THE
SCOUT
FUNDS
Scout Kansas
Tax-Exempt Bond Fund
Prospectus
February 23, 1998
PROSPECTUS
February 23, 1998
SCOUT KANSAS TAX-EXEMPT BOND FUND, INC.
Managed By:
UMB Bank, n.a.
Kansas City, Missouri
Toll-Free:
1-800-996-2862
Distributed By:
Jones & Babson, Inc.
BMA Tower, 700 Karnes Blvd.
Kansas City, Missouri 64108-3306
INVESTMENT OBJECTIVE
Scout 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 $ 1,000
(unless Automatic Monthly)
Initial Uniform Transfers
(Gifts) to Minors Purchase $ 250
(unless Automatic Monthly)
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 COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL
OFFENSE.
TABLE OF CONTENTS
Page
Fund Expenses 3
Investment Objective and Portfolio Management Policy 4
Municipal Bonds and Debt Instruments 4
Repurchase Agreements 7
Risk Factors Applicable to Repurchase Agreements 7
When-Issued Securities 7
Inverse Floaters 7
Futures Transactions 8
Investment Restrictions 8
Performance Measures 8
How to Purchase Shares 9
Initial Investments 10
Investments Subsequent to Initial Investment 10
Telephone Investment Service 10
Automatic Monthly Investment Plan 11
How to Redeem Shares 11
Systematic Redemption Plan 13
How to Exchange Shares Between Scout Funds 14
How Share Price is Determined 14
Officers and Directors 15
Manager and Underwriter 15
General Information and History 16
Dividends, Distributions and Their Taxation 17
Shareholder Services 18
Shareholder Inquiries 18
FUND EXPENSES
Scout Kansas Tax-Exempt Bond Fund
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 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 or its political
subdivisions.
The Fund will concentrate its investments in municipal obligations issued by
Kansas and its 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 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 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 considered 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 Standard & Poor's, respectively, or issued by the U.S. Government,
and that have a maturity of one year or less or have a variable interest rate.
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. 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.
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. 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 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 restrictions is set forth in the "Statement of Additional
Information."
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.
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.
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. Mail your 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.
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.
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."
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 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 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
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 by name and number, the number
of shares or dollar amount to be redeemed for exchange and the Scout Fund 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.
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 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.
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.
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.
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.
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 64108-3306
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
JB153 2/98
<PAGE>
PART B
SCOUT KANSAS TAX-EXEMPT BOND FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
February 23, 1998
This Statement is not a Prospectus but should be read in conjunction
with the Fund's current Prospectus dated February 23, 1998. To obtain
the Prospectus please call the Fund toll-free at 1-800-996-2862.
TABLE OF CONTENTS
Page
Investment Objective and Policies 2
Municipal Bonds and Debt Instruments 2
Portfolio Transactions 8
Investment Restrictions 9
Performance Measures 10
How the Fund's Shares are Distributed 10
How Share Purchases are Handled 11
Redemption of Shares 11
Signature Guarantees 12
Dividends, Distributions and Taxes 12
Manager and Underwriter 15
How Share Price is Determined 15
Officers and Directors 15
Custodian 18
Independent Certified Public Accountants 18
Fixed Income Securities Described and Ratings 18
Other Scout Funds 23
Financial Statements 24
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 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 collateral-
ized 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 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 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; 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 restric-tions
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.
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 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 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 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 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 securi-ties, 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.
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
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 instrumentali-ties; 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 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).
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 sent to those
shareholders who request them only after the Fund has determined 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
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.
DIVIDENDS, DISTRIBUTIONS
AND TAXES
The Fund's policy is to distribute substan-tially 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.
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 gains 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 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. Govern-ment 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 90% 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 1997 Act 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 Corpo-rations. 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 Inter-est. 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, 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.
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 Third Monday
King, Jr. Day 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 (56), 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.,
_______________________________________
* Directors who are interested persons as that term is defined in
the Investment Company Act of 1940, as amended.
Buffalo USA Global 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.; 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.
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.; 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.
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-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.; 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.
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, Shadow Stock Fund,
Inc., Buffalo Balanced Fund, Inc., Buffalo Equity Fund, Inc., Buffalo
High Yield Fund, Inc., Buffalo USA Global 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.
COMPENSATION TABLE
Pension or Estimated Total
Aggregate Retirement Annual Compensation
Compensation Benefits Accrued Benefits From All Scout
Name of For Fund As Part of Fund Upon Funds Paid to
Director Service Expenses Retirement Directors**
______________ ____________ ________________ ___________ _____________
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
______________ ____________ ________________ ___________ ______________
* 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. Directors'
fees are paid by the Funds' manager and not by the Funds themselves.
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.
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.
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 invest-ment. 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 de-fault 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
AA or credit quality. The obligor's ability to
AA- pay interest and repay principal is very strong, although not
quite as strong as bonds rated "AAA".
A+, Investment grade and of high credit
A or quality. The obligor's ability to pay
A- interest and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB+, Investment grade and of satisfactory
BBB or credit quality. The obligor's ability to
BBB- pay interest and repay principal is considered to be 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.
BB+, Bonds are considered speculative. The
BB or obligor's ability to pay interest and
BB- repay principal may be affected over time by adverse 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 specula-
B or tive. While bonds in this class are cur-
B- rently meeting debt service require-ments, the probability of
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 charac-
CCC or teristics which if not remedied may
CCC- lead to default. The ability to meet obligations requires an
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
DD principal payments. Such bonds are
D extremely speculative and should be valued on the basis of their
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;
(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+".
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.
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.
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.
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.
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.
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.
A prospectus for any of the Funds may be obtained from the Scout Fund
Group, P.O. Box 410498, Kansas City, MO 64141-0498.
<PAGE>
FINANCIAL STATEMENTS
Baird,
Kurtz &
Dobson
Certified Public Accountants
City Center Square
1100 Main Street, Suite 2700
Kansas City, MO 64105-2112
816 221-6300 Fax: 816 221-6380
http://www.bkd.com
Member of
Moores Rowland International
Independent Accountants' Report
To the Shareholders and
Board of Directors
Scout Kansas Tax-Exempt Bond Fund, Inc.
(in Organization)
Kansas City, Missouri
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 as 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 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 misstatement. 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.
/s/BAIRD, KURTZ & DOBSON
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
January 13, 1998
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) 10,000
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
See Note to Financial Statements
SCOUT KANSAS 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
-3-
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.
