File No. 33-5648
File No. 811-4520
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 GLOBAL BOND FUND, INC.
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(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
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(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
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
__X__ on December 15, 2000 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 will be filed on or around
December 27, 2000.
Waddell & Reed Advisors Funds
FIXED INCOME &
MONEY MARKET FUNDS
Bond Fund
Global Bond Fund
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.
This Prospectus shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any state in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such state.
Prospectus
_______________, 2000
Table of Contents
AN OVERVIEW OF THE FUNDS........................................X
BOND FUND.......................................................X
GLOBAL BOND FUND................................................X
GOVERNMENT SECURITIES FUND......................................X
HIGH INCOME FUND................................................X
MUNICIPAL BOND FUND.............................................X
MUNICIPAL HIGH INCOME FUND......................................X
MUNICIPAL MONEY MARKET FUND.....................................X
CASH MANAGEMENT.................................................X
THE INVESTMENT PRINCIPLES OF THE FUNDS..........................X
YOUR ACCOUNT....................................................X
THE MANAGEMENT OF THE FUNDS.....................................X
FINANCIAL HIGHLIGHTS............................................X
An Overview of the Fund
Waddell & Reed Advisors Bond Fund
Goal
(formerly United Bond Fund) 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 Investors Service, Inc. ("MIS")).
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; and
* 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.
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; and
* 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.
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.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31, each year (%)
1990 4.24%
1991 17.76%
1992 7.84%
1993 13.19%
1994 -5.76%
1995 20.50%
1996 3.20%
1997 9.77%
1998 7.27%
1999 -1.08%
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 March 31,
2000 was 2.32%.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999 (%)
1 Year 5 Years 10 YearsLife of Class(1)
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%
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.
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:
Shareholder Fees Class A Class B Class C Class Y
(fees paid directly from Shares Shares Shares Shares
your investment) ----- ----- ----- -----
Maximum Sales Charge(Load)
Imposed on Purchases
(as a percentage
of offering price) 5.75% None None None
Maximum Deferred Sales
Charge (Load)(1) None(2) 5% 1% None
(as a percentage of
lesser of amount invested
or redemption value)
Annual Fund Operating
Expenses(3) Class A Class B Class C Class Y
(expenses that are Shares Shares Shares Shares
deducted from Fund assets) ------ ------ ------ ------
Management Fees 0.52% 0.52% 0.52% 0.52%
Distribution and
Service (12b-1) Fees 0.25% 1.00% 1.00% None
Other Expenses 0.23% 0.39% 0.48% 0.21%
Total Annual Fund
Operating Expenses 1.00% 1.91% 2.00% 0.73%
(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)Management Fees and Total Annual Fund Operating Expenses have been restated
to reflect the change in management fees effective June 30, 1999; otherwise
expense ratios are based on other Fund-level expenses for the fiscal year ended
December 31, 1999. 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 A, Class B or Class
C shares 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:
If shares are redeemed
at end of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $671 $875 $1,096 $1,729
Class B Shares $594 $901 $1,134 $1,998(1)
Class C Shares $303 $626 $1,076 $2,324
Class Y Shares $ 75 $233 $ 406 $ 906
If shares are not redeemed
at end of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $671 $875 $1,096 $1,729
Class B Shares $194 $601 $1,034 $1,998(1)
Class C Shares $203 $626 $1,076 $2,324
Class Y Shares $ 75 $233 $ 406 $ 906
(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.
An Overview of the Fund
Waddell & Reed Advisors Global Bond Fund
Goals
(formerly Waddell & Reed Advisors High Income Fund II) 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 Ba and below
by MIS, 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 in
countries that are members of the Organization of Economic Co-Operation and
Development (OECD). The Fund may invest in securities issued by foreign or U.S.
governments and in foreign or U.S. companies of any size.
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);
* credit analysis of the issuer (financial strength, cash flow, management,
strategy and accounting);
* maturity of the issue;
* quality of the issue;
* debt denomination of the issue (e.g. U.S. Dollar, Euro, Yen); and
* 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 Funds
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, 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; and
* WRIMCO's skill in evaluating and managing the interest rate and credit risks
of the Fund's portfolio.
The investment performance of Global Bond Fund may also be affected by changes
in foreign exchange rates, which may affect the value of certain securities the
Fund holds. Investing in foreign securities presents additional risks, such as
foreign currency fluctuations and 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 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.
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.
CHART OF YEAR-BY-YEAR RETURNS
as of December 31, each year (%)
1990 -5.29%
1991 31.31%
1992 15.23%
1993 17.39%
1994 -4.07%
1995 16.88%
1996 11.93%
1997 14.97%
1998 2.69%
1999 1.45%
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
_______%.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999 (%)
1 Year 5 Years 10 Years Life of Class(1)
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%
The index shown is a broad-based, securities market indexes that is unmanaged.
The Lipper average is a composite of mutual funds with goals similar to the
goals of the Fund.
(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.
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:
Shareholder Fees Class A Class B Class C Class Y
(fees paid directly from Shares Shares Shares Shares
your investment) ----- ----- ----- -----
Maximum Sales Charge(Load)
Imposed on Purchases
(as a percentage
of offering price) 5.75% None None None
Maximum Deferred Sales
Charge (Load)(1) None(2) 5% 1% None
(as a percentage of
lesser of amount invested
or redemption value)
Annual Fund Operating
Expenses(3) Class A Class B Class C Class Y
(expenses that are Shares Shares Shares Shares
deducted from Fund assets) ------ ------ ------ ------
Management Fees 0.63% 0.63% 0.63% 0.63%
Distribution and
Service (12b-1) Fees 0.25% 1.00% 1.00% None
Other Expenses 0.25% 0.25% 0.25% 0.21%
Total Annual Fund
Operating Expenses 1.13% 1.88% 1.88% 0.84%
(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)Management Fees and Total Annual Fund Operating Expenses have been restated
to reflect the change in management fees effective June 30, 1999; otherwise,
expense ratios are based on other Fund-level expenses for the fiscal year ended
September 30, 1999, and for Class B and Class C, the expenses attributable to
each class that are anticipated for the current 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 A, Class B or Class
C shares 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:
If shares are redeemed at
end of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $683 $912 $1,159 $1,865
Class B Shares $590 $889 $1,114 $1,998(1)
Class C Shares $290 $589 $1,014 $2,196
Class Y Shares $ 85 $267 $ 463 $1,031
If shares are not
redeemed at end
of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $683 $912 $1,159 $1,865
Class B Shares $190 $589 $1,014 $1,998(1)
Class C Shares $190 $589 $1,014 $2,196
Class Y Shares $ 85 $267 $ 463 $1,031
(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.
An Overview of the Fund
Waddell & Reed Advisors Government Securities Fund
Goal
(formerly United Government Securities Fund) 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; and
* 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.
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 OF YEAR-BY-YEAR RETURNS
as of December 31, each year (%)
1990 7.27%
1991 16.07%
1992 7.54%
1993 9.99%
1994 -3.88%
1995 19.30%
1996 1.77%
1997 9.16%
1998 7.49%
1999 -0.64%
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 March 31,
2000 was 2.19%.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999 (%)
1 Year 5 Years 10 Years Life of Class(1)
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%
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.
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.
Shareholder Fees Class A Class B Class C Class Y
(fees paid directly from Shares Shares Shares Shares
your investment) ----- ----- ----- -----
Maximum Sales Charge (Load)
Imposed on Purchases
(as a percentage of
offering price) 4.25% None None None
Maximum Deferred Sales
Charge (Load)(1) None(2) 5% 1% None
(as a percentage of
lesser of amount
invested or redemption
value)
Annual Fund Operating
Expenses(3) Class A Class B Class C Class Y
(expenses that are Shares Shares Shares Shares
deducted from Fund assets)
----- ----- ----- -----
Management Fees 0.50% 0.50% 0.50% 0.50%
Distribution and
Service (12b-1) Fees 0.25% 1.00% 1.00% None
Other Expenses 0.40% 0.40% 0.60% 0.30%
Total Annual Fund
Operating Expenses 1.15% 1.90% 2.10% 0.80%
(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)Management Fees and Total Fund Operating Expenses have been restated to
reflect the change in management fees effective June 30, 1999; otherwise,
expense ratios are based on other Fund-level expenses of the Fund for the fiscal
year ended March 31, 2000. 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 A, Class B or Class
C shares 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:
If shares are redeemed
at end of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $537 $775 $1,031 $1,763
Class B Shares $593 $897 $1,126 $2,025(1)
Class C Shares $313 $658 $1,129 $2,431
Class Y Shares $ 82 $255 $ 444 $ 990
If shares are not
redeemed at end
of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $537 $775 $1,031 $1,763
Class B Shares $193 $597 $1,026 $2,025(1)
Class C Shares $213 $658 $1,129 $2,431
Class Y Shares $ 82 $255 $ 444 $ 990
(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.
An Overview of the Funds
Waddell & Reed Advisors High Income Fund
Goals
(formerly United High Income Fund) 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 MIS 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 will emphasize 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; and
* 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 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; and
* 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.
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 OF YEAR-BY-YEAR RETURNS
as of December 31, each year (%)
1990 -14.97%
1991 37.45%
1992 16.33%
1993 17.69%
1994 -3.66%
1995 17.80%
1996 11.88%
1997 14.32%
1998 3.88%
1999 2.92%
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 March 31,
2000 was -1.73%.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999 (%)
1 Year 5 Years 10 Years Life of Class(1)
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%
The indexes shown are broad-based, securities market indexes that are unmanaged.
The Salomon Brothers High Yield Market Index will replace the Solomon 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.
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:
Shareholder Fees Class A Class B Class C Class Y
(fees paid directly from Shares Shares Shares Shares
your investment) ----- ----- ----- -----
Maximum Sales Charge(Load)
Imposed on Purchases
(as a percentage
of offering price) 5.75% None None None
Maximum Deferred Sales
Charge (Load)(1) None(2) 5% 1% None
(as a percentage of
lesser of amount invested
or redemption value)
Annual Fund Operating
Expenses(3) Class A Class B Class C Class Y
(expenses that are Shares Shares Shares Shares
deducted from Fund assets) ------ ------ ------ ------
Management Fees 0.61% 0.61% 0.61% 0.61%
Distribution and
Service (12b-1) Fees 0.25% 1.00% 1.00% None
Other Expenses 0.20% 0.38% 0.31% 0.20%
Total Annual Fund
Operating Expenses 1.06% 1.99% 1.92% 0.81%
(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)Management Fees and Total Fund Operating Expenses have been restated to
reflect the change in management fees effective June 30, 1999; otherwise,
expense ratios are based on other Fund-level expenses of the Fund for the fiscal
year ended March 31, 2000. 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 A, Class B or Class
C shares 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:
If shares are redeemed
at end of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $677 $893 $1,126 $1,795
Class B Shares $602 $924 $1,173 $2,074(1)
Class C Shares $295 $603 $1,037 $2,243
Class Y Shares $ 83 $259 $ 450 $1,002
If shares are not redeemed
at end of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $677 $893 $1,126 $1,795
Class B Shares $202 $624 $1,073 $2,074(1)
Class C Shares $195 $603 $1,037 $2,243
Class Y Shares $ 83 $259 $ 450 $1,002
(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.
An Overview of the Fund
Waddell & Reed Advisors Municipal Bond Fund
Goal
(formerly United Municipal Bond Fund) seeks to provide income that is not
subject to Federal income tax.
Principal Strategy
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").
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 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; and
* 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.
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 other higher-yielding bonds held by
the Fund ("prepayment 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; and
* 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.
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 OF YEAR-BY-YEAR RETURNS
as of December 31, each year (%)
1990 5.63%
1991 13.15%
1992 9.53%
1993 14.30%
1994 -7.14%
1995 20.17%
1996 4.12%
1997 10.23%
1998 5.20%
1999 -5.50%
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 March 31,
2000 was 3.19%.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999 (%)
1 Year 5 Years 10 Years Life of Class(1)
Class A Shares of Municipal -9.52% 5.60% 6.23%
Bond Fund
Lehman Brothers Municipal Bond
Index -2.07% 6.92% 6.89%
Lipper General Municipal Debt
Funds Universe Average -4.16% 6.06% 6.14%
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 -4.16% 6.06% 6.14% -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 -4.16% 6.06% 6.14% -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 -4.16% 6.06% 6.14% -4.63%
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.
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.
Shareholder Fees Class A Class B Class C Class Y
(fees paid directly Shares Shares Shares Shares
from your investment) ------- ------- ------- -------
Maximum Sales Charge
(Load) Imposed on
Purchases (as a
percentage of
offering price) 4.25% None None None
Maximum Deferred
Sales Charge (Load)(1) None(2) 5% 1% None
(as a percentage of
lesser of amount
invested or redemption
value)
Annual Fund Operating
Expenses(3) Class A Class B Class C Class Y
(expenses that are Shares Shares Shares Shares
deducted from Fund assets) ------ ------ ------ ------
Management Fees 0.51% 0.51% 0.51% 0.51%
Distribution and Service
(12b-1) Fees 0.23% 1.00% 1.00% None
Other Expenses 0.11% 0.11% 0.11% 0.24%
Total Annual Fund
Operating Expenses 0.85% 1.62% 1.62% 0.75%
(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)Management Fees and Total Annual Fund Operating Expenses have been restated
to reflect the change in management fees effective June 30, 1999; otherwise,
expense ratios are based on other Fund-level expenses for the fiscal year ended
September 30, 1999, and for Class B and Class C, the expenses attributable to
each class that are anticipated for the current 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 A, Class B or Class
C shares 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:
If shares are redeemed
at end of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $508 $685 $876 $1,429
Class B Shares $565 $811 $981 $1,715(1)
Class C Shares $265 $511 $881 $1,922
Class Y Shares $ 77 $240 $417 $ 930
If shares are not
redeemed at end
of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $508 $685 $876 $1,429
Class B Shares $165 $511 $881 $1,715(1)
Class C Shares $165 $511 $881 $1,922
Class Y Shares $ 77 $240 $417 $ 930
(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.
An Overview of the Fund
Waddell & Reed Advisors Municipal High Income Fund
Goal
(formerly United Municipal High Income Fund) seeks to provide a high level of
income that is not subject to Federal income tax.
Principal Strategy
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 MIS) or
lower, including bonds rated below investment grade, junk bonds (rated BB and
lower by S&P and Ba and lower by MIS), 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 facility 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 of the security;
* the creditworthiness of the particular issuer or of the private company
involved; and
* 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. 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; and
* 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 High Income Fund is designed for investors seeking current income that
is primarily free from Federal income tax and that is higher than is normally
available with securities in the higher-rated categories, through a highly
diversified portfolio. The Fund is not suitable for all investors. You should
consider whether the Fund fits your particular investment objectives.
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 OF YEAR-BY-YEAR RETURNS
as of December 31, each year (%)
1990 7.19%
1991 11.67%
1992 10.15%
1993 13.19%
1994 -3.12%
1995 16.74%
1996 6.90%
1997 11.77%
1998 6.82%
1999 -5.20%
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 March
31, 2000 was 1.44%.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999 (%)
1 Year 5 Years 10 Years Life of Class(1)
Class A Shares of Municipal -9.22% 6.23% 6.96%
High Income Fund
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 -7.84%
High Income Fund
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 -4.06%
High Income Fund
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 -5.00% -4.46%
High Income Fund
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%
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.
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.
Shareholder Fees Class A Class B Class C Class Y
(fees paid directly from Shares Shares Shares Shares
your investment) ----- ----- ----- -----
Maximum Sales Charge (Load)
Imposed on Purchases
(as a percentage of
offering price) 4.25% None None None
Maximum Deferred Sales
Charge (Load)(1) None(2) 5% 1% None
(as a percentage of
lesser of amount
invested or redemption
value)
Annual Fund Operating
Expenses(3) Class A Class B Class C Class Y
(expenses that are Shares Shares Shares Shares
deducted from Fund assets) ------ ------ ------ ------
Management Fees 0.52% 0.52% 0.52% 0.52%
Distribution and
Service (12b-1) Fees 0.23% 1.00% 1.00% None
Other Expenses 0.14% 0.14% 0.14% 0.30%
Total Annual Fund
Operating Expenses 0.89% 1.66% 1.66% 0.82%
(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)Management Fees and Total Annual Fund Operating Expenses have been restated
to reflect the change in management fees effective June 30, 1999; otherwise,
expense ratios are based on other Fund-level expenses for the fiscal year ended
September 30, 1999, and for Class B and Class C, the expenses attributable to
each class that are anticipated for the current 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 A, Class B or Class
C shares 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:
If shares are redeemed
at end of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $512 $697 $ 897 $1,474
Class B Shares $569 $823 $1,002 $1,759(1)
Class C Shares $269 $523 $ 902 $1,965
Class Y Shares $ 84 $262 $455 $1,014
If shares are not
redeemed at end
of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $512 $697 $897 $1,474
Class B Shares $169 $523 $902 $1,759(1)
Class C Shares $169 $523 $902 $1,965
Class Y Shares $ 84 $262 $455 $1,014
(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.
An Overview of the Fund
Waddell & Reed Advisors Municipal Money Market Fund
Goal
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 A-1 or A-2 by S&P or
Prime-1 or Prime-2 by MIS, 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 AMT.
"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.
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; and
* 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.
Performance
Municipal Money Market Fund
The Fund commenced operations on ______________, 2000. Since this Fund has less
than one calendar year's performance, 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.
Shareholder Fees Class A Class B Class C
(fees paid directly from Shares Shares Shares
your investment) ------ ------ ------
Maximum Sales Charge (Load)
Imposed on Purchases
(as a percentage of
offering price) None None None
Maximum Deferred Sales
Charge (Load)(1) None 5% 1%
(as a percentage of
lesser of amount
invested or redemption
value)
Annual Fund Operating
Expenses(3) Class A Class B Class C
(expenses that are Shares Shares Shares
deducted from Fund assets) ------ ------ ------
Management Fees 0.40% 0.40% 0.40%
Distribution and
Service (12b-1) Fees None 1.00% 1.00%
Other Expenses % % %
Total Annual Fund
Operating Expenses % % %
(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)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 A, Class B or Class
C shares 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:
If shares are redeemed
at end of period: 1 Year 3 Years
Class A Shares $ $
Class B Shares $ $
Class C Shares $ $
If shares are not
redeemed at end
of period: 1 Year 3 Years
Class A Shares $ $
Class B Shares $ $
Class C Shares $ $
(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.
An Overview of the Fund
Waddell & Reed Advisors Cash Management
Goal
(formerly United Cash Management) 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 MIS, 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; and
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.
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.
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 OF YEAR-BY-YEAR RETURNS
as of December 31, each year (%)
1990 7.77%
1991 5.65%
1992 3.16%
1993 2.38%
1994 3.47%
1995 5.30%
1996 4.74%
1997 4.91%
1998 4.97%
1999 4.61%
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
as of December 31, 1999 (%)
1 Year 5 Years 10 Years
Life of Class(1)
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%
(1)Since September 9, 1999 for Class B shares and September 9, 1999 for Class C
shares.
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.
Shareholder Fees Class A Class B Class C
(fees paid directly from Shares Shares Shares
your investment) ------ ------ ------
Maximum Sales Charge (Load)
Imposed on Purchases
(as a percentage of
offering price) None None None
Maximum Deferred Sales
Charge (Load)(1) None 5% 1%
(as a percentage of
lesser of amount
invested or redemption
value)
Annual Fund Operating
Expenses(3) Class A Class B Class C
(expenses that are Shares Shares Shares
deducted from Fund assets) ------ ------ ------
Management Fees 0.40% 0.40% 0.40%
Distribution and
Service (12b-1) Fees None 1.00% 1.00%
Other Expenses 0.44% 0.44% 0.44%
Total Annual Fund
Operating Expenses 0.84% 1.84% 1.84%
(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)Management Fees and Total Annual Fund Operating Expenses have been restated
to reflect the change in management fees effective June 30, 1999; otherwise,
expense ratios are based on other Fund-level expenses of the Fund for the fiscal
year ended June 30, 1999 and for Class B and Class C, the expenses attributable
to each class that are anticipated for the current 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 A, Class B or Class
C shares 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:
If shares are redeemed
at end of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $ 86 $268 $ 466 $1,037
Class B Shares $587 $879 $1,095 $1,894(1)
Class C Shares $287 $579 $ 995 $2,159
If shares are not
redeemed at end
of period: 1 Year 3 Years 5 Years 10 Years
Class A Shares $ 86 $268 $466 $1,037
Class B Shares $187 $579 $995 $1,894(1)
Class C Shares $187 $579 $995 $2,159
(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.
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 any 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 with the sales proceeds.
By taking a temporary defensive position, the Fund may not achieve its
investment objective.
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, securities
rated BB and lower by S&P or Ba by MIS, 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; and/or
* 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.
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 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
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 own 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 MIS. 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; and/or
* 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.
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 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.
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 MIS; and/or
* 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. For example, the Fund may invest, to a lesser extent, 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. 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.
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; or
* hedge exposure to interest rate risk by investing in futures contracts and
options on futures contracts.
By taking a temporary defensive position, the Fund may not achieve its
investment objective.
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 facility or class of
facilities 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.
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; and
* 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 C by MIS,
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 MIS; and/or
* 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 (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 will typically invest 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.
Other municipal obligations include lease obligations of municipal authorities
or entities and participations in these obligations.
The Fund may invest up to ______% 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 by S&P or MIS; and/or
* 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; and
* 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 Investment Company Act of 1940, as amended
(the "1940 Act"). There is no guarantee that the Fund will achieve its goal.
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; and
* 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; and
* 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 Statement of Additional Information
("SAI") about the Fund's valuation procedures.
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 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.
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) will likely change as well.
* Financial risk is based on the financial situation of the issuer of the
security. To the extent a Fund invests in 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 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 each 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.
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, as described.
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.
General Comparison of Class A, Class B and Class C Shares
(Non-Money Market Funds)
Class A Class B Class C
* Initial sales * No initial sales * No initial sales
charge charge charge
* No deferred sales * Deferred sales * A 1% deferred
charge(1) charge on shares sales charge on
you sell within shares you sell
six years after within twelve
purchase months after
purchase
* Maximum * Maximum * Maximum
distribution and distribution and distribution and
service (12b-1) service (12b-1) service (12b-1)
fees of 0.25% fees of 1.00% fees of 1.00%
* For an investment * Converts to Class * Does not convert
of $2 million or A shares 8 years to Class A
more, only Class after the month shares, so annual
A shares are in which the expenses do not
available shares were decrease
purchased, thus
reducing 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
(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.
General Comparison of Class A, Class B and Class C Shares
Cash Management and Municipal Money Market Fund
Class A Class B Class C
* No initial sales * No initial sales * No initial sales
charge charge charge
* Funds Plus * Funds Plus * Funds Plus
Service optional Service required Service required
for direct for direct
investment investment
* Deferred sales * A 1% deferred
charge on shares sales charge on
you sell within shares you sell
six years within twelve
months
* No distribution * Maximum * Maximum
and service (12b- distribution and distribution and
1) fees service (12b-1) service (12b-1)
fees of 1.00% fees of 1.00%
* For an investment
of $2,000,000 or * Converts to Class * Does not convert
more only Class A A shares 8 years to Class A
shares are after the month shares, so annual
available in which the expenses do not
shares were decrease
purchased, thus
reducing future
annual expenses
Effective June 30, 2000, Cash Management Waddell & Reed Money Market C shares
are 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 Investment Company Act of 1940, as amended, 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 a class's fees 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.
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
Sales
Sales Charge Reallowance
Charge as to Dealers
as Approx. as
Percent Percent Percent
of of of
Size of Offering Amount Offering
Purchase Price Invested Price
-------- -------- ------- --------
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
(1)No sales charge is payable at the time of purchase on investments of $2
million or more, although for such investments a Fund may impose a CDSC of 1%
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.
For Government Securities Fund
Municipal Bond Fund
Municipal High Income Fund
Sales
Sales Charge Reallowance
Charge as to Dealers
as Approx. as
Percent Percent Percent
of of of
Size of Offering Amount Offering
Purchase Price Invested Price
-------- -------- ------- --------
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
(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%
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 the 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 Fund 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 except shares of Waddell &
Reed Advisors Cash Management (formerly United Cash Management), Waddell &
Reed Advisors Municipal Money Market Fund or Class A shares of W&R Funds
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 Waddell & Reed
Advisors Cash Management, Waddell & Reed Advisors Municipal Money Market Fund
or W&R Funds Money Market Fund, made during a thirteen-month period ("Letter
of Intent"); and
* Grouping purchases by certain related persons.
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;
* Investment advisors and financial planners who have entered into an agreement
for this purpose with the Distributor and who charge an advisory, consulting
or other fee for their services and buy shares for their own account or the
account of their clients; and Retirement Plans and deferred compensations
plans and trusts used to fund those Plans (including, for example, plans
qualified or created under sections 401(a), 403(b) or 457 of the Internal
Revenue Code); and
* 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 and
the purchase is made within 60 days of such redemption.
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 a 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
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. The CDSC is applied to the lesser of amount invested or
redemption value.
To keep your CDSC as low as possible, each time you place a request to redeem
shares, the Fund first redeems shares in your account not subject to a deferred
sales charge (including shares which represent the value of 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. 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.
Contingent Deferred Sales As % of Amount Subject to Charge
Charge on Shares Sold within
Year
1 5.0%
2 4.0%
3 3.0%
4 3.0%
5 2.0%
6 1.0%
7+ 0.0%
In the table, a "year" is a 12-month period. In applying the sales charge, all
purchases are considered to have been made on the first day of the month in
which the purchase was made.
For example, if a shareholder opens an account on December 15, 2000, then
redeems all Class B shares on December 12, 2001, 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 accelerated to the revised 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 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 or
employees of the Fund, WRIMCO, the Distributor or their affiliated companies,
financial advisors of Waddell & Reed, Inc. and 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.
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.
* 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.
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 Board of Directors.
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.
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, 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 Class A 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.
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
For Class A, Class B and Class 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 or for a corporation $10 million
(within
first
twelve
months)
For other investors Any amount
To Add to an Account Any amount
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
* 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.
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 Class Y
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.
* 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.
Special Requirements for Selling Shares
Account Type Special Requirements
Individual or The written instructions must
Joint Tenant be signed by all persons
required to sign for
transactions, exactly as their
names appear on the account.
Sole The written instructions must
Proprietorship be signed by the individual
owner of the business.
UGMA, UTMA The custodian must sign the
written instructions
indicating capacity as
custodian.
Retirement The written instructions must
Account 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 At least one person authorized
Organization by corporate resolution to act
on the account must sign the
written instructions.
Conservator, The written instructions must
Guardian or be signed by the person
Other Fiduciary properly authorized by court
order to act in the particular
fiduciary capacity.
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; or
* 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.
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, as applicable, of the Fund within forty-five 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 Waddell & Reed Advisors Fund
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.
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, 800-366-5465, 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 and W&R Funds; or
* 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 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 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, and
Municipal High Income Funds, 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 Services allow you to transfer money into your Fund account,
or between fund accounts, automatically. While Regular Investment Services 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 Services
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
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 High Income Fund II, daily. 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
preceeding 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. Dividends from a Fund's investment company taxable
income (which includes net short-term gains), if 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 alternative minimum tax.
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). An exchange of Fund shares for shares of any other fund in
the Waddell & Reed Advisors Funds or W&R Funds 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 ninety 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 forty-five 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 thirty 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 its portfolio would be affected. In that event, the Fund may decide
to reevaluate its investment goal and policies.
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 the 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.
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 and Target/United Funds 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 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 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
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, a former affiliate of
WRIMCO. 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.
Bryan J. Bailey is primarily responsible for the management of the Municipal
Bond Fund. Mr. Bailey has held his Fund responsibilities since June 14, 2000. He
is Vice President of WRIMCO and Vice President of the Fund. Mr. Bailey had
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
14, 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 WRIMCO since May 1987.
Mira Stevovich is primarily responsible for the management of Cash Management
and 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.
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 year
ended December 31, 1999 were 0.47%;
* 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, 1999 were 0.56%;
* 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 year ended March 31, 2000 were 0.47%;
* 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 year ended March 31, 2000 were 0.60%;
* 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, 1999 were 0.44%;
* 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, 1999 were 0.50%;
* for Municipal Money Market Fund at the annual rate of 0.40% of net assets;
and
* for Cash Management Fund at the annual rate of 0.40% of net assets.
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.
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 (other than for Cash
Management) 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.
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 December 31, 1999, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
For the fiscal year
ended December 31,
-----------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Class A Per-Share Data
Net asset value,
beginning of
period ........ $6.39 $6.32 $6.14 $6.34 $5.62
-------------------------
Income from investment operations:
Net investment
income...... 0.35 0.38 0.39 0.39 0.40
Net realized and
unrealized gain
(loss) on
investments. (0.42) 0.07 0.19 (0.20) 0.72
-------------------------
Total from investment
operations .... (0.07) 0.45 0.58 0.19 1.12
-------------------------
Less distributions
from net investment
income ........ (0.35) (0.38) (0.40)(0.39) (0.40)
-------------------------
Net asset value,
end of period . $5.97 $6.39 $6.32 $6.14 $6.34
=========================
Class A Ratios/Supplemental Data
Total return(2).. -1.08% 7.27% 9.77% 3.20% 20.50%
Net assets, end of
period (in
millions) ..... $501 $551 $524 $519 $563
Ratio of expenses to
average net assets 0.95% 0.84% 0.77% 0.77% 0.74%
Ratio of net investment
income to average
net assets .... 5.72% 5.88% 6.34% 6.34% 6.54%
Portfolio turnover
rate .......... 34.12% 33.87% 35.08% 55.74% 66.38%
(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.
Bond Fund
For a Class B share outstanding throughout the period:
For the
period
from
9/9/99(1)
to
12/31/99
-------
Class B Per-Share Data
Net asset value,
beginning of period $6.05
-----
Income from investment
operations:
Net investment income 0.10
Net realized and
unrealized loss
on investments... (0.08)
----
Total from investment
operations ........ 0.02
----
Less distributions from
net investment income (0.10)
----
Net asset value,
end of period ..... $5.97
====
Class B Ratios/Supplemental Data
Total return........ 0.30%
Net assets, end of
period (in
millions) ......... $2
Ratio of expenses to
average net assets 1.91%(2)
Ratio of net investment
income to average
net assets ........ 4.93%(2)
Portfolio turnover
rate .............. 34.12%(2)
(1)Commencement of operations.
(2)Annualized.
Bond Fund
For a Class C share outstanding throughout the period:
For the
period
from
9/9/99(1)
to
12/31/99
-------
Class C Per-Share Data
Net asset value,
beginning of period $6.05
----
Income from investment
operations:
Net investment income 0.10
Net realized and
unrealized loss
on investments... (0.09)
----
Total from investment
operations ........ 0.01
----
Less distributions from
net investment income (0.10)
----
Net asset value,
end of period ..... $5.96
====
Class C Ratios/Supplemental Data
Total return........ 0.13%
Net assets, end of
period (in
thousands) ........ $289
Ratio of expenses to
average net assets 1.98%(2)
Ratio of net investment
income to average
net assets ........ 4.87%(2)
Portfolio turnover
rate .............. 34.12%(2)
(1)Commencement of operations.
(2)Annualized.
Bond Fund
For a Class Y share outstanding throughout each period:
For the fiscal year For the
ended December 31, period from
-------------------------------- 6/19/95(1) to
1999 1998 1997 1996 12/31/95
----- ----- ----- ---- ---------
Class Y Per-Share Data
Net asset value,
beginning of period $6.39 $6.32 $6.14 $6.34 $6.11
----- ----- ----- ----- -----
Income from investment
operations:
Net investment income 0.40 0.39 0.42 0.40 0.21
Net realized and
unrealized gain (loss)
on investments... (0.45) 0.07 0.17 (0.20) 0.22
----- ----- ----- ----- -----
Total from investment
operations ........ (0.05) 0.46 0.59 0.20 0.43
----- ----- ----- ----- -----
Less distributions from
net investment income (0.37) (0.39) (0.41) (0.40) (0.20)
----- ----- ----- ----- -----
Net asset value,
end of period ..... $5.97 $6.39 $6.32 $6.14 $6.34
===== ===== ===== ===== =====
Class Y Ratios/Supplemental Data
Total return........ -0.81% 7.54% 9.91% 3.35% 7.20%
Net assets, end of
period (in
millions) ......... $2 $6 $5 $12 $3
Ratio of expenses to
average net assets 0.69% 0.61% 0.64% 0.62% 0.63%(2)
Ratio of net investment
income to average
net assets ........ 6.00% 6.10% 6.48% 6.52% 6.41%(2)
Portfolio turnover
rate .............. 34.12% 33.87% 35.08% 55.74% 66.38%(2)
1)Commencement of operations.
2)Annualized.
Global Bond Fund (formerly, High Income Fund II)
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' reports, along with the Fund's financial statements for the fiscal
year ended September 30, 2000, are included in the Fund's SAI, which is
available upon request.
For a Class A share outstanding throughout each period(1):
For the fiscal year ended September 30,
---------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Class A Per-Share Data
Net asset value,
beginning of
period ............ $4.12 $4.42 $4.14 $4.03
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... 0.35 0.37 0.36 0.35
Net realized and
unrealized gain
(loss) on
investments...... (0.24) (0.30) 0.28 0.11
----- ----- ----- ----- -----
Total from investment
operations ........ 0.11 0.07 0.64 0.46
----- ----- ----- ----- -----
Less dividends declared
from net investment
income ............ (0.35) (0.37) (0.36) (0.35)
----- ----- ----- ----- -----
Net asset value,
end of period ..... $3.88 $4.12 $4.42 $4.14
===== ===== ===== ===== =====
Class A Ratios/Supplemental Data
Total return(2)..... 2.66% 1.22% 16.20% 11.90%
Net assets, end of
period (in
millions) ......... $371 $416 $407 $368
Ratio of expenses to
average net assets 1.06% 0.96% 0.93% 0.95%
Ratio of net investment
income to average
net assets ........ 8.60% 8.26% 8.54% 8.60%
Portfolio turnover
rate .............. 46.17% 58.85% 64.38% 55.64%
1)On January 12, 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.
3)Annualized.
Global Bond Fund (formerly, High Income Fund II)
For a Class B share outstanding throughout the period:
For the
Period from
10/6/99(1) to
9/30/00
---------
Class B Per-Share Data
Net asset value,
beginning of
period $3.88
-----
Income from investment
operations:
Net investment
income
Net realized and
unrealized loss
on investments
-----
Total from investment
operations
-----
Less dividends declared
from net investment
income
-----
Net asset value,
end of period
=====
Class B Ratios/Supplemental Data
Total return
Net assets, end of
period (in
millions)
Ratio of expenses to
average net assets (2)
Ratio of net investment
income to average
net assets (2)
Portfolio turnover
rate (3)
1)Commencement of operations.
2)Annualized.
3)
Global Bond Fund (formerly, High Income Fund II)
For a Class C share outstanding throughout the period:
For the
Period from
10/6/99(1) to
9/30/00
---------
Class C Per-Share Data
Net asset value,
beginning of
period $3.88
-----
Income from investment
operations:
Net investment
income
Net realized and
unrealized loss
on investments
-----
Total from investment
operations
-----
Less dividends declared
from net investment
income
-----
Net asset value,
end of period
=====
Class C Ratios/Supplemental Data
Total return
Net assets, end of
period (in
thousands)
Ratio of expenses to
average net assets (2)
Ratio of net investment
income to average
net assets (2)
Portfolio turnover
rate (3)
(1)Commencement of operations.
(2)Annualized.
(3)
Global Bond Fund (formerly, High Income Fund II)
For a Class Y share outstanding throughout each period:
For the
For the fiscal year period
ended September 30, from 2/27/96(1)
-----------------------------------------
to
2000 1999 1998 1997
9/30/96
------- ------ ------ ------ --------
Class Y Per-Share Data
Net asset value,
beginning of period $3.88 $4.12 $4.42 $4.14 $4.15
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... 0.36 0.37 0.37 0.21
Net realized and
unrealized gain (loss)
on investments... (0.24) (0.30) 0.28 (0.01)
----- ----- ----- ----- -----
Total from investment
operations ........ 0.12 0.07 0.65 0.20
----- ----- ----- ----- -----
Less dividends declared
from net investment
income ............ (0.36) (0.37) (0.37) (0.21)
----- ----- ----- ----- -----
Net asset value,
end of period ..... $ $3.88 $4.12 $4.42 $4.14
===== ===== ===== ===== =====
Class Y Ratios/Supplemental Data
Total return........ % 2.95% 1.38% 16.38% 5.00%
Net assets, end of
period (in
millions) ......... $ $3 $2 $2 $2
Ratio of expenses
to average net
assets ............ % 0.77% 0.79% 0.77% 0.77%(2)
Ratio of net
investment income
to average net
assets ............ % 8.89% 8.43% 8.69% 8.83%(2)
Portfolio
turnover rate ..... % 46.17% 58.85% 64.38% 55.64%(2)
1)Commencement of operations.
2)Annualized.
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 year
ended March 31, 2000, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
For the fiscal year ended March 31,
-------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Class A Per-Share Data
Net asset value,
beginning of period $5.43 $5.46 $5.19 $5.32 $5.13
-------------------------
Income from investment
operations:
Net investment income 0.31 0.32 0.33 0.33 0.34
Net realized and unrealized
gain (loss) on
investments. (0.21) (0.03) 0.27 (0.13) 0.19
-------------------------
Total from investment
operations .... 0.10 0.29 0.60 0.20 0.53
-------------------------
Less dividends declared from
net investment income (0.31) (0.32) (0.33) (0.33) (0.34)
-------------------------
Net asset value,
end of period . $5.22 $5.43 $5.46 $5.19 $5.32
=========================
Class A Ratios/Supplemental Data
Total return(2).. 1.82% 5.44% 11.84% 3.75% 10.48%
Net assets, end
of period (in
millions) ..... $117 $134 $131 $129 $146
Ratio of expenses to
average net assets 1.12% 0.96% 0.89% 0.91% 0.83%
Ratio of net investment
income to average
net assets .... 5.77% 5.82% 6.14% 6.17% 6.34%
Portfolio turnover
rate .......... 26.78% 37.06% 35.18% 34.18% 63.05%
(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.
Government Securities Fund
For a Class B share outstanding throughout the period:
For the
period
from
10/4/99(1)
to
3/31/00
--------
Class B Per-Share Data
Net asset value,
beginning of period $5.25
----
Income from investment
operations:
Net investment
income........... 0.13
Net realized and
unrealized loss
on investments... (0.03)
----
Total from investment
operations ........ 0.10
----
Less dividends declared
from net investment
income ............ (0.13)
----
Net asset value,
end of period ..... $5.22
Class B Ratios/Supplemental Data
Total return........ 1.88%
Net assets, end of
period (in thousands) $599
Ratio of expenses
to average
net assets ........ 1.85%(2)
Ratio of net investment
income to average
net assets ........ 5.19%(2)
Portfolio turnover
rate .............. 26.78%(2)
(1)Commencement of operations.
(2)Annualized.
Government Securities Fund
For a Class C share outstanding throughout the period:
For the
period
from
10/8/99(1)
to
3/31/00
Class C Per-Share Data
Net asset value,
beginning of period $5.23
----
Income from investment
operations:
Net investment
income........... 0.12
Net realized and
unrealized loss
on investments... (0.01)
----
Total from investment
operations ........ 0.11
----
Less dividends declared
from net investment
income ............ (0.12)
----
Net asset value,
end of period ..... $5.22
Class C Ratios/Supplemental Data
Total return........ 2.08%
Net assets, end of
period (in thousands) $269
Ratio of expenses
to average net
assets ............ 2.07%(2)
Ratio of net investment
income to average
net assets ........ 4.98%(2)
Portfolio turnover
rate .............. 26.78%(2)
(1)Commencement of operations.
(2)Annualized.
Government Securities Fund
For a Class Y share outstanding throughout each period:
For the
For the fiscal year period
ended March 31, from 9/27/95(1)
------------------------- to
2000 1999 1998 1997 3/31/96
---- ---- ---- ---- --------
Class Y Per-Share Data
Net asset value,
beginning of period $5.43 $5.46 $5.19 $5.32 $5.33
---- ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... 0.33 0.33 0.34 0.34 0.17
Net realized and
unrealized gain
(loss) on
investments...... (0.21) (0.03) 0.27 (0.13) (0.01)
----- ----- ----- ----- -----
Total from investment
operations ........ 0.12 0.30 0.61 0.21 0.16
----- ----- ----- ----- -----
Less dividends declared
from net investment
income ............ (0.33) (0.33) (0.34) (0.34) (0.17)
----- ----- ----- ----- -----
Net asset value,
end of period ..... $5.22 $5.43 $5.46 $5.19 $5.32
===== ===== ===== ===== =====
Class Y Ratios/Supplemental Data
Total return........ 2.20% 5.71% 12.02% 3.99% 3.04%
Net assets, end of
period (in
millions) ......... $2 $2 $2 $1 $1
Ratio of expenses
to average net
assets ............ 0.75% 0.68% 0.66% 0.67% 0.60%(2)
Ratio of net
investment income
to average net
assets ............ 6.15% 6.10% 6.37% 6.41% 6.40%(2)
Portfolio
turnover rate ..... 26.78% 37.06% 35.18% 34.18% 63.05%(2)
(1)Commencement of operations.
(2)Annualized.
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 March 31, 2000, is included in the Fund's SAI, which is available upon
request.
For a Class A share outstanding throughout each period(1):
For the fiscal year ended March 31,
-----------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Class A Per-Share Data
Net asset value,
beginning of period $9.39 $10.04 $ 9.25 $9.09 $8.70
---- ---- ---- ---- ----
Income from investment
operations:
Net investment income 0.78 0.81 0.82 0.80 0.79
Net realized and
unrealized gain (loss)
on investments (0.84) (0.66) 0.79 0.16 0.40
---- ---- ---- ---- ----
Total from investment
operations (0.06) 0.15 1.61 0.96 1.19
---- ---- ---- ---- ----
Less dividends
from net
investment income (0.79) (0.80) (0.82) (0.80) (0.80)
---- ---- ---- ---- ----
Net asset value,
end of period . $8.54 $9.39 $10.04 $9.25 $9.09
===== ===== ===== ===== =====
Class A Ratios/Supplemental Data
Total return(2).. -0.65% 1.70% 18.03% 10.94% 14.16%
Net assets, end of period
(in millions) . $826 $1,009 $1,102 $983 $972
Ratio of expenses to average
net assets .... 1.04% 0.94% 0.84% 0.89% 0.85%
Ratio of net investment income
to average net assets 8.65% 8.44% 8.38% 8.68% 8.74%
Portfolio turnover rate 41.55% 53.19% 63.40% 53.17% 41.67%
(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.
High Income Fund
For a Class B share outstanding throughout the period:
For the
period
from
10/4/99(1)
to
3/31/00
--------
Class B Per-Share Data
Net asset value,
beginning of period $8.84
----
Income from investment
operations:
Net investment income 0.36
Net realized and
unrealized loss
on investments... (0.30)
----
Total from investment
operations ........ 0.06
----
Less dividends from
net investment
income ............ (0.36)
----
Net asset value,
end of period ..... $8.54
====
Class B Ratios/Supplemental Data
Total return........ 0.61%
Net assets, end of
period (in
millions) ......... $3
Ratio of expenses to
average net assets 1.96%(2)
Ratio of net investment
income to average
net assets ........ 7.79%(2)
Portfolio turnover
rate .............. 41.55%(2)
(1)Commencement of operations.
(2)Annualized.
High Income Fund
For a Class C share outstanding throughout the period:
For the
period
from
10/4/99(1)
to
3/31/00
--------
Class C Per-Share Data
Net asset value,
beginning of period $8.84
----
Income from investment
operations:
Net investment income 0.36
Net realized and
unrealized loss
on investments... (0.30)
----
Total from investment
operations ........ 0.06
----
Less dividends from
net investment
income ............ (0.36)
----
Net asset value,
end of period ..... $8.54
Class C Ratios/Supplemental Data
Total return........ 0.65%
Net assets, end of
period (in thousands) $404
Ratio of expenses to
average net assets 1.91%(2)
Ratio of net investment
income to average
net assets ........ 7.88%(2)
Portfolio turnover
rate .............. 41.55%(2)
(1)Commencement of operations.
(2)Annualized.
High Income Fund
For a Class Y share outstanding throughout each period:
For the
For the fiscal period
year ended March 31, from 1/4/96(1)
------------------------------------- to
2000 1999 1998 1997 3/31/96
------ ------ ------ ----- --------
Class Y Per-Share Data
Net asset value,
beginning of period $9.39 $10.04 $ 9.25 $9.10 $9.19
------ ------ ----- ----- -----
Income from investment
operations:
Net investment
income........... 0.81 0.83 0.82 0.81 0.20
Net realized and
unrealized gain (loss)
on investments... (0.84) (0.66) 0.79 0.15 (0.10)
------ ------ ----- ----- -----
Total from investment
operations ........ (0.03) 0.17 1.61 0.96 0.10
------ ------ ----- ----- -----
Less dividends
from net
investment income . (0.82) (0.82) (0.82) (0.81) (0.19)
------ ------ ----- ----- -----
Net asset value,
end of period ..... $8.54 $9.39 $10.04 $9.25 $9.10
====== ====== ===== ===== =====
Class Y Ratios/Supplemental Data
Total return........ -0.39% 1.90% 18.13% 11.07% 1.00%
Net assets, end of
period (in
millions) ......... $2 $2 $3 $3 $2
Ratio of expenses
to average net
assets ............ 0.79% 0.74% 0.77% 0.77% 0.80%(2)
Ratio of net
investment income
to average net
assets ............ 8.91% 8.62% 8.46% 8.78% 8.55%(2)
Portfolio
turnover rate ..... 41.55% 53.19% 63.40% 53.17% 41.67%(2)
(1)Commencement of operations.
(2)Annualized.
Municipal 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 yea
ended September 30, 1999 and the six months ended March 31, 2000, are included i
Fund's SAI, which is available upon request.
For a Class A share outstanding throughout each period(1):
For the six For the fiscal year ended September 30,
months ended ------------------------------------------
3/31/00 1999 1998 1997 1996 1995
----------- ------ ------ ------ ------ ------
Class A Per-Share Data
Net asset value,
beginning of period $6.90 $7.63 $7.47 $7.32 $7.25 $6.91
----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... 0.18 0.36 0.37 0.38 0.39 0.39
Net realized and
unrealized gain
(loss) on
investments...... (0.13) (0.61) 0.25 0.30 0.12 0.38
----- ----- ----- ----- ----- -----
Total from investment
operations ........ 0.05 (0.25) 0.62 0.68 0.51 0.77
----- ----- ----- ----- ----- -----
Less distributions:
From net investment
income........... (0.18) (0.37) (0.37) (0.37) (0.39) (0.39)
From capital gains (0.03) (0.11) (0.09) (0.16) (0.05) (0.00)
In excess of capital
gains............ (0.04) (0.00) (0.00) (0.00) (0.00) (0.04)
----- ----- ----- ----- ----- -----
Total distributions. (0.25) (0.48) (0.46) (0.53) (0.44) (0.43)
----- ----- ----- ----- ----- -----
Net asset value,
end of period ..... $6.70 $6.90 $7.63 $7.47 $7.32 $7.25
===== ===== ===== ===== ===== =====
Class A Ratios/Supplemental Data
Total return(2)..... 0.83% -3.46% 8.67% 9.77% 7.16% 11.51%
Net assets, end of
period (in
millions) ......... $774 $874 $997 $994 $997 $975
Ratio of expenses to
average net assets 0.90%(3) 0.79% 0.72% 0.67% 0.68% 0.65%
Ratio of net investment
income to average
net assets ........ 5.30%(3) 4.98% 4.95% 5.14% 5.23% 5.51%
Portfolio
turnover rate ..... 9.41% 30.93% 50.65% 47.24% 74.97% 70.67%
(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.
(3)Annualized.
Municipal Bond Fund
For a Class B share outstanding throughout the period:
For the
period from
10/5/99(1) to
3/31/00
---------
Class B Per-Share Data
Net asset value,
beginning of
period $6.87
-----
Income from investment
operations:
Net investment
income 0.15
Net realized and
unrealized loss
on investments (0.10)
-----
Total from investment
operations 0.05
-----
Less distributions:
From net investment
income (0.15)
From capital gains (0.03)
In excess of capital gains (0.04)
-----
Total distributions (0.22)
-----
Net asset value,
end of period $6.70
=====
Class B Ratios/Supplemental Data
Total return 0.78%
Net assets, end of
period (in
thousands) $421
Ratio of expenses to
average net assets 1.88%(2)
Ratio of net investment
income to average
net assets 4.34%(2)
Portfolio turnover
rate 9.41%(3)
1)Commencement of operations.
2)Annualized.
3)For the six months ended March 31, 2000.
Municipal Bond Fund
For a Class C share outstanding throughout the period:
For the
period from
10/7/99(1) to
3/31/00
---------
Class C Per-Share Data
Net asset value,
beginning of
period $6.87
-----
Income from investment
operations:
Net investment
income 0.15
Net realized and
unrealized loss
on investments (0.10)
-----
Total from investment
operations 0.05
-----
Less distributions:
From net investment
income (0.15)
From capital gains (0.03)
In excess of capital gains (0.04)
-----
Total distributions (0.22)
-----
Net asset value,
end of period $6.70
=====
Class C Ratios/Supplemental Data
Total return 0.78%
Net assets, end of
period (in
thousands) $202
Ratio of expenses to
average net assets 1.92%(2)
Ratio of net investment
income to average
net assets 4.30%(2)
Portfolio turnover
rate 9.41%(3)
(1)Commencement of operations.
(2)Annualized.
(3)For the six months ended March 31, 2000.
Municipal Bond Fund
For a Class Y share outstanding throughout each period:
For the
period
from
For the 12/30/98(1)
six months to
3/31/00 9/30/99
------ -------
Class Y Per-Share Data
Net asset value,
beginning of period $6.90 $7.41
----- -----
Income from investment
operations:
Net investment
income........... 0.19 0.28
Net realized and
unrealized loss
on investments... (0.14) (0.51)
----- -----
Total from investment
operations ........ 0.05 (0.23)
----- -----
Less distributions
From net investment
income........... (0.18) (0.28)
From capital gains (0.03) (0.00)
In excess of capital gains (0.04) (0.00)
----- -----
Total distributions. (0.25) (0.28)
Net asset value,
end of period ..... $6.70 $6.90
===== =====
Class Y Ratios/Supplemental Data
Total return........ 0.84% -3.21%
Net assets, end of
period (in
thousands) ........ $7,954 $2
Ratio of expenses
to average net
assets ............ 0.74%(2) 0.67%(2)
Ratio of net
investment income
to average net
assets ............ 5.47%(2) 5.08%(2)
Portfolio
turnover rate ..... 9.41% 30.93%(3)
1)Commencement of operations.
2)Annualized.
3)For the fiscal year ended September 30, 1999.
Municipal High Income Fund
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' reports, along with the Fund's financial statements for the fiscal
year ended September 30, 1999 and the six months ended March 31, 2000, are
included in the Fund's SAI, which is available upon request.
For a Class A share outstanding throughout each period(1):
For the six For the fiscal year ended September 30,
months ended--------------------------------------------
3/31/00 1999 1998 1997 1996 1995
-------- ------- ------ ------ ------ ------
Class A Per-Share Data
Net asset value,
beginning of
period ............ $5.19 $5.69 $5.55 $5.31 $5.27 $5.12
----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... 0.15 0.31 0.32 0.34 0.34 0.35
Net realized and
unrealized gain (loss)
on investments... (0.25) (0.37) 0.21 0.25 0.04 0.17
----- ----- ----- ----- ----- -----
Total from investment
operations ........ (0.10) (0.06) 0.53 0.59 0.38 0.52
----- ----- ----- ----- ----- -----
Less distributions:
Declared from net
investment income (0.15) (0.31) (0.32) (0.34) (0.34) (0.35)
From capital gains (0.00)(2) (0.13) (0.07) (0.01) (0.00) (0.00)
In excess of capital
gains............ (0.00)(2) (0.00) (0.00) (0.00) (0.00) (0.02)
----- ----- ----- ----- ----- -----
Total distributions. (0.15) (0.44) (0.39) (0.35) (0.34) (0.37)
----- ----- ----- ----- ----- -----
Net asset value, end
of period ......... $4.94 $5.19 $5.69 $5.55 $5.31 $5.27
===== ===== ===== ===== ===== =====
Class A Ratios/Supplemental Data
Total return(3)..... -1.82% -1.22% 9.88% 11.45% 7.40% 10.63%
Net assets, end of
period (in millions) $437 $510 $522 $474 $400 $383
Ratio of expenses to
average net assets 0.95%(4) 0.87% 0.82% 0.78% 0.81% 0.76%
Ratio of net investment
income to average
net assets ........ 6.03%(4) 5.59% 5.72% 6.19% 6.41% 6.75%
Portfolio turnover rate 10.60% 26.83% 35.16% 19.47% 26.91% 19.07%
(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.
(4)Annualized.
Municipal High Income Fund
For a class B share outstanding throughout the period:
For the
period
from
10/5/99(1)
to
3/31/00
--------
Class B Per-Share Data
Net asset value,
beginning of period $5.16
----
Income from investment
operations:
Net investment income 0.12
Net realized and
unrealized loss
on investments... (0.22)
----
Total from investment
operations ........ (0.10)
----
Less distributions:
Declared from net
investment income (0.12)
.From capital gains (0.00)(2)
In excess of
capital gains.... (0.00)(2)
-----
Total distributions. (0.12)
-----
Net asset value,
end of period ..... $4.94
=====
Class B Ratios/Supplemental Data
Total return........ -1.88%
Net assets, end of
period (in millions) $1
Ratio of expenses to
average net assets 1.96%(3)
Ratio of net investment
income to average
net assets ........ 5.10%(3)
Portfolio turnover
rate .............. 10.60%(4)
(1)Commencement of operations.
(2)Not shown due to rounding.
(3)Annualized.
(4)For the six months ended March 31, 2000.
Municipal High Income Fund
For a Class C share outstanding throughout the period:
For the
period
from
10/8/99(1)
to
3/31/00
--------
Class C Per-Share Data
Net asset value,
beginning of period $5.16
----
Income from investment
operations:
Net investment income 0.12
Net realized and
unrealized loss
on investments... (0.22)
----
Total from investment
operations ........ (0.10)
----
Less distributions:
Declared from net
investment income (0.12)
.From capital gains (0.00)(2)
In excess of
capital gains.... (0.00)(2)
-----
Total distributions. (0.12)
-----
Net asset value,
end of period ..... $4.94
=====
Class C Ratios/Supplemental Data
Total return........ -1.91%
Net assets, end of
period (in thousands) $331
Ratio of expenses to
average net assets 1.87%(3)
Ratio of net investment
income to average
net assets ........ 5.16%(3)
Portfolio turnover
rate .............. 10.60%(4)
(1)Commencement of operations.
(2)Not shown due to rounding.
(3)Annualized.
(4)For the six months ended March 31, 2000.
Municipal High Income Fund
For a Class Y share outstanding throughout each period:
For the six For the period For the period
months ended from 12/30/98(1) from 7/1/98(1)
3/31/00 to 9/30/99 to8/25/98
------------ ------------ --------------
Class Y Per-Share Data
Net asset value,
beginning of
period ............ $5.19 $5.65 $5.64
------ ----- -----
Income from investment
operations:
Net investment
income........... 0.15 0.24 0.05
Net realized and
unrealized gain (loss)
on investments... (0.25) (0.33) 0.01
----- ----- -----
Total from investment
operations ........ (0.10) (0.09) 0.06
----- ----- -----
Less distributions:
Declared from net
investment income (0.15) (0.24) (0.05)
From capital gains (0.00)(2) (0.13) (0.00)
In excess of capital
gains............ (0.00)(2) (0.00) (0.00)
----- ----- -----
Total distributions. (0.15) (0.37) (0.05)
----- ----- -----
Net asset value, end
of period ......... $4.94 $5.19 $5.65
===== ===== =====
Class Y Ratios/Supplemental Data
Total return........ -1.60% -1.53% 1.07%
Net assets, end of
period (in thousands) $2 $2 $0
Ratio of expenses to
average net assets 0.94%(3) 0.80%(3) 0.61%(3)
Ratio of net investment
income to average
net assets ........ 5.94%(3) 5.68%(3) 5.99%(3)
Portfolio turnover
rate .............. 10.60% 26.83%(4) 35.16%(3)
1)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.
2)Not shown due to rounding.
3)Annualized.
4)For the fiscal year ended September 30, 1999.
Cash Management
This information has been audited by Deloitte & Touche LLP, whose independent
auditors' reports, along with the Fund's financial statements for the fiscal
year ended June 30, 1999 and the six months 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):
For the six For the fiscal year ended June 30,
months ended--------------------------------------
12/31/99 1999 1998 1997 1996 1995
-------- ---- ---- ---- ---- ----
Class A Per-Share Data
Net asset value,
beginning of
period.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------
Net investment
income ...... 0.0241 0.0455 0.0484 0.0472 0.0487 0.0465
Less dividends
declared .... (0.0241)(0.0455)(0.0484)(0.0472) (0.0487)(0.0465)
------------------------------------
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... 2.47% 4.67% 4.93% 4.80% 5.01% 4.74%
Net assets, end of
period (in
millions) ... $800 $667 $533 $514 $402 $369
Ratio of expenses
to average net
assets ...... 0.83%(2) 0.83% 0.89% 0.87% 0.91% 0.97%
Ratio of net investment
income to average net
assets ...... 4.72%(2) 4.54% 4.84% 4.70% 4.89% 4.68%
1)On September 5, 1995, Fund shares outstanding were designated Class A shares.
2)Annualized.
Cash Management
For a Class B share outstanding throughout each period:
For the
period from
9/9/99(1) to
12/31/99
-----------
Class B Per-Share Data
Net asset value,
beginning of period $1.00
-------
Net investment income 0.0120
Less dividends declared (0.0120)
-------
Net asset value,
end of period .... $1.00
======
Class B Ratios/Supplemental Data
Total Return........ 1.21%
Net assets, end of
period (in millions) $3
Ratio of expenses to
average net assets 1.65%(2)
Ratio of net investment
income to average
net assets ....... 4.25%(2)
(1)Commencement of operations.
(2)Annualized.
Cash Management
For a Class C share outstanding throughout each period:
For the
period from
9/9/99(1) to
12/31/99
-----------
Class C Per-Share Data
Net asset value,
beginning of period $1.00
-------
Net investment income 0.0119
Less dividends declared (0.0119)
-------
Net asset value,
end of period .... $1.00
======
Class C Ratios/Supplemental Data
Total Return........ 1.20%
Net assets, end of
period (in thousands) $160
Ratio of expenses to
average net assets 1.81%(2)
Ratio of net investment
income to average
net assets ....... 4.13%(2)
(1)Commencement of operations.
(2)Annualized.
Waddell & Reed Advisors Funds
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
928 Grand Boulevard 6300 Lamar Avenue
Kansas City, Missouri 64141 P. O. Box 29217
Shawnee Mission, Kansas
Legal Counsel 66201-9217
Kirkpatrick & Lockhart LLP 913-236-2000
1800 Massachusetts Avenue, N.W. 888-WADDELL
Washington, D. C. 20036
Independent Auditors Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Boulevard Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment 913-236-2000
Management Company 888-WADDELL
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
913-236-2000 6300 Lamar Avenue
888-WADDELL P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
888-WADDELL
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
WADDELL & REED, INC.
6300 Lamar Avenue, P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
WADDELL & REED ADVISORS GLOBAL BOND FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
____________, 2000
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus
("Prospectus") for Waddell & Reed Advisors Global Bond Fund, Inc. (the
"Fund"), formerly, Waddell & Reed Advisors High Income Fund II, Inc., dated,
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....... 5
Investment Management and Other Services............ 39
Purchase, Redemption and Pricing of Shares.......... 45
Directors and Officers.............................. 62
Payments to Shareholders............................ 69
Taxes .............................................. 70
Portfolio Transactions and Brokerage................ 74
Other Information................................... 76
Appendix A.......................................... 78
Financial Statements ............................... 85
Waddell & Reed Advisors Global Bond Fund, Inc. is a mutual fund; an
investment that pools shareholders' money and invests it toward a specified
goal. In technical terms, the Fund is an open-end, diversified management
company organized as a Maryland corporation on May 8, 1986.
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 information in advertisements and sales materials.
The performance results shown are for periods prior to the changes in the
Fund's investment strategies and policies and during which the Fund sought to
achieve its goals by investing primarily in a diversified portfolio of high-
yield, high-risk, fixed-income securities.
Total Return
The total return is the overall change in the value of an investment over
a given period of time. An average annual total return quotation is computed
by finding the average annual compounded rates of return over the one-, five-,
and ten-year periods that would equate the initial amount invested to the
ending redeemable value. Standardized total return information is calculated
by assuming an initial $1,000 investment and, for Class A shares, deducting
the maximum sales load of 5.75%. All dividends and distributions are assumed
to be reinvested in shares of the applicable class at net asset value for the
class as of the day the dividend or distribution is paid. No sales load is
charged on reinvested dividends or distributions on Class A shares. The
formula used to calculate the total return for a particular class of the Fund
is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for the
periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to
have been invested. If the sales charge applicable to Class A shares were
reflected, it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of March
31, 2000, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
With Without
Sales Load Sales Load
Deducted Deducted
One year period from April 1, 1999 to
March 31, 2000: -6.73% -1.04%
Five-year period from April 1, 1995 to
March 31, 2000: 6.67% 7.94%
Ten-year period from April 1, 1990 to
March 31, 2000: 9.36% 10.01%
Prior to January 12, 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 March 31, 2000, which is the most recent
balance sheet included in this SAI, for the period since class inception on
October 4, 1999 to March 31, 2000 was -4.52%.
The cumulative total return quotation for Class B shares without the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class
inception on October 4, 1999 to March 31, 2000 was 0.31%.
The cumulative total return quotation for Class C shares with the maximum
deferred sales charge deducted as of March 31, 2000, which is the most recent
balance sheet included in this SAI, for the period since class inception on
October 4, 1999 to March 31, 2000 was -0.69%.
The cumulative total return quotation for Class C shares without the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class
inception on October 4, 1999 to March 31, 2000 was 0.28%.
The average annual total return quotation for Class Y shares as of March
31, 2000, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
Period from April 1, 1999 to
March 31, 2000: -0.75%
Period from February 27, 1996* to
March 31, 2000: 6.41%
*Date of inception.
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 return 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 March 31, 2000, the date of the most
recent balance sheet included in this SAI, is 8.75%. The yield for Class B
shares of the Fund computed according to the formula for the 30-day period
ended on March 31, 2000, the date of the most recent balance sheet included in
this SAI, is 8.60%. The yield for Class C shares of the Fund computed
according to the formula for the 30-day period ended on March 31, 2000, the
date of the most recent balance sheet included in this SAI, is 8.21%. The
yield for Class Y shares of the Fund computed according to the formula for the
30-day period ended on March 31, 2000, the date of the most recent balance
sheet included in this SAI, is 9.68%.
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 also may from time to time publish in
advertisements or sales material 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 a 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 goals. 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 goals. See
"Investment Restrictions and Limitations" for a listing of the fundamental and
non-fundamental (e.g., operating) investment restrictions and policies of the
Fund.
Securities - General
The Fund may invest in securities including common stock, preferred
stock, debt securities and convertible securities. Although common stocks and
other equity securities have a history of long-term growth in value, their
prices tend to fluctuate in the short term, particularly those of smaller
companies. The Fund may invest in preferred stock rated in any rating
category of the established rating services or, if unrated, judged by WRIMCO
to be of equivalent quality. Debt securities have varying levels of
sensitivity to changes in interest rates and varying degrees of quality. As a
general matter, however, when interest rates rise, the values of fixed-rate
securities fall and, conversely, when interest rates fall, the values of
fixed-rate debt securities rise. Similarly, long-term bonds are generally
more sensitive to interest rate changes than short-term bonds.
Lower quality debt securities (commonly called "junk bonds") are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than high-quality securities and may
decline significantly in periods of general economic difficulty. The market
for lower-rated debt securities may be thinner and less active than that for
higher-rated debt securities, which can adversely affect the prices at which
the former are sold. Adverse publicity and changing investor perceptions may
decrease the values and liquidity of lower-rated debt securities, especially
in a thinly traded market. Valuation becomes more difficult and judgment
plays a greater role in valuing lower-rated debt securities than with respect
to securities for which more external sources of quotations and last sale
information are available. Since the risk of default is higher for lower-
rated debt securities, WRIMCO's research and credit analysis are an especially
important part of managing securities of this type held by the Fund. WRIMCO
continuously monitors the issuers of lower-rated debt securities in the Fund's
portfolio in an attempt to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments. The Fund
may choose, at its expense or in conjunction with others, to pursue litigation
or otherwise exercise its rights as a security holder to seek to protect the
interests of security holders if it determines this to be in the best interest
of the Fund's shareholders.
The Fund may invest in debt securities rated in any rating category of
the established rating services, including securities rated in the lowest
category (securities rated D by Standard & Poor's ("S&P") and C by Moody's
Investors Service, Inc. ("MIS")). Debt securities rated D by S&P or C by MIS
are in payment default or are regarded as having extremely poor prospects of
ever attaining any real investment standing. Debt securities rated at least
BBB by S&P or Baa by MIS are considered to be investment grade debt
securities. Securities rated BBB or Baa may have speculative characteristics.
In addition, the Fund will treat unrated securities judged by WRIMCO to be of
equivalent quality to a rated security as having that rating.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from
time to time, and the Fund may retain a portfolio security whose rating has
been changed.
The Fund may 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). WRIMCO typically determines the maturity
of a bond that is subject to a put by reference to the put date and the
maturity of a callable bond by reference to its stated maturity.
The Fund may purchase debt securities whose principal amount at maturity
is dependent upon the performance of a specified equity security. The issuer
of such debt securities, typically an investment banking firm, is unaffiliated
with the issuer of the equity security to whose performance the debt security
is linked. Equity-linked debt securities differ from ordinary debt securities
in that the principal amount received at maturity is not fixed, but is based
on the price of the linked equity security at the time the debt security
matures. The performance of equity-linked debt securities depends primarily
on the performance of the linked equity security and may also be influenced by
interest rate changes. In addition, although the debt securities are
typically adjusted for diluting events such as stock splits, stock dividends
and certain other events affecting the market value of the linked equity
security, the debt securities are not adjusted for subsequent issuances of the
linked equity security for cash. Such an issuance could adversely affect the
price of the debt security. In addition to the equity risk relating to the
linked equity security, such debt securities are also subject to credit risk
with regard to the issuer of the debt security. In general, however, such
debt securities are less volatile than the equity securities to which they are
linked.
The Fund may invest in convertible securities. A convertible security is
a bond, debenture, note, preferred stock or other security that may be
converted into or exchanged for a prescribed amount of common stock of the
same or different issuer within a particular period of time at a specified
price or formula. Convertible securities generally have higher yields than
common stocks of the same or similar issuers, but lower yields than comparable
nonconvertible securities, are less subject to fluctuation in value than the
underlying stock because they have fixed income characteristics, and provide
the potential for capital appreciation if the market price of the underlying
common stock increases.
The value of a convertible security is influenced by changes in interest
rates, with investment value declining as interest rates increase and
increasing as interest rates decline. The credit standing of the issuer and
other factors also may have an effect on the convertible security's investment
value. A convertible security may be subject to redemption at the option of
the issuer at a price established in the security's offering document. If a
convertible security held by the Fund is called for redemption, the Fund will
be required to convert it into the underlying stock, sell it to a third party
or permit the issuer to redeem the security. Convertible securities are
typically issued by smaller capitalized companies whose stock prices may be
volatile. Thus, any of these actions could have an adverse effect on the
Fund's ability to achieve its investment objectives.
The Fund may also invest in a type of convertible preferred stock that
pays a cumulative, fixed dividend that is senior to, and expected to be in
excess of, the dividends paid on the common stock of the issuer. At the
mandatory conversion date, the preferred stock is converted into not more than
one share of the issuer's common stock at the "call price" that was
established at the time the preferred stock was issued. If the price per
share of the related common stock on the mandatory conversion date is less
than the call price, the holder of the preferred stock will nonetheless
receive only one share of common stock for each share of preferred stock (plus
cash in the amount of any accrued but unpaid dividends). At any time prior to
the mandatory conversion date, the issuer may redeem the preferred stock upon
issuing to the holder a number of shares of common stock equal to the call
price of the preferred stock in effect on the date of redemption divided by
the market value of the common stock, with such market value typically
determined one or two trading days prior to the date notice of redemption is
given. The issuer must also pay the holder of the preferred stock cash in an
amount equal to any accrued but unpaid dividends on the preferred stock. This
convertible preferred stock is subject to the same market risk as the common
stock of the issuer, except to the extent that such risk is mitigated by the
higher dividend paid on the preferred stock. The opportunity for equity
appreciation afforded by an investment in such convertible preferred stock,
however, is limited, because in the event the market value of the issuer's
common stock increases to or above the call price of the preferred stock, the
issuer may (and would be expected to) call the preferred stock for redemption
at the call price. This convertible preferred stock is also subject to credit
risk with regard to the ability of the issuer to pay the dividend established
upon issuance of the preferred stock. Generally, convertible preferred stock
is less volatile than the related common stock of the issuer.
Specific Securities and Investment Practices
Foreign Securities and Currencies
During normal market conditions, the Fund will invest primarily in
issuers in countries that are members of the Organization of Economic Co-
Operation and Development. These countries include: Australia, Austria,
Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece,
Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the
Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden,
Switzerland, Turkey, the United Kingdom and the United States. The Fund may
invest to a lesser degree in issuers located in other countries.
The Fund may invest in the securities of foreign issuers, including
depositary receipts. In general, depositary receipts are securities
convertible into and evidencing ownership of securities of foreign corporate
issuers, although depositary receipts may not necessarily be denominated in
the same currency as the securities into which they may be converted.
American depositary receipts, in registered form, are dollar-denominated
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. International depositary receipts and European
depositary receipts, in bearer form, are foreign receipts evidencing a similar
arrangement and are designed for use by non-U.S. investors and traders in non-
U.S. markets. Global depositary receipts are designed to facilitate the
trading of securities of foreign issuers by U.S. and non-U.S. investors and
traders.
WRIMCO believes that there are investment opportunities as well as risks
in investing in foreign securities. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy or each other in such matters
as gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Individual foreign
companies may also differ favorably or unfavorably from domestic companies in
the same industry. Foreign currencies may be stronger or weaker than the U.S.
dollar or than each other. Thus, the value of securities denominated in or
indexed to foreign currencies, and of dividends and interest from such
securities, can change significantly when foreign currencies strengthen or
weaken relative to the U.S. dollar. WRIMCO believes that the Fund's ability
to invest a substantial portion of its assets abroad might enable it to take
advantage of these differences and strengths where they are favorable.
However, foreign securities and foreign currencies involve additional
significant risks, apart from the risks inherent in U.S. investments. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable
to those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial conditions and
operations. In addition, the costs of foreign investing, including
withholding taxes, brokerage commissions and custodial costs, are generally
higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal
rights in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse
to the interests of U.S. investors, including the possibility of expropriation
or nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into
U.S. dollars, or other government intervention. There may be greater
possibility of default by foreign governments or government-sponsored
enterprises. Investments in foreign countries also involve a risk of local
political, economic, or social instability, military action or unrest, or
adverse diplomatic developments. There is no assurance that WRIMCO will be
able to anticipate these potential events or counter their effects.
The considerations noted above generally are intensified in developing
countries. A developing country is a nation that, in WRIMCO's opinion, is
likely to experience long-term gross domestic product growth above that
expected to occur in the United States, the United Kingdom, France, Germany,
Italy, Japan and Canada. Developing countries may have relatively unstable
governments, economies based on only a few industries and securities markets
that trade a small number of securities.
Certain foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The Fund could also be adversely affected by the conversion of certain
European currencies into the euro. This conversion, which is underway, is
scheduled to be completed in 2002. However, problems with the conversion
process and delays could increase volatility in world capital markets and
affect European capital markets in particular.
The Fund may purchase and sell foreign currency and invest in foreign
currency deposits, and may enter into forward currency contracts. The Fund
may incur a transaction charge in connection with the exchange of currency.
Currency conversion involves dealer spreads and other costs, although
commissions are not usually charged. See "Options, Futures and Other
Strategies - Forward Currency Contracts."
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.
Common Stocks
As a fundamental policy, the Fund will not purchase, or otherwise
voluntarily acquire, any common stocks unless, after such purchase or
acquisition, not more than 20% of the value of its total assets would be
invested in common stocks. This 20% limit includes common stocks acquired on
conversion of convertible securities, on exercise of warrants or call options,
or in any other voluntary manner. It does not include premiums paid or
received in connection with put or call options, or the amount of any margin
deposits as to options or futures contracts. If the Fund is invested up to
20% in common stocks, it may still purchase or sell futures and options
relating to common stocks. The common stocks that the Fund purchases will be
selected to try to achieve either a combination of the Fund's primary and
secondary goals, in which case they will be dividend-paying, or its secondary
goal, in which case they may not be dividend-paying; however, the Fund does
not intend to invest more than 10% of its total assets in non-dividend-paying
common stocks.
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 prices 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) securities for which market quotations are not readily available;
(4) bank deposits, unless they are payable at principal amount plus
accrued interest on demand or within seven days after demand;
(5) securities involved in swap, cap, floor and collar transactions;
(6) non-government stripped fixed-rate mortgage-backed securities; and
(7) over-the-counter ("OTC") options and their underlying collateral.
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, currencies, precious metals
or other commodities, 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, currency or other instrument to which they are indexed and
may also be influenced by interest rate changes in the United States and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security and their values may decline
substantially if the issuer's creditworthiness deteriorates. Indexed
securities may be more volatile than the underlying investments.
Gold-indexed securities, for example, typically provide for a maturity
value that depends on the price of gold, resulting in a security whose price
tends to rise and fall together with gold prices. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their maturity
value may increase when the specified currency value increases, resulting in a
security that performs similarly to a foreign-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each other.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government agencies. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
Investment Company Securities
The Fund may purchase securities of closed-end investment companies. As
a shareholder in an investment company, the Fund would bear its pro rata share
of that investment company's expenses, which could result in duplication of
certain fees, including management and administrative fees.
Lending Securities
Securities loans may be made on a short-term or long-term basis for the
purpose of increasing the Fund's income. If the Fund lends securities, the
borrower pays the Fund an amount equal to the dividends or interest on the
securities that the Fund would have received if it had not lent the
securities. Under the Fund's current securities lending procedures, the Fund
may lend securities only to broker-dealers and financial institutions deemed
creditworthy by WRIMCO.
Any securities loan that the Fund makes must be collateralized in
accordance with applicable regulatory requirements (the "Guidelines"). At the
time of each loan, the Fund must receive collateral equal to no less than 100%
of the market value of the securities loaned. Under the present Guidelines,
the collateral must consist of cash, U.S. Government securities or bank
letters of credit, at least equal in value to the market value of the
securities lent on each day that the loan is outstanding. If the market value
of the securities lent exceeds the value of the collateral, the borrower must
add more collateral so that it at least equals the market value of the
securities lent. If the market value of the securities decreases, the
borrower is entitled to return of the excess collateral.
There are two methods of receiving compensation for making loans. The
first is to receive a negotiated loan fee from the borrower. This method is
available for all three types of collateral. The second method, which is not
available when letters of credit are used as collateral, is for the Fund to
receive interest on the investment of the cash collateral or to receive
interest on the U.S. Government securities used as collateral. Part of the
interest received in either case may be shared with the borrower.
The letters of credit that the Fund may accept as collateral are
agreements by banks (other than the borrowers of the Fund's securities),
entered into at the request of the borrower and for its account and risk,
under which the banks are obligated to pay to the Fund, while the letter is in
effect, amounts demanded by the Fund if the demand meets the terms of the
letter. The Fund's right to make this demand secures the borrower's
obligations to it. The terms of any such letters and the creditworthiness of
the banks providing them (which might include the Fund's custodian bank) must
be satisfactory to the Fund. The Fund will make loans only under rules of the
NYSE, which presently require the borrower to give the securities back to the
Fund within five business days after the Fund gives notice to do so. If the
Fund loses its voting rights on securities loaned, it will have the securities
returned to it in time to vote them if a material event affecting the
investment is to be voted on. The Fund may pay reasonable finder's,
administrative and custodian fees in connection with loans of securities.
Some, but not all, of these rules are necessary to meet requirements of
certain laws relating to securities loans. These rules will not be changed
unless the change is permitted under these requirements. These requirements
do not, however, cover the present rules, which may be changed without
shareholder vote, as to: (1) whom securities may be loaned, (2) the
investment of cash collateral, or (3) voting rights.
There may be risks of delay in receiving additional collateral from the
borrower if the market value of the securities loaned increases, as well as
risks of delay in recovering the securities loaned or even loss of rights in
the collateral should the borrower of the securities fail financially.
Money Market Instruments
Money market instruments are high-quality, short-term debt instruments
that present minimal credit risk. They may include U.S. Government
securities, commercial paper and other short-term corporate obligations, and
certificates of deposit and other financial institution obligations. These
instruments may carry fixed or variable interest rates.
Mortgage-Backed and Asset-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities represent direct
or indirect participations in, or are secured by and payable from, mortgage
loans secured by real property and include single- and multi-class pass-
through securities and collateralized mortgage obligations. Multi-class pass-
through securities and collateralized mortgage obligations are collectively
referred to in this SAI as "CMOs." Some CMOs are directly supported by other
CMOs, which in turn are supported by mortgage pools. Investors typically
receive payments out of the interest and principal on the underlying
mortgages. The portions of the payments that investors receive, as well as
the priority of their rights to receive payments, are determined by the
specific terms of the CMO class.
The U.S. Government mortgage-backed securities in which the Fund may
invest include mortgage-backed securities issued or guaranteed as to the
payment of principal and interest (but not as to market value) by Ginnie Mae,
Fannie Mae or Freddie Mac. Other mortgage-backed securities are issued by
private issuers, generally originators of and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers and special purpose entities. Payments of principal and interest (but
not the market value) of such private mortgage-backed securities may be
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. Government or one of its
agencies or instrumentalities, or they may be issued without any government
guarantee of the underlying mortgage assets but with some form of non-
government credit enhancement. These credit enhancements do not protect
investors from changes in market value.
The Fund may purchase mortgage-backed securities issued by both
government and non-government entities such as banks, mortgage lenders, or
other financial institutions. Other types of mortgage-backed securities will
likely be developed in the future, and the Fund may invest in them if 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, interest-only ("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, principal-only ("PO")
classes are entitled to receive all or a portion of the principal payments,
but none of the interest, from the underlying mortgage assets. PO classes are
purchased at substantial discounts from par, and the yield to investors will
be reduced if principal payments are slower than expected. IOs, POs and other
CMOs involve special risks, and evaluating them requires special knowledge.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types
of real and personal property and receivables from revolving credit (credit
card) agreements. Such assets are securitized through the use of trusts or
special purpose corporations. Payments or distributions of principal and
interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present. The value of asset-backed securities may also depend on the
creditworthiness of the servicing agent for the loan pool, the originator of
the loans or the financial institution providing the credit enhancement.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities
differ from those of traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other obligations generally may be prepaid at any time.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. Generally, however,
prepayments on fixed-rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Similar factors apply to prepayments on asset-backed securities, but the
receivables underlying asset-backed securities generally are of a shorter
maturity and thus are likely to experience substantial prepayments. Such
securities, however, often provide that for a specified time period the
issuers will replace receivables in the pool that are repaid with comparable
obligations. If the issuer is unable to do so, repayment of principal on the
asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the servicer and the time the issuer makes the payments
on the mortgage-backed securities, and this delay reduces the effective yield
to the holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and
the associated average life assumption. The average life of pass-through
pools varies with the maturities of the underlying mortgage loans. A pool's
term may be shortened by unscheduled or early payments of principal on the
underlying mortgages. Because prepayment rates of individual pools vary
widely, it is not possible to predict accurately the average life of a
particular pool. In the past, a common industry practice has been to assume
that prepayments on pools of fixed-rate 30-year mortgages would result in a
12-year average life for the pool. At present, mortgage pools, particularly
those with loans with other maturities or different characteristics, are
priced on an assumption of average life determined for each pool. In periods
of declining interest rates, the rate of prepayment tends to increase, thereby
shortening the actual average life of a pool of mortgage-related securities.
Conversely, in periods of rising interest rates, the rate of prepayment tends
to decrease, thereby lengthening the actual average life of the pool. Changes
in the rate or "speed" of these payments can cause the value of the mortgage-
backed securities to fluctuate rapidly. However, these effects may not be
present, or may differ in degree, if the mortgage loans in the pools have
adjustable interest rates or other special payment terms, such as a prepayment
charge. Actual prepayment experience may cause the yield of mortgage-backed
securities to differ from the assumed average life yield.
The market for privately issued mortgage-backed and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specifically structured in a
manner that provides any of a wide variety of investment characteristics, such
as yield, effective maturity and interest rate sensitivity. As market
conditions change, however, and especially during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of some CMO
classes and the ability of the structure to provide the anticipated investment
characteristics may be reduced. These changes can result in volatility in the
market value and, in some instances, reduced liquidity of the CMO class.
Options, Futures and Other Strategies
General. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, forward currency
contracts, swaps, caps, floors, collars, indexed securities and other
derivative instruments (collectively, "Financial Instruments") to attempt to
enhance income or yield or to attempt to hedge the Fund's investments. The
strategies described below may be used in an attempt to manage the Fund's
foreign currency exposure as well as other risks of the Fund's investments
that can affect fluctuation in its net asset value.
Generally, the Fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, the Fund will only purchase or
sell a particular Financial Instrument if the Fund is authorized to invest in
the type of asset by which the return on, or value of, the Financial
Instrument is primarily measured. Since the Fund is authorized to invest in
foreign securities, it may purchase and sell foreign currency derivatives.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential declines in the value of one
or more investments held in the Fund's portfolio. Thus, in a short hedge the
Fund takes a position in a Financial Instrument whose price is expected to
move in the opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge the Fund takes a position in a Financial Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not
own a corresponding security and, therefore, the transaction does not relate
to a security the Fund owns. Rather, it relates to a security that the Fund
intends to acquire. If the Fund does not complete the hedge by purchasing the
security it anticipated purchasing, the effect on the Fund's portfolio is the
same as if the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Financial Instruments on indices,
in contrast, generally are used to attempt to hedge against price movements in
market sectors in which the Fund has invested or expects to invest. Financial
Instruments on debt securities may be used to hedge either individual
securities or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several exchanges upon
which they are traded and the Commodity Futures Trading Commission (the
"CFTC"). In addition, the Fund's ability to use Financial Instruments will be
limited by tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below,
WRIMCO expects to discover additional opportunities in connection with
Financial Instruments and other similar or related techniques. These new
opportunities may become available as WRIMCO develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
Financial Instruments or other techniques are developed. WRIMCO may utilize
these opportunities to the extent that they are consistent with the Fund's
goals and permitted by the Fund's investment limitations and applicable
regulatory authorities. The Fund might not use any of these strategies, and
there can be no assurance that any strategy used will succeed. The Fund's
Prospectus or SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of the Fund and may involve a
small investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities 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 indices will depend on the degree of
correlation between price movements in the index and price movements in the
securities being hedged.
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match the Fund's current or anticipated investments exactly. The
Fund may invest in options and futures contracts based on securities with
different issuers, maturities, or other characteristics from the securities in
which it typically invests, which involves a risk that the options or futures
position will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily
price fluctuation limits or trading halts. The Fund may purchase or sell
options and futures contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to attempt to
compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price
changes in the Fund's options or futures positions are poorly correlated with
its other investments, the positions may fail to produce anticipated gains or
result in losses that are not offset by gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable
price movements. However, such strategies can also reduce opportunity for
gain by offsetting the positive effect of favorable price movements. For
example, if the Fund entered into a short hedge because WRIMCO projected a
decline in the price of a security in the Fund's portfolio, and the price of
that security increased instead, the gain from that increase might be wholly
or partially offset by a decline in the price of the Financial Instrument.
Moreover, if the price of the Financial Instrument declined by more than the
increase in the price of the security, the Fund could suffer a loss. In
either such case, the Fund would have been in a better position had it not
attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties
(i.e., Financial Instruments other than purchased options). If the Fund were
unable to close out its positions in such Financial Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair the
Fund's ability to sell a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time.
(5) The Fund's ability to close out a position in a Financial Instrument
prior to expiration or maturity depends on the existence of a liquid secondary
market or, in the absence of such a market, the ability and willingness of the
other party to the transaction (the "counterparty") to enter into a
transaction closing out the position. Therefore, there is no assurance that
any position can be closed out at a time and price that is favorable to the
Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will
comply with SEC guidelines regarding cover for these instruments and will, if
the guidelines so require, set aside cash or liquid assets in an account with
its custodian in the prescribed amount as determined daily. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies or other options, futures
contracts or forward contracts, or (2) cash and liquid assets with a value,
marked-to-market daily, sufficient to cover its potential obligations to the
extent not covered as provided in (1) above.
Assets used as cover or held in a segregated 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 segregated accounts could
impede portfolio management or the Fund's ability to meet redemption requests
or other current obligations.
Options. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon
price during the option period. A put option gives the purchaser the right to
sell, and obligates the writer to buy, the underlying investment at the
agreed-upon price during the option period. Purchasers of options pay an
amount, known as a premium, to the option writer in exchange for the right
under the option contract.
The purchase of call options can serve as a long hedge, and the purchase
of put options can serve as a short hedge. Writing put or call options can
enable the Fund to enhance income or yield by reason of the premiums paid by
the purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the
option, minus the premium received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
appreciates to a price higher than the exercise price of the call option, it
can be expected that the option will be exercised and the Fund will be
obligated to sell the security or currency at less than its market value. If
the call option is an OTC option, the securities or other assets used as cover
would be considered illiquid to the extent described under "Illiquid
Investments."
Writing put options can serve as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be
obligated to purchase the security or currency at more than its market value.
If the put option is an OTC option, the securities or other assets used as
cover would be considered illiquid to the extent described under "Illiquid
Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised
have no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, the Fund may terminate a position in a put
or call option it had purchased by writing an identical put or call option;
this is known as a closing sale transaction. Closing transactions permit the
Fund to realize profits or limit losses on an option position prior to its
exercise or expiration.
A type of put that the Fund may purchase is an "optional delivery standby
commitment," which is entered into by parties selling debt securities to the
Fund. An optional delivery standby commitment gives the Fund the right to
sell the security back to the seller on specified terms. This right is
provided as an inducement to purchase the security.
Risks of Options on Securities. Options offer large amounts of leverage,
which will result in the Fund's net asset value being more sensitive to
changes in the value of the related instrument. The Fund may purchase or
write both exchange-traded and OTC options. Exchange-traded options in the
United States are issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect, guarantees completion
of every exchange-traded option transaction. In contrast, OTC options are
contracts between the Fund and its counterparty (usually a securities dealer
or a bank) with no clearing organization guarantee. Thus, when the Fund
purchases an OTC option, it relies on the counterparty from whom it purchased
the option to make or take delivery of the underlying investment upon exercise
of the option. Failure by the counterparty to do so would result in the loss
of any premium paid by the Fund as well as the loss of any expected benefit of
the transaction.
The Fund's ability to establish and close out positions in exchange-
listed options depends on the existence of a liquid market. However, there
can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating directly
with the counterparty, or by a transaction in the secondary market if any such
market exists. There can be no assurance that the Fund will in fact be able
to close out an OTC option position at a favorable price prior to expiration.
In the event of insolvency of the counterparty, the Fund might be unable to
close out an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would
be unable to sell the investment used as cover for the written option until
the option expires or is exercised.
Options on Indices. Puts and calls on indices 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 Indices. The risks of investment in options on
indices may be greater than options on securities. Because index options are
settled in cash, when the Fund writes a call on an index it cannot provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. The Fund can offset some of the risk of writing a call
index option by holding a diversified portfolio of securities similar to those
on which the underlying index is based. However, the Fund cannot, as a
practical matter, acquire and hold a portfolio containing exactly the same
securities as underlie the index and, as a result, bears a risk that the value
of the securities held will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from
a risk standpoint because of the "timing risk" inherent in writing index
options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund as the call writer will
not learn that the Fund has been assigned until the next business day at the
earliest. The time lag between exercise and notice of assignment poses no
risk for the writer of a covered call on a specific underlying security, such
as common stock, because there the writer's obligation is to deliver the
underlying security, not to pay its value as of a fixed time in the past. So
long as the writer already owns the underlying security, it can satisfy its
settlement obligations by simply delivering it, and the risk that its value
may have declined since the exercise date is borne by the exercising holder.
In contrast, even if the writer of an index call holds securities that exactly
match the composition of the underlying index, it will not be able to satisfy
its assignment obligations by delivering those securities against payment of
the exercise price. Instead, it will be required to pay cash in an amount
based on the closing index value on the exercise date. By the time it learns
that it has been assigned, the index may have declined, with a corresponding
decline in the value of its portfolio. This "timing risk" is an inherent
limitation on the ability of index call writers to cover their risk exposure
by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay
the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size and
strike price, the terms of OTC options (options not traded on exchanges)
generally are established through negotiation with the other party to the
option contract. While this type of arrangement allows the Fund great
flexibility to tailor the option to its needs, OTC options generally involve
greater risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
Generally, OTC foreign currency options used by the Fund are European-
style options. This means that the option is only exercisable immediately
prior to its expiration. This is in contrast to American-style options, which
are exercisable at any time prior to the expiration date of the option.
Futures Contracts and Options Thereon. The purchase of futures or call
options on futures 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
indices. 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 strategies can be used to manage the average
duration of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten
the average duration of the Fund's fixed-income portfolio, the Fund may sell a
debt futures contract or a call option thereon, or purchase a put option on
that futures contract. If WRIMCO wishes to lengthen the average duration of
the Fund's fixed-income portfolio, the Fund may buy a debt futures contract or
a call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial
margin" in an amount generally equal to 10% or less of the contract value.
Margin must also be deposited when writing a call or put option on a futures
contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not
represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to the Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin payment, and initial
margin requirements might be increased generally in the future by regulatory
action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund
purchases or sells a futures contract or writes a call or put option thereon,
it is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If the Fund has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a
time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to
the instrument purchased or sold. Positions in futures and options on futures
may be closed only on an exchange or board of trade that provides a secondary
market. However, there can be no assurance that a liquid secondary market
will exist for a particular contract at a particular time. In such event, it
may not be possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or an option on a futures
contract can vary from the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price beyond the limit. Daily
price limits do not limit potential losses because prices could move to the
daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the futures contract or option or to
maintain liquid assets in an account.
Risk 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 the 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 future contracts through offsetting
transactions, which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of general interest rate, currency exchange
rate or stock market trends by WRIMCO may still not result in a successful
transaction. WRIMCO may be incorrect in its expectations as to the extent of
various interest rate, currency exchange rate or stock market movements or the
time span within which the movements take place.
Index Futures. The risk of imperfect correlation between movements in
the price of an index futures and movements in the price of the securities
that are the subject of the hedge increases as the composition of the Fund's
portfolio diverges from the securities included in the applicable index. The
price of the index futures may move more than or less than the price of the
securities being hedged. If the price of the index futures moves less than
the price of the securities that are the subject of the hedge, the hedge will
not be fully effective but, if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position than
if it had not hedged at all. If the price of the securities being hedged has
moved in a favorable direction, this advantage will be partially offset by the
futures contract. If the price of the futures contract moves more than the
price of the securities, the Fund will experience either a loss or a gain on
the futures contract that will not be completely offset by movements in the
price of the securities that are the subject of the hedge. To compensate for
the imperfect correlation of movements in the price of the securities being
hedged and movements in the price of the index futures, the Fund may buy or
sell index futures in a greater dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the prices of such
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 its common stocks 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 contracts 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 indices 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 contracts that is not offset by a reduction in the price
of the securities it had anticipated purchasing.
Foreign Currency Hedging Strategies--Special Considerations. The Fund
may use options and futures contracts on foreign currencies (including the
euro), as described above, and forward currency contracts, as described below,
to attempt to hedge against movements in the values of the foreign currencies
in which the Fund's securities are denominated or to attempt to enhance income
or yield. Currency hedges can protect against price movements in a security
that the Fund owns or intends to acquire that are attributable to changes in
the value of the currency in which it is denominated. Such hedges do not,
however, protect against price movements in the securities that are
attributable to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no Financial Instruments on that currency are available or such
Financial Instruments are more expensive than certain other Financial
Instruments. In such cases, the Fund may seek to hedge against price
movements in that currency by entering into transactions using Financial
Instruments on another currency or a basket of currencies, the values of which
WRIMCO believes will have a high degree of positive correlation to the value
of the currency being hedged. The risk that movements in the price of the
Financial Instrument will not correlate perfectly with movements in the price
of the currency subject to the hedging transaction is magnified when this
strategy is used.
The value of Financial Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Financial
Instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions
in the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is
a global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain
open, significant price and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the Financial Instruments
until they reopen.
Settlement of transactions involving foreign currencies might be required
to take place within the country issuing the underlying currency. Thus, the
Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
Forward Currency Contracts. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time of the forward
currency contract. These forward currency contracts are traded directly
between currency traders (usually large commercial banks) and their customers.
Such transactions may serve as long hedges; for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges; for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security,
dividend or interest payment denominated in a foreign currency.
The Fund may also use forward currency contracts to hedge against a
decline in the value of existing investments denominated in foreign currency.
For example, if the Fund owned securities denominated in euros, it could enter
into a forward currency contract to sell euros in return for U.S. dollars to
hedge against possible declines in the euro's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security
values caused by other factors. The Fund could also hedge the position by
selling another currency expected to perform similarly to the euro. This type
of hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield or efficiency, but generally would not hedge currency
exposure as effectively as a simple hedge into U.S. dollars. Proxy hedges may
result in losses if the currency used to hedge does not perform similarly to
the currency in which the hedged securities are denominated.
The Fund also may use forward currency contracts to attempt to enhance
income or yield. The Fund could use forward currency contracts to increase
its exposure to foreign currencies that WRIMCO believes might rise in value
relative to the U.S. dollar, or shift its exposure to foreign currency
fluctuations from one country to another. For example, if the Fund owned
securities denominated in a foreign currency and WRIMCO believed that currency
would decline relative to another currency, it might enter into a forward
currency contract to sell an appropriate amount of the first foreign currency,
with payment to be made in the second foreign currency.
The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When the Fund enters into a forward currency contract, it relies on
the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result
in the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward
currency contracts only by negotiating directly with the counterparty. Thus,
there can be no assurance that the Fund will in fact be able to close out a
forward currency contract at a favorable price prior to maturity. In
addition, in the event of insolvency of the counterparty, the Fund might be
unable to close out a forward currency contract at any time prior to maturity.
In either event, the Fund would continue to be subject to market risk with
respect to the position, and would continue to be required to maintain a
position in securities denominated in the foreign currency or to maintain cash
or liquid assets in an account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
forward currency contract has been established. Thus, the Fund might need to
purchase or sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward currency contracts. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Normally, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, WRIMCO believes that it is
important to have the flexibility to enter into such forward currency
contracts when it determines that the best interests of the Fund will be
served.
Successful use of forward currency contracts depends on WRIMCO's skill in
analyzing and predicting currency values. Forward currency contracts may
substantially change the Fund's exposure to changes in currency exchange rates
and could result in losses to the Fund if currencies do not perform as WRIMCO
anticipates. There is no assurance that WRIMCO's use of forward currency
contracts will be advantageous to the Fund or that WRIMCO will hedge at an
appropriate time.
Combined Positions. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of its overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a
futures contract. Another possible combined position would involve writing a
call option at one strike price and buying a call option at a lower price, in
order to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Turnover. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or
puts written by the Fund, and the sale or purchase of futures contracts, may
cause it to sell or purchase related investments, thus increasing its turnover
rate. Once the Fund has received an exercise notice on an option it has
written, it cannot effect a closing transaction in order to terminate its
obligation under the option and must deliver or receive the underlying
securities at the exercise price. The exercise of puts purchased by the Fund
may also cause the sale of related investments, also increasing turnover;
although such exercise is within the Fund's control, holding a protective put
might cause it to sell the related investments for reasons that would not
exist in the absence of the put. The Fund will pay a brokerage commission
each time it buys or sells a put or call or purchases or sells a futures
contract. Such commissions may be higher than those that would apply to
direct purchases or sales.
Swaps, Caps, Floors and Collars. The Fund may enter into swaps, caps,
floors and collars to preserve a return or a spread on a particular investment
or portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance yield. Swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive cash flows on a notional
principal amount, e.g., an exchange of floating rate payments for fixed-rate
payments. The purchase of a cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined value, to receive payments on a
notional principal amount from the party selling the cap. The purchase of a
floor entitles the purchaser, to the extent that a specified index falls below
a predetermined value, to receive payments on a notional principal amount from
the party selling the floor. A collar combines elements of buying a cap and
selling a floor.
Swap agreements, including caps, floors and collars, can be individually
negotiated and structured to include exposure to a variety of different types
of investments or market factors. Depending on their structure, swap
agreements may increase or decrease the overall volatility of the Fund's
investments and its share price and yield because, and to the extent, these
agreements affect the Fund's exposure to long- or short-term interest rates
(in the United States or abroad), foreign currency values, mortgage-backed
security values, corporate borrowing rates or other factors such as security
prices or inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agrees to
exchange payments in U.S. dollars for payments in foreign currency, the swap
agreement would tend to decrease the Fund's exposure to U.S. interest rates
and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options.
The creditworthiness of firms with which the Fund enters into swaps, caps
or floors will be monitored by WRIMCO. If a firm's creditworthiness declines,
the value of the agreement would be likely to decline, potentially resulting
in losses. If a default occurs by the other party to such transaction, the
Fund will have contractual remedies pursuant to the agreements related to the
transaction.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such accounts 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 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 Investment Company Act of 1940, as amended (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
that are traded in foreign markets are often subject to restrictions that
prohibit resale to U.S. persons or entities or permit sales only to foreign
broker-dealers who agree to limit their resale to such persons or entities.
The buyer of such securities must enter into an agreement that, usually for a
limited period of time, it will resell such securities subject to such
restrictions. 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 10 years).
All such Treasury securities are backed by the full faith and credit of the
United States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing
Administration, Fannie Mae (also known as the Federal National Mortgage
Association), Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage
Association ("Ginnie Mae"), General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
("Freddie Mac"), Farm Credit Banks, Maritime Administration, the Tennessee
Valley Authority, the Resolution Funding Corporation, and the Student Loan
Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan
Banks, are backed by the right of the agency or instrumentality to borrow from
the Treasury. Others, such as securities issued by the Federal National
Mortgage Association, are supported only by the credit of the instrumentality
and by a pool of mortgage assets. If the securities are not backed by the
full faith and credit of the United States, the owner of the securities must
look principally to the agency issuing the obligation for repayment and may
not be able to assert a claim against the United States in the event that the
agency or instrumentality does not meet its commitment.
U.S. Government securities may include mortgage-backed securities issued
by U.S. Government agencies or instrumentalities including, but not limited
to, Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed securities
include pass-through securities, participation certificates and collateralized
mortgage obligations. See "Mortgage-Backed and Asset-Backed Securities."
Timely payment of principal and interest on Ginnie Mae pass-throughs is
guaranteed by the full faith and credit of the United States. Freddie Mac and
Fannie Mae are both instrumentalities of the U.S. Government, but their
obligations are not backed by the full faith and credit of the United States.
It is possible that the availability and the marketability (i.e., liquidity)
of the securities discussed in this section could be adversely affected by
actions of the U.S. Government to tighten the availability of its credit.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased directly
from issuers) bear variable or floating interest rates and may carry rights
that permit holders to demand payment of the unpaid principal balance plus
accrued interest from the issuers or certain financial intermediaries on dates
prior to their stated maturities. Floating rate securities have interest
rates that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market value for
the instrument that approximates its par value.
Warrants and Rights
Warrants are options to purchase equity securities at specific prices
valid for a specific period of time. The prices do not necessarily move
parallel to the prices of the underlying securities. Rights are similar to
warrants, but normally have a short duration and are distributed directly by
the issuer to its shareholders. Rights and warrants have no voting rights,
receive no dividends and have no rights with respect to the assets of the
issuer. Warrants and rights are highly volatile and, therefore, more
susceptible to a sharp decline in value than the underlying security might be.
They are also generally less liquid than an investment in the underlying
shares.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase securities in which it may invest on a when-issued
or delayed-delivery basis or sell them on a delayed-delivery basis. In either
case, payment and delivery for the securities take place at a future date.
The securities so purchased or sold by the Fund are subject to market
fluctuation; their value may be less or more when delivered than the purchase
price paid or received. When purchasing securities on a when-issued or
delayed-delivery basis, the Fund assumes the rights and risks of ownership,
including the risk of price and yield fluctuations. No interest accrues to
the Fund until delivery and payment is completed. When the Fund makes a
commitment to purchase securities on a when-issued or delayed-delivery basis,
it will record the transaction and thereafter reflect the value of the
securities in determining its net asset value per share. When the Fund sells
a security on a delayed-delivery basis, the Fund does not participate in
further gains or losses with respect to the security. When the Fund makes a
commitment to sell securities on a delayed basis, it will record the
transaction and thereafter value the securities at the sales price in
determining the Fund's net asset value per share. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, the
Fund could miss a favorable price or yield opportunity, or could suffer a
loss.
Ordinarily the Fund purchases securities on a when-issued or delayed-
delivery basis with the intention of actually taking delivery of the
securities. However, before the securities are delivered to the Fund and
before it has paid for them (the "settlement date"), the Fund could sell the
securities if WRIMCO decided it was advisable to do so for investment reasons.
The Fund will hold aside or segregate cash or other securities, other than
those purchased on a when-issued or delayed-delivery basis, at least equal to
the amount it will have to pay on the settlement date; these other securities
may, however, be sold at or before the settlement date to pay the purchase
price of the when-issued or delayed-delivery securities.
Zero Coupon Securities
Zero coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or that specify a
future date when the securities begin to pay current interest; instead, they
are sold at a deep discount from their face value and are redeemed at face
value when they mature. Because zero coupon securities do not pay current
income, their prices can be very volatile when interest rates change and
generally are subject to greater price fluctuations in response to changing
interest rates than prices of comparable maturities that make current
distributions of interest in cash.
The Fund may invest in zero coupon securities that are "stripped" U.S.
Treasury notes and bonds, zero coupon bonds of corporate issuers and other
securities that are issued with original issue discount ("OID"). The Federal
tax law requires that a holder of a security with OID accrue a ratable portion
of the OID on the security as income each year, even though the holder may
receive no interest payment on the security during the year. Accordingly,
although the Fund will receive no payments on its zero coupon securities prior
to their maturity or disposition, it will have current income attributable to
those securities and includable in the dividends paid to its shareholders.
Those dividends will be paid from the Fund's cash assets or by liquidation of
portfolio securities, if necessary, at a time when the Fund otherwise might
not have done so.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury security and selling them as
individual securities. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) can also be separated in this
fashion. Original issue zeros are zero coupon securities originally issued by
the U.S. Government, a government agency or a corporation in zero coupon form.
Investment Restrictions and Limitations
Certain of the Fund's investment restrictions and other limitations are
described in this SAI. The following are the Fund's fundamental investment
limitations set forth in their entirety, which, like the Fund's goals, cannot
be changed without shareholder approval. For this purpose, shareholder
approval means the approval, at a meeting of Fund shareholders, by the lesser
of (1) the holders of 67% or more of the Fund's shares represented at the
meeting, if more than 50% of the Fund's outstanding shares are present in
person or by proxy or (2) more than 50% of the Fund's outstanding shares. The
Fund may not:
(1) Purchase or sell physical commodities; however, this policy shall
not prevent the Fund from purchasing and selling foreign currency,
futures contracts, options, forward contracts, swaps, caps, floors,
collars, and other financial instruments.
(2) Invest in mineral related programs or leases.
(3) With respect to 75% of its total assets, purchase securities of any
one issuer (other than cash items and "Government securities" as
defined in the 1940 Act), if immediately after and as a result of
such purchase, (a) the value of the holdings of the Fund in the
securities of such issuer exceeds 5% of the value of the Fund's
total assets, or (b) the Fund owns more than 10% of the outstanding
voting securities of such issuer; or buy the securities of companies
in any one industry if more than 25% of the Fund's total assets
would then be invested in companies in that industry.
(4) 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; the Fund may also buy these
shares as part of a merger or consolidation.
(5) Invest for the purpose of exercising control or management of other
companies.
(6) Participate on a joint, or a joint and several, basis in any trading
account in any securities.
(7) Sell securities short (unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short) or purchase securities on margin, except that (1) this policy
does not prevent the Fund from entering into short positions in
foreign currency, futures contracts, options, forward contracts,
swaps, caps, floors, collars and other financial instruments, (2)
the Fund may obtain such short-term credits as are necessary for the
clearance of transactions, and (3) the Fund may make margin payments
in connection with futures contracts, options, forward contracts,
swaps, caps, floors, collars and other financial instruments.
(8) Engage in the underwriting of securities, except to the extent it
may be deemed to be an underwriter in connection with the sale of
restricted securities.
(9) Borrow for investment purposes, that is, to purchase securities.
The Fund may borrow money from banks as a temporary measure or for
extraordinary or emergency purposes but only up to 5% 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.
(10) Make loans other than certain limited types of loans; the Fund may
buy debt securities and other obligations consistent with its goals
and other investment policies and restrictions; it can also lend its
portfolio securities to the extent allowed, and in accordance with
the requirements, under the 1940 Act and enter into repurchase
agreements.
The following interpretation applies to, but is not
part of this fundamental restriction: The fund's
investments in master notes and similar instruments
will not be considered to be the making of a loan.
(11) Buy real estate nor any nonliquid interest in real estate investment
trusts; however, the Fund may invest in securities (other than
limited partnership interests) issued by companies engaged in such
business, including real estate investment trusts; 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) At least 65% of the Fund's total assets normally will be invested in
debt securities.
(2) The Fund does not intend to invest more than 35% of its total assets
in non-investment-grade debt securities.
(3) At least 65% of the Fund's total assets normally will be invested in
issuers located in at least three different countries, and no more
than 30% of the Fund's total assets normally will be invested in
issuers within a single country outside the U.S.
(4) The Fund does not intend to invest more than 25% of its total assets
in non-U.S. dollar-denominated securities.
(5) The Fund does not intend to invest more than 10% of its total assets
in non-dividend-paying common stocks.
(6) The Fund may not purchase a security if, as a result, more than 10%
of its net assets would consist of illiquid securities.
(7) The Fund does not intend to invest more than 5% of its total assets
in the securities of investment companies that do not redeem their
shares.
(8) 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, options on futures contracts and currency
options.
An investment policy or limitation that states a maximum percentage of
the Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of
an asset. Accordingly, a subsequent change in the asset's value, net assets,
or other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities for a year and
dividing it by the monthly average of the market value of such securities
during the year, excluding certain short-term securities. The Fund'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, 1999 and 1998 was 46.17% and 58.85%, respectively.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly owned subsidiary of Waddell & Reed,
Inc. Under the Management Agreement, WRIMCO is employed to supervise the
investments of the Fund and provide investment advice to the Fund. The
address of WRIMCO and Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's
underwriter.
The Management Agreement permits WRIMCO, or an affiliate of WRIMCO, to
enter into a separate agreement for transfer agency services ("Shareholder
Servicing Agreement") and a separate agreement for accounting services
("Accounting Services Agreement") with the Fund. The Management Agreement
contains detailed provisions as to the matters to be considered by the Fund's
Board of Directors prior to approving any Shareholder Servicing Agreement or
Accounting Services Agreement.
Waddell & Reed Financial, Inc.
WRIMCO is a wholly owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company, which is a wholly owned subsidiary of Waddell & Reed
Financial, Inc., a publicly held company. The address of these companies is
6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
WRIMCO and its predecessors have served as investment manager to each of
the registered investment companies in the Waddell & Reed Advisors Funds
(formerly, the United Group of Mutual Funds), W&R Funds, Inc. (formerly,
Waddell & Reed Funds, Inc.) and the W&R Target Funds, Inc. (formerly,
Target/United Funds, Inc.) since each company's inception date, Waddell &
Reed, Inc. serves as principal underwriter for the investment companies in the
Waddell & Reed Advisors Funds and W&R Funds, Inc. and acts as principal
underwriter and distributor for variable life insurance and variable annuity
policies for which W&R Target Funds, Inc. is the underlying investment
vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund
and Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell &
Reed, Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing
of related information to the Fund and handling of shareholder inquiries. A
new Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting
services and assistance, including maintenance of the Fund's records, pricing
of the Fund's shares, preparation of prospectuses for existing shareholders,
preparation of proxy statements and certain shareholder reports. A new
Accounting Services Agreement, or amendments to an existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the
Fund pays WRIMCO a fee as described in the Prospectus. The management fees
paid by the Fund to WRIMCO during the Fund's fiscal years ended September 30,
1999, 1998 and 1997 were $2,247,697, $2,302,825 and $2,103,768, 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, for the Class A, Class B and
Class C shares, the Fund pays the Agent 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. The Fund also pays certain out-of-pocket expenses of the Agent,
including long distance telephone communications costs; microfilm and storage
costs for certain documents; forms, printing and mailing costs; charges of any
sub-agent used by Agent in performing services under the Shareholder Servicing
Agreement; and costs of legal and special services not provided by Waddell &
Reed, Inc., WRIMCO or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a
monthly fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 11,000
From $ 25 to $ 50 $ 22,000
From $ 50 to $ 100 $ 33,000
From $ 100 to $ 200 $ 44,000
From $ 200 to $ 350 $ 55,000
From $ 350 to $ 550 $ 66,000
From $ 550 to $ 750 $ 77,000
From $ 750 to $1,000 $ 93,500
$1,000 and Over $110,000
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.
Fees paid to the Agent for accounting services for the fiscal years ended
September 30, 1999, 1998 and 1997 were $60,000 for each of the three years.
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, WRIMCO 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 aggregate dollar amount of
underwriting commissions for Class A shares for the fiscal years ended
September 30, 1999, 1998 and 1997 were $1,114,812, $1,812,811 and $1,267,590,
respectively. The amounts retained by WRIMCO for the same periods were
$470,096, $768,637 and $537,529, 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 sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation
and indemnification relating to litigation.
Under the Distribution and Service Plan (the "Plan") for Class A shares
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act, the Fund may
pay Waddell & Reed, Inc., the principal underwriter for the Fund, a fee not to
exceed 0.25% of the Fund's average annual net assets attributable to Class A
shares, paid monthly, to reimburse Waddell & Reed, Inc. for its costs and
expenses in connection with, either directly or through others, the
distribution of the Class A shares, the provision of personal services to
Class A shareholders and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its financial
advisors, registered representatives and sales managers (collectively, the
"sales force") and through other broker-dealers, banks and other appropriate
intermediaries. In distributing shares through its sales force, Waddell &
Reed, Inc. will pay commissions and incentives to the sales force at or about
the time of sale and will incur other expenses including costs for
prospectuses, sales literature, advertisements, sales office maintenance,
processing of orders and general overhead with respect to its efforts to
distribute the Fund's shares. The Class A Plan permits Waddell & Reed, Inc.
to receive reimbursement for these Class A-related distribution activities
through the distribution fee, subject to the limit contained in the Plan. The
Class A Plan also permits Waddell & Reed, Inc. to be reimbursed for amounts it
expends in compensating, training and supporting registered financial
advisors, sales managers and/or other appropriate personnel in providing
personal services to Class A shareholders of the Fund and/or maintaining Class
A shareholder accounts; increasing services provided to Class A shareholders
of the Fund by office personnel located at field sales offices; engaging in
other activities useful in providing personal service to Class A shareholders
of the Fund and/or maintenance of Class A shareholder accounts; and in
compensating broker-dealers, and other third parties, who may regularly sell
Class A shares of the Fund, and other third parties, for providing shareholder
services and/or maintaining shareholder accounts with respect to Class A
shares. Service fees and distribution fees in the amounts of $896,909 and
$89,113, respectively, were paid (or accrued) by the Fund under the Class A
Plan for the fiscal year ended September 30, 1999.
To the extent that Waddell & Reed, Inc. incurs expenses for which
reimbursement may be made under the Plan that relate to distribution
activities also involving another fund in the Waddell & Reed Advisors Funds or
W&R Funds, Inc., Waddell & Reed, Inc. typically determines the amount
attributable to the Fund's expenses under the Plan on the basis of a
combination of the respective classes' relative net assets and number of
shareholder accounts.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for, either directly or through others,
providing personal services to shareholders of that class and/or maintaining
shareholder accounts for that class and a distribution fee of up to 0.75% of
the average daily net assets of the class to compensate Waddell & Reed, Inc.
for, either directly or through others, distributing the shares of that class.
The Class B Plan and the Class C Plan each permit Waddell & Reed, Inc. to
receive compensation, through the distribution and service fee, respectively,
for its distribution activities for that class, which are similar to the
distribution activities described with respect to the Class A Plan, and for
its activities in providing personal services to shareholders of that class
and/or maintaining shareholder accounts of that class, which are similar to
the corresponding activities for which it is entitled to reimbursement under
the Class A Plan.
As noted above, Class A shares, Class B shares and Class C shares are
offered through Waddell & Reed, Inc. and other broker-dealers. In addition to
the dealer reallowance that may be applicable to Class A share purchases, as
described in the Prospectus, Waddell & Reed, Inc. may pay such broker-dealers
a portion of the fees it receives under the respective Plans as well as other
compensation in connection with the distribution of Fund shares, including the
following: 1) for the purchase of Class A shares purchased at NAV by clients
of Legend Equities Corporation (_Legend_), Waddell & Reed, Inc. (or its
affiliate) may pay Legend 1.00% of net assets invested; 2) for the purchase of
Class B shares, Waddell & Reed, Inc. (or its affiliate) may pay Legend 4.00%
of net assets invested; 3) for the purchase of Class C shares, Waddell & Reed,
Inc. (or its affiliate) may pay Legend 1.00% of net assets invested.
The only Directors or interested persons, as defined in the 1940 Act, of
the Fund who have a direct or indirect financial interest in the operation of
a Plan are the officers and Directors who are also officers of either Waddell
& Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. Each
Plan is anticipated to benefit the Fund and its shareholders of the affected
class through Waddell & Reed, Inc.'s activities not only to distribute the
shares of the affected class but also to provide personal services to
shareholders of that class and thereby promote the maintenance of their
accounts with the Fund. The Fund anticipates that shareholders of a
particular class may benefit to the extent that Waddell & Reed's activities
are successful in increasing the assets of the Fund, through increased sales
or reduced redemptions, or a combination of these, and reducing a
shareholder's share of Fund and class expenses. Increased Fund assets may
also provide greater resources with which to pursue the goals of the Fund.
Further, continuing sales of shares may also reduce the likelihood that it
will be necessary to liquidate portfolio securities, in amounts or at times
that may be disadvantageous to the Fund, to meet redemption demands. In
addition, the Fund anticipates that the revenues from the Plan will provide
Waddell & Reed, Inc. with greater resources to make the financial commitments
necessary to continue to improve the quality and level of services to the Fund
and the shareholders of the affected class. Each Plan was approved by the
Fund's Board of Directors, including the Directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in
the operations of the Plan or any agreement referred to in the Plan
(hereafter, the "Plan Directors"). The Class A Plan was also approved by the
affected shareholders of the Fund.
Among other things, each Plan provides that (1) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors
will review, a report of amounts expended under the Plan and the purposes for
which such expenditures were made, (2) the Plan will continue in effect only
so long as it is approved at least annually, and any material amendments
thereto will be effective only if approved, by the Directors including the
Plan Directors acting in person at a meeting called for that purpose, (3)
amounts to be paid by the Fund under the Plan may not be materially increased
without the vote of the holders of a majority of the outstanding shares of the
affected class of the Fund, and (4) while the Plan remains in effect, the
selection and nomination of the Directors who are Plan Directors will be
committed to the discretion of the Plan Directors.
Custodial and Auditing Services
The Fund's Custodian is UMB Bank, n.a., 928 Grand Boulevard, Kansas City,
Missouri. In general, the Custodian is responsible for holding the Fund's
cash and securities. Deloitte & Touche LLP, 1010 Grand Boulevard, Kansas
City, Missouri, the Fund's independent auditors, audits the Fund's financial
statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value ("NAV") of each class of the shares of the Fund is
the value of the assets of that class, less the liabilities of that class,
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 March 31, 2000,
which is the most recent balance sheet included in this SAI, was as follows:
NAV per Class A share (Class A
net assets divided by Class A shares
outstanding) .............................. $3.75
Add: selling commission (5.75% of offering
price) .................................... .23
-----
Maximum offering price per Class A share
(Class A NAV divided by 94.25%) ........... $3.98
=====
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 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 NYSE is open for trading, as of the later of the close of the
regular session of the NYSE or of 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 securities in the portfolio of the Fund, except as otherwise noted,
that are listed or traded on a stock exchange, are valued on the basis of the
last sale on that day or, lacking any sales, at a price that is the mean
between the closing bid and asked prices. Other securities that are traded
over-the-counter are priced using the Nasdaq stock market, which provides
information on bid and asked prices quoted by major dealers in such stocks.
Bonds, other than convertible bonds, are valued using a third-party pricing
system. Convertible bonds are valued using this pricing system only on days
when there is no sale reported. Short-term debt securities and other assets
are valued at amortized cost, which approximates market. When market
quotations are not readily available, securities and other assets are valued
at fair value as determined in good faith under procedures established by, and
under the general supervision and responsibility of, the 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 by reference to established futures
exchanges. The value of a futures contract purchased by the Fund will be
either the closing purchase price of the contract or the bid price.
Conversely, the value of a futures contract sold by the Fund will be either
the closing price or the asked price.
When the Fund writes a put or call, an amount equal to the premium
received is included in the Fund's Statement of Assets and Liabilities as an
asset, and an equivalent deferred credit is included in the liability section.
The deferred credit is "marked-to-market" (that is, treated as sold for its
fair market value) to reflect the current market value of the put or call. If
a call the Fund wrote is exercised, the proceeds received on the sale of the
related investment are increased by the amount of the premium the Fund
received. If the Fund exercised a call it purchased, the amount paid to
purchase the related investment is increased by the amount of the premium
paid. If a put written by the Fund is exercised, the amount that the Fund
pays to purchase the related investment is decreased by the amount of the
premium it received. If the Fund exercises a put it purchased, the amount
received from the sale of the related investment is reduced by the amount of
the premium it paid. If a put or call written by the Fund expires, it has a
gain in the amount of the premium; if it enters into a closing purchase
transaction, it will have a gain or loss depending on whether the premium was
more or less than the cost of the closing transaction.
Foreign currency exchange rates are generally determined prior to the
close of trading of the regular session of the NYSE. Occasionally events
affecting the value of foreign investments and such exchange rates occur
between the time at which they are determined and the close of the regular
session of trading on the NYSE, which events will not be reflected in a
computation of the Fund's NAV on that day. If events materially affecting the
value of such investments or currency exchange rates occur during such time
period, investments will be valued at their fair value as determined in good
faith by or under the direction of the Board of Directors. The foreign
currency exchange transactions of the Fund conducted on a spot (i.e., cash)
basis are valued at the spot rate for purchasing or selling currency
prevailing on the foreign exchange market. This rate under normal market
conditions differs from the prevailing exchange rate in an amount generally
less than one-tenth of one percent due to the costs of converting from one
currency to another.
Optional delivery standby commitments are valued at fair value under the
general supervision and responsibility of the Fund's Board of Directors. They
are accounted for in the same manner as exchange-listed puts.
Minimum Initial and Subsequent Investments
For Class A, Class B and Class C shares, initial investments must be at
least $500 with the exceptions described in this paragraph. A $100 minimum
initial investment pertains to certain exchanges of shares from another fund
in the Waddell & Reed Advisors Funds or W&R Funds, Inc. A $50 minimum initial
investment pertains to purchases for certain retirement plan accounts and to
accounts for which an investor has arranged, at the time of initial
investment, to make subsequent purchases for the account by having regular
monthly withdrawals of $25 or more made from a bank account. A minimum initial
investment of $25 is applicable to purchases made through payroll deduction
for or by employees of WRIMCO, Waddell & Reed, Inc., their affiliates or
certain retirement plan accounts of such employees. Except with respect to
certain exchanges and automatic withdrawals from a bank account, a shareholder
may make subsequent investments of any amount. See "Exchanges for Shares of
Other Funds in the Waddell & Reed Advisors Funds and W&R Funds, Inc."
For Class Y shares, investments by government entities or authorities or
by corporations must total at least $10 million within the first twelve months
after initial investment. There is no initial investment minimum for other
Class Y investors.
Reduced Sales Charges (Applicable to Class A Shares Only)
Account Grouping
Large purchases of Class A shares are subject to lower sales charges.
The schedule of sales charges appears in the Prospectus. For the purpose of
taking advantage of the lower sales charges available for large purchases, a
purchase in any of categories 1 through 7 listed below made by an individual
or deemed to be made by an individual may be grouped with purchases in any
other of these categories:
1. Purchases by an individual for his or her own account (includes purchases
under the Waddell & Reed Advisors Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own
account (includes Waddell & Reed Advisors Funds Revocable Trust Form of
spouse);
3. Purchases by that individual or his or her spouse in their joint account;
4. Purchases by that individual or his or her spouse for the account of
their child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in a
Uniform Transfers to Minors Act ("UTMA") or Uniform Gifts to Minors Act
("UGMA") account;
6. Purchases by that individual or his or her spouse for his or her
Individual Retirement Account ("IRA"), salary reduction plan account
under Section 457 of the Internal Revenue Code of 1986, as amended, (the
"Code") provided that such purchases are subject to a sales charge (see
"Net Asset Value Purchases"), tax-sheltered annuity account ("TSA") or
Keogh plan account, provided that the individual and spouse are the only
participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or her
spouse is the settlor (the person who establishes the trust).
For the foregoing categories, an individual's domestic partner is treated
as his or her spouse.
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother has an
account in her own name; A's father has an account in his own name;
the UGMA account may be grouped with A's father's account but may
not be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in
the trust account is eligible for grouping with an IRA account of W,
H's wife;
C. H's will provides for the establishment of a trust for the benefit
of his minor children upon H's death; his bank is named as trustee;
upon H's death, an account is established in the name of the bank,
as trustee; a purchase in the account may be grouped with an account
held by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account
may not be grouped with R's individual account. If X's spouse, Y,
was successor trustee, this purchase could be grouped with Y's
individual account.
All purchases of Class A shares made under a "qualified" plan -- either
an employee benefit plan of an incorporated business or, for an unincorporated
business, a Keogh plan in which there is more than one participant where one
or more of the participants is other than the spouse of the owner/employer
will be grouped. A "qualified" plan is established pursuant to Section 401 of
the Code. All qualified plans of any one employer or affiliated employers
will also be grouped. An affiliate is defined as an employer that directly,
or indirectly, controls or is controlled by or is under control with another
employer. All qualified employee benefit plans of an employer who is a
franchisor and those of its franchisee(s) may also be grouped.
Example A: Corporation X sets up a defined benefit plan; its subsidiary,
Corporation Y, sets up a 401(k) plan; all contributions made under
both plans will be grouped.
Example B: H has established a Keogh plan; he and his wife W are the only
participants in the plan; they may group their purchases made under
the plan with any purchases in categories 1 through 7 above.
Example C: H has established a Keogh plan; his wife, W, is a participant and
they have hired one or more employees who also become participants
in the plan; H and W may not combine any purchases made under the
plan with any purchases in categories 1 through 7 above; however,
all purchases made under the plan for H, W or any other employee
will be combined.
All purchases of Class A shares made under a simplified employee pension
plan ("SEP"), payroll deduction plan or similar arrangement adopted by an
employer or affiliated employers (as defined above) may be grouped provided
that the employer elects to have all such purchases grouped at the time the
plan is set up. If the employer does not make such an election, the purchases
made by individual employees under the plan may be grouped with the other
accounts of the individual employees described above in "Account Grouping."
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced
sales charge. In order for an eligible purchase to be grouped, the investor
must advise Waddell & Reed, Inc. at the time the purchase is made that it is
eligible for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $75,000; at the same
time, H's parents open up three UGMA accounts for H and W's three
minor children and invest $10,000 in each child's name; the combined
purchase of $105,000 of Class A shares is subject to a reduced sales
load of 4.75% provided that Waddell & Reed, Inc. is advised that the
purchases are entitled to grouping.
Rights of Accumulation
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that
account, the additional purchase is combined with the NAV of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc.
for the purpose of determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund three
years ago. His account has a NAV of $80,000. His wife, W, now
wishes to invest $20,000 in Class A shares of the Fund. W's
purchase will be combined with H's existing account and will be
entitled to a reduced sales charge of 4.75%. H's original purchase
was subject to a full sales charge and the reduced charge does not
apply retroactively to that purchase.
In order to be entitled to Rights of Accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account(s) with which the purchase may be combined.
Letter of Intent
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under an 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 Letter is accepted by Waddell &
Reed, Inc. Each purchase made from time to time under the LOI is treated as
if the purchaser were buying at one time the total amount which he or she
intends to invest. The sales charge applicable to all purchases of Class A
shares made under the terms of the LOI will be the sales charge in effect on
the beginning date of the 13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under an LOI, the investor's Rights of
Accumulation (see above) will be taken into account; that is, Class A shares
already held in the same account in which the purchase is being made or in any
account eligible for grouping with that account, as described above, will be
included.
Example: H signs an LOI indicating his intent to invest in his own name a
dollar amount sufficient to entitle him to purchase Class A shares
at the sales charge applicable to a purchase of $100,000. H has an
IRA account and the Class A shares held under the IRA in the Fund
have a NAV as of the date the LOI is accepted by Waddell & Reed,
Inc. of $15,000; H's wife, W, has an account in her own name
invested in another fund in the Waddell & Reed Advisors Funds which
charges the same sales load as the Fund, with a NAV as of the date
of acceptance of the LOI of $10,000; H needs to invest $75,000 in
Class A shares over the 13-month period in order to qualify for the
reduced sales load applicable to a purchase of $100,000.
A copy of the LOI signed by a purchaser will be returned to the purchaser
after it is accepted by Waddell & Reed, Inc. and will set forth the dollar
amount of Class A shares which must be purchased within the 13-month period in
order to qualify for the reduced sales charge.
If a purchaser holds shares which have been purchased under a contractual
plan, the shares held under the plan will be taken into account in determining
the amount which must be invested under the LOI only if the contractual plan
has been completed.
The minimum initial investment under an LOI is 5% of the dollar amount
which must be invested under the LOI. An amount equal to 5% of the purchase
required under the LOI will be held "in escrow." If a purchaser does not,
during the period covered by the LOI, invest the amount required to qualify
for the reduced sales charge under the terms of the LOI, he or she will be
responsible for payment of the sales charge applicable to the amount actually
invested. The additional sales charge owed on purchases of Class A shares
made under an LOI which is not completed will be collected by redeeming part
of the shares purchased under the LOI and held "in escrow" unless the
purchaser makes payment of this amount to Waddell & Reed, Inc. within 20 days
of Waddell & Reed, Inc.'s request for payment.
If the actual amount invested is higher than the amount an investor
intends to invest, and is large enough to qualify for a sales charge lower
than that available under the LOI, the lower sales charge will apply.
An LOI does not bind the purchaser to buy, or Waddell & Reed, Inc. to
sell, the shares covered by the LOI.
With respect to LOIs for $2,000,000 or purchases otherwise qualifying for
no sales charge under the terms of the LOI, the initial investment must be at
least $200,000.
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.
An LOI is not available for purchases made under an SEP plan where the
employer has elected to have all purchases under the SEP grouped.
Other Funds in the Waddell & Reed Advisors Funds and W&R Funds, Inc.
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the Waddell &
Reed Advisors Funds and the W&R Funds, Inc. subject to a sales charge. A
purchase of Class A shares, or Class A shares held, in any of the funds in the
Waddell & Reed Advisors Funds and/or the W&R Funds, Inc. subject to a sales
charge will be treated as an investment in the Fund in determining the
applicable sales charge. For these purposes, Class A shares of Waddell & Reed
Advisors Cash Management, Inc., Waddell & Reed Advisors Municipal Money Market
Fund, Inc. or W&R Funds, Inc. Money Market Fund that were acquired by exchange
of another Waddell & Reed Advisors Fund or W&R Funds, Inc. Class A shares on
which a sales charge was paid, plus the shares paid as dividends on those
acquired shares, are also taken into account.
Net Asset Value Purchases of Class A Shares
Class A shares of the Fund may be purchased at NAV by the Directors and
officers of the Fund or of any affiliated entity of Waddell & Reed, Inc.,
employees of Waddell & Reed, Inc. or of any of its affiliates, financial
advisors of Waddell & Reed, Inc. and the spouse, children, parents, children's
spouses and spouse's parents of each such Director, officer, employee and
financial advisor. "Child" includes stepchild; "parent" includes stepparent.
Purchases of Class A shares in an IRA sponsored by Waddell & Reed, Inc.
established for any of these eligible purchasers may also be at NAV.
Purchases of Class A shares in any tax-qualified retirement plan under which
the eligible purchaser is the sole participant may also be made at NAV.
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.
"Employees" include 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"
include 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 the UGMA or UTMA
purchasing for the child or grandchild of any employee or financial advisor
may purchase Class A shares at NAV whether or not the custodian himself is an
eligible purchaser.
Until March 31, 2001, Class A shares may also be purchased at NAV by
persons who are 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 Funds or W&R Funds, Inc.
and the purchase is made within 60 days of such redemption.
Purchases of Class A shares in a 401(k) plan having 100 or more eligible
employees and purchases of Class A shares in a 457 plan having 100 or more
eligible employees, and the shares are held in individual plan participant
accounts on the Fund's records, may be made at NAV.
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 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. The reasons for these quantity
discounts are, in general, that (1) they are traditional and have long been
permitted in the industry and are therefore necessary to meet competition as
to sales of shares of other funds having such discounts, (2) certain quantity
discounts are required by rules of the National Association of Securities
Dealers, Inc. (as is elimination of sales charges on the reinvestment of
dividends and distributions), and (3) they are designed to avoid an unduly
large dollar amount of sales charge on substantial purchases in view of
reduced selling expenses. Quantity discounts are made available to certain
related persons for reasons of family unity and to provide a benefit to tax-
exempt plans and organizations.
In general, the reasons for the other instances in which there are
reduced or eliminated sales charges for Class A shares are as follows.
Exchanges at NAV are permitted because a sales charge has already been paid on
the shares exchanged. Sales of Class A shares without a sales charge are
permitted to Directors, officers and certain others due to reduced or
eliminated selling expenses and since such sales may aid in the development of
a sound employee organization, encourage responsibility and interest in the
Waddell & Reed Advisors Funds and an identification with its aims and
policies. Limited reinvestments of redemptions of Class A shares at no sales
charge are permitted to attempt to protect against mistaken or not fully
informed redemption decisions. Class A shares may be issued at no sales
charge in plans of reorganization due to reduced or eliminated sales expenses
and since, in some cases, such issuance is exempted by 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 shareholders
adversely affected since, in each case, the Fund receives the NAV per share of
all shares sold or issued.
Flexible Withdrawal Service for Class A, Class B and Class C Shareholders
If you qualify, you may arrange to receive through the Flexible
Withdrawal Service (the "Service") regular monthly, quarterly, semiannual or
annual payments by redeeming on an ongoing basis Class A, Class B or Class C
shares that you own of the Fund or of any of the funds in the Waddell & Reed
Advisors Funds or W&R Funds, Inc. It would be a disadvantage to an investor
to make additional purchases of Class A shares while the Service is in effect
because it would result in duplication of sales charges. Class B and Class C
shares and certain Class A shares to which the CDSC otherwise applies that are
redeemed under the Service are not subject to a CDSC provided the amount
withdrawn does not, annually, exceed 24% of the account value. 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 your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to one-twelfth
of a percentage of the value of the shares in the account (you select the
percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least five shares).
Shares are redeemed on the 20th day of the month in which the payment is
to be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
Retirement plan accounts may be subject to a fee imposed by the plan
custodian for use of the Service.
If you have a share certificate for the shares you want to make available
for the Service, you must enclose the certificate with the form initiating the
Service.
The dividends and distributions on shares of a class you have made
available for the Service are paid in additional shares of that class. All
payments are made by redeeming shares, which may involve a gain or loss for
tax purposes. To the extent that payments under the Service exceed dividends
and distributions, the number of shares you own will decrease. When all of
the shares in your account are redeemed, you will not receive any further
payments. Thus, the payments are not an annuity, an income or a return on
your investment.
You may, at any time, change the manner in which you have chosen to have
shares redeemed to any of the other choices originally available to you. You
may, at any time, redeem part or all of the shares in your account; if you
redeem all of the shares, the Service is terminated. The Fund can also
terminate the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed will
be sent to you to assist you in completing your Federal income tax return.
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 Class A 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., W&R Funds, Inc. Municipal Bond Fund and
Limited-Term Bond Fund are the exceptions and special rules apply. Class A
shares of these funds may be exchanged for Class A shares of the Fund only if
(1) you received those shares as a result of one or more exchanges of shares
on which a maximum sales charge was originally paid (currently 5.75%), or (2)
the shares have been held from the date of the 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 Cash Management or
Municipal Money Market Fund 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 a fund. The shares of Cash Management or
Municipal Money Market Fund which you designate for automatic exchange must be
worth at least $100, which may be allocated among different Funds so long as
each Fund receives a value of at least $25. Minimum initial investment and
minimum balance requirements apply to such automatic exchange service.
Class C Share Exchanges
You may exchange Class C shares of the Fund for Class C shares of other
funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc. without
charge.
The redemption of the Fund's Class C shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in
the exchange, those acquired shares are treated as having been purchased when
the original redeemed shares were purchased.
You may have a specific dollar amount of Class C shares of Waddell & Reed
Advisors Cash Management, Inc. or Waddell & Reed Advisors Municipal Money
Market Fund, Inc. automatically exchanged each month into Class C shares of
the Fund or any other fund in the Waddell & Reed Advisors Funds, provided you
already own Class C shares of a fund. The shares of Cash Management or
Municipal Money Market Fund 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 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.
Retirement Plans
Your account may be set up as a funding vehicle for a retirement plan.
For individual taxpayers meeting certain requirements, Waddell & Reed, Inc.
offers model or prototype documents for the following retirement plans. All
of these plans involve investment in shares of the Fund (or shares of certain
other funds in the Waddell & Reed Advisors Funds or W&R Funds, Inc.).
Individual Retirement Accounts (IRAs). Investors having eligible earned
income may set up a plan that is commonly called an IRA. Under a traditional
IRA, an investor can contribute each year up to 100% of his or her earned
income, up to an annual maximum of $2,000 (provided the investor has not
reached age 70 1/2. For a married couple, the annual maximum is $4,000
($2,000 for each spouse) or, if less, the couple's combined earned income for
the taxable year, even if one spouse had no earned income. Generally, the
contributions are deductible unless the investor (or, if married, either
spouse) is an active participant in an employer-sponsored retirement plan or
if, notwithstanding that the investor or one or both spouses so participate,
their adjusted gross income does not exceed certain levels. A married
investor who is not an active participant, who files jointly with his or her
spouse and whose combined adjusted gross income does not exceed $150,000 is
not affected by his or her spouse's active participant status.
An investor may also use a traditional IRA to receive a rollover
contribution that is either (a) a direct rollover distribution from an
employer's plan or (b) a rollover of an eligible distribution paid to the
investor from an employer's plan or another IRA. To the extent a rollover
contribution is made to a traditional IRA, the distribution will not be
subject to Federal income tax until distributed from the IRA. A direct
rollover generally applies to any distribution from an employer's plan
(including a custodial account under Section 403(b)(7) of the Code, but not an
IRA) other than certain periodic payments, required minimum distributions and
other specified distributions. In a direct rollover, the eligible rollover
distribution is paid directly to the IRA, not to the investor. If, instead,
an investor receives payment of an eligible rollover distribution, all or a
portion of that distribution generally may be rolled over to an IRA within 60
days after receipt of the distribution. Because mandatory Federal income tax
withholding applies to any eligible rollover distribution which is not paid in
a direct rollover, investors should consult their tax advisers or pension
consultants as to the applicable tax rules. If you already have an IRA, you
may have the assets in that IRA transferred directly to an IRA offered by
Waddell & Reed, Inc.
Roth IRAs. Investors having eligible earned income, and whose adjusted
gross income (or combined adjusted gross income, if married) does not exceed
certain levels, may establish and contribute up to $2,000 to a Roth IRA (or to
any combination of Roth and traditional IRAs). For a married couple, the
annual maximum is $4,000 ($2,000 for each spouse) or, if less, the couple's
combined earned income for the taxable year, even if one spouse had no earned
income.
In addition, for an investor whose adjusted gross income does not exceed
$100,000 (and who is not married filing a separate return), certain
distributions from traditional IRAs may be rolled over to a Roth IRA and any
of the investor's traditional IRAs may be converted into a Roth IRA; these
rollover distributions and conversions are, however, subject to Federal income
tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in the Roth IRA, and withdrawals of earnings are not
subject to Federal income tax if the account has been held for at least five
years and the account holder has reached age 59 1/2 (or certain other
conditions apply).
Education IRAs. Although not technically for retirement savings,
Education IRAs provide a vehicle for saving for a child's higher education.
An Education IRA may be established for the benefit of any minor, and any
person whose adjusted gross income does not exceed certain levels may
contribute to an Education IRA, provided that no more than $500 may be
contributed for any year to Education IRAs for the same beneficiary.
Contributions are not deductible and may not be made after the beneficiary
reaches age 18; however, earnings accumulate tax free, and withdrawals are not
subject to tax if used to pay the qualified higher education expenses of the
beneficiary (or certain members of his or her family).
Simplified Employee Pension (SEP) plans. Employers can make
contributions to SEP-IRAs established for employees. Generally, an employer
may contribute up to 15% of compensation, subject to certain annual maximums,
per year for each employee.
Savings Incentive Match Plans for Employees (SIMPLE Plans). An employer
with 100 or fewer eligible employees who does not sponsor another active
retirement plan may sponsor a SIMPLE plan to contribute to its employees'
retirement accounts. A SIMPLE plan can be funded by either an IRA or a 401(k)
plan. In general, an employer can choose to match employee contributions
dollar-for-dollar (generally, up to 3% of the employee's compensation) or may
contribute to all eligible employees 2% of their compensation, whether or not
they defer salary to their SIMPLE plans. SIMPLE plans involve fewer
administrative requirements, generally, than traditional 401(k) or other
qualified plans.
Keogh Plans. Keogh plans, which are available to self-employed
individuals, are defined contribution plans that may be either a money
purchase plan or a profit-sharing plan. As a general rule, an investor under
a defined contribution Keogh plan can contribute each year up to 25% of his or
her annual earned income, with an annual maximum of $30,000.
457 Plans. If an investor is an employee of a state or local government
or of certain types of charitable organizations, he or she may be able to
enter into a deferred compensation arrangement in accordance with Section 457
of the Code.
TSAs - Custodial Accounts and Title I Plans. If an investor is an
employee of a public school system, church or of certain types of charitable
organizations, he or she may be able to enter into a deferred compensation
arrangement through a custodian account under Section 403(b)(7) of the Code.
Some organizations have adopted Title I plans, which are funded by employer
contributions in addition to employee deferrals.
Pension and Profit-Sharing Plans, including 401(k) Plans. With a 401(k)
plan, employees can make tax-deferred contributions into a plan to which the
employer may also contribute, usually on a matching basis. An employee may
defer each year up to 25% of compensation, subject to certain annual maximums,
which may be increased each year based on cost-of-living adjustments.
More detailed information about these arrangements and applicable forms
are available from Waddell & Reed, Inc. These plans may involve complex tax
questions as to premature distributions and other matters. Investors should
consult their tax adviser or pension consultant.
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 redemption of
shares of the Fund may be made in portfolio securities when the Fund's Board
of Directors determines that conditions exist making cash payments
undesirable. 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 without charge all or part of any amount of Class A shares you redeem
from the Fund by sending the Fund the amount you wish to reinvest. The amount
you return will be reinvested in Class A shares at the NAV next calculated
after the Fund receives the returned amount. Your written request to reinvest
and the amount to be reinvested must be received within 45 days after your
redemption request was received, and the Fund must be offering Class A shares
at the time your reinvestment request is received. You can do this only once
as to Class A shares of the Fund. You do not use up this privilege by
redeeming Class A shares to invest the proceeds at NAV in a Keogh plan or an
IRA.
There is also a reinvestment privilege for Class B and Class C shares
and, where applicable, certain Class A shares under which you may reinvest all
or part of any amount of the shares you redeemed and have the corresponding
amount of the deferred sales charge, if any, which you paid restored to your
account by adding the amount of that charge to the amount you are reinvesting
in shares of the same class. If Fund shares of that class are then being
offered, you can put all or part of your redemption payment back into such
shares at the NAV next calculated after you have returned the amount. Your
written request to do this must be received within 45 days after your
redemption request was received. You can do this only once as to Class B,
Class C and Class A shares of the Fund. For purposes of determining future
deferred sales charges, the reinvestment will be treated as a new investment.
You do not use up this privilege by redeeming shares to invest the proceeds at
NAV in a Keogh plan or an IRA.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to compel the redemption of shares held under any
account or any plan if the aggregate NAV of such shares (taken at cost or
value as the Board of Directors may determine) is less than $500. The Board
of Directors has no intent to compel redemptions in the foreseeable future.
If it should elect to compel redemptions, shareholders who are affected will
receive prior written notice and will be permitted 60 days to bring their
accounts up to the minimum before this redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors. The majority of
the Directors are not affiliated with Waddell & Reed, Inc.
The principal occupation during the past five years of each Director and
officer 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 AdvisorsFunds, W&R
Funds, Inc. and W&R Target 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 its
officers is also an officer of one or more of the funds in the Fund Complex.
KEITH A. TUCKER*
Chairman of the Board of Directors of the Fund and each of the other
funds in the Fund Complex; Chairman of the Board of Directors, Chief Executive
Officer and Director of Waddell & Reed Financial, Inc.; President, Chairman of
the Board of Directors, Director and Chief Executive Officer of Waddell & Reed
Financial Services, Inc.; Chairman of the Board of Directors and Director of
WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of each of the funds in the Fund Complex; formerly, Chairman of the
Board of Directors of Waddell & Reed Asset Management Company, a former
affiliate of Waddell & Reed Financial, Inc. Date of birth: February 11,
1945.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
President of JoDill Corp., an agricultural company; President and
Director of Dillingham Enterprises Inc.; formerly, Director and consultant,
McDougal Construction Company; formerly, Instructor at Central Missouri State
University; formerly, Member of the Board of Police Commissioners, Kansas
City, Missouri; formerly, Senior Vice President-Sales and Marketing of Garney
Companies, Inc., a specialty utility contractor. Date of birth: January 9,
1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e
Eccles Foundation; Director of First Security Corp., a bank holding company,
and Director of Fluor Corp., a company with interests in coal; formerly,
President of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, Partner, Levy and Craig, P.C., a law
firm. Date of birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of Oklahoma;
Adjunct Professor of Law at the University of Oklahoma College of Law;
Managing Member, Harroz Investments, L.L.C.; formerly, Vice President for
Executive Affairs of the University of Oklahoma; formerly, Attorney with Crowe
& Dunlevy, a law firm. Date of birth: January 17, 1967.
JOHN F. HAYES
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a
law firm; formerly, President of Gilliland & Hayes, P.A.; formerly, Director
of Central Properties, Inc. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Executive Vice President, Chief Operating
Officer and Director of Waddell & Reed Financial, Inc.; Executive Vice
President, Chief Operating Officer, Director and Treasurer of Waddell & Reed
Financial Services, Inc.; Executive Vice President, Principal Financial
Officer, Director and Treasurer of WRIMCO; President, Chief Executive Officer,
Principal Financial Officer, Director and Treasurer of Waddell & Reed, Inc.;
Director and Treasurer of Waddell & Reed Services Company; Chairman of the
Board of Directors, Chief Executive Officer, President and Director of
Fiduciary Trust Company of New Hampshire, an affiliate of Waddell & Reed,
Inc.; Director of Legend Group Holdings, LLC, Legend Advisory Corporation,
Legend Equities Corporation, Advisory Services Corporation, The Legend Group,
Inc. and LEC Insurance Agency, Inc.; formerly, Vice President of each of the
funds in the Fund Complex; formerly, Director and Treasurer of Waddell & Reed
Asset Management Company; formerly, President of Waddell & Reed Services
Company. Date of birth: November 12, 1936.
HENRY J. HERRMANN*
Vice President of the Fund and each of the other funds in the Fund
Complex; President, Chief Investment Officer, and Director of Waddell & Reed
Financial, Inc.; Executive Vice President, Chief Investment Officer and
Director of Waddell & Reed Financial Services, Inc.; Director of Waddell &
Reed, Inc.; President, Chief Executive Officer, Chief Investment Officer and
Director of WRIMCO; Chairman of the Board of Directors of Austin, Calvert &
Flavin, Inc., an affiliate of WRIMCO; formerly, President, Chief Executive
Officer, Chief Investment Officer and Director of Waddell & Reed Asset
Management Company. Date of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and its subsidiaries. Date of birth: February 19,
1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of
each of the funds in the Fund Complex then in existence. (Mr. Morgan retired
as Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director
and Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company. Date
of birth: April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director and Vice President of Network Rehabilitation Services; Board
Member, Member of Executive Committee and Finance Committee of Truman Medical
Center; formerly, Employment Counselor and Director of McCue-Parker Center.
Date of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, Shalton & Welte, a law firm; Director of
Columbian Bank and Trust. Date of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
Professor of Business Administration, University of Missouri-Kansas City;
formerly, Chancellor, University of Missouri-Kansas City. Date of birth:
January 1, 1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
Daniel C. Schulte
Vice President, Assistant Secretary and General Counsel of the Fund and
each of the other funds in the Fund Complex; Vice President, Secretary and
General Counsel of Waddell & Reed Financial, Inc.; Senior Vice President,
Secretary and General Counsel of Waddell & Reed Financial Services Company,
Waddell & Reed, Inc., WRIMCO and Waddell & Reed Services Company; Secretary
and Director of Fiduciary Trust Company of New Hampshire, an affiliate of
Waddell & Reed, Inc.; formerly, Assistant Secretary of Waddell & Reed
Financial, Inc.; formerly, an attorney with Klenda, Mitchell, Austerman &
Zuercher, L.L.C. Date of birth: December 8, 1965.
Kristen A. Richards
Vice President, Secretary and Associate General Counsel of the Fund and
each of the other funds in the Fund Complex; Vice President and Associate
General Counsel of WRIMCO; formerly, Assistant Secretary of the Fund and each
of the other funds in the Fund Complex; formerly, Compliance Officer of
WRIMCO. Date of birth: December 2, 1967.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund
and each of the other funds in the Fund Complex; Vice President of Waddell &
Reed Services Company. Date of birth: July 18, 1942.
Daniel J. Vrabac
Vice President of the Fund and three other funds in the Fund Complex;
Senior Vice President of WRIMCO; formerly, Vice President of Waddell & Reed
Asset Management Company. Date of birth: July 24, 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 WRIMCO are
indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, whereby an incumbent Director who has attained the age of 70 may, or
if elected on or after May 31, 1993 and has attained the age of 75 must,
resign his or her position as Director and, unless he or she elects otherwise,
will serve as Director Emeritus provided the Director has served as a Director
of the Funds for at least five years which need not have been consecutive.A
Director Emeritus receives fees in recognition of his or her past services
whether or not services are rendered in his or her capacity as Director
Emeritus, but he or she has no authority or responsibility with respect to the
management of the Fund. Messrs. Henry L. Bellmon, Jay B. Dillingham, Doyle
Patterson, Ronald K. Richey and Paul S. Wise retired as Directors of the Fund
and of each of the funds in the Fund Complex, and each serves as Director
Emeritus.
The funds in the Waddell & Reed Advisors Funds, W&R Target Funds, Inc.
and W&R Funds, Inc. pay to each Director, effective October 1, 1999, an annual
base fee of $50,000, plus $3,000 for each meeting of the Board of Directors
attended and effective January 1, 2000, an annual base fee of $52,000 plus
$3,250 for each meeting of the Board of Directors attended, plus reimbursement
of expenses for attending such meeting and $500 for each committee meeting
attended which is not in conjunction with a Board of Directors meeting, other
than Directors who are affiliates of Waddell & Reed, Inc. (prior to October 1,
1999, the funds in the Waddell & Reed Advisors Funds, W&R Target Funds, Inc.
and Waddell & Reed Funds, Inc. paid to each Director an annual base fee of
$48,000 plus $2,500 for each meeting of the Board of Directors attended). The
fees to the Directors are divided among the funds in the Waddell & Reed
Advisors Funds, W&R Target Funds, Inc. and W&R Funds, Inc. based on the funds'
relative size. During the Fund's fiscal year ended September 30, 1999, the
Fund's Directors received the following fees for service as a director:
COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
-------- ------------ ------------
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 992 59,000
John A. Dillingham 992 59,000
David P. Gardner 952 56,500
Linda K. Graves 992 59,000
Joseph Harroz, Jr. 929 56,500
John F. Hayes 992 59,000
Glendon E. Johnson 1,001 59,500
William T. Morgan 992 59,000
Ronald C. Reimer 926 56,500
Frank J. Ross, Jr. 992 59,000
Eleanor B. Schwartz 1,001 59,500
Frederick Vogel III 1,001 59,500
*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, 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, 2000, regarding the
ownership of the Fund's shares.
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
------------------- ----- ------------ -------
PAYMENTS TO SHAREHOLDERS
General
There are three sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is net investment income, which is
derived from the dividends, interest and earned discount on the securities the
Fund holds ,less expenses (which will vary by class). The second source is
net realized capital gains, which are derived from the proceeds received from
the Fund's sale of securities at a price higher than the Fund's tax basis
(usually cost) in such securities, less losses from the sales of securities at
a price lower than the Fund's basis therein; these gains can be either long-
term or short-term, depending on how long the Fund has owned the securities
before it sells them. The third source is net realized gains from foreign
currency transactions. The payments made to shareholders from net investment
income, net short-term capital gains and net realized gains from certain
foreign currency transactions are called dividends.
The Fund pays distributions from net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may
not have such gains, depending on whether securities are sold and at what
price. If the Fund has net capital gains, it will ordinarily pay
distributions once each year, in the latter part of the fourth calendar
quarter, except to the extent it has net capital losses carried over from a
prior year or years to offset the gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (1) you want
cash for your dividends and/or distributions, or (2) you want your dividends
and/or distributions paid in shares of the Fund of the same class as that with
respect to which they were paid. However, a total dividend and/or
distribution amount less than five dollars will be automatically paid in
shares of the Fund of the same class as that with respect to which they were
paid. You can change your instructions at any time. If you give no
instructions, your dividends and distributions will be paid in shares of the
Fund of the same class as that with respect to which they were paid. All
payments in Fund shares are at NAV without any sales charge. The NAV used for
this purpose is that computed as of the record date for the dividend or
distribution, although this could be changed by the Board of Directors.
Even if you receive dividends and distributions on Fund shares in cash,
you can thereafter reinvest them (or distributions only) in shares of the Fund
at NAV next calculated after receipt by Waddell & Reed, Inc. of the amount
clearly identified as a reinvestment. The reinvestment must be within 45 days
after the payment.
TAXES
General
The Fund has qualified since inception for treatment as a regulated
investment company ("RIC") under the Code, so that it is relieved of Federal
income tax on that part of its investment company taxable income (consisting
generally of net investment income, net short-term capital gains and net gains
from certain foreign currency transactions) that it distributes to its
shareholders. To continue to qualify for treatment as a RIC, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following:
(1) the Fund must derive at least 90% of its gross income each taxable year
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of securities or foreign currencies or
other income (including gains from options, futures contracts or forward
contracts) derived with respect to its business of investing in securities or
those currencies ("Income Requirement"); (2) at the close of each quarter of
the Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities, securities of
other RICs and other securities that are limited, in respect of any one
issuer, to an amount that does not exceed 5% of the value of the Fund's total
assets and that does not represent more than 10% of the issuer's outstanding
voting securities ("50% Diversification Requirement"); and (3) at the close of
each quarter of the Fund's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
If the Fund failed to qualify for treatment as a RIC for any taxable
year, (a) it would be taxed as an ordinary corporation on the full amount of
its taxable income for that year (even if it distributed that income to its
shareholders) and (b) the shareholders would treat all distributions out of
its earnings and profits, including distributions of net capital gains, as
dividends (that is, ordinary income). In addition, the Fund could be required
to recognize unrealized gains, pay substantial taxes and interest and make
substantial distributions before qualifying for RIC treatment.
Dividends and distributions declared by the Fund in December of any year
and payable to its shareholders of record on a date in that month are deemed
to have been paid by the Fund and received by the shareholders on December 31
of that year even if they are paid by the Fund during the following January.
Accordingly, those dividends and distributions will be taxed to the
shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of short-term, capital
loss to the extent of any distributions received on those shares. Investors
also should be aware that if shares are purchased shortly before the record
date for a dividend or distribution, the investor will receive some portion of
the purchase price back as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute, by the end of any calendar year,
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. For these purposes, the Fund may defer into the next calendar
year net capital losses incurred between November 1 and the end of the current
calendar year. It is the policy of the Fund to pay sufficient dividends and
distributions each year to avoid imposition of the Excise Tax.
Income from Foreign Securities
Dividends and interest received and gains realized, by the Fund, may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions ("foreign taxes") that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
Foreign Currency Gains and Losses
Gains or losses (1) from the disposition of foreign currencies including
forward currency contracts, (2) on the disposition of each debt security
denominated in a foreign currency that are attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the security
and the date of disposition, and (3) that are attributable to fluctuations in
exchange rates that occur between the time the Fund accrues interest,
dividends or other receivables, or expenses or other liabilities, denominated
in a foreign currency and the time the Fund actually collects the receivables
or pays the liabilities, generally are treated as ordinary income or loss.
These gains or losses, referred to under the Code as "section 988" gains or
losses, may increase or decrease the amount of the Fund's investment company
taxable income to be distributed to its shareholders as ordinary income,
rather than affecting the amount of its net capital gain.
Income from Options, Futures and Forward Currency Contracts and Foreign
Currencies
The use of hedging and option income strategies, such as writing
(selling) and purchasing options and futures contracts and entering into
forward currency contracts, involves complex rules that will determine for
income tax purposes the amount, character and timing of recognition of the
gains and losses the Fund realizes in connection therewith. Gains from the
disposition of foreign currencies (except certain gains that may be excluded
by future regulations), and gains from options, futures contracts and forward
currency contracts derived by the Fund with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement.
Any income the Fund earns from writing options is treated as short-term
capital gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it received for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being
exercised, the premium it received also will be a short-term capital gain. If
such an option is exercised and the Fund thus sells the securities subject to
the option, the premium the Fund receives will be added to the exercise price
to determine the gain or loss on the sale.
Certain options, futures contracts and forward currency contracts in
which the Fund may invest may be "section 1256 contracts." Section 1256
contracts held by the Fund at the end of its taxable year, other than
contracts subject to a "mixed straddle" election made by the Fund, are
"marked-to-market" (that is, treated as sold at that time for their fair
market value) for Federal income tax purposes, with the result that unrealized
gains or losses are treated as though they were realized. Sixty percent of
any net gains or losses recognized on these deemed sales, and 60% of any net
realized gains or losses from any actual sales of section 1256 contracts, are
treated as long-term capital gains or losses, and the balance is treated as
short-term capital gains or losses. Section 1256 contracts also may be
marked-to-market for purposes of the Excise Tax and other purposes. The Fund
may need to distribute any mark-to-market gains to its shareholders to satisfy
the Distribution Requirement and/or avoid imposition of the Excise Tax, even
though it may not have closed the transactions and received cash to pay the
distributions.
Code section 1092 (dealing with straddles) also may affect the taxation
of options and futures contracts in which the Fund may invest. That section
defines a "straddle" as offsetting positions with respect to personal
property; for these purposes, options, futures contracts and forward currency
contracts are personal property. Section 1092 generally provides that any
loss from the disposition of a position in a straddle may be deducted only to
the extent the loss exceeds the unrealized gain on the offsetting position(s)
of the straddle. In addition, these rules may postpone the recognition of
loss that would otherwise be recognized under the mark-to-market rules
discussed above. The regulations under section 1092 also provide certain
"wash sale" rules which apply to transactions where a position is sold at a
loss and a new offsetting position is acquired within a prescribed period, and
"short sale" rules applicable to straddles. If the Fund makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions will be determined under rules
that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences of straddle transactions to the Fund are not entirely clear.
If the Fund has an appreciated financial position -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which
exceeds its adjusted basis -- and enters into a "constructive sale" of the
position, the Fund will be treated as having made an actual sale thereof, with
the result that gain will be recognized at that time. A constructive sale
generally consists of a short sale, an offsetting notional principal contract
or futures or forward currency contract entered into by the Fund or a related
person with respect to the same or substantially identical property. In
addition, if the appreciated financial position is itself a short sale or such
a contract, acquisition of the underlying property or substantially identical
property will be deemed a constructive sale. The foregoing will not apply,
however, to any transaction during any taxable year that otherwise would be
treated as a constructive sale if the transaction is closed within 30 days
after the end of that year and the Fund holds the appreciated financial
position unhedged for 60 days after that closing (i.e., at no time during that
60-day period is the Fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially
identical or related property, such as having an option to sell, being
contractually obligated to sell, making a short sale, or granting an option to
buy substantially identical stock or securities).
Zero Coupon and Payment-in-Kind Securities
The Fund may acquire zero coupon or other securities issued with OID. As
the holder of those securities, the Fund must include in its income the OID
that accrues on the securities during the taxable year, even if the Fund
receives no corresponding payment on the securities during the year.
Similarly, the Fund must include in its gross income securities it receives as
"interest" on payment-in-kind securities. Because the Fund annually must
distribute substantially all of its investment company taxable income,
including any accrued OID and other non-cash income, in order to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, it may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those
distributions will be made from the Fund's cash assets or from the proceeds of
sales of portfolio securities, if necessary. The Fund may realize capital
gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio
of the Fund. Transactions in securities other than those for which an
exchange is the primary market are generally effected with dealers acting as
principals or market makers. Brokerage commissions are paid primarily for
effecting transactions in securities traded on an exchange and otherwise only
if it appears likely that a better price or execution can be obtained. The
individual who manages the Fund may manage other advisory accounts with
similar investment objectives. It can be anticipated that the manager will
frequently place concurrent orders for all or most accounts for which the
manager has responsibility or WRIMCO may otherwise combine orders for the Fund
with those of other funds in the Waddell & Reed Advisors Funds, W&R Target
Funds, Inc. and W&R Funds, Inc. or other accounts for which it has investment
discretion, including accounts affiliated with WRIMCO. WRIMCO, at its
discretion, may aggregate such orders. Under current written procedures,
transactions effected pursuant to such combined orders are averaged as to
price and allocated in accordance with the purchase or sale orders actually
placed for each fund or advisory account, except where the combined order is
not filled completely. In this case, for a transaction not involving an
initial public offering ("IPO"), WRIMCO will ordinarily allocate the
transaction pro rata based on the orders placed, subject to certain variances
provided for in the written procedures. For a partially filled IPO order,
subject to certain variances specified in the written procedures, WRIMCO
generally allocates the shares as follows: the IPO shares are initially
allocated pro rata among the included funds and/or advisory accounts grouped
according to investment objective, based on relative total assets of each
group; and the shares are then allocated within each group pro rata based on
relative total assets of the included funds and/or advisory accounts, except
that (a) within a group having a small cap-related investment objective,
shares are allocated on a rotational basis after taking into account the
impact of the anticipated initial gain on the value of the included fund or
advisory account and (b) within a group having a mid-cap-related investment
objective, shares are allocated based on the portfolio manager's judgment,
including but not limited to such factors as the fund's or advisory account's
investments strategies and policies, cash availability, any minimum investment
policy, liquidity, anticipated term of the investment and current securities
positions.
In all cases, WRIMCO seeks to implement its allocation procedures to
achieve a fair and equitable allocation of securities among its funds and
other advisory accounts. Sharing in large transactions could affect the price
the Fund pays or receives or the amount it buys or sells. As well, a better
negotiated commission may be available through combined orders.
To effect the portfolio transactions of the Fund, WRIMCO is authorized to
engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to seek "best
execution" (prompt and reliable execution at the best price obtainable) for
reasonable and competitive commissions. WRIMCO need not seek competitive
commission bidding but is expected to minimize the commissions paid to the
extent consistent with the interests and policies of the Fund. Subject to
review by the Board of Directors, such policies include the selection of
brokers which provide execution and/or research services and other services,
including pricing or quotation services directly or through others ("research
and brokerage services") considered by WRIMCO to be useful or desirable for
its investment management of the Fund and/or the other funds and accounts over
which WRIMCO has investment discretion.
Research and brokerage services are, in general, defined by reference to
Section 28(e) of the Securities Exchange Act of 1934 as including (1) advice,
either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities and purchasers or sellers, (2) furnishing
analyses and reports, or (3) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement and custody).
"Investment discretion" is, in general, defined as having authorization to
determine what securities shall be purchased or sold for an account, or making
those decisions even though someone else has responsibility.
The commissions paid to brokers that provide such research and/or
brokerage services may be higher than the commission another qualified broker
would charge for effecting comparable transactions if a good faith
determination is made by WRIMCO that the commission is reasonable in relation
to the research or brokerage services provided. Subject to the foregoing
considerations, WRIMCO may also consider sales of Fund shares as a factor in
the selection of broker-dealers to execute portfolio transactions. No
allocation of brokerage or principal business is made to provide any other
benefits to WRIMCO.
The investment research provided by a particular broker may be useful
only to one or more of the other advisory accounts of WRIMCO and investment
research received for the commissions of those other accounts may be useful
both to the Fund and one or more of such other accounts. To the extent that
electronic or other products provided by such brokers to assist WRIMCO in
making investment management decisions are used for administration or other
non-research purposes, a reasonable allocation of the cost of the product
attributable to its non-research use is made by WRIMCO.
Such investment research, which may be supplied by a third party at the
request of a broker, includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of WRIMCO;
serves to make 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.
During the Fund's fiscal years ended September 30, 1999, 1998 and 1997,
it paid brokerage commissions of $43,015, $7,715 and $19,948, respectively.
These figures do not include principal transactions or spreads or concessions
on principal transactions, i.e., those in which the Fund sells securities to a
broker-dealer firm or buys from a broker-dealer firm securities owned by it.
During the Fund's fiscal year ended September 30, 1999, the transactions,
other than principal transactions, which were directed to broker-dealers who
provided research services as well as execution totaled $12,734,199 on which
$22,854 in brokerage commissions were paid. These transactions were allocated
to these broker-dealers by the internal allocation procedures described above.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
under Rule 17j-1 of the 1940 Act that permits their respective directors,
officers and employees to invest in securities, including securities that may
be purchased or held by the Fund. The Code of Ethics subjects covered
personnel to certain restrictions that include prohibited activities, pre-
clearance requirements and reporting obligations.
OTHER INFORMATION
The Shares of the Fund
The Fund offers four classes of 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 contingent deferred sales charge;
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 NAVs of the two
classes. 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 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 which time the directors then in office will call a shareholders' meeting
for the election of directors. To the extent that Section 16(c) of the 1940
Act applies to the Fund, the directors are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
director when requested in writing to do so by the shareholders of record of
not less than 10% of the Fund's outstanding shares.
Each share (regardless of class) has one vote. All shares of the Fund
vote together as a single class, except as to any matter for which a separate
vote of any class is required by the 1940 Act, and except as to any matter
which affects the interests of one or more particular classes, in which case
only the shareholders of the affected classes are entitled to vote, each as a
separate class.
APPENDIX A
The following are descriptions of some of the ratings of securities which
the Fund may use. The Fund may also use ratings provided by other nationally
recognized statistical rating organizations in determining the securities
eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. An S&P
corporate bond rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment of
creditworthiness may take into consideration obligors such as guarantors,
insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P does
not perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information,
or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to pay
interest and repay principal is very strong, and debt rated AA differs from
AAA issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity to
pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace periods. The D rating will also be
used upon a filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments may impose certain
rating or other standards for obligations eligible for investment by savings
banks, trust companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable
MIS rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF PREFERRED STOCK RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. An S&P
preferred stock rating is an assessment of the capacity and willingness of an
issuer to pay preferred stock dividends and any applicable sinking fund
obligations. A preferred stock rating differs from a bond rating inasmuch as
it is assigned to an equity issue, which issue is intrinsically different
from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the debt rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA -- This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is
very strong, although not as overwhelming as for issues rated AAA.
A -- An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB -- An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the 'A' category.
BB, B, CCC -- Preferred stock rated BB, B, and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of
speculation and CCC the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
CC -- The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C -- A preferred stock rated C is a non-paying issue.
D -- A preferred stock rated D is a non-paying issue with the issuer in
default on debt instruments.
NR -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
Plus (+) or minus (-) -- To provide more detailed indications of
preferred stock quality, the rating from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
A preferred stock rating is not a recommendation to purchase, sell or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
or unavailability of, such information or based on other circumstances.
Moody's Investors Service, Inc. Because of the fundamental differences
between preferred stocks and bonds, a variation of MIS' familiar bond rating
symbols is used in the quality ranking of preferred stock. The symbols are
designed to avoid comparison with bond quality in absolute terms. It should
always be borne in mind that preferred stock occupies a junior position to
bonds within a particular capital structure and that these securities are
rated within the universe of preferred stocks.
Note: MIS applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Preferred stock rating symbols and their definitions are as follows:
aaa -- An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well-maintained in the
foreseeable future.
a -- An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
aaa and aa classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa -- An issue which is rated baa is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.
ba -- An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b -- An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated caa is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca -- An issue which is rated ca is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
c -- This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
23. Exhibits: Waddell & Reed Advisors Global Bond Fund, Inc.
---------
(a) Articles of Incorporation filed by EDGAR on November 13, 1995 as
EX-99.B1-h2charter to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
Articles Supplementary, filed by EDGAR on November 13, 1995 as EX-
99.B1-h2artsup 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)h2suppbc 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)h2artsup to Post Effective Amendment No. 24 to the
Registration Statement on Form N-1A*
Articles of Amendment attached hereto as EX-99.B(a)h2artamend
(b) By-Laws, as amended, filed by EDGAR on December 27, 1996 as EX-
99.B2-h2bylaw 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)h2bylaw2 to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-1A*
Amendment to Bylaws attached hereto as EX-99.B(b)h2bylaw3amend
Amendment to Bylaws attached hereto as EX-99.B(b)h2bylaw4amend
(c) Not applicable
(d) Investment Management Agreement filed by EDGAR on November 13, 1995
as EX-99.B5-h2ima to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
Assignment of the Investment Management Agreement filed by EDGAR on
November 13, 1995 as EX-99.B5-h2assign 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)h2imafee to
Post-Effective Amendment No. 22 to the Registration Statement on
Form N-1A*
(e) Underwriting Agreement filed by EDGAR on November 13, 1995 as EX-
99.B6-h2ua to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A*
(f) Not applicable
(g) Custodian Agreement, as amended, filed by EDGAR on December 29, 1999
as EX-99.B(g)h2ca to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A*
Custodian Agreement, as amended, attached hereto as EX-99.B(g)h2ca
(h) Service Agreement filed by EDGAR 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 November 13, 1995
as EX-99.B9-h2saa to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A*
Shareholder Servicing Agreement filed by EDGAR on December 1, 1998
as EX-99.B9-h2ssa 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, filed by EDGAR on July 2, 1999 as EX-
99.B(h)h2ssacom to Post-Effective Amendment No. 22 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)h2ssacomp
Class Y letter of understanding filed by EDGAR on December 27, 1996
as EX-99.B9-h2lou to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A*
Fidelity Bond Coverage (Exhibit C) to the Shareholder Servicing
Agreement, as amended, filed by EDGAR on December 29, 1999 as EX-
99.B(h)h2ssafid to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A*
Fidelity Bond Coverage (Exhibit C) to the Shareholder Servicing
Agreement, as amended, attached hereto as EX-99.B(h)h2ssafidbd
Accounting Services Agreement filed by EDGAR on November 13, 1995 as
EX-99.B9-h2asa 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)h2asaamend
(i) Opinion and Consent of Counsel attached hereto as EX-99.B(i)h2legopn
(j) Consent of Deloitte & Touche LLP, Independent Accountants, filed by
EDGAR on June 30, 2000 as EX-99.B(j)h2consnt to Post Effective
Amendment No. 24 to the Registration Statement on Form N-1A*
(k) Not applicable
(l) Agreement with initial shareholder, Waddell & Reed, Inc., (refiling
by EDGAR) filed by EDGAR on November 13, 1995 as EX-99.B13-h2inital
to Post-Effective Amendment No. 17 to the Registration Statement on
Form N-1A*
(m) Service Plan for Class A Shares filed by EDGAR on November 13, 1995
as EX-99.B15-h2spca 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-h2dsp 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)h2dspb to Post-Effective Amendment No. 22
to the Registration Statement on Form N-1A*
Distribution and Service Plan for Class C shares filed by EDGAR on
July 2, 1999 as EX-99.B(m)h2dspc 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)h2mcp to Post Effective Amendment No. 24 to the
Registration Statement on Form N-1A*
(p) Code of Ethics filed by EDGAR on June 30, 2000 as EX-99.B(p)h2code
to Post Effective Amendment No. 24 to the Registration Statement
on Form N-1A*
Code of Ethics attached hereto as EX-99.B(p)h2coe
24. Persons Controlled by or under common control with Registrant
-------------------------------------------------------------
None
25. Indemnification
---------------
Reference is made to Section 7 of ARTICLE Seventh of the Articles of
Incorporation of Registrant filed by EDGAR on December 1, 1998 as EX-
99.B1-h2charter to Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A* and to Article IV of the Underwriting Agreement
filed by EDGAR on November 13, 1995 as Ex-99.B6-h2ua to Post-Effective
Amendment No. 17 to the Registration Statement on Form N-1A*, both 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
----------------------------------------------------
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
predecessor, 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. It is 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 Municipal High Income Fund, Inc.
Waddell & Reed Advisors Asset Strategy Fund, Inc.
Waddell & Reed Advisors Small Cap Fund, Inc.
Waddell & Reed Advisors Tax-Managed Equity 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 September 25, 2000 SEC No. 8-27030, under the
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 are no service contracts 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
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
/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
/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
/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
Attest:
/s/Kristen A. Richards
--------------------------------
Kristen A. Richards
Secretary
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(a) 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
18th day of October, 2000.
WADDELL & REED ADVISORS GLOBAL BOND 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.
Signatures Title
---------- -----
/s/Keith A. Tucker* Chairman of the Board October 18, 2000
---------------------- ----------------
Keith A. Tucker
/s/Robert L. Hechler* President, Principal October 18, 2000
---------------------- Financial Officer and ----------------
Robert L. Hechler Director
/s/Henry J. Herrmann* Vice President and October 18, 2000
---------------------- Director ----------------
Henry J. Herrmann
/s/Theodore W. Howard* Vice President, Treasurer October 18, 2000
---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/James M. Concannon* Director October 18, 2000
------------------ ----------------
James M. Concannon
/s/John A. Dillingham* Director October 18, 2000
------------------ ----------------
John A. Dillingham
/s/David P. Gardner* Director October 18, 2000
------------------ ----------------
David P. Gardner
/s/Linda K. Graves* Director October 18, 2000
------------------ ----------------
Linda K. Graves
/s/Joseph Harroz, Jr.* Director October 18, 2000
------------------ ----------------
Joseph Harroz, Jr.
/s/John F. Hayes* Director October 18, 2000
------------------- ----------------
John F. Hayes
/s/Glendon E. Johnson* Director October 18, 2000
------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director October 18, 2000
------------------- ----------------
William T. Morgan
/s/Ronald C. Reimer* Director October 18, 2000
------------------ ----------------
Ronald C. Reimer
/s/Frank J. Ross, Jr.* Director October 18, 2000
------------------ ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director October 18, 2000
------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director October 18, 2000
------------------- ----------------
Frederick Vogel III
*By /s/Kristen A. Richards
-------------------------
Kristen A. Richards
Attorney-in-Fact
ATTEST:/s/Daniel C. Schulte
--------------------------
Daniel C. Schulte
Assistant Secretary
