N-30D 1 tmn30d.txt SEMIANNUAL REPORT TO SHAREHDOLDERS DATED DECEMBER 31, 2001 Waddell & Reed Advisors Tax-Managed Equity Fund Semiannual Report ----------------- December 31, 2001 CONTENTS 3 President's Letter 5 Performance Summary 7 Portfolio Highlights 8 Investments 11 Statement of Assets and Liabilities 12 Statement of Operations 13 Statement of Changes in Net Assets 14 Financial Highlights 18 Notes to Financial Statements 23 Independent Auditors' Report 24 Householding Notice 25 Directors & Officers This report is submitted for the general information of the shareholders of Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. It is not authorized for distribution to prospective investors in the Fund unless accompanied with or preceded by the Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. current prospectus and current Fund performance information. PRESIDENT'S LETTER OF TAX-MANAGED EQUITY FUND December 31, 2001 Dear Shareholder: We are pleased to share with you this report on your Fund's operations for the six months ended December 31, 2001. The last six months were dominated by the tragic events of September 11, 2001, the onset of the war on terrorism, and a difficult, recessionary market environment. The attacks were emotionally staggering, yet they seemed to have helped solidify our resolve as a country and to remind us of the robust nature of the American spirit. Many of us have faced these challenges and turned them into opportunities: to reconnect with loved ones, to renew commitments to our values and to use our experiences to move forward. We also can take encouragement from the fact that, by year-end, the economy showed some indications of turning around. Apparently spurred by the Federal Reserve's eleven interest rate cuts during 2001, along with some early success in the war, the markets recovered somewhat toward the end of the year as many analysts began to anticipate a recovery in 2002. While we view this as a positive sign for the year to come, we believe that the challenges of 2001 may take some time to overcome. At December 31, many of the primary equity indexes posted losses for the second half of 2001. For the last six months, the technology-heavy Nasdaq Industrials Index was down 8.40 percent. The other two major indexes also suffered during the period, although not quite as much, as the S&P 500 Index declined 5.60 percent and the Dow Jones Industrial Average declined 3.72 percent. By contrast, bonds have done a bit better during the last six months, as evidenced by the Salomon Brothers Broad Investment Grade Index increasing 4.73 percent for the period. It appears that a combination of the declining stock market, interest rate cuts and a slower economy has helped bond performance over the last six months. As you review your finances, it is helpful to note that, while the market may decline in the face of economic uncertainty and geopolitical events, it often rebounds over the intermediate or long term. While the current circumstances may be difficult, we believe that it is unwise to act impulsively. We believe that the best way to approach a fluctuating market is to develop and maintain a personal financial plan. From our experience, those who adhere to a structured and consistent investment program remain well positioned to take advantage of opportunities, including those presented by the market's occasional downdrafts. Ultimately, we believe that it is essential for serious investors to maintain a long-term perspective and to maintain a diversified portfolio. Short-term downturns often create excellent buying opportunities, as well as opportunities to further diversify holdings. We believe that it remains important for all investors to review their investment asset allocation on a regular basis to ensure that it continues to adhere to individual risk tolerance and is adaptable to market changes. Remember, a plan that is appropriate for you is appropriate regardless of inevitable market changes. You have a partnership with your Waddell & Reed financial advisor, and that partnership is built upon a customized program based on your specific needs. Focusing on that plan, despite market fluctuations, could be your key to a sound financial future. Thank you for your ongoing dedication and partnership. Respectfully, Henry J. Herrmann President SHAREHOLDER SUMMARY OF TAX-MANAGED EQUITY FUND ------------------------------------------------------------------ Tax-Managed Equity Fund GOAL Seeks long-term growth of capital while minimizing taxable gains and income to shareholders. Strategy Designed for investors seeking long-term capital appreciation, but who are also seeking to minimize Federal income taxes resulting from their investment. The Fund will primarily be invested in common stocks of large to medium sized U.S. and foreign companies that the Fund's investment manager considers to be high in quality and attractive in their long-term investment potential. The Fund seeks stocks that are favorably priced in relation to their fundamental value and will likely grow over time. Founded 2000 Scheduled Dividend Frequency Annually (December) PERFORMANCE SUMMARY -- Class A Shares Per Share Data For the Six Months Ended December 31, 2001 ------------------------------------------ Dividend paid $0.01 ===== Net asset value on 12-31-01 $7.43 6-30-01 8.24 ------ Change per share $(0.81) ====== Past performance is not necessarily indicative of future results. SHAREHOLDER SUMMARY OF TAX-MANAGED EQUITY FUND ------------------------------------------------------------------ Because of ongoing market volatility, the Fund's performance may be subject to substantial short-term fluctuation and current performance may be less than the results shown below. Please check the Waddell & Reed website at www.waddell.com for more current performance information. Average Annual Total Return (A) Class A Class B ----------------------- ----------------------- With Without With Without Period Sales Load(B) Sales Load(C) CDSC(D) CDSC(E) ------ ---------- ---------- ----------- ---------- 1-year period ended 12-31-01 -26.61% -22.13% -25.88% -22.79% 5-year period ended 12-31-01 --- --- --- --- 10-year period ended 12-31-01 --- --- --- --- Since inception of Class (F) -18.16% -15.34% -18.03% -16.10% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data is based on deduction of 5.75% sales load on the initial purchase in the periods. (C)Performance data does not take into account the sales load deducted on an initial purchase. (D)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 5.00% upon redemption at the end of the period. (E)Performance data does not reflect the effect of paying the applicable CDSC upon redemption at the end of the period. (F)3-31-00 for Class A shares and Class B shares (the date on which shares were first acquired by shareholders). Average Annual Total Return(A) Class C(B) Class Y(C) ------ ---------- ---------- 1-year period ended 12-31-01 -22.82% -22.01% 5-year period ended 12-31-01 --- --- 10-year period ended 12-31-01 --- --- Since inception of Class (D) -16.17% -16.00% (A)Performance data represents share price appreciation (depreciation), including reinvestment of all income and capital gains distributions. Performance data represents past performance and is no guarantee of future results. Share price, investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (B)Performance data reflects the effect of paying the applicable contingent deferred sales charge (CDSC) at a maximum of 1.00% which declines to zero at the end of the first year after investment. (Accordingly, these returns reflect no CDSC since it only applies to Class C shares held for twelve months or less.) (C)Performance data does not include the effect of sales charges, as Class Y shares are not subject to these charges. (D)3-31-00 for Class C shares and 4-19-00 for Class Y shares (the date on which shares were first acquired by shareholders). SHAREHOLDER SUMMARY OF TAX-MANAGED EQUITY FUND ------------------------------------------------------------------ Portfolio Highlights On December 31, 2001, Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. had net assets totaling $48,631,390 invested in a diversified portfolio of: 94.66% Common Stocks 5.34% Cash and Cash Equivalents As a shareholder of Waddell & Reed Advisors Tax-Managed Equity Fund, Inc., for every $100 you had invested on December 31, 2001, your Fund owned: $30.30 Manufacturing Stocks 20.13 Services Stocks 16.97 Finance, Insurance and Real Estate Stocks 10.72 Transportation, Communication, Electric and Sanitary Services Stocks 9.27 Wholesale and Retail Trade Stocks 7.27 Mining Stocks 5.34 Cash and Cash Equivalents THE INVESTMENTS OF TAX-MANAGED EQUITY FUND December 31, 2001 Shares Value COMMON STOCKS Amusement and Recreation Services - 1.07% Walt Disney Company (The) ................ 25,000 $ 518,000 ----------- Building Materials and Garden Supplies - 2.10% Home Depot, Inc. (The) ................... 20,000 1,020,200 ----------- Business Services - 11.92% AOL Time Warner Inc.* .................... 48,900 1,569,690 Amdocs Limited* .......................... 28,400 964,748 eBay Inc.* ............................... 27,700 1,852,992 Microsoft Corporation* ................... 21,300 1,411,231 ----------- 5,798,661 ----------- Chemicals and Allied Products - 7.52% Amgen Inc.* .............................. 13,800 778,803 Forest Laboratories, Inc.* ............... 1,400 114,730 Pfizer Inc. .............................. 27,300 1,087,905 Pharmacia Corporation .................... 20,000 853,000 Schering-Plough Corporation .............. 23,000 823,630 ----------- 3,658,068 ----------- Communication - 8.82% Cox Communications, Inc., Class A* ....... 28,700 1,202,817 SBC Communications Inc. .................. 19,100 748,147 Telefonaktiebolaget LM Ericsson, ADR, Class B ........................... 114,000 595,650 Vodafone Group Plc, ADR ................. 35,000 898,800 WorldCom, Inc. - WorldCom group* ......... 60,000 845,100 ----------- 4,290,514 ----------- Depository Institutions - 1.25% Citigroup Inc. ........................... 12,000 605,760 ----------- See Notes to Schedule of Investments on page 10. THE INVESTMENTS OF TAX-MANAGED EQUITY FUND December 31, 2001 Shares Value COMMON STOCKS (Continued) Eating and Drinking Places - 1.88% Starbucks Corporation* ................... 48,000 $ 914,640 ----------- Electronic and Other Electric Equipment - 5.43% Linear Technology Corporation ............ 14,000 545,720 Lucent Technologies Inc. ................. 42,000 264,180 Nokia Corporation, Series A, ADR ......... 20,000 490,600 Nortel Networks Corporation .............. 42,000 315,000 Texas Instruments Incorporated ........... 36,700 1,027,600 ----------- 2,643,100 ----------- Food Stores - 1.51% Kroger Co. (The)* ........................ 35,200 734,624 ----------- Furniture and Fixtures - 0.97% Lear Corporation* ........................ 12,400 472,936 ----------- General Merchandise Stores - 3.78% Kohl's Corporation* ...................... 5,600 394,464 Target Corporation ....................... 35,200 1,444,960 ----------- 1,839,424 ----------- Health Services - 2.92% HCA - The Healthcare Company ............. 36,800 1,418,272 ----------- Industrial Machinery and Equipment - 5.82% Cisco Systems, Inc.* ..................... 38,000 688,370 Cooper Cameron Corporation* .............. 23,200 936,352 Dell Computer Corporation* ............... 29,600 804,084 EMC Corporation* ......................... 30,000 403,200 ----------- 2,832,006 ----------- See Notes to Schedule of Investments on page 10. THE INVESTMENTS OF TAX-MANAGED EQUITY FUND December 31, 2001 Shares Value COMMON STOCKS (Continued) Instruments and Related Products - 4.50% Danaher Corporation ...................... 13,000 $ 784,030 Medtronic, Inc. .......................... 27,400 1,403,154 ----------- 2,187,184 ----------- Insurance Carriers - 7.31% American International Group, Inc. ...... 19,700 1,564,180 Berkshire Hathaway Inc., Class B* ........ 350 883,750 MGIC Investment Corporation .............. 17,900 1,104,788 ----------- 3,552,718 ----------- Motion Pictures - 4.22% Blockbuster Inc., Class A ................ 35,000 882,000 Fox Entertainment Group, Inc., Class A* .. 44,100 1,169,973 ----------- 2,051,973 ----------- Nondepository Institutions - 4.88% Financial Federal Corporation* ........... 51,100 1,596,875 Morgan Stanley Dean Witter & Co. ......... 13,900 777,566 ----------- 2,374,441 ----------- Oil and Gas Extraction - 7.27% Anadarko Petroleum Corporation ........... 22,500 1,279,125 Apache Corporation ....................... 23,980 1,196,122 Burlington Resources Inc. ................ 28,200 1,058,628 ----------- 3,533,875 ----------- Petroleum and Coal Products - 1.49% Exxon Mobil Corporation .................. 18,400 723,120 ----------- See Notes to Schedule of Investments on page 10. THE INVESTMENTS OF TAX-MANAGED EQUITY FUND December 31, 2001 Shares Value COMMON STOCKS (Continued) Printing and Publishing - 1.78% New York Times Company (The), Class A .... 20,000 $ 865,000 ----------- Security and Commodity Brokers - 3.53% Charles Schwab Corporation (The) ......... 69,000 1,067,430 Goldman Sachs Group, Inc. (The) .......... 7,000 649,250 ----------- 1,716,680 ----------- Transportation by Air - 1.90% Southwest Airlines Co. ................... 50,000 924,000 ----------- Transportation Equipment - 2.79% Lockheed Martin Corporation .............. 29,100 1,358,097 ----------- TOTAL COMMON STOCKS - 94.66% $46,033,293 (Cost: $47,966,249) TOTAL SHORT-TERM SECURITIES - 5.78% $ 2,814,000 (Cost: $2,814,000) TOTAL INVESTMENT SECURITIES - 100.44% $48,847,293 (Cost: $50,780,249) LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.44%) (215,903) NET ASSETS - 100.00% $48,631,390 Notes to Schedule of Investments *No income dividends were paid during the preceding 12 months. See Note 1 to financial statements for security valuation and other significant accounting policies concerning investments. See Note 3 to financial statements for cost and unrealized appreciation and depreciation of investments owned for Federal income tax purposes. STATEMENT OF ASSETS AND LIABILITIES TAX-MANAGED EQUITY FUND December 31, 2001 (In Thousands, Except for Per Share Amounts) ASSETS Investment securities - at value (Notes 1 and 3) ................................. $48,847 Cash ............................................. 1 Receivables: Fund shares sold ................................ 257 Dividends and interest .......................... 11 Prepaid insurance premium ......................... 1 ------- Total assets .................................. 49,117 LIABILITIES ------- Payable to Fund shareholders ...................... 452 Accrued service fee (Note 2) ..................... 7 Accrued shareholder servicing (Note 2) ........... 7 Accrued accounting services fee (Note 2) ......... 2 Accrued distribution fee (Note 2) ................ 2 Accrued management fee (Note 2) ................... 1 Other ............................................ 15 ------- Total liabilities ............................. 486 ------- Total net assets ............................. $48,631 ======= NET ASSETS $0.001 par value capital stock: Capital stock ................................... $ 7 Additional paid-in capital ...................... 66,604 Accumulated undistributed loss: Accumulated undistributed net investment loss.... (219) Accumulated undistributed net realized loss on investment transactions .................... (15,828) Net unrealized depreciation in value of investments ................................... (1,933) ------- Net assets applicable to outstanding units of capital ............................. $48,631 ======= Net asset value per share (net assets divided by shares outstanding): Class A .......................................... $7.43 Class B .......................................... $7.35 Class C .......................................... $7.34 Class Y .......................................... $7.43 Capital shares outstanding: Class A .......................................... 5,689 Class B .......................................... 582 Class C .......................................... 281 Class Y .......................................... 3 Capital shares authorized ........................ 1,000,000 See Notes to Financial Statements. STATEMENT OF OPERATIONS TAX-MANAGED EQUITY FUND For the Six Months Ended December 31, 2001 (In Thousands) INVESTMENT LOSS Income (Note 1B): Dividends ........................... $ 110 Interest and amortization ........... 34 ------- Total income ........................ 144 ------- Expenses (Note 2): Investment management fee ........... 161 Service fee: Class A .......................... 53 Class B ........................... 6 Class C ........................... 3 Shareholder servicing: Class A ........................... 38 Class B ........................... 6 Class C ........................... 3 Class Y ........................... ---* Distribution fee: Class A .......................... 2 Class B ........................... 17 Class C ........................... 8 Registration fees ................... 26 Accounting services fee ............. 14 Audit fees .......................... 8 Custodian fees ...................... 2 Legal fees .......................... 1 Other ............................... 15 ------- Total expenses .................... 363 ------- Net investment loss ........... (219) REALIZED AND UNREALIZED LOSS ON ------- INVESTMENTS (NOTES 1 AND 3) Realized net loss on investments ..... (4,308) Unrealized depreciation in value of investments during the period .... (960) ------- Net loss on investments ............. (5,268) Net decrease in net assets resulting from ------- operations ....................... $(5,487) ======= *Not shown due to rounding. See Notes to Financial Statements. STATEMENT OF CHANGES IN NET ASSETS TAX-MANAGED EQUITY FUND (In Thousands) For the For the For the period six fiscal from months period 3-31-00* ended ended through 12-31-01 6-30-01 12-31-00 INCREASE (DECREASE) IN NET ASSETS --------- --------- --------- Operations: Net investment income (loss) ... $ (219) $ (285) $ 300 Realized net loss on investments (4,308) (10,975) (545) Unrealized appreciation (depreciation) ................ (960) 2,136 (3,109) ------- ------- ------- Net decrease in net assets resulting from operations ... (5,487) (9,124) (3,354) ------- ------- ------- Distributions to shareholders from net investment income (Note 1E):** Class A ........................ (38) --- (300) Class B ........................ --- --- --- Class C ........................ --- --- --- Class Y ........................ ---*** --- ---*** ------- ------- ------- (38) --- (300) ------- ------- ------- Capital share transactions (Note 5) ....................... (1,760) (14,804) 83,398 ------- ------- ------- Total increase (decrease) ... (7,285) (23,928) 79,744 NET ASSETS Beginning of period ............. 55,916 79,844 100 ------- ------- ------- End of period ................... $48,631 $55,916 $79,844 ======= ======= ======= Undistributed net investment income (loss) ................ $ (219) $ 38 $ --- ===== === ==== *Commencement of operations. **See "Financial Highlights" on pages 14 - 17. ***Not shown due to rounding. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS TAX-MANAGED EQUITY FUND Class A Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the For the six fiscal period from months period 3-31-00* ended ended through 12-31-01 6-30-01 12-31-00 -------- -------- -------- Net asset value, beginning of period ........ $8.24 $9.55 $10.00 ----- ----- ------ Income (loss) from investment operations: Net investment income (loss) ... (0.03) (0.03) 0.04 Net realized and unrealized loss on investments .. (0.77) (1.28) (0.45) ----- ----- ------ Total from investment operations ...... (0.80) (1.31) (0.41) ----- ----- ------ Less distributions from net investment income ........... (0.01) (0.00) (0.04) ----- ----- ------ Net asset value, end of period .... $7.43 $8.24 $ 9.55 ===== ===== ====== Total return** ..... -9.75% -13.72% -4.11% Net assets, end of period (in millions) ........ $42 $48 $67 Ratio of expenses to average net assets 1.34%*** 1.57%*** 1.15%*** Ratio of net investment income (loss) to average net assets ....... -0.76%*** -0.82%*** 1.63%*** Portfolio turnover rate ............. 20.00% 30.09% 16.89% *Commencement of operations of the class. **Total return calculated without taking into account the sales load deducted on an initial purchase. ***Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS TAX-MANAGED EQUITY FUND Class B Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the For the six fiscal period from months period 3-31-00* ended ended through 12-31-01 6-30-01 12-31-00 -------- -------- -------- Net asset value, beginning of period ........ $8.17 $ 9.52 $10.00 ----- ----- ------ Income (loss) from investment operations: Net investment income (loss) ... (0.07) (0.06) 0.01 Net realized and unrealized loss on investments .. (0.75) (1.29) (0.49) ----- ----- ------ Total from investment operations ...... (0.82) (1.35) (0.48) ----- ----- ------ Less distributions from net investment income ........... (0.00) (0.00) (0.00) ----- ----- ------ Net asset value, end of period .... $7.35 $8.17 $9.52 ===== ===== ====== Total return ....... -10.04% -14.18% -4.80% Net assets, end of period (in millions) ........ $4 $6 $9 Ratio of expenses to average net assets 2.21%** 2.40%** 2.08%** Ratio of net investment income (loss) to average net assets ....... -1.63%** -1.63%** 0.67%** Portfolio turnover rate ............. 20.00% 30.09% 16.89% *Commencement of operations of the class. **Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS TAX-MANAGED EQUITY FUND Class C Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the For the six fiscal period from months period 3-31-00* ended ended through 12-31-01 6-30-01 12-31-00 -------- -------- -------- Net asset value, beginning of period ........ $8.17 $9.51 $10.00 ----- ----- ------ Income (loss) from investment operations: Net investment income (loss) ... (0.06) (0.06) 0.01 Net realized and unrealized loss on investments .. (0.77) (1.28) (0.50) ----- ----- ------ Total from investment operations ...... (0.83) (1.34) (0.49) ----- ----- ------ Less distributions from net investment income ........... (0.00) (0.00) (0.00) ----- ----- ------ Net asset value, end of period .... 7.34 $8.17 $9.51 ===== ===== ====== Total return ....... -10.16% -14.09% -4.90% Net assets, end of period (in millions) ........ $2 $3 $4 Ratio of expenses to average net assets ........... 2.26%** 2.40%** 2.09%** Ratio of net investment income (loss) to average net assets ....... -1.67%** -1.64%** 0.66%** Portfolio turnover rate ............. 20.00% 30.09% 16.89% *Commencement of operations of the class. **Annualized. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS TAX-MANAGED EQUITY FUND Class Y Shares For a Share of Capital Stock Outstanding Throughout Each Period: For the For the For the six fiscal period from months period 4-19-00* ended ended through 12-31-01 6-30-01 12-31-00 -------- -------- -------- Net asset value, beginning of period ........ $8.24 $ 9.55 $10.07 ----- ----- ------ Income (loss) from investment operations: Net investment income (loss) ... (0.02) (0.03) 0.04 Net realized and unrealized loss on investments .. (0.77) (1.28) (0.51) ----- ----- ------ Total from investment operations ...... (0.79) (1.31) (0.47) ----- ----- ------ Less distributions from net investment income ........... (0.02) (0.00) (0.05) ----- ----- ------ Net asset value, end of period .... $7.43 $8.24 $ 9.55 ===== ===== ====== Total return ....... -9.61% -13.72% -4.70% Net assets, end of period (in thousands) ....... $19 $21 $32 Ratio of expenses to average net assets 1.20%** 1.44%** 1.17%** Ratio of net investment income (loss) to average net assets ....... -0.62%** -0.70%** 1.41%** Portfolio turnover rate ............. 20.00% 30.09% 16.89%*** *Commencement of operations of the class. **Annualized. ***For the period from March 31, 2000 through December 31, 2000. See Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS December 31, 2001 NOTE 1 -- Significant Accounting Policies Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. Its investment objective is to seek growth of capital. Effective for the fiscal period ended June 30, 2001, the Fund changed its fiscal year end for both financial reporting and Federal income tax purposes to June 30 from December 31. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America. A. Security valuation -- Each stock and convertible bond is valued at the latest sale price thereof on each 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 the Nasdaq Stock Market, which provides information on bid and asked prices quoted by major dealers in such stocks. Short-term debt securities are valued at amortized cost, which approximates market. B. Security transactions and related investment income -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Securities gains and losses are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. See Note 3 -- 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 translations arise from changes in currency exchange rates. The Fund 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 Fund'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 Fund intends to pay distributions as required to avoid imposition of excise tax. Accordingly, provision has not been made for Federal income taxes. See Note 4 - Federal Income Tax Matters. E. Dividends and distributions -- Dividends and distributions to shareholders are recorded by the Fund on the business day following record date. Net investment income dividends and capital gains distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are due to differing treatments for items such as deferral of wash sales and post-October losses, foreign currency transactions, net operating losses and expiring capital loss carryovers. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. NOTE 2 -- Investment Management and Payments to Affiliated Persons The Fund pays a fee to Waddell & Reed Investment Management Company ("WRIMCO"), the Fund's investment manager and a wholly owned subsidiary of W&R, for investment management services. The fee is computed daily based on the net asset value at the close of business. The fee is payable by the Fund at the annual rates of: 0.65% of net assets up to $1 billion, 0.60% of net assets over $1 billion and up to $2 billion, 0.55% of net assets over $2 billion and up to $3 billion, and 0.50% of net assets over $3 billion. However, WRIMCO has voluntarily agreed to waive its management fee on any day if the Fund's net assets are less than $25 million, subject to WRIMCO's right to change or modify this waiver. The Fund accrues and pays this fee daily. The Fund has an Accounting Services Agreement with Waddell & Reed Services Company ("WARSCO"), a wholly owned subsidiary of W&R. Under the agreement, WARSCO acts as the agent in providing bookkeeping and accounting services and assistance to the Fund, including maintenance of Fund records, pricing of Fund shares, preparation of prospectuses for existing shareholders, preparation of proxy statements and certain shareholder reports. For these services, the Fund 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 Level ------------------------- ------------------- From $ 0 to $ 10 $ 0 From $ 10 to $ 25 $ 11,000 From $ 25 to $ 50 $ 22,000 From $ 50 to $ 100 $ 33,000 From $ 100 to $ 200 $ 44,000 From $ 200 to $ 350 $ 55,000 From $ 350 to $ 550 $ 66,000 From $ 550 to $ 750 $ 77,000 From $ 750 to $1,000 $ 93,500 $1,000 and Over $110,000 In addition, for each class of shares in excess of one, the Fund pays WARSCO a monthly per-class fee equal to 2.5% of the monthly base fee. For Class A, Class B and Class C shares, the Fund pays WARSCO a monthly per account charge for shareholder servicing of $1.5042 for each shareholder account which was in existence at any time during the prior month. Prior to December 1, 2001, the shareholder servicing charge was $1.3375 per account, paid monthly. With respect to Class Y shares, the Fund pays WARSCO a monthly fee at an annual rate of 0.15% of the average daily net assets of the class for the preceding month. The Fund also reimburses W&R and WARSCO for certain out-of-pocket costs for all classes. As principal underwriter for the Fund's shares, W&R received gross sales commissions for Class A shares (which are not an expense of the Fund) of $158,432. During the period ended December 31, 2001, W&R received $5,416 and $352 in deferred sales charges for Class B shares and Class C shares, respectively. With respect to Class A, Class B and Class C shares, W&R paid sales commissions of $102,724 and all expenses in connection with the sale of Fund shares, except for registration fees and related expenses. Under a Distribution and Service Plan for Class A shares adopted by the Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund may pay a distribution and/or service fee to W&R in an amount not to exceed 0.25% of the Fund's Class A average annual net assets. The fee is to be paid to reimburse W&R for amounts it expends in connection with the distribution of the Class A shares and/or provision of personal services to Fund shareholders and/or maintenance of shareholder accounts. Under the Distribution and Service Plan adopted by the Fund for Class B and Class C shares, respectively, the Fund may pay W&R a service fee of up to 0.25%, on an annual basis, of the average daily net assets of the class to compensate W&R for providing services to shareholders of that class and/or maintaining shareholder accounts for that class and a distribution fee of up to 0.75%, on an annual basis, of the average daily net assets of the class to compensate W&R for distributing the shares of that class. The Class B Plan and the Class C Plan each permit W&R to receive compensation, through the distribution and service fee, respectively, for its distribution activities for that class, which are similar to the distribution activities described with respect to the Class A Plan, and for its activities in providing personal services to shareholders of that class and/or maintaining shareholder accounts of that class, which are similar to the corresponding activities for which it is entitled to reimbursement under the Class A Plan. The Fund paid Directors' fees of $888, which are included in other expenses. W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company, and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding company. NOTE 3 -- Investment Securities Transactions Purchases of investment securities, other than U.S. Government obligations and short-term securities, aggregated $9,450,259, while proceeds from maturities and sales aggregated $12,279,168. Purchases of short-term securities aggregated $35,084,484, while proceeds from maturities and sales aggregated $34,066,000. No U.S. Government obligations were purchased or sold during the period ended December 31, 2001. For Federal income tax purposes, cost of investments owned at December 31, 2001 was $50,780,249, resulting in net unrealized depreciation of $1,932,956, of which $3,686,989 related to appreciated securities and $5,619,945 to depreciated securities. NOTE 4 -- Federal Income Tax Matters For Federal income tax purposes, the Fund realized capital losses of $11,125,260 during the fiscal period ended June 30, 2001. Remaining capital loss carryovers aggregated $11,520,280 at June 30, 2001, and are available to offset future realized capital gain net income for Federal income tax purposes but will expire if not utilized as follows: $395,020 at June 30, 2008, and $11,125,260 at June 30, 2009. NOTE 5 -- Multiclass Operations The Fund is authorized to offer four classes of shares, Class A, Class B, Class C and Class Y, each of which have equal rights as to assets and voting privileges. Class Y shares are not subject to a sales charge on purchases, are not subject to a Rule 12b-1 Distribution and Service Plan and are subject to a separate shareholder servicing fee structure. A comprehensive discussion of the terms under which shares of each class are offered is contained in the Prospectus and the Statement of Additional Information for the Fund. Income, non-class specific expenses, and realized and unrealized gains and losses are allocated daily to each class of shares based on the value of their relative net assets as of the beginning of each day adjusted for the prior day's capital share activity. Transactions in capital stock are summarized below. Amounts are in thousands. For the For the For the period from six months fiscal period March 31, ended ended 2000 through 12-31-01 6-30-01 12-31-00 ------------ ------------ ------------ Shares issued from sale of shares: Class A ............ 1,249 1,585 8,181 Class B ............. 75 129 1,056 Class C ............. 39 63 559 Class Y ............ ---* 1 3 Shares issued from reinvestment of dividend: Class A ............. 5 --- 30 Class B ............. --- --- --- Class C ............. --- --- --- Class Y ............. ---* --- ---* Shares redeemed: Class A ............ (1,360) (2,791) (1,220) Class B ............. (180) (366) (131) Class C ............. (71) (187) (123) Class Y ............ --- (1) --- ----- ----- ----- Increase (decrease) in outstanding capital shares ...... (243) (1,567) 8,355 ===== ===== ===== Value issued from sale of shares: Class A ............ $ 9,217 $ 13,837 $81,344 Class B ............. 554 1,120 10,447 Class C ............. 280 535 5,531 Class Y ............ 1 5 33 Value issued from reinvestment of dividend: Class A ............. 36 --- 291 Class B ............. --- --- --- Class C ............. --- --- --- Class Y ............. ---* --- ---* Value redeemed: Class A ............ (9,982) (25,298) (11,832) Class B ............. (1,332) (3,389) (1,247) Class C ............. (534) (1,603) (1,169) Class Y ............ --- (11) --- ------- -------- ------- Increase (decrease) in outstanding capital . $(1,760) $(14,804) $83,398 ======= ======== ======= *Not shown due to rounding. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Waddell & Reed Advisors Tax-Managed Equity Fund, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. (the "Fund") as of December 31, 2001, and the related statement of operations for the six-month period then ended, the statements of changes in net assets for the six-month period then ended, the fiscal period from January 1, 2001 through June 30, 2001, and the fiscal period from March 31, 2000 (inception) through December 31, 2000, and the financial highlights for the six- month period ended December 31, 2001, the fiscal period from January 1, 2001 through June 30, 2001, and the fiscal period from March 31, 2000 through December 31, 2000. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with the custodian. 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 referred to above present fairly, in all material respects, the financial position of Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. as of December 31, 2001, the results of its operations for the six-month period then ended, the changes in its net assets for the six-month period then ended, the fiscal period from January 1, 2001 through June 30, 2001, and the fiscal period from March 31, 2000 through December 31, 2000, and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Kansas City, Missouri February 8, 2002 DIRECTORS Keith A. Tucker, Overland Park, Kansas, Chairman of the Board James M. Concannon, Topeka, Kansas John A. Dillingham, Kansas City, Missouri David P. Gardner, San Mateo, California Linda K. Graves, Topeka, Kansas Joseph Harroz, Jr., Norman, Oklahoma John F. Hayes, Hutchinson, Kansas Robert L. Hechler, Overland Park, Kansas Henry J. Herrmann, Overland Park, Kansas Glendon E. Johnson, Miami, Florida William T. Morgan, Coronado, California Frank J. Ross, Jr., Kansas City, Missouri Eleanor B. Schwartz, Kansas City, Missouri Frederick Vogel III, Milwaukee, Wisconsin OFFICERS Henry J. Herrmann, President Theodore W. Howard, Vice President and Treasurer Barry M. Ogden, Vice President Kristen A. Richards, Vice President and Secretary Daniel C. Schulte, Vice President Householding Notice If you currently receive one copy of the shareholder reports and prospectus for your household (even if more than one person in your household owns shares of the Fund) and you would prefer to receive separate shareholder reports and prospectuses for each account holder living at your address, you can do either of the following: Fax your request to 800-532-2749. Write to us at the address listed on the inside back cover for Waddell & Reed, Inc. Please list each account for which you would like to receive separate shareholder reports and prospectus mailings. We will resume sending separate documents within 30 days of receiving your request. The Waddell & Reed Advisors Group of Mutual Funds Waddell & Reed Advisors Accumulative Fund Waddell & Reed Advisors Asset Strategy Fund, Inc. Waddell & Reed Advisors Bond Fund Waddell & Reed Advisors Cash Management, Inc. Waddell & Reed Advisors Continental Income Fund, Inc. Waddell & Reed Advisors Core Investment Fund Waddell & Reed Advisors Global Bond Fund, Inc. Waddell & Reed Advisors Government Securities Fund, Inc. Waddell & Reed Advisors High Income Fund, Inc. Waddell & Reed Advisors International Growth Fund, Inc. Waddell & Reed Advisors Municipal Bond Fund, Inc. Waddell & Reed Advisors Municipal High Income Fund, Inc. Waddell & Reed Advisors Municipal Money Market Fund, Inc. Waddell & Reed Advisors New Concepts Fund, Inc. Waddell & Reed Advisors Retirement Shares, Inc. Waddell & Reed Advisors Science and Technology Fund Waddell & Reed Advisors Small Cap Fund, Inc. Waddell & Reed Advisors Tax-Managed Equity Fund, Inc. Waddell & Reed Advisors Value Fund, Inc. Waddell & Reed Advisors Vanguard Fund, Inc. ------------------------------------ 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 (888)-WADDELL (888)-923-3355 Our INTERNET address is: http://www.waddell.com NUR1019SA(12-01) For more complete information regarding any of the mutual funds in Waddell & Reed Advisors Funds, including charges and expenses, please obtain the Fund's prospectus by calling or writing to the number or address listed above. Please read the prospectus carefully before investing.