SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 2 [X]
Post-Effective Amendment No. File No. 333-40845 [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2 File No. 811-08513 [X]
Scout Kansas Tax-Exempt Bond Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
BMA Tower, 700 Karnes Boulevard, Kansas City, MO 64108-3306
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code (816) 751-5900
Larry D. Armel, President, Scout Kansas Tax-Exempt Bond Fund, Inc.
BMA Tower, 700 Karnes Boulevard, Kansas City, MO 64108-3306
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: Upon effective date of this
Registration Statement.
Title of Securities Being Registered: Common Stock, $1.00 par value The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective on such date as the Commission acting pursuant
to Section 8(a) of the Investment Company Act of 1940 may determine.
Please address inquiries and a carbon copy of all
and communications to: communications to:
John G. Dyer, Esq. Mark H. Plafker, Esq.
Scout Kansas Tax-Exempt Bond Fund, Inc. Stradley, Ronon, Stevens & Young, LLP
BMA Tower 2600 One Commerce Square
700 Karnes Blvd. Philadelphia, PA 19103-7098
Kansas City, MO 64108-3306 Telephone: (215) 564-8024
Telephone: (816) 751-5900
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SCOUT KANSAS TAX-EXEMPT BOND FUND, INC.
CROSS REFERENCE SHEET
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Form N-1A
Item Number Location in Prospectus
Item 1. Cover Page........................... Cover Page
Item 2. Synopsis............................. Not Applicable
Item 3. Condensed Financial Information...... Per Share Capital and Income
Changes
Item 4. General Description of
Registrant........................... Investment Objective and
Portfolio Management Policy
Item 5. Management of the Fund................ Officers and Directors;
Management and Investment
Counsel
Item 6. Capital Stock and
Other Securities...................... How to Purchase Shares;
How to Redeem Shares; How
Share Price is Determined;
General Information and
History; Dividends,
Distributions and their
Taxation
Item 7. Purchase of Securities................ Cover Page; How to
being Offered Purchase Shares; Shareholder
Services
Item 8. Redemption or Repurchase.............. How to Redeem Shares
Item 9. Pending Legal Proceedings............. Not Applicable
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SCOUT KANSAS TAX-EXEMPT BOND FUND, INC.
CROSS REFERENCE SHEET (Continued)
Form N-1A Location in Statement of
Item Number Additional Information
Item 10. Cover Page.......................... Cover Page
Item 11. Table of Contents................... Cover Page
Item 12. General Information
and History......................... Investment Objectives and
Policies; Management and
Investment Counsel
Item 13. Investment Objectives
and Policies......................... Investment Objectives and
Policies; Investment
Restrictions
Item 14. Management of the Fund............... Management and Investment
Counsel
Item 15. Control Persons and Principal........ Management and
Holders of Securities Investment Counsel; Officers
and Directors
Item 16. Investment Advisory and other........ Management and
Services Investment Counsel
Item 17. Brokerage Allocation................. Portfolio Transactions
Item 18. Capital Stock and Other Securities... General Information and
History (Prospectus);
Financial Statements
Item 19. Purchase, Redemption and Pricing How Share Purchases
of Securities Being Offered.......... are Handled; Redemption of
Shares; Financial Statements
Item 20. Tax Status........................... Dividends, Distributions and
their Taxation (Prospectus)
Item 21. Underwriters......................... How the Fund's Shares are
Distributed
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SCOUT KANSAS TAX-EXEMPT BOND FUND, INC.
CROSS REFERENCE SHEET (Continued)
Form N-1A Location in Statement of
Item Number Additional Information
Item 22. Calculation of Yield Quotations
of Money Market Fund................. Not Applicable
Item 23. Financial Statements................. Financial Statements
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PROSPECTUS
February ___, 1998
Scout (R) Kansas Tax-Exempt Bond Fund, Inc.
Toll-Free 1-800-996-2862
INVESTMENT OBJECTIVE
Scout (R) Kansas Tax-Exempt Bond Fund, Inc. is a member of the Scout Fund Group.
The Scout Funds were created especially for the benefit of customers of
affiliated banks of UMB Financial Corporation and those investors who share the
Funds' investment goals. The Fund is no-load. The Scout Kansas Tax-Exempt Bond
Fund seeks current income exempt from regular federal income tax and Kansas
state personal income taxes. The Fund seeks to achieve its objective by
investing at least 80% of its net assets in municipal bonds or debt instruments,
the interest on which is exempt from regular federal income tax and from state
personal income tax. The shares offered by this prospectus are not deposits or
obligations of, nor guaranteed or endorsed by, UMB Bank, n.a., or any of its
affiliate banks. They are not federally insured by the Federal Deposit Insurance
Corporation (F.D.I.C.), the Federal Reserve Board or any other agency. These
shares may involve investment risks, including the possible loss of the
principal invested.
PURCHASE INFORMATION
Minimum Investment
Initial Purchase (unless Automatic Monthly): $ 1,000
Initial Uniform Transfers (Gifts) to Minors
Purchase (unless Automatic Monthly): $ 250
Subsequent Purchase (unless Automatic
Monthly):
By Mail $ 100
By Telephone Purchase (ACH) $ 100
By Wire $ 500
Automatic Monthly Purchases:
Initial $ 100
Subsequent $ 50
Shares are purchased and redeemed at net asset value. There are no sales,
redemption or Rule 12b-1 distribution charges. If you need further information,
please call the Fund at the telephone number indicated above.
ADDITIONAL INFORMATION
This prospectus should be read and retained for future reference. It contains
the information that you should know before you invest. A "Statement of
Additional Information" of the same date as this prospectus has been filed
with the Securities and Exchange Commission and is incorporated by reference.
Investors desiring additional information about the Fund may obtain a copy
without charge by calling the Fund at the telephone number indicated above or by
writing to the address on the cover.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
Page
Fund Expenses.......................................................
Investment Objective and Portfolio Management Policy................
Municipal Bonds and Debt Instruments................................
Repurchase Agreements...............................................
Risk Factors Applicable to Repurchase Agreements....................
When-Issued Securities..............................................
Inverse Floaters....................................................
Futures Transactions................................................
Investment Restrictions.............................................
Performance Measures................................................
How to Purchase Shares..............................................
Initial Investments.................................................
Investments Subsequent to Initial Investment........................
Telephone Investment Service........................................
Automatic Monthly Investment Plan...................................
How to Redeem Shares................................................
Systematic Redemption Plan..........................................
How to Exchange Shares Between Scout Funds..........................
How Share Price is Determined.......................................
Officers and Directors..............................................
Manager and Underwriter.............................................
General Information and History.....................................
Dividends, Distributions and Their Taxation.........................
Shareholder Services................................................
Shareholder Inquiries...............................................
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SCOUT KANSAS TAX-EXEMPT BOND FUND, INC.
FUND EXPENSES
The following information is provided in order to assist you in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly.
Shareholder Transaction Expenses
Maximum sales load imposed on purchases None
Maximum sales load imposed on reinvested dividends None
Deferred sales load None
Redemption fee None
Exchange fee None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees .50%
12b-1 fees None
Other expenses .02%
Total Fund operating expenses .52%
Example
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
1 Year 3 Year
$5 $17
The above example should not be considered a representation of past or future
expenses, as actual expenses may be greater or less than those shown. The
assumed 5% annual return is hypothetical and should not be considered a
representation of past or future annual return. The actual return may be greater
or less than the assumed amount. The various costs and expenses reflected in the
foregoing Expense Tables and Example are explained in more detail in this
prospectus. "Other expenses" is based on estimated amounts for the current
fiscal year. Management fees are discussed in greater detail under "Manager and
Underwriter."
INVESTMENT OBJECTIVE AND
PORTFOLIO MANAGEMENT POLICY
The Scout Kansas Tax-Exempt Bond Fund seeks current income exempt from regular
federal income tax and Kansas state personal income taxes. The Fund seeks to
achieve its objective by investing at least 80% of its net assets in municipal
bonds or debt instruments, the interest on which is exempt from regular federal
income tax and from state personal income tax.
The Fund will generally invest in securities that, at the time of purchase, are
classified as investment grade by Moody's Investors Service, Inc. ("Moody's")
(Aaa to Baa), by Standard & Poor's (AAA to BBB) or Fitch Investor's Services
("Fitch") (AAA to BBB). The ratings BBB
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and Baa are not identical. Standard & Poor's and Fitch consider bonds and debt
instruments rated BBB to have adequate capacity to pay principal and interest.
Moody's considers bonds and debt instruments rated Baa to have speculative
characteristics. Securities that are subsequently downgraded to non-investment
grade may continue to be held by the Fund until such time as they can be
disposed of in a reasonably practicable manner. In addition, the credit quality
of unrated securities purchased by the Fund must be, in the opinion of the
Fund's manager, at least equivalent to a Baa rating by Moody's or a BBB rating
by Standard & Poor's or Fitch.
MUNICIPAL BONDS AND DEBT INSTRUMENTS
Municipal bonds and debt instruments include bonds, notes and commercial paper
of varying maturities issued by a municipality for a wide variety of both public
and private purposes, the interest on which is, in the opinion of bond counsel,
exempt from regular federal income tax. Public purpose municipal bonds include
general obligation and revenue bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility or from the proceeds of a specific revenue
source. Some revenue bonds are payable solely or partly from funds which are
subject to annual appropriations by a state's legislature and the availability
of monies for such payments. Municipal notes include bond anticipation, tax
anticipation and revenue anticipation notes. Bond, tax and revenue anticipation
notes are short-term obligations that will be retired with the proceeds of an
anticipated bond issue, tax revenue or facility revenue, respectively. Under
normal market conditions, the Fund will invest at least 80% of its net assets in
obligations issued by Kansas political subdivisions.
The Fund will concentrate its investments in municipal obligations issued by
Kansas political subdivisions. The Fund is, therefore, more susceptible
to factors adversely affecting issuers in Kansas than mutual funds which do not
concentrate in a specific state. Municipal obligations of issuers in a single
state may be adversely effected by economic developments (including insolvency
of an issuer) and by legislation and other governmental activities in that
state. Municipal obligations that rely on an annual appropriation of funds by a
state's legislature for payment are also subject to the risk that the
legislature will not appropriate the necessary amounts or take other action
needed to permit the issuer of such obligations to make required payments. To
the extent that the Fund's assets are concentrated in municipal obligations of
issuers of a single state, the Fund may be subject to an increased risk of loss.
The Fund may also invest in obligations issued by the governments of Puerto
Rico, the U.S. Virgin Islands and Guam.
The Fund may invest up to 20% of its net assets in municipal obligations issued
by the same or similar types of issuers, including, without limitation, the
following: lease rental obligations of state and local authorities; obligations
dependent on annual appropriations by a state's legislature for payment;
obligations of state and local housing finance authorities, municipal utilities
systems or public housing authorities; obligations of hospitals or life care
facilities; or industrial development or pollution control bonds issued for
electric utility systems, steel companies, paper companies or other purposes.
This may make the Fund more susceptible to adverse economic, political or
regulatory occurrences affecting a particular category of issuer. For example,
health
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care-related issuers are susceptible to fluctuations in Medicare and Medicaid
reimbursements, and national and state health care legislation. As the Fund's
concentration increases, so does the potential for fluctuation in the value of
the Fund's shares.
The secondary market for some municipal obligations issued within Kansas
(including issues which are privately placed) is less liquid than that for
taxable debt obligations or other more widely traded municipal obligations. The
Fund will not invest in illiquid securities if more than 15% of its net assets
would be invested in securities that are not readily marketable. No established
resale market exists for certain of the municipal obligations in which the Fund
may invest. The market for obligations rated below investment grade is also
likely to be less liquid than the market for higher rated obligations. As a
result, the Fund may be unable to dispose of these municipal obligations at
times when it would otherwise wish to do so at the prices at which they are
valued.
Certain securities held by the Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer redeems securities held by the
Fund during a time of declining interest rates, the Fund may not be able to
reinvest the proceeds in securities providing the same investment return as the
securities redeemed.
Some of the securities in which the Fund invests may include so-called
"zero-coupon" bonds, whose values are subject to greater fluctuation in response
to changes in market interest rates than bonds which pay interest currently.
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity rather than at intervals during the life of the
security. The Fund is required to accrue income from zero-coupon bonds on a
current basis, even though it does not receive that income currently in cash and
the Fund is required to distribute its share of the Fund's income for each
taxable year. Thus, the Fund may have to sell other investments to obtain cash
needed to make income distributions.
The Fund may invest in municipal leases, and participations in municipal leases.
The obligation of the issuer to meet its obligations under such leases is often
subject to the appropriation by the appropriate legislative body, on an annual
or other basis, of funds for the payment of the obligations. Investments in
municipal leases are thus subject to the risk that the legislative body will not
make the necessary appropriation and the issuer will not otherwise be willing or
able to meet its obligation.
In pursuit of its investment objective, the Fund assumes investment risk,
chiefly in the form of interest rate and credit risk. Interest rate risk is the
risk that changes in market interest rates will affect the value of the Fund's
investment portfolio. In general, the value of a municipal bond falls when
interest rates rise, and increases when interest rates fall. Credit risk is the
risk that an issuer of a municipal bond is unable to meet its obligation to make
interest and principal payments. Municipal bonds with longer maturities
(durations) or lower ratings generally provide higher current income, but are
subject to greater price fluctuation due to changes in market conditions than
bonds with shorter maturities or higher ratings, respectively. In addition, the
values of municipal bonds are affected by changes in general economic conditions
and business conditions affecting the specific industries or their issuers.
Changes by recognized rating services in their ratings of a security and in the
ability of the issuer to make payments of principal and
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interest may also affect the value of the Fund's investments. The amount of
information about the financial conditions of an issuer of municipal obligations
may not be as extensive as that made available by corporations whose securities
are publicly traded.
In addition, the Fund's investment in zero coupon bonds, bonds issued or
acquired at a discount, delayed interest bonds and bonds which are used to
finance certain private activities are subject to special tax rules that may
affect the amount, timing or character of your distributions. Also, certain
municipal debt instruments may be subject to the federal alternative minimum
tax, however, at least 80% of the Fund's net assets will be invested in
securities that are not subject to such tax. More detailed tax information is
included in the "Statement of Additional Information."
The Fund will generally not trade in securities in order to obtain short-term
profits. However, the Fund may buy and sell securities to take advantage of
yield relationships among similar securities or, when circumstances warrant, the
Fund may buy and sell portfolio securities without regard to the length of time
held. The Fund's portfolio turnover rate is not expected to exceed 25% annually.
Non-Diversified Status
As a "non-diversified" investment company, the Fund may invest, with respect to
50% of its total assets, more than 5% (but not more than 25%) of its total
assets in the securities of any issuer. The Fund is likely to invest a greater
percentage of its assets in the securities of a single issuer than would a
diversified fund. Therefore, the Fund is more susceptible to any single adverse
economic or political occurrence or development affecting issuers of Kansas
municipal obligations. For purposes of this restriction, each Kansas
political subdivision is considerd to be the ultimate issuer, rather than
the Kansas Development Finance Authority, under whose authority Kansas bonds
are issued.
Portfolio Maturity
The Fund purchases municipal bonds with different maturities in pursuit of its
investment objective, but maintains under normal market conditions an investment
portfolio with an overall weighted average portfolio maturity of 5 to 30 years.
Other Investment Information
When, in the manager's judgment, market conditions warrant substantial temporary
investments in high-quality securities, the Fund may do so. The Fund may invest
in high-quality short-term municipal securities in order to reduce risk and
preserve capital. Under normal market conditions, the Fund may invest only up to
20% of net assets in short-term municipal securities that are exempt from
regular federal income tax, although the Fund may invest up to 100% as a
temporary defensive measure in response to adverse market conditions.
If suitable short-term municipal investments are not reasonably available, the
Fund may invest in short-term taxable securities that are rated Aa or AA by
Moody's and S&P, respectively, or issued by the U.S. Government, and that have a
maturity of one year or less or have a variable interest rate.
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Investments in money market securities shall include government securities,
government agency securities, commercial paper, municipal notes, banker's
acceptances, bank certificates of deposit and repurchase agreements. Investment
in commercial paper is restricted to companies rated P2 or higher by Moody's,
A-2 or higher by Standard & Poor's, or F2 or higher by Fitch's with comparable
rating restrictions for municipal notes.
The Fund cannot guarantee that its objective will be achieved because there are
inherent risks in the ownership of the investments made by the Fund. The value
of the Fund's shares will reflect changes in the market value of its
investments. Dividends paid by the Fund will vary with the income it receives
from these investments.
Kansas
The Kansas economy is primarily centered on trade, services, government and
manufacturing, with agriculture remaining as an important component. Employment
has grown 2.5% - 3.0% annually over the past three years, however, personal
income figures are volatile in view of the forming component of the economy.
State revenue sources include a 4.9% sales tax, a corporate income tax
between 4% and 7.25% and an individual tax rate between 3.5% and 7.75%. Income
and sales taxes each account for 40% of the state's operating revenue which, in
the 1996-97 fiscal year, totaled $3.68 billion, which was higher than projected
levels above the projections. Revenues are conservatively projected to increase
only 1.1% in 1998 over actual 1997 revenues.
Kansas has no general obligation debt and relatively few bonds that are issued
are rated. The most significant debt is that of the Department of Transportation
for highway purposes. Other debt is issued under the authority of the Kansas
Development Finance Authority. Because the State has no general obligation
debt, there is no rating for Kansas general obligation bonds.
Kansas Taxes
Individuals, trusts, estates and corporations will not be subject to the Kansas
income tax on the portion of exempt-interest dividends derived from interest on
obligations of Kansas and its political subdivisions issued after December 31,
1987, and interest on obligations issued before January 1, 1988 where the laws
of the State of Kansas authorizing the issuance of such obligations specifically
exempt the interest on such obligations from income tax under the laws of the
State of Kansas. All remaining dividends (except for dividends, if any, derived
from debt obligations issued by the governments of Puerto Rico, the U.S. Virgin
Islands and Guam and which are exempt from federal and state income taxes
pursuant to federal law), including dividends derived from capital gains, will
be includable in the Kansas taxable income of individuals, trusts, estates and
corporations. Distributions treated as long-term capital gains for federal
income tax purposes will generally receive the same characterization under
Kansas law. Capital gains or losses realized from a redemption, sale or exchange
of shares of the Fund by a Kansas taxpayer will be taken into account for Kansas
income tax purposes.
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The above exemptions do not apply to the privilege tax imposed on banks, banking
associations, trust companies, savings and loan associations and insurance
companies, or the franchise tax imposed on corporations. Banks, banking
associations, trust companies, savings and loan associations, insurance
companies and corporations are urged to consult their own tax advisors regarding
the effects of these taxes before investing in the Fund.
The tax discussion set forth above is for general information only. The
foregoing relates to Kansas income taxation as in effect as of the date of this
Prospectus. Investors should consult their own tax advisors regarding the state,
local and other tax consequences of an investment in the Fund, including any
proposed change in the tax laws.
REPURCHASE AGREEMENTS
A repurchase agreement involves the sale of securities to the Fund with the
concurrent agreement by the seller to repurchase the securities at the Fund's
cost plus interest at an agreed rate upon demand or within a specified time,
thereby determining the yield during the purchaser's period of ownership. The
result is a fixed rate of return insulated from market fluctuations during such
period. Under the Investment Company Act of 1940, repurchase agreements are
considered loans by the Fund.
The Fund will enter into such repurchase agreements only with United States
banks having assets in excess of $1 billion which are members of the Federal
Deposit Insurance Corporation, and with certain securities dealers who meet the
qualifications set from time to time by the Board of Directors of the Fund. The
term to maturity of a repurchase agreement normally will be no longer than a few
days. Repurchase agreements maturing in more than seven days and other illiquid
securities will not exceed 10% of the net assets of the Fund.
RISK FACTORS APPLICABLE TO REPURCHASE AGREEMENTS
The use of repurchase agreements involves certain risks. For example, if the
seller of the agreement defaults on its obligation to repurchase the underlying
securities at a time when the value of these securities has declined, the Fund
may incur a loss upon disposition of them. If the seller of the agreement
becomes insolvent and subject to liquidation or reorganization under the
Bankruptcy Code or other laws, disposition of the underlying securities may be
delayed pending court proceedings. Finally, it is possible that the Fund may not
be able to perfect its interest in the underlying securities. While the Fund's
management acknowledges these risks, it is expected that they can be controlled
through stringent security selection criteria and careful monitoring procedures.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" basis, which means that
payment and delivery occur on a future settlement date. The price and yield of
such securities are generally fixed on the date of commitment to purchase.
However, the market value of the securities may fluctuate prior to delivery and
upon delivery the securities may be worth more or less than the
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Fund agreed to pay for them. The Fund may also purchase instruments that give it
the option to purchase a municipal obligation when and if issued.
INVERSE FLOATERS
The Fund may invest in municipal securities whose interest rates bear an inverse
relationship to the interest rate on another security or the value of an index
("inverse floaters"). An investment in inverse floaters may involve greater risk
than an investment in a fixed rate bond. Because changes in the interest rate on
the other security or index inversely affect the residual interest paid on the
inverse floater, the value of an inverse floater is generally more volatile than
that of a fixed rate bond. Inverse floaters have interest rate adjustment
formulae which generally reduce or, in the extreme, eliminate the interest paid
to the Fund when short-term interest rates rise, and increase the interest paid
to the Fund when short-term interest rates fall. Inverse floaters have varying
degrees of liquidity, and the market for these securities is new and relatively
volatile. These securities tend to underperform the market for fixed rate bonds
in a rising interest rate environment, but tend to outperform the market for
fixed rate bonds when interest rates decline. Shifts in long-term interest rates
may, however, alter this tendency. Although volatile, inverse floaters typically
offer the potential for yields exceeding the yields available on fixed rate
bonds with comparable credit quality and maturity. These securities usually
permit the investor to convert the floating rate to a fixed rate (normally
adjusted downward), and this optional conversion feature may provide a partial
hedge against rising rates if exercised at an opportune time. Inverse floaters
are leveraged because they provide two or more dollars of bond market exposure
for every dollar invested.
FUTURES TRANSACTIONS
The Fund may purchase and sell various kinds of financial futures contracts and
options thereon to hedge against changes in interest rates. Futures contracts
may be based on various debt securities (such as U.S.Government securities and
municipal obligations) and securities indices (such as the Municipal Bond Index
traded on the Chicago Board of Trade). Such transactions involve a risk of loss
or depreciation due to unanticipated adverse changes in securities prices, which
may exceed the Fund's initial investment in these contracts. The Fund may not
purchase or sell futures contracts or related options, except for closing
purchase or sale transactions, if immediately thereafter the sum of the amount
of margin deposits and premiums paid on the Fund's outstanding positions would
exceed 5% of the market costs. There can be no assurance that the investment
manager's use of futures will be advantageous to the Fund. Distributions by the
Fund of any gains realized on its transactions in futures and options on futures
will be taxable.
INVESTMENT RESTRICTIONS
In addition to the policies set forth under the caption "Investment Objective
and Portfolio Management Policy" the Fund is subject to certain other
restrictions which may not be changed without approval of the "holders of a
majority of the outstanding shares" of the Fund. Among these restrictions, the
more important ones are that the Fund will not purchase the securities of any
issuer if, with respect to 50% of the Fund's total assets, more than 25% of the
Fund's total assets would be invested in the securities of such issuer; borrow
money in excess of 10% of total assets taken at market value, and then only
from banks as a temporary measure for extraordinary or emergency purposes;
will not borrow to increase income (leveraging), but only to facilitate
redemption requests which might otherwise require untimely dispositions of
portfolio securities (interest paid on such borrowings will reduce net income);
and securities will not be purchased while outstanding bank borrowings exceed
5% of the value of the Fund's total assets. The full text of these restric-
tions is set forth in the "Statement of Additional Information."
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PERFORMANCE MEASURES
From time to time, the Fund may advertise its performance in various ways, as
summarized below. Further discussion of these matters also appears in the
"Statement of Additional Information." A discussion of Fund performance will be
included in the Fund's Annual Report to Shareholders which will be available
from the Fund upon request at no charge.
Yield
From time to time, the Fund may advertise "yield" and "effective yield." The
"yield" of the Fund refers to the income generated by an investment in the Fund
over a seven-day period (which period will be stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The "effective yield" is
calculated similarly, but, when annualized, the income earned by an investment
in the Fund is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment.
The Fund may quote its yield in advertisements or in reports to shareholders.
Yield information may be useful in reviewing the performance of the Fund and in
providing a basis for comparison with other investment alternatives. However,
since the net investment income of the Fund changes in response to fluctuations
in interest rates and Fund expenses, any given yield quotations should not be
considered representative of the Fund's yields for any future period. Current
yield and price quotations for the Fund may be obtained by telephoning
1-800-996-2862.
Total Return
The Fund may advertise "average annual total return" over various periods of
time. Such total return figures show the average percentage change in value of
an investment in the Fund from the beginning date of the measuring period to the
end of the measuring period. These figures reflect changes in the price of the
Fund's shares and assume that any income dividends and/or capital gains
distributions made by the Fund during the period were reinvested in shares of
the Fund. Figures will be given for recent one-, five- and ten-year periods (if
applicable), and may be given for other periods as well (such as from
commencement of the Fund's operations, or on a year-by-year basis). When
considering "average" total return figures for periods longer than one year, it
is important to note that a Fund's annual total return for any one year in the
period might have been greater or less than the average for the entire period.
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Performance Comparisons
In advertisements or in reports to shareholders, the Fund may compare its
performance to that of other mutual funds with similar investment objectives and
to bond or other relevant indices. For example, it may compare its performance
to rankings prepared by Lipper Analytical Services, Inc. (Lipper), a widely
recognized independent service which monitors the performance of mutual funds.
The Fund may also compare its performance to the Consumer Price Index.
Performance information, rankings, ratings, published editorial comments and
listings as reported in national financial publications such as Kiplinger's
Personal Finance Magazine, Business Week, Morningstar Mutual Funds, Investor's
Business Daily, Institutional Investor, The Wall Street Journal, Mutual Fund
Forecaster, No-Load Investor, Money, Forbes, Fortune and Barron's may also be
used in comparing performance of the Fund. Performance comparisons should not be
considered as representative of the future performance of any Fund. Further
information regarding the performance of the Fund is contained in the "Statement
of Additional Information."
Performance rankings, recommendations, published editorial comments and listings
reported in Money, Barron's, Kiplinger's Personal Finance Magazine, Financial
World, Forbes, U.S. News & World Report, Business Week, The Wall Street Journal,
Investors Business Daily, USA Today, Fortune and Stanger's may also be cited (if
the Fund is listed in any such publication) or used for comparison, as well as
performance listings and rankings from Morningstar Mutual Funds, Personal
Finance, Income and Safety, The Mutual Fund Letter, No-Load Fund Investor,
United Mutual Fund Selector, No-Load Fund Analyst, No-Load Fund X, Louis
Rukeyser's Wall Street newsletter, Donoghue's Money Letter, CDA Investment
Technologies, Inc., Wiesenberger Investment Companies Service and Donoghue's
Mutual Fund Almanac.
HOW TO PURCHASE SHARES
Shares are purchased from the Fund at net asset value (no sales charge) next
computed after a completed purchase order has been received by the Fund's agent,
Jones & Babson, Inc., P.O. Box 410498, Kansas City, MO 64141-0498 and accepted
by the Fund. To complete a purchase order by mail, wire or telephone, please
provide the information detailed below. For information or assistance call toll
free 1-800-996-2862.
The Fund reserves the right in its sole discretion to withdraw all or any part
of the offering made by this prospectus or to reject purchase orders when, in
the judgment of management, such withdrawal or rejection is in the best interest
of the Fund and its shareholders. The Fund also reserves the right at any time
to waive or increase the minimum requirements applicable to initial or
subsequent investments with respect to any person or class of persons, which
include shareholders of the Fund's special investment programs. The Fund
reserves the right to refuse to accept orders for Fund shares unless accompanied
by payment, except when a responsible person has indemnified the Fund against
losses resulting from the failure of investors to make payment. In the event
that the Fund sustains a loss as the result of failure by a purchaser to make
payment, the Fund's underwriter, Jones & Babson, Inc., will cover the loss.
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INITIAL INVESTMENTS
Initial investments - By mail. You may open an account and make an investment by
completing and signing the application which accompanies this prospectus. The
minimum initial purchase is $1,000 unless your purchase is pursuant to the
Uniform Transfers (Gifts) to Minors Act, in which case the minimum initial
purchase is $250. However, if electing the Automatic Monthly Investment Plan,
the minimum initial purchase is reduced to $100 for all accounts. Make your
check payable to UMB Bank, n.a. the application and check to:
Scout Kansas Tax-Exempt Bond Fund, Inc.
P.O. Box 410498
Kansas City, MO 64141-0498
Initial investments - By wire. You may purchase shares of the Fund by wiring the
purchase price ($1,000 minimum) through the Federal Reserve Bank to the
custodian, UMB Bank, n.a. Prior to sending your money, you must call the Fund
toll free 1-800-996-2862 and provide it with the identity of the registered
account owner, the registered address, the Social Security or Taxpayer
Identification Number of the registered owner, the amount being wired, the name
and telephone number of the wiring bank and the person to be contacted in
connection with the order. You will then be provided a Fund account number,
after which you should instruct your bank to wire the specified amount, along
with the account number and the account registration to:
UMB Bank, n.a.
Kansas City, Missouri, ABA #101000695
For: Scout Kansas Tax-Exempt Bond Fund, Inc.
AC=987090-8352
For Account No. (insert assigned Fund account number and
name in which account is registered).
A completed application must be sent to the Fund as soon as possible so the
necessary remaining information can be recorded in your account. Payment of
redemption proceeds may be delayed until the completed application is received
by the Fund.
INVESTMENTS SUBSEQUENT TO INITIAL INVESTMENT
You may add to your Fund account at any time in amounts of $100 or more if
purchases are made by mail or telephone purchase (ACH), or $500 or more if
purchases are made by wire. Automatic monthly investments must be in amounts of
$50 or more.
Checks should be mailed to the Fund at its address, but made payable to UMB
Bank, n.a. Always identify your account number or include the detachable
reminder stub which accompanies each confirmation.
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Wire share purchases should include your account registration, your account
number and the name of the Fund. It also is advisable to notify the Fund by
telephone that you have sent a wire purchase order to the bank.
TELEPHONE INVESTMENT SERVICE
To use the Telephone Investment Service, you must first establish your Fund
account and authorize telephone orders in the application form, or,
subsequently, on a special authorization form provided upon request. If you
elect the Telephone Investment Service and your request is received prior to
3:00 P.M. (Central Time), you may purchase Fund shares ($100 minimum) by
telephone and authorize the Fund to draft your checking account for the cost of
the shares so purchased. You will receive the next available price after the
Fund has received your telephone call. Availability and continuance of this
privilege is subject to acceptance and approval by the Fund and all
participating banks. During periods of increased market activity, you may have
difficulty reaching the Fund by telephone, in which case you should contact the
Fund by mail or telegraph. The Fund will not be responsible for the consequences
of delays including delays in the banking or Federal Reserve wire systems.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, and if such procedures are followed, the
Fund will not be liable for losses due to unauthorized or fraudulent
instructions. Such procedures may include, but are not limited to, requiring
personal identification prior to acting upon instructions received by telephone,
providing written confirmations of such transactions and/or tape recording of
telephone instructions.
The Fund reserves the right to initiate a charge for this service and to
terminate or modify any or all of the privileges in connection with this service
at any time upon 15 days written notice to shareholders, and to terminate or
modify the privileges without prior notice in any circumstances where such
termination or modification is in the best interest of the Fund and its
shareholders.
AUTOMATIC MONTHLY INVESTMENT PLAN
You may elect to make monthly investments in a constant dollar amount from your
checking account ($50 minimum, after an initial investment of $100 or more for
any account). The Fund will draft your checking account on the same day each
month in the amount you authorize in your application, or, subsequently, on a
special authorization form provided upon request. Availability and continuance
of this privilege is subject to acceptance and approval by the Fund and all
participating banks. If the date selected falls on a day upon which Fund shares
are not priced, investment will be made on the first date thereafter upon which
Fund shares are priced. The Fund will not be responsible for the consequences of
delays including delays in the banking or Federal Reserve wire systems.
The Fund reserves the right to initiate a charge for this service and to
terminate or modify any or all of the privileges in connection with this service
at any time upon 15 days written notice to shareholders, and to terminate or
modify the privileges without prior notice in any circumstances where such
termination or modification is in the best interest of the Fund and its
shareholders.
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HOW TO REDEEM SHARES
Shareholders registered in the stock records of the Fund may withdraw all or
part of their investment by redeeming shares. In each instance, you must comply
with the general requirements relating to all redemptions as well as with
specific requirements set out for the particular redemption method you select.
If you wish to expedite redemptions by using the telephone/telegraph privilege,
you should carefully note the special requirements and limitations relating to
these methods.
All redemption requests must be transmitted to the Fund, P.O. Box 410498, Kansas
City, MO 64141-0498. Shareholders who have authorized telephone redemption may
call toll free 1-800- 996-2862. The Fund will redeem shares at the price (net
asset value per share) next effective after receipt of a redemption request in
"good order." (See "How Share Price is Determined.")
The Fund will endeavor to transmit redemption proceeds to the proper party, as
instructed, as soon as practicable after a redemption request has been received
in "good order," but in no event later than the third business day thereafter.
Transmissions are made by mail unless an expedited method has been authorized
and specified in the redemption request. The Fund will not be responsible for
the consequences of delays including delays in the banking or Federal Reserve
wire systems.
Redemptions will not become effective until all documents in the form required
have been received. In the case of redemption requests made within 15 days of
the date of purchase, the Fund may delay transmission of proceeds until such
time as it is certain that unconditional payment in federal funds has been
collected for the purchase of shares being redeemed or 15 days from the date of
purchase, whichever occurs first. You can avoid the possibility of delay by
paying for all of your purchases with a certified check or a transfer of federal
funds.
Where additional documentation is normally required to support redemptions as in
the case of corporations, fiduciaries and others who hold shares in a
representative or nominee capacity, such as certified copies of corporate
resolutions, or certificates of incumbency, or such other documentation as may
be required under the Uniform Commercial Code or other applicable laws or
regulations, it is the responsibility of the shareholder to maintain such
documentation on file and in a current status. A failure to do so will delay the
redemption. If you have questions concerning redemption requirements, please
write or telephone the Fund well ahead of an anticipated redemption in order to
avoid any possible delay.
Requests which are subject to special conditions or which specify an effective
date other than as provided herein cannot be accepted.
The right of redemption may be suspended or the date of payment postponed beyond
the normal three-day period when the New York Stock Exchange is closed or under
emergency circumstances as determined by the Securities and Exchange Commission.
Additional details are set forth in the "Statement of Additional Information."
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Due to the high cost of maintaining smaller accounts, the Directors have
authorized the Fund to close shareholder accounts where their value falls below
the current minimum initial investment requirement at the time of initial
purchase as a result of redemptions and not as the result of market action, and
remains below this level for 60 days after each such shareholder account is
mailed a notice of: (1) the Fund's intention to close the account, (2) the
minimum account size requirement, and (3) the date on which the account will be
closed if the minimum size requirement is not met. Since the minimum investment
amount and the minimum account size are the same, any redemption from an account
containing only the minimum investment amount may result in redemption of that
account.
Withdrawal By Mail -- Shares may be redeemed by mailing your request to the
Fund. To be in "good order" the request must include the following:
(1) A written redemption request or stock assignment (stock power)
containing the genuine signature of each registered owner exactly as
the shares are registered, with clear identification of the account by
registered name(s), account number and the number of shares or the
dollar amount to be redeemed;
(2) any outstanding stock certificates representing shares to be redeemed;
(3) signature guarantees as required (see Signature Guarantees); and
(4) any additional documentation which the Fund may deem necessary to
insure a genuine redemption such as an application if one is not on
file, or in the case of corporations, fiduciaries and others who hold
shares in a representative or nominee capacity (see below).
Where additional documentation is normally required to support redemptions as in
the case of corporations, fiduciaries and others who hold shares in a
representative or nominee capacity, such as certified copies of corporate
resolutions, or certificates of incumbency, or such other documentation as may
be required under the Uniform Commercial Code or other applicable laws or
regulations, it is the responsibility of the shareholder to maintain such
documentation on file and in a current status. A failure to do so will delay the
redemption. If you have questions concerning redemption requirements, please
write or telephone the Fund well ahead of an anticipated redemption in order to
avoid any possible delay.
Signature Guarantees are required in connection with all redemptions of $50,000
or more by mail, or changes in share registration, except as hereinafter
provided. These requirements may be waived by the Fund in certain instances
where it appears reasonable to do so and will not unduly affect the interests of
other shareholders. Signature(s) must be guaranteed by an "eligible guarantor
institution" as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934. Eligible guarantor institutions include: (1) national or state banks,
savings associations, savings and loan associations, trust companies, savings
banks, industrial loan companies and credit unions; (2) national securities
exchanges, registered securities associations and clearing agencies; or (3)
securities broker/dealers which are members of a national securities exchange or
clearing
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<PAGE>
agency or which have a minimum net capital of $100,000. A notarized
signature will not be sufficient for the request to be in proper form.
Signature guarantees will be waived for mail redemptions of $50,000 or less, but
they will be required if the checks are to be payable to someone other than the
registered owner(s), or are to be mailed to an address different from the
registered address of the shareholder(s), or where there appears to be a pattern
of redemptions designed to circumvent the signature guarantee requirement, or
where the Fund has other reason to believe that this requirement would be in the
best interests of the Fund and its shareholders.
Withdrawal By Telephone or Telegraph -- You may withdraw any amount ($500
minimum if wired) by telephone toll free 1-800-996-2862, or by telegraph to the
Fund's address. Telephone/telegraph redemption authorizations signed by all
registered owners with signatures guaranteed must be on file with the Fund
before you may redeem by telephone or telegraph. Funds will be sent only to the
address of record. The signature guarantee requirement may be waived by the Fund
if the request for this redemption method is made at the same time the initial
application to purchase shares is submitted.
All communications must include the Fund's name, your account number, the exact
registration of your shares, the number of shares or dollar amount to be
redeemed and the identity of the bank and bank account (name and number) to
which the proceeds are to be wired. This procedure may only be used for
non-certificated shares held in open account. For the protection of
shareholders, your redemption instructions can only be changed by filing with
the Fund new instructions on a form obtainable from the Fund which must be
properly signed with signature(s) guaranteed.
Telephone or telegraph redemption proceeds may be transmitted to your
pre-identified bank account either by wire or mail to a domestic commercial bank
which is a member of the Federal Reserve System, or by credit to such account
with UMB Bank, n.a. as designated by you on your pre-authorization form. If you
elect to have proceeds wired to a bank other than UMB Bank, n.a., and your
request is received prior to 3:00 P.M. (Central Time), proceeds normally will be
wired the following business day. Once the funds are transmitted, the time of
receipt and the funds' availability are not under our control. If your request
is received on any day after the cut-off time, proceeds normally will be wired
on the second business day following the day of receipt of your request.
Normally your bank account with UMB Bank, n.a. will be credited on the following
business day for all requests. The Fund reserves the right to change its policy
or to refuse a telephone or telegraph redemption request or require additional
documentation to assure a genuine redemption, and, at its option, may pay such
redemption by wire or check and may limit the frequency or the amount of such
requests. The Fund reserves the right to terminate or modify any or all of the
services in connection with this privilege at any time without prior notice.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, and if such procedures are followed, the
Fund will not be liable for losses due to unauthorized or fraudulent
instructions. Such procedures may include, but are not limited to requiring
personal identification prior to acting upon instructions received by telephone,
providing written confirmations of such transactions and/or tape recording of
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telephone instructions. There are provisions on the telephone/telegraph
redemption authorization form limiting the liability of the Fund and Jones &
Babson, Inc. in this respect.
SYSTEMATIC REDEMPTION PLAN
If you own shares in an open account valued at $10,000 or more, and desire to
make regular monthly or quarterly withdrawals without the necessity and
inconvenience of executing a separate redemption request to initiate each
withdrawal, you may enter into a Systematic Withdrawal Plan by completing forms
obtainable from the Fund. For this service, the manager may charge you a fee not
to exceed $1.50 for each withdrawal. Currently the manager assumes the
additional expenses arising out of this type of plan, but it reserves the right
to initiate such a charge at any time in the future when it deems it necessary.
If such a charge is imposed, participants will be provided 30 days notice.
Subject to a $50 minimum, you may withdraw each period a specified dollar
amount. Shares also may be redeemed at a rate calculated to exhaust the account
at the end of a specified period of time.
Dividends and capital gains distributions must be reinvested in additional
shares. Under all withdrawal programs, liquidation of shares in excess of
dividends and distributions reinvested will diminish and may exhaust your
account, particularly during a period of declining share values.
You may revoke or change your plan or redeem all of your remaining shares at any
time. Withdrawal payments will be continued until the shares are exhausted or
until the Fund or you terminate the plan by written notice to the other.
HOW TO EXCHANGE SHARES BETWEEN SCOUT FUNDS
Shareholders may exchange their Fund shares, which have been held in open
account for 15 days or more, and for which good payment has been received, for
identically registered shares of any other Fund in the Scout Fund Group, which
is legally registered for sale in the state of residence of the investor
provided that the minimum amount exchanged from the Fund has a value of $1,000
or more and meets the minimum investment requirement of the Fund into which it
is exchanged. An exchange between two Scout Funds is treated as a sale of the
shares from which the exchange occurs and a purchase of shares of the Fund into
which the exchange occurs. Exchanging shareholders will receive the next quoted
prices for their shares after the request is received in "good order." (See "How
Share Price is Determined.")
To authorize the Telephone/Telegraph Exchange Privilege, all registered owners
must authorize this privilege on the original application, or the Fund must
receive a special authorization form, provided upon request. During periods of
increased market activity, you may have difficulty reaching the Fund by
telephone, in which case you should contact the Fund by mail or telegraph. The
Fund reserves the right to initiate a charge for this service at any time, and
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may terminate or modify any or all of the privileges in connection with this
service at any time and without prior notice under any circumstances (such as
during periods of market instability or if the Fund has difficulty valuing its
shares) where continuance of these privileges would be detrimental to the Fund
or its shareholders, or under any other circumstances, upon 60 days written
notice to shareholders. The Fund will not be responsible for the consequences of
delays including delays in the banking or Federal Reserve wire systems.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, and if such procedures are followed, the
Fund will not be liable for losses due to unauthorized or fraudulent
instructions. Such procedures may include, but are not limited to requiring
personal identification prior to acting upon instructions received by telephone,
providing written confirmations of such transactions and/or tape recording of
telephone instructions.
Exchanges by mail may be accomplished by a written request properly signed by
all registered owners identifying the account, the number of shares or dollar
amount to be redeemed for exchange, and the Scout Fund by name and number into
which the account is being transferred.
If you wish to exchange part or all of your shares in the Fund for shares of
another Fund in the Scout Fund Group, you should review the prospectus
carefully. Any such exchange will be based upon the respective net asset values
of the shares involved. An exchange between Funds involves the sale of an asset.
Unless the shareholder account is tax-deferred, this is a taxable event.
HOW SHARE PRICE IS DETERMINED
The net asset value per share is computed once daily, Monday through Friday, at
the specific time during the day that the Board of Directors sets at least
annually, except on days on which changes in the value of portfolio securities
will not materially affect the net asset value, or days
during which no security is tendered for redemption and no order to purchase or
sell such security is received by the Fund, or customary holidays. For a list of
the holidays during which the Fund is not open for business, see "How Share
Price is Determined" in the "Statement of Additional Information."
The per share calculation is made by subtracting from the Fund's total assets
any liabilities and then dividing into this amount the total outstanding shares
as of the date of the calculation.
The price at which new shares of the Fund will be sold and at which issued
shares presented for redemption will be liquidated is computed once daily at
3:00 P.M. (Central Time), except on those days when the Fund is not open for
business.
Money market securities which on the date of valuation have 60 days or less to
maturity, are valued on the basis of the amortized cost valuation technique
which involves valuing a security at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
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Each security listed on an Exchange is valued at its last sale price on that
Exchange on the date as of which assets are valued. Where the security is listed
on more than one Exchange, the Fund will use the price of that Exchange which it
generally considers to be the principal Exchange on which the security is
traded. Lacking sales, the security is valued at the mean between the current
closing bid and asked prices. An unlisted security for which over-the-counter
market quotations are readily available is valued at the mean between the last
current bid and asked prices. When market quotations are not readily available,
any security or other asset is valued at its fair value as determined in good
faith by the Board of Directors.
Debt securities (other than short-term obligations), including listed issues,
are valued on the basis of valuations furnished by a pricing service which
utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as institution-size
trading in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data, without exclusive
reliance upon exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Use of
the pricing service has been approved by the Fund's Board of Directors.
OFFICERS AND DIRECTORS
The officers of the Fund manage its day-to-day operations. The Fund's manager
and officers are subject to the supervision and control of the Board of
Directors. A list of the officers and directors of the Fund and a brief
statement of their present positions and principal occupations during the past
five years is set forth in the "Statement of Additional Information."
MANAGER AND UNDERWRITER
Jones & Babson, Inc. was founded in 1960. It organized the Fund in 1997 and acts
as its principal underwriter at no cost to the Fund.
UMB Bank, n.a., 1010 Grand Blvd., Kansas City, MO 64106, is the Fund's
manager and investment adviser and provides or pays the cost of all
management, supervisory and administrative services required in the
normal operation of the Fund. This includes investment management and
supervision; fees of the custodian, independent public accountants and legal
counsel; remuneration of officers, directors and other personnel; rent;
shareholder services, including the maintenance of the shareholder accounting
system and transfer agency; and such other items as are incidental to corporate
administration.
M. Kathryn Gellings and Rex Matlack are the portfolio managers for the Fund. Ms.
Gellings joined UMB Bank, n.a. in 1986. She has 11 years of experience in
investment management. Mr. Matlack has 16 years of investment management
experience, and joined UMB Bank, n.a. in 1993. He is a Chartered Financial
Analyst.
Jones & Babson, Inc. acts as principal underwriter for the Fund at no cost to
the Fund. UMB Bank, n.a. employs at its own expense Jones & Babson, Inc. to
provide services to the Fund, including the maintenance of the shareholder
accounting system and transfer agency, and such
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other items as are incidental to corporate administration. The cost of the
services of Jones & Babson, Inc. is included in the fee of UMB Bank, n.a.
As compensation for all the foregoing services, the Fund pays UMB Bank, n.a.,
a fee at the annual rate of 50/100 of one percent (.50%) of its total net
assets, which is computed daily and paid semimonthly.
Not considered normal operating expenses, and therefore payable by the Fund, are
taxes, fees and other charges of governments and their agencies, including the
cost of qualifying the Fund's shares for sale in any jurisdiction, interest,
brokerage costs and all costs and expenses including legal and accounting fees
incurred in anticipation of or arising out of litigation or administrative
proceedings to which the Fund, its officers or directors may be subject or a
party thereto.
The Bank is also the investment manager for the eight other mutual funds within
the Scout Fund Group and currently manages approximately $12.5 billion in client
assets on a discretionary basis.] The Bank serves a broad variety of individual,
corporate and other institutional clients by maintaining an extensive research
and analytical staff. It has an experienced investment analysis and research
staff which eliminates the need for the Fund to maintain an extensive duplicate
staff, with the consequent increase in the cost of investment advisory services.
The Management Agreement limits the liability of the manager, as well as its
officers, directors and personnel, to acts or omissions involving willful
malfeasance, bad faith, gross negligence or reckless disregard of their duties.
Certain officers and directors of the Fund are also officers or directors or
both of other Scout Funds or Jones & Babson, Inc.
Jones & Babson, Inc. is a wholly-owned subsidiary of Business Men's Assurance
Company of America, which is considered to be a controlling person under the
Investment Company Act of 1940. Assicurazioni Generali S.p.A., an insurance
organization founded in 1831 based in Trieste, Italy, is considered to be a
controlling person and is the ultimate parent of Business Men's Assurance
Company of America. Mediobanca is a 5% owner of Generali.
The current Management Agreement between the Fund and UMB Bank, n.a. will
continue in effect until October 31, 1999, and will continue automatically for
successive annual periods ending each October 31 so long as such continuance is
specifically approved at least annually by the Board of Directors of the Fund or
by the vote of a majority of the outstanding voting securities of the Fund, and,
provided also that such continuance is approved by the vote of a majority of the
directors who are not parties to the Agreement or interested persons of any such
party at a meeting held in person and called specifically for the purpose of
evaluating and voting on such approval. The Agreement provides that either party
may terminate by giving the other 60 days written notice. The Agreement
terminates automatically if assigned by either party, as required under the
Investment Company Act of 1940.
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GENERAL INFORMATION AND HISTORY
The Fund, incorporated in Maryland on October 16, 1997 has a present authorized
capitalization of 10,000,000 shares of $1 par value common stock. The Fund may
divide its shares into separate series or classes with the approval of its Board
of Directors. The Fund currently issues a single class of shares which all have
like rights and privileges. Each full and fractional share, when issued and
outstanding, has: (1) equal voting rights with respect to matters which affect
the Fund; and (2) equal dividend, distribution and redemption rights to the
assets of the Fund. Shares when issued are fully paid and non-assessable. The
Fund will not issue any senior securities. Shareholders do not have pre-emptive
or conversion rights.
Non-cumulative voting - These shares have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors, if they choose to do so, and in such
event, the holders of the remaining less than 50% of the shares voting will not
be able to elect any directors.
The Maryland General Corporation Law permits registered investment companies,
such as the Fund, to operate without an annual meeting of shareholders under
specified circumstances if an annual meeting is not required by the Investment
Company Act of 1940. There are procedures whereby the shareholders may remove
directors. These procedures are described in the "Statement of Additional
Information" under the caption "Officers and Directors." The Fund has adopted
the appropriate provisions in its By-Laws and will not hold annual meetings of
shareholders for the following purposes unless required to do so: (1) election
of directors; (2) approval of any investment advisory agreement; (3)
ratification of the selection of independent public accountants; and (4)
approval of a distribution plan. As a result, the Fund does not intend to hold
annual meetings.
Federal Banking Laws -- The Glass-Steagall Act is a federal law that prohibits
national banks from sponsoring, distributing or controlling a registered
open-end investment company. It is possible that certain activities of UMB Bank,
n.a. relating to the Fund may be claimed to be comparable to the matters covered
by such provisions. It is not expected that any conclusions regarding such
activities of UMB Bank, n.a. would have any material effect on the assets of the
Fund or its shareholders, because the Fund's distribution is under the control
of Jones & Babson, Inc., the Fund's distributor, which is not subject to the
Glass-Steagall Act. Although it is not anticipated that decisions under the
Glass-Steagall Act adverse to UMB Bank, n.a. would have any material effect on
the conduct of the Fund's operations, if any unanticipated changes affecting the
Fund's operations were deemed appropriate the Board of Directors would promptly
consider suitable adjustments.
The Fund may use the name "Scout" in its name so long as UMB Bank, n.a. is
continued as its manager. Complete details with respect to the use of the name
are set out in a licensing agreement between the Fund, Jones & Babson, Inc. and
UMB Bank, n.a.
This prospectus omits certain of the information contained in the registration
statement filed with the Securities and Exchange Commission, Washington, D.C.
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These items may be inspected at the offices of the Commission or obtained from
the Commission upon payment of the fee prescribed.
DIVIDENDS, DISTRIBUTIONS AND THEIR TAXATION
At the close of each business day, dividends consisting of substantially all of
the Fund's net investment income are declared payable to shareholders of record
at the close of the previous business day, and credited to their accounts. All
daily dividends declared during a given month will be distributed on the last
day of the month. It is contemplated that substantially all of any net capital
gains realized during a fiscal year will be distributed with the fiscal year-end
dividend, with any remaining balance paid in December.
Capital gains realized on the sale of securities, if any, will be distributed
annually on or before December 31. Dividend and capital gains distributions will
be reinvested automatically in additional shares at the net asset value per
share computed and effective at the close of business on the day after the
record date, unless the shareholder has elected on the original application, or
by written instructions filed with the Fund, to have them paid in cash.
The Fund intends to qualify for taxation as a "regulated investment company"
under the Internal Revenue Code so that the Fund will not be subject to federal
income tax to the extent that it distributes its income to its shareholders and
satisfies the requirements relating to the sources of its income and
diversification of its assets. The Fund primarily invests in municipal bonds
whose income is exempt from regular federal, state and local income taxes. The
Fund's regular monthly dividends will be exempt from regular federal, state and
local income taxes. Distributions of taxable income and net short-term capital
gains will be taxable to shareholders as ordinary income. Distributions made to
you from interest on certain private activity bonds, while still exempt from the
regular income tax, are a preference item in determining your alternative
minimum tax. Any gain realized by the Fund from the disposition of a tax-exempt
bond that was acquired after April 30, 1993 for a price less than the principal
amount of the bond is taxable to shareholders as ordinary income to the extent
of the accrued market discount. Distributions of long-term capital gains are
taxable to shareholders as such for federal income tax purposes, regardless of
the length of time Fund shares have been owned by the shareholder. The Fund does
not try to realize any particular amount of capital gains during a year; rather,
realized gains are a by-product of Fund management activities. Consequently,
capital gains distributions may be expected to vary considerably from year to
year. Also, for those investors subject to tax, if purchases of shares in a Fund
are made shortly before a record date for a dividend or capital gains
distribution, a portion of the investment will be returned as a taxable
distribution.
Tax-exempt distributions received from the Fund are includable in the tax base
for determining the taxability of social security and railroad retirement
benefits.
Shareholders are notified annually by the Fund as to federal tax status of
dividends and distributions paid by the Fund.
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Exchange and redemption of Fund shares are taxable events for federal income tax
purposes. Shareholders may also be subject to state and municipal taxes on such
exchanges and redemptions.
To comply with IRS regulations, the Fund is required by federal law to withhold
31% of reportable payments (which may include dividends, capital gains
distributions and redemptions) paid to shareholders who have not complied with
IRS regulations. In order to avoid this withholding requirement, shareholders
must certify on their Application, or on a separate form supplied by the Fund,
that their Social Security or Taxpayer Identification Number provided is correct
and that they are not currently subject to backup withholding, or that they are
exempt from backup withholding.
The federal income tax status of all distributions will be reported to
shareholders each January as a part of the annual statement of shareholder
transactions. Shareholders not subject to tax on their income will not be
required to pay tax on amounts distributed to them.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN
TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN THE FUND.
SHAREHOLDER SERVICES
The Fund and its manager offer shareholders a broad variety of services
described throughout this prospectus. For further information about these
services, please contact UMB Bank, n.a.
SHAREHOLDER INQUIRIES
Telephone inquiries may be made toll free to the Fund, 1-800-996-2862.
Shareholders may address written inquiries to the Fund at:
Scout Kansas Tax-Exempt Bond Fund, Inc.
P.O. Box 410498
Kansas City, MO 64141-0498
For express delivery services:
Scout Kansas Tax-Exempt Bond Fund, Inc.
BMA Tower
700 Karnes Blvd.
Kansas City, MO 64108-33066
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Scout Stock Fund
Scout Regional Fund
Scout WorldWide Fund
Scout Capital Preservation Fund
Scout Bond Fund
Scout Balanced Fund
Scout Money Market Fund
Scout Tax-Free Money Market Fund
Scout Kansas Tax-Exempt Bond Fund*
No-Load Mutual Funds
* Available in Kansas and Missouri only
Manager and Investment Counsel
UMB Bank, n.a., Kansas City, Missouri
Auditors
Baird, Kurtz & Dobson, Kansas City, Missouri
Legal Counsel
Stradley, Ronon, Stevens & Young, LLP
Philadelphia, Pennsylvania
John G. Dyer, Kansas City, Missouri
Custodian
UMB Bank, n.a., Kansas City, Missouri
JONES & BABSON
MUTUAL FUNDS
P.O. Box 410498
Kansas City, MO 64141-0498
TOLL-FREE 1-800-996-2862
The Scout Funds
Scout Kansas
Tax-Exempt Bond Fund
Prospectus
February __, 1998
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PART B
SCOUT KANSAS TAX-EXEMPT BOND FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
February __, 1998
This Statement is not a Prospectus but should be read in conjunction with the
Fund's current Prospectus dated February __, 1998. To obtain the Prospectus
please call the Fund toll-free at 1-800-996-2862.
TABLE OF CONTENTS
Investment Objective and Policies...................................1
Municipal Bonds and Debt Instruments................................1
Portfolio Transactions..............................................10
Investment Restrictions.............................................11
Performance Measures................................................12
How the Fund's Shares are Distributed...............................13
How Share Purchases are Handled.....................................13
Redemption of Shares................................................14
Signature Guarantees................................................15
Dividends and Distributions.........................................15
Manager and Underwriter.............................................18
How Share Price is Determined.......................................19
Officers and Director...............................................19
Custodian...........................................................22
Independent Certified Public Accountants............................22
Fixed Income Securities Described and Ratings.......................22
Other Scout Funds...................................................29
Financial Statements................................................30
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the Fund's investment objective and policies
set forth in the Prospectus.
MUNICIPAL BONDS AND DEBT INSTRUMENTS
Municipal bonds and debt instruments are issued to obtain funds for various
public and private purposes. Such securities include bonds as well as tax-exempt
commercial paper, project notes and municipal notes such as tax, revenue and
bond anticipation notes of short maturity, generally less than three years. In
general, there are three categories of municipal obligations, the interest on
which is exempt from federal income tax and is not a tax preference item for
purposes of the AMT: (i) certain "public purpose" obligations (whenever issued),
which include obligations
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issued directly by state and local governments or their agencies to fulfill
essential governmental functions; (ii) certain obligations issued before August
8, 1986 for the benefit of non-governmental persons or entities; and (iii)
certain "private activity bonds" issued after August 7, 1986, which include
"qualified Section 501(c)(3) bonds" or refundings of certain obligations
included in the second category. In assessing the federal income tax treatment
of interest on any municipal obligation, the Portfolio will generally rely on an
opinion of the issuer's counsel (when available) and will not undertake any
independent verification of the basis for the opinion. The two principal
classifications of municipal bonds are "general obligation" and "revenue" bonds.
Interest on certain "private activity bonds" issued after August 7, 1986 is
exempt from regular federal income tax, but such interest (including a
distribution by the Fund derived from such interest) is treated as a tax
preference item which could subject the recipient to or increase the recipient's
liability for the AMT. For corporate shareholders, the Fund's distributions
derived from interest on all municipal obligations (whenever issued) is included
in "adjusted current earnings" for purposes of the AMT as applied to
corporations (to the extent not already included in alternative minimum taxable
income as income attributable to private activity bonds).
Any recognized gain or income attributable to market discount on long-term
tax-exempt municipal obligations (i.e., obligations with a term of more than one
year) purchased after April 30, 1993 other than, in general, at their original
issue is taxable as ordinary income. A long-term debt obligation is generally
treated as acquired at a market discount if purchased after its original issue
at a price less than (i) the stated principal amount payable at maturity, in the
case of an obligation that does not have original issue discount; or (ii) in the
case of an obligation that does have original issue discount, the sum of the
issue price and any original issue discount that accrued before the obligation
was purchased, subject to a de minimis exclusion.
Issuers of general obligation bonds include states, counties, cities, towns and
regional districts. The proceeds of these obligations are used to fund a wide
range of public projects including the construction or improvement of schools,
highways and roads, water and sewer systems and a variety of other public
purposes. The basic security of general obligation bonds is the issuer's pledge
of its faith, credit and taxing power for the payment of principal and interest.
The taxes that can be levied for the payment of debt service may be limited or
unlimited as to rate and amount.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue sources. Revenue bonds
have been issued to fund a wide variety of capital projects, including electric,
gas, water, sewer and solid waste disposal systems; highways, bridges and
tunnels; port, airport and parking facilities; transportation systems; housing
facilities, colleges and universities and hospitals. Although the principal
security behind these bonds varies widely, many provide additional security in
the form of a debt service reserve fund whose monies may be used to make
principal and interest payments on the issuer's obligations. Housing finance
authorities have a wide range of security including partially or fully insured,
rent subsidized and/or collateralized mortgages and/or the net revenues from
housing or other public projects. In addition to a debt service reserve fund,
some authorities provide further security in the form of a state's ability
(without legal obligation) to make up deficiencies in the debt service
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reserve fund. Lease rental revenue bonds issued by a state or local authority
for capital projects are normally secured by annual lease rental payments from
the state or locality to the authority sufficient to cover debt service on the
authority's obligations. Such payments are usually subject to annual
appropriations by the state or locality.
Industrial development and pollution control bonds, although nominally issued by
municipal authorities, are in most cases revenue bonds and are generally not
secured by the taxing power of the municipality, but are usually secured by the
revenues derived by the authority from payments of the industrial user or users.
The Fund may on occasion acquire revenue bonds which carry warrants or similar
rights covering equity securities. Such warrants or rights may be held
indefinitely, but if exercised, the Fund anticipates that it would, under normal
circumstances, dispose of any equity securities so acquired within a reasonable
period of time.
While most municipal bonds pay a fixed rate of interest semiannually in cash,
there are exceptions. Some bonds pay no periodic cash interest, but rather make
a single payment at maturity representing both principal and interest. Bonds may
be issued or subsequently offered with interest coupons materially greater or
less than those then prevailing, with price adjustments reflecting such
deviation.
The obligations of any person or entity to pay the principal of and interest on
a municipal obligation are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Act, and laws, if any, which may be enacted by Congress or
state legislatures extending the time for payment of principal or interest, or
both, or imposing other constraints upon enforcement of such obligations. There
is also the possibility that as a result of litigation or other conditions the
power or ability of any person or entity to pay when due principal of and
interest on a municipal obligation may be materially affected. There have been
recent instances of defaults and bankruptcies involving municipal obligations
which were not foreseen by the financial and investment communities. The Fund
will take whatever action it considers appropriate in the event of anticipated
financial difficulties, default or bankruptcy of either the issuer of any
municipal obligation or of the underlying source of funds for debt service. Such
action may include retaining the services of various persons or firms (including
affiliates of the investment adviser) to evaluate or protect any real estate,
facilities or other assets securing any such obligation or acquired for the
portfolio as a result of any such event, and the Fund may also manage (or engage
other persons to manage) or otherwise deal with any real estate, facilities or
other assets so acquired. The Fund anticipates that real estate consulting and
management services may be required with respect to properties securing various
municipal obligations in its portfolio or subsequently acquired by the Fund. The
Fund will incur additional expenditures in taking protective action with respect
to portfolio obligations in default and assets securing such obligations.
The yields on municipal obligations will be dependent on a variety of factors,
including purposes of issue and source of funds for repayment, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, maturity of the obligation and rating of the issue. The
ratings of Moody's, S&P and Fitch represent their opinions as to the quality of
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the municipal obligations which they undertake to rate. It should be emphasized,
however, that ratings are based on judgment and are not absolute standards of
quality. Consequently, municipal obligations with the same maturity, coupon and
rating may have different yields while obligations of the same maturity and
coupon with different ratings may have the same yield. In addition, the market
price of municipal obligations will normally fluctuate with changes in interest
rates, and therefore the net asset value of the Fund will be affected by such
changes.
Obligations of Particular Types of Issuers
Hospital bond ratings are often based on feasibility studies which contain
projection of expenses, revenues and occupancy levels. Among the influences
affecting a hospital's gross receipts and net income available to service its
debt are demand for hospital services, the ability of the hospital to provide
the services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding and possible federal legislation limiting the rates of increase
of hospital charges.
Electric utilities face problems in financing large construction programs in an
inflationary period, cost increases and delay occasioned by safety and
environmental considerations (particularly with respect to nuclear facilities),
difficulty in obtaining fuel at reasonable prices, and in achieving timely and
adequate rate relief from regulatory commissions, effects of energy conservation
and limitations on the capacity of the capital market to absorb utility debt.
Life care facilities are an alternative form of long-term housing for the
elderly which offer residents the independence of a condominium life style and,
if needed, the comprehensive care of nursing home services. Bonds to finance
these facilities have been issued by various state and local authorities. Since
the bonds are normally secured only by the revenues of each facility and not by
state or local government tax payments, they are subject to a wide variety of
risks. Primarily, the projects must maintain adequate occupancy levels to be
able to provide revenues sufficient to meet debt service payments. Moreover,
since a portion of housing, medical care and other services may be financed by
an initial deposit, it is important that the facility maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability of
management to accurately forecast inflationary cost pressures is an important
factor in this process. The facilities may also be affected adversely by
regulatory cost restrictions applied to health care delivery in general,
particularly state regulations or changes in Medicare and Medicaid payments or
qualifications, or restrictions imposed by medical insurance companies. They may
also face competition from alternative health care or conventional housing
facilities in the private or public sector.
Obligations of Puerto Rico, the U.S. Virgin Islands and Guam. Subject to the
investment policies set forth in the Prospectus, the Fund may invest in the
obligations of Puerto Rico, the U.S. Virgin Islands and Guam. Accordingly, the
Fund may be adversely affected by local political and economic conditions and
developments within Puerto Rico, the U.S. Virgin Islands and Guam affecting the
issuers of such obligations.
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Puerto Rico has a diversified economy dominated by the manufacturing and service
sectors. Manufacturing is the largest sector in terms of gross domestic product
and is more diversified than during earlier phases of Puerto Rico's industrial
development. The three largest sectors of the economy (as a percentage of
employment) are services (47%), government (22%) and manufacturing (16.4%).
These three sectors represent 37.5%, 11% and 41.8%, respectively, of the gross
domestic product. The service sector is the fastest growing, followed by
manufacturing which has begun to show signs of expansion. The North American
Free Trade Agreement ("NAFTA"), which became effective January 1, 1994, could
lead to the loss of Puerto Rico's lower salaried or labor intensive jobs to
Mexico.
The Commonwealth of Puerto Rico exercises virtually the same control over its
internal affairs as do the 50 states; however, it differs from the states in its
relationship with the federal government. Most federal taxes, except those such
as social security taxes that are imposed by mutual consent, are not levied in
Puerto Rico. However, in conjunction with the 1993 U.S. budget plan, Section 936
of the Code was amended and provided for two alternative limitations to the
Section 936 credit. The first option limited the credit against such income to
40% of the credit allowable under then current law, with a five-year phase-in
period starting at 60% of the allowable credit. The second option was a wage and
depreciation based credit. Additional amendments to Section 936 in 1996 imposed
caps on these credits, beginning in 1998 for the first option and beginning in
2002 for the second option. More importantly, the 1996 amendments eliminated
both options for taxable years beginning in 2006. The eventual elimination of
tax benefits to those U.S. companies with operations in Puerto Rico may lead to
slower growth in the future. There can be no assurance that this will not lead
to a weakened economy, a lower rating on Puerto Rico's debt or lower prices for
Puerto Rican bonds that may be held by the Fund in the long-term. Short-term
affects are minimal.
Puerto Rico's financial reporting was first conformed to generally accepted
accounting principles in fiscal 1990. Nonrecurring revenues have been used
frequently to balance recent years' budgets. In November, 1993 Puerto Ricans
voted on whether they wished to retain Commonwealth status, leaving intact the
current relationship with the federal government. There can be no assurance that
the statehood issue will not be brought up in the future. A successful statehood
vote in Puerto Rico would then require the U.S. Congress to ratify the election.
The U.S. Virgin Islands ("USVI") are located approximately 1,100 miles
east-southeast of Miami and are made up of St. Croix, St. Thomas and St. John.
The economy is heavily reliant on the tourism industry, with roughly 43% of
non-agricultural employment in tourist-related trade and services. In 1996,
unemployment stood at 13.8%. The tourism industry is economically sensitive and
would likely be adversely affected by a recession in either the United States or
Europe.
An important component of the USVI revenue base is the federal excise tax on rum
exports. Tax revenues rebated by the federal government to the USVI provide the
primary security of many outstanding USVI bonds. Since more than 90% of the rum
distilled in the USVI is distilled at one plant, any interruption in its
operations (as occurred after Hurricane Hugo in 1989) would adversely affect
these revenues. Consequently, there can be no assurance that rum exports to the
United States and the rebate of tax revenues to the USVI will continue at their
present levels. The preferential tariff treatment the USVI rum industry
currently enjoys could be reduced under
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NAFTA. Increased competition from Mexican rum producers could reduce USVI rum
imported to the U.S., decreasing excise tax revenues generated. The USVI is
periodically hit by hurricanes. Several hurricanes have caused extensive damage,
which has had a negative impact on revenue collections. There is currently no
rated, unenhanced Virgin Islands debt outstanding (although there is unrated
debt outstanding).
Guam, an unincorporated U.S. territory, is located 1,500 miles southeast of
Tokyo. The U.S. military is a key component of Guam's economy. The federal
government directly comprises more than 10% of the employment base, with a
substantial component of the service sector to support these personnel. The
Naval Air Station, one of several U.S. military facilities on the island, has
been slated for closure by the Defense Base Closure and Realignment Committee;
however, the administration plans to use these facilities to expand the island's
commercial airport. Guam is also heavily reliant on tourists, particularly the
Japanese. For 1995, the government realized a General Fund operating surplus.
The administration has taken steps to improve its financial position; however,
there are no guarantees that an improvement will be realized. Guam's general
obligation debt is rated BBB by S&P with a negative outlook.
Municipal Leases
The Fund may invest in municipal leases and participations therein, which
arrangements frequently involve special risks. Municipal leases are obligations
in the form of a lease or installment purchase arrangement which is issued by
state or local governments to acquire equipment and facilities. Interest income
from such obligations is generally exempt from local and state taxes in the
state of issuance. "Participations" in such leases are undivided interests in a
portion of the total obligation. Participations entitle their holders to receive
a pro rata share of all payments under the lease. A trustee is usually
responsible for administering the terms of the participation and enforcing the
participants' rights in the underlying lease. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased
assets to pass eventually to the government issuer) have evolved as a means of
government issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. State
debt-issuance limitations are deemed to be inapplicable to these arrangements
because of the inclusion in many leases or contracts of "non-appropriation"
clauses that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated for
such purpose by the appropriate legislative body on a yearly or other periodic
basis. Such arrangements are, therefore, subject to the risk that the
governmental issuer will not appropriate funds for lease payments.
Certain municipal lease obligations owned by the Fund may be deemed illiquid for
the purpose of the Fund's 10% limitation on investments in illiquid securities,
unless determined by the investment adviser, pursuant to guidelines adopted by
the Directors of the Fund, to be liquid securities for the purpose of such
limitation. In determining the liquidity of municipal lease obligations, the
investment adviser will consider a variety of factors including: (1) the
willingness of dealers to bid for the security; (2) the number of dealers
willing to purchase or sell the obligation and the number of other potential
buyers; (3) the frequency of trades and quotes for the obligation; and (4) the
nature of the marketplace trades. In addition, the investment adviser will
consider factors unique to particular lease obligations affecting the
marketability
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thereof. These include the general creditworthiness of the municipality, and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by the Fund. In the event the Fund
acquires an unrated municipal lease obligation, the investment adviser will be
responsible for determining the credit quality of such obligation on an on-going
basis, including an assessment of the likelihood that the lease may or may not
be canceled.
Zero Coupon Bonds
Zero coupon bonds are debt obligations which do not require the periodic payment
of interest and are issued at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity at a rate of interest reflecting the
market rate of the security at the time of issuance. Zero coupon bonds benefit
the issuer by mitigating its need for cash to meet debt service, but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash.
Credit Quality
The Fund is dependent on the investment adviser's judgment, analysis and
experience in evaluating the quality of municipal obligations. In evaluating the
credit quality of a particular issue, whether rated or unrated, the investment
adviser will normally take into consideration, among other things, the financial
resources of the issuer (or, as appropriate, of the underlying source of funds
for debt service), its sensitivity to economic conditions and trends, any
operating history of and the community support for the facility financed by the
issue, the ability of the issuer's management and regulatory matters. The
investment adviser will attempt to reduce the risks of investing in the lowest
investment grade, below investment grade and comparable unrated obligations
through active portfolio management, credit analysis and attention to current
developments and trends in the economy and the financial markets.
When-Issued Securities
New issues of municipal obligations are sometimes offered on a "when-issued"
basis, that is, delivery and payment for the securities normally take place
within a specified number of days after the date of the Fund's commitment and
are subject to certain conditions such as the issuance of satisfactory legal
opinions. The Fund may also purchase securities on a when-issued basis pursuant
to refunding contracts in connection with the refinancing of an issuer's
outstanding indebtedness. Refunding contracts generally require the issuer to
sell and the Fund to buy such securities on a settlement date that could be
several months or several years in the future.
The Fund will make commitments to purchase when-issued securities only with the
intention of actually acquiring the securities, but may sell such securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. The payment obligation and the interest rate that will be received on
the securities are fixed at the time the Fund enters into the purchase
commitment. When the Fund commits to purchase securities on a when-issued basis
it records the transaction and reflects the value of the security in determining
its net asset value. Securities purchased on a when-issued basis and the
securities held by the Fund are subject to changes in
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value based upon the perception of the creditworthiness of the issuer and
changes in the level of interest rates (i.e. appreciation when interest rates
decline and depreciation when interest rates rise). Therefore, to the extent
that the Fund remains substantially fully invested at the same time that it has
purchased securities on a when-issued basis, there will be greater fluctuations
in the Fund's net asset value than if it solely set aside cash to pay for
when-issued securities.
Variable Rate Obligations
The Fund may purchase variable rate obligations. Variable rate instruments
provide for adjustments in the interest rate at specified intervals (weekly,
monthly, semiannually, etc.). Rate revisions may alternatively be determined by
formula or in some other contractual fashion. Variable rate obligations normally
provide that the holder can demand payment of the obligation on short notice at
par with accrued interest and are frequently secured by letters of credit or
other credit support arrangements provided by banks. To the extent that such
letters of credit or other arrangements constitute an unconditional guarantee of
the issuer's obligations, a bank may be treated as the issuer of a security for
the purpose of complying with the diversification requirements set forth in
Section 5(b) of the 1940 Act and Rule 5b-2 thereunder. The Fund would anticipate
using these obligations as cash equivalents pending longer term investment of
its funds.
Redemption, Demand and Put Features
Most municipal bonds have a fixed final maturity date. However, it is
commonplace for the issuer to reserve the right to call the bond earlier. Also,
some bonds may have "put" or "demand" features that allow early redemption by
the bondholder. Longer term fixed-rate bonds may give the holder a right to
request redemption at certain times (often annually after the lapse of an
intermediate term). These bonds are more defensive than conventional long-term
bonds (protecting to some degree against a rise in interest rates) while
providing greater opportunity than comparable intermediate term bonds, because
the Fund may retain the bond if interest rates decline. By acquiring these kinds
of obligations the Fund obtains the contractual right to require the issuer of
the security or some other person (other than a broker or dealer) to purchase
the security at an agreed upon price, which right is contained in the obligation
itself rather than in a separate agreement with the seller or some other person.
Because this right is assignable with the security, which is readily marketable
and valued in the customary manner, the Fund will not assign any separate value
to such right.
Futures Contracts and Options on Futures Contracts
A change in the level of interest rates may affect the value of the securities
held by the Fund (or of securities that the Fund expects to purchase). To hedge
against changes in rates, the Fund may enter into: (i) futures contracts for the
purchase or sale of debt securities; and (ii) futures contracts on securities
indices. All futures contracts entered into by the Fund are traded on exchanges
or boards of trade that are licensed and regulated by the Commodity Futures
Trading Commission ("CFTC") and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant exchange. The Fund
may purchase and write call and put options on futures contracts which are
traded on a United States or foreign exchange
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or board of trade. The Fund will be required, in connection with transactions in
futures contracts and the writing of options on futures, to make margin
deposits, which will be held by the Fund's custodian for the benefit of the
futures commission merchant through whom the Fund engages in such futures and
options transactions.
Some futures contracts and options thereon may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit transactions in an exchange-traded instrument,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or futures option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
The Fund will engage in futures and related options transactions only for bona
fide hedging purposes as defined in or permitted by CFTC regulations. The Fund
will determine that the price fluctuations in the futures contracts and options
on futures are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. The Fund's futures transactions will
be entered into for traditional hedging purposes -- that is, futures contracts
will be sold to protect against a decline in the price of securities that the
Fund owns, or futures contracts will be purchased to protect the Fund against an
increase in the price of securities it intends to purchase. However, in
particular cases, when it is economically advantageous for the Fund to do so, a
long futures position may be terminated (or an option may expire) without the
corresponding purchase of securities. The Fund will engage in transactions in
futures and related options contracts only to the extent such transactions are
consistent with the requirements of the Code for maintaining qualification of
the Fund as a regulated investment company for federal income tax purposes (see
"Dividends, Distributions and Taxes").
Asset Coverage Requirements
Transactions involving when-issued securities, the lending of securities or
futures contracts and options (other than options that the Fund has purchased)
expose the Fund to an obligation to another party. The Fund will not enter into
any such transactions unless it owns either: (1) an offsetting ("covered")
position in securities or other options or futures contracts; or (2) cash or
liquid securities (such as readily marketable obligations and money market
instruments) with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. The Fund will comply with
Securities and Exchange Commission guidelines regarding cover for these
instruments and, if the guidelines so require, set aside cash or liquid
securities in a segregated account maintained by its custodian in the prescribed
amount. The securities in the segregated account will be marked to market daily.
Assets used to cover or held in a segregated account maintained by the custodian
cannot be sold while the position requiring coverage or segregation is
outstanding unless they are replaced with other appropriate assets. As a result,
the commitment of a large portion of the Fund's assets to segregated accounts or
to cover could impede fund management or the Fund's ability to meet redemption
requests or other current obligations.
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PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the Fund are made by UMB Bank, n. a.
Officers of the Fund and Jones & Babson, Inc. are generally responsible for
implementing or supervising these decisions, including allocation of portfolio
brokerage and principal business and the negotiation of commissions and/or the
price of the securities.
The Fund in purchasing and selling portfolio securities will seek the best
available combination of execution and overall price (which shall include the
cost of the transaction) consistent with the circumstances which exist at the
time. The Fund does not intend to solicit competitive bids on each transaction.
The Fund believes it is in its best interest and that of its shareholders to
have a stable and continuous relationship with a diverse group of financially
strong and technically qualified broker-dealers who will provide quality
executions at competitive rates. Broker-dealers meeting these qualifications
also will be selected for their demonstrated loyalty to the Fund, when acting on
its behalf, as well as for any research or other services provided to the Fund.
The Fund normally will not pay a higher commission rate to broker-dealers
providing benefits or services to it than it would pay to broker-dealers who do
not provide such benefits or services. However, the Fund reserves the right to
do so within the principles set out in Section 28(e) of the Securities Exchange
Act of 1934 when it appears that this would be in the best interests of the
shareholders.
No commitment is made to any broker or dealer with regard to placing of orders
for the purchase or sale of Fund portfolio securities, and no specific formula
is used in placing such business. Allocation is reviewed regularly by both the
Board of Directors of the Fund and by UMB Bank, n.a.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, it may place portfolio orders with qualified broker-dealers who
recommend the Fund to other clients, or who act as agent in the purchase of the
Fund's shares for their clients.
Research services furnished by broker-dealers may be useful to the Fund manager
in serving other clients, as well as the Fund. Conversely, the Fund may benefit
from research services obtained by the manager from the placement of portfolio
brokerage of other clients.
When it appears to be in the best interests of its shareholders, the Fund may
join with other clients of the manager in acquiring or disposing of a portfolio
holding. Securities acquired or proceeds obtained will be equitably distributed
between the Fund and other clients participating in the transaction. In some
instances, this investment procedure may affect the price paid or received by
the Fund or the size of the position obtained by the Fund.
The Fund does not intend to purchase securities solely for short-term trading;
nor will securities be sold for the sole purpose of realizing gains. However, a
security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what the
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Fund's manager believes to be a disparity in the normal yield relationship
between the two securities. In addition, a security may be sold and another
purchased when, in the opinion of management, a favorable yield spread exists
between specific issues or different market sectors. A high portfolio turnover
rate may increase transaction costs and result in additional taxable gains.
Short-term debt instruments with maturities of less than one year are excluded
from the calculation of portfolio turnover.
INVESTMENT RESTRICTIONS
In addition to the investment objective and portfolio management policies set
forth in the Prospectus under the caption "Investment Objective and Portfolio
Management Policy", the following restrictions also may not be changed without
approval of the "holders of a majority of the outstanding shares" of the Fund.
The Fund will not: (1) engage in the purchase or sale of real estate or
commodities; (2) underwrite the securities of other issuers; (3) make loans to
other persons, except by the purchase of debt obligations which are permitted
under its policy (the purchase of a security subject to a repurchase agreement
or the purchase of a portion of publicly distributed debt securities is the
making of a loan); (4) purchase securities on margin, or sell securities short;
(5) borrow or pledge its credit under normal circumstances, except up to 10% of
its gross assets (computed at the lower of fair market value or cost) for
temporary or emergency purposes, and not for the purpose of leveraging its
investments, and provided further that any borrowing in excess of 5% of the
total assets of the Fund shall have asset coverage of at least 3 to 1; (6)
invest more than 25% of its total assets (taken at market value at the time of
each investment) in the securities of issuers in any particular industry, except
for temporary defensive purposes. (This limitation shall not apply to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; investments in certificates of deposit and banker's
acceptances will not be considered investments in the banking industry; utility
companies will be divided according to their services; financial service
companies will be classified according to the end users of their services; and
asset-backed securities will be classified according to the underlying assets
securing such securities.); or (7) issue senior securities except for those
investment procedures permissible under the Fund's other restrictions.
The following are "non-fundamental" restrictions, which can be changed by the
Board of Directors of the Fund without shareholder approval:
The Fund may not: (1) invest in companies for the purpose of exercising control
of management; (2) purchase shares of other investment companies except as
permitted under the Investment Company Act of 1940, as amended from time to
time, or pursuant to a plan of merger or consolidation; (3) invest in the
aggregate more than 5% of the value of its gross assets in the securities of
issuers (other than federal, state, territorial, or local governments, or
corporations, or authorities established thereby), which, including
predecessors, have not had at least three years' continuous operations; (4)
enter into dealings with its officers or directors, its manager or underwriter,
or their officers or directors, or any organization in which such persons have a
financial interest, except for transactions in the Fund's own shares or other
securities through brokerage practices which are considered normal and generally
accepted under the circumstances
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existing at the time; or (5) invest in securities issued by UMB Financial
Corporation or affiliate banks of UMB Financial Corporation.
For purposes of the Fund's investment restrictions, the determination of the
"issuer" of a municipal obligation which is not a general obligation bond will
be made by the investment adviser on the basis of the characteristics of the
obligation and other relevant factors, the most significant of which is the
source of funds committed to meeting interest and principal payments of such
obligations.
PERFORMANCE MEASURES
Total Return
"Average annual total return" figures are computed according to a formula
prescribed by the Securities and Exchange Commission. The formula can be
expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year (or other) periods at the
end of the 1, 5 or 10 year (or other)
periods (or fractional portions thereof).
Current Yield
The current annualized yield for the Fund is computed by: (a) determining the
net change in the value of a hypothetical pre-existing account in the Fund
having a balance of one share at the beginning of a seven calendar-day period
for which yield is to be quoted, (b) dividing the net change by the value of the
account at the beginning of the period to obtain the base period return, and (c)
annualizing the results (i.e., multiplying the base period return by 365/7). The
net change in value of the account reflects the value of additional shares
purchased with dividends declared on the original share and any such additional
shares, but does not include realized gains and losses or unrealized
appreciation and depreciation. In addition, the Fund may calculate a compound
effective yield by adding 1 to the base period return (calculated as described
above, raising the sum to a power equal to 365/7 and subtracting 1).
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Tax Equivalent Yield
Tax equivalent yield is determined by dividing that portion of current yield
which is tax-exempt by one minus a stated income tax rate and adding that
portion of current yield, if any, that is not tax-exempt.
HOW THE FUND'S SHARES ARE DISTRIBUTED
Jones & Babson, Inc., as agent of the Fund, agrees to supply its best efforts as
sole distributor of the Fund's shares and, at its own expense, pay all sales and
distribution expenses in connection with their offering other than registration
fees and other government charges.
Jones & Babson, Inc. does not receive any fee or other compensation under the
distribution agreement with the Fund which continues in effect until October 31,
1999, and which will continue automatically for successive annual periods ending
each October 31, if continued at least annually by the Fund's Board of
Directors, including a majority of those directors who are not parties to such
Agreement or interested persons of any such party. It terminates automatically
if assigned by either party or upon 60 days written notice by either party to
the other.
HOW SHARE PURCHASES ARE HANDLED
Each order accepted will be fully invested in whole and fractional shares,
unless the purchase of a certain number of whole shares is specified, at the net
asset value per share next effective after the order is accepted by the Fund.
Each investment is confirmed by a year-to-date statement which provides the
details of the immediate transaction, plus all prior transactions in your
account during the current year. This includes the dollar amount invested, the
number of shares purchased or redeemed, the price per share and the aggregate
shares owned. A transcript of all activity in your account during the previous
year will be furnished each January. By retaining each annual summary and the
last year-to-date statement, you have a complete detailed history of your
account which provides necessary tax information. A duplicate copy of a past
annual statement is available from Jones & Babson, Inc. at its cost, subject to
a minimum charge of $5 per account, per year requested.
Normally, the shares which you purchase are held by the Fund in open account,
thereby relieving you of the responsibility of providing for the safekeeping of
a negotiable share certificate. Should you have a special need for a
certificate, one will be issued on request for all, or a portion of the whole
shares in your account. There is no charge for the first certificate issued. A
charge of $3.50 will be made for any replacement certificates issued. In order
to protect the interests of the other shareholders, share certificates will be
that unconditional payment for the shares represented by the certificate has
been received by its custodian, UMB Bank, n.a.
If an order to purchase shares must be canceled due to non-payment, the
purchaser will be responsible for any loss incurred by the Fund arising out of
such cancellation. To recover any such loss, the Fund reserves the right to
redeem shares owned by any purchaser whose order is
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canceled, and such purchaser may be prohibited or restricted in the manner of
placing further orders.
The Fund reserves the right in its sole discretion to withdraw all or any part
of the offering made by the Prospectus or to reject purchase orders when, in the
judgment of management, such withdrawal or rejection is in the best interest of
the Fund and its shareholders. The Fund also reserves the right at any time to
waive or increase the minimum requirements applicable to initial or subsequent
investments with respect to any person or class of persons, which include
shareholders of the Fund's special investment programs.
REDEMPTION OF SHARES
The right of redemption may be suspended, or the date of payment postponed
beyond the normal three-day period by the Fund's Board of Directors under the
following conditions authorized by the Investment Company Act of 1940: (1) for
any period (a) during which the New York Stock Exchange is closed, other than
customary weekend and holiday closing, or (b) during which trading on the New
York Stock Exchange is restricted; (2) for any period during which an emergency
exists as a result of which (a) disposal by the Fund of securities owned by it
is not reasonably practicable, or (b) it is not reasonably practicable for the
Fund to determine the fair value of its net assets; or (3) for such other
periods as the Securities and Exchange Commission may by order permit for the
protection of the Fund's shareholders.
The Fund may satisfy redemption requests by distributing securities in-kind. If
shares are redeemed in-kind, the redeeming shareholder may incur brokerage costs
in converting the assets to cash. The method of valuing securities used to make
redemptions in-kind will be the same as the method of valuing portfolio
securities described under "How Share Price is Determined" in the Prospectus,
and such valuation will be made as of the same time the redemption price is
determined.
SIGNATURE GUARANTEES
Signature guarantees normally reduce the possibility of forgery and are required
in connection with each redemption method to protect shareholders from loss.
Signature guarantees are required in connection with all redemptions of $50,000
or more by mail or changes in share registration, except as provided in the
Prospectus.
Signature guarantees must appear together with the signatures(s) of the
registered owner(s), on:
(1) a written request for redemption;
(2) a separate instrument of assignment, which should specify the total number
of shares to be redeemed (this "stock power" may be obtained from the Fund or
from most banks or stock brokers); or
(3) all stock certificates tendered for redemption.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund's policy is to distribute substantially all of its net investment
income, if any, together with any net realized capital gains in the amount and
at a date that will avoid both income (including capital gains) taxes on them
and the imposition of the federal excise tax on undistributed income and capital
gains (see discussion under "Dividends, Distributions and Their Taxation" in the
Prospectus).
Unless the shareholder elects otherwise, dividends and capital gains
distributions are reinvested in additional shares at net asset value. Any
dividend and distribution election will remain in effect until the Fund is
notified by the shareholder in writing at least three days prior to the record
date to change the election. An account statement is sent to shareholders
whenever an income dividend or capital gains distribution is paid.
Any dividend or capital gains distribution reduces the net asset value per share
by the per share amount of such distribution.
Distributions of Net Investment Income--By meeting certain requirements of the
Code, the Fund has qualified and continues to qualify to pay "exempt-interest
dividends" to you. These dividends are derived from interest income exempt from
regular income tax, and are not subject to regular federal income tax when they
are distributed to you. In addition, to the extent that exempt interest
dividends are derived from interest on obligations of Kansas and its political
subdivisions, or from interest on U.S. territorial obligations (including Puerto
Rico, the U.S. Virgin Islands or Guam), they will also be exempt from personal
income tax in Kansas.
The Fund may earn taxable income on temporary investments, on the discount from
stripped obligations or their coupons, on income from securities loans or other
taxable transactions, on the excess of short-term capital gains over long-term
capital losses earned by the Fund ("net short-term capital gain") or on ordinary
income derived from the sale of market discount bonds. Any distribution by the
Fund from such income will be taxable to you as ordinary income, whether you
take them in cash or additional shares.
From time to time, the Fund may purchase a tax-exempt bond in the secondary
market for a price that is less than the principal amount of the bond. This
discount is called market discount if it exceeds a de minimis amount of discount
under the Code. For market discount bonds purchased after April 30, 1993, a
portion of the gain on sale or disposition (not to exceed the accrued portion of
market discount at the time of the sale) is treated as ordinary income rather
than capital gain. Any distribution by the Fund of market discount income will
be taxable to you as ordinary income.
The Fund receives income generally in the form of dividends, interest, original
issue, market and acquisition discount, and other income derived from its
investments. This income, less expenses incurred in the operation of the Fund,
constitutes its net investment income from which dividends may be paid to you.
Any distributions by the Fund from such income will be taxable to you, whether
you take them in cash or in additional shares.
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Distributions of Capital Gains--The Fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gains over net
long-term capital losses will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by the Fund will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares in the Fund. Any net short-term or long-term capital gains realized
by the Fund (net of any capital loss carryovers) will generally be distributed
once each year, and may be distributed more frequently, if necessary, in order
to reduce or eliminate federal excise or income taxes on the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required to
track its sales of portfolio securities and to report its capital gain
distributions to you according to the following categories of holding periods:
"28 percent tax rate gains:" securities sold by the Fund after July 28, 1997
that were held for more than one year but not more than 18 months, and under a
transitional rule securities sold by the Fund before May 7, 1997 that were held
for more than 12 months. These gains will be taxable to individual investors at
a maximum rate of 28%.
"20 percent tax rate gains:" securities sold by the Fund after July 28, 1997
that were held for more than 18 months, and under a transitional rule securities
sold by the Fund between May 7, 1997 and July 28, 1997 that were held for more
than 12 months. These gains will be taxable to individual investors at a maximum
rate of 20% for investors in the 28% or higher federal income tax rate brackets,
and at a maximum rate of 10% for investors in the 15% federal income tax rate
bracket.
"Qualified 5-year gains:" For individuals in the 15% federal income tax rate
bracket, qualified 5-year gains are net gains on securities held for more than 5
years which are sold after December 31, 2000. For individuals who are subject to
tax at higher federal income tax rate brackets, qualified 5-year gains are net
gains on securities which are purchased after December 31, 2000 and are held for
more than 5 years. Taxpayers subject to tax at the higher federal income tax
rate brackets may also make an election for shares held on January 1, 2001 to
recognize gain on their shares in order to qualify such shares as qualified
5-year property. These gains will be taxable to individual investors at a
maximum rate of 18% for investors in the 28% or higher federal income tax
brackets, and at a maximum rate of 8% for investors in the 15% federal income
tax rate bracket.
The Fund will advise you in its annual information reporting at calendar year
end of the amount of its capital gain distributions which will qualify for these
maximum federal tax rates for each calendar year. Questions concerning each
investor's personal tax reporting should be addressed to the investor's personal
tax advisor.
Election to be Taxed as a Regulated Investment Company--The Fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code ("Code"), and intends to so qualify during the current fiscal year.
The directors reserve the right not to maintain the qualification of the Fund as
a regulated investment company if they determine such course of action to be
beneficial to you. In such case, the Fund will be subject to federal and
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possibly state corporate taxes on its taxable income and gains, and
distributions to you will be taxed as ordinary dividend income to the extent of
the Fund's available earnings and profits.
In order to qualify as a regulated investment company for federal income tax
purposes, the Fund must meet certain specific requirements, including:
(i) The Fund must maintain a diversified (for federal income tax purposes)
portfolio of securities, wherein no security (other than U.S. Government
securities and securities of other regulated investment companies) can exceed
25% of the Fund's total assets, and, with respect to 50% of the Fund's total
assets, no investment (other than cash and cash items, U.S. Government
securities and securities of other regulated investment companies) can exceed 5%
of the Fund's total assets;
(ii) The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
disposition of stock or securities or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities or
currencies;
(iii) The Fund must distribute to its shareholders at least 98% of its net
investment income and net tax-exempt income for each of its fiscal years; and
(iv) The Fund must realize less than 30% of its gross income for each fiscal
year from gains from the sale of securities and certain other assets that have
been held by the Fund for less than three months ("short-short income"). The
Taxpayer Relief Act of 1997 repealed the 30% short- short income test for tax
years of regulated investment companies beginning after August 5, 1997; however,
this rule may have continuing effect in some states for purposes of classifying
the Fund as a regulated investment company.
Excise Tax Distribution Requirements--The Code requires the Fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the 12 month period ending
October 31 (in addition to amounts from the prior year that were neither
distributed nor taxed to the Fund) to you by December 31 of each year in order
to avoid federal excise taxes. The Fund intends as a matter of policy to declare
and pay sufficient dividends in December or January (which are treated by you as
received in December) but does not guarantee and can give no assurances that its
distributions will be sufficient to eliminate all such taxes.
Dividends-Received Deduction for Corporations--Because the Fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions will generally be eligible for the intercorporate
dividends-received deduction.
Treatment of Private Activity Bond Interest--The interest on bonds issued to
finance essential state and local government operations is generally tax-exempt,
and distributions paid from this interest income on such bonds will generally
qualify as exempt-interest dividends. Interest in certain non-essential or
"private activity bonds" (including those from housing and student loans) issued
after August 7, 1986, while still tax-exempt for regular federal income tax
purposes,
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constitutes a preference item for taxpayers in determining their alternative
minimum tax under the Code and under the income tax provisions of several
states. Private activity bond interest could subject you to or increase your
liability under federal and state alternative minimum taxes, depending on your
individual or corporate tax position.
Consistent with the Fund's investment objectives, the Fund may acquire such
private activity bonds if, in the Fund manager's opinion, such bonds represent
the most attractive investment opportunity then available to the Fund. Persons
who are defined in the Code as "substantial users" (or persons related to such
users) of facilities financed by private activity bonds should consult with
their tax advisors before purchasing shares in the Fund.
The Code also imposes certain limitations and restrictions on the use of
tax-exempt bond financing for non-governmental business activities, such as
activities financed by certain industrial development of private activity bonds.
Some of these bonds, including bonds for sports arenas, parking facilities and
pollution control facilities, are generally not tax-exempt because they
generally do not pay tax-exempt interest. If the interest on private activity
bonds is not tax-exempt for regular federal income tax purposes, such bonds will
not be purchased by the Fund.
Investment in Original Discount (OID) and Market Discount (MD) Bonds--The Fund's
investment in zero coupon bonds issued or acquired at a discount, delayed
interest bonds or bonds that provide for payment of interest-in-kind (PIK) may
cause the Fund to recognize income and make distributions to you prior to its
receipt of cash payments. Zero coupon and delayed interest bonds are normally
issued at a discount and are, therefore, generally subject to tax reporting as
OID obligations. The Fund is required to accrue as income a portion of the
discount at which these securities were issued, and to distribute such income
each year (as ordinary dividends) in order to maintain its qualification as a
regulated investment company and to avoid income reporting and excise taxes at
the Fund level. PIK bonds are subject to similar rules concerning the amount,
character and timing of income required to be accrued by the Fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price at maturity, or revised issue price in the case of a bond having OID, are
said to have been acquired with market discount. For these bonds, the Fund may
elect to accrue market discount on a current basis, in which case the Fund will
be required to distribute any such accrued discount. If the Fund does not elect
to accrue market discount into income currently, gain recognized on the sale of
such bonds will be recharacterized as ordinary income instead of capital gain to
the extent of any accumulated market discount on the obligation.
MANAGER AND UNDERWRITER
Pursuant to a Management Agreement, the Fund employs at its own expense UMB
Bank, n.a. as its manager and investment counsel. Jones & Babson, Inc. serves as
principal underwriter at no charge to the Fund.
The aggregate management fee payable to UMB Bank, n.a. by Scout Kansas
Tax-Exempt Bond Fund, during the current fiscal year ending June 30, 1998, from
which UMB Bank, n.a. will pay all the Fund's expenses except those payable
directly by the Fund is .50%. The annual fee charged by UMB Bank, n.a. covers
all normal operating costs of the Fund.
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HOW SHARE PRICE IS DETERMINED
The net asset value per share of the Fund portfolio is computed once daily,
Monday through Friday, at the specific time during the day that the Board of
Directors of the Fund sets at least annually, except on days on which changes in
the value of a Fund's portfolio securities will not materially affect the net
asset value, or days during which no security is tendered for redemption and no
order to purchase or sell such security is received by the Fund, or the
following holidays:
New Year's Day January 1
Martin Luther King, Jr. Day Third Monday in January
Presidents' Holiday Third Monday in February
Good Friday Friday before Easter
Memorial Day Last Monday in May
Independence Day July 4
Labor Day First Monday in September
Thanksgiving Day Fourth Thursday in November
Christmas Day December 25
OFFICERS AND DIRECTORS
The Fund is managed by UMB Bank, n.a., subject to the supervision and control of
its Board of Directors. The following table lists the officers and directors of
the Fund and their ages. Unless noted otherwise, the address of each officer and
director is BMA Tower, 700 Karnes Blvd., Kansas City, Missouri 64108-3306.
Except as indicated, each has been an employee of Jones & Babson, Inc. for more
than five years.
*Larry D. Armel (55), President and Director, Jones & Babson, Inc., Scout Stock
Fund, Inc., Scout Regional Fund, Inc., Scout Bond Fund, Inc., Scout Money Market
Fund, Inc., Scout Tax- Free Money Market Fund, Inc., Scout WorldWide Fund, Inc.,
Scout Balanced Fund, Inc., Scout Capital Preservation Fund, Inc., Shadow Stock
Fund, Inc., David L. Babson Growth Fund, Inc., D. L. Babson Money Market Fund,
Inc., D.L. Babson Tax-Free Income Fund, Inc., Babson Value Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Babson- Stewart Ivory
International Fund, Inc., Buffalo Balanced Fund, Inc., Buffalo Equity Fund,
Inc., Buffalo High Yield Fund, Inc., Buffalo USA Global Fund, Inc., Buffalo
Small Cap Fund, Inc., Investors Mark Series Fund, Inc., Director, AFBA Five Star
Fund, Inc.; Trustee and President, D. L. Babson Bond Trust.
William E. Hoffman, D.D.S. (59), Director, Scout Stock Fund, Inc., Scout
Regional Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout
Tax-Free Money Market Fund, Inc., Scout WorldWide Fund, Inc., Scout Balanced
Fund, Inc., Scout Capital Preservation Fund, Inc.; Orthodontist, 3700 West 83rd
Street, Suite 206, Prairie Village, Kansas 66208.
Eric T. Jager (54), Director, Scout Stock Fund, Inc., Scout Regional Fund, Inc.,
Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money
Market Fund, Inc., Scout WorldWide Fund, Inc., Scout Balanced Fund, Inc., Scout
Capital Preservation Fund, Inc.,
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President, Windcrest Investment Management, Inc.; Director, Bartlett Futures,
Inc., Nygaard Corporation, 4800 Main Street, Suite 600, Kansas City, Missouri
64112.
Stephen F. Rose (50), Director, Scout Stock Fund, Inc., Scout Regional Fund,
Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money
Market Fund, Inc., Scout WorldWide Fund, Inc., Scout Balanced Fund, Inc., Scout
Capital Preservation Fund, Inc.; President, Sun Publications, Inc., 7373 W.
107th Street, Overland Park, Kansas 66212.
Stuart Wien (74), Director, Scout Stock Fund, Inc., Scout Regional Fund, Inc.,
Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money
Market Fund, Inc., Scout WorldWide Fund, Inc., Scout Balanced Fund, Inc., Scout
Capital Preservation Fund, Inc.; Retired, 4589 West 124th Place, Leawood, Kansas
66209, formerly Chairman of the Board, Milgram Food Stores, Inc.
* Directors who are interested persons as that term is defined in the Investment
Company Act of 1940, as amended.
P. Bradley Adams (37), Vice President and Treasurer, Jones & Babson, Inc., Scout
Stock Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout
Tax-Free Money Market Fund, Inc., Scout Regional Fund, Inc., Scout WorldWide
Fund, Inc., Scout Balanced Fund, Inc., Scout Capital Preservation Fund, Inc.,
David L. Babson Growth Fund, Inc., D. L. Babson Money Market Fund, Inc., D. L.
Babson Tax-Free Income Fund, Inc., Babson Enterprise Fund, Inc., Babson
Enterprise Fund II, Inc., Babson Value Fund, Inc., Shadow Stock Fund, Inc.,
Babson-Stewart Ivory International Fund, Inc., D.L. Babson Bond Trust, Buffalo
Balanced Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc.,
Buffalo USA Global Fund, Inc., Buffalo Small Cap Fund; Vice President and Chief
Financial Officer, AFBA Five Star Fund, Inc.; Principal Financial Officer,
Investors Mark Series Fund, Inc.
Michael A. Brummel (40), Vice President, Assistant Secretary and Assistant
Treasurer, Jones & Babson, Inc., Scout Stock Fund, Inc., Scout Bond Fund, Inc.,
Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout
Regional Fund, Inc., Scout WorldWide Fund, Inc., Scout Balanced Fund, Inc.,
Scout Capital Preservation Fund, Inc., David L. Babson Growth Fund, Inc., D.L.
Babson Money Market Fund, Inc., D.L. Babson Tax-Free Income Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value Fund, Inc.,
Shadow Stock Fund, Inc., Babson-Stewart Ivory International Fund, Inc., D.L.
Babson Bond Trust, Buffalo Balanced Fund, Inc., Buffalo Equity Fund, Inc.,
Buffalo High Yield Fund, Inc., Buffalo USA Global Fund, Inc., Buffalo Small Cap
Fund, Inc.
Martin A. Cramer (48), Vice President and Secretary, Jones & Babson, Inc., Scout
Stock Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout
Tax-Free Money Market Fund, Inc., Scout Regional Fund, Inc., Scout WorldWide
Fund, Inc., Scout Balanced Fund, Inc., Scout Capital Preservation Fund, Inc.,
David L. Babson Growth Fund, Inc., D.L. Babson Money Market Fund, Inc., D.L.
Babson Tax-Free Income Fund, Inc., Babson Enterprise Fund, Inc., Babson
Enterprise Fund II, Inc., Babson Value Fund, Inc., Shadow Stock Fund, Inc.,
Babson-
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Stewart Ivory International Fund, Inc., D.L. Babson Bond Trust, Buffalo Balanced
Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc., Buffalo
USA Global Fund, Inc., Buffalo Small Cap Fund, Inc.; Secretary and Assistant
Vice President, AFBA Five Star Fund, Inc.; Secretary, Investors Mark Series
Fund, Inc.
John G. Dyer (52), Vice President and Legal Counsel, Scout Stock Fund, Inc.,
Scout Regional Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc.,
Scout Tax-Free Money Market Fund, Inc., Scout WorldWide Fund, Inc., Scout
Balanced Fund, Inc., Scout Capital Preservation Fund, Inc., Buffalo Balanced
Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc., Buffalo
USA Global Fund, Inc., Buffalo Small Cap Fund, Inc.
Constance E. Martin (36), Vice President. Assistant Vice President, Jones &
Babson, Inc.; Vice President, Scout Stock Fund, Inc., Scout Bond Fund, Inc.,
Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout
Regional Fund, Inc., Scout WorldWide Fund, Inc., Scout Balanced Fund, Inc.,
Scout Capital Preservation Fund, Inc., David L. Babson Growth Fund, Inc., D.L.
Babson Money Market Fund, Inc., D.L. Babson Tax-Free Income Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value Fund, Inc.,
Babson-Stewart Ivory International Fund, Inc., D.L. Babson Bond Trust, Buffalo
Balanced Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc.,
Buffalo USA Global Fund, Inc., Buffalo Small Cap Fund, Inc.
Remuneration of Officers and Directors. None of the officers or directors will
be remunerated by the Fund for their normal duties and services. Their
compensation and expenses arising out of normal operations will be paid by UMB
Bank, n.a. under the provisions of the Management Agreement.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total
Pension or Estimated Compensation
Aggregate Retirement Annual From All
Compensation Benefits Accrued Benefits Scout Funds
For Fund As Part of Upon Paid To
Name of Director Service Fund Expenses Retirement Directors**
- ---------------- ------------ --------------- ---------- -----------
<S> <C> <C> <C> <C>
Larry D. Armel* -- -- -- --
William E. Hoffman $250 -- -- $7,125
Eric T. Jager $250 -- -- $7,125
Stephen F. Rose $250 -- -- $7,125
Stuart Wien $250 -- -- $7,125
</TABLE>
* As an "interested director," Mr. Armel receives no compensation for his
services as director.
** The amounts reported in this column reflect the total compensation expected
to be paid to each director for his services as a director of nine Scout
Funds during the fiscal year ending June 30, 1998, and such amounts include
an overall retainer of $3,000 per year for service as a director for the
Scout Fund complex. Directors' fees are paid by the Funds' manager and not
by the Funds themselves.
-21-
<PAGE>
Messrs. Hoffman, Jager, Rose and Wien have no financial interest in, nor are
they affiliated with, either Jones & Babson, Inc. or UMB Bank, n.a. The Audit
Committee of the Board of Directors is composed of Messrs. Hoffman, Jager, Rose
and Wien.
The officers and directors of the Fund as a group own less than 1% of any of the
Funds.
The Fund will not hold annual meetings except as required by the Investment
Company Act of 1940 and other applicable laws. The Fund is a Maryland
corporation. Under Maryland law, a special meeting of stockholders of the Fund
must be held if the Fund receives the written request for a meeting from the
stockholders entitled to cast at least 25% of all the votes entitled to be cast
at the meeting. The Fund has undertaken that its directors will call a meeting
of stockholders if such a meeting is requested in writing by the holders of not
less than 10% of the outstanding shares of the Fund. To the extent required by
the undertaking, the Fund will assist shareholder communications in such
matters.
CUSTODIAN
The Fund's portfolio assets are held for safekeeping by UMB Bank, n.a. This
means UMB Bank, n.a., rather than the Fund, has possession of the Fund's cash
and securities. As directed by the Fund's officers, it delivers cash to those
who have sold securities to the Fund in return for such securities, and to those
who have purchased portfolio securities from the Fund, it delivers such
securities in return for their cash purchase price. It also collects income
directly from issuers of securities owned by the Fund and holds this for payment
to shareholders after deduction of the Fund's expenses. UMB Bank, n.a. also
functions as manager and investment adviser to the Fund (see "Manager and
Underwriter" in the Prospectus).
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Fund's financial statements are audited annually by independent certified
public accountants approved by the directors each year, and in years in which an
annual meeting is held the directors may submit their selection of independent
certified public accountants to the shareholders for ratification. Reports to
shareholders will be published at least semiannually.
Baird, Kurtz & Dobson, City Center Square, Suite 2700, 1100 Main Street, Kansas
City, Missouri 64105, is the present independent certified public accountant for
the Fund.
FIXED INCOME SECURITIES DESCRIBED AND RATINGS
In evaluating investment suitability, each investor must relate the
characteristics of a particular investment under consideration to personal
financial circumstances and goals.
-22-
<PAGE>
Description of Bond Ratings
Standard & Poor's Corporation (S&P).
AAA - Highest Grade. These securities possess the ultimate degree of protection
as to principal and interest. Marketwise, they move with interest rates, and
hence provide the maximum safety on all counts.
AA - High Grade. Generally, these bonds differ from AAA issues only in a small
degree. Here too, prices move with the long-term money market.
A - Upper-medium Grade. They have considerable investment strength, but are not
entirely free from adverse effects of changes in economic and trade conditions.
Interest and principal are regarded as safe. They predominantly reflect money
rates in their market behavior but, to some extent, also economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Moody's Investors Service, Inc. (Moody's).
Aaa - Best Quality. These securities carry the smallest degree of investment
risk and are generally referred to as "gilt-edge." Interest payments are
protected by a large, or by an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - High Quality by All Standards. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there may be
other elements present which make the long-term risks appear somewhat greater.
A - Upper-medium Grade. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
-23-
<PAGE>
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa to B. The modifier 1 indicates that the
issue ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range rating; and the modifier 3 indicates that
the issue ranks in the lower end of its generic category.
Fitch Investors Service
Debt instruments rated 'AAA', 'AA', 'A', 'BBB' are considered to be investment
grade.
AAA Highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA+, Investment grade and of very high credit quality. The obligor's
AA or ability to pay interest and repay principal is very strong, although
AA- not quite as strong as bonds rated 'AAA'.
A+, Investment grade and of high credit quality. The obligor's ability to
A or pay interest and repay principal is considered to be strong, but may
A- be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BB+, Investment grade and of satisfactory credit quality. The obligor's
BBB or ability to pay interest and repay principal is considered to be
BBB- adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and
therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds
with higher ratings.
-24-
<PAGE>
BB+, Bonds are considered speculative. The obligor's ability to pay
BB or interest and repay principal may be affected over time by adverse
BB- economic changes. However business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B+, Bonds are considered highly speculative. While bonds in this class are
B or currently meeting debt service requirements, the probability of
B- continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC+, Bonds have certain identifiable characteristics which if not remedied
CCC or may lead to default. The ability to meet obligations requires an
CCC- advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default of payment of interest or principal.
DDD Bonds are in default of interest and/or principal payments. Such bonds
DD are extremely speculative and should be valued on the basis of their
D ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery on these
bonds. 'D' represents the lowest potential for recovery.
NR Indicated that Fitch does not rate the specific issue.
Description of Taxable Commerical Paper Ratings
Moody's - Moody's commercial paper rating is an opinion of the ability of an
issuer to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's has one rating - prime. Every such
prime rating means Moody's believes that the commercial paper note will be
redeemed as agreed. Within this single rating category are the following
classifications:
Prime - 1 Highest Quality
Prime - 2 Higher Quality
Prime - 3 High Quality
The criteria used by Moody's for rating a commercial paper issuer under this
graded system include, but are not limited to the following factors:
(1) evaluation of the management of the issuer;
(2) economic evaluation of the issuer's industry or industries and an appraisal
of speculative type risks which may be inherent in certain areas;
(3) evaluation of the issuer's products in relation to competition and customer
acceptance;
-25-
<PAGE>
(4) liquidity;
(5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years;
(7) financial strength of a parent company and relationships which exist with
the issuer; and
(8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet
such obligations.
S&P - Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely repayment of debt having an original maturity of no more
than 270 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
"A" Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
"A-1" This designation indicates that the degree of safety regarding timely
payment is very strong.
"A-2" Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming.
"A-3" Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
"B" Issues rated "B" are regarded as having only an adequate capacity for timely
payment. Furthermore, such capacity may be damaged by changing conditions or
short-term adversities.
"C" This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
"D" This rating indicates that the issuer is either in default or is expected to
be in default upon maturity.
Fitch -
F1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for payment.
F1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than 'F1+'
-26-
<PAGE>
F2 Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great
as for issues assigned 'F1+' and 'F1'.
F3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance of timely payment is adequate;
however, near-term adverse changes could cause these securities to be rate
below investment grade.
FS Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance of timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating have characteristics suggesting a
minimal degree of assurance of timely payment and are vulnerable to
near-term adverse changes in financial and economic conditions.
LOC The symbol LOC indicated that the rating is based upon a letter of credit
default issued by a commercial bank.
Ratings of Municipal Securities
The ratings of bonds by Moody's and S & P represent their opinions of quality of
the municipal bonds they undertake to rate. These ratings are general and are
not absolute standards. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields, while municipal bonds of the same
maturity and coupon with different ratings may have the same yield.
Both Moody's and S&P's Municipal Bond Ratings cover obligations of states and
political subdivisions. Ratings are assigned to general obligation and revenue
bonds. General obligation bonds are usually secured by all resources available
to the municipality and the factors outlined in the rating definitions below are
weighted in determining the rating. Because revenue bonds in general are payable
from specifically pledged revenues, the essential element in the security for a
revenue bond is the quantity and quality of the pledged revenues available to
pay debt service.
Although an appraisal of most of the same factors that bear on the quality of
general obligation bond credit is usually appropriate in the rating analysis of
a revenue bond, other factors are important, including particularly the
competitive position of the municipal enterprise under review and the basic
security covenants. Although a rating reflects S&P's judgment as to the issuer's
capacity for the timely payment of debt service, in certain instances it may
also reflect a mechanism or procedure for an assured and prompt cure of a
default, should one occur, i.e., an insurance program, federal or state guaranty
or the automatic withholding and use of state aid to pay the defaulted debt
service.
S&P Ratings
AAA Prime - These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
-27-
<PAGE>
General Obligation Bonds - In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements.
Quality of management appears superior.
Revenue Bonds - Debt service coverage has been, and is expected to remain,
substantial. Stability of the pledged revenues is also exceptionally strong, due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant, earnings test for
issuance of additional bonds, debt service, reserve requirements) are rigorous.
There is evidence of superior management.
AA - High Grade - The investment characteristics of general obligation and
revenue bonds in this group are only slightly less marked than those of the
prime quality issues. Bonds rated "AA" have the second strongest capacity for
payment of debt service.
A - Good Grade - Principal and interest payments on bonds in this category are
regarded as safe. This rating describes the third strongest capacity for payment
of debt service. It differs from the two higher ratings because:
General Obligation Bonds - There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and
expenditures or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the
issuer to meet debt obligations at some future date.
Revenue Bonds - Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic
security provisions, while satisfactory, are less stringent. Management
performance appears adequate.
Moody's Ratings of Municipal Bonds.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. These
securities carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large, or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities, fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat greater.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
-28-
<PAGE>
Moody's Ratings of Municipal Notes.
MIG 1: The best quality, enjoying strong protection from established cash flows
of funds for their servicing or from established and broad-based access to the
market for refinancing, or both.
MIG 2: High quality, with margins of protection ample, although not so large as
in the preceding group.
MIG 3: Favorable quality, with all security elements accounted for, but lacking
the undeniable strength of the preceding grades. Market access for refinancing,
in particular, is likely to be less well established.
OTHER SCOUT FUNDS
The Fund is one of nine no-load funds comprising the Scout Fund Group, managed
by UMB Bank, n.a. The other funds are:
Scout Stock Fund, Inc. was organized in 1982, with the objective of long-term
growth of both capital and dividend income. Current yield is secondary to the
long-term growth objective.
Scout Regional Fund, Inc. was organized in 1986, and now has the objective of
long-term growth of both capital and dividend income through investment in
smaller regional companies. Current yield is secondary to the long-term growth
objective.
Scout WorldWide Fund, Inc. was organized in 1993, with the objective of
investment in a diversified portfolio of equity securities (common stocks and
securities convertible into common stocks) of established companies either
located outside the U.S. or whose primary business is carried on outside the
country. The Fund seeks to generate a favorable total return consisting of
interest, dividend and other income, if any, and appreciation in the value of
the Fund's portfolio securities by investing in equity securities which in the
opinion of the manager offer good growth potential and in many cases pay
dividends.
Scout Capital Preservation Fund, Inc. was organized in 1997, with the objective
of long-term capital growth.
Scout Bond Fund, Inc. was organized in 1982, with the objective of providing
shareholders with maximum current income consistent with its quality and
maturity standards by investing in a diversified portfolio of fixed-income
obligations.
Scout Balanced Fund, Inc. was organized in 1995, with the objective of both
long-term capital growth and high-current income.
Scout Money Market Fund, Inc. was organized in 1982, and consists of the Federal
Portfolio and the Prime Portfolio, each of which invests in high-quality,
short-term debt instruments for the purpose of maximizing income consistent with
safety of principal and liquidity.
-29-
<PAGE>
Scout Tax-Free Money Market Fund, Inc. was organized in 1982, with the objective
of providing investors with the highest level of investment income exempt from
federal income tax consistent with its quality and maturity standards.
<PAGE>
ACCOUNTANTS' REPORT AND
FINANCIAL STATEMENTS
January 13, 1998
Baird, Kurtz & Dobson
City Center Square
1100 Main Street
Suite 2700
Kansas City, MO 64105-2112
To the Shareholders and
Board of Directors
Scout Kansas Tax-Exempt Bond Fund, Inc.
(in Organization)
Kansas City, Missouri
Independent Accountants' Report
We have audited the accompanying statement of assets and liabilities
of SCOUT KANSAS TAX-EXEMPT BOND FUND, INC. (in Organization), including the
statement of net assets of January 13, 1998. These financial statements
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We have conducted our audit 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 are free of material misstatment. An audit includes examining,
on a test basis, evidence supporting amounts and disclosures in the
financial statements. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SCOUT KANSAS
TAX-EXEMPT BOND FUND, INC. (in Organization) as of January 13, 1998, in
conformity with generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
January 13, 1998
<PAGE>
SCOUT KANSAS TAX-EXEMPT BOND FUND, INC.
(in organization)
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 13, 1998
ASSETS
Cash $100,000
-----------
NET ASSETS CONSIST OF:
Capital (capital stock and paid-in capital) 100,000
-----------
NET ASSETS APPLICABLE TO OUTSTANDING SHARES $100,000
===========
Capital shares, $1.00 par value
Authorized 10,000,000
===========
Outstanding 10,000
===========
NET ASSET VALUE PER SHARE $10.00
===========
SCOUT KANAS TAX-EXEMPT BOND FUND, INC.
(in organization)
STATEMENT OF NET ASSETS
JANUARY 13, 1998
CASH $100,000
===========
TOTAL NET ASSETS (Equivalent to $10.00 per share;
10,000,000 shares of $1.00 par value common
stock authorized; 10,000 shares outstanding) $100,000
===========
See Note to Financial Statements
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<PAGE>
SCOUT KANSAS TAX-EXEMPT BOND FUND, INC.
(in organization)
NOTE TO FINANCIAL STATEMENTS
JANUARY 13, 1998
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund, a new series of the Scout fund group, is in organization with
registration pending under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. On January 13, 1998, the
Fund deposited initial seed capital of $100,000 for 10,000 shares of $1.00 par
value shares sold to a related party in order to initiate registration with the
Securities and Exchange Commission. A summary of the significant accounting
policies that the Fund uses in the preparation of its financial statements
follows. The policy is in conformity with generally accepted accounting
principles.
Fund Management
Management fees, which will include all normal expenses of the Fund,
other than taxes, fees, and other charges of governmental agencies for
qualifying the Fund's shares for sale, special legal fees, interest and
brokerage commissions, will be paid to UMB Bank, n.a., a related party. The fees
are based on average daily net assets of the Fund at the annual rate of .50 of
one percent of net assets. Certain officers and/or directors of the Fund are
also officers and/or directors of UMB Bank, n.a.
Federal Income Taxes
The Fund complies with the Internal Revenue Code requirements
applicable to regulated investment companies and will distribute all income to
its shareholders. Therefore, no federal income tax provision is required.
-31-
<PAGE>
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements: (Included in Part B of the Registration
Statement.)
(b) (1) Registrant's Articles of Incorporation*
(2) Form of Registrant's By-laws*
(3) Not applicable, because there is no voting trust agreement
(4) Specimen copy of each security to be issued by the
registrant*
(5) Form of Management Agreement between UMB Bank, n.a. and the
Registrant*
(6) Form of principal Underwriting Agreement between Jones &
Babson, Inc. and the Registrant*
(7) Not applicable, because there are no pension, bonus or other
agreements for the benefit of directors and officers
(8) Form of Custodian Agreement between Registrant and United
Missouri Bank of Kansas City, N.A.*
(9) Form of Transfer Agency Agreement between the Registrant and
Jones & Babson, Inc.*
(10) Opinion and consent of counsel as to the legality of the
registrant's securities being registered.*
(11) Consent of Independent Certified Public Accountants.
(12) Not applicable.
(13) Form of letter from contributors of initial capital to the
Registrant that purchase was made for investment purposes
without any present intention of redeeming or selling. (to
be supplied by amendment)
(14) Not applicable.
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<PAGE>
(15) Not applicable.
(16) Schedule for computation of performance quotations. Not
applicable.
(17) Not applicable.
(18) Not applicable.
(19) Powers-of-Attorney for William E. Hoffman, Eric T.
Jager, Stephen F. Rose, Stuart Wien and P. Bradley
Adams*
* Incorporated by reference
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL OF THE
REGISTRANT.
None.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
The number of record holders of each class of securities of
the Registrant as of February 2, 1998, is as follows:
(1) (2)
Title of Class Number of Record Holders
Common Stock One
$1.00 par value
Item 27. INDEMNIFICATION.
Under the terms of the Maryland General Corporation Law and
the company's by-laws, the company shall indemnify any person
who was or is a director, officer, or employee of the company
to the maximum extent permitted by the Maryland General
Corporation Law; provided however, that any such
indemnification (unless ordered by a court) shall be made by
the company only as authorized in the specific case upon a
determination that indemnification of such persons is proper
in the circumstances. Such determination shall be made
(i) by the Board of Directors by a majority vote of a
quorum which consists of the directors who are neither
"interested persons" of the company as defined in Section
2(a)(19) of the 1940 Act, nor parties to the proceedings, or
(ii)if the required quorum is not obtainable or if a
quorum of such directors so directs, by independent legal
counsel in a written opinion. No indemnification will be
provided by the company to any director or officer of the
-2-
<PAGE>
company for any liability to the company or shareholders to
which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless
disregard of duty.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
UMB Bank, n.a. is a commercial bank.
Item 29. PRINCIPAL UNDERWRITERS.
(a) Jones & Babson, Inc., the only principal underwriter of
the Registrant, also acts principal underwriter for the David
L. Babson Growth Fund, Inc., D.L. Babson Money Market Fund,
Inc., D.L. Babson Tax-Free Income Fund, Babson Bond Trust,
Babson Value Fund, Inc., Shadow Stock Fund, Inc.,
Babson-Stewart Ivory International Fund, Inc., Scout Stock
Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund,
Inc. Scout Tax-Free Money Market Fund, Inc., Scout Regional
Fund, Inc., Scout WorldWide Fund, Inc., Scout Balanced Fund,
Inc., Scout Capital Preservation Fund, Inc., Buffalo Balanced
Fund, Inc., Buffalo Equity Fund, Inc., Buffalo USA Global
Fund, Inc., Buffalo High Yield Fund, Inc., Buffalo Small Cap
Fund, Inc. and AFBA Five Star Fund, Inc.
(b) Herewith is the information required by the following
table with respect to each director, officer or partner of the
only underwriter named in answer to Item 21 of Part B:
-3-
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Position and Offices Positions and Offices
Business Address with Underwriter with Registrant
<S> <C> <C>
Stephen S. Soden Chairman and Director Director
BMA Tower
700 Karnes Boulevard
Kansas City,
MO 64108-3306
Larry D. Armel President and Director President and Director
BMA Tower
700 Karnes Boulevard
Kansas City,
MO 64108-3306
Giorgio Balzer Director None
BMA Tower
700 Karnes Boulevard
Kansas City,
MO 64108-3306
Robert T. Rakich Director None
BMA Tower
700 Karnes Boulevard
Kansas City,
MO 64108-3306
Edward S. Ritter Director None
BMA Tower
700 Karnes Boulevard
Kansas City,
MO 64108-3306
Robert N. Sawyer Director None
BMA Tower
700 Karnes Boulevard
Kansas City,
MO 64108-3306
Vernon W. Voorhees Director None
BMA Tower
700 Karnes Boulevard
Kansas City,
MO 64108-3306
-4-
<PAGE>
P. Bradley Adams Vice President Vice President and Chief
BMA Tower and Treasurer Financial Officer
700 Karnes Boulevard
Kansas City,
MO 64108-3306
Michael A. Brummel Vice President Vice President
BMA Tower
700 Karnes Boulevard
Kansas City,
MO 64108-3306
Martin A. Cramer Vice President and Secretary Secretary
BMA Tower
700 Karnes Boulevard
Kansas City,
MO 64108-3306
</TABLE>
(c) The principal underwriter does not receive any
remuneration or compensation for the duties or services
rendered to the Registrant pursuant to the principal
underwriting Agreement.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
Each account, book or other document required to be maintained
by Section 31(a) of the 1940 Act and the Rules (17 CFR
270.31a-1 to 31a-3) promulgated thereunder is in the physical
possession of Jones Babson, Inc., at BMA Tower, 700 Karnes
Boulevard, Kansas City, Missouri 64108-3306.
Item 31. MANAGEMENT SERVICES.
All management services are covered in the management
agreement between the Registrant and UMB Bank, n.a. which are
discussed in Parts A and B.
Item 32. UNDERTAKINGS.
Registrant undertakes to file a post-effective amendment using
uncertified financial statements within four to six months
from the commencement of investment operations following the
effective date of Registrant's 1933 Act Registration
Statement.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this amendment to its
registration statement to be signed on its behalf by the undersigned, thereunto
authorized, in the City of Kansas City, and State of Missouri on the 19th day of
February, 1998.
SCOUT KANSAS TAX-EXEMPT BOND FUND, INC.
(Registrant)
By Larry D. Armel
Larry D. Armel, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Larry D. Armel President, February 19, 1998
Larry D. Armel Principal Executive
Officer and Director
William E. Hoffman Director February 19, 1998
William E. Hoffman*
Eric T. Jager Director February 19, 1998
Eric T. Jager*
Stephen F. Rose Director February 19, 1998
Stephen F. Rose*
Stuart Wien Director February 19, 1998
Stuart Wien*
P. Bradley Adams Vice President and February 19, 1998
P. Bradley Adams Principal Financial
and Accounting Officer
</TABLE>
* By Larry D. Armel, pursuant to Powers of Attorney.
-6-
EXHIBIT INDEX
<PAGE>
Item 24 (b).
Exhibit Page No.
(11) Consent of Independent Accountants
-7-
EXHIBIT 11
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Baird, Kurtz & Dobson
City Center Square
1100 Main Street
Suite 2700
Kansas City, MO 64105-2112
To the Shareholders and
Board of Directors
Scout Kansas Tax-Exempt Bond Fund, Inc.
(in Organization)
Kansas City, Missouri
We hereby consent to the use in this Registration Statement under the
Securities Act of 1933 and the Investment Company Act of 1940, both on form
N-1A, of our report dated January 13, 1998, accompanying and pertaining to the
financial statements of Scout Kansas Tax-Exempt Bond Fund, Inc. (in
Organization), a series of the Scout fund group, as of January 13, 1998, which
is included in such Registration Statement.
BAIRD, KURTZ & DOBSON
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
February 3, 1998
