United Municipal Bond Fund, Inc.
This Fund seeks to provide income that is not subject to Federal income tax.
The Securities and Exchange Commission has not approved or disapproved the
Fund's securities, or determined whether this Prospectus is accurate or
adequate. It is a criminal offense to state otherwise.
Prospectus
September 20, 1999
<PAGE>
Table of Contents
AN OVERVIEW OF THE FUND...................................................... 3
PERFORMANCE.................................................................. 5
FEES AND EXPENSES............................................................ 7
THE INVESTMENT PRINCIPLES OF
THE FUND..................................................................... 9
Investment Goal, Principal Strategies
and Other Investments..................................................... 9
Risk Considerations of Principal
Strategies and Other Investments.......................................... 10
Year 2000 Issue........................................................... 11
YOUR ACCOUNT................................................................. 12
Choosing a Share Class.................................................... 12
Sales Charge Reductions and
Waivers................................................................ 14
Waivers for Certain Investors.......................................... 14
Ways to Set Up Your Account............................................... 18
Buying Shares............................................................. 18
Minimum Investments....................................................... 21
Adding to Your Account.................................................... 21
Selling Shares............................................................ 22
Telephone Transactions.................................................... 25
Shareholder Services...................................................... 25
Personal Service....................................................... 25
Reports................................................................ 25
Exchanges.............................................................. 26
Automatic Transactions for Class A,
Class B and Class C Shareholders....................................... 26
Distributions and Taxes................................................... 27
Distributions.......................................................... 27
Taxes.................................................................. 27
THE MANAGEMENT OF THE FUND................................................... 31
Portfolio Management...................................................... 31
Management Fee............................................................ 31
FINANCIAL HIGHLIGHTS......................................................... 33
<PAGE>
An Overview of the Fund
[PILLAR GRAPHIC]
Goal
United Municipal Bond Fund, Inc. (the "Fund") seeks to provide income that is
not subject to Federal income tax.
Principal Strategy
The Fund seeks to achieve its goal by investing primarily in tax-exempt
municipal bonds, mainly of investment grade (rated BBB or higher by Standard &
Poor's ("S&P") or Baa or higher by Moody's Investors Service, Inc. ("MIS")). The
Fund may invest in bonds of any maturity. "Municipal bonds" mean obligations the
interest on which is not includable in gross income for Federal income tax
purposes. However, a significant portion of the Fund's municipal bond interest
may be subject to the alternative minimum tax ("AMT"). The Fund diversifies its
holdings among two main types of municipal bonds:
o general obligation bonds, which are backed by the full faith, credit and
taxing power of the governmental authority, and
o revenue bonds, which are payable only from specific sources, such as the
revenue from a particular facility or a special tax. Revenue bonds include
industrial development bonds ("IDBs"), which finance privately operated
facilities.
Waddell & Reed Investment Management Company ("WRIMCO"), the Fund's investment
manager, may look at a number of factors in selecting securities for the Fund's
portfolio. These include:
o the security's current coupon;
o the maturity of the security;
o the relative value of the security;
o the creditworthiness of the particular issuer or of the private company
involved; and
o the structure of the security, including whether it has a put or a call
feature.
Generally, in determining whether to sell a security, WRIMCO will use the same
type of analysis that is used in buying securities in order to determine whether
the security continues to be a desired investment for the
3
<PAGE>
Fund. WRIMCO may sell a security to take advantage of more attractive
investment opportunities or to raise cash.
Principal Risks of Investing in the Fund
Because the Fund primarily owns fixed income securities issued by municipal
authorities, a variety of factors can affect its investment performance, such
as:
o an increase in interest rates which may cause the value of the Fund's
securities, especially bonds with longer maturities, to decline;
o prepayment of higher-yielding bonds held by the Fund ("call risk");
o changes in the maturities of bonds owned by the Fund;
o the credit quality of the issuers whose securities the Fund owns or of the
private companies involved in IDB-financed projects;
o the local economic, political or regulatory environment affecting bonds owned
by the Fund;
o failure of a bond's interest to qualify as tax-exempt;
o adverse bond and stock market conditions, sometimes in response to general
economic or industry news, that may cause the prices of the Fund's holdings
to fall as part of a broad market decline;
o legislation affecting the tax status of municipal bond interest; and
o the skill of WRIMCO in evaluating and managing the interest rate and credit
risks of the Fund's portfolio.
A significant portion of the Fund's municipal bond interest may subject
investors to the alternative minimum tax ("AMT") for Federal income tax
purposes; this would have the effect of reducing the Fund's return to any such
investor.
As with any mutual fund, the value of the Fund's shares will change and you
could lose money on your investment. An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Who May Want to Invest
The Fund is designed for investors seeking current income that is primarily free
from Federal income tax, through a diversified, actively managed portfolio. You
should consider whether the Fund fits your particular investment objectives.
4
<PAGE>
Performance
[PILLAR GRAPHIC]
The bar chart and performance table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund's performance from year
to year and by showing how the Fund's average annual total returns for the
periods shown compare with those of a broad measure of market performance and a
peer group average.
O The bar chart presents the average annual total returns for Class A and shows
how performance has varied from year to year for the past ten calendar years.
O The bar chart does not reflect any sales charge that you may be required to
pay upon purchase of the Fund's Class A shares. If the sales charge was
included, the returns would be less than those shown.
O The performance table shows Class A average annual total returns and compares
them to the market indicators listed. No performance information is provided
for Class B, Class C or Class Y shares since these classes do not have annual
returns for at least one calendar year.
O The bar chart and the performance table assume reinvestment of dividends and
distributions. As with all mutual funds, the Fund's past performance does not
necessarily indicate how it will perform in the future.
Note that the performance information in the bar chart and performance table is
based on calendar-year periods, while the information shown in the Financial
Highlights section of this Prospectus and in the Fund's shareholder reports is
based on the Fund's fiscal year.
[BAR CHART PLOT POINTS]
<TABLE>
<CAPTION>
CHART OF YEAR-BY-YEAR RETURNS
as of December 31 each year (%)
<S> <C>
1989 11.23%
1990 5.63%
1991 13.15%
1992 9.53%
1993 14.30%
1994 -7.14%
1995 20.17%
1996 4.12%
1997 10.23%
1998 5.20%
</TABLE>
[END PLOT POINTS]
In the period shown in the chart, the highest quarterly return was 8.87% (the
first quarter of 1995) and the lowest quarterly return was -6.48% (the first
quarter of 1994). The Class A return for the year through June 30, 1999 was
- -1.48%.
5
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998 (%)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares of the
Fund 0.73% 5.23% 7.96%
Lehman Brothers
Municipal Bond Index 6.48% 6.23% 8.22%
Lipper General
Municipal Bond Fund
Universe Average 5.32% 5.44% 7.68%
</TABLE>
The index shown is a broad-based, securities market index that is unmanaged. The
Lipper average is a composite of mutual funds with goals similar to the goal of
the Fund.
6
<PAGE>
Fees and Expenses
[PILLAR GRAPHIC]
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid directly from Class A Class B Class C Class Y
your investment) Shares Shares Shares Shares
<S> <C> <C> <C> <C>
Maximum Sales Charge
(Load) Imposed on
Purchases (as a
percentage of offering
price) 4.25% None None None
Maximum Deferred
Sales Charge (Load)(1)
(as a percentage of
lesser of amount
invested or redemption
value) None 5% 1% None
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses(2)
(expenses that are deducted from Fund assets)
<S> <C> <C> <C> <C>
Management Fees 0.48% 0.48% 0.48% 0.48%
Distribution and
Service (12b-1) Fees(3) 0.19% 1.00% 1.00% None
Other Expenses 0.10% 0.10% 0.10% 0.18%
Total Annual Fund
Operating Expenses 0.77% 1.58% 1.58% 0.66%
</TABLE>
(1)The contingent deferred sales charge ("CDSC") which is imposed on the lesser
of amount invested or redemption value of Class B shares declines from 5% for
redemptions made within the first calendar year of purchase, to 4% for
redemptions made within the second calendar year, to 3% for redemptions made
within the third and fourth calendar years, to 2% for redemptions made within
the fifth calendar year, to 1% for redemptions made within the sixth calendar
year and to 0% for redemptions made after the sixth calendar year. Please
note that the CDSC is not based on the length of time that shares are held.
Instead, the CDSC is based on the calendar year of purchase and the calendar
year of redemption. For Class C shares, a 1% CDSC applies to the lesser of
amount invested or redemption value of Class C shares redeemed within twelve
months.
(2)Management Fees and Total Annual Fund Operating Expenses have been restated
to reflect the change in management fees effective June 30, 1999; otherwise,
expense ratios are based on other Fund-level expenses of the Fund for the
fiscal year ended September 30, 1998, and for Class B, Class C and Class Y,
the expenses attributable to each class that are anticipated for the current
year. Actual expenses may be greater or less than those shown.
(3)It is possible that long-term Class A, Class B and Class C shareholders of
the Fund may bear 12b-1 distribution fees which are more than the maximum
asset-based sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
7
<PAGE>
Example
This example is intended to help you compare the cost of investing in the
shares of the Fund with the cost of investing in other mutual funds. The
example assumes that (a) you invest $10,000 in the particular Class A, Class B,
Class C or Class Y shares for each time period specified, (b) your investment
has a 5% return each year, and (c) the expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions, your costs
would be:
<TABLE>
<CAPTION>
If shares are redeemed at
end of period: 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A Shares $500 $661 $835 $1,339
Class B Shares $561 $799 $960 $1,582*
Class C Shares $261 $499 $860 $1,878
Class Y Shares $ 67 $211 $368 $ 822
</TABLE>
<TABLE>
<CAPTION>
If shares are not redeemed
at end of period: 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A Shares $500 $661 $835 $1,339
Class B Shares $161 $499 $860 $1,582*
Class C Shares $161 $499 $860 $1,878
Class Y Shares $ 67 $211 $368 $ 822
</TABLE>
*Reflects annual operating expenses of Class A after conversion of Class B
shares into Class A shares at the end of the seventh calendar year following
the first calendar year of purchase.
8
<PAGE>
The Investment Principles of the Fund
[PILLAR GRAPHIC]
Investment Goal, Principal Strategies and
Other Investments
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 a
diversified portfolio of municipal bonds. There is no guarantee 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. 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.
Municipal bonds are issued by a wide range of state and local governments,
agencies and authorities for various purposes. The two main types 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 a special tax or other revenue source. IDBs are revenue bonds
issued by or on behalf of public authorities to obtain funds to finance
privately operated facilities. Other municipal obligations include lease
obligations of municipal authorities or entities and participations in these
obligations.
The Fund may invest more than 25% of its total assets in IDBs.
At least 80% of the Fund's net assets will be invested during normal market
conditions in municipal bonds of investment grade, which means that the bonds
are either:
o rated at least BBB by S&P, or Baa by MIS; or
o if unrated, are determined by WRIMCO to be of comparable quality.
The Fund may invest up to 10% of its total assets in taxable debt securities
other than municipal bonds. These must be either:
9
<PAGE>
o U.S. Government securities;
o obligations of domestic banks and certain savings and loan associations;
o commercial paper rated at least A by S&P or MIS; and/or
o any of the foregoing obligations subject to repurchase agreements.
The Fund may invest in other types of securities and use certain other
instruments in seeking to achieve the Fund's goal. For example, the Fund may
invest, to a lesser extent, in options, futures contracts, asset-backed
securities and other derivative instruments if it is permitted to invest in the
type of asset by which the return on, or value of, the derivative is measured.
Income from taxable obligations, repurchase agreements and derivative
instruments will be subject to Federal income tax. In order to more quickly
participate in market or economic conditions, the Fund may buy or sell futures
contracts. At this time, the Fund has limited exposure to futures contracts and
derivatives in general. You will find more information about the Fund's
permitted investments and strategies, as well as the restrictions that apply to
them, in the Statement of Additional Information ("SAI").
When WRIMCO believes that a temporary defensive position is desirable, WRIMCO
may take certain steps with respect to up to all of the Fund's assets, including
any one or more of the following:
o shorten the average maturity of the Fund's portfolio;
o hold taxable obligations, subject to the limitations stated above; or
o emphasize debt securities of a higher quality than those the Fund would
ordinarily hold.
By taking a temporary defensive position, the Fund may not achieve its
investment objective.
Risk Considerations of Principal Strategies
and Other Investments
Risks exist in any investment. The Fund is subject to market risk, financial
risk and, in some cases, prepayment risk.
o Market risk is the possibility of a change in the price of the security
because of market factors, including changes in interest rates. Bonds with
longer maturities are more interest-rate sensitive. For example, if
interest rates increase, the value of a bond with a longer maturity is more
likely to decrease. Because
10
<PAGE>
of market risk, the share price of the Fund will likely change as well.
o Financial risk is based on the financial situation of the issuer of the
security. The financial risk of the Fund depends on the credit quality of the
securities in which it invests.
o Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid
before its expected maturity date.
For IDBs, 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 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. You will find more information in the SAI about the types of
projects in which the Fund may invest from time to time and a discussion of the
risks associated with such projects.
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 due to changes in
interest rates, market conditions, and other company and economic news.
Performance will also depend on WRIMCO's skill in selecting investments.
Year 2000 Issue
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by WRIMCO and the Fund's other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
WRIMCO is taking steps that it believes are reasonably designed to address Year
2000 computer-related problems with respect to the computer systems that it uses
and to obtain assurances that comparable steps are being taken by the Fund's
other major service providers. Although there can be no assurances, WRIMCO
believes these steps will be sufficient to avoid any adverse impact on the Fund.
Similarly, the companies and other issuers in which the Fund invests could be
adversely affected by Year 2000 computer-related problems, and there can be no
assurance that the steps taken, if any, by these issuers will be sufficient to
avoid any adverse impact on the Fund.
11
<PAGE>
Your Account
[PILLAR GRAPHIC]
Choosing a Share Class
This Prospectus offers four classes of shares for the Fund: Class A, Class B,
Class C and Class Y. Each class has its own sales charge, if any, and expense
structure. The decision as to which class of shares is best suited to your needs
depends on a number of factors that you should discuss with your financial
advisor. Some factors to consider are how much you plan to invest and how long
you plan to hold your investment. For example, if you are investing a
substantial amount and plan to hold your shares for a long time, Class A shares
may be the most appropriate for you. If you are investing a lesser amount, you
may want to consider Class B shares (if investing for at least seven calendar
years) or Class C shares (if investing for less than seven calendar years).
Class Y shares are designed for institutional investors and others investing
through certain intermediaries, as described below.
Since your objectives may change over time, you may want to consider another
class when you buy additional Fund shares. All of your future investments in the
Fund will be made in the class you select when you open your account, unless you
inform the Fund otherwise, in writing, when you make a future investment.
12
<PAGE>
General Comparison of Class A, Class B and Class C Shares
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
<S> <C> <C>
Initial sales charge No initial sales charge No initial sales charge
No deferred sales charge Deferred sales charge on A 1% deferred sales
shares you sell within six charge on shares you sell
calendar years within twelve months
Maximum distribution Maximum distribution Maximum distribution
and service (12b-1) fees and service (12b-1) fees and service (12b-1) fees
of 0.25% of 1.00% of 1.00%
For an investment of Converts to Class A shares Does not convert to
$2,000,000 or more at the end of the seventh Class A shares, so annual
Waddell & Reed calendar year following expenses do not
financial advisors will the year of purchase, decrease
recommend purchase thus reducing future
of Class A shares due to annual expenses
no sales charge and
lower annual expenses
For an investment of
$300,000 or more Waddell
& Reed financial advisors
often may recommend
purchase of Class A shares
due to a reduced sales
charge and lower annual
expenses
</TABLE>
The Fund has adopted a Distribution and Service Plan ("Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, for each of its
Class A, Class B and Class C shares. Under the Class A Plan, the Fund may pay
Waddell & Reed, Inc. a fee of up to 0.25%, on an annual basis, of the average
daily net assets of the Class A shares. This fee is to reimburse Waddell & Reed,
Inc. for the amounts it spends for distributing the Fund's Class A shares,
providing service to Class A shareholders and/or maintaining Class A shareholder
accounts. Under the Class B Plan and the Class C Plan, the Fund may pay Waddell
& Reed, Inc., on an annual basis, a service fee of up to 0.25% of the average
daily net assets of the class to compensate Waddell & Reed, Inc. for providing
service to shareholders of that class and/or maintaining shareholder accounts
for that class and a distribution fee of up to 0.75% of the average daily net
assets of the class to compensate Waddell & Reed, Inc. for distributing shares
of that class. Because a class's fees are paid out of the assets of that class
on an ongoing basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
13
<PAGE>
Class A shares are subject to a sales charge when you buy them, based on the
amount of your investment, according to the table below. Class A shares pay an
annual 12b-1 fee of up to 0.25% of average Class A net assets. The ongoing
expenses of this class are lower than those for Class B or Class C shares and
higher than those for Class Y shares.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Sales Charge Sales Charge as
as Percent of Approx. Percent of
Size of Purchase Offering Price Amount Invested
- ---------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
Sales Charge Reductions and Waivers
Lower sales charges are available by:
o Combining additional purchases of Class A shares of any of the funds in the
United Group, except shares of United Cash Management, Inc. unless acquired
by exchange for Class A shares on which a sales charge was paid (or as a
dividend or distribution on such acquired shares), with the net asset value
("NAV") of Class A shares already held ("Rights of Accumulation");
o Grouping all purchases of Class A shares, except shares of United Cash
Management, Inc., made during a thirteen-month period ("Letter of Intent");
and
o Grouping purchases by certain related persons.
Additional information and applicable forms are available from Waddell & Reed
financial advisors.
Waivers for Certain Investors
Class A shares may be purchased at NAV by:
o The Directors and officers of the Fund, employees of Waddell & Reed, Inc.,
employees of their affiliates, financial advisors of Waddell & Reed, Inc. and
the spouse, children, parents, children's spouses and spouse's parents of
each;
o Certain retirement plans and certain trusts for these persons; and
14
<PAGE>
o A 401(k) plan or a 457 plan having 100 or more eligible employees.
You will find more information in the SAI about sales charge reductions and
waivers.
Contingent Deferred Sales Charge. A contingent deferred sales charge ("CDSC")
may be assessed against your redemption amount of Class B or Class C shares and
paid to Waddell & Reed, Inc. (the "Distributor"), as further described below.
The purpose of the CDSC is to compensate the Distributor for the costs incurred
by it in connection with the sale of the Fund's Class B or Class C shares. The
CDSC will not be imposed on Class B or Class C shares representing payment of
dividends or distributions or on amounts which represent an increase in the
value of a shareholder's account resulting from capital appreciation above the
amount paid for Class B or Class C shares purchased during the CDSC period. The
date of redemption is measured, in calendar years, from the first calendar year
of purchase. For example, if a shareholder opens an account on November 1, 1999,
then redeems all shares on March 1, 2000, the shareholder would pay a CDSC of
4%, the rate applicable to redemptions made within the second calendar year of
purchase. Please note that the CDSC is not based on the length of time that
shares are held. Instead, the CDSC is based on the calendar year of purchase and
the calendar year of redemption. The CDSC is applied to the lesser of amount
invested or redemption value.
To keep your CDSC as low as possible, each time you place a request to redeem
shares, the Fund assumes that a redemption is made first of shares not subject
to a deferred sales charge (including shares which represent appreciation on
shares held, reinvested dividends and distributions), and then of shares that
represent the lowest sales charge.
Unless instructed otherwise, the Fund, when requested to redeem a specific
dollar amount, will redeem additional Class B or Class C shares equal in value
to the CDSC. For example, should you request a $1,000 redemption and the
applicable CDSC is $27, the Fund will redeem shares having an aggregate NAV of
$1,027, absent different instructions.
Class B shares are not subject to a sales charge when you buy them. However, you
may pay a CDSC if you sell your Class B shares within six calendar years of
their purchase, based on the table below. Class B shares pay an annual 12b-1
service fee of up to 0.25% of average net assets and a distribution fee of up to
15
<PAGE>
0.75% of average net assets. Over time, these fees will increase the cost of
your investment and may cost you more than if you had bought Class A shares.
Class B shares will automatically convert to Class A shares of the Fund at the
end of the seventh calendar year following the year of purchase. The Class A
shares have lower ongoing expenses.
The Fund will redeem your Class B shares at their NAV next calculated after
receipt of a written request for redemption in good order, subject to the CDSC
discussed below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Date of Redemption Deferred Sales Charge
- -----------------------------------------------------------------
<S> <C>
anytime within 1st calendar year 5%
anytime within 2nd calendar year 4%
anytime within 3rd calendar year 3%
anytime within 4th calendar year 3%
anytime within 5th calendar year 2%
anytime within 6th calendar year 1%
after 6th calendar year 0%
</TABLE>
All Class B investments made during a calendar year are deemed a single
investment during that calendar year for purposes of calculating the CDSC.
Class C shares are not subject to a sales charge when you buy them, but if you
sell your Class C shares within twelve months of buying them, you will pay a 1%
CDSC. For purposes of the CDSC, purchases of Class C shares within a month will
be considered as being purchased on the first day of the month. Class C shares
pay an annual 12b-1 service fee of up to 0.25% of average net assets and a
distribution fee of up to 0.75% of average net assets. Over time, these fees
will increase the cost of your investment and may cost you more than if you had
bought Class A shares. Class C shares do not convert to any other class.
For Class C shares, the CDSC will be applied to the lesser of amount invested or
redemption value of shares that have been held for twelve months or less.
The CDSC will not apply in the following circumstances:
o redemptions of Class B or Class C shares requested within one year of the
shareholder's death or disability, provided the Fund is notified of the death
or disability at the time of the request and furnished proof of such event
satisfactory to the Distributor.
16
<PAGE>
o redemptions of Class B or Class C shares made pursuant to a shareholder's
participation in any systematic withdrawal service adopted for a Fund. (The
service and this exclusion from the CDSC do not apply to a one-time
withdrawal.)
o redemptions the proceeds of which are reinvested in Class B or Class C shares
(must be reinvested in the same class as that which was redeemed) of the Fund
within thirty days after such redemption.
o the exercise of certain exchange privileges.
o redemptions effected pursuant to the Fund's right to liquidate a
shareholder's Class B or Class C shares if the aggregate NAV of those shares
is less than $500.
o redemptions effected by another registered investment company by virtue of a
merger or other reorganization with the Fund or by a former shareholder of
such investment company of Class B or Class C shares of the Fund acquired
pursuant to such reorganization.
These exceptions may be modified or eliminated by the Fund at any time without
prior notice to shareholders, except with respect to redemptions effected
pursuant to the Fund's right to liquidate a shareholder's shares, which requires
certain notices.
Class Y shares are not subject to a sales charge or annual 12b-1 fees.
Class Y shares are only available for purchase by:
o 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;
o government entities or authorities and corporations whose investment within
the first twelve months after initial investment is $10 million or more; and
o certain retirement plans and trusts for employees and financial advisors of
Waddell & Reed, Inc. and its affiliates.
17
<PAGE>
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 free of Federal
transfer tax consequences. 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
financial advisor for the form.
Buying Shares
You may buy shares of the Fund through Waddell & Reed, Inc. and its financial
advisors. To open your account you must complete and sign an application. Your
Waddell & Reed financial advisor can help you with any questions you might have.
To purchase any class of shares 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
18
<PAGE>
To purchase Class Y shares by wire, you must first obtain an account number by
calling 1-800-366-2520, then mail a completed application to Waddell & Reed,
Inc., P.O. Box 29217, Shawnee Mission, Kansas 66201-9217, or fax it to
913-236-5044. Instruct your bank to wire the amount you wish to invest, 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.
You may also buy Class Y shares of the Fund indirectly through certain
broker-dealers, banks and other third parties, some of which may charge you a
fee. These firms may have additional requirements regarding the purchase of
Class Y shares.
The price to buy a share of the Fund, called the offering price, is calculated
every business day.
The offering price of a share (the price to buy one share of a particular class)
is the next NAV calculated per share of that class plus, for Class A shares, the
sales charge shown in the table above.
In the calculation of the Fund's NAV:
o The securities in the Fund's portfolio that are listed or traded on an
exchange are valued primarily using market prices.
o Bonds are generally valued according to prices quoted by an independent
pricing service.
o Short-term debt securities are valued at amortized cost, which approximates
market value.
o Other investment assets for which market prices are unavailable 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 close of
business of the NYSE, normally 4 p.m. Eastern time, except that an option or
futures contract held by the Fund may be priced at the close of the regular
session of any other securities or commodities exchange on which that instrument
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:
o Orders are accepted only at the home office of Waddell & Reed, Inc.
o All of your purchases must be made in U.S. dollars.
19
<PAGE>
o 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.
o The Fund does not issue certificates representing Class B, Class C or Class Y
shares of the Fund.
o If you purchase Class Y shares of the Fund from certain broker-dealers, banks
or other authorized third parties, the Fund will be deemed to have received
your purchase order when that third party (or its designee) has received your
order. Your order will receive the Class Y offering price next calculated
after the order has been received in proper form by the authorized third
party (or its designee). You should consult that firm to determine the time
by which it must receive your order for you to purchase shares of the Fund at
that day's price.
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.
20
<PAGE>
Minimum Investments
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
For Class A, Class B and Class C:
- ------------------------------------------------------------------------
<S> <C>
To Open an Account $500
For certain exchanges $100
For certain accounts opened with Automatic
Investment Service $ 50
For certain accounts opened through payroll
deductions for or by employees of WRIMCO,
Waddell & Reed, Inc. and their affiliates $ 25
To Add to an Account Any amount
For certain exchanges $100
For Automatic Investment Service $ 25
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
For Class Y:
- ------------------------------------------------------------------------
<S> <C>
To Open an Account
For a government entit y
or authority or for a
corporation: $10 million (within first twelve months)
For other investors: Any amount
To Add to an Account Any amount
</TABLE>
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 to Waddell & Reed, Inc., along with:
o the detachable form that accompanies the confirmation of a prior purchase or
your year-to-date statement; or
o a letter stating your account number, the account registration and the class
of shares that you wish to purchase.
To add to your Class Y 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.
If you purchase Class Y shares from certain broker-dealers, banks or other
authorized third parties, additional purchases may be made through those firms.
21
<PAGE>
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 share of a particular class) is the NAV
per share of that class, subject to any CDSC applicable to Class B or Class C
shares.
To sell shares by written request: Complete an Account Service Request form,
available from your Waddell & Reed financial advisor, or write a letter of
instruction with:
o the name on the account registration;
o the Fund's name;
o the Fund account number;
o the dollar amount or number, and the class, of shares to be redeemed; and
o any other applicable requirements listed in the table below.
Deliver the form or your letter to your Waddell & Reed financial advisor, or
mail it to:
Waddell & Reed Services Company
P. O. Box 29217
Shawnee Mission, Kansas
66201-9217
Unless otherwise instructed, Waddell & Reed Services Company will send a check
to the address on the account.
To sell Class Y 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 Class Y
shares and make payment by wire to your predesignated bank account or by check
to you at the address on the account.
When you place an order to sell shares, your shares will be sold at the next NAV
calculated, subject to any applicable CDSC, after receipt of a written request
for redemption in good order by Waddell & Reed Services Company at the address
listed above. Note the following:
o If more than one person owns the shares, each owner must sign the written
request.
o If you hold a certificate, it must be properly endorsed and sent to the Fund.
22
<PAGE>
o 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 that
the check has cleared and been honored. If you do not, payment of the
redemption proceeds on these shares will be delayed until the earlier of 10
days or the date the Fund can verify that your purchase check has cleared and
been honored.
o 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.
o Payment is normally made in cash, although under extraordinary conditions
redemptions may be made in portfolio securities.
o If you purchased Class Y shares from certain broker-dealers, banks or other
authorized third parties, you may sell those shares through those firms, some
of which may charge you a fee and may have additional requirements to sell
Fund shares. The Fund will be deemed to have received your order to sell
Class Y shares when that firm (or its designee) has received your order. Your
order will receive the Class Y NAV next calculated after the order has been
received in proper form by the authorized firm (or its designee). You should
consult that firm to determine the time by which it must receive your order
for you to sell Class Y shares at that day's price.
23
<PAGE>
Special Requirements for Selling Shares
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Account Type Special Requirements
- --------------------------------------------------------------------------------
<S> <C>
Individual or The written instructions must be signed by all
Joint Tenant persons required to sign for transactions, exactly
as their names appear on the account.
Sole Proprietorship The written instructions must be signed by the
individual owner of the business.
UGMA, UTMA The custodian must sign the written instructions
indicating capacity as custodian.
The trustee must sign the written instructions
indicating capacity as trustee. If the trustee's name is
Trust not in the account registration, provide a currently
certified copy of the trust document.
Business or At least one person authorized by corporate
Organization resolution to act on the account must sign the
written instructions.
Conservator, Guardian The written instructions must be signed by the
or Other Fiduciary person properly authorized by court order to
act in the particular fiduciary capacity.
</TABLE>
The Fund may require a signature guarantee in certain situations such as:
o a redemption request made by a corporation, partnership or fiduciary;
o a redemption request made by someone other than the owner of record; or
o the check is made payable to someone other than the owner of record.
This requirement is intended to protect you and Waddell & Reed from fraud. You
can obtain a signature guarantee from most banks and securities dealers, but not
from a notary public.
The Fund reserves the right to redeem at NAV all of your Fund shares if their
aggregate NAV is less than $500. The Fund will give you notice 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 of Class A shares
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 with Class A shares of the
Fund.
The deferred sales charge will not apply to the proceeds of Class B or Class C
shares which are redeemed and then reinvested in
24
<PAGE>
Class B or Class C shares, as applicable, within thirty days after such
redemption. The Distributor will, with your reinvestment, restore an amount
equal to the deferred sales charge attributable to the amount reinvested by
adding the deferred sales charge amount to your reinvestment. For purposes of
determining future deferred sales charges, the reinvestment will be treated as a
new investment. You may do this only once as to Class B shares of the Fund and
once as to Class C shares of the Fund.
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 financial advisor is available to provide personal
service. Additionally, a toll-free call, 1-800-366-5465, connects you to a
Customer Service Representative or our automated customer telephone service.
During normal business hours, our Customer Service staff is available to answer
your questions or update your account records. At almost any time of the day or
night, you may access your account information from a touch-tone phone, or from
our web site, www.waddell.com, to:
o Obtain information about your accounts;
o Obtain price information about other funds in the United Group; or
o Request duplicate statements.
Reports
Statements and reports sent to you include the following:
o confirmation statements (after every purchase, other than those purchases
made through Automatic Investment Service, and after every exchange, transfer
or redemption)
25
<PAGE>
o year-to-date statements (quarterly)
o annual and semiannual reports to shareholders (every six months)
To reduce expenses, only one copy of the most recent 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 above for Customer Service if
you need additional copies of annual or semiannual reports or account
information.
Exchanges
You may sell your shares and buy shares of the same class of other funds in the
United Group without the payment of an additional sales charge if you buy Class
A shares or payment of a CDSC when you exchange Class B or Class C shares. For
Class B and Class C shares, the time period for the CDSC will continue to run.
In addition, exchanging Class Y shareholders may buy Class A shares of United
Cash Management, Inc.
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 permitted 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 for Class A, Class B and Class C Shareholders
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.
26
<PAGE>
- --------------------------------------------------------------------------------
Regular Investment Plans
- --------------------------------------------------------------------------------
Automatic Investment Service
To move money from your bank account to an existing Fund account
<TABLE>
<CAPTION>
Minimum Amount Minimum Frequency
<S> <C>
$25 Monthly
</TABLE>
Funds Plus Service
To move money from United Cash Management, Inc. to the Fund whether in the
same or a different account in the same class
<TABLE>
<CAPTION>
Minimum Amount Minimum Frequency
<S> <C>
$100 Monthly
</TABLE>
Distributions and Taxes
Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to its shareholders each year.
Usually the Fund distributes net investment income monthly. Net capital gains
usually are distributed in December.
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, capital gains and other distributions
with respect to a class will be automatically paid in additional shares of
the same class 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 of the same
class will be automatically paid in shares of the same class, but you will
be sent a check for each dividend distribution. However, if the dividend
distribution is less than five dollars, the distribution will be
automatically paid in additional shares of the same class of the Fund.
3. Cash Option. You will be sent a check for your dividends, capital gains and
other distributions if the total distribution is equal to or greater than
five dollars. If the distribution is less than five dollars, it will be
automatically paid in additional shares of the same class of the Fund.
Taxes
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:
27
<PAGE>
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. For Federal income tax purposes, your
long-term capital gains generally are taxed at a maximum rate of 20%. Dividends
paid by the Fund are not expected to be eligible for the dividends received
deduction allowed to corporations.
The Fund notifies you after each calendar year-end as to the amounts of
dividends and other distributions paid (or deemed paid) to you for that year.
Exempt-interest dividends paid by the Fund may be subject to income taxation
under state and local tax laws. In addition, a portion of those dividends is
expected to be attributable to interest on certain bonds that must be treated by
you as a "tax preference item" for purposes of calculating your liability, if
any, for the AMT; the Fund anticipates such portion will be not more than 40% of
the dividends it will pay to its shareholders. The Fund will provide you with
information concerning the amount of distributions 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 must withhold 31% of all taxable dividends, capital gains
and other 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
28
<PAGE>
dividends, capital gains and other distributions also is required for
shareholders subject to backup withholding.
Taxes on transactions. Your redemption of Fund shares will result in a taxable
gain or loss to you, depending on whether the redemption proceeds are more or
less than what you paid 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 Wednesday on or 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 Class A Fund shares through a redemption or exchange within
ninety days after your purchase and then reacquire Class A Fund shares or
acquire Class A shares of another fund in the United Group without paying a
sales charge due to the thirty-day reinvestment privilege or exchange privilege.
See "Your Account." In these cases, any gain on the disposition of the original
Class A 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
29
<PAGE>
shareholders; you will find more information in the SAI. There may be other
Federal, state or local tax considerations applicable to a particular investor.
You are urged to consult your own tax adviser.
30
<PAGE>
The Management of the Fund
[PILLAR GRAPHIC]
Portfolio Management
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. WRIMCO and its predecessors have served as investment
manager to each of the registered investment companies in the United Group of
Mutual Funds, Waddell & Reed Funds, Inc. and Target/United Funds, Inc. since the
inception of the company. WRIMCO is located at 6300 Lamar Avenue, P.O. Box
29217, Shawnee Mission, Kansas 66201-9217.
John M. Holliday is primarily responsible for the 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, Vice President of the Fund and Vice
President of other investment companies for which WRIMCO serves as investment
manager. From July 1986 to March 1998, Mr. Holliday was Senior Vice President
of, and a portfolio manager for, Waddell & Reed Asset Management Company, a
former affiliate of WRIMCO. Mr. Holliday has served as the portfolio manager for
investment companies managed by WRIMCO and its predecessors since August 1979,
and has been an employee of such 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.
Management Fee
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 in the SAI.
The management fee is payable by the Fund at the annual rate of 0.525% of net
assets up to $500 million,
31
<PAGE>
0.50% of net assets over $500 million and up to $1 billion, 0.45% of net assets
over $1 billion and up to $1.5 billion, and 0.40% of net assets over $1.5
billion.
Prior to June 30, 1999, the management fee of the Fund was calculated by adding
a group fee to a specific fee. The specific fee was 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 was determined on the basis of the combined net
asset values of all the funds in the United Group and then allocated pro rata to
the Fund based on its relative net assets at the annual rates shown in the
following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Group Fee Rate
Group Net Asset Level Annual Group Fee Rate
(all dollars in millions) For Each Level
- --------------------------------------------------------------
<S> <C>
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%
</TABLE>
Management fees for the fiscal year ended September 30, 1998 were 0.42% of the
Fund's average net assets.
32
<PAGE>
Financial Highlights
[PILLAR GRAPHIC]
The following information is to help you understand the financial performance of
the Fund's Class A and Class Y shares for the fiscal periods shown. Certain
information reflects financial results for a single Fund share. "Total return"
shows how much your investment would have increased (or decreased) during each
period, assuming reinvestment of all dividends and distributions. This
information has been audited by Deloitte & Touche LLP, whose independent
auditors' reports, along with the Fund's financial statements for the fiscal
year ended September 30, 1998 and the six months ended March 31, 1999, are
included in the SAI, which is available upon request.
33
<PAGE>
For a Class A share outstanding throughout each period*:
<TABLE>
<CAPTION>
For the
six For the fiscal year ended
months September 30,
ended -------------------------------------------------------
3/31/99 1998 1997 1996 1995 1994
Class A Per-Share Data
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 7.63 $ 7.47 $ 7.32 $ 7.25 $ 6.91 $ 7.83
-----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment
income 0.18 0.37 0.38 0.39 0.39 0.38
Net realized and
unrealized gain
(loss) on
investments (0.13) 0.25 0.30 0.12 0.38 (0.67)
------------------------------------------------------------------------------------------------
Total from investment
operations 0.05 0.62 0.68 0.51 0.77 (0.29)
------------------------------------------------------------------------------------------------
Less distributions:
From net
investment income (0.19) (0.37) (0.37) (0.39) (0.39) (0.38)
From capital gains (0.11) (0.09) (0.16) (0.05) (0.00) (0.25)
In excess of
capital gains (0.00) (0.00) (0.00) (0.00) (0.04) (0.00)
------------------------------------------------------------------------------------------------
Total distributions (0.30) (0.46) (0.53) (0.44) (0.43) (0.63)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $ 7.38 $ 7.63 $ 7.47 $ 7.32 $ 7.25 $ 6.91
------------------------------------------------------------------------------------------------
Class A Ratios/Supplemental Data
Total return** 0.68% 8.67% 9.77% 7.16% 11.51% -3.91%
Net assets, end of
period (in millions) $ 965 $ 997 $ 994 $ 997 $ 975 $ 951
Ratio of expenses to
average net assets 0.74%*** 0.72% 0.67% 0.68% 0.65% 0.64%
Ratio of net
investment income to
average net assets 4.94%*** 4.95% 5.14% 5.23% 5.51% 5.17%
Portfolio turnover
rate 17.98% 50.65% 47.24% 74.97% 70.67% 62.61%
</TABLE>
*On January 21, 1996, Fund shares outstanding were designated Class A shares.
There were no Class B or Class C shares outstanding during the periods shown.
**Total return calculated without taking into account the sales load deducted
on an initial purchase.
***Annualized.
34
<PAGE>
For a Class Y share outstanding throughout the period:
<TABLE>
<CAPTION>
For the
period
from
12/30/98*
through
3/31/99
----------------
<S> <C>
Class Y Per-Share Data
Net asset value, beginning of period $ 7.41
------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.09
Net realized and unrealized loss on investments (0.03)
------------------------------------------------------------------------
Total from investment operations 0.06
------------------------------------------------------------------------
Less dividends from net investment income (0.09)
------------------------------------------------------------------------
Net asset value, end of period $ 7.38
------------------------------------------------------------------------
Class Y Ratios/Supplemental Data
Total return 0.85%
Net assets, end of period (in thousands) $ 2
Ratio of expenses to average net assets 0.60%**
Ratio of net investment income to average net assets 5.18%**
Portfolio turnover rate 17.98%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the six months ended March 31, 1999.
35
<PAGE>
This space is intended for your notes and calculations.
36
<PAGE>
This space is intended for your notes and calculations.
37
<PAGE>
This space is intended for your notes and calculations.
38
<PAGE>
United Municipal Bond Fund, Inc.
[PILLAR GRAPHIC]
Custodian
UMB Bank, n.a.
Kansas City, Missouri
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts
Avenue, N.W.
Washington, D.C. 20036
Independent Auditors
Deloitte & Touche LLP
1010 Grand Avenue
Kansas City, Missouri
64106-2232
Investment Manager
Waddell & Reed Investment
Management Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Underwriter
Waddell & Reed, Inc.
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Shareholder Servicing Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
Accounting Services Agent
Waddell & Reed
Services Company
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, Kansas
66201-9217
(913) 236-2000
(800) 366-5465
39
<PAGE>
[PILLAR GRAPHIC]
September 20, 1999
UNITED MUNICIPAL BOND FUND, INC.
You can get more information about the Fund in--
o its Statement of Additional Information (SAI) dated September 20, 1999, which
contains detailed information about the Fund, particularly its investment
policies and practices. You may not be aware of important information about
the Fund unless you read both the Prospectus and the SAI. The current SAI is
on file with the Securities and Exchange Commission (SEC) and it is
incorporated into this Prospectus by reference (that is, the SAI is legally
part of the Prospectus).
o its Annual and Semiannual Reports to Shareholders, which detail the Fund's
actual investments and include financial statements as of the close of the
particular annual or semiannual period. The annual report also contains a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the year covered by the
report.
To request a copy of the current SAI or copies of the Fund's most recent Annual
and Semiannual reports, without charge, or for other inquiries, contact the Fund
or Waddell & Reed, Inc. at the address and telephone number below. Copies of the
SAI, Annual and/or Semiannual reports may also be requested via e-mail at
[email protected].
Information about the Fund (including its current SAI and most recent Annual and
Semiannual Reports) is available from the SEC's web site at http://www.sec.gov
and from the SEC's Public Reference Room in Washington, D.C. You can find out
about the operation of the Public Reference Room and applicable copying charges
by calling 1-800-SEC-0330.
The Fund's SEC file number is: 811-2657.
- --------------------------------------------------------------------------------
[WADDELL & REED LOGO]
Waddell & Reed, Inc.
6300 Lamar Avenue, P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000, (800) 366-5465
NU1008(9-99)
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
(800) 366-5465
September 20, 1999
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with the prospectus ("Prospectus")
for the United Municipal Bond Fund, Inc. (the "Fund"), dated September 20, 1999,
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
Investment Strategies, Policies and Practices .................. 4
Investment Management and Other Services ....................... 32
Purchase, Redemption and Pricing of Shares ..................... 37
Directors and Officers ......................................... 47
Payments to Shareholders ....................................... 53
Taxes .......................................................... 54
Portfolio Transactions and Brokerage ........................... 57
Other Information .............................................. 59
Appendix A ..................................................... 61
Financial Statements ........................................... 67
<PAGE>
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 company organized as a Maryland
corporation on September 29, 1976.
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
Total return is the overall change in the value of an investment over a
given period of time. 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, deducting the
maximum sales load of 4.25%. 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 March
31, 1999, which is the most recent balance sheet included in this SAI, for the
periods shown were as follows:
2
<PAGE>
With Without
Sales Load Sales Load
Deducted Deducted
One-year period from April 1, 1998 to
March 31, 1999: 0.90% 5.38%
Five-year period from April 1, 1994 to
March 31, 1999: 6.83% 7.76%
Ten-year period from April 1, 1989 to
March 31, 1999: 8.05% 8.52%
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.
No total return information is provided for Class B or Class C shares since
Class B and Class C had not commenced operations, and Class Y did not have a
full year of operations, as of March 31, 1999.
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
Yield refers to the income generated by an investment in the Fund over a
given period of time. 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 March 31, 1999, the date of the most recent
balance sheet included in this SAI, is
3
<PAGE>
4.55%. The yield for Class Y shares of the Fund for the 30-day period ended
March 31, 1999 is 4.94%
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 for Class A shares computed according to the
formula for the 30-day period ended on March 31, 1999, the date of the most
recent balance sheet included in this SAI, is 5.32%, 6.25%, 6.51%, 7.01% and
7.41% for marginal tax brackets of 15%, 28%, 31%, 36% and 39.6%, respectively.
The tax-equivalent yield for Class Y shares computed according to the formula
for the 30-day period ended on March 31, 1999 is 5.78%, 6.78%, 7.07%, 7.61% and
7.05% for marginal tax brackets of 15%, 28%, 31%, 36% and 39.6%, respectively.
No yield information is provided for Class B or Class C since neither had
commenced operations as of March 31, 1999.
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. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
related, 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 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.
4
<PAGE>
INVESTMENT STRATEGIES, POLICIES AND PRACTICES
This SAI supplements the information contained in the Prospectus and
contains more detailed information about the investment strategies and policies
the Fund's investment manager, Waddell & Reed Investment Management Company
("WRIMCO"), may employ and the types of instruments in which the Fund may
invest, in pursuit of the Fund's goal. A summary of the 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, or use them to the full extent permitted by the Fund's investment
policies and restrictions. WRIMCO buys an instrument or uses a technique only if
it believes that doing so will help the Fund achieve its goal. See "Investment
Restrictions" for a listing of the fundamental and non-fundamental (e.g.,
operating) investment restrictions and policies of the Fund.
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. 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.
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 (collectively, "lease obligations"). 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
5
<PAGE>
acquire land and a variety of equipment and facilities. 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.
The Fund has not held and does not intend to hold municipal lease
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, WRIMCO 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.
6
<PAGE>
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. 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. See Appendix A for a description of bond ratings.
Now or in the future, Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"), and Moody's Investors
7
<PAGE>
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. Credit ratings for individual securities may change from time
to time, and 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. In either case, payment and
delivery for the bonds take place at a future date. 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. When purchasing
bonds on a when-issued or delayed-delivery basis, the Fund assumes the rights
and risks of ownership, including the risk of price and yield fluctuations. 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
8
<PAGE>
asset value per share. 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. 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. 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.
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 its portfolio, the Fund 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
9
<PAGE>
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 are high quality debt instruments issued or
guaranteed as to principal or interest by the U.S. Treasury or an agency or
instrumentality of the U.S. Government. These 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
10
<PAGE>
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.
Money Market Instruments
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 and other financial institution obligations. These instruments may carry
fixed or variable interest rates.
Zero Coupon Securities
Zero coupon securities 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 securities do not pay current income, their
prices can be very volatile when interest rates change and generally are subject
to greater price fluctuations in response to changing interest rates than prices
of comparable maturities that make current distributions of interest in cash.
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"). The
Federal tax law requires that a holder of a security with OID accrue a ratable
portion of the OID on the security as income each year, 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 income attributable to
those securities and includable in the dividends paid to its shareholders. 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.
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
11
<PAGE>
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 Securities. 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." 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 the
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.
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
12
<PAGE>
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.
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 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 the investor's 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.
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
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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. Changes in the rate or "speed" of these payments can
cause the value of the mortgage-backed
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securities to fluctuate rapidly. 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.
The market for privately issued mortgage-backed and asset-backed securities
is smaller and less liquid than the market for U.S. Government mortgage-backed
securities. CMO classes may be specifically 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 reduced.
These changes can result in volatility in the market value and in some instances
reduced liquidity of the CMO class.
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. The performance of indexed securities depends to a
great extent on the performance of the security 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 investments.
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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 securities that are subject to legal or
contractual restrictions on resale. However, restricted securities generally can
be sold in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, as amended, 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. Certain
restricted securities, e.g., Rule 144A securities, may be determined to be
liquid in accordance with guidelines adopted by the Board of Directors. See
"Illiquid Investments" below.
Illiquid Investments
Illiquid investments are investments that cannot be sold or disposed of in
the ordinary course of business within seven days at approximately the prices at
which they are valued. 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;
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(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.
If through a change in values, net assets, or other circumstances, the Fund
were in a position where more than 10% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. The Fund
will not enter into a repurchase transaction that will cause more than 10% of
its net assets to be invested in illiquid investments, which include repurchase
agreements not terminable within seven days. 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
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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. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, swaps, caps, collars,
floors, indexed securities and other derivative instruments (collectively,
"Financial Instruments") to attempt to (i) enhance income or yield, (ii) hedge
the Fund's investments, or (iii) manage other risks of the Fund's investments
that can affect fluctuation in its net asset value.
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
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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 may be limited by
tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below,
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 might not
use any of these strategies, and there can be no assurance that any strategy
used will succeed. 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. In general,
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. 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, and use of Financial Instruments could result in a loss,
regardless of whether the intent was to reduce risk or increase return.
(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
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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.
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(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.
(5) 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. A call option gives the purchaser the right to buy, and obligates
the writer to sell, the underlying investment at the agreed-upon 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 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.
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
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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.
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Risks of Options on Securities. 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 instrument. 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
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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
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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
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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
26
<PAGE>
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
27
<PAGE>
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
28
<PAGE>
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. The Fund may enter into swaps, caps,
collars and floors to preserve a return or a 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 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
the 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 the floor. A collar combines
elements of buying a cap and selling a floor.
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 overall volatility of the Fund's investments and its
share price and yield because, and to the extent, these agreements affect 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. If a firm's creditworthiness declines,
the value of the 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 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
29
<PAGE>
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. The Fund
understands that the position of the SEC is that assets involved in swap
transactions are illiquid and are, therefore, subject to the limitations on
investing in illiquid securities.
Borrowing
The Fund may borrow money, but only from banks and for emergency or
extraordinary purposes. If the Fund does borrow, its share price may be subject
to greater fluctuation until the borrowing is paid off.
Investment Restrictions and Limitations
Certain of the Fund's investment restrictions, policies and other
limitations are described in the Prospectus and this SAI. The following are the
Fund's fundamental investment limitations set forth in their entirety, which,
like the Fund's goal and types of securities in which the Fund may invest,
cannot be changed without shareholder approval. For this purpose, shareholder
approval means the approval, at a meeting of Fund shareholders, by the lesser of
(1) the holders of 67% or more of the Fund's shares represented at the meeting,
if more than 50% of the Fund's outstanding shares are present in person or by
proxy or (2) more than 50% of the Fund's outstanding shares. The Fund may not:
(i) 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) 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;
30
<PAGE>
(iii) Invest for the purpose of exercising control or management of other
companies;
(iv) 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) Participate on a joint, or a joint and several basis, in any trading
account in securities;
(vi) Engage in the underwriting of securities, that is, the selling of
securities for others;
(vii) 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 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;
(viii) 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; or
(ix) issue senior securities.
The following investment restrictions are not fundamental and may be
changed by the Board of Directors without shareholder approval:
(i) 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
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
instrumentalities, or to collateralized mortgage
31
<PAGE>
obligations, other mortgage-related securities, asset-backed
securities, indexed securities or over-the-counter derivative
instruments.
(ii) The Fund does not intend to invest more than 5% of its assets in
U.S. Government securities.
(iii) The Fund may not purchase a security if, as a result, more than 10%
of its net assets would consist of illiquid securities.
(iv) The Fund does not intend to purchase IDBs that finance facilities
(other than utilities) of nongovernmental users if, as a result,
more than 25% of its assets would be invested in issuers in any one
industry.
The method of determining who is an issuer for purposes of the 5%
limitation in fundamental restriction (ix) is non-fundamental. In particular, in
applying this limitation:
(a) For municipal bonds created by a particular government but backed only
by the assets and revenues of a subdivision of that government, such as
an agency, instrumentality, authority or other subdivision, the Fund
considers such subdivision to be the issuer;
(b) For IDBs, the nongovernmental user of facilities financed by them is
considered a separate issuer; and
(c) The Fund considers a guarantee of a municipal bond to be a separate
security that would be given a value and included in the limitation if
the value of all municipal bonds created by the guarantor and owned by
the Fund exceeds 10% of the value of the Fund's total assets.
An investment policy or limitation that states a maximum percentage of the
Fund's assets that may be so invested or prescribes quality standards is
typically applied immediately after, and based on, the Fund's acquisition of an
asset. Accordingly, a subsequent change in the asset's value, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations.
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. The Fund's
portfolio turnover rate for the fiscal years ended September 30, 1998 and 1997
was 50.65% and 47.24%, 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,
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<PAGE>
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.
Waddell & Reed Financial, Inc.
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 Waddell & Reed Financial, Inc., a publicly held company. The
address of these companies is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217.
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 company's
inception date, whichever was later, and to Target/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 for which
Target/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.
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<PAGE>
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,
1998, 1997 and 1996 were $4,183,289, $4,208,872 and $4,344,734, 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, Class B
and Class C 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.
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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, 1998, 1997 and 1996 were $86,250, $86,250 and $90,000,
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, 1998, 1997 and 1996 were $1,153,458, $900,465 and $1,203,218, respectively.
The amounts retained by Waddell & Reed, Inc. for each period were $489,470,
$389,479 and $523,700, respectively.
No portion of the sales charge is reallowed to dealers. A major portion of
the sales charge for Class A shares and the contingent deferred sales charge
("CDSC") for Class B and Class C shares is paid to financial advisors and
managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may compensate its
financial
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<PAGE>
advisors as to purchases for which there is no sales or deferred 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 the Distribution and Service Plan (the "Plan") for Class A shares
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 for Class A, Class B and Class C shares, 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 costs 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 Class A Plan permits Waddell
& Reed, Inc. to receive reimbursement for these Class A-related distribution
activities through the distribution fee, subject to the limit contained in the
Plan. The Class A Plan also permits Waddell & Reed, Inc. to be reimbursed for
amounts it expends in compensating, training and supporting registered financial
advisors, 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 and distribution fees in
the amounts of $1,900,103 and $10,307, respectively, were paid (or accrued) by
the Fund under the Class A Plan for the fiscal year ended September 30, 1998. To
the extent that Waddell & Reed, Inc. incurs expenses for which reimbursement may
be made under the Plan that relate to distribution activities also involving
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<PAGE>
another fund in the United Group of Funds or Waddell & Reed Funds, Inc., Waddell
& Reed, Inc. typically determines the amount attributable to the Fund's expenses
under the Plan on the basis of a combination of the respective classes' relative
net assets and number of shareholder accounts.
Under the Plans adopted by the Fund for Class B and Class C shares,
respectively, the Fund may pay Waddell & Reed, Inc., on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate Waddell & Reed, Inc. for providing services to shareholders of that
class and/or maintaining shareholder accounts for that class and a distribution
fee of up to 0.75% of the average daily net assets of the class to compensate
Waddell & Reed, Inc. for distributing the shares of that class. The Class B Plan
and the Class C Plan each permit Waddell & Reed, Inc. to receive compensation,
through the distribution and service fee, respectively, for its distribution
activities for that class, which are similar to the distribution activities
described with respect to the Class A Plan, and for its activities in providing
personal services to shareholders of that class and/or marinating shareholder
accounts of that class, which are similar to the corresponding activities for
which it is entitled to reimbursement under the Class A Plan.
The only Directors or interested persons, as defined in the 1940 Act, of
the Fund who have a direct or indirect financial interest in the operation of a
Plan are the officers and Directors who are also officers of either Waddell &
Reed, Inc. or its affiliate(s) or who are shareholders of Waddell & Reed
Financial, Inc., the indirect parent company of Waddell & Reed, Inc. Each Plan
is anticipated to benefit the Fund and its shareholders of the affected class
through Waddell & Reed, Inc.'s activities not only to distribute the shares of
the affected class but also to provide personal services to shareholders of that
class and thereby promote the maintenance of their accounts with the Fund. The
Fund anticipates that shareholders of a particular class may benefit to the
extent that Waddell & Reed's activities are successful in increasing the assets
of the Fund, through increased sales or reduced redemptions, or a combination of
these, and reducing a shareholder's share of Fund and class expenses. Increased
Fund assets may also provide greater resources with which to pursue the goal of
the Fund. Further, continuing sales of shares may also reduce the likelihood
that it will be necessary to liquidate portfolio securities, in amounts or at
times that may be disadvantageous to the Fund, to meet redemption demands. In
addition, the Fund anticipates that the revenues from the Plan will provide
Waddell & Reed, Inc. with greater resources to make the financial commitments
necessary to continue to improve the quality and level of services to the Fund
and the shareholders of the affected class. Each 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
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<PAGE>
(hereafter, the "Plan Directors"). The Class A Plan was also approved by the
affected shareholders of the Fund.
Among other things, each 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 shares of the affected class 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 auditors,
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 sales charge is
paid to Waddell & Reed, Inc., the Fund's underwriter. The price makeup as of
March 31, 1999, which is the most recent balance sheet included in this SAI, was
as follows:
Net asset value per Class A share (Class
A net assets divided by Class A
shares outstanding) ............................................... $7.38
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%) ....................... $7.71
=====
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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 B, Class C or 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.
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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, Class B and Class C 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);
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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, or
salary reduction plan account under Section 457 of the Internal Revenue
Code of 1986, as amended (the "Code"), tax-sheltered annuity account
("TSA") or Keogh plan account, provided that the individual and spouse are
the only participants in the Keogh plan and provided that all such
purchases are subject to a sales charge (see "Net Asset Value Purchases");
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
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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
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combined with the additional purchase only if the contractual plan has been
completed.
Letter of Intent
The benefit of a reduced sales charge for larger purchases of Class A
shares is also available under a Letter of Intent. By signing a Letter of Intent
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 Letter of Intent is accepted by Waddell &
Reed, Inc. Each purchase made from time to time under the Letter of Intent 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 Letter of Intent 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 Letter of Intent, 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 Letter of Intent 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 Letter of Intent 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 Letter of Intent 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 Letter of Intent 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 Letter of Intent is 5% of the dollar
amount which must be invested under the Letter of Intent. An amount equal to 5%
of the purchase required under the Letter of Intent will be held "in escrow." If
a purchaser
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does not, during the period covered by the Letter of Intent, invest the amount
required to qualify for the reduced sales charge under the terms of the Letter
of Intent, 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 Letter of Intent which is not completed
will be collected by redeeming part of the shares purchased under the Letter of
Intent 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 Letter of Intent, the lower sales charge will apply.
A Letter of Intent does not bind the purchaser to buy, or Waddell & Reed,
Inc. to sell, the shares covered by the Letter of Intent.
With respect to Letters of Intent for $2,000,000 or purchases otherwise
qualifying for no sales charge under the terms of the Letter of Intent, 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 Letter of
Intent will be deducted in computing the aggregate purchases under the Letter of
Intent.
Other Funds in the United Group
Reduced sales charges for larger purchases of Class A shares apply to
purchases of any of the Class A shares of any of the funds in the United Group
subject to a sales charge. A purchase of Class A shares, or Class A shares held,
in any of the funds in the United Group subject to a sales charge will be
treated as an investment in the Fund in determining the applicable sales charge.
For these purposes, Class A shares of United Cash Management, Inc. that were
acquired by exchange of another United Group fund's Class A shares on which a
sales charge was paid, plus the shares paid as dividends on those acquired
shares, are also taken into account.
Net Asset Value Purchases of Class A Shares
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, financial advisors of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each such
Director, officer, employee and financial advisor. "Child" includes stepchild;
"parent" includes stepparent. Trusts under which the grantor and the trustee or
a co-trustee are each an
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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. "Employees" also includes
individuals who, on November 6, 1998, were employees (including retired
employees) of a company that on that date was an affiliate of Waddell & Reed,
Inc. "Financial advisors" includes retired financial advisors. A "retired
financial advisor" is any financial advisor who was, at the time of separation
from service from Waddell & Reed, Inc., a Senior Financial Advisor. A custodian
under UGMA or UTMA purchasing for the child or grandchild of any employee or
financial advisor may purchase Class A shares at net asset value whether or not
the custodian himself is an eligible purchaser.
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.
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 Letter of Intent 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
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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, Class B and Class C 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 Class A shares while the Service is
in effect because it would result in duplication of sales charges. Class C
shares purchased within the past year remain subject to the CDSC; however, Class
B shares redeemed under the Service are not subject to a CDSC. Applicable forms
to start the Service are available through Waddell & Reed, Services Company.
The maximum amount of the withdrawal for monthly, quarterly, semiannual and
annual withdrawals is 2%, 6%, 12% and 24% respectively of the value of your
account at the time the Service is established. The withdrawal proceeds are not
subject to the deferred sales charge, but only within these percentage
limitations. The minimum withdrawal is $50. The Service, and this exclusion from
the deferred sales charge, does not apply to a one-time withdrawal.
To qualify for the Service, you must have invested at least $10,000 in
Class A, Class B or Class C shares which you still own
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of any of the funds in the United Group; or, you must own Class A, Class B or
Class C 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 of a class you have made
available for the Service are paid in additional shares of that class. 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 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
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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, provided you already own Class A shares of the Fund. The shares of
United Cash Management, Inc. which you designate for automatic exchange must be
worth at least $100, which may be allocated among the Class A 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 the Fund and use the proceeds to
purchase Class Y shares of the Fund if you meet the criteria for purchasing
Class Y shares.
Class B Share Exchanges
You may exchange Class B shares of the Fund for Class B shares of other
Funds in the United Group without charge.
The redemption of the Fund's Class B shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class B shares of United Cash
Management, Inc. automatically exchanged each month into Class B shares of the
Fund or any other fund in the United Group, provided you already own Class B
shares of the Fund. The shares of United Cash Management, Inc. which you
designate for automatic exchange must be worth at least $100, which may be
allocated among different Funds 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.
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Class C Share Exchanges
You may exchange Class C shares of the Fund for Class C shares of other
Funds in the United Group without charge.
The redemption of the Fund's Class C shares as part of an exchange is not
subject to the deferred sales charge. For purposes of computing the deferred
sales charge, if any, applicable to the redemption of the shares acquired in the
exchange, those acquired shares are treated as having been purchased when the
original redeemed shares were purchased.
You may have a specific dollar amount of Class C shares of United Cash
Management, Inc. automatically exchanged each month and invested into Class C
shares of the Fund or any other fund in the United Group, provided you already
own Class C shares of the Fund. The shares of United Cash Management, Inc.
which you designate for automatic exchange must be worth at least $100, which
may be allocated among different Funds 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.
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 Fund offers a one-time reinvestment privilege that allows you to
reinvest without charge all or part of any amount of Class A shares you redeem
at the net asset value next determined after the Fund receives the returned
amount. Your written request to reinvest and the amount to be reinvested must be
received within 30 days after your redemption request was received, and the Fund
must be offering Class A shares of the Fund at the time your reinvestment
request is received. You can do this only once as to Class A shares of the Fund.
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There is also a reinvestment privilege for Class B and Class C shares under
which you may reinvest all or part of any amount of Class B or Class C shares
you redeemed and have the corresponding amount of the deferred sales charge, if
any, which you paid restored to your account by adding the amount of that charge
to the amount you are reinvesting in Class B or Class C shares, as applicable.
If Class B or Class C shares of the Fund are then being offered, you can put all
or part of your redemption payment back into the Class B or Class C shares of
the Fund 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. You can do this only once as to Class B shares of the Fund and
only once as to Class C shares of the Fund. For purposes of determining future
deferred sales charges, the reinvestment will be treated as a new investment.
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 majority of the
Directors is not affiliated with Waddell & Reed, Inc.
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. Vogel 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
Target/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.
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KEITH A. TUCKER*
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, Chief Executive
Officer, Principal Financial Officer and Director of Waddell & Reed Financial,
Inc.; President, Chairman of the Board of Directors and Chief Executive Officer
of Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors
of WRIMCO, Waddell & Reed, Inc. and Waddell & Reed Services Company; formerly,
President of each of the funds in the Fund Complex; formerly, Chairman of the
Board of Directors of Waddell & Reed Asset Management Company, a former
affiliate of Waddell & Reed Financial, Inc. Date of birth: February 11, 1945.
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
President, JoDill Corp., an agricultural company; President and Director of
Dillingham Enterprises Inc.; formerly, Director and consultant, McDougal
Construction Company; formerly, Instructor at Central Missouri State University;
formerly, Member of the Board of Police Commissioners, Kansas City, Missouri;
formerly, Senior Vice President-Sales and Marketing, Garney Companies, Inc., a
specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
525 Middlefield Road, Suite 200
Menlo Park, California 94025
President of Hewlett Foundation and Chairman of George S. and Delores Dori
Eccles Foundation. Director of First Security Corp., a bank holding company, and
Director of Fluor Corp., a company with interests in coal. Date of birth: March
24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas. Partner, Levy and Craig, P.C., a law firm. Date of
birth: July 29, 1953.
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents and Adjunct Professor of Law at the
University of Oklahoma College of Law;
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formerly, Vice President for Executive Affairs of the University of Oklahoma;
formerly, an Attorney with Crowe & Dunlevy, a law firm. Date of birth: January
17, 1967.
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 of the Board of
Directors, Gilliland & Hayes, P.A., a law firm; formerly, President, Gilliland &
Hayes, P.A. Date of birth: December 11, 1919.
ROBERT L. HECHLER*
President and Principal Financial Officer of the Fund and each of the other
funds in the Fund Complex; Executive Vice President, Chief Operating Officer and
Director of Waddell & Reed Financial, Inc.; Vice President, Chief Operating
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.; President, Director and
Treasurer of Waddell & Reed Services Company; formerly, Vice President of each
of the funds in the Fund Complex; formerly, Director and Treasurer of Waddell &
Reed Asset Management Company, a former affiliate of Waddell & Reed Financial,
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;
President, Chief Investment Officer, Treasurer and Director of Waddell & Reed
Financial, Inc.; 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; formerly, President, Chief Executive Officer, Chief Investment Officer
and Director of Waddell & Reed Asset Management Company, a former affiliate of
Waddell & Reed Financial, Inc. Date of birth: December 8, 1942.
GLENDON E. JOHNSON
13635 Deering Bay Drive
Unit 284
Miami, Florida 33158
Retired; formerly, Director and Chief Executive Officer of John Alden
Financial Corporation and subsidiaries. Date of birth: February 19, 1924.
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WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President of each
of the funds 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 and United Investors Life Insurance
Company, affiliates of Waddell & Reed, Inc. Date of birth: April 27, 1928.
RONALD C. REIMER
2601 Verona Road
Mission Hills, Kansas 66208
Retired. Co-founder and teacher at Servant Leadership School of Kansas
City; Director of Network Rehabilitation Services; formerly, Employment
Counselor and Director of McCue-Parker Center. Date of birth: August 3, 1934.
FRANK J. ROSS, JR.*
700 West 47th Street
Kansas City, Missouri 64112
Shareholder, Polsinelli, White, Vardeman & Shalton, a law firm. Date of
birth: April 9, 1953.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Professor of Business Administration, University of Missouri-Kansas City;
formerly, 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.
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Helge K. Lee
Vice President, Secretary and General Counsel of the Fund and each of the
other funds in the Fund Complex; Secretary and General Counsel of Waddell & Reed
Financial, Inc.; Vice President, Secretary, General Counsel and Director of
Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary and
General Counsel of WRIMCO and Waddell & Reed, Inc.; Senior Vice President,
Secretary, General Counsel and Director of Waddell & Reed Services Company;
formerly, Executive Vice President, Secretary and Chief Compliance Officer of
LGT Asset Management, Inc. and affiliates; formerly, Senior Vice President,
General Counsel and Secretary of Strong Capital Management, Inc. and affiliates.
Date of birth: March 30, 1946.
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.
John M. Holliday
Vice President of the Fund and eight other funds in the Fund Complex;
Senior Vice President of WRIMCO; formerly, Senior Vice President of Waddell &
Reed Asset Management Company; formerly, Senior Vice President of Waddell &
Reed, Inc. Date of birth: June 11, 1935.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
The Directors who may be deemed to be "interested persons" as defined in
the 1940 Act of the Fund's underwriter, Waddell & Reed, Inc., or of its manager,
WRIMCO, 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 70 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.
Henry L. Bellmon, Jay B. Dillingham, Doyle Patterson, Ronald K. Richey and Paul
S. Wise retired as Directors of the Fund and of each of the funds in the Fund
Complex and elected a position as Director Emeritus.
The funds in the United Group, Target/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 plus reimbursement of expenses
of attending such meeting and $500 for each committee meeting attended which
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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, Target/United Funds, Inc.
and Waddell & Reed Funds, Inc. based on their relative size.
During the Fund's fiscal year ended September 30, 1998, 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*
- -------- ------------ ------------
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 2,588 56,000
John A. Dillingham 2,588 56,000
David P. Gardner 0 0
Linda K. Graves 2,588 56,000
Joseph Harroz, Jr 0 0
John F. Hayes 2,588 56,000
Glendon E. Johnson 2,539 55,000
William T. Morgan 2,588 56,000
Ronald C. Reimer 0 0
Frank J. Ross, Jr 2,588 56,000
Eleanor B. Schwartz 2,588 56,000
Frederick Vogel III 2,588 56,000
* No pension or retirement benefits have been accrued as a part of Fund
expenses.
Mr. Gardner was elected as a Director on August 19, 1998. Messrs. Harroz,
Hechler, Herrmann and Reimer were elected as Directors on November 18, 1998. The
officers are paid by WRIMCO or its affiliates.
Shareholdings
As of July 31, 1999, all of the Fund's Directors and officers as a group
owned less than 1% of the outstanding shares of the Fund.
The following table sets forth information with respect to the Fund, as of July
31, 1999, regarding the ownership of the Fund's shares.
<TABLE>
<CAPTION>
Shares owned
Name and Address Beneficially
of Beneficial Owner Class or of Record Percent
- ------------------- ----- ------------- -------
<S> <C> <C> <C>
Waddell & Reed, Inc. Class Y 278 100.00%
Attn: Mike Strohm
P. O. Box 29217
Shawnee Mission KS 66201-9217
</TABLE>
55
<PAGE>
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 carried over 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. However, a total dividend and/or distribution
amount less than five dollars will be automatically 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 Fund shares in cash, you can
thereafter reinvest them (or distributions only)
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in 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
The Fund has qualified for treatment as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code"), so
that it is relieved of Federal income tax on that part 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) that is distributed to its shareholders. To continue to qualify as
a RIC, the Fund must distribute to its shareholders for each taxable year at
least 90% of the sum of its investment company taxable income 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.
If the Fund failed to qualify for treatment as a RIC for any taxable year,
(a) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year (event if it distributed that income to its
shareholders) and (b) the shareholder would treat all distributions our of its
earnings and profits, including distributions that otherwise would be
"exempt-interest dividends" described in the following paragraph and
distributions of net capital gain (the excess of net long-term capital gain over
net short-term capital loss), as dividends (that is, ordinary income). In
addition, the Fund could be required to recognize unrealized gains, pay
substantial taxes and interest, and make substantial distributions before
requalifying for RIC treatment.
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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
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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 contracts 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 contracts subject to a "mixed straddle" election
made by the Fund, are "marked-to-market" (that is, treated as sold at that time
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.
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<PAGE>
That 60% portion will qualify for the 20% (10% for taxpayers in the 15% marginal
tax bracket) maximum tax rate on net capital gains enacted by the Taxpayer
Relief Act of 1997. Section 1256 contracts also may be marked-to-market for
purposes of the Excise Tax and other purposes. The Fund may need to distribute
any mark-to-market 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. The regulations under section
1092 also provide 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.
If the Fund has an appreciated financial position -- generally, an interest
(including an interest through an option, futures contract or short sale) with
respect to any debt instrument (other than "straight debt") or partnership
interest the fair market value of which exceeds its adjusted basis -- and enters
into a "constructive sale" of the same or substantially similar property, the
Fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or futures contract
entered into by the Fund or a related person with respect to the same or
substantially similar property. In addition, if the appreciated financial
position is itself a short sale such a contract, acquisition of the underlying
property or substantially similar property will be deemed a constructive sale.
Zero Coupon Securities
The Fund may acquire zero coupon or other securities issued with 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
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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
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 or WRIMCO may otherwise combine orders for the Fund with
those of other funds in the United Group, Target/United Funds, Inc. and Waddell
& Reed Funds, Inc. or other accounts for which it has investment discretion,
including accounts affiliated with WRIMCO. Under current written procedures,
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, except where the combined order is not filled
completely. In this case, WRIMCO will ordinarily allocate the transaction pro
rata based on the orders placed, subject to certain variances provided for in
the written procedures. Sharing in large transactions could affect the price the
Fund pays or receives or the amount it buys or sells. However, sometimes a
better negotiated price is available through combined orders.
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 seek "best execution"
(prompt and reliable execution at the best price obtainable) for reasonable and
competitive commissions or spreads, as applicable. The Fund has not effected
transactions through brokers and does not anticipate doing so. However, if
WRIMCO were to effect brokerage transactions, it need not seek competitive
commission bidding but is expected to minimize the commissions paid to the
extent
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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 ("research and 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 has
investment discretion.
Research and 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 research and/or 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 research or 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.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of WRIMCO 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
request 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.
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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 four classes of shares: Class A, Class B, Class C and Class
Y. Each class represents an interest in the same assets of the Fund and differs
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 distribution and/or service
fee; Class B and Class C are subject to a CDSC and to ongoing distribution and
service fees; Class B shares convert at the end of the seventh calendar year
following the first year of purchase to Class A shares; and Class Y shares,
which are designated for institutional investors, have no sales charge nor
ongoing distribution and/or 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 four
classes, dividends and liquidation proceeds of Class B shares and Class C shares
are expected to be lower than for Class A shares, which in turn 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. Shares are
fully paid and nonassessable when purchased.
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 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 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
time which 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
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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.
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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.
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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.
66
<PAGE>
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.
67
<PAGE>
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.
68
<PAGE>
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.
69
<PAGE>
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;
70
<PAGE>
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.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS
ALABAMA - 0.20%
BMC Special Care Facilities Financing
Authority of the City of Montgomery,
Revenue Bonds, Series 1998-B (Baptist
Health),
4.875%, 11-15-2018 .................................................. $ 2,000 $ 1,942,500
ALASKA - 3.84%
City of Valdez, Alaska, Marine
Terminal Revenue Refunding Bonds
(BP Pipelines (Alaska) Inc. Project),
Series 1993A,
5.85%, 8-1-2025 ..................................................... 28,650 29,831,813
State of Alaska, International Airports
System Revenue Bonds, Series 1999A,
5.0%, 10-1-2019 ..................................................... 3,000 2,906,250
Alaska Energy Authority, Power Revenue
Refunding Bonds, Fifth Series (Bradley
Lake Hydroelectric Project),
5.0%, 7-1-2021 ...................................................... 2,350 2,264,812
Alaska Housing Finance Corporation,
Housing Development Bonds, 1997
Series B (AMT),
5.8%, 12-1-2029 ..................................................... 2,000 2,045,000
Total ............................................................... 37,047,875
ARKANSAS - 0.32%
Arkansas Development Finance Authority,
Single Family Mortgage Revenue Bonds
(Access Program), 1995 Series F (AMT),
7.45%, 1-1-2027 ..................................................... 1,690 1,869,562
City of Gurdon, Arkansas, Pollution Control
Revenue Refunding Bonds,
1998 Series A (Non-AMT),
5.375%, 3-1-2020 .................................................... 1,250 1,251,563
Total ............................................................... 3,121,125
CALIFORNIA - 9.96%
California Statewide Communities Development Authority:
Special Facilities Lease Revenue Bonds,
1997 Series A (United Air Lines, Inc. - San
Francisco International Airport Projects),
5.7%, 10-1-2033 ..................................................... 20,900 21,396,375
Hospital Revenue Certificates of Participation,
Series 1992, Cedars-Sinai Medical Center,
6.5%, 8-1-2012 ...................................................... 5,200 5,954,000
Hospital Refunding Revenue Certificates of
Participation, Series 1993, Cedars-Sinai Medical
Center, Inverse Floating Rate Securities (INFLOS),
7.626%, 11-1-2015 (A) ............................................... 3,300 3,361,875
</TABLE>
See Notes to Schedule of Investments on page __.
1
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
CALIFORNIA (Continued)
East Bay Municipal Utility District (Alameda
and Contra Costa Counties, California),
Wastewater System Subordinated Revenue
Refunding Bonds, Series 1993B-2,
Inverse Floating Securities:
7.17%, 6-1-2013 (A) ................................................. $ 8,450 $ 9,474,563
7.27%, 6-1-2020 (A) ................................................. 7,250 7,920,625
Transmission Agency of Northern California,
California-Oregon Transmission Project
Revenue Bonds, 1990 Series A,
7.0%, 5-1-2013 ...................................................... 12,000 14,895,000
County of San Bernardino, California,
Certificates of Participation (1992 Justice
Center/Airport Improvements Refunding
Project), Inland Empire Public Facilities
Corporation, Short/RITES Certificates,
5.5%, 7-1-2016 (B) .................................................. 9,500 9,891,875
Southern California Public Power Authority:
Multiple Project Revenue Bonds, 1989 Series,
6.75%, 7-1-2012 ..................................................... 3,455 4,202,144
Mead-Adelanto Project Revenue Bonds,
1994 Series A, Linked Inverse Floating
Rate Security,
5.15%, 7-1-2015 ..................................................... 2,800 2,894,500
Mead-Phoenix Project Revenue Bonds,
1994 Series A, Linked Inverse Floating
Rate Security,
5.15%, 7-1-2015 ..................................................... 2,600 2,687,750
California Rural Home Mortgage Finance
Authority, Single Family Mortgage
Revenue Bonds (Mortgage-Backed Securities
Program):
1998 Series A,
5.75%, 12-1-2029 .................................................... 3,345 3,700,406
1997 Series C,
6.75%, 3-1-2029 ..................................................... 2,050 2,288,312
1998 Series B,
5.75%, 12-1-2029 .................................................... 2,000 2,212,500
Delta Counties Home Mortgage Finance Authority
(California), Single Family Mortgage Revenue
Bonds (Mortgage-Backed Securities Program),
1998 Series A,
5.2%, 12-1-2014 ..................................................... 3,110 3,144,988
</TABLE>
See Notes to Schedule of Investments on page __.
2
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
CALIFORNIA (Continued)
Intermodal Container Transfer Facility,
Joint Powers Authority, Intermodal
Container Transfer Facility Refunding
Revenue Bonds, 1989 Series A,
7.7%, 11-1-2014 ..................................................... $ 2,000 $ 2,040,880
Total ............................................................... 96,065,793
COLORADO - 4.43%
City and County of Denver, Colorado,
Airport System Revenue Bonds:
Series 1991D,
7.75%, 11-15-2013 ................................................... 11,905 14,970,537
Series 1992B,
7.25%, 11-15-2023 ................................................... 11,990 13,114,063
Series 1996D,
5.5%, 11-15-2025 .................................................... 2,000 2,072,500
Colorado Housing and Finance Authority,
Single Family Program Senior and Subordinate
Bonds:
1996 Series B-1,
7.65%, 11-1-2026 .................................................... 2,750 3,066,250
1997 Series C-2,
6.875%, 11-1-2028 ................................................... 2,500 2,765,625
1999 Series A-2,
6.45%, 4-1-2030 ..................................................... 2,185 2,395,306
1997 Series A-2,
7.25%, 5-1-2027 ..................................................... 2,000 2,255,000
1998 Series A-3,
6.5%, 5-1-2016 ...................................................... 1,000 1,095,000
Highlands Ranch Metropolitan District No. 3,
Douglas County, Colorado,
General Obligation Bonds, Series 1998A,
5.125%, 12-1-2012 ................................................... 1,000 1,021,250
Total ............................................................... 42,755,531
CONNECTICUT - 4.90%
Connecticut Development Authority, Water
Facilities Revenue Bonds (Bridgeport
Hydraulic Company Project):
1996 Series,
6.0%, 9-1-2036 ...................................................... 15,000 15,956,250
1995 Series,
6.15%, 4-1-2035 ..................................................... 9,200 9,936,000
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-2014 ...................................................... 13,700 13,751,375
</TABLE>
See Notes to Schedule of Investments on page __.
3
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
CONNECTICUT (Continued)
Bristol Resource 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 $ 7,656,250
Total ............................................................... 47,299,875
FLORIDA - 2.99%
Escambia County, Florida, Pollution Control Revenue
Bonds (Champion International Corporation Project):
Series 1994,
6.9%, 8-1-2022 ...................................................... 8,855 9,696,225
Series 1996,
6.4%, 9-1-2030 ...................................................... 6,200 6,626,250
Pasco County, Florida, Solid Waste Disposal
and Resource Recovery System, Revenue
Bonds, Series 1998 (AMT),
6.0%, 4-1-2011 ...................................................... 4,930 5,509,275
Housing Finance Authority of Lee County, Florida,
Single Family Mortgage Revenue Bonds:
Series 1998A, Subseries 6,
6.45%, 3-1-2031 ..................................................... 2,800 3,059,000
Series 1999A, Subseries 2,
5.0%, 9-1-2030 ...................................................... 1,620 1,617,975
City of Miami, Florida, Health Facilities
Authority, Health Facilities Revenue Refunding
Bonds (Mercy Hospital Project), Series 1994A,
Inverse Floating Rate Security (INFLOS),
6.97%, 8-15-2015 (A) ................................................ 2,200 2,293,500
Total ............................................................... 28,802,225
GEORGIA - 3.08%
Municipal Electric Authority of Georgia:
Project One Special Obligation Bonds,
Fifth Crossover Series,
6.4%, 1-1-2013 ...................................................... 15,500 18,096,250
General Power Revenue Bonds,
1992B Series,
8.25%, 1-1-2011 ..................................................... 8,700 11,592,750
Total ............................................................... 29,689,000
HAWAII - 2.49%
State of Hawaii, Airports System Revenue
Bonds, Second Series of 1991,
6.9%, 7-1-2012 ...................................................... 20,195 24,032,050
</TABLE>
See Notes to Schedule of Investments on page __.
4
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
IDAHO - 0.74%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.),
6.65%, 2-15-2021 .................................................... $ 6,000 $ 7,162,500
ILLINOIS - 2.23%
City of Chicago:
Collateralized Single Family Mortgage Revenue Bonds:
Series 1998C-1,
6.3%, 9-1-2029 ...................................................... 4,000 4,360,000
Series 1998A-1,
6.45%, 9-1-2029 ..................................................... 2,500 2,756,250
Series 1997-B,
6.95%, 9-1-2028 ..................................................... 1,890 2,104,987
Chicago-O'Hare International Airport, General Airport
Revenue Refunding Bonds, 1993 Series A,
5.0%, 1-1-2012 ...................................................... 3,000 3,037,500
Illinois Health Facilities Authority,
Revenue Bonds:
Series 1999 (Alexian Brothers Health
System):
5.0%, 1-1-2025 ...................................................... 5,000 4,818,750
5.0%, 1-1-2019 ...................................................... 1,500 1,464,375
Series 1997A (Victory Health
Services),
5.375%, 8-15-2016 ................................................... 3,000 2,996,250
Total ............................................................... 21,538,112
INDIANA - 5.17%
Indiana State Office Building Commission,
Capitol Complex Revenue Bonds:
Series 1990B (State Office Building I Facility),
7.4%, 7-1-2015 ...................................................... 8,000 10,260,000
Series 1990A (Senate Avenue Parking Facility),
7.4%, 7-1-2015 ...................................................... 4,775 6,123,937
Indianapolis Airport Authority,
Special Facility Revenue Bonds, Series 1995 A
(United Air Lines, Inc., Indianapolis
Maintenance Center Project),
6.5%, 11-15-2031 .................................................... 10,850 11,677,313
Indiana Transportation Finance Authority,
Highway Revenue Bonds, Series 1990A,
7.25%, 6-1-2015 ..................................................... 9,000 11,160,000
</TABLE>
See Notes to Schedule of Investments on page __.
5
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
INDIANA (Continued)
East Chicago Elementary School Building
Corporation (Lake County, Indiana), First
Mortgage Refunding Bonds, Series 1996,
6.25%, 1-5-2016 ..................................................... $ 7,655 $ 8,631,013
Indiana Health Facility Financing Authority,
Hospital Revenue Bonds, Series 1999A
(Deaconess Hospital Obligated Group),
5.75%, 3-1-2019 ..................................................... 2,000 2,045,000
Total ............................................................... 49,897,263
KANSAS - 1.39%
Sedgwick County, Kansas and Shawnee County,
Kansas, Single Family Mortgage Revenue Bonds
(Mortgage-Backed Securities Program):
1998 Series A-1 (AMT),
5.5%, 12-1-2022 ..................................................... 8,000 8,610,000
1997 Series A-1 (AMT),
6.95%, 6-1-2029 ..................................................... 4,320 4,757,400
Total ............................................................... 13,367,400
LOUISIANA - 2.45%
Louisiana Public Facilities Authority:
Hospital Revenue and Refunding Bonds:
St. Francis Medical Center Project,
Residual Interest Bonds (RIBS), Series 1994C,
7.355%, 7-22-2024 (A) ............................................... 7,150 8,374,437
Pendleton Memorial Methodist Hospital
Project, Series 1998,
5.25%, 6-1-2017 ..................................................... 2,000 1,932,500
Hospital Revenue Bonds,
Franciscan Missionaries of Our Lady Health
System Project, Series 1998C,
5.0%, 7-1-2019 ...................................................... 2,250 2,193,750
Parish of Jefferson Home Mortgage Authority,
Tax-Exempt Agency Mortgage-Backed
Securities, Series 1994A,
7.55%, 12-1-2026 .................................................... 5,495 6,655,819
Parish of East Baton Rouge, State of
Louisiana, Refunding Revenue Bonds
(Georgia-Pacific Corporation Project),
Series 1998,
5.35%, 9-1-2011 ..................................................... 3,000 3,015,000
</TABLE>
See Notes to Schedule of Investments on page __.
6
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
LOUISIANA (Continued)
Parish of Webster, Louisiana, Pollution
Control Revenue Refunding Bonds,
1998 Series B (non-AMT),
5.2%, 3-1-2013 ...................................................... $ 1,435 $ 1,445,763
Total ............................................................... 23,617,269
MASSACHUSETTS - 1.21%
Massachusetts Housing Finance Agency,
Single Family Housing Revenue Bonds,
Series 57 (AMT),
5.6%, 6-1-2030 ...................................................... 4,945 5,050,081
Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue Bonds,
1993 Series A, Inverse Floating Rate Security (INFLOS),
7.12%, 7-1-2018 (A) ................................................. 2,500 2,668,750
Massachusetts State College Building
Authority, Project and Refunding
Revenue Bonds, Senior Series 1994-A,
7.5%, 5-1-2014 ...................................................... 1,750 2,220,312
Boston Water and Sewer Commission,
General Revenue Bonds, 1992 Series A
(Senior Series),
5.75%, 11-1-2013 .................................................... 1,575 1,716,750
Total ............................................................... 11,655,893
MICHIGAN - 3.34%
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 9,750,000
WMX Technologies, Inc. Project, Series 1993,
6.0%, 12-1-2013 ..................................................... 3,600 3,771,000
City of Detroit, Michigan, Sewage Disposal
System Revenue and Revenue Refunding Bonds,
Series 1993-A, Inverse Floating Rate Security
(INFLOS),
7.922%, 7-1-2023 (A) ................................................ 11,200 13,017,750
Michigan State Hospital Finance Authority:
Hospital Revenue and Refunding Bonds
(Bay Medical Center), Series 1997A,
5.375%, 7-1-2011 .................................................... 2,190 2,304,975
Hospital Revenue Bonds (The Detroit Medical
Center Obligated Group), Series 1998A,
5.125%, 8-15-2018 ................................................... 2,000 1,822,500
</TABLE>
See Notes to Schedule of Investments on page __.
7
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MICHIGAN (Continued)
Charter County of Wayne, Michigan, Detroit
Metropolitan Wayne County Airport, Airport
Revenue Bonds, Subordinate Lien, Series 1993B,
5.25%, 12-1-2013 .................................................... $ 1,500 $ 1,539,375
Total ............................................................... 32,205,600
MINNESOTA - 0.75%
City of Rochester, Minnesota, Health
Care Facilities Revenue Bonds (Mayo
Foundation/Mayo Medical Center),
Series 1992D, Floating Inverse
Rate Securities (FIRS),
8.36%, 11-15-2009 (A) ............................................... 4,500 5,242,500
HealthSystem Minnesota, The Healthcare
Network, City of St. Louis Park,
Minnesota, Health Care Facilities Revenue
Bonds (HealthSystem Minnesota Obligated
Group), Series 1993,
Relinked Inverse Floater,
5.1%, 7-1-2013 ...................................................... 2,000 2,032,500
Total ............................................................... 7,275,000
MISSISSIPPI - 2.34%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control
Refunding Revenue Bonds (Weyerhaeuser
Company Project), Series 1992B, Indexed
Inverse Floating/Fixed Term Bonds,
8.95%, 4-1-2022 (A) ................................................. 11,000 13,131,250
Mississippi Higher Education Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1996-C:
6.75%, 9-1-2014 ..................................................... 5,500 5,726,875
6.7%, 9-1-2012 ...................................................... 1,470 1,530,638
Mississippi Home Corporation, Single Family
Mortgage Revenue Bonds, Series 1999A,
5.25%, 6-1-2031 ..................................................... 2,000 2,185,000
Total ............................................................... 22,573,763
</TABLE>
See Notes to Schedule of Investments on page __.
8
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MISSOURI - 3.07%
Missouri Housing Development Commission,
Single Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series C,
7.25%, 9-1-2026 ..................................................... $ 2,805 $ 3,120,562
1997 Series C-1 (Non-AMT),
6.55%, 9-1-2028 ..................................................... 1,960 2,151,100
1996 Series C,
7.45%, 9-1-2027 ..................................................... 1,465 1,660,944
1998 Series D-2 (AMT),
6.3%, 3-1-2029 ...................................................... 1,150 1,265,000
1998 Series B-2 (AMT),
6.4%, 3-1-2029 ...................................................... 975 1,059,094
1997 Series A-2,
7.3%, 3-1-2028 ...................................................... 925 1,044,094
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 4,825,000
Freeman Health System Project, Series 1998,
5.25%, 2-15-2018 .................................................... 2,460 2,429,250
Lake of the Ozarks General Hospital, Inc.,
Series 1998,
5.1%, 2-15-2018 ..................................................... 2,220 2,178,375
Health Facilities Revenue Bonds
(Barnes-Jewish, Inc./Christian Health
Services), Series 1993A:
6.0%, 5-15-2011 ..................................................... 3,000 3,375,000
5.25%, 5-15-2014 .................................................... 2,900 3,005,125
Poplar Bluff, Missouri, Public Building Corporation,
Leasehold Refunding and Improvement Revenue Bonds
(Poplar Bluff, Missouri), Series 1998,
5.1%, 9-1-2018 ...................................................... 2,000 1,985,000
Missouri Higher Education Loan Authority
(A Public Instrumentality and Body
Corporate and Politic of the State of
Missouri), Student Loan Revenue Bonds,
Subordinate Series 1994A,
5.45%, 2-15-2009 .................................................... 1,500 1,505,625
Total ............................................................... 29,604,169
</TABLE>
See Notes to Schedule of Investments on page __.
9
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MONTANA - 0.21%
Montana Higher Education Student Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1998-B,
5.5%, 12-1-2031 ..................................................... $ 2,000 $ 2,007,500
NEBRASKA - 1.88%
Nebraska Higher Education Loan Program, Inc.,
1993-2 Series A-6 Junior Subordinate Bonds,
6.4%, 6-1-2013 ...................................................... 14,500 15,496,875
Hospital Authority No. 1 of Scotts Bluff
County, Nebraska, Revenue Bonds (Regional
West Medical Center Project), Series 1998,
5.125%, 11-15-2019 .................................................. 2,750 2,657,188
Total ............................................................... 18,154,063
NEVADA - 0.53%
Nevada Housing Division, Single Family
Mortgage Bonds:
1998 Series A-1 Mezzanine Bonds,
5.35%, 4-1-2016 ..................................................... 2,050 2,062,812
1996 Series C Subordinate Bonds,
6.35%, 4-1-2009 ..................................................... 940 992,875
Clark County, Nevada, Industrial Development
Revenue Bonds (Nevada Power Company Project)
Series 1997A,
5.9%, 11-1-2032 ..................................................... 2,000 2,032,500
Total ............................................................... 5,088,187
NEW HAMPSHIRE - 1.06%
State of New Hampshire, Turnpike System Revenue
Bonds, 1994 Series C, Residual Interest
Bonds (RIBS),
6.827%, 2-1-2024 (A) ................................................ 10,000 10,212,500
</TABLE>
See Notes to Schedule of Investments on page __.
10
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
NEW MEXICO - 1.63%
New Mexico Educational Assistance Foundation:
Student Loan Program Bonds:
Second Subordinate 1996 Series A-3,
6.75%, 11-1-2008 .................................................... $ 2,175 $ 2,340,844
First Subordinate 1996 Series A-2,
6.2%, 11-1-2008 ..................................................... 2,210 2,290,112
Second Subordinate 1995 Series A-3,
6.6%, 11-1-2010 ..................................................... 1,235 1,265,875
Student Loan Purchase Bonds,
Senior 1995 Series IV-A1 (AMT),
7.05%, 3-1-2010 ..................................................... 4,645 4,975,956
New Mexico Hospital Equipment Loan Council,
Hospital Revenue Bonds (Memorial Medical
Center, Inc. Project), Series 1998,
5.5%, 6-1-2028 ...................................................... 5,000 4,887,500
Total ............................................................... 15,760,287
NEW YORK - 3.52%
Mental Health Services Facilities Improvement
Revenue Bonds, 1993 Series F Refunding,
5.375%, 2-15-2014 ................................................... 12,000 12,465,000
The City of New York, General Obligation Bonds:
Fiscal 1997 Series H,
6.125%, 8-1-2025 .................................................... 5,730 6,274,350
Fiscal 1994 Series C, Inverse Floaters,
22.46%, 9-30-2003 (C) ............................................... 3,250 4,883,125
Dormitory Authority of the State of New York:
State University Educational Facilities,
Revenue Bonds, Series 1990B,
7.5%, 5-15-2011 ..................................................... 2,000 2,467,500
Department of Health of the State of
New York, Revenue Bonds, Series 1996,
5.5%, 7-1-2010 ...................................................... 2,000 2,127,500
Nyack Hospital, Revenue Bonds, Series 1996,
6.25%, 7-1-2013 ..................................................... 1,000 1,080,000
New York State Urban Development Corporation,
Correctional Capital Facilities Revenue Bonds,
1993A Refunding Series,
5.25%, 1-1-2014 ..................................................... 3,000 3,206,250
New York City Industrial Development Agency,
Special Facility Revenue Bonds, Series 1998
(1998 British Airways Plc Project),
5.25%, 12-1-2032 .................................................... 1,500 1,479,375
Total ............................................................... 33,983,100
</TABLE>
See Notes to Schedule of Investments on page __.
11
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
NORTH CAROLINA - 1.47%
North Carolina Medical Care Commission,
Hospital Revenue Bonds:
Gaston Health Care, Series 1998,
5.0%, 2-15-2019 ..................................................... $ 2,500 $ 2,421,875
Halifax Regional Medical Center, Series 1998,
5.0%, 8-15-2018 ..................................................... 2,170 2,061,500
Rex Healthcare, Series 1998,
5.0%, 6-1-2017 ...................................................... 2,000 1,985,000
The Columbus County Industrial Facilities
and Pollution Control Financing Authority
(North Carolina), Environmental Improvement
Revenue Bonds, 1996 Series A,
5.85%, 12-1-2020 .................................................... 5,000 5,168,750
The Martin County Industrial Facilities and
Pollution Control Financing Authority (North
Carolina), Solid Waste Disposal Revenue Bonds
(Weyerhaeuser Company Project), Series 1993,
5.65%, 12-1-2023 .................................................... 2,500 2,515,625
Total ............................................................... 14,152,750
NORTH DAKOTA - 0.73%
City of Fargo, North Dakota, Health System
Revenue Bonds (Meritcare Obligated Group),
Series 1996A,
5.55%, 6-1-2016 ..................................................... 5,350 5,637,562
State of North Dakota, North Dakota Housing
Finance Agency, Housing Finance Program Bonds,
Home Mortgage Finance Program, 1998 Series A,
5.25%, 7-1-2018 ..................................................... 1,390 1,400,425
Total ............................................................... 7,037,987
OHIO - 1.12%
State of Ohio Air Quality Development Revenue
Bonds (Columbus Southern Power Company
Project), Series 1985 B,
6.25%, 12-1-2020 .................................................... 4,500 4,753,125
County of Erie, Ohio, Franciscan Services
Corporation, Revenue Refunding Bonds,
Series 1993 A (Providence Hospital, Inc.),
6.0%, 1-1-2013 ...................................................... 4,000 4,190,000
City of Moraine, Ohio, Solid Waste
Disposal Revenue Bonds (General Motors
Corporation Project), Series 1994,
6.75%, 7-1-2014 ..................................................... 1,550 1,832,875
Total ............................................................... 10,776,000
</TABLE>
See Notes to Schedule of Investments on page __.
12
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
OKLAHOMA - 0.70%
Oklahoma Housing Finance Agency, Single
Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series B, Subseries B-2 (AMT),
7.625%, 9-1-2026 .................................................... $ 5,050 $ 5,630,750
1996 Series A,
7.05%, 9-1-2026 ..................................................... 1,000 1,108,750
Total ............................................................... 6,739,500
OREGON - 0.62%
State of Oregon, Housing and Community
Services Department, Mortgage Revenue
Bonds, Single-Family Mortgage Program:
1996 Series D,
6.375%, 7-1-2027 .................................................... 3,150 3,339,000
1992 Series B,
6.875%, 7-1-2028 .................................................... 2,500 2,643,750
Total ............................................................... 5,982,750
PENNSYLVANIA - 3.42%
City of Philadelphia, Pennsylvania, Water
and Wastewater Revenue Bonds, Series 1993,
Inverse Rate Securities,
7.63%, 6-15-2012 (A) ................................................ 11,750 13,277,500
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 5,437,500
Allegheny County Hospital Development Authority
(Pennsylvania), UPMC Health System Revenue
Refunding Bonds, Series 1999B,
5.0%, 12-15-2017 .................................................... 5,000 4,910,450
County of Allegheny, Pennsylvania, Airport
Revenue Refunding Bonds,
Series 1997A-1 (AMT),
5.75%, 1-1-2012 ..................................................... 4,000 4,380,000
City of Philadelphia, Pennsylvania, General
Obligation Bonds, Series 1998:
4.75%, 3-15-2017 .................................................... 1,615 1,566,550
4.75%, 3-15-2018 .................................................... 1,000 967,500
Pennsylvania Intergovernmental Cooperation
Authority, Special Tax Revenue Refunding
Bonds (City of Philadelphia Funding Program),
Series of 1999,
5.0%, 6-15-2021 ..................................................... 2,500 2,456,250
Total ............................................................... 32,995,750
</TABLE>
See Notes to Schedule of Investments on page __.
13
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
PUERTO RICO - 1.30%
Puerto Rico Public Buildings Authority,
Public Education and Health Facilities,
Refunding Bonds, Series M,
5.7%, 7-1-2016 ...................................................... $12,000 $ 12,570,000
SOUTH CAROLINA - 1.80%
South Carolina Jobs - Economic Development
Authority, Hospital Revenue Refunding and
Improvement Bonds (South Carolina Baptist
Hospital), Series 1993D, Intermediate Longs,
Inverse Floating Securities,
7.57%, 8-1-2021 (A) ................................................. 14,550 15,332,063
Orangeburg County, South Carolina, Solid
Waste Disposal Facilities Revenue Bonds
(South Carolina Electric & Gas Company
Project), Series 1994,
5.7%, 11-1-2024 ..................................................... 2,000 2,067,500
Total ............................................................... 17,399,563
TENNESSEE - 0.94%
The Health and Educational Facilities Board
of the Metropolitan Government of Nashville
and Davidson County, Tennessee:
Health Facility Revenue Refunding Bonds (Open
Arms Developmental Centers Project), Series 1998,
5.1%, 8-1-2016 ...................................................... 2,745 2,710,687
Multi-Modal Interchangeable Rate, Health Facility
Revenue Bonds (Richland Place, Inc. Project),
Series 1993,
5.5%, 5-1-2023 ...................................................... 1,990 2,054,675
Volunteer State Student Funding Corporation,
Educational Loan Revenue Bonds,
Junior Subordinate Series 1993C Bonds,
5.85%, 12-1-2008 .................................................... 2,700 2,733,750
Memphis-Shelby County Airport Authority,
Special Facilities Revenue Bonds,
Refunding Series 1997 (Federal Express
Corporation),
5.35%, 9-1-2012 ..................................................... 1,500 1,561,875
Total ............................................................... 9,060,987
</TABLE>
See Notes to Schedule of Investments on page __.
14
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
TEXAS - 5.25%
AllianceAirport Authority, Inc.,
Special Facilities Revenue Bonds,
Series 1991 (American Airlines, Inc.
Project),
7.0%, 12-1-2011 ..................................................... $14,300 $ 16,731,000
Texas Department of Housing and Community
Affairs, Single Family Mortgage Revenue
Bonds:
1997 Series A (AMT) TEAMS Structure,
5.8%, 9-1-2029 ...................................................... 5,000 5,143,750
1997 Series D (AMT) TEAMS Structure:
5.65%, 3-1-2029 ..................................................... 2,500 2,553,125
5.7%, 9-1-2029 ...................................................... 1,500 1,543,125
Amarillo Health Facilities Corporation,
Hospital Revenue Bonds (Baptist St. Anthony's
Hospital Corporation Project), Series 1998,
5.5%, 1-1-2015 ...................................................... 6,320 6,746,600
City of Austin, Texas, Subordinate Lien
Revenue Refunding Bonds, Series 1998,
5.25%, 5-15-2019 .................................................... 5,000 5,175,000
Gulf Coast Waste Disposal Authority,
Multi-Modal Interchangeable Rate Revenue
Bonds (Champion International Corporation
Project), Series 1992A,
6.875%, 12-1-2028 ................................................... 3,220 3,489,675
Lufkin Health Facilities Development
Corporation, Health System Revenue and
Refunding Bonds (Memorial Health System
of East Texas), Series 1995,
6.875%, 2-15-2026 ................................................... 2,995 3,305,731
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 2,946,187
Midland County Hospital District, Hospital
Revenue Refunding Bonds, Series 1997,
5.375%, 6-1-2016 .................................................... 2,000 2,047,500
Collin County Housing Finance Corporation,
Student Housing Revenue Bonds (Collin
County Community College District Foundation,
Inc. Project), Series 1998A,
5.25%, 6-1-2031 ..................................................... 1,000 965,000
Total ............................................................... 50,646,693
</TABLE>
See Notes to Schedule of Investments on page __.
15
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
UTAH - 5.83%
Tooele County, Utah, Hazardous Waste Treatment
Revenue Bonds (Union Pacific Corporation/
USPCI, Inc. Project), Series A,
5.7%, 11-1-2026 ..................................................... $37,200 $ 36,781,500
Intermountain Power Agency, Power Supply
Revenue Refunding Bonds, 1993 Series A,
Inverse Floating Rate Securities (INFLOS),
7.671%, 7-1-2021 (A) ................................................ 18,200 19,428,500
Total ............................................................... 56,210,000
WASHINGTON - 7.07%
Washington Public Power Supply System:
Nuclear Project No. 3, Refunding Revenue Bonds:
Series 1989B,
7.125%, 7-1-2016 .................................................... 20,750 25,496,563
Series 1993C, Inverse Floating Rate Security,
7.24%, 7-1-2012 (A) ................................................. 7,000 7,350,000
Nuclear Project No. 1, Refunding Revenue Bonds:
Series 1989B,
7.125%, 7-1-2016 .................................................... 8,200 10,075,750
Series 1993A, Inverse Floating Rate Securities,
7.72%, 7-1-2011 (A) ................................................. 7,500 9,000,000
Nuclear Project No. 2, Refunding Revenue
Bonds, Series 1994A, Linked Inverse
Floating Rate Securities,
5.4%, 7-1-2012 ...................................................... 5,000 5,293,750
State of Washington, Various Purpose General
Obligation Bonds, Series 1990A,
6.75%, 2-1-2015 ..................................................... 4,995 5,994,000
Public Utility District No. 1 of Douglas
County, Washington, Wells Hydroelectric
Revenue Bonds, Series of 1965,
3.7%, 9-1-2018 ...................................................... 4,200 3,927,000
Housing Authority of the City of Seattle,
Low-Income Housing Assistance Revenue Bonds,
1995 (GNMA Collateralized Mortgage
Loan - Kin On Project),
7.4%, 11-20-2036 .................................................... 875 1,012,813
Total ............................................................... 68,149,876
</TABLE>
See Notes to Schedule of Investments on page __.
16
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
WEST VIRGINIA - 0.40%
Braxton County, West Virginia, Solid Waste
Disposal Revenue Bonds (Weyerhaeuser Company
Project), Series 1995A,
6.5%, 4-1-2025 ...................................................... $ 3,500 $ 3,828,125
WISCONSIN - 0.94%
Wisconsin Public Power Incorporated SYSTEM (The),
Power Supply System Revenue Bonds,
Series 1993B-2, Yield Curve Notes (YCNs),
7.4%, 7-1-2014 (A) .................................................. 5,500 5,960,625
Wisconsin Housing and Economic Development
Authority, Home Ownership Revenue Bonds,
1997 Series H,
5.75%, 9-1-2028 ..................................................... 3,000 3,086,250
Total ............................................................... 9,046,875
TOTAL MUNICIPAL BONDS - 95.32% $919,455,436
(Cost: $860,460,826)
TOTAL SHORT-TERM SECURITIES - 4.18% $ 40,268,873
(Cost: $40,268,873)
TOTAL INVESTMENT SECURITIES - 99.50% $959,724,309
(Cost: $900,729,699)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.50% 4,865,700
NET ASSETS - 100.00% $964,590,009
</TABLE>
See Notes to Schedule of Investments on page __.
17
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 1999
Notes to Schedule of Investments
(A) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in effect
at March 31, 1999.
(B) The interest rate is subject to change periodically and based upon
prevailing market rates. The interest rate shown is the rate in effect at
March 31, 1999.
(C) The interest rate is subject to change periodically and inversely based
upon prevailing market rates with a leverage factor of three. The interest
rate shown is the rate in effect at March 31, 1999.
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.
18
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999
(In Thousands, Except for Per Share and Share Amounts)
Assets
Investment securities--at value
(Notes 1 and 3) ........................................ $959,724
Cash ...................................................... 48
Receivables:
Interest ............................................... 13,377
Investment securities sold ............................. 7,232
Fund shares sold ....................................... 398
Prepaid insurance premium ................................. 25
--------
Total assets ......................................... 980,804
--------
Liabilities
Payable for investment securities purchased ............... 12,933
Payable to Fund shareholders .............................. 2,983
Accrued service fee (Note 2) .............................. 151
Accrued transfer agency and dividend
disbursing (Note 2) .................................... 82
Accrued management fee (Note 2) ........................... 11
Accrued distribution fee (Note 2) ......................... 10
Accrued accounting services fee (Note 2) .................. 7
Other ..................................................... 37
--------
Total liabilities .................................... 16,214
--------
Total net assets .................................. $964,590
========
Net Assets
$1.00 par value capital stock
Capital stock .......................................... $130,780
Additional paid-in capital ............................. 772,851
Accumulated undistributed income:
Accumulated undistributed net investment
income .............................................. 811
Accumulated undistributed net realized gain on
investment transactions ............................. 1,153
Net unrealized appreciation in value of
investments ......................................... 58,995
--------
Net assets applicable to outstanding units
of capital ....................................... $964,590
========
Net asset value per share (net assets divided
by shares outstanding)
Class A ................................................... $7.38
Class Y ................................................... $7.38
Capital shares outstanding
Class A ................................................... 130,780,125
Class Y ................................................... 274
Capital shares authorized .................................... 600,000,000
See notes to financial statements.
19
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended MARCH 31, 1999
(In Thousands)
Investment Income
Interest and amortization (Note 1B) .......................... $ 27,556
--------
Expenses (Note 2):
Investment management fee ................................. 2,045
Service fee - Class A ..................................... 964
Transfer agency and dividend disbursing - Class A ......... 352
Distribution fee - Class A ................................ 66
Accounting services fee ................................... 42
Custodian fees ............................................ 19
Audit fees ................................................ 12
Legal fees ................................................ 8
Other ..................................................... 92
--------
Total expenses ......................................... 3,600
--------
Net investment income ............................... 23,956
--------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 3)
Realized net gain on securities .............................. 6,085
Realized net gain on put options purchased ................... 473
Realized net loss on futures contracts closed ................ (954)
--------
Net realized gain on investments .......................... 5,604
Net unrealized depreciation in value of
investments during the period ............................. (23,060)
--------
Net loss on investments ................................ (17,456)
--------
Net increase in net assets resulting
from operations .................................. $ 6,500
========
See notes to financial statements.
20
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
For the six For the fiscal
months ended year ended
March 31, September 30,
1999 1998
------------ --------------
Increase (Decrease) in Net Assets
Operations:
Net investment income ..................... $ 23,956 $ 48,804
Realized net gain on investments .......... 5,604 16,941
Unrealized appreciation (depreciation) .... (23,060) 16,492
--------- ---------
Net increase in net assets
resulting from operations ............ 6,500 82,237
--------- ---------
Distributions to shareholders from (Note 1D):*
Net investment income:
Class A ................................ (24,572) (48,648)
Class Y** .............................. -- --
Realized gains on securities transactions:
Class A ................................ (14,344) (12,104)
Class Y ................................ -- --
--------- ---------
(38,916) (60,752)
--------- ---------
Capital share transactions:
Proceeds from sale of shares:
Class A (12,966,204 and 41,023,912
shares, respectively) ............... 96,903 307,508
Class Y (270 and 0 shares,
respectively) ....................... 2 --
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (4,385,218 and 6,763,886
shares, respectively) ............... 32,641 50,042
Class Y (4 and 0 shares,
respectively)** ..................... -- --
Payments for shares redeemed:
Class A (17,259,889 and 50,159,643
shares, respectively) ................ (129,429) (376,023)
Class Y (0 and 0 shares, respectively) . -- --
--------- ---------
Net increase (decrease) in net
assets resulting from capital
share transactions ................... 117 (18,473)
--------- ---------
Total increase (decrease) ............ (32,299) 3,012
Net Assets
Beginning of period .......................... 996,889 993,877
--------- ---------
End of period, including undistributed
net investment income of $811 and
$1,427, respectively ...................... $ 964,590 $ 996,889
========= =========
* See "Financial Highlights" on pages __-__.
** Amounts for the fiscal period ended March 31, 1999 not shown due to
rounding.
See notes to financial statements.
21
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the
six For the fiscal year ended
months September 30,
ended -----------------------------------------------------------
3/31/99 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.63 $7.47 $7.32 $7.25 $6.91 $7.83
------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income .......... 0.18 0.37 0.38 0.39 0.39 0.38
Net realized and
unrealized gain
(loss) on
investments ..... (0.13) 0.25 0.30 0.12 0.38 (0.67)
------ ------ ------ ------ ------ ------
Total from investment
operations ......... 0.05 0.62 0.68 0.51 0.77 (0.29)
------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income .......... (0.19) (0.37) (0.37) (0.39) (0.39) (0.38)
From capital gains . (0.11) (0.09) (0.16) (0.05) (0.00) (0.25)
In excess of capital
gains ........... (0.00) (0.00) (0.00) (0.00) (0.04) (0.00)
------ ------ ------ ------ ------ ------
Total distributions ... (0.30) (0.46) (0.53) (0.44) (0.43) (0.63)
------ ------ ------ ------ ------ ------
Net asset value,
end of period ...... $7.38 $7.63 $7.47 $7.32 $7.25 $6.91
====== ====== ====== ====== ====== ======
Total return* ......... 0.68% 8.67% 9.77% 7.16% 11.51% -3.91%
Net assets, end of
period (in
millions) .......... $965 $997 $994 $997 $975 $951
Ratio of expenses to
average net assets . 0.74%** 0.72% 0.67% 0.68% 0.65% 0.64%
Ratio of net investment
income to average
net assets ......... 4.94%** 4.95% 5.14% 5.23% 5.51% 5.17%
Portfolio
turnover rate ...... 17.98% 50.65% 47.24% 74.97% 70.67% 62.61%
</TABLE>
* Total return calculated without taking into account the sales load deducted
on an initial purchase.
** Annualized.
See notes to financial statements.
22
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout the Period:
<TABLE>
<CAPTION>
For the
period
from
12/30/98*
through
3/31/99
---------
<S> <C>
Net asset value,
beginning of period ............................ $7.41
-----
Income from investment
operations:
Net investment
income ...................................... 0.09
Net realized and
unrealized loss
on investments .............................. (0.03)
-----
Total from investment
operations ..................................... 0.06
-----
Less dividends from
net investment
income ......................................... (0.09)
-----
Net asset value,
end of period .................................. $7.38
=====
Total return ...................................... 0.85%
Net assets, end of
period (in
thousands) ..................................... $2
Ratio of expenses
to average net
assets ......................................... 0.60%**
Ratio of net
investment income
to average net
assets ......................................... 5.18%**
Portfolio
turnover rate .................................. 17.98%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the six months ended March 31, 1999
23
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
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 business day following record date. Net
investment income dividends and capital gains distributions are determined
in accordance with income tax regulations which may differ from 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 carryovers.
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
24
<PAGE>
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 $21.5 billion of combined net
assets at March 31, 1999) 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
<TABLE>
<CAPTION>
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
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
</TABLE>
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 for Class A shares (which are not an expense of the
25
<PAGE>
Fund) of $570,713, out of which W&R paid sales commissions of $329,283 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 Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $19,375, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and
short-term securities, aggregated $172,761,913 while proceeds from maturities
and sales aggregated $168,429,367. Purchases of options aggregated $9,264,075
while proceeds from options aggregated $9,737,508. Purchases of short-term
securities aggregated $612,602,837 while proceeds from maturities and sales
aggregated $604,858,799. No long-term U.S. Government securities were bought or
sold during the period ended March 31, 1999.
For Federal income tax purposes, cost of investments owned at March 31,
1999 was $905,169,182, resulting in net unrealized appreciation of $54,555,127,
of which $56,672,237 related to appreciated securities and $2,117,110 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $15,978,789 during its fiscal year ended September 30, 1998, which has been
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.
26
<PAGE>
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 two classes of
shares, Class A and Class Y, each of which has equal rights as to assets and
voting privileges. 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. A comprehensive discussion of the terms under which shares of either
class are offered is contained in the Prospectus and the Statement of Additional
Information for the Fund.
Income, non-class specific expenses and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity. The Fund commenced multiclass operations on December 30,
1998.
27
<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 March 31, 1999, and the related statement of operations for the six-month
period then ended, the statements of changes in net assets for the six-month
period ended March 31, 1999 and the fiscal year ended September 30, 1998, and
the financial highlights for the six-month period then ended and for each of the
five fiscal years in the period ended September 30, 1998. 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 audits.
We conducted our audits 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 as of March
31, 1999, 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of United
Municipal Bond Fund, Inc. as of March 31, 1999, the results of its operations
for the six-month period then ended, the changes in its net assets for the
six-month period then ended and the fiscal year ended September 30, 1998, and
the financial highlights for the six-month period ended March 31, 1999 and for
each of the five fiscal years in the period ended September 30, 1998 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
May 7, 1999
28
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS
ALASKA - 3.22%
City of Valdez, Alaska, Marine
Terminal Revenue Refunding Bonds
(BP Pipelines (Alaska) Inc. Project),
Series 1993A,
5.85%, 8-1-2025 ..................................................... $28,650 $ 30,046,687
Alaska Housing Finance Corporation,
Housing Development Bonds, 1997
Series B (AMT),
5.8%, 12-1-2029 ..................................................... 2,000 2,075,000
Total ............................................................... 32,121,687
ARKANSAS - 0.32%
Arkansas Development Finance Authority,
Single Family Mortgage Revenue Bonds
(Access Program), 1995 Series F (AMT),
7.45%, 1-1-2027 ..................................................... 1,690 1,897,025
City of Gurdon, Arkansas, Pollution Control
Revenue Refunding Bonds,
1998 Series A (Non-AMT),
5.375%, 3-1-2020 .................................................... 1,250 1,290,625
Total ............................................................... 3,187,650
CALIFORNIA - 9.83%
California Statewide Communities Development
Authority:
Special Facilities Lease Revenue Bonds,
1997 Series A (United Air Lines, Inc.-San
Francisco International Airport Projects),
5.7%, 10-1-2033 ..................................................... 20,900 21,762,125
Hospital Revenue Certificates
of Participation, Series 1992,
Cedars-Sinai Medical Center,
6.5%, 8-1-2012 ...................................................... 5,200 6,084,000
Hospital Refunding Revenue Certificates of
Participation, Series 1993,
Cedars-Sinai Medical Center,
Inverse Floating Rate Securities (INFLOS),
7.068%, 11-1-2015 (A) ............................................... 3,300 3,460,875
</TABLE>
See Notes to Schedule of Investments on page __.
29
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
CALIFORNIA (Continued)
East Bay Municipal Utility District,
Wastewater System Subordinated Revenue
Refunding Bonds, Series 1993B-2 (YCNs):
6.72%, 6-1-2013 (A) ................................................. $ 8,450 $ 9,622,438
6.82%, 6-1-2020 (A) ................................................. 7,250 8,056,562
Transmission Agency of Northern California,
California-Oregon Transmission Project
Revenue Bonds, 1990 Series A,
7.0%, 5-1-2013 ...................................................... 12,000 15,240,000
Southern California Public Power Authority:
Multiple Project Revenue Bonds, 1989 Series,
6.75%, 7-1-2012 ..................................................... 3,455 4,271,244
Mead-Adelanto Project Revenue Bonds,
1994 Series A, Linked Inverse Floating
Rate Security,
5.15%, 7-1-2015 ..................................................... 2,800 2,971,500
Mead-Phoenix Project Revenue Bonds,
1994 Series A, Linked Inverse Floating
Rate Security,
5.15%, 7-1-2015 ..................................................... 2,600 2,759,250
County of San Bernardino, California,
Certificates of Participation (1992 Justice
Center/Airport Improvements Refunding
Project), Inland Empire Public Facilities
Corporation, Short/RITES Certificates,
6.85%, 7-1-2016 (B) ................................................. 9,500 9,986,875
California Rural Home Mortgage Finance
Authority, Single Family Mortgage
Revenue Bonds (Mortgage-Backed Securities
Program):
1998 Series A,
5.75%, 12-1-2029 .................................................... 3,500 3,928,750
1997 Series C,
6.75%, 3-1-2029 ..................................................... 2,050 2,372,875
1998 Series B,
5.75%, 12-1-2029 .................................................... 2,000 2,235,000
</TABLE>
See Notes to Schedule of Investments on page __.
30
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
CALIFORNIA (Continued)
Delta Counties Home Mortgage Finance Authority,
Single Family Mortgage Revenue Bonds
(Mortgage-Backed Securities Program),
1998 Series A,
5.2%, 12-1-2014 ..................................................... $ 3,110 $ 3,199,412
Intermodal Container Transfer Facility,
Joint Powers Authority, Intermodal
Container Transfer Facility Refunding
Revenue Bonds, 1989 Series A,
7.7%, 11-1-2014 ..................................................... 2,000 2,072,500
Total ............................................................... 98,023,406
COLORADO - 5.36%
City and County of Denver, Colorado,
Airport System Revenue Bonds:
Series 1991D,
7.75%, 11-15-2013 ................................................... 11,905 15,268,163
Series 1992B,
7.25%, 11-15-2023 ................................................... 11,990 13,353,862
Colorado Housing and Finance Authority:
Single Family Program Senior and Subordinate
Bonds:
1996 Series B-1,
7.65%, 11-1-2026 .................................................... 2,750 3,114,375
1997 Series C-2,
6.875%, 11-1-2028 ................................................... 2,500 2,809,375
1997 Series A-2,
7.25%, 5-1-2027 ..................................................... 2,000 2,297,500
1996 Series C-1,
7.55%, 11-1-2027 .................................................... 1,580 1,797,250
1998 Series A-3,
6.5%, 5-1-2016 ...................................................... 1,000 1,115,000
Single Family Program Senior Bonds:
1996 Series A-1,
7.4%, 11-1-2027 ..................................................... 3,735 4,192,538
1995 Series D-1,
7.375%, 6-1-2026 .................................................... 75 83,812
Colorado Student Obligation Bond Authority,
Student Loan Asset-Backed Obligations,
Senior Subordinate, 1995 Series II-B,
6.2%, 12-1-2008 ..................................................... 8,000 8,410,000
</TABLE>
See Notes to Schedule of Investments on page __.
31
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
COLORADO (Continued)
Highlands Ranch Metropolitan District No. 3,
Douglas County, Colorado,
General Obligation Bonds, Series 1998A,
5.125%, 12-1-2012 ................................................... $ 1,000 $ 1,023,750
Total ............................................................... 53,465,625
CONNECTICUT - 2.41%
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-2014 ...................................................... 13,750 13,990,625
Bristol Resource 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 7,805,000
Connecticut Development Authority, Water
Facilities Revenue Bonds (Bridgeport
Hydraulic Company Project-1995 Series),
6.15%, 4-1-2035 ..................................................... 2,000 2,200,000
Total ............................................................... 23,995,625
FLORIDA - 1.56%
Escambia County, Florida, Pollution Control
Revenue Bonds (Champion International
Corporation Project), Series 1996,
6.4%, 9-1-2030 ...................................................... 6,200 6,796,750
Pasco County, Florida, Solid Waste Disposal
and Resource Recovery System, Revenue
Bonds, Series 1998 (AMT),
6.0%, 4-1-2011 ...................................................... 4,930 5,583,225
Housing Finance Authority of Lee County, Florida,
Single Family Mortgage Revenue Bonds,
Series 1998A, Subseries 6,
6.45%, 3-1-2031 ..................................................... 2,800 3,136,000
Total ............................................................... 15,515,975
GEORGIA - 3.05%
Municipal Electric Authority of Georgia:
Project One Special Obligation Bonds,
Fifth Crossover Series,
6.4%, 1-1-2013 ...................................................... 15,500 18,464,375
General Power Revenue Bonds,
1992B Series,
8.25%, 1-1-2011 ..................................................... 8,700 11,908,125
Total ............................................................... 30,372,500
</TABLE>
See Notes to Schedule of Investments on page __.
32
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
HAWAII - 2.45%
State of Hawaii, Airports System Revenue
Bonds, Second Series of 1991,
6.9%, 7-1-2012 ...................................................... $20,195 $ 24,435,950
IDAHO - 0.75%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.), Indexed Inverse
Floating Rate Securities,
8.25%, 2-15-2021 (A) ................................................ 6,000 7,470,000
ILLINOIS - 1.72% City of Chicago:
Collateralized Single Family Mortgage Revenue Bonds:
Series 1998C-1,
6.3%, 9-1-2029 ...................................................... 4,000 4,380,000
Series 1998A-1,
6.45%, 9-1-2029 ..................................................... 2,500 2,768,750
Series 1997-B,
6.95%, 9-1-2028 ..................................................... 1,890 2,142,788
Chicago-O'Hare International Airport, General Airport
Revenue Refunding Bonds, 1993 Series A,
5.0%, 1-1-2012 ...................................................... 3,000 3,116,250
Illinois Health Facilities Authority,
Revenue Bonds, Series 1997 (Victory
Health Services),
5.375%, 8-15-2016 ................................................... 3,000 3,048,750
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 1,679,975
Total ............................................................... 17,136,513
INDIANA - 6.04%
Indianapolis Airport Authority,
Special Facility Revenue Bonds, Series 1995 A
(United Air Lines, Inc., Indianapolis
Maintenance Center Project),
6.5%, 11-15-2031 .................................................... 18,850 20,546,500
</TABLE>
See Notes to Schedule of Investments on page __.
33
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
INDIANA (Continued)
Indiana State Office Building Commission,
Capitol Complex Revenue Bonds:
Series 1990B (State Office Building
I Facility),
7.4%, 7-1-2015 ...................................................... $ 8,000 $ 10,470,000
Series 1990A (Senate Avenue Parking Facility),
7.4%, 7-1-2015 ...................................................... 4,775 6,249,281
Indiana Transportation Finance Authority,
Highway Revenue Bonds, Series 1990A,
7.25%, 6-1-2015 ..................................................... 9,000 11,643,750
East Chicago Elementary School Building
Corporation (Lake County, Indiana), First
Mortgage Refunding Bonds, Series 1996,
6.25%, 1-5-2016 ..................................................... 7,655 8,908,506
Indiana Health Facility Financing Authority,
Hospital Revenue Refunding Bonds, Series 1992
(The Methodist Hospitals, Inc.),
6.75%, 9-15-2009 .................................................... 2,200 2,403,500
Total ............................................................... 60,221,537
KANSAS - 1.43%
Sedgwick County, Kansas and Shawnee County,
Kansas, Single Family Mortgage Revenue Bonds
(Mortgage-Backed Securities Program):
1998 Series A-1 (AMT),
5.5%, 12-1-2022 ..................................................... 8,000 8,830,000
1997 Series A-1 (AMT),
5.5%, 6-1-2029 ...................................................... 4,775 5,449,469
Total ............................................................... 14,279,469
KENTUCKY - 0.47%
Kentucky Economic Development Finance
Authority, Hospital Revenue Bonds,
Baptist Healthcare System Issue,
Series 1994,
5.0%, 8-15-2015 ..................................................... 4,650 4,702,313
</TABLE>
See Notes to Schedule of Investments on page __.
34
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
LOUISIANA - 2.73%
Louisiana Public Facilities Authority:
Hospital Revenue and Refunding Bonds:
St. Francis Medical Center Project,
Residual Interest Bonds (RIBS), Series 1994C,
6.797%, 7-22-2024 (A) ............................................... $ 7,150 $ 8,374,437
Pendleton Memorial Methodist Hospital
Project, Series 1998,
5.25%, 6-1-2017 ..................................................... 2,000 1,950,000
Hospital Revenue Bonds,
Franciscan Missionaries of Our Lady Health
System Project, Series 1998C,
5.0%, 7-1-2019 ...................................................... 2,250 2,252,813
Parish of Jefferson Home Mortgage Authority,
Tax-Exempt Agency Mortgage-Backed
Securities, Series 1994A,
7.55%, 12-1-2026 .................................................... 5,495 6,923,700
City of Shreveport, State of Louisiana,
Airport System PFC Revenue Bonds, Series
1997B (AMT-Subject),
5.0%, 1-1-2015 ...................................................... 3,165 3,192,694
Parish of East Baton Rouge, State of
Louisiana, Refunding Revenue Bonds
(Georgia-Pacific Corporation Project),
Series 1998,
5.35%, 9-1-2011 ..................................................... 3,000 3,037,500
Parish of Webster, Louisiana, Pollution
Control Revenue Refunding Bonds,
1998 Series B (non-AMT),
5.2%, 3-1-2013 ...................................................... 1,435 1,490,606
Total ............................................................... 27,221,750
MASSACHUSETTS - 1.56%
Massachusetts Housing Finance Agency,
Single Family Housing Revenue Bonds,
Series 57 (AMT),
5.6%, 6-1-2030 ...................................................... 5,000 5,168,750
Massachusetts Port Authority, Revenue
Refunding Bonds, Series 1998-B (AMT),
5.0%, 7-1-2016 ...................................................... 3,560 3,577,800
Massachusetts Municipal Wholesale Electric
Company, A Public Corporation of the
Commonwealth of Massachusetts, Power
Supply System Revenue Bonds, 1993 Series A,
Inverse Floating Rate Security (INFLOS),
6.966%, 7-1-2018 (A) ................................................ 2,500 2,734,375
</TABLE>
See Notes to Schedule of Investments on page __.
35
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MASSACHUSETTS (Continued)
Massachusetts State College Building
Authority, Project and Refunding
Revenue Bonds, Senior Series 1994-A,
7.5%, 5-1-2014 ...................................................... $ 1,750 $ 2,316,562
Boston Water and Sewer Commission,
General Revenue Bonds, 1992 Series A
(Senior Series),
5.75%, 11-1-2013 .................................................... 1,575 1,767,937
Total ............................................................... 15,565,424
MICHIGAN - 3.06%
City of Detroit, Michigan, Sewage Disposal
System Revenue and Revenue Refunding Bonds,
Series 1993-A, Inverse Floating Rate Security
(INFLOS),
7.618%, 7-1-2023 (A) ................................................ 11,200 12,656,000
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 10,030,000
Michigan State Hospital Finance Authority:
Hospital Revenue and Refunding Bonds
(Bay Medical Center), Series 1997A,
5.375%, 7-1-2011 .................................................... 2,190 2,332,350
Hospital Revenue Bonds (The Detroit Medical
Center Obligated Group), Series 1998A,
5.125%, 8-15-2018 ................................................... 2,000 1,967,500
Charter County of Wayne, Michigan, Detroit
Metropolitan Wayne County Airport, Airport
Revenue Bonds:
Series 1998A,
5.0%, 12-1-2019 ..................................................... 2,000 2,002,500
Subordinate Lien, Series 1993B,
5.25%, 12-1-2013 .................................................... 1,500 1,550,625
Total ............................................................... 30,538,975
MINNESOTA - 0.75%
City of Rochester, Minnesota, Health
Care Facilities Revenue Bonds (Mayo
Foundation/Mayo Medical Center),
Series 1992D, Floating Inverse
Rate Securities (FIRS),
7.4%, 11-15-2009 (A) ................................................ 4,500 5,377,500
</TABLE>
See Notes to Schedule of Investments on page __.
36
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MINNESOTA (Continued)
HealthSystem Minnesota, The Healthcare
Network, City of St. Louis Park,
Minnesota, Health Care Facilities Revenue
Bonds (HealthSystem Minnesota Obligated
Group), Series 1993,
Relinked Inverse Floater,
5.1%, 7-1-2013 (A)................................................... $ 2,000 $ 2,052,500
Total ............................................................... 7,430,000
MISSISSIPPI - 2.27%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control
Refunding Revenue Bonds (Weyerhaeuser
Company Project), Series 1992B, Indexed
Inverse Floating/Fixed Term Bonds,
8.25%, 4-1-2022 (A) ................................................. 11,000 13,598,750
Mississippi Higher Education Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1996-C:
6.75%, 9-1-2014 ..................................................... 5,500 5,802,500
6.7%, 9-1-2012 ...................................................... 1,470 1,550,850
Mississippi Home Corporation, Single Family
Mortgage Revenue Bonds, Series 1996F (AMT),
7.55%, 12-1-2027 .................................................... 1,490 1,700,462
Total ............................................................... 22,652,562
MISSOURI - 3.26%
Missouri Housing Development Commission,
Single Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series C,
7.25%, 9-1-2026 ..................................................... 2,985 3,373,050
1997 Series C-1 (Non-AMT),
6.55%, 9-1-2028 ..................................................... 1,980 2,217,600
1996 Series C,
7.45%, 9-1-2027 ..................................................... 1,570 1,813,350
1998 Series D-2 (AMT),
6.3%, 3-1-2029 ...................................................... 1,150 1,275,063
1998 Series B-2 (AMT),
6.4%, 3-1-2029 ...................................................... 1,000 1,101,250
1997 Series A-2,
7.3%, 3-1-2028 ...................................................... 925 1,063,750
</TABLE>
See Notes to Schedule of Investments on page __.
37
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
MISSOURI (Continued)
Health and Educational Facilities Authority
of the State of Missouri, Health Facilities
Revenue Bonds:
BJC Health System, Series 1994A,
6.75%, 5-15-2012 .................................................... $ 4,000 $ 4,845,000
Freeman Health System Project, Series 1998,
5.25%, 2-15-2018 .................................................... 2,460 2,484,600
Lake of the Ozarks General Hospital, Inc.,
Series 1998,
5.1%, 2-15-2018 ..................................................... 2,220 2,242,200
Health Facilities Revenue Bonds
(Barnes-Jewish, Inc./Christian Health
Services), Series 1993A:
6.0%, 5-15-2011 ..................................................... 3,000 3,393,750
5.25%, 5-15-2014 .................................................... 2,900 3,070,375
Poplar Bluff, Missouri, Public Building Corporation,
Leasehold Refunding and Improvement Revenue Bonds
(Poplar Bluff, Missouri), Series 1998,
5.1%, 9-1-2018 ...................................................... 2,000 2,027,500
City of Fenton, Missouri, Public Facilties
Authority, Leasehold Revenue Bonds,
Series 1997 (City of Fenton, Missouri,
Lessee),
5.25%, 1-1-2018 ..................................................... 2,000 2,022,500
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 1,522,500
Total ............................................................... 32,452,488
NEBRASKA - 1.61%
Nebraska Higher Education Loan Program, Inc.,
1993-2 Series A-6 Junior Subordinate Bonds,
6.4%, 6-1-2013 ...................................................... 14,500 16,004,375
NEVADA - 0.32%
Nevada Housing Division, Single Family
Mortgage Bonds:
1998 Series A-1 Mezzanine Bonds,
5.35%, 4-1-2016 ..................................................... 2,050 2,083,313
1996 Series C Subordinate Bonds,
6.35%, 4-1-2009 ..................................................... 985 1,063,800
Total ............................................................... 3,147,113
</TABLE>
See Notes to Schedule of Investments on page __.
38
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
NEW JERSEY - 0.75%
The Hudson County Improvement Authority,
Essential Purpose Pooled Governmental
Loan Program Bonds, Series 1986,
7.6%, 8-1-2025 ...................................................... $ 5,080 $ 5,492,750
The Union County Utilities Authority
(Union County, New Jersey), Solid Waste
Facility Senior Lease Revenue Bonds
(Ogden Martin Systems of Union, Inc.
Lessee - Series 1998 A),
5.0%, 6-1-2015 ...................................................... 2,000 2,030,000
Total ............................................................... 7,522,750
NEW MEXICO - 3.19%
New Mexico Educational Assistance Foundation:
Student Loan Program Bonds:
First Subordinate 1995 Series A-2:
5.95%, 11-1-2007 .................................................... 2,740 $ 2,873,575
5.85%, 11-1-2006 .................................................... 1,575 1,645,875
Second Subordinate 1996 Series A-3,
6.75%, 11-1-2008 .................................................... 2,175 2,373,469
First Subordinate 1996 Series A-2,
6.2%, 11-1-2008 ..................................................... 2,210 2,323,262
Second Subordinate 1995 Series A-3,
6.6%, 11-1-2010 ..................................................... 1,415 1,469,831
Student Loan Purchase Bonds,
Senior 1995 Series IV-A1 (AMT),
7.05%, 3-1-2010 ..................................................... 5,310 5,761,350
City of Albuquerque, New Mexico, Governmental Purpose
Airport Refunding Revenue Bonds, Series 1989,
6.5%, 7-1-2019 ...................................................... 15,350 15,350,000
Total ............................................................... 31,797,362
NEW YORK - 6.48%
Mental Health Services Facilities Improvement
Revenue Bonds, 1993 Series F Refunding,
5.375%, 2-15-2014 ................................................... 12,000 12,465,000
New York State Medical Care Facilities Finance Agency:
Hospital Insured Mortgage Revenue Bonds,
1994 Series A Refunding,
5.25%, 8-15-2014 .................................................... 10,000 10,362,500
</TABLE>
See Notes to Schedule of Investments on page __.
39
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
NEW YORK (Continued)
Dormitory Authority of the State of New York:
City University System Consolidated Revenue
Bonds, Series 1993F,
5.0%, 7-1-2014 ...................................................... $ 9,700 $ 9,748,500
City University System Consolidated Third General
Resolution Revenue Bonds, 1998 Series 1,
5.0%, 7-1-2016 ...................................................... 3,000 3,048,750
State University Educational Facilities,
Revenue Bonds, Series 1990B,
7.5%, 5-15-2011 ..................................................... 2,000 2,490,000
Department of Health of the State of
New York, Revenue Bonds, Series 1996,
5.5%, 7-1-2010 ...................................................... 2,000 2,152,500
Nyack Hospital, Revenue Bonds, Series 1996,
6.25%, 7-1-2013 ..................................................... 1,000 1,096,250
The City of New York, General Obligation Bonds:
Fiscal 1997 Series H,
6.125%, 8-1-2025 .................................................... 5,730 6,303,000
Fiscal 1994 Series C, Inverse Floaters,
20.36%, 9-30-2003 (C) ............................................... 3,250 5,074,063
Housing New York Corporation, Senior
Revenue Refunding Bonds, Series 1993,
5.0%, 11-1-2013 ..................................................... 6,600 6,616,500
New York State Urban Development Corporation:
Correctional Capital Facilities Revenue Bonds,
1993A Refunding Series,
5.25%, 1-1-2014 ..................................................... 3,000 3,240,000
Correctional Facilities Service Contract
Revenue Bonds, Series A,
5.0%, 1-1-2013 ...................................................... 2,000 2,035,000
Total ............................................................... 64,632,063
NORTH CAROLINA - 1.78%
North Carolina Medical Care Commission,
Hospital Revenue Bonds:
Rex Healthcare, Series 1998,
5.0%, 6-1-2017 ...................................................... 7,850 7,928,500
Gaston Health Care, Series 1998,
5.0%, 2-15-2019 ..................................................... 2,500 2,478,125
Halifax Regional Medical Center, Series 1998,
5.0%, 8-15-2018 ..................................................... 2,170 2,102,187
Columbus County Industrial (The),
Facilities and Pollution Control Financing
Authority (North Carolina), Environmental
Improvement Revenue Bonds, 1996 Series A,
5.85%, 12-1-2020 .................................................... 5,000 5,250,000
Total ............................................................... 17,758,812
</TABLE>
See Notes to Schedule of Investments on page __.
40
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
NORTH DAKOTA - 0.71%
City of Fargo, North Dakota, Health System
Revenue Bonds (Meritcare Obligated Group),
Series 1996A,
5.55%, 6-1-2016 ..................................................... 5,350 $ 5,711,125
State of North Dakota, North Dakota Housing
Finance Agency, Housing Finance Program Bonds,
Home Mortgage Finance Program, 1998 Series A,
5.25%, 7-1-2018 ..................................................... 1,390 1,412,588
Total ............................................................... 7,123,713
OHIO - 0.62%
County of Erie, Ohio, Franciscan Services
Corporation, Revenue Refunding Bonds,
Series 1993 A (Providence Hospital, Inc.),
6.0%, 1-1-2013 ...................................................... 4,000 4,255,000
City of Moraine, Ohio, Solid Waste
Disposal Revenue Bonds (General Motors
Corporation Project), Series 1994,
6.75%, 7-1-2014 ..................................................... 1,550 1,904,562
Total ............................................................... 6,159,562
OKLAHOMA - 0.73%
Oklahoma Housing Finance Agency, Single
Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series B, Subseries B-2 (AMT),
7.625%, 9-1-2026 .................................................... $ 5,450 6,172,125
1996 Series A,
7.05%, 9-1-2026 ..................................................... 1,000 1,126,250
Total ............................................................... 7,298,375
OREGON - 0.27%
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 2,678,125
1992 Series C,
5.5%, 7-1-2013 ...................................................... 35 35,000
Total ............................................................... 2,713,125
</TABLE>
See Notes to Schedule of Investments on page __.
41
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
PENNSYLVANIA - 2.94%
City of Philadelphia, Pennsylvania, Water
and Wastewater Revenue Bonds, Series 1993,
Inverse Rate Securities,
7.23%, 6-15-2012 (A) ................................................ $11,750 $ 13,262,812
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 5,537,500
County of Allegheny, Pennsylvania, Airport
Revenue Refunding Bonds,
Series 1997A-1 (AMT),
5.75%, 1-1-2012 ..................................................... 4,000 4,455,000
Delaware County Authority, Hospital Revenue
Bonds, Series of 1992 (Riddle Memorial
Hospital),
6.5%, 1-1-2022 ...................................................... 2,800 3,073,000
Philadelphia Authority for Industrial Development,
Philadelphia, Pennsylvania, Airport Revenue
Bonds, Series 1998A (Philadelphia Airport
System Project),
5.0%, 7-1-2015 ...................................................... 3,000 3,030,000
Total ............................................................... 29,358,312
PUERTO RICO - 1.27%
Puerto Rico Public Buildings Authority,
Public Education and Health Facilities,
Refunding Bonds, Series M,
5.7%, 7-1-2016 ...................................................... 12,000 12,630,000
SOUTH CAROLINA - 1.80%
South Carolina Jobs - Economic Development
Authority, Hospital Revenue Refunding and
Improvement Bonds (South Carolina Baptist
Hospital), Series 1993D, Intermediate Longs,
7.07%, 8-1-2021 ..................................................... 14,550 15,859,500
Orangeburg County, South Carolina, Solid
Waste Disposal Facilities Revenue Bonds
(South Carolina Electric & Gas Company
Project), Series 1994,
5.7%, 11-1-2024 ..................................................... 2,000 2,082,500
Total ............................................................... 17,942,000
</TABLE>
See Notes to Schedule of Investments on page __.
42
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
TENNESSEE - 0.92%
The Health and Educational Facilities Board
of the Metropolitan Government of Nashville
and Davidson County, Tennessee:
Health Facility Revenue Refunding Bonds (Open
Arms Developmental Centers Project), Series 1998,
5.1%, 8-1-2016 ...................................................... $ 2,745 $ 2,758,725
Multi-Modal Interchangeable Rate, Health Facility
Revenue Bonds (Richland Place, Inc. Project),
Series 1993,
5.5%, 5-1-2023 ...................................................... 1,990 2,091,988
Volunteer State Student Funding Corporation,
Educational Loan Revenue Bonds,
Junior Subordinate Series 1993C Bonds,
5.85%, 12-1-2008 .................................................... 2,700 2,757,375
Memphis-Shelby County Airport Authority,
Special Facilities Revenue Bonds,
Refunding Series 1997 (Federal Express
Corporation),
5.35%, 9-1-2012 ..................................................... 1,500 1,580,625
Total ............................................................... 9,188,713
TEXAS - 4.84%
AllianceAirport Authority, Inc.,
Special Facilities Revenue Bonds,
Series 1991 (American Airlines, Inc.
Project),
7.0%, 12-1-2011 ..................................................... 14,300 17,231,500
Texas Department of Housing and Community
Affairs, Single Family Mortgage Revenue
Bonds:
1997 Series A (AMT) TEAMS Structure,
5.8%, 9-1-2029 ...................................................... 5,000 5,225,000
1997 Series D (AMT) TEAMS Structure:
5.65%, 3-1-2029 ..................................................... 2,500 2,590,625
5.7%, 9-1-2029 ...................................................... 1,500 1,554,375
Amarillo Health Facilities Corporation,
Hospital Revenue Bonds (Baptist St. Anthony's
Hospital Corporation Project), Series 1998,
5.5%, 1-1-2015 ...................................................... 6,320 6,880,900
Lubbock Health Facilities Development
Corporation, Hospital Revenue Bonds
(Methodist Hospital, Lubbock, Texas
Project), Series 1993B,
6.75%, 12-1-2010 .................................................... 5,000 6,125,000
</TABLE>
See Notes to Schedule of Investments on page __.
43
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
TEXAS (Continued)
Gulf Coast Waste Disposal Authority,
Multi-Modal Interchangeable Rate Revenue
Bonds (Champion International Corporation
Project), Series 1992A,
6.875%, 12-1-2028 ................................................... $ 3,220 $ 3,570,175
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 2,981,813
Midland County Hospital District, Hospital
Revenue Refunding Bonds, Series 1997,
5.375%, 6-1-2016 .................................................... 2,000 2,072,500
Total ............................................................... 48,231,888
UTAH - 3.32%
Intermountain Power Agency, Power Supply
Revenue Refunding Bonds, 1993 Series A,
Inverse Floating Rate Securities (INFLOS),
7.266%, 7-1-2021 (A) ................................................ 18,200 19,724,250
Tooele County, Utah, Hazardous Waste Treatment
Revenue Bonds (Union Pacific Corporation/
USPCI, Inc. Project), Series A,
5.7%, 11-1-2026 ..................................................... 13,200 13,365,000
Total ............................................................... 33,089,250
WASHINGTON - 8.77%
Washington Public Power Supply System:
Nuclear Project No. 3, Refunding Revenue Bonds:
Series 1989B,
7.125%, 7-1-2016 .................................................... 20,750 26,119,063
Series 1993C,
6.77%, 7-1-2012 ..................................................... 7,000 7,621,250
Nuclear Project No. 1, Refunding Revenue Bonds:
Series 1997B:
5.125%, 7-1-2013 .................................................... 10,000 10,225,000
5.125%, 7-1-2015 .................................................... 5,000 5,131,250
Series 1989B,
7.125%, 7-1-2016 .................................................... 8,200 10,321,750
Series 1998A,
5.0%, 7-1-2013 ...................................................... 2,000 2,025,000
Nuclear Project No. 2 Refunding Revenue
Bonds, Series 1994A:
Inverse Floating Rate Securities,
7.47%, 7-1-2011 (A) ................................................. 7,500 9,300,000
Linked Inverse Floating Rate Securities,
5.4%, 7-1-2012 ...................................................... 5,000 5,400,000
</TABLE>
See Notes to Schedule of Investments on page __.
44
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Principal
Amount in
Thousands Value
<S> <C> <C>
MUNICIPAL BONDS (Continued)
WASHINGTON (Continued)
State of Washington, Various Purpose General
Obligation Bonds, Series 1990A,
6.75%, 2-1-2015 ..................................................... $ 4,995 $ 6,200,044
Public Utility District No. 1 of Douglas
County, Washington, Wells Hydroelectric
Revenue Bonds, Series of 1965,
3.7%, 9-1-2018 ...................................................... 4,200 4,037,250
Housing Authority of the City of Seattle,
Low-Income Housing Assistance Revenue Bonds,
1995 (GNMA Collateralized Mortgage
Loan - Kin On Project),
7.4%, 11-20-2036 .................................................... 875 1,029,219
Total ............................................................... 87,409,826
WISCONSIN - 0.61%
Wisconsin Public Power Incorporated SYSTEM (The),
Power Supply System Revenue Bonds,
Series 1993B-2, Yield Curve Notes (YCNs),
6.95%, 7-1-2014 (A) ................................................. 5,500 6,084,375
WEST VIRGINIA - 0.39%
Braxton County, West Virginia, Solid Waste
Disposal Revenue Bonds (Weyerhaeuser Company
Project), Series 1995A,
6.5%, 4-1-2025 ...................................................... 3,500 3,863,125
TOTAL MUNICIPAL BONDS - 93.56% $932,744,188
(Cost: $850,689,274)
TOTAL SHORT-TERM SECURITIES - 3.19% $ 31,791,313
(Cost: $31,791,313)
TOTAL INVESTMENT SECURITIES - 96.75% $964,535,501
(Cost: $882,480,587)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 3.25% 32,353,371
NET ASSETS - 100.00% $996,888,872
</TABLE>
See Notes to Schedule of Investments on page __.
45
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1998
Notes to Schedule of Investments
(A) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in effect
at September 30, 1998.
(B) The interest rate is subject to change periodically and based upon
prevailing market rates. The interest rate shown is the rate in effect at
September 30, 1998.
(C) The interest rate is subject to change periodically and based upon
prevailing market rates with a leverage factor of three. The interest rate
shown is the rate in effect at September 30, 1998.
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.
46
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
(In Thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
Assets
<S> <C>
Investment securities--at value
(Notes 1 and 3) .......................................... $ 964,536
Receivables:
Investment securities sold ............................... 22,511
Interest ................................................. 14,244
Fund shares sold ......................................... 544
Prepaid insurance premium ................................... 29
----------
Total assets ........................................... 1,001,864
----------
Liabilities
Payable to Fund shareholders ................................ 2,630
Payable for investment securities purchased ................. 2,080
Accrued service fee (Note 2) ................................ 177
Accrued transfer agency and dividend
disbursing (Note 2) ...................................... 60
Accrued management fee (Note 2) ............................. 12
Accrued accounting services fee (Note 2) .................... 7
Distribution fee (Note 2) ................................... 1
Due to custodian ............................................ 1
Other ....................................................... 7
----------
Total liabilities ........................................ 4,975
----------
Total net assets .................................... $ 996,889
==========
Net Assets
$1.00 par value capital stock, authorized --
600,000; shares outstanding - 130,689
Capital stock ............................................ $ 130,689
Additional paid-in capital ............................... 772,825
Accumulated undistributed income:
Accumulated undistributed net investment
income ................................................ 1,427
Accumulated undistributed net realized gain on
investment transactions ............................... 9,893
Net unrealized appreciation in value of
investments ........................................... 82,055
----------
Net assets applicable to outstanding units
of capital .......................................... $ 996,889
==========
Net asset value per share (net assets divided by
shares outstanding) ......................................... $7.63
=====
</TABLE>
See notes to financial statements.
47
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1998
(In Thousands)
<TABLE>
<CAPTION>
Investment Income
<S> <C>
Interest and amortization (Note 1B) ........................ $ 55,883
--------
Expenses (Note 2):
Investment management fee ............................... 4,183
Service fee ............................................. 1,900
Transfer agency and dividend disbursing ................. 670
Accounting services fee ................................. 86
Custodian fees .......................................... 44
Audit fees .............................................. 20
Distribution fees ....................................... 10
Legal fees .............................................. 9
Other ................................................... 157
--------
Total expenses ....................................... 7,079
--------
Net investment income ............................. 48,804
--------
Realized and Unrealized Gain on
Investments (Notes 1 and 3)
Realized net gain on securities ............................ 20,753
Realized net loss on put options purchased ................. (4,234)
Realized net gain on futures contracts closed .............. 422
--------
Net realized gain on investments ........................ 16,941
Net unrealized appreciation in value of
investments during the period ........................... 16,492
--------
Net gain on investments .............................. 33,433
--------
Net increase in net assets resulting
from operations ................................ $ 82,237
========
</TABLE>
See notes to financial statements.
48
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the fiscal year
ended September 30,
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income .................... $ 48,804 $ 50,228
Realized net gain on
investments ........................... 16,941 9,662
Unrealized appreciation .................. 16,492 31,319
--------- ---------
Net increase in net assets
resulting from operations .......... 82,237 91,209
--------- ---------
Distributions to shareholders from(Note 1D):*
Net investment income: ................... (48,648) (49,761)
Realized gains on securities
transactions: ......................... (12,104) (20,845)
--------- ---------
(60,752) (70,606)
--------- ---------
Capital share transactions:
Proceeds from sale of shares:
(41,023,912 and 69,698,111
shares, respectively) ................. 307,508 511,770
Proceeds from reinvestment of
dividends and/or capital gains
distribution: (6,763,886 and
8,113,114 shares, respectively) ....... 50,042 58,978
Payments for shares redeemed:
(50,159,643 and 80,867,185
shares, respectively) ................. (376,023) (594,413)
--------- ---------
Net decrease in net
assets resulting from capital
share transactions ................. (18,473) (23,665)
--------- ---------
Total increase (decrease) .......... 3,012 (3,062)
Net Assets
Beginning of period ......................... 993,877 996,939
--------- ---------
End of period, including
undistributed net investment
income of $1,427 and
$1,271, respectively ..................... $ 996,889 $ 993,877
========= =========
</TABLE>
*See "Financial Highlights" on page __.
See notes to financial statements.
49
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For the fiscal year ended
September 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $7.47 $7.32 $7.25 $6.91 $7.83
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income .......... 0.37 0.38 0.39 0.39 0.38
Net realized and
unrealized gain
(loss) on
investments ..... 0.25 0.30 0.12 0.38 (0.67)
----- ----- ----- ----- -----
Total from investment
operations ......... 0.62 0.68 0.51 0.77 (0.29)
----- ----- ----- ----- -----
Less distributions:
From net investment
income .......... (0.37) (0.37) (0.39) (0.39) (0.38)
From capital gains . (0.09) (0.16) (0.05) (0.00) (0.25)
In excess of capital
gains ........... (0.00) (0.00) (0.00) (0.04) (0.00)
----- ----- ----- ----- -----
Total distributions ... (0.46) (0.53) (0.44) (0.43) (0.63)
----- ----- ----- ----- -----
Net asset value,
end of period ...... $7.63 $7.47 $7.32 $7.25 $6.91
===== ===== ===== ===== =====
Total return* ......... 8.67% 9.77% 7.16% 11.51% -3.91%
Net assets, end of
period (in
millions) .......... $997 $994 $997 $975 $951
Ratio of expenses to
average net assets . 0.72% 0.67% 0.68% 0.65% 0.64%
Ratio of net investment
income to average
net assets ......... 4.95% 5.14% 5.23% 5.51% 5.17%
Portfolio
turnover rate ...... 50.65% 47.24% 74.97% 70.67% 62.61%
</TABLE>
* Total return calculated without taking into account the sales load deducted
on an initial purchase.
See notes to financial statements.
50
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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 carryovers.
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
51
<PAGE>
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 $18.9 billion of combined net
assets at September 30, 1998) 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
<TABLE>
<CAPTION>
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
<S> <C>
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
</TABLE>
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 $1,153,458, out of which
W&R paid sales commissions of $663,988 and all expenses in
52
<PAGE>
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 Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $35,405, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., a holding company,
and a direct subsidiary of Waddell & Reed Financial Services, Inc., a holding
company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and
short-term securities, aggregated $487,150,153 while proceeds from maturities
and sales aggregated $581,245,455. Purchases of options aggregated $5,409,385
while proceeds from options aggregated $2,903,135. Purchases of short-term
securities aggregated $1,018,059,216 while proceeds from maturities and sales
aggregated $989,228,207. No U.S. Government securities were bought or sold
during the period ended September 30, 1998.
For Federal income tax purposes, cost of investments owned at September 30,
1998 was $886,920,070, resulting in net unrealized appreciation of $77,615,431,
of which $77,619,034 related to appreciated securities and $3,603 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $15,978,789 during its fiscal year ended September 30, 1998, of which a
portion was paid to shareholders during the period ended September 30, 1998.
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.
53
<PAGE>
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 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, 1998, the Fund had not commenced multiclass operations.
54
<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, 1998, and the related statements of operations for the fiscal
year then ended and changes in net assets for each of the fiscal years in the
two-year period then ended, and the financial highlights for each of the fiscal
years in the five-year period 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 audits.
We conducted our audits 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, 1998 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 audits provide 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, 1998, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 6, 1998
55
