<PAGE>
Please read this Prospectus before investing, and keep it on file for future
reference. It sets forth concisely the information about the Fund that you
ought to know before investing.
Additional information has been filed with the Securities and Exchange
Commission and is contained in a Statement of Additional Information ("SAI")
dated December 31, 1996. The SAI is available free upon request to the Fund or
Waddell & Reed, Inc., the Fund's underwriter, at the address or telephone number
below. The SAI is incorporated by reference into this Prospectus and you will
not be aware of all facts unless you read both this Prospectus and the SAI.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
United Municipal Bond Fund, Inc.
Class A Shares
This Fund seeks to provide income that is not subject to Federal income tax.
This Prospectus describes one class of shares of the Fund -- Class A Shares.
Prospectus
December 31, 1996
UNITED MUNICIPAL BOND FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
<PAGE>
Table of Contents
AN OVERVIEW OF THE FUND.........................................3
EXPENSES........................................................5
FINANCIAL HIGHLIGHTS............................................6
PERFORMANCE.....................................................8
Explanation of Terms ..........................................8
ABOUT WADDELL & REED...........................................10
ABOUT THE INVESTMENT PRINCIPLES OF THE FUND....................11
Investment Goals and Principles ..............................11
Risk Considerations ........................................11
Securities and Investment Practices ..........................12
ABOUT YOUR ACCOUNT.............................................23
Ways to Set Up Your Account ..................................23
Buying Shares ................................................23
Minimum Investments ..........................................25
Adding to Your Account .......................................25
Selling Shares ...............................................26
Shareholder Services .........................................28
Personal Service ...........................................28
Reports ....................................................28
Exchanges ..................................................28
Automatic Transactions .....................................28
Distributions and Taxes ......................................29
Distributions ..............................................29
Taxes ......................................................29
ABOUT THE MANAGEMENT AND EXPENSES OF THE FUND..................32
WRIMCO and Its Affiliates ....................................33
Breakdown of Expenses ........................................34
Management Fee .............................................34
Other Expenses .............................................35
<PAGE>
An Overview of the Fund
The Fund: This Prospectus describes the Class A shares of United Municipal Bond
Fund, Inc., an open-end, diversified management investment company.
Goals and Strategies: United Municipal Bond Fund, Inc. (the "Fund") seeks to
provide income not subject to Federal income tax through a diversified portfolio
of primarily tax-exempt municipal bonds. See "About the Investment Principles
of the Fund" for further information.
Management: Waddell & Reed Investment Management Company ("WRIMCO") provides
investment advice to the Fund and manages the Fund's investments. WRIMCO is a
wholly-owned subsidiary of Waddell & Reed, Inc. WRIMCO, Waddell & Reed, Inc.
and its predecessors have provided investment management services to registered
investment companies since 1940. See "About the Management and Expenses of the
Fund" for further information about management fees.
Distributor: Waddell & Reed, Inc. acts as principal underwriter and distributor
of the shares of the Fund.
Purchases: You may buy Class A shares of the Fund through Waddell & Reed, Inc.
and its account representatives. The price to buy a Class A share of the Fund
is the net asset value of a Class A share plus a sales charge. See "About Your
Account" for information on how to purchase Class A shares.
Redemptions: You may redeem your shares at net asset value. When you sell your
shares, they may be worth more or less than what you paid for them. See "About
Your Account" for a description of redemption and reinvestment procedures.
Who May Want to Invest: The Fund is designed for investors seeking current
income that is primarily free from Federal income tax. You should consider
whether the Fund fits with your particular investment objectives.
Risk Considerations: The Fund invests primarily in municipal bonds which may
vary widely as to their interest rates, degree of security and maturity. The
value of the Fund's investments and the income generated will vary from day to
day, generally reflecting changes in interest rates, market conditions and other
company and economic news. Performance will also depend on WRIMCO's skill in
selecting investments. See "About the Investment Principles of the Fund" for
information about the risks associated with the Fund's investments.
<PAGE>
Expenses
Shareholder transaction expenses are charges you pay when you buy or sell shares
of a fund.
Maximum sales load
on purchases 4.25%
(as a percentage of offering price)
Maximum sales load
on reinvested
dividends None
Deferred
sales load None
Redemption fees None
Exchange fee None
Annual Fund operating expenses (as a percentage of average net assets).
Management fees 0.44%
12b-1 fees 0.13%
Other expenses1 0.12%
Total Fund operating
expenses 0.69%
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return2 and (2) redemption at the end of each time period:
1 year $ 49
3 years $ 64
5 years $ 79
10 years $125
The purpose of this table is to assist you in understanding the various costs
and expenses that a shareholder of the Class A shares of the Fund will bear
directly or indirectly. The example should not be considered a representation
of past or future expenses; actual expenses may be greater or lesser than those
shown. For a more complete discussion of certain expenses and fees, see
"Breakdown of Expenses."
1Expense information has been restated to reflect the current shareholder
servicing fee which became effective April 1, 1996.
2Use of an assumed annual return of 5% is for illustration purposes only and is
not a representation of the Fund's future performance, which may be greater or
lesser.
<PAGE>
Financial Highlights
(Audited)
The following information has been audited by Price Waterhouse LLP, independent
accountants, and should be read in conjunction with the financial statements and
notes thereto, together with the report of Price Waterhouse LLP, included in the
SAI.
For a Class A share outstanding throughout each period.*
<TABLE>
For the fiscal year ended September 30,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..... $7.25 $6.91 $7.83 $7.40 $7.18 $6.66 $7.07 $6.91 $6.29 $7.67
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income from investment operations:
Net investment
income ................ 0.39 0.39 0.38 0.41 0.43 0.45 0.47 0.49 0.48 0.49
Net realized and
unrealized gain
(loss) on
investments ........... 0.12 0.38 (0.67) 0.65 0.35 0.52 (0.16) 0.22 0.62 (0.70)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations .............. 0.51 0.77 (0.29) 1.06 0.78 0.97 0.31 0.71 1.10 (0.21)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less distributions:
Dividends from net
investment
income ................ (0.39) (0.39) (0.38) (0.40) (0.43) (0.45) (0.49) (0.48) (0.48) (0.48)
Distributions from
capital gains ......... (0.05) (0.00) (0.25) (0.23) (0.13) (0.00) (0.23) (0.07) (0.00) (0.69)
Distribution in excess
of capital gains ...... (0.00) (0.04) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions ....... (0.44) (0.43) (0.63) (0.63) (0.56) (0.45) (0.72) (0.55) (0.48) (1.17)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period ........... $7.32 $7.25 $6.91 $7.83 $7.40 $7.18 $6.66 $7.07 $6.91 $6.29
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return** ............ 7.16% 11.51% -3.91% 15.15% 11.41% 14.97% 4.46% 10.74% 18.07% -3.50%
Net assets, end of
period (000
omitted) ................$996,939 $975,109 $950,952$1,055,434 $890,004 $769,122 $648,546 $594,733 $477,479 $413,163
Ratio of expenses to
average net assets ...... 0.68% 0.65% 0.64% 0.56% 0.57% 0.57% 0.57% 0.57% 0.58% 0.58%
Ratio of net investment
income to average
net assets .............. 5.23% 5.51% 5.17% 5.38% 5.92% 6.47% 6.82% 6.98% 7.32% 6.98%
Portfolio turnover rate ... 74.97% 70.67% 62.61% 94.51% 125.44% 144.36% 181.25% 226.41% 225.49% 216.82%
*On January 21, 1996, the Fund began offering Class Y shares to the public. Fund shares outstanding prior to that date were
designated Class A shares.
**Total return calculated without taking into account the sales load deducted on an initial purchase.
Note: During the fiscal periods ended September 30, 1996, 1995, 1994, 1993, 1992, 1991, 1990, 1989, 1988 and 1987, 84.75%,
88.99%, 58.94%, 62.53%, 76.13%, 97.45%, 66.46%, 84.53%, 98.05% and 40.77%, respectively, of the dividends paid were
exempt from Federal income tax.
</TABLE>
<PAGE>
Performance
Mutual fund performance is commonly measured as total return. The Fund may
also advertise its performance by showing yield and performance rankings.
Performance information is calculated and presented separately for each class of
Fund shares.
Explanation of Terms
Total Return is the overall change in value of an investment in the Fund
over a given period, assuming reinvestment of any dividends and other
distributions. A cumulative total return reflects actual performance over a
stated period of time. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative total
return if performance had been constant over the entire period. Average annual
total returns smooth out variations in performance; they are not the same as
actual year-by-year results. Non-standardized total return may not reflect
deduction of the applicable sales charge or may be for periods other than those
required to be presented or may otherwise differ from standardized total return.
Total return quotations that do not reflect the applicable sales charge will
reflect a higher rate of return.
Yield refers to the income generated by an investment in the Fund over a
given period of time, expressed as an annual percentage rate. The Fund's yield
is based on a 30-day period ending on a specific date and is computed by
dividing the Fund's net investment income per share earned during the period by
the Fund's maximum offering price per share on the last day of the period. Tax
equivalent yield is calculated by applying the stated income tax rate to only
the net investment income exempt from taxation according to a standard formula.
Performance Rankings are comparisons of the Fund's performance to the
performance of other selected mutual funds, selected recognized market
indicators such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average, or non-market indices or averages of mutual fund industry
groups. The Fund may quote its performance rankings and/or other information as
published by recognized independent mutual fund statistical services or by
publications of general interest. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
relates, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of sales charges, fee waivers and/or expense
reimbursements.
All performance information that the Fund advertises or includes in
information provided to present or prospective shareholders is historical in
nature and is not intended to represent or guarantee future results. The value
of the Fund's shares when redeemed may be more or less than their original cost.
The Fund's recent performance and holdings will be detailed twice a year in
the Fund's annual and semiannual reports, which are sent to all Fund
shareholders.
<PAGE>
About Waddell & Reed
Since 1937, Waddell & Reed has been helping people make the most of their
financial future by helping them take advantage of various financial services.
Today, Waddell & Reed has over 2500 account representatives located throughout
the United States. Your primary contact in your dealings with Waddell & Reed
will be your local account representative. However, the Waddell & Reed
shareholder services department, which is part of the Waddell & Reed
headquarters operations in Overland Park, Kansas, is available to assist you and
your Waddell & Reed account representative. You may speak with a customer
service representative by calling 913-236-2000.
<PAGE>
About the Investment Principles of the Fund
Investment Goals and Principles
The goal of the Fund is to provide income that is not subject to Federal
income tax. The Fund seeks to achieve this goal by investing principally in
municipal bonds. There is no assurance that the Fund will achieve its goal.
As used in this Prospectus, "municipal bonds" mean obligations the interest
on which is not includable in gross income for Federal income tax purposes. See
"Distributions and Taxes" concerning the alternative minimum tax ("AMT"). The
Fund anticipates that not more than 40% of the dividends it will pay to
shareholders will be treated as a preference item for AMT purposes. The Fund
and WRIMCO rely on the opinion of bond counsel for the issuer in determining
whether obligations are municipal bonds.
Sometimes WRIMCO may believe that a full or partial defensive position is
desirable temporarily due to present or anticipated market or economic
conditions that are affecting or could affect the values of municipal bonds. To
achieve a temporary defensive posture, WRIMCO may take any one or more of the
following steps: (i) shorten the average maturity of the Fund's portfolio; (ii)
hold cash or debt securities other than municipal bonds ("taxable obligations")
subject to the 10% limitation described below; and (iii) emphasize debt
securities of a higher quality than those the Fund would ordinarily hold (see
discussion of quality ratings below and in Appendix A to the SAI). A defensive
posture might reduce the Fund's yield. As an alternative to taking a temporary
defensive position or in order to more quickly participate in market or economic
conditions, the Fund may buy or sell futures contracts, as discussed below.
Risk Considerations
There are risks inherent in any investment. The Fund is subject to varying
degrees of market risk, financial risk and, in some cases, prepayment risk.
Market risk is the potential for fluctuations in the price of the security
because of market factors. Because of market risk, you should anticipate that
the share price of the Fund will fluctuate. Financial risk is based on the
financial situation of the issuer. The financial risk of the Fund depends on
the credit quality of the underlying securities. Prepayment risk is the
possibility that, during periods of falling interest rates, a debt security with
a high stated interest rate will be prepaid prior to its expected maturity date.
Because the Fund owns different types of investments, its performance will
be affected by a variety of factors. The value of the Fund's investments and
the income it generates will vary from day to day, generally reflecting changes
in interest rates, market conditions, and other company and economic news.
The Fund may also invest in certain derivative instruments, including
options, futures contracts, options on futures contracts, indexed securities,
mortgage-backed securities and stripped securities. The use of derivative
instruments involves special risks. See "Risks of Derivative Instruments" for
further information on the risks of investing in these instruments.
Income from taxable obligations, options and futures contracts will be
subject to Federal income tax.
Securities and Investment Practices
The following pages contain more detailed information about types of
instruments in which the Fund may invest and strategies WRIMCO may employ in
pursuit of the Fund's investment goal. A summary of risks associated with these
instrument types and investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques to the full extent permitted by the Fund's investment policies and
restrictions unless it believes that doing so will help the Fund achieve its
goal.
Certain of the investment policies and restrictions of the Fund are also
stated below. A fundamental policy of the Fund may not be changed without the
approval of the shareholders of the Fund. Operating policies may be changed by
the Board of Directors without the approval of the affected shareholders. The
goal of the Fund and the types of securities and other assets in which it may
invest are fundamental policies. Unless otherwise indicated, other policies are
operating policies.
Policies and limitations are typically considered at the time of purchase;
the sale of instruments is usually not required in the event of a subsequent
change in circumstances.
Please see the SAI for further information concerning the following
instruments and associated risks and the Fund's investment policies and
restrictions.
Municipal bonds are issued by a wide range of state and local governments,
agencies and authorities for various purposes. The two main kinds of municipal
bonds are "general obligation" bonds and "revenue" bonds. In "general
obligation" bonds, the issuer has pledged its full faith, credit and taxing
power for the payment of principal and interest. "Revenue" bonds are payable
only from specific sources; these may include revenues from a particular
facility or class of facilities or special tax or other revenue source.
Industrial development bonds are revenue bonds issued by or on behalf of
public authorities to obtain funds to finance privately operated facilities.
Their credit quality is generally dependent on the credit standing of the
company involved. To the extent that the Fund invests in municipal bonds the
payment of principal and interest on which is derived from revenue of similar
projects, or in municipal bonds of issuers located in the same geographic area,
the Fund may be more susceptible to the risks associated with economic,
political or regulatory occurrences that might adversely affect particular
projects or areas. Similarly, to the extent the Fund invests up to 25% of its
assets in industrial revenue bonds issued for any one industry, the Fund may be
susceptible to the risks associated with a particular industry. See the SAI for
examples of the types of projects in which the Fund may invest from time to time
and for a discussion of the risks associated with such projects.
Problems in the utility industry generally affect the values of and the
dividends paid on utility stocks rather than the ability to pay bond
obligations. These problems include the effects of (i) inflation on financing
large construction programs, (ii) environmental considerations on costs, delays
and operations, (iii) limitations of available capital on the ability to issue
additional debt, (iv) shortages and high prices of fuel on operations and
profits, and (v) energy conservation on sales.
Other municipal obligations include municipal lease obligations of
municipal authorities or entities and participations in these obligations
(collectively, "lease obligations"). WRIMCO determines liquidity of lease
obligations in accordance with guidelines established by the Fund's Board of
Directors. Unrated municipal lease obligations are considered to be illiquid.
In determining the credit quality of unrated municipal lease obligations, one of
the factors, among others, to be considered is the likelihood that the lease
will not be canceled. Certain "non-appropriation" lease obligations may present
special risks because the municipality's obligation to make future lease or
installment payments depends on money being appropriated each year for this
purpose.
Municipal bonds vary widely as to their interest rates, degree of security
and maturity. Bonds are selected on the basis of quality, yield and
diversification. Factors that affect the yield on municipal bonds include
general money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation and the nature of the issue.
Lower-rated bonds usually, but not always, have higher yields than similar but
higher-rated bonds.
Medium- or lower-rated municipal securities are frequently traded only in
markets where the number of potential purchasers and sellers, if any, is very
limited. This factor may have the effect of limiting the availability of the
securities for purchase by the Fund and may also limit the ability of the Fund
to sell such securities at their fair value either to meet redemption requests
or in response to changes in the economy or the financial markets.
Lower-quality debt securities (commonly called "junk bonds") are considered
to be speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. The market prices of these securities
may fluctuate more than high-quality securities and may decline significantly in
periods of general economic difficulty. While the market for high-yield, high-
risk corporate debt securities has been in existence for many years and has
weathered previous economic downturns, the 1980s brought a dramatic increase in
the use of such securities to fund highly-leveraged corporate acquisitions and
restructurings. Past experience may not provide an accurate indication of the
future performance of the high-yield, high-risk bond market, especially during
periods of economic recession. The market for lower-rated debt securities may
be thinner and less active than that for higher-rated debt securities, which can
adversely affect the prices at which the former are sold. Adverse publicity and
changing investor perceptions may decrease the values and liquidity of lower-
rated debt securities, especially in a thinly-traded market. Valuation becomes
more difficult and judgment plays a greater role in valuing lower-rated debt
securities than with respect to securities for which more external sources of
quotations and last sale information are available. Since the risk of default
is higher for lower-rated debt securities, WRIMCO's research and credit analysis
are an especially important part of managing securities of this type held by the
Fund. WRIMCO continuously monitors the issuers of lower-rated debt securities
in the Fund's portfolio in an attempt to determine if the issuers will have
sufficient cash flow and profits to meet required principal and interest
payments. The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder to
seek to protect the interests of security holders if it determines this to be in
the best interest of the Fund's shareholders.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from
time to time, and the Fund may retain a portfolio security whose rating has been
changed.
Policies and Restrictions: As a fundamental policy, at least 80% of the
Fund's net assets will be invested during normal market conditions in municipal
bonds.
As a fundamental policy, when WRIMCO believes market conditions dictate,
the Fund may have more than 25% of its assets invested in industrial development
bonds the interest on which is paid by revenues from generating plants.
As a fundamental policy, the Fund may not purchase any municipal bonds that
are not either (i) rated at least BBB by Standard & Poor's Ratings Services
("S&P") or Baa by Moody's Investors Service, Inc. ("MIS"), or (ii) are unrated
municipal bonds that, in the opinion of WRIMCO, would have the quality ratings
described above if they were rated, unless thereafter at least 80% of the value
of the Fund's total assets would consist of cash or municipal bonds that were of
such quality at the time of purchase. See Appendix A to the SAI for a
description of bond ratings.
Debt Securities. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest, and must repay the amount borrowed at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values.
Debt securities have varying levels of sensitivity to changes in interest
rates and varying degrees of quality. As a general matter, however, when
interest rates rise, the values of fixed-rate debt securities fall and,
conversely, when interest rates fall, the values of fixed-rate debt securities
rise. The values of floating and adjustable-rate debt securities are not as
sensitive to changes in interest rates as the values of fixed-rate debt
securities. Longer-term bonds are generally more sensitive to interest rate
changes than shorter-term bonds.
U.S. Government Securities are high-quality instruments issued or
guaranteed as to principal or interest by the U.S. Treasury or by an agency or
instrumentality of the U.S. Government. Not all U.S. Government Securities are
backed by the full faith and credit of the United States. Some are backed by
the right of the issuer to borrow from the U.S. Treasury; others are backed by
discretionary authority of the U.S. Government to purchase the agencies'
obligations; while others are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment.
Zero coupon bonds do not make interest payments; instead, they are sold at
a deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can
be very volatile when interest rates change. In calculating its income, the
Fund takes into account as income a portion of the difference between a zero
coupon bond's purchase price and its face value.
Money market instruments are high-quality, short-term debt instruments that
present minimal credit risk. They may include U.S. Government Securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit, bankers' acceptances, bank deposits and other financial institution
obligations. These instruments may carry fixed or variable interest rates.
Policies and Restrictions: As a fundamental policy, up to 10% of the
Fund's assets may be invested in taxable obligations.
As a fundamental policy, the only taxable obligations that the Fund may
purchase are (i) obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities ("U.S. Government Securities"), (ii) bank
obligations of domestic banks or savings and loan associations that are subject
to regulation by the U.S. Government (these obligations may include certificates
of deposit, letters of credit and acceptances), and (iii) commercial paper rated
at least A by S&P or MIS.
As a fundamental policy, the Fund will not invest in securities on which
the payment of principal and interest is the obligation of any nongovernmental
entity unless the company obligated to make these payments has been in
continuous operation for at least three years; however, the Fund may buy
securities not meeting this test if it does not then have more than 5% of its
total assets in these other securities. This three-year period includes the
operation of predecessor companies.
The Fund does not intend to invest more than 5% of its assets in U.S.
Government Securities.
Options, Futures and Other Strategies. The Fund may use certain options
and indexed securities to attempt to enhance income or yield or may attempt to
reduce the overall risk of its investments by using certain options, futures
contracts and certain other strategies described herein. The strategies
described below may be used in an attempt to manage certain risks of the Fund's
investments that can affect fluctuation in its net asset value.
The Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations. The Fund might not use
any of these strategies, and there can be no assurance that any strategy that is
used will succeed. The risks associated with such strategies are described
below. Also see the SAI for more information on these instruments and
strategies and their risk considerations.
Options. The Fund may engage in certain strategies involving options to
attempt to enhance the Fund's income or yield or to attempt to reduce the
overall risk of its investments. A call option gives the purchaser the right to
buy, and obligates the writer to sell, the underlying investment at the agreed
upon exercise price during the option period. A put option gives the purchaser
the right to sell, and obligates the writer to buy, the underlying investment at
the agreed upon exercise price during the option period. Purchasers of options
pay an amount, known as a premium, to the option writer in exchange for the
right under the option contract.
Options offer large amounts of leverage, which will result in the Fund's
net asset value being more sensitive to changes in the value of the related
investment. There is no assurance that a liquid secondary market will exist for
exchange-listed options. The Fund will be able to close a position in an option
it has written only if there is a market for the put or call. If the Fund is
not able to enter into a closing transaction on an option it has written, it
will be required to maintain the securities, or cash in the case of an option on
an index, subject to the call or the collateral underlying the put until a
closing purchase transaction can be entered into or the option expires. Because
index options are settled in cash, the Fund cannot provide in advance for its
potential settlement obligations on a call it has written on an index by holding
the underlying securities. The Fund bears the risk that the value of the
securities it holds will vary from the value of the index.
Policies and Restrictions: As a fundamental policy, the Fund may purchase
and write (sell) put and call options only on domestic debt securities and
municipal bond indices, and the options on futures contracts described below,
subject to certain restrictions that are set forth in the SAI.
The Fund may purchase and write (sell) options on domestic debt securities
and municipal bond indices only if they are listed on a national securities
exchange.
The Fund will only write puts on domestic debt securities if it would be
willing to purchase the underlying security at the exercise price.
Futures Contracts and Options on Futures Contracts. When the Fund
purchases a futures contract, it incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified time
in the future for a specified price. When the Fund sells a futures contract, it
incurs an obligation to deliver the specified amount of the underlying
obligation at a specified time in return for an agreed upon price.
When the Fund writes an option on a futures contract, it becomes obligated,
in return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the term of the option. If the Fund
has written a call, it assumes a short futures position. If it has written a
put, it assumes a long futures position. When the Fund purchases an option on a
futures contract, it acquires a right in return for the premium it pays to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put).
Policies and Restrictions: As a fundamental policy, the Fund may only buy
and sell futures contracts relating to domestic debt securities, futures
contracts relating to municipal bond indices and options on futures relating to
domestic debt securities.
The Fund intends to use futures contracts and options thereon only to
attempt to hedge against market risks that could adversely affect the value of
its portfolio.
Indexed Securities. The Fund may purchase indexed securities, which are
securities the value of which varies in relation to the value of other
securities, securities indices, currencies, precious metals or other commodities
or other financial indicators, as long as WRIMCO determines that it is
consistent with the Fund's goal and investment policies. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. The performance of indexed securities depends to a great extent on
the performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Indexed
securities may be more volatile than the underlying instruments.
Policies and Restrictions: The Fund does not intend to invest more than
25% of its total assets in indexed securities.
Mortgage-Backed Securities may include pools of mortgages, such as
collateralized mortgage obligations, and stripped mortgage-backed securities.
The value of these securities may be significantly affected by changes in
interest rates, the market's perception of the issuers and the creditworthiness
of the parties involved.
The yield characteristics of mortgage-backed securities differ from those
of traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently on mortgage-backed securities
and that principal may be prepaid at any time because the underlying mortgage
loans generally may be prepaid at any time. As a result, if the Fund purchases
these securities at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity while a prepayment rate that is slower than
expected will have the opposite effect of increasing yield to maturity.
Conversely, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. Accelerated prepayments on securities purchased by
the Fund at a premium also impose a risk of loss of principal because the
premium may not have been fully amortized at the time the principal is repaid in
full.
Timely payment of principal and interest on pass-through securities of the
Government National Mortgage Association (but not the Federal Home Loan Mortgage
Corporation or the Federal National Mortgage Association) is guaranteed by the
full faith and credit of the United States. This is not a guarantee against
market decline of the value of these securities or shares of the Fund. It is
possible that the availability and marketability (i.e., liquidity) of these
securities could be adversely affected by actions of the U.S. Government to
tighten the availability of its credit.
Policies and Restrictions: The Fund may invest in mortgage-backed
securities as long as WRIMCO determines that it is consistent with the Fund's
goal and investment policies. The Fund does not intend to invest more than one-
third of its total assets in mortgage-backed securities.
Stripped Securities are the separate income or principal components of a
debt instrument. These involve risks that are similar to those of other debt
securities, although they may be more volatile. The prices of stripped
mortgage-backed securities may be particularly affected by changes in interest
rates.
Policies and Restrictions: The Fund may invest in stripped securities as
long as WRIMCO determines that it is consistent with the Fund's goal and
investment policies.
Risks of Derivative Instruments. The use of options, futures contracts and
options on futures contracts and the investment in indexed securities, stripped
securities and mortgage-backed securities involve special risks, including (i)
possible imperfect or no correlation between price movements of the portfolio
investments (held or intended to be purchased) involved in the transaction and
price movements of the instruments involved in the transaction, (ii) possible
lack of a liquid secondary market for any particular instrument at a particular
time, (iii) the need for additional portfolio management skills and techniques,
(iv) losses due to unanticipated market price movements, (v) the fact that,
while such strategies can reduce the risk of loss, they can also reduce the
opportunity for gain, or even result in losses, by offsetting favorable price
movements in investments involved in the transaction, (vi) incorrect forecasts
by WRIMCO concerning interest rates or direction of price fluctuations of the
investment involved in the transaction, which may result in the strategy being
ineffective, (vii) loss of premiums paid by the Fund on options it purchases,
and (viii) the possible inability of the Fund to purchase or sell a portfolio
security at a time when it would otherwise be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate
securities in connection with such transactions and the possible inability of
the Fund to close out or liquidate its position.
For a hedging strategy to be completely effective, the price change of the
hedging instrument must equal the price change of the investment being hedged.
The risk of imperfect correlation of these price changes increases as the
composition of the Fund's portfolio diverges from instruments underlying a
hedging instrument. Such equal price changes are not always possible because
the investment underlying the hedging instruments may not be the same investment
that is being hedged. WRIMCO will attempt to create a closely correlated hedge
but hedging activity may not be completely successful in eliminating market
value fluctuation.
WRIMCO may use derivative instruments, including securities with embedded
derivatives, for hedging purposes to adjust the risk characteristics of the
Fund's portfolio of investments and may use some of these instruments to adjust
the return characteristics of the Fund's portfolio of investments. An embedded
derivative is a derivative that is part of another financial instrument.
Embedded derivatives typically, but not always, are debt securities whose return
of principal or interest, in part, is determined by reference to something that
is not intrinsic to the security itself. The use of derivative techniques for
speculative purposes can increase investment risk. If WRIMCO judges market
conditions incorrectly or employs a strategy that does not correlate well with
the Fund's investments, these techniques could result in a loss, regardless of
whether the intent was to reduce risk or increase return. These techniques may
increase the volatility of the Fund and may involve a small investment of cash
relative to the magnitude of the risk assumed. In addition, these techniques
could result in a loss if the counterparty to the transaction does not perform
as promised or if there is not a liquid secondary market to close out a position
that the Fund has entered into.
The ordinary spreads between prices in the cash and futures markets, due to
the differences in the natures of those markets, are subject to distortion. Due
to the possibility of distortion, a correct forecast of general interest rate
trends by WRIMCO may still not result in a successful transaction. WRIMCO may
be incorrect in its expectations as to the extent of various interest rate
movements or the time span within which the movements take place.
Options and futures transactions may increase portfolio turnover rates,
which results in correspondingly greater commission expenses and transaction
costs and may result in certain tax consequences. See the SAI for further
information regarding these and other risks.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its goal, investment policies and regulatory requirements
applicable to investment companies.
When-Issued and Delayed-Delivery Transactions are trading practices in
which payment and delivery for the securities take place at a future date. The
market value of a security could change during this period, which could affect
the Fund's yield.
The Fund may purchase municipal bonds on a when-issued or delayed-delivery
basis and sell municipal bonds on a delayed-delivery basis. When purchasing
municipal bonds on a delayed-delivery basis, the Fund assumes the rights and
risks of ownership, including the risk of price and yield fluctuations. When
the Fund has sold a municipal bond on a delayed-delivery basis, the Fund does
not participate in further gains or losses with respect to the bond. If the
other party to a delayed-delivery transaction fails to deliver or pay for the
bonds, the Fund could miss a favorable price or yield opportunity or could
suffer a loss.
Illiquid Securities. Illiquid investments may be difficult to sell
promptly at an acceptable price. Difficulty in selling securities may result in
a loss or may be costly to the Fund.
Policies and Restrictions: The Fund may not purchase a security if, as a
result, more than 10% of its net assets would consist of illiquid investments.
Diversification. Diversifying the Fund's investment portfolio can reduce
the risks of investing. This may include limiting the amount of money invested
in any one issuer or, on a broader scale, in any one industry.
Policies and Restrictions: As a fundamental policy, the Fund may not
purchase the securities of any "issuer" if more than 5% of the Fund's total
assets would then be invested in that "issuer." This restriction does not apply
to U.S. Government Securities.
There is a question as to who is the issuer of certain types of municipal
bonds. For example, municipal bonds may be created by a particular government
but be backed only by the assets and revenues of a subdivision of that
government such as an agency, instrumentality, authority or other subdivision.
In such case, the Fund would consider that such subdivision is the issuer for
the purposes of this 5% restriction. In the case of industrial development
bonds, the nongovernmental user of facilities financed by them is also
considered as a separate issuer. The method of determining who is an issuer may
be changed without shareholder vote. The Fund considers a guarantee of a
municipal bond by a government or other entity to be a separate security that
would be given a value and included in the 5% restriction if the value of all
municipal bonds created by the government or entity and owned by the Fund
exceeds 10% of the value of the Fund's total assets.
As a fundamental policy, the Fund may not purchase securities of issuers in
any one industry except for municipal bonds and U.S. Government Securities if
more than 25% of the value of its assets would then be invested in issuers in
that industry. Despite the fact that this restriction does not apply to
municipal bonds, the Fund intends to apply the restriction to nongovernmental
users (other than utilities) of facilities financed by industrial development
bonds.
Borrowing. If the Fund borrows money, its share price may be subject to
greater fluctuation until the borrowing is paid off. If the Fund makes
additional investments while borrowings are outstanding, this may be considered
a form of leverage. The Fund's ability to borrow for other than emergency or
extraordinary purposes is a special risk consideration.
Policies and Restrictions: As a fundamental policy, the Fund may not
engage in repurchase transactions.
<PAGE>
About Your Account
The different ways to set up (register) your account are listed below.
Ways to Set Up Your Account
- -------------------------------------------------
Individual or Joint Tenants
For your general investment needs
Individual accounts are owned by one person. Joint accounts have two or more
owners (tenants).
- -------------------------------------------------
Business or Organization
For investment needs of corporations, associations, partnerships, institutions
or other groups
- -------------------------------------------------
Gifts or Transfers to a Minor
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child without paying
Federal transfer tax. Depending on state laws, you can set up a custodial
account under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA").
- -------------------------------------------------
Trust
For money being invested by a trust
The trust must be established before an account can be opened, or you may use a
trust form made available by Waddell & Reed. Contact your Waddell & Reed
account representative for the form.
- -------------------------------------------------
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its account
representatives. To open your account you must complete and sign an
application. Your Waddell & Reed account representative can help you with any
questions you might have.
The price to buy a share of the Fund, called the offering price, is
calculated every business day.
The offering price of a Class A share (price to buy one Class A share) is
the Fund's Class A net asset value ("NAV") plus the sales charge shown in the
table below.
Sales
Sales Charge
Charge as
as Approx.
PercentPercent
of of
Size of Offering Amount
Purchase Price Invested
- -----------------------
Under
$100,000 4.25% 4.44%
$100,000
to less
than
$300,000 3.25 3.36
$300,000
to less
than
$500,000 2.50 2.56
$500,000
to less
than
$1,000,0001.75 1.78
$1,000,000
to less
than
$2,000,0001.00 1.01
$2,000,000
and over 0.00 0.00
The Fund's Class A NAV is the value of a single share. The Class A NAV is
computed by adding, with respect to that class, the value of the Fund's
investments, cash and other assets, subtracting its liabilities, and then
dividing the result by the number of Class A shares outstanding.
The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market quotations or, if market quotations
are not available, at their fair value in a manner determined in good faith by
or at the direction of the Board of Directors. Bonds are generally valued by an
independent pricing service. Short-term debt securities are valued at amortized
cost, which approximates market value. Other assets are valued at their fair
value by or at the direction of the Board of Directors.
The Fund is open for business each day the New York Stock Exchange (the
"NYSE") is open. The Fund normally calculates the NAVs of its shares as of the
later of the close of business of the NYSE, normally 4 p.m. Eastern time, or the
close of the regular session of any other securities or commodities exchange on
which an option held by the Fund is traded.
When you place an order to buy shares, your order will be processed at the
next offering price calculated after your order is received and accepted. Note
the following:
Orders are accepted only at the home office of Waddell & Reed, Inc.
All of your purchases must be made in U.S. dollars.
If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
When you sign your account application, you will be asked to certify that
your Social Security or other taxpayer identification number is correct and
whether you are subject to backup withholding for failing to report income to
the IRS.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Lower sales charges are available by combining additional purchases of
Class A shares of the Fund or Class A shares of United Government Securities
Fund, Inc. or United Municipal High Income Fund, Inc. with the NAV of Class A
shares already held ("rights of accumulation") and by grouping all purchases of
Class A shares made during a thirteen-month period ("Statement of Intention").
Class A shares of another fund purchased through a contractual plan may not be
included unless the plan has been completed. Purchases by certain related
persons may be grouped. Additional information and applicable forms are
available from Waddell & Reed account representatives.
Class A shares may be purchased at NAV by the Directors and officers of the
Fund, employees of Waddell & Reed, Inc., employees of their affiliates, account
representatives of Waddell & Reed, Inc. and the spouse, children, parents,
children's spouses and spouse's parents of each such Director, officer, employee
and account representative. Shares may also be issued at NAV in a merger,
acquisition or exchange offer made pursuant to a plan of reorganization to which
the Fund is a party.
Minimum Investments
To Open an Account $500
For certain exchanges $100
For certain accounts opened with Automatic Investment Service $50
To Add to an Account
For certain exchanges $100
For Automatic Investment Service $25
Adding to Your Account
Subject to the minimums described under "Minimum Investments," you can make
additional investments of any amount at any time.
To add to your account, make your check payable to Waddell & Reed, Inc.
Mail the check along with:
the detachable form that accompanies the confirmation of a prior purchase by
you or your year-to-date statement; or
a letter stating your account number, the account registration and that you
wish to purchase Class A shares of the Fund.
Mail to Waddell & Reed, Inc. at the address printed on your confirmation or
year-to-date statement.
Selling Shares
You can arrange to take money out of your Fund account at any time by
selling (redeeming) some or all of your shares.
The redemption price (price to sell one Class A share) is the Fund's Class
A NAV.
To sell shares, your request must be made in writing.
Complete an Account Service Request form, available from your Waddell &
Reed account representative, or write a letter of instruction with:
the name on the account registration;
the Fund's name;
the Fund account number;
the dollar amount or number of shares to be redeemed; and
any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed account
representative, or mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the
address on the account.
Special Requirements for Selling Shares
Account Type Special Requirements
Individual or The written instructions must
Joint Tenant be signed by all persons
required to sign for
transactions, exactly as their
names appear on the account.
Sole The written instructions must
Proprietorship be signed by the individual
owner of the business.
UGMA, UTMA The custodian must sign the
written instructions
indicating capacity as
custodian.
Trust The trustee must sign the
written instructions
indicating capacity as
trustee. If the trustee's
name is not in the account
registration, provide a
currently certified copy of
the trust document.
Business or At least one person authorized
Organization by corporate resolution to act
on the account must sign the
written instructions.
Conservator, The written instructions must
Guardian or be signed by the person
Other Fiduciary properly authorized by court
order to act in the particular
fiduciary capacity.
When you place an order to sell shares, your shares will be sold at the
next NAV calculated after receipt of a written request for redemption in good
order by Waddell & Reed, Inc. at its home office. Note the following:
If more than one person owns the shares, each owner must sign the written
request.
If you hold a certificate, it must be properly endorsed and sent to the Fund.
If you recently purchased the shares by check, the Fund may delay payment of
redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance,
satisfactory to the Fund, that the check has cleared and been honored. If no
such assurance is given, payment of the redemption proceeds on these shares
will be delayed until the earlier of 10 days or the date the Fund is able to
verify that your purchase check has cleared and been honored.
Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted or as permitted by the Securities and Exchange Commission.
Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
The Fund reserves the right to require a signature guarantee on certain
redemption requests. This requirement is designed to protect you and Waddell &
Reed from fraud. The Fund may require a signature guarantee in certain
situations such as:
the request for redemption is made by a corporation, partnership or
fiduciary;
the request for redemption is made by someone other than the owner of record;
or
the check is being made payable to someone other than the owner of record.
The Fund will accept a signature guarantee from a national bank, a
federally chartered savings and loan or a member firm of a national stock
exchange or other eligible guarantor in accordance with procedures of the Fund's
transfer agent. A notary public cannot provide a signature guarantee.
The Fund reserves the right to redeem at NAV all shares of the Fund owned
or held by you having an aggregate NAV of less than $500. The Fund will give
you notice of its intention to redeem your shares and a 60-day opportunity to
purchase a sufficient number of additional shares to bring the aggregate NAV of
your shares to $500.
You may reinvest without charge all or part of the amount you redeemed by
sending to the Fund the amount you want to reinvest. The reinvested amounts
must be received by the Fund within thirty days after the date of your
redemption. You may do this only once as to Class A shares of the Fund.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your
account.
Personal Service
Your local Waddell & Reed account representative is available to provide
personal service. Additionally, the Waddell & Reed Customer Services staff is
available to respond promptly to your inquiries and requests.
Reports
Statements and reports sent to you include the following:
confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange, transfer
or redemption)
year-to-date statements (quarterly)
annual and semiannual reports (every six months)
To reduce expenses, only one copy of annual and semiannual reports will be
mailed to your household, even if you have more than one account with the Fund.
Call 913-236-2000 if you need copies of annual or semiannual reports or
historical account information.
Exchanges
You may sell your Class A shares and buy Class A shares of other funds in
the United Group.
You may exchange any Class A shares of the Fund that you have held for at
least six months and any Class A shares of the Fund acquired as payment of a
dividend or distribution for Class A shares of any other fund in the United
Group. You may exchange any Class A shares of the Fund that you have held for
less than six months only for Class A shares of United Government Securities
Fund, Inc. or United Municipal High Income Fund, Inc.
You may exchange only into funds that are legally registered for sale in
your state of residence. Note that exchanges out of the Fund may have tax
consequences for you. Before exchanging into a fund, read its prospectus.
The Fund reserves the right to terminate or modify these exchange
privileges at any time, upon notice in certain instances.
Automatic Transactions
Flexible withdrawal service lets you set up monthly, quarterly, semiannual
or annual redemptions from your account.
Regular Investment Plans allow you to transfer money into your Fund account
automatically. While Regular Investment Plans do not guarantee a profit and
will not protect you against loss in a declining market, they can be an
excellent way to invest for retirement, a home, educational expenses and other
long-term financial goals.
Regular Investment Plans
Automatic Investment Service
To move money from your bank account to an existing Fund account
Minimum Frequency
$25 Monthly
Funds Plus Service To move money from United Cash Management, Inc. to the Fund
whether in the same or a different account
Minimum Frequency
$100 Monthly
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Ordinarily, dividends are distributed
from the Fund's net investment income, which includes accrued interest, earned
discount and other income earned on portfolio assets less expenses, monthly.
Net capital gains ordinarily are distributed in December. The Fund may make
additional distributions if necessary to avoid Federal income or excise taxes on
certain undistributed income and capital gains.
Distribution Options. When you open an account, specify on your
application how you want to receive your distributions. The Fund offers three
options:
1. Share Payment Option. Your dividends and capital gains distributions will
be automatically paid in additional Class A shares of the Fund. If you do
not indicate a choice on your application, you will be assigned this
option.
2. Income-Earned Option. Your capital gains distributions will be
automatically paid in Class A shares, but you will be sent a check for each
dividend distribution.
3. Cash Option. You will be sent a check for your dividends and capital gain
distributions.
Taxes
The Fund has qualified and intends to continue to qualify for treatment as
a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"), so that it will be relieved of Federal income tax on that
part of its investment company taxable income (consisting generally of taxable
net investment income and net short-term capital gain) and net capital gain (the
excess of net long-term capital gain over net short-term capital loss) that are
distributed to its shareholders. In addition, the Fund intends to continue to
qualify to pay "exempt-interest" dividends, which requires, among other things,
that at the close of each calendar quarter at least 50% of the value of its
total assets must consist of obligations the interest on which is excludable
from gross income under section 103(a) of the Code.
There are certain tax requirements that the Fund must follow in order to
avoid Federal taxation. In its effort to adhere to these requirements, the Fund
may have to limit its investment activity in some types of instruments.
As with any investment, you should consider how your investment in the Fund
will be taxed. You should be aware of the following tax implications:
Taxes on distributions. The distributions by the Fund that are designated
by it as exempt-interest dividends generally may be excluded by you from your
gross income. Dividends from the Fund's investment company taxable income are
taxable to you as ordinary income, whether received in cash or paid in
additional Fund shares. Distributions of the Fund's net capital gains, when
designated as such, are taxable to you as long-term capital gains, whether
received in cash or paid in additional Fund shares and regardless of the length
of time you have owned your shares. None of the dividends paid by the Fund is
expected to be eligible for the dividends-received deduction allowed to
corporations. The Fund notifies you after each calendar year-end as to the
amounts of dividends and other distributions paid (or deemed paid) to you for
that year.
Exempt-interest dividends paid by the Fund may be subject to income
taxation under state and local tax laws. In addition, a portion of those
dividends is expected to be attributable to interest on certain bonds that must
be treated by you as a "tax preference item" for purposes of calculating your
liability, if any, for the AMT; the Fund anticipates such portion will be not
more than 40% of the dividends it will pay to its shareholders. The Fund will
provide you with information concerning the amount of distributions subject to
the AMT after the end of each calendar year. Shareholders who may be subject to
the AMT should consult with their tax advisers concerning investment in the
Fund.
Entities or other persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by private activity bonds
("PABs") should consult their tax advisers before purchasing Fund shares
because, for users of certain of these facilities, the interest on PABs is not
exempt from Federal income tax. For these purposes, the term "substantial user"
is defined generally to include a "non-exempt person" who regularly uses in
trade or business a part of a facility financed from the proceeds of PABs.
Withholding. The Fund is required to withhold 31% of all taxable
dividends, capital gains distributions and redemption proceeds payable to
individuals and certain other noncorporate shareholders who do not furnish the
Fund with a correct taxpayer identification number. Withholding at that rate
from taxable dividends and capital gains distributions also is required for such
shareholders who otherwise are subject to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in
taxable gain or loss to you, depending on whether the redemption proceeds are
more or less than your adjusted basis for the redeemed shares (which normally
includes any sales charge paid). If you have a gain on a redemption of Fund
shares, the entire gain will be taxable even though a portion of the gain may
represent municipal bond interest earned by the Fund but not yet paid out as a
dividend. If the redemption is not made until after record date, however, that
interest will be received by you as a dividend that is mostly tax-exempt rather
than as part of a taxable gain. Ordinarily, record date is the first Friday
after the 9th day of each month.
An exchange of Fund shares for shares of any other fund in the United Group
generally will have similar tax consequences. However, special rules apply when
you dispose of Fund shares through a redemption or exchange within ninety days
after your purchase thereof and subsequently reacquire Fund shares or acquire
shares of another fund in the United Group without paying a sales charge due to
the thirty-day reinvestment privilege or exchange privilege. See "About Your
Account." In these cases, any gain on the disposition of the original Fund
shares would be increased, or loss decreased, by the amount of the sales charge
you paid when those shares were acquired, and that amount will increase the
adjusted basis of the shares subsequently acquired. In addition, if you
purchase Fund shares within thirty days before or after redeeming other Fund
shares (regardless of class) at a loss, part or all of that loss will not be
deductible and will increase the basis of the newly-purchased shares.
Interest on indebtedness incurred or continued to purchase or carry shares
of the Fund will not be deductible for Federal income tax purposes to the extent
the Fund's distributions consist of exempt-interest dividends. Proposals may be
introduced before Congress for the purpose of restricting or eliminating the
Federal income tax exemption for interest on municipal bonds. If such a
proposal were enacted, the availability of municipal bonds for investment by the
Fund and the value of its portfolio would be affected. In that event, the Fund
may decide to reevaluate its investment goal and policies.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for a more detailed discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
<PAGE>
About the Management and Expenses of the Fund
United Municipal Bond Fund, Inc. is a mutual fund: an investment that
pools shareholders' money and invests it toward a specified goal. In technical
terms, the Fund is an open-end, diversified management investment company
organized as a corporation under Maryland law on September 29, 1976.
The Fund is governed by a Board of Directors, which has overall
responsibility for the management of its affairs. The majority of directors are
not affiliated with Waddell & Reed, Inc.
The Fund has two classes of shares. In addition to the Class A shares
offered by this Prospectus, the Fund has Class Y shares which are offered
through a separate prospectus. Prior to January 21, 1996, the Fund offered only
one class of shares to the public. Shares outstanding on that date were
designated as Class A shares. Class Y shares are designed for institutional
investors. Class Y shares are not subject to a sales charge on purchases and
are not subject to redemption fees. Class Y shares are not subject to a Rule
12b-1 fee. Additional information about Class Y shares may be obtained by
calling 913-236-2000 or by writing to Waddell & Reed, Inc. at the address on the
inside back cover of this Prospectus.
The Fund does not hold annual meetings of shareholders; however, certain
significant corporate matters, such as the approval of a new investment advisory
agreement or a change in a fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon receipt
by the Fund of a request in writing signed by shareholders holding not less than
25% of all shares entitled to vote at such meeting, provided certain conditions
stated in the Bylaws of the Fund are met. There will normally be no meeting of
the shareholders for the purpose of electing directors until such time as less
than a majority of directors holding office have been elected by shareholders,
at which time the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the Investment
Company Act of 1940, as amended (the "1940 Act"), applies to the Fund, the
directors are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any director when requested in writing to
do so by the shareholders of record of not less than 10% of the Fund's
outstanding shares.
Each share (regardless of class) has one vote. All shares of the Fund vote
together as a single class, except as to any matter for which a separate vote of
any class is required by the 1940 Act, and except as to any matter which affects
the interests of one or more particular classes, in which case only the
shareholders of the affected classes are entitled to vote, each as a separate
class. Shares are fully paid and nonassessable when purchased.
WRIMCO and Its Affiliates
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board
of Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. Waddell & Reed, Inc. and its predecessors have served as
investment manager to each of the registered investment companies in the United
Group of Mutual Funds, except United Asset Strategy Fund, Inc., since 1940 or
the inception of the company, whichever was later, and to TMK/United Funds, Inc.
since that fund's inception, until January 8, 1992, when it assigned its duties
as investment manager and assigned its professional staff for investment
management services to WRIMCO. WRIMCO has also served as investment manager for
Waddell & Reed Funds, Inc. since its inception in September 1992, and United
Asset Strategy Fund, Inc. since it commenced operations in March 1995.
John M. Holliday is primarily responsible for the day-to-day management of
the portfolio of the Fund. Mr. Holliday has held his Fund responsibilities
since May 23, 1980. He is Senior Vice President of WRIMCO, Senior Vice
President of Waddell & Reed Asset Management Company, an affiliate of WRIMCO,
Vice President of the Fund and Vice President of other investment companies for
which WRIMCO serves as investment manager. Mr. Holliday has served as the
portfolio manager for investment companies managed by Waddell & Reed, Inc. and
its successor, WRIMCO, since August 1979, and has been an employee of Waddell &
Reed, Inc. and its successor, WRIMCO, since April 1978. Other members of
WRIMCO's investment management department provide input on market outlook,
economic conditions, investment research and other considerations relating to
the Fund's investments.
Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter
for each of the other funds in the United Group of Mutual Funds and Waddell &
Reed Funds, Inc. and acts as the principal underwriter and distributor for
variable life insurance and variable annuity policies issued by United Investors
Life Insurance Company for which TMK/United Funds, Inc. is the underlying
investment vehicle.
Waddell & Reed Services Company acts as transfer agent ("Shareholder
Servicing Agent") for the Fund and processes the payments of dividends. Waddell
& Reed Services Company also acts as agent ("Accounting Services Agent") in
providing bookkeeping and accounting services and assistance to the Fund and
pricing daily the value of its shares.
WRIMCO and Waddell & Reed Services Company are subsidiaries of Waddell &
Reed, Inc. Waddell & Reed, Inc. is a direct subsidiary of Waddell & Reed
Financial Services, Inc., a holding company, and an indirect subsidiary of
United Investors Management Company, a holding company, and Torchmark
Corporation, a holding company.
WRIMCO places transactions for the portfolio of the Fund and in doing so
may consider sales of shares of the Fund and other funds it manages as a factor
in the selection of brokers to execute portfolio transactions.
Breakdown of Expenses
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice
and supervising its investments. The Fund also pays other expenses, which are
explained below.
Management Fee
The management fee of the Fund is calculated by adding a group fee to a
specific fee. It is accrued and paid to WRIMCO daily.
The specific fee is computed on the Fund's net asset value as of the close
of business each day at the annual rate of .03 of 1% of its net assets. The
group fee is a pro rata participation based on the relative net asset size of
the Fund in the group fee computed each day on the combined net asset values of
all the funds in the United Group at the annual rates shown in the following
table:
Group Fee Rate
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Growth in assets of the United Group assures a lower group fee rate.
The combined net asset values of all of the funds in the United Group were
approximately $14.7 billion as of September 30, 1996. Management fees for the
fiscal year ended September 30, 1996 were 0.44% of the Fund's average net
assets.
Other Expenses
While the management fee is a significant component of the Fund's annual
operating costs, the Fund has other expenses as well.
The Fund pays the Accounting Services Agent a monthly fee based on the
average net assets of the Fund for accounting services. With respect to its
Class A shares, the Fund pays the Shareholder Servicing Agent a monthly fee for
each Class A shareholder account that was in existence at any time during the
month, and a fee for each account on which a dividend or distribution had a
record date during the month.
The Fund has adopted a Service Plan pursuant to Rule 12b-1 of the 1940 Act
with respect to its Class A shares. Under the Plan, the Fund may pay monthly a
fee to Waddell & Reed, Inc. in an amount not to exceed .25% of the Fund's
average annual net assets of its Class A shares. The fee is to be paid to
reimburse Waddell & Reed, Inc. for amounts it expends in connection with the
provision of personal services to Class A shareholders and/or maintenance of
Class A shareholder accounts. In particular, the Service Plan and a related
Service Agreement between the Fund and Waddell & Reed, Inc. contemplate that
these expenditures may include costs and expenses incurred by Waddell & Reed,
Inc. and its affiliates in compensating, training and supporting registered
account representatives, sales managers and/or other appropriate personnel in
providing personal services to Class A shareholders and/or maintaining Class A
shareholder accounts; increasing services provided to Class A shareholders by
office personnel located at field sales offices; engaging in other activities
useful in providing personal services to Class A shareholders and/or the
maintenance of Class A shareholder accounts; and in compensating broker-dealers
who may regularly sell Class A shares, and other third parties, for providing
Class A shareholder services and/or maintaining Class A shareholder accounts.
The total expenses for the fiscal year ended September 30, 1996 for the
Fund's Class A shares were 0.68% of the average net assets of the Fund's Class A
shares.
The Fund cannot precisely predict what its portfolio turnover rate will be,
but the Fund may have a high portfolio turnover. A higher turnover will
increase transaction and commission costs and could generate taxable income or
loss.
<PAGE>
United Municipal Bond Fund, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 Massachusetts Ave, N. W. (913) 236-2000
Washington, D. C. 20036
Shareholder Servicing Agent
Independent Accountants Waddell & Reed
Deloitte & Touche LLP Services Company
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Investment Manager Shawnee Mission, Kansas
Waddell & Reed Investment 66201-9217
Management Company (913) 236-2000
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
Our INTERNET address is:
http://www.waddell.com
<PAGE>
United Municipal Bond Fund, Inc.
Class A Shares
PROSPECTUS
December 31, 1996
The United Group of Mutual Funds
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United Gold & Government Fund, Inc.
United Government Securities Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United International Growth Fund, Inc.
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United New Concepts Fund, Inc.
United Retirement Shares, Inc.
United Vanguard Fund, Inc.
NUP1008(12-96)
printed on recycled paper
<PAGE>
Please read this Prospectus before investing, and keep it on file for future
reference. It sets forth concisely the information about the Fund that you
ought to know before investing.
Additional information has been filed with the Securities and Exchange
Commission and is contained in a Statement of Additional Information ("SAI")
dated December 31, 1996. The SAI is available free upon request to the Fund or
Waddell & Reed, Inc., the Fund's underwriter, at the address or telephone number
below. The SAI is incorporated by reference into this Prospectus and you will
not be aware of all facts unless you read both this Prospectus and the SAI.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
United Municipal Bond Fund, Inc.
Class Y Shares
This Fund seeks to provide income that is not subject to Federal income tax.
This Prospectus describes one class of shares of the Fund -- Class Y Shares.
Prospectus
December 31, 1996
UNITED MUNICIPAL BOND FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
<PAGE>
Table of Contents
AN OVERVIEW OF THE FUND.........................................3
EXPENSES........................................................4
FINANCIAL HIGHLIGHTS............................................5
PERFORMANCE.....................................................6
Explanation of Terms ..........................................6
ABOUT WADDELL & REED............................................8
ABOUT THE INVESTMENT PRINCIPLES OF THE FUND.....................9
Investment Goals and Principles ...............................9
Risk Considerations .........................................9
Securities and Investment Practices ..........................10
ABOUT YOUR ACCOUNT.............................................21
Buying Shares ................................................21
Minimum Investments ..........................................23
Adding to Your Account .......................................23
Selling Shares ...............................................23
Telephone Transactions .......................................25
Shareholder Services .........................................25
Personal Service ...........................................25
Reports ....................................................25
Exchanges ..................................................26
Distributions and Taxes ......................................26
Distributions ..............................................26
Taxes ......................................................26
ABOUT THE MANAGEMENT AND EXPENSES OF THE FUND..................29
WRIMCO and Its Affiliates ....................................30
Breakdown of Expenses ........................................31
Management Fee .............................................31
Other Expenses .............................................32
<PAGE>
An Overview of the Fund
The Fund: This Prospectus describes the Class Y shares of United Municipal Bond
Fund, Inc., an open-end, diversified management investment company.
Goals and Strategies: United Municipal Bond Fund, Inc. (the "Fund") seeks to
provide income not subject to Federal income tax through a diversified portfolio
of primarily tax-exempt municipal bonds. See "About the Investment Principles
of the Fund" for further information.
Management: Waddell & Reed Investment Management Company ("WRIMCO") provides
investment advice to the Fund and manages the Fund's investments. WRIMCO is a
wholly-owned subsidiary of Waddell & Reed, Inc. WRIMCO, Waddell & Reed, Inc.
and its predecessors have provided investment management services to registered
investment companies since 1940. See "About the Management and Expenses of the
Fund" for further information about management fees.
Distributor: Waddell & Reed, Inc. acts as principal underwriter and distributor
of the shares of the Fund.
Purchases: You may buy Class Y shares of the Fund through Waddell & Reed, Inc.
and its account representatives. The price to buy a Class Y share of the Fund
is the net asset value of a Class Y share. There is no sales charge incurred
upon purchase of Class Y shares of the Fund. See "About Your Account" for
information on how to purchase Class Y shares.
Redemptions: You may redeem your shares at net asset value. When you sell your
shares, they may be worth more or less than what you paid for them. See "About
Your Account" for a description of redemption procedures.
Who May Want to Invest: The Fund is designed for investors seeking current
income that is primarily free from Federal income tax. You should consider
whether the Fund fits with your particular investment objectives.
Risk Considerations: The Fund invests primarily in municipal bonds which may
vary widely as to their interest rates, degree of security and maturity. The
value of the Fund's investments and the income generated will vary from day to
day, generally reflecting changes in interest rates, market conditions and other
company and economic news. Performance will also depend on WRIMCO's skill in
selecting investments. See "About the Investment Principles of the Fund" for
information about the risks associated with the Fund's investments.
<PAGE>
Expenses
Shareholder transaction expenses are charges you pay when you buy or sell shares
of a fund.
Maximum sales load
on purchases None
Maximum sales load
on reinvested
dividends None
Deferred
sales load None
Redemption fees None
Exchange fee None
Annual Fund operating expenses (as a percentage of average net assets).3
Management fees 0.44%
12b-1 fees None
Other expenses 0.20%
Total Fund operating
expenses 0.64%
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return4 and (2) redemption at the end of each time period:
1 year $ 7
3 years $20
The purpose of this table is to assist you in understanding the various costs
and expenses that a shareholder of the Class Y shares of the Fund will bear
directly or indirectly. The example should not be considered a representation
of past or future expenses; actual expenses may be greater or lesser than those
shown. For a more complete discussion of certain expenses and fees, see
"Breakdown of Expenses."
3Expense ratios are based on the management fees and other Fund-level expenses
of the Fund for the fiscal year ended September 30, 1996, and the expenses
attributable to the Class Y shares that are anticipated for the current year.
Actual expenses may be greater or lesser than those shown.
4Use of an assumed annual return of 5% is for illustration purposes only and is
not a representation of the Fund's future performance, which may be greater or
lesser.
<PAGE>
Financial Highlights
Financial Highlights for Class Y shares are not included because the Fund had no
Class Y shares outstanding during the fiscal year ended September 30, 1996.
<PAGE>
Performance
Mutual fund performance is commonly measured as total return. The Fund may
also advertise its performance by showing yield and performance rankings.
Performance information is calculated and presented separately for each class of
Fund shares.
Explanation of Terms
Total Return is the overall change in value of an investment in the Fund
over a given period, assuming reinvestment of any dividends and other
distributions. A cumulative total return reflects actual performance over a
stated period of time. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative total
return if performance had been constant over the entire period. Average annual
total returns smooth out variations in performance; they are not the same as
actual year-by-year results. Non-standardized total return may be for periods
other than those required to be presented or may otherwise differ from
standardized total return.
Yield refers to the income generated by an investment in the Fund over a
given period of time, expressed as an annual percentage rate. The Fund's yield
is based on a 30-day period ending on a specific date and is computed by
dividing the Fund's net investment income per share earned during the period by
the Fund's maximum offering price per share on the last day of the period. Tax
equivalent yield is calculated by applying the stated income tax rate to only
the net investment income exempt from taxation according to a standard formula.
Performance Rankings are comparisons of the Fund's performance to the
performance of other selected mutual funds, selected recognized market
indicators such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average, or non-market indices or averages of mutual fund industry
groups. The Fund may quote its performance rankings and/or other information as
published by recognized independent mutual fund statistical services or by
publications of general interest. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
relates, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of sales charges, fee waivers and/or expense
reimbursements.
All performance information that the Fund advertises or includes in
information provided to present or prospective shareholders is historical in
nature and is not intended to represent or guarantee future results. The value
of the Fund's shares when redeemed may be more or less than their original cost.
The Fund's recent performance and holdings will be detailed twice a year in
the Fund's annual and semiannual reports, which are sent to all Fund
shareholders.
<PAGE>
About Waddell & Reed
Since 1937, Waddell & Reed has been helping people make the most of their
financial future by helping them take advantage of various financial services.
Today, Waddell & Reed has over 2500 account representatives located throughout
the United States. Your primary contact in your dealings with Waddell & Reed
will be your local account representative. However, the Waddell & Reed
shareholder services department, which is part of the Waddell & Reed
headquarters operations in Overland Park, Kansas, is available to assist you and
your Waddell & Reed account representative. You may speak with a customer
service representative by calling 913-236-2000.
<PAGE>
About the Investment Principles of the Fund
Investment Goals and Principles
The goal of the Fund is to provide income that is not subject to Federal
income tax. The Fund seeks to achieve this goal by investing principally in
municipal bonds. There is no assurance that the Fund will achieve its goal.
As used in this Prospectus, "municipal bonds" mean obligations the interest
on which is not includable in gross income for Federal income tax purposes. See
"Distributions and Taxes" concerning the alternative minimum tax ("AMT"). The
Fund anticipates that not more than 40% of the dividends it will pay to
shareholders will be treated as a preference item for AMT purposes. The Fund
and WRIMCO rely on the opinion of bond counsel for the issuer in determining
whether obligations are municipal bonds.
Sometimes WRIMCO may believe that a full or partial defensive position is
desirable temporarily due to present or anticipated market or economic
conditions that are affecting or could affect the values of municipal bonds. To
achieve a temporary defensive posture, WRIMCO may take any one or more of the
following steps: (i) shorten the average maturity of the Fund's portfolio; (ii)
hold cash or debt securities other than municipal bonds ("taxable obligations")
subject to the 10% limitation described below; and (iii) emphasize debt
securities of a higher quality than those the Fund would ordinarily hold (see
discussion of quality ratings below and in Appendix A to the SAI). A defensive
posture might reduce the Fund's yield. As an alternative to taking a temporary
defensive position or in order to more quickly participate in market or economic
conditions, the Fund may buy or sell futures contracts, as discussed below.
Risk Considerations
There are risks inherent in any investment. The Fund is subject to varying
degrees of market risk, financial risk and, in some cases, prepayment risk.
Market risk is the potential for fluctuations in the price of the security
because of market factors. Because of market risk, you should anticipate that
the share price of the Fund will fluctuate. Financial risk is based on the
financial situation of the issuer. The financial risk of the Fund depends on
the credit quality of the underlying securities. Prepayment risk is the
possibility that, during periods of falling interest rates, a debt security with
a high stated interest rate will be prepaid prior to its expected maturity date.
Because the Fund owns different types of investments, its performance will
be affected by a variety of factors. The value of the Fund's investments and
the income it generates will vary from day to day, generally reflecting changes
in interest rates, market conditions, and other company and economic news.
The Fund may also invest in certain derivative instruments, including
options, futures contracts, options on futures contracts, indexed securities,
mortgage-backed securities and stripped securities. The use of derivative
instruments involves special risks. See "Risks of Derivative Instruments" for
further information on the risks of investing in these instruments.
Income from taxable obligations, options and futures contracts will be
subject to Federal income tax.
Securities and Investment Practices
The following pages contain more detailed information about types of
instruments in which the Fund may invest and strategies WRIMCO may employ in
pursuit of the Fund's investment goal. A summary of risks associated with these
instrument types and investment practices is included as well.
WRIMCO might not buy all of these instruments or use all of these
techniques to the full extent permitted by the Fund's investment policies and
restrictions unless it believes that doing so will help the Fund achieve its
goal.
Certain of the investment policies and restrictions of the Fund are also
stated below. A fundamental policy of the Fund may not be changed without the
approval of the shareholders of the Fund. Operating policies may be changed by
the Board of Directors without the approval of the affected shareholders. The
goal of the Fund and the types of securities and other assets in which it may
invest are fundamental policies. Unless otherwise indicated, other policies are
operating policies.
Policies and limitations are typically considered at the time of purchase;
the sale of instruments is usually not required in the event of a subsequent
change in circumstances.
Please see the SAI for further information concerning the following
instruments and associated risks and the Fund's investment policies and
restrictions.
Municipal bonds are issued by a wide range of state and local governments,
agencies and authorities for various purposes. The two main kinds of municipal
bonds are "general obligation" bonds and "revenue" bonds. In "general
obligation" bonds, the issuer has pledged its full faith, credit and taxing
power for the payment of principal and interest. "Revenue" bonds are payable
only from specific sources; these may include revenues from a particular
facility or class of facilities or special tax or other revenue source.
Industrial development bonds are revenue bonds issued by or on behalf of
public authorities to obtain funds to finance privately operated facilities.
Their credit quality is generally dependent on the credit standing of the
company involved. To the extent that the Fund invests in municipal bonds the
payment of principal and interest on which is derived from revenue of similar
projects, or in municipal bonds of issuers located in the same geographic area,
the Fund may be more susceptible to the risks associated with economic,
political or regulatory occurrences that might adversely affect particular
projects or areas. Similarly, to the extent the Fund invests up to 25% of its
assets in industrial revenue bonds issued for any one industry, the Fund may be
susceptible to the risks associated with a particular industry. See the SAI for
examples of the types of projects in which the Fund may invest from time to time
and for a discussion of the risks associated with such projects.
Problems in the utility industry generally affect the values of and the
dividends paid on utility stocks rather than the ability to pay bond
obligations. These problems include the effects of (i) inflation on financing
large construction programs, (ii) environmental considerations on costs, delays
and operations, (iii) limitations of available capital on the ability to issue
additional debt, (iv) shortages and high prices of fuel on operations and
profits, and (v) energy conservation on sales.
Other municipal obligations include municipal lease obligations of
municipal authorities or entities and participations in these obligations
(collectively, "lease obligations"). WRIMCO determines liquidity of lease
obligations in accordance with guidelines established by the Fund's Board of
Directors. Unrated municipal lease obligations are considered to be illiquid.
In determining the credit quality of unrated municipal lease obligations, one of
the factors, among others, to be considered is the likelihood that the lease
will not be canceled. Certain "non-appropriation" lease obligations may present
special risks because the municipality's obligation to make future lease or
installment payments depends on money being appropriated each year for this
purpose.
Municipal bonds vary widely as to their interest rates, degree of security
and maturity. Bonds are selected on the basis of quality, yield and
diversification. Factors that affect the yield on municipal bonds include
general money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation and the nature of the issue.
Lower-rated bonds usually, but not always, have higher yields than similar but
higher-rated bonds.
Medium- or lower-rated municipal securities are frequently traded only in
markets where the number of potential purchasers and sellers, if any, is very
limited. This factor may have the effect of limiting the availability of the
securities for purchase by the Fund and may also limit the ability of the Fund
to sell such securities at their fair value either to meet redemption requests
or in response to changes in the economy or the financial markets.
Lower-quality debt securities (commonly called "junk bonds") are considered
to be speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. The market prices of these securities
may fluctuate more than high-quality securities and may decline significantly in
periods of general economic difficulty. While the market for high-yield, high-
risk corporate debt securities has been in existence for many years and has
weathered previous economic downturns, the 1980s brought a dramatic increase in
the use of such securities to fund highly-leveraged corporate acquisitions and
restructurings. Past experience may not provide an accurate indication of the
future performance of the high-yield, high-risk bond market, especially during
periods of economic recession. The market for lower-rated debt securities may
be thinner and less active than that for higher-rated debt securities, which can
adversely affect the prices at which the former are sold. Adverse publicity and
changing investor perceptions may decrease the values and liquidity of lower-
rated debt securities, especially in a thinly-traded market. Valuation becomes
more difficult and judgment plays a greater role in valuing lower-rated debt
securities than with respect to securities for which more external sources of
quotations and last sale information are available. Since the risk of default
is higher for lower-rated debt securities, WRIMCO's research and credit analysis
are an especially important part of managing securities of this type held by the
Fund. WRIMCO continuously monitors the issuers of lower-rated debt securities
in the Fund's portfolio in an attempt to determine if the issuers will have
sufficient cash flow and profits to meet required principal and interest
payments. The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder to
seek to protect the interests of security holders if it determines this to be in
the best interest of the Fund's shareholders.
While credit ratings are only one factor WRIMCO relies on in evaluating
high-yield debt securities, certain risks are associated with credit ratings.
Credit ratings evaluate the safety of principal and interest payments, not
market value risk. Credit ratings for individual securities may change from
time to time, and the Fund may retain a portfolio security whose rating has been
changed.
Policies and Restrictions: As a fundamental policy, at least 80% of the
Fund's net assets will be invested during normal market conditions in municipal
bonds.
As a fundamental policy, when WRIMCO believes market conditions dictate,
the Fund may have more than 25% of its assets invested in industrial development
bonds the interest on which is paid by revenues from generating plants.
As a fundamental policy, the Fund may not purchase any municipal bonds that
are not either (i) rated at least BBB by Standard & Poor's Ratings Services
("S&P") or Baa by Moody's Investors Service, Inc. ("MIS"), or (ii) are unrated
municipal bonds that, in the opinion of WRIMCO, would have the quality ratings
described above if they were rated, unless thereafter at least 80% of the value
of the Fund's total assets would consist of cash or municipal bonds that were of
such quality at the time of purchase. See Appendix A to the SAI for a
description of bond ratings.
Debt Securities. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest, and must repay the amount borrowed at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values.
Debt securities have varying levels of sensitivity to changes in interest
rates and varying degrees of quality. As a general matter, however, when
interest rates rise, the values of fixed-rate debt securities fall and,
conversely, when interest rates fall, the values of fixed-rate debt securities
rise. The values of floating and adjustable-rate debt securities are not as
sensitive to changes in interest rates as the values of fixed-rate debt
securities. Longer-term bonds are generally more sensitive to interest rate
changes than shorter-term bonds.
U.S. Government Securities are high-quality instruments issued or
guaranteed as to principal or interest by the U.S. Treasury or by an agency or
instrumentality of the U.S. Government. Not all U.S. Government Securities are
backed by the full faith and credit of the United States. Some are backed by
the right of the issuer to borrow from the U.S. Treasury; others are backed by
discretionary authority of the U.S. Government to purchase the agencies'
obligations; while others are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment.
Zero coupon bonds do not make interest payments; instead, they are sold at
a deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can
be very volatile when interest rates change. In calculating its income, the
Fund takes into account as income a portion of the difference between a zero
coupon bond's purchase price and its face value.
Money market instruments are high-quality, short-term debt instruments that
present minimal credit risk. They may include U.S. Government Securities,
commercial paper and other short-term corporate obligations, and certificates of
deposit, bankers' acceptances, bank deposits and other financial institution
obligations. These instruments may carry fixed or variable interest rates.
Policies and Restrictions: As a fundamental policy, up to 10% of the
Fund's assets may be invested in taxable obligations.
As a fundamental policy, the only taxable obligations that the Fund may
purchase are (i) obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities ("U.S. Government Securities"), (ii) bank
obligations of domestic banks or savings and loan associations that are subject
to regulation by the U.S. Government (these obligations may include certificates
of deposit, letters of credit and acceptances), and (iii) commercial paper rated
at least A by S&P or MIS.
As a fundamental policy, the Fund will not invest in securities on which
the payment of principal and interest is the obligation of any nongovernmental
entity unless the company obligated to make these payments has been in
continuous operation for at least three years; however, the Fund may buy
securities not meeting this test if it does not then have more than 5% of its
total assets in these other securities. This three-year period includes the
operation of predecessor companies.
The Fund does not intend to invest more than 5% of its assets in U.S.
Government Securities.
Options, Futures and Other Strategies. The Fund may use certain options
and indexed securities to attempt to enhance income or yield or may attempt to
reduce the overall risk of its investments by using certain options, futures
contracts and certain other strategies described herein. The strategies
described below may be used in an attempt to manage certain risks of the Fund's
investments that can affect fluctuation in its net asset value.
The Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations. The Fund might not use
any of these strategies, and there can be no assurance that any strategy that is
used will succeed. The risks associated with such strategies are described
below. Also see the SAI for more information on these instruments and
strategies and their risk considerations.
Options. The Fund may engage in certain strategies involving options to
attempt to enhance the Fund's income or yield or to attempt to reduce the
overall risk of its investments. A call option gives the purchaser the right to
buy, and obligates the writer to sell, the underlying investment at the agreed
upon exercise price during the option period. A put option gives the purchaser
the right to sell, and obligates the writer to buy, the underlying investment at
the agreed upon exercise price during the option period. Purchasers of options
pay an amount, known as a premium, to the option writer in exchange for the
right under the option contract.
Options offer large amounts of leverage, which will result in the Fund's
net asset value being more sensitive to changes in the value of the related
investment. There is no assurance that a liquid secondary market will exist for
exchange-listed options. The Fund will be able to close a position in an option
it has written only if there is a market for the put or call. If the Fund is
not able to enter into a closing transaction on an option it has written, it
will be required to maintain the securities, or cash in the case of an option on
an index, subject to the call or the collateral underlying the put until a
closing purchase transaction can be entered into or the option expires. Because
index options are settled in cash, the Fund cannot provide in advance for its
potential settlement obligations on a call it has written on an index by holding
the underlying securities. The Fund bears the risk that the value of the
securities it holds will vary from the value of the index.
Policies and Restrictions: As a fundamental policy, the Fund may purchase
and write (sell) put and call options only on domestic debt securities and
municipal bond indices, and the options on futures contracts described below,
subject to certain restrictions that are set forth in the SAI.
The Fund may purchase and write (sell) options on domestic debt securities
and municipal bond indices only if they are listed on a national securities
exchange.
The Fund will only write puts on domestic debt securities if it would be
willing to purchase the underlying security at the exercise price.
Futures Contracts and Options on Futures Contracts. When the Fund
purchases a futures contract, it incurs an obligation to take delivery of a
specified amount of the obligation underlying the contract at a specified time
in the future for a specified price. When the Fund sells a futures contract, it
incurs an obligation to deliver the specified amount of the underlying
obligation at a specified time in return for an agreed upon price.
When the Fund writes an option on a futures contract, it becomes obligated,
in return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the term of the option. If the Fund
has written a call, it assumes a short futures position. If it has written a
put, it assumes a long futures position. When the Fund purchases an option on a
futures contract, it acquires a right in return for the premium it pays to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put).
Policies and Restrictions: As a fundamental policy, the Fund may only buy
and sell futures contracts relating to domestic debt securities, futures
contracts relating to municipal bond indices and options on futures relating to
domestic debt securities.
The Fund intends to use futures contracts and options thereon only to
attempt to hedge against market risks that could adversely affect the value of
its portfolio.
Indexed Securities. The Fund may purchase indexed securities, which are
securities the value of which varies in relation to the value of other
securities, securities indices, currencies, precious metals or other commodities
or other financial indicators, as long as WRIMCO determines that it is
consistent with the Fund's goal and investment policies. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. The performance of indexed securities depends to a great extent on
the performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Indexed
securities may be more volatile than the underlying instruments.
Policies and Restrictions: The Fund does not intend to invest more than
25% of its total assets in indexed securities.
Mortgage-Backed Securities may include pools of mortgages, such as
collateralized mortgage obligations, and stripped mortgage-backed securities.
The value of these securities may be significantly affected by changes in
interest rates, the market's perception of the issuers and the creditworthiness
of the parties involved.
The yield characteristics of mortgage-backed securities differ from those
of traditional debt securities. Among the major differences are that interest
and principal payments are made more frequently on mortgage-backed securities
and that principal may be prepaid at any time because the underlying mortgage
loans generally may be prepaid at any time. As a result, if the Fund purchases
these securities at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity while a prepayment rate that is slower than
expected will have the opposite effect of increasing yield to maturity.
Conversely, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. Accelerated prepayments on securities purchased by
the Fund at a premium also impose a risk of loss of principal because the
premium may not have been fully amortized at the time the principal is repaid in
full.
Timely payment of principal and interest on pass-through securities of the
Government National Mortgage Association (but not the Federal Home Loan Mortgage
Corporation or the Federal National Mortgage Association) is guaranteed by the
full faith and credit of the United States. This is not a guarantee against
market decline of the value of these securities or shares of the Fund. It is
possible that the availability and marketability (i.e., liquidity) of these
securities could be adversely affected by actions of the U.S. Government to
tighten the availability of its credit.
Policies and Restrictions: The Fund may invest in mortgage-backed
securities as long as WRIMCO determines that it is consistent with the Fund's
goal and investment policies. The Fund does not intend to invest more than one-
third of its total assets in mortgage-backed securities.
Stripped Securities are the separate income or principal components of a
debt instrument. These involve risks that are similar to those of other debt
securities, although they may be more volatile. The prices of stripped
mortgage-backed securities may be particularly affected by changes in interest
rates.
Policies and Restrictions: The Fund may invest in stripped securities as
long as WRIMCO determines that it is consistent with the Fund's goal and
investment policies.
Risks of Derivative Instruments. The use of options, futures contracts and
options on futures contracts and the investment in indexed securities, stripped
securities and mortgage-backed securities involve special risks, including (i)
possible imperfect or no correlation between price movements of the portfolio
investments (held or intended to be purchased) involved in the transaction and
price movements of the instruments involved in the transaction, (ii) possible
lack of a liquid secondary market for any particular instrument at a particular
time, (iii) the need for additional portfolio management skills and techniques,
(iv) losses due to unanticipated market price movements, (v) the fact that,
while such strategies can reduce the risk of loss, they can also reduce the
opportunity for gain, or even result in losses, by offsetting favorable price
movements in investments involved in the transaction, (vi) incorrect forecasts
by WRIMCO concerning interest rates or direction of price fluctuations of the
investment involved in the transaction, which may result in the strategy being
ineffective, (vii) loss of premiums paid by the Fund on options it purchases,
and (viii) the possible inability of the Fund to purchase or sell a portfolio
security at a time when it would otherwise be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate
securities in connection with such transactions and the possible inability of
the Fund to close out or liquidate its position.
For a hedging strategy to be completely effective, the price change of the
hedging instrument must equal the price change of the investment being hedged.
The risk of imperfect correlation of these price changes increases as the
composition of the Fund's portfolio diverges from instruments underlying a
hedging instrument. Such equal price changes are not always possible because
the investment underlying the hedging instruments may not be the same investment
that is being hedged. WRIMCO will attempt to create a closely correlated hedge
but hedging activity may not be completely successful in eliminating market
value fluctuation.
WRIMCO may use derivative instruments, including securities with embedded
derivatives, for hedging purposes to adjust the risk characteristics of the
Fund's portfolio of investments and may use some of these instruments to adjust
the return characteristics of the Fund's portfolio of investments. An embedded
derivative is a derivative that is part of another financial instrument.
Embedded derivatives typically, but not always, are debt securities whose return
of principal or interest, in part, is determined by reference to something that
is not intrinsic to the security itself. The use of derivative techniques for
speculative purposes can increase investment risk. If WRIMCO judges market
conditions incorrectly or employs a strategy that does not correlate well with
the Fund's investments, these techniques could result in a loss, regardless of
whether the intent was to reduce risk or increase return. These techniques may
increase the volatility of the Fund and may involve a small investment of cash
relative to the magnitude of the risk assumed. In addition, these techniques
could result in a loss if the counterparty to the transaction does not perform
as promised or if there is not a liquid secondary market to close out a position
that the Fund has entered into.
The ordinary spreads between prices in the cash and futures markets, due to
the differences in the natures of those markets, are subject to distortion. Due
to the possibility of distortion, a correct forecast of general interest rate
trends by WRIMCO may still not result in a successful transaction. WRIMCO may
be incorrect in its expectations as to the extent of various interest rate
movements or the time span within which the movements take place.
Options and futures transactions may increase portfolio turnover rates,
which results in correspondingly greater commission expenses and transaction
costs and may result in certain tax consequences. See the SAI for further
information regarding these and other risks.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its goal, investment policies and regulatory requirements
applicable to investment companies.
When-Issued and Delayed-Delivery Transactions are trading practices in
which payment and delivery for the securities take place at a future date. The
market value of a security could change during this period, which could affect
the Fund's yield.
The Fund may purchase municipal bonds on a when-issued or delayed-delivery
basis and sell municipal bonds on a delayed-delivery basis. When purchasing
municipal bonds on a delayed-delivery basis, the Fund assumes the rights and
risks of ownership, including the risk of price and yield fluctuations. When
the Fund has sold a municipal bond on a delayed-delivery basis, the Fund does
not participate in further gains or losses with respect to the bond. If the
other party to a delayed-delivery transaction fails to deliver or pay for the
bonds, the Fund could miss a favorable price or yield opportunity or could
suffer a loss.
Illiquid Securities. Illiquid investments may be difficult to sell
promptly at an acceptable price. Difficulty in selling securities may result in
a loss or may be costly to the Fund.
Policies and Restrictions: The Fund may not purchase a security if, as a
result, more than 10% of its net assets would consist of illiquid investments.
Diversification. Diversifying the Fund's investment portfolio can reduce
the risks of investing. This may include limiting the amount of money invested
in any one issuer or, on a broader scale, in any one industry.
Policies and Restrictions: As a fundamental policy, the Fund may not
purchase the securities of any "issuer" if more than 5% of the Fund's total
assets would then be invested in that "issuer." This restriction does not apply
to U.S. Government Securities.
There is a question as to who is the issuer of certain types of municipal
bonds. For example, municipal bonds may be created by a particular government
but be backed only by the assets and revenues of a subdivision of that
government such as an agency, instrumentality, authority or other subdivision.
In such case, the Fund would consider that such subdivision is the issuer for
the purposes of this 5% restriction. In the case of industrial development
bonds, the nongovernmental user of facilities financed by them is also
considered as a separate issuer. The method of determining who is an issuer may
be changed without shareholder vote. The Fund considers a guarantee of a
municipal bond by a government or other entity to be a separate security that
would be given a value and included in the 5% restriction if the value of all
municipal bonds created by the government or entity and owned by the Fund
exceeds 10% of the value of the Fund's total assets.
As a fundamental policy, the Fund may not purchase securities of issuers in
any one industry except for municipal bonds and U.S. Government Securities if
more than 25% of the value of its assets would then be invested in issuers in
that industry. Despite the fact that this restriction does not apply to
municipal bonds, the Fund intends to apply the restriction to nongovernmental
users (other than utilities) of facilities financed by industrial development
bonds.
Borrowing. If the Fund borrows money, its share price may be subject to
greater fluctuation until the borrowing is paid off. If the Fund makes
additional investments while borrowings are outstanding, this may be considered
a form of leverage. The Fund's ability to borrow for other than emergency or
extraordinary purposes is a special risk consideration.
Policies and Restrictions: As a fundamental policy, the Fund may not
engage in repurchase transactions.
<PAGE>
About Your Account
Class Y shares are designed for institutional investors. Class Y shares
are available for purchase by:
participants of employee benefit plans established under section 403(b) or
section 457, or qualified under section 401, including 401(k) plans, of the
Internal Revenue Code of 1986, as amended (the "Code"), when the plan has 100
or more eligible employees and holds the shares in an omnibus account on the
Fund's records;
banks, trust institutions, investment fund administrators and other third
parties investing for their own accounts or for the accounts of their
customers where such investments for customer accounts are held in an omnibus
account on the Fund's records;
government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more; and
certain retirement plans and trusts for employees and account representatives
of Waddell & Reed, Inc. and its affiliates.
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its account
representatives. To open your account you must complete and sign an
application. Your Waddell & Reed account representative can help you with any
questions you might have.
The price to buy a share of the Fund, called the offering price, is
calculated every business day.
The offering price of a Class Y share (price to buy one Class Y share) is
the Fund's Class Y net asset value ("NAV"). The Fund's Class Y shares are sold
without a sales charge.
To purchase by wire, you must first obtain an account number by calling 1-
800-366-2520, then mail a completed application to Waddell & Reed, Inc., P. O.
Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to 913-236-5044.
Instruct your bank to wire the amount you wish to invest to UMB Bank, n.a., ABA
Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer Name and
Account Number.
To purchase by check, make your check payable to Waddell & Reed, Inc. Mail
the check, along with your completed application, to Waddell & Reed, Inc., P.O.
Box 29217, Shawnee Mission, Kansas 66201-9217.
The Fund's Class Y NAV is the value of a single share. The Class Y NAV is
computed by adding, with respect to that class, the value of the Fund's
investments, cash and other assets, subtracting its liabilities, and then
dividing the result by the number of Class Y shares outstanding.
The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market quotations or, if market quotations
are not available, at their fair value in a manner determined in good faith by
or at the direction of the Board of Directors. Bonds are generally valued
according to prices quoted by an independent pricing service. Short-term debt
securities are valued at amortized cost, which approximates market value. Other
assets are valued at their fair value by or at the direction of the Board of
Directors.
The Fund is open for business each day the New York Stock Exchange (the
"NYSE") is open. The Fund normally calculates the NAVs of its shares as of the
later of the close of business of the NYSE, normally 4 p.m. Eastern time, or the
close of the regular session of any other securities or commodities exchange on
which an option held by the Fund is traded.
When you place an order to buy shares, your order will be processed at the
next offering price calculated after your order is received and accepted. Note
the following:
Orders are accepted only at the home office of Waddell & Reed, Inc.
All of your purchases must be made in U.S. dollars.
If you buy shares by check, and then sell those shares by any method other
than by exchange to another fund in the United Group, the payment may be
delayed for up to ten days to ensure that your previous investment has
cleared.
The Fund does not issue certificates representing Class Y shares of the Fund.
When you sign your account application, you will be asked to certify that
your Social Security or other taxpayer identification number is correct and
whether you are subject to backup withholding for failing to report income to
the IRS.
Waddell & Reed, Inc. reserves the right to reject any purchase orders,
including purchases by exchange, and it and the Fund reserve the right to
discontinue offering Fund shares for purchase.
Minimum Investments
To Open an Account
For a government entity or authority or for a corporation: $10 million
(within
first
twelve
months)
For other
investors: Any amount
Adding to Your Account
You can make additional investments of any amount at any time.
To add to your account by wire: Instruct your bank to wire the amount you
wish to invest, along with the account number and registration, to UMB Bank,
n.a., ABA Number 101000695, W&R Underwriter Account Number 0007978, FBO Customer
Name and Account Number.
To add to your account by mail: Make your check payable to Waddell & Reed,
Inc. Mail the check along with a letter stating your account number, the
account registration and that you wish to purchase Class Y shares of the Fund
to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
Selling Shares
You can arrange to take money out of your Fund account at any time by
selling (redeeming) some or all of your shares.
The redemption price (price to sell one Class Y share) is the Fund's Class
Y NAV.
To sell shares by telephone or fax: If you have elected this method in
your application or by subsequent authorization, call 1-800-366-5465 or fax your
request to 913-236-5044 and give your instructions to redeem shares and make
payment by wire to your pre-designated bank account or by check to you at the
address on the account.
To sell shares by written request: Complete an Account Service Request
form, available from your Waddell & Reed account representative, or write a
letter of instruction with:
the name on the account registration;
the Fund's name;
the Fund account number;
the dollar amount or number of shares to be redeemed; and
any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed account
representative, or mail it to:
Waddell & Reed, Inc.
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed will send a check to the
address on the account.
Special Requirements for Selling Shares
Account Type Special Requirements
Retirement The written instructions must
Account be signed by a properly
authorized person.
Trust The trustee must sign the
written instructions
indicating capacity as
trustee. If the trustee's
name is not in the account
registration, provide a
currently certified copy of
the trust document.
Business or At least one person authorized
Organization by corporate resolution to act
on the account must sign the
written instructions.
When you place an order to sell shares, your shares will be sold at the
next NAV calculated after receipt of a written request for redemption in good
order by Waddell & Reed, Inc. at its home office. Note the following:
If more than one person owns the shares, each owner must sign the written
request.
If you recently purchased the shares by check, the Fund may delay payment of
redemption proceeds. You may arrange for the bank upon which the purchase
check was drawn to provide to the Fund telephone or written assurance,
satisfactory to the Fund, that the check has cleared and been honored. If no
such assurance is given, payment of the redemption proceeds on these shares
will be delayed until the earlier of 10 days or the date the Fund is able to
verify that your purchase check has cleared and been honored.
Redemptions may be suspended or payment dates postponed on days when the NYSE
is closed (other than weekends or holidays), when trading on the NYSE is
restricted or as permitted by the Securities and Exchange Commission.
Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
The Fund reserves the right to require a signature guarantee on certain
redemption requests. This requirement is designed to protect you and Waddell &
Reed from fraud. The Fund may require a signature guarantee in certain
situations such as:
the request for redemption is made by a corporation, partnership or
fiduciary;
the request for redemption is made by someone other than the owner of record;
or
the check is being made payable to someone other than the owner of record.
The Fund will accept a signature guarantee from a national bank, a
federally chartered savings and loan or a member firm of a national stock
exchange or other eligible guarantor in accordance with procedures of the Fund's
transfer agent. A notary public cannot provide a signature guarantee.
The Fund reserves the right to redeem at NAV all shares of the Fund owned
or held by you having an aggregate NAV of less than $500. The Fund will give
you notice of its intention to redeem your shares and a 60-day opportunity to
purchase a sufficient number of additional shares to bring the aggregate NAV of
your shares to $500.
Telephone Transactions
The Fund and its agents will not be liable for following instructions
communicated by telephone that they reasonably believe to be genuine. The Fund
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Fund fails to do so, the Fund may be liable for
losses due to unauthorized or fraudulent instructions. Current procedures
relating to instructions communicated by telephone include tape recording
instructions, requiring personal identification and providing written
confirmations of transactions effected pursuant to such instructions.
Shareholder Services
Waddell & Reed provides a variety of services to help you manage your
account.
Personal Service
Your local Waddell & Reed account representative is available to provide
personal service. Additionally, the Waddell & Reed Customer Services staff is
available to respond promptly to your inquiries and requests.
Reports
Statements and reports sent to you include the following:
confirmation statements (after every purchase, exchange, transfer or
redemption)
year-to-date statements (quarterly)
annual and semiannual reports (every six months)
To reduce expenses, only one copy of most annual and semiannual reports
will be mailed to your household, even if you have more than one account with
the Fund. Call 913-236-2000 if you need copies of annual or semiannual reports
or historical account information.
Exchanges
You may sell your Class Y shares and buy Class Y shares of other funds in
the United Group. You may exchange only into funds that are legally registered
for sale in your state of residence. Note that exchanges out of the Fund may
have tax consequences for you. Before exchanging into a fund, read its
prospectus.
The Fund reserves the right to terminate or modify these exchange
privileges at any time, upon notice in certain instances.
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Ordinarily, dividends are distributed
from the Fund's net investment income, which includes accrued interest, earned
discount and other income earned on portfolio assets less expenses, monthly.
Net capital gains ordinarily are distributed in December. The Fund may make
additional distributions if necessary to avoid Federal income or excise taxes on
certain undistributed income and capital gains.
Distribution Options. When you open an account, specify on your
application how you want to receive your distributions. The Fund offers three
options:
1. Share Payment Option. Your dividends and capital gains distributions will
be automatically paid in additional Class Y shares of the Fund. If you do
not indicate a choice on your application, you will be assigned this
option.
2. Income-Earned Option. Your capital gains distributions will be
automatically paid in Class Y shares, but you will be sent a check for each
dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital gains
distributions.
For retirement accounts, all distributions are automatically paid in Class
Y shares.
Taxes
The Fund has qualified and intends to continue to qualify for treatment as
a regulated investment company under the Code, so that it will be relieved of
Federal income tax on that part of its investment company taxable income
(consisting generally of taxable net investment income and net short-term
capital gain) and net capital gain (the excess of net long-term capital gain
over net short-term capital loss) that are distributed to its shareholders. In
addition, the Fund intends to continue to qualify to pay "exempt-interest"
dividends, which requires, among other things, that at the close of each
calendar quarter at least 50% of the value of its total assets must consist of
obligations the interest on which is excludable from gross income under section
103(a) of the Code.
There are certain tax requirements that the Fund must follow in order to
avoid Federal taxation. In its effort to adhere to these requirements, the Fund
may have to limit its investment activity in some types of instruments.
As with any investment, you should consider how your investment in the Fund
will be taxed. You should be aware of the following tax implications:
Taxes on distributions. The distributions by the Fund that are designated
by it as exempt-interest dividends generally may be excluded by you from your
gross income. Dividends from the Fund's investment company taxable income are
taxable to you as ordinary income, whether received in cash or paid in
additional Fund shares. Distributions of the Fund's net capital gain, when
designated as such, are taxable to you as long-term capital gain, whether
received in cash or paid in additional Fund shares and regardless of the length
of time you have owned your shares. None of the dividends paid by the Fund is
expected to be eligible for the dividends-received deduction allowed to
corporations. The Fund notifies you after each calendar year-end as to the
amounts of dividends and other distributions paid (or deemed paid) to you for
that year.
Exempt-interest dividends paid by the Fund may be subject to income
taxation under state and local tax laws. In addition, a portion of those
dividends is expected to be attributable to interest on certain bonds that must
be treated by you as a "tax preference item" for purposes of calculating your
liability, if any, for the AMT; the Fund anticipates such portion will be not
more than 40% of the dividends it will pay to its shareholders. The Fund will
provide you with information concerning the amount of distributions subject to
the AMT after the end of each calendar year. Shareholders who may be subject to
the AMT should consult with their tax advisers concerning investment in the
Fund.
Entities or other persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by private activity bonds
("PABs") should consult their tax advisers before purchasing Fund shares
because, for users of certain of these facilities, the interest on PABs is not
exempt from Federal income tax. For these purposes, the term "substantial user"
is defined generally to include a "non-exempt person" who regularly uses in
trade or business a part of a facility financed from the proceeds of PABs.
Withholding. The Fund is required to withhold 31% of all taxable
dividends, capital gains distributions and redemption proceeds payable to
individuals and certain other noncorporate shareholders who do not furnish the
Fund with a correct taxpayer identification number. Withholding at that rate
from taxable dividends and capital gains distributions also is required for such
shareholders who otherwise are subject to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in
taxable gain or loss to you, depending on whether the redemption proceeds are
more or less than your adjusted basis for the redeemed shares. If you have a
gain on a redemption of Fund shares, the entire gain will be taxable even though
a portion of the gain may represent municipal bond interest earned by the Fund
but not yet paid out as a dividend. If the redemption is not made until after
record date, however, that interest will be received by you as a dividend that
is mostly tax-exempt rather than as part of a taxable gain. Ordinarily, record
date is the first Friday after the 9th day of each month.
An exchange of Fund shares for shares of any other fund in the United Group
generally will have similar tax consequences. In addition, if you purchase Fund
shares within thirty days before or after redeeming other Fund shares
(regardless of class) at a loss, part or all of that loss will not be deductible
and will increase the basis of the newly-purchased shares.
Interest on indebtedness incurred or continued to purchase or carry shares
of the Fund will not be deductible for Federal income tax purposes to the extent
the Fund's distributions consist of exempt-interest dividends. Proposals may be
introduced before Congress for the purpose of restricting or eliminating the
Federal income tax exemption for interest on municipal bonds. If such a
proposal were enacted, the availability of municipal bonds for investment by the
Fund and the value of its portfolio would be affected. In that event, the Fund
may decide to reevaluate its investment goal and policies.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for a more detailed discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor. You are urged to consult
your own tax adviser.
<PAGE>
About the Management and Expenses of the Fund
United Municipal Bond Fund, Inc. is a mutual fund: an investment that
pools shareholders' money and invests it toward a specified goal. In technical
terms, the Fund is an open-end, diversified management investment company
organized as a corporation under Maryland law on September 29, 1976.
The Fund is governed by a Board of Directors, which has overall
responsibility for the management of its affairs. The majority of directors are
not affiliated with Waddell & Reed, Inc.
The Fund has two classes of shares. In addition to the Class Y shares
offered by this Prospectus, the Fund has issued and outstanding Class A shares
which are offered by Waddell & Reed, Inc. through a separate prospectus. Prior
to January 21, 1996, the Fund offered only one class of shares to the public.
Shares outstanding on that date were designated as Class A shares. Class A
shares are subject to a sales charge on purchases but are not subject to
redemption fees. Class A shares are subject to a Rule 12b-1 fee at an annual
rate of up to 0.25% of the Fund's average net assets attributable to Class A
shares. Additional information about Class A shares may be obtained by calling
913-236-2000 or by writing to Waddell & Reed, Inc. at the address on the inside
back cover of the Prospectus.
The Fund does not hold annual meetings of shareholders; however, certain
significant corporate matters, such as the approval of a new investment advisory
agreement or a change in a fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon receipt
by the Fund of a request in writing signed by shareholders holding not less than
25% of all shares entitled to vote at such meeting, provided certain conditions
stated in the Bylaws of the Fund are met. There will normally be no meeting of
the shareholders for the purpose of electing directors until such time as less
than a majority of directors holding office have been elected by shareholders,
at which time the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the Investment
Company Act of 1940, as amended (the "1940 Act"), applies to the Fund, the
directors are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any director when requested in writing to
do so by the shareholders of record of not less than 10% of the Fund's
outstanding shares.
Each share (regardless of class) has one vote. All shares of the Fund vote
together as a single class, except as to any matter for which a separate vote of
any class is required by the 1940 Act, and except as to any matter which affects
the interests of one or more particular classes, in which case only the
shareholders of the affected classes are entitled to vote, each as a separate
class. Shares are fully paid and nonassessable when purchased.
WRIMCO and Its Affiliates
The Fund is managed by WRIMCO, subject to the authority of the Fund's Board
of Directors. WRIMCO provides investment advice to the Fund and supervises the
Fund's investments. Waddell & Reed, Inc. and its predecessors have served as
investment manager to each of the registered investment companies in the United
Group of Mutual Funds, except United Asset Strategy Fund, Inc., since 1940 or
the inception of the company, whichever was later, and to TMK/United Funds, Inc.
since that fund's inception, until January 8, 1992, when it assigned its duties
as investment manager and assigned its professional staff for investment
management services to WRIMCO. WRIMCO has also served as investment manager for
Waddell & Reed Funds, Inc. since its inception in September 1992 and United
Asset Strategy Fund, Inc. since it commenced operations in March 1995.
John M. Holliday is primarily responsible for the day-to-day management of
the portfolio of the Fund. Mr. Holliday has held his Fund responsibilities
since May 23, 1980. He is Senior Vice President of WRIMCO, Senior Vice
President of Waddell & Reed Asset Management Company, an affiliate of WRIMCO,
Vice President of the Fund and Vice President of other investment companies for
which WRIMCO serves as investment manager. Mr. Holliday has served as the
portfolio manager for investment companies managed by Waddell & Reed, Inc. and
its successor, WRIMCO, since August 1979, and has been an employee of Waddell &
Reed, Inc. and its successor, WRIMCO, since April 1978. Other members of
WRIMCO's investment management department provide input on market outlook,
economic conditions, investment research and other considerations relating to
the Fund's investments.
Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter
for each of the other funds in the United Group of Mutual Funds and Waddell &
Reed Funds, Inc. and acts as the principal underwriter and distributor for
variable life insurance and variable annuity policies issued by United Investors
Life Insurance Company for which TMK/United Funds, Inc. is the underlying
investment vehicle.
Waddell & Reed Services Company acts as transfer agent ("Shareholder
Servicing Agent") for the Fund and processes the payments of dividends. Waddell
& Reed Services Company also acts as agent ("Accounting Services Agent") in
providing bookkeeping and accounting services and assistance to the Fund and
pricing daily the value of its shares.
WRIMCO and Waddell & Reed Services Company are subsidiaries of Waddell &
Reed, Inc. Waddell & Reed, Inc. is a direct subsidiary of Waddell & Reed
Financial Services, Inc., a holding company, and an indirect subsidiary of
United Investors Management Company, a holding company, and Torchmark
Corporation, a holding company.
WRIMCO places transactions for the portfolio of the Fund and in doing so
may consider sales of shares of the Fund and other funds it manages as a factor
in the selection of brokers to execute portfolio transactions.
Breakdown of Expenses
Like all mutual funds, the Fund pays fees related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted from
shareholder accounts.
The Fund pays a management fee to WRIMCO for providing investment advice
and supervising its investments. The Fund also pays other expenses, which are
explained below.
Management Fee
The management fee of the Fund is calculated by adding a group fee to a
specific fee. It is accrued and paid to WRIMCO daily.
The specific fee is computed on the Fund's net asset value as of the close
of business each day at the annual rate of .03 of 1% of its net assets. The
group fee is a pro rata participation based on the relative net asset size of
the Fund in the group fee computed each day on the combined net asset values of
all the funds in the United Group at the annual rates shown in the following
table:
Group Fee Rate
Annual
Group Net Group
Asset Level Fee Rate
(all dollars For Each
in millions) Level
- ------------ --------
From $0
to $750 .51 of 1%
From $750
to $1,500 .49 of 1%
From $1,500
to $2,250 .47 of 1%
From $2,250
to $3,000 .45 of 1%
From $3,000
to $3,750 .43 of 1%
From $3,750
to $7,500 .40 of 1%
From $7,500
to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Growth in assets of the United Group assures a lower group fee rate.
The combined net asset values of all of the funds in the United Group were
approximately $14.7 billion as of September 30, 1996. Management fees for the
fiscal year ended September 30, 1996 were 0.44% of the Fund's average net
assets, which during that period consisted only of the Fund's Class A shares.
Other Expenses
While the management fee is a significant component of the Fund's annual
operating costs, the Fund has other expenses as well.
The Fund pays the Accounting Services Agent a monthly fee based on the
average net assets of the Fund for accounting services. With respect to its
Class Y shares, the Fund pays the Shareholder Servicing Agent a monthly fee
based on the average daily net assets of the class for the preceding month.
The Fund also pays other expenses, such as fees and expenses of certain
directors, audit and outside legal fees, costs of materials sent to
shareholders, taxes, brokerage commissions, interest, insurance premiums,
custodian fees, fees payable by the Fund under federal or other securities laws
and to the Investment Company Institute, and extraordinary expenses including
litigation and indemnification relative to litigation.
The Fund cannot precisely predict what its portfolio turnover rate will be,
but the Fund may have a high portfolio turnover. A higher turnover will
increase transaction and commission costs and could generate taxable income or
loss.
<PAGE>
United Municipal Bond Fund, Inc.
Custodian Underwriter
UMB Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas
Kirkpatrick & Lockhart LLP 66201-9217
1800 Massachusetts Ave, N. W. (913) 236-2000
Washington, D. C. 20036
Shareholder Servicing Agent
Independent Accountants Waddell & Reed
Deloitte & Touche LLP Services Company
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Investment Manager Shawnee Mission, Kansas
Waddell & Reed Investment 66201-9217
Management Company (913) 236-2000
6300 Lamar Avenue
P. O. Box 29217 Accounting Services Agent
Shawnee Mission, Kansas Waddell & Reed
66201-9217 Services Company
(913) 236-2000 6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
Our INTERNET address is:
http://www.waddell.com
<PAGE>
United Municipal Bond Fund, Inc.
Class Y Shares
PROSPECTUS
December 31, 1996
The United Group of Mutual Funds
United Asset Strategy Fund, Inc.
United Cash Management, Inc.
United Continental Income Fund, Inc.
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United Gold & Government Fund, Inc.
United Government Securities Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United International Growth Fund, Inc.
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United New Concepts Fund, Inc.
United Retirement Shares, Inc.
United Vanguard Fund, Inc.
NUP1008-Y(12-96)
printed on recycled paper
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
December 31, 1996
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with a prospectus ("Prospectus")
for the Class A shares or the Class Y shares, as applicable, of United Municipal
Bond Fund, Inc. (the "Fund"), dated December 31, 1996, which may be obtained
from the Fund or its underwriter, Waddell & Reed, Inc., at the address or
telephone number shown above.
TABLE OF CONTENTS
Performance Information ............................ 2
Goals and Investment Policies ...................... 4
Investment Management and Other Services ........... 25
Purchase, Redemption and Pricing of Shares ......... 29
Directors and Officers ............................. 40
Payments to Shareholders ........................... 45
Taxes .............................................. 46
Portfolio Transactions and Brokerage ............... 50
Other Information .................................. 52
Appendix A ......................................... 53
<PAGE>
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may, from time to
time, publish the Fund's total return information, yield information and/or
performance rankings in advertisements and sales materials.
Total Return
An average annual total return quotation is computed by finding the average
annual compounded rates of return over the one-, five-, and ten-year periods
that would equate the initial amount invested to the ending redeemable value.
Standardized total return information is calculated by assuming an initial
$1,000 investment and, for Class A shares, from which the maximum sales load of
4.25% is deducted. All dividends and distributions are assumed to be reinvested
in shares of the applicable class at net asset value for the class as of the day
the dividend or distribution is paid. No sales load is charged on reinvested
dividends or distributions on Class A shares. The formula used to calculate the
total return for a particular class of the Fund is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for the
periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares were reflected,
it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of
September 30, 1996, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
With Without
Sales LoadSales Load
Deducted Deducted
One-year period from October 1, 1995 to
September 30, 1996: 2.61% 7.16%
Five-year period from October 1, 1991 to
September 30, 1996: 7.12% 8.05%
Ten-year period from October 1, 1986 to
September 30, 1996: 7.89% 8.36%
Prior to January 21, 1996, the Fund offered only one class of shares to the
public. Shares outstanding on that date were designated as Class A shares.
Since that date, Class Y shares of the Fund have been available to certain
institutional investors.
The Fund may also quote unaveraged or cumulative total return for a class
which reflects the change in value of an investment in that class over a stated
period of time. Cumulative total returns will be calculated according to the
formula indicated above but without averaging the rate for the number of years
in the period.
Yield
A yield quoted for a class of the Fund is computed by dividing the net
investment income per share of that class earned during the period for which the
yield is shown by the maximum offering price per share of that class on the last
day of that period according to the following formula:
6
Yield = 2 ((((a - b)/cd)+1) -1)
Where with respect to a particular class of the Fund:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares of the class outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last day
of the period.
The yield for Class A shares of the Fund computed according to the formula
for the 30-day period ended on September 30, 1996, the date of the most recent
balance sheet included in this SAI, is 5.16%.
The Fund may also advertise or include in sales material its tax equivalent
yield, which is calculated by applying the stated income tax rate to only the
net investment income exempt from taxation according to a standard formula which
provides for computation of tax equivalent yield by dividing that portion of the
Fund's yield which is tax exempt by one minus a stated income tax rate and
adding the product to that portion, if any, of the yield of the Fund that is not
tax exempt.
The tax equivalent yield computed according to the formula for the 30-day
period ended on September 30, 1996, the date of the most recent balance sheet
included in this SAI, is 6.05%, 7.12%, 7.42%, 7.99% and 8.46% for marginal tax
brackets of 15%, 28%, 31%, 36% and 39.6%, respectively.
Change in yields primarily reflect different interest rates received by the
Fund as its portfolio securities change. Yield is also affected by portfolio
quality, portfolio maturity, type of securities held and operating expenses of
the applicable class.
Performance Rankings
Waddell & Reed, Inc. or the Fund also may from time to time publish in
advertisements or sales material performance rankings as published by recognized
independent mutual fund statistical services such as Lipper Analytical Services,
Inc., or by publications of general interest such as Forbes, Money, The Wall
Street Journal, Business Week, Barron's, Fortune or Morningstar Mutual Fund
Values. Each class of the Fund may also compare its performance to that of
other selected mutual funds or selected recognized market indicators such as the
Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average.
Performance information may be quoted numerically or presented in a table, graph
or other illustration.
All performance information that the Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of the Fund's shares when redeemed may be more or
less than their original cost.
GOALS AND INVESTMENT POLICIES
The goals and investment policies of the Fund are described in the
Prospectus, which refers to the following investment methods and practices.
Specific Securities and Investment Practices
Municipal Bonds
Municipal bonds are issued by a wide range of state and local governments,
agencies and authorities for various public purposes. The two main kinds of
municipal bonds are "general obligation" bonds and "revenue" bonds. In "general
obligation" bonds, the issuer has pledged its full faith, credit and taxing
power for the payment of principal and interest. "Revenue" bonds are payable
only from specific sources; these may include revenues from a particular
facility or class of facilities or special tax or other revenue source.
A special class of municipal bonds issued by state and local government
authorities and agencies are industrial development bonds ("IDBs"). The Fund
may purchase IDBs only if the interest on them is free from Federal income
taxation, although such interest is an item of tax preference for purposes of
the alternative minimum tax. In general, IDBs are revenue bonds and are issued
by or on behalf of public authorities to obtain funds to finance privately
operated facilities for business and manufacturing, sports and pollution
control. IDBs are also used to finance public facilities such as airports and
mass transit systems. The credit quality of IDBs is usually directly related to
the credit standing of the user of the facilities being financed. The Fund may
invest an unlimited percentage of its assets in municipal bonds that are
industrial development bonds.
Municipal leases and participation interests therein are another type of
municipal bond. The factors to be considered in determining whether or not any
rated municipal lease obligations are liquid include (i) the frequency of trades
and quotes for the obligations, (ii) the number of dealers willing to purchase
or sell the security and the number of other potential buyers, (iii) the
willingness of dealers to undertake to make a market in the securities, (iv) the
nature of marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer, (v) the
likelihood that the marketability of the obligation will be maintained through
the time the instrument is held, (vi) the credit quality of the issuer and the
lessee, and (vii) the essentiality to the lessee of the property covered by the
lease. Unrated municipal lease obligations are considered illiquid. These
obligations, which may take the form of a lease, an installment purchase, or a
conditional sale contract, are issued by state and local governments and
authorities to acquire land and a variety of equipment and facilities. The Fund
has not held and does not intend to hold such obligations directly as a lessor
of the property, but may from time to time purchase a participation interest in
a municipal obligation from a bank or other third party. A participation
interest gives the Fund a specified, undivided interest in the obligation in
proportion to its purchased interest in the total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt, including
voter referenda, interest rate limits or public sale requirements. Leases,
installment purchases or conditional sale contracts have evolved as a means for
governmental issuers to acquire property and equipment without being required to
meet these constitutional and statutory requirements. Many leases and contracts
include "non-appropriation clauses" providing 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 legislative body on a yearly or other
periodic basis. Non-appropriation clauses free the issuer from debt issuance
limitations. In determining the liquidity of a municipal lease obligation,
Waddell & Reed Investment Management Company ("WRIMCO"), the Fund's investment
manager, will differentiate between direct interests in municipal leases and
municipal lease-backed securities, the latter of which may take the form of a
lease-backed revenue bond, a tax-exempt asset-backed security or any other
investment structure using a municipal lease-purchased agreement as its base.
See "Asset-Backed Securities." While the former may present liquidity issues,
the latter are based on a well established method of securing payment of a
municipal lease obligation.
WRIMCO and the Fund rely on the opinion of bond counsel for the issuer in
determining whether obligations are municipal bonds. If a court holds that an
obligation held by the Fund is not a municipal bond (i.e., that the interest
thereon is taxable), the Fund will sell the obligation as soon as possible, but
it might incur a loss upon such sale.
Now or in the future, Standard & Poor's Ratings Services ("S&P") and
Moody's Investors Service, Inc. ("MIS") may use different rating designations
for municipal bonds depending on their maturities on issuance or other
characteristics. For example, MIS now rates the top four categories of
"municipal notes" (i.e., municipal bonds generally with a maturity at the time
of issuance ranging from six months to three years) as MIG 1, MIG 2, MIG 3 and
MIG 4. Municipal bonds purchased by the Fund comply with the 80% requirement
discussed in the Prospectus if they are within the top four rating designations
of S&P or MIS for the type of municipal bond in question. The Fund is not
required to dispose of any municipal bond if its rating falls below the rating
required for its purchase, nor does such a fall in rating affect the amount of
unrated municipal bonds which the Fund may buy.
Investment In Electrical Utility Related Municipal Bonds
From time to time the Fund may have varying but substantial portions of its
assets invested in municipal bonds of Public Power Agencies and in Pollution
Control Revenue Bonds which are IDBs. The interest on both types of bonds is
paid by revenues from generating plants. The Fund may invest any portion of its
assets in these bonds, and it is expected that there may be times, depending on
economic conditions in the industry or the relative attractiveness of other
municipal bonds, when more than 25% of its assets will be so invested.
Certain problems facing the generating industry in general may or may not
affect its ability to meet obligations on bonds. These problems include the
effects of (i) inflation on financing large construction programs, (ii) cost
increases and delays arising out of environmental considerations, (iii)
limitations of available capital on the ability to issue additional debt, (iv)
the effect of shortages and high prices of fuel on operations and profits, and
(v) the effect of energy conservation on sales. Problems of these types
generally affect the values of and the dividends paid on utility common stocks
rather than the ability to pay bond obligations.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase municipal bonds on a when-issued or delayed-delivery
basis or sell them on a delayed-delivery basis. The bonds so purchased or sold
by the Fund are subject to market fluctuation; their value may be less or more
when delivered than the purchase price paid or received. For example, delivery
to the Fund and payment by the Fund in the case of a purchase by it, or delivery
by the Fund and payment to it in the case of a sale by the Fund, may take place
a month or more after the date of the transaction. The purchase or sale price
is fixed on the transaction date. The Fund will enter into when-issued or
delayed-delivery transactions in order to secure what is considered to be an
advantageous price and yield at the time of entering into the transaction. No
interest accrues to the Fund until delivery and payment is completed. When the
Fund makes a commitment to purchase municipal bonds on a when-issued or delayed-
delivery basis, it will record the transaction and thereafter reflect the value
of the bonds in determining its net asset value per share. The municipal bonds
sold by the Fund on a delayed-delivery basis are also subject to market
fluctuation; their value when the Fund delivers them may be more than the
purchase price the Fund receives. When the Fund makes a commitment to sell
municipal bonds on a delayed basis, it will record the transaction and
thereafter value the bonds at the sales price in determining the Fund's net
asset value per share.
Ordinarily the Fund purchases municipal bonds on a when-issued or delayed-
delivery basis with the intention of actually taking delivery of the bonds.
However, before the bonds are delivered to the Fund and before it has paid for
them (the "settlement date"), the Fund could sell the bonds if WRIMCO decided it
was advisable to do so for investment reasons. The Fund will hold aside or
segregate cash or other securities, other than those purchased on a when-issued
or delayed-delivery basis, at least equal to the amount it will have to pay on
the settlement date; these other securities may, however, be sold at or before
the settlement date to pay the purchase price of the when-issued or delayed-
delivery bonds.
Limited Investment in Other Debt Securities
All of the Fund's invested assets, other than cash or receivables, must be
invested in municipal bonds, except that a limited amount of assets may be
invested in specified debt securities that are referred to in the Prospectus as
taxable obligations and in certain options and futures contracts (see discussion
below). The Fund may invest in taxable obligations only if, after any such
investment, not more than 10% of its assets would consist of taxable
obligations. The only taxable obligations that the Fund may purchase are (i)
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government Securities"), (ii) bank obligations of
domestic banks or savings and loan associations that are subject to regulation
by the U.S. Government (these obligations may include certificates of deposit,
letters of credit and acceptances), and (iii) commercial paper. The taxable
commercial paper the Fund may buy must, at the time of purchase, be rated at
least A by S&P or MIS. See Appendix A to the Prospectus for a description of
these ratings.
Defensive Strategies and Temporary Investments
To shorten the average maturity of the Fund's portfolio, it may buy
municipal bonds that are payable in a relatively short time. This could be
either because they were so payable when they were first issued or because they
will mature shortly after purchase.
Another reason for buying either these short-term municipal bonds or
taxable obligations (up to the 10% limitation on taxable obligations described
in the Prospectus) during normal market conditions is to keep assets at work
until appropriate investments in longer-term municipal bonds can be made or in
order to have cash available to pay for redemptions.
Short-term municipal bonds or taxable obligations purchased for defensive
purposes will be held for as long as WRIMCO believes a temporary defensive
posture should be maintained. When bought during normal conditions, they will
be held until appropriate investments in longer-term municipal bonds are made or
until they are sold to meet redemptions.
U.S. Government Securities
U.S. Government Securities include Treasury Bills (which mature within one
year of the date they are issued), Treasury Notes (which have maturities of one
to ten years) and Treasury Bonds (which generally have maturities of more than
10 years). All such Treasury securities are backed by the full faith and credit
of the United States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Federal National Mortgage Association ("Fannie Mae"), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation, and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by Fannie Mae, are supported only
by the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United States, the
owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment.
U.S. Government Securities may include mortgage-backed securities issued by
U.S. Government agencies or instrumentalities including, but not limited to,
Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed securities
include "pass-through" securities and "participation certificates." Another
type of mortgage-backed security is a collateralized mortgage obligation
("CMO"). See "Mortgage-Backed Securities." Timely payment of principal and
interest on Ginnie Mae pass-throughs is guaranteed by the full faith and credit
of the United States. Freddie Mac and Fannie Mae are both instrumentalities of
the U.S. Government, but their obligations are not backed by the full faith and
credit of the United States. It is possible that the availability and the
marketability (i.e., liquidity) of the securities discussed in this section
could be adversely affected by actions of the U.S. Government to tighten the
availability of its credit.
Zero Coupon Bonds
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts) and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury security and selling them as
individual securities. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) can also be separated in this
fashion. Original issue zeros are zero coupon securities originally issued by
the U.S. Government, a government agency, or a corporation in zero coupon form.
Mortgage-Backed Securities
A mortgage-backed security may be an obligation of the issuer backed by a
mortgage or pool of mortgages or a direct interest in an underlying pool of
mortgages. Mortgage-backed securities are based on different types of mortgages
including those on commercial real estate or residential properties. Some
mortgage-backed securities, such as collateralized mortgage obligations, make
payments of both principal and interest at a variety of intervals; others make
semiannual interest payments at a predetermined rate and repay principal at
maturity (like a typical bond). Pass-through securities and participation
certificates represent pools of mortgages that are assembled, with interests
sold in the pool; the assembly is made by an "issuer," such as a mortgage
banker, commercial bank or savings and loan association, which assembles the
mortgages in the pool and passes through payments of principal and interest for
a fee payable to it. Payments of principal and interest by individual
mortgagors are passed through to the holders of the interest in the pool.
Monthly or other regular payments on pass-through securities and participation
certificates include payments of principal (including prepayments on mortgages
in the pool) rather than only interest payments.
The Fund may purchase mortgage-backed securities issued by both government
and non-government entities, such as banks, mortgage lenders, or other financial
institutions, as long as WRIMCO determines that it is consistent with the Fund's
goal and investment policies. Other types of mortgage-backed securities will
likely be developed in the future, and the Fund may invest in them if WRIMCO
determines they are consistent with the Fund's goal and investment policies.
The Fund does not intend to invest more than one-third of its total assets in
mortgage-backed securities.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are created when a U.S. Government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security ("PO") receives the
principal payments made by the underlying mortgage-backed security, while the
holder of the "interest-only" security ("IO") receives interest payments from
the same underlying security.
The prices of stripped mortgage-backed securities may be particularly
affected by changes in interest rates. As interest rates fall, prepayment rates
tend to increase, which tends to reduce prices of IOs and increase prices of
POs. Rising interest rates can have the opposite effect. The Fund intends to
invest less than five percent of its total assets in stripped securities.
Asset-Backed Securities
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as pass-
through securities. Interest and principal payments ultimately depend upon
payment of the underlying loans by individuals, although the securities may be
supported by letters of credit or other credit enhancements. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased directly
from issuers) bear variable or floating interest rates and may carry rights that
permit holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries on dates prior to
their stated maturities. Floating rate securities have interest rates that
change whenever there is a change in a designated base rate while variable rate
instruments provide for a specified periodic adjustment in the interest rate.
These formulas are designed to result in a market value for the instrument that
approximates its par value.
Indexed Securities
The Fund may purchase securities the value of which varies in relation to
the value of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators, as long as WRIMCO
determines that it is consistent with the Fund's goal and investment policies.
Indexed securities typically, but not always, are debt securities or deposits
whose value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically
provide for a maturity value that depends on the price of gold, resulting in a
security whose price tends to rise and fall together with gold prices.
Currency-indexed securities typically are short-term to intermediate-term debt
securities whose maturity values or interest rates are determined by reference
to the values of one or more specified foreign currencies, and may offer higher
yields than U.S. dollar-denominated securities of equivalent issuers. Currency-
indexed securities may be positively or negatively indexed; that is, their
maturity value may increase when the specified currency value increases,
resulting in a security that performs similarly to a foreign-denominated
instrument, or their maturity value may decline when foreign currencies
increase, resulting in a security whose price characteristics are similar to a
put on the underlying currency. Currency-indexed securities may also have
prices that depend on the values of a number of different foreign currencies
relative to each other.
Recent issuers of indexed securities have included banks, corporations, and
certain U.S. Government agencies. Certain indexed securities that are not
traded on an established market may be deemed illiquid.
Options, Futures and Other Strategies
General. As discussed in the Prospectus, WRIMCO may use certain options to
attempt to enhance income or yield or may attempt to reduce overall risk of its
investments by using certain options and futures contracts (sometimes referred
to as "futures"). Options and futures are sometimes referred to collectively as
"Financial Instruments." The Fund's ability to use a particular Financial
Instrument may be limited by its investment limitations or operating policies.
See "Investment Restrictions."
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Financial Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge the Fund takes
a position in a Financial Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge the Fund takes a position in a Financial Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to hedge
against price movements in one or more particular securities positions that the
Fund owns or intends to acquire. Financial Instruments on indices, in contrast,
generally are used to attempt to hedge against price movements in market sectors
in which the Fund has invested or expects to invest. Financial Instruments on
debt securities may be used to hedge either individual securities or broad debt
market sectors.
The use of Financial Instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several exchanges upon
which they are traded, the Commodity Futures Trading Commission (the "CFTC").
In addition, the Fund's ability to use Financial Instruments will be limited by
tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below and in
the Prospectus, WRIMCO expects to discover additional opportunities in
connection with options, futures contracts, options on futures contracts and
other similar or related techniques. These new opportunities may become
available as WRIMCO develops new techniques, as regulatory authorities broaden
the range of permitted transactions and as new options, futures contracts,
options on futures contracts or other techniques are developed. WRIMCO may
utilize these opportunities to the extent that they are consistent with the
Fund's goal and permitted by the Fund's investment limitations and applicable
regulatory authorities. The Fund's Prospectus or SAI will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities and interest rate
markets, which requires different skills than predicting changes in the prices
of individual securities. There can be no assurance that any particular
strategy will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Financial Instrument and price movements of the investments
being hedged. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match the Fund's current or anticipated investments exactly. The Fund may
invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if
the Fund entered into a short hedge because WRIMCO projected a decline in the
price of a security in the Fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Financial Instrument. Moreover, if the
price of the Financial Instrument declined by more than the increase in the
price of the security, the Fund could suffer a loss. In either such case, the
Fund would have been in a better position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties (i.e.,
Financial Instruments other than purchased options). If the Fund were unable to
close out its positions in such Financial Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close out a position
in a Financial Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the other party to the transaction ("counterparty")
to enter into a transaction closing out the position. Therefore, there is no
assurance that any position can be closed out at a time and price that is
favorable to the Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will 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 and liquid assets with a value, marked to market daily, sufficient to cover
its potential obligations to the extent not covered as provided in (1) above.
The Fund will comply with SEC guidelines regarding cover for these instruments
and will, if the guidelines so require, set aside cash or liquid assets in a
segregated account with its custodian in the prescribed amount as determined
daily.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Options on Securities. The Fund may write (sell) and purchase options on
securities, but only if the investments to which the options relate are domestic
debt securities, including, without limitation, U.S. Government Securities. The
above limitation is a fundamental policy, which cannot be changed without a
shareholder vote. The Fund has no fundamental policies as to percentage
limitations on its purchase and sale of options on securities.
The Fund may write and purchase options on domestic debt securities to
attempt to enhance income or to reduce the overall risk of its investments. The
Fund may only write and purchase options on domestic debt securities if they are
listed on a national securities exchange.
The purchase of call options serves as a long hedge, and the purchase of
put options serves as a short hedge. Writing put or call options can enable the
Fund to enhance income or yield by reason of the premiums paid by the purchasers
of such options. However, if the market price of the security underlying a put
option declines to less than the exercise price of the option, minus the premium
received, the Fund would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security appreciates
to a price higher than the exercise price of the call option, it can be expected
that the option will be exercised and the Fund will be obligated to sell the
security at less than its market value. The Fund will write calls on securities
when WRIMCO believes that the amount of the premium represents adequate
compensation for the loss of the opportunity.
Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a
price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Fund will be obligated to purchase the
security at more than its market value. The Fund will write a put option on a
security only when it has determined that it would be willing to purchase the
underlying security at the exercise price.
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
Risks of Options on Securities. The Fund is only authorized to write and
purchase options on securities that are listed on a national securities
exchange. Exchange-listed options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. However, there can be no
assurance that such a market will exist at any particular time.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Options on Municipal Bond Indices. The Fund may write and purchase options
on indices, but only if the indices are municipal bond indices. The above
limitation is a fundamental policy, which cannot be changed without a
shareholder vote. The Fund has no fundamental policies as to percentage
limitations on its purchase and sale of options on municipal bond indices.
The Fund may write and purchase options on municipal bond indices to
attempt to enhance the Fund's income or to reduce the overall risk of its
investments. The Fund may only write and purchase options on municipal bond
indices if they are listed on a national securities exchange.
Puts and calls on municipal bond indices are similar to puts and calls on
securities or futures contracts except that all settlements are in cash and gain
or loss depends on changes in the index in question rather than on price
movements in individual securities or futures contracts. When the Fund writes a
call on a municipal bond index, it receives a premium and agrees that, prior to
the expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the municipal
bond index upon which the call is based is greater than the exercise price of
the call. The amount of cash is equal to the difference between the closing
price of the index and the exercise price of the call times a specified multiple
("multiplier"), which determines the total dollar value for each point of such
difference. When the Fund buys a call on a municipal bond index, it pays a
premium and has the same rights as to such call as are indicated above. When
the Fund buys a put on a municipal bond index, it pays a premium and has the
right, prior to the expiration date, to require the seller of the put, upon the
Fund's exercise of the put, to deliver to the Fund an amount of cash if the
closing level of the municipal bond index upon which the put is based is less
than the exercise price of the put, which amount of cash is determined by the
multiplier, as described above for calls. When the Fund writes a put on a
municipal bond index, it receives a premium and the purchaser has the right,
prior to the expiration date, to require the Fund to deliver to it an amount of
cash equal to the difference between the closing level of the municipal bond
index and the exercise price times the multiplier if the closing level is less
than the exercise price.
Risks of Options on Municipal Bond Indices. The risks of investment in
options on municipal bond indices may be greater than options on securities.
Because municipal bond index options are settled in cash, when the Fund writes a
call on a municipal bond index it cannot provide in advance for its potential
settlement obligations by acquiring and holding the underlying securities. The
Fund can offset some of the risk of writing a call index option by holding a
diversified portfolio of municipal bonds similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same municipal bonds as
underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if the Fund could assemble a municipal bond portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund as the call writer will not
learn that it has been assigned until the next business day at the earliest.
The time lag between exercise and notice of assignment poses no risk for the
writer of a covered call on a specific underlying security, such as a debt
security, because there the writer's obligation is to deliver the underlying
security, not to pay its value as of a fixed time in the past. So long as the
writer already owns the underlying security, it can satisfy its settlement
obligations by simply delivering it, and the risk that its value may have
declined since the exercise date is borne by the exercising holder. In
contrast, even if the writer of an index call holds municipal bonds that exactly
match the composition of the underlying index, it will not be able to satisfy
its assignment obligations by delivering those municipal bonds against payment
of the exercise price. Instead, it will be required to pay cash in an amount
based on the closing index value on the exercise date. By the time it learns
that it has been assigned, the index may have declined, with a corresponding
decline in the value of its municipal bond portfolio. This "timing risk" is an
inherent limitation on the ability of index call writers to cover their risk
exposure by holding municipal bond positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
Futures Contracts and Options Thereon. The Fund may buy and sell interest
rate futures contracts, but only futures contracts relating to domestic debt
securities ("Debt Futures") and futures contracts relating to municipal bond
indices ("Municipal Bond Index Futures"). The Fund may also buy and sell
options on Debt Futures. The limitation on buying and selling futures contracts
to Debt Futures and Municipal Bond Index Futures, and the limitation on buying
and selling options on futures contracts to options on Debt Futures, are
fundamental policies, which cannot be changed without a shareholder vote. The
Fund has no fundamental policies as to percentage limitations on futures
contracts and options on futures contracts; see below, however, as to
limitations relating to the CFTC.
The purchase of futures or call options on futures can serve as a long
hedge, and the sale of futures or the purchase of put options on futures can
serve as a short hedge. Writing call options on futures contracts can serve as
a limited short hedge, using a strategy similar to that used for writing call
options on securities or indices. Similarly, writing put options on futures
contracts can serve as a limited long hedge. The Fund will purchase futures
contracts and options thereon only for the purpose of hedging against changes in
the market value of its portfolio securities or changes in the market value of
securities that WRIMCO anticipates that it may wish to include in the portfolio
of the Fund.
Futures strategies also can be used to manage the average duration of the
Fund's fixed-income portfolio. If WRIMCO wishes to shorten the average duration
of the Fund's fixed-income portfolio, the Fund may sell a futures contract or a
call option thereon, or purchase a put option on that futures contract. If
WRIMCO wishes to lengthen the average duration of the Fund's fixed-income
portfolio, the Fund may buy a futures contract or a call option thereon, or sell
a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
consisting of cash or U.S. Government Securities in an amount generally equal to
10% or less of the contract value. Margin must also be deposited when writing a
call or put option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions in
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may
be closed only on an exchange or board of trade that provides a secondary
market. The Fund intends to enter into futures and options on futures only on
exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time. In such event, it may not be possible
to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or option thereon can vary
from the previous day's settlement price; once that limit is reached, no trades
may be made that day at a price beyond the limit. Daily price limits do not
limit potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing the liquidation
of unfavorable positions.
If the Fund were unable to liquidate a futures contract or option thereon
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the futures contract or option or to maintain cash or securities in a
segregated account.
As an operating policy, to the extent that the Fund enters into futures
contracts or options on futures contracts, in each case other than for bona fide
hedging purposes (as defined by the CFTC), the aggregate initial margin and
premiums required to establish those positions (excluding the amount by which
options are "in-the-money" at the time of purchase) will not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any contracts the Fund has entered into. (In
general, a call option on a futures contract is "in-the-money" if the value of
the underlying futures contract exceeds the strike, i.e., exercise, price of the
call; a put option on a futures contract is "in-the-money" if the value of the
underlying futures contract is exceeded by the strike price of the put.) This
policy does not limit to 5% the percentage of the Fund's assets that are at risk
in futures contracts and options on futures contracts.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to the differences in the natures of those markets, are subject to
the following factors, which may create distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of
general interest rate or municipal bond market trends by WRIMCO may still not
result in a successful transaction. WRIMCO may be incorrect in its expectations
as to the extent of various interest rate or bond market movements or the time
span within which the movements take place.
Municipal Bond Index Futures. The risk of imperfect correlation between
movements in the price of Municipal Bond Index Futures and movements in the
price of the municipal bonds that are the subject of the hedge increases as the
composition of the Fund's municipal bond portfolio diverges from the municipal
bonds included in the applicable index. The price of the Municipal Bond Index
Future may move more than or less than the price of the securities being hedged.
If the price of the Municipal Bond Index Future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
security, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the Municipal Bond Index Futures, the Fund may buy or
sell Municipal Bond Index Futures in a greater dollar amount than the dollar
amount of the securities being hedged if the historical volatility of the prices
of such securities being hedged is more than the historical volatility of the
prices of the municipal bonds included in the index. It is also possible that,
where the Fund has sold Municipal Bond Index Futures to hedge against decline in
the market, the market may advance and the value of the securities held in the
portfolio may decline. If this occurred, the Fund would lose money on the
futures contract and also experience a decline in value of its portfolio
securities. However, while this could occur for a very brief period or to a
very small degree, over time the value of a diversified portfolio of municipal
bonds will tend to move in the same direction as the municipal bond indices on
which the futures contracts are based.
Where Municipal Bond Index Futures are purchased to hedge against a
possible increase in the price of securities before the Fund is able to invest
in them in an orderly fashion, it is possible that the market may decline
instead. If the Fund then concludes not to invest in them at that time because
of concern as to possible further market decline or for other reasons, it will
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities it had anticipated purchasing.
Limitations on the Use of Options on Securities, Municipal Bond Indices and
Futures Contracts. The Fund's use of options is governed by the following
guidelines, which can be changed by the Fund's Board of Directors without a
shareholder vote:
(1) options may be purchased or written only when WRIMCO believes that
there exists a liquid secondary market in such options;
(2) the Fund may not write call options having aggregate exercise prices
greater than 25% of its net assets; and
(3) the Fund may purchase a put or a call option (including straddles or
spreads) only if the value of its premium, when aggregated with the premiums on
all other options held by the Fund, does not exceed 5% of the Fund's total
assets.
Combined Positions. The Fund may purchase and write options in combination
with each other, or in combination with futures contracts, to adjust the risk
and return characteristics of its overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Turnover. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate.
Once the Fund has received an exercise notice on an option it has written, it
cannot effect a closing transaction in order to terminate its obligation under
the option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The
Fund will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than
those that would apply to direct purchases or sales.
Investment Restrictions
Certain of the Fund's investment restrictions and policies are described in
the Prospectus. The following are fundamental policies and, together with
certain restrictions described in the Prospectus, cannot be changed without
shareholder approval. Under these additional restrictions, the Fund:
(i) May not make any investments other than in the municipal bonds and in
the taxable obligations, options, futures contracts and other
financial instruments described in the Prospectus. Further, such
municipal bonds and taxable obligations are subject to the percentage
limitations and the quality restrictions described in the Prospectus.
Thus, the Fund may not purchase any voting securities, any commodities
or commodity contracts (except that it may buy and sell the options,
futures contracts and other financial instruments described in the
Prospectus whether or not any of them is considered to be a commodity
or a commodity contract), any real estate or interests in real estate
investment trusts or any investment company securities. Also, the
Fund may not engage in repurchase transactions;
(ii) May not invest in securities on which the payment of principal and
interest is the obligation of any nongovernmental entity (i.e., a
company) unless the company obligated to make these payments has been
in continuous operation for at least three years. This three-year
period includes the operation of predecessor companies. However, the
Fund may buy securities not meeting this test if it does not then have
more than 5% of its total assets in these other securities;
(iii) May not lend money or other assets; it may, of course, purchase all or
a portion of an issue of the municipal bonds or taxable obligations in
which it invests;
(iv) May not invest for the purpose of exercising control or management of
other companies;
(v) May not buy or continue to hold securities if any one of the Fund's
Directors or officers or certain others own more than .5 of 1% of the
securities of an issuer and if the persons who own that much or more
own 5% of that issuer's securities;
(vi) May not sell short, buy on margin, engage in arbitrage transactions or
participate on a joint, or a joint and several, basis in any trading
account in securities; however, it may make margin deposits in
connection with the options, futures contracts and other financial
instruments described in the Prospectus; also, the Fund may enter into
escrow and collateral arrangements in connection with its use of
options and futures contracts;
(vii) May not engage in the underwriting of securities, that is, the selling
of securities for others. Also, it may not invest in restricted
securities. Restricted securities are securities which cannot freely
be sold for legal reasons or because a promise has been given
establishing conditions for their sale;
(viii) May not purchase the securities of any "issuer" if more than 5% of the
Fund's total assets, taken at market, would then be invested in that
"issuer"; or
(ix) May not purchase securities of issuers in any one industry except for
municipal bonds and U.S. Government Securities if more than 25% of the
value of its assets would then be invested in issuers in that
industry.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities for a year and dividing
it by the monthly average of the market value of such securities during the
year, excluding certain short-term securities. The Fund's turnover rate may
vary greatly from year to year, as well as within a particular year, and may be
affected by cash requirements for the redemption of its shares. For fiscal
years 1996 and 1995 the portfolio turnover rates were 74.97% and 70.67%,
respectively.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly-owned subsidiary of Waddell & Reed, Inc.
Under the Management Agreement, WRIMCO is employed to supervise the investments
of the Fund and provide investment advice to the Fund. The address of WRIMCO
and Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's Board of Directors prior to approving any Shareholder
Servicing Agreement or Accounting Services Agreement.
Torchmark Corporation and United Investors Management Company
WRIMCO is a wholly-owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly-owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly-
owned subsidiary of United Investors Management Company. United Investors
Management Company is a wholly-owned subsidiary of Torchmark Corporation.
Torchmark Corporation is a publicly held company. The address of Torchmark
Corporation and United Investors Management Company is 2001 Third Avenue South,
Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds,
except United Asset Strategy Fund, Inc., since 1940 or the company's inception
date, whichever was later, and to TMK/United Funds, Inc. since that fund's
inception, until January 8, 1992 when it assigned its duties as investment
manager for these funds (and the related professional staff) to WRIMCO. WRIMCO
has also served as investment manager for Waddell & Reed Funds, Inc. since its
inception in September 1992, and United Asset Strategy Fund, Inc. since it
commenced operations in March 1995. Waddell & Reed, Inc. serves as principal
underwriter for the investment companies in the United Group of Mutual Funds and
Waddell & Reed Funds, Inc. and acts as principal underwriter and distributor for
variable life insurance and variable annuity policies issued by United Investors
Life Insurance Company for which TMK/United Funds, Inc. is the underlying
investment vehicle.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund and
Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell & Reed,
Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Board of Directors
without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the Fund
pays WRIMCO a fee as described in the Prospectus.
The management fees paid to WRIMCO for the fiscal years ended September 30,
1996, 1995 and 1994 were $4,344,734, $4,207,453 and $4,531,669, respectively.
For purposes of calculating the daily fee, the Fund does not include money
owed to it by Waddell & Reed, Inc. for shares which it has sold but not yet paid
the Fund. The Fund accrues and pays this fee daily.
Under the Shareholder Servicing Agreement with respect to Class A shares,
the Fund pays the Agent a monthly fee of $1.3125 ($1.0208 prior to April 1,
1996) for each shareholder account that was in existence at any time during the
prior month, plus $0.30 for each account on which a dividend or distribution, of
cash or shares, had a record date in that month. For Class Y shares, the Fund
pays the Agent a monthly fee equal to one-twelfth of .15 of 1% of the average
daily net assets of that class for the preceding month. The Fund also pays
certain out-of-pocket expenses of the Agent, including long distance telephone
communications costs, microfilm and storage costs for certain documents, forms,
printing and mailing costs, and costs of legal and special services not provided
by Waddell & Reed, Inc., WRIMCO or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a monthly
fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The fees paid to the Agent for accounting services for the fiscal years
ended September 30, 1996, 1995 and 1994 were $90,000, $85,000 and $92,500,
respectively.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement
are described above. Waddell & Reed, Inc. and affiliates pay the Fund's
Directors and officers who are affiliated with WRIMCO and its affiliates. The
Fund pays the fees and expenses of the Fund's other Directors.
Waddell & Reed. Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The aggregate dollar amounts of
underwriting commissions for Class A shares for the fiscal years ended September
30, 1996, 1995 and 1994 were $1,203,218, $1,075,152 and $2,263,180,
respectively. The amounts retained by Waddell & Reed, Inc. for each period were
$523,700, $462,638 and $983,744, respectively.
A major portion of the sales charge for Class A shares is paid to account
representatives and managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may
compensate its account representatives as to purchases for which there is no
sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under a Service Plan for Class A shares (the "Plan") adopted by the Fund
pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay Waddell & Reed,
Inc., the principal underwriter for the Fund, a fee not to exceed .25% of the
Fund's average annual net assets attributable to Class A shares, paid monthly,
to reimburse Waddell & Reed, Inc. for its costs and expenses in connection with
the provision of personal services to Class A shareholders of the Fund and/or
maintenance of Class A shareholder accounts.
The Plan and a related Service Agreement between the Fund and Waddell &
Reed, Inc. contemplate that Waddell & Reed, Inc. may be reimbursed for amounts
it expends in compensating, training and supporting registered account
representatives, sales managers and/or other appropriate personnel in providing
personal services to Class A shareholders of the Fund and/or maintaining Class A
shareholder accounts; increasing services provided to Class A shareholders of
the Fund by office personnel located at field sales offices; engaging in other
activities useful in providing personal service to Class A shareholders of the
Fund and/or maintenance of Class A shareholder accounts; and in compensating
broker-dealers who may regularly sell Class A shares of the Fund, and other
third parties, for providing shareholder services and/or maintaining shareholder
accounts with respect to Class A shares. Service fees in the amount of
$1,279,529 were paid (or accrued) by the Fund with respect to Class A shares for
the fiscal year ended September 30, 1996.
The Plan and the Service Agreement were approved by the Fund's Board of
Directors, including the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operations of the
Plan or any agreement referred to in the Plan (hereafter, the "Plan Directors").
The Plan was also approved by the affected shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will be
effective only if approved, by the Directors including the Plan Directors acting
in person at a meeting called for that purpose, (iii) amounts to be paid by the
Fund under the Plan may not be materially increased without the vote of the
holders of a majority of the outstanding Class A shares of the Fund, and (iv)
while the Plan remains in effect, the selection and nomination of the Directors
who are Plan Directors will be committed to the discretion of the Plan
Directors.
Custodial and Auditing Services
The Fund's Custodian is UMB Bank, n.a., Kansas City, Missouri. In general,
the Custodian is responsible for holding the Fund's cash and securities.
Deloitte and Touche LLP, Kansas City, Missouri, the Fund's independent
accountants, audits the Fund's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each class of the shares of the Fund is the value of
the assets of that class, less that class's liabilities, divided by the total
number of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined net asset
value plus the sales charge described in the Prospectus. The price makeup as of
September 30, 1996 was as follows:
Net asset value per Class A share (Class
A net assets divided by Class A shares
outstanding) ............................. $7.32
Add: selling commission (4.25% of offering
price) ................................... .32
-----
Maximum offering price per Class A share
(Class A net asset value divided by 95.75%) $7.64
=====
The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge. The
offering price of a Class Y share is its net asset value next determined
following acceptance of a purchase order. The number of shares you receive for
your purchase depends on the next offering price after Waddell & Reed, Inc.
receives and accepts your order at its principal business office at the address
shown on the cover of this SAI. You will be sent a confirmation after your
purchase which will indicate how many shares you have purchased. Shares are
normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the Fund
may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily computed
once on each day that the New York Stock Exchange (the "NYSE") is open for
trading as of the later of the close of the regular session of the NYSE or the
close of the regular session of any domestic securities or commodities exchange
on which an option or future held by the Fund is traded. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that the NYSE will not be open on the following days:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. However, it is possible that the
NYSE may close on other days. The net asset value will change every business
day, since the value of the assets and the number of shares outstanding change
every day.
The Board of Directors has decided to use the prices provided by an
independent pricing service to value municipal bonds. The Board of Directors
believes that such a service does quote the securities' fair value. The Board
of Directors, however, may hereafter determine to use another service or use the
bid price quoted by dealers if it should determine that such service or quotes
more accurately reflect the fair value of municipal bonds held by the Fund.
Short-term debt securities are valued at amortized cost, which approximates
market. Securities or other assets that are not valued by either of the
foregoing methods and for which market quotations are not readily available
would be valued by appraisal at their fair value as determined in good faith
under procedures established by and under the general supervision and
responsibility of the Board of Directors.
Options and futures contracts purchased and held by the Fund are valued at
the last sales price thereof on the securities or commodities exchanges on which
they are traded, or, if there are no transactions, at the mean between bid and
asked prices. Ordinarily, the close of the regular session for option trading
on national securities exchanges is 4:10 p.m. Eastern time and the close of the
regular session for commodities exchanges is 4:15 p.m. Eastern time. Futures
contracts will be valued with reference to established futures exchanges. The
value of a futures contract purchased by the Fund will be either the closing
price of that contract or the bid price. Conversely, the value of a futures
contract sold by the Fund will be either the closing price or the asked price.
Minimum Initial and Subsequent Investments
For Class A shares, initial investments must be at least $500 with the
exceptions described in this paragraph. A $100 minimum initial investment
pertains to certain exchanges of shares from another fund in the United Group.
A $50 minimum initial investment pertains to accounts for which an investor has
arranged, at the time of initial investment, to make subsequent purchases for
the account by having regular monthly withdrawals of $25 or more made from a
bank account. A minimum initial investment of $25 is applicable to purchases
made through payroll deduction for or by employees of WRIMCO, Waddell & Reed,
Inc. or their affiliates. Except with respect to certain exchanges and
automatic withdrawals from a bank account, a shareholder may make subsequent
investments of any amount. See "Exchanges for Shares of Other Funds in the
United Group."
For Class Y shares, investments by government entities or authorities or by
corporations must total at least $10 million within the first twelve months
after initial investment. There is no initial investment minimum for other
Class Y investors.
Reduced Sales Charges (Applicable to Class A Shares Only)
Account Grouping
Large purchases of Class A shares are subject to lower sales charges. The
schedule of sales charges appears in the Prospectus for Class A shares. For the
purpose of taking advantage of the lower sales charges available for large
purchases, a purchase in any of categories 1 through 7 listed below made by an
individual or deemed to be made by an individual may be grouped with purchases
in any other of these categories. References to purchases in an Individual
Retirement Account ("IRA") or other retirement plan (for which investments in
the Fund would not be appropriate) are made only to illustrate how purchases of
Fund shares may be grouped with purchases made in other funds in the United
Group.
1. Purchases by an individual for his or her own account (includes purchases
under the United Funds Revocable Trust form);
2. Purchases by that individual's spouse purchasing for his or her own account
(includes United Funds Revocable Trust Form of spouse);
3. Purchases by that individual or his or her spouse in their joint account;
4. Purchases by that individual or his or her spouse for the account of their
child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in a
Uniform Gift to Minors Act ("UGMA") or Uniform Transfers to Minors Act
("UTMA") account;
6. Purchases by that individual or his or her spouse for his or her IRA, tax
sheltered annuity account or Keogh plan account, provided that the
individual and spouse are the only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or her
spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother has an
account in her own name; A's father has an account in his own name;
the UGMA account may be grouped with A's father's account but may not
be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in the
trust account is eligible for grouping with an IRA account of W, H's
wife;
C. H's will provides for the establishment of a trust for the benefit of
his minor children upon H's death; his bank is named as trustee; upon
H's death, an account is established in the name of the bank, as
trustee; a purchase in the account may be grouped with an account held
by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account may
not be grouped with R's individual account. If X's spouse, Y, was
successor trustee, this purchase could be grouped with Y's individual
account.
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase of Class A shares in accounts eligible for grouping may
be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $100,000; at the same
time, H's parents open up two UGMA accounts for H and W's two minor
children and invest $100,000 in each child's name; the combined
purchases of Class A shares are subject to the reduced sales load
applicable to a purchase of $300,000 provided that Waddell & Reed,
Inc. is advised that the purchases are entitled to grouping.
Rights of Accumulation
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund three
years ago. His account has a net asset value of $100,000. His wife,
W, now wishes to invest $15,000 in Class A shares of the Fund. W's
purchase will be combined with H's existing account and will be
entitled to the reduced sales charge applicable to a purchase in
excess of $100,000. H's original $100,000 purchase was subject to a
full sales charge and the reduced charge does not apply retroactively
to that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan, the shares held under such plan may be combined with the additional
purchase only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Statement of Intention. By signing a Statement
of Intention form, which is available from Waddell & Reed, Inc., the purchaser
indicates an intention to invest, over a 13-month period, a dollar amount which
is sufficient to qualify for a reduced sales charge. The 13-month period begins
on the date the first purchase made under the Statement of Intention is accepted
by Waddell & Reed, Inc. Each purchase made from time to time under the
Statement of Intention is treated as if the purchaser were buying at one time
the total amount which he or she intends to invest. The sales charge applicable
to all purchases of Class A shares made under the terms of the Statement of
Intention will be the sales charge in effect on the beginning date of the 13-
month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, Class A shares already held in the same account in which the purchase is
being made or in any account eligible for grouping with that account, as
described above, will be included.
Example: H signs a Statement of Intention indicating his intent to invest in
his own name a dollar amount sufficient to entitle him to purchase
Class A shares at the sales charge applicable to a purchase of
$300,000. H has an UGMA account for his child and the Class A shares
held in the account have a net asset value as of the date the
Statement of Intention is accepted by Waddell & Reed, Inc. of $50,000;
H's wife, W, has an account in her own name invested in another fund
in the United Group which charges the same sales load as the Fund,
with a net asset value as of the date of acceptance of the Statement
of Intention of $75,000; H needs to invest $175,000 in Class A shares
over the 13-month period in order to qualify for the reduced sales
load applicable to a purchase of $300,000.
A copy of the Statement of Intention signed by a purchaser will be returned
to the purchaser after it is accepted by Waddell & Reed, Inc. and will set forth
the dollar amount of Class A shares which must be purchased within the 13-month
period in order to qualify for the reduced sales charge.
The minimum initial investment under a Statement of Intention is 5% of the
dollar amount which must be invested under the Statement of Intention. An
amount equal to 5% of the purchase required under the Statement of Intention
will be held "in escrow." If a purchaser does not, during the period covered by
the Statement of Intention, invest the amount required to qualify for the
reduced sales charge under the terms of the Statement of Intention, he or she
will be responsible for payment of the sales charge applicable to the amount
actually invested. The additional sales charge owed on purchases of Class A
shares made under a Statement of Intention which is not completed will be
collected by redeeming part of the shares purchased under the Statement of
Intention and held "in escrow" unless the purchaser makes payment of this amount
to Waddell & Reed, Inc. within 20 days of Waddell & Reed, Inc.'s request for
payment.
If the actual amount invested is higher than the amount an investor intends
to invest, and is large enough to qualify for a sales charge lower than that
available under the Statement of Intention, the lower sales charge will apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell &
Reed, Inc. to sell, the shares covered by the Statement of Intention.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement of Intention will be deducted in computing the aggregate purchases
under the Statement of Intention.
Other Funds in the United Group
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the funds in the United Group which are subject to a sales
charge. A purchase of, or shares held, in any of the funds in the United Group
which are subject to the same sales charge as the Fund will be treated as an
investment in the Fund for the purpose of determining the applicable sales
charge. The following funds in the United Group have shares that are subject to
a maximum 5.75% ("full") sales charge as described in the prospectus of each
Fund: United Funds, Inc., United International Growth Fund, Inc., United
Continental Income Fund, Inc., United Vanguard Fund, Inc., United Retirement
Shares, Inc., United High Income Fund, Inc., United New Concepts Fund, Inc.,
United Gold & Government Fund, Inc., United Asset Strategy Fund, Inc. and United
High Income Fund II, Inc. The following funds in the United Group have shares
that are subject to a "reduced" sales charge as described in the prospectus of
each fund: United Municipal Bond Fund, Inc., United Government Securities Fund,
Inc. and United Municipal High Income Fund, Inc. For the purposes of obtaining
the lower sales charge which applies to large purchases, purchases in a fund in
the United Group of shares that are subject to a full sales charge may not be
grouped with purchases of shares in a fund in the United Group that are subject
to a reduced sales charge; conversely, purchases of shares in a fund with a
reduced sales charge may not be grouped or combined with purchases of shares of
a fund that are subject to a full sales charge.
United Cash Management, Inc. is not subject to a sales charge. Purchases
in that fund are not eligible for grouping with purchases in any other fund.
Net Asset Value Purchases of Class A Shares
As stated in the Prospectus, Class A shares of the Fund may be purchased at
net asset value by the Directors and officers of the Fund, employees of Waddell
& Reed, Inc., employees of their affiliates, account representatives of Waddell
& Reed, Inc. and the spouse, children, parents, children's spouses and spouse's
parents of each such Director, officer, employee and account representative.
"Child" includes stepchild; "parent" includes stepparent. Trusts under which
the grantor and the trustee or a co-trustee are each an eligible purchaser are
also eligible for net asset value purchases of Class A shares. "Employees"
includes retired employees. A retired employee is an individual separated from
service from Waddell & Reed, Inc. or affiliated companies with a vested interest
in any Employee Benefit Plan sponsored by Waddell & Reed, Inc. or its affiliated
companies. "Account representatives" includes retired account representatives.
A "retired account representative" is any account representative who was, at the
time of separation from service from Waddell & Reed, Inc., a Senior Account
Representative. A custodian under UGMA or UTMA purchasing for the child or
grandchild of any employee or account representative may purchase Class A shares
at net asset value whether or not the custodian himself is an eligible
purchaser.
Reasons for Differences in Public Offering Price of Class A Shares
As described herein and in the Prospectus for Class A shares, there are a
number of instances in which the Fund's Class A shares are sold or issued on a
basis other than the maximum public offering price, that is, the net asset value
plus the highest sales charge. Some of these relate to lower or eliminated
sales charges for larger purchases of Class A shares, whether made at one time
or over a period of time as under a Statement of Intention or right of
accumulation. See the table of sales charges in the Prospectus. The reasons
for these quantity discounts are, in general, that (i) they are traditional and
have long been permitted in the industry and are therefore necessary to meet
competition as to sales of shares of other funds having such discounts, (ii)
certain quantity discounts are required by rules of the National Association of
Securities Dealers, Inc. (as are elimination of sales charges on the
reinvestment of dividends and distributions), and (iii) they are designed to
avoid an unduly large dollar amount of sales charge on substantial purchases in
view of reduced selling expenses. Quantity discounts are made available to
certain related persons for reasons of family unity and to provide a benefit to
tax-exempt plans and organizations.
The reasons for the other instances in which there are reduced or
eliminated sales charges for Class A shares are as follows. Exchanges at net
asset value are permitted because a sales charge has already been paid on the
shares exchanged. Sales of Class A shares without sales charge are permitted to
Directors, officers and certain others due to reduced or eliminated selling
expenses and since such sales may aid in the development of a sound employee
organization, encourage incentive, responsibility and interest in the United
Group and an identification with its aims and policies. Limited reinvestments
of redemptions of Class A shares at no sales charge are permitted to attempt to
protect against mistaken or not fully informed redemption decisions. Class A
shares may be issued at no sales charge in plans of reorganization due to
reduced or eliminated sales expenses and since, in some cases, such issuance is
exempted by the 1940 Act from the otherwise applicable restrictions as to what
sales charge must be imposed. In no case in which there is a reduced or
eliminated sales charge are the interests of existing shareholders adversely
affected since, in each case, the Fund receives the net asset value per share of
all shares sold or issued.
Redemptions
The Prospectus gives information as to redemption procedures. Redemption
payments are made within seven days unless delayed because of emergency
conditions determined by the SEC, when the NYSE is closed other than for
weekends or holidays, or when trading on the NYSE is restricted. Payment is
made in cash, although under extraordinary conditions redemptions may be made in
portfolio securities. Payment for redemption of shares of the Fund may be made
in portfolio securities when the Fund's Board of Directors determines that
conditions exist making cash payments undesirable. Securities used for payment
of redemptions are valued at the value used in figuring net asset value. There
would be brokerage costs to the redeeming shareholder in selling such
securities. The Fund, however, has elected to be governed by Rule 18f-1 under
the 1940 Act, pursuant to which it is obligated to redeem shares solely in cash
up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder.
Flexible Withdrawal Service for Class A Shareholders
If you qualify, you may arrange to receive through the Flexible Withdrawal
Service (the "Service") regular monthly, quarterly, semiannual or annual
payments by redeeming on a regular basis Class A shares that you own of the Fund
or of any of the funds in the United Group. It would be a disadvantage to an
investor to make additional purchases of shares while a withdrawal program is in
effect because it would result in duplication of sales charges. Applicable
forms to start the Service are available from Waddell & Reed, Inc.
To qualify for the Service, you must have invested at least $10,000 in
Class A shares which you still own of any of the funds in the United Group; or,
you must own Class A shares having a value of at least $10,000. The value for
this purpose is the value at the offering price.
You can choose to have your shares redeemed to receive:
1. a monthly, quarterly, semiannual or annual payment of $50 or more;
2. a monthly payment, which will change each month, equal to one-twelfth
of a percentage of the value of the shares in the account (you select the
percentage); or
3. a monthly or quarterly payment, which will change each month or
quarter, by redeeming a number of shares fixed by you (at least five shares).
Shares are redeemed on the 20th day of the month in which the payment is to
be made, or on the prior business day if the 20th is not a business day.
Payments are made within five days of the redemption.
If you have a share certificate for the shares you want to make available
for the Service, you must enclose the certificate with the form initiating the
Service.
The dividends and distributions on shares you have made available for the
Service are paid in additional Class A shares. All payments under the Service
are made by redeeming Class A shares, which may involve a gain or loss for tax
purposes. To the extent that payments exceed dividends and distributions, the
number of Class A shares you own will decrease. When all of the shares in your
account are redeemed, you will not receive any further payments. Thus, the
payments are not an annuity or an income or return on your investment.
You may, at any time, change the manner in which you have chosen to have
shares redeemed to any of the other choices originally available to you. You
may, at any time, redeem part or all of the shares in your account; if you
redeem all of the shares, the Service is terminated. The Fund can also
terminate the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed will be
sent to you to assist you in completing your Federal income tax return.
Exchanges for Shares of Other Funds in the United Group
Class A Share Exchanges
You may decide you would rather own Class A shares of one or more of the
other funds in the United Group rather than Class A shares of the Fund. An
exchange of Class A shares of the Fund may be made only if you have held the
shares for at least six months unless the exchange is for Class A shares of
United Government Securities Fund, Inc. or United Municipal High Income Fund,
Inc. or unless the Class A shares of the Fund were acquired by dividends or
distributions paid in shares, in which cases there is no holding period. You
may exchange for shares of another fund without payment of an additional sales
charge. You should ask for and read the prospectus for the fund into which you
are thinking of making an exchange before doing so.
Fund shares may be received in exchange for Class A shares of any of the
other funds in the United Group, except for shares of United Cash Management,
Inc. acquired by direct purchase or received in payment of dividends on those
shares.
Subject to the above rules regarding sales charges, you may have a specific
dollar amount of Class A shares of United Cash Management, Inc. automatically
exchanged each month into Class A shares of the Fund or any other fund in the
United Group. The shares of United Cash Management, Inc. which you designate
for automatic exchange must be worth at least $100 or you must own Class A
shares of the fund in the United Group into which you want to exchange. The
minimum value of shares which you may designate for automatic exchange monthly
is $100, which may be allocated among the Class A or corresponding shares of
different funds in the United Group so long as each fund receives a value of at
least $25. Minimum initial investment and minimum balance requirements apply to
such automatic exchange service.
You may redeem your Class A shares of a Fund and use the proceeds to
purchase Class Y shares of that Fund if you meet the criteria for purchasing
Class Y shares.
Class Y Share Exchanges
Class Y shares of a Fund may be exchanged for Class Y shares of any other
fund in the United Group.
General Exchange Information
When you exchange shares, the total shares you receive will have the same
aggregate net asset value as the total shares you exchange. The relative values
are those next figured after the fund receives your exchange request in good
order.
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any time
and any such exchange may not be accepted.
Reinvestment Privilege
The Prospectus for Class A shares discusses the reinvestment privilege for
Class A shares under which, if you redeem your Class A shares and then decide it
was not a good idea, you may reinvest. If Class A shares of the Fund are then
being offered, you can put all or part of your redemption payment back into
Class A shares of the Fund without any sales charge at the net asset value next
determined after you have returned the amount. Your written request to do this
must be received within 30 days after your redemption request was received. You
can do this only once as to Class A shares of the Fund. You do not use up this
privilege by redeeming Class A shares to invest the proceeds at net asset value
in a Keogh plan or an IRA.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to compel the redemption of shares held under any
account or any plan if the aggregate net asset value of such shares (taken at
cost or value as the Board of Directors may determine) is less than $500. The
Board has no intent to compel redemptions in the foreseeable future. If it
should elect to compel redemptions, shareholders who are affected will receive
prior written notice and will be permitted 60 days to bring their accounts up to
the minimum before this redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors.
The principal occupation during at least the past five years of each
Director and officer is given below. Each of the persons listed through and
including Mr. Wise is a member of the Fund's Board of Directors. The other
persons are officers but not members of the Board of Directors. For purposes of
this section, the term "Fund Complex" includes each of the registered investment
companies in the United Group of Mutual Funds, Waddell & Reed Funds, Inc. and
TMK/United Funds, Inc. Each of the Fund's Directors is also a Director of each
of the other funds in the Fund Complex and each of its officers is also an
officer of one or more of the funds in the Fund Complex.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund and each of the other funds
in the Fund Complex; Chairman of the Board of Directors of Waddell & Reed
Financial Services, Inc., United Investors Management Company and United
Investors Life Insurance Company; Chairman of the Board of Directors and Chief
Executive Officer of Torchmark Corporation; Chairman of the Board of Directors
of Vesta Insurance Group, Inc.; formerly, Chairman of the Board of Directors of
Waddell & Reed, Inc. Father of Linda Graves, Director of the Fund and each of
the other funds in the Fund Complex.
KEITH A. TUCKER*
President of the Fund and each of the other funds in the Fund Complex;
President, Chief Executive Officer and Director of Waddell & Reed Financial
Services, Inc.; Chairman of the Board of Directors of WRIMCO, Waddell & Reed,
Inc., Waddell & Reed Services Company, Waddell & Reed Asset Management Company
and Torchmark Distributors, Inc., an affiliate of Waddell & Reed, Inc.; Vice
Chairman of the Board of Directors, Chief Executive Officer and President of
United Investors Management Company; Vice Chairman of the Board of Directors of
Torchmark Corporation; Director of Southwestern Life Corporation; formerly,
partner in Trivest, a private investment concern; formerly, Director of Atlantis
Group, Inc., a diversified company.
HENRY L. BELLMON
Route 1
P. O. Box 26
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma.
DODDS I. BUCHANAN
905 13th Street
Boulder, Colorado 80302
Advisory Director, The Hand Companies, an actuarial consulting company;
President, Buchanan Ranch Corporation; formerly, Professor and Chairman of
Marketing, College of Business, University of Colorado.
JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Retired.
LINDA GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, partner, Levy and Craig, P.C., a law firm.
Daughter of Ronald K. Richey, Chairman of the Board of the Fund and each of the
other funds in the Fund Complex.
JOHN F. HAYES*
335 N. Washington
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Kansas Bankshares;
Director of Central Properties, Inc.; Chairman, Gilliland & Hayes, P.A., a law
firm; formerly, President, Gilliland & Hayes, P.A.
GLENDON E. JOHNSON
7300 Corporate Center Drive
P. O. Box 020270
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Financial Corporation
and subsidiaries.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of the
Fund and each fund in the Fund Complex then in existence. (Mr. Morgan retired
as Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company; formerly, Director
of Waddell & Reed Asset Management Company, United Investors Management Company
and United Investors Life Insurance Company, affiliates of Waddell & Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management and
investment.
WILLIAM L. ROGERS
1999 Avenue of the Stars
Los Angeles, California 90067
Principal, Colony Capital, Inc., a real estate related investment company;
formerly, partner in Trivest, a private investment concern.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Partner, Polsinelli, White, Vardeman & Shalton, a law firm.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Chancellor, University of Missouri-Kansas City; formerly, Interim
Chancellor, University of Missouri-Kansas City.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired.
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
Robert L. Hechler
Vice President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Vice President, Chief Operations Officer,
Director and Treasurer of Waddell & Reed Financial Services, Inc.; Executive
Vice President, Principal Financial Officer, Director and Treasurer of WRIMCO;
President, Chief Executive Officer, Principal Financial Officer, Director and
Treasurer of Waddell & Reed, Inc.; Director and Treasurer of Waddell & Reed
Asset Management Company; President, Director and Treasurer of Waddell & Reed
Services Company; Vice President, Treasurer and Director of Torchmark
Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund and each of the other funds in the Fund Complex;
Vice President, Chief Investment Officer and Director of Waddell & Reed
Financial Services, Inc.; Director of Waddell & Reed, Inc.; President, Chief
Executive Officer, Chief Investment Officer and Director of WRIMCO and Waddell &
Reed Asset Management Company; Senior Vice President and Chief Investment
Officer of United Investors Management Company.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund and
each of the other funds in the Fund Complex; Vice President of Waddell & Reed
Services Company.
Sharon K. Pappas
Vice President, Secretary and General Counsel of the Fund and each of the
other funds in the Fund Complex; Vice President, Secretary and General Counsel
of Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary and
General Counsel of WRIMCO and Waddell & Reed, Inc.; Director, Senior Vice
President, Secretary and General Counsel of Waddell & Reed Services Company;
Director, Secretary and General Counsel of Waddell & Reed Asset Management
Company; Vice President, Secretary and General Counsel of Torchmark
Distributors, Inc.; formerly, Assistant General Counsel of WRIMCO, Waddell &
Reed Financial Services, Inc., Waddell & Reed, Inc., Waddell & Reed Asset
Management Company and Waddell & Reed Services Company.
John M. Holliday
Vice President of the Fund and eight other funds in the Fund Complex;
Senior Vice President of WRIMCO and Waddell & Reed Asset Management Company;
formerly, Senior Vice President of Waddell & Reed, Inc.
Carl E. Sturgeon
Vice President of the Fund and eleven other funds in the Fund Complex; Vice
President of WRIMCO; formerly, Vice President of Waddell & Reed, Inc.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
As of the date of this SAI, six of the Fund's Directors may be deemed to be
"interested persons" as defined in the 1940 Act of its underwriter, Waddell &
Reed, Inc., or of WRIMCO. The Directors who may be deemed to be "interested
persons" are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a director may elect after resignation from the Board
provided the director has attained the age of 75 and has served as a director of
the funds in the United Group for a total of at least five years. A Director
Emeritus receives fees in recognition of his past services whether or not
services are rendered in his capacity as Director Emeritus, but has no authority
or responsibility with respect to management of the Fund. Mr. Leslie S. Wright
retired as a Director of the Fund and of each of the funds in the Fund Complex
effective April 1, 1996, and has elected a position as Director Emeritus.
During the Fund's fiscal year ended September 30, 1996, Mr. Wright received
total compensation for his service as a Director of $2,792 from the Fund Complex
and aggregate compensation from the Fund of $43,000.
The funds in the United Group, TMK/United Funds, Inc. and Waddell & Reed
Funds, Inc. pay to each Director a total of $44,000 per year, plus $1,000 for
each meeting of the Board of Directors attended (prior to April 1, 1996, the
Funds in the United Group (with the exception of United Asset Strategy Fund,
Inc.), TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. paid to each
Director a fee of $40,000 per year plus $1,000 for each meeting of the Board of
Directors attended) and $500 for each committee meeting attended which is not in
conjunction with a Board of Directors meeting, other than Directors who are
affiliates of Waddell & Reed, Inc. The fees to the Directors who receive them
are divided among the funds in the United Group, TMK/United Funds, Inc. and
Waddell & Reed Funds, Inc. based on their relative size.
During the Fund's fiscal year ended September 30, 1996, the Fund's
Directors received the following fees for service as a director:
COMPENSATION TABLE
Pension
or Retirement Total
Aggregate Benefits Compensation
Compensation Accrued As From Fund
From Part of Fund and Fund
Director Fund Expenses Complex
- -------- ------------ -------------- ------------
Ronald K. Richey $ 0 $0 $ 0
Keith A Tucker 0 0 0
Henry L. Bellmon 3,118 0 48,000
Dodds I. Buchanan 3,118 0 48,000
Jay B. Dillingham 3,118 0 48,000
Linda Graves 3,118 0 48,000
John F. Hayes 3,118 0 48,000
Glendon E. Johnson 3,118 0 48,000
William T. Morgan 3,118 0 48,000
Doyle Patterson 3,118 0 48,000
Eleanor B. Schwartz 3,054 0 47,000
Frederick Vogel III 3,118 0 48,000
Paul S. Wise 3,118 0 48,000
Mr. Rogers and Mr. Ross were elected as Directors on October 16, 1996. The
officers are paid by WRIMCO or its affiliates.
Shareholdings
As of November 30, 1996, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. As of such date
no person owned of record or was known by the Fund to own beneficially 5% or
more of the Fund's outstanding shares.
PAYMENTS TO SHAREHOLDERS
General
There are two sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is the Fund's net investment income, which
is derived from the interest and earned discount on the securities it holds,
less expenses (which will vary by class). The second source is net realized
capital gains, which are derived from the proceeds received from the sale of
securities at a price higher than the Fund's tax basis (usually cost) in such
securities attributable to that difference, less losses from sales of securities
at a price lower than the Fund's basis therein; these gains can be either long-
term or short-term, depending on how long the Fund has owned the securities
before it sells them. The payments made to shareholders from net investment
income and net short-term capital gains are called dividends.
The Fund pays distributions from has net capital gains (the excess of net
long-term capital gains over net short-term capital losses). It may or may not
have such gain, depending on whether securities are sold and at what price. If
the Fund has net capital gains, it will pay distributions once each year, in the
latter part of the fourth calendar quarter, except to the extent it has prior
year net capital losses to offset the gains.
Choices You Have on Your Dividends and Distributions
On your application form, you can give instructions that (i) you want cash
for your dividends and distributions, (ii) you want your dividends and
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid, or (iii) you want cash for your dividends and want your
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid. You can change your instructions at any time. If you
give no instructions, your dividends and distributions will be paid in shares of
the Fund of the same class as that with respect to which they were paid. All
payments in Fund shares are at net asset value without any sales charge. The
net asset value used for this purpose is that computed as of the record date for
the dividend or distribution, although this could be changed by the Board of
Directors.
Even if you get dividends and distributions on Class A shares in cash, you
can thereafter reinvest them (or distributions only) in Class A shares of the
Fund at net asset value (i.e., with no sales charge) next determined after
receipt by Waddell & Reed, Inc. of the amount clearly identified as a
reinvestment. The reinvestment must be within 45 days after the payment.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended (the
"Code"), the Fund must distribute to its shareholders for each taxable year at
least 90% of the sum of its investment company taxable income (consisting
generally of taxable net investment income, net short-term capital gains and net
gains from certain foreign currency transactions) plus its net interest income
excludable from gross income under section 103(a) of the Code ("Distribution
Requirement"), and must meet several additional requirements. These
requirements include the following: (1) the Fund must derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures contracts or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) the Fund
must derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, or any of the following, that were held for
less than three months -- (i) options, futures or forward contracts (other than
those on foreign currencies) or (ii) foreign currencies (or options, futures
contracts or forward contracts thereon) that are not directly related to the
Fund's principal business of investing in securities (or in option and futures
contracts with respect to securities) ("Short-Short Limitation"); (3) at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. Government
Securities, securities of other RICs and other securities that are limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets and that does not represent more than 10% of the
outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. Government Securities or
the securities of other RICs) of any one issuer.
Dividends paid by the Fund will qualify as "exempt-interest dividends," and
thus will be excludable from your gross income, if the Fund satisfies the
additional requirement that, at the close of each quarter of its taxable year,
at least 50% of the value of its total assets consists of securities the
interest on which is excludable from gross income under section 103(a); the Fund
intends to continue to satisfy this requirement. The aggregate dividends
excludable from all shareholders' gross income may not exceed the Fund's net
tax-exempt income. The Fund uses the average annual method to determine the
exempt income portion of each distribution, and the percentage of income
designated as tax-exempt for any particular distribution may be substantially
different from the percentage of the Fund's income that was tax-exempt during
the period covered by the distribution. The treatment of dividends from the
Fund under state and local income tax laws may differ from the treatment thereof
under the Code.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from the Fund still are
tax-exempt to the extent described above; they are only included in the
calculation of whether a recipient's income exceeds the established amounts.
If the Fund invests in any instruments that generate taxable income, under
the circumstances described in the Prospectus, distributions of the interest
earned thereon will be taxable to you as ordinary income to the extent of the
Fund's earnings and profits. Moreover, if the Fund realizes capital gain as a
result of market transactions, any distribution of that gain will be taxable to
you. There also may be collateral federal income tax consequences regarding the
receipt of tax-exempt dividends by shareholders such as S corporations,
financial institutions and property and casualty insurance companies. Any
shareholder that falls into any of these categories should consult its tax
adviser concerning its investment in Fund shares.
Dividends and distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months are deemed to have been paid by the Fund and received by you on
December 31 of that year even if they are paid by the Fund during the following
January. Accordingly, those dividends and distributions will be reported by,
and (except for exempt interest dividends) taxed to, shareholders for the year
in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares and any balance of the loss that is not disallowed will
be treated as long-term, instead of short-term, capital loss to the extent of
any distributions received on those shares. Investors also should be aware that
if shares are purchased shortly before the record date for a taxable dividend or
distribution, the investor will receive some portion of the purchase price back
as a taxable dividend or distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary (taxable) income for that year and capital gain net income
for the one-year period ending on October 31 of that year, plus certain other
amounts. It is the Fund's policy to pay sufficient distributions each year to
avoid imposition of the Excise Tax. The Fund may defer into the next calendar
year net capital losses incurred between November 1 and the end of the current
calendar year.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses the
Fund realizes in connection therewith. Gains from options and futures derived
by the Fund with respect to its business of investing in securities will qualify
as permissible income under the Income Requirement. However, income from the
disposition of options and futures will be subject to the Short-Short Limitation
if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all of the Fund's hedging transactions. To the
extent this treatment is not available, the Fund may be forced to defer the
closing out of certain options and futures beyond the time when it otherwise
would be advantageous to do so, in order for the Fund to continue to qualify as
a RIC.
Any income the Fund earns from writing options is treated as short-term
capital gains. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it received for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund lapses without being
exercised, the premium it receives also will be a short-term capital gain. If
such an option is exercised and the Fund thus sells the securities subject to
the option, the premium the Fund received will be added to the exercise price to
determine the gain or loss on the sale. The Fund will not write so many options
that it could fail to continue to qualify as a RIC.
Certain options and futures contracts in which the Fund may invest may be
"section 1256 contracts. "Section 1256 contracts held by the Fund at the end of
each taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which the Fund has made an election not to have the
following rules apply, are "marked-to-market" (that is, treated as sold for
their fair market value) for Federal income tax purposes, with the result that
unrealized gains or losses are treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, are
treated as long-term capital gains or losses, and the balance is treated as
short-term capital gains or losses. Section 1256 contracts also may be marked-
to-market for purposes of the Excise Tax and for other purposes. The Fund must
distribute any such gains to its shareholders even though it may not have closed
the transactions and received cash to pay the distributions.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Fund may invest. That section
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property.
Section 1092 generally provides that any loss from the disposition of a position
in a straddle may be deducted only to the extent the loss exceeds the unrealized
gain on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, that apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If the Fund makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences of
straddle transactions to the Fund are not entirely clear.
Zero Coupon Securities
The Fund may acquire zero coupon or other securities issued with original
issue discount. As a holder of those securities, the Fund must account for the
portion of the original issue discount that accrues on the securities during the
taxable year (and include in its income any such discount that accrues on
taxable securities), even if the Fund receives no corresponding payment on the
securities during the year. Because the Fund annually must distribute
substantially all of its investment company taxable income and net income
excludable from gross income under section 103(a), including any accrued
original issue discount, in order to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax, the Fund may be required in a particular
year to distribute as a dividend an amount that is greater than the total amount
of cash it actually receives. Those distributions will be made from the Fund's
cash assets or from the proceeds of sales of portfolio securities, if necessary.
The Fund may realize capital gains or losses from those sales, which would
increase or decrease its investment company taxable income and/or net capital
gain. In addition, any such gains may be realized on the disposition of
securities held for less than three months. Because of the Short-Short
Limitation, any such gains would reduce the Fund's ability to sell other
securities, options or futures contracts, held for less than three months that
it might wish to sell in the ordinary course of its portfolio management.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management Agreement
is to arrange the purchase and sale of securities for the portfolio of the Fund.
Purchases are made directly from issuers or from underwriters, dealers or banks.
Purchases from underwriters include a commission or concession paid by the
issuer to the underwriter. Purchases from dealers will include the spread
between the bid and asked prices. Brokerage commissions are paid primarily for
effecting transactions in securities traded on an exchange and otherwise only if
it appears likely that a better price or execution can be obtained. The Fund
has not effected transactions through brokers and does not anticipate doing so.
The individual who manages the Fund may manage other advisory accounts with
similar investment objectives. It can be anticipated that the manager will
frequently place concurrent orders for all or most of the accounts for which the
manager has responsibility. Transactions effected pursuant to such combined
orders are averaged as to price and allocated in accordance with the purchase or
sale orders actually placed for each fund or advisory account.
To effect the portfolio transactions of the Fund, WRIMCO is authorized to
engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to achieve "best
execution" (prompt and reliable execution at the best price obtainable) for
reasonable and competitive commissions. WRIMCO need not seek competitive
commission bidding but is expected to minimize the commissions paid to the
extent consistent with the interests and policies of the Fund. Subject to
review by the Board of Directors, such policies include the selection of brokers
which provide execution and/or research services and other services, including
pricing or quotation services directly or through others ("brokerage services")
considered by WRIMCO to be useful or desirable for its investment management of
the Fund and/or the other funds and accounts over which WRIMCO or its affiliates
have investment discretion.
Brokerage services are, in general, defined by reference to Section 28(e)
of the Securities Exchange Act of 1934 as including (i) advice, either directly
or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities and the
availability of securities and purchasers or sellers; (ii) furnishing analyses
and reports; or (iii) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). "Investment
discretion" is, in general, defined as having authorization to determine what
securities shall be purchased or sold for an account, or making those decisions
even though someone else has responsibility.
The commissions paid to brokers that provide such brokerage services may be
higher than another qualified broker would charge for effecting comparable
transactions if a good faith determination is made by WRIMCO that the commission
is reasonable in relation to the brokerage services provided. Subject to the
foregoing considerations, WRIMCO may also consider the willingness of particular
brokers and dealers to sell shares of the Fund and other funds managed by WRIMCO
and its affiliates as a factor in its selection. No allocation of brokerage or
principal business is made to provide any other benefits to WRIMCO or its
affiliates.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of WRIMCO or its affiliates and
investment research received for the commissions of those other accounts may be
useful both to the Fund and one or more of such other accounts. To the extent
that electronic or other products provided by such brokers to assist WRIMCO in
making investment management decisions are used for administration or other non-
research purposes, a reasonable allocation of the cost of the product
attributable to its non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party at the
instance of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of WRIMCO;
serves to make available additional views for consideration and comparisons; and
enables WRIMCO to obtain market information on the price of securities held in
the Fund's portfolio or being considered for purchase.
In placing transactions for the Fund's portfolio, WRIMCO may consider sales
of shares of the Fund and other funds managed by WRIMCO and its affiliates as a
factor in the selection of brokers to execute portfolio transactions. WRIMCO
intends to allocate brokerage on the basis of this factor only if the sale is $2
million or more and there is no sales charge. This results in the consideration
only of sales which by their nature would not ordinarily be made by Waddell &
Reed, Inc.'s direct sales force and is done in order to prevent the direct sales
force from being disadvantaged by the fact that it cannot participate in Fund
brokerage.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
OTHER INFORMATION
The Shares of the Fund
The Fund offers two classes of shares: Class A and Class Y. Prior to
January 21, 1996, the Fund offered only one class of shares to the public.
Shares outstanding on that date were designated as Class A shares. Each class
represents an interest in the same assets of the Fund and differ as follows:
each class of shares has exclusive voting rights on matters pertaining to
matters appropriately limited to that class; Class A shares are subject to an
initial sales charge and to an ongoing service fee; each class may bear
differing amounts of certain class-specific expenses; and each class has a
separate exchange privilege. The Fund does not anticipate that there will be
any conflicts between the interests of holders of the different classes of
shares of the Fund by virtue of those classes. On an ongoing basis, the Board
of Directors will consider whether any such conflict exists and, if so, take
appropriate action. Each share of the Fund is entitled to equal voting,
dividend, liquidation and redemption rights, except that due to the differing
expenses borne by the two classes, dividends and liquidation proceeds of Class A
shares are expected to be lower than for Class Y shares of the Fund. Each
fractional share of a class has the same rights, in proportion, as a full share
of that class.
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities that
the Fund may use. The Fund may also use ratings provided by other nationally
recognized statistical rating organizations in determining the securities
eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Services. An S&P corporate or municipal bond
rating is a current assessment of the creditworthiness of an obligor with
respect to a specific obligation. This assessment of creditworthiness may take
into consideration obligors such as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
A brief description of the applicable S&P rating symbols and their meanings
follow:
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to pay
interest and repay principal is very strong, and debt rated AA differs from AAA
issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. It is used when interest payments
or principal payments are not made on a due date even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace periods. The D rating will also be used upon a filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) -- To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR -- Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Debt Obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "investment grade" ratings)
are generally regarded as eligible for bank investment. In addition, the laws
of various states governing legal investments may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable MIS
rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest
investment attributes are designated by the symbol "1" following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment.
- --Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).
- --Source of Payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note.)
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings -- MIS ratings for state and municipal
short-term obligations will be designated Moody's Investment Grade (MIG). This
distinction is in recognition of the differences between short-term credit risk
and long-term risk. Factors affecting the liquidity of the borrower are
uppermost in importance in short-term borrowing, while various factors of major
importance in bond risk are of lesser importance over the short run. Rating
symbols and their meanings follow:
MIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3 -- This designation denotes favorable quality. All security elements
are accounted for but this is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4 -- This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market. Ratings
are graded into several categories, ranging from "A-1" for the highest quality
obligations to D for the lowest. Issuers rated A are further referred to by use
of numbers 1, 2 and 3 to indicate the relative degree of safety. Issues
assigned an A rating (the highest rating) are regarded as having the greatest
capacity for timely payment. An A-1 designation indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation. An A-2 rating indicates that capacity for timely payment is
satisfactory; however, the relative degree of safety is not as high as for
issues designated A-1. Issues rated A-3 have adequate capacity for timely
payment; however, they are more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations. Issues rated B
are regarded as having only speculative capacity for timely payment. A C rating
is assigned to short-term debt obligations with a doubtful capacity for payment.
Debt rated D is in payment default, which occurs when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace period.
MIS commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. MIS employs the designations of Prime 1, Prime 2 and
Prime 3, all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers. Issuers rated Prime 1 have a superior capacity for
repayment of short-term promissory obligations and repayment capacity will
normally be evidenced by (1) lending market positions in well established
industries; (2) high rates of return on funds employed; (3) conservative
capitalization structures with moderate reliance on debt and ample asset
protection; (4) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and (5) well established access to a range of
financial markets and assured sources of alternate liquidity. Issuers rated
Prime 2 also have a strong capacity for repayment of short-term promissory
obligations as will normally be evidenced by many of the characteristics
described above for Prime 1 issuers, but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation;
capitalization characteristics, while still appropriate, may be more affected by
external conditions; and ample alternate liquidity is maintained. Issuers rated
Prime 3 have an acceptable capacity for repayment of short-term promissory
obligations, as will normally be evidenced by many of the characteristics above
for Prime 1 issuers, but to a lesser degree. The effect of industry
characteristics and market composition may be more pronounced; variability in
earnings and profitability may result in changes in the level of debt protection
measurements and requirement for relatively high financial leverage; and
adequate alternate liquidity is maintained.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS
ALABAMA - 1.45%
Alabama Higher Education Loan Corporation,
Student Loan Revenue Refunding Bonds,
Series 1994-D,
6.0%, 9-1-2007 ........................ $ 8,155 $ 8,379,262
The Industrial Development Board of the
Town of Camden (Alabama), Pollution
Control Facilities Revenue Refunding
Bonds, Series 1990-A (MacMillan
Bloedel Project),
7.75%, 5-1-2009 ....................... 5,655 6,093,263
Total ................................. 14,472,525
ALASKA - 0.43%
City of Valdez, Alaska, Marine Terminal
Revenue Refunding Bonds (Sohio Pipe Line
Company Project), Series 1985,
7.125%, 12-1-2025 ..................... 2,500 2,703,125
Alaska Housing Finance Corporation,
General Housing Purpose Bonds, 1994
Series A (Refunding/Non-AMT),
5.0%, 12-1-2008 ....................... 1,640 1,562,100
Total ................................. 4,265,225
ARIZONA - 0.63%
Arizona Educational Loan Marketing
Corporation, Educational Loan Revenue
Bonds, Junior Subordinate Series 1993,
6.3%, 12-1-2008 ....................... 3,155 3,241,762
The Industrial Development Authority
of the City of Tucson, Arizona,
Multifamily Housing Revenue Bonds,
Series 1985 (HSL La Cholla Project),
Adjustable Rate Bond,
3.7499%, 12-1-2014..................... 3,030 3,030,000
Total ................................. 6,271,762
ARKANSAS - 0.18%
Arkansas Development Finance Authority,
Single Family Mortgage Revenue Bonds
(Access Program), 1995 Series F,
7.45%, 1-1-2027 ....................... 1,710 1,846,800
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CALIFORNIA - 8.18%
Southern California Public Power Authority:
Palo Verde Project, Power Project
Revenue Bonds, 1993 Subordinate Refunding
Series, Auction-Based/Inverse Floater,
5.35%, 7-1-2012 ....................... $10,000 $ 9,500,000
Transmission Project Revenue Bonds, 1992
Subordinate Refunding Series (Southern
Transmission Project), Auction-Based/
Inverse Floater (RIBS),
7.57%, 7-1-2012 (A).................... 5,000 5,175,000
Multiple Project Revenue Bonds, 1989 Series,
6.75%, 7-1-2012 ....................... 3,455 3,856,644
Mead-Adelanto Project Revenue Bonds,
1994 Series A, Linked Inverse Floating
Rate Security,
5.15%, 7-1-2015 ....................... 2,800 2,576,000
Mead-Phoenix Project Revenue Bonds,
1994 Series A, Linked Inverse Floating
Rate Security,
5.15%, 7-1-2015 ....................... 1,600 1,464,000
Transmission Agency of Northern California,
California-Oregon Transmission Project
Revenue Bonds, 1990 Series A,
7.0%, 5-1-2013 ........................ 12,000 13,995,000
Imperial Irrigation District,
1993 Refunding Certificates of
Participation (1990 Electric
System Project),
5.2%, 11-1-2009 ....................... 10,000 9,812,500
Alhambra Redevelopment Agency, Industrial
Redevelopment Project, As Amended, Tax
Allocation Refunding Bonds, Series 1996,
5.35%, 5-1-2014 ....................... 7,250 7,041,562
Stanislaus Waste-To-Energy Financing
Agency, Solid Waste Facility Refunding
Revenue Certificates (Ogden Martin Systems
of Stanislaus, Inc. Project), Series 1990,
7.625%, 1-1-2010 ...................... 5,775 6,157,594
California Statewide Communities Development
Authority, Hospital Revenue Certificates
of Participation, Cedars-Sinai Medical Center,
Series 1992,
6.5%, 8-1-2012 ........................ 5,200 5,525,000
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CALIFORNIA (Continued)
California Health Facilities Financing
Authority, Hospital Revenue Bonds (Downey
Community Hospital), Series 1993,
5.75%, 5-15-2015 ...................... $ 4,250 $ 3,984,375
Student Education Loan Marketing Corporation,
Student Loan Program Revenue Bonds, Junior
Subordinate Series 111-D-1 Bonds,
6.7%, 7-1-2008 ........................ 3,500 3,465,000
Sacramento Municipal Utility District,
Electric Revenue Refunding Bonds,
1993 Series G,
6.5%, 9-1-2013 ........................ 2,500 2,768,750
Intermodal Container Transfer Facility,
Joint Powers Authority, Intermodal
Container Transfer Facility Refunding
Revenue Bonds, 1989 Series A,
7.7%, 11-1-2014 ....................... 2,000 2,090,000
California Rural Home Mortgage Finance
Authority, Single Family Mortgage
Revenue Bonds (Mortgage-Backed Securities
Program), 1995 Series B,
7.75%, 9-1-2026 ....................... 1,755 1,996,313
Los Angeles County Public Works Financing
Authority, Lease Revenue Refunding Bonds
(County of Los Angeles 1996 Master
Refunding Project),
5.25%, 9-1-2013 ....................... 1,230 1,168,500
Sacramento County Sanitation Districts
Financing Authority, 1993 Revenue Bonds,
5.125%, 12-1-2013 ..................... 1,000 932,500
Total ................................. 81,508,738
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
COLORADO - 7.84%
City and County of Denver, Colorado,
Airport System Revenue Bonds:
Series 1991D:
7.75%, 11-15-2013 ..................... $11,905 $ 14,181,831
7.0%, 11-15-2025 ...................... 6,000 6,217,500
Series 1992C,
6.75%, 11-15-2013 ..................... 11,410 11,880,662
Series 1990A,
0.0%, 11-15-2003 ...................... 7,955 5,300,019
Series 1992B,
7.25%, 11-15-2023 ..................... 2,500 2,693,750
Series 1991A,
0.0%, 11-15-2003 ...................... 3,370 2,245,263
Series 1994A,
7.5%, 11-15-2003 ...................... 2,000 2,187,500
Colorado Housing and Finance Authority:
Single Family Program Senior Bonds:
1995 Series A,
8.0%, 6-1-2025 ........................ 4,400 4,999,500
1995 Series D-1,
7.375%, 6-1-2026 ...................... 4,045 4,459,613
1996 Series A-1,
7.4%, 11-1-2027 ....................... 3,765 4,165,031
1995 Series C-1,
7.65%, 12-1-2025 ...................... 2,610 2,923,200
1995 Series B-1,
7.9%, 12-1-2025 ....................... 1,225 1,391,906
Single Family Program Senior and Subordinate
Bonds:
1996 Series B-1,
7.65%, 11-1-2026 ...................... 2,750 3,073,125
1996 Series C-1,
7.55%, 11-1-2027 ...................... 1,580 1,726,150
Colorado Student Obligation Bond Authority,
Student Loan Asset-Backed Obligations,
Senior Subordinate, 1995 Series II-B,
6.2%, 12-1-2008 ....................... 8,000 8,020,000
City of Colorado Springs, Colorado,
Utilities System Refunding Revenue Bonds,
Series 1991A,
6.5%, 11-15-2015 ...................... 1,500 1,625,625
Douglas County, Colorado, Certificates of
Participation, Series 1996,
5.6%, 11-1-2011 ....................... 1,105 1,110,525
Total ................................. 78,201,200
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CONNECTICUT - 2.57%
Bristol Resources Recovery Facility,
Operating Committee, Solid Waste Revenue
Refunding Bonds (Ogden Martin Systems of
Bristol, Inc. Project--1995 Series),
6.5%, 7-1-2014 ........................ $ 7,000 $ 7,297,500
Connecticut Development Authority,
Adjustable Rate Pollution Control Revenue
Bonds (New England Power Company Project--
1985 Series),
7.25%, 10-15-2015 ..................... 6,700 7,185,750
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-2014 ........................ 6,750 6,277,500
Connecticut Resources Recovery Authority,
Mid-Connecticut System Bonds,
1996 Series A,
5.25%, 11-15-2008 ..................... 5,000 4,900,000
Total ................................. 25,660,750
FLORIDA - 2.30%
Escambia County, Florida, Pollution Control
Revenue Bonds (Champion International
Corporation Project), Series 1994,
6.9%, 8-1-2022 ........................ 9,000 9,450,000
Lake County, Florida, Resource Recovery
Industrial Development Refunding Revenue
Bonds (NRG/Recovery Group Project),
Series 1993A:
5.85%, 10-1-2009 ...................... 5,825 5,686,656
5.95%, 10-1-2013 ...................... 2,690 2,616,025
Manatee County, Florida, Public Utilities
Revenue Refunding Bonds, Series 1993 A,
5.0%, 10-1-2013 ....................... 5,000 4,650,000
City of Atlantic Beach, Florida, Variable
Rate Demand, Improvement and Refunding
Revenue Bonds, Series 1994B (Fleet
Landing Project),
4.089%, 10-1-2024 ..................... 500 500,000
Total ................................. 22,902,681
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
GEORGIA - 3.24%
Municipal Electric Authority of Georgia:
Project One Special Obligation Bonds,
Fifth Crossover Series,
6.4%, 1-1-2013 ........................ $15,500 $ 16,836,875
General Power Revenue Bonds,
1992B Series,
8.25%, 1-1-2011 ....................... 8,700 10,972,875
Development Authority of Burke County
(Georgia), Pollution Control Revenue Bonds
(Georgia Power Company Plant Vogtle
Project), Sixth Series 1994,
6.375%, 8-1-2024 ...................... 4,300 4,488,125
Total ................................. 32,297,875
HAWAII - 2.26%
State of Hawaii, Airports System Revenue
Bonds, Second Series of 1991,
6.9%, 7-1-2012 ........................ 20,195 22,517,425
IDAHO - 0.65%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.), Indexed Inverse
Floating/Fixed Term Bonds,
8.57%, 2-15-2021 (B) .................. 6,000 6,502,500
ILLINOIS - 4.42%
City of Chicago, Chicago-O'Hare
International Airport:
General Airport Second Lien Revenue
Refunding Bonds, 1993 Series C:
5.0%, 1-1-2011 ........................ 10,590 9,835,462
5.0%, 1-1-2010 ........................ 3,000 2,808,750
Special Facility Revenue
Bonds, American Airlines,
Inc. Project:
7.875%, 11-1-2025 ..................... 7,250 7,793,750
Series 1994,
8.2%, 12-1-2024 ....................... 3,000 3,468,750
Special Facility Revenue Bonds (United
Air Lines, Inc. Project):
Series 1984C,
8.2%, 5-1-2018 ........................ 5,115 5,549,775
Series 1988A,
8.4%, 5-1-2018 ........................ 5,000 5,443,750
General Airport Revenue Refunding
Bonds, 1993 Series A,
5.0%, 1-1-2012 ........................ 3,000 2,808,750
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
ILLINOIS (Continued)
Illinois Health Facilities Authority
(Lutheran General HealthSystem),
Indexed Inverse Floating Rate
Revenue Bonds, Series 1993B,
7.24%, 4-1-2014 (C) ................... $ 4,100 $ 4,187,125
City of Peoria, City of Moline and City
of Freeport, Illinois, Collateralized
Single Family Mortgage Revenue Bonds,
Series 1995-A,
7.6%, 4-1-2027 ........................ 2,000 2,167,500
Total ................................. 44,063,612
INDIANA - 2.60%
Indiana State Office Building Commission,
Capitol Complex Revenue Bonds:
Series 1990B (State Office Building
I Facility),
7.4%, 7-1-2015 ........................ 8,000 9,590,000
Series 1990A (Senate Avenue Parking Facility),
7.4%, 7-1-2015 ........................ 4,775 5,724,031
Indiana Transportation Finance Authority,
Highway Revenue Bonds, Series 1990A,
7.25%, 6-1-2015 ....................... 9,000 10,620,000
Total ................................. 25,934,031
KENTUCKY - 0.64%
Kentucky Economic Development Finance
Authority, Hospital Revenue Bonds,
Baptist Healthcare System Issue,
Series 1994,
5.0%, 8-15-2015 ....................... 4,650 4,248,937
Kenton County Airport Board (Commonwealth
of Kentucky), Special Facilities Revenue
Bonds, 1992 Series A (Delta Air Lines,
Inc. Project),
7.5%, 2-1-2012 ........................ 2,000 2,140,000
Total ................................. 6,388,937
LOUISIANA - 3.16%
Memorial Hospital Service District of the
Parish of Calcasieu, State of Louisiana,
Hospital Revenue Bonds (Lake Charles
Memorial Hospital Project), Series 1993,
Adjustable Rate Bond,
4.875%, 12-1-2018 ..................... 12,500 12,500,000
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
LOUISIANA (Continued)
Parish of Jefferson Home Mortgage Authority,
Tax-Exempt Agency Mortgage-Backed
Securities:
Series 1994A,
7.55%, 12-1-2026 ...................... $ 5,495 $ 6,312,381
Series 1995A,
6.65%, 12-1-2026 ...................... 4,300 4,536,500
Louisiana Public Facilities Authority,
Hospital Revenue and Refunding Bonds
(St. Francis Medical Center Project),
Series 1994B,
5.375%, 7-1-2014 ...................... 8,600 8,127,000
Total ................................. 31,475,881
MAINE - 0.31%
Maine Educational Loan Marketing Corporation,
Student Loan Revenue Refunding Bonds,
Series 1991A,
6.9%, 11-1-2003 ....................... 2,970 3,137,062
MARYLAND - 0.39%
Northeast Maryland Waste Disposal Authority,
Solid Waste Revenue Bonds (Montgomery
County Resource Recovery Project),
Series 1993A,
6.3%, 7-1-2016 ........................ 3,700 3,852,625
MASSACHUSETTS - 4.21%
Massachusetts Municipal Wholesale Electric
Company, A Public Corporation of the
Commonwealth of Massachusetts, Power
Supply System Revenue Bonds, Linked
PARS and INFLOS,
5.45%, 7-1-2018 ....................... 30,000 28,275,000
The New England Education Loan Marketing
Corporation, Student Loan Refunding Bonds,
1993 Series A (Nellie Mae),
5.7%, 7-1-2005 ........................ 7,550 7,625,500
Massachusetts Bay Transportation Authority,
General Transportation System Bonds,
1995 Series B,
5.25%, 3-1-2012 ....................... 2,430 2,341,912
Massachusetts State College Building
Authority, Project and Refunding
Revenue Bonds, Senior Series 1994-A,
7.5%, 5-1-2014 ........................ 1,750 2,119,688
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MASSACHUSETTS (Continued)
Boston Water and Sewer Commission,
General Revenue Bonds, 1992 Series A
(Senior Series),
5.75%, 11-1-2013 ...................... $ 1,575 $ 1,596,656
Total ................................. 41,958,756
MICHIGAN - 1.87%
Michigan Strategic Fund, Limited Obligation
Refunding Revenue Bonds (The Detroit Edison
Company Pollution Control Bonds Project),
Collateralized Series 1991 AA,
6.95%, 5-1-2011 ....................... 8,000 9,070,000
Michigan State Hospital Finance Authority:
Hospital Revenue Refunding Bonds
(McLaren Obligated Group),
Series 1993A,
5.375%, 10-15-2013 .................... 2,250 2,109,375
Hospital Revenue Bonds (Holland Community
Hospital), Series 1993,
5.25%, 1-1-2010 ....................... 1,200 1,128,000
The Economic Development Corporation of
Dickinson County (Michigan), Solid Waste
Disposal Refunding Revenue Bonds
(Champion International Corporation Project),
Series 1989,
6.55%, 3-1-2007 ....................... 3,000 3,138,750
School District of the City of Detroit,
Wayne County, Michigan, School Building
and Site Improvement and Refunding Bonds
(Unlimited Tax General Obligation),
Series 1993,
5.0%, 5-1-2011 ........................ 1,885 1,753,050
Charter County of Wayne, Michigan, Detroit
Metropolitan Wayne County Airport, Airport
Revenue Bonds, Subordinate Lien,
Series 1993B,
5.25%, 12-1-2013 ...................... 1,500 1,402,500
Total ................................. 18,601,675
MINNESOTA - 0.70%
City of Rochester, Minnesota, Health
Care Facilities Revenue Bonds (Mayo
Foundation/Mayo Medical Center),
Series 1992D, Indexed Inverse
Floating/Fixed Term Bonds,
8.11%, 11-15-2009 (D) ................. 4,500 4,764,375
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MINNESOTA (Continued)
Minnesota Housing Finance Agency, Single
Family Mortgage Bonds, 1994 Series E,
5.6%, 7-1-2013 ........................ $ 2,250 $ 2,179,687
Total ................................. 6,944,062
MISSISSIPPI - 2.09%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control
Refunding Revenue Bonds (Weyerhaeuser
Company Project), Series 1992B, Indexed
Inverse Floating/Fixed Term Bonds,
8.57%, 4-1-2022 (E) ................... 11,000 12,182,500
Mississippi Higher Education Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1996-C:
6.75%, 9-1-2014 ....................... 5,500 5,568,750
6.7%, 9-1-2012 ........................ 1,470 1,490,212
Mississippi Home Corporation, Single Family
Mortgage Revenue Bonds, Series 1996F (AMT),
6.0%, 12-1-2027 ....................... 1,500 1,614,375
Total ................................. 20,855,837
MISSOURI - 3.47%
Health Facilities Revenue Bonds
(Barnes-Jewish, Inc./Christian Health
Services), Series 1993A:
6.0%, 5-15-2011 ....................... 3,000 3,116,250
5.25%, 5-15-2014 ...................... 2,900 2,776,750
Missouri Housing Development Commission,
Single Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series C,
7.25%, 9-1-2026 ....................... 2,985 3,283,500
1996 Series C,
7.45%, 9-1-2027 ....................... 1,680 1,843,800
Variable Rate Demand Certificates of
Participation in Boatmen's St. Louis,
Grantor Trust # 1, Series 1996A, ,
3.95%, 6-30-2001 ...................... 5,000 5,000,000
St. Louis Municipal Finance Corporation,
City Justice Center, Leasehold Revenue
Improvement Bonds, Series 1996A (City of
St. Louis, Missouri, Lessee):
5.7%, 2-15-2009 ....................... 2,465 2,474,244
5.6%, 2-15-2008 ....................... 2,390 2,398,963
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MISSOURI (Continued)
Health and Educational Facilities Authority
of the State of Missouri, Health Facilities
Revenue Bonds (BJC Health System),
Series 1994A,
6.75%, 5-15-2012 ...................... $ 4,000 $ 4,505,000
Health and Educational Facilities Authority
of the State of Missouri, Variable Rate
Demand Health Facilities Revenue Bonds
(Bethesda Barclay House), Series 1996A,
4.189%, 8-15-2026 ..................... 4,400 4,400,000
Missouri Development Finance Board, Industrial
Development Revenue Bonds, Series 1995
(J & J Enterprises Leasing, L.C. Project),
4.089%, 8-1-2010 ...................... 3,430 3,430,000
Missouri Higher Education Loan Authority
(A Public Instrumentality and Body
Corporate and Politic of the State of
Missouri), Student Loan Revenue Bonds,
Subordinate Series 1994A,
5.45%, 2-15-2009 ...................... 1,500 1,393,125
Total ................................. 34,621,632
MONTANA - 0.12%
State of Montana, The Board of Regents
of Higher Education, Montana State
University, Facilities Improvement and
Refunding Revenue Bonds, Series D 1996,
5.25%, 11-15-2013 ..................... 1,250 1,204,687
NEBRASKA - 1.47%
Nebraska Higher Education Loan Program,
Inc., 1993-2 Series A-6 Junior
Subordinate Bonds,
6.4%, 6-1-2013 ........................ 14,500 14,681,250
NEVADA - 0.78%
Washoe County, Nevada, Variable Rate Demand
Water Facilities, Revenue Bonds (Sierra
Pacific Power Company Project),
Series 1987,
6.65%, 6-1-2017 ....................... 5,000 5,275,000
Nevada Housing Division, Single Family
Mortgage Bonds:
1996 Series C Mezzanine Bonds,
6.6%, 4-1-2014 ........................ 1,500 1,518,750
1996 Series C Subordinate Bonds,
6.35%, 4-1-2009 ....................... 1,000 1,012,500
Total ................................. 7,806,250
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW HAMPSHIRE - 0.44%
The Industrial Development Authority of
The State of New Hampshire, Pollution
Control Revenue Bonds (The Connecticut
Light and Power Company Project),
Series 1989,
7.375%, 12-1-2019 ..................... $ 4,000 $ 4,355,000
NEW JERSEY - 3.45%
The Union County Utilities Authority
(New Jersey), Solid Waste System Revenue
Bonds, 1991 Series A:
6.95%, 6-15-2003 ...................... 9,000 9,213,750
7.2%, 6-15-2014 ....................... 5,400 5,494,500
7.15%, 6-15-2009 ...................... 4,000 4,080,000
The Hudson County Improvement Authority,
Essential Purpose Pooled Governmental
Loan Program Bonds, Series 1986,
7.6%, 8-1-2025 ........................ 5,170 5,712,850
Pollution Control Financing Authority
of Camden County (Camden County, New
Jersey), Solid Waste Disposal and
Resource Recovery System Revenue Bonds,
Series 1991 B,
7.5%, 12-1-2009 ....................... 5,340 5,333,325
Middlesex County Utilities Authority,
Sewer Revenue Refunding Bonds, Series
1992A, Indexed Inverse Floating/Fixed
Term Bonds,
7.7%, 8-15-2010 (F) ................... 3,000 3,270,000
The Essex County Utilities Authority (Essex
County, New Jersey), Solid Waste System
Revenue Bonds, Tax-Exempt Series 1996-A,
5.5%, 4-1-2011 ........................ 1,300 1,275,625
Total ................................. 34,380,050
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW MEXICO - 2.45%
New Mexico Educational Assistance
Foundation, Student Loan Program Bonds:
First Subordinate 1995 Series A-2:
5.95%, 11-1-2007 ...................... $ 3,005 $ 2,982,463
5.85%, 11-1-2006 ...................... 1,745 1,712,281
5.5%, 11-1-2003 ....................... 1,255 1,308,337
First Subordinate 1996 Series A-2,
6.2%, 11-1-2008 ....................... 2,210 2,207,238
Second Subordinate 1996 Series A-3,
6.75%, 11-1-2008 ...................... 2,175 2,172,281
Second Subordinate 1995 Series A-3,
6.6%, 11-1-2010 ....................... 1,500 1,481,250
New Mexico Educational Assistance
Foundation, Student Loan Purchase Bonds:
Senior 1995 Series IV-A1,
7.05%, 3-1-2010 ....................... 6,485 6,882,206
First Subordinate 1994 Series II-B (Amt),
5.75%, 12-1-2008 ...................... 1,750 1,719,375
City of Albuquerque, New Mexico, Governmental
Purpose Airport Refunding Revenue Bonds,
Series 1989,
6.5%, 7-1-2019 ........................ 3,950 3,994,082
Total ................................. 24,459,513
NEW YORK - 7.41%
New York State Environmental Facilities
Corporation, State Water Pollution
Control, Revolving Fund Revenue Bonds,
Series 1994 A (New York City Municipal
Water Finance Authority Project)
(Second Resolution Bonds):
5.75%, 6-15-2012 ...................... 10,000 10,300,000
5.75%, 6-15-2011 ...................... 5,000 5,112,500
The City of New York, General Obligation
Bonds:
Fiscal 1996 Series E,
6.5%, 2-15-2006 ....................... 5,000 5,212,500
Fiscal 1994 Series C Inverse Floater,
19.46%, 9-30-2003 (G) ................. 3,250 4,875,000
Fiscal 1997 Series A, Fixed Rate
Tax-Exempt Bonds,
6.0%, 8-1-2004 ........................ 3,000 3,052,500
New York City Municipal Water Finance
Authority, Water and Sewer System
Revenue Bonds, Fiscal 1993 Series A,
6.0%, 6-15-2010 ....................... 12,000 12,450,000
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW YORK (Continued)
New York State Medical Care Facilities
Finance Agency, Mental Health Services
Facilities Improvement Revenue Bonds,
1993 Series F Refunding,
5.375%, 2-15-2014 ..................... $12,000 $ 11,520,000
Housing New York Corporation, Senior
Revenue Refunding Bonds, Series 1993,
5.0%, 11-1-2013 ....................... 6,600 5,931,750
Dormitory Authority of the State of New York:
State University Educational
Facilities, Revenue Bonds,
Series 1990B,
7.5%, 5-15-2011 ....................... 2,000 2,335,000
Department of Health of the State of
New York, Revenue Bonds, Series 1996,
5.5%, 7-1-2010 ........................ 2,000 1,915,000
Nyack Hospital, Revenue Bonds, Series 1996,
6.25%, 7-1-2013 ....................... 1,000 1,008,750
Municipal Assistance Corporation for the
City of New York (A Public Benefit
Corporation of the State of New York),
Series E Bonds,
5.2%, 7-1-2008 ........................ 4,000 4,005,000
New York State Urban Development Corporation,
Correctional Capital Facilities Revenue Bonds,
1993A, Refunding Series,
5.25%, 1-1-2014 ....................... 3,000 2,898,750
New York Local Government Assistance
Corporation (A Public Benefit Corporation
of the State of New York),
Series 1993D Bonds,
5.375%, 4-1-2014 ...................... 2,370 2,278,163
Rockland County Solid Waste Management
Authority, General Obligation Bonds,
Series 1996B-AMT,
5.625%, 12-15-2014 .................... 1,000 975,000
Total ................................. 73,869,913
NORTH CAROLINA - 2.09%
North Carolina Eastern Municipal Power
Agency, Power System Revenue Bonds,
Refunding Series 1993 B,
7.0%, 1-1-2008 ........................ 19,000 20,828,750
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
OHIO - 1.59%
County of Cuyahoga, Ohio, Hospital Revenue
Bonds, Series 1990 (Meridia Health System),
7.25%, 8-15-2019 ...................... $ 4,980 $ 5,291,250
1993 Beneficial Interest Certificates
(Belleville Hydroelectric Project),
Ohio Municipal Electric Generation
Agency Joint Venture 5, "OMEGA JV5",
5.375%, 2-15-2013 ..................... 2,750 2,677,813
State of Ohio, Pollution Control Revenue
Refunding Bonds, Ohio Water Development
Authority, 1989 Series A (Ohio Edison
Company Project),
7.625%, 7-1-2023 ...................... 2,500 2,606,250
State of Ohio (OPFC), Mental Health Capital
Facilities Bonds, Series II-1996A,
4.5%, 12-1-2010 ....................... 2,350 2,097,375
City of Moraine, Ohio, Solid Waste
Disposal Revenue Bonds (General Motors
Corporation Project), Series 1994,
6.75%, 7-1-2014 ....................... 1,550 1,712,750
City of Dayton, Ohio, Special Facilities
Revenue Refunding Bonds, 1993 Series E
(Emery Air Freight Corporation and
Emery Worldwide Airlines, Inc. -
Guarantors), (Non-AMT),
6.05%, 10-1-2009 ...................... 1,500 1,507,500
Total ................................. 15,892,938
OKLAHOMA - 1.01%
Oklahoma Housing Finance Agency, Single
Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series B, Subseries B-2 (AMT),
7.625%, 9-1-2026 ...................... 5,815 6,323,813
1996 Series A,
7.05%, 9-1-2026 ....................... 1,000 1,081,250
Trustees of the Tulsa Municipal Airport
Trust, 1988 Adjustable Rate Revenue
Obligations, American Airlines,
7.375%, 12-1-2020 ..................... 2,500 2,646,875
Total ................................. 10,051,938
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
OREGON - 0.98%
The Port of Portland, Oregon, Portland
International Airport, Revenue Bonds,
Series Eleven:
5.5%, 7-1-2011 ........................ $ 4,285 $ 4,220,725
5.5%, 7-1-2010 ........................ 4,140 4,098,600
State of Oregon, Housing and Community
Services Department, Mortgage Revenue
Bonds, Single-Family Mortgage Program,
1992 Series C,
5.5%, 7-1-2013 ........................ 1,485 1,459,013
Total ................................. 9,778,338
PENNSYLVANIA - 1.30%
Pennsylvania Turnpike Commission,
Pennsylvania Turnpike Revenue Bonds,
Series N of 1991,
6.5%, 12-1-2013 ....................... 5,000 5,256,250
Washington County Hospital Authority
(Commonwealth of Pennsylvania), Hospital
Revenue Bonds, Series of 1993 (The
Washington Hospital Project),
5.5%, 7-1-2012 ........................ 5,000 4,818,750
Delaware County Authority, Hospital Revenue
Bonds, Series of 1992 (Riddle Memorial
Hospital),
6.5%, 1-1-2022 ........................ 2,800 2,845,500
Total ................................. 12,920,500
PUERTO RICO - 1.54%
Puerto Rico Public Buildings Authority,
Public Education and Health Facilities,
Refunding Bonds, Series M,
4.8%, 7-1-2016 ........................ 12,000 11,085,000
Puerto Rico Highway and Transportation
Authority, Highway Revenue Bonds
Series W,
4.09%, 7-1-2010 ....................... 4,250 4,250,000
Total ................................. 15,335,000
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
SOUTH CAROLINA - 0.50%
South Carolina State Education Assistance
Authority, Guaranteed Student Loan
Revenue and Refunding Bonds:
1993 Series,
5.55%, 9-1-2008 ....................... $ 3,000 $ 2,947,500
1995 Series, Series C Subordinate Lien
Refunding Bonds,
6.0%, 9-1-2008 ........................ 2,000 2,030,000
Total ................................. 4,977,500
TENNESSEE - 0.75%
Tennessee Housing Development Agency,
Homeownership Program Bonds, Issue T,
7.375%, 7-1-2023 ...................... 4,665 4,863,263
Volunteer State Student Funding Corporation,
Educational Loan Revenue Bonds,
Junior Subordinate Series 1993C Bonds,
5.85%, 12-1-2008 ...................... 2,700 2,632,500
Total ................................. 7,495,763
TEXAS - 8.14%
Alliance Airport Authority, Inc.,
Special Facilities Revenue Bonds:
Series 1990 (American Airlines, Inc.
Project),
7.5%, 12-1-2029 ....................... 15,000 15,956,250
Series 1991 (American Airlines, Inc.
Project),
7.0%, 12-1-2011 ....................... 13,100 14,328,125
Brazos River Authority (Texas),
Collateralized Pollution Control Revenue
Bonds (Texas Utilities Electric Company
Project), Series 1991A,
7.875%, 3-1-2021 ...................... 11,855 13,040,500
City of Austin, Texas, Combined Utility
Systems Revenue Refunding Bonds,
Series 1996 A,
5.125%, 5-15-2011 ..................... 7,330 6,908,525
Gulf Coast Waste Disposal Authority,
Multi-Modal Interchangeable Rate Revenue
Bonds (Champion International Corporation
Project), Series 1992A,
6.875%, 12-1-2028 ..................... 6,000 6,172,500
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
TEXAS (Continued)
Lubbock Health Facilities Development
Corporation, Hospital Revenue Bonds
(Methodist Hospital, Lubbock, Texas
Project),
6.75%, 12-1-2010 ...................... $ 5,000 $ 5,543,750
Texas Department of Housing and Community
Affairs, Single Family Mortgage Revenue
Bonds, 1996 Series B (Non-AMT) Teams
Structure, MBIA Insured,
6.0%, 3-1-2017 ........................ 5,000 5,012,500
Dallas-Fort Worth International Airport,
Facility Improvement Corporation, American
Airlines, Inc. Revenue Bonds, Series 1990,
7.5%, 11-1-2025 ....................... 4,700 5,011,375
Harris County Health Facilities Development
Corporation, Hospital Revenue Bonds
(Memorial Hospital System Project),
Series 1989,
6.5%, 6-1-2019 ........................ 4,500 4,713,750
Sabine River Authority of Texas,
Collateralized Pollution Control Revenue
Bonds (Texas Utilities Electric Company
Project), Series 1990,
8.25%, 10-1-2020 ...................... 4,000 4,440,000
Total ................................. 81,127,275
UTAH - 1.06%
Intermountain Power Agency, Power Supply
Revenue Refunding Bonds, 1997 Series B,
5.75%, 7-1-2016 ....................... 10,000 9,675,000
Utah Housing Finance Agency, Single Family
Mortgage Senior Bonds, 1993 Issue B
(Federally Insured or Guaranteed Mortgage
Loans),
5.7%, 7-1-2013 ........................ 945 928,463
Total ................................. 10,603,463
VIRGINIA - 0.56%
City of Richmond, Virginia, General Obligation
Public Improvement Refunding Bonds,
Series 1991B,
6.25%, 1-15-2018 ...................... 2,665 2,774,931
City of Chesapeake, Virginia, Water
and Sewer System Revenue Refunding
Bonds, Series of 1994,
5.1%, 5-1-2014 ........................ 2,000 1,840,000
See Notes to Schedule of Investments on page 78.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
VIRGINIA (Continued)
Southeastern Public Service Authority of
Virginia, Senior Revenue Refunding Bonds,
Series 1993A (Regional Solid Waste System),
5.125%, 7-1-2013....................... $ 1,000 $ 937,500
Total ................................. 5,552,431
WASHINGTON - 5.72%
Washington Public Power Supply System:
Nuclear Project No. 1, Refunding Revenue Bonds:
PARS Series 1993A,
5.75%, 7-1-2011 ....................... 15,000 14,887,500
Series 1989B,
7.125%, 7-1-2016 ...................... 8,200 9,337,750
Nuclear Project No. 3, Refunding Revenue Bonds,
Series 1989B,
7.125%, 7-1-2016 ...................... 20,750 23,629,063
State of Washington, Various Purpose General
Obligation Bonds, Series 1990A,
6.75%, 2-1-2015 ....................... 4,995 5,675,569
Public Utility District No. 1 of Douglas
County, Washington, Wells Hydroelectric
Revenue Bonds, Series of 1965,
3.7%, 9-1-2018 ........................ 4,200 3,533,250
Total ................................. 57,063,132
WEST VIRGINIA - 0.22%
Mason County, West Virginia, Pollution
Control Revenue Bonds (Appalachian Power
Company Project), Series G,
7.4%, 1-1-2014 ........................ 2,000 2,162,500
TOTAL MUNICIPAL BONDS - 95.17% $948,827,782
(Cost: $914,583,767)
TOTAL SHORT-TERM SECURITIES - 4.66% $ 46,410,335
(Cost: $46,410,335)
TOTAL INVESTMENT SECURITIES - 99.83% $995,238,117
(Cost: $960,994,102)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.17% 1,700,545
NET ASSETS - 100.00% $996,938,662
See Notes to Schedule of Investments on page 78.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1996
Notes to Schedule of Investments
(A) Coupon resets semi-annually to 12% - ((SAVRS rate + 28 basis
points)*365/360). Minimum coupon rate is 0%.
(B) Coupon resets weekly to 11.95% - Kenny S&P Index. Minimum coupon rate is
0%. On February 15, 1999, rate becomes fixed at 6.65%.
(C) Coupon resets weekly to 10.62% - Kenny S&P Index. Minimum coupon rate is
0%. On April 1, 1998, rate becomes fixed at 6.25%.
(D) Coupon resets weekly to 11.37% - PSA Municipal Swap Index. Minimum coupon
rate is 0%. On November 15, 2000, rate becomes fixed at 6.15%.
(E) Coupon resets weekly to 11.95% - Kenny S&P Index. Minimum coupon rate is
0%. On April 1, 1999, rate becomes fixed at 6.70%.
(F) Coupon resets weekly to 10.90% - Bankers Trust Company TENR Index. Minimum
coupon rate is 0%. On August 15, 1997, rate becomes fixed at 6.25%.
(G) Coupon resets every 35 days based on an auction rate. Minimum coupon rate
is 0%. Bond may be linked at the option of the holder at which time the
rate is fixed at 5.50%.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
Assets
Investment securities--at value
(Notes 1 and 3) ............................... $ 995,238,117
Cash ........................................... 71,739
Receivables:
Investment securities sold .................... 17,298,190
Interest ...................................... 16,174,952
Fund shares sold .............................. 753,022
Prepaid insurance premium ...................... 30,640
--------------
Total assets ................................ 1,029,566,660
--------------
Liabilities
Payable for investment securities purchased .... 29,500,716
Payable for Fund shares redeemed ............... 2,709,600
Accrued service fee ............................ 264,300
Accrued transfer agency and dividend disbursing 56,050
Accrued accounting services fee ................ 7,083
Other .......................................... 90,249
--------------
Total liabilities ........................... 32,627,998
--------------
Total net assets ........................... $ 996,938,662
==============
Net Assets
$1.00 par value capital stock, authorized --
600,000,000; shares outstanding --136,116,397
Capital stock ................................. $ 136,116,397
Additional paid-in capital .................... 809,535,199
Accumulated undistributed income:
Accumulated undistributed net investment
income ...................................... 804,983
Accumulated undistributed net realized gain on
investment transactions ..................... 16,238,068
Net unrealized appreciation in value of
investments at end of period ................ 34,244,015
--------------
Net assets applicable to outstanding units
of capital ................................. $ 996,938,662
==============
Net asset value per share (net assets divided by
shares outstanding) ............................ $7.32
=====
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1996
Investment Income
Interest ......................................... $58,637,123
-----------
Expenses (Note 2):
Investment management fee ....................... 4,344,734
Service fee ..................................... 1,279,529
Transfer agency and dividend disbursing ......... 693,674
Accounting services fee ......................... 90,000
Custodian fees .................................. 50,880
Audit fees ...................................... 36,648
Legal fees ...................................... 24,021
Other ........................................... 254,196
-----------
Total expenses ................................ 6,773,682
-----------
Net investment income ........................ 51,863,441
-----------
Realized and Unrealized Gain (Loss) on Investments
Realized net gain on securities .................. 27,157,997
Realized net gain on futures contracts closed .... 492,688
Realized net gain on put options purchased ....... 635,082
-----------
Net realized gain on investments ................ 28,285,767
Net unrealized depreciation in value of
investments during the period ................... (10,296,280)
-----------
Net gain on investments ....................... 17,989,487
-----------
Net increase in net assets resulting
from operations ............................ $69,852,928
===========
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year
ended September 30,
-----------------------------
1996 1995
-------------- ------------
Increase in Net Assets
Operations:
Net investment income.............. $51,863,441 $ 52,049,896
Realized net gain (loss) on
investments ..................... 28,285,767 (4,681,498)
Unrealized appreciation
(depreciation) .................. (10,296,280) 55,263,393
------------ -------------
Net increase in net assets
resulting from operations ...... 69,852,928 102,631,791
------------ -------------
Dividends to shareholders:*
From net investment income ........ (52,041,101) (52,122,952)
From realized gains on securities
transactions .................... (6,890,412) ---
In excess of realized gains on securities
transactions .................... --- (5,125,035)
------------ -------------
(58,931,513) (57,247,987)
------------ -------------
Capital share transactions:
Proceeds from sale of shares
(69,215,523 and 16,748,709
shares, respectively) ........... 507,068,546 118,813,088
Proceeds from reinvestment of
dividends and/or capital gains
distribution (6,577,962 and
6,061,556 shares, respectively) . 48,186,696 42,256,392
Payments for shares redeemed
(74,246,333 and 25,912,586
shares, respectively) ........... (544,346,793) (182,296,814)
------------ -------------
Net increase (decrease) in net
assets resulting from capital
share transactions ............. 10,908,449 (21,227,334)
------------ -------------
Total increase ................. 21,829,864 24,156,470
Net Assets
Beginning of period ................ 975,108,798 950,952,328
------------ -------------
End of period, including
undistributed net investment
income of $804,983 and
$982,643, respectively ............ $996,938,662 $975,108,798
============ =============
*See "Financial Highlights" on page 82.
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the fiscal year ended
September 30,
------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Net asset value,
beginning of period $7.25 $6.91 $7.83 $7.40 $7.18
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... .39 .39 .38 .41 .43
Net realized and
unrealized gain
(loss) on
investments...... .12 .38 (0.67) .65 .35
----- ----- ----- ----- -----
Total from investment
operations ........ .51 .77 (0.29) 1.06 .78
----- ----- ----- ----- -----
Less distributions:
Dividends from net
investment
income........... (0.39) (0.39) (0.38) (0.40) (0.43)
Distribution from
capital gains.... (0.05) (0.00) (0.25) (0.23) (0.13)
Distribution in excess
of capital gains. (0.00) (0.04) (0.00) (0.00) (0.00)
----- ----- ----- ----- -----
Total distributions. (0.44) (0.43) (0.63) (0.63) (0.56)
----- ----- ----- ----- -----
Net asset value,
end of period ..... $7.32 $7.25 $6.91 $7.83 $7.40
===== ===== ===== ===== =====
Total return*....... 7.16% 11.51% -3.91% 15.15% 11.41%
Net assets, end of
period (000
omitted) ......... $996,939$975,109$950,952$1,055,434$890,004
Ratio of expenses to
average net assets 0.68% 0.65% 0.64% 0.56% 0.57%
Ratio of net investment
income to average
net assets ........ 5.23% 5.51% 5.17% 5.38% 5.92%
Portfolio
turnover rate ..... 74.97% 70.67% 62.61% 94.51% 125.44%
*Total return calculated without taking into account the sales load
deducted on an initial purchase.
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 -- Significant Accounting Policies
United Municipal Bond Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Its investment objective is to provide income not subject to Federal
income taxation. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
A. Security valuation -- Municipal bonds and the taxable obligations in the
Fund's investment portfolio are not listed or traded on any securities
exchange. Therefore, municipal bonds are valued using a pricing system
provided by a pricing service or dealer in bonds. Short-term debt
securities, whether taxable or nontaxable, are valued at amortized cost,
which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined by the Internal
Revenue Code) and premiums on the purchase of bonds are amortized for both
financial and tax reporting purposes over the remaining lives of the bonds.
Interest income is recorded on the accrual basis. See Note 3 -- Investment
Security Transactions.
C. Federal income taxes -- The Fund intends to distribute all of its net
investment income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under the Internal Revenue Code.
The Fund intends to pay distributions as required to avoid imposition of
excise tax. Accordingly, provision has not been made for Federal income
taxes. In addition, the Fund intends to meet requirements of the Internal
Revenue Code which will permit it to pay dividends from net investment
income, substantially all of which will be exempt from Federal income tax.
See Note 4 -- Federal Income Tax Matters.
D. Dividends and distributions -- Dividends and distributions to shareholders
are recorded by the Fund on the record date. Net investment income
distributions and capital gains distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are due to differing treatments
for items such as deferral of wash sales and post-October losses, net
operating losses and expiring capital loss carryforwards.
E. Futures -- See Note 5 -- Futures.
F. Options -- See Note 6 -- Options.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .03% of net assets and (ii)
a "Group" fee computed each day on the combined net asset values of all of the
funds in the United Group of mutual funds (approximately $14.7 billion of
combined net assets at September 30, 1996) at annual rates of .51% of the first
$750 million of combined net assets, .49% on that amount between $750 million
and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between
$2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion, .40%
between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly-owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The Fund also pays WARSCO a monthly per account charge for transfer agency
and dividend disbursement services of $1.3125 for each shareholder account which
was in existence at any time during the prior month ($1.0208 per account prior
to April 1, 1996), plus $0.30 for each account on which a dividend or
distribution of cash or shares had a record date in that month. The Fund also
reimburses W&R and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received direct and
indirect gross sales commissions (which are not an expense of the Fund) of
$1,203,218, out of which W&R paid sales commissions of $679,518 and all expenses
in connection with the sale of Fund shares, except for registration fees and
related expenses.
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to W&R in an
amount not to exceed .25% of the Fund's average annual net assets. The fee is
to be paid to reimburse W&R for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts.
The Fund paid Directors' fees of $38,644.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and short-
term securities, aggregated $731,444,908 while proceeds from maturities and
sales aggregated $768,866,286. Purchases of short-term securities aggregated
$1,099,803,029 while proceeds from maturities and sales aggregated
$1,062,507,910. No U.S. Government securities were bought or sold during the
period ended September 30, 1996.
For Federal income tax purposes, cost of investments owned at September 30,
1996 was $965,397,491, resulting in net unrealized appreciation of $29,840,626,
of which $32,769,927 related to appreciated securities and $2,929,301 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $20,584,544 during its fiscal year ended September 30, 1996, which included
losses of $6,444,652 deferred from the year ended September 30, 1995 (see
discussion below). A portion of the realized capital gain was paid to
shareholders during the period ended September 30, 1996. Remaining net capital
gains will be distributed to the Fund's shareholders.
Internal Revenue Code regulations permit the Fund to defer into its next
fiscal year net capital losses incurred between each November 1 and the end of
its next fiscal year ("post-October losses"). From November 1, 1994 through
September 30, 1995, the Fund incurred net long-term capital losses of
$6,444,652, which have been deferred to the fiscal year ended September 30,
1996.
NOTE 5 -- Futures
The Fund may engage in buying and selling interest rate futures contracts,
but only Debt Futures and Municipal Bond Index Futures. Upon entering into a
futures contract, the Fund is required to deposit, in a segregated account, an
amount of cash or U.S. Treasury Bills equal to a varying specified percentage of
the contract amount. This amount is known as the initial margin. Subsequent
payments ("variation margins") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying debt security
or index. These changes in the variation margins are recorded by the Fund as
unrealized gains or losses. Upon the closing of the contracts, the cumulative
net change in the variation margin is recorded as realized gain or loss. The
Fund uses futures to attempt to reduce the overall risk of its investments.
NOTE 6 -- Options
Options purchased by the Fund are accounted for in the same manner as
marketable portfolio securities. The cost of portfolio securities acquired
through the exercise of call options is increased by the premium paid to
purchase the call. The proceeds from securities sold through the exercise of
put options are decreased by the premium paid to purchase the put. The Fund
uses options to attempt to reduce the overall risk of its investments.
NOTE 7 -- Multiclass Operations
On January 21, 1996, the Fund was authorized to offer investors a choice of
two classes of shares, Class A and Class Y, each of which has equal rights as to
assets and voting privileges. Class A shares represent existing shareholders;
Class Y shares are offered through a separate Prospectus to certain
institutional investors. Class Y shares are not subject to a sales charge on
purchases; they are not subject to a Rule 12b-1 Service Plan and have a separate
transfer agency and dividend disbursement services fee structure. As of
September 30, 1996, the Fund had not commenced multiclass operations.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
United Municipal Bond Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of United Municipal Bond Fund, Inc.
(the "Fund") at September 30, 1996, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
each of the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
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 the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Kansas City, Missouri
November 8, 1996
