WADDELL & REED
FUNDS, INC.
Total Return Fund
Growth Fund
International Growth Fund
Asset Strategy Fund
Limited-Term Bond Fund
Municipal Bond Fund
ANNUAL
REPORT
----------------------------------------
For the fiscal year ended March 31, 1997
<PAGE>
WADDELL & REED TOTAL RETURN FUND
MANAGER'S LETTER
MARCH 31, 1997
- -----------------------------------------------------------------
Dear Shareholder:
This report relates to the operation of the Total Return Fund for the fiscal
year ended March 31, 1997. The following discussion, graphs and tables provide
you with information regarding the Fund's performance during that period.
The past fiscal year proved to be difficult for most equity investments. While
the major market indexes experienced significant advances during a majority of
the fiscal year, the gains were largely attributable to a limited number of
well-capitalized companies that are heavily weighted in the indexes. A
relatively small group of stocks in the technology sector experienced above-
average performance, while cyclical issues generally experienced poor returns.
The Fund maintained a management style during the past fiscal year consistent
with prior years. We continued to focus our investments on companies that we
perceived as having the most potential for superior long-term growth, while
seeking current income where feasible. The Fund has retained its emphasis on
corporations with efficient worldwide distribution systems and companies with
significant exports to emerging nations.
The strategies and techniques we applied resulted in the direction of the Fund's
performance remaining modestly below that of the indexes charted on the
following page. Those indexes reflect the performance of securities that
generally represent the stock market (the S&P 500 Index) and the universe of
funds with similar investment objectives (the Lipper Growth and Income Fund
Universe Average).
We expect growth prospects to improve during the coming fiscal year. We will
continue to invest in companies that are dominant in their particular
industries. Current examples of companies that appear to offer attractive
investment opportunities include Intel, Gillette, Deere and Caterpillar.
Thank you very much for your continued support and confidence in our
organization.
Respectfully,
Russell E. Thompson
Manager, Waddell & Reed Funds, Inc. Total Return Fund
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
TOTAL RETURN FUND CLASS B SHARES,
THE STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX,
AND THE LIPPER GROWTH & INCOME FUND UNIVERSE AVERAGE
Total S & P 500 Lipper
Return Composite Growth &
Fund Stock Income Fund
Class B Price Universe
Shares Index Average
--------- --------- ----------
09/30/92 Purchase10,000 10,000 10,000
03/31/93 11,147 10,962 11,053
03/31/94 12,073 11,123 11,395
03/31/95 12,818 12,855 12,509
03/31/96 16,503 16,982 16,001
03/31/97 18,472 20,349 18,490
===== Total Return Fund, Class B Shares (1) (2) -- $18,472
+++++The Standard & Poor's 500 Composite Stock Price Index (1) -- $20,349
- ----- Lipper Growth & Income Fund Universe Average (1) -- $18,490
(1) Because the Fund commenced operations on a date other than at the end of a
month, and partial month calculations of the performance of the S&P 500
Composite Stock Price Index and the Lipper Growth & Income Fund Universe
Average (including income) are not available, the investments in the Fund,
Index and Lipper Universe were effected as of September 30, 1992.
(2) The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund.
Average Annual Total Return *
Class B ** Class Y
-----------------------------
Year Ended
3/31/97 8.93% 12.69%
4+ Years Ended
3/31/97*** 14.39% N/A
Life of
Class Y **** N/A 21.42%
*Total return for the Class Y shares may be greater than that of the Class B
shares because the Fund's Class Y shares are not subject to a contingent
deferred sales charge and have a lower 12b-1 fee.
**Performance data quoted represents past performance. Investment return and
principal value will fluctuate and an investor's shares, when redeemed, may
be worth more or less than their original cost. The returns shown reflect
the payment of the applicable contingent deferred sales charge (CDSC), as
described in the Prospectus, upon total redemption assumed to have occurred
at the end of each period. The maximum CDSC is 3%, declining to zero at the
end of the third calendar year of investment. The CDSC's applied for the
periods shown are 3% (1 Year) and 0% (4+ Years).
***9/21/92 (the initial offering date) through 3/31/97
****12/29/95 (the date on which Fund Class Y shares were first acquired by
investors) through 3/31/97.
Past performance is not predictive of future performance. Indexes are
unmanaged.
<PAGE>
SHAREHOLDER SUMMARY
- -----------------------------------------------------------------
TOTAL RETURN FUND
PORTFOLIO STRATEGY:
Common stocks and OBJECTIVE: Current income while
securities convertible into seeking capital
common stocks. growth.
Cash Reserves STRATEGY: Invests primarily in common
stocks, or securities convertible into
common stocks, of companies that have a
record of paying regular dividends on
common stock and also have the potential
for capital appreciation. (May purchase
securities subject to repurchase
agreements. May invest in certain
options, futures and other hedging
techniques.)
The use of cash reserves (often invested
in money market securities) for
defensive purposes is a strategy that
may be utilized by the Total Return Fund
from time to time.
Moving into cash reserve positions at
times thought to be near a major stock
market peak may allow the Fund the
opportunity to capture profits and
attempt to cushion the impact of market
declines. The added flexibility
provided by our CASH RESERVES STRATEGY,
when deemed appropriate, may be used in
the management of the portfolio.
FOUNDED: 1992
SCHEDULED DIVIDEND FREQUENCY: ANNUALLY
(December)
<PAGE>
PERFORMANCE SUMMARY - Class B Shares
PER SHARE DATA
For the Fiscal Year ended March 31, 1997
- ----------------------------------------
CAPITAL GAINS DISTRIBUTION $0.11
=====
NET ASSET VALUE ON
3/31/97 $18.18 adjusted to: $18.29(A)
3/31/96 16.34
------
CHANGE PER SHARE $ 1.95
======
(A)This number includes the capital gains distribution of $0.11 paid in December
1996 added to the actual net asset value on March 31, 1997.
Past performance is not necessarily indicative of future results.
TOTAL RETURN HISTORY
Average Annual
Total Return
----------------
With Without
CDSC** CDSC***
------ -------
Period
- ------
1-year period ended 3-31-97 8.93% 11.93%
Period from 9-21-92*
through 3-31-97 14.39% 14.39%
*Initial public offering of the Fund.
**"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted represents past performance and
reflects payment of the applicable contingent deferred sales charge upon
redemption at the end of each period.
***"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted in this column represents past
performance without reflecting deduction of the applicable contingent
deferred sales charge upon redemption at the end of each period.
Investment return and principal value will fluctuate and an investor's
shares, when redeemed, may be worth more or less than their original cost.
PORTFOLIO HIGHLIGHTS
On March 31, 1997, Total Return Fund had net assets totaling $317,957,176
invested in a diversified portfolio of:
89.82% Common Stocks
10.18% Cash and Cash Equivalents
As a shareholder of Total Return Fund, for every $100 you had invested on March
31, 1997, your Fund owned:
$57.30 Manufacturing Stocks
10.81 Wholesale and Retail Trade Stocks
10.18 Cash and Cash Equivalents
9.06 Finance, Insurance and Real Estate Stocks
6.83 Services Stocks
2.98 Transportation, Communication, Electric
and Sanitary Services Stocks
1.72 Contract Construction Stocks
1.12 Agriculture, Forestry and Fisheries Stocks
Not all holdings will be represented in the portfolio at all times.
<PAGE>
THE INVESTMENTS OF
TOTAL RETURN FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS
Apparel and Accessory Stores - 1.16%
Gap, Inc. (The) 110,500 $ 3,701,750
Apparel and Other Textile Products - 0.91%
Tommy Hilfiger Corporation* 55,700 2,910,325
Building Materials and Garden Supplies - 0.71%
Home Depot, Inc. (The) 42,200 2,257,700
Business Services - 0.99%
Electronic Data Systems Corporation 59,700 2,410,388
Manpower Inc. 20,500 738,000
Total 3,148,388
Chemicals and Allied Products - 17.13%
Abbott Laboratories 60,700 3,406,788
Air Products and Chemicals, Inc. 63,500 4,310,062
Amgen Inc.* 55,400 3,102,400
Avon Products, Inc. 27,500 1,443,750
BetzDearborn Inc. 44,400 2,802,750
Colgate-Palmolive Company 33,100 3,297,588
Crompton & Knowles Corporation 43,500 848,250
Dow Chemical Company (The) 31,800 2,544,000
du Pont (E.I.) de Nemours and Company 55,200 5,851,200
Geon Company (The) 40,700 946,275
IMC Global, Inc. 30,400 1,098,200
Lilly (Eli) and Company 37,000 3,043,250
Merck & Co., Inc. 38,700 3,260,475
PPG Industries, Inc. 69,000 3,726,000
Pfizer Inc. 35,900 3,020,087
Praxair, Inc. 55,200 2,477,100
Procter & Gamble Company (The) 33,100 3,806,500
Union Carbide Corporation 48,300 2,137,275
Warner-Lambert Company 38,600 3,338,900
Total 54,460,850
Communication - 1.31%
MCI Communications Corporation 54,700 1,945,241
SBC Communications Inc. 25,400 1,336,675
360 Communications Company* 51,500 888,375
Total 4,170,291
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
TOTAL RETURN FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS(Continued)
Depository Institutions - 4.35%
BankAmerica Corporation 27,600 $ 2,780,700
Chase Manhattan Corporation (The) 30,500 2,855,562
Citicorp 30,400 3,290,800
First Bank System, Inc. 27,600 2,014,800
Norwest Corporation 62,500 2,890,625
Total 13,832,487
Electric, Gas and Sanitary Services - 0.32%
WMX Technologies, Inc. 33,100 1,013,687
Electronic and Other Electric Equipment - 9.35%
AMP Incorporated 60,700 2,086,562
Analog Devices, Inc.* 157,800 3,550,500
Emerson Electric Co. 44,200 1,989,000
General Electric Company 66,300 6,580,275
Harman International Industries,
Incorporated 7,980 267,330
Intel Corporation 68,900 9,581,372
LSI Logic Corporation* 54,400 1,890,400
Molex Incorporated, Class A 33,750 1,177,031
Rival Company (The) 69,700 1,511,584
TRINOVA Corporation 33,100 1,108,850
Total 29,742,904
Engineering and Management Services - 0.58%
Fluor Corporation 35,400 1,858,500
Food and Kindred Products - 1.85%
CPC International Inc. 27,600 2,263,200
PepsiCo, Inc. 110,500 3,605,063
Total 5,868,263
Food Stores - 0.46%
Kroger Co. (The)* 29,000 1,471,750
Forestry - 1.12%
Georgia-Pacific Corporation 23,500 1,703,750
Weyerhaeuser Company 41,400 1,847,475
Total 3,551,225
Furniture and Home Furnishings Stores - 0.87%
Circuit City Stores, Inc. 83,200 2,776,800
General Building Contractors - 0.29%
Pulte Corporation 31,100 909,675
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
TOTAL RETURN FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS(Continued)
General Merchandise Stores - 4.06%
Dayton Hudson Corporation 75,800 $ 3,164,650
Federated Department Stores, Inc.* 45,900 1,508,963
Kmart Corporation* 223,200 2,706,300
May Department Stores Company (The) 55,200 2,511,600
Wal-Mart Stores, Inc. 108,600 3,027,225
Total 12,918,738
Health Services - 1.61%
Columbia/HCA Healthcare Corporation 68,000 2,286,500
Tenet Healthcare Corporation* 55,200 1,359,300
Vencor, Incorporated* 38,600 1,461,975
Total 5,107,775
Heavy Construction, Excluding Building - 0.25%
Foster Wheeler Corporation 22,100 781,788
Industrial Machinery and Equipment - 14.22%
AGCO Corporation 158,200 4,370,275
Applied Materials, Inc.* 91,300 4,228,286
Case Corporation 62,200 3,156,650
Caterpillar Inc. 72,500 5,818,125
cisco Systems, Inc.* 88,200 4,250,093
Compaq Computer Corporation* 19,900 1,524,837
Deere & Company 108,800 4,732,800
Eaton Corporation 27,600 1,956,150
Harnischfeger Industries, Inc. 65,500 3,045,750
Hewlett-Packard Company 46,900 2,497,425
Ingersoll-Rand Company 22,100 964,112
International Business Machines Corporation 17,100 2,349,113
New Holland NV* 70,700 1,573,075
Parker Hannifin Corporation 33,100 1,415,025
United Technologies Corporation 44,200 3,326,050
Total 45,207,766
Instruments and Related Products - 2.53%
General Motors Corporation, Class H 9,700 526,225
Guidant Corporation 53,500 3,290,250
Medtronic, Inc. 44,200 2,751,450
Xerox Corporation 25,700 1,461,687
Total 8,029,612
Insurance Carriers - 2.18%
Aetna Inc. 38,500 3,306,188
Oxford Health Plans Inc.* 62,000 3,630,844
Total 6,937,032
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
TOTAL RETURN FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS(Continued)
Miscellaneous Manufacturing Industries - 1.01%
Armstrong World Industries, Inc. 49,700 $ 3,218,075
Miscellaneous Retail - 0.18%
OfficeMax, Inc.* 43,875 570,375
Motion Pictures - 0.89%
Walt Disney Company (The) 38,700 2,825,100
Nondepository Institutions - 2.53%
Federal Home Loan Mortgage Corporation 159,200 4,338,200
Fannie Mae 102,600 3,706,425
Total 8,044,625
Paper and Allied Products - 0.43%
International Paper Company 35,400 1,376,175
Petroleum and Coal Products - 2.35%
Mobil Corporation 22,600 2,952,125
Royal Dutch Petroleum Company 16,600 2,905,000
Tosco Corporation 56,700 1,615,950
Total 7,473,075
Prepackaged Software - 2.76%
Computer Associates International,
Inc. 31,100 1,209,013
Microsoft Corporation* 44,200 4,052,565
Oracle Systems Corporation* 91,100 3,512,998
Total 8,774,576
Primary Metal Industries - 0.77%
Aluminum Company of America 35,900 2,441,200
Railroad Transportation - 0.49%
Union Pacific Corporation 27,600 1,566,300
Rubber and Miscellaneous Plastics Products - 0.91%
Goodyear Tire & Rubber Company (The) 55,200 2,884,200
Special Trade Contractors - 1.18%
Telefonaktiebolaget LM Ericsson,
Class B, ADR 110,500 3,736,226
Transportation by Air - 0.86%
AMR Corporation* 22,100 1,823,250
Southwest Airlines Co. 35,000 774,375
US Airways Group, Inc.* 5,000 122,500
Total 2,720,125
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
TOTAL RETURN FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS(Continued)
Transportation Equipment - 5.84%
AlliedSignal Inc. 38,700 $ 2,757,375
Boeing Company (The) 35,100 3,461,737
Chrysler Corporation 121,500 3,645,000
Dana Corporation 42,000 1,380,750
General Motors Corporation 55,200 3,056,700
Northrop Grumman Corporation 46,700 3,531,688
Sundstrand Corporation 17,200 746,050
Total 18,579,300
Wholesale Trade -- Durable Goods - 0.56%
Motorola, Inc. 29,600 1,787,100
Wholesale Trade -- Nondurable Goods - 2.81%
Gillette Company (The) 103,200 7,494,900
Safeway Inc.* 31,200 1,446,900
Total 8,941,800
TOTAL COMMON STOCKS - 89.82% $285,595,558
(Cost: $217,306,032)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Communication - 0.60%
NYNEX Corp.,
5.58%, 4-22-97 $1,905 1,898,799
Depository Institutions - 0.57%
U.S. Bancorp,
Master Note 1,825 1,825,000
Food and Kindred Products - 0.17%
General Mills, Inc.,
Master Note 548 548,000
Insurance Agents, Brokers and Service - 1.10%
Aon Corp.,
5.36%, 5-12-97 3,500 3,478,635
Nondepository Institutions - 3.58%
Island Finance Puerto Rico Inc.,
5.26%, 4-10-97 5,865 5,857,288
Whirlpool Financial Corp.,
5.43%, 4-16-97 5,545 5,532,454
Total 11,389,742
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
TOTAL RETURN FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Petroleum and Coal Products - 0.98%
Kerr-McGee Credit Corp.,
5.7%, 4-22-97 $3,135 $ 3,124,576
Security and Commodity Brokers - 1.41%
Merrill Lynch & Co., Inc.,
5.27%, 4-15-97 4,485 4,475,808
Textile Mill Products - 0.47%
Sara Lee Corporation,
Master Note 1,492 1,492,000
Transportation Equipment - 1.71%
Echlin, Inc.,
5.37%, 5-9-97 5,465 5,434,023
TOTAL SHORT-TERM SECURITIES - 10.59% $ 33,666,583
(Cost: $33,666,583)
TOTAL INVESTMENT SECURITIES - 100.41% $319,262,141
(Cost: $250,972,615)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.41%) (1,304,965)
NET ASSETS - 100.00% $317,957,176
See Notes to Schedules of Investments on page 59.
<PAGE>
WADDELL & REED GROWTH FUND
MANAGER'S LETTER
MARCH 31, 1997
- -----------------------------------------------------------------
Dear Shareholder:
This report relates to the operation of the Growth Fund for the fiscal year
ended March 31, 1997. The following discussion, graphs and tables provide you
with information regarding the Fund's performance during that period.
Market conditions during the past fiscal year were unfavorable for investing in
small cap stocks. In fact, omitting the performance of Intel and Microsoft
(which are truly large cap issues) from the NASDAQ Industrials Index, all
benchmark indexes tracking small cap growth underperformed money market returns
for the first time since 1994. Following the nearly eighteen percent decline in
small cap stocks during the summer of 1996, investors' preferences shifted to
large cap and blue chip stocks.
The Fund largely continued to pursue a strategy of investing in companies in
healthcare and technology, sectors that continue to exhibit high growth
potential. However, the absence of normal seasonal "January effect" improvement
in the small cap market caused us to take some long-term gains in our core
positions. Additionally, we have emphasized more "measured growth" companies
over potential "rapid growth" opportunities.
The strategies and techniques we applied resulted in the performance of the Fund
remaining below that of the indexes charted on the following page. Those
indexes reflect the performance of securities that generally represent the small
companies sector of the stock market (the NASDAQ Industrials Index) and the
universe of funds with similar investment objectives (the Lipper Small Company
Growth Fund Universe Average). The underperformance of the Fund relative to the
indexes resulted from our minimal use of initial public offerings before the
summer highs.
As the next fiscal year begins, it appears that expectations for profit growth
will continue an ongoing downward reassessment, particularly with the recent
interest rate increases by the Federal Reserve. Performance during these
periods is normally poor. Nevertheless, it should be kept in mind that declines
in this sector are well-advanced and valuations have markedly improved over the
past year.
Thank you very much for your continued support and confidence in our
organization.
Respectfully,
Mark G. Seferovich
Manager, Waddell & Reed Funds, Inc. Growth Fund
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
GROWTH FUND CLASS B SHARES,
THE NASDAQ INDUSTRIALS INDEX,
AND THE LIPPER GROWTH FUND UNIVERSE AVERAGE
Lipper
Growth Growth
Fund, Nasdaq Fund
Class B Industrials Universe
Shares Index Average
--------- ---------- ----------
09/30/92 Purchase 10,000 10,000 10,000
03/31/93 11,771 11,493 11,177
03/31/94 14,497 12,548 11,674
03/31/95 17,775 12,913 12,694
03/31/96 22,497 16,507 16,254
03/31/97 20,029 16,396 18,130
===== Growth Fund, Class B Shares (1) (2) -- $20,029
***** Nasdaq Industrial Index(1) - $16,396
- ----- Lipper Growth Fund Universe Average (1) -- $18,130
(1) Because the Fund 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, the investments were effected as of
September 30, 1992.
(2) The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund.
Average Annual Total Return*
Class B** Class Y
-----------------------------
Year Ended
3/31/97 -13.57% -10.37%
4+ Years Ended
3/31/97*** 16.59% N/A
Life of
Class Y **** N/A -4.40%
*Total return for the Class Y shares may be greater than that of the Class B
shares because the Fund's Class Y shares are not subject to a contingent
deferred sales charge and have a lower 12b-1 fee.
**Performance data quoted represents past performance. Investment return and
principal value will fluctuate and an investor's shares, when redeemed, may
be worth more or less than their original cost. The returns shown reflect
the payment of the applicable contingent deferred sales charge (CDSC), as
described in the Prospectus, upon total redemption assumed to have occurred
at the end of each period. The maximum CDSC is 3%, declining to zero at the
end of the third calendar year of investment. The CDSC's applied for the
periods shown are 3% (1 Year) and 0% (4+ Years).
***9/21/92 (the initial offering date) through 3/31/97
****12/29/95 (the date on which Fund Class Y shares were first acquired by
shareholders) through 3/31/97.
Past performance is not predictive of future performance. Indexes are
unmanaged.
<PAGE>
SHAREHOLDER SUMMARY
- -----------------------------------------------------------------
GROWTH FUND
PORTFOLIO STRATEGY:
Common stocks and OBJECTIVE: Capital appreciation.
securities convertible
into common stocks.
Cash Reserves STRATEGY: Invests primarily in common
stocks, or securities convertible into
common stocks, of companies that offer
above-average growth potential,
including relatively new or unseasoned
companies. (May purchase securities
subject to repurchase agreements. May
invest in certain options, futures and
other hedging techniques.)
The use of cash reserves (often invested
in money market securities) for
defensive purposes is a strategy that
may be utilized by the Growth Fund from
time to time.
Moving into cash reserve positions at
times thought to be near a major stock
market peak may allow the Fund the
opportunity to capture profits and
attempt to cushion the impact of market
declines. The added flexibility
provided by our CASH RESERVES STRATEGY,
when deemed appropriate, may be used in
the management of the portfolio.
FOUNDED: 1992
SCHEDULED DIVIDEND FREQUENCY: ANNUALLY
(December)
PERFORMANCE SUMMARY - Class B Shares
PER SHARE DATA
For the Fiscal Year Ended March 31, 1997
- ----------------------------------------
CAPITAL GAINS DISTRIBUTION $0.60
=====
NET ASSET VALUE ON
3/31/97 $18.16 adjusted to: $18.76(A)
3/31/96 21.00
------
CHANGE PER SHARE $(2.24)
======
(A)This number includes the capital gains distribution of $0.60 paid in December
1996 added to the actual net asset value on March 31, 1997.
Past performance is not necessarily indicative of future results.
TOTAL RETURN HISTORY
Average Annual Total Return
----------------------------
With Without
CDSC** CDSC***
------ -------
Period
- ------
1-year period ended 3-31-97 -13.57% -10.97%
Period from 9-21-92*
through 3-31-97 16.59% 16.59%
*Initial public offering of the Fund.
**"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted represents past performance and
reflects payment of the applicable contingent deferred sales charge upon
redemption at the end of each period.
***"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted in this column represents past
performance without reflecting deduction of the applicable contingent
deferred sales charge upon redemption at the end of each period.
Investment return and principal value will fluctuate and an investor's
shares, when redeemed, may be worth more or less than their original cost.
<PAGE>
PORTFOLIO HIGHLIGHTS
On March 31, 1997, Growth Fund had net assets totaling $198,351,710 invested in
a diversified portfolio of:
78.81% Common Stocks
21.19% Cash and Cash Equivalents
As a shareholder of Growth Fund, for every $100 you had invested on March 31,
1997, your Fund owned:
$42.24 Services Stocks
21.19 Cash and Cash Equivalents
20.92 Manufacturing Stocks
7.36 Transportation, Communication, Electric
and Sanitary Services Stocks
5.18 Finance, Insurance and Real Estate Stocks
3.11 Wholesale and Retail Trade Stocks
Not all holdings will be represented in the portfolio at all times.
<PAGE>
THE INVESTMENTS OF
GROWTH FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS
Business Services - 20.89%
America Online, Inc.* 160,000 $ 6,780,000
CKS Group, Inc.* 150,000 3,103,050
CUC International Inc.* 150,000 3,375,000
CompuServe Corporation* 200,000 1,962,400
FactSet Research Systems, Inc.* 175,000 3,390,625
HBO & Company 55,900 2,658,716
HCIA Inc.* 70,000 1,168,090
Health Management Systems, Inc.* 84,400 553,833
IMNET Systems, Inc.* 100,000 1,481,200
Mecon, Inc.* 120,000 438,720
PHAMIS, Inc.* 110,000 1,980,000
Parametric Technology Corporation* 130,000 5,858,060
SCB Computer Technology, Inc.* 150,000 2,512,500
Shared Medical Systems Corporation 100,000 4,662,500
Synopsys, Inc.* 60,000 1,503,720
Total 41,428,414
Chemicals and Allied Products - 1.16%
Watson Pharmaceuticals Inc.* 64,500 2,297,812
Communication - 6.80%
COLT Telecom Group plc, ADR* 75,000 1,439,025
Cincinnati Bell Inc. 50,000 2,825,000
Intermedia Communications of
Florida, Inc.* 150,000 2,475,000
360 Communications Company* 200,000 3,450,000
WorldCom Inc.* 150,000 3,290,550
Total 13,479,575
Electronic and Other Electric Equipment - 2.23%
Ascend Communications, Inc.* 50,000 2,040,600
Atmel Corporation* 100,000 2,393,700
Total 4,434,300
Engineering and Management Services - 1.20%
Transition Systems, Inc.* 200,000 2,375,000
Food and Kindred Products - 1.16%
Tootsie Roll Industries, Inc. 51,500 2,311,063
Furniture and Home Furnishings Stores - 0.71%
Williams-Sonoma, Inc.* 48,750 1,401,562
Health Services - 6.41%
American Healthcorp, Inc.* 200,000 2,237,400
Physicians Resource Group, Inc.* 200,000 2,650,000
Quorum Health Group, Inc.* 100,000 3,093,700
Vencor, Incorporated* 125,000 4,734,375
Total 12,715,475
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
GROWTH FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS (Continued)
Hotels and Other Lodging Places - 1.23%
Vail Resorts, Inc.* 125,500 $ 2,447,250
Industrial Machinery and Equipment - 1.85%
Franklin Electronic Publishers, Inc.* 150,000 1,762,500
Tractor Supply Company* 100,000 1,912,500
Total 3,675,000
Instruments and Related Products - 8.07%
DePuy, Inc.* 150,000 3,281,250
LUNAR CORPORATION* 100,000 3,400,000
St. Jude Medical, Inc.* 100,000 3,337,500
STERIS Corporation* 150,000 3,665,550
Target Therapeutics, Inc.* 35,000 2,314,375
Total 15,998,675
Insurance Agents, Brokers and Services - 1.13%
CRA Managed Care, Inc.* 60,000 2,235,000
Insurance Carriers - 1.92%
United HealthCare Corporation 80,000 3,810,000
Miscellaneous Manufacturing Industries - 4.14%
Blyth Industries, Inc.* 111,900 4,042,388
Tiffany & Co. 110,000 4,180,000
Total 8,222,388
Miscellaneous Retail - 0.77%
Books-A-Million, Inc.* 15,300 73,624
MSC Industrial Direct Co., Inc.* 50,000 1,456,250
Total 1,529,874
Personal Services - 3.30%
Block (H&R), Inc. 60,000 1,762,500
Equity Corporation International* 225,000 4,781,250
Total 6,543,750
Prepackaged Software - 9.21%
BMC Software, Inc.* 50,000 2,303,100
Broderbund Software, Inc.* 100,000 2,175,000
Cerner Corporation* 150,000 1,950,000
Dendrite International, Inc.* 150,000 1,425,000
Expert Software, Inc.* 150,000 318,750
GT Interactive Software Corp.* 60,000 431,220
HPR Inc.* 160,000 1,780,000
Intuit Inc.* 175,000 4,046,875
Medic Computer Systems, Inc.* 200,000 3,212,400
Premenos Technology Corp.* 100,000 625,000
Total 18,267,345
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
GROWTH FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS (Continued)
Real Estate - 2.13%
Stewart Enterprises, Inc., Class A 116,100 $ 4,223,137
Stone, Clay and Glass Products - 2.31%
Department 56, Inc.* 150,000 2,606,250
Gentex Corporation* 100,000 1,981,200
Total 4,587,450
Trucking and Warehousing - 0.56%
Heartland Express, Inc.* 57,733 1,111,360
Wholesale Trade -- Durable Goods - 1.63%
OmniCare, Inc. 137,600 3,233,600
TOTAL COMMON STOCKS - 78.81% $156,328,030
(Cost: $153,885,493)
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Commercial Paper
Chemicals and Allied Products - 2.16%
BOC Group PLC (The),
5.34%, 4-7-97 $4,290 4,286,182
Communication - 2.17%
NYNEX Corp.,
5.58%, 4-22-97 4,325 4,310,922
Depository Institutions - 0.11%
U.S. Bancorp,
Master Note 213 213,000
Electric, Gas and Sanitary Services - 3.92%
Carolina Power & Light Co.,
5.32%, 4-10-97 7,780 7,769,653
Food and Kindred Products - 1.34%
General Mills, Inc.,
Master Note 46 46,000
Hercules Inc.,
5.65%, 4-21-97 2,615 2,606,792
Total 2,652,792
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
GROWTH FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Commercial Paper (Continued)
Insurance Agents, Brokers and Service - 2.19%
Aon Corp.,
5.47%, 4-18-97 $4,360 $ 4,348,738
Insurance Carriers - 1.63%
USAA Capital Corp.,
5.28%, 4-29-97 3,250 3,236,653
Metal Mining - 1.92%
BHP Finance (USA) Inc.,
5.32%, 4-4-97 3,820 3,818,306
Petroleum and Coal Products - 2.42%
Kerr-McGee Credit Corp.,
5.7%, 4-22-97 4,820 4,803,974
Textile Mill Products - 0.01%
Sara Lee Corporation,
Master Note 13 13,000
Total Commercial Paper - 17.87% 35,453,220
Municipal Obligations - 2.15%
California
Oakland-Alameda County Coliseum Lease Revenue
Bonds (Oakland Coliseum Project), 1995 Series
B-1 (Canadian Imperial Bank of Commerce),
5.42%, 4-10-97 4,255 $ 4,255,000
TOTAL SHORT-TERM SECURITIES - 20.02% $ 39,708,220
(Cost: $39,708,220)
TOTAL INVESTMENT SECURITIES - 98.83% $196,036,250
(Cost: $193,593,713)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.17% 2,315,460
NET ASSETS - 100.00% $198,351,710
See Notes to Schedules of Investments on page 59.
<PAGE>
WADDELL & REED INTERNATIONAL GROWTH FUND
MANAGER'S LETTER
MARCH 31, 1997
- -----------------------------------------------------------------
Dear Shareholder:
This report relates to the operation of the International Growth Fund for the
fiscal year ended March 31, 1997. The following discussion, graphs and tables
provide you with information regarding the Fund's performance during that
period.
During the past fiscal year, global inflation remained low and economic growth
was varied in different regions of the world. Economic growth accelerated in
the U.S. and Great Britain, but remained slow in Continental Europe as the trend
of corporate and financial restructuring continued. Japan's economic recovery
was driven by a significant acceleration in exports while its domestic economy
remained weak due to unresolved structural problems and tighter fiscal policy.
Data suggests that Latin American economies are now in recovery. Most Asian
economies slowed notably in late 1996, but remained among the fastest growing
areas of the world. International investments were impacted by the growing
strength of the U.S. Dollar during the past fiscal year relative to most foreign
currencies.
Although the manager of the Fund has changed during the past fiscal year, we
have largely adhered to consistent investment strategies and techniques. Over
the past fiscal year, we concentrated our European investments in quality
companies that continued to restructure, as well as in competitive exporters
which tend to benefit from the rising U.S. Dollar. We increased our exposure to
Latin America as those economies recovered, with particular focus on Brazilian
companies involved in market reforms. In the Pacific Basin, we concentrated on
Hong Kong companies enjoying strong demand in China. We continued to limit our
exposure to Japan, concentrating on a few high-quality blue chips which
benefited from the strong U.S. Dollar. Infrastructure stocks were preferred for
emerging economies with strong government spending plans.
As charted on the following page, the strategies and techniques we applied
during the past fiscal year resulted in the Fund significantly outperforming the
securities index that reflects the performance of the securities market in
Europe, Asia and the Far East (the Morgan Stanley E.A.FE. Index), and the
universe of funds with similar investment objectives (the Lipper International
Fund Universe Average).
We expect global inflation to remain subdued as the next fiscal year begins. We
believe European economies will recover slightly in the second half of this
year. The move toward European unity should continue to dominate public budgets
and private consumption. We anticipate continued improvement in Latin America,
boosted by progress on privatization and deregulation. The economic outlook for
Japan remains clouded by fiscal tightening and unresolved structural problems.
We expect the Hong Kong market to appreciate ahead of the July 1st transition to
Chinese rule. Hong Kong's economy should be strengthened by higher property
prices and increased private consumption. We will continue to take advantage of
unique opportunities presented by global deregulation and privatization and
retain our primary focus on investing in quality growth stocks.
Thank you very much for your continued support and confidence in our
organization.
Respectfully,
Thomas A. Mengel
Manager, Waddell & Reed Funds, Inc. International Growth Fund
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERNATIONAL GROWTH FUND CLASS B SHARES(1),
THE MORGAN STANLEY E.A.FE. INDEX
AND THE LIPPER INTERNATIONAL FUND UNIVERSE AVERAGE
Morgan
International Stanley Lipper
Growth E.A.FE. International
Fund, Index Fund
Class B (with net Universe
Shares Dividends) Average
--------- ---------- ----------
09/30/92Purchase 10,000 10,000 10,000
03/31/93 9,753 10,767 10,747
03/31/94 9,785 13,190 13,649
03/31/95 10,160 13,992 13,397
03/31/96 10,937 15,717 15,561
03/31/97 13,654 15,946 16,853
===== International Growth Fund, Class B (2) (3) -- $13,654
****** Morgan Stanley E.A.FE. Index (with net dividends)(2) - $15,946
*-*-*-*- Lipper International Fund Universe Average(2) - $16,853
Past performance is not predictive of future performance. Indexes are
unmanaged.
Comparative performance of International Growth Fund Class B Shares following
change in objective.
International MSCI Lipper
Growth E.A.FE. International
Fund, Index Fund
Class B (with net Universe
Shares Dividends) Average
--------- --------- ----------
04/30/95 Purchase 10,000 10,000 10,000
03/31/96 9,965 10,826 11,257
03/31/97 12,442 10,983 12,192
===== International Growth Fund, Class B (3) (4) -- $12,442
******MSCI E.A.FE. Index (with net dividends)(4) - $10,983
*-*-*-*-Lipper International Fund Universe Average(4) - $12,192
(1) Effective as of 4/20/95, the name of the Fund was changed to Waddell &
Reed International Growth Fund and its investment objective was changed to
long-term appreciation, with realization of income as a secondary objective.
Due to the change in objective, more appropriate indexes have been selected
with which to compare the Fund's performance following 4/20/95.
(2) Because the Fund 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, the investments were effected as of
September 30, 1992.
(3) The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund.
(4) Because the Fund 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, the investments were effected as of
April 30, 1995.
Average Annual Total Return*
Class B** Class Y
-----------------------------
Year Ended
3/31/97 21.85% 25.93%
4+ Years Ended
3/31/97*** 7.41% N/A
Aggregate Total
Return for Life
of Class Y **** N/A 21.12%
*Total return for the Class Y shares may be greater than that of the Class B
shares because the Fund's Class Y shares are not subject to a contingent
deferred sales charge and have a lower 12b-1 fee.
**Performance data quoted represents past performance. Investment return and
principal value will fluctuate and an investor's shares, when redeemed, may
be worth more or less than their original cost. The returns shown reflect
the payment of the applicable contingent deferred sales charge (CDSC), as
described in the Prospectus, upon total redemption assumed to have occurred
at the end of each period. The maximum CDSC is 3%, declining to zero at the
end of the third calendar year of investment. The CDSC's applied for the
periods shown are 3% (1 Year) and 0% (4+ Years).
***9-21-92 (the initial offering date) through 3-31-97
****12/29/95 (the date on which Fund Class Y shares were first acquired by
shareholders) through 3/31/97.
Past performance is not predictive of future performance. Indexes are
unmanaged.
<PAGE>
SHAREHOLDER SUMMARY
- -----------------------------------------------------------------
INTERNATIONAL GROWTH FUND
PORTFOLIO STRATEGY:
Normally at least 80% in OBJECTIVE: Long-term appreciation
foreign securities. Not of capital with current
more than 75% in securities income as a secondary
in any one country. consideration.
Maximum of 15% in currency STRATEGY: Invests in securities
exchange contracts (common or preferred stocks
and/or debt securities) issued
Cash Reserves by companies or governments of any
nation, including the United States.
Securities are selected for their
potential to provide long-term growth.
The Fund provides an opportunity to
invest in foreign companies in many
different industries. (May purchase
securities subject to repurchase
agreements. May invest in certain
options, futures and other hedging
techniques.)
The use of cash reserves (often invested
in money market securities) for
defensive purposes is a strategy that
may be utilized by the International
Growth Fund from time to time.
Moving into cash reserve positions at
times thought to be near a major stock
market peak may allow the Fund the
opportunity to capture profits and
attempt to cushion the impact of market
declines. The added flexibility
provided by our CASH RESERVES STRATEGY,
when deemed appropriate, may be used in
the management of the portfolio.
FOUNDED: 1992
SCHEDULED DIVIDEND FREQUENCY: ANNUALLY
(December)
<PAGE>
PERFORMANCE SUMMARY - Class B Shares
PER SHARE DATA
For the Fiscal Year Ended March 31, 1997
- ----------------------------------------
DIVIDEND PAID $0.01
=====
NET ASSET VALUE ON
3/31/97 $12.40
3/31/96 9.94
------
CHANGE PER SHARE $ 2.46
======
Past performance is not necessarily indicative of future results.
TOTAL RETURN HISTORY
Average Annual Total Return
---------------------------
With Without
CDSC** CDSC***
------ -------
Period
- ------
1-year period ended 3-31-97 21.85% 24.85%
Period from 9-21-92*
through 3-31-97 7.41% 7.41%
*Initial public offering of the Fund.
**"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted represents past performance and
reflects payment of the applicable contingent deferred sales charge upon
redemption at the end of each period.
***"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted in this column represents past
performance without reflecting deduction of the applicable contingent
deferred sales charge upon redemption at the end of each period.
Investment return and principal value will fluctuate and an investor's
shares, when redeemed, may be worth more or less than their original cost.
<PAGE>
PORTFOLIO HIGHLIGHTS
On March 31, 1997, International Growth Fund had net assets totaling $50,699,347
invested in a diversified portfolio of:
90.24% Common Stocks and Warrants
4.76% Preferred Stocks
4.69% Cash and Cash Equivalents and Open Forward Currency Contracts
0.31% Other Government Security
As a shareholder of International Growth Fund, for every $100 you had invested
on March 31, 1997, your Fund owned:
90.24% Common Stocks and Warrants
4.76% Preferred Stocks
4.69% Cash and Cash Equivalents and Open Forward Currency Contracts
0.31% Other Government Security
Not all holdings will be represented in the portfolio at all times.
THE INVESTMENTS OF
INTERNATIONAL GROWTH FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS AND WARRANTS
Argentina - 1.79%
Capex S.A., Class A (A) 50,000 $ 500,000
Disco S.A., Sponsored ADR* 12,500 407,813
Total 907,813
Australia - 0.92%
Westpac Banking Corporation Limited (A) 80,000 464,069
Denmark - 0.95%
Sydbank A/S (A) 10,000 483,160
Finland - 1.96%
Nokia Corporation, Series K (A) 7,000 417,743
TT Tieto Oy [Class B] (A) 7,000 576,149
Total 993,892
France - 13.31%
Accor S.A. (A) 2,400 349,666
Banque Nationale de Paris (A) 13,000 579,090
Business Objects S.A., ADR* 30,000 296,250
Cap Gemini Sogeti S.A. (A)* 10,000 608,068
Chargeurs International S.A. (A)* 6,000 373,925
Cofidur (A)* 9,683 410,465
Compagnie Generale des Eaux (A) 2,500 340,636
Elf Aquitaine S.A. (A) 4,000 411,078
GEA Grenobloise d'Electronique et
d'Automatismes (A) 10,000 600,232
Generale de Geophysique S.A. (A)* 4,500 406,358
Group Axime (A)* 4,000 474,486
Rhone-Poulenc S.A. (A)* 20,000 677,888
Societe Generale (A) 4,000 468,786
Societe Industrielle de Transports
Automobiles S.A. (A) 1,500 300,027
Union Financiere de France Banque S.A. (A) 4,044 449,453
Total 6,746,408
Germany - 4.99%
CKAG Colonia Konzern AG (A) 4,000 376,499
Daimler-Benz AG (A)* 9,500 759,772
eff-eff Fritz Fuss GmbH & Co. (A) 5,000 215,827
IVG Holding AG (A) 9,000 311,871
Plettac AG (A) 2,000 432,854
Rofin-Sinar Technologies Inc. (A)* 30,000 431,250
Total 2,528,073
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
INTERNATIONAL GROWTH FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS AND WARRANTS (Continued)
Hong Kong - 5.59%
China Travel International Investment
Hong Kong Limited (A) 670,000 $ 322,082
GZI Transport Limited, Warrants (A)* 130,000 23,152
Guangdong Corporation Limited (A) 484,000 415,368
Guangdong Tannery Ltd. (A)* 24,200 7,105
Guangnan Holdings Limited (A) 250,000 324,244
HSBC Holdings plc (A) 25,000 580,735
Hysan Development Company Limited (A) 80,000 239,521
JCG Holdings Ltd. (A) 280,000 220,421
National Mutual Asia Ltd. (A) 300,000 313,597
Tingyi (Cayman Islands) Holding Corp.(A)* 1,776,000 387,343
Total 2,833,568
Indonesia - 2.31%
PT Bank NISP, F (A)* 840,000 384,860
Pt Steady Safe Transportation
Service, F (A) 283,333 336,335
Pt United Tractors, F (A) 150,000 449,836
Total 1,171,031
Israel - 0.45%
Check Point Software Technologies Ltd.* 11,000 226,875
Italy - 1.51%
Industrie Natuzzi S.p.A., ADR 20,000 477,500
STET - Societa Financiaria
Telefonica p.a. (A) 80,000 289,382
Total 766,882
Japan - 3.93%
Daiichi Corporation (A) 10,000 145,608
Eisai Co., Ltd. (A) 15,000 257,240
NEC Corporation (A) 30,000 339,751
Nintendo Corp., Ltd. (A) 6,000 430,998
Promise Co., Ltd. (A) 6,500 272,367
Tokyo Electron Limited (A) 16,500 547,242
Total 1,993,206
Malaysia - 0.83%
Multi-Purpose Hldgs Bhd (A) 200,000 419,778
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
INTERNATIONAL GROWTH FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS AND WARRANTS (Continued)
Mexico - 2.62%
Corporacion Industrial Sanluis, S.A.
de C.V., CPO (A) 29,500 $ 177,542
Empresas ICA Sociedad Controladora,
S.A. de C.V., ADS* 10,000 158,750
Gruma, S.A., Class B (A)* 61,326 299,151
Grupo Financiero Inbursa, S.A. de
C.V., Class B (A) 80,000 282,800
Grupo Radio Centro, S.A. de C.V., ADR 10,000 86,250
Grupo Televisa, S.A., GDR* 13,000 323,375
Total 1,327,868
Netherlands - 8.66%
Cap Gemini Sogeti S.A. (A)* 15,000 544,029
Fugro N.V. (A) 40,000 853,379
Getronics N.V. (A) 15,000 488,026
Internatio-Muller N.V. (A) 18,000 550,109
Koninklijke Boskalis Westminster
N.V. (A) 30,000 598,432
Koninklijke Pakhoed NV (A) 15,000 503,227
Ordina Beheer N.V. (A)* 7,500 522,028
Qiagen N.V., ADR* 10,000 331,250
Total 4,390,480
Norway - 3.16%
Blom ASA (A) 15,000 549,765
Merkantildata A/S (A) 25,000 565,602
Schibsted AS (A) 24,000 485,061
Total 1,600,428
Philippines - 1.13%
Belle Corporation (A)* 1,000,000 318,786
Filinvest Development Corporation (A) 900,000 256,167
Total 574,953
Portugal - 0.72%
Portugal Telecom, S.A.,
Ordinary Shares, ADS 10,000 367,500
Singapore - 0.79%
Uraco Holdings Limited (A) 650,000 402,595
Spain - 2.39%
Abengoa, S.A. (A)* 13,113 473,360
Sociedad General de Aquas de
Barcelona, S.A. (A) 10,000 375,141
Tele Pizza, S.A. (A)* 8,354 363,654
Total 1,212,155
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
INTERNATIONAL GROWTH FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS AND WARRANTS (Continued)
Sweden - 6.95%
Astra AB, Class A (A) 10,000 484,218
Biacore International AB, ADR* 15,000 273,750
Biora AB (A)* 40,000 422,445
Bure Investment AB (A) 20,000 260,375
Celsius Industrier AB, Class B (A)* 7,000 134,372
Diligentia AB (A)* 9,000 104,615
Enator AB (A)* 12,500 297,239
Frontec AB, Class B (A)* 16,000 161,539
Kinnevik AB, Series B (A) 6,000 168,181
Medical Invest Svenska AB (A)* 16,600 584,383
Skandia Group Insurance
Company Ltd. (A) 20,000 631,011
Total 3,522,128
Switzerland - 9.65%
The Ares-Serono Group, Class B (A) 600 789,990
Brauerei Eichhof AG (A) 120 246,090
Choco Lindt & Spru AG, Registered (A) 20 386,514
Ciba Specialty Chemicals Holding Inc.* 501 41,445
Credit Suisse Group, Registered
Shares (A) 10,000 1,201,251
Novartis AG (A)* 501 622,027
SMH Swiss Corporation (A) 760 422,663
Swisslog Holding AG (A)* 2,000 709,072
Zurich Insurance Company (A) 1,500 472,367
Total 4,891,419
Taiwan - 1.13%
Want Want Holdings Ltd.* 200,000 574,000
Thailand - 1.01%
Srithai Superware Public Company
Limited, F (A) 102,300 511,894
United Kingdom - 13.49%
Avis Europe PLC (A)* 250,000 542,916
Corporate Services Group plc (A) 225,000 740,340
Dr Solomon's Group PLC, ADR* 42,500 935,000
Freepages Group plc (A)* 1,000,000 751,856
Hays plc (A) 60,000 537,980
JBA Holdings plc (A) 44,000 528,438
Johnson Matthey plc (A) 30,000 269,730
Michael Page Group plc (A) 60,000 531,070
Misys plc (A) 30,000 616,950
Professional Staff plc, ADR* 65,000 568,750
Tomkins plc (A) 80,000 357,995
Vodafone Group Plc (A) 100,000 458,188
Total 6,839,213
TOTAL COMMON STOCKS AND WARRANTS - 90.24% $45,749,388
(Cost: $41,064,648)
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
INTERNATIONAL GROWTH FUND
MARCH 31, 1997
Shares Value
PREFERRED STOCKS
Brazil - 3.09%
Telebras S.A., ADR 5,000 $ 511,875
Telecomunicacoes de Sao Paulo S.A. 2,500,000 635,453
Telecomunicacoes do Rio de
Janeiro S.A.* 3,000,000 416,706
Total 1,564,034
Germany - 1.67%
Marschollek, Lautenschlager und
Partner AG (A) 2,500 524,580
Moebel Walther AG (A) 6,000 323,741
Total 848,321
TOTAL PREFERRED STOCKS - 4.76% $ 2,412,355
(Cost: $2,112,409)
Principal
Amount in
Thousands
OTHER GOVERNMENT SECURITY - 0.31%
Australia
Queensland Treasury Corporation,
12.0%, 5-15-97 (B) $A200 $ 157,813
(Cost: $146,778)
Face
Amount in
Thousands
UNREALIZED GAIN ON OPEN FORWARD CURRENCY CONTRACTS
- - 0.15%
Deutsche Marks, 4-21-97 (B) DM1,458 24,523
Swiss Francs, 4-21-97 (B) SFr1,680 49,265
Total $ 73,788
Principal
Amount in
Thousands
SHORT-TERM SECURITIES
Depository Institutions - 4.01%
U.S. Bancorp,
Master Note $2,032 2,032,000
Food and Kindred Products - 4.17%
General Mills, Inc.,
Master Note 2,115 2,115,000
Textile Mill Products - 2.57%
Sara Lee Corporation,
Master Note 1,305 1,305,000
TOTAL SHORT-TERM SECURITIES - 10.75% $ 5,452,000
(Cost: $5,452,000)
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
INTERNATIONAL GROWTH FUND
MARCH 31, 1997
Value
TOTAL INVESTMENT SECURITIES - 106.21% $53,845,344
(Cost: $48,775,835)
LIABILITIES, NET OF CASH AND OTHER ASSETS - (6.21%) (3,145,997)
NET ASSETS - 100.00% $50,699,347
See Notes to Schedules of Investments on page 59.
<PAGE>
WADDELL & REED ASSET STRATEGY FUND
FUND MANAGER'S LETTER
- -----------------------------------------------------------------
MARCH 31, 1997
Dear Shareholder:
This report relates to the operation of the Asset Strategy Fund for the fiscal
year ended March 31, 1997. The discussion, graphs and tables contained in this
report will provide you with information regarding the Fund's performance during
that period.
The past fiscal year was characterized by modest economic growth, low inflation,
and slowing growth rates for U.S. corporate earnings. Interest rates rose
during the year overall, and showed substantial volatility. Investor psychology
in the equity markets ranged from fear in July to euphoria at the end of 1996 to
anxiety during the last fiscal quarter.
Although the managers of the Fund have changed during the past fiscal year, we
have adhered to investment strategies and techniques consistent with those of
the previous manager. During the past fiscal year, we focused on value and
confined our securities purchases to stocks and bonds that were out of favor.
This contrarian approach allowed us to minimize risk and was consistent with our
belief that market valuations were causing inflated equity prices. We attempted
to anticipate changes in sectors and in asset groups that were not popular
investment options. U.S. stock indexes achieved all-time high levels and the
flow of investments into U.S. equity funds continued to set records.
Unfortunately, our relative performance was not good as the financial market
environment in the past fiscal year did not favor such a low risk, value-
oriented investment approach.
The strategies and techniques we applied resulted in the direction of the Fund's
overall performance, and the performance of its holdings in the various
categories of securities in which the Fund invests, remaining below that of the
indexes charted on the following page due largely to the Fund's low exposure to
U.S. stocks. Those indexes reflect the performance of securities that generally
represent the stock market (the S&P 500 Index), one-month certificates of
deposit (Salomon Brothers Short-Term Index for 1 Month Certificates of Deposit),
the bond market (the Salomon Brothers Broad Investment Grade Bond Index) and the
universe of portfolios with similar investment objectives (the Lipper Flexible
Portfolio Universe Average). A variety of indexes is presented because the Fund
invests in stocks, bonds and other instruments. We have chosen to use the
Salomon Brothers Index beginning with this year's Annual Report, instead of the
Lehman Brothers Aggregate Bond Index that had been presented in prior years. We
believe that the Salomon Brothers Index provides a more accurate basis for
comparing the Fund's performance to the performance of the types of fixed income
securities in which the Fund invests. Both indexes are presented on the
following page in this year's Annual Report for comparison purposes.
We expect the U.S. economy to continue to grow during 1997, with the strongest
growth occurring during the first half of the year. The Federal Reserve may
take steps to raise short-term interest rates again to combat resulting
inflationary pressures. The Fund has worked to lower the duration of its fixed
income holdings to offset the impact of anticipated rising interest rates. Our
strategy will be to reduce exposure to long-term U.S. Treasury bonds and
corporate bonds, and reinvest the proceeds into corporate bonds with shorter
maturities and higher yields. This strategy will also diversify risk by
reducing exposure to any one particular bond issuer. In addition, we intend to
focus on increasing our equity exposure in those U.S. stocks that are expected
to have better relative performance in the anticipated economic environment.
Thank you for your continued confidence.
Respectfully,
Michael L. Avery
Daniel J. Vrabac
Managers, Waddell & Reed Funds, Inc. Asset Strategy Fund
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
ASSET STRATEGY FUND CLASS B SHARES,
THE STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX,
THE LEHMAN BROTHERS AGGREGATE BOND INDEX,
THE SALOMON BROTHERS BROAD INVESTMENT GRADE DEBT INDEX,
THE SALOMON BROTHERS SHORT-TERM INDEX FOR 1 MONTH CERTIFICATES OF DEPOSIT,
AND THE LIPPER FLEXIBLE PORTFOLIO UNIVERSE AVERAGE
Salomon
Salomon Brothers
Asset S&P 500 Lehman Brothers Short-Term Lipper
Strategy Composite Brothers Broad Index Flexible
Fund, Stock Aggregate Investment for 1 month Portfolio Funds
Class B Price Bond Grade Certificates Universe
Shares Index Index Debt Index of Deposit Average
--------- --------- ---------- ---------- ---------- ----------
5/01/95Purchase 10,000 10,000 10,000 10,000 10,000 10,000
3/31/96 10,300 12,832 10,925 10,936 10,541 11,320
3/31/97 10,212 15,377 11,461 11,473 11,122 12,445
==== Asset Strategy Fund, Class B Shares (1)(2) -- $10,212
++++ The Standard & Poor's 500 Composite Stock Price Index (1) --
$15,377
**** Lehman Brothers Aggregate Bond Index (1) -- $11,461
-+-+-+ Salomon Brothers Broad Investment Grade Debt Index (1) -- $11,473
*--*-- Salomon Brothers Short-Term Index for 1 Month Certificates of
Deposit (1) -- $11,122
---- Lipper Flexible Portfolio Universe Average (1) -- $12,445
(1) Because the Fund 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, the investments were effected as of
April 30, 1995.
(2) The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund.
Average Annual Total Return*
Class B** Class Y
-----------------------------
Year Ended
3/31/97 -3.73% 0.05%
1+ Years Ended
3/31/97*** 0.09% N/A
Life of Class Y ****N/A 1.47%
*Total return for the Class Y shares may be greater than that of the Class B
shares because the Fund's Class Y shares are not subject to a contingent
deferred sales charge and have a lower 12b-1 fee.
**Performance data quoted represents past performance. Investment return and
principal value will fluctuate and an investor's shares, when redeemed, may
be worth more or less than their original cost. The returns shown reflect
the payment of the applicable contingent deferred sales charge (CDSC), as
described in the Prospectus, upon total redemption assumed to have occurred
at the end of each period. The maximum CDSC is 3%, declining to zero at the
end of the third calendar year of investment. The CDSC's applied for the
periods shown are 3%.
***4-20-95 (the initial offering date) through 3-31-97
****12/29/95 (the date on which Fund Class Y shares were first acquired by
shareholders) through 3/31/97.
Past performance is not predictive of future performance. Indexes are
unmanaged.
<PAGE>
SHAREHOLDER SUMMARY
- -----------------------------------------------------------------
ASSET STRATEGY FUND
Stocks 40% OBJECTIVE: To seek high total return with
(can range from 10-60%) reduced risk over the
long term.
Bonds 40%
(can range from 20-60%) STRATEGY: Invests in stocks, bonds
and short-term
Short-Term Instruments 20% instruments, both in the
(can range from 0-70%) United States and abroad, which are
allocated in a mix that varies based on
the current outlook for the different
markets. (May purchase securities
subject to repurchase agreements. May
invest in certain options, futures and
other hedging techniques.)
The use of cash reserves (often invested
in money market securities) for
defensive purposes is a strategy that
may be utilized by the Asset Strategy
Fund from time to time.
Moving into cash reserve positions at
times thought to be near a major stock
market peak may allow the Fund the
opportunity to capture profits and
attempt to cushion the impact of market
declines. The added flexibility
provided by our CASH RESERVES STRATEGY,
when deemed appropriate, may be used in
the management of the portfolio.
FOUNDED: 1995
SCHEDULED DIVIDEND FREQUENCY:
QUARTERLY(March, June, September
and December)
PERFORMANCE SUMMARY - Class B Shares
PER SHARE DATA
For the Fiscal Year ended March 31, 1997
- ----------------------------------------
DIVIDEND PAID $0.21
=====
CAPITAL GAINS DISTRIBUTION $0.14
=====
NET ASSET VALUE ON
3/31/97 $9.73 adjusted to: $9.87(A)
3/31/96 10.15
------
CHANGE PER SHARE ($0.28)
======
(A)This number includes the capital gains distribution of $0.14 paid in
December 1996 added to the actual net asset value on March 31, 1997.
Past performance is not necessarily indicative of future results.
TOTAL RETURN HISTORY
Aggregate Annual
Total Return
----------------
With Without
CDSC** CDSC***
------ -------
Period
- ------
1-year period ended 3-31-97 -3.73% -0.86%
Period from 4-20-95*
through 3-31-97 0.09% 1.08%
*Initial public offering of the Fund.
**"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted represents past performance and
reflects payment of the applicable contingent deferred sales charge upon
redemption at the end of each period.
***"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted in this column represents past
performance without reflecting deduction of the applicable contingent
deferred sales charge upon redemption at the end of each period.
Investment return and principal value will fluctuate and an investor's
shares, when redeemed, may be worth more or less than their original cost.
<PAGE>
PORTFOLIO HIGHLIGHTS
On March 31, 1997, Asset Strategy Fund had net assets totaling $13,513,706
invested in a diversified portfolio of:
56.89% Common Stocks
22.48% Corporate Debt Securities
12.11% United States Government Securities
4.37% Foreign Government Securities
4.15% Cash and Cash Equivalents
As a shareholder of Asset Strategy Fund, for every $100 you had invested on
March 31, 1997, your Fund owned:
56.89 Common Stocks
22.48 Corporate Debt Securities
12.11 United States Government Securities
4.37 Foreign Government Securities
4.15 Cash and Cash Equivalents
Not all holdings will be represented in the portfolio at all times.
<PAGE>
THE INVESTMENTS OF
ASSET STRATEGY FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS
Business Services - 2.53%
Adaptec Inc.* 4,900 $ 174,866
First Data Corporation 3,200 108,400
Red Brick Systems, Inc.* 4,300 59,392
Total 342,658
Chemicals and Allied Products - 6.80%
IMC Global, Inc. 8,500 307,063
Nalco Chemical Company 10,600 396,175
Praxair, Inc. 4,800 215,400
Total 918,638
Communication - 9.54%
Cox Communications, Inc.* 16,000 330,000
Nokia Corporation, Series A, ADS 8,500 495,125
SBC Communications Inc. 4,300 226,287
360 Communications Company* 13,800 238,050
Total 1,289,462
Electric, Gas and Sanitary Services - 1.90%
Sonat Inc. 4,700 256,150
Food and Kindred Products - 2.26%
Seagram Company Ltd. (The) 8,000 306,000
Furniture and Fixtures - 0.67%
Lear Corporation* 2,700 90,112
General Merchandise Stores - 3.70%
Federated Department Stores, Inc.* 8,000 263,000
May Department Stores Company (The) 5,200 236,600
Total 499,600
Health Services - 2.04%
Living Centers of America, Inc.* 8,000 276,000
Heavy Construction, Excluding Building - 2.04%
Koninklijke Boskalis Westminster N.V. (A) 13,812 275,518
Holding and Other Investment Offices - 1.78%
LTC Properties, Inc. 14,500 241,062
See Notes to Schedule of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
ASSET STRATEGY FUND
MARCH 31, 1997
Shares Value
COMMON STOCKS (Continued)
Industrial Machinery and Equipment - 5.64%
AGCO Corporation 4,100 $ 113,262
Case Corporation 4,800 243,600
Harnischfeger Industries, Inc. 3,000 139,500
Integrated Process Equipment Corp.* 8,800 147,946
New Holland NV 5,300 117,925
Total 762,233
Instruments and Related Products - 2.41%
General Motors Corporation, Class H 6,000 325,500
Personal Services - 1.93%
Equity Corporation International* 12,300 261,375
Petroleum and Coal Products - 5.13%
Mobil Corporation 1,800 235,125
Royal Dutch Petroleum Company 1,300 227,500
Tosco Corporation 8,100 230,850
Total 693,475
Prepackaged Software - 3.04%
Maxis, Inc.* 25,000 182,800
Oracle Systems Corporation* 5,900 227,516
Total 410,316
Textile Mill Products - 1.19%
Polymer Group, Inc. * 12,100 160,325
Transportation by Air - 2.56%
Delta Air Lines, Inc. 1,400 117,775
Southwest Airlines Co. 10,300 227,888
Total 345,663
Transportation Equipment - 1.73%
Sundstrand Corporation 5,400 234,225
TOTAL COMMON STOCKS - 56.89% $ 7,688,312
(Cost: $8,037,016)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Amusement and Recreation Services - 2.49%
Trump Atlantic City Associates,
11.25%, 5-1-2006 $370 336,700
Chemicals and Allied Products - 2.15%
The BOC Group, Inc.,
5.875%, 1-29-2001 300 290,124
See Notes to Schedule of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
ASSET STRATEGY FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Depository Institutions - 4.42%
Banco de Inversion y Comercio Exterior S.A.,
9.375%, 12-27-2000 (C) $300 $ 302,439
Banco Nacional de Comercio Exterior, S.N.C.,
7.5%, 7-1-2000 300 294,150
Total 596,589
Electric, Gas and Sanitary Services - 2.28%
Compania de Transporte de Energia Electrica
en Alta Tension TRANSENER Sociedad Anonima,
9.625%, 7-15-99 (C) 300 308,250
Electronic and Other Electric Equipment - 1.40%
VLSI Technology, Inc., Convertible,
8.25%, 10-1-2005 200 189,376
Food and Kindred Products - 2.07%
Coca-Cola Bottling Co. Consolidated,
6.85%, 11-1-2007 300 279,468
Paper and Allied Products - 3.00%
Buckeye Cellulose Corporation,
9.25%, 9-15-2008 400 406,000
Primary Metal Industries - 2.23%
Ispat Mexicana, S.A. de C.V.,
10.375%, 3-15-2001 (C) 300 301,500
Printing and Publishing - 2.44%
Viacom International, Inc.,
9.125%, 8-15-99 325 329,875
TOTAL CORPORATE DEBT SECURITIES - 22.48% $ 3,037,882
(Cost: $3,112,022)
See Notes to Schedule of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
ASSET STRATEGY FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
FOREIGN GOVERNMENT SECURITIES
Argentina - 2.26%
The Republic of Argentina,
9.25%, 2-23-2001 $300 $ 306,000
Mexico - 2.11%
United Mexican States,
6.97%, 8-12-2000 300 284,619
TOTAL FOREIGN GOVERNMENT SECURITIES - 4.37% $ 590,619
(Cost: $589,343)
UNITED STATES GOVERNMENT SECURITIES
United States Treasury:
6.125%, 5-31-97 850 850,527
7.25%, 2-15-98 60 60,582
7.125%, 2-29-2000 60 60,806
7.5%, 2-15-2005 60 62,072
9.125%, 5-15-2018 500 601,875
TOTAL UNITED STATES GOVERNMENT SECURITIES - 12.11% $1,635,862
(Cost: $1,715,797)
TOTAL SHORT-TERM SECURITIES - 2.40% $ 324,000
(Cost: $324,000)
TOTAL INVESTMENT SECURITIES - 98.25% $13,276,675
(Cost: $13,778,178)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.75% 237,031
NET ASSETS - 100.00% $13,513,706
See Notes to Schedules of Investments on page 59.
<PAGE>
WADDELL & REED LIMITED-TERM BOND FUND
MANAGER'S LETTER
MARCH 31, 1997
- ---------------------------------------------------------------------------
Dear Shareholder:
This report relates to the operation of the Limited-Term Bond Fund for the
fiscal year ended March 31, 1997. The following discussion, graphs and tables
provide you with information regarding the Fund's performance during that
period.
The past fiscal year was characterized by stronger than expected economic
growth, causing inflation concerns and contributing to generally sub par returns
in the fixed income markets. Strong employment growth, combined with a low
unemployment rate and above-trend growth in the Gross Domestic Product, created
fears of wage inflation and inflation in general. Following strong signs of
economic growth during the last half of the fiscal year, the Federal Reserve
raised the Federal Funds Rate by a quarter point in March in an effort to slow
the growth of the economy.
In response to the prevailing economic conditions, the Fund increased its
exposure to mortgage-backed and corporate bonds. Mortgage-backed bonds tend to
provide attractive yield and total return characteristics in an environment of
gradually rising interest rates. Corporate bonds typically provide superior
yield and are attractive during periods of economic growth. We also attempted
to maintain an average maturity for the Fund's holdings near the mid point of
the two to five year range.
The strategies and techniques we applied resulted in the direction of the Fund's
performance remaining modestly below that of the indexes charted on the
following page. Those indexes generally represent the limited-term sector of
the bond market (the Salomon Brothers 1-5 Years Treasury/Government
Sponsored/Corporate Bond Index) and the universe of funds with similar
investment objectives (the Lipper Short-Intermediate Investment Grade Debt Fund
Universe Average). We have chosen to use the Salomon Brothers Index beginning
with this year's Annual Report, instead of the Lehman Brothers Mutual Fund Short
Investment Grade Debt Index that had been presented in prior years. We believe
that the Salomon Brothers Index provides a more accurate basis for comparing the
Fund's performance to the performance of the types of fixed income securities in
which the Fund invests. The Salomon Brothers Index and the Lehman Brothers
Index are both presented on the following page in this year's Annual Report for
comparison purposes. The Lipper Universe Average to which the Fund was
previously assigned, the Lipper Short Investment Grade Debt Fund Universe
Average, has been changed by Lipper Analytical Services, Inc. to the above-
referenced index.
As the next fiscal year begins, evidence of strong consumer demand suggests that
the recent pattern of above-trend U.S. real economic growth will continue. We
anticipate that the Federal Reserve will take measures to tighten domestic
monetary policy in response to perceived inflationary pressures that may result
from continued economic growth, low unemployment and high utilization of
production capacity. However, we believe that the Federal Reserve's actions
will be restrained due to the continuing strength of the dollar and limited
inflationary pressures. We expect to continue our strategy of seeking relative
value opportunities in securities offering superior yield characteristics, such
as mortgage-backed and corporate bonds. We will also look to lengthen
maturities somewhat in order to take advantage of anticipated real interest rate
levels.
Thank you very much for your continued support and confidence in our
organization.
Respectfully,
W. Patrick Sterner
Manager, Waddell & Reed Funds, Inc. Limited-Term Bond Fund
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
LIMITED-TERM BOND FUND CLASS B SHARES,
THE LEHMAN BROTHERS MUTUAL FUND SHORT INVESTMENT GRADE DEBT INDEX,
THE SALOMON BROTHERS 1-5 YEARS TREASURY/GOVERNMENT SPONSORED/CORPORATE BOND
INDEX,
AND THE LIPPER SHORT-INTERMEDIATE INVESTMENT GRADE DEBT FUND UNIVERSE AVERAGE
Salomon
Brothers Lipper Short-
Limited-Lehman 1-5 Years Intermediate
Term Brothers Treasury/ Investment
Bond Mutual Fund Government Grade Debt
Fund, Short Investment Sponsored/ Fund
Class BGrade Debt Corporate Universe
Shares Index Index Average
-------- --------- --------- ----------
09/30/92Purchase10,00010,000 10,000 10,000
03/31/93 10,206 10,333 10,295 10,277
03/31/94 10,350 10,710 10,573 10,549
03/31/95 10,632 11,264 11,033 10,954
03/31/96 11,419 12,345 11,983 11,920
03/31/97 11,821 13,030 12,601 12,468
===== Limited-Term Bond Fund, Class B Shares (1) (2) -- $11,821
+++++ Lehman Brothers Mutual Fund Short Investment Grade Debt Index (1) --
$13,030
******** Salomon Brothers 1-5 Years Treasury/ Government Sponsored/ Corporate
Index (1) -- $12,601
- ---------- Lipper Short Intermediate Investment Grade Debt Fund Universe
Average (1) -- $12,468
(1) Because the Fund 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, the investments were effected as of
September 30, 1992.
(2) The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund.
Average Annual Total Return *
Class B** Class Y
-----------------------------
Year Ended
3/31/97 0.55% 4.33%
4+ Years Ended
3/31/97*** 3.84% N/A
Life of Class Y ****N/A 3.96%
*Total return for the Class Y shares may be greater than that of the Class B
shares because the Fund's Class Y shares are not subject to a contingent
deferred sales charge and have a lower 12b-1 fee.
**Performance data quoted represents past performance. Investment return and
principal value will fluctuate and an investor's shares, when redeemed, may
be worth more or less than their original cost. The returns shown reflect
the payment of the applicable contingent deferred sales charge (CDSC), as
described in the Prospectus, upon total redemption assumed to have occurred
at the end of each period. The maximum CDSC is 3%, declining to zero at the
end of the third calendar year of investment. The CDSC's applied for the
periods shown are 3% (1 Year) and 0% (3+ Years).
***9-21-92(the initial offering date) through 3-31-97
****12/29/95 (the date on which Fund Class Y shares were first acquired by
shareholders) through 3/31/97.
Past performance is not predictive of future performance. Indexes are
unmanaged.
<PAGE>
SHAREHOLDER SUMMARY
- -----------------------------------------------------------------
LIMITED-TERM BOND FUND
PORTFOLIO STRATEGY:
OBJECTIVE: High level of current income
Dollar-weighted average consistent with
maturity of portfolio is preservation of capital.
between two and five years.
At least 65% investment-grade
bonds.
STRATEGY: Invests primarily in debt
securities of investment grade,
including debt securities issued or
guaranteed by the U.S. Government or its
agencies or instrumentalities, with the
portfolio having a dollar-weighted
average maturity of not less than two
years, but not more than five years.
(May purchase securities subject to
repurchase agreements. May invest in
certain options, futures and other
hedging
techniques.)
FOUNDED: 1992
SCHEDULED DIVIDEND FREQUENCY: MONTHLY
<PAGE>
PERFORMANCE SUMMARY - Class B Shares
PER SHARE DATA
For the Fiscal Year Ended March 31, 1997
- ----------------------------------------
DIVIDENDS PAID $0.44
=====
CAPITAL GAIN DISTRIBUTION $0.01
=====
NET ASSET VALUE ON
3/31/97 $9.90 adjusted to: $ 9.91(A)
3/31/96 10.00
------
CHANGE PER SHARE $(0.09)
======
(A)This number includes the capital gains distribution of $0.01 paid in December
1996 added to the actual net asset value on March 31, 1997.
Past performance is not necessarily indicative of future results.
TOTAL RETURN HISTORY
Average Annual
Total Return
----------------
With Without
CDSC** CDSC***
------ -------
Period
- ------
1-year period ended 3-31-97 0.55% 3.52%
Period from 9-21-92*
through 3-31-97 3.84% 3.84%
*Initial public offering of the Fund.
**"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted represents past performance and
reflects payment of the applicable contingent deferred sales charge upon
redemption at the end of each period.
***"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted in this column represents past
performance without reflecting deduction of the applicable contingent
deferred sales charge upon redemption at the end of each period.
Investment return and principal value will fluctuate and an investor's
shares, when redeemed, may be worth more or less than their original cost.
<PAGE>
PORTFOLIO HIGHLIGHTS
On March 31, 1997, Limited-Term Bond Fund had net assets totaling $17,875,039
invested in a diversified portfolio of:
95.64% Bonds
4.36% Cash and Cash Equivalents
As a shareholder of Limited-Term Bond Fund, for every $100 you had invested on
March 31, 1997, your Fund owned:
$60.89 Corporate Bonds
32.29 U.S. Government Securities
4.36 Cash and Cash Equivalents
2.46 Municipal Bond
Not all holdings will be represented in the portfolio at all times.
<PAGE>
THE INVESTMENTS OF
LIMITED-TERM BOND FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES
Chemicals and Allied Products - 2.85%
American Home Products Corporation,
7.7%, 2-15-2000 $500 $ 510,195
Communication - 2.91%
GTE Corporation,
8.85%, 3-1-98 510 520,837
Depository Institutions - 6.66%
First Chicago Corporation,
7.625%, 1-15-2003 600 609,702
Wells Fargo & Company,
8.375%, 5-15-2002 558 580,214
Total 1,189,916
Food and Kindred Products - 1.35%
ConAgra, Inc.,
9.75%, 11-1-97 236 240,758
General Merchandise Stores - 6.89%
Dillard Department Stores, Inc.,
8.75%, 6-15-98 200 204,806
Penney (J.C.) Company, Inc.,
10.0%, 10-15-97 505 514,817
Sears, Roebuck and Co.,
8.2%, 4-15-99 500 511,645
Total 1,231,268
Industrial Machinery and Equipment - 2.88%
Tenneco Inc.,
8.2%, 11-15-99 500 514,370
Instruments and Related Products - 4.01%
Baxter International Inc.,
8.125%, 11-15-2001 350 360,189
Polaroid Corporation,
8.0%, 3-15-99 350 357,045
Total 717,234
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
LIMITED-TERM BOND FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Nondepository Institutions - 11.71%
Associates Corporation of North America,
8.25%, 12-1-99 $500 $ 516,215
Avco Financial Services, Inc.,
7.375%, 8-15-2001 500 502,305
Ford Motor Credit Company,
4.3%, 7-15-98 24 24,380
General Motors Acceptance Corporation:
6.375%, 9-23-97 50 50,069
7.75%, 1-15-99 500 508,210
Norwest Financial, Inc.,
6.2%, 9-15-99 500 492,685
Total 2,093,864
Personal Services - 2.74%
Service Corporation International,
6.375%, 10-1-2000 500 489,040
Petroleum and Coal Products - 4.15%
Chevron Corporation,
8.11%, 12-1-2004 520 538,762
Phillips Petroleum Company,
9.5%, 11-15-97 200 203,408
Total 742,170
Railroad Transportation - 2.86%
Union Pacific Corporation,
7.875%, 2-15-2002 500 511,410
Security and Commodity Brokers - 6.09%
Merrill Lynch & Co., Inc.,
6.0%, 1-15-2001 600 579,114
Salomon Inc.,
7.75%, 5-15-2000 500 509,105
Total 1,088,219
Textile Mill Products - 2.86%
Fruit of the Loom, Inc.,
7.875%, 10-15-99 500 511,635
Transportation by Air - 2.93%
Federal Express Corporation,
10.0%, 9-1-98 500 522,725
TOTAL CORPORATE DEBT SECURITIES - 60.89% $10,883,641
(Cost: $11,014,208)
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
LIMITED-TERM BOND FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BOND - 2.46%
Kansas
Kansas Development Finance Authority,
Health Facilities Revenue Bonds
(Stormont-Vail HealthCare, Inc.),
7.25%, 11-15-2002 $440 $ 439,450
(Cost: $440,000)
UNITED STATES GOVERNMENT SECURITIES
Federal Home Loan Mortgage Corporation:
5.5%, 4-15-2013 68 67,752
5.5%, 9-15-2013 1 1,104
6.4%, 2-15-2018 250 244,608
Federal National Mortgage Association:
6.0%, 11-1-2000 348 333,155
5.0%, 12-25-2001 38 37,361
7.95%, 3-7-2005 500 504,765
8.0%, 2-1-2008 240 243,919
6.0%, 1-1-2009 293 275,099
6.0%, 2-1-2009 296 278,479
6.5%, 12-1-2010 671 645,348
6.0%, 1-1-2011 546 513,192
6.5%, 2-1-2011 556 534,896
7.0%, 5-1-2011 468 459,903
7.0%, 7-1-2011 472 464,091
7.0%, 9-25-2020 33 32,575
7.0%, 4-1-2026 491 469,052
Government National Mortgage Association:
6.5%, 10-15-2008 230 221,906
7.0%, 7-15-2010 450 444,093
TOTAL UNITED STATES GOVERNMENT SECURITIES - 32.29% $5,771,298
(Cost: $5,957,050)
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
LIMITED-TERM BOND FUND
MARCH 31, 1997
Value
TOTAL SHORT-TERM SECURITIES - 3.76% $ 673,000
(Cost: $673,000)
TOTAL INVESTMENT SECURITIES - 99.40% $17,767,389
(Cost: $18,084,258)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.60% 107,650
NET ASSETS - 100.00% $17,875,039
See Notes to Schedules of Investments on page 59.
<PAGE>
WADDELL & REED MUNICIPAL BOND FUND
MANAGER'S LETTER
MARCH 31, 1997
- ---------------------------------------------------------------------------
Dear Shareholder:
This report relates to the operation of the Municipal Bond Fund for the fiscal
year ended March 31, 1997. The following discussion, graphs and tables provide
you with information regarding the Fund's performance during that period.
Interest rates on longer-term Treasury bonds fluctuated over an approximate one
percent range during the past fiscal year, from a low in early December to
closer to the high end as the fourth quarter closed. Yields on municipal bonds
have been more stable and, due to strong early year seasonal demand, have
declined less in price than other fixed income categories. Action by the
Federal Reserve to increase short-term interest rates in March caused an upward
movement in all interest rates and added new uncertainty to the markets.
The Fund continued to pursue a relatively cautious and defensive strategy in
anticipation of increased yields in its municipal bond investments. Due to the
expected rise in interest rates, we increased the Fund's holdings of "cushion
bonds," bonds with high coupons priced to shorter call dates. This strategy was
intended to maintain a reasonable yield on the Fund's portfolio while reducing
price risks that accompany higher yields.
The strategies and techniques we applied resulted in the direction of the Fund's
performance remaining consistent with that of the indexes charted on the
following page. Those indexes reflect the performance of securities that
generally represent the municipal bond market (the Lehman Brothers Municipal
Bond Index) and the universe of funds with similar investment objectives (the
Lipper General Municipal Debt Fund Universe Average).
We expect that an attractive buying opportunity will occur later this year when
the position of the Federal Reserve and the strength of the economy become
clearer. At that time, we anticipate adjusting the Fund's portfolio for stable
or declining interest rates. In a stable to declining interest rate
environment, maturity and call protection will be the areas to which we will be
most attuned. If the Federal Reserve can continue to hold inflation in check,
municipal bond investments should prove to be rewarding during the coming fiscal
year.
Thank you for your continued support and confidence in our organization.
Respectfully,
John M. Holliday
Manager, Waddell & Reed Funds, Inc. Municipal Bond Fund
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
MUNICIPAL BOND FUND B SHARES,
THE LEHMAN BROTHERS MUNICIPAL BOND INDEX,
AND THE LIPPER GENERAL MUNICIPAL DEBT FUND UNIVERSE AVERAGE
Lipper
Municipal Lehman General
Bond Brothers Municipal
Fund Municipal Debt Fund
Class B Debt Universe
Shares Index Average
--------- --------- ----------
09/30/92 Purchase 10,000 10,000 10,000
03/31/93 10,700 10,560 10,576
03/31/94 10,782 10,805 10,759
03/31/95 11,469 11,608 11,432
03/31/96 12,327 12,581 12,242
03/31/97 12,983 13,269 12,831
===== Municipal Bond Fund, Class B Shares (1) (2)-- $12,983
+++++ Lehman Brothers Municipal Bond Index (1) -- $13,269
- ---------- Lipper General Municipal Debt Fund Universe Average (1) -- $12,831
Past performance is not predictive of future performance. Indexes are
unmanaged.
(1) Because the Fund 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, the investments were effected as of
September 30, 1992.
(2) The value of the investment in the Fund is impacted by the ongoing
expenses of the Fund.
Average Annual Total Return *
Class B** Class Y
-----------------------------
Year Ended
3/31/97 2.32% 5.96%
3+ Years Ended
3/31/97*** 6.02% N/A
Aggregate Total
Return for Life
of Class Y **** N/A 3.85%
*Total return for the Class Y shares may be greater than that of the Class B
shares because the Fund's Class Y shares are not subject to a contingent
deferred sales charge and have a lower 12b-1 fee.
**Performance data quoted represents past performance. Investment return and
principal value will fluctuate and an investor's shares, when redeemed, may
be worth more or less than their original cost. The returns shown reflect
the payment of the applicable contingent deferred sales charge (CDSC), as
described in the Prospectus, upon total redemption assumed to have occurred
at the end of each period. The maximum CDSC is 3%, declining to zero at the
end of the third calendar year of investment. The CDSC's applied for the
periods shown are 3% (1 Year) and 0% (3+ Years).
***9-21-92 (the initial offering date) through 3-31-97
****12/29/95 (the date on which Fund Class Y shares were first acquired by
shareholders) through 3/31/97.
<PAGE>
SHAREHOLDER SUMMARY
- -----------------------------------------------------------------
MUNICIPAL BOND FUND
PORTFOLIO STRATEGY:
Minimum 80% OBJECTIVE: Income which is not subject
Municipal Bonds. to Federal income taxation.
(Income may be subject to state
Maximum 5% non-investment and local taxes, and a portion
grade debt securities. may be subject to Federal taxes,
including alternative minimum
Less than 25% of its assets tax.)
in securities of issuers
located in any single state.
STRATEGY: Invests in municipal bonds
(debt securities the interest on which
is generally exempt from Federal income
tax). (May invest in certain options,
futures and other hedging techniques.)
FOUNDED: 1992
SCHEDULED DIVIDEND FREQUENCY: MONTHLY
<PAGE>
PERFORMANCE SUMMARY - Class B Shares
PER SHARE DATA
For the Fiscal Year Ended March 31, 1997
- ----------------------------------------
DIVIDENDS PAID $0.45
=====
NET ASSET VALUE ON
3/31/97 $10.74
3/31/96 10.63
------
CHANGE PER SHARE $ 0.11
======
Past performance is not necessarily indicative of future results.
TOTAL RETURN HISTORY
Average Annual
Total Return
----------------
With Without
CDSC** CDSC***
------ -------
Period
- ------
1-year period ended 3-31-97 2.32% 5.32%
Period from 9-21-92*
through 3-31-97 6.02% 6.02%
*Initial public offering of the Fund.
**"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted represents past performance and
reflects payment of the applicable contingent deferred sales charge upon
redemption at the end of each period.
***"CDSC" refers to the contingent deferred sales charge described in the
Prospectus. Performance data quoted in this column represents past
performance without reflecting deduction of the applicable contingent
deferred sales charge upon redemption at the end of each period.
Investment return and principal value will fluctuate and an investor's
shares, when redeemed, may be worth more or less than their original cost.
<PAGE>
PORTFOLIO HIGHLIGHTS
On March 31, 1997, Municipal Bond Fund had net assets totaling $36,618,614
invested in a diversified portfolio.
As a shareholder of Municipal Bond Fund, for every $100 you had invested on
March 31, 1997, your Fund owned:
$17.07 Industrial Revenue Bonds
12.51 Other Municipal Bonds
10.56 Public Power Revenue Bonds
10.36 Hospital Revenue Bonds
9.93 Airport Revenue Bonds
8.67 Transportation Revenue Bonds
6.11 Electric Utility Revenue Bonds
5.79 Housing Revenue Bonds
4.95 Cash and Cash Equivalents
4.70 Special Tax Bonds
4.56 Lifecare Centers Revenue Bonds
2.40 Resource Recovery Revenue Bonds
2.39 Education Revenue Bonds
Not all holdings will be represented in the portfolio at all times.
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS
ARIZONA - 0.75%
City of Bullhead City, Arizona, Bullhead
Parkway Improvement District,
Improvement Bonds,
6.1%, 1-1-2013 $ 270 $ 273,375
ARKANSAS - 3.95%
City of Blytheville, Arkansas, Solid Waste
Recycling and Sewage Treatment Revenue
Bonds (Nucor Corporation Project), Series 1992,
6.9%, 12-1-2021 1,000 1,055,000
Baxter County, Arkansas, Industrial Development
Revenue Refunding Bonds (Aeroquip Corporation
Project), Series 1993,
5.8%, 10-1-2013 400 392,000
Total 1,447,000
CALIFORNIA - 3.58%
Foothill/Eastern Transportation Corridor
Agency, Toll Road Revenue Bonds, Series
1995A,
0.0%, 1-1-2013 (D) 2,000 1,310,000
COLORADO - 2.79%
City and County of Denver, Colorado, Special
Facilities Airport Revenue Bonds (United
Air Lines Project), Series 1992A,
6.875%, 10-1-2032 1,000 1,022,500
DISTRICT OF COLUMBIA - 1.96%
District of Columbia, Redevelopment Land
Agency (Washington, D.C.), Sports Arena
Special Tax Revenue Bonds (Series 1996),
5.625%, 11-1-2010 750 718,125
GUAM - 0.68%
Guam Power Authority, Revenue Bonds,
1992 Series A,
6.3%, 10-1-2022 250 250,625
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
ILLINOIS - 1.11%
Illinois Development Finance Authority,
Local Government Program Revenue Bonds,
Series 1993 (Village of Maywood Project),
6.0%, 1-1-2008 $ 400 $ 405,000
INDIANA - 5.11%
City of Sullivan, Indiana, Pollution
Control Revenue Refunding Bonds
(Indiana Michigan Power Company Project),
Series C,
5.95%, 5-1-2009 1,500 1,494,375
East Chicago Elementary School Building
Corporation (Lake County, Indiana),
First Mortgage Bonds, Series 1993A,
5.5%, 1-15-2016 400 377,500
Total 1,871,875
IOWA - 0.93%
Scott County, Iowa, Refunding Certificates
of Participation (County Golf Course
Project, Series 1993),
6.2%, 5-1-2013 340 341,700
LOUISIANA - 0.58%
Parish of St. Charles, State of Louisiana,
Pollution Control Revenue Bonds (Union
Carbide Project), Series 1992,
7.35%, 11-1-2022 200 214,000
MARYLAND - 7.41%
Prince George's County, Maryland,
Project and Refunding Revenue Bonds
(Dimensions Health Corporation Issue),
Series 1994,
5.375%, 7-1-2014 1,000 932,500
Northeast Maryland Waste Disposal
Authority, Solid Waste Revenue Bonds
(Montgomery County Resource Recovery
Project), Series 1993A,
6.2%, 7-1-2010 665 673,313
Montgomery County Revenue Authority
(Maryland), Golf Course System Revenue
Bonds, Series 1996A,
6.125%, 10-1-2022 650 632,125
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MARYLAND (Continued)
Maryland Health and Higher Educational
Facilities Authority, Project and
Refunding Revenue Bonds, Doctors Community
Hospital Issue, Series 1993,
5.75%, 7-1-2013 $ 500 $ 477,500
Total 2,715,438
MICHIGAN - 2.52%
Michigan State Hospital Finance
Authority, Hospital Revenue Refunding
Bonds (Crittenton Hospital),
Series 1994A,
5.25%, 3-1-2014 1,000 923,750
MISSOURI - 0.70%
City of Ste. Genevieve, Missouri, Waterworks
Revenue Bonds, Series 1993,
6.6%, 2-1-2013 250 254,688
MONTANA - 3.99%
Montana Health Facility Authority, Health Care
Revenue Bonds, Series 1996 (Community Medical
Center, Inc.),
6.375%, 6-1-2018 1,500 1,460,625
NEBRASKA - 1.36%
Nebraska Higher Education Loan Program, Inc.,
Senior Subordinate Bonds, 1993-2
Series A-SA,
6.2%, 6-1-2013 500 497,500
NEVADA - 2.59%
West Wendover Recreation District, Elko
County, Nevada, General Obligation
(Limited Tax), Recreational Facilities
and Refunding Bonds, Series 1996,
6.25%, 12-1-2021 950 947,625
NEW JERSEY - 4.18%
New Jersey Economic Development Authority,
Economic Development Refunding Bonds (Preston
Trucking Company, Inc. - 1996 Project),
6.5%, 9-1-2014 1,500 1,530,000
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW MEXICO - 4.70%
City of Albuquerque, New Mexico, Gross
Receipts/Lodgers' Tax Refunding and
Improvement Revenue Bonds, Series 1991B,
0.0%, 7-1-2013 $4,500 $ 1,721,250
NEW YORK - 8.44%
New York State Thruway Authority,
Local Highway and Bridge Service
Contract Bonds:
Series 1995,
6.25%, 4-1-2014 1,400 1,410,500
Series 1993,
5.25%, 4-1-2013 500 455,625
New York City Industrial Development Agency,
Amended and Restated Industrial Development
Revenue Bonds (1991 Japan Airlines Company,
Ltd. Project),
6.0%, 11-1-2015 1,000 1,021,250
Onondaga County Resource Recovery Agency,
Project Revenue Bonds (Resource Recovery
Facility - 1992 Series),
7.0%, 5-1-2015 200 204,500
Total 3,091,875
NORTH CAROLINA - 2.97%
North Carolina Eastern Municipal Power
Agency, Power System Revenue Bonds,
Refunding Series 1993 B,
7.0%, 1-1-2008 1,000 1,086,250
OHIO - 2.26%
City of Moraine, Ohio, Solid Waste
Disposal Revenue Bonds (General Motors
Corporation Project), Series 1994,
6.75%, 7-1-2014 750 825,937
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
OKLAHOMA - 6.29%
Oklahoma Housing Finance Agency, Single
Family Mortgage Revenue Bonds
(Homeownership Loan Program),
1996 Series A,
7.05%, 9-1-2026 $1,000 $ 1,081,250
Tulsa Public Facilities Authority (Oklahoma):
Recreational Facilities Revenue Bonds,
Series 1985,
6.2%, 11-1-2012 500 505,000
Assembly Center Lease Payment Revenue
Bonds, Refunding Series 1985,
6.6%, 7-1-2014 200 216,750
Holdenville Industrial Authority, Correctional
Facility Revenue Bonds, Series 1995,
6.35%, 7-1-2006 500 501,875
Total 2,304,875
PENNSYLVANIA - 4.56%
Montgomery County Industrial Development
Authority, Retirement Community Revenue Bonds
(Adult Communities Total Services, Inc.
Obligated Group), Series 1996B,
5.625%, 11-15-2012 1,750 1,669,062
SOUTH CAROLINA - 2.62%
York County, South Carolina, Pollution Control
Facilities Revenue Refunding Bonds (Bowater
Incorporated Project), Series 1991A,
7.4%, 1-1-2010 900 960,750
TENNESSEE - 2.84%
Tennessee Housing Development Agency,
Homeownership Program Bonds, Issue T,
7.375%, 7-1-2023 1,000 1,040,000
See Notes to Schedules of Investments on page 59.
<PAGE>
THE INVESTMENTS OF
MUNICIPAL BOND FUND
MARCH 31, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
TEXAS - 9.27%
Dallas-Fort Worth International Airport,
Facility Improvement Corporation, American
Airlines, Inc. Revenue Bonds, Series 1990,
7.5%, 11-1-2025 $1,500 $ 1,593,750
Port of Corpus Christi, Authority of
Nueces County, Texas, Pollution Control
Revenue Bonds (Hoechst Celanese Corporation
Project), Series 1992,
6.875%, 4-1-2017 1,000 1,056,250
Sabine River Authority of Texas,
Collateralized Pollution Control
Revenue Refunding Bonds (Texas
Utilities Electric Company Project),
Series 1993B,
5.85%, 5-1-2022 800 744,000
Total 3,394,000
WASHINGTON - 6.91%
Public Utility District No. 1 of Pend Oreille
County, Washington, Electric Revenue Bonds,
1996 Series A (Subject to AMT),
6.375%, 1-1-2015 1,500 1,488,750
Washington Public Power Supply System,
Nuclear Project No. 1, Refunding
Revenue Bonds, Series 1996A,
6.0%, 7-1-2008 1,000 1,040,000
Total 2,528,750
TOTAL MUNICIPAL BONDS - 95.05% $34,806,575
(Cost: $34,293,635)
TOTAL SHORT-TERM SECURITIES - 4.13% $ 1,513,000
(Cost: $1,513,000)
TOTAL INVESTMENT SECURITIES - 99.18% $36,319,575
(Cost: $35,806,635)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.82% 299,039
NET ASSETS - 100.00% $36,618,614
See Notes to Schedules of Investments on page 59.
<PAGE>
WADDELL & REED FUNDS, INC.
MARCH 31, 1997
Notes to Schedules of Investments
* No income dividends were paid during the preceding 12 months.
(A) Listed on an exchange outside the United States.
(B) Principal amounts are denominated in the indicated foreign currency where
applicable ($A - Australian Dollar, DM - Deutsche Mark, SFr - Swiss Franc).
(C) As of March 31, 1997, the following restricted securities were owned in the
Asset Strategy Fund:
Principal
Acquisition Amount Market
Security Date in 000'sCost Value
-------- ----------- --------- ----------- -----
-------
Banco de Inversion y
Comercio Exterior S.A.,
9.375%, 12-27-2000 2/18/97 $300 $312,000 $302,439
Compania de Transporte de
Energia Electrica en Alta
Tension TRANSENER Sociedad
Anonima,
9.625%, 7-15-99 2/13/97 300 311,250 308,250
Ispat Mexicana, S.A. de C.V.,
10.375%, 3-15-2001 3/17/97 300 303,375 301,500
-------- --------
$926,625 $912,189
======== ========
The total market value of restricted securities represents approximately
6.75% of the total net assets at March 31, 1997.
(D) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 4 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
WADDELL & REED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997 Total International
Return Growth Growth
Fund Fund Fund
Assets ------------ ----------- -----------
Investment securities--at
value (Notes 1 and 4) $319,262,141 $196,036,250$53,845,344
Cash --- 5,283 2,997
Receivables:
Fund shares sold 1,449,752 523,175 454,629
Investment securities
sold 103,169 4,416,452 828,619
Dividends and interest 263,782 89,508 101,413
Unamortized organization
expenses (Note 2) 3,259 3,259 3,259
Prepaid insurance premium 456 462 76
------------ ------------ -----------
Total assets 321,082,559 201,074,389 55,236,337
Liabilities ------------ ----------- -----------
Payable for Fund shares
redeemed 2,188,470 1,401,887 112,453
Payable for investment
securities purchased 684,931 1,120,728 4,372,301
Accrued service fee -
Class B (Note 3) 183,077 134,337 26,156
Accrued transfer agency and
dividend disbursing (Note 3) 38,049 41,955 8,839
Due to custodian 1,503 --- ---
Organization expenses
payable 3,259 3,259 3,259
Accrued distribution
fee - Class B (Note 3) 6,517 4,075 1,031
Dividends payable --- --- ---
Accrued accounting
services fee (Note 3) 4,167 4,167 1,666
Accrued management fee
(Note 2) 6,168 4,403 1,115
Other 9,242 7,868 10,170
------------ ------------ -----------
Total liabilities 3,125,383 2,722,679 4,536,990
------------ ------------ -----------
Total net assets $317,957,176 $198,351,710 $50,699,347
Net Assets ============ ============ ===========
$0.01 par value capital stock
Capital stock $ 174,931 $ 109,224 $40,886
Additional paid-in
capital 246,814,790 185,400,277 43,052,909
Accumulated undistributed income (loss):
Accumulated undistributed net
investment income --- --- ---
Accumulated undistributed
net realized gain (loss)
on investments 2,677,929 10,399,672 2,559,619
Net unrealized appreciation
(depreciation) of investments
at end of period 68,289,526 2,442,537 5,045,933
------------ ------------ -----------
Net assets applicable to
outstanding units
of capital $317,957,176 $198,351,710 $50,699,347
============ ============ ===========
Net asset value, redemption and
offering price per share:
Class B Shares $18.18 $18.16 $12.40
Class Y Shares $18.35 $18.32 $12.52
Capital shares outstanding:
Class B Shares 17,465,624 10,908,035 4,070,442
Class Y Shares 27,468 14,408 18,133
Capital shares authorized 500,000,000 500,000,000 500,000,000
See notes to financial statements.
WADDELL & REED FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997 Asset Limited- Municipal
Strategy Term Bond Bond
Fund Fund Fund
Assets ------------ ----------- -----------
Investment securities--at
value (Notes 1 and 4) $13,276,675 $17,767,389 $36,319,575
Cash 2,517 320 ---
Receivables:
Fund shares sold 71,543 93,315 31,523
Investment securities
sold 129,746 --- ---
Dividends and interest 121,031 295,218 639,510
Unamortized organization
expenses (Note 2) 481 3,259 3,259
Prepaid insurance premium 74 80 100
------------ ------------ -----------
Total assets 13,602,067 18,159,581 36,993,967
Liabilities ------------ ------------ -----------
Payable for Fund shares
redeemed 74,590 253,963 317,756
Payable for investment
securities purchased --- --- ---
Accrued service fee -
Class B (Note 3) 8,367 11,401 21,699
Accrued transfer agency and
dividend disbursing (Note 3) 2,541 3,331 4,348
Due to custodian --- --- 3,933
Organization expenses
payable 481 3,259 3,259
Accrued distribution
fee - Class B (Note 3) 276 366 753
Dividends payable --- 9,682 19,262
Accrued accounting
services fee (Note 3) 833 833 1,667
Accrued management fee
(Note 2) 299 275 562
Other 974 1,452 2,114
------------ ------------ -----------
Total liabilities 88,361 284,542 375,353
------------ ------------ -----------
Total net assets $13,513,706 $17,875,039 $36,618,614
Net Assets ============ ============ ===========
$0.01 par value capital stock
Capital stock $ 13,892 $ 18,053 $ 34,111
Additional paid-in
capital 14,196,290 18,262,177 36,320,553
Accumulated undistributed income (loss):
Accumulated undistributed net
investment income 31,035 --- ---
Accumulated undistributed
net realized gain (loss)
on investments (226,008) (88,322) (248,990)
Net unrealized appreciation
(depreciation) of investments
at end of period (501,503) (316,869) 512,940
------------ ------------ -----------
Net assets applicable to
outstanding units
of capital $13,513,706 $17,875,039 $36,618,614
============ ============ ===========
Net asset value, redemption and
offering price per share:
Class B Shares $9.73 $9.90 $10.74
Class Y Shares $9.73 $9.90 $10.74
Capital shares outstanding:
Class B Shares 1,377,255 1,794,717 3,410,974
Class Y Shares 11,935 10,618 97
Capital shares authorized 500,000,000 500,000,000 500,000,000
See notes to financial statements.
<PAGE>
WADDELL & REED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended MARCH 31, 1997
Total International
Return Growth Growth
Fund Fund Fund
Investment Income ------------ ----------- -----------
Income (Note 1B):
Interest and amortization $ 1,123,014 $ 4,182,041 $ 258,150
Dividends 3,646,222 171,606 348,846
----------- ----------- ----------
Total income 4,769,236 4,353,647 606,996
----------- ----------- ----------
Expenses (Notes 2 and 3):
Distribution fees -
Class B 1,997,173 1,767,043 233,734
Investment management fee 1,886,789 1,904,258 251,914
Service fee - Class B 645,242 566,457 69,183
Transfer agency and
dividend disbursing -
Class B 441,224 514,901 87,229
Registration fees 84,277 80,362 29,268
Accounting services fee 50,000 50,000 17,500
Custodian fees 16,077 12,384 55,495
Audit fees 16,300 16,253 8,462
Amortization of organization
expenses 6,518 6,518 6,518
Amortization of prepaid
registration fees --- --- ---
Legal fees 3,608 3,338 1,237
Shareholder servicing fee -
Class Y 223 32 69
Distribution fees - Class Y 380 106 124
Other 61,560 67,978 10,624
------------ ------------ -----------
Total expenses 5,209,371 4,989,630 771,357
------------ ------------ -----------
Net investment income
(loss) (440,135) (635,983) (164,361)
------------ ------------ -----------
Realized and Unrealized Gain
(Loss) on Investments (Notes 1 and 4)
Realized net gain (loss)
on securities 3,484,953 13,839,883 3,179,365
Realized net gain (loss)
from foreign currency
transactions --- --- (3,011)
------------ ------------ -----------
Realized net gain
(loss) on investments 3,484,953 13,839,883 3,176,354
------------ ------------ -----------
Unrealized appreciation
(depreciation) in value
of securities during
the period 26,027,620 (39,982,914) 4,245,896
Unrealized depreciation from
translation of assets and
liabilities in foreign
currencies --- --- (23,809)
Unrealized appreciation on
forward currency
contracts during the
period --- --- 70,820
------------ ------------ -----------
Unrealized appreciation
(depreciation) 26,027,620 (39,982,914) 4,292,907
------------ ------------ -----------
Net gain (loss)
on investments 29,512,573 (26,143,031) 7,469,261
------------ ------------ -----------
Net increase (decrease)
in net assets
resulting from
operations $29,072,438 ($26,779,014) $7,304,900
============ ============ ===========
See notes to financial statements.
<PAGE>
WADDELL & REED FUNDS, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended MARCH 31, 1997
Asset Limited- Municipal
Strategy Term Bond Bond
Fund Fund Fund
Investment Income ------------ ----------- -----------
Income (Note 1B):
Interest and amortization $627,008 $1,254,083 $2,188,413
Dividends 54,477 --- ---
------------ ------------ -----------
Total income 681,485 1,254,083 2,188,413
------------ ------------ -----------
Expenses (Notes 2 and 3):
Distribution fees -
Class B 107,986 145,292 269,119
Investment management fee 116,390 108,389 200,636
Service fee - Class B 35,643 47,846 82,819
Transfer agency and
dividend disbursing -
Class B 37,048 43,801 57,118
Registration fees 26,577 20,453 25,639
Accounting services fee 10,000 10,000 20,000
Custodian fees 4,668 3,506 7,144
Audit fees 7,633 9,243 9,280
Amortization of organization
expenses 152 6,518 6,518
Amortization of prepaid
registration fees 3,483 --- ---
Legal fees 1,145 478 2,621
Shareholder servicing fee -
Class Y 26 22 2
Distribution fees - Class Y 48 41 3
Other 12,379 5,946 8,504
------------ ------------ -----------
Total expenses 363,178 401,535 689,403
------------ ------------ -----------
Net investment income
(loss) 318,307 852,548 1,499,010
------------ ------------ -----------
Realized and Unrealized Gain
(Loss) on Investments (Notes 1 and 4)
Realized net gain (loss)
on securities (224,368) (88,346) 308,152
Realized net gain (loss)
from foreign currency
transactions 1,803 --- ---
------------ ------------ -----------
Realized net gain
(loss) on investments (222,565) (88,346) 308,152
------------ ------------ -----------
Unrealized appreciation
(depreciation) in value
of securities during
the period (178,352) (110,492) 23,298
Unrealized depreciation from
translation of assets and
liabilities in foreign
currencies --- --- ---
Unrealized appreciation on
forward currency
contracts during the
period --- --- ---
------------ ------------ -----------
Unrealized appreciation
(depreciation) (178,352) (110,492) 23,298
------------ ------------ -----------
Net gain (loss)
on investments (400,917) (198,838) 331,450
------------ ------------ -----------
Net increase (decrease)
in net assets
resulting from
operations ($82,610) $653,710 $1,830,460
============ ============ ===========
See notes to financial statements.
WADDELL & REED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended MARCH 31, 1997
Total International
Return Growth Growth
Fund Fund Fund
Increase (Decrease)
in Net Assets ------------ ----------- -----------
Operations:
Net investment income
(loss) ($ 440,135) ($ 635,983) ($ 164,361)
Realized net gain (loss)
on investments 3,484,953 13,839,883 3,176,354
Unrealized
appreciation
(depreciation) 26,027,620 (39,982,914) 4,292,907
------------ --------------- -----------
Net increase (decrease)
in net assets
resulting from
operations 29,072,438 (26,779,014) 7,304,900
------------ ------------ -----------
Dividends to shareholders (Note 1E):*
From net investment income
Class B --- --- (27,619)
Class Y --- --- (21)
From realized net gain on
investment transactions
Class B (1,707,064) (6,956,540) ---
Class Y (541) (30) ---
------------ ------------ -----------
(1,707,605) (6,956,570) (27,640)
------------ ------------ -----------
Capital share
transactions
(Note 6) 82,272,487 29,529,409 22,541,081
------------ ------------ -----------
Total increase
(decrease) 109,637,320 (4,206,175) 29,818,341
Net Assets
Beginning of period 208,319,856 202,557,885 20,881,006
------------ ------------ -----------
End of period $317,957,176 $198,351,710 $50,699,347
============ ============ ===========
Undistributed net
investment income $--- $--- $---
==== ==== ====
*See "Financial Highlights" on pages 68 - 79.
See notes to financial statements.
<PAGE>
WADDELL & REED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Fiscal Year Ended MARCH 31, 1997
Asset Limited- Municipal
Strategy Term Bond Bond
Fund Fund Fund
Increase (Decrease)
in Net Assets ------------ ----------- -----------
Operations:
Net investment income
(loss) $ 318,307 $ 852,548 $ 1,499,010
Realized net gain (loss)
on investments (222,565) (88,346) 308,152
Unrealized
appreciation
(depreciation) (178,352) (110,492) 23,298
----------- ----------- -----------
Net increase (decrease)
in net assets
resulting from
operations (82,610) 653,710 1,830,460
----------- ----------- -----------
Dividends to shareholders (Note 1E):*
From net investment income
Class B (293,198) (851,617) (1,498,961)
Class Y (759) (931) (49)
From realized net gain on
investment transactions
Class B (191,005) (15,809) ---
Class Y (14) (4) ---
----------- ----------- -----------
(484,976) (868,361) (1,499,010)
----------- ----------- -----------
Capital share
transactions
(Note 6) 858,835 (5,592,840) 2,417,313
----------- ----------- -----------
Total increase
(decrease) 291,249 (5,807,491) 2,748,763
Net Assets
Beginning of period 13,222,457 23,682,530 33,869,851
----------- ----------- -----------
End of period $13,513,706 $17,875,039 $36,618,614
=========== =========== ===========
Undistributed net
investment income $31,035 $--- $---
======= ==== ====
*See "Financial Highlights" on pages 68 - 79.
See notes to financial statements.
WADDELL & REED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended MARCH 31, 1996
Total International
Return Growth Growth
Fund Fund Fund
Increase in Net Assets ------------ ----------- -----------
Operations:
Net investment income
(loss) $ (169,693) $ (361,532) $98,687
Realized net gain (loss)
on investments 2,284,263 5,724,029 (46,537)
Unrealized
appreciation
(depreciation) 32,910,995 27,231,115 850,135
------------ --------------- -----------
Net increase in net assets
resulting from
operations 35,025,565 32,593,612 902,285
------------ ------------ -----------
Dividends to shareholders (Note 1E):*
From net investment income
Class B --- --- (175,192)
Class Y --- --- ---
In excess of net investment income
Class B --- --- (33,657)
Class Y --- --- ---
From realized net gain on
investment transactions
Class B (498,889) (3,023,159) ---
Class Y --- --- ---
------------ ------------ -----------
(498,889) (3,023,159) (208,849)
------------ ------------ -----------
Capital share
transactions
(Note 6) 69,102,445 72,304,504 8,999,169
------------ ------------ -----------
Total increase 103,629,121 101,874,957 9,692,605
Net Assets
Beginning of period 104,690,735 100,682,928 11,188,401
------------ ------------ -----------
End of period $208,319,856 $202,557,885$20,881,006
============ ============ ===========
Undistributed net
investment income
(loss) $--- $--- $(33,657)
==== ==== =======
*See "Financial Highlights" on pages 68 - 79.
See notes to financial statements.
<PAGE>
WADDELL & REED FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended MARCH 31, 1996
Asset Limited- Municipal
Strategy Term Bond Bond
Fund** Fund Fund
Increase in Net Assets ------------ ----------- -----------
Operations:
Net investment income
(loss) $ 141,002 $ 647,104 $ 1,228,328
Realized net gain (loss)
on investments 187,466 90,054 96,208
Unrealized
appreciation
(depreciation) (323,151) 99,034 749,744
------------ ------------ -----------
Net increase in net assets
resulting from operations 5,317 836,192 2,074,280
------------ ------------ -----------
Dividends to shareholders (Note 1E):*
From net investment income
Class B (134,202) (647,092) (1,228,317)
Class Y (5) (12) (11)
In excess of net investment income
Class B --- --- ---
Class Y --- --- ---
From realized net gain on
investment transactions
Class B --- --- ---
Class Y --- --- ---
------------ ------------ -----------
(134,207) (647,104) (1,228,328)
------------ ------------ -----------
Capital share
transactions
(Note 6) 13,351,347 11,074,676 5,589,817
------------ ------------ -----------
Total increase 13,222,457 11,263,764 6,435,769
Net Assets
Beginning of period --- 12,418,766 27,434,082
------------ ------------ -----------
End of period $13,222,457 $23,682,530 $33,869,851
============ ============ ===========
Undistributed net
investment income
(loss) $4,882 $--- $---
====== ==== ====
*See "Financial Highlights" on pages 68 - 79.
**For the period from April 20, 1995 (see Note 2) through March 31, 1996.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
TOTAL RETURN FUND
Class B Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
For the fiscal period
year ended March 31, ended
------ ---------------------- March 31,
1997 1996 1995 1994 1993*
------ ------ ------ ------ ------
Net asset value,
beginning of
period $16.34 $12.73 $11.99 $11.07 $10.00
------ ------ ------ ------ ------
Income from investment
operations:
Net investment income
(loss) (0.02) (0.01) 0.00 (0.01) 0.02
Net realized and
unrealized gain
on investments 1.97 3.67 0.74 0.93 1.07
------ ------ ------ ------ ------
Total from investment
operations 1.95 3.66 0.74 0.92 1.09
------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income (0.00) (0.00) (0.00) (0.00) (0.02)
Distribution from
capital gains (0.11) (0.05) (0.00) (0.00) (0.00)
------ ------ ------ ------ ------
Total distributions (0.11) (0.05) (0.00) (0.00) (0.02)
------ ------ ------ ------ ------
Net asset value,
end of period $18.18 $16.34 $12.73 $11.99 $11.07
====== ====== ====== ====== ======
Total return 11.93% 28.75% 6.17% 8.31% 10.91%
Net assets, end of
period (000
omitted) $317,453 $208,233 $104,691 $61,735
$12,460
Ratio of expenses
to average net
assets 1.95% 1.99% 2.05% 2.16% 2.21%
Ratio of net investment
income to average
net assets -0.17% -0.11% -0.04% -0.12% 0.32%
Portfolio turnover
rate 26.23% 16.78% 16.60% 17.31% 23.97%
Average commission
rate paid $0.0578
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993. Ratios and the portfolio turnover rate have been
annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
TOTAL RETURN FUND
Class Y Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
fiscal For the
year period from
ended December 29, 1995*
3/31/97 to March 31, 1996
-------- --------------------
Net asset value,
beginning of
period $16.38 $15.32
------ ------
Income from investment
operations:
Net investment
income .04 0.03
Net realized and
unrealized gain
on investments 2.04 1.03
------ ------
Total from investment
operations 2.08 1.06
------ ------
Less distribution from
capital gains (0.11) (0.00)
------ ------
Net asset value,
end of period $18.35 $16.38
====== ======
Total return 12.69% 6.92%
Net assets, end of
period (000
omitted) $504 $87
Ratio of expenses
to average net
assets 1.18% 0.96%**
Ratio of net investment
income to average
net assets 0.65% 1.04%**
Portfolio turnover
rate 26.23% 16.78%**
Average commission
rate paid $0.0578
*Commencement of operations.
**Annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
GROWTH FUND
Class B Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
For the fiscal period
year ended March 31, ended
----- ---------------------- March 31,
1997 1996 1995 1994 1993*
------ ------ ------ ------ ------
Net asset value,
beginning of
period $21.00 $16.90 $14.08 $11.68 $10.00
------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (loss) (0.06) (0.02) 0.00 (0.04) (0.02)
Net realized and
unrealized gain (loss)
on investments (2.18) 4.49 3.15 2.75 1.79
------ ------ ------ ------ ------
Total from investment
operations (2.24) 4.47 3.15 2.71 1.77
------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment
income (0.00) (0.00) (0.00) (0.00) (0.01)
Distribution from
capital gains (0.60) (0.37) (0.33) (0.31) (0.08)
------ ------ ------ ------ ------
Total distributions (0.60) (0.37) (0.33) (0.31) (0.09)
------ ------ ------ ------ ------
Net asset value,
end of period $18.16 $21.00 $16.90 $14.08 $11.68
====== ====== ====== ====== ======
Total return -10.97% 26.57% 22.61% 23.16% 17.71%
Net assets, end of period
(000 omitted) $198,088$ 202,557$100,683 $43,524
$7,976
Ratio of expenses
to average net
assets 2.12% 2.14% 2.23% 2.34% 2.50%
Ratio of net investment
income to average
net assets -0.27% -0.25% 0.01% -0.97% -0.68%
Portfolio turnover
rate 37.20% 31.84% 56.30% 69.12% 124.44%
Average commission
rate paid $0.0516
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993. Ratios and the portfolio turnover rate have been
annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
GROWTH FUND
Class Y Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
fiscal For the
year period from
ended December 29, 1995*
3/31/97 to March 31, 1996
-------- --------------------
Net asset value,
beginning of
period $21.04 $20.21
------ ------
Income from investment
operations:
Net investment
income 0.01 .04
Net realized and
unrealized gain (loss)
on investments (2.13) .79
------ ------
Total from investment
operations (2.12) .83
------ ------
Less distributions:
Dividends from net
investment income (0.00) (0.00)
Distributions from
capital gains (0.60) (0.00)
------ ------
Total distributions (0.60) (0.00)
------ ------
Net asset value,
end of period $18.32 $21.04
====== ======
Total return -10.37% 4.11%
Net assets, end of
period (000
omitted) $264 $1
Ratio of expenses
to average net
assets 1.17% 1.17%**
Ratio of net investment
income to average
net assets 0.31% 0.78%**
Portfolio turnover
rate 37.20% 31.84%**
Average commission
rate paid $0.0516
*Commencement of operations.
**Annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
INTERNATIONAL GROWTH FUND*
Class B Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
For the fiscal period
year ended March 31, ended
----- ---------------------- March 31,
1997 1996 1995 1994 1993**
------ ------ ------ ------ ------
Net asset value,
beginning of
period $9.94 $9.36 $9.37 $9.68 $10.00
------ ------ ----- ----- ------
Income from investment
operations:
Net investment
income (loss) (0.03) 0.08 0.36 0.34 0.20
Net realized and
unrealized gain (loss)
on investments 2.50 0.63 (0.01) (0.31) (0.32)
------ ------ ----- ----- ------
Total from investment
operations 2.47 0.71 0.35 0.03 (0.12)
------ ------ ----- ----- ------
Less distributions:
Dividends declared
from net investment
income (0.01) (0.11) (0.36) (0.26) (0.20)
In excess of net
investment income (0.00) (0.02) (0.00) (0.00) (0.00)
Tax-basis return of
capital (0.00) (0.00) (0.00) (0.08) (0.00)
------ ------ ----- ----- ------
Total distributions (0.01) (0.13) (0.36) (0.34) (0.20)
------ ------ ----- ----- ------
Net asset value,
end of period $12.40 $9.94 $9.36 $9.37 $ 9.68
====== ====== ===== ===== ======
Total return 24.85% 7.64% 3.84% 0.33% -1.28%
Net assets, end of
period (000
omitted) $50,472 $20,874$11,188 $10,282 $7,181
Ratio of expenses
to average net
assets 2.46% 2.50% 2.29% 2.24% 2.06%
Ratio of net investment
income to average
net assets -0.52% 0.63% 3.87% 3.56% 3.88%
Portfolio turnover
rate 94.76% 88.55% 13.33% 34.90% 8.35%
Average commission
rate paid $0.0124
*International Growth Fund (formerly Global Income Fund) changed its name and
investment objective effective April 20, 1995.
**The Corporation's inception date is January 29, 1992; however, since the
Fund did not have any investment activity or incur expenses prior to the
date of initial public offering, the per share information is for a capital
share outstanding for the period from September 21, 1992 (initial public
offering) through March 31, 1993. Ratios and the portfolio turnover rate
have been annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
INTERNATIONAL GROWTH FUND*
Class Y Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
fiscal For the
year period from
ended December 29, 1995*
3/31/97 to March 31, 1996
-------- --------------------
Net asset value,
beginning of
period $9.95 $9.70
------ ------
Income from investment
operations:
Net investment
income (loss) 0.02 0.02
Net realized and
unrealized gain
on investments 2.56 0.23
------ ------
Total from investment
operations 2.58 0.25
------ ------
Less dividends from net
investment income (0.01) (0.00)
------ ------
Net asset value,
end of period $12.52 $9.95
====== ======
Total return 25.93% 2.58%
Net assets, end of
period (000
omitted) $227 $7
Ratio of expenses
to average net
assets 1.59% 1.84%**
Ratio of net investment
income to average
net assets 0.05% 1.07%**
Portfolio turnover
rate 94.76% 88.55%**
Average commission
rate paid $0.0124
*Commencement of operations.
**Annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
ASSET STRATEGY FUND
Class B Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the
period
from
For the April 20,
fiscal 1995
year through
ended March
3/31/97 31, 1996*
--------- ---------
Net asset value,
beginning of period $10.15 $10.00
------ ------
Income from investment
operations:
Net investment
income 0.23 0.16
Net realized and
unrealized gain (loss)
on investments (0.30) 0.14
------ ------
Total from investment
operations (0.07) 0.30
------ ------
Less distributions:
Dividends from
net investment
income (0.21) (0.15)
Distributions from
capital gains (0.14) (0.00)
------ ------
(0.35) (0.15)
------ ------
Net asset value,
end of period $9.73 $10.15
====== ======
Total return -0.86% 3.00%
Net assets, end of
period (000
omitted) $13,398 $13,221
Ratio of expenses
to average net
assets 2.52% 2.54%
Ratio of net investment
income to average net
assets 2.21% 2.14%
Portfolio
turnover rate 109.92% 75.02%
Average commission
rate paid $0.0375
*The Fund's inception date is January 31, 1995; however, since the Fund
did not have investment activity or incur expenses prior to the date of
public offering, the per share information is for a capital share
outstanding for the period from April 20, 1995 (initial public offering)
through March 31, 1996. Ratios have been annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
ASSET STRATEGY FUND
Class Y Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
fiscal For the
year period from
ended December 29, 1995*
3/31/97 to March 31, 1996
-------- --------------------
Net asset value,
beginning of
period $10.16 $10.23
------ ------
Income from investment
operations:
Net investment
income 0.27 0.07
Net realized and
unrealized loss
on investments (0.26) (0.08)
------ ------
Total from investment
operations 0.01 (0.01)
------ ------
Less distributions:
Dividends from net
investment income (0.30) (0.06)
Distributions from
capital gains (0.14) (0.00)
------ ------
(0.44) (0.06)
------ ------
Net asset value,
end of period $9.73 $10.16
====== ======
Total return 0.05% -0.25%
Net assets, end of
period (000
omitted) $116 $1
Ratio of expenses
to average net
assets 1.61% 1.95%**
Ratio of net investment
income to average
net assets 2.97% 2.34%**
Portfolio turnover
rate 109.92% 75.02%**
Average commission
rate paid $0.0375
*Commencement of operations.
**Annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
LIMITED-TERM BOND FUND
Class B Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
For the fiscal period
year ended March 31, ended
------ ---------------------- March 31,
1997 1996 1995 1994 1993*
------ ------ ------ ------ ------
Net asset value,
beginning of
period $10.00 $ 9.70 $9.84 $10.06 $10.00
------ ------ ----- ------ ------
Income from investment
operations:
Net investment
income 0.44 0.41 0.39 0.35 0.18
Net realized and
unrealized gain
(loss) on
investments (0.09) 0.30 (0.13) (0.20) 0.06
------ ------ ----- ------ ------
Total from investment
operations 0.35 0.71 0.26 0.15 0.24
------ ------ ----- ------ ------
Less distributions:
Dividends declared
from net investment
income (0.44) (0.41) (0.39) (0.35) (0.18)
Distribution from
capital gains (0.01) (0.00) (0.01) (0.02) (0.00)
------ ------ ----- ------ ------
Total distributions (0.45) (0.41) (0.40) (0.37) (0.18)
------ ------ ----- ------ ------
Net asset value,
end of period $9.90 $10.00 $9.70 $ 9.84 $10.06
====== ====== ===== ====== ======
Total return 3.52% 7.41% 2.73% 1.41% 2.40%
Net assets, end of
period (000
omitted) $17,770 $23,682$12,419 $11,671 $6,259
Ratio of expenses
to average net
assets 2.07% 2.10% 2.17% 2.14% 2.15%
Ratio of net investment
income to average
net assets 4.40% 4.14% 4.05% 3.41% 3.48%
Portfolio turnover
rate 23.05% 22.08% 29.20% 25.90% 39.64%
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993. Ratios and the portfolio turnover rate have been
annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
LIMITED-TERM BOND FUND
Class Y Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
fiscal For the
year period from
ended December 29, 1995*
3/31/97 to March 31, 1996
-------- --------------------
Net asset value,
beginning of
period $10.00 $10.16
------ ------
Income from investment
operations:
Net investment
income 0.52 0.11
Net realized and
unrealized loss
on investments (0.09) (0.16)
------ ------
Total from investment
operations 0.43 (0.05)
------ ------
Less distributions:
Dividends from net
investment income (0.52) (0.11)
Distribution from
capital gains (0.01) (0.00)
------ ------
(0.53) (0.11)
------ ------
Net asset value,
end of period $9.90 $10.00
====== ======
Total return 4.33% -0.49%
Net assets, end of
period (000
omitted) $105 $1
Ratio of expenses
to average net
assets 1.04% 1.18%**
Ratio of net investment
income to average
net assets 5.62% 4.70%**
Portfolio turnover
rate 23.05% 22.08%**
*Commencement of operations.
**Annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
MUNICIPAL BOND FUND
Class B Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
For the fiscal period
year ended March 31, ended
------ ---------------------- March 31,
1997 1996 1995 1994 1993*
------ ------ ------ ------ ------
Net asset value,
beginning of
period $10.63 $10.30 $10.12 $10.53 $10.00
------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income 0.45 0.43 0.44 0.39 0.21
Net realized and
unrealized gain
(loss) on
investments 0.11 0.33 0.18 (0.28) 0.53
------ ------ ------ ------ ------
Total from investment
operations 0.56 0.76 0.62 0.11 0.74
------ ------ ------ ------ ------
Less distributions:
Dividends declared
from net investment
income (0.45) (0.43) (0.44) (0.39) (0.21)
Distribution from
capital gains (0.00) (0.00) (0.00) (0.13) (0.00)
------ ------ ------ ------ ------
Total distributions (0.45) (0.43) (0.44) (0.52) (0.21)
------ ------ ------ ------ ------
Net asset value,
end of period $10.74 $10.63 $10.30 $10.12 $10.53
====== ====== ====== ====== ======
Total return 5.32% 7.48% 6.37% 0.76% 7.37%
Net assets, end of
period (000
omitted) $36,618 $33,869$27,434 $24,960 $8,557
Ratio of expenses
to average net
assets 1.92% 1.93% 1.94% 1.98% 1.94%
Ratio of net investment
income to average
net assets 4.18% 4.05% 4.41% 3.62% 3.99%
Portfolio turnover
rate 34.72% 42.02% 56.92% 18.93% 140.02%
*The Corporation's inception date is January 29, 1992; however, since the Fund
did not have any investment activity or incur expenses prior to the date of
initial public offering, the per share information is for a capital share
outstanding for the period from September 21, 1992 (initial public offering)
through March 31, 1993. Ratios and the portfolio turnover rate have been
annualized.
See notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS OF
MUNICIPAL BOND FUND
Class Y Shares
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
fiscal For the
year period from
ended December 29, 1995*
3/31/97 to March 31, 1996
-------- --------------------
Net asset value,
beginning of
period $10.63 $10.94
------ ------
Income from investment
operations:
Net investment
income 0.52 0.12
Net realized and
unrealized gain
(loss) on
investments 0.11 (0.31)
------ ------
Total from investment
operations 0.63 (0.19)
------ ------
Less dividends from net
investment income (0.52) (0.12)
------ ------
Net asset value,
end of period $10.74 $10.63
====== ======
Total return 5.96% -1.80%
Net assets, end of
period (000
omitted) $1 $1
Ratio of expenses
to average net
assets 1.28% 1.18%**
Ratio of net investment
income to average
net assets 4.83% 4.33%**
Portfolio turnover
rate 34.72% 42.02%**
*Commencement of operations.
**Annualized.
See notes to financial statements.
<PAGE>
WADDELL & REED FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
Note 1 - Significant Accounting Policies
Waddell & Reed Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. The Corporation issues six series of capital shares;
each series represents ownership of a separate mutual fund. The assets
belonging to each Fund are held separately by the custodian. The capital
shares of each Fund represent a pro rata beneficial interest in the
principal, net income and realized and unrealized capital gains or losses
of its respective investments and other assets. The following is a summary
of significant accounting policies consistently followed by the Corporation
in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a pricing service or dealer in bonds.
Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Stocks which are traded over-the-counter are
priced using Nasdaq (National Association of Securities Dealers Automated
Quotations System) which provides information on bid and asked or closing
prices quoted by major dealers in such stocks. Restricted securities and
securities for which quotations are not readily available are valued as
determined in good faith in accordance with procedures established by and
under the general supervision of the Corporation's Board of Directors.
Short-term debt securities are valued at amortized cost, which approximates
market. Short-term debt securities denominated in foreign currencies are
valued at amortized cost in that currency.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the Internal
Revenue Code), premiums and post-1984 market discount on the purchase of
bonds are amortized for both financial and tax reporting purposes over the
remaining lives of the bonds. Dividend income is recorded on the ex-
dividend date. Interest income is recorded on the accrual basis. See Note
4 -- Investment Securities Transactions.
C. Foreign currency translations -- All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars daily. Purchases and
sales of investment securities and accruals of income and expenses are
translated at the rate of exchange prevailing on the date of the
transaction. For assets and liabilities other than investments in
securities, net realized and unrealized gains and losses from foreign
currency translation arise from changes in currency exchange rates. The
Corporation combines fluctuations from currency exchange rates and
fluctuations in market value when computing net realized and unrealized
gain or loss from investments.
D. Federal income taxes -- It is the Corporation's policy to distribute all of
its taxable income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code. In addition, the Corporation intends to pay
distributions as required to avoid imposition of excise tax. Accordingly,
provision has not been made for Federal income taxes. See Note 5 --
Federal Income Tax Matters.
E. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by each Fund on the record date. Net investment income
dividends and capital gains distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are due to differing treatments for items
such as deferral of wash sales and post-October losses, foreign currency
transactions, net operating losses and expiring capital loss carryforwards.
The following items identified in the period ended March 31, 1997 have been
reclassified between accumulated undistributed net investment income and
accumulated undistributed net realized gain on investment transactions or
to additional paid-in capital:
Increase Decrease Decrease
Undistributed Undistributed Additional
Net Investment Net Realized Paid-In
Income Gain Capital
Total Return
Fund $440,135 $(440,135)
Growth Fund 635,983 $(635,983)
International
Growth Fund 228,669 (228,669)
F. Futures -- See Note 7 -- Futures.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
NOTE 2 -- Organization
The Corporation was incorporated in Maryland on January 29, 1992 and was
inactive (except for matters relating to its organization and registration
as an investment company under the Investment Company Act of 1940 and
registration of shares under the Securities Act of 1933) until September
21, 1992 (the date of the initial public offering). The original
Corporation consisted of five mutual funds - Total Return Fund, Growth
Fund, Limited-Term Bond Fund, Municipal Bond Fund and International Growth
Fund.
On April 24, 1992, Waddell & Reed, Inc. ("W&R"), the Corporation's
principal distributor and underwriter, purchased for investment 2,000
shares of each series of the original Corporation at their net asset value
of $10.00 per share.
The Corporation's organizational expenses in the amount of $162,960 were
advanced to the Corporation by W&R and are an obligation to be paid by the
original mutual funds. These expenses are being amortized and are payable
evenly over 60 months following the date of the initial public offering.
Asset Strategy Fund was established in Maryland on January 31, 1995 and was
inactive (except for matters relating to its organization and registration
as an investment company under the Investment Company Act of 1940 and
registration of shares under the Securities Act of 1933) until April 20,
1995 (the date of the initial public offering).
Asset Strategy Fund had prepaid registration fees in the amount of $20,900
which were advanced to the Corporation by W&R. These expenses were
amortized evenly over Asset Strategy Fund's first 12 months.
Asset Strategy Fund's organizational expenses in the amount of $759 were
advanced to the Corporation by W&R and are an obligation to be paid by it.
These expenses are being amortized and are payable evenly over 60 months
following the date of the initial public offering.
NOTE 3 -- Investment Management And Payments To Affiliated Persons
Waddell & Reed Investment Management Company ("WRIMCO"), a wholly-owned
subsidiary of W&R, serves as the Corporation's investment manager. WRIMCO
provides advice and supervises investments for which services it is paid a
fee computed on each Fund's net assets as of the close of business each day
at the following annual rates: Total Return Fund - 0.71% of net assets,
Growth Fund - 0.81% of net assets, International Growth Fund - 0.81% of net
assets, Asset Strategy Fund - 0.81% of net assets, Limited-Term Bond Fund -
0.56% of net assets, and Municipal Bond Fund - 0.56% of net assets. The
fee is accrued and paid daily.
The Corporation has an Accounting Services Agreement with Waddell & Reed
Services Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the
agreement, WARSCO acts as the agent in providing accounting services and
assistance to the Corporation and pricing daily the value of shares of the
Corporation. For these services, each of the Funds pays WARSCO a monthly
fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Fund
------------------------ -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
For Class B shares, each Fund pays WARSCO a monthly per account charge for
transfer agency and dividend disbursement services of $1.3125 for each
shareholder account which was in existence at any time during the prior
month ($1.0208 per account prior to April 1, 1996), plus $0.30 for each
account on which a dividend or distribution of cash or shares had a record
date in that month. For Class Y shares, each Fund pays WARSCO a monthly
fee equal to one-twelfth of .15 of 1% of the average daily net assets of
that Class for the preceding month. Each Fund also reimburses W&R, WRIMCO
and WARSCO for certain out-of-pocket costs.
The Corporation has adopted a 12b-1 plan for both Class B and Class Y
shares. Under the Distribution and Service Plan for the Class B shares,
W&R, principal underwriter and sole distributor of the Corporation's
shares, is compensated in an amount calculated and payable daily up to 1%
annually of each of the Fund's average daily net assets. This fee consists
of two elements: (i) up to 0.75% of the particular Fund's Class B net asset
value for distribution services and distribution expenses including
commissions paid by the Distributor to its sales representatives and
managers and (ii) up to 0.25% of the particular Fund's Class B net asset
value may be paid to reimburse the Distributor for continuing payments made
to the Distributor's representatives and managers, its administrative costs
in overseeing these payments, and the expenses of WARSCO in providing
certain personal services to shareholders. During the period ended March
31, 1997, the Distributor received $5,967,537 in 12b-1 payments. During
this same period W&R paid sales commissions of $3,902,661.
Under a Distribution and Service Plan for Class Y shares adopted by the
Corporation pursuant to Rule 12b-1, with respect to each Fund, the
Corporation pays W&R daily a distribution and/or service fee not to exceed,
on an annual basis, 0.25% of the particular Fund's Class Y net asset value.
During the period ended March 31, 1997, the Distributor received $751 in
12b-1 payments on Class Y shares.
For Class B shares, a contingent deferred sales charge may be assessed
against a shareholder's redemption amount and paid to the Distributor, W&R.
The purpose of the deferred sales charge is to compensate the Distributor
for the costs incurred by the Distributor in connection with the sale of a
Fund's shares. The amount of the deferred sales charge will be the
following percent of the total amount invested during a calendar year to
acquire the shares or the value of the shares redeemed, whichever is less.
Redemption at any time during the calendar year of investment and the first
full calendar year after the calendar year of investment, 3%; the second
full calendar year, 2%; the third full calendar year, 1%; and thereafter,
0%. All investments made during a calendar year shall be deemed as a
single investment during the calendar year for purposes of calculating the
deferred sales charge. The deferred sales charge will not be imposed on
shares representing payment of dividends or distributions or on amounts
which represent an increase in the value of the shareholder's account
resulting from capital appreciation above the amount paid for shares
purchased during the deferred sales charge period. During the period ended
March 31, 1997, the Distributor received $902,776 in deferred sales
charges.
The Corporation paid Directors' fees of $21,878, which are included in
other expenses.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 4 -- Investment Securities Transactions
Investment securities transactions for the period ended March 31, 1997 are
summarized as follows:
Total International
Return Growth Growth
Fund Fund Fund
----------- ----------- -----------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $130,985,182 $106,569,609 $54,231,968
Purchases of U.S. Government
securities --- --- ---
Purchases of short-term
securities 245,610,692 866,162,182
40,335,190
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 64,167,412 58,921,577
25,784,978
Proceeds from maturities
and sales of U.S.
Government securities --- --- 1,000,000
Proceeds from maturities
and sales of short-term
securities 229,985,477 897,536,026
41,848,075
Asset Limited- Municipal
Strategy Term Bond Bond
Fund Fund Fund
----------- ---------- -----------
Purchases of investment
securities, excluding short-
term and U.S. Government
securities $14,413,220 $ 1,780,514
$16,291,824
Purchases of U.S. Government
securities 3,040,785 2,528,559 ---
Purchases of short-term
securities 34,621,037 9,641,000 13,382,501
Proceeds from maturities
and sales of investment
securities, excluding
short-term and U.S.
Government securities 7,307,672 5,702,356 12,044,583
Proceeds from maturities
and sales of U.S.
Government securities 4,313,574 3,339,282 ---
Proceeds from maturities
and sales of short-term
securities 39,820,014 10,143,065
14,216,050
For Federal income tax purposes, cost of investments owned at March 31,
1997 and the related unrealized appreciation (depreciation) were as
follows:
Aggregate
Appreciation
Cost Appreciation Depreciation (Depreciation)
----------- ------------ ------------ -----------
Total Return Fund $250,977,093 $70,238,657 $1,953,609 $68,285,048
Growth Fund 193,593,713 29,636,437 27,193,900 2,442,537
International Growth
Fund 48,775,835 6,470,734 1,475,013 4,995,721
Asset Strategy Fund 13,778,178 213,972 715,475 (501,503)
Limited-Term Bond Fund 18,084,258 33,572 350,441 (316,869)
Municipal Bond Fund 35,896,819 679,117 256,361 422,756
NOTE 5 -- Federal Income Tax Matters
For Federal income tax purposes, Total Return Fund and Growth Fund realized
capital gain net income of $3,484,953 and $13,839,882, respectively,
during the year ended March 31, 1997. For Federal income tax purposes,
International Growth Fund realized capital gain net income of $2,863,917
during the year ended March 31, 1997, which includes utilization of capital
loss carryforwards of $389,830. For Federal income tax purposes, Municipal
Bond Fund realized capital gains of $302,510 during the year ended March
31, 1997, which were entirely offset by utilization of capital loss
carryforwards. Remaining prior year capital loss carryforwards of
Municipal Bond Fund totaled $160,264 at March 31, 1997. Of this amount,
$31,213 is available to offset future realized capital gain net income
through March 31, 2003, and the remaining $129,051 is available to offset
future realized capital gain net income through March 31, 2004. For
Federal income tax purposes, Asset Strategy Fund and Limited-Term Bond Fund
realized capital losses of $224,368 and 88,346, respectively, during the
year ended March 31, 1997, and these losses are available to offset future
realized capital gain net income of each fund through March 31, 2005. A
portion of the capital gain net income of Total Return Fund and Growth Fund
was paid to shareholders during the year ended March 31, 1997. Remaining
capital gains of these Funds, as well as the capital gain net income of
International Growth Fund, will be distributed to shareholders.
NOTE 6 -- Commencement of Multiclass Operations
On December 2, 1995, each Fund within the Corporation was authorized to
offer investors a choice of two classes of shares, Class B and Class Y,
each of which has equal rights as to assets and voting privileges with
respect to each Fund. Class Y shares are not subject to a contingent
deferred sales charge on redemptions and have separate fee structures for
transfer agency and dividend disbursement services and Rule 12b-1 Service
Plan fees. A comprehensive discussion of the terms under which shares of
either class are offered is contained in the Prospectus and the Statement
of Additional Information for the Corporation.
Income, non-class specific expenses and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of
relative net assets as of the beginning of each day adjusted for the prior
day's capital share activity.
Transactions in capital stock for the period ended March 31, 1997 are
summarized below.
Total International
Return Growth Growth
Fund Fund Fund
----------- ------------ ------------
Shares issued from sale
of shares:
Class B 6,808,591 3,632,678 2,238,293
Class Y 24,004 14,358 17,526
Shares issued from
reinvestment of
dividends and/or capital
gains distribution:
Class B 95,480 341,944 2,464
Class Y 30 1 2
Shares redeemed:
Class B (2,181,104) (2,712,593) (270,903)
Class Y (1,854) --- (118)
--------- --------- ---------
Increase in outstanding
capital shares:
Class B 4,722,967 1,262,029 1,969,854
Class Y 22,180 14,359 17,410
--------- --------- ---------
Total for Fund 4,745,147 1,276,388 1,987,264
========= ========= =========
Value issued from sale
of shares:
Class B $119,248,838 $77,383,014 $25,345,167
Class Y 448,206 293,327 208,529
Value issued from
reinvestment of
dividends and/or capital
gains distribution:
Class B 1,705,291 6,948,199 27,578
Class Y 541 30 21
Value redeemed:
Class B (39,096,763) (55,095,161) (3,038,791)
Class Y (33,626) --- (1,423)
----------- ----------- -----------
Increase in outstanding
capital:
Class B 81,857,366 29,236,052 22,333,954
Class Y 415,121 293,357 207,127
----------- ----------- -----------
Total for Fund $82,272,487 $29,529,409 $22,541,081
=========== =========== ===========
Asset Limited- Municipal
Strategy Term Bond Bond
Fund Fund Fund
----------- ------------ ------------
Shares issued from sale
of shares:
Class B 648,628 532,545 690,053
Class Y 11,760 10,427 ---
Shares issued from
reinvestment of
dividends and/or capital
gains distribution:
Class B 47,461 84,279 123,331
Class Y 77 91 5
Shares redeemed:
Class B (621,105) (1,190,546) (587,793)
Class Y --- --- ---
--------- --------- -------
Increase (decrease) in
outstanding capital shares:
Class B 74,984 (573,722) 225,591
Class Y 11,837 10,518 5
--------- --------- -------
Total for Fund 86,821 (563,204) 225,596
========= ========= =======
Value issued from sale
of shares:
Class B $6,618,305 $5,314,824 $7,405,072
Class Y 120,365 104,186 ---
Value issued from
reinvestment of
dividends and/or capital
gains distribution:
Class B 483,186 840,800 1,327,022
Class Y 773 956 48
Value redeemed:
Class B (6,363,794) (11,853,606) (6,314,829)
Class Y --- --- ---
----------- ----------- ----------
Increase (decrease) in
outstanding capital:
Class B 737,697 (5,697,982) 2,417,265
Class Y 121,138 105,142 48
----------- ----------- ----------
Total for Fund $ 858,835 ($5,592,840) $2,417,313
=========== =========== ==========
Transactions in capital stock for the period ended March 31, 1996 are
summarized below.
Total International
Return Growth Growth
Fund Fund Fund
----------- ------------ ------------
Shares issued from sale
of shares:
Class B 5,512,195 4,325,372 1,097,607
Class Y 5,288 49 723
Shares issued from
reinvestment of
dividends and/or capital
gains distribution:
Class B 32,501 151,221 22,332
Class Y --- --- ---
Shares redeemed:
Class B (1,027,718) (787,512) (214,469)
Class Y --- --- ---
--------- --------- -------
Increase in outstanding
capital shares:
Class B 4,516,978 3,689,081 905,470
Class Y 5,288 49 723
--------- --------- -------
Total for Fund 4,522,266 3,689,130 906,193
========= ========= =======
Value issued from sale
of shares:
Class B $83,845,520 $84,517,378 $10,888,190
Class Y 81,853 1,000 7,109
Value issued from
reinvestment of
dividends and/or capital
gains distribution:
Class B 498,248 3,019,878 212,070
Class Y --- --- ---
Value redeemed:
Class B (15,323,176) (15,233,752) (2,108,200)
Class Y --- --- ---
----------- ----------- ----------
Increase in outstanding
capital:
Class B 69,020,592 72,303,504 8,992,060
Class Y 81,853 1,000 7,109
----------- ----------- ----------
Total for Fund $69,102,445 $72,304,504 $8,999,169
=========== =========== ==========
Asset Limited- Municipal
Strategy Term Bond Bond
Fund Fund Fund
----------- ------------ ------------
Shares issued from sale
of shares:
Class B 1,509,865 1,575,447 959,634
Class Y 97 100 92
Shares issued from
reinvestment of
dividends and/or capital
gains distribution:
Class B 13,133 62,029 104,734
Class Y 1 2 2
Shares redeemed:
Class B (220,727) (549,241) (542,901)
Class Y --- --- ---
--------- --------- -------
Increase in outstanding
capital shares:
Class B 1,302,271 1,088,235 521,467
Class Y 98 102 94
--------- --------- -------
Total for Fund 1,302,369 1,088,337 521,561
========= ========= =======
Value issued from sale
of shares:
Class B $15,469,968 $15,955,031 $10,219,694
Class Y 1,000 1,000 1,000
Value issued from
reinvestment of
dividends and/or capital
gains distribution:
Class B 134,044 622,642 1,108,944
Class Y 5 11 11
Value redeemed:
Class B (2,253,670) (5,504,008) (5,739,832)
Class Y --- --- ---
----------- ----------- ----------
Increase in outstanding
capital:
Class B 13,350,342 11,073,665 5,588,806
Class Y 1,005 1,011 1,011
----------- ----------- ----------
Total for Fund $13,351,347 $11,074,676 $5,589,817
=========== =========== ==========
NOTE 7 -- Futures
Upon entering into a futures contract, the Fund is required to deposit, in
a segregated account, an amount of cash or U.S. Treasury Bills equal to a
varying specified percentage of the contract amount. This amount is known
as the initial margin. Subsequent payments ("variation margins") are made
or received by the Fund each day, dependent on the daily fluctuations in
the value of the underlying debt security or index. These changes in the
variation margins are recorded by the Fund as unrealized gains or losses.
Upon the closing of the contracts, the cumulative net change in the
variation margin is recorded as realized gain or loss. The Fund uses
futures to attempt to reduce the overall risk of its investments.
NOTE 8 -- Commitments
At March 31, 1997, International Growth Fund had entered into foreign
exchange contracts in addition to the contracts listed in the Schedule of
Investments, under which it had agreed to purchase and sell foreign
currency with an approximate market value of $4,382,925 and $842,898,
respectively.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Waddell & Reed Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Total Return Fund, Growth Fund,
International Growth Fund, Asset Strategy Fund, Limited-Term Bond Fund
and Municipal Bond Fund (collectively the "Funds") comprising Waddell &
Reed Funds, Inc., as of March 31, 1997, the related statements of
operations and changes in net assets for the year then ended, and the
financial highlights for the year then ended. These financial statements
and the financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
The financial statements and the financial highlights of the Funds for
each of the periods presented in the four-year period ended March 31,
1996 were audited by other auditors whose report, dated May 10, 1996,
expressed an unqualified opinion on those statements and financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
the financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at March 31, 1997 by correspondence with
the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of each
of the respective funds comprising Waddell & Reed Funds, Inc. as of March
31, 1997, the results of their operations, the changes in their net
assets, and their financial highlights for the year then ended in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
May 7, 1997
<PAGE>
INCOME TAX INFORMATION
The amounts of the dividends and long-term capital gains below, multiplied by
the number of shares in Total Return Fund, Growth Fund or Asset Strategy Fund,
respectively, owned by you on the record dates, will give you the total amounts
to be reported in your Federal income tax return for the years in which they
were received or reinvested.
PER-SHARE AMOUNTS REPORTABLE AS:
----------------------------------------------------------
For Individuals For Corporations
------------------------- ------------------------------
Long-Term Non- Long-Term
Record Ordinary Non- Capital Qual- Qual- Non- Capital
Date Total Income Taxable Gain ifying ifying Taxable Gain
- -------- ------ ------- ---------------- ------ ------- -------- ------
Total Return Fund
Class B and Class Y
12-13-96 $0.107 $ --- $ --- $0.1070 $ --- $ --- $ --- $0.1070
------ ------ ------ ------ ------ ------ ----- ------
$0.107 $ --- $ --- $0.1070 $ --- $ --- $ --- $0.1070
====== ====== ====== ====== ====== ====== ===== ======
Growth Fund
Class B and Class Y
12-13-96 $0.600 $0.4378 $ --- $0.1622 $ --- $0.4378$ --- $0.1622
------ ------ ------ ------ ------ ------ ----- ------
$0.600 $0.4378 $ --- $0.1622 $ --- $0.4378$ --- $0.1622
====== ====== ====== ====== ====== ====== ===== ======
International Growth Fund
Class B and Class Y
12-13-96 $0.009 $0.0090 $ --- $ --- $ --- $0.0090$ --- $ ---
------ ------ ------ ------ ------ ------ ----- ------
$0.009 $0.0090 $ --- $ --- $ --- $0.0090$ --- $ ---
====== ====== ====== ====== ====== ====== ===== ======
Asset Strategy Fund
Class B
6-14-96 $0.040 $0.0400 $ --- $ --- $0.0058 $0.0342$ --- $ ---
9-13-96 .050 .0500 --- --- .0070 .0430 --- ---
12-13-96 .215 .2150 --- --- .0109 .2041 --- ---
3-14-97 .040 .0400 --- --- .0011 .0389 --- ---
------ ------ ------ ------ ------ ------ ----- ------
$0.345 $0.3450 $ --- $ --- $0.0248 $0.3202$ --- $---
====== ====== ====== ====== ====== ====== ===== ======
Asset Strategy Fund
Class B
6-14-96 $0.063 $0.0630 $ --- $ --- $0.0091 $0.0539$ --- $ ---
9-13-96 .076 .0760 --- --- .0106 .0654 --- ---
12-13-96 .237 .2370 --- --- .0140 .2230 --- ---
3-14-97 .062 .0620 --- --- .0017 .0603 --- ---
------ ------ ------ ------ ------ ------ ----- ------
$0.438 $0.4380 $ --- $ --- $0.0354 $0.4026$ --- $ ---
====== ====== ====== ====== ====== ====== ===== ======
Dividends are declared and recorded by each Fund on each day the New York Stock
Exchange is open for business. Dividends are paid monthly on the 27th of the
month or on the preceding business day if the 27th is a weekend or holiday.
Exempt Interest Dividends - The exempt interest portion of dividends paid
represents the distribution of state and municipal bond interest and is exempt
from Federal income taxation.
The table below shows the taxability of dividends and long-term capital gains
paid during the fiscal year ended March 31, 1996:
PER-SHARE AMOUNTS REPORTABLE AS:
----------------------------------------------------------
For Individuals For Corporations
------------------------- ------------------------------
Long-Term Non- Long-Term
Record Ordinary Non- Capital Qual- Qual- Non- Capital
Date Income Taxable Gain ifying ifying Taxable Gain
- ------------ -------- ------- --------- ------- ------ -------- ----
Limited-Term Bond Fund
Class B and Class Y
April through
March 1997 100.00% ---% ---% ---% 100.00% ---% ---%
Long-Term
Record Exempt Non- Non- Capital
Date Total Interest Exempt Taxable Gain
- -------- --------- -------- ------- ------- --------
Municipal Bond Fund
Class B and Class Y
April through
December
1995 100.00% 96.3391% 3.6609% ---% ---%
January through
March
1996 100.00% 98.6746% 1.3254% ---% ---%
CORPORATION DEDUCTIONS -- Under Federal tax law, the amounts reportable as
Qualifying Dividends are eligible for the dividends received deduction in the
year received as provided by Section 243 of the Internal Revenue Code.
The tax status of dividends paid will be reported to you on Form 1099-DIV after
the close of the applicable calendar year.
Income from Municipal Bond Fund may be subject to the alternative minimum tax.
Shareholders are advised to consult with their tax advisor concerning the tax
treatment of dividends and distributions from all Funds.
<PAGE>
DIRECTORS
Ronald K. Richey, Birmingham, Alabama, Chairman of the Board
Henry L. Bellmon, Red Rock, Oklahoma
Dodds I. Buchanan, Boulder, Colorado
Linda Graves, Topeka, Kansas
John F. Hayes, Hutchinson, Kansas
Glendon E. Johnson, Miami, Florida
William T. Morgan, Coronado, California
William L. Rogers, Los Angeles, California
Frank J. Ross, Jr., Kansas City, Missouri
Eleanor B. Schwartz, Kansas City, Missouri
Keith A. Tucker, Overland Park, Kansas
Frederick Vogel III, Milwaukee, Wisconsin
Paul S. Wise, Carefree, Arizona
OFFICERS
Keith A. Tucker, President
Michael L. Avery, Vice President
Robert L. Hechler, Vice President
Henry J. Herrmann, Vice President
John M. Holliday, Vice President
Theodore W. Howard, Vice President and Treasurer
Thomas A. Mengel, Vice President
Sharon K. Pappas, Vice President and Secretary
Mark G. Seferovich, Vice President
W. Patrick Sterner, Vice President
Russell E. Thompson, Vice President
Daniel J. Vrabac, Vice President
This report is submitted for the general information of the shareholders of
Waddell & Reed Funds, Inc. It is not authorized for distribution to prospective
investors unless accompanied with or preceded by the Waddell & Reed Funds, Inc.
current prospectus.
To all IRA Planholders:
As required by law, income tax will automatically be withheld from any
distribution or withdrawal from an IRA unless you make a written election not to
have taxes withheld. The election may be made by submitting forms provided by
Waddell & Reed, Inc. which can be obtained from your Waddell & Reed
representative or by submitting Internal Revenue Service form W-4P. Once made,
an election can be revoked by providing written notice to Waddell & Reed, Inc.
If you elect not to have tax withheld you may be required to make payments of
estimated tax. Penalties may be imposed by the IRS if withholding and estimated
tax payments are not adequate.
<PAGE>
WADDELL & REED FUNDS, INC.
Total Return Fund
Growth Fund
International Growth Fund
Asset Strategy Fund
Limited-Term Bond Fund
Municipal Bond Fund
- ------------------------------------
FOR MORE INFORMATION:
Contact your representative, or your
local office as listed on your
Account Statement, or contact:
WADDELL & REED
CUSTOMER SERVICE
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
(800) 366-5465
Our INTERNET address is:
http://www.waddell.com
WRR3000A(3-97)
printed on recycled paper
