File No. 811-2657
File No. 2-56969
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ____
Post-Effective Amendment No. 38
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 X
Amendment No. 28
UNITED MUNICIPAL BOND FUND, INC.
(Exact Name as Specified in Charter)
6300 Lamar Avenue, Shawnee Mission, Kansas 66202-4200
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code (913) 236-2000
Sharon K. Pappas, P. O. Box 29217, Shawnee Mission, Kansas 66201-9217
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
_____ immediately upon filing pursuant to paragraph (b)
__X__ on December 31, 1997 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
_____ this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
==================================================================
DECLARATION REQUIRED BY RULE 24f-2(a)(1)
The issuer has registered an indefinite amount of its securities under the
Securities Act of 1933 pursuant to Rule 24f-2(a)(1). Notice for the
Registrant's fiscal year ended September 30, 1997 was filed on or about November
26, 1997.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
================================
Cross Reference Sheet
=====================
Part A of
Form N-1A
Item No. Prospectus Caption
- --------- ------------------
1 ........................ Cover Page
2(a) ..................... Expenses
(b) ..................... An Overview of the Fund
(c) ..................... An Overview of the Fund
3(a) ..................... Financial Highlights
(b) ..................... *
(c) ..................... Performance
(d) ..................... Performance; About Your Account
4(a) ..................... About the Investment Principles of the Fund; About
the Management and Expenses of the Fund
(b) ..................... About the Investment Principles of the Fund
(c) ..................... An Overview of the Fund; About the Investment
Principles of the Fund
5(a) ..................... About the Management and Expenses of the Fund
(b)...................... Inside Back Cover; About the Management and
Expenses of the Fund
(c) ..................... About the Management and Expenses of the Fund
(d) ..................... About the Management and Expenses of the Fund
(e) ..................... Inside Back Cover; About the Management and
Expenses of the Fund
(f) ..................... Expenses; About the Management and Expenses of the
Fund
(g)...................... *
5A......................... **
6(a) ..................... About the Management and Expenses of the Fund
(b) ..................... *
(c) ..................... *
(d) ..................... About the Management and Expenses of the Fund
(e) ..................... About Your Account
(f)...................... About Your Account
(g) ..................... About Your Account
(h) ..................... About the Management and Expenses of the Fund
7(a) ..................... Inside Back Cover; About Your Account; About the
Management and Expenses of the Fund
(b) ..................... About Your Account
(c) ..................... About Your Account
(d) ..................... About Your Account
(e) ..................... *
(f) ..................... About the Management and Expenses of the Fund
8(a) ..................... About Your Account
(b) ..................... *
(c) ..................... About Your Account
(d) ..................... About Your Account
9 ........................ *
Part B of
Form N-1A
Item No. SAI Caption
- --------- -----------
10(a) ..................... Cover Page
(b) ..................... *
11 ........................ Cover Page
12 ........................ *
13(a) ..................... Goal and Investment Policies
(b) ..................... Goal and Investment Policies
(c) ..................... Goal and Investment Policies
(d) ..................... Goal and Investment Policies
14(a) ..................... Directors and Officers
(b) ..................... Directors and Officers
(c) ..................... Directors and Officers
15(a) ..................... *
(b) ..................... Directors and Officers
(c) ..................... Directors and Officers
16(a)(i) .................. Investment Management and Other Services
(a)(ii) ................. Directors and Officers
(a)(iii) ................ Investment Management and Other Services
(b) ..................... Investment Management and Other Services
(c) ..................... *
(d) ..................... Investment Management and Other Services
(e) ..................... *
(f) ..................... Investment Management and Other Services
(g) ..................... *
(h) ..................... Investment Management and Other Services
(i) ..................... Investment Management and Other Services
17(a) ..................... Portfolio Transactions and Brokerage
(b) ..................... *
(c) ..................... Portfolio Transactions and Brokerage
(d) ..................... Portfolio Transactions and Brokerage
(e) ..................... *
18(a) ..................... Other Information
(b) ..................... *
19(a) ..................... Purchase, Redemption and Pricing of Shares
(b) ..................... Purchase, Redemption and Pricing of Shares
(c) ..................... Purchase, Redemption and Pricing of Shares
20 ........................ Payments to Shareholders; Taxes
21(a) ..................... Investment Management and Other Services
(b) ..................... Investment Management and Other Services
(c) ..................... *
22(a) ..................... *
(b)(i) .................. Performance Information
(b)(ii) ................. Performance Information
(b)(iii) ................ Performance Information
(b)(iv).................. Performance Information
23 ........................ Financial Statements
- ---------------------------------------------------------------------------
*Not Applicable or Negative Answer
**Included in Annual Report to Shareholders
<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, 1997. 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, 1997
UNITED MUNICIPAL BOND FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
800-366-5465
<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 Goal and Principles ...............................11
Risk Considerations ........................................11
Securities and Investment Practices ..........................12
ABOUT YOUR ACCOUNT.............................................26
Ways to Set Up Your Account ..................................26
Buying Shares ................................................26
Minimum Investments ..........................................28
Adding to Your Account .......................................28
Selling Shares ...............................................29
Shareholder Services .........................................31
Personal Service ...........................................31
Reports ....................................................31
Exchanges ..................................................31
Automatic Transactions .....................................32
Distributions and Taxes ......................................32
Distributions ..............................................32
Taxes ......................................................33
ABOUT THE MANAGEMENT AND EXPENSES OF THE FUND..................36
WRIMCO and Its Affiliates ....................................37
Breakdown of Expenses ........................................38
Management Fee .............................................38
Other Expenses .............................................38
<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.
Goal 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
(as a percentage of
offering price) 4.25%
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 0.43%
12b-1 fees1 0.13%
Other expenses 0.11%
Total Fund operating
expenses 0.67%
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 $ 63
5 years $ 78
10 years $122
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."
1It is possible that long-term shareholders of the Fund may bear 12b-1
distribution fees which are more than the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc. See "Breakdown of Expenses."
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
The following information has been audited in conjunction with the audits
of the Financial Statements of the Fund. Financial Statements for the fiscal
year ended September 30, 1997 and the independent auditors' report of Deloitte &
Touche LLP thereon are included in the SAI and should be read in conjunction
with the Financial Highlights.
For a Class A share outstanding throughout each period.*
<TABLE>
For the fiscal year ended September 30,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..... $7.32 $7.25 $6.91 $7.83 $7.40 $7.18 $6.66 $7.07 $6.91 $6.29
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income from investment operations:
Net investment
income ................ 0.38 0.39 0.39 0.38 0.41 0.43 0.45 0.47 0.49 0.48
Net realized and
unrealized gain
(loss) on
investments ........... 0.30 0.12 0.38 (0.67) 0.65 0.35 0.52 (0.16) 0.22 0.62
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations .............. 0.68 0.51 0.77 (0.29) 1.06 0.78 0.97 0.31 0.71 1.10
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less distributions:
From net investment
income ................ (0.37) (0.39) (0.39) (0.38) (0.40) (0.43) (0.45) (0.49) (0.48) (0.48)
From capital gains ...... (0.16) (0.05) (0.00) (0.25) (0.23) (0.13) (0.00) (0.23) (0.07) (0.00)
In excess of capital gains (0.00) (0.00) (0.04) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions ....... (0.53) (0.44) (0.43) (0.63) (0.63) (0.56) (0.45) (0.72) (0.55) (0.48)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period ........... $7.47 $7.32 $7.25 $6.91 $7.83 $7.40 $7.18 $6.66 $7.07 $6.91
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return** ............ 9.77% 7.16% 11.51% -3.91% 15.15% 11.41% 14.97% 4.46% 10.74% 18.07%
Net assets, end of
period (000
omitted) ................ $993,877 $996,939 $975,109 $950,952$1,055,434 $890,004 $769,122 $648,546 $594,733 $477,479
Ratio of expenses to
average net assets ...... 0.67% 0.68% 0.65% 0.64% 0.56% 0.57% 0.57% 0.57% 0.57% 0.58%
Ratio of net investment
income to average
net assets .............. 5.14% 5.23% 5.51% 5.17% 5.38% 5.92% 6.47% 6.82% 6.98% 7.32%
Portfolio turnover rate ... 47.24% 74.97% 70.67% 62.61% 94.51% 125.44% 144.36% 181.25% 226.41% 225.49%
*On January 21, 1996, Fund shares outstanding 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, 1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990, 1989 and 1988, 67.70%,
84.75%, 88.99%, 58.94%, 62.53%, 76.13%, 97.45%, 66.46%, 84.53% and 98.05%, 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 Composite Stock Price 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 the telephone number listed on the inside back
cover of this Prospectus.
<PAGE>
About the Investment Principles of the Fund
Investment Goal 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 Federal 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 tax 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, swaps, caps, collars,
floors, indexed securities, stripped securities and mortgage-backed and other
asset-backed 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, repurchase agreements and derivative
instruments 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. For 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.
Other municipal obligations include 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, a division of The
McGraw-Hill Companies, Inc. ("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 ("U.S. Government Securities"). 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.
The Fund may invest in zero coupon securities that are zero coupon bonds of
municipal and corporate issuers, "stripped" U.S. Treasury notes and bonds and
other securities that are issued with original issue discount ("OID"). Zero
coupon bonds are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or that specify a future date when the
securities begin to pay current interest; 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 and generally are subject to greater
fluctuations in response to changing interest rates than the prices of debt
obligations of comparable maturities that make current distributions of interest
in cash.
The Federal tax law requires that a holder of a security with OID accrue as
income (or, in the case of a municipal OID security, otherwise take into
account) each year a ratable portion of the OID on the security, even though the
holder may receive no interest payment on the security during the year.
Accordingly, although the Fund will receive no payments on its zero coupon
securities prior to their maturity or disposition, it will have current taxable
and/or tax-exempt income attributable to those securities. Nevertheless, for
income and excise tax purposes the Fund annually must distribute to its
shareholders substantially all of its taxable net investment income, including
OID, and also must distribute substantially all of its tax-exempt income.
Accordingly, the Fund will be required to include in its dividends an amount
equal to the income attributable to its zero coupon and other OID securities.
See "Taxes" in the SAI. Those dividends will be paid from the Fund's cash
assets or by liquidation of portfolio securities, if necessary, at a time when
the Fund otherwise might not have done so.
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) 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 (which
obligations may include certificates of deposit, letters of credit and
acceptances), and (iii) commercial paper rated at least A by S&P or MIS. The
Fund may also purchase these taxable obligations subject to repurchase
agreements.
The Fund does not currently intend to purchase the securities of any issuer
(other than securities issued or guaranteed by domestic governments or political
subdivisions thereof) if, as a result, more than 5% of its total assets would be
invested in the securities of business enterprises that, including predecessors,
have a record of less than three years of continuous operation. This
restriction does not apply to any obligations issued or guaranteed by the U.S.
government or a state or local government authority, or their respective
agencies or instrumentalities, or to collateralized mortgage obligations, other
mortgage-related securities, asset-backed securities, indexed securities or
over-the-counter derivative instruments.
The Fund does not intend to invest more than 5% of its assets in U.S.
Government Securities.
Debt Holdings, by Ratings. During the fiscal year ended September 30,
1997, the percentage of the assets of the Fund invested in debt securities in
each of the rating categories of S&P and the corporate debt securities not rated
by an established rating service, determined on a dollar-weighted average, were
as follows:
Rated Percentage of
by S&P Fund Assets
- ------ ----------------
AAA 30.6%
AA 9.1
A 21.7
BBB 15.7
BB 8.8
B 0.1
CCC 0.0
CC 0.0
C 0.0
D 0.0
Unrated (Equivalent to)
- -------
AAA 1.7%
AA 2.7
A 7.1
BBB 2.0
BB 0.0
B 0.0
CCC 0.0
CC 0.0
C 0.0
D 0.0
The percentage of assets in each category was calculated on the basis of a
monthly dollar-weighted average. The monthly dollar-weighted average was
calculated using the market value of the securities in the Fund's portfolio at
the end of each month in the thirteen-month period ended with its last fiscal
year, averaged over its last fiscal year. The rating used for each security is
that security's rating as of the end of each month and, as ratings may change
over time, does not necessarily indicate past or future ratings of any
particular security or the ratings of securities in the Fund's portfolio in
general. Asset composition of the Fund by rating categories at any particular
time does not necessarily indicate future asset composition by rating
categories.
Options, Futures and Other Strategies. The Fund may use certain options,
futures contracts, swaps, caps, collars, floors, indexed securities, mortgage-
backed and other asset-backed securities and certain other strategies described
herein to attempt to enhance income or yield or to attempt to reduce the risk of
its investments. 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 may also use various techniques to increase or
decrease its exposure to changing security prices, interest rates or other
factors that affect security values.
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.
Policies and Restrictions: Subject to the Fund's fundamental policies and
the further limitations stated in the SAI, generally the Fund may purchase and
sell any type of derivative instrument (including, without limitation, futures
contracts, options, forward contracts, swaps, caps, collars, floors and indexed
securities). However, the Fund will only purchase or sell a particular
derivative instrument if the Fund is authorized to invest in the type of asset
by which the return on, or value of, the derivative instrument is primarily
measured. Dividends paid by the Fund that are attributable to income from
taxable obligations and derivative instruments are subject to Federal income
tax. See "Distributions and Taxes."
Options. The Fund may engage in certain strategies involving options to
attempt to enhance its 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 market for options that are not listed on an
exchange may be less active than the market 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 offsetting put or call. If the Fund is not able to enter
into an offsetting 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.
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 the futures contract at
a specified exercise price at any time during the term of the option. If the
Fund writes a call, it assumes a short futures position. If it writes a put, it
assumes a long futures position. When the Fund purchases an option on a futures
contract, it acquires the right, in return for the premium it pays, to assume a
position in the futures contract (a long position if the option is a call and a
short position if the option is a put).
Indexed Securities are securities the value of which varies in relation to
the value of other securities, securities indices or other financial indicators,
subject to its operating policy regarding derivative instruments. 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.
Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors as described below. The Fund may enter into these
transactions to preserve a return or spread on a particular investment or
portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance income or yield.
Swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of a cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
value, to receive payments on a notional principal amount from the party selling
such cap. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling such floor. A collar combines
elements of buying a cap and selling a floor.
Depending on how they are used, the swap, cap, collar and floor agreements
used by the Fund may also increase or decrease the overall volatility of its
investments and its share price and yield. The most significant factor in the
performance of these agreements is the change in the specific interest rate or
other factors that determine the amounts of payments due to and from the Fund.
The Fund usually will enter into swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. If, however, an agreement
calls for payments by the Fund, the Fund must be prepared to make such payments
when due. The creditworthiness of firms with which the Fund enters into swaps,
caps, collars or floors will be monitored by WRIMCO in accordance with
procedures adopted by the Board of Directors. If a firm's creditworthiness
declines, the value of an agreement would be likely to decline, potentially
resulting in losses. If a default occurs by the other party to such
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The Fund understands that the position of the staff of the Securities and
Exchange Commission is that assets involved in such transactions are illiquid
and are, therefore, subject to the limitations on investment in illiquid
investments as described in the SAI.
Mortgage-Backed and Other Asset-Backed Securities are bonds backed by
specific types of assets. Mortgage-backed securities represent direct or
indirect interests in pools of underlying mortgage loans that are secured by
real property. U.S. Government mortgage-backed securities are issued or
guaranteed as to principal and interest (but not as to market value) by the
Government National Mortgage Association, Fannie Mae (formerly, the Federal
National Mortgage Association), the Federal Home Loan Mortgage Corporation or
other government-sponsored enterprises. Other mortgage-backed securities are
sponsored or issued by private entities, including investment banking firms and
mortgage originators.
Mortgage-backed securities may be composed of one or more classes and may
be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to in this
Prospectus as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of
these payments that investors receive, as well as the priority of their rights
to receive payments, are determined by the specific terms of the CMO class.
For example, interest-only ("IO") classes are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, then
the total amount of interest payments allocable to the IO class, and therefore
the yield to investors, generally will be reduced. In some instances, an
investor in an IO may fail to recoup all of his or her initial investment, even
if the security is government guaranteed or considered to be of the highest
quality. Conversely, principal-only ("PO") classes are entitled to receive all
or a portion of the principal payments, but none of the interest, from the
underlying mortgage assets. PO classes are purchased at substantial discounts
from par, and the yield to investors will be reduced if principal payments are
slower than expected. IOs, POs and other CMOs involve special risks, and
evaluating them requires special knowledge.
When interest rates decline and homeowners refinance their mortgages,
mortgage-backed bonds may be paid off more quickly than investors expect. When
interest rates rise, mortgage-backed bonds may be paid off more slowly than
originally expected. Changes in the rate or "speed" of these prepayments can
cause the value of mortgage-backed securities to fluctuate rapidly.
Other asset-backed securities are similar to mortgage-backed securities,
except that the underlying assets securing the debt are different. These
underlying assets may be nearly any type of financial asset or receivable, such
as motor vehicle installment sales contracts, home equity loans, leases of
various types of real and personal property and receivables from credit cards.
The yield characteristics of mortgage-backed and other asset-backed
securities differ from those of traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently
and that principal may be prepaid at any time because the underlying mortgage
loans or other assets generally may be prepaid at any time. Generally,
prepayments on fixed-rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Mortgage-backed and other asset-backed securities may also decrease in value as
a result of increases in interest rates and, because of prepayments, may benefit
less than other bonds from declining interest rates. Reinvestments of
prepayments may occur at lower interest rates than the original investment, thus
adversely affecting the Fund's yield. Actual prepayment experience may cause
the yield of a mortgage-backed security to differ from what was assumed when the
Fund purchased the security.
The market for privately issued mortgage-backed and other asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specially structured in a manner
that provides any of a wide variety of investment characteristics, such as
yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
Risks of Derivative Instruments. The use of options, futures contracts,
options on futures contracts, swaps, caps, collars and floors, and the
investment in indexed securities, stripped securities and mortgage-backed and
other asset-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 assets 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 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. 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.
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 sells 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.
Repurchase Agreements. In a repurchase agreement, the Fund buys a security
at one price and simultaneously agrees to sell it back at a higher price.
Delays or losses could result if the other party to the agreement defaults or
becomes insolvent.
Policies and Restrictions: The Fund may not enter into a repurchase
agreement if, as a result, more than 10% of its net assets would consist of
illiquid investments, which include repurchase agreements not terminable within
seven days.
Restricted Securities and Illiquid Investments. Restricted securities are
securities that are subject to legal or contractual restrictions on resale.
Restricted securities may be illiquid due to restrictions on their resale.
Certain restricted securities may be determined to be liquid in accordance with
guidelines adopted by the Fund's Board of Directors.
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, with
respect to 75% of its total assets, purchase securities of any one issuer (other
than cash items and "Government Securities" as defined in the Investment Company
Act of 1940, as amended (the "1940 Act")), if immediately after and as a result
of such purchase, the value of the holdings of the Fund in the securities of
such issuer exceeds 5% of the value of the Fund's total assets.
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.
<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.
Percent Percent
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
$1,000,000 1.75 1.78
$1,000,000
to less
than
$2,000,000 1.00 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 Internal Revenue Service.
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, one toll-free call, 1-800-366-5465, connects
you to a Customer Service Representative or TeleWaddell, our automated customer
telephone service. During normal business hours, our Customer Services staff is
available to respond to your inquiries, process a transaction or update your
account records. At almost any time of the day or night, you may access
TeleWaddell from a touch-tone phone to:
. Obtain information about your accounts;
. Obtain price information about other funds in the United Group; or
. Request duplicate statements.
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 the telephone number listed on the inside back cover of this Prospectus 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 ongoing 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 its shareholders each year. Ordinarily, dividends are
distributed monthly from the Fund's net investment income, which includes
accrued interest, earned OID and market discount and other income earned on
portfolio assets less expenses. 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 and other
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 and other 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 gains
and other 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 gains) and net capital gains
(the excess of net long-term capital gains over net short-term capital losses)
that is 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 satisfy 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
generally 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. Under the Taxpayer Relief Act of 1997
("1997 Act"), different maximum tax rates apply to a noncorporate taxpayer's net
capital gains depending on the taxpayer's holding period and marginal rate of
Federal income tax - generally, 28% for gains recognized on securities held for
more than one year but not more than 18 months and 20% (10% for taxpayers in the
15% marginal tax bracket) for gains recognized on securities held for more than
18 months. The Internal Revenue Service permits the Fund to divide each net
capital gains distribution into a 28% rate gains distribution and a 20% rate
gains distribution (in accordance with the Fund's holding periods for the
securities it sold that generated the distributed gains) and requires Fund
shareholders to treat those portions accordingly. 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, including the portions of capital gains distributions, if any,
subject to the different maximum rates of tax applicable under the 1997 Act.
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 that must be
treated as a tax preference item 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 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 by
Waddell & Reed, Inc. through a separate prospectus. 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 or writing to Waddell & Reed, Inc. at the telephone number
or 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 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.
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 $18.0 billion as of September 30, 1997. Management fees for the
fiscal year ended September 30, 1997 were 0.43% 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 other distribution had
a record date during the month.
The Fund has adopted a Distribution and Service Plan (the "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 0.25% 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 distribution of the Class A shares, and/or provision of
personal services to Class A shareholders and maintenance of Class A shareholder
accounts.
There are two parts to this fee: all or a portion of the fee may be paid
to Waddell & Reed, Inc. for distribution services and distribution expenses,
including commissions paid by Waddell & Reed, Inc. to its account
representatives, account managers and/or other broker-dealers (the "distribution
fee") with respect to the Fund's Class A shares; and all or a portion of the fee
may be paid to Waddell & Reed, Inc. for the provision by Waddell & Reed, Inc.,
Waddell & Reed Services Company and/or other third parties (including broker-
dealers who may sell Class A shares) of personal services to Class A
shareholders and other services to maintain Class A shareholder accounts (the
"service fee"). However, the total amount of the distribution fee and service
fee paid by the Fund pursuant to the Plan will not exceed, on an annual basis,
0.25% of the average annual net assets of the Fund's Class A shares.
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 Avenue, N. W. (913) 236-2000
Washington, D. C. 20036 (800) 366-5465
Independent Accountants Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Avenue Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment (913) 236-2000
Management Company (800) 366-5465
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
(800) 366-5465 P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Our INTERNET address is:
http://www.waddell.com
<PAGE>
United Municipal Bond Fund, Inc.
Class A Shares
PROSPECTUS
December 31, 1997
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(12-97)
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, 1997. 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, 1997
UNITED MUNICIPAL BOND FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
913-236-2000
800-366-5465
<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 Goal and Principles ................................9
Risk Considerations .........................................9
Securities and Investment Practices ..........................10
ABOUT YOUR ACCOUNT.............................................24
Buying Shares ................................................24
Minimum Investments ..........................................26
Adding to Your Account .......................................26
Selling Shares ...............................................26
Telephone Transactions .......................................28
Shareholder Services .........................................28
Personal Service ...........................................28
Reports ....................................................28
Exchanges ..................................................29
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 Y shares of United Municipal Bond
Fund, Inc., an open-end, diversified management investment company.
Goal 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 0.43%
12b-1 fees None
Other expenses 0.19%
Total Fund operating
expenses 0.62%
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 $ 6
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."
3 Expense ratios are based on the management fees and other Fund-level
expenses of the Fund for the fiscal year ended September 30, 1997, 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, 1997.
<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 Composite Stock Price 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 the telephone number listed on the inside back
cover of this Prospectus.
<PAGE>
About the Investment Principles of the Fund
Investment Goal 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 Federal 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 tax 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, swaps, caps, collars,
floors, indexed securities, stripped securities and mortgage-backed and other
asset-backed 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, repurchase agreements and derivative
instruments 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. For 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.
Other municipal obligations include 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, a division of The
McGraw-Hill Companies, Inc. ("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 ("U.S. Government Securities"). 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.
The Fund may invest in zero coupon securities that are zero coupon bonds of
municipal and corporate issuers, "stripped" U.S. Treasury notes and bonds and
other securities that are issued with original issue discount ("OID"). Zero
coupon bonds are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or that specify a future date when the
securities begin to pay current interest; 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 and generally are subject to greater
fluctuations in response to changing interest rates than the prices of debt
obligations of comparable maturities that make current distributions of interest
in cash.
The Federal tax law requires that a holder of a security with OID accrue as
income (or, in the case of a municipal OID security, otherwise take into
account) each year a ratable portion of the OID on the security, even though the
holder may receive no interest payment on the security during the year.
Accordingly, although the Fund will receive no payments on its zero coupon
securities prior to their maturity or disposition, it will have current taxable
and/or tax-exempt income attributable to those securities. Nevertheless, for
income and excise tax purposes the Fund annually must distribute to its
shareholders substantially all of its taxable net investment income, including
OID, and also must distribute substantially all of its tax-exempt income.
Accordingly, the Fund will be required to include in its dividends an amount
equal to the income attributable to its zero coupon and other OID securities.
See "Taxes" in the SAI. Those dividends will be paid from the Fund's cash
assets or by liquidation of portfolio securities, if necessary, at a time when
the Fund otherwise might not have done so.
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) 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 (which
obligations may include certificates of deposit, letters of credit and
acceptances), and (iii) commercial paper rated at least A by S&P or MIS. The
Fund may also purchase these taxable obligations subject to repurchase
agreements.
The Fund does not currently intend to purchase the securities of any issuer
(other than securities issued or guaranteed by domestic governments or political
subdivisions thereof) if, as a result, more than 5% of its total assets would be
invested in the securities of business enterprises that, including predecessors,
have a record of less than three years of continuous operation. This
restriction does not apply to any obligations issued or guaranteed by the U.S.
government or a state or local government authority, or their respective
agencies or instrumentalities, or to collateralized mortgage obligations, other
mortgage-related securities, asset-backed securities, indexed securities or
over-the-counter derivative instruments.
The Fund does not intend to invest more than 5% of its assets in U.S.
Government Securities.
Debt Holdings, by Ratings. During the fiscal year ended September 30,
1997, the percentage of the assets of the Fund invested in debt securities in
each of the rating categories of S&P and the corporate debt securities not rated
by an established rating service, determined on a dollar-weighted average, were
as follows:
Rated Percentage of
by S&P Fund Assets
- ------ ----------------
AAA 30.6%
AA 9.1
A 21.7
BBB 15.7
BB 8.8
B 0.1
CCC 0.0
CC 0.0
C 0.0
D 0.0
Unrated (Equivalent to)
- -------
AAA 1.7%
AA 2.7
A 7.1
BBB 2.0
BB 0.0
B 0.0
CCC 0.0
CC 0.0
C 0.0
D 0.0
The percentage of assets in each category was calculated on the basis of a
monthly dollar-weighted average. The monthly dollar-weighted average was
calculated using the market value of the securities in the Fund's portfolio at
the end of each month in the thirteen-month period ended with its last fiscal
year, averaged over its last fiscal year. The rating used for each security is
that security's rating as of the end of each month and, as ratings may change
over time, does not necessarily indicate past or future ratings of any
particular security or the ratings of securities in the Fund's portfolio in
general. Asset composition of the Fund by rating categories at any particular
time does not necessarily indicate future asset composition by rating
categories.
Options, Futures and Other Strategies. The Fund may use certain options,
futures contracts, swaps, caps, collars, floors, indexed securities, mortgage-
backed and other asset-backed securities and certain other strategies described
herein to attempt to enhance income or yield or to attempt to reduce the risk of
its investments. 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 may also use various techniques to increase or
decrease its exposure to changing security prices, interest rates or other
factors that affect security values.
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.
Policies and Restrictions: Subject to the Fund's fundamental policies and
the further limitations stated in the SAI, generally the Fund may purchase and
sell any type of derivative instrument (including, without limitation, futures
contracts, options, forward contracts, swaps, caps, collars, floors and indexed
securities). However, the Fund will only purchase or sell a particular
derivative instrument if the Fund is authorized to invest in the type of asset
by which the return on, or value of, the derivative instrument is primarily
measured. Dividends paid by the Fund that are attributable to income from
taxable obligations and derivative instruments are subject to Federal income
tax. See "Distributions and Taxes."
Options. The Fund may engage in certain strategies involving options to
attempt to enhance its 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 market for options that are not listed on an
exchange may be less active than the market 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 offsetting put or call. If the Fund is not able to enter
into an offsetting 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.
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 the futures contract at
a specified exercise price at any time during the term of the option. If the
Fund writes a call, it assumes a short futures position. If it writes a put, it
assumes a long futures position. When the Fund purchases an option on a futures
contract, it acquires the right, in return for the premium it pays, to assume a
position in the futures contract (a long position if the option is a call and a
short position if the option is a put).
Indexed Securities are securities the value of which varies in relation to
the value of other securities, securities indices or other financial indicators,
subject to its operating policy regarding derivative instruments. 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.
Swaps, Caps, Collars and Floors. The Fund may enter into swaps, caps,
collars and floors as described below. The Fund may enter into these
transactions to preserve a return or spread on a particular investment or
portion of its portfolio, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to attempt to
enhance income or yield.
Swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive cash flows, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of a cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
value, to receive payments on a notional principal amount from the party selling
such cap. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling such floor. A collar combines
elements of buying a cap and selling a floor.
Depending on how they are used, the swap, cap, collar and floor agreements
used by the Fund may also increase or decrease the overall volatility of its
investments and its share price and yield. The most significant factor in the
performance of these agreements is the change in the specific interest rate or
other factors that determine the amounts of payments due to and from the Fund.
The Fund usually will enter into swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. If, however, an agreement
calls for payments by the Fund, the Fund must be prepared to make such payments
when due. The creditworthiness of firms with which the Fund enters into swaps,
caps, collars or floors will be monitored by WRIMCO in accordance with
procedures adopted by the Board of Directors. If a firm's creditworthiness
declines, the value of an agreement would be likely to decline, potentially
resulting in losses. If a default occurs by the other party to such
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The Fund understands that the position of the staff of the Securities and
Exchange Commission is that assets involved in such transactions are illiquid
and are, therefore, subject to the limitations on investment in illiquid
investments as described in the SAI.
Mortgage-Backed and Other Asset-Backed Securities are bonds backed by
specific types of assets. Mortgage-backed securities represent direct or
indirect interests in pools of underlying mortgage loans that are secured by
real property. U.S. Government mortgage-backed securities are issued or
guaranteed as to principal and interest (but not as to market value) by the
Government National Mortgage Association, Fannie Mae (formerly, the Federal
National Mortgage Association), the Federal Home Loan Mortgage Corporation or
other government-sponsored enterprises. Other mortgage-backed securities are
sponsored or issued by private entities, including investment banking firms and
mortgage originators.
Mortgage-backed securities may be composed of one or more classes and may
be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to in this
Prospectus as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of
these payments that investors receive, as well as the priority of their rights
to receive payments, are determined by the specific terms of the CMO class.
For example, interest-only ("IO") classes are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal prepayments, then
the total amount of interest payments allocable to the IO class, and therefore
the yield to investors, generally will be reduced. In some instances, an
investor in an IO may fail to recoup all of his or her initial investment, even
if the security is government guaranteed or considered to be of the highest
quality. Conversely, principal-only ("PO") classes are entitled to receive all
or a portion of the principal payments, but none of the interest, from the
underlying mortgage assets. PO classes are purchased at substantial discounts
from par, and the yield to investors will be reduced if principal payments are
slower than expected. IOs, POs and other CMOs involve special risks, and
evaluating them requires special knowledge.
When interest rates decline and homeowners refinance their mortgages,
mortgage-backed bonds may be paid off more quickly than investors expect. When
interest rates rise, mortgage-backed bonds may be paid off more slowly than
originally expected. Changes in the rate or "speed" of these prepayments can
cause the value of mortgage-backed securities to fluctuate rapidly.
Other asset-backed securities are similar to mortgage-backed securities,
except that the underlying assets securing the debt are different. These
underlying assets may be nearly any type of financial asset or receivable, such
as motor vehicle installment sales contracts, home equity loans, leases of
various types of real and personal property and receivables from credit cards.
The yield characteristics of mortgage-backed and other asset-backed
securities differ from those of traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently
and that principal may be prepaid at any time because the underlying mortgage
loans or other assets generally may be prepaid at any time. Generally,
prepayments on fixed-rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Mortgage-backed and other asset-backed securities may also decrease in value as
a result of increases in interest rates and, because of prepayments, may benefit
less than other bonds from declining interest rates. Reinvestments of
prepayments may occur at lower interest rates than the original investment, thus
adversely affecting the Fund's yield. Actual prepayment experience may cause
the yield of a mortgage-backed security to differ from what was assumed when the
Fund purchased the security.
The market for privately issued mortgage-backed and other asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage-backed securities. CMO classes may be specially structured in a manner
that provides any of a wide variety of investment characteristics, such as
yield, effective maturity and interest rate sensitivity. As market conditions
change, however, and especially during periods of rapid or unanticipated changes
in market interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
Risks of Derivative Instruments. The use of options, futures contracts,
options on futures contracts, swaps, caps, collars and floors, and the
investment in indexed securities, stripped securities and mortgage-backed and
other asset-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 assets 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 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. 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.
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 sells 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.
Repurchase Agreements. In a repurchase agreement, the Fund buys a security
at one price and simultaneously agrees to sell it back at a higher price.
Delays or losses could result if the other party to the agreement defaults or
becomes insolvent.
Policies and Restrictions: The Fund may not enter into a repurchase
agreement if, as a result, more than 10% of its net assets would consist of
illiquid investments, which include repurchase agreements not terminable within
seven days.
Restricted Securities and Illiquid Investments. Restricted securities are
securities that are subject to legal or contractual restrictions on resale.
Restricted securities may be illiquid due to restrictions on their resale.
Certain restricted securities may be determined to be liquid in accordance with
guidelines adopted by the Fund's Board of Directors.
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, with
respect to 75% of its total assets, purchase securities of any one issuer (other
than cash items and "Government Securities" as defined in the Investment Company
Act of 1940, as amended (the "1940 Act")), if immediately after and as a result
of such purchase, the value of the holdings of the Fund in the securities of
such issuer exceeds 5% of the value of the Fund's total assets.
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.
<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-
800-366-5465, 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 Internal Revenue Service.
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, one toll-free call, 1-800-366-5465, connects
you to a Customer Service Representative or TeleWaddell, our automated customer
telephone service. During normal business hours, our Customer Services staff is
available to respond to your inquiries, process a transaction or update your
account records. At almost any time of the day or night, you may access
TeleWaddell from a touch-tone phone to:
. Obtain information about your accounts;
. Obtain price information about other funds in the United Group; or
. Request duplicate statements.
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 the telephone number listed on the inside back cover of this
Prospectus 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 or Class A shares of United Cash Management, 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.
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to its shareholders each year. Ordinarily, dividends are
distributed monthly from the Fund's net investment income, which includes
accrued interest, earned OID and market discount and other income earned on
portfolio assets less expenses. 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 and other
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 and other 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
and other 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 is 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 satisfy 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
generally 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. Under the Taxpayer Relief Act of 1997
("1997 Act"), different maximum tax rates apply to a noncorporate taxpayer's net
capital gain depending on the taxpayer's holding period and marginal rate of
federal income tax - generally, 28% for gain recognized on securities held for
more than one year but not more than 18 months and 20% (10% for taxpayers in the
15% marginal tax bracket) for gain recognized on securities held for more than
18 months. The Internal Revenue Service permits the Fund to divide each net
capital gain distribution into a 28% rate gain distribution and a 20% rate gain
distribution (in accordance with the Fund's holding periods for the securities
it sold that generated the distributed gain) and requires Fund shareholders to
treat those portions accordingly. 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, including the portions of capital gain distributions, if any, subject
to the different maximum rates of tax applicable under the 1997 Act.
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 that must be
treated as a tax preference item 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 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. 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
or writing to Waddell & Reed, Inc. at the telephone number or 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 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.
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 $18.0 billion as of September 30, 1997. Management fees for the
fiscal year ended September 30, 1997 were 0.43% 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 Avenue, N. W. (913) 236-2000
Washington, D. C. 20036 (800) 366-5465
Independent Accountants Shareholder Servicing Agent
Deloitte & Touche LLP Waddell & Reed
1010 Grand Avenue Services Company
Kansas City, Missouri 6300 Lamar Avenue
64106-2232 P. O. Box 29217
Shawnee Mission, Kansas
Investment Manager 66201-9217
Waddell & Reed Investment (913) 236-2000
Management Company (800) 366-5465
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
(800) 366-5465 P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Our INTERNET address is:
http://www.waddell.com
<PAGE>
United Municipal Bond Fund, Inc.
Class Y Shares
PROSPECTUS
December 31, 1997
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(12-97)
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
(800) 366-5465
December 31, 1997
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, 1997, 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
Goal and Investment Policies ....................... 4
Investment Management and Other Services ........... 28
Purchase, Redemption and Pricing of Shares ......... 33
Directors and Officers ............................. 45
Payments to Shareholders ........................... 51
Taxes .............................................. 52
Portfolio Transactions and Brokerage ............... 56
Other Information .................................. 58
Appendix A ......................................... 60
Financial Statements ............................... 67
<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, 1997, 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, 1996 to
September 30, 1997: 5.10% 9.77%
Five-year period from October 1, 1992 to
September 30, 1997: 6.80% 7.73%
Ten-year period from October 1, 1987 to
September 30, 1997: 9.29% 9.76%
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, 1997, the date of the most recent
balance sheet included in this SAI, is 4.56%.
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, 1997, the date of the most recent balance sheet
included in this SAI, is 5.35%, 6.31%, 6.58%, 7.09% and 7.51% 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 Composite Stock Price 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.
GOAL AND INVESTMENT POLICIES
The goal 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 Federal 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 IDBs.
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, a division of The McGraw-Hill
Companies, Inc. ("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.
Bonds Backed by Generating Plants Revenue
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 repurchase agreements and certain derivative
instruments (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 (which 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 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,
Fannie Mae (formerly, the Federal National Mortgage Association), 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, participation certificates and collateralized
mortgage obligations. See "Mortgage-Backed Securities" and "Asset-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 Securities
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 and Asset-Backed Securities
Mortgage-Backed Secutities. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
in this SAI as "CMOs." The U.S. Government mortgage-backed securities in which
the Fund may invest include mortgage-backed securities issued or guaranteed as
to the payment of principal and interest (but not as to market value) by Ginnie
Mae, Fannie Mae or Freddie Mac. Other mortgage-backed securities are issued by
private issuers, generally originators of and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers and special purpose entities. Payments of principal and interest (but
not the market value) of such private mortgage-backed securities may be
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. Government or one of its
agencies or instrumentalities, or they may be issued without any government
guarantee of the underlying mortgage assets but with some form of non-government
credit enhancement. These credit enhancements do not protect investors from
changes in market value.
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.
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.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed above.
However, the underlying assets are not first lien mortgage loans or interests
therein, but include assets such as motor vehicle installment sales contracts,
other installment sale contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may
be guaranteed up to a certain amount and for a certain time period by a letter
of credit or pool insurance policy issued by a financial institution
unaffiliated with the issuer, or other credit enhancements may be present. 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.
Special Characteristics of Mortgage-Backed and Asset-Backed Securities.
The yield characteristics of mortgage-backed and asset-backed securities differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other obligations generally may be prepaid at any time. Prepayments on a
pool of mortgage loans are influenced by a variety of economic, geographic,
social and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are likely to experience
substantial prepayments. Such securities, however, often provide that for a
specified time period the issuers will replace receivables in the pool that are
repaid with comparable obligations. If the issuer is unable to do so, repayment
of principal on the asset-backed securities may commence at an earlier date.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the mortgage-
backed securities, and this delay reduces the effective yield to the holder of
such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield.
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 or other financial indicators,
subject to its operating policy regarding derivative instruments. 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.
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.
Restricted Securities
Restricted securities are subject to legal or contractual restrictions on
resale because they are not registered under the Securities Act of 1933, as
amended (the "1933 Act"). Restricted securities generally can be sold in
privately negotiated transactions, pursuant to an exemption from registration
under the 1933 Act or in a registered public offering. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to seek
registration and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to seek registration of the security.
There are risks associated with investment in restricted securities in that
there can be no assurance of a ready market for resale. Also, the contractual
restrictions on resale might prevent the Fund from reselling the securities at a
time when such sale would be desirable. Restricted securities in which the Fund
seeks to invest need not be listed or admitted to trading on a foreign or
domestic exchange and may be less liquid than listed securities. See "Illiquid
Investments" below.
Illiquid Investments
The Fund may not invest more than 10% of its net assets in illiquid
investments. Investments currently considered to be illiquid include: (i)
repurchase agreements not terminable within seven days; (ii) securities for
which market quotations are not readily available; (iii) securities involved in
swap, cap, collar and floor transactions; (iv) bank deposits, unless they are
payable at principal amount plus accrued interest on demand or within seven days
after demand; (v) restricted securities not determined to be liquid pursuant to
guidelines established by the Fund's Board of Directors; (vi) non-government
stripped fixed-rate mortgage-backed securities; and (vii) over-the-counter
("OTC") options and their underlying collateral. The assets used as cover for
OTC options written by the Fund will be considered illiquid unless the OTC
options are sold to qualified dealers who agree that the Fund may repurchase any
OTC option it writes at a maximum price to be calculated by a formula set forth
in the option agreement. The cover for an OTC option written subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the
option.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements, subject
to its limitation on investment in illiquid investments. See "Illiquid
Investments." A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a commercial bank or broker-
dealer) agrees, at the time of purchase, that it will repurchase the security at
a specified time and price. The amount by which the resale price is greater
than the purchase price reflects an agreed-upon market interest rate effective
for the period of the agreement. The return on the securities subject to the
repurchase agreement may be more or less than the return on the repurchase
agreement.
The majority of the repurchase agreements in which the Fund would engage
are overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is that
the Fund may suffer a loss if the seller fails to pay the agreed-upon amount on
the delivery date and that amount is greater than the resale price of the
underlying securities and other collateral held by the Fund. In the event of
bankruptcy or other default by the seller, there may be possible delays and
expenses in liquidating the underlying securities or other collateral, decline
in their value and loss of interest. The return on such collateral may be more
or less than that from the repurchase agreement. The Fund's repurchase
agreements will be structured so as to fully collateralize the loans. In other
words, the value of the underlying securities, which will be held by the Fund's
custodian bank or by a third party that qualifies as a custodian under Section
17(f) of the Investment Company Act of 1940, as amended (the "1940 Act"), is
and, during the entire term of the agreement, will remain at least equal to the
value of the loan, including the accrued interest earned thereon. Repurchase
agreements are entered into only with those entities approved by WRIMCO on the
basis of criteria established by the Fund's Board of Directors.
Options, Futures and Other Strategies
General. As discussed in the Prospectus, WRIMCO may use certain options,
futures contracts (sometimes referred to as "futures"), options on futures
contracts, swaps, caps, collars, floors and indexed securities (collectively,
"Financial Instruments") to attempt to enhance income or yield or to attempt to
hedge the Fund's investments. Generally, the Fund may purchase and sell any
type of Financial Instrument. However, as an operating policy, the Fund will
only purchase or sell a particular Financial Instrument if the Fund is
authorized to invest in the type of asset by which the return on, or value of,
the Financial Instrument is primarily measured.
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 and 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 Financial Instruments 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
Financial Instruments 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 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 an
account with its custodian in the prescribed amount as determined daily.
Assets used as cover or held in an 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 accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options. The purchase of call options can serve as a long hedge, and the
purchase of put options can serve 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. If the call option is an OTC option,
the securities or other assets used as cover would be considered illiquid to the
extent described under "Illiquid Investments."
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. If the put option is an OTC option, the
securities or other assets used as cover would be considered illiquid to the
extent described under "Illiquid Investments."
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.
A type of put that the Fund may purchase is an "optional delivery standby
commitment," which is entered into by parties selling debt securities to the
Fund. An optional delivery standby commitment gives the Fund the right to sell
the security back to the seller on specified terms. This right is provided as
an inducement to purchase the security.
Risks of Options on Securities. The Fund may purchase or write both
exchange-traded and OTC options. Exchange-traded 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. In contrast, OTC options are contracts between the Fund and
its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the counterparty from whom it purchased the option to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the Fund
as well as the loss of any expected benefit of the 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. Closing
transactions can be made for OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. There can be no assurance that the Fund will in fact be able to close
out an OTC option position at a favorable price prior to expiration. In the
event of insolvency of the counterparty, the Fund might be unable to close out
an OTC option position at any time prior to its expiration.
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 Indices. Puts and calls on 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 an 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 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 an 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 an 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 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
an index, it receives a premium and the purchaser of the put 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 index and the
exercise price times the multiplier if the closing level is less than the
exercise price.
Risks of Options on Indices. The risks of investment in options on indices
may be greater than options on securities. Because index options are settled in
cash, when the Fund writes a call on an 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 securities 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 securities 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 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 the Fund
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 securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities 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 portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If the Fund purchases 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.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows the Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than exchange-
traded options, which are guaranteed by the clearing organization of the
exchanges where they are traded.
Futures Contracts and Options on Futures Contracts. The purchase of
futures contracts or call options on futures contracts can serve as a long
hedge, and the sale of futures contracts or the purchase of put options on
futures contracts 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. Futures
contracts and options on futures contracts can also be purchased and sold to
attempt to enhance income or yield.
In addition, futures strategies 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 debt 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 debt 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"
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 contracts and options on
futures contracts may be closed only on an exchange or board of trade that
provides a secondary market. However, there can be no assurance that a liquid
secondary 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 an option on a futures
contract 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 liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on a
futures position 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 liquid assets in an account.
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 debt 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 debt market movements or the time span within
which the movements take place.
Index Futures. The risk of imperfect correlation between movements in the
price of an index future and movements in the price of the securities that are
the subject of the hedge increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable index. The price of the
index futures may move more than or less than the price of the securities being
hedged. If the price of the 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
securities, 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 index futures, the Fund may buy or sell 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 securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts 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 securities will tend to move in the same direction as
the market indices on which the futures contracts are based.
Where 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.
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.
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.
Swaps, Caps, Collars and Floors. Swap agreements, including caps, collars
and floors, can be individually negotiated and structured to include exposure to
a variety of different types of investments or market factors. Depending on
their structure, swap agreements may increase or decrease the Fund's exposure to
long- or short-term interest rates, mortgage-backed security values, corporate
borrowing rates or other factors such as security prices or inflation rates.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. Caps and floors have an effect similar to buying
or writing options.
The creditworthiness of firms with which the Fund enters into swaps, caps
or floors will be monitored by WRIMCO in accordance with procedures adopted by
the Fund's Board of Directors. If a default occurs by the other party to such
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in an account with the Fund's
custodian that satisfies the requirements of the 1940 Act. The Fund will also
establish and maintain such account with respect to its total obligations under
any swaps that are not entered into on a net basis and with respect to any caps
or floors that are written by the Fund. WRIMCO and the Fund believe that such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions.
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; purchase or
sell physical commodities; however, this policy shall not prevent the
Fund from purchasing and selling foreign currency, futures contracts,
options, forward contracts, swaps, caps, collars, floors and other
Financial Instruments; or purchase any real estate or interests in
real estate investment trusts or any investment company securities;
(ii) May not lend money or other assets; the Fund may, however, buy debt
securities and other obligations consistent with its goal and other
investment policies and restrictions;
(iii) May not invest for the purpose of exercising control or management of
other companies;
(iv) May not sell securities short (unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold
short) or purchase securities on margin, except that (1) this policy
does not prevent the Fund from entering into short positions in
foreign currency, futures contracts, options, forward contracts,
swaps, caps, collars, floors and other financial instruments, (2) the
Fund may obtain such short-term credits as are necessary for the
clearance of transactions, and (3) the Fund may make margin payments
in connection with futures contracts, options, forward contracts,
swaps, caps, collars, floors and other financial instruments;
(v) May not participate on a joint, or a joint and several basis, in any
trading account in securities;
(vi) May not engage in the underwriting of securities, that is, the selling
of securities for others;
(vii) With respect to 75% of its total assets, may not purchase securities
of any one issuer (other than cash items and "Government securities"
as defined in the 1940 Act), if immediately after and as a result of
such purchase, the value of the holdings of the Fund in the securities
of such issuer exceeds 5% of the value of the Fund's total assets; or
(viii) 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 1997 and 1996 the portfolio turnover rates were 47.24% and 74.97%,
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,
1997, 1996 and 1995 were $4,208,872, $4,344,734 and $4,207,453,
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 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, 1997, 1996 and 1995 were $86,250, $90,000 and $85,000,
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, 1997, 1996 and 1995 were $900,465, $1,203,218 and $1,075,152, respectively.
The amounts retained by Waddell & Reed, Inc. for each period were $389,479,
$523,700 and $462,638, 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 Distribution and 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 0.25% 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 distribution of the Class A shares and/or the
service and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its registered
representatives and sales managers (sales force) unless it elects, which is not
currently contemplated, to make distribution of shares also through other
broker-dealers. In distributing shares through its sales force, Waddell & Reed,
Inc. will pay commissions and incentives to the sales force at or about the time
of sale and will incur other expenses including for prospectuses, sales
literature, advertisements, sales office maintenance, processing of orders and
general overhead with respect to its efforts to distribute the Fund's shares.
The Plan permits Waddell & Reed, Inc. to receive reimbursement for these
distribution activities through the distribution fee, subject to the limit
contained in the Plan. The Plan also permits Waddell & Reed, Inc. to 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 $1,257,977 were paid (or accrued) by the Fund with respect
to Class A shares for the fiscal year ended September 30, 1997.
The Plan was 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 & 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, 1997 was as follows:
Net asset value per Class A share (Class
A net assets divided by Class A shares
outstanding) ............................. $7.47
Add: selling commission (4.25% of offering
price) ................................... .33
-----
Maximum offering price per Class A share
(Class A net asset value divided by 95.75%) $7.80
=====
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, Martin Luther King, Jr. 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 options 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 Gifts 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 an ongoing 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 or Class A shares of United Cash Management, Inc.
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.; Director of Full House Resorts, Inc., a
developer of resorts and gaming casinos; 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. Date of birth: June 16, 1926.
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. Date of birth: February 11, 1945.
HENRY L. BELLMON
Route 1
P. O. Box 26
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University. Date of birth: September
3, 1921.
JAMES M. CONCANNON
950 Docking Road
Topeka, Kansas 66615
Dean and Professor of Law, Washburn University School of Law; Director,
AmVestors CBO II Inc. Date of birth: October 2, 1947.
JOHN A. DILLINGHAM
4040 Northwest Claymont Drive
Kansas City, Missouri 64116
Director and consultant, McDougal Construction Company; President, JoDill
Corp.; formerly Senior Vice President-Sales and Marketing, Garney Companies,
Inc., a specialty utility contractor. Date of birth: January 9, 1939.
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. Date of birth: July 29, 1953.
JOHN F. HAYES*
20 West 2nd Avenue
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financial
Corporation; Director of Central Properties, Inc.; Chairman, Gilliland & Hayes,
P.A., a law firm; formerly, President, Gilliland & Hayes, P.A. Date of birth:
December 11, 1919.
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. Date of birth: February 19, 1924.
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.
Date of birth: April 27, 1928.
WILLIAM L. ROGERS
1999 Avenue of the Stars
Los Angeles, California 90067
Principal, Colony Capital, Inc., a real estate related investment company.
Date of birth: September 8, 1946.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Partner, Polsinelli, White, Vardeman & Shalton, a law firm. Date of birth:
April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Chancellor, University of Missouri-Kansas City. Date of birth: January 1,
1937.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired. Date of birth: August 7, 1935.
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan, a fertilizer company. Date
of birth: July 16, 1920.
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. Date of birth: November 12, 1936.
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. Date of birth: December 8,
1942.
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. Date of birth: July 18, 1942.
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. Date of birth:
February 9, 1959.
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. Date of birth: June
11, 1935.
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. Date of
birth: July 24, 1934.
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 or her past services whether or not
services are rendered in his or her capacity as Director Emeritus, but has no
authority or responsibility with respect to management of the Fund. Messrs.
Doyle Patterson and Jay B. Dillingham retired as Directors of the Fund and of
each of the funds in the Fund Complex effective January 1, 1997 and January 14,
1997, respectively, and each has elected a position as Director Emeritus.
During the Fund's fiscal year ended September 30, 1997, Mr. Patterson received
total compensation for his service as a Director of $47,000 from the Fund
Complex and the Fund and aggregate compensation from the Fund of $2,685. During
the Fund's fiscal year ended September 30, 1997, Mr. Dillingham received total
compensation for his service as a Director of $47,000 from the Fund Complex and
the Fund and aggregate compensation from the Fund of $2,689.
The funds in the United Group, TMK/United Funds, Inc. and Waddell & Reed
Funds, Inc. pay to each Director a total of $48,000 per year, plus $2,500 for
each meeting of the Board of Directors attended (prior to January 1, 1998, the
funds in the United Group, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc.
paid to each Director a fee of $44,000 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, 1997, the Fund's
Directors received the following fees for service as a director:
COMPENSATION TABLE
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
- -------- ------------ ------------
Ronald K. Richey $ 0 $ 0
Keith A Tucker 0 0
Henry L. Bellmon 2,855 50,000
James M. Concannon 629 12,000
John A. Dillingham 629 12,000
Linda Graves 2,855 50,000
John F. Hayes 2,855 50,000
Glendon E. Johnson 2,792 49,000
William T. Morgan 2,855 50,000
William L. Rogers 2,678 47,000
Frank J. Ross, Jr. 2,730 48,000
Eleanor B. Schwartz 2,855 50,000
Frederick Vogel III 2,855 50,000
Paul S. Wise 2,855 50,000
*No pension or retirement benefits have been accrued as a part of Fund expenses.
Messrs. Rogers and Ross were elected as Directors on October 16, 1996.
Messrs. Concannon and Dillingham were elected as Directors on July 24, 1997.
The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of November 30, 1997, 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 net investment income, which is derived
from the interest and earned discount on the securities the Fund 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 Fund's sale of
securities at a price higher than the Fund's tax basis (usually cost) in such
securities, 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 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 net
capital losses from a prior year or years 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) 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
issuer's outstanding voting securities ("50% Diversification Requirement"); and
(3) 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 shareholders' 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 shareholders 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 shareholders. 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 the
shareholders 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, the
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 taxable dividends and
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.
Income from Options and Futures Contracts
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the amount, character and timing of recognition of the gains
and losses the Fund realizes in connection therewith. Gains from options and
futures contracts derived by the Fund with respect to its business of investing
in securities will qualify as permissible income under the Income Requirement.
Any income the Fund earns from writing options is treated as short-term
capital gain. 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 receives 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.
Certain options and futures in which the Fund may invest may be "section
1256 contracts." Section 1256 contracts held by the Fund at the end of its
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 gains or losses recognized on these deemed sales, and 60% of
any net realized gains or losses 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. As of the date of this SAI, it
is not entirely clear whether that 60% portion will qualify for the reduced
maximum tax rates on net capital gains enacted by the Taxpayer Relief Act of
1997 - 20% (10% for taxpayers in the 15% marginal tax bracket) for gains
recognized on capital assets held for more than 18 months - instead of the 28%
rate in effect before that legislation, which now applies to gains recognized on
capital assets held for more than one year but not more than 18 months, although
technical corrections legislation passed by the House of Representatives would
treat it as qualifying therefor. Section 1256 contracts also may be marked-to-
market for purposes of the Excise Tax and for other purposes. The Fund may need
to distribute any such gains to its shareholders to satisfy the Distribution
Requirement and/or avoid imposition of the Excise Tax even though it may not
have closed the transactions and received cash to pay the distributions.
Code section 1092 (dealing with straddles) may also 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 ("OID"). As a holder of those securities, the Fund must account
for the OID that accrues on such tax-exempt securities, and must include in its
income the OID that accrues on such taxable securities during the taxable year,
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 OID, to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax, it 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.
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 sales of Fund shares as a
factor in the selection of broker-dealers to execute portfolio transactions. 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.
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, a division of The McGraw-Hill Companies, Inc. 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, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS
ALASKA _ 0.17%
Alaska Housing Finance Corporation,
General Housing Purpose Bonds, 1994
Series A (Refunding/Non-AMT),
5.0%, 12-1-2008 ....................... $ 1,640 $ 1,637,950
ARIZONA _ 0.33%
Arizona Educational Loan Marketing
Corporation, Educational Loan Revenue
Bonds, Junior Subordinate Series 1993,
6.3%, 12-1-2008 ....................... 3,155 3,324,581
ARKANSAS _ 0.19%
Arkansas Development Finance Authority,
Single Family Mortgage Revenue Bonds
(Access Program), 1995 Series F (AMT),
7.45%, 1-1-2027 ....................... 1,690 1,886,462
CALIFORNIA _ 8.60%
Southern California Public Power Authority:
Palo Verde Project, Power Project
Revenue Bonds, 1993 Subordinate Refunding
Series, Linked Inverse Floating Rate Security,
5.35%, 7-1-2012 ....................... 10,000 10,112,500
Multiple Project Revenue Bonds, 1989 Series,
6.75%, 7-1-2012 ....................... 3,455 3,968,931
Mead-Adelanto Project Revenue Bonds,
1994 Series A, Linked Inverse Floating
Rate Security,
5.15%, 7-1-2015 ....................... 2,800 2,772,000
Mead-Phoenix Project Revenue Bonds,
1994 Series A, Linked Inverse Floating
Rate Security,
5.15%, 7-1-2015 ....................... 2,600 2,561,000
Transmission Agency of Northern California,
California-Oregon Transmission Project
Revenue Bonds, 1990 Series A,
7.0%, 5-1-2013 ........................ 12,000 14,490,000
California Statewide Communities Development
Authority:
Hospital Refunding Revenue Certificates of
Participation, Series 1993,
Cedars-Sinai Medical Center
Linked Inverse Floating Rate Security,
5.4%, 11-1-2015 ....................... 6,500 6,394,375
Hospital Revenue Certificates
of Participation,
Series 1992,
Cedars-Sinai Medical Center,
6.5%, 8-1-2012 ........................ 5,200 5,876,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CALIFORNIA (Continued)
County of San Bernardino, California,
Certificates of Participation (1992 Justice
Center/Airport Improvements Refunding
Project), Inland Empire Public Facilities
Corporation, Short/RITES Certificates,
6.78%, 7-1-2016 (A) ................... $ 9,500 $ 9,583,125
Imperial Irrigation District,
1993 Refunding Certificates of
Participation (1990 Electric
System Project),
5.2%, 11-1-2009 ....................... 8,500 8,829,375
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 ...................... 5,595 6,007,631
Inland Empire Solid Waste Financing Authority,
Revenue Bonds, 1996 Series B (Landfill
Improvement Financing Project),
6.25%, 8-1-2011 ....................... 5,000 5,468,750
California Rural Home Mortgage Finance
Authority, Single Family Mortgage
Revenue Bonds (Mortgage-Backed Securities
Program):
1997 Series C,
5.5%, 3-1-2029 ........................ 2,230 2,478,087
1995 Series B,
7.75%, 9-1-2026 ....................... 1,670 1,964,338
Sacramento Municipal Utility District,
Electric Revenue Refunding Bonds,
1993 Series G,
6.5%, 9-1-2013 ........................ 2,500 2,890,625
Intermodal Container Transfer Facility,
Joint Powers Authority, Intermodal
Container Transfer Facility Refunding
Revenue Bonds, 1989 Series A,
7.7%, 11-1-2014 ....................... 2,000 2,075,000
Total ................................. 85,471,737
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
COLORADO _ 11.94%
City and County of Denver, Colorado,
Airport System Revenue Bonds:
Series 1991D:
7.75%, 11-15-2013 ..................... $11,905 $ 14,791,963
7.0%, 11-15-2025 ...................... 4,750 5,029,062
7.0%, 11-15-2025 (Prerefunded) ........ 1,250 1,370,313
Series 1992C:
6.75%, 11-15-2013 ..................... 10,080 10,848,600
6.75%, 11-15-2013 (Prerefunded) ....... 1,330 1,484,613
Series 1992B:
7.25%, 11-15-2023 ..................... 11,990 13,338,875
7.25%, 11-15-2023 (Prerefunded)........ 510 580,763
Series 1994A:
7.5%, 11-15-2023 ...................... 1,655 1,892,906
7.5%, 11-15-2023 (Prerefunded) ........ 345 408,394
Series 1997D:
6%, 11-15-2013 ........................ 4,000 4,415,000
City and County of Denver, Colorado, Special
Facilities Airport Revenue Bonds (United
Air Lines Project), Series 1992A,
6.875%, 10-1-2032 ..................... 28,700 30,744,875
Colorado Housing and Finance Authority:
Single Family Program Senior Bonds:
1995 Series A,
8.0%, 6-1-2025 ........................ 3,930 4,445,813
1995 Series D-1,
7.375%, 6-1-2026 ...................... 4,035 4,514,156
1996 Series A-1,
7.4%, 11-1-2027 ....................... 3,735 4,197,206
1995 Series C-1,
7.65%, 12-1-2025 ...................... 2,445 2,738,400
1995 Series B-1,
7.9%, 12-1-2025 ....................... 1,115 1,254,375
Single Family Program Senior and Subordinate
Bonds:
1996 Series B-1,
7.65%, 11-1-2026 ...................... 2,750 3,124,688
1997 Series A-2,
7.25%, 5-1-2027 ....................... 2,000 2,255,000
1996 Series C-1,
7.55%, 11-1-2027 ...................... 1,580 1,793,300
Colorado Student Obligation Bond Authority,
Student Loan Asset-Backed Obligations,
Senior Subordinate, 1995 Series II-B,
6.2%, 12-1-2008 ....................... 8,000 8,290,000
Douglas County, Colorado, Certificates of
Participation, Series 1996,
5.6%, 11-1-2011 ....................... 1,105 1,190,638
Total ................................. 118,708,940
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CONNECTICUT _ 2.00%
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 $ 7,603,750
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-2014 ........................ 6,750 6,648,750
Connecticut Development Authority,
Adjustable Rate Pollution Control Revenue
Bonds (New England Power Company Project--
1985 Series),
7.25%, 10-15-2015 ..................... 5,200 5,583,500
Total ................................. 19,836,000
FLORIDA _ 2.14%
Escambia County, Florida, Pollution Control
Revenue Bonds (Champion International
Corporation Project), Series 1994,
6.9%, 8-1-2022 ........................ 10,000 11,075,000
Pasco County, Florida, Solid Waste Disposal
and Resource Recovery System, Revenue
Bonds, Series 1998,
6.0%, 4-1-2011 ........................ 4,930 5,256,612
Manatee County, Florida, Public Utilities
Revenue Refunding Bonds, Series 1993 A,
5.0%, 10-1-2013 ....................... 5,000 4,900,000
Total ................................. 21,231,612
GEORGIA _ 2.93%
Municipal Electric Authority of Georgia:
Project One Special Obligation Bonds,
Fifth Crossover Series,
6.4%, 1-1-2013 ........................ 15,500 17,670,000
General Power Revenue Bonds,
1992B Series,
8.25%, 1-1-2011 ....................... 8,700 11,494,875
Total ................................. 29,164,875
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
HAWAII _ 2.39%
State of Hawaii, Airports System Revenue
Bonds, Second Series of 1991,
6.9%, 7-1-2012 ........................ $20,195 $ 23,754,369
IDAHO _ 0.69%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.), Indexed Inverse
Floating/Fixed Term Bonds,
8.18%, 2-15-2021 (B) .................. 6,000 6,840,000
ILLINOIS _ 3.88%
City of Chicago, Chicago-O'Hare
International Airport:
Special Facility Revenue Bonds (United
Air Lines, Inc. Project):
Series 1984C,
8.2%, 5-1-2018 ........................ 5,015 5,397,394
Series 1988A,
8.4%, 5-1-2018 ........................ 4,905 5,291,269
General Airport Second Lien Revenue
Refunding Bonds, 1993 Series C:
5.0%, 1-1-2011 ........................ 5,590 5,576,025
5.0%, 1-1-2010 ........................ 3,000 3,018,750
Special Facility Revenue
Bonds (American Airlines,
Inc. Project),
7.875%, 11-1-2025 ..................... 7,250 7,920,625
General Airport Revenue Refunding
Bonds, 1993 Series A,
5.0%, 1-1-2012 ........................ 3,000 2,917,500
Illinois Health Facilities Authority
(Lutheran General HealthSystem),
Indexed Inverse Floating Rate
Revenue Bonds, Series 1993B,
6.85%, 4-1-2014 (C) ................... 4,100 4,597,125
City of Chicago, Collateralized Single
Family Mortgage Revenue Bonds,
Series 1997-B,
6.95%, 9-1-2028 ....................... 2,000 2,215,000
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 ........................ 1,490 1,668,800
Total ................................. 38,602,488
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
INDIANA _ 3.81%
Indiana State Office Building Commission,
Capitol Complex Revenue Bonds:
Series 1990B (State Office Building
I Facility),
7.4%, 7-1-2015 ........................ $ 8,000 $ 10,010,000
Series 1990A (Senate Avenue Parking Facility),
7.4%, 7-1-2015 ........................ 4,775 5,974,719
Indiana Transportation Finance Authority,
Highway Revenue Bonds, Series 1990A,
7.25%, 6-1-2015 ....................... 9,000 10,980,000
East Chicago Elementary School Building
Corporation (Lake County, Indiana), First
Mortgage Refunding Bonds, Series 1996,
6.25%, 1-5-2016 ....................... 7,655 8,506,619
Indiana Health Facility Financing Authority,
Hospital Revenue Refunding Bonds, Series 1992
(The Methodist Hospitals, Inc.),
6.75%, 9-15-2009 ...................... 2,200 2,384,250
Total ................................. 37,855,588
KENTUCKY _ 0.67%
Kentucky Economic Development Finance
Authority, Hospital Revenue Bonds,
Baptist Healthcare System Issue,
Series 1994,
5.0%, 8-15-2015 ....................... 4,650 4,458,187
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 2,205,000
Total ................................. 6,663,187
LOUISIANA _ 1.92%
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,
4.8%, 12-1-2018 ....................... 12,335 12,335,000
Parish of Jefferson Home Mortgage Authority,
Tax-Exempt Agency Mortgage-Backed
Securities, Series 1994A,
7.55%, 12-1-2026 ...................... 5,495 6,751,981
Total ................................. 19,086,981
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MAINE _ 0.29%
Maine Educational Loan Marketing Corporation,
Student Loan Revenue Refunding Bonds,
Series 1991A,
6.9%, 11-1-2003 ....................... $ 2,710 $ 2,916,638
MASSACHUSETTS _ 1.17%
Massachusetts Municipal Wholesale Electric
Company, A Public Corporation of the
Commonwealth of Massachusetts, Power
Supply System Revenue Bonds, 1993 Series
A, Linked Inverse Floating Rate Security,
5.45%, 7-1-2018 ....................... 5,000 4,931,250
Massachusetts Health and Educational
Facilities Authority, Revenue Bonds,
New England Deaconess Hospital Issue,
Series C,
7.2%, 4-1-2022 ........................ 2,500 2,734,375
Massachusetts State College Building
Authority, Project and Refunding
Revenue Bonds, Senior Series 1994-A,
7.5%, 5-1-2014 ........................ 1,750 2,205,000
Boston Water and Sewer Commission,
General Revenue Bonds, 1992 Series A
(Senior Series),
5.75%, 11-1-2013 ...................... 1,575 1,689,188
Total ................................. 11,559,813
MICHIGAN - 1.74%
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 9,620,000
Michigan State Hospital Finance Authority:
Hospital Revenue and Refunding Bonds
(Bay Medical Center), Series 1997A,
5.375%, 7-1-2011 ...................... 2,190 2,242,012
Hospital Revenue Bonds (Holland Community
Hospital), Series 1993,
5.25%, 1-1-2010 ....................... 1,200 1,183,500
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MICHIGAN (Continued)
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 $ 1,863,794
The Economic Development Corporation of the
County of Jackson, Variable Rate Demand Bonds
(Vista Grande Villa Project), Series 1987,
3.85%, 6-1-2027 ....................... 900 900,000
Charter County of Wayne, Michigan, Detroit
Metropolitan Wayne County Airport, Airport
Revenue Bonds, Subordinate Lien,
Series 1993B,
5.25%, 12-1-2013 ...................... 1,500 1,481,250
Total ................................. 17,290,556
MINNESOTA - 0.83%
City of Rochester, Minnesota, Health
Care Facilities Revenue Bonds (Mayo
Foundation/Mayo Medical Center),
Series 1992D, Indexed Inverse
Floating/Fixed Term Bonds,
7.58%, 11-5-2009 (D) .................. 4,500 5,040,000
HealthSystem Minnesota, The Healthcare
Network, City of St. Louis Park,
Minnesota, Health Care Facilities Revenue
Bonds (Healthsystem Minnesota Obligated
Group), Series 1993B and 1993C,
Relinked Inverse Floater,
5.1%, 7-1-2013 ........................ 2,000 1,950,000
City of Minneapolis, Minnesota and
Housing and Redevelopment Authority of the
City of Saint Paul, Minnesota, Health Care
Revenue Bonds (Children's Health Care),
Variable Rate Demand,
3.9%, 8-15-2025 ....................... 1,300 1,300,000
Total ................................. 8,290,000
MISSISSIPPI _ 2.21%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control
Refunding Revenue Bonds (Weyerhaeuser
Company Project), Series 1992B, Indexed
Inverse Floating/Fixed Term Bonds,
8.18%, 4-1-2022 (E) ................... 11,000 13,021,250
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MISSISSIPPI (Continued)
Mississippi Higher Education Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1996-C:
6.75%, 9-1-2014 ....................... $ 5,500 $ 5,720,000
6.7%, 9-1-2012 ........................ 1,470 1,528,800
Mississippi Home Corporation, Single Family
Mortgage Revenue Bonds, Series 1996F (AMT),
7.55%, 12-1-2027 ...................... 1,500 1,702,500
Total ................................. 21,972,550
MISSOURI _ 5.64%
Health and Educational Facilities Authority
of the State of Missouri:
Insured Variable Rate Demand Health Facilities,
Revenue Refunding Bonds
(Cox Health Systems),
Series 1997,
3.85%, 6-1-2015 ....................... 10,000 10,000,000
Variable Rate Demand, Health Facilities
Revenue Bonds (Bethesda Barclay House),
Series 1996A,
4.0%, 8-15-2026 ....................... 4,200 4,200,000
Missouri Housing Development Commission,
Single Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series C,
7.25%, 9-1-2026 ....................... 2,985 3,365,588
1996 Series C,
7.45%, 9-1-2027 ....................... 1,670 1,914,237
1997 Series A-2,
7.3%, 3-1-2028 ........................ 1,000 1,140,000
Health Facilities Revenue Bonds
(Barnes-Jewish, Inc./Christian Health
Services), Series 1993A:
6.0%, 5-15-2011 ....................... 3,000 3,258,750
5.25%, 5-15-2014 ...................... 2,900 2,936,250
The Industrial Development Authority of the
County of Jackson, State of Missouri,
Variable Rate Demand, Recreational Facilities
Revenue Bonds (YMCA of Greater Kansas City
Project), Series 1996A,
4.0%, 11-1-2016 ....................... 6,000 6,000,000
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 4,700,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MISSOURI (Continued)
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 $ 1,496,250
The Industrial Development Authority of the
City of Kansas City, Missouri (Ewing
Marion Kauffman Foundation Project),
Variable Rate Demand Revenue Bonds,
Series 1997A,
3.9%, 4-1-2027 ........................ 17,000 17,000,000
Total ................................. 56,011,075
NEBRASKA _ 1.56%
Nebraska Higher Education Loan Program,
Inc., 1993-2 Series A-6 Junior
Subordinate Bonds,
6.4%, 6-1-2013 ........................ 14,500 15,533,125
NEVADA _ 0.11%
Nevada Housing Division, Single Family
Mortgage Bonds, 1996 Series C
Subordinate Bonds,
6.35%, 4-1-2009 ....................... 1,000 1,053,750
NEW JERSEY _ 1.94%
The Union County Utilities Authority
(New Jersey), Solid Waste System Revenue
Bonds, 1991 Series A:
6.95%, 6-15-2003 ...................... 9,000 9,258,750
7.15%, 6-15-2009 ...................... 1,000 1,032,500
The Hudson County Improvement Authority,
Essential Purpose Pooled Governmental
Loan Program Bonds, Series 1986,
7.6%, 8-1-2025 ........................ 5,125 5,605,469
Middlesex County Utilities Authority,
Sewer Revenue Refunding Bonds, Series
1992A, Indexed Inverse Floating/Fixed
Term Bonds,
6.85%, 8-15-2010 ...................... 3,000 3,408,750
Total ................................. 19,305,469
NEW MEXICO _ 3.24%
City of Albuquerque, New Mexico, Governmental
Purpose Airport Refunding Revenue Bonds,
Series 1989,
6.5%, 7-1-2019 ........................ 15,350 15,436,574
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW MEXICO (Continued)
New Mexico Educational Assistance
Foundation, Student Loan Program Bonds:
First Subordinate 1995 Series A-2:
5.95%, 11-1-2007 ...................... $ 2,835 $ 2,920,050
5.85%, 11-1-2006 ...................... 1,645 1,690,237
First Subordinate 1996 Series A-2,
6.2%, 11-1-2008 ....................... 2,210 2,281,825
Second Subordinate 1996 Series A-3,
6.75%, 11-1-2008 ...................... 2,175 2,340,844
Second Subordinate 1995 Series A-3,
6.6%, 11-1-2010 ....................... 1,415 1,445,069
New Mexico Educational Assistance
Foundation, Student Loan Purchase Bonds,
Senior 1995 Series IV-A1,
7.05%, 3-1-2010 ....................... 5,635 6,121,019
Total ................................. 32,235,618
NEW YORK _ 12.13%
New York State Medical Care Facilities
Finance Agency:
Hospital Insured Mortgage Revenue Bonds,
1994 Series A Refunding:
5.25%, 8-15-2014 ...................... 10,000 10,025,000
5.5%, 8-15-2024 ....................... 10,000 10,037,500
5.375%, 2-15-2025 ..................... 15,000 14,868,750
Mental Health Services
Facilities Improvement Revenue Bonds,
1993 Series F Refunding,
5.375%, 2-15-2014 ..................... 12,000 11,955,000
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 10,687,500
5.75%, 6-15-2011 ...................... 5,000 5,412,500
The City of New York, General Obligation
Bonds, Fiscal 1994 Series C,
Linked Inverse Floating Rate Security,
8.0%, 9-30-2003 ....................... 13,000 14,950,000
Dormitory Authority of the State of New York:
State University Educational
Facilities, Revenue Bonds,
Series 1990B,
7.5%, 5-15-2011 ....................... 2,000 2,420,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW YORK (Continued)
Department of Health of the State of
New York, Revenue Bonds, Series 1996,
5.5%, 7-1-2010 ........................ $ 2,000 $ 2,022,500
Nyack Hospital, Revenue Bonds, Series 1996,
6.25%, 7-1-2013 ....................... 1,000 1,060,000
City University System Consolidated Revenue
Bonds, Series 1993F,
5.0%, 7-1-2014 ........................ 9,700 9,202,875
New York City Municipal Water Finance
Authority, Water and Sewer System
Revenue Bonds, Fiscal 1993 Series A,
6.0%, 6-15-2010 ....................... 12,000 13,230,000
Housing New York Corporation, Senior
Revenue Refunding Bonds, Series 1993,
5.0%, 11-1-2013 ....................... 6,600 6,410,250
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 4,160,000
New York State Urban Development Corporation,
Correctional Capital Facilities Revenue Bonds,
1993A Refunding Series,
5.25%, 1-1-2014 ....................... 3,000 3,071,250
New York City Industrial Development Agency,
Amended and Restated Industrial Development
Revenue Bonds (1991 Japan Airlines Company,
Ltd. Project),
6.0%, 11-1-2015 ....................... 1,000 1,061,250
Total ................................. 120,574,375
NORTH CAROLINA _ 2.18%
North Carolina Eastern Municipal Power
Agency, Power System Revenue Bonds,
Refunding Series 1993 B,
7.0%, 1-1-2008 ........................ 19,000 21,636,250
NORTH DAKOTA _ 0.55%
City of Fargo, North Dakota, Health System
Revenue Bonds (Meritcare Obligated Group),
Series 1996A,
5.55%, 6-1-2016 ....................... 5,350 5,416,875
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
OHIO _ 2.24%
State of Ohio (Ohio Building Authority),
Workers' Compensation Facilities Bonds
(William Green Building), 1993 Series A,
4.75%, 4-1-2014 ....................... 11,590 10,807,675
County of Cuyahoga, Ohio, Hospital Revenue
Bonds, Series 1990 (Meridia Health System),
7.25%, 8-15-2019 ...................... 4,980 5,390,850
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 2,637,500
City of Moraine, Ohio, Solid Waste
Disposal Revenue Bonds (General Motors
Corporation Project), Series 1994,
6.75%, 7-1-2014 ....................... 1,550 1,803,812
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 1,603,125
Total ................................. 22,242,962
OKLAHOMA _ 1.04%
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 6,534,606
1996 Series A,
7.05%, 9-1-2026 ....................... 1,000 1,105,000
Trustees of the Tulsa Municipal Airport
Trust, 1988 Adjustable Rate Revenue
Obligations, American Airlines,
7.375%, 12-1-2020 ..................... 2,500 2,715,625
Total ................................. 10,355,231
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
OREGON _ 0.42%
State of Oregon, Housing and Community
Services Department, Mortgage Revenue
Bonds, Single-Family Mortgage Program:
1992 Series B,
6.875%, 7-1-2028 ...................... $ 2,500 $ 2,668,750
1992 Series C,
5.5%, 7-1-2013 ........................ 1,485 1,525,837
Total ................................. 4,194,587
PENNSYLVANIA _ 1.92%
Delaware Valley Regional Finance Authority,
(Bucks, Chester, Delaware and Montgomery Counties,
Pennsylvania), Local Government Revenue Bonds,
1997 Series B,
5.6%, 7-1-2017 ........................ 5,000 5,237,500
Bethlehem Authority, Northampton and Lehigh
Counties, Pennsylvania, Water Revenue
Refunding Bonds, Series 1994,
4.875%, 11-15-2014 .................... 5,000 4,743,750
County of Allegheny, Pennsylvania, Airport
Revenue Refunding Bonds,
Series 1997A-1 (AMT),
5.75%, 1-1-2012 ....................... 4,000 4,275,000
Delaware County Authority, Hospital Revenue
Bonds, Series of 1992 (Riddle Memorial
Hospital),
6.5%, 1-1-2022 ........................ 2,800 2,933,000
Monroe County Hospital Authority, Hospital
Revenue Bonds (Pocono Medical Center),
Series A of 1997,
5.125%, 7-1-2015 ...................... 2,000 1,935,000
Total ................................. 19,124,250
PUERTO RICO _ 1.64%
Puerto Rico Public Buildings Authority,
Public Education and Health Facilities,
Refunding Bonds, Series M,
4.8%, 7-1-2016 ........................ 12,000 12,030,000
Puerto Rico Highway and Transportation
Authority, Highway Revenue Bonds,
Series W,
3.95%, 7-1-2010 ....................... 4,250 4,250,000
Total ................................. 16,280,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
SOUTH CAROLINA _ 0.45%
City of Charleston, South Carolina,
Waterworks and Sewer System Refunding
Revenue Bonds, Series 1986,
5.0%, 1-1-2016 ........................ $ 2,525 $ 2,408,219
South Carolina State Education Assistance
Authority, Guaranteed Student Loan
Revenue and Refunding Bonds:
1995 Series, Series C Subordinate Lien
Refunding Bonds,
6.0%, 9-1-2008 ........................ 2,000 2,105,000
Total ................................. 4,513,219
TENNESSEE _ 2.02%
The Industrial Development Board of the
County of McMinn, Pollution Control
Facilities Revenue Bonds, Series 1991
(Calhoun Newsprint Company Project -
Bowater Incorporated Obligor), (the
"Construction Bonds"),
7.625%, 3-1-2016 ...................... 10,000 10,937,500
Tennessee Housing Development Agency,
Homeownership Program Bonds, Issue T,
7.375%, 7-1-2023 ...................... 4,665 4,939,069
Volunteer State Student Funding Corporation,
Educational Loan Revenue Bonds,
Junior Subordinate Series 1993C Bonds,
5.85%, 12-1-2008 ...................... 2,700 2,720,250
Memphis-Shelby County Airport Authority,
Special Facilities Revenue Bonds,
Refunding Series 1997 (Federal Express
Corporation),
5.35%, 9-1-2012 ....................... 1,500 1,503,750
Total ................................. 20,100,569
TEXAS _ 6.85%
AllianceAirport Authority, Inc.,
Special Facilities Revenue Bonds:
Series 1990 (American Airlines, Inc.
Project),
7.5%, 12-1-2029 ....................... 15,000 16,331,250
Series 1991 (American Airlines, Inc.
Project),
7.0%, 12-1-2011 ....................... 14,100 16,250,250
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
TEXAS (Continued)
Dallas-Fort Worth International Airport,
Facility Improvement Corporation, American
Airlines, Inc. Revenue Bonds, Series 1990,
7.5%, 11-1-2025 ....................... $ 7,700 $ 8,373,750
Gulf Coast Waste Disposal Authority,
Multi-Modal Interchangeable Rate Revenue
Bonds (Champion International Corporation
Project), Series 1992A,
6.875%, 12-1-2028 ..................... 6,000 6,517,500
Lubbock Health Facilities Development
Corporation, Hospital Revenue Bonds
(Methodist Hospital, Lubbock, Texas
Project), Series 1993B,
6.75%, 12-1-2010 ...................... 5,000 5,893,750
Texas Department of Housing and Community
Affairs, Single Family Mortgage Revenue
Bonds, 1997 Series A,
5.8%, 9-1-2029 ........................ 5,000 5,043,750
Harris County Health Facilities Development
Corporation, Hospital Revenue Bonds
(Memorial Hospital System Project),
Series 1989,
6.5%, 6-1-2019 ........................ 4,500 4,758,750
City of Houston, Texas, Airport System
Special Facilities Revenue Bonds
(Continental Airlines, Inc. Terminal
Improvement Projects), Series 1997B,
6.125%, 7-15-2017 ..................... 2,850 2,939,062
Midland County Hospital District, Hospital
Revenue Refunding Bonds, Series 1997,
5.375%, 6-1-2016 ...................... 2,000 1,980,000
Total ................................. 68,088,062
VIRGINIA _ 0.20%
City of Chesapeake, Virginia, Water
and Sewer System Revenue Refunding
Bonds, Series of 1994,
5.1%, 5-1-2014 ........................ 2,000 1,935,000
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
WASHINGTON _ 7.17%
Washington Public Power Supply System:
Nuclear Project No. 3, Refunding Revenue Bonds:
Series 1989B,
7.125%, 7-1-2016 ...................... $20,750 $ 24,925,937
Series 1997 A,
5.25%, 7-1-2014 ....................... 6,220 6,150,025
Nuclear Project No. 1, Refunding Revenue Bonds:
Linked Inverse floating Rate Security,
Series 1993A,
5.75%, 7-1-2011 ....................... 15,000 15,750,000
Series 1989B,
7.125%, 7-1-2016 ...................... 8,200 9,850,250
Series 1997B,
5.125%, 7-1-2015 ...................... 5,000 4,843,750
State of Washington, Various Purpose General
Obligation Bonds, Series 1990A,
6.75%, 2-1-2015 ....................... 4,995 5,987,756
Public Utility District No. 1 of Douglas
County, Washington, Wells Hydroelectric
Revenue Bonds, Series of 1965,
3.7%, 9-1-2018 ........................ 4,200 3,743,250
Total ................................. 71,250,968
WEST VIRGINIA _ 0.60%
Braxton County, West Virginia, Solid Waste
Disposal Revenue Bonds (Weyerhaeuser Company
Project), Series 1995A,
6.5%, 4-1-2025 ........................ 3,500 3,762,500
Mason County, West Virginia, Pollution
Control Revenue Bonds (Appalachian Power
Company Project), Series G,
7.4%, 1-1-2014 ........................ 2,000 2,152,500
Total ................................. 5,915,000
TOTAL MUNICIPAL BONDS _ 99.80% $991,860,712
(Cost: $924,819,386)
Number of
Contracts
OPTIONS - 0.02%
December 110 Put Options on Treasury Bond
Futures, Expires 11-15-97 ............. 2,000 $ 250,000
(Cost: $1,728,130)
TOTAL SHORT-TERM SECURITIES _ 0.17% $ 1,664,000
(Cost: $1,664,000)
See Notes to Schedule of Investments on page .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1997
Value
TOTAL INVESTMENT SECURITIES _ 99.99% $993,774,712
(Cost: $928,211,516)
CASH AND OTHER ASSETS, NET OF LIABILITIES _ 0.01% 101,904
NET ASSETS - 100.00% $993,876,616
Notes to Schedule of Investments
(A) Coupon resets weekly based on the formula 10.55% less the Kenny S&P Index.
Minimum coupon rate is 0%. On January 1, 1999, the rate becomes fixed at
5.50%.
(B) Coupon resets weekly based on the formula 11.95% less the Kenny S&P Index.
Minimum coupon rate is 0%. On February 15, 1999, rate becomes fixed at
6.65%.
(C) Coupon resets weekly based on the formula 10.62% less the Kenny S&P Index.
Minimum coupon rate is 0%. On April 1, 1998, rate becomes fixed at 6.25%.
(D) Coupon resets weekly based on the formula 11.37% less the PSA Municipal
Swap Index. Minimum coupon rate is 0%. On November 15, 2000, rate becomes
fixed at 6.15%.
(E) Coupon resets weekly based on the formula 11.95% less the Kenny S&P Index.
Minimum coupon rate is 0%. On April 1, 1999, rate becomes fixed at 6.70%.
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, 1997
Assets
Investment securities--at value
(Notes 1 and 3) ............................... $ 993,774,712
Receivables:
Interest ...................................... 16,003,200
Fund shares sold .............................. 1,064,449
Prepaid insurance premium ...................... 32,061
--------------
Total assets ................................ 1,010,874,422
--------------
Liabilities
Payable for investment securities purchased .... 14,167,451
Payable to Fund shareholders ................... 2,423,045
Accrued service fee (Note 2) ................... 264,038
Accrued transfer agency and dividend
disbursing (Note 2) ........................... 71,756
Accrued management fee (Note 2) ................ 11,600
Due to custodian ............................... 9,648
Accrued accounting services fee (Note 2) ....... 7,083
Other .......................................... 43,185
--------------
Total liabilities ........................... 16,997,806
--------------
Total net assets ........................... $ 993,876,616
==============
Net Assets
$1.00 par value capital stock, authorized --
600,000,000; shares outstanding _ 133,060,437
Capital stock ................................. $133,060,437
Additional paid-in capital .................... 788,926,333
Accumulated undistributed income:
Accumulated undistributed net investment
income ...................................... 1,270,995
Accumulated undistributed net realized gain on
investment transactions ..................... 5,055,655
Net unrealized appreciation in value of
investments ................................. 65,563,196
------------
Net assets applicable to outstanding units
of capital ................................. $993,876,616
============
Net asset value per share (net assets divided by
shares outstanding) ............................ $7.47
=====
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1997
Investment Income
Interest and amortization (Note 1B) .............. $56,789,291
-----------
Expenses (Note 2):
Investment management fee ....................... 4,208,872
Service fee ..................................... 1,257,977
Transfer agency and dividend disbursing ......... 724,587
Accounting services fee ......................... 86,250
Custodian fees .................................. 42,227
Audit fees ...................................... 27,343
Legal fees ...................................... 20,115
Other ........................................... 194,517
-----------
Total expenses ................................ 6,561,888
-----------
Net investment income ........................ 50,227,403
-----------
Realized and Unrealized Gain on
Investments (Notes 1 and 3)
Realized net gain on securities .................. 7,890,338
Realized net gain on put options purchased ....... 1,713,707
Realized net gain on futures contracts closed .... 58,125
-----------
Net realized gain on investments ................ 9,662,170
Net unrealized appreciation in value of
investments during the period ................... 31,319,181
-----------
Net gain on investments ......................... 40,981,351
-----------
Net increase in net assets resulting
from operations ............................. $91,208,754
===========
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year
ended September 30,
-----------------------------
1997 1996
-------------- ------------
Increase (Decrease) in Net Assets
Operations:
Net investment income.............. $ 50,227,403 $51,863,441
Realized net gain on
investments ..................... 9,662,170 28,285,767
Unrealized appreciation
(depreciation) ................... 31,319,181 (10,296,280)
------------ -------------
Net increase in net assets
resulting from operations ...... 91,208,754 69,852,928
------------ -------------
Distributions to shareholders (Note 1D):*
From net investment income ........ (49,761,391) (52,041,101)
From realized gains on securities
transactions .................... (20,844,583) (6,890,412)
------------ -------------
(70,605,974) (58,931,513)
------------ -------------
Capital share transactions:
Proceeds from sale of shares
(69,698,111 and 69,215,523
shares, respectively) ........... 511,770,397 507,068,546
Proceeds from reinvestment of
dividends and/or capital gains
distribution (8,113,114 and
6,577,962 shares, respectively) . 58,977,509 48,186,696
Payments for shares redeemed
(80,867,185 and 74,246,333
shares, respectively) ........... (594,412,732) (544,346,793)
------------ -------------
Net increase (decrease) in net
assets resulting from capital
share transactions ............. (23,664,826) 10,908,449
------------ -------------
Total increase (decrease) ...... (3,062,046) 21,829,864
Net Assets
Beginning of period ................ 996,938,662 975,108,798
------------ -------------
End of period, including
undistributed net investment
income of $1,270,995 and
$804,983, respectively ............ $993,876,616 $996,938,662
============ =============
*See "Financial Highlights" on page .
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,
------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Net asset value,
beginning of period $7.32 $7.25 $6.91 $7.83 $7.40
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... .38 .39 .39 .38 .41
Net realized and
unrealized gain
(loss) on
investments...... .30 .12 .38 (0.67) .65
----- ----- ----- ----- -----
Total from investment
operations ........ .68 .51 .77 (0.29) 1.06
----- ----- ----- ----- -----
Less distributions:
From net investment
income........... (0.37) (0.39) (0.39) (0.38) (0.40)
From capital gains (0.16) (0.05) (0.00) (0.25) (0.23)
In excess of capital
gains............ (0.00) (0.00) (0.04) (0.00) (0.00)
----- ----- ----- ----- -----
Total distributions. (0.53) (0.44) (0.43) (0.63) (0.63)
----- ----- ----- ----- -----
Net asset value,
end of period ..... $7.47 $7.32 $7.25 $6.91 $7.83
===== ===== ===== ===== =====
Total return*....... 9.77% 7.16% 11.51% -3.91% 15.15%
Net assets, end of
period (000
omitted) ......... $993,877$996,939$975,109$950,952$1,055,434
Ratio of expenses to
average net assets 0.67% 0.68% 0.65% 0.64% 0.56%
Ratio of net investment
income to average
net assets ........ 5.14% 5.23% 5.51% 5.17% 5.38%
Portfolio
turnover rate ..... 47.24% 74.97% 70.67% 62.61% 94.51%
*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, 1997
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 in 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 Subchapter M of 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
dividends and capital gains distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are due to differing treatments for items
such as deferral of wash sales and post-October losses, 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 $18.0 billion of
combined net assets at September 30, 1997) 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, 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 gross sales
commissions (which are not an expense of the Fund) of $900,465, out of which W&R
paid sales commissions of $510,986 and all expenses in connection with the sale
of Fund shares, except for registration fees and related expenses.
Under a Distribution and Service Plan for Class A shares adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
may pay monthly a distribution and/or service 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 distribution of the
Class A shares and/or provision of personal services to Fund shareholders and/or
maintenance of shareholder accounts.
The Fund paid Directors' fees of $38,670, which are included in other
expenses.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and short-
term securities, aggregated $449,376,246 while proceeds from maturities and
sales aggregated $445,254,709. Purchases of options aggregated $14,576,549
while proceeds from options aggregated $14,562,121. Purchases of short-term
securities aggregated $896,599,663 while proceeds from maturities and sales
aggregated $942,937,166. No U.S. Government securities were bought or sold
during the period ended September 30, 1997.
For Federal income tax purposes, cost of investments owned at September 30,
1997 was $933,612,685, resulting in net unrealized appreciation of $60,162,027,
of which $62,004,258 related to appreciated securities and $1,842,231 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $10,659,950 during its fiscal year ended September 30, 1997. A portion of
the realized capital gain was paid to shareholders during the period ended
September 30, 1997. Remaining net capital gains will be distributed to the
Fund's shareholders.
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 Distribution and Service Plan
and have a separate transfer agency and dividend disbursement services fee
structure. As of September 30, 1997, the Fund had not commenced multiclass
operations.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United Municipal Bond Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United Municipal Bond Fund, Inc. (the "Fund") as
of September 30, 1997, the related statements of operations and changes in net
assets for the year then ended, and the financial highlights for the year then
ended. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audit. The financial statements and the financial highlights of the Fund for
each of the periods in the four-year period ended September 30, 1996 were
audited by other auditors whose report, dated November 8, 1996, expressed an
unqualified opinion on those statements and financial highlights.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
September 30, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of United Municipal
Bond Fund, Inc. as of September 30, 1997, the results of its operations, the
changes in its net assets, and the financial highlights for the year then ended
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
October 31, 1997
<PAGE>
REGISTRATION STATEMENT
PART C
OTHER INFORMATION
24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements -- United Municipal Bond Fund, Inc.
Included in Part B:
-------------------
As of September 30, 1997
Statements of Assets and Liabilities
For the year ended September 30, 1997
Statements of Operations
For the two years ended September 30, 1997
Statement of Changes in Net Assets
Schedule I -- Investment Securities as of September 30, 1997
Report of Independent Accountants
Included in Part C:
-------------------
Financial Data Schedule
Other schedules prescribed by Regulation S-X are not filed because the
required matter is not present or is insignificant.
(b) Exhibits
(1) Articles of Incorporation, as amended, filed November 17, 1995 as
EX-99.B1-charter to Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A*
Articles Supplementary filed November 17, 1995 as EX-99.B1-
mbartsup to Post-Effective Amendment No. 35 to the Registration
Statement on Form N-1A*
(2) By-Laws, as amended, filed December 27, 1996 as EX-99.B2-mbbylaw
to Post-Effective Amendment No. 36 to the Registration Statement
on Form N-1A*
(3) Not applicable
(4) Article FIFTH and Article SEVENTH of the Articles of
Incorporation of Registrant filed November 17, 1995 as EX-99.B1-
charter to Post-Effective Amendment No. 35 to the Registration
Statement on Form N-1A*; Article I, Article IV and Article VII of
the Bylaws of the Registrant filed December 27, 1996 as EX-99.B2-
mbbylaw to Post-Effective Amendment No. 36 to the Registration
Statement on Form N-1A*
(5) Investment Management Agreement filed November 17, 1995 as EX-
99.B5-mbima to Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A*
Assignment to the Investment Management Agreement filed November
17, 1995 as EX-99.B5-mbassign to Post-Effective Amendment No. 35
to the Registration Statement on Form N-1A*
(6) Underwriting Agreement filed November 17, 1995 as EX-99.B6-mbua
to Post-Effective Amendment No. 35 to the Registration Statement
on Form N-1A*
(7) Not applicable
(8) Custodian Agreement, as amended, filed May 30, 1997 as EX-99.B8-
mbca to Post-Effective Amendment No. 37 to the Registration
Statement on Form N1-A*
(9) (a) Shareholder Servicing Agreement attached hereto as EX-99.B9-
mbssa
(b) Accounting Services Agreement filed November 17, 1995 as EX-
99.B9-mbasa to Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A*
(c) Service Agreement filed by electronic format on July 30,
1993 as Exhibit (b)(15) to Post-Effective Amendment No. 32
to the Registration Statement on Form N-1A*
(d) Amendment to Service Agreement filed December 29, 1994 as
EX-99.B9(d)mbsaa to Post-Effective Amendment No. 34 to the
Registration Statement on Form N-1A*
(e) Amendment to Service Agreement filed November 17, 1995 as
EX-99.B9-mbappsaa to Post-Effective Amendment No. 37 to the
Registration Statement on Form N1-A*
(f) Fund Class A Application, as amended, filed May 30, 1997 as
EX-99.B9-mbappca to Post-Effective Amendment No. 37 to the
Registration Statement on Form N1-A*
(g) Fund Class Y Application filed November 17, 1995 as EX-
99.B9-mbappcy to Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A*
(h) Fund NAV Application filed November 17, 1995 as EX-99.B9-
mbnavapp to Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A*
(i) Class Y letter of understanding filed December 27, 1996 as
EX-99.B9-mblou to Post-Effective Amendment No. 36 to the
Registration Statement on Form N-1A*
(10) Not applicable
(11) Consent of Deloitte & Touche LLP, Independent Accountants,
attached hereto as EX-99.B11-mbconsnt
Consent of Price Waterhouse LLP, Independent Accountants,
attached hereto as EX-99.B11-mbpwcon
Opinion of Price Waterhouse LLP attached hereto as EX-99.B11-
mbpwopin
(12) Not applicable
(13) Not applicable
(14) Not applicable
(15) Service Plan for Class A Shares filed November 17, 1995 as EX-
99.B15-mbspca to Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A*
Distribution and Service Plan for Class A shares attached hereto
as EX-99.B15-mbdsp
(16) (a) Computation of average annual total return performance
quotations for Class A shares filed by electronic format on
July 30, 1993 as Exhibit (b)(16)(1) to Post-Effective
Amendment No. 32 to the Registration Statement on Form N-1A*
(b) Computation of yield performance quotation and tax
equivalent yield performance quotation for Class A shares
filed December 27, 1996 as EX-99.B16-mbyldcla to Post-
Effective Amendment No. 36 to the Registration Statement on
Form N-1A*
(17) Financial Data Schedule attached hereto as EX-27.B17-mbfds
(18) Multiple Class Plan filed November 17, 1995 as EX-99.B18-mbmcp to
Post-Effective Amendment No. 35 to the Registration Statement on
Form N-1A*
25. Persons controlled by or under common control with Registrant
-------------------------------------------------------------
None
26. Number of Holders of Securities
-------------------------------
Number of Record Holders as of
Title of Class November 30, 1997
-------------- ------------------------------
Class A Capital Stock 30,804
Class Y Capital Stock 0
27. Indemnification
---------------
Reference is made to Article SEVENTH paragraph 6(b) through (f) of the
Articles of Incorporation filed November 17, 1995 as EX-99.B1-charter to
Post-Effective Amendment No. 35 to the Registration Statement on Form N-1A*
and to Article IV of the Underwriting Agreement filed November 17, 1995 as
EX-99.B6-mbua to Post-Effective Amendment No. 35 to the Registration
Statement on Form N-1A*, both of which provide indemnification. Also refer
to Section 2-418 of the Maryland General Corporation Law regarding
indemnification of directors, officers, employees and agents.
28. Business and Other Connections of Investment Manager
----------------------------------------------------
Waddell & Reed Investment Management Company is the investment manager of
the Registrant. Under the terms of an Investment Management Agreement
between Waddell & Reed, Inc. and the Registrant, Waddell & Reed, Inc. is to
provide investment management services to the Registrant. Waddell & Reed,
Inc. assigned its investment management duties under this agreement to
Waddell & Reed Investment Management Company on January 8, 1992. Waddell &
Reed Investment Management Company is not engaged in any business other
than the provision of investment management services to those registered
investment companies described in Part A and Part B of this Post-Effective
Amendment.
Each director and executive officer of Waddell & Reed Investment Management
Company has had as his sole business, profession, vocation or employment
during the past two years only his duties as an executive officer and/or
employee of Waddell & Reed Investment Management Company or its
predecessors, except as to persons who are directors and/or officers of the
Registrant and have served in the capacities shown in the Statement of
Additional Information of the Registrant, and except for Mr. Ronald K.
Richey. Mr. Richey is Chairman of the Board and Chief Executive Officer of
Torchmark Corporation, the parent company of Waddell & Reed, Inc., and
Chairman of the Board of United Investors Management Company, a holding
company of which Waddell & Reed, Inc. is an indirect subsidiary. Mr.
Richey's address is 2001 Third Avenue South, Birmingham, Alabama 35233.
The address of the others is 6300 Lamar Avenue, Shawnee Mission, Kansas
66202-4200.
As to each director and officer of Waddell & Reed Investment Management
Company, reference is made to the Prospectus and SAI of this Registrant.
29. Principal Underwriter
---------------------
(a) Waddell & Reed, Inc. is the principal underwriter of the Registrant.
It is also the principal underwriter to the following investment
companies:
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 Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
United Asset Strategy Fund, Inc.
Advantage I
Advantage II
Advantage Plus
Waddell & Reed Funds, Inc.
(b) The information contained in the underwriter's application on form BD,
under the Securities Exchange Act of 1934, is herein incorporated by
reference.
(c) No compensation was paid by the Registrant to any principal
underwriter who is not an affiliated person of the Registrant or any
affiliated person of such affiliated person.
30. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and
rules promulgated thereunder are under the possession of Mr. Robert L.
Hechler and Ms. Sharon K. Pappas, as officers of the Registrant, each of
whose business address is Post Office Box 29217, Shawnee Mission, Kansas
66201-9217.
31. Management Services
-------------------
There is no service contract other than as discussed in Part A and Part B
of this Post-Effective Amendment and as listed in response to Items (b)(9)
and (b)(15) hereof.
32. Undertakings
------------
(a) Not applicable
(b) Not applicable
(c) The Fund agrees to furnish to each person to whom a prospectus is
delivered a copy of the Fund's latest annual report to shareholders
upon request and without charge.
(d) To the extent that Section 16(c) of the Investment Company Act of
1940, as amended, applies to the Fund, the Fund agrees, if requested
in writing by the shareholders of record of not less than 10% of the
Fund's outstanding shares, to call a meeting of the shareholders of
the Fund for the purpose of voting upon the question of removal of any
director and to assist in communications with other shareholders as
required by Section 16(c).
- ---------------------------------
*Incorporated herein by reference
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) of the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Overland Park, and State of Kansas, on the 29th day
of December, 1997.
UNITED MUNICIPAL BOND FUND, INC.
(Registrant)
By /s/ Keith A. Tucker*
------------------------
Keith A. Tucker, President
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, this Post-Effective Amendment has been signed
below by the following persons in the capacities and on the date indicated.
Signatures Title
---------- -----
/s/Ronald K. Richey* Chairman of the Board December 29, 1997
- ---------------------- ----------------
Ronald K. Richey
/s/Keith A. Tucker* President and Director December 29, 1997
- ---------------------- (Principal Executive Officer) ----------------
Keith A. Tucker
/s/Theodore W. Howard* Vice President, Treasurer December 29, 1997
- ---------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/Robert L. Hechler* Vice President and December 29, 1997
- ---------------------- Principal Financial ----------------
Robert L. Hechler Officer
/s/Henry L. Bellmon* Director December 29, 1997
- ---------------------- ----------------
Henry L. Bellmon
/s/James M. Concannon* Director December 29, 1997
- ------------------ ----------------
James M. Concannon
/s/John A. Dillingham* Director December 29, 1997
- ------------------ ----------------
John A. Dillingham
/s/Linda Graves* Director December 29, 1997
- ------------------ ----------------
Linda Graves
/s/John F. Hayes* Director December 29, 1997
- ------------------- ----------------
John F. Hayes
Director
- ------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan* Director December 29, 1997
- ------------------- ----------------
William T. Morgan
/s/William L. Rogers* Director December 29, 1997
- ------------------ ----------------
William L. Rogers
/s/Frank J. Ross, Jr.* Director December 29, 1997
- ------------------ ----------------
Frank J. Ross, Jr.
/s/Eleanor B Schwartz* Director December 29, 1997
- ------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III* Director December 29, 1997
- ------------------- ----------------
Frederick Vogel III
/s/Paul S. Wise* Director December 29, 1997
- ------------------- ----------------
Paul S. Wise
*By
Sharon K. Pappas
Attorney-in-Fact
ATTEST:
David R. Burford
Assistant Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned, UNITED FUNDS,
INC., UNITED INTERNATIONAL GROWTH FUND, INC., UNITED MUNICIPAL BOND FUND, INC.,
UNITED VANGUARD FUND, INC., UNITED HIGH INCOME FUND, INC., UNITED CASH
MANAGEMENT, INC., UNITED NEW CONCEPTS FUND, INC., UNITED GOVERNMENT SECURITIES
FUND, INC., UNITED MUNICIPAL HIGH INCOME FUND, INC., UNITED GOLD & GOVERNMENT
FUND, INC., UNITED HIGH INCOME FUND II, INC., UNITED CONTINENTAL INCOME FUND,
INC., UNITED RETIREMENT SHARES, INC., UNITED ASSET STRATEGY FUND, INC.,
TMK/UNITED FUNDS, INC. AND WADDELL & REED FUNDS, INC. (each hereinafter called
the "Corporation"), and certain directors and officers for the Corporation, do
hereby constitute and appoint KEITH A. TUCKER, ROBERT L. HECHLER, and SHARON K.
PAPPAS, and each of them individually, their true and lawful attorneys and
agents to take any and all action and execute any and all instruments which said
attorneys and agents may deem necessary or advisable to enable each Corporation
to comply with the Securities Act of 1933 and/or the Investment Company Act of
1940, as amended, and any rules, regulations, orders or other requirements of
the United States Securities and Exchange Commission thereunder, in connection
with the registration under the Securities Act of 1933 and/or the Investment
Company Act of 1940, as amended, including specifically, but without limitation
of the foregoing, power and authority to sign the names of each of such
directors and officers in his/her behalf as such director or officer as
indicated below opposite his/her signature hereto, to any Registration Statement
and to any amendment or supplement to the Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 and/or the
Investment Company Act of 1940, as amended, and to any instruments or documents
filed or to be filed as a part of or in connection with such Registration
Statement or amendment or supplement thereto; and each of the undersigned hereby
ratifies and confirms all that said attorneys and agents shall do or cause to be
done by virtue hereof.
Date: December 10, 1997 /s/Keith A. Tucker
--------------------------
Keith A. Tucker, President
/s/Ronald K. Richey Chairman of the Board December 10, 1997
- -------------------- ----------------
Ronald K. Richey
/s/Keith A. Tucker President and Director December 10, 1997
- -------------------- (Principal Executive ----------------
Keith A. Tucker Officer)
/s/Theodore W. Howard Vice President, Treasurer December 10, 1997
- -------------------- and Principal Accounting ----------------
Theodore W. Howard Officer
/s/Robert L. Hechler Vice President and December 10, 1997
- -------------------- Principal Financial ----------------
Robert L. Hechler Officer
/s/Henry L. Bellmon Director December 10, 1997
- -------------------- ----------------
Henry L. Bellmon
/s/James M. Concannon Director December 10, 1997
- -------------------- ----------------
James M. Concannon
/s/John A. Dillingham Director December 10, 1997
- -------------------- ----------------
John A. Dillingham
/s/Linda Graves Director December 10, 1997
- -------------------- ----------------
Linda Graves
/s/John F. Hayes Director December 10, 1997
- -------------------- ----------------
John F. Hayes
Director
- -------------------- ----------------
Glendon E. Johnson
/s/William T. Morgan Director December 10, 1997
- -------------------- ----------------
William T. Morgan
/s/William L. Rogers Director December 10, 1997
- -------------------- ----------------
William L. Rogers
/s/Frank J. Ross, Jr. Director December 10, 1997
- -------------------- ----------------
Frank J. Ross, Jr.
/s/Eleanor B. Schwartz Director December 10, 1997
- -------------------- ----------------
Eleanor B. Schwartz
/s/Frederick Vogel III Director December 10, 1997
- -------------------- ----------------
Frederick Vogel II
/s/Paul S. Wise Director December 10, 1997
- -------------------- ----------------
Paul S. Wise
Attest:
/s/Sharon K. Pappas
- --------------------------------
Sharon K. Pappas, Vice President
and Secretary
EX-99.B9-mbssa
SHAREHOLDER SERVICING AGREEMENT
THIS AGREEMENT, made as of the 1ST day of November, 1992, by and between
UNITED MUNICIPAL BOND FUND, INC., and Waddell & Reed Services Company (the
"Agent"), as amended and restated as of April 1, 1996,
W I T N E S S E T H :
WHEREAS, The Company wishes, as applicable, to appoint the Agent or to
continue the appointment of the Agent to be its shareholder servicing agent
upon, and subject to, the terms and provisions of this Agreement;
NOW THEREFORE, in consideration of the mutual covenants contained in this
Agreement, the parties agree as follows:
1. Appointment of Agent as Shareholder Servicing Agent for the Company;
Acceptance.
(1) The Company hereby appoints the Agent to act as Shareholder
Servicing Agent for the Company upon, and subject to, the terms and provisions
of this Agreement.
(2) The Agent hereby accepts the appointment as Shareholder Servicing
Agent for the Company and agrees to act as such upon, and subject to, the terms
and provisions of this Agreement.
(3) The Agent may appoint an entity or entities approved by the
Company in writing to perform any portion of Agent's duties hereunder (the
"Subagent").
2. Definitions.
(1) In this Agreement -
(a) The term the "Act" means the Investment Company Act of 1940
as amended from time to time;
(b) The term "account" means the shares of the Company
registered on the books of the Company in the name of a shareholder under a
particular account registration number and includes shares subject to
instructions by the shareholder with respect to periodic redemptions and/or
reinvestment in additional shares of any dividends payable on said shares;
(c) The term "affiliate" of a person shall mean a person
controlling, controlled by, or under common control with that person;
(d) The term "Class" shall mean each separate sub-class of a
class of shares of the Company, as may now or in the future exist;
(e) The term "Fund" shall mean each separate class of shares of
the Company, as may now or in the future exist;
(f) The term "officers' instruction" means an instruction given
on behalf of the Company to the Agent and signed on behalf of the Company by any
one or more persons authorized to do so by the Company's Board of Directors;
(g) The term "prospectus" means the prospectus and Statement of
Additional Information of the applicable Fund or Class from time to time in
effect;
(h) The term "shares" means shares including fractional shares
of capital stock of the Company, whether or not such shares are evidenced by an
outstanding stock certificate issued by the Company;
(i) The term "shareholder" shall mean the owner of record of
shares of the Company;
(j) The term "stock certificate" means a certificate
representing shares in the form then currently in use by the Company.
3. Duties of the Agent.
The Agent shall perform such duties as shall be set forth in this
paragraph 3 and in accordance with the practice stated in Exhibit A of this
Agreement or any amendment thereof, any or all of which duties may be delegated
to or performed by one or more Subagents pursuant to Paragraph (3) above.
(1) Transfers.
Subject to the provisions of this Agreement the Agent hereby
agrees to perform the following functions as transfer agent for the Company:
(a) Recording the ownership, transfer, exchange and cancellation
of ownership of shares of the Company on the books of the Company;
(b) Causing the issuance, transfer, exchange and cancellation of
stock certificates;
(c) Establishing and maintaining records of accounts;
(d) Computing and causing to be prepared and mailed or otherwise
delivered to shareholders payment checks and notices of reinvestment in
additional shares of dividends, stock dividends or stock splits declared by the
Company on shares and of redemption proceeds due by the Company on redemption of
shares;
(e) Furnishing to shareholders such information as may be
reasonably required by the Company, including appropriate income tax
information;
(f) Addressing and mailing to shareholders prospectuses, annual
and semi-annual reports and proxy materials for shareholder meetings prepared by
or on behalf of the Company;
(g) Replacing allegedly lost, stolen or destroyed stock
certificates in accordance with and subject to procedures and conditions agreed
upon and set out in officers' instructions;
(h) Maintaining such books and records relating to transactions
effected by the Agent pursuant to this Agreement as are required by the Act, or
by rules or regulations thereunder, or by any other applicable provisions of
law, to be maintained by the Company or its transfer agent with respect to such
transactions; preserving, or causing to be preserved, any such books and records
for such periods as may be required by any such law, rule or regulation;
furnishing the Company such information as to such transactions and at such time
as may be reasonably required by it to comply with applicable laws and
regulations;
(i) Providing such services and carrying out such
responsibilities on behalf of the Company, or imposed on the Agent as the
Company's transfer agent, not otherwise expressly provided for in this Paragraph
3, as may be required by or be reasonably necessary to comply with any statute,
act, governmental rule, regulation or directive or court order, including,
without limitation, the requirements imposed by the Tax Equity and Fiscal
Responsibility Act of 1982 and the Income and Dividend Tax Compliance Act of
1983 relating to the withholding of tax from distributions to shareholders.
(2) Correspondence.
The Agent agrees to deal with and answer all correspondence from
or on behalf of shareholders relating to its functions under this Agreement.
4. Compensation of the Agent.
The Company agrees to pay the Agent for its services under this
Agreement in accordance with the schedule as then in effect set forth in Exhibit
B of this Agreement or any amendment thereof. In addition, the Company agrees
to reimburse the Agent for the following "out-of-pocket" expenses of the Agent
within five days after receipt of an itemized statement of such expenses, to the
extent that payment of such expenses has not been or is not to be made directly
by the Company: (i) costs of stationery, appropriate forms, envelopes, checks,
postage, printing (except cost of printing prospectuses, annual and semi-annual
reports and proxy materials) and mailing charges, including returned mail and
proxies, incurred by the Agent with respect to materials and communications sent
to shareholders in carrying out its duties to the Company under this Agreement;
(ii) long distance telephone costs incurred by the Agent for telephone
communications and microfilm and storage costs for transfer agency records and
documents; (iii) costs of all ancillary and supporting services and related
expenses (other than insurance premiums) reasonably required by and provided to
the Agent, other than by its employees or employees of an affiliate, with
respect to functions of the Company being performed by it in its capacity as
Agent hereunder, including legal advice and representation in litigation to the
extent that such payments are permitted under Paragraph 7 of this Agreement and
charges to Agent made by any Subagent; (iv) costs for special reports or
information furnished on request pursuant to this Agreement and not specifically
required by the Agent by Paragraph 3 of this Agreement; and (v) reasonable costs
and expenses incurred by the Agent in connection with the duties of the Agent
described in Paragraph (3)(1)(i). In addition, the Company agrees to promptly
pay over to the Agent any fees or payment of charges it may receive from a
shareholder for services furnished to the shareholder by the Agent.
Services and operations incident to the sale and distribution of the
Company's shares, including sales communications, confirmations of investments
(not including reinvestment of dividends) and the clearing or collection of
payments will not be for the account or at the expense of the Company under this
Agreement.
5. Right of Company to Inspect Records, etc.
The Company will have the right under this Agreement to perform on
site inspection of records and accounts and to perform audits directly
pertaining to the Company shareholder accounts serviced by the Agent hereunder
at the Agent's or any Subagent's facilities in accordance with reasonable
procedures at the frequency necessary to assure proper administration of the
Agreement. The Agent will cooperate with the Company's auditors or
representatives of appropriate regulatory agencies and furnish all reasonably
requested records and data.
6. Insurance.
The Agent now has the insurance coverage described in Exhibit C,
attached hereto, and the Agent will not take any action to eliminate or decrease
such coverage during the term of this Agreement without receiving the approval
of the Fund in advance of any change, except the Agent, after giving reasonable
notice to the Company, may eliminate or decrease any coverage if the premiums
for such coverage are substantially increased.
7. Standard of Care; Indemnification.
The Agent will at all times exercise due diligence and good faith in
performing its duties hereunder. The Agent will make every reasonable effort
and take all reasonably available measures to assure the adequacy of its
personnel and facilities as well as the accurate performance of all services to
be performed by it hereunder within, at a minimum, the time requirements of any
applicable statutes, rules or regulations or as set forth in the prospectus.
The Agent shall not be responsible for, and the Company agrees to
indemnify the Agent for any losses, damages or expenses (including reasonable
counsel fees and expenses) (i) resulting from any claim, demand, action or suit
not resulting from the Agent's failure to exercise good faith or due diligence
and arising out of or in connection with the Agent's duties on behalf of the
Company hereunder; (ii) for any delay, error or omission by reason of
circumstances beyond its control, including acts of civil or military authority,
national emergencies, labor difficulties (except with respect to the Agent's
employees), fire, mechanical breakdown beyond its control, flood or catastrophe,
acts of God, insurrection, war, riots, or failure beyond its control of
transportation, communication or power supply; or (iii) for any action taken or
omitted to be taken by the Agent in good faith in reliance on (a) the
authenticity of any instrument or communication reasonably believed by it to be
genuine and to have been properly made and signed or endorsed by an appropriate
person, (b) the accuracy of any records or information provided to it by the
Company, (c) any authorization or instruction contained in any officers'
instruction, or (d) with respect to the functions performed for the Company
listed under Paragraph 3(1) of this Agreement, any advice of counsel approved by
the Company who may be internally employed counsel or outside counsel, in either
case for the Company and/or the Agent.
In order for the rights to indemnification to apply, it is understood
that if in any case the Company may be asked to indemnify or hold the Agent
harmless, the Company shall be advised of all pertinent facts concerning the
situation in question, and it is further understood that the Agent will use
reasonable care to identify and notify the Company promptly concerning any
situation which presents or appears likely to present a claim for
indemnification against the Company. The Company shall have the option to
defend the Agent against any claim which may be the subject of this
indemnification and, in the event that the Company so elects, it will so notify
the Agent and thereupon the Company shall take over complete defense of the
claim and the Agent shall sustain no further legal or other expenses in such
situation for which the Agent shall seek indemnification under this paragraph.
The Agent will in no case confess any claim or make any compromise in any case
in which the Company will be asked to indemnify the Agent except with the
Company's prior written consent.
8. Term of the Agreement; Taking Effect; Amendments.
This Agreement shall become effective at the start of business on the
date hereof and shall continue, unless terminated as hereinafter provided, for a
period of one year and from year to year thereafter, provided that such
continuance shall be specifically approved as provided below.
This Agreement shall go into effect, or may be continued, or may be
amended or a new agreement between the Company and the Agent covering the
substance of this Agreement may be entered into only if the terms of this
Agreement, such continuance, the terms of such amendment or the terms of such
new agreement have been approved by the Board of Directors of the Company,
including the vote of a majority of the directors who are not "interested
persons," as defined in the Act, of either party to this Agreement or of Waddell
& Reed Investment Management Company, cast in person at a meeting called for the
purpose of voting on such approval. Such a vote is hereinafter referred to as a
"disinterested director vote."
Any disinterested director vote shall include a determination that (i)
the Agreement, amendment, new agreement or continuance in question is in the
best interests of the Company and its shareholders; (ii) the services to be
performed under the Agreement, the Agreement as amended, new agreement or
agreement to be continued, are services required for the operation of the
Company; (iii) the Agent can provide services the nature and quality of which
are at least equal to those provided by others offering the same or similar
services; and (iv) the fees for such services are fair and reasonable in the
light of the usual and customary charges made by others for services of the same
nature and quality.
9. Termination.
(1) This Agreement may be terminated by the Agent at any time without
penalty upon giving the Company 120 days' written notice (which notice may be
waived by the Company) and may be terminated by the Company at any time without
penalty upon giving the Agent sixty (60) days' written notice (which notice may
be waived by the Agent), provided that such termination by the Company shall be
directed or approved by the vote of a majority of the Board of Directors of the
Company in office at the time or by the vote of the holders of a majority (as
defined in or under the Act) of the outstanding shares of the Company.
(2) On termination, the Agent will deliver to the Company or its
designee all files, documents and records of the Company used, kept or
maintained by the Agent in the performance of its services hereunder, including
such of the Company's records in machine readable form as may be maintained by
the Agent, as well as such summary and/or control data relating thereto used by
or available to the Agent.
(3) In the event of any termination which involves the appointment of
a new shareholder servicing agent, including the Company's acting as such on its
own behalf, the Company shall have the non-exclusive right to the use of the
data processing programs used by the Agent in connection with the performance of
its duties under this Agreement without charge.
(4) In addition, on such termination or in preparation therefore, at
the request of the Company and at the Company's expense the Agent shall provide
to the extent that its capabilities then permit such documentation, personnel
and equipment as may be reasonably necessary in order for a new agent or the
Company to fully assume and commence to perform the agency functions described
in this Agreement with a minimum disruption to the Company's activities.
10. Construction; Governing Law.
The headings used in this Agreement are for convenience only and shall
not be deemed to constitute a part hereof. Whenever the context requires, words
denoting singular shall be read to include the plural. This Agreement and the
rights and obligations of the parties hereunder, shall be construed and
interpreted in accordance with the laws of the State of Kansas, except to the
extent that the laws of the State of Maryland apply with respect to share
transactions.
11. Representations and Warranties of Agent.
Agent represents and warrants that it is a corporation duly organized
and existing and in good standing under the laws of the State of Missouri, that
it is duly qualified to carry on its business in the State of Kansas and
wherever its duties require, that it has the power and authority under laws and
by its Articles of Incorporation and Bylaws to enter into this Shareholder
Servicing Agreement and to perform the services contemplated by this Agreement.
12. Entire Agreement.
This Agreement and the Exhibits annexed hereto constitutes the entire
and complete agreement between the parties hereto relating to the subject matter
hereof, supersedes and merges all prior discussions between the parties hereto,
and may not be modified or amended orally.
IN WITNESS WHEREOF, the parties have hereto caused this Agreement to
be duly executed on the day and year first above written.
UNITED MUNICIPAL BOND FUND, INC.
By:_________________________________
Sharon K. Pappas, Vice President
ATTEST:
By:____________________________
Sheryl Strauss, Assistant Secretary
WADDELL & REED SERVICES COMPANY
By:__________________________________
Robert L. Hechler, President
ATTEST:
By:___________________________
Sharon K. Pappas, Secretary
<PAGE>
EXHIBIT A
A. DUTIES IN SHARE TRANSFERS AND REGISTRATION
1. The Agent in carrying out its duties shall follow general commercial
practices and the Rules of the Stock Transfer Association, Inc. except as they
may conflict or be inconsistent with the specific provisions of the Company's
Articles of Incorporation and Bylaws, prospectus, applicable Federal and state
laws and regulations and this Agreement.
2. The Agent shall not require that the signature of the appropriate
person be guaranteed, witnessed or verified in order to effect a redemption,
transfer, exchange or change of address except as may from time to time be
directed by the Company as set forth in an officers' instruction. In the event
a signature guarantee is required by the Company, the Agent shall not inquire as
to the genuineness of the guarantee.
3. The Agent shall not replace a lost, stolen or misplaced stock
certificate without requiring and being furnished with an open penalty surety
bond protecting the Company and the Agent against loss.
B. The practices, procedures and requirements specified in A above may be
modified, altered, varied or supplemented as from time to time may be mutually
agreed upon by the Company and the Agent and evidenced on behalf of the Company
by an officers' instruction. Any such change shall not be deemed to be an
amendment to the Agreement within the meaning of Paragraph 8 of the Agreement.
<PAGE>
EXHIBIT B
COMPENSATION
Class A Shares
An amount payable on the first day of each month of $1.3125 for each account of
the Company which was in existence during any portion of the immediately
preceding month and, in addition, to pay to the Agent the sum of $0.30 for each
account for which, during such month, a record date was established for payment
of a dividend, in cash or otherwise (which term includes a distribution),
irrespective of whether such dividend was payable in that month or later or was
payable directly or was to be reinvested.
Class Y Shares
An amount payable on the first day of each month equal to 1/12 of .15 of 1% of
the average daily net assets of the Class for the preceding month.
<PAGE>
EXHIBIT C
Bond or
Name of Bond Policy No. Insurer
Investment Company 87015197B ICI
Blanket Bond Form Mutual
Insurance
Company
Fidelity $18,800,000
Audit Expense 50,000
On Premises 18,800,000
In Transit 18,800,000
Forgery or Alteration 18,800,000
Securities 18,800,000
Counterfeit Currency 18,800,000
Uncollectible Items of
Deposit 25,000
Voice-Initiated Transactions 500,000
Total Limit 18,800,000
Directors and Officers/ 87015197D ICI
Errors and Omissions Liability Mutual
Insurance Form Insurance
Total Limit $ 5,000,000 Company
Blanket Lost Instrument Bond (Mail Loss) 30S100639551 Aetna
Life &
Casualty
Blanket Undertaking Lost Instrument
Waiver of Probate 42SUN339806 Hartford
Casualty
Insurance
EX-99.B11-mbconsnt
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 38 to Registration
Statement No. 2-56969 of our report dated October 31, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectuses, which also are a part of such Registration
Statement.
Deloitte & Touche LLP
Kansas City, Missouri
December 29, 1997
EX-99.B11-mbpwcon
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 38 to the Registration
Statement on Form N-1A (the "Registration Statement") of our report dated
November 8, 1996, relating to the statement of changes in net assets for the
year ended September 30, 1996 and the financial highlights for each of the
periods in the nine-year period ended September 30, 1996 of United Municipal
Bond Fund, Inc., which appears in such Statement of Additional Information, and
to the incorporation by reference of our report into the Class A Shares
Prospectus and the Class Y Shares Prospectus which constitute part of this
Registration Statement.
Price Waterhouse LLP
Kansas City, Missouri
December 29, 1997
EX-99.B11-mbpwopin
Report of Independent Accountants
To the Board of Directors and Shareholders of
United Municipal Bond Fund, Inc.
In our opinion, the accompanying statement of changes in net assets and the
financial highlights present fairly, in all material respects, the changes in
net assets and financial highlights of United Municipal Bond Fund, Inc. (the
"Fund") for the year ended September 30, 1996 and for each of the periods in the
nine-year period ended September 30, 1997, respectively, in conformity with
generally accepted accounting principles. This statement of changes in net
assets 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 provide a reasonable basis for the opinion expressed above. We have not
audited the financial statements of United Municipal Bond Fund, Inc. for any
period subsequent to September 30, 1996.
Price Waterhouse LLP
Kansas City, Missouri
November 8, 1996
EX-99.B15-mbdsp
DISTRIBUTION AND SERVICE PLAN
FOR CLASS A SHARES
(Adopted on October 1, 1993,
Restated on February 8, 1995 and
amended on July 24, 1997)
This Plan is adopted by United Municipal Bond Fund, Inc. (the "Fund"), pursuant
to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act")
to provide for payment by the Fund of certain expenses in connection with the
distribution of the Fund's Class A shares, provision of personal services to the
Fund's Class A shareholders and/or maintenance of its Class A shareholder
accounts. Payments under the Plan are to be made to Waddell & Reed, Inc.
("W&R") which serves as the principal underwriter for the Fund under the terms
of the Underwriting Agreement pursuant to which W&R offers and sells the shares
of the Fund.
Distribution Fee and Service Fee
The Fund is authorized to pay to W&R an amount not to exceed on an annual basis
.25 of 1% of the Fund's average net assets of the Class A shares as either (1) a
"distribution fee" to finance the distribution of the Fund's Class A shares, or
(2) a "service fee" to finance shareholder servicing by W&R, its affiliated
companies, broker-dealers who may sell Class A shares and other third-parties to
encourage and foster the maintenance of Class A shareholder accounts, or as a
combination of the two fees. The amounts shall be payable to W&R monthly or at
such other intervals as the board of directors may determine to reimburse W&R
for costs and expenses incurred.
NASD Definition
For purposes of this Plan, the "distribution fee" may be considered as a sales
charge that is deducted from the Class A net assets of the Fund and does not
include the service fee. The "service fee" shall be considered a payment made
by the Fund for personal service and/or maintenance of Class A shareholder
accounts, as such is now defined by the National Association of Securities
Dealers, Inc. ("NASD"), provided, however, if the NASD adopts a definition of
"service fee" for purposes of Rule 2830 of the NASD Conduct Rules that differs
from the definition of "service fee" as presently used, or if the NASD adopts a
related definition intended to define the same concept, the definition of
"service fee" as used herein shall be automatically amended to conform to the
NASD definition.
Quarterly Reports
W&R shall provide to the board of directors of the Fund and the board of
directors shall review at least quarterly a written report of the amounts so
expended of the distribution fee and/or service fee paid or payable to it under
this Plan and the purposes for which such expenditures were made.
Approval of Plan
This Plan shall become effective when it has been approved by a vote of at least
a majority of the outstanding Class A voting securities of the Fund (as defined
in the Act) and by a vote of the board of directors of the Fund and of the
directors who are not interested persons of the Fund and have no direct or
indirect financial interest in the operation of the Plan or any agreement
related to this Plan (other than as directors or shareholders of the Fund)
("independent directors") cast in person at a meeting called for the purposes of
voting on such Plan.
Continuance
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the directors,
including the independent directors, as specified hereinabove for the adoption
of the Plan by the directors and independent directors.
Director Continuation
In considering whether to adopt, continue or implement this Plan, the directors
shall have a duty to request and evaluate, and W&R shall have a duty to furnish,
such information as may be reasonably necessary to an informed determination of
whether this Plan should be adopted, implemented or continued.
Termination
This Plan may be terminated at any time by a vote of a majority of the
independent directors of the Fund or by a vote of the majority of the
outstanding Class A voting securities of the Fund without penalty. On
termination, the payment of all distribution fees and service fees shall cease,
and the Fund shall have no obligation to W&R to reimburse it for any cost or
expenditure it has made or may make to distribute the Class A shares or service
Class A shareholder accounts.
Amendments
This Plan may not be amended to increase materially the amount to be spent for
distribution of Class A shares, personal service and/or maintenance of
shareholder accounts without approval of the Class A shareholders, and all
material amendments of this Plan must be approved in the manner prescribed for
the adoption of the Plan as provided hereinabove.
Directors
While this Plan is in effect, the selection and nomination of the directors who
are not interested persons of the Fund shall be committed to the discretion of
the directors who are not interested persons of the Fund.
Records
Copies of this Plan, the Underwriting Agreement and reports made pursuant to
this Plan shall be preserved as provided in Rule 12b-1(f) under the Act.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO
SHAREHOLDERS DATED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000203493
<NAME> UNITED MUNICIPAL BOND FUND, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 928,211,516
<INVESTMENTS-AT-VALUE> 993,774,712
<RECEIVABLES> 17,067,649
<ASSETS-OTHER> 32,061
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,010,874,422
<PAYABLE-FOR-SECURITIES> 14,167,451
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,830,355
<TOTAL-LIABILITIES> 16,997,806
<SENIOR-EQUITY> 133,060,437
<PAID-IN-CAPITAL-COMMON> 788,926,333
<SHARES-COMMON-STOCK> 133,060,437
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,270,995
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,055,655
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 65,563,196
<NET-ASSETS> 993,876,616
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 56,789,291
<OTHER-INCOME> 0
<EXPENSES-NET> (6,561,888)
<NET-INVESTMENT-INCOME> 50,227,403
<REALIZED-GAINS-CURRENT> 9,662,170
<APPREC-INCREASE-CURRENT> 31,319,181
<NET-CHANGE-FROM-OPS> 91,208,754
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (49,761,391)
<DISTRIBUTIONS-OF-GAINS> (20,844,583)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 69,698,111
<NUMBER-OF-SHARES-REDEEMED> (80,867,185)
<SHARES-REINVESTED> 8,113,114
<NET-CHANGE-IN-ASSETS> (3,062,046)
<ACCUMULATED-NII-PRIOR> 804,983
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,208,872
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,561,888
<AVERAGE-NET-ASSETS> 977,155,610
<PER-SHARE-NAV-BEGIN> 7.32
<PER-SHARE-NII> 0.38
<PER-SHARE-GAIN-APPREC> 0.30
<PER-SHARE-DIVIDEND> (0.37)
<PER-SHARE-DISTRIBUTIONS> (0.16)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.47
<EXPENSE-RATIO> 0.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
December 29, 1997
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N. W.
Judiciary Plaza
Washington, D. C. 20549
RE: United Municipal Bond Fund, Inc.
Post-Effective Amendment No. 38
Dear Sir or Madam:
In connection with the filing of the above referenced Post-Effective Amendment,
I hereby represent that the Amendment does not contain disclosures which would
render it ineligible to become effective pursuant to paragraph (b) of Rule 485.
Very truly yours,
Sharon K. Pappas
General Counsel
SKP:fr
