48%
Net assets, end of
period (in millions) $114 $117 $134 $131 $129 $146
Ratio of expenses to
average net assets 1.12%(3) 1.12% 0.96% 0.89% 0.91% 0.83%
Ratio of net investment
income to average
net assets 5.85%(3) 5.77% 5.82% 6.14% 6.17% 6.34%
Portfolio turnover rate 15.79% 26.78% 37.06% 35.18% 34.18% 63.05%
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) ON JULY 31, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
(2) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
(3) ANNUALIZED.
98
<PAGE>
--------------------------------------------------------------------------------
GOVERNMENT SECURITIES FUND
For a Class B share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM
FISCAL PERIOD 10/4/99(1) THROUGH
ENDED 9/30/00 3/31/00
--------------------------------------------------------------------------------
CLASS B PER-SHARE DATA
--------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $5.22 $5.25
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.13 0.13
Net realized and unrealized gain (loss)
on investments 0.05 (0.03)
--------------------------------------------------------------------------------
Total from investment operations 0.18 0.10
--------------------------------------------------------------------------------
Less dividends declared from net
investment income (0.13) (0.13)
--------------------------------------------------------------------------------
Net asset value, end of period $5.27 $5.22
--------------------------------------------------------------------------------
CLASS B RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return 3.56% 1.88%
Net assets, end of period (in millions) $2 $1
Ratio of expenses to average net assets 1.92%(2) 1.85%(2)
Ratio of net investment income to average
net assets 5.04%(2) 5.19%(2)
Portfolio turnover rate 15.79% 26.78%(2)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
99
<PAGE>
--------------------------------------------------------------------------------
GOVERNMENT SECURITIES FUND
For a Class C share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM
FISCAL PERIOD 10/8/99(1) THROUGH
ENDED 9/30/00 3/31/00
--------------------------------------------------------------------------------
CLASS C PER-SHARE DATA
--------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $5.22 $5.23
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.13 0.12
Net realized and unrealized gain (loss)
on investments 0.05 (0.01)
--------------------------------------------------------------------------------
Total from investment operations 0.18 0.11
--------------------------------------------------------------------------------
Less dividends declared from net investment
income (0.13) (0.12)
--------------------------------------------------------------------------------
Net asset value, end of period $5.27 $5.22
--------------------------------------------------------------------------------
CLASS C RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return 3.48% 2.08%
Net assets, end of period (in thousands) $714 $269
Ratio of expenses to average net assets 2.06%(2) 2.07%(2)
Ratio of net investment income to average net assets 4.90%(2) 4.98%(2)
Portfolio turnover rate 15.79% 26.78%(2)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
100
<PAGE>
--------------------------------------------------------------------------------
GOVERNMENT SECURITIES FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE FOR THE FISCAL YEAR ENDED MARCH 31, 9/27/95(1)
FISCAL PERIOD -------------------------------------------- THROUGH
ENDED 9/30/00 2000 1999 1998 1997 3/31/96
-------------------------------------------------------------------------------------------------------
CLASS Y PER-SHARE DATA
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $5.22 $5.43 $5.46 $5.19 $5.32 $5.33
-------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income 0.16 0.33 0.33 0.34 0.34 0.17
Net realized and
unrealized gain
(loss) on
investments 0.05 (0.21) (0.03) 0.27 (0.13) (0.01)
-------------------------------------------------------------------------------------------------------
Total from investment
operations 0.21 0.12 0.30 0.61 0.21 0.16
-------------------------------------------------------------------------------------------------------
Less dividends declared
from net investment
income (0.16) (0.33) (0.33) (0.34) (0.34) (0.17)
-------------------------------------------------------------------------------------------------------
Net asset value,
end of period $5.27 $5.22 $5.43 $5.46 $5.19 $5.32
-------------------------------------------------------------------------------------------------------
CLASS Y RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------
Total return 4.16% 2.20% 5.71% 12.02% 3.99% 3.04%
Net assets, end of
period (in millions) $3 $2 $2 $2 $1 $1
Ratio of expenses
to average net
assets 0.77%(2) 0.75% 0.68% 0.66% 0.67% 0.60%(2)
Ratio of net
investment income
to average net assets 6.20%(2) 6.15% 6.10% 6.37% 6.41% 6.40%(2)
Portfolio
turnover rate 15.79% 26.78% 37.06% 35.18% 34.18% 63.05%(2)
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
101
<PAGE>
--------------------------------------------------------------------------------
HIGH INCOME FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal
period ended September 30, 2000, is included in the Fund's SAI, which is
available upon request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE
FISCAL PERIOD FOR THE FISCAL YEAR ENDED MARCH 31,
ENDED -------------------------------------------------------------
9/30/00 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------
CLASS A PER-SHARE DATA
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.54 $9.39 $10.04 $ 9.25 $9.09 $8.70
-------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment
income 0.37 0.78 0.81 0.82 0.80 0.79
Net realized and
unrealized gain
(loss) on
investments (0.44) (0.84) (0.66) 0.79 0.16 0.40
-------------------------------------------------------------------------------------------------------
Total from
investment
operations (0.07) (0.06) 0.15 1.61 0.96 1.19
-------------------------------------------------------------------------------------------------------
Less dividends from
net investment income (0.37) (0.79) (0.80) (0.82) (0.80) (0.80)
-------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.10 $8.54 $ 9.39 $10.04 $9.25 $9.09
-------------------------------------------------------------------------------------------------------
CLASS A RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------
Total return(2) -0.81% -0.65% 1.70% 18.03% 10.94% 14.16%
Net assets, end of
period (in millions) $750 $826 $1,009 $1,102 $983 $972
Ratio of expenses
to average net assets 1.06%(3) 1.04% 0.94% 0.84% 0.89% 0.85%
Ratio of net
investment income
to average net assets 8.94%(3) 8.65% 8.44% 8.38% 8.68% 8.74%
Portfolio turnover rate 24.20% 41.55% 53.19% 63.40% 53.17% 41.67%
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) ON JULY 31, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
(2) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
(3) ANNUALIZED.
102
<PAGE>
--------------------------------------------------------------------------------
HIGH INCOME FUND
For a Class B share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL PERIOD PERIOD FROM
ENDED 10/4/99(1) THROUGH
9/30/00 3/31/00
--------------------------------------------------------------------------------
CLASS B PER-SHARE DATA
--------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $8.54 $8.84
--------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.33 0.36
Net realized and unrealized loss on investments (0.44) (0.30)
--------------------------------------------------------------------------------
Total from investment operations (0.11) 0.06
--------------------------------------------------------------------------------
Less dividends from net investment income (0.33) (0.36)
--------------------------------------------------------------------------------
Net asset value, end of period $8.10 $8.54
--------------------------------------------------------------------------------
CLASS B RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return -1.28% 0.61%
Net assets, end of period (in millions) $5 $3
Ratio of expenses to average net assets 1.99%(2) 1.96%(2)
Ratio of net investment income to average net assets 8.02%2 7.79%(2)
Portfolio turnover rate 24.20% 41.55%(2)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
103
<PAGE>
--------------------------------------------------------------------------------
HIGH INCOME FUND
For a Class C share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL PERIOD PERIOD FROM
ENDED 10/4/99(1) THROUGH
9/30/00 3/31/00
--------------------------------------------------------------------------------
CLASS C PER-SHARE DATA
--------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $8.54 $8.84
--------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.33 0.36
Net realized and unrealized loss on investments (0.43) (0.30)
--------------------------------------------------------------------------------
Total from investment operations (0.10) 0.06
--------------------------------------------------------------------------------
Less dividends from net investment income (0.33) (0.36)
--------------------------------------------------------------------------------
Net asset value, end of period $8.11 $8.54
--------------------------------------------------------------------------------
CLASS C RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return -1.28% 0.65%
Net assets, end of period (in thousands) $856 $404
Ratio of expenses to average net assets 2.07%(2) 1.91%(2)
Ratio of net investment income to average net assets 7.94%(2) 7.88%(2)
Portfolio turnover rate 24.20% 41.55%(2)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
104
<PAGE>
--------------------------------------------------------------------------------
HIGH INCOME FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE FISCAL PERIOD FROM
FISCAL PERIOD YEAR ENDED MARCH 31, 1/4/96(1)
ENDED -------------------------------------------- THROUGH
9/30/00 2000 1999 1998 1997 3/31/96
-------------------------------------------------------------------------------------------------------
CLASS Y PER-SHARE DATA
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.54 $9.39 $10.04 $ 9.25 $9.10 $9.19
-------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment
income 0.39 0.81 0.83 0.82 0.81 0.20
Net realized and
unrealized gain (loss)
on investments (0.44) (0.84) (0.66) 0.79 0.15 (0.10)
-------------------------------------------------------------------------------------------------------
Total from investment
operations (0.05) (0.03) 0.17 1.61 0.96 0.10
-------------------------------------------------------------------------------------------------------
Less dividends from
net investment income (0.39) (0.82) (0.82) (0.82) (0.81) (0.19)
-------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.10 $8.54 $ 9.39 $10.04 $9.25 $9.10
-------------------------------------------------------------------------------------------------------
CLASS Y RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------
Total return -0.69% -0.39% 1.90% 18.13% 11.07% 1.00%
Net assets, end of
period (in millions) $2 $2 $2 $3 $3 $2
Ratio of expenses
to average net assets 0.80%(2) 0.79% 0.74% 0.77% 0.77% 0.80%(2)
Ratio of net
investment income
to average net assets 9.21%(2) 8.91% 8.62% 8.46% 8.78% 8.55%(2)
Portfolio turnover rate 24.20% 41.55% 53.19% 63.40% 53.17% 41.67%(2)
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
105
<PAGE>
--------------------------------------------------------------------------------
MUNICIPAL BOND FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended September 30, 2000, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------
CLASS A PER-SHARE DATA
-------------------------------------------------------------------------------------------------------
<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
-------------------------------------------------------------------------------------------------------
CLASS A RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------
Total return(2) 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>
(1) ON JANUARY 21, 1996, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
(2) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
106
<PAGE>
--------------------------------------------------------------------------------
MUNICIPAL BOND FUND
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/5/99(1) THROUGH
9/30/00
--------------------------------------------------------------------------------
CLASS B PER-SHARE DATA
--------------------------------------------------------------------------------
<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
--------------------------------------------------------------------------------
CLASS B RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return 3.56%
Net assets, end of period (in millions) $1
Ratio of expenses to average net assets 1.86%(2)
Ratio of net investment income to average net assets 4.17%(2)
Portfolio turnover rate 15.31%(3)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
(3) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000.
107
<PAGE>
--------------------------------------------------------------------------------
MUNICIPAL BOND FUND
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/7/99(1) THROUGH
9/30/00
--------------------------------------------------------------------------------
CLASS C PER-SHARE DATA
--------------------------------------------------------------------------------
<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
--------------------------------------------------------------------------------
CLASS C RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return 3.56%
Net assets, end of period (in millions) $1
Ratio of expenses to average net assets 1.84%(2)
Ratio of net investment income to average net assets 4.18%(2)
Portfolio turnover rate 15.31%(3)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
(3) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000.
108
<PAGE>
--------------------------------------------------------------------------------
MUNICIPAL BOND FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL YEAR PERIOD FROM
ENDED 12/30/98(1) THROUGH
9/30/00 9/30/99
--------------------------------------------------------------------------------
CLASS Y PER-SHARE DATA
--------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $6.90 $7.41
--------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.36(2) 0.28
Net realized and unrealized loss on investments (0.08)(2) (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
--------------------------------------------------------------------------------
CLASS Y RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return 4.32% -3.21%
Net assets, end of period (in thousands) $2 $2
Ratio of expenses to average net assets 0.71% 0.67%(3)
Ratio of net investment income to average net assets 5.38% 5.08%(3)
Portfolio turnover rate 15.31% 30.93%(4)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) BASED ON AVERAGE WEEKLY SHARES OUTSTANDING.
(3) ANNUALIZED.
(4) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999.
109
<PAGE>
--------------------------------------------------------------------------------
MUNICIPAL HIGH INCOME FUND
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal year
ended September 30, 2000, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------
CLASS A PER-SHARE DATA
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $5.19 $5.69 $5.55 $5.31 $5.27
-------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.30 0.31 0.32 0.34 0.34
Net realized and unrealized
gain (loss) on investments (0.27) (0.37) 0.21 0.25 0.04
-------------------------------------------------------------------------------------------------------
Total from investment
operations 0.03 (0.06) 0.53 0.59 0.38
-------------------------------------------------------------------------------------------------------
Less distributions:
Declared from net
investment income (0.30) (0.31) (0.32) (0.34) (0.34)
From capital gains (0.00) (0.13) (0.07) (0.01) (0.00)
In excess of capital gains (0.00)(2) (0.00)(2) (0.00) (0.00) (0.00)
-------------------------------------------------------------------------------------------------------
Total distributions (0.30) (0.44) (0.39) (0.35) (0.34)
-------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.92 $5.19 $5.69 $5.55 $5.31
-------------------------------------------------------------------------------------------------------
CLASS A RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------
Total return(3) 0.83% -1.22% 9.88% 11.45% 7.40%
Net assets, end of
period (in millions) $417 $510 $522 $474 $400
Ratio of expenses to
average net assets 0.94% 0.87% 0.82% 0.78% 0.81%
Ratio of net investment
income to average net assets 6.08% 5.59% 5.72% 6.19% 6.41%
Portfolio turnover rate 22.41% 26.83% 35.16% 19.47% 26.91%
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) ON JANUARY 30, 1996, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A SHARES.
(2) NOT SHOWN DUE TO ROUNDING.
(3) TOTAL RETURN CALCULATED WITHOUT TAKING INTO ACCOUNT THE SALES LOAD DEDUCTED
ON AN INITIAL PURCHASE.
110
<PAGE>
--------------------------------------------------------------------------------
MUNICIPAL HIGH INCOME FUND
For a Class B share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/5/99(1) THROUGH
9/30/00
--------------------------------------------------------------------------------
CLASS B PER-SHARE DATA
--------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $5.16
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.25
Net realized and unrealized loss on investments (0.24)
--------------------------------------------------------------------------------
Total from investment operations 0.01
--------------------------------------------------------------------------------
Less distributions:
Declared from net investment income (0.25)
From capital gains (0.00)
In excess of capital gains (0.00)(2)
--------------------------------------------------------------------------------
Total distributions (0.25)
--------------------------------------------------------------------------------
Net asset value, end of period $4.92
--------------------------------------------------------------------------------
CLASS B RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return 0.29%
Net assets, end of period (in millions) $1
Ratio of expenses to average net assets 1.89%(3)
Ratio of net investment income to average net assets 5.16%(3)
Portfolio turnover rate 22.41%(4)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) NOT SHOWN DUE TO ROUNDING.
(3) ANNUALIZED.
(4) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000.
111
<PAGE>
--------------------------------------------------------------------------------
MUNICIPAL HIGH INCOME FUND
For a Class C share outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
10/8/99(1) THROUGH
9/30/00
--------------------------------------------------------------------------------
CLASS C PER-SHARE DATA
--------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $5.16
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.25
Net realized and unrealized loss on investments (0.24)
--------------------------------------------------------------------------------
Total from investment operations 0.01
--------------------------------------------------------------------------------
Less distributions:
Declared from net investment income (0.25)
From capital gains (0.00)
In excess of capital gains (0.00)(2)
--------------------------------------------------------------------------------
Total distributions (0.25)
--------------------------------------------------------------------------------
Net asset value, end of period $4.92
--------------------------------------------------------------------------------
CLASS C RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return 0.26%
Net assets, end of period (in thousands) $822
Ratio of expenses to average net assets 1.91%(3)
Ratio of net investment income to average net assets 5.13%(3)
Portfolio turnover rate 22.41%(4)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) NOT SHOWN DUE TO ROUNDING.
(3) ANNUALIZED.
(4) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000.
112
<PAGE>
--------------------------------------------------------------------------------
MUNICIPAL HIGH INCOME FUND
For a Class Y share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
FISCAL YEAR PERIOD FROM PERIOD FROM
ENDED 12/30/98(1) THROUGH 7/1/98(1) TO
9/30/00 9/30/99 8/25/98
-------------------------------------------------------------------------------------------------------
CLASS Y PER-SHARE DATA
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $5.19 $5.65 $5.64
-------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.30 0.24 0.05
Net realized and unrealized
gain (loss) on investments (0.27) (0.33) 0.01
-------------------------------------------------------------------------------------------------------
Total from investment operations 0.03 (0.09) 0.06
-------------------------------------------------------------------------------------------------------
Less distributions:
Declared from net investment income (0.30) (0.24) (0.05)
From capital gains (0.00) (0.13) (0.00)
In excess of capital gains (0.00)(2) (0.00)(2) (0.00)
-------------------------------------------------------------------------------------------------------
Total distributions (0.30) (0.37) (0.05)
-------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.92 $5.19 $5.65
-------------------------------------------------------------------------------------------------------
CLASS Y RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------
Total return 0.97% -1.53% 1.07%
Net assets, end of period (in thousands) $18 $2 $0
Ratio of expenses to average net assets 1.08% 0.80%(3) 0.61%(3)
Ratio of net investment income
to average net assets 5.96% 5.68%(3) 5.99%(3)
Portfolio turnover rate 22.41% 26.83%(4) 35.16%(3)
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) CLASS Y SHARES COMMENCED OPERATIONS ON JULY 1, 1998 AND CONTINUED OPERATIONS
UNTIL AUGUST 25, 1998 WHEN ALL VALUE SHOWN IN THE TABLE. OPERATIONS
RECOMMENCED ON DECEMBER 30, 1998.
(2) NOT SHOWN DUE TO ROUNDING.
(3) ANNUALIZED.
(4) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999.
113
<PAGE>
--------------------------------------------------------------------------------
CASH MANAGEMENT
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' report, along with the Fund's financial statements for the fiscal
period ended September 30, 2000, is included in the Fund's SAI, which is
available upon request.
For a Class A share outstanding throughout each period(1):
<TABLE>
<CAPTION>
FOR THE
FISCAL PERIOD FOR THE FISCAL YEAR ENDED JUNE 30,
ENDED -----------------------------------------------------
9/30/00 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------
CLASS A PER-SHARE DATA
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------------------------------------------
Net investment income 0.0148 0.0511 0.0455 0.0484 0.0472 0.0487
Less dividends declared (0.0148) (0.0511) (0.0455) (0.0484) (0.0472) (0.0487)
-------------------------------------------------------------------------------------------------------
Net asset value,
end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------------------------------------------
CLASS A RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------
Total return 1.50% 5.18% 4.67% 4.93% 4.80% 5.01%
Net assets, end of
period (in millions) $875 $782 $667 $533 $514 $402
Ratio of expenses to
average net assets 0.81%(2) 0.83% 0.83% 0.89% 0.87% 0.91%
Ratio of net investment
income to average net assets 5.92%(2) 5.08% 4.54% 4.84% 4.70% 4.89%
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) ON SEPTEMBER 5, 1995, FUND SHARES OUTSTANDING WERE DESIGNATED CLASS A
SHARES.
(2) ANNUALIZED.
114
<PAGE>
--------------------------------------------------------------------------------
CASH MANAGEMENT
For a Class B share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL PERIOD PERIOD FROM
ENDED 9/9/99(1) THROUGH
9/30/00 6/30/00
--------------------------------------------------------------------------------
CLASS B PER-SHARE DATA
--------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $1.00 $1.00
--------------------------------------------------------------------------------
Net investment income 0.0133 0.0346
Less dividends declared (0.0133) (0.0346)
--------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00
--------------------------------------------------------------------------------
CLASS B RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return 1.29% 3.43%
Net assets, end of period (in millions) $2 $3
Ratio of expenses to average net assets 1.43%(2) 1.67%(2)
Ratio of net investment income to average net assets 5.29%(2) 4.49%(2)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
115
<PAGE>
--------------------------------------------------------------------------------
CASH MANAGEMENT
For a Class C share outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL PERIOD PERIOD FROM
ENDED 9/9/99(1) THROUGH
9/30/00 6/30/00
--------------------------------------------------------------------------------
CLASS C PER-SHARE DATA
--------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $1.00 $1.00
--------------------------------------------------------------------------------
Net investment income 0.0126 0.0335
Less dividends declared (0.0126) (0.0335)
--------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00
--------------------------------------------------------------------------------
CLASS C RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Total return 1.29% 3.32%
Net assets, end of period (in millions) $1 $1
--------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.68%(2) 1.82%(2)
Ratio of net investment income to average net assets 5.05%(2) 4.45%(2)
--------------------------------------------------------------------------------
</TABLE>
(1) COMMENCEMENT OF OPERATIONS.
(2) ANNUALIZED.
116
<PAGE>
This space is intended for your notes and calculations.
117
<PAGE>
This space is intended for your notes and calculations.
118
<PAGE>
--------------------------------------------------------------------------------
WADDELL & REED ADVISORS FUNDS
CUSTODIAN
UMB Bank, n.a.
928 Grand Boulevard
Kansas City, Missouri 64141
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D. C. 20036
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1010 Grand Boulevard
Kansas City, Missouri
64106-2232
INVESTMENT MANAGER
Waddell & Reed Investment
Management Company
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
UNDERWRITER
Waddell & Reed, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
SHAREHOLDER SERVICING AGENT
Waddell & Reed
Services Company
6301 Glenwood
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
ACCOUNTING SERVICES AGENT
Waddell & Reed
Services Company
6301 Glenwood
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
119
<PAGE>
--------------------------------------------------------------------------------
WADDELL & REED ADVISORS FUNDS
You can get more information about each Fund in its--
- STATEMENT OF ADDITIONAL INFORMATION (SAI), which contains detailed
information about the Fund, particularly the investment policies and
practices. You may not be aware of important information about the Fund
unless you read both the Prospectus and the SAI. The current SAI is on file
with the Securities and Exchange Commission (SEC) and it is incorporated
into this Prospectus by reference (that is, the SAI is legally part of the
Prospectus).
- ANNUAL AND SEMIANNUAL REPORTS TO SHAREHOLDERS, which detail the Fund's
actual investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the year covered by
the report.
To request a copy of a Fund's current SAI or copies of its most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the Fund
or Waddell & Reed, Inc. at the address and telephone number below. Copies of the
SAI, Annual and/or Semiannual reports may also be requested via e-mail at
[email protected].
Information about the Funds (including the current SAI and most recent Annual
and Semiannual Reports) is available from the SEC's web site at
http://www.sec.gov and may also be obtained, after paying a duplicating fee, by
electronic request at [email protected] or from the SEC's Public Reference Room
in Washington, D.C. You can find out about the operation of the Public Reference
Room and applicable copying charges by calling 202-942-8090.
The Funds' SEC file numbers are as follows:
Waddell & Reed Advisors Funds, Inc. Bond Fund: 811-2552
Waddell & Reed Advisors Cash Management, Inc.: 811-2922
Waddell & Reed Advisors Global Bond Fund, Inc.: 811-4520
Waddell & Reed Advisors Government Securities Fund, Inc.: 811-3458
Waddell & Reed Advisors High Income Fund, Inc.: 811-2907
Waddell & Reed Advisors Municipal Bond Fund, Inc.: 811-2657
Waddell & Reed Advisors Municipal High Income Fund, Inc.: 811-4427
Waddell & Reed Advisors Municipal Money Market Fund, Inc.: 811-10137
[LOGO] WADDELL & REED
FINANCIAL SERVICES
---------------------------
INVESTING. WITH A PLAN-SM-.
Waddell & Reed, Inc.
6300 Lamar Avenue, P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME 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 High Income Fund (the Fund), dated
December 15, 2000, which may be obtained from the Fund or its underwriter,
Waddell & Reed, Inc., at the address or telephone number shown above.
TABLE OF CONTENTS
Performance Information ............................................ 2
Investment Strategies, Policies and Practices....................... 6
Investment Management and Other Services ...........................
Purchase, Redemption and Pricing of Shares ......................... 41
Directors and Officers ............................................. 54
Payments to Shareholders ........................................... 60
Taxes .............................................................. 61
Portfolio Transactions and Brokerage ............................... 65
Other Information .................................................. 68
Appendix A.......................................................... 70
Financial Statements ...............................................
<PAGE>
Waddell & Reed Advisors Municipal High Income 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 9, 1985.
Prior to June 30, 2000, the Fund was known as United Municipal High Income 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.
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may, from
time to time, publish the Fund's total return information and/or performance
rankings in advertisements and sales materials.
TOTAL RETURN
Total return is the overall change in the value of an investment over a
given period of time. An average annual total return quotation is computed by
finding the average annual compounded rates of return over the one-, five-, and
ten-year periods that would equate the initial amount invested to the ending
redeemable value. Standardized total return information is calculated by
assuming an initial $1,000 investment and, for Class A shares, deducting the
maximum sales load of 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
2
<PAGE>
entire amount of the $1,000 initial payment will be assumed to have been
invested. If the sales charge applicable to Class A shares were reflected, it
would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of
September 30, 2000, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
<TABLE>
<CAPTION>
With Without
Sales Load Sales Load
Deducted Deducted
<S> <C> <C>
One year period from October 1, 1999 to
September 30, 2000: -3.46% 0.83%
Five-year period from October 1, 1995 to
September 30, 2000: 4.64% 5.55%
Ten-year period from October 1, 1990 to
September 30, 2000: 7.02% 7.49%
</TABLE>
Prior to January 30, 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 -4.47%.
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 0.29%.
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 8, 1999 to September 30, 2000 was -0.70%.
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 8, 1999 to September 30, 2000 was 0.26%.
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:
3
<PAGE>
One-year period from October 1, 1999 to
September 30, 2000: 0.97%
Period from December 30, 1998* to
September 30, 2000: -0.33%
*Commencement of operations.
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:
6
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 5.89%. 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 5.22%. 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 5.17%. 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 7.96%.
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
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computation of tax-equivalent yield by dividing that portion of the Fund's
yield which is tax exempt by one minus a stated income tax rate and adding
the product to that portion, if any, of the yield of the Fund that is not
tax-exempt.
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 6.83%, 7.97%, 8.30%, 8.90% and
9.40% 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 6.06%, 7.07%, 7.36%, 7.90% and 8.34% 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 5.99%,
6.99%, 7.27%, 7.80% and 8.24% 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 9.23%, 10.77%, 11.21%, 12.03% and
12.70% 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 may be an item of tax preference for purposes of the
Federal alternative minimum tax. In general, IDBs and PABs are revenue bonds and
are issued by or on behalf of public authorities to obtain funds to finance
privately operated facilities (i.e. energy and pollution control). IDBs and PABs
are also used to finance public facilities such as airports or 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.
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Municipal leases and participation interests therein are another type
of municipal bond (collectively, lease obligations). These obligations, which
may take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a variety of equipment and facilities. The factors to be considered in
determining whether or not any rated municipal lease obligations are liquid
include (1) the frequency of trades and quotes for the obligations; (2) the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake to make a
market in the securities; (4) the nature of marketplace trades, including the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer; (5) the likelihood that the marketability of the
obligation will be maintained through the time the instrument is held; (6) the
credit quality of the issuer and the lessee; and (7) the essentiality to the
lessee of the property covered by the lease. Unrated municipal lease obligations
are considered illiquid.
The Fund 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 methods 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
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is taxable), the Fund will sell the obligation as soon as possible, but it
might incur a loss upon such sale.
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 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. Credit ratings for individual securities may change from time
to time, and the Fund may retain a portfolio security whose rating
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<PAGE>
has been changed. See Appendix A for a description of bond ratings.
RISKS OF CERTAIN TYPES OF MUNICIPAL BONDS
At any one time the Fund may have more than 25% of its total assets in
similar type projects in which low-quality municipal bonds are likely to be
issued, including the following: electrical utilities, steel, health care and
life care facilities and small industries. A substantial amount of the assets of
the Fund may therefore be invested in securities that are related in such a way
that an economic, business or political development or change affecting one such
security would likewise affect the other securities. For example, a declining
market for health care facilities might adversely affect the ability of
municipalities to make timely payments of principal and interest on revenue
bonds to be paid from hospital revenues. The Fund could also have more than 25%
of its total assets invested in issuers in the same geographic area, but will
not have more than 25% of its total assets in securities of issuers located in
any one state.
Many of the low-quality municipal bonds in which the Fund seeks to
invest will be IDBs and PABs. It is likely that more than 25% of the Fund's
total assets will be invested in IDBs and PABs. As discussed above under
Municipal Bonds, the entity responsible for payment of the principal and
interest on IDBs and PABs is usually the nongovernmental user of the facility
being financed by the bond issue. Consequently, to the extent the Fund invests
up to 25% of its total assets in bonds issued by entities in any one industry,
it will be subject to the risks inherent in the industry to which the issuer
belongs.
For example, a hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability of
the hospital to provide the services required, management and medical
capabilities, economic developments in the service area, efforts by insurers and
government agencies to limit rates and expenses, confidence in the hospital,
service area economic developments, competition, availability and expense of
malpractice insurance, Medicaid and Medicare funding, and possible Federal
legislation limiting the rates of increase of hospital charges. Significant
events impacting the hospital industry in any one of these areas might adversely
affect the industry's ability to service its debt or to pay principal when due.
Life care facilities are an alternative form of long-term housing for
the elderly. They are subject to a wide variety of risks. Primarily, the
projects must maintain adequate occupancy levels to be able to provide revenues
adequate to maintain debt service payments. Moreover, since a portion of
housing, medical care and other services may be financed by an initial deposit
it is important that the facility maintain adequate financial reserves to secure
estimated actuarial liabilities. The ability
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<PAGE>
of management to accurately forecast inflationary cost pressures weighs
importantly in the process. The facilities may also be impacted by regulatory
cost restrictions applied to health care delivery in general, particularly
state regulations or changes in Medicare and Medicaid payments or
qualifications, or restrictions imposed by medical insurance companies. They
may also face competition from alternative health care or conventional
housing facilities in the private or public sector.
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.
Pollution control and other IDBs and PABs are issued by various state
and local agencies to finance various projects, including those of domestic
steel producers, and are secured solely by agreements with such companies.
Domestic steel companies are suffering the consequences of such adverse trends
as high labor costs, high foreign imports encouraged by foreign productivity
increases and a strong U.S. dollar, and other cost pressures such as are imposed
by antipollution legislation. Domestic steel capacity is being reduced currently
by large-scale plant closings.
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;
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(4) bank deposits, unless they are payable at principal amount
plus accrued interest on demand or within seven days after
demand;
(5) over-the-counter (OTC) options and their underlying
collateral;
(6) securities for which market quotations are not readily
available; and
(7) securities involved in swaps, caps, floor and collar
transactions.
The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
If through a change in values, net assets, or other circumstances, the
Fund were in a position where more than 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 indices 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.
INVESTMENT COMPANY SECURITIES
The Fund may purchase securities of closed-end investment companies. As
a shareholder in an investment company, the Fund would bear its pro rata share
of that investment company's expenses, which could result in duplication of
certain fees, including management and administrative fees.
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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). Under normal conditions, the
Fund may invest in taxable obligations only if, after any such investment,
not more than 20% of its total assets would consist of taxable obligations
including options, futures contracts and other taxable derivative
instruments. However, as a temporary defensive measure, the Fund may invest
up to all of its assets in 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 Standard & Poor's
(S&P), or Moody's. See Appendix A for a description of these ratings.
MONEY MARKET INSTRUMENTS
Money market instruments are high-quality, short-term debt
instruments that present minimal credit risk. They may include U.S.
Government securities, commercial paper and other short-term corporate
obligations, and certificates of deposit and other financial institution
obligations. These instruments may carry fixed or variable interest rates.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent
direct or indirect participations in, or are secured by and payable from,
mortgage loans secured by real property and include single- and multi-class
pass-through securities and collateralized mortgage obligations. Multi-class
pass-through securities and collateralized mortgage obligations are
collectively referred to in this SAI as CMOs. Some CMOs are directly
supported by other CMOs, which in turn are supported by mortgage pools.
Investors typically receive payments out of the interest and principal on the
underlying mortgages. The portions of the payments that investors receive, as
well as the priority of their rights to receive payments, are determined by
the specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund may
invest include mortgage-backed securities issued or
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<PAGE>
guaranteed as to the payment of principal and interest (but not as to market
value) by Ginnie Mae, Fannie Mae or Freddie Mac. Other mortgage-backed
securities are issued by private issuers, generally originators of and
investors in mortgage loans, including savings associations, mortgage
bankers, commercial banks, investment bankers and special purpose entities.
Payments of principal and interest (but not the market value) of such private
mortgage-backed securities may be supported by pools of mortgage loans or
other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. Government or one of its agencies or instrumentalities, or they
may be issued without any government guarantee of the underlying mortgage
assets but with some form of non-government credit enhancement. These credit
enhancements do not protect investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage lenders or
other financial institutions. Other types of mortgage-backed securities will
likely be developed in the future, and the Fund may invest in them as long as
WRIMCO determines they are consistent with the Fund's goals and investment
policies.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed
securities are created when a U.S. Government agency or a financial
institution separates the interest and principal components of a
mortgage-backed security and sells them as individual securities. The holder
of the principal-only security (PO) receives the principal payments made by
the underlying mortgage-backed security, while the holder of the
interest-only security (IO) receives interest payments from the same
underlying security.
For example, IO classes are entitled to receive all or a portion of
the interest, but none (or only a nominal amount) of the principal payments,
from the underlying mortgage assets. If the mortgage assets underlying an IO
experience greater than anticipated principal prepayments, then the total
amount of interest allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of the investor's initial investment, even if the
security is guaranteed by the U.S. Government or considered to be of the
highest quality. Conversely, PO classes are entitled to receive all or a
portion of the principal payments, but none of the interest, from the
underlying mortgage assets. PO classes are purchased at substantial discounts
from par, and the yield to investors will be reduced if principal payments
are slower than expected. IOs, POs and other CMOs involve special risks, and
evaluating them requires special knowledge.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities,
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as discussed above. However, the underlying assets are not first lien
mortgage loans or interests therein, but include assets such as motor vehicle
installment sales contracts, other installment sale contracts, home equity
loans, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts or special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to a certain
amount and for a certain time period by a letter of credit or pool insurance
policy issued by a financial institution unaffiliated with the issuer, or
other credit enhancements may be present. The value of asset-backed
securities may also depend on the creditworthiness of the servicing agent for
the loan pool, the originator of the loans or the financial institution
providing the credit enhancement.
SPECIAL CHARACTERISTICS OF MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. The yield characteristics of mortgage-backed and asset-backed
securities differ from those of traditional debt securities. Among the major
differences are that interest and principal payments are made more
frequently, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans or other obligations generally may be
prepaid at any time. Prepayments on a pool of mortgage loans are influenced
by a variety of economic, geographic, social and other factors, including
changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and servicing decisions.
Generally, however, prepayments on fixed-rate mortgage loans will increase
during a period of falling interest rates and decrease during a period of
rising interest rates. Similar factors apply to prepayments on asset-backed
securities, but the receivables underlying asset-backed securities generally
are of a shorter maturity and thus are likely to experience substantial
prepayments. Such securities, however, often provide that for a specified
time period the issuers will replace receivables in the pool that are repaid
with comparable obligations. If the issuer is unable to do so, repayment of
principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the servicer and the time the issuer makes the
payments on the mortgage-backed securities, and this delay reduces the
effective yield to the holder of such securities.
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Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and
the associated average life assumption. The average life of pass-through
pools varies with the maturities of the underlying mortgage loans. A pool's
term may be shortened by unscheduled or early payments of principal on the
underlying mortgages. Because prepayment rates of individual pools vary
widely, it is not possible to predict accurately the average life of a
particular pool. In the past, a common industry practice has been to assume
that prepayments on pools of fixed-rate 30-year mortgages would result in a
12-year average life for the pool. At present, mortgage pools, particularly
those with loans with other maturities or different characteristics, are
priced on an assumption of average life determined for each pool. In periods
of declining interest rates, the rate of prepayment tends to increase,
thereby shortening the actual average life of a pool of mortgage-related
securities. Conversely, in periods of rising interest rates, the rate of
prepayment tends to decrease, thereby lengthening the actual average life of
the pool. Changes in the rate or speed of these payments can cause the value
of the mortgage backed securities to fluctuate rapidly. However, these
effects may not be present, or may differ in degree, if the mortgage loans in
the pools have adjustable interest rates or other special payment terms, such
as a prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed securities
is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics,
such as yield, effective maturity and interest rate sensitivity. As market
conditions change, however, and especially during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of some
CMO classes and the ability of the structure to provide the anticipated
investment characteristics may be reduced. These changes can result in
volatility in the market value and in some instances reduced liquidity, of
the CMO class.
OPTIONS, FUTURES AND OTHER STRATEGIES
GENERAL. WRIMCO may use certain options, futures contracts
(sometimes referred to as futures), options on futures contracts, 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.
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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 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.
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WRIMCO may utilize these opportunities to the extent that they are consistent
with the Fund's goal and permitted by the Fund's investment limitations and
applicable regulatory authorities. The Fund might not use any of these
strategies, and there can be no assurance that any strategy used will
succeed. The Fund's Prospectus or SAI will be supplemented to the extent that
new products or techniques involve materially different risks than those
described below or in the Prospectus.
SPECIAL RISKS. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of the Fund and may involve a
small investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon
WRIMCO's ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any
particular strategy will succeed, and use of Financial Instruments could
result in a loss, regardless of whether the intent was to reduce risk or
increase return.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Financial Instrument and price movements of the
investments being hedged. For example, if the value of a Financial Instrument
used in a short hedge increased by less than the decline in value of the
hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the
markets in which Financial Instruments are traded. The effectiveness of
hedges using Financial Instruments on indexes will depend on the degree of
correlation between price movements in the index and price movements in the
securities being hedged.
Because there are a limited number of types of exchange-traded
options and futures contracts, it is likely that the standardized contracts
available will not match the Fund's current or anticipated investments
exactly. The Fund may invest in options and futures contracts based on
securities with different issuers, maturities, or other characteristics from
the securities in which it typically invests, which involves a risk that the
options or futures position will not track the performance of the Fund's
other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of
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the underlying instrument, and the time remaining until expiration of the
contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options
and futures markets and the securities markets, from structural differences
in how options and futures and securities are traded, or from imposition of
daily price fluctuation limits or trading halts. The Fund may purchase or
sell options and futures contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to attempt to
compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price
changes in the Fund's options or futures positions are poorly correlated with
its other investments, the positions may fail to produce anticipated gains or
result in losses that are not offset by gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable
price movements. However, such strategies can also reduce opportunity for
gain by offsetting the positive effect of favorable price movements. For
example, if the Fund entered into a short hedge because WRIMCO projected a
decline in the price of a security in the Fund's portfolio, and the price of
that security increased instead, the gain from that increase might be wholly
or partially offset by a decline in the price of the Financial Instrument.
Moreover, if the price of the Financial Instrument declined by more than the
increase in the price of the security, the Fund could suffer a loss. In
either such case, the Fund would have been in a better position had it not
attempted to hedge at all.
(4) As described below, the Fund might be required to maintain
assets as cover, maintain accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties
(i.e., Financial Instruments other than purchased options). If the Fund were
unable to close out its positions in such Financial Instruments, it might be
required to continue to maintain such assets or accounts or make such
payments until the position expired or matured. These requirements might
impair the Fund's ability to sell a portfolio security or make an investment
at a time when it would otherwise be favorable to do so, or require that the
Fund sell a portfolio security at a disadvantageous time.
(5) The Fund's ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction (the counterparty) to enter
into a transaction closing out the position. Therefore, there is no assurance
that any position can be closed out at a time and price that is favorable to
the Fund.
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COVER. Transactions using Financial Instruments, other than
purchased options, expose the Fund to an obligation to another party. The
Fund will comply with SEC guidelines regarding cover for these instruments
and will, if the guidelines so require, set aside cash or liquid assets in an
account with its custodian in the prescribed amount as determined daily. The
Fund will not enter into any such transactions unless it owns either (1) an
offsetting (covered position in securities, currencies or other options,
futures contracts or forward contracts, or (2) cash and liquid assets with a
value, marked-to-market daily, sufficient to cover its potential obligations
to the extent not covered as provided in (1) above.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a
large portion of the Fund's assets to cover or accounts could impede
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
OPTIONS. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon
price during the option period. A put option gives the purchaser the right to
sell, and obligates the writer to buy, the underlying investment at the
agreed-upon price during the option period. Purchasers of options pay an
amount, known as a premium, to the option writer in exchange for the right
under the option contract.
The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or call
options can enable the Fund to enhance income or yield by reason of the
premiums paid by the purchasers of such options. However, if the market price
of the security underlying a put option declines to less than the exercise
price of the option, minus the premium received, the Fund would expect to
suffer a loss.
Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent
of the premium received for writing the option. However, if the security
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 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
depreciates to a price lower
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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 at more than its market value. If the put option is an OTC option,
the securities or other assets used as cover would be considered illiquid to
the extent described under Illiquid Investments.
The value of an option position will reflect, among other things,
the current market value of the underlying investment, the time remaining
until expiration, the relationship of the exercise price to the market price
of the underlying investment, the historical price volatility of the
underlying investment and general market conditions. Options that expire
unexercised have no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, the Fund may terminate a position in a put
or call option it had purchased by writing an identical put or call option;
this is known as a closing sale transaction. Closing transactions permit the
Fund to realize profits or limit losses on an option position prior to its
exercise or expiration.
A type of put that the Fund may purchase is an optional delivery
standby commitment, which is entered into by parties selling debt securities
to the Fund. An optional delivery standby commitment gives the Fund the right
to sell the security back to the seller on specified terms. This right is
provided as an inducement to purchase the security.
RISKS OF OPTIONS ON SECURITIES. Options offer large amounts of
leverage, which will result in the Fund's net asset value being more
sensitive to changes in the value of the related instrument. The Fund may
purchase or write both exchange-traded and OTC options. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between the Fund and its counterparty (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus,
when the Fund purchases an OTC option, it relies on the counterparty from
whom it purchased the option to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counterparty to do so
would result in the loss of any premium paid by the Fund as well as the loss
of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular
time. Closing transactions can be
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made for OTC options only by negotiating directly with the counterparty, or
by a transaction in the secondary market if any such market exists. There can
be no assurance that the Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency
of the counterparty, the Fund might be unable to close out an OTC option
position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an
option it had purchased, it would have to exercise the option to realize any
profit. The inability to enter into a closing purchase transaction for a
covered call option written by the Fund could cause material losses because
the Fund would be unable to sell the investment used as cover for the written
option until the option expires or is exercised.
OPTIONS ON INDEXES. Puts and calls on indexes are similar to puts
and calls on securities or futures contracts except that all settlements are
in cash and gain or loss depends on changes in the index in question rather
than on price movements in individual securities or futures contracts. When
the Fund writes a call on an index, it receives a premium and agrees that,
prior to the expiration date, the purchaser of the call, upon exercise of the
call, will receive from the Fund an amount of cash if the closing level of
the index upon which the call is based is greater than the exercise price of
the call. The amount of cash is equal to the difference between the closing
price of the index and the exercise price of the call times a specified
multiple (the multiplier), which determines the total dollar value for each
point of such difference. When the Fund buys a call on an index, it pays a
premium and has the same rights as to such call as are indicated above. When
the Fund buys a put on an index, it pays a premium and has the right, prior
to the expiration date, to require the seller of the put, upon the Fund's
exercise of the put, to deliver to the Fund an amount of cash if the closing
level of the index upon which the put is based is less than the exercise
price of the put, which amount of cash is determined by the multiplier, as
described above for calls. When the Fund writes a put on an index, it
receives a premium and the purchaser of the put has the right, prior to the
expiration date, to require the Fund to deliver to it an amount of cash equal
to the difference between the closing level of the index and the exercise
price times the multiplier if the closing level is less than the exercise
price.
RISKS OF OPTIONS ON INDEXES. The risks of investment in options on
indexes may be greater than options on securities. Because index options are
settled in cash, when the Fund writes a call on an index it cannot provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. The Fund can offset some of the risk of writing a call
index option by holding a diversified portfolio of securities similar to
those on which the underlying index is based. However, the Fund cannot, as a
practical matter, acquire
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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 debt security, because there the writer's obligation is to deliver the
underlying security, not to pay its value as of a fixed time in the past. So
long as the writer already owns the underlying security, it can satisfy its
settlement obligations by simply delivering it, and the risk that its value
may have declined since the exercise date is borne by the exercising holder.
In contrast, even if the writer of an index call holds securities that
exactly match the composition of the underlying index, it will not be able to
satisfy its assignment obligations by delivering those securities against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date. By the time it
learns that it has been assigned, the index may have declined, with a
corresponding decline in the value of its portfolio. This timing risk is an
inherent limitation on the ability of index call writers to cover their risk
exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before
the closing index value for that day is available, it runs the risk that the
level of the underlying index may subsequently change. If such a change
causes the exercised option to fall out-of-the-money, the Fund will be
required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the
assigned writer.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size and
strike price, the terms of OTC options (options not traded on exchanges)
generally are established through negotiation with the other party to the
option contract. While this type of arrangement allows the Fund great
flexibility to tailor the option to its needs, OTC options generally involve
greater risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The purchase of
futures contracts or call options on futures contracts can serve as a long
hedge, and the sale of futures or the purchase of put options on futures can
serve as a short hedge. Writing call options on futures contracts can serve
as a limited short hedge, using a strategy similar to that used for writing
call options on securities or indexes. Similarly, writing put options on
futures contracts can serve as a limited long hedge. Futures contracts and
options on futures contracts can also be purchased and sold to attempt to
enhance income or yield.
In addition, futures contract strategies can be used to manage the
average duration of the Fund's fixed-income portfolio. If WRIMCO wishes to
shorten the average duration of the Fund's fixed-income portfolio, the Fund
may sell a debt futures contract or a call option thereon, or purchase a put
option on that futures contract. If WRIMCO wishes to lengthen the average
duration of the Fund's fixed-income portfolio, the Fund may buy a debt
futures contract or a call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at
the inception of a futures contract the Fund is required to deposit initial
margin in an amount generally equal to 10% or less of the contract value.
Margin must also be deposited when writing a call or put option on a futures
contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not
represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to the Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the Fund may be required
by an exchange to increase the level of its initial margin payment, and
initial margin requirements might be increased generally in the future by
regulatory action.
Subsequent variation margin payments are made to and from the
futures broker daily as the value of the futures position varies, a process
known as marking-to-market. Variation margin does not involve borrowing, but
rather represents a daily settlement of the Fund's obligations to or from a
futures broker. When the Fund purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when the
Fund purchases or sells a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Fund has
insufficient cash to meet daily variation margin requirements, it might need
to sell securities at a time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing,
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respectively, an instrument identical to the instrument purchased or sold.
Positions in futures and options on futures may be closed only on an exchange
or board of trade that provides a secondary market. However, there can be no
assurance that a liquid secondary market will exist for a particular contract
at a particular time. In such event, it may not be possible to close a
futures contract or options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading,
thereby preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option
on a futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the futures contract or option or to
maintain cash or liquid assets in an account.
RISKS OF FUTURES CONTRACTS AND OPTIONS THEREON. The ordinary spreads
between prices in the cash and futures markets (including the options on
futures market), due to differences in the natures of those markets, are
subject to the following factors which may create distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the cash
and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of general interest rate or debt 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 or
debt market movements or the time span within which the movements take place.
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INDEX FUTURES. The risk of imperfect correlation between movements
in the price of an index futures and movements in the price of the securities
that are the subject of the hedge increases as the composition of the Fund's
portfolio diverges from the securities included in the applicable index. The
price of the index futures may move more than or less than the price of the
securities being hedged. If the price of the index futures moves less than
the price of the securities that are the subject of the hedge, the hedge will
not be fully effective but, if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position
than if it had not hedged at all. If the price of the securities being hedged
has moved in a favorable direction, this advantage will be partially offset
by the futures contract. If the price of the futures contract moves more than
the price of the securities, the Fund will experience either a loss or a gain
on the futures contract that will not be completely offset by movements in
the price of the securities that are the subject of the hedge. To compensate
for the imperfect correlation of movements in the price of the securities
being hedged and movements in the price of the index futures, the Fund may
buy or sell index futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
the securities being hedged is more than the historical volatility of the
prices of the securities included in the index. It is also possible that,
where the Fund has sold index futures contracts to hedge against decline in
the market, the market may advance and the value of the securities held in
the portfolio may decline. If this occurred, the Fund would lose money on the
futures contract and also experience a decline in value of its portfolio
securities. However, while this could occur for a very brief period or to a
very small degree, over time the value of a diversified portfolio of
securities will tend to move in the same direction as the market indexes on
which the futures contracts are based.
Where index futures are purchased to hedge against a possible
increase in the price of securities before the Fund is able to invest in them
in an orderly fashion, it is possible that the market may decline instead. If
the Fund then concludes not to invest in them at that time because of concern
as to possible further market decline or for other reasons, it will realize a
loss on the futures contract that is not offset by a reduction in the price
of the securities it had anticipated purchasing.
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
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option at a lower price, in order to reduce the risk of the written call
option in the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction costs
and may be more difficult to open and close out.
TURNOVER. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or
puts written by the Fund, and the sale or purchase of futures contracts, may
cause it to sell or purchase related investments, thus increasing its
turnover rate. Once the Fund has received an exercise notice on an option it
has written, it cannot effect a closing transaction in order to terminate its
obligation under the option and must deliver or receive the underlying
securities at the exercise price. The exercise of puts purchased by the Fund
may also cause the sale of related investments, also increasing turnover;
although such exercise is within the Fund's control, holding a protective put
might cause it to sell the related investments for reasons that would not
exist in the absence of the put. The Fund will pay a brokerage commission
each time it buys or sells a put or call or purchases or sells a futures
contract. Such commissions may be higher than those that would apply to
direct purchases or sales.
SWAPS, CAPS, FLOORS AND COLLARS. The Fund may enter into swaps,
caps, floors and collars to preserve a return or a spread on a particular
investment or portion of its portfolio, to protect against any increase in
the price of securities the Fund anticipates purchasing at a later date or to
attempt to enhance yield. Swaps involve the exchange by the Fund with another
party of their respective commitments to pay or receive cash flows on a
notional principal amount, e.g., an exchange of floating rate payments for
fixed-rate payments. The purchase of a cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined value, to receive
payments on a notional principal amount from the party selling the cap. The
purchase of a floor entitles the purchaser, to the extent that a specified
index falls below a predetermined value, to receive payments on a notional
principal amount from the party selling the floor. A collar combines elements
of buying a cap and selling a floor.
Swap agreements, including caps, floors and collars, can be
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors. Depending on their
structure, swap agreements may increase or decrease the overall volatility of
the Fund's investments and its share price and yield because, and to the
extent, these agreements affect the Fund's exposure to long- or short-term
interest rates, mortgage-backed security values, corporate borrowing rates or
other factors such as security prices or inflation rates.
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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 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
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be possible delays and expenses in liquidating the underlying securities or
other collateral, decline in their value and loss of interest. The return on
such collateral may be more or less than that from the repurchase agreement.
The Fund's repurchase agreements will be structured so as to fully
collateralize the loans. In other words, the value of the underlying
securities, which will be held by the Fund's custodian bank or by a third
party that qualifies as a custodian under section 17(f) of the 1940 Act, is
and, during the entire term of the agreement, will remain at least equal to
the value of the loan, including the accrued interest earned thereon.
Repurchase agreements are entered into only with those entities approved by
WRIMCO.
RESTRICTED SECURITIES
Restricted securities are securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally
can be sold in privately negotiated transactions, pursuant to an exemption
from registration under the Securities Act of 1933, as amended, or in a
registered public offering. Where registration is required, the Fund may be
obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions
were to develop, the Fund might obtain a less favorable price than prevailed
when it decided to seek registration of the security.
There are risks associated with investment in restricted securities
in that there can be no assurance of a ready market for resale. Also, the
contractual restrictions on resale might prevent the Fund from reselling the
securities at a time when such sale would be desirable. Restricted securities
in which the Fund seeks to invest need not be listed or admitted to trading
on a foreign or domestic exchange and may be less liquid than listed
securities. Certain restricted securities, e.g., Rule 144A securities, may be
determined to be liquid in accordance with guidelines adopted by the Board of
Directors. See Illiquid Investments.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities (U.S. Government securities) are high quality
debt instruments issued or guaranteed as to principal or interest by the U.S.
Treasury or an agency or instrumentality of the U.S. Government. These
securities include Treasury Bills (which mature within one year of the date
they are issued), Treasury Notes (which have maturities of one to ten years)
and Treasury Bonds (which generally have maturities of more than ten years).
All such Treasury securities are backed by the full faith and credit of the
United States.
28
<PAGE>
U.S. Government agencies and instrumentalities that issue or
guarantee securities include, but are not limited to, the Federal Housing
Administration, Fannie Mae (also known as the Federal National Mortgage
Association), Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage
Association (Ginnie Mae), General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
(Freddie Mac), Farm Credit Banks, Maritime Administration, the Tennessee
Valley Authority, the Resolution Funding Corporation and the Student Loan
Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of
the United States. Some, such as securities issued by the Federal Home Loan
Banks, are backed by the right of the agency or instrumentality to borrow
from the Treasury. Other securities, such as securities issued by Fannie Mae,
are supported only by the credit of the instrumentality and by a pool of
mortgage assets. If the securities are not backed by the full faith and
credit of the United States, the owner of the securities must look
principally to the agency issuing the obligation for repayment and may not be
able to assert a claim against the United States in the event that the agency
or instrumentality does not meet its commitment.
U.S. Government securities may include mortgage-backed securities
issued by U.S. Government agencies or instrumentalities including, but not
limited to, Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed
securities include pass-through securities, participation certificates and
collateralized mortgage obligations. See Mortgage-Backed and Asset-Backed
Securities. Timely payment of principal and interest on Ginnie Mae
pass-throughs is guaranteed by the full faith and credit of the United
States. Freddie Mac and Fannie Mae are both instrumentalities of the U.S.
Government, but their obligations are not backed by the full faith and credit
of the United States. It is possible that the availability and the
marketability (i.e., liquidity) of the securities discussed in this section
could be adversely affected by actions of the U.S. Government to tighten the
availability of its credit.
VARIABLE OR FLOATING RATE INSTRUMENTS
Variable or floating rate instruments (including notes purchased
directly from issuers) bear variable or floating interest rates and may carry
rights that permit holders to demand payment of the unpaid principal balance
plus accrued interest from the issuers or certain financial intermediaries on
dates prior to their stated maturities. Floating rate securities have
interest rates that change whenever there is a change in a designated base
rate while variable rate instruments provide for a specified periodic
adjustment in the interest rate. These formulas are designed to result in a
market value for the instrument that approximates its par value.
29
<PAGE>
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.
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.
30
<PAGE>
The Fund may invest in zero coupon securities that are zero coupon
bonds of municipal and corporate issuers, stripped U.S. Treasury notes and
bonds, and other securities that are issued with original issue discount
(OID). The Federal tax law requires that a holder of a security with OID
accrue a ratable portion of the OID on the security (and include the accrued
OID on a taxable security as income) each year, even though the holder may
receive no interest payment on the security during the year. Because the Fund
annually must distribute substantially all of its taxable income and net
tax-exempt income, including any tax-exempt OID, to continue to qualify for
treatment as a regulated investment company (RIC), it may be required in a
particular year to distribute as a dividend an amount that is greater than
the total amount of cash it actually receives. Those dividends will be paid
from the Fund's cash assets or by liquidation of portfolio securities, if
necessary, at a time when the Fund otherwise might not have done so. The Fund
may realize capital gains or losses from those sales, which would increase or
decrease its taxable income and or net capital gains.
A broker-dealer creates a derivative zero by separating the interest
and principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of
Registered Interest and Principal of Securities) by separating the interest
and principal components of an outstanding U.S. Treasury security and selling
them as individual securities. Bonds issued by the Resolution Funding
Corporation (REFCORP) and the Financing Corporation (FICO) can also be
separated in this fashion. Original issue zeros are zero coupon securities
originally issued by the U.S. Government, a government agency, or a
corporation in zero coupon form.
INVESTMENT RESTRICTIONS AND LIMITATIONS
Certain of the Fund's investment restrictions, 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:
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<PAGE>
(1) Make any investments other than in municipal bonds and in the
taxable obligations, options, futures contracts and other
financial instruments described in the Prospectus;
(2) 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;
(3) Lend money or other assets (neither purchasing debt securities
and other obligations consistent with its goal and its other
investment policies and restrictions or engaging in repurchase
agreements is considered lending);
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.
(4) Borrow money except that, as a temporary measure for
extraordinary or emergency purposes and not for investment
purposes, the Fund may borrow from banks up to 5% of the value
of its total assets. The Fund may not pledge its assets in
connection with any permitted borrowings; however, this policy
does not prevent the Fund from pledging its assets in
connection with its purchase and sale of futures contracts,
options, forward contracts, swaps, caps, floors, collars and
other financial instruments;
(5) Invest for the purpose of exercising control or management of
other companies;
(6) Sell securities short (unless it owns or has the right to
obtain securities equivalent in kind and amount to the
securities sold short) or purchase securities on margin,
except that (1) this policy does not prevent the Fund from
entering into short positions in futures contracts, options,
forward contracts, swaps, caps, floors, collars and other
financial instruments, (2) the Fund may obtain such short-term
credits as are necessary for the clearance of transactions,
and (3) the Fund may make margin payments in connection with
futures contracts, options, forward contracts, swaps, caps,
floors, collars and other financial instruments;
(7) Participate on a joint, or a joint and several basis, in any
trading account in securities;
(8) Engage in the underwriting of securities;
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<PAGE>
(9) 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;
(10) Buy shares of other investment companies that redeem their
shares. The Fund may buy shares of investment companies that
do not redeem their shares if it does so in a regular
transaction in the open market and then does not have more
than one-tenth (i.e., 10%) of its total assets in these
shares;
(11) Invest more than 25% of its assets in IDBs issued for any one
industry or in any one state; or
(12) Issue senior securities.
THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL AND MAY BE
CHANGED BY THE BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL:
(1) During normal market conditions, at least 75% of the Fund's
total assets will be invested in medium- and lower-quality
municipal bonds, which are bonds rated BBB through D by S&P,
or Baa through C by Moody'S, or, if unrated, are determined by
WRIMCO to be of comparable quality. The Fund may invest in
higher-quality municipal bonds, and have less than 75% of its
total assets in medium- and lower-quality municipal bonds, at
times when yield spreads are narrow and the higher yields do
not justify the increased risk and when, in WRIMCO's opinion,
there is a lack of medium- and lower-quality issues in which
to invest.
(2) The Fund may invest 25% or more of its total assets in IDBs
and PABs and may have 25% or more of its total assets invested
in securities the payment of principal and interest on which
is derived from revenue of similar projects, or in municipal
bonds of issuers located in the same geographic area.
(3) The Fund will not purchase an IDB or PAB if it would then have
more than 5% of its total assets invested in IDBs and PABs of
companies with less than three years of continuous operation.
(4) The Fund may not purchase a security if, as a result, more
than 10% of its net assets would consist of illiquid
investments.
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<PAGE>
(5) To the extent that the Fund enters into futures contracts,
options on futures contracts or options on foreign currencies
traded on a CFTC-regulated exchange, in each case other than
for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish
those positions (excluding the amount by which options are
in-the-money at the time of purchase) will not exceed 5% of
the liquidation value of the Fund's portfolio, after taking
into account unrealized profits and unrealized losses on any
contracts the Fund has entered into. (In general, a call
option on a futures contract is in-the-money if the value of
the underlying futures contract exceeds the strike, i.e.,
exercise, price of the call; a put option on a futures
contract is in-the-money if the value of the underlying
futures contract is exceeded by the strike price of the put.)
This policy does not limit to 5% the percentage of the Fund's
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
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<PAGE>
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 22.41% and 10.60%, respectively.
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
35
<PAGE>
for variable life insurance and variable annuity policies for which W&R
Target Funds, Inc. is the underlying investment vehicle.
SHAREHOLDER SERVICES
Under the Shareholder Servicing Agreement entered into between the
Fund and Waddell & Reed Services Company (the Agent), a subsidiary of Waddell
& Reed, Inc., the Agent performs shareholder servicing functions, including
the maintenance of shareholder accounts, the issuance, transfer and
redemption of shares, distribution of dividends and payment of redemptions,
the furnishing of related information to the Fund and handling of shareholder
inquiries. A new Shareholder Servicing Agreement, or amendments to the
existing one, may be approved by the Fund's Board of Directors without
shareholder approval.
ACCOUNTING SERVICES
Under the Accounting Services Agreement entered into between the Fund and the
Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, preparation of prospectuses for existing shareholders,
preparation of proxy statements and certain shareholder reports. A new
Accounting Services Agreement, or amendments to an existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
PAYMENTS BY THE FUND FOR MANAGEMENT, ACCOUNTING AND SHAREHOLDER SERVICES
Under the Management Agreement, for WRIMCO's management services,
the Fund pays WRIMCO a fee as described in the Prospectus. The management
fees paid by the Fund to WRIMCO during the Fund's fiscal years ended
September 30, 2000, 1999 and 1998 were $2,353,002, $2,626,158 and $2,461,306,
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
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<PAGE>
distribution, of cash or shares, had a record date in that month. The Fund
also pays certain out-of-pocket expenses of the Agent, including long
distance telephone communications costs; microfilm and storage costs for
certain documents; forms, printing and mailing costs; charges of any
sub-agent used by Agent in performing services under the Shareholder
Servicing Agreement; and costs of legal and special services not provided by
Waddell & Reed, Inc., WRIMCO or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a
monthly fee of one-twelfth of the annual fee shown in the following table (as
amended September 1, 2000).
ACCOUNTING SERVICES FEE
<TABLE>
<CAPTION>
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:
ACCOUNTING SERVICES FEE
<TABLE>
<CAPTION>
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>
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<PAGE>
Fees paid to the Agent for accounting services for the fiscal years
ended September 30, 2000, 1999 and 1998 were $60,913, $60,000 and $60,000,
respectively.
Since the Fund pays a management fee for investment supervision and
an accounting services fee for accounting services as discussed above, WRIMCO
and the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement
are described above. Waddell & Reed, Inc. and affiliates 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 $473,666,
$1,439,099 and $1,691,251, respectively. For the fiscal year ended September
30, 2000, the dollar amount of underwriting commissions for Class B shares
was $191, and for Class C shares was $138. The amounts retained by Waddell &
Reed, Inc. for each fiscal year were, in the aggregate, $173,810, $618,700
and $713,220, 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
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<PAGE>
monthly, to reimburse Waddell & Reed, Inc. for its costs and expenses in
connection with, either directly or through others, the distribution of the
Class A shares, the provision of personal services to Class A shareholders
and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its financial
advisors, registered representatives and sales managers (collectively, the
sales force) and through other broker-dealers, banks and other appropriate
intermediaries. In distributing shares through its sales force, Waddell &
Reed, Inc. will pay commissions and incentives to the sales force at or about
the time of sale and will incur other expenses including costs for
prospectuses, sales literature, advertisements, sales office maintenance,
processing of orders and general overhead with respect to its efforts to
distribute the Fund's shares. The Class A Plan permits Waddell & Reed, Inc.
to receive reimbursement for these Class A-related distribution activities
through the distribution fee, subject to the limit contained in the Plan. The
Class A Plan also permits Waddell & Reed, Inc. to be reimbursed for amounts
it expends in compensating, training and supporting registered financial
advisors, sales managers and/or other appropriate personnel in providing
personal services to Class A shareholders of the Fund and/or maintaining
Class A shareholder accounts; increasing services provided to Class A
shareholders of the Fund by office personnel located at field sales offices;
engaging in other activities useful in providing personal service to Class A
shareholders of the Fund and/or maintenance of Class A shareholder accounts;
and in compensating broker-dealers, and other third parties, who may
regularly sell Class A shares of the Fund, and other third parties, for
providing shareholder services and/or maintaining shareholder accounts with
respect to Class A shares. Service fees and distribution fees in the amounts
of $1,013,317 and $41,981, 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
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<PAGE>
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 $1,620 and $4,587, 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 $1,048 and $3,096,
respectively, were paid (or accrued) by the Fund under the Class C Plan for
the fiscal year ended September 30, 2000.
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
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<PAGE>
pay Legend 1.00% of net assets invested; 2) for the purchase of Class B
shares, Waddell & Reed, Inc. (or its affiliate) may pay Legend 4.00% of net
assets invested; 3) for the purchase of Class C shares, Waddell & Reed, Inc.
(or its affiliate) may pay Legend 1.00% of net assets invested.
Each Plan was approved by the Fund's Board of Directors, including
the Directors who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operations of the Plans or any
agreement referred to in the Plans (hereafter, the Plan Directors). 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., Kansas City, 928 Grand
Boulevard, 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:
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<TABLE>
<S> <C>
NAV per Class A share (Class
A net assets divided by Class A shares
outstanding) ............................................................. $4.92
Add: selling commission (4.25% of offering
price) ................................................................... .22
-----
Maximum offering price per Class A share
(Class A NAV divided by 95.75%)........................................... $5.14
=====
</TABLE>
The offering price of a Class A share is its NAV next calculated
following acceptance of a purchase order plus the sales charge. The offering
price of a Class B, Class C or a Class Y share is its NAV next calculated
following acceptance of a purchase order. The number of shares you receive
for your purchase depends on the next offering price after Waddell & Reed,
Inc. or an authorized third party receives and accepts your order at its
principal business office. You will be sent a confirmation after your
purchase which will indicate how many shares you have purchased. Shares are
normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or
the Fund may determine to discontinue offering Fund shares for purchase.
The NAV and offering price per share are ordinarily computed once on
each day that the New York Stock Exchange (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 day.
The Board of Directors has decided to use the prices quoted by a
dealer in bonds that offers a pricing service to value municipal bonds. The
Board of Directors believes that such a service does quote their 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 with remaining maturities of 60 days or
less 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
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fair value as determined in good faith under procedures established by, and
under the general supervision and responsibility of, the Board of Directors.
Options and futures contracts purchased and held by the Fund are
valued at the last sales price on the securities or commodities exchanges on
which they are traded, or, if there are no transactions, at the mean between
bid and asked prices. Ordinarily, the close of the regular session for
options trading on national securities exchanges is 4:10 p.m. Eastern time
and the close of the regular session for commodities exchanges is 4:15 p.m.
Eastern time. Futures contracts will be valued with reference to established
futures exchanges. The value of a futures contract purchased by the Fund will
be either the closing price of that contract or the bid price. Conversely,
the value of a futures contract sold by the Fund will be either the closing
price or the asked price.
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 accounts for which an investor has
arranged, at the time of initial investment, to make subsequent purchases for
the account by having regular monthly withdrawals of $25 or more made from a
bank account. A minimum initial investment of $25 is applicable to purchases
made through payroll deduction for or by employees of Waddell & Reed, Inc.,
WRIMCO, or their affiliates. Except with respect to certain exchanges and
automatic withdrawals from a bank account, a shareholder may make subsequent
investments of any amount.
For Class Y shares, investments by government entities or
authorities or by corporations must total at least $10 million within the
first twelve months after initial investment. There is no initial investment
minimum for other Class Y investors.
REDUCED SALES CHARGES (APPLICABLE TO CLASS A SHARES ONLY)
ACCOUNT GROUPING
Large purchases of Class A shares are subject to lower sales
charges. The schedule of sales charges appears in the Prospectus. For the
purpose of taking advantage of the lower sales charges available for large
purchases, a purchase in any of categories 1 through 7 listed below made by
an individual or deemed to be made by an individual may be grouped with
purchases in any other of these categories. References to purchases in an
Individual Retirement Account (IRA) or other tax-advantaged plan (for which
investments in the Fund would not be appropriate) are
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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);
3. Purchases by that individual or his or her spouse in their joint
account;
4. Purchases by that individual or his or her spouse for the account of
their child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in
a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act
(UGMA) account;
6. Purchases by that individual or his or her spouse for his or her IRA,
or 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), or his or her 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
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<PAGE>
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.)
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 two UGMA accounts for H and
W's two minor children and invest $100,000 in each child's
name; the combined purchases of Class A shares are subject to
the 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
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
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<PAGE>
entitled to a reduced charge and provide Waddell & Reed, Inc. with the name
and number of the existing account(s) with which the purchase may be combined.
LETTER OF INTENT
The benefit of a reduced sales charge for larger purchases of Class
A shares is also available under a Letter of Intent (LOI). By signing an LOI
form, which is available from Waddell & Reed, Inc., the purchaser indicates
an intention to invest, over a 13-month period, a dollar amount which is
sufficient to qualify for a reduced sales charge. The 13-month period begins
on the date the first purchase made under the LOI is accepted by Waddell &
Reed, Inc. Each purchase made from time to time under the LOI is treated as
if the purchaser were buying at one time the total amount which he or she
intends to invest. The sales charge applicable to all purchases of Class A
shares made under the terms of the LOI will be the sales charge in effect on
the beginning date of the 13-month period.
In determining the amount which the purchaser must invest in order
to qualify for a reduced sales charge under an LOI, the investor's Rights of
Accumulation (see above) will be taken into account; that is, Class A shares
already held in the same account in which the purchase is being made or in
any account eligible for grouping with that account, as described above, will
be included.
Example: H signs an LOI indicating his intent to invest in his own name
a dollar amount sufficient to entitle him to purchase Class A
shares at the sales charge applicable to a purchase of
$100,000. H has an 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 $15,000; H's wife, W,
has an account in her own name invested in another fund in the
Waddell & Reed Advisors Funds which charges the same sales
load as the Fund, with a NAV as of the date of acceptance of
the LOI of $10,000; H needs to invest $75,000 in Class A
shares over the 13-month period in order to qualify for the
reduced sales load applicable to a purchase of $100,000.
A copy of the LOI signed by a purchaser will be returned to the
purchaser after it is accepted by Waddell & Reed, Inc. and will set forth the
dollar amount of Class A shares which must be purchased within the 13-month
period in order to qualify for the reduced sales charge.
The minimum initial investment under an LOI is 5% of the dollar
amount which must be invested under the LOI. An amount equal to 5% of the
purchase required under the LOI will be held in escrow. If a purchaser does
not, during the period covered by the LOI, invest the amount required to
qualify for the reduced sales charge under the terms of the LOI, he or she
will be
46
<PAGE>
responsible for payment of the sales charge applicable to the amount actually
invested. The additional sales charge owed on purchases of Class A shares
made under an LOI which is not completed will be collected by redeeming part
of the shares purchased under the LOI and held in escrow unless the purchaser
makes payment of this amount to Waddell & Reed, Inc. within 20 days of
Waddell & Reed, Inc.'s request for payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower
than that available under the LOI, the lower sales charge will apply.
An LOI does not bind the purchaser to buy, or Waddell & Reed, Inc.
to sell, the shares covered by the LOI.
With respect to LOIs for $2,000,000 or purchases otherwise
qualifying for no sales charge under the terms of the LOI, the initial
investment must be at least $200,000, and the value of any shares redeemed
during the 13-month period which were acquired under the LOI will be deducted
in computing the aggregate purchases under the LOI.
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
47
<PAGE>
financial advisor may purchase Class A shares at NAV whether or not the
custodian himself is an eligible purchaser. Employees includes retired
employees. A retired employee is an individual separated from service from
Waddell & Reed, Inc., or from an affiliated company with a vested interest in
any Employee Benefit plan sponsored by Waddell & Reed, Inc. or any of its
affiliated companies. Financial advisors includes retired financial advisors.
A retired financial advisor is any financial advisor who was, at the time of
separation from service from Waddell & Reed, Inc., a Senior Financial
Advisor. A custodian under UGMA or UTMA purchasing for the child or
grandchild of any employee or financial advisor may purchase Class A shares
at NAV whether or not the custodian himself is an eligible purchaser.
Until March 31, 2001, Class A shares may also be purchased at NAV by
persons who are clients of Legend if the purchase is made with the proceeds
of the redemption of shares of a mutual fund which is not within the Waddell
& Reed Advisors Funds or W&R Funds, Inc. and the purchase is made within 60
days of such redemption.
Shares may also be issued at NAV in a merger, acquisition or
exchange offer made pursuant to a plan of reorganization to which the Fund is
a party.
REASONS FOR DIFFERENCES IN THE PUBLIC OFFERING PRICE OF CLASS A SHARES
As described herein and in the Prospectus, there are a number of
instances in which the Fund's Class A shares are sold or issued on a basis
other than at the maximum public offering price, that is, the NAV plus the
highest sales charge. Some of these instances relate to lower or eliminated
sales charges for larger purchases of Class A shares, whether made at one
time or over a period of time as under an LOI or Rights of Accumulation. See
the table of sales charges in the Prospectus for the Class A shares. The
reasons for these quantity discounts are, in general, that (1) they are
traditional and have long been permitted in the industry and are therefore
necessary to meet competition as to sales of shares of other funds having
such discounts, (2) certain quantity discounts are required by rules of the
National Association of Securities Dealers, Inc. (as is elimination of sales
charges on the reinvestment of dividends and distributions), and (3) they are
designed to avoid an unduly large dollar amount of sales charge on
substantial purchases in view of reduced selling expenses. Quantity discounts
are made available to certain related persons for reasons of family unity 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
48
<PAGE>
expenses and since such sales may aid in the development of a sound employee
organization, encourage responsibility and interest in the Waddell & Reed
Advisors Funds and an identification with its aims and policies. Limited
reinvestments of redemptions of Class A shares at no sales charge are
permitted to attempt to protect against mistaken or not fully informed
redemption decisions. Class A shares may be issued at no sales charge in
plans of reorganization due to reduced or eliminated sales expenses and
since, in some cases, such issuance is exempted in the 1940 Act from the
otherwise applicable restrictions as to what sales charge must be imposed.
Reduced or eliminated sales charges may also be used for certain short-term
promotional activities by Waddell & Reed, Inc. In no case in which there is a
reduced or eliminated sales charge are the interests of existing Class A
shareholders adversely affected since, in each case, the Fund receives the
NAV per share of all shares sold or issued.
EXCHANGES FOR SHARES OF OTHER FUNDS IN THE WADDELL & REED ADVISORS FUNDS AND W&R
FUNDS, INC.
CLASS A SHARE EXCHANGES
Once a sales charge has been paid on shares of a fund in the Waddell
& Reed Advisors Funds or the W&R Funds, Inc., these shares and any shares
added to them from dividends or distributions paid in shares may be freely
exchanged for Class A shares of another fund in the Waddell & Reed Advisors
Funds or the W&R Funds, Inc. The shares you exchange must be worth at least
$100 or you must already own shares of the fund in the Waddell & Reed
Advisors Funds or the W&R Funds, Inc. into which you want to exchange.
You may exchange Class A shares you own in another fund in the
Waddell & Reed Advisors Funds or the W&R Funds, Inc. for Class A shares of
the Fund without charge if (1) a sales charge was paid on these shares, or
(2) the shares were received in exchange for shares for which a sales charge
was paid, or (3) the shares were acquired from reinvestment of dividends and
distributions paid on such shares. There may have been one or more such
exchanges so long as a sales charge was paid on the shares originally
purchased. Also, shares acquired without a sales charge because the purchase
was $2 million or more will be treated the same as shares on which a sales
charge was paid.
Shares of Waddell & Reed Advisors Municipal Bond Fund, Inc., Waddell
& Reed Advisors Government Securities Fund, Inc., Waddell & Reed Advisors
Municipal High Income Fund, Inc. (formerly, United Municipal Bond Fund, Inc.,
United Government Securities Fund, Inc. and United Municipal High Income
Fund, Inc., respectively), W&R Funds, Inc. Municipal Bond Fund and W&R Funds,
Inc. Limited-Term Bond Fund (formerly, Waddell & Reed Funds, Inc.) are the
exceptions and special rules apply. Class A shares of any of these funds may
be exchanged for Class A shares of the
49
<PAGE>
Fund only if (1) you received those shares as a result of one or more
exchanges of shares on which a maximum sales charge was originally paid
(currently, 5.75%), or (2) the shares have been held from the date of
original purchase for at least six months.
Subject to the above rules regarding sales charges, you may have a
specific dollar amount of Class A shares of Waddell & Reed Advisors Cash
Management, Inc. or Class A shares of Waddell & Reed Advisors Municipal Money
Market Fund, Inc. automatically exchanged each month into Class A shares of the
Fund or any other fund in the Waddell & Reed Advisors Funds, provided you
already own Class A shares of the fund. The shares of Waddell & Reed Advisors
Cash Management, Inc. or Waddell & Reed Advisors Municipal Money Market Fund,
Inc. which you designate for automatic exchange must be worth at least $100,
which may be allocated among the Class A shares of different funds in the
Waddell & Reed Advisors Funds so long as each fund receives a value of at least
$25. Minimum initial investment and minimum balance requirements apply to such
automatic exchange service.
You may redeem your Class A shares of the Fund and use the proceeds to
purchase Class Y shares of the Fund if you meet the criteria for purchasing
Class Y shares.
CLASS B SHARE EXCHANGES
You may exchange Class B shares of the Fund for Class B shares of
other funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc.
without charge.
The redemption of the Fund's Class B shares as part of an exchange is
not subject to the deferred sales charge. For purposes of computing the
deferred sales charge, if any, applicable to the redemption of the shares
acquired in the exchange, those acquired shares are treated as having been
purchased when the original redeemed shares were purchased.
You may have a specific dollar amount of Class B shares of Waddell &
Reed Advisors Cash Management, Inc. or Waddell & Reed Advisors Municipal
Money Market Fund, Inc. automatically exchanged each month into Class B
shares of the Fund or any other fund in the Waddell & Reed Advisors Funds,
provided you already own Class B shares of the fund. The shares of Waddell &
Reed Advisors Cash Management, Inc. or Waddell & Reed Advisors Municipal
Money Market Fund, Inc. which you designate for automatic exchange must be
worth at least $100, which may be allocated among different Funds so long as
each Fund receives a value of at least $25. Minimum initial investment and
minimum balance requirements apply to such automatic exchange service.
CLASS C SHARE EXCHANGES
You may exchange Class C shares of the Fund for Class C shares of
other funds in the Waddell & Reed Advisors Funds and/or
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W&R Funds, Inc. without charge.
The redemption of the Fund's Class C shares as part of an exchange
is not subject to the deferred sales charge. For purposes of computing the
deferred sales charge, if any, applicable to the redemption of the shares
acquired in the exchange, those acquired shares are treated as having been
purchased when the original redeemed shares were purchased.
You may have a specific dollar amount of Class C shares of Waddell &
Reed Advisors Cash Management, Inc. or Waddell & Reed Advisors Municipal
Money Market Fund, Inc. automatically exchanged each month into Class C
shares of the Fund or any other fund in the Waddell & Reed Advisors Funds,
provided you already own Class C shares of the fund. The shares of Waddell &
Reed Advisors Cash Management, Inc. or Waddell & Reed Advisors Municipal
Money Market Fund, Inc. which you designate for automatic exchange must be
worth at least $100, which may be allocated among different Funds so long as
each Fund receives a value of at least $25. Minimum initial investment and
minimum balance requirements apply to such automatic exchange service.
CLASS Y SHARE EXCHANGES
Class Y shares of the Fund may be exchanged for Class Y shares of
any other fund in the Waddell & Reed Advisors Funds or W&R Funds, Inc. or for
Class A shares of Waddell & Reed Advisors Cash Management, Inc. or Class A
shares of Waddell & Reed Advisors Municipal Money Market Fund, Inc.
GENERAL EXCHANGE INFORMATION
When you exchange shares, the total shares you receive will have the
same aggregate NAV as the total shares you exchange. The relative values are
those next figured after your exchange request is received in good order.
These exchange rights and other exchange rights concerning the other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc., can in
most instances be eliminated or modified at any time and any such exchange
may not be accepted.
FLEXIBLE WITHDRAWAL SERVICE FOR CLASS A, CLASS B AND CLASS C SHAREHOLDERS
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service ( the Service) regular monthly, quarterly, semiannual or
annual payments by redeeming on an ongoing basis Class A, Class B or Class C
shares that you own of the Fund or of any of the funds in the Waddell & Reed
Advisors Funds or W&R Funds, Inc. It would be a disadvantage to an investor
to make additional purchases of Class A shares while the Service is in effect
because it would result in duplication of sales charges. Class B and Class C
shares, and certain Class A shares to which the CDSC otherwise applies, that
are redeemed
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under the Service are not subject to a CDSC provided the amount withdrawn
does not exceed 24% of the account value annually. Applicable forms to start
the Service are available through Waddell & Reed Services Company.
The maximum amount of the withdrawal for monthly, quarterly, semiannual
and annual withdrawals is 2%, 6%, 12% and 24% respectively of the value of your
account at the time the Service is established. The withdrawal proceeds are not
subject to the deferred sales charge, but only within these percentage
limitations. The minimum withdrawal is $50. The Service, and this exclusion from
the deferred sales charge, do not apply to a one-time withdrawal.
To qualify for the Service, you must have invested at least $10,000 in
Class A, Class B or Class C shares which you still own of any of the funds in
the Waddell & Reed Advisors Funds or W&R Funds, Inc.; or, you must own Class A,
Class B or Class C shares having a value of at least $10,000. The value for this
purpose is the value at the current offering price.
You can choose to have shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to
one-twelfth of a percentage of the value of the shares in the Account; (you
select the percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least five shares).
Shares are redeemed on the 20th day of the month in which the
payment is to be made, or on the prior business day if the 20th is not a
business day. Payments are made within five days of the redemption.
If you have a share certificate for the shares you want to make
available for the Service, you must enclose the certificate with the form
initiating the Service.
The dividends and distributions on shares of a class you have made
available for the Service are paid in additional shares of that class. All
payments under the Service are made by redeeming shares, which may involve a
gain or loss for tax purposes. To the extent that payments exceed dividends
and distributions, the number of shares you own will decrease. When all of
the shares in an account are redeemed, you will not receive any further
payments. Thus, the payments are not an annuity, an income or a return on
your investment.
You may, at any time, change the manner in which you have chosen to
have shares redeemed to any of the other choices
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originally available to you. You may, at any time, redeem part or all of the
shares in your account; if you redeem all of the shares, the Service is
terminated. The Fund can also terminate the Service by notifying you in
writing.
After the end of each calendar year, information on shares redeemed
will be sent to you to assist you in completing your Federal income tax
return.
REDEMPTIONS
The Prospectus gives information as to redemption procedures.
Redemption payments are made within seven days from receipt of request, unless
delayed because of emergency conditions determined by the SEC, when the NYSE is
closed other than for weekends or holidays, or when trading on the NYSE is
restricted. Payment is made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities. Payment for redemptions of
shares of the Fund may be made in portfolio securities when the Fund's Board of
Directors determines that conditions exist making cash payments undesirable.
Redemptions made in securities will be made only in readily marketable
securities. Securities used for payment of redemptions are valued at the value
used in figuring NAV. There would be brokerage costs to the redeeming
shareholder in selling such securities. The Fund, however, has elected to be
governed by Rule 18f-1 under the 1940 Act, pursuant to which it is obligated to
redeem shares solely in cash up to the lesser of $250,000 or 1% of its NAV
during any 90-day period for any one shareholder.
REINVESTMENT PRIVILEGE
The Fund offers a one-time reinvestment privilege that allows you to
reinvest all or part of any amount of Class A shares you redeem from the Fund
by sending to the Fund the amount you wish to reinvest. The amount you return
will be reinvested in Class A shares at the NAV next calculated after the
Fund receives the returned amount. Your written request to reinvest and the
amount to be reinvested must be received within 45 days after your redemption
request was received, and the Fund must be offering Class A shares at the
time your reinvestment request is received. You can do this only once as to
Class A shares of the Fund.
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
53
<PAGE>
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.
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.
54
<PAGE>
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors, Chief
Executive Officer and Director of Waddell & Reed Financial, Inc.; President,
Chairman of the Board of Directors, Director and Chief Executive Officer of
Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
and Director of WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services
Company; formerly, President of each of the funds in the Fund Complex;
formerly, Chairman of the Board of Directors of Waddell & Reed Asset
Management Company, a former affiliate of Waddell & Reed Financial, Inc. Date
of birth: February 11, 1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President of JoDill Corp., an agricultural company; President and
Director of Dillingham Enterprises Inc.; formerly, Director and consultant,
McDougal Construction Company; formerly, Instructor at Central Missouri State
University; formerly, Member of the Board of Police Commissioners, Kansas City,
Missouri; formerly, Senior Vice President-Sales and Marketing of Garney
Companies, Inc., a specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e
Eccles Foundation; Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal; formerly, President
of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, Partner, Levy and Craig, P.C., a law
firm. Date of birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of Oklahoma;
Adjunct Professor of Law at the University of Oklahoma College of Law; Managing
Member, Harroz Investments, L.L.C.; formerly, Vice President for Executive
Affairs of the University of Oklahoma; formerly, Attorney with Crowe & Dunlevy,
a law firm. Date of birth: January 17, 1967.
55
<PAGE>
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a law
firm; formerly, President of Gilliland & Hayes, P.A.; formerly, Director of
Central Properties, Inc. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of
the other funds in the Fund Complex; Executive Vice President, Chief
Operating Officer and Director of Waddell & Reed Financial, Inc.; Executive
Vice President, Chief Operating Officer, Director and Treasurer of Waddell &
Reed Financial Services, Inc.; Executive Vice President, Principal Financial
Officer, Director and Treasurer of WRIMCO; President, Chief Executive
Officer, Principal Financial Officer, Director and Treasurer of Waddell &
Reed, Inc.; Director and Treasurer of Waddell & Reed Services Company;
Chairman of the Board of Directors, Chief Executive Officer, President and
Director of Fiduciary Trust Company of New Hampshire, an affiliate of Waddell
& Reed, Inc.; Director of Legend Group Holdings, LLC, Legend Advisory
Corporation, Legend Equities Corporation, Advisory Services Corporation, The
Legend Group, Inc. and LEC Insurance Agency, Inc., affiliates of Waddell &
Reed Financial, Inc.; formerly, Vice President of each of the funds in the
Fund Complex; formerly, Director and Treasurer of Waddell & Reed Asset
Management Company; formerly, President of Waddell & Reed Services Company.
Date of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer, and Director of Waddell & Reed
Financial, Inc.; Executive Vice President, Chief Investment Officer and Director
of Waddell & Reed Financial Services, Inc.; Director of Waddell & Reed, Inc.;
President, Chief Executive Officer, Chief Investment Officer and Director of
WRIMCO; Chairman of the Board of Directors of Austin, Calvert & Flavin, Inc., an
affiliate of WRIMCO; formerly, President, Chief Executive Officer, Chief
Investment Officer and Director of Waddell & Reed Asset Management Company. Date
of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and its subsidiaries. Date of birth: February 19, 1924.
56
<PAGE>
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of
each of the funds in the Fund Complex then in existence. (Mr. Morgan retired as
Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company. Date of birth:
April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director and Vice President of Network Rehabilitation Services; Board
Member, Member of Executive Committee and Finance Committee of Truman Medical
Center; formerly, Employment Counselor and Director of McCue-Parker Center. Date
of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, Shalton & Welte, a law firm; Director of
Columbian Bank and Trust. Date of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
Professor of Business Administration, University of Missouri-Kansas
City; formerly, Chancellor, University of Missouri-Kansas City. Date of birth:
January 1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
DANIEL C. SCHULTE
Vice President, Assistant Secretary and General Counsel of the Fund and
each of the other funds in the Fund Complex; Vice President, Secretary and
General Counsel of Waddell & Reed Financial, Inc.; Senior Vice President,
Secretary and General Counsel of Waddell & Reed Financial Services Company,
Waddell & Reed, Inc., WRIMCO and Waddell & Reed Services Company; Secretary and
Director of Fiduciary Trust Company of New Hampshire, an affiliate of Waddell &
Reed, Inc.; formerly, Assistant Secretary of Waddell & Reed Financial, Inc.;
formerly, an attorney with Klenda, Mitchell, Austerman & Zuercher, L.L.C. Date
of birth: December 8, 1965.
57
<PAGE>
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.
MARK OTTERSTROM
Vice President of the Fund and Vice President of WRIMCO; formerly,
Assistant Portfolio Manager for investment companies managed by WRIMCO. Date of
birth: December 17, 1954.
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,
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<PAGE>
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:
COMPENSATION TABLE
<TABLE>
<CAPTION>
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 954 63,500
John A. Dillingham 954 63,500
David P. Gardner 954 63,500
Linda K. Graves 954 63,500
Joseph Harroz, Jr. 954 63,500
John F. Hayes 954 63,500
Glendon E. Johnson 954 63,500
William T. Morgan 954 63,500
Ronald C. Reimer 912 60,250
Frank J. Ross, Jr. 954 63,500
Eleanor B. Schwartz 954 63,500
Frederick Vogel III 954 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>
<CAPTION>
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
------------------- ----- ------------ -------
<S> <C> <C> <C>
Betty W Tasliaferro (TOD)Class B 21,392 7.52%
9104 Roe Ave
Prairie Village KS 66207-2603
</TABLE>
59
<PAGE>
<TABLE>
<S> <C> <C> <C>
Lawrence H Moninghoff (TOD)Class B 20,943 7.36%
HC 2 Box 2780
Old Town FL 32680-9736
Earline Nelson (TOD) Class B 15,651 5.50%
2804 SW 10th St
Lees Summit MO 64081-2375
Barbara A Friberg Class C 16,377 7.66%
2008 Sunkist Ave
Waukesha WI 53188-2106
Peggy A Myers (TOD) Class C 15,789 7.38%
26 Hanover Rd
York PA 17404-5902
Swarn Dhar Class C 31,493 14.73%
3556 Lydius St
Schenectady NY 12303-3563
Waddell & Reed Inc Class Y 406 99.48%
Attn: Ty Towery
P O Box 29217
Shawnee Mission KS 66201-9217
</TABLE>
PAYMENTS TO SHAREHOLDERS
GENERAL
There are two sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is
derived from the interest and earned discount on the securities the Fund
holds, less expenses (which will vary by class). 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.
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<PAGE>
CHOICES YOU HAVE ON YOUR DIVIDENDS AND DISTRIBUTIONS
On your application form, you can give instructions that (1) you
want cash for your dividends and/or distributions or (2) you want your
dividends and/or distributions paid in shares of the Fund of the same class
as that with respect to which they were paid. However, a total dividend
and/or distribution amount less than five dollars will be automatically paid
in shares of the Fund of the same class as that with respect to which they
were paid. You can change your instructions at any time. If you give no
instructions, your dividends and distributions will be paid in shares of the
Fund of the same class as that with respect to which they were paid. All
payments in shares are at NAV without any sales charge. The NAV used for this
purpose is that computed as of the record date for the dividend or
distribution, although this could be changed by the Directors.
Even if you receive dividends and distributions on Class A shares in
cash, you can thereafter reinvest them (or distributions only) in Class A
shares of the Fund at NAV (i.e., no sales charge) next calculated after
receipt by Waddell & Reed, Inc., of the amount clearly identified as a
reinvestment. The reinvestment must be within 45 days after the payment.
TAXES
GENERAL
The Fund has qualified since inception for treatment as a 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
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
61
<PAGE>
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 is it distributed that income to its
shareholders) and (b) the shareholders 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.
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
62
<PAGE>
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.
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 in 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
63
<PAGE>
buys. If an option written by the Fund lapses without being exercised, the
premium it received also will be a short-term capital gain. If such an option
is exercised and the Fund thus sells the securities subject to the option,
the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale.
Certain options 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 gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss 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 and futures 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 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 stock, debt instrument (other than straight debt) or
partnership interest the fair market value of which exceeds its adjusted basis
-- and enters into a constructive sale of the position, the Fund will be
64
<PAGE>
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 gains or losses from those sales,
which would increase or decrease its investment company taxable income and/or
net capital gains.
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. Transactions in
securities other than those for which an exchange is the primary market are
generally effected with dealers acting
65
<PAGE>
as principals or market makers. Brokerage commissions are paid primarily for
effecting transactions in securities traded on an exchange and otherwise only
if it appears likely that a better price or execution can be obtained. The
individual who manages the Fund may manage other advisory accounts with
similar investment objectives. It can be anticipated that the manager will
frequently place concurrent orders for all or most accounts for which the
manager has responsibility or WRIMCO may otherwise combine orders for the
Fund with those of other funds in the Waddell & Reed Advisors Funds, W&R
Target Funds, Inc. and W&R Funds, Inc. or other accounts for which it has
investment discretion, including accounts affiliated with WRIMCO. WRIMCO, at
its discretion, may aggregate such orders. Under current written procedures,
transactions effected pursuant to such combined orders are averaged as to
price and allocated in accordance with the purchase or sale orders actually
placed for each fund or advisory account, except where the combined order is
not filled completely. In this case, for a transaction not involving an
initial public offering (IPO), WRIMCO will ordinarily allocate the
transaction pro rata based on the orders placed, subject to certain variances
provided for in the written procedures. For a partially filled IPO order,
subject to certain exceptions.
In all cases, WRIMCO seeks to implement its allocation procedures to
achieve a fair and equitable allocation of securities among its funds and
other advisory accounts. Sharing in large transactions could affect the price
the Fund pays or receives or the amount it buys or sells. As well, a better
negotiated commission may be available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is
authorized to engage broker-dealers (brokers) which, in its best judgment
based on all relevant factors, will implement the policy of the Fund to seek
best execution (prompt and reliable execution at the best price obtainable)
for reasonable and competitive commissions 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
66
<PAGE>
availability of securities and purchasers or sellers; (2) furnishing analyses
and reports; or (3) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
Investment discretion is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or
making those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than the commission another qualified broker
would charge for effecting comparable transactions and are permissible if a
good faith determination is made by WRIMCO that the commission is reasonable
in relation to the research or brokerage services provided. Subject to the
foregoing considerations, WRIMCO may also consider sales of Fund shares as a
factor in the selection of broker-dealers to execute portfolio transactions.
No allocation of brokerage or principal business is made to provide any other
benefits to WRIMCO.
The investment research provided by a particular broker may be
useful only to one or more of the other advisory accounts of WRIMCO, and
investment research received for the commissions of those other accounts may
be useful both to the Fund and one or more of such other accounts. To the
extent that electronic or other products provided by such brokers to assist
WRIMCO in making investment management decisions are used for administration
or other non-research purposes, a reasonable allocation of the cost of the
product attributable to its non-research use is made and this cost is paid by
WRIMCO.
Such investment research (which may be supplied by a third party at
the request of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of WRIMCO;
serves to make available additional views for consideration and comparisons;
and enables WRIMCO to obtain market information on the price of securities
held in the Fund's portfolio or being considered for purchase. The Fund may
also use its brokerage to pay for pricing or quotation services to value
securities.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of
Ethics under Rule 17j-1 of the 1940 Act that permits their respective
directors, officers and employees to invest in securities, including
securities that may be purchased or held by the Fund. The Code of Ethics
subjects covered personnel to certain restrictions that include prohibited
activities, pre-clearance requirements and reporting obligations.
67
<PAGE>
OTHER INFORMATION
THE SHARES OF THE FUND
The Fund offers four classes of its shares: Class A, Class B, Class
C and Class Y. Each class represents an interest in the same assets of the
Fund and differ as follows: each class of shares has exclusive voting rights
on matters appropriately limited to that class; Class A shares are subject to
an initial sales charge and to an ongoing distribution and/or service fee and
certain Class A shares are subject to a CDSC; Class B and Class C are subject
to a CDSC and to ongoing distribution and service fees; Class B shares that
have been held by a shareholder for eight years will convert, automatically,
eight years after the month in which the shares were purchased, to Class A
shares of the Fund, and such conversion will be made, without charge or fee,
on the basis of the relative NAV of the two classes; and Class Y shares,
which are designated for institutional investors, have no sales charge nor
ongoing distribution and/or service fee; each class may bear differing
amounts of certain class-specific expenses; and each class has a separate
exchange privilege. The Fund does not anticipate that there will be any
conflicts between the interests of holders of the different classes of shares
of the Fund by virtue of those classes. On an ongoing basis, the Board of
Directors will consider whether any such conflict exists and, if so, take
appropriate action. Each share of the Fund is entitled to equal voting,
dividend, liquidation and redemption rights, except that due to the differing
expenses borne by the four classes, dividends and liquidation proceeds of
Class B shares and Class C shares are expected to be lower than for Class A
shares, which in turn are expected to be lower than for Class Y shares of the
Fund. Each fractional share of a class has the same rights, in proportion, as
a full share of that class. Shares are fully paid and nonassessable when
purchased.
The Fund does not hold annual meetings of shareholders; however,
certain significant corporate matters, such as the approval of a new
investment advisory agreement or a change in a fundamental investment policy,
which require shareholder approval will be presented to shareholders at a
meeting called by the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding not
less than 25% of all shares entitled to vote at such meeting, provided certain
conditions stated in the Bylaws are met. There will normally be no meeting of
the shareholders for the purpose of electing directors until such time as less
than a majority of directors holding office have been elected by shareholders,
at time which the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the 1940 Act
applies to the Fund, the directors are required to call a meeting of
shareholders for the purpose of voting upon the question of
68
<PAGE>
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.
69
<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.
70
<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
71
<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
72
<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
73
<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,
74
<PAGE>
ranging from A-1 for the highest quality obligations to D for the lowest.
Issuers rated A are further referred to by use of numbers 1, 2 and 3 to
indicate the relative degree of safety. Issues assigned an A rating (the
highest rating) are regarded as having the greatest capacity for timely
payment. An A-1 designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An A-2
rating indicates that capacity for timely payment is satisfactory; however,
the relative degree of safety is not as high as for issues designated A-1.
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.
75
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS
ALABAMA - 0.75%
The Marshall County Health Care Authority,
Hospital Revenue Refunding Bonds, Series
1992 (Guntersville-Arab Medical Center),
7.0%, 10-1-13 ....................................................... $ 3,100 $3,131,000
ALASKA - 0.48%
City of Seward, Alaska, Revenue Bonds, 1996
(Alaska Sealife Center Project),
7.65%, 10-1-16 ...................................................... 2,000 2,030,000
ARIZONA - 1.75%
Hayden-Winkelman Unified School District No.
41 of Gila County, Arizona, Capital
Appreciation Refunding Bonds, Series 1995,
0.0%, 7-1-10 ........................................................ 6,145 3,564,100
The Industrial Development Authority of the
County of Gila, Arizona, Environmental Revenue
Refunding Bonds (ASARCO Incorporated Project),
Series 1998,
5.55%, 1-1-27 ....................................................... 4,750 3,788,125
Total ............................................................... 7,352,225
CALIFORNIA - 2.19%
California Statewide Communities Development
Authority, Hospital Refunding Revenue Certificates
of Participation, Series 1993, Cedars-Sinai
Medical Center, Inverse Floating Rate
Security (INFLOS),
6.342%, 11-1-15 (A) ................................................. 4,000 3,845,000
Sierra Kings Health Care District Revenue
Bonds, Series 1996,
6.5%, 12-1-26 ....................................................... 1,500 1,216,875
Certificates of Participation (1991 Capital
Improvement Project), Bella Vista Water
District (California),
7.375%, 10-1-17 ..................................................... 1,500 1,578,330
Carson Redevelopment Agency (California),
Redevelopment Project Area No. 1,
Tax Allocation Bonds, Series 1993B,
6.0%, 10-1-16 ....................................................... 1,500 1,535,625
Kings County Waste Management Authority, Solid
Waste Revenue Bonds, Series 1994 (California),
7.2%, 10-1-14 ....................................................... 940 1,016,375
Total ............................................................... 9,192,205
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
1
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
COLORADO - 3.20%
Sand Creek Metropolitan District, Adams County and City and County of Denver,
Colorado, General Obligation Limited Tax Bonds:
Series 1998,
6.625%, 12-1-17 ..................................................... $ 3,070 $2,916,500
Series 1997,
7.125%, 12-1-16 ..................................................... 2,000 1,985,000
City and County of Denver, Colorado, Revenue Bonds (Jewish Community Centers
of Denver Project), Series 1994:
8.25%, 3-1-24 ....................................................... 2,390 2,479,625
7.875%, 3-1-19 ...................................................... 815 834,356
Colorado Health Facilities Authority,
Revenue Bonds (Steamboat Springs
Health Care Association Project),
Series 1999,
5.7%, 9-15-23 ....................................................... 3,000 2,370,000
Bachelor Gulch Metropolitan District,
Eagle County, Colorado, General Obligation
Bonds, Series 1996,
7.0%, 12-1-15 ....................................................... 1,095 1,123,744
Eaglebend Affordable Housing Corporation,
Multifamily Housing Project Revenue
Refunding Bonds, Series 1997A,
6.45%, 7-1-21 ....................................................... 1,000 950,000
Deer Creek Metropolitan District, Jefferson
County, Colorado, General Obligation Bonds,
Series 2000,
7.625%, 12-1-19 ..................................................... 750 762,187
Total ............................................................... 13,421,412
CONNECTICUT - 2.21%
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-14 ........................................................ 5,250 4,600,312
Connecticut Development Authority, Pollution
Control Revenue Refunding Bonds (The
Connecticut Light and Power Company
Project - 1993B Series),
5.95%, 9-1-28 ....................................................... 2,500 2,328,125
State of Connecticut Health and
Education Facilities Authority,
Revenue Bonds, Edgehill Issue
Series A (Fixed Rate),
6.875%, 7-1-27 ...................................................... 2,300 2,317,250
Total ............................................................... 9,245,687
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
2
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
DISTRICT OF COLUMBIA - 1.26%
Certificates of Participation, Series 1993,
District of Columbia,
7.3%, 1-1-13 ........................................................ $ 3,000 $3,161,250
District of Columbia Revenue Bonds
(National Public Radio Issue),
Series 1992,
7.625%, 1-1-13 ...................................................... 2,000 2,115,000
Total ............................................................... 5,276,250
FLORIDA - 4.06%
Sanford Airport Authority (Florida),
Industrial Development Revenue Bonds
(Central Florida Terminals, Inc. Project):
Series 1995A,
7.75%, 5-1-21 ....................................................... 4,000 4,195,000
Series 1995C,
7.5%, 5-1-21 ........................................................ 500 516,875
St. Johns County Industrial Development
Authority (Florida), Health Care Revenue
Bonds, Tax Exempt Series 1997A
(Bayview Project),
7.1%, 10-1-26 ....................................................... 4,000 3,905,000
Escambia County Health Facilities Authority,
Health Facilities Revenue Bonds (Azalea
Trace, Inc.), Series 1997,
6.0%, 1-1-15 ........................................................ 3,000 2,790,000
Sarasota County (Florida) Health Facilities Authority, Health Care Facilities
Revenue Refunding Bonds, Series 1995 (Sarasota-Manatee Jewish Housing
Council, Inc. Project),
6.7%, 7-1-25 ........................................................ 3,000 2,550,000
Dade County Industrial Development Authority,
Industrial Development Revenue Bonds,
Series 1995 (Miami Cerebral Palsy
Residential Services, Inc. Project),
8.0%, 6-1-22 ........................................................ 1,800 1,813,500
City of Fort Walton Beach, First Mortgage
Industrial Development Revenue Bonds,
Series 1986 (Ft. Walton Beach Ventures,
Inc. Project),
10.5%, 12-1-16 ...................................................... 1,210 1,225,839
Total ............................................................... 16,996,214
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
3
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
GEORGIA - 1.77%
Coffee County Hospital Authority (Georgia),
Revenue Anticipation Certificates (Coffee
Regional Medical Center, Inc. Project),
Series 1997A,
6.75%, 12-1-16 ...................................................... $ 5,000 $4,618,750
Savannah Economic Development Authority,
First Mortgage Revenue Bonds (Senior Care
Group, Inc. - Shadowmoss Project),
Series 1999A,
6.75%, 7-1-29 ....................................................... 3,185 2,782,894
Total ............................................................... 7,401,644
HAWAII - 0.59%
Department of Transportation of the State
of Hawaii, Special Facility Revenue Bonds
(Continental Airlines, Inc.), Series 1997,
5.625%, 11-15-27 .................................................... 3,000 2,471,250
ILLINOIS - 2.10%
Illinois Development Finance Authority
Revenue Bonds, Series 1993C (Catholic
Charities Housing Development
Corporation Project),
6.1%, 1-1-20 ........................................................ 2,500 2,325,000
Village of Lansing, Illinois, Landings
Redevelopment Project Area, Tax Increment
Refunding Revenue Bonds (Limited Sales
Tax Pledge), Series 1992,
7.0%, 12-1-08 ....................................................... 2,000 2,102,500
Illinois Health Facilities Authority,
Revenue Refunding Bonds, Series 1998
(Lifelink Corporation Obligated Group),
5.7%, 2-15-24 ....................................................... 1,750 1,397,813
Village of Hodgkins, Cook County, Illinois,
Tax Increment Revenue Refunding Bonds,
Series 1995A,
7.625%, 12-1-13 ..................................................... 1,750 1,844,062
Village of Bourbonnais, Kankakee County,
Illinois, Sewerage Revenue Bonds,
Series 1993,
7.25%, 12-1-12 ...................................................... 1,085 1,135,181
Total ............................................................... 8,804,556
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
4
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
INDIANA - 1.68%
Indiana Health Facility Financing Authority:
Revenue Refunding Bonds, Series 1998
(Greenwood Village South Project),
5.625%, 5-15-28 ..................................................... $4,100 $3,182,625
Hospital Revenue Bonds, Series 1992
(Fayette Memorial Hospital Project),
7.2%, 10-1-22 ....................................................... 1,000 985,000
City of Goshen, Indiana, Revenue Bonds,
Series 1998 (Greencroft Obligated Group),
5.75%, 8-15-28 ...................................................... 1,900 1,463,000
City of Carmel, Indiana, Retirement Rental
Housing Revenue Refunding Bonds (Beverly
Enterprises - Indiana, Inc. Project),
Series 1992,
8.75%, 12-1-08 ...................................................... 1,335 1,406,756
Total ............................................................... 7,037,381
IOWA - 3.09%
City of Creston, Iowa, Industrial Development
Revenue Bonds, Series 1997A (CF Processing,
L.C. Project),
8.0%, 8-1-26 ........................................................ 5,000 4,975,000
City of Cedar Rapids, Iowa, First Mortgage
Revenue Bonds, Series 1998-A (Cottage Grove
Place Project),
5.875%, 7-1-28 ...................................................... 5,000 4,012,500
Iowa Finance Authority,
Community Provider Revenue Bonds (Boys and
Girls Home and Family Services, Inc. Project),
Series 1998,
6.25%, 12-1-28 ...................................................... 4,000 3,970,000
Total ............................................................... 12,957,500
KANSAS - 4.82%
Kansas Development Finance Authority:
Revenue Bonds (Village Shalom Obligated Group),
Series 1998AA,
5.625%, 11-15-28 .................................................... 4,750 3,889,063
Multifamily Housing Revenue Bonds, Series 1998K
(Pioneer Olde Town Apartments Project),
6.5%, 10-1-30 ....................................................... 3,200 2,860,000
Community Provider Loan Program (Community
Living Opportunities, Inc.), Series
1992A Revenue Bonds,
8.875%, 9-1-11 ...................................................... 2,790 2,872,472
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
5
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
KANSAS (CONTINUED)
Certificates of Participation, Series 1998A,
Evidencing Proportionate Interests of the
Owners Thereof in Rental Payments to be
Made by the City of Spring Hill, Kansas, to
Spring Hill Golf Corporation,
6.5%, 1-15-28 ....................................................... $ 4,000 $3,570,000
City of Olathe, Kansas, Senior Living Facility
Revenue Bonds (Aberdeen Village, Inc.),
Series 2000A,
8.0%, 5-15-30 ....................................................... 2,505 2,505,000
City of Prairie Village, Kansas, Revenue Bonds
(Claridge Court Project), Series 1993A:
8.75%, 8-15-23 ...................................................... 1,000 1,066,250
8.5%, 8-15-04 ....................................................... 640 680,800
City of Topeka, Kansas, Economic Development
Revenue Bonds, Series 2000A (YMCA Project),
7.5%, 9-01-25 ....................................................... 2,800 2,758,000
Total ............................................................... 20,201,585
KENTUCKY - 0.25%
County of Perry, Kentucky, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1994,
7.0%, 6-1-24 ........................................................ 1,000 1,037,500
LOUISIANA - 1.59%
Louisiana Public Facilities Authority,
Revenue Bonds (Progressive Healthcare
Providers/Louisiana, Inc. Project), Series 1998:
6.375%, 10-1-20 ..................................................... 2,000 1,817,500
6.375%, 10-1-28 ..................................................... 2,000 1,742,500
5.75%, 10-1-03 ...................................................... 1,160 1,109,250
Board of Commissioners of the Port of New Orleans,
Industrial Development Revenue Refunding Bonds
(Continental Grain Company Project), Series 1993,
7.5%, 7-1-13 ........................................................ 2,000 2,005,000
Total ............................................................... 6,674,250
MAINE - 2.06%
Maine Health and Higher Educational Facilities Authority, Revenue Bonds,
Piper Shores Issue, Series 1999A:
7.55%, 1-1-29 ....................................................... 5,000 4,818,750
7.5%, 1-1-19 ........................................................ 1,000 968,750
Maine Veterans' Homes, Revenue Bonds, 1995 Series,
7.75%, 10-1-20 ...................................................... 2,810 2,862,687
Total ............................................................... 8,650,187
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
6
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
MARYLAND - 0.81%
Maryland Economic Development Corporation,
Senior Lien Revenue Bonds (Rocky Gap
Golf Course and Hotel/Meeting Center
Project), Series 1996 A,
8.375%, 10-1-09 ..................................................... $ 3,250 $3,380,000
MASSACHUSETTS - 4.43%
Massachusetts Industrial Finance Agency:
First Mortgage Revenue Bonds, Reeds
Landing Project, Series 1993,
8.625%, 10-1-23 ..................................................... 9,945 9,945,000
Resource Recovery Revenue Bonds (SEMASS
Project), Series 1991B,
9.25%, 7-1-15 ....................................................... 4,900 5,165,188
Resource Recovery Revenue Refunding Bonds
(Ogden Haverhill Project),
Series 1998A Bonds,
5.6%, 12-1-19 ....................................................... 2,500 2,196,875
Revenue Bonds, Beaver Country Day School
Issue, Series 1992, Subseries A,
8.1%, 3-1-08 ........................................................ 1,215 1,234,744
Total ............................................................... 18,541,807
MINNESOTA - 0.32%
City of Coon Rapids, Minnesota, Multifamily
Housing Revenue Bonds (Wedum Redwood
Terrace, LLC Project), Series 1999A,
6.375%, 11-1-29 ..................................................... 1,450 1,348,500
MISSOURI - 4.44%
The Industrial Development Authority of the
City of Kansas City, Missouri:
Revenue Bonds (The Bishop Spencer Place,
Incorporated Project), Series 1994,
8.0%, 9-1-16 ........................................................ 2,965 3,061,363
Multifamily Housing Revenue Bonds (Village
Green Apartments Project), Series 1998,
6.25%, 4-1-30 ....................................................... 1,750 1,570,625
The Industrial Development Authority of the
City of Bridgeton, Missouri, Senior Housing
Revenue Bonds (The Sarah Community Project),
Series 1998,
5.9%, 5-1-28 ........................................................ 3,100 2,514,875
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
7
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
MISSOURI (CONTINUED)
Missouri Housing Development Commission,
Multifamily Housing Revenue Bonds (The Mansion
Apartments Phase II Project), Series 1999,
6.17%, 10-1-32 ...................................................... $ 3,915 $3,499,031
The City of Lake Saint Louis, Missouri,
Public Facilities Authority, Certificates
of Participation (Municipal Golf Course
Project), Series 1993,
7.55%, 12-1-14 ...................................................... 2,000 2,142,500
The Industrial Development Authority of
the City of St. Louis, Missouri,
Industrial Revenue Refunding Bonds
(Kiel Center Multipurpose Arena Project),
Series 1992,
7.75%, 12-1-13 ...................................................... 1,500 1,571,250
The Industrial Development Authority of
Callaway County, Missouri, Industrial
Development Revenue Bonds (A.P. Green
Refractories Co. Project), Series 1984,
8.6%, 11-1-14 ....................................................... 900 928,260
Tax Increment Financing Commission of Kansas
City, Missouri, Tax Increment Refunding and
Improvement Revenue Bonds (Briarcliff West
Project), Series 2000,
6.25%, 8-1-23 ....................................................... 3,500 3,307,500
Total ............................................................... 18,595,404
NEVADA - 0.64%
Reno-Sparks Convention & Visitors Authority,
Nevada, Limited Obligation Medium-Term
Refunding Bonds, Series November 1, 1996,
6.0%, 11-1-06 ....................................................... 2,640 2,669,700
NEW HAMPSHIRE - 2.64%
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 ...................................................... 11,200 10,192,000
Lisbon Regional School District, New
Hampshire, General Obligation Capital
Appreciation School Bonds,
0.0%, 2-1-13 ........................................................ 1,390 891,337
Total ............................................................... 11,083,337
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
8
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
NEW JERSEY - 3.09%
New Jersey Health Care Facilities Financing
Authority, Revenue Bonds, Englewood Hospital
and Medical Center Issue, Series 1994,
6.75%, 7-1-24 ....................................................... $ 4,480 $4,093,600
New Jersey Economic Development Authority:
First Mortgage Revenue Fixed Rate Bonds
(Winchester Gardens at Ward Homestead
Project), Series 1996A,
8.625%, 11-1-25 ..................................................... 3,000 3,176,250
Economic Development Bonds, Kapkowski Road Landfill Reclamation
Improvement District Project (City of Elizabeth), Series 1998A:
6.375%, 4-1-18 ...................................................... 2,385 2,376,056
0.0%, 4-1-11 ........................................................ 1,740 865,650
Senior Mortgage Revenue and Revenue Refunding
Bonds (Arbor Glen of Bridgewater Project),
Series 1998A,
6.0%, 5-15-28 ....................................................... 3,150 2,417,625
Total ............................................................... 12,929,181
NEW YORK - 3.89%
New York City Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, Inverse
Rate Securities, Fiscal 1994 Series E,
Newly Linked Bonds,
5.21%, 6-15-12 ...................................................... 5,500 5,541,250
City of New York, General Obligation Bonds,
Fiscal 2001 Series B Tax-Exempt Bonds,
5.75%, 8-1-14 ....................................................... 5,000 5,143,750
Tompkins County Industrial Development
Agency, Life Care Community Revenue Bonds,
1994 (Kendal at Ithaca, Inc. Project),
7.875%, 6-1-24 ...................................................... 4,035 4,151,006
Suffolk County Industrial Development Agency,
Continuing Care Retirement Community, First
Mortgage Fixed Rate Revenue Bonds
(Jefferson's Ferry Project - Series 1999A),
7.2%, 11-1-19 ....................................................... 1,500 1,473,750
Total ............................................................... 16,309,756
NORTH CAROLINA - 1.05%
City of Charlotte, North Carolina, Charlotte/
Douglas International Airport, Special
Facility Refunding Revenue Bonds, Series 1998
(US Airways, Inc. Project),
5.6%, 7-1-27 ........................................................ 3,075 2,325,469
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
9
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
City of Durham, North Carolina, Multifamily
Housing Revenue Bonds (Ivy Commons Project),
Series 1997,
8.0%, 3-1-29 ........................................................ $ 2,205 $ 2,075,456
Total ............................................................... 4,400,925
NORTH DAKOTA - 0.61%
City of Grand Forks, North Dakota, Senior Housing Revenue Bonds (4000 Valley
Square Project), Series 1997:
6.25%, 12-1-34 ...................................................... 2,000 1,450,000
6.375%, 12-1-34 ..................................................... 1,500 1,125,000
Total ............................................................... 2,575,000
OHIO - 2.04%
Ohio Water Development Authority, State of
Ohio, Solid Waste Disposal Revenue Bonds
(Bay Shore Power Project), Tax-Exempt
Series 1998 A,
5.875%, 9-1-20 ...................................................... 6,000 4,792,500
City of Toledo, Ohio, Multifamily Housing
Mortgage Revenue Bonds, Series 1998-A
(Hillcrest Apartments Project),
6.125%, 12-1-29 ..................................................... 4,000 3,750,000
Total ............................................................... 8,542,500
OKLAHOMA - 3.04%
Bixby Public Works Authority, Utility
System Revenue Bonds, Refunding
Series 1994,
7.25%, 11-1-19 ...................................................... 2,685 2,886,375
The Clinton Public Works Authority,
Refunding and Improvement Revenue
Bonds, Series 1994,
6.25%, 1-1-19 ....................................................... 2,575 2,603,969
Oklahoma County Industrial Authority,
Industrial Development Revenue Bonds:
1986 Series A (Westlake Nursing Center
Project):
10.25%, 9-1-16 (B) .................................................. 905 678,750
10.125%, 9-1-06 (B) ................................................. 430 322,500
1986 Series B (Choctaw Nursing
Center Project):
10.25%, 9-1-16 (B) .................................................. 1,230 713,400
10.125%, 9-1-06 (B) ................................................. 525 304,500
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
10
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
OKLAHOMA (CONTINUED)
The Broken Arrow Public Golf Authority
(Broken Arrow, Oklahoma), Recreational
Facilities Revenue Bonds, Series 1995,
7.25%, 8-1-20 ....................................................... $ 2,025 $ 2,088,281
Trustees of the Oklahoma Ordnance Works
Authority, Industrial Development Revenue
Refunding Bonds (A.P. Green Industries,
Inc. Project), Series 1992,
8.5%, 5-1-08 ........................................................ 1,600 1,672,000
The Guthrie Public Works Authority
(Guthrie, Oklahoma), Utility System
Revenue Bonds, Series 1994A,
6.75%, 9-1-19 ....................................................... 1,415 1,487,519
Total ............................................................... 12,757,294
OREGON - 0.36%
Myrtle Creek Building Authority, Gross
Revenue Bonds, Series 1996A (Myrtle Creek
Golf Course Project),
8.0%, 6-1-21 (B) .................................................... 3,000 1,500,000
PENNSYLVANIA - 7.09%
Allegheny County Hospital Development Authority,
Health System Revenue Bonds, Series 2000B
(West Penn Allegheny Health System),
9.25%, 11-15-22 ..................................................... 13,000 12,350,000
Delaware County Authority (Pennsylvania),
First Mortgage Revenue Bonds, Series 1994,
(Riddle Village Project),
8.25%, 6-1-22 ....................................................... 4,000 4,560,000
Philadelphia Authority for Industrial
Development, Commercial Development Revenue
Refunding Bonds (Doubletree Guest Suites
Project), Series 1997A,
6.5%, 10-1-27........................................................ 3,500 3,421,250
Clearfield Hospital Authority, Hospital
Revenue and Refunding Bonds (Clearfield
Hospital Project), Series 1994,
6.875%, 6-1-16 ...................................................... 3,240 3,211,650
Allentown Area Hospital Authority, Hospital
Revenue Bonds (Sacred Heart Hospital of
Allentown), Series A of 1993,
6.75%, 11-15-14 ..................................................... 2,865 2,832,769
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
11
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (CONTINUED)
Susquehanna Area Regional Airport Authority,
Airport Facilities Revenue Bonds (Aero
Harrisburg, LLC Project), Series 1999,
5.5%, 1-1-24 ........................................................ $ 2,000 $ 1,712,500
South Wayne County Water and Sewer Authority
(Wayne County, Pennsylvania), Sewer Revenue
Bonds, Series of 1992,
8.2%, 4-15-13 ....................................................... 1,600 1,614,000
Total ............................................................... 29,702,169
RHODE ISLAND - 0.50%
City of Providence, Rhode Island, Special
Obligation Tax Increment Bonds, Series D,
6.65%, 6-1-16 ....................................................... 2,000 2,072,500
SOUTH CAROLINA - 3.00%
South Carolina Jobs - Economic Development Authority,
Solid Waste Recycling Facilities Revenue Bonds
(Santee River Rubber Project):
Tax-Exempt Series 1998A,
8.0%, 12-1-14 ....................................................... 4,000 3,745,000
Tax-Exempt Series 1998B,
9.0%, 12-1-11 ....................................................... 2,460 2,398,500
Connector 2000 Association, Inc., Toll Road
Revenue Bonds (Southern Connector Project,
Greenville, South Carolina),
Senior Capital Appreciation Bonds, Series 1998B:
0.0%, 1-1-35 ........................................................ 17,000 1,317,500
0.0%, 1-1-36 ........................................................ 11,000 783,750
McCormick County, South Carolina, Hospital
Facilities Revenue Refunding and Improvement
Bonds, Series 1997 (McCormick Health Care
Center Project),
7.0%, 3-1-18 ........................................................ 2,530 2,264,350
South Carolina State Housing, Finance
and Development Authority, Multifamily
Housing Mortgage Revenue Bonds (United
Dominion-Plum Chase), Series 1991,
8.5%, 10-1-21 ....................................................... 2,000 2,075,340
Total ............................................................... 12,584,440
SOUTH DAKOTA - 0.48%
South Dakota Health and Educational
Facilities Authority, Refunding Revenue
Bonds (Westhills Village Retirement
Community Issue), Series 1993,
7.25%, 9-1-13 ....................................................... 2,000 1,990,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
12
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
TENNESSEE - 0.82%
The Health and Educational Facilities
Board of the City of Crossville, Tennessee,
Hospital Revenue Improvement Bonds,
Series 1992 (Cumberland Medical Center),
6.75%, 11-1-12 ...................................................... $ 2,000 $ 2,020,000
Upper Cumberland Gas Utility District
(of Cumberland County, Tennessee),
Gas System Revenue Bonds, Series 1996,
7.0%, 3-1-16 (B) .................................................... 1,400 1,429,750
Total ............................................................... 3,449,750
TEXAS - 5.69%
AllianceAirport Authority, Inc., Special
Facilities Revenue Bonds:
Series 1991 (American Airlines, Inc. Project),
7.0%, 12-1-11 ....................................................... 4,700 5,046,625
Series 1996 (Federal Express Corporation Project),
6.375%, 4-1-21 ...................................................... 4,000 3,970,000
Lubbock Health Facilities Development Corporation,
Fixed Rate First Mortgage Revenue Bonds
(Carillon, Inc. Project), Series 1999A,
6.5%, 7-1-19 ........................................................ 6,000 5,325,000
North Central Texas Health Facilities Development
Corporation, Retirement Facility Revenue Bonds
(Northwest Senior Housing Corporation -
Edgemere Project), Series 1999A, Fixed
Rate Bonds,
7.5%, 11-15-29 ...................................................... 3,000 2,973,750
Alvarado Industrial Development Corporation,
Industrial Development Revenue Bonds
(Rich-Mix Products of Texas, Inc. Project),
Series 1996,
7.75%, 3-1-10 ....................................................... 2,625 2,562,656
City of Houston, Housing Corporation
No. 1, First Lien Revenue Refunding
Bonds, Series 1996 (6800 Long Drive
Apartments - Section 8 New Construction
Program), Houston, Texas,
6.625%, 2-1-20 ...................................................... 2,305 2,232,969
Gulf Coast Waste Disposal Authority, Waste
Disposal Revenue Bonds (Valero Energy
Corporation Project), Series 1999,
5.7%, 4-1-32 ........................................................ 2,000 1,732,500
Total ............................................................... 23,843,500
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
13
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
UTAH - 4.42%
Tooele County, Utah, Hazardous Waste
Treatment Revenue Bonds (Union Pacific
Corporation/USPCI, Inc. Project),
Series A,
5.7%, 11-1-26 ....................................................... $17,000 $ 14,853,750
Utah Housing Finance Agency, Revenue Bonds
(RHA Community Services of Utah, Inc.
Project), Series 1997A,
6.875%, 7-1-27 ...................................................... 2,440 2,342,400
Carbon County, Utah, Solid Waste Disposal Facility Revenue Refunding Bonds
(Sunnyside Cogeneration Associates Project):
Series 1999A,
7.1%, 8-15-23 ....................................................... 1,250 1,250,000
Series 1999B,
0.0%, 8-15-24 ....................................................... 390 64,350
Total ............................................................... 18,510,500
VIRGINIA - 2.74%
Peninsula Ports Authority of Virginia,
Port Facility Refunding Revenue Bonds
(Zeigler Coal Project), Series 1997 (Non-AMT),
6.9%, 5-2-22 ........................................................ 5,000 2,750,000
Norfolk Redevelopment and Housing Authority,
Multifamily Rental Housing Facility Revenue
Bonds, Series 1996 (1016 Limited Partnership -
Sussex Apartments Project),
8.0%, 9-1-26 ........................................................ 3,480 3,340,800
Fairfax County Redevelopment and Housing
Authority, Multifamily Housing Revenue
Refunding Bonds (Burke Shire Commons
Apartments Project), Series 1996,
7.6%, 10-1-36 ....................................................... 3,000 2,853,750
Pocahontas Parkway Association, Route 895
Connector, Toll Road Revenue Bonds, Senior
Capital Appreciation Bonds, Series 1998B,
0.0%, 8-15-18 ....................................................... 9,000 2,542,500
Total ............................................................... 11,487,050
WASHINGTON - 1.13%
Port of Anacortes, Washington, Revenue and
Refunding Bonds, 1998 Series A (AMT),
5.625%, 9-1-16 ...................................................... 3,790 3,477,325
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 ...................................................... 1,142 1,274,758
Total ............................................................... 4,752,083
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
14
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
WEST VIRGINIA - 0.37%
Upshur County, West Virginia, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1995,
7.0%, 7-15-25 ....................................................... $ 1,500 $1,560,000
WISCONSIN - 2.39%
Wisconsin Health and Educational Facilities
Authority, Revenue Bonds, Series 1995:
National Regency of New Berlin, Inc.
Project,
8.0%, 8-15-25 ....................................................... 4,445 4,611,688
Hess Memorial Hospital Association, Inc.
Project,
7.75%, 11-1-15 ...................................................... 3,400 3,527,500
City of Superior, Wisconsin, Water Supply
Facilities Revenue Refunding Bonds
(Superior Water, Light and Power Company
Project), Series 1996,
6.125%, 11-1-21 ..................................................... 1,910 1,874,188
Total ............................................................... 10,013,376
TOTAL MUNICIPAL BONDS - 89.84% $376,479,618
(Cost: $397,924,802)
SHORT-TERM SECURITIES
COMMERCIAL PAPER
ELECTRIC, GAS AND SANITARY SERVICES - 2.16%
Detroit Edison Co.,
6.85%, 10-3-00 ...................................................... 2,400 2,399,087
Reliant Energy Inc.,
7.0%, 10-2-00 ....................................................... 6,660 6,658,705
Total ............................................................... 9,057,792
FOOD AND KINDRED PRODUCTS - 2.48%
ConAgra Inc.,
6.7%, 10-3-00 ....................................................... 10,000 9,996,278
General Mills, Inc.,
6.67%, Master Note .................................................. 376 376,000
Total ............................................................... 10,372,278
NONDEPOSITORY INSTITUTIONS - 0.29%
PACCAR Financial Corp.,
6.49%, Master Note .............................................. 1,224 1,224,000
TOTAL COMMERCIAL PAPER - 4.93% 20,654,070
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
15
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
SHORT-TERM SECURITIES (CONTINUED)
MUNICIPAL OBLIGATIONS
CALIFORNIA - 1.19%
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 ................................................... 5,000 5,000,000
COLORADO - 0.64%
Colorado Health Facilities Authority,
Revenue Refunding Bonds (Christian Living
Campus - University Hills Project), Series 1997
(US Bank),
5.75%, 10-4-00 .................................................. 2,690 2,690,000
MINNESOTA - 0.79%
City of Burnsville, MN, Multifamily Housing
Revenue Refunding Bonds (Berkshire of
Burnsville), Series 2000A
(Federal National Mortgage Association),
5.65%, 10-5-00 .................................................. 3,300 3,300,000
OKLAHOMA - 1.16%
Tulsa Industrial Authority, Multifamily Housing
Revenue Bonds (Park Chase Apartments Project),
Series 1999A-1 (Federal National Mortgage
Association),
5.65%, 10-5-00 .................................................. 4,856 4,856,000
WASHINGTON - 1.19%
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 .................................................. 5,000 5,000,000
TOTAL MUNICIPAL OBLIGATIONS - 4.97% 20,846,000
TOTAL SHORT-TERM SECURITIES - 9.90% $41,500,070
(Cost: $41,500,070)
TOTAL INVESTMENT SECURITIES - 99.74% $417,979,688
(Cost: $439,424,872)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.26% 1,084,627
NET ASSETS - 100.00% $419,064,315
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
16
<PAGE>
THE INVESTMENTS OF
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 2000
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) Non-income producing as the issuer has either missed its most recent
interest payment or declared bankruptcy.
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.
17
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
ASSETS
<S> <C>
Investment securities - at value
(Notes 1 and 3) ............................................................................ $417,980
Cash .......................................................................................... 321
Receivables:
Interest ................................................................................... 7,328
Investment securities sold.................................................................. 203
Fund shares sold............................................................................ 241
Prepaid insurance premium ..................................................................... 11
--------
Total assets ............................................................................. 426,084
LIABILITIES --------
Payable for investment sercurities purchased................................................... 5,141
Payable to Fund shareholders .................................................................. 1,494
Dividends payable ............................................................................. 235
Accrued service fee (Note 2) .................................................................. 81
Accrued transfer agency and dividend
disbursing (Note 2) ........................................................................ 41
Accrued management fee (Note 2) ............................................................... 12
Accrued accounting services fee (Note 2) ...................................................... 6
Accrued distribution fee (Note 2) ............................................................. 6
Other ......................................................................................... 4
--------
Total liabilities ........................................................................ 7,020
--------
Total net assets ...................................................................... $419,064
NET ASSETS ========
$1.00 par value capital stock
Capital stock .............................................................................. $ 85,112
Additional paid-in capital ................................................................. 361,009
Accumulated undistributed loss:
Accumulated undistributed net realized loss
on investment transactions ............................................................... (5,272)
Distribution in excess of net realized
loss on investment transactions .......................................................... (340)
Net unrealized depreciation in value of
investments .............................................................................. (21,445)
--------
Net assets applicable to outstanding
units of capital ...................................................................... $419,064
========
Net asset value per share (net assets divided
by shares outstanding)
Class A .................................................................................... $4.92
Class B .................................................................................... $4.92
Class C .................................................................................... $4.92
Class Y .................................................................................... $4.92
Capital shares outstanding
Class A .................................................................................... 84,702
Class B .................................................................................... 239
Class C .................................................................................... 167
Class Y .................................................................................... 4
Capital shares authorized ........................................................................ 300,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
INVESTMENT INCOME
<S> <C>
Interest and amortization (Note 1B) ........................................................... $31,388
--------
Expenses (Note 2):
Investment management fee .................................................................. 2,353
Service fee:
Class A................................................................................... 1,013
Class B................................................................................... 2
Class C................................................................................... 1
Transfer agency and dividend disbursing:
Class A................................................................................... 468
Class B................................................................................... 2
Class C................................................................................... 1
Accounting services fee .................................................................... 61
Legal fees.................................................................................. 57
Distribution fee:
Class A................................................................................... 42
Class B................................................................................... 4
Class C................................................................................... 3
Custodian fees ............................................................................. 18
Audit fees ................................................................................. 18
Other ...................................................................................... 149
--------
Total expenses ........................................................................... 4,192
--------
Net investment income ................................................................. 27,196
--------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(NOTES 1 AND 3)
Realized net loss on investments .............................................................. (5,257)
Unrealized depreciation in value of
investments during the period .............................................................. (20,065)
--------
Net loss on investments .................................................................... (25,322)
--------
Net increase in net assets resulting
from operations ....................................................................... $ 1,874
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
-------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ........................................... $27,196 $29,398
Realized net gain (loss) on
investments ................................................... (5,257) 721
Unrealized depreciation ......................................... (20,065) (37,310)
-------- --------
Net increase (decrease) in net assets
resulting from operations .................................. 1,874 (7,191)
-------- --------
Distributions to shareholders (Note 1D):*
From net investment income:
Class A ....................................................... (27,143) (29,398)
Class B ....................................................... (32) ---
Class C ....................................................... (21) ---
Class Y ....................................................... ---** ---**
From realized net gains on investment transactions:
Class A ....................................................... --- (12,257)
Class B ....................................................... --- ---
Class C ....................................................... --- ---
Class Y ....................................................... --- ---**
In excess of realized capital gains:
Class A ....................................................... (335) (19)
Class B ....................................................... (1) ---
Class C ....................................................... ---** ---
Class Y ....................................................... ---** ---**
-------- --------
(27,532) (41,674)
-------- --------
Capital share transactions
(Note 5) ........................................................ (65,145) 36,537
-------- --------
Total decrease .......................................... (90,803) (12,328)
NET ASSETS
Beginning of period ................................................ 509,867 522,195
-------- --------
End of period ...................................................... $419,064 $509,867
======== ========
Undistributed net investment income ............................. $--- $---
==== ====
</TABLE>
*See "Financial Highlights" on pages - .
**Not shown due to rounding.
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME 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 ................... $5.19 $5.69 $5.55 $5.31 $5.27
Income (loss) from investment ------- ------ ------ ------ ------
operations:
Net investment
income ................ 0.30 0.31 0.32 0.34 0.34
Net realized and
unrealized gain
(loss) on
investments ........... (0.27) (0.37) 0.21 0.25 0.04
Total from investment ------- ------ ------ ------ ------
operations ............... 0.03 (0.06) 0.53 0.59 0.38
Less distributions: ------- ------ ------ ------ ------
Declared from net
investment income ..... (0.30) (0.31) (0.32) (0.34) (0.34)
From capital gains ....... (0.00) (0.13) (0.07) (0.01) (0.00)
In excess of capital
gains ................. (0.00)* (0.00)* (0.00) (0.00) (0.00)
------- ------ ------ ------- -------
Total distributions ......... (0.30) (0.44) (0.39) (0.35) (0.34)
------- ------ ------ ------- -------
Net asset value, end
of period ................ $4.92 $5.19 $5.69 $5.55 $5.31
======= ====== ====== ======= =======
Total return** .............. 0.83% -1.22% 9.88% 11.45% 7.40%
Net assets, end
of period (in
millions) ................ $417 $510 $522 $474 $400
Ratio of expenses to
average net
assets ................... 0.94% 0.87% 0.82% 0.78% 0.81%
Ratio of net investment
income to average
net assets ............... 6.08% 5.59% 5.72% 6.19% 6.41%
Portfolio turnover
rate ..................... 22.41% 26.83% 35.16% 19.47% 26.91%
</TABLE>
*Not shown due to rounding.
**Total return calculated without taking into account the sales load deducted
on an initial purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME 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 ........... $5.16
-----
Income from investment operations:
Net investment income ......... 0.25
Net realized and
unrealized loss
on investments ............. (0.24)
-----
Total from investment
operations .................... 0.01
-----
Less distributions:
Declared from net
investment income .......... (0.25)
From capital gains ............ (0.00)
In excess of capital
gains ...................... (0.00)**
-----
Total distributions .............. (0.25)
-----
Net asset value,
end of period ................. $4.92
=====
Total return ..................... 0.29%
Net assets, end of
period (in millions) .......... $1
Ratio of expenses to
average net assets ............ 1.89%***
Ratio of net investment
income to average
net assets .................... 5.16%***
Portfolio turnover
rate .......................... 22.41%****
</TABLE>
*Commencement of operations.
**Not shown due to rounding.
***Annualized.
****For the fiscal year ended September 30, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS C SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
10-8-99*
THROUGH
9-30-00
-------
<S> <C>
Net asset value,
beginning of period ........... $5.16
-----
Income from investment operations:
Net investment income ......... 0.25
Net realized and
unrealized loss
on investments ............. (0.24)
-----
Total from investment
operations .................... 0.01
-----
Less distributions:
Declared from net
investment income .......... (0.25)
From capital gains ............ (0.00)
In excess of capital
gains ...................... (0.00)**
-----
Total distributions .............. (0.25)
-----
Net asset value,
end of period ................. $4.92
=====
Total return ..................... 0.26%
Net assets, end of
period (000 omitted) .......... $822
Ratio of expenses to
average net assets ............ 1.91%***
Ratio of net investment
income to average
net assets .................... 5.13%***
Portfolio turnover
rate .......................... 22.41%****
</TABLE>
*Commencement of operations.
**Not shown due to rounding.
***Annualized.
****For the fiscal year ended September 30, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS Y SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE FOR THE
FOR THE PERIOD PERIOD
FISCAL FROM FROM
YEAR 12-30-98* 7-1-98*
ENDED TO TO
9-30-00 9-30-99 8-25-98
------- ------- -------
<S> <C> <C> <C>
Net asset value,
beginning of period ................................................. $5.19 $5.65 $5.64
----- ----- -----
Income (loss) from investment
operations:
Net investment
income ........................................................... 0.30 0.24 0.05
Net realized and
unrealized gain (loss)
on investments ................................................... (0.27) (0.33) 0.01
----- ----- -----
Total from investment
operations .......................................................... 0.03 (0.09) 0.06
----- ----- -----
Less distributions:
Declared from net
investment income ................................................ (0.30) (0.24) (0.05)
From capital gains .................................................. (0.00) (0.13) (0.00)
In excess of capital
gains ............................................................ (0.00)** (0.00)** (0.00)
----- ----- -----
Total distributions .................................................... (0.30) (0.37) (0.05)
----- ----- -----
Net asset value, end
of period ........................................................... $4.92 $5.19 $5.65
===== ===== =====
Total return ........................................................... 0.97% -1.53% 1.07%
Net assets, end of
period (000 omitted) ................................................ $18 $2 $0
Ratio of expenses to
average net assets .................................................. 1.08% 0.80%*** 0.61%***
Ratio of net investment
income to average
net assets .......................................................... 5.96% 5.68%*** 5.99%***
Portfolio turnover
rate ................................................................ 22.41% 26.83%**** 35.16%***
</TABLE>
*Class Y shares commenced operations on July 1, 1998 and continued
operations until August 25, 1998 when all outstanding Class Y shares
were redeemed at the ending net asset value shown in the table.
Operations recommenced on December 30, 1998.
**Not shown due to rounding.
***Annualized.
****For the fiscal year ended September 30, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Waddell & Reed Advisors Municipal High Income Fund, Inc. (the "Fund"),
formerly United Municipal High Income Fund, Inc., is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Its investment objective is to seek to provide a high level of income
which is 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 -- All of the Fund's net investment income is
declared and recorded by the Fund as dividends payable on each day to
shareholders of record as of the close of the preceding business day. Net
investment income dividends and capital gains distributions are
25
<PAGE>
determined in accordance with income tax regulations which may differ from
accounting principles generally accepted in the United States of America.
These differences are due to differing treatments for items such as
deferral of wash sales and post-October losses, net operating losses and
expiring capital loss carryovers.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
NOTE 2 -- INVESTMENT MANAGEMENT AND PAYMENTS TO AFFILIATED PERSONS
The Fund pays a fee for investment management services. The fee is computed
daily based on the net asset value at the close of business. The fee is payable
by the Fund at the annual 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>
26
<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
$473,666. During the period ended September 30, 2000, W&R received $191 and $138
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 $299,856 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
27
<PAGE>
Fund's Class A average annual net assets. The fee is to be paid to reimburse W&R
for amounts it expends in connection with the distribution of the Class A shares
and/or provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts.
Under the Distribution and Service Plan adopted by the Fund for Class B and
Class C shares, respectively, the Fund may pay W&R, on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate W&R for providing services to shareholders of that class and/or
maintaining shareholder accounts for that class and a distribution fee of up to
0.75% of the average daily net assets of the class to compensate W&R for
distributing the shares of that class. The Class B Plan and the Class C Plan
each permit W&R to receive compensation, through the distribution and service
fee, respectively, for its distribution activities for that class, which are
similar to the distribution activities described with respect to the Class A
Plan, and for its activities in providing personal services to shareholders of
that class and/or maintaining shareholder accounts of that class, which are
similar to the corresponding activities for which it is entitled to
reimbursement under the Class A Plan.
The Fund paid Directors' fees of $14,913, 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 $92,618,033, while proceeds from maturities
and sales aggregated $168,200,290. Purchases of short-term securities aggregated
$1,084,062,431, while proceeds from maturities and sales aggregated
$1,069,496,934. No 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 $439,752,323, resulting in net unrealized depreciation of $21,772,635,
of which $5,943,280 related to appreciated securities and $27,715,915 related to
depreciated securities.
NOTE 4 -- FEDERAL INCOME TAX MATTERS
For Federal income tax purposes, the Fund realized capital gain net income
of $241,560 during its fiscal year ended September 30, 2000, which included the
effect of certain losses deferred into the next fiscal year (see discussion
below). The
28
<PAGE>
capital gain net income has been distributed to the Fund's shareholders.
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 $5,283,963, which have been deferred to the fiscal year ending
September 30, 2001.
NOTE 5 -- MULTICLASS OPERATIONS
The Fund is authorized to offer four classes of shares, Class A, Class B,
Class C and Class Y, each of which have equal rights as to assets and voting
privileges. Class Y shares are not subject to a sales charge on purchases, are
not subject to a Rule 12b-1 Distribution and Service Plan and are subject to a
separate transfer agency and dividend disbursement services fee structure. A
comprehensive discussion of the terms under which shares of each class are
offered is contained in the Prospectus and the Statement of Additional
Information for the Fund.
Income, non-class specific expenses, and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of their
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
Transactions in capital stock are summarized below. Amounts are in
thousands.
29
<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED SEPTEMBER 30,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Shares issued from sale of shares:
Class A ............................. 7,227 12,672
Class B ............................. 256 ---
Class C ............................. 182 ---
Class Y ............................. 3 ---*
Shares issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ............................. 4,359 6,356
Class B ............................. 5 ---
Class C ............................. 4 ---
Class Y ............................. ---* ---*
Shares redeemed:
Class A ............................. (25,188) (12,423)
Class B ............................. (23) ---
Class C ............................. (19) ---
Class Y ............................. --- ---
-------- -------
Increase (decrease) in
outstanding capital
shares .............................. (13,194) 6,605
======== =======
Value issued from sale of shares:
Class A ............................. $35,691 $69,498
Class B ............................. 1,264 ---
Class C ............................. 902 ---
Class Y ............................. 16 2
Value issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A ............................. 21,490 34,776
Class B ............................. 27 ---
Class C ............................. 21 ---
Class Y ............................. ---* ---*
Value redeemed:
Class A ............................. (124,351) (67,739)
Class B ............................. (112) ---
Class C ............................. (93) ---
Class Y ............................. --- ---
-------- -------
Increase (decrease) in
outstanding capital ........... $(65,145) $36,537
======== =======
</TABLE>
*Not shown due to rounding.
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Waddell & Reed Advisors Municipal High Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Waddell & Reed Advisors Municipal High Income
Fund, Inc. (formerly United Municipal High Income 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 or alternative auditing procedures. 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 High Income 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
31
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. EXHIBITS: Waddell & Reed Advisors Municipal High Income Fund, Inc.
(a) Articles of Incorporation, as amended, filed by EDGAR on December 1,
1995 as EX-99.B1-charter to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
Articles Supplementary filed by EDGAR on December 1, 1995 as
EX-99.B1-mhartsup to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
Articles Supplementary filed by EDGAR on July 2, 1999 as
EX-99.B(a)mhsuppbc to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A*
Articles of Amendment filed by EDGAR on June 30, 2000 as
EX-99.B(a)mhartsup to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-1A*
(b) Bylaws, as amended, filed by EDGAR on December 27, 1996 as
EX-99.B2-mhbylaw to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A*
Amendment to Bylaws filed by EDGAR on July 2, 1999 as
EX-99.B(b)mhbylaw2 to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A*
Amendment to Bylaws attached hereto as EX-99.B(b)mhbylaw
(c) Not applicable
(d) Investment Management Agreement filed by EDGAR on December 1, 1995 as
EX-99.B5-mhima to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
Fee schedule (Exhibit A) to the Investment Management Agreement, as
amended, filed by EDGAR on July 2, 1999 as EX-99.B(d)mhimafee to
Post-Effective Amendment No. 22 to the Registration Statement on Form
N-1A*
Assignment of the Investment Management Agreement filed by EDGAR on
December 1, 1995 as EX-99.B5-mhassign to Post-Effective Amendment No.
17 to the Registration Statement on Form N-1A*
(e) Underwriting Agreement filed by EDGAR on December 1, 1995 as
EX-99.B6-mhua to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
(f) Not applicable
<PAGE>
(g) Custodian Agreement, as amended, filed by EDGAR on December 29, 1999
as EX-99.B(g)mhca to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A*
(h) Shareholder Servicing Agreement filed by EDGAR on December 1, 1998 as
EX-99.B9-mhssa to Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A*
Compensation Table (Exhibit B) to the Shareholder Servicing Agreement,
as amended, attached hereto as EX-99.B(h)mhssacomp
Fidelity Bond Coverage (Exhibit C) to the Shareholder Servicing
Agreement, as amended, attached hereto as EX-99.B(h)mhssafid
Accounting Services Agreement filed by EDGAR on December 1, 1995 as
EX-99.B9-mhasa to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
Amendment to Accounting Services Agreement attached hereto as
EX-99.B(h)mhasaamend
Service Agreement filed by EDGAR on electronic format on July 30, 1993
as Exhibit (b)(15) to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A*
Amendment to Service Agreement filed by EDGAR on December 1, 1995 as
EX-99.B9-mhsaa to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
Class Y letter of understanding filed by EDGAR on December 27, 1996 as
EX-99.B9-mhlou to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A*
(i) Opinion and Consent of Counsel attached hereto as EX-99.B(i)mhlegopn
(j) Consent of Deloitte & Touche LLP, Independent Accountants, attached
hereto as EX-99.B(j)mhconsnt
(k) Not applicable
(l) Not applicable
(m) Service Plan filed by EDGAR on December 1, 1995 as EX-99.B15-mhspca to
Post-Effective Amendment No. 17 to the Registration Statement on Form
N-1A*
Distribution and Service Plan for Class A shares filed by EDGAR on
December 29, 1997 as EX-99.B15-mhdsp to Post-Effective Amendment No.
20 to the Registration Statement on Form N-1A*
Distribution and Service Plan for Class B shares filed by EDGAR on
July 2, 1999 as EX-99.B(m)mhdspb to Post-Effective Amendment No. 22 to
the Registration Statement on Form N-1A*
<PAGE>
Distribution and Service Plan for Class C shares filed by EDGAR on
July 2, 1999 as EX-99.B(m)mhdspc to Post-Effective Amendment No. 22 to
the Registration Statement on Form N-1A*
(n) Not applicable
(o) Multiple Class Plan, as amended, filed by EDGAR on June 30, 2000 as
EX-99.B(o)mhmcp to Post-Effective Amendment No. 24 to the Registration
Statement on Form N-1A*
(p) Code of Ethics, as revised, attached hereto as EX-99.B(p)mhcode
24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
25. INDEMNIFICATION
Reference is made to Section (7)(c) of Article SEVENTH of the Articles of
Incorporation of Registrant filed by EDGAR on December 1, 1998 as
EX-99.B1-charter to Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A*, Article VII of the Bylaws attached hereto as
EX-99.B(b)mhbylaw and to Article IV of the Underwriting Agreement filed by
EDGAR on December 1, 1995 as EX-99.B6-mhua to Post-Effective Amendment No.
17 to the Registration Statement on Form N-1A*, each of which provide
indemnification. Also refer to Section 2-418 of the Maryland General
Corporation Law regarding indemnification of directors, officers, employees
and agents.
Registrant undertakes to carry out all indemnification provisions of its
Articles of Incorporation, Bylaws, and the above-described contracts in
accordance with the Investment Company Act Release No. 11330 (September 4,
1980) and successor releases.
Insofar as indemnification for liability arising under the 1933 Act, as
amended, may be provided to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
of the Registrant of expenses incurred or paid by a director, officer of
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER
<PAGE>
Waddell & Reed Investment Management Company ("WRIMCO") is the investment
manager of the Registrant. Under the terms of an Investment Management
Agreement between Waddell & Reed, Inc. and the Registrant, Waddell & Reed,
Inc. is to provide investment management services to the Registrant.
Waddell & Reed, Inc. assigned its investment management duties under this
agreement to WRIMCO on January 8, 1992. WRIMCO is not engaged in any
business other than the provision of investment management services to
those registered investment companies described in Part A and Part B of
this Post-Effective Amendment and to other investment advisory clients.
Each director and executive officer of WRIMCO has had as his sole business,
profession, vocation or employment during the past two years only his
duties as an executive officer and/or employee of WRIMCO or its
predecessors, except as to persons who are directors and/or officers of the
Registrant and have served in the capacities shown in the Statement of
Additional Information of the Registrant. The address of the officers is
6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
As to each director and officer of WRIMCO, reference is made to the
Prospectus and SAI of this Registrant.
27. PRINCIPAL UNDERWRITER
(a) Waddell & Reed, Inc. is the principal underwriter of the Registrant.
It is also the principal underwriter to the following investment
companies:
Waddell & Reed Advisors Funds, Inc.
Waddell & Reed Advisors International Growth Fund, Inc.
Waddell & Reed Advisors Continental Income Fund, Inc.
Waddell & Reed Advisors Vanguard Fund, Inc.
Waddell & Reed Advisors Retirement Shares, Inc.
Waddell & Reed Advisors Municipal Bond Fund, Inc.
Waddell & Reed Advisors High Income Fund, Inc.
Waddell & Reed Advisors Cash Management, Inc.
Waddell & Reed Advisors Government Securities Fund, Inc.
Waddell & Reed Advisors New Concepts Fund, Inc.
Waddell & Reed Advisors Global Bond Fund, Inc.
Waddell & Reed Advisors Asset Strategy Fund, Inc.
Waddell & Reed Advisors Small Cap Fund, Inc.
Waddell & Reed Advisors Tax-Managed Equity Fund, Inc.
Waddell & Reed Advisors Value Fund, Inc.
Waddell & Reed Advisors Municipal Money Market Fund, Inc.
W&R Funds, Inc.
Advantage I
Advantage II
Advantage Plus
Advantage Gold
(b) The information contained in the underwriter's application on Form BD
as filed on November 30, 2000 SEC No. 8-27030, under the
<PAGE>
Securities Exchange Act of 1934, is herein incorporated by reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or any
affiliated person of such affiliated person.
28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Kristen A. Richards, as officers of the Registrant, each of
whose business address is Post Office Box 29217, Shawnee Mission, Kansas
66201-9217.
29. MANAGEMENT SERVICES
There is no service contract other than as discussed in Part A and B of
this Post-Effective Amendment and as listed in response to Items 23.(h) and
23.(m) hereof.
30. UNDERTAKINGS
Not applicable
---------------------------------
*Incorporated herein by reference
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, WADDELL &
REED ADVISORS ASSET STRATEGY FUND, INC., WADDELL & REED ADVISORS CASH
MANAGEMENT, INC., WADDELL & REED ADVISORS CONTINENTAL INCOME FUND, INC., WADDELL
& REED ADVISORS FUNDS, INC., WADDELL & REED ADVISORS GOVERNMENT SECURITIES FUND,
INC., WADDELL & REED ADVISORS HIGH INCOME FUND, INC., WADDELL & REED ADVISORS
GLOBAL BOND FUND, INC., WADDELL & REED ADVISORS INTERNATIONAL GROWTH FUND, INC.,
WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC., WADDELL & REED ADVISORS
MUNICIPAL HIGH INCOME FUND, INC., WADDELL & REED ADVISORS MUNICIPAL MONEY MARKET
FUND, INC., WADDELL & REED ADVISORS NEW CONCEPTS FUND, INC., WADDELL & REED
ADVISORS RETIREMENT SHARES, INC., WADDELL & REED ADVISORS SMALL CAP FUND, INC.,
WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC., WADDELL & REED ADVISORS
VALUE FUND, INC., WADDELL & REED ADVISORS VANGUARD FUND, INC., W&R TARGET FUNDS,
INC. AND W&R FUNDS, INC. (each hereinafter called the "Corporation"), and
certain directors and officers for the Corporation, do hereby constitute and
appoint KEITH A. TUCKER, ROBERT L. HECHLER, DANIEL C. SCHULTE and KRISTEN A.
RICHARDS, and each of them individually, their true and lawful attorneys and
agents to take any and all action and execute any and all instruments which said
attorneys and agents may deem necessary or advisable to enable each Corporation
to comply with the Securities Act of 1933 and/or the Investment Company Act of
1940, as amended, and any rules, regulations, orders or other requirements of
the United States Securities and Exchange Commission thereunder, in connection
with the registration under the Securities Act of 1933 and/or the Investment
Company Act of 1940, as amended, including specifically, but without limitation
of the foregoing, power and authority to sign the names of each of such
directors and officers in his/her behalf as such director or officer as
indicated below opposite his/her signature hereto, to any Registration Statement
and to any amendment or supplement to the Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 and/or the
Investment Company Act of 1940, as amended, and to any instruments or documents
filed or to be filed as a part of or in connection with such Registration
Statement or amendment or supplement thereto; and each of the undersigned hereby
ratifies and confirms all that said attorneys and agents shall do or cause to be
done by virtue hereof.
Date: August 16, 2000 /s/Robert L. Hechler
--------------------------
Robert L. Hechler, President
<TABLE>
<S> <C> <C>
/s/Keith A. Tucker Chairman of the Board August 16, 2000
------------------- -----------------
Keith A. Tucker
/s/Robert L. Hechler President, Principal August 16, 2000
-------------------- Financial Officer and -----------------
Robert L. Hechler Director
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Henry J. Herrmann Vice President and August 16, 2000
-------------------- Director -----------------
Henry J. Herrmann
/s/Theodore W. Howard Vice President, Treasurer August 16, 2000
-------------------- and Principal Accounting -----------------
Theodore W. Howard Officer
/s/James M. Concannon Director August 16, 2000
-------------------- -----------------
James M. Concannon
/s/John A. Dillingham Director August 16, 2000
-------------------- -----------------
John A. Dillingham
/s/David P. Gardner Director August 16, 2000
------------------- -----------------
David P. Gardner
/s/Linda K. Graves Director August 16, 2000
-------------------- -----------------
Linda K. Graves
/s/Joseph Harroz, Jr. Director August 16, 2000
-------------------- -----------------
Joseph Harroz, Jr.
/s/John F. Hayes Director August 16, 2000
-------------------- -----------------
John F. Hayes
/s/Glendon E. Johnson Director August 16, 2000
-------------------- -----------------
Glendon E. Johnson
/s/William T. Morgan Director August 16, 2000
-------------------- -----------------
William T. Morgan
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Ronald C. Reimer Director August 16, 2000
-------------------- -----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr. Director August 16, 2000
-------------------- -----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director August 16, 2000
-------------------- -----------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director August 16, 2000
-------------------- -----------------
Frederick Vogel III
</TABLE>
Attest:
/s/Kristen A. Richards
--------------------------------
Kristen A. Richards
Secretary
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) of the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Overland Park, and State of Kansas, on the 15th day
of December, 2000.
WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC.
(Registrant)
By /s/ Robert L. Hechler*
------------------------
Robert L. Hechler, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C> <C>
/s/Keith A. Tucker* Chairman of the Board December 15, 2000
---------------------- ----------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal December 15, 2000
---------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and December 15, 2000
---------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer December 15, 2000
---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon* Director December 15, 2000
------------------ ----------------
James M. Concannon
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/John A. Dillingham* Director December 15, 2000
------------------ ----------------
John A. Dillingham
/s/David P. Gardner* Director December 15, 2000
------------------ ----------------
David P. Gardner
/s/Linda K. Graves* Director December 15, 2000
------------------ ----------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director December 15, 2000
------------------ ----------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director December 15, 2000
------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson* Director December 15, 2000
------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director December 15, 2000
------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer* Director December 15, 2000
------------------ ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director December 15, 2000
------------------ ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director December 15, 2000
------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director December 15, 2000
------------------- ----------------
Frederick Vogel III
</TABLE>
<PAGE>
*By /s/Kristen A. Richards
--------------------------
Kristen A. Richards
Attorney-in-Fact
ATTEST:/s/Daniel C. Schulte
---------------------------
Daniel C. Schulte
Assistant Secretary
