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WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
913-236-2000
888-WADDELL
June 30, 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 Waddell & Reed Advisors Municipal Bond Fund, Inc. (the
"Fund"), formerly, United Municipal Bond Fund, Inc., dated June 30, 2000, which
may be obtained from the Fund or its underwriter, Waddell & Reed, Inc., at the
address or telephone number shown above.
TABLE OF CONTENTS
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<S> <C>
Performance Information .................................................................... 2
Investment Strategies, Policies and Practices .............................................. 5
Investment Management and Other Services ................................................... 33
Purchase, Redemption and Pricing of Shares ................................................. 38
Directors and Officers ..................................................................... 50
Payments to Shareholders ................................................................... 57
Taxes ...................................................................................... 58
Portfolio Transactions and Brokerage ....................................................... 62
Other Information .......................................................................... 64
Appendix A ................................................................................. 66
Financial Statements ....................................................................... 72
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Waddell & Reed Advisors 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, 2000, which is the most recent balance sheet included in this SAI, for
the periods shown were as follows:
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With Without
Sales Load Sales Load
Deducted Deducted
<S> <C> <C>
One-year period from April 1, 1999 to
March 31, 2000: -7.42% -3.32%
Five-year period from April 1, 1995 to
March 31, 2000: 4.47% 5.38%
Ten-year period from April 1, 1990 to
March 31, 2000: 6.66% 7.12%
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Prior to January 21, 1996, the Fund offered only one class of shares to
the public. Shares outstanding on that date were designated as Class A shares.
Since that date, Class Y shares of the Fund have been available to certain
institutional investors.
The cumulative total return quotation for Class B shares with the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was -4.10%.
The cumulative total return quotation for Class B shares without the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was 0.78%.
The cumulative total return quotation for Class C shares with the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was -0.20%.
The cumulative total return quotation for Class C shares without the
maximum deferred sales charge deducted as of March 31, 2000, which is the most
recent balance sheet included in this SAI, for the period since class inception
on October 4, 1999 to March 31, 2000 was 0.78%.
The average annual total return quotations for Class Y shares as of
March 31, 2000, which is the most recent balance sheet included in this SAI, for
the periods shown were as follows:
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<S> <C>
Period from April 1, 1999 to
March 31, 2000: 0.09%
Period from December 30, 1998* to
March 31, 2000: -1.92%
</TABLE>
*Date of inception.
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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:
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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 , Class B, Class C and Class Y shares of the Fund
computed according to the formula for the 30-day period ended on March 31, 2000,
the date of the most recent balance sheet included in this SAI, is 5.10%, 4.65%,
4.47% and 5.55%, respectively.
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, 2000, the date of the most
recent balance sheet included in this SAI, is 5.95%, 6.97%, 7.26%, 7.81% and
8.26% for marginal tax brackets of 15%, 28%, 31%, 36% and 39.6%, respectively.
The tax-equivalent yield for Class B shares computed according to the formula
for the 30-day period ended on March 31, 2000 is 5.43%, 6.36, 6.62%, 7.12% and
7.53% for marginal tax brackets of 15%,
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28%, 31%, 36% and 39.6%, respectively. The tax-equivalent yield for Class C
shares computed according to the formula for the 30-day period ended on March
31, 2000 is 5.21%, 6.11%, 6.36%, 6.84% and 7.23% 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, 2000 is 6.48%, 7.56%, 7.90%, 8.50% and 8.99% for marginal tax brackets of
15%, 28%, 31%, 36% and 39.6%, respectively.
Change in yields primarily reflect different interest rates received by
the Fund as its portfolio securities change. Yield is also affected by portfolio
quality, portfolio maturity, type of securities held and operating expenses of
the applicable class.
PERFORMANCE RANKINGS AND OTHER INFORMATION
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.
Performance information for the Fund may be accompanied by information
about market conditions and other factors that affected the Fund's performance
for the period(s) shown.
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.
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
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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"), which are
also generally referred to as private activity bonds ("PABS"). The Fund may
purchase IDBs and PABs 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 and PABS are revenue bonds
and are issued by or on behalf of public authorities to obtain funds to finance
privately operated facilities such as for energy and pollution control. IDBs and
PABs are also used to finance public facilities such as airports and mass
transit systems. The credit quality of IDBs and PABs 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 or PABs.
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 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
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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 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-purchase 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 (with the result 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.
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
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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 ("S&P"), and Moody's Investors
Service, Inc. ("MIS") may use different rating designations for municipal bonds
depending on their maturities on issuance or other characteristics. For example,
MIS now rates the top four categories of "municipal notes" (i.e., municipal
bonds generally with a maturity at the time of issuance ranging from six months
to three years) as MIG 1, MIG 2, MIG 3 and MIG 4. Municipal bonds purchased by
the Fund comply with the 80%
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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 or are of
equivalent ratings as determined by WRIMCO. 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. 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 total 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 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
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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 total 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), (iii) commercial paper and (iv)
any of the foregoing obligations subject to repurchase agreements. The taxable
commercial paper the Fund may buy must, at the time of purchase, be rated at
least A by S&P or MIS. See Appendix A for a description of these ratings.
DEFENSIVE STRATEGIES AND TEMPORARY INVESTMENTS
To shorten the average maturity of 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 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.
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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 (also known as the Federal National Mortgage Association), Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("Ginnie Mae"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("Freddie Mac"), Farm Credit Banks,
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding
Corporation, and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by Fannie Mae, are supported only by
the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United States, the
owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment.
U.S. Government securities may include mortgage-backed securities
issued by U.S. Government agencies or instrumentalities including, but not
limited to, Ginnie Mae, Freddie Mac and Fannie Mae. These mortgage-backed
securities include pass-through securities, participation certificates and
collateralized mortgage obligations. See "Mortgage-Backed and Asset-Backed
Securities." Timely payment of principal and interest on Ginnie Mae
pass-throughs is guaranteed by the full
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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 (and include the accrued OID on a
taxable security as income) each year, even though the holder may receive no
interest payment on the security during the year. Because the Fund annually must
distribute substantially all of its taxable income and net tax-exempt income,
including any tax-exempt OID, to continue to qualify for treatment as a
regulated investment company ("RIC"), 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 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. The Fund may realize capital gains or losses
from those sales, which would increase or decrease its taxable income and or net
capital gains.
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
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Accrual on Treasury Securities), TIGRs (Treasury Investment Growth Receipts)
and TRs (Treasury Receipts) are examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury security and selling them as
individual securities. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) can also be separated in this
fashion. Original issue zeros are zero coupon securities originally issued by
the U.S. Government, a government agency, or a corporation in zero coupon form.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
MORTGAGE-BACKED 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
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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 guaranteed by the Government 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".
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, floor and collar 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 will 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
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loans. In other words, the value of the underlying securities, which will be
held by the Fund's custodian bank or by a third party that qualifies as a
custodian under Section 17(f) of the Investment Company Act of 1940, as amended
(the "1940 Act"), is and, during the entire term of the agreement, will remain
at least equal to the value of the loan, including the accrued interest earned
thereon. Repurchase agreements are entered into only with those entities
approved by WRIMCO.
OPTIONS, FUTURES AND OTHER STRATEGIES
GENERAL. WRIMCO may use certain options, futures contracts (sometimes
referred to as "futures"), options on futures contracts, swaps, caps, floors,
collars, 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
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particular securities positions that the Fund owns or intends to acquire.
Financial Instruments on indices, in contrast, generally are used to attempt to
hedge against price movements in market sectors in which the Fund has invested
or expects to invest. Financial Instruments on debt securities may be used to
hedge either individual securities or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations
of the Securities and Exchange Commission (the "SEC"), the several exchanges
upon which they are traded and the Commodity Futures Trading Commission (the
"CFTC"). In addition, the Fund's ability to use Financial Instruments 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
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of the investments being hedged, such as speculative or other pressures on the
markets in which Financial Instruments are traded. The effectiveness of hedges
using Financial Instruments on indices will depend on the degree of correlation
between price movements in the index and price movements in the securities
being hedged.
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match the Fund's current or anticipated investments exactly. The Fund
may invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because WRIMCO projected a decline in the price
of a security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Financial Instrument. Moreover, if the price of the
Financial Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not attempted to hedge at all.
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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 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 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.
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Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value. If the call option is an OTC
option, the securities or other assets used as cover would be considered
illiquid to the extent described under "Illiquid Investments."
Writing put options can serve as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security depreciates to
a price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Fund will be obligated to purchase the
security at more than its market value. If the put option is an OTC option, the
securities or other assets used as cover would be considered illiquid to the
extent described under "Illiquid Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
A type of put that the Fund may purchase is an "optional delivery
standby commitment," which is entered into by parties selling debt securities to
the Fund. An optional delivery standby commitment gives the Fund the right to
sell the security back to the seller on specified terms. This right is provided
as an inducement to purchase the security.
RISKS OF OPTIONS ON SECURITIES. 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
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are issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between the Fund and its counterparty (usually a securities dealer or a bank)
with no clearing organization guarantee. Thus, when the Fund purchases an OTC
option, it relies on the counterparty from whom it purchased the option to make
or take delivery of the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating directly
with the counterparty, or by a transaction in the secondary market if any such
market exists. There can be no assurance that the Fund will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, the Fund might be unable to close
out an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
OPTIONS ON INDICES. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple ("multiplier"),
which determines the total dollar value for each point of such difference. When
the Fund buys a call on an index, it pays a premium and has the same rights as
to such call as are indicated above. When the Fund buys a put on an index, it
pays a premium and has the right, prior to the expiration date, to require the
seller of the put, upon the Fund's exercise of the put, to deliver to the Fund
an amount of cash if the closing level of the index upon which the put is based
is less than the exercise price of the put, which amount of cash is determined
by
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the multiplier, as described above for calls. When the Fund writes a put on
an index, it receives a premium and the purchaser of the put has the right,
prior to the expiration date, to require the Fund to deliver to it an amount of
cash equal to the difference between the closing level of the index and the
exercise price times the multiplier if the closing level is less than the
exercise price.
RISKS OF OPTIONS ON INDICES. The risks of investment in options on
indices may be greater than options on securities. Because index options are
settled in cash, when the Fund writes a call on an index it cannot provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. The Fund can offset some of the risk of writing a call
index option by holding a diversified portfolio of securities similar to those
on which the underlying index is based. However, the Fund cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same securities as
underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if the Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, the Fund as the call writer will not learn that the Fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as a debt security, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If the Fund purchases an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently
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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. 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.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The purchase of
futures contracts or call options on futures contracts can serve as a long
hedge, and the sale of futures contracts or the purchase of put options on
futures contracts can serve as a short hedge. Writing call options on futures
contracts can serve as a limited short hedge, using a strategy similar to that
used for writing call options on securities or indices. Similarly, writing put
options on futures contracts can serve as a limited long hedge. Futures
contracts and options on futures contracts can also be purchased and sold to
attempt to enhance income or yield.
In addition, futures strategies can be used to manage the average
duration of the Fund's fixed-income portfolio. If WRIMCO wishes to shorten the
average duration of the Fund's fixed-income portfolio, the Fund may sell a debt
futures contract or a call option thereon, or purchase a put option on that
futures contract. If WRIMCO wishes to lengthen the average duration of the
Fund's fixed-income portfolio, the Fund may buy a debt futures contract or a
call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain
26
<PAGE>
circumstances, such as periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin payment, and initial
margin requirements might be increased generally in the future by regulatory
action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions in
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures contracts and options on
futures contracts may be closed only on an exchange or board of trade that
provides a secondary market. However, there can be no assurance that a liquid
secondary market will exist for a particular contract at a particular time. In
such event, it may not be possible to close a futures contract or options
position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on
a futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option or to maintain cash or
liquid assets in an account.
RISKS OF FUTURES CONTRACTS AND OPTIONS THEREON. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to the differences in the natures of those markets, are subject to
the following
27
<PAGE>
factors, which may create distortions. First, all participants in the futures
market are subject to margin deposit and maintenance requirements. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through offsetting transactions, which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures market depends on participants entering into offsetting transactions
rather than making or taking delivery. To the extent participants decide to
make or take delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of general interest rate or debt market trends
by WRIMCO may still not result in a successful transaction. WRIMCO may be
incorrect in its expectations as to the extent of various interest rate or debt
market movements or the time span within which the movements take place.
INDEX FUTURES. The risk of imperfect correlation between movements in
the price of an index future and movements in the price of the securities that
are the subject of the hedge increases as the composition of the Fund's
portfolio diverges from the securities included in the applicable index. The
price of the index futures may move more than or less than the price of the
securities being hedged. If the price of the index future moves less than the
price of the securities that are the subject of the hedge, the hedge will not be
fully effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where the Fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
28
<PAGE>
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.
COMBINED POSITIONS. The Fund may purchase and write options in
combination with each other, or in combination with futures contracts, to adjust
the risk and return characteristics of its overall position. For example, the
Fund may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
TURNOVER. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate. Once
the Fund has received an exercise notice on an option it has written, it cannot
effect a closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
SWAPS, CAPS, FLOORS AND COLLARS. The Fund may enter into swaps, caps,
floors and collars 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
29
<PAGE>
of their respective commitments to pay or receive cash flows on a notional
principal amount, 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, floors and collars, 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 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.
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<PAGE>
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
futures contracts, options, forward contracts, swaps, caps,
floors, collars 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;
(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, floors, collars and other
financial instruments, (2) the Fund may obtain such
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<PAGE>
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, floors, collars, 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 total 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 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 total
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.
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<PAGE>
(iv) The Fund does not intend to purchase IDBs or PABs that finance
facilities (other than utilities) of nongovernmental users if,
as a result, more than 25% of its total assets would be invested
in issuers in any one industry.
(v) To the extent that the Fund enters into futures contracts,
options on futures contracts or options on foreign currencies
traded on a CFTC-regulated exchange, 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 total assets that are at risk in futures
contracts and options on futures contracts.
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 and PABs, 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
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<PAGE>
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, 1999 and 1998
was 30.93% and 50.65%, respectively.
INVESTMENT MANAGEMENT AND OTHER SERVICES
THE MANAGEMENT AGREEMENT
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly owned subsidiary of Waddell & Reed, Inc.
Under the Management Agreement, WRIMCO is employed to supervise the investments
of the Fund and provide investment advice to the Fund. The address of WRIMCO and
Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits WRIMCO, or an affiliate of WRIMCO, 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, which 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.
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<PAGE>
Waddell & Reed, Inc. and its predecessors have served as investment
manager to each of the registered investment companies in the Waddell & Reed
Advisors Funds (formerly, the United Group of Mutual Funds) 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 W&R Funds, Inc.
(formerly, Waddell & Reed Funds, Inc.) since its inception in September 1992.
Waddell & Reed, Inc. serves as principal underwriter for the investment
companies in the Waddell & Reed Advisors Funds and W&R 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.
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, preparation of prospectuses for existing shareholders,
preparation of proxy statements and certain shareholder 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, 1999, 1998 and 1997 were $4,196,083, $4,183,289 and $4,208,872,
respectively.
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<PAGE>
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; charges of any sub-agent used by Agent in performing
services under the Shareholder Servicing Agreement; and costs of legal and
special services not provided by Waddell & Reed, Inc., WRIMCO or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a
monthly fee of one-twelfth of the annual fee shown in the following table.
ACCOUNTING SERVICES FEE
<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 fees paid to the Agent for accounting services for the fiscal years
ended September 30, 1999, 1998 and 1997 were $85,000, $86,250 and $86,250,
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
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<PAGE>
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, 1999, 1998 and 1997 were $993,053, $1,153,458 and $900,465, respectively.
The amounts retained by Waddell & Reed, Inc. for each period were $421,925,
$489,470 and $389,479, respectively.
As described in the Prospectus, Waddell & Reed, Inc. reallows to
selling broker-dealers a portion of the sales charge paid for purchases of Class
A shares. 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 and for
certain Class A shares may be paid to financial advisors and managers of Waddell
& Reed, Inc. and selling broker-dealers. Waddell & Reed, Inc. may compensate its
financial 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, either directly or through others, the distribution
of the Class A shares, the provision of personal services to Class A
shareholders and/or maintenance of Class A shareholder accounts.
Waddell & Reed, Inc. offers the Fund's shares through its financial
advisors, registered representatives and sales managers ("sales force") and
through other broker-dealers, banks and other appropriate intermediaries. In
distributing shares through its sales force, Waddell & Reed, Inc. will pay
commissions and
37
<PAGE>
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 $2,033,851 and $129,146,
respectively, were paid (or accrued) by the Fund under the Class A Plan for the
fiscal year ended September 30, 1999.
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 another fund in the Waddell & Reed Advisors Funds or W&R 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, either directly or through others,
providing personal 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,
either directly or through others, 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 maintaining
shareholder accounts of that class, which are similar to the corresponding
activities for which it is entitled to reimbursement under the Class A Plan.
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<PAGE>
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
(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., 928 Grand Boulevard, Kansas
City, Missouri. In general, the Custodian is responsible
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for holding the Fund's cash and securities. Deloitte & Touche LLP, 1010 Grand
Boulevard, 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 ("NAV") 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 NAV
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
September 30, 1999, which is the most recent balance sheet included in this
SAI, was as follows:
<TABLE>
<S> <C>
NAV per Class A share (Class
A net assets divided by Class A shares
outstanding) ................................. $6.70
Add: selling commission (4.25% of offering
price) ....................................... .30
-----
Maximum offering price per Class A share
(Class A NAV divided by 95.75%)............... $7.00
=====
</TABLE>
The offering price of a Class A share is its NAV next calculated
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 NAV next calculated
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. or an authorized third party receives and accepts your order at its
principal business office. 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 NAV 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 futures contract held by the Fund is traded. The NYSE
annually announces the days on which it will not be open for trading. The
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<PAGE>
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 NAV 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 value. 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 on the securities or commodities exchanges on
which they are traded, or, if there are no transactions, at the mean between
bid and asked prices. Ordinarily, the close of the regular session for
options trading on national securities exchanges is 4:10 p.m. Eastern time
and the close of the regular session for commodities exchanges is 4:15 p.m.
Eastern time. Futures contracts will be valued with reference to established
futures exchanges. The value of a futures contract purchased by the Fund will
be either the closing price of that contract or the bid price. Conversely,
the value of a futures contract sold by the Fund will be either the closing
price or the asked price.
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
For Class A, 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 Waddell & Reed Advisors Funds or W&R Funds, Inc. 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
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<PAGE>
automatic withdrawals from a bank account, a shareholder may make subsequent
investments of any amount. See "Exchanges for Shares of Other Funds in the
Waddell & Reed Advisors Funds and W&R Funds, Inc."
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 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 tax-advantage 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 shares of
other funds in the Waddell & Reed Advisors Funds.
1. Purchases by an individual for his or her own account (includes
purchases under the Waddell & Reed Advisors Funds Revocable Trust
form);
2. Purchases by that individual's spouse purchasing for his or her own
account (includes Waddell & Reed Advisors 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 Transfers to Minors Act ("UTMA") or Uniform Gifts to
Minors Act ("UGMA") 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
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<PAGE>
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).
For the foregoing categories, an individual's domestic partner is
treated as his or her spouse.
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother
has an account in her own name; A's father has an account in
his own name; the UGMA account may be grouped with A's
father's account but may not be grouped with Grandmother's
account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase
made in the trust account is eligible for grouping with an IRA
account of W, H's wife;
C. H's will provides for the establishment of a trust for the
benefit of his minor children upon H's death; his bank is
named as trustee; upon H's death, an account is established in
the name of the bank, as trustee; a purchase in the account
may be grouped with an account held by H's wife in her own
name.
D. X establishes a trust naming herself as trustee and R, her
son, as successor trustee and R and S as beneficiaries; upon
X's death, the account is transferred to R as trustee; a
purchase in the account may not be grouped with R's individual
account. If X's spouse, Y, was successor trustee, this
purchase could be grouped with Y's individual account.
Account grouping as described above is available under the following
circumstances.
ONE-TIME PURCHASES
A one-time purchase of Class A shares in accounts eligible for grouping
may be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $100,000; at
the same time, H's parents open up two UGMA accounts for H and
W's two minor children and invest $100,000 in each child's
name; the combined purchases of Class A shares are subject to
the reduced
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<PAGE>
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 NAV 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 NAV 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(s) with which the purchase may be combined.
LETTER OF INTENT
The benefit of a reduced sales charge for larger purchases of Class
A shares is also available under an LOI ("LOI"). By signing an LOI 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 LOI is accepted by Waddell &
Reed, Inc. Each purchase made from time to time under the LOI 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 LOI 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 an LOI, 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.
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<PAGE>
Example: H signs an LOI 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 NAV as of the date the LOI
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
Waddell & Reed Advisors Funds which charges the same sales
load as the Fund, with a NAV as of the date of acceptance of
the LOI 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 LOI 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 an LOI is 5% of the dollar
amount which must be invested under the LOI. An amount equal to 5% of the
purchase required under the LOI will be held "in escrow." If a purchaser does
not, during the period covered by the LOI, invest the amount required to
qualify for the reduced sales charge under the terms of the LOI, 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 an LOI which is not completed will be collected by
redeeming part of the shares purchased under the LOI 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 LOI, the lower sales charge will apply.
An LOI does not bind the purchaser to buy, or Waddell & Reed, Inc.
to sell, the shares covered by the LOI.
With respect to LOIs for $2,000,000 or purchases otherwise
qualifying for no sales charge under the terms of the LOI, the initial
investment must be at least $200,000.
The value of any shares redeemed during the 13-month period which
were acquired under the LOI will be deducted in computing the aggregate
purchases under the LOI.
45
<PAGE>
OTHER FUNDS IN THE WADDELL & REED ADVISORS FUNDS AND W&R FUNDS, INC.
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 Waddell
& Reed Advisors Funds and the W&R Funds, Inc. subject to a sales charge. A
purchase of Class A shares, or Class A shares held, in any of the funds in
the Waddell & Reed Advisors Funds and/or the W&R Funds, Inc. 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 Waddell & Reed
Advisors Cash Management, Inc. (formerly, United Cash Management, Inc.) or
W&R Funds, Inc. Money Market Fund that were acquired by exchange of another
Waddell & Reed Advisors Fund or W&R Funds, Inc. 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
As stated in the Prospectus, Class A shares of the Fund may be
purchased at NAV by the Directors and officers of the Fund or of any
affiliated entity of Waddell & Reed, Inc., employees of Waddell & Reed,
Inc. or of any of its 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 eligible purchaser are also eligible
for NAV purchases of Class A shares. "Employees" include retired employees. A
"retired employee" is an individual separated from service from Waddell &
Reed, Inc., or from an affiliated company, with a vested interest in any
Employee Benefit Plan sponsored by Waddell & Reed, Inc. or any of its
affiliated companies. "Employees" also include 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"
include 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 NAV whether or not the custodian
himself is an eligible purchaser.
Until March 31, 2001, Class A shares may also be purchased at NAV by
persons who are clients of Legend Equities Corporation ("Legend") if the
purchase is made with the proceeds of the redemption of shares of a mutual
fund which is not within the Waddell & Reed Advisors Funds or W&R Funds, Inc.
and the purchase is made within 60 days of such redemption.
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<PAGE>
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, there are a number of
instances in which the Fund's Class A shares are sold or issued on a basis
other than at the maximum public offering price, that is, the NAV plus the
highest sales charge. Some of these instances 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 an LOI or Rights 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 is 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.
In general, the reasons for the other instances in which there are
reduced or eliminated sales charges for Class A shares are as follows.
Exchanges at NAV are permitted because a sales charge has already been paid
on the shares exchanged. Sales of Class A shares without a sales charge are
permitted to Directors, officers and certain others due to reduced or
eliminated selling expenses and since such sales may aid in the development
of a sound employee organization, encourage responsibility and interest in
the Waddell & Reed Advisors Funds 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.
Reduced or eliminated sales charges may also be used for certain short-term
promotional activities by Waddell & Reed, Inc. 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 NAV per share
of all shares sold or issued.
47
<PAGE>
REDEMPTIONS
The Prospectus gives information as to redemption procedures.
Redemption payments are made within seven days from receipt of request 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 determining NAV. 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 NAV 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, Class B or Class C
shares that you own of the Fund or of any of the funds in the Waddell & Reed
Advisors Funds or W&R Funds, Inc. 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 B and Class C
shares and certain Class A shares to which the CDSC otherwise applies that
are 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 of any of the funds
in the Waddell & Reed Advisors Funds or W&R Funds, Inc.; 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 current offering price.
You can choose to have your shares redeemed to receive:
48
<PAGE>
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, 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 WADDELL & REED ADVISORS FUNDS AND
W&R FUNDS, INC.
CLASS A SHARE EXCHANGES
You may decide you would rather own Class A shares of one or more of
the other funds in the Waddell & Reed Advisors Funds or the W&R Funds, Inc.
rather than Class A shares of the Fund. An exchange of Class A shares of the
Fund may be made only if you have held the shares for at least six months
unless the exchange is for Class A shares of Waddell & Reed Advisors
Government
49
<PAGE>
Securities Fund, Inc., Waddell & Reed Advisors Municipal High Income Fund,
Inc., Waddell & Reed Advisors Cash Management, Inc., W&R Funds Municipal Bond
Fund, W&R Funds Limited-Term Bond Fund or W&R Funds Money Market Fund 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. The
shares you exchange must be worth at least $100 or you must already own
shares of the fund into which you are investing. 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 Waddell & Reed Advisors Funds, except for shares of
Waddell & Reed Advisors 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 Waddell & Reed Advisors Cash
Management, Inc. automatically exchanged each month into Class A shares of
the Fund or any other fund in the Waddell & Reed Advisors Funds, provided you
already own Class A shares of the fund. The shares of Waddell & Reed Advisors
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 Waddell & Reed Advisors 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.
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 Waddell & Reed Advisors Funds and/or W&R Funds, Inc.
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 Waddell &
Reed Advisors Cash Management, Inc. automatically exchanged each month into
Class B shares of the Fund or any other fund in the Waddell & Reed Advisors
Funds, provided you already own Class B shares of a fund. The shares of
Waddell & Reed
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<PAGE>
Advisors 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 C SHARE EXCHANGES
You may exchange Class C shares of the Fund for Class C shares of
other Funds in the Waddell & Reed Advisors Funds and/or W&R Funds, Inc.
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 Waddell &
Reed Advisors Cash Management, Inc. automatically exchanged each month into
Class C shares of the Fund or any other fund in the Waddell & Reed Advisors
Funds, provided you already own Class C shares of a fund. The shares of
Waddell & Reed Advisors 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 Waddell & Reed Advisors Funds or Class A shares of Waddell
& Reed Advisors Cash Management, Inc.
GENERAL EXCHANGE INFORMATION
When you exchange shares, the total shares you receive will have the
same aggregate NAV 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 Waddell & Reed Advisors Funds 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 NAV next calculated after the
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Fund receives the returned amount. Your written request to reinvest and the
amount to be reinvested must be received within forty-five 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.
There is also a reinvestment privilege for Class B and Class C
shares and, where applicable, certain Class A shares under which you may
reinvest all or part of any amount of the 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 shares of the same class. If Fund shares of that class
are then being offered, you can put all or part of your redemption payment
back into such shares at the NAV next calculated after you have returned the
amount. Your written request to do this must be received within forty-five
days after your redemption request was received. You can do this only once as
to Class B, Class C and Class A 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 NAV 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 are not affiliated with Waddell & Reed, Inc.
The principal occupation during the past five years of each Director
and officer is stated 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 of the Fund but are 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 Waddell & Reed Advisors Funds of
Mutual Funds, W&R Funds, Inc. and Target/United Funds, Inc. Each
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<PAGE>
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.
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 and Director of Waddell & Reed Financial, Inc.; President, Chairman of
the Board of Directors, Director and Chief Executive Officer of Waddell & Reed
Financial Services, Inc.; Chairman of the Board of Directors and Director 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 of 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 of Garney
Companies, Inc., a specialty utility contractor. Date of birth: January 9, 1939.
DAVID P. GARDNER
263 West 3rd Avenue
San Mateo, California 94402
Chairman and Chief Executive Officer of George S. and Delores Dor'e
Eccles Foundation; Director of First Security Corp., a bank holding company,
and Director of Fluor Corp., a company with interests in coal; formerly,
President of Hewlett Foundation. Date of birth: March 24, 1933.
LINDA K. GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, Partner, Levy and Craig, P.C., a law
firm. Date of birth: July 29, 1953.
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<PAGE>
JOSEPH HARROZ, JR.
125 South Creekdale Drive
Norman, Oklahoma 73072
General Counsel of the Board of Regents at the University of Oklahoma;
Adjunct Professor of Law at the University of Oklahoma College of Law; Managing
Member, Harroz Investments, L.L.C.; formerly, Vice President for Executive
Affairs of the University of Oklahoma; formerly, 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; Chairman of the Board of Directors, Gilliland & Hayes, P.A., a law
firm; formerly, President of Gilliland & Hayes, P.A.; formerly, Director of
Central Properties, Inc. 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.; Executive 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.; Director and
Treasurer of Waddell & Reed Services Company; Chairman of the Board of
Directors, Chief Executive Officer, President and Director of Fiduciary Trust
Company of New Hampshire, an affiliate of Waddell & Reed, Inc.; Director of
Legend Group Holdings, LLC, Legend Advisory Corporation, Legend Equities
Corporation, Advisory Services Corporation, The Legend Group, Inc. and LEC
Insurance Agency, Inc.; formerly, Vice President of each of the funds in the
Fund Complex; formerly, Director and Treasurer of Waddell & Reed Asset
Management Company; formerly, President of Waddell & Reed Services Company. 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, and Director of Waddell & Reed
Financial, Inc.; Executive 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; Chairman of the Board of Directors of Austin, Calvert & Flavin, Inc., an
affiliate of WRIMCO; formerly, President, Chief Executive Officer, Chief
Investment Officer and Director of Waddell & Reed Asset Management Company. Date
of birth: December 8, 1942.
54
<PAGE>
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 its subsidiaries. Date of birth: February
19, 1924.
WILLIAM T. MORGAN*
928 Glorietta Blvd.
Coronado, California 92118
Retired; formerly, Chairman of the Board of Directors and President
of 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. 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 and Vice President of Network Rehabilitation Services;
Board Member, Member of Executive Committee and Finance Committee of Truman
Medical Center; 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;
Director of Columbian Bank and Trust. Date of birth: April 9, 1953.
ELEANOR B. SCHWARTZ
1213 West 95th Court, Chartwell 4
Kansas City, Missouri 64114
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.
DANIEL C. SCHULTE
Vice President, Assistant Secretary and General Counsel of the Fund
and each of the other funds in the Fund Complex; Vice President, Secretary
and General Counsel of Waddell & Reed
55
<PAGE>
Financial, Inc.: Senior Vice President, Secretary and General Counsel of
Waddell & Reed Financial Services Company, Waddell & Reed, Inc., WRIMCO and
Waddell & Reed Services Company; Secretary and Director of Fiduciary Trust
Company of New Hampshire, and affiliate of Waddell & Reed, Inc.; formerly,
Assistant Secretary of Waddell & Reed Financial, Inc.; formerly, an attorney
with Klenda, Mitchell, Austerman & Zuercher, L.L.C. Date of birth: December
8, 1965.
KRISTEN A. RICHARDS
Vice President, Secretary and Associate General Counsel of the Fund
and each of the other funds in the Fund Complex; Vice President and Associate
General Counsel of WRIMCO; formerly, Assistant Secretary of the Fund and each
of the other funds in the Fund Complex; formerly, Compliance Officer of
WRIMCO. Date of birth: December 2, 1967.
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.
BRYAN J. BAILEY
Bryan J. Bailey is Vice President of the Fund and one other Fund in
the Fund Complex and Vice President of WRIMCO; formerly, Assistant Portfolio
Manager for investment companies managed by WRIMCO. Date of birth: April
17, 1963.
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, whereby an incumbent Director who has attained the age of 70 may,
or if elected on or after May 31, 1993 and has attained the age of 75 must,
resign his or her position as Director and, unless he or she elects
otherwise, will serve as Director Emeritus provided the Director has served
as a Director of the Funds for at least five years which need not have been
consecutive. 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 he or she has no authority or responsibility with
respect to the management of the Fund. Messrs. Henry L. Bellmon, Jay B.
Dillingham, Doyle Patterson, Ronald K. Richey and Paul S. Wise retired as
Directors
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<PAGE>
of the Fund and of each of the funds in the Fund Complex, and each serves as
Director Emeritus.
The funds in the Waddell & Reed Advisors Funds, Target/United Funds,
Inc. and W&R Funds, Inc. pay to each Director, effective October 1, 1999, an
annual base fee of $50,000, plus $3,000 for each meeting of the Board of
Directors attended and effective January 1, 2000, an annual base fee of
$52,000 plus $3,250 for each meeting of the Board of Directors attended, plus
reimbursement of expenses for attending such meeting and $500 for each
committee meeting attended which is not in conjunction with a Board of
Directors meeting, other than Directors who are affiliates of Waddell & Reed,
Inc. (prior to October 1, 1999, the funds in the Waddell & Reed Advisors
Funds, Target/United Funds, Inc. and W&R Funds, Inc. paid to each Director an
annual base fee of $48,000 plus $2,500 for each meeting of the Board of
Directors attended). The fees to the Directors are divided among the funds in
the Waddell & Reed Advisors Funds, Target/United Funds, Inc. and W&R Funds,
Inc. based on the funds' relative size.
During the Fund's fiscal year ended September 30, 1999, the Fund's
Directors received the following fees for service as a director:
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From Fund
From and Fund
Director Fund Complex*
-------- ------------ ------------
<S> <C> <C>
Robert L. Hechler $ 0 $ 0
Henry J. Herrmann 0 0
Keith A. Tucker 0 0
James M. Concannon 2,355 59,000
John A. Dillingham 2,355 59,000
David P. Gardner 2,259 56,500
Linda K. Graves 2,355 59,000
Joseph Harroz, Jr. 2,203 56,500
John F. Hayes 2,355 59,000
Glendon E. Johnson 2,375 59,500
William T. Morgan 2,355 59,000
Ronald C. Reimer 2,189 56,500
Frank J. Ross, Jr. 2,355 59,000
Eleanor B. Schwartz 2,375 59,500
Frederick Vogel III 2,375 59,500
</TABLE>
*No pension or retirement benefits have been accrued as a part of Fund
expenses.
The officers are paid by WRIMCO or its affiliates.
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<PAGE>
SHAREHOLDINGS
As of May 31, 2000, 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 May 31, 2000, 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>
Phyllis A Reimer Trustee Class B 6,923 9.27%
U/A dtd November 20 1996
Phyllis A Reimer Lvg Trust
5014 Briercrest
Lakewood CA 90713-1819
Betty W Taliaferro (TOD) Class B 15,537 20.80%
9104 Roe Ave
Prairie Village KS 66207-2603
Leo Stokinger & Class B 3,821 5.11%
Patti Stokinger Jtn Ros
24 Robin Rd
Norfolk MA 02056-1731
O. C. Jergens Inc Class B 3,849 5.15%
11644 NE San Rafael
Portland OR 97220-1962
Earline Nelson (TOD) Class B 11,639 15.58%
2804 SW 10th St
Lees Summit MO 64081-2375
Randy J. Dircks & Class C 6,179 13.22%
Kathryn M. Holipitza Jtn Ros
109 Jennifer Dr
Chester NH 03036-4121
Elisabeth R Lawrence & Class Y 8,428 18.03%
Paul E. Lawrence Jtn Ros
7512 Tempo Terr
Fridley MN 55432-3227
Noeida B. Castro & Class C 2,343 5.01%
Othoniel Castro Jtn Ros
837 NW 69th St
Kansas City MO 64118-1022
Carolyn Kuchinsky Class C 2,345 5.02%
444 Saratoga Ave Apt 21C
Santa Clara CA 95050-6267
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<PAGE>
Johanna G. Beal (TOD) Class C 5,692 12.18%
80 Grove St Apt 610
Melrose MA 02176-4639
Super Cash Investment Class Y 1,287,958 99.98%
Portfolio LP
A Partnership
1001 N US Highway 1 Ste 800
Jupiter FL 33477-4407
</TABLE>
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
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<PAGE>
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 NAV without any sales charge. The NAV 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 receive dividends and distributions on Fund shares in cash,
you can thereafter reinvest them (or distributions only) in shares of the Fund
at NAV (i.e., with no sales charge) next calculated after receipt by Waddell &
Reed, Inc. of the amount clearly identified as a reinvestment. The reinvestment
must be within forty-five days after the payment.
TAXES
The Fund has qualified since inception for treatment as a RIC under 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 and net short-term capital gains that it distributes to its
shareholders. To continue to qualify for treatment as a RIC, the Fund must
distribute to its shareholders for each taxable year at least 90% 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 (even if it distributed that income to its
shareholders) and (b) the shareholder would treat all distributions out of its
earnings and profits, including distributions that otherwise would be
"exempt-interest dividends" described in the following paragraph and
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<PAGE>
distributions of net capital gains, as taxable 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.
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 gains as a result of market transactions, any distribution of the gains
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-
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<PAGE>
interest dividends) taxed to, the shareholders for the year in which that
December 31 falls.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares and any balance of the loss that is not disallowed will
be treated as a 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. For these purposes, the Fund may defer into the next
calendar year net capital losses incurred between November 1 and the end of the
current calendar year. It is the Fund's policy to pay sufficient taxable
dividends and distributions each year to avoid imposition of the Excise Tax.
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
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<PAGE>
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. 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, futures contracts and forward currency 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.
In addition, these rules may postpone the recognition of a loss that would
otherwise be recognized under the mark-to-market rules discussed above. The
regulations under section 1092 also provide certain "wash sale" rules, which
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 position, 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 identical
property. In addition, if the appreciated financial position is itself a short
sale such a contract, acquisition of the underlying property or substantially
identical property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction during any taxable year that otherwise would
be treated as a constructive sale if the
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<PAGE>
transaction is closed within 30 days after the end of that year and the Fund
holds the appreciated financial position unhedged for 60 days after that
closing (I.E., at no time during that 60-day period is the Fund's risk of loss
regarding that position reduced by reason of certain specified transactions
with respect to substantially identical or related property, such as having an
option to sell, being contractually obligated to sell, making a short sale, or
granting an option to buy substantially identical stock or securities).
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 corresponding payment on the securities during the year. Because the
Fund annually must distribute substantially all of its investment company
taxable income and net tax-exempt income, including any accrued OID, to satisfy
the Distribution Requirement and (with respect to taxable income) 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 Waddell & Reed Advisors Funds, Target/United Funds,
Inc. and W&R Funds, Inc. or other accounts for which it has investment
discretion, including accounts affiliated with WRIMCO. WRIMCO, at its
discretion, may
64
<PAGE>
aggregate such orders. 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, for a transaction not involving an initial public offering ("IPO"),
WRIMCO will ordinarily allocate the transaction pro rata based on the orders
placed, subject to certain variances provided for in the written procedures.
For a partially filled IPO order, subject to certain variances specified in
the written procedures, WRIMCO generally allocates the shares as follows: the
IPO shares are initially allocated pro rata among the included funds and/or
advisory accounts grouped according to investment objective, based on relative
total assets of each group; and the shares are then allocated within each
group pro rata based on relative total assets of the included funds and/or
advisory accounts, except that (a) within a group having a small cap-related
investment objective, shares are allocated on a rotational basis after taking
into account the impact of the anticipated initial gain on the value of the
included fund or advisory account and (b) within a group having a
mid-cap-related investment objective, shares are allocated based on the
portfolio manager's judgment, including but not limited to such factors as the
fund's or advisory account's investments strategies and policies, cash
availability, any minimum investment policy, liquidity, anticipated term of
the investment and current securities positions.
In all cases, WRIMCO seeks to implement its allocation procedures to achieve a
fair and equitable allocation of securities among its funds and other advisory
accounts. Sharing in large transactions could affect the price the Fund pays or
receives or the amount it buys or sells. As well, a better negotiated price may
be 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 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.
65
<PAGE>
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 the commission 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.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
under Rule 17j-1 of the 1940 Act that permits their respective directors,
officers and employees to invest in securities, including securities that may be
purchased or held by the Fund. The Code of Ethics subjects covered personnel to
certain restrictions that include prohibited activities, pre-clearance
requirements and reporting obligations.
66
<PAGE>
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
appropriately limited to that class; Class A shares are subject to an initial
sales charge and to an ongoing distribution and/or service fee and certain Class
A shares are subject to a contingent deferred sales charge; Class B and Class C
are subject to a CDSC and to ongoing distribution and service fees; Class B
shares converts to Class A shares eight years after the month in which the
shares were purchased; 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 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 a fundamental investment policy, which require
shareholder approval will be presented to shareholders at a meeting called by
the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon
receipt by the Fund of a request in writing signed by shareholders holding not
less than 25% of all shares entitled to vote at such meeting, provided certain
conditions stated in the Bylaws 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
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
67
<PAGE>
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.
68
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities
that the Fund may use. The Fund may also use ratings provided by other
nationally recognized statistical rating organizations in determining the
securities eligible for investment.
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC. An S&P
corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment of creditworthiness may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
A brief description of the applicable S&P rating symbols and their
meanings follow:
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
69
<PAGE>
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.
70
<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.
71
<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.
72
<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.
73
<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;
74
<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.
75
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS
ALABAMA - 0.23%
BMC Special Care Facilities Financing
Authority of the City of Montgomery,
Revenue Bonds, Series 1998-B (Baptist
Health),
4.875%, 11-15-18 .................................................... $ 2,000 $ 1,760,000
ALASKA - 3.15%
City of Valdez, Alaska, Marine
Terminal Revenue Refunding Bonds
(BP Pipelines (Alaska) Inc. Project),
Series 1993A,
5.85%, 8-1-25 ....................................................... 18,150 17,628,188
State of Alaska, International Airports
System Revenue Bonds, Series 1999A,
5.0%, 10-1-19 ....................................................... 3,000 2,636,250
Alaska Housing Finance Corporation,
Housing Development Bonds, 1997
Series B (AMT),
5.8%, 12-1-29 ....................................................... 2,390 2,276,475
Alaska Energy Authority, Power Revenue
Refunding Bonds, Fifth Series (Bradley
Lake Hydroelectric Project),
5.0%, 7-1-21 ........................................................ 2,350 2,085,625
Total ............................................................... 24,626,538
CALIFORNIA - 9.23%
California Statewide Communities Development Authority:
Special Facilities Lease Revenue Bonds,
1997 Series A (United Air Lines, Inc. - San
Francisco International Airport Projects),
5.7%, 10-1-33 ....................................................... 20,900 18,183,000
Hospital Revenue Certificates of Participation,
Series 1992, Cedars-Sinai Medical Center,
6.5%, 8-1-12 ........................................................ 5,200 5,531,500
Hospital Refunding Revenue Certificates of
Participation, Series 1993, Cedars-Sinai Medical
Center, Inverse Floating Rate Securities (INFLOS),
7.049%, 11-1-15 (A) ................................................. 3,300 3,036,000
East Bay Municipal Utility District (Alameda and Contra Costa Counties,
California), Wastewater System Subordinated Revenue Refunding Bonds,
Series 1993B-2, Inverse Floating Securities:
6.62%, 6-1-13 (A) ................................................... 8,450 8,587,312
6.72%, 6-1-20 (A) ................................................... 7,250 7,077,812
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Southern California Public Power Authority:
Multiple Project Revenue Bonds, 1989 Series,
6.75%, 7-1-12 ....................................................... $ 3,455 $ 3,912,788
Mead-Adelanto Project Revenue Bonds,
1994 Series A:
Auction Rate Securities (ACES),
4.01%, 7-1-15 ....................................................... 1,400 1,400,000
Inverse Floaters,
6.01%, 7-1-15 (A) ................................................... 1,400 1,326,500
Mead-Phoenix Project Revenue Bonds,
1994 Series A:
Auction Rate Securities (ACES),
4.01%, 7-1-15 ....................................................... 1,300 1,300,000
Inverse Floaters,
6.01%, 7-1-15 (A) ................................................... 1,300 1,239,875
Transmission Agency of Northern California,
California-Oregon Transmission Project
Revenue Bonds, 1990 Series A,
7.0%, 5-1-13 ........................................................ 7,500 8,868,750
Foothill/Eastern Transportation Corridor Agency,
Toll Road Refunding Revenue Bonds, Series 1999:
Capital Appreciation Bonds,
0.0%, 1-15-17 ....................................................... 8,000 3,010,000
Current Interest Bonds,
5.125%, 1-15-19 ..................................................... 3,000 2,838,750
California Rural Home Mortgage Finance
Authority, Single Family Mortgage
Revenue Bonds (Mortgage-Backed Securities
Program):
1997 Series C,
6.75%, 3-1-29 ....................................................... 2,050 2,152,500
1998 Series B,
6.35%, 12-1-29 ...................................................... 1,940 2,024,875
Delta Counties Home Mortgage Finance Authority
(California), Single Family Mortgage Revenue
Bonds (Mortgage-Backed Securities Program),
1998 Series A,
5.2%, 12-1-14 ....................................................... 1,865 1,764,756
Total ............................................................... 72,254,418
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
COLORADO - 3.70%
City and County of Denver, Colorado,
Airport System Revenue Bonds:
Series 1991D,
7.75%, 11-15-13 ..................................................... $11,905 $13,809,800
Series 1996D,
5.5%, 11-15-25 ...................................................... 2,000 1,907,500
Colorado Housing and Finance Authority,
Single Family Program Senior and Subordinate
Bonds:
1997 Series C-2 Senior Bonds,
6.875%, 11-1-28 ..................................................... 2,500 2,625,000
1999 Series A-2 Senior Bonds,
6.45%, 4-1-30 ....................................................... 2,185 2,215,044
1997 Series A-2 Senior Bonds,
7.25%, 5-1-27 ....................................................... 2,000 2,147,500
1999 Series C-2 Senior Bonds,
7.05%, 4-1-31 ....................................................... 2,000 2,127,500
Series B-3,
6.7%, 10-1-16 ....................................................... 1,000 1,077,500
1998 Series A-3,
6.5%, 5-1-16 ........................................................ 1,000 1,047,500
Highlands Ranch Metropolitan District No. 3,
Douglas County, Colorado, General
Obligation Bonds, Series 1999,
5.3%, 12-1-19 ....................................................... 1,250 1,118,750
University of Colorado Hospital Authority,
Revenue Bonds, Series 1999A,
5.0%, 11-15-19 ...................................................... 1,000 890,000
Total ............................................................... 28,966,094
CONNECTICUT - 4.27%
Connecticut Development Authority, Water
Facilities Revenue Bonds (Bridgeport
Hydraulic Company Project - 1996 Series),
6.0%, 9-1-36 ........................................................ 13,875 14,031,094
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
CONNECTICUT (CONTINUED)
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-14 ........................................................ $13,700 $ 12,141,625
Bristol Resource Recovery Facility,
Operating Committee, Solid Waste Revenue
Refunding Bonds (Ogden Martin Systems of
Bristol, Inc. Project - 1995 Series),
6.5%, 7-1-14 ........................................................ 7,000 7,245,000
Total ............................................................... 33,417,719
FLORIDA - 2.81%
Escambia County, Florida, Pollution Control Revenue
Bonds (Champion International Corporation Project):
Series 1994,
6.9%, 8-1-22 ........................................................ 9,855 10,039,781
Series 1996,
6.4%, 9-1-30 ........................................................ 6,200 6,052,750
Housing Finance Authority of Lee County, Florida,
Single Family Mortgage Revenue Bonds:
Series 1998A, Subseries 6,
6.45%, 3-1-31 ....................................................... 2,175 2,234,812
Series 1999A, Subseries 2,
5.0%, 9-1-30 ........................................................ 1,620 1,536,975
City of Miami, Florida, Health Facilities
Authority, Health Facilities Revenue Refunding
Bonds (Mercy Hospital Project), Series 1994A,
Inverse Floating Rate Security (INFLOS),
6.27%, 8-15-15 (A) .................................................. 2,200 2,090,000
Total ............................................................... 21,954,318
GEORGIA - 3.81%
Municipal Electric Authority of Georgia:
Project One Special Obligation Bonds,
Fifth Crossover Series,
6.4%, 1-1-13 ........................................................ 15,500 17,069,375
General Power Revenue Bonds,
1992B Series,
8.25%, 1-1-11 ....................................................... 8,700 10,907,625
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
GEORGIA (CONTINUED)
Private Colleges and Universities Authority,
Revenue and Refunding Bonds (Mercer University
Project), Tax-Exempt Series 1999A,
5.25%, 10-1-20 ...................................................... $ 2,000 $ 1,820,000
Total ............................................................... 29,797,000
HAWAII - 3.34%
State of Hawaii, Airports System Revenue
Bonds, Second Series of 1991,
6.9%, 7-1-12 ........................................................ 20,195 22,567,912
Department of Budget and Finance of the State
of Hawaii, Special Purpose Revenue Bonds
(Citizens Utilities Company Project):
Residual Interest Bonds (RIBS), Series 1991B,
8.727%, 11-1-21 (A) ................................................. 1,750 1,855,000
Select Auction Variable Rate Securities (SAVRS),
Series 1991A,
4.25%, 11-1-21 ...................................................... 1,750 1,750,000
Total................................................................ 26,172,912
IDAHO - 0.86%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.),
6.632%, 2-15-21 ..................................................... 6,000 6,742,500
ILLINOIS - 2.30%
City of Chicago, Collateralized Single Family
Mortgage Revenue Bonds:
Series 1998C-1,
6.3%, 9-1-29 ........................................................ 3,980 4,104,375
Series 1998A-1,
6.45%, 9-1-29 ....................................................... 2,480 2,591,600
Series 1999A,
6.35%, 10-1-30 ...................................................... 2,500 2,537,500
Series 1999C,
7.05%, 10-1-30 ...................................................... 2,000 2,137,500
Series 1997-B,
6.95%, 9-1-28 ....................................................... 1,835 1,929,044
Illinois Health Facilities Authority, Revenue Bonds:
Series 1997A (Victory Health Services),
5.375%, 8-15-16 ..................................................... 3,000 2,523,750
Series 1999 (Alexian Brothers Health System),
5.0%, 1-1-19 ........................................................ 1,500 1,320,000
School District Number 116, Champaign County,
Illinois (Urbana), General Obligation School
Building Bonds, Series 1999C,
0.0%, 1-1-12 ........................................................ 1,695 862,331
Total ............................................................... 18,006,100
</TABLE>
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<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
INDIANA - 4.84%
Indiana State Office Building Commission,
Capitol Complex Revenue Bonds:
Series 1990B (State Office Building I Facility),
7.4%, 7-1-15 ........................................................ $ 8,000 $ 9,580,000
Series 1990A (Senate Avenue Parking Facility),
7.4%, 7-1-15 ........................................................ 4,775 5,718,062
Indiana Transportation Finance Authority,
Highway Revenue Bonds, Series 1990A,
7.25%, 6-1-15 ....................................................... 9,000 10,485,000
Indianapolis Airport Authority,
Special Facility Revenue Bonds, Series 1995 A
(United Air Lines, Inc., Indianapolis
Maintenance Center Project),
6.5%, 11-15-31 ...................................................... 10,850 10,321,062
Indiana Health Facility Financing Authority,
Hospital Revenue Bonds, Series 1999A
(Deaconess Hospital Obligated Group),
5.75%, 3-1-19 ....................................................... 2,000 1,815,000
Total ............................................................... 37,919,124
KANSAS - 2.02%
Sedgwick County, Kansas and Shawnee County,
Kansas, Single Family Mortgage
Revenue Bonds
(Mortgage-Backed Securities Program):
1998 Series A-1 (AMT),
6.5%, 12-1-22 ....................................................... 7,760 8,157,700
1997 Series A-1 (AMT),
6.95%, 6-1-29 ....................................................... 5,225 5,577,688
1999 Series A-1 (AMT),
5.5%, 12-1-26 ....................................................... 2,000 2,107,500
Total ............................................................... 15,842,888
KENTUCKY - 0.07%
County of Jefferson, Kentucky, Insured
Hospital Revenue Bonds, Series 1992 (Alliant
Health System, Inc. Project), Inverse Floaters,
6.418%, 10-23-14 (A) ................................................ 500 543,125
</TABLE>
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<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
LOUISIANA - 0.72%
Parish of East Baton Rouge, State of
Louisiana, Refunding Revenue Bonds
(Georgia-Pacific Corporation Project),
Series 1998,
5.35%, 9-1-11 ....................................................... $ 3,000 $ 2,756,250
Louisiana Public Facilities Authority,
Hospital Revenue and Refunding Bonds,
St. Francis Medical Center Project
(Pendleton Memorial Methodist Hospital
Project), Series 1998,
5.25%, 6-1-17 ....................................................... 2,000 1,557,500
Parish of Webster, Louisiana, Pollution
Control Revenue Refunding Bonds,
1998 Series B (Non-AMT),
5.2%, 3-1-13 ........................................................ 1,435 1,338,137
Total ............................................................... 5,651,887
MASSACHUSETTS - 1.57%
City of Quincy, Massachusetts, Revenue Refunding
Bonds, Quincy Hospital Issue, Series 1993,
Inverse Floating Rate Security (INFLOS),
6.353%, 1-15-11 (A) ................................................. 5,700 5,671,500
Massachusetts Housing Finance Agency,
Single Family Housing Revenue Bonds,
Series 57 (AMT),
5.6%, 6-1-30 ........................................................ 4,670 4,325,588
Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue Bonds,
1993 Series A, Inverse Floating Rate Security (INFLOS),
6.245%, 7-1-18 (A) .................................................. 2,500 2,290,625
Total ............................................................... 12,287,713
MICHIGAN - 2.14%
Michigan Strategic Fund:
Limited Obligation Refunding Revenue Bonds,
The Detroit Edison Company Pollution Control
Bonds Project, Collateralized Series 1991 AA,
6.95%, 5-1-11 ....................................................... 8,000 9,170,000
Limited Obligation Revenue Bonds, WMX
Technologies, Inc. Project, Series 1993,
6.0%, 12-1-13 ....................................................... 4,000 3,595,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
City of Detroit, Michigan, Sewage Disposal
System Revenue and Revenue Refunding Bonds,
Series 1993-A, Inverse Floating Rate Security
(INFLOS),
7.294%, 7-1-23 (A) .................................................. $ 2,600 $ 2,489,500
Michigan State Hospital Finance Authority,
Hospital Revenue Bonds (The Detroit Medical
Center Obligated Group), Series 1998A,
5.125%, 8-15-18 ..................................................... 2,000 1,477,500
Total ............................................................... 16,732,000
MINNESOTA - 0.73%
City of Rochester, Minnesota, Health
Care Facilities Revenue Bonds (Mayo
Foundation/Mayo Medical Center),
Series 1992D, Floating Inverse
Rate Securities (FIRS),
7.629%, 11-15-09 (A) ................................................ 4,500 4,770,000
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,
5.804%, 7-1-13 (A) .................................................. 1,000 955,000
Total ............................................................... 5,725,000
MISSISSIPPI - 2.67%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control
Refunding Revenue Bonds (Weyerhaeuser
Company Project), Series 1992B,
6.608%, 4-1-22 ...................................................... 11,000 11,825,000
Mississippi Higher Education Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1996-C:
6.75%, 9-1-14 ....................................................... 5,500 5,548,125
6.7%, 9-1-12 ........................................................ 1,470 1,481,025
Mississippi Home Corporation, Single Family
Mortgage Revenue Bonds, Series 1999A,
6.3%, 6-1-31 ........................................................ 1,995 2,024,925
Total ............................................................... 20,879,075
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
MISSOURI - 1.75%
Health and Educational Facilities Authority
of the State of Missouri, Health Facilities
Revenue Bonds:
Barnes-Jewish, Inc./Christian Health
Services, Series 1993A,
6.0%, 5-15-11 ....................................................... $ 3,000 $ 3,116,250
Freeman Health System Project, Series 1998,
5.25%, 2-15-18 ...................................................... 2,460 2,007,975
Lake of the Ozarks General Hospital, Inc.,
Series 1998,
5.1%, 2-15-18 ....................................................... 2,220 1,995,225
Missouri Housing Development Commission,
Single Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1997 Series C-1 (Non-AMT),
6.55%, 9-1-28 ....................................................... 1,960 2,045,750
1998 Series D-2 (AMT),
6.3%, 3-1-29 ........................................................ 1,145 1,150,725
1998 Series B-2 (AMT),
6.4%, 3-1-29 ........................................................ 950 982,063
1997 Series A-2 (AMT),
7.3%, 3-1-28 ........................................................ 855 927,675
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%, 2-15-09 ...................................................... 1,500 1,445,625
Total ............................................................... 13,671,288
MONTANA - 0.41%
Montana Higher Education Student Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1998-B,
5.5%, 12-1-31 ....................................................... 3,500 3,189,375
NEBRASKA - 1.97%
Nebraska Higher Education Loan Program, Inc.,
1993-2 Series A-6 Junior Subordinate Bonds,
6.4%, 6-1-13 ........................................................ 14,500 15,424,375
</TABLE>
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<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
NEVADA - 1.18%
Clark County, Nevada:
Industrial Development Refunding Revenue
Bonds (Nevada Power Company Project),
Series 1995B,
5.9%, 10-1-30 ....................................................... $ 5,500 $ 4,826,250
Industrial Development Revenue Bonds (Nevada
Power Company Project), Series 1997A,
5.9%, 11-1-32 ....................................................... 2,000 1,752,500
Nevada Housing Division, Single Family
Mortgage Bonds:
1998 Series A-1 Mezzanine Bonds,
5.35%, 4-1-16 ....................................................... 1,915 1,816,856
1996 Series C Subordinate Bonds,
6.35%, 4-1-09 ....................................................... 830 853,863
Total ............................................................... 9,249,469
NEW HAMPSHIRE - 2.30%
State of New Hampshire, Turnpike System
Revenue Bonds, 1994 Series C, Linked Select Auction
Variable Rate Securities (SAVRS) and Residual Interest
Bonds (RIBS),
5.23%, 2-1-24 ....................................................... 20,000 18,025,000
NEW MEXICO - 0.42%
New Mexico Educational Assistance Foundation,
Student Loan Program Bonds:
Second Subordinate 1996 Series A-3,
6.75%, 11-1-08 ...................................................... 2,175 2,234,813
Second Subordinate 1995 Series A-3,
6.6%, 11-1-10 ....................................................... 1,105 1,087,044
Total ............................................................... 3,321,857
NEW YORK - 3.42%
New York State Medical Care Facilities Finance Agency,
Mental Health Services Facilities Improvement
Revenue Bonds, 1993 Series F Refunding,
5.375%, 2-15-14 ..................................................... 9,750 9,603,750
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
NEW YORK (CONTINUED)
The City of New York, General Obligation Bonds,
Fiscal 1994 Series C, Inverse Floaters,
19.108%, 9-30-03 (B) ................................................ $ 3,250 $ 4,208,750
Tsasc, Tobacco Flexible Amortization Bonds (TFABs),
Series 1999-1,
6.0%, 7-15-2019 ..................................................... 4,000 3,960,000
Dormitory Authority of the State of New York,
State University Educational Facilities,
Revenue Bonds, Series 1990B,
7.5%, 5-15-11 ....................................................... 2,000 2,275,000
Nyack Hospital, Revenue Bonds, Series 1996,
6.25%, 7-1-13 ....................................................... 1,000 983,750
New York State Urban Development Corporation,
Correctional Capital Facilities Revenue Bonds,
1993A Refunding Series,
5.25%, 1-1-14 ....................................................... 3,000 2,966,250
New York City Transitional Finance Authority,
Future Tax Secured Bonds, Fiscal 1999 Series C
Tax-Exempt Bonds,
5.0%, 5-1-19 ........................................................ 3,000 2,733,750
Total ............................................................... 26,731,250
NORTH CAROLINA - 2.61%
County of Cumberland, North Carolina, Hospital
Facility Revenue Bonds (Cumberland County
Hospital System, Inc.), Series 1999:
5.25%, 10-1-14 ...................................................... 4,830 4,546,237
5.25%, 10-1-19 ...................................................... 2,500 2,259,375
5.25%, 10-1-11 ...................................................... 2,250 2,140,312
The Columbus County Industrial Facilities
and Pollution Control Financing Authority
(North Carolina), Environmental Improvement
Revenue Bonds, 1996 Series A,
5.85%, 12-1-20 ...................................................... 5,000 4,675,000
North Carolina Medical Care Commission,
Hospital Revenue Bonds:
Gaston Health Care, Series 1998,
5.0%, 2-15-19 ....................................................... 2,500 2,137,500
Halifax Regional Medical Center, Series 1998,
5.0%, 8-15-18 ....................................................... 2,170 1,689,887
Rex Healthcare, Series 1998,
5.0%, 6-1-17 ........................................................ 750 681,563
The Martin County Industrial Facilities and
Pollution Control Financing Authority (North
Carolina), Solid Waste Disposal Revenue Bonds
(Weyerhaeuser Company Project), Series 1993,
5.65%, 12-1-23 ...................................................... 2,500 2,262,500
Total ............................................................... 20,392,374
</TABLE>
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<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
NORTH DAKOTA - 0.75%
City of Fargo, North Dakota, Health System
Revenue Bonds (Meritcare Obligated Group),
Series 1996A,
5.55%, 6-1-16 ....................................................... $ 2,800 $ 2,751,000
County of Burleigh, North Dakota, Healthcare
Revenue Refunding Bonds, Series 1999
(Medcenter One, Inc.),
5.25%, 5-1-13 ....................................................... 1,900 1,847,750
State of North Dakota, North Dakota Housing
Finance Agency, Housing Finance Program Bonds,
Home Mortgage Finance Program, 1998 Series A,
5.25%, 7-1-18 ....................................................... 1,350 1,248,750
Total ............................................................... 5,847,500
OHIO - 0.69%
County of Erie, Ohio, Franciscan Services
Corporation, Revenue Refunding Bonds,
Series 1993 A (Providence Hospital, Inc.),
6.0%, 1-1-13 ........................................................ 4,000 3,940,000
State of Ohio Air Quality Development Revenue
Bonds (Columbus Southern Power Company
Project), Series 1985 B,
6.25%, 12-1-20 ...................................................... 1,500 1,488,750
Total ............................................................... 5,428,750
OKLAHOMA - 0.74%
Oklahoma Housing Finance Agency, Single
Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series B, Subseries B-2 (AMT),
7.625%, 9-1-26 ...................................................... 4,495 4,820,887
1996 Series A,
7.05%, 9-1-26 ....................................................... 925 974,719
Total ............................................................... 5,795,606
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
OREGON - 0.73%
State of Oregon, Housing and Community
Services Department, Mortgage Revenue
Bonds, Single-Family Mortgage Program:
1996 Series D,
6.375%, 7-1-27 ...................................................... $ 3,045 $ 3,090,675
1992 Series B,
6.875%, 7-1-28 ...................................................... 2,500 2,590,625
Total ............................................................... 5,681,300
PENNSYLVANIA - 3.47%
City of Philadelphia, Pennsylvania, Water
and Wastewater Revenue Bonds, Series 1993,
Inverse Rate Securities,
6.78%, 6-15-12 (A) .................................................. 7,100 7,313,000
Allegheny County Hospital Development Authority
(Pennsylvania), UPMC Health System Revenue
Refunding Bonds, Series 1999B,
5.0%, 12-15-17 ...................................................... 5,000 4,506,250
The Philadelphia Parking Authority, Airport
Parking Revenue Bonds, Series of 1999,
5.25%, 9-1-20 ....................................................... 3,000 2,812,500
Pennsylvania Higher Education Assistance Agency,
Student Loan Revenue Bonds, Fixed Rate Bonds,
1991 Series C,
7.15%, 9-1-21 ....................................................... 2,190 2,332,350
City of Philadelphia, Pennsylvania, General
Obligation Bonds, Series 1998:
4.75%, 3-15-17 ...................................................... 1,615 1,433,313
4.75%, 3-15-18 ...................................................... 1,000 878,750
Pennsylvania Intergovernmental Cooperation
Authority, Special Tax Revenue Refunding
Bonds (City of Philadelphia Funding Program),
Series of 1999,
5.0%, 6-15-21 ....................................................... 2,500 2,225,000
Falls Township Hospital Authority, Refunding
Revenue Bonds, The Delaware Valley Medical Center
Project (FHA Insured Mortgage), Series 1992,
7.0%, 8-1-22 ........................................................ 2,000 2,122,500
Delaware Valley Regional Finance Authority
(Bucks, Chester, Delaware and Montgomery Counties,
Pennsylvania), Local Government Revenue Bonds,
1997 Series B,
5.6%, 7-1-17 ........................................................ 2,000 1,992,500
Pennsylvania Higher Educational Facilities Authority,
Revenue Bonds (Thomas Jefferson University),
1999 Series A,
5.0%, 7-1-19 ........................................................ 1,750 1,581,563
Total ............................................................... 27,197,726
</TABLE>
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<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
SOUTH CAROLINA - 1.71%
South Carolina Jobs - Economic Development
Authority, Hospital Revenue Refunding and
Improvement Bonds (South Carolina Baptist
Hospital), Series 1993D, Intermediate Longs,
Inverse Floating Securities,
7.339%, 8-1-21 (A) .................................................. $14,550 $ 13,386,000
TENNESSEE - 0.89%
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%, 8-1-16 ........................................................ 2,745 2,504,813
Multi-Modal Interchangeable Rate, Health Facility
Revenue Bonds (Richland Place, Inc. Project),
Series 1993,
5.5%, 5-1-23 ........................................................ 1,950 1,789,125
Volunteer State Student Funding Corporation,
Educational Loan Revenue Bonds,
Junior Subordinate Series 1993C Bonds,
5.85%, 12-1-08 ...................................................... 2,700 2,649,375
Total ............................................................... 6,943,313
TEXAS - 6.19%
AllianceAirport Authority, Inc.,
Special Facilities Revenue Bonds,
Series 1991 (American Airlines, Inc.
Project),
7.0%, 12-1-11 ....................................................... 14,400 15,426,000
Trinity River Authority of Texas (Tarrant
County Water Project), Improvement and Refunding
Revenue Bonds, Series 1999,
5.25%, 2-1-20 ....................................................... 7,415 6,933,025
Amarillo Health Facilities Corporation,
Hospital Revenue Bonds (Baptist St. Anthony's
Hospital Corporation Project), Series 1998,
5.5%, 1-1-15 ........................................................ 6,320 6,272,600
</TABLE>
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<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
TEXAS (CONTINUED)
City of Austin, Texas, Subordinate Lien
Revenue Refunding Bonds, Series 1998,
5.25%, 5-15-19 ...................................................... $ 5,000 $ 4,662,500
Texas Department of Housing and Community Affairs,
Single Family Mortgage
Revenue Bonds, 1997 Series D (AMT) TEAMS Structure:
5.65%, 3-1-29 ....................................................... 2,500 2,334,375
5.7%, 9-1-29 ........................................................ 1,500 1,410,000
Gulf Coast Waste Disposal Authority,
Multi-Modal Interchangeable Rate Revenue
Bonds (Champion International Corporation
Project), Series 1992A,
6.875%, 12-1-28 ..................................................... 3,220 3,244,150
Lufkin Health Facilities Development
Corporation, Health System Revenue and
Refunding Bonds (Memorial Health System
of East Texas), Series 1995,
6.875%, 2-15-26 ..................................................... 2,960 2,789,800
City of Houston, Texas, Airport System,
Special Facilities Revenue Bonds
(Continental Airlines, Inc. Terminal
Improvement Projects), Series 1997B,
6.125%, 7-15-17 ..................................................... 2,850 2,589,937
Midland County Hospital District, Hospital
Revenue Refunding Bonds, Series 1997,
5.375%, 6-1-16 ...................................................... 2,000 1,927,500
Collin County Housing Finance Corporation,
Student Housing Revenue Bonds (Collin
County Community College District Foundation,
Inc. Project), Series 1998A,
5.25%, 6-1-31 ....................................................... 1,000 877,500
Total ............................................................... 48,467,387
UTAH - 4.14%
Tooele County, Utah, Hazardous Waste Treatment
Revenue Bonds (Union Pacific Corporation
USPCI, Inc. Project), Series A,
5.7%, 11-1-26 ....................................................... 37,200 32,364,000
</TABLE>
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<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
WASHINGTON - 8.24%
Washington Public Power Supply System:
Nuclear Project No. 3, Refunding Revenue Bonds:
Series 1989B,
7.125%, 7-1-16 ...................................................... $20,750 $ 23,862,500
Series 1993C, Inverse Floating Rate Security,
6.87%, 7-1-12 (A) ................................................... 7,000 6,781,250
Nuclear Project No. 1, Refunding Revenue Bonds:
Series 1989B,
7.125%, 7-1-16 ...................................................... 8,200 9,430,000
Series 1993A, Inverse Floating Rate Security,
6.67%, 7-1-11 (A) ................................................... 7,500 7,987,500
Nuclear Project No. 2, Refunding Revenue
Bonds, Series 1994A, Inverse Floating Rate
Securities,
6.23%, 7-1-12 (A) ................................................... 2,500 2,446,875
State of Washington, Various Purpose General
Obligation Bonds, Series 1990A,
6.75%, 2-1-15 ....................................................... 4,995 5,550,694
Pilchuck Development Public Corporation (State
of Washington), Special Facilities Airport
Revenue Bonds, Series 1993 (TRAMCO, INC. Project),
6.0%, 8-1-23 ........................................................ 3,500 3,311,875
Public Utility District No. 1 of Douglas County,
Washington, Wells Hydroelectric Revenue Bonds,
Series of 1965,
3.7%, 9-1-18 ........................................................ 3,980 3,203,900
Housing Authority of the City of Seattle,
Low-Income Housing Assistance Revenue Bonds,
1995 (GNMA Collateralized Mortgage
Loan - Kin On Project),
7.4%, 11-20-36 ...................................................... 1,750 1,942,500
Total ............................................................... 64,517,094
WEST VIRGINIA - 0.71%
Braxton County, West Virginia, Solid Waste
Disposal Revenue Bonds (Weyerhaeuser Company
Project), Series 1995A,
6.5%, 4-1-25 ........................................................ 3,500 3,513,125
The County Commission of Monongalia County, West
Virginia, Pollution Control Revenue Bonds (The
Potomac Edison Company Fort Martin Station Project),
1993 Series B,
5.95%, 4-1-13 ....................................................... 2,000 2,037,500
Total ............................................................... 5,550,625
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
WISCONSIN - 1.06%
Wisconsin Public Power Incorporated SYSTEM
(The), Power Supply System Revenue Bonds,
Series 1993B-2, Yield Curve Notes (YCNs),
6.582%, 7-1-14 (A) .................................................. $ 5,500 $ 5,479,375
Wisconsin Housing and Economic Development
Authority, Home Ownership Revenue Bonds,
1997 Series H,
5.75%, 9-1-28 ....................................................... 3,000 2,846,250
Total ............................................................... 8,325,625
TOTAL MUNICIPAL BONDS - 91.84% $718,788,325
(Cost: $730,057,777)
<CAPTION>
NUMBER OF
CONTRACTS
<S> <C> <C>
OPTION - 0.00%
June 88 Put Options on June 00
Treasury Bond Futures ............................................... 1,000 $ 15,625
(Cost: $918,750)
TOTAL SHORT-TERM SECURITIES - 7.12% $ 55,733,710
(Cost: $55,733,710)
TOTAL INVESTMENT SECURITIES - 98.96% $774,537,660
(Cost: $786,710,237)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.04% 8,177,401
NET ASSETS - 100.00% $782,715,061
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
MARCH 31, 2000
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, 2000.
(B) 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, 2000.
See Note 1 to financial statements for security valuation and other
significant accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Investment securities--at value
(Notes 1 and 3) .................................................................. $774,538
Cash ................................................................................ 1
Receivables:
Interest ......................................................................... 11,378
Investment securities sold........................................................ 2,740
Fund shares sold ................................................................. 139
Prepaid insurance premium ........................................................... 24
--------
Total assets ................................................................... 788,820
--------
LIABILITIES
Payable to Fund shareholders ........................................................ 4,756
Payable for investment securities purchased.......................................... 1,074
Accrued service fee (Note 2) ........................................................ 149
Accrued transfer agency and dividend disbursing (Note 2)............................. 82
Accrued distribution fee (Note 2) ................................................... 12
Accrued management fee (Note 2) ..................................................... 11
Accrued accounting services fee (Note 2)............................................. 7
Other ............................................................................... 14
--------
Total liabilities .............................................................. 6,105
--------
Total net assets ............................................................ $782,715
========
NET ASSETS
$0.001 par value capital stock
Capital stock .................................................................... $ 117
Additional paid-in capital ....................................................... 808,078
Accumulated undistributed income (loss):
Accumulated undistributed net investment income .................................. 696
Accumulated undistributed net realized loss on
investment transactions ........................................................ (9,678)
Distributions in excess of net realized loss on
investment transactions ........................................................ (4,325)
Net unrealized depreciation in value of
investments .................................................................... (12,173)
--------
Net assets applicable to outstanding units
of capital .................................................................. $782,715
========
Net asset value per share (net assets divided
by shares outstanding)
Class A .......................................................................... $6.70
Class B .......................................................................... $6.70
Class C .......................................................................... $6.70
Class Y .......................................................................... $6.70
Capital shares outstanding
Class A .......................................................................... 115,505
Class B .......................................................................... 63
Class C .......................................................................... 30
Class Y .......................................................................... 1,186
Capital shares authorized .............................................................. 600,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest and amortization (Note 1B) ...................................................... $25,374
-------
Expenses (Note 2):
Investment management fee ............................................................. 2,109
Service fee:
Class A.............................................................................. 946
Class B.............................................................................. ---*
Class C.............................................................................. ---*
Transfer agency and dividend disbursing:
Class A.............................................................................. 395
Class B.............................................................................. 1
Class C.............................................................................. ---*
Distribution fee:
Class A.............................................................................. 43
Class B.............................................................................. 1
Class C.............................................................................. 1
Accounting services fee ............................................................... 43
Custodian fees ........................................................................ 15
Audit fees ............................................................................ 12
Legal fees ............................................................................ 8
Other ................................................................................. 115
-------
Total expenses ...................................................................... 3,689
-------
Net investment income ............................................................ 21,685
-------
REALIZED AND UNREALIZED LOSS ON
INVESTMENTS (NOTES 1 AND 3)
Realized net loss on securities .......................................................... (6,743)
Realized net gain on put options purchased ............................................... 385
Realized net loss on futures contracts closed ............................................ (3,135)
-------
Realized net loss on investments ...................................................... (9,493)
-------
Net unrealized depreciation in value of
securities during the period .......................................................... (6,583)
Net unrealized depreciation in value of
options during the period (903)
-------
Net unrealized depreciation in value of
investments during the period........................................................ (7,486)
-------
Net loss on investments ............................................................. (16,979)
-------
Net increase in net assets resulting
from operations ............................................................... $ 4,706
=======
</TABLE>
*Not shown due to rounding.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS FISCAL YEAR
ENDED ENDED
MARCH 31, SEPTEMBER 30,
2000 1999
------------ --------------
<S> <C> <C>
DECREASE IN NET ASSETS
Operations:
Net investment income......................................... 21,685 $47,065
Realized net gain (loss) on
investments ................................................ (9,493) 9,001
Unrealized depreciation ...................................... (7,486) (86,742)
-------- --------
Net increase (decrease) in net assets
resulting from operations ............................... 4,706 (30,676)
-------- --------
Distributions to shareholders (Note 1D):*
From net investment income:
Class A .................................................... (21,648) (47,791)
Class B .................................................... (5) ---
Class C .................................................... (2) ---
Class Y .................................................... (35) ---**
From realized gains on securities transactions:
Class A .................................................... (4,738) (14,339)
Class B .................................................... (1) ---
Class C .................................................... (1) ---
Class Y .................................................... ---** ---
In excess of realized gains on securities transactions:
Class A .................................................... (4,324) ---
Class B .................................................... (1) ---
Class C .................................................... ---** ---
Class Y .................................................... ---** ---
-------- --------
(30,755) (62,130)
-------- --------
Capital share transactions
(Note 7) ..................................................... (65,318) (30,001)
--------- --------
Total decrease ....................................... (91,367) (122,807)
NET ASSETS
Beginning of period ............................................. 874,082 996,889
--------- --------
End of period, including undistributed
net investment income of $696 and
$701, respectively ........................................... $782,715 $874,082
======== ========
</TABLE>
*See "Financial Highlights" on pages - .
**Not shown due to rounding.
SEE NOTES TO FINANCIAL STATEMENTS.
<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 -----------------------------------------------------------
3/31/00 1999 1998 1997 1996 1995
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $6.90 $7.63 $7.47 $7.32 $7.25 $6.91
----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.18 0.36 0.37 0.38 0.39 0.39
Net realized and
unrealized gain
(loss) on
investments .................. (0.13) (0.61) 0.25 0.30 0.12 0.38
----- ----- ----- ----- ----- -----
Total from investment
operations ...................... 0.05 (0.25) 0.62 0.68 0.51 0.77
----- ----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.18) (0.37) (0.37) (0.37) (0.39) (0.39)
From capital gains .............. (0.03) (0.11) (0.09) (0.16) (0.05) (0.00)
In excess of capital
gains ........................ (0.04) (0.00) (0.00) (0.00) (0.00) (0.04)
----- ----- ----- ----- ----- -----
Total distributions ................ (0.25) (0.48) (0.46) (0.53) (0.44) (0.43)
----- ----- ----- ----- ----- -----
Net asset value,
end of period ................... $6.70 $6.90 $7.63 $7.47 $7.32 $7.25
===== ===== ===== ===== ===== =====
Total return* ...................... 0.83% -3.46% 8.67% 9.77% 7.16% 11.51%
Net assets, end of
period (in
millions) ....................... $774 $874 $997 $994 $997 $975
Ratio of expenses to
average net assets............... 0.90%** 0.79% 0.72% 0.67% 0.68% 0.65%
Ratio of net investment
income to average
net assets ...................... 5.30%** 4.98% 4.95% 5.14% 5.23% 5.51%
Portfolio
turnover rate ................... 9.41% 30.93% 50.65% 47.24% 74.97% 70.67%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
**Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS B SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
10/5/99*
THROUGH
3/31/00
-------
<S> <C>
Net asset value,
beginning of period ............. $6.87
------
Income from investment
operations:
Net investment income ........... 0.15
Net realized and
unrealized loss
on investments ............... (0.10)
------
Total from investment
operations ...................... 0.05
------
Less distributions:
From net investment
income ....................... (0.15)
From capital gains .............. (0.03)
In excess of capital
gains ........................ (0.04)
------
Total distributions ................ (0.22)
------
Net asset value
end of period ................... $6.70
======
Total return ....................... 0.78%
Net assets, end of
period (000 omited) ............. $421
Ratio of expenses to
average net assets .............. 1.88%**
Ratio of net investment
income to average
net assets ...................... 4.34%**
Portfolio turnover
rate ............................ 9.41%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the six months ended March 31, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS C SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
10/7/99*
THROUGH
3/31/00
-------
<S> <C>
Net asset value,
beginning of period ............. $6.87
------
Income from investment
operations:
Net investment income ........... 0.15
Net realized and
unrealized loss
on investments ............... (0.10)
------
Total from investment
operations ...................... 0.05
------
Less distributions:
From net investment
income ....................... (0.15)
From capital gains .............. (0.03)
In excess of capital
gains ........................ (0.04)
------
Total distributions ................ (0.22)
------
Net asset value,
end of period ................... $6.70
======
Total return ....................... 0.78%
Net assets, end of
period (000 omited) ............. $202
Ratio of expenses to
average net assets .............. 1.92%**
Ratio of net investment
income to average
net assets ...................... 4.30%**
Portfolio turnover
rate ............................ 9.41%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the six months ended March 31, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
CLASS Y SHARES
FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD
SIX FROM
MONTHS 12/30/98*
ENDED THROUGH
3/31/00 9/30/99
------- -------
<S> <C> <C>
Net asset value,
beginning of period.............. $6.90 $7.41
----- -----
Income from investment
operations:
Net investment
income ....................... 0.19 0.28
Net realized and
unrealized loss
on investments ............... (0.14) (0.51)
----- -----
Total from investment
operations ...................... 0.05 (0.23)
----- -----
Less distributions
From net investment
income ....................... (0.18) (0.28)
From capital gains .............. (0.03) (0.00)
In excess of capital
gains ........................ (0.04) (0.00)
----- -----
Total distributions................. (0.25) (0.28)
----- -----
Net asset value,
end of period ................... $6.70 $6.90
===== =====
Total return ....................... 0.84% -3.21%
Net assets, end of
period (000 omited) ............. $7,954 $2
Ratio of expenses
to average net
assets .......................... 0.74%** 0.67%**
Ratio of net
investment income
to average net
assets .......................... 5.47%** 5.08%**
Portfolio
turnover rate ................... 9.41% 30.93%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the fiscal year ended September 30, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
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 tax. 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 accounting principles generally
accepted in the United States of America.
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 accounting principles generally accepted in the
United States of America. 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.
<PAGE>
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
NOTE 2 -- INVESTMENT MANAGEMENT AND PAYMENTS TO AFFILIATED PERSONS
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee is
payable by the Fund at the annual rate of 0.525% of net assets up to $500
million, 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. The Fund accrues and pays the 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.
<TABLE>
<CAPTION>
ACCOUNTING SERVICES FEE
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>
For Class A, Class B and Class C shares, the Fund 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. With respect to Class Y
shares, the Fund pays WARSCO a monthly fee at an annual rate of 0.15% of the
average daily net assets of the class for the preceding 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 Fund) of
$137,107. With respect to Class A, Class B and Class C shares, W&R paid sales
commissions of $79,555 and all expenses in
<PAGE>
connection with the sale of Fund shares, except for registration fees and
related expenses.
A contingent deferred sales charge ("CDSC") may be assessed against a
shareholder's redemption amount of Class B and Class C shares and is paid to
W&R. The purpose of the deferred sales charge is to compensate W&R for the costs
incurred by W&R in connection with the sale of Fund shares.
With respect to Class B shares, the amount of the CDSC will be the
following percent of the total amount invested during a calendar year to acquire
the shares or the value of the shares redeemed, whichever is less. Redemption at
any time during the first calendar year of investment, 5%; the second calendar
year, 4%; the third calendar year, 3%; the fourth calendar year, 3%; the fifth
calendar year, 2%; the sixth calendar year, 1% and thereafter, 0%.
If Class C shares are sold within 12 months of buying these shares, a
1% CDSC will be imposed.
The deferred sales charge will not be imposed on shares representing
payment of dividends or distributions or on amounts which represent an increase
in the value of the shareholder's account resulting from capital appreciation
above the amount paid for shares purchased during the deferred sales charge
period. During the period ended March 31, 2000, W&R received $204 and $13 in
deferred sales charges from Class B shares and Class C shares, respectively.
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 0.25% of the Fund's average annual net assets. The fee is to be paid to
reimburse W&R for amounts it expends in connection with the distribution of the
Class A shares and/or provision of personal services to Fund shareholders and/or
maintenance of shareholder accounts.
Under the Distribution and Service Plan adopted by the Fund for Class B
and Class C shares, respectively, the Fund may pay W&R, on an annual basis, a
service fee of up to 0.25% of the average daily net assets of the class to
compensate W&R 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 W&R for
distributing the shares of that class. The Class B Plan and the Class C Plan
each permit W&R 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 maintaining shareholder accounts of that class, which are
similar to the corresponding activities for which is it entitled to
reimbursement under the Class A Plan.
The Fund paid Directors' fees of $14,746, which are included in other
expenses.
<PAGE>
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 $72,630,433 while proceeds from maturities and
sales aggregated $169,737,807. Purchases of options aggregated $4,708,535 while
proceeds from options aggregated $4,175,008. Purchases of short-term securities
aggregated $833,574,430 while proceeds from maturities and sales aggregated
$812,717,902. No long-term U.S. Government securities were bought or sold during
the period ended March 31, 2000.
For Federal income tax purposes, cost of investments owned at March 31,
2000 was $789,819,687, resulting in net unrealized depreciation of $15,282,027,
of which $21,394,338 related to appreciated securities and $36,676,365 related
to depreciated securities.
NOTE 4 -- FEDERAL INCOME TAX MATTERS
For Federal income tax purposes, the Fund realized capital gain net
income of $8,892,543 during its fiscal year ended September 30, 1999, 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.
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
The Fund is authorized to offer four classes of shares, Class A, Class
B, Class C and Class Y, each of which have equal rights as to assets and voting
privileges. Class Y shares are not subject to a sales charge on purchases, are
not subject to a Rule 12b-1 Distribution and Service Plan and are subject to a
separate transfer
<PAGE>
agency and dividend disbursement services fee structure. A comprehensive
discussion of the terms under which shares of each 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
their relative net assets as of the beginning of each day adjusted for the prior
day's capital share activity.
Transactions in capital stock are summarized below. Amounts are in
thousands.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS FISCAL YEAR
ENDED ENDED
MARCH 31, SEPTEMBER 30,
2000 1999
------------ ------------
<S> <C> <C>
Shares issued from sale of shares:
Class A .................... 5,419 25,267
Class B .................... 70 ---
Class C .................... 31 ---
Class Y .................... 1,181 ---*
Shares issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A .................... 3,833 7,013
Class B .................... 1 ---
Class C .................... 1 ---
Class Y .................... 5 ---*
Shares redeemed:
Class A .................... (20,343) (36,372)
Class B .................... (8) ---
Class C .................... (2) ---
Class Y .................... --- ---
------- ------
Decrease in
outstanding capital
shares .................... (9,812) (4,092)
======= ======
Value issued from sale of shares:
Class A .................... $35,979 $185,060
Class B .................... 463 ---
Class C .................... 210 ---
Class Y .................... 7,683 2
Value issued from
reinvestment of dividends
and/or capital gains
distribution:
Class A .................... 25,388 51,386
Class B .................... 7 ---
Class C .................... 4 ---
Class Y .................... 36 ---*
Value redeemed:
Class A .................... (135,022) (266,449)
Class B .................... (52) ---
Class C .................... (14) ---
Class Y .................... --- ---
-------- --------
Decrease in outstanding
capital .................... $(65,318) $(30,001)
======== ========
</TABLE>
*Not shown due to rounding.
<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, 2000, 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 then ended and the fiscal year ended September 30, 1999, and the
financial highlights for the six-month period ended March 31, 2000, and for each
of the five fiscal years in the period ended September 30, 1999. 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 auditing standards generally
accepted in the United States of America. 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, 2000, 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, 2000, 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, 1999, and
the financial highlights for the six-month period ended March 31, 2000, and for
each of the five fiscal years in the period ended September 30, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Kansas City, Missouri
May 5, 2000
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 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 $ 1,760,000
ALASKA - 3.98%
City of Valdez, Alaska, Marine
Terminal Revenue Refunding Bonds
(BP Pipelines (Alaska) Inc. Project),
Series 1993A,
5.85%, 8-1-2025 ..................................................... 28,650 28,148,625
State of Alaska, International Airports
System Revenue Bonds, Series 1999A,
5.0%, 10-1-2019 ..................................................... 3,000 2,655,000
Alaska Energy Authority, Power Revenue
Refunding Bonds, Fifth Series (Bradley
Lake Hydroelectric Project),
5.0%, 7-1-2021 ...................................................... 2,350 2,070,937
Alaska Housing Finance Corporation,
Housing Development Bonds, 1997
Series B (AMT),
5.8%, 12-1-2029 ..................................................... 2,000 1,952,500
Total ............................................................... 34,827,062
CALIFORNIA - 10.83%
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 19,332,500
Hospital Revenue Certificates of Participation,
Series 1992, Cedars-Sinai Medical Center,
6.5%, 8-1-2012 ...................................................... 5,200 5,577,000
Hospital Refunding Revenue Certificates of
Participation, Series 1993, Cedars-Sinai Medical
Center, Inverse Floating Rate Securities (INFLOS),
7.17%, 11-1-2015 (A) ................................................ 3,300 2,978,250
East Bay Municipal Utility District (Alameda
and Contra Costa Counties, California),
Wastewater System Subordinated Revenue
Refunding Bonds, Series 1993B-2,
Inverse Floating Securities:
7.27%, 6-1-2013 (A) ................................................. 8,450 8,555,625
7.37%, 6-1-2020 (A) ................................................. 7,250 7,032,500
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
Transmission Agency of Northern California,
California-Oregon Transmission Project
Revenue Bonds, 1990 Series A,
7.0%, 5-1-2013 ...................................................... $12,000 $ 13,950,000
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 9,571,250
Southern California Public Power Authority:
Multiple Project Revenue Bonds, 1989 Series,
6.75%, 7-1-2012 ..................................................... 3,455 3,904,150
Mead-Adelanto Project Revenue Bonds,
1994 Series A:
Mead-Adelanto Auction Rate Securities (ACES),
4.01%, 7-1-2015 ..................................................... 1,400 1,400,000
Mead-Adelanto Inverse Floaters,
6.01%, 7-1-2015 (A) ................................................. 1,400 1,331,750
Mead-Phoenix Project Revenue Bonds,
1994 Series A:
Auction Rate Securities (ACES),
4.01%, 7-1-2015 ..................................................... 1,300 1,300,000
Inverse Floaters,
6.01%, 7-1-2015 (A) ................................................. 1,300 1,218,750
California Rural Home Mortgage Finance
Authority, Single Family Mortgage
Revenue Bonds (Mortgage-Backed Securities
Program):
1998 Series A,
6.35%, 12-1-2029 .................................................... 3,345 3,495,525
1997 Series C,
6.75%, 3-1-2029 ..................................................... 2,050 2,173,000
1998 Series B,
6.35%, 12-1-2029 .................................................... 1,940 2,092,775
Foothill/Eastern Transportation Corridor Agency,
Toll Road Refunding Revenue Bonds, Series 1999:
Capital Appreciation Bonds,
0.0%, 1-15-2017 ..................................................... 8,000 2,920,000
Current Interest Bonds,
5.125%, 1-15-2019 ................................................... 3,000 2,816,250
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 2,942,837
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 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 $ 2,049,140
Total ............................................................... 94,641,302
COLORADO - 3.45%
City and County of Denver, Colorado,
Airport System Revenue Bonds:
Series 1991D,
7.75%, 11-15-2013 ................................................... 11,905 14,003,256
Series 1996D,
5.5%, 11-15-2025 .................................................... 2,000 1,920,000
Colorado Housing and Finance Authority,
Single Family Program Senior and Subordinate
Bonds:
1996 Series B-1,
7.65%, 11-1-2026 .................................................... 2,750 2,987,187
1997 Series C-2,
6.875%, 11-1-2028 ................................................... 2,500 2,668,750
1999 Series A-2,
6.45%, 4-1-2030 ..................................................... 2,185 2,286,056
1997 Series A-2,
7.25%, 5-1-2027 ..................................................... 2,000 2,190,000
1998 Series A-3,
6.5%, 5-1-2016 ...................................................... 1,000 1,061,250
Highlands Ranch Metropolitan District No. 3,
Douglas County, Colorado,
General Obligation Bonds:
Series 1999,
5.3%, 12-1-2019 ..................................................... 1,250 1,164,063
Series 1998A,
5.125%, 12-1-2012 ................................................... 1,000 960,000
University of Colorado Hospital Authority,
Revenue Bonds, Series 1999A,
5.0%, 11-15-2019 .................................................... 1,000 896,250
Total ............................................................... 30,136,812
CONNECTICUT - 5.08%
Connecticut Development Authority, Water
Facilities Revenue Bonds (Bridgeport
Hydraulic Company Project):
1996 Series,
6.0%, 9-1-2036 ...................................................... 15,000 14,981,250
1995 Series,
6.15%, 4-1-2035 ..................................................... 9,200 9,303,500
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
CONNECTICUT (CONTINUED)
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-2014 ...................................................... $13,700 $ 12,775,250
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 7,358,750
Total ............................................................... 44,418,750
FLORIDA - 3.35%
Escambia County, Florida, Pollution Control Revenue
Bonds (Champion International Corporation Project):
Series 1994,
6.9%, 8-1-2022 ...................................................... 8,855 9,430,575
Series 1996,
6.4%, 9-1-2030 ...................................................... 6,200 6,285,250
City of Leesburg, Florida, Hospital Revenue
Refunding Bonds (Leesburg Regional Medical
Center Project), Series 1993A,
6.125%, 7-1-2012 .................................................... 5,000 5,137,500
Housing Finance Authority of Lee County, Florida,
Single Family Mortgage Revenue Bonds:
Series 1998A, Subseries 6,
6.45%, 3-1-2031 ..................................................... 2,175 2,278,312
Series 1999A, Subseries 2,
5.0%, 9-1-2030 ...................................................... 1,620 1,555,200
Jacksonville Health Facilities Authority,
Hospital Revenue Bonds (Charity Obligated
Group), Series 1999C,
5.25%, 8-15-2019 .................................................... 2,745 2,570,006
City of Miami, Florida, Health Facilities
Authority, Health Facilities Revenue Refunding
Bonds (Mercy Hospital Project), Series 1994A,
Inverse Floating Rate Security (INFLOS),
6.87%, 8-15-2015 (A) ................................................ 2,200 2,043,250
Total ............................................................... 29,300,093
GEORGIA - 3.40%
Municipal Electric Authority of Georgia:
Project One Special Obligation Bonds,
Fifth Crossover Series,
6.4%, 1-1-2013 ...................................................... 15,500 16,953,125
General Power Revenue Bonds,
1992B Series,
8.25%, 1-1-2011 ..................................................... 8,700 10,907,625
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
GEORGIA (CONTINUED)
Private Colleges and Universities Authority,
Revenue and Refunding Bonds (Mercer University
Project), Tax-Exempt Series 1999A,
5.25%, 10-1-2020 .................................................... $ 2,000 $ 1,837,500
Total ............................................................... 29,698,250
HAWAII - 3.00%
State of Hawaii, Airports System Revenue
Bonds, Second Series of 1991,
6.9%, 7-1-2012 ...................................................... 20,195 22,593,156
Department of Budget and Finance of the State
of Hawaii, Special Purpose Revenue Bonds
(Citizens Utilities Company Project):
Residual Interest Bonds (RIBS), Series 1991B,
8.575%, 11-1-2021 (A) ............................................... 1,750 1,890,000
Select Auction Variable Rate Securities (SAVRS),
Series 1991A,
4.4%, 11-1-2021 ..................................................... 1,750 1,750,000
Total................................................................ 26,233,156
IDAHO - 0.76%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.),
6.65%, 2-15-2021 .................................................... 6,000 6,660,000
ILLINOIS - 2.13%
City of Chicago, Collateralized Single Family
Mortgage Revenue Bonds:
Series 1998C-1,
6.3%, 9-1-2029 ...................................................... 4,000 4,185,000
Series 1998A-1,
6.45%, 9-1-2029 ..................................................... 2,500 2,650,000
Series 1999A,
6.35%, 10-1-2030 .................................................... 2,500 2,646,875
Series 1999C,
7.05%, 10-1-2030 .................................................... 2,000 2,182,500
Series 1997-B,
6.95%, 9-1-2028 ..................................................... 1,890 2,005,762
Illinois Health Facilities Authority, Revenue Bonds:
Series 1997A (Victory Health Services),
5.375%, 8-15-2016 ................................................... 3,000 2,763,750
Series 1999 (Alexian Brothers Health System),
5.0%, 1-1-2019 ...................................................... 1,500 1,338,750
School District Number 116, Champaign County,
Illinois (Urbana), General Obligation School
Building Bonds, Series 1999C,
0.0%, 1-1-2012 ...................................................... 1,695 847,500
Total ............................................................... 18,620,137
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
INDIANA - 5.91%
Indiana State Office Building Commission,
Capitol Complex Revenue Bonds:
Series 1990B (State Office Building I Facility),
7.4%, 7-1-2015 ...................................................... $ 8,000 $ 9,560,000
Series 1990A (Senate Avenue Parking Facility),
7.4%, 7-1-2015 ...................................................... 4,775 5,706,125
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 10,985,625
Indiana Transportation Finance Authority,
Highway Revenue Bonds, Series 1990A,
7.25%, 6-1-2015 ..................................................... 9,000 10,631,250
East Chicago Elementary School Building
Corporation (Lake County, Indiana), First
Mortgage Refunding Bonds, Series 1996,
6.25%, 1-5-2016 ..................................................... 7,655 8,162,144
Indiana Health Facility Financing Authority,
Hospital Revenue Bonds:
Series 1999D (Charity Obligated
Group),
5.5%, 11-15-2024 .................................................... 5,000 4,706,250
Series 1999A (Deaconess Hospital
Obligated Group),
5.75%, 3-1-2019 ..................................................... 2,000 1,907,500
Total ............................................................... 51,658,894
KANSAS - 1.85%
Sedgwick County, Kansas and Shawnee County,
Kansas, Single Family Mortgage Revenue Bonds
(Mortgage-Backed Securities Program):
1998 Series A-1 (AMT),
6.5%, 12-1-2022 ..................................................... 8,000 8,420,000
1997 Series A-1 (AMT),
6.95%, 6-1-2029 ..................................................... 5,225 5,649,531
1999 Series A-1 (AMT),
5.5%, 12-1-2026 ..................................................... 2,000 2,135,000
Total ............................................................... 16,204,531
KENTUCKY - 0.06%
County of Jefferson, Kentucky, Insured
Hospital Revenue Bonds, Series 1992 (Alliant
Health System, Inc. Project), Inverse Floaters,
8.836%, 10-23-2014 (A) .............................................. 500 536,250
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
LOUISIANA - 1.14%
Louisiana Public Facilities Authority,
Hospital Revenue and Refunding Bonds:
St. Francis Medical Center Project,
Residual Interest Bonds (RIBS), Series 1994C,
6.858%, 7-22-2024 (A) ............................................... $ 3,650 $ 4,042,375
Pendleton Memorial Methodist Hospital
Project, Series 1998,
5.25%, 6-1-2017 ..................................................... 2,000 1,717,500
Parish of East Baton Rouge, State of
Louisiana, Refunding Revenue Bonds
(Georgia-Pacific Corporation Project),
Series 1998,
5.35%, 9-1-2011 ..................................................... 3,000 2,887,500
Parish of Webster, Louisiana, Pollution
Control Revenue Refunding Bonds,
1998 Series B (Non-AMT),
5.2%, 3-1-2013 ...................................................... 1,435 1,361,456
Total ............................................................... 10,008,831
MASSACHUSETTS - 1.66%
City of Quincy, Massachusetts, Revenue Refunding
Bonds, Quincy Hospital Issue, Series 1993,
Inverse Floating Rate Security (INFLOS),
6.32%, 1-15-2011 (A) ................................................ 5,700 5,671,500
Massachusetts Housing Finance Agency,
Single Family Housing Revenue Bonds,
Series 57 (AMT),
5.6%, 6-1-2030 ...................................................... 4,735 4,504,169
Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue Bonds,
1993 Series A, Inverse Floating Rate Security (INFLOS),
7.17%, 7-1-2018 (A) ................................................. 2,500 2,284,375
Massachusetts State College Building
Authority, Project and Refunding
Revenue Bonds, Senior Series 1994-A,
7.5%, 5-1-2014 ...................................................... 1,750 2,089,063
Total ............................................................... 14,549,107
MICHIGAN - 1.99% 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 9,210,000
Limited Obligation Revenue Bonds, WMX
Technologies, Inc. Project, Series 1993,
6.0%, 12-1-2013 ..................................................... 4,000 4,040,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
MICHIGAN (CONTINUED)
City of Detroit, Michigan, Sewage Disposal
System Revenue and Revenue Refunding Bonds,
Series 1993-A, Inverse Floating Rate Security
(INFLOS),
7.567%, 7-1-2023 (A) ................................................ $ 2,600 $ 2,486,250
Michigan State Hospital Finance Authority,
Hospital Revenue Bonds (The Detroit Medical
Center Obligated Group), Series 1998A,
5.125%, 8-15-2018 ................................................... 2,000 1,695,000
Total ............................................................... 17,431,250
MINNESOTA - 0.66%
City of Rochester, Minnesota, Health
Care Facilities Revenue Bonds (Mayo
Foundation/Mayo Medical Center),
Series 1992D, Floating Inverse
Rate Securities (FIRS),
7.6%, 11-15-2009 (A) ................................................ 4,500 4,848,750
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,
6.043%, 7-1-2013 (A) ................................................ 1,000 938,750
Total ............................................................... 5,787,500
MISSISSIPPI - 2.43%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control
Refunding Revenue Bonds (Weyerhaeuser
Company Project), Series 1992B,
6.7%, 4-1-2022 ...................................................... 11,000 12,072,500
Mississippi Higher Education Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1996-C:
6.75%, 9-1-2014 ..................................................... 5,500 5,548,125
6.7%, 9-1-2012 ...................................................... 1,470 1,482,863
Mississippi Home Corporation, Single Family
Mortgage Revenue Bonds, Series 1999A,
5.25%, 6-1-2031 ..................................................... 2,000 2,107,500
Total ............................................................... 21,210,988
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
MISSOURI - 1.94%
Health and Educational Facilities Authority
of the State of Missouri, Health Facilities
Revenue Bonds:
Barnes-Jewish, Inc./Christian Health
Services, Series 1993A:
6.0%, 5-15-2011 ..................................................... $ 3,000 $ 3,157,500
5.25%, 5-15-2014 .................................................... 2,900 2,834,750
Freeman Health System Project, Series 1998,
5.25%, 2-15-2018 .................................................... 2,460 2,229,375
Lake of the Ozarks General Hospital, Inc.,
Series 1998,
5.1%, 2-15-2018 ..................................................... 2,220 2,009,100
Missouri Housing Development Commission,
Single Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1997 Series C-1 (Non-AMT),
6.55%, 9-1-2028 ..................................................... 1,960 2,072,700
1998 Series D-2 (AMT),
6.3%, 3-1-2029 ...................................................... 1,145 1,190,800
1997 Series A-2 (AMT),
7.3%, 3-1-2028 ...................................................... 910 997,587
1998 Series B-2 (AMT),
6.4%, 3-1-2029 ...................................................... 950 995,125
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 1,445,625
Total ............................................................... 16,932,562
MONTANA - 0.16%
Montana Higher Education Student Assistance
Corporation, Student Loan Revenue Bonds,
Subordinate Series 1998-B,
5.5%, 12-1-2031 ..................................................... 1,500 1,395,000
NEBRASKA - 1.68%
Nebraska Higher Education Loan Program, Inc.,
1993-2 Series A-6 Junior Subordinate Bonds,
6.4%, 6-1-2013 ...................................................... 14,500 14,663,125
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
NEVADA - 0.97%
Clark County, Nevada:
Industrial Development Refunding Revenue
Bonds (Nevada Power Company Project),
Series 1995B,
5.9%, 10-1-2030 ..................................................... $ 4,000 $ 3,760,000
Industrial Development Revenue Bonds (Nevada
Power Company Project), Series 1997A,
5.9%, 11-1-2032 ..................................................... 2,000 1,877,500
Nevada Housing Division, Single Family
Mortgage Bonds:
1998 Series A-1 Mezzanine Bonds,
5.35%, 4-1-2016 ..................................................... 2,050 1,947,500
1996 Series C Subordinate Bonds,
6.35%, 4-1-2009 ..................................................... 880 906,400
Total ............................................................... 8,491,400
NEW HAMPSHIRE - 0.96%
State of New Hampshire, Turnpike System
Revenue Bonds, 1994 Series C, Indexed
Inverse Floater, Residual Interest
Bonds (RIBS),
6.351%, 2-1-2024 (A) ................................................ 10,000 8,350,000
NEW MEXICO - 1.20%
New Mexico Educational Assistance Foundation:
Student Loan Program Bonds:
Second Subordinate 1996 Series A-3,
6.75%, 11-1-2008 .................................................... 2,175 2,245,687
First Subordinate 1996 Series A-2,
6.2%, 11-1-2008 ..................................................... 2,210 2,198,950
Second Subordinate 1995 Series A-3,
6.6%, 11-1-2010 ..................................................... 1,235 1,216,475
Student Loan Purchase Bonds,
Senior 1995 Series IV-A1 (AMT),
7.05%, 3-1-2010 ..................................................... 4,645 4,807,575
Total ............................................................... 10,468,687
NEW YORK - 3.62%
New York State Medical Care Facilities Finance Agency,
Mental Health Services Facilities Improvement
Revenue Bonds, 1993 Series F Refunding,
5.375%, 2-15-2014 ................................................... 12,000 11,850,000
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
NEW YORK (CONTINUED)
The City of New York, General Obligation Bonds:
Fiscal 1994 Series C, Inverse Floaters,
20.36%, 9-30-2003 (C) ............................................... $ 3,250 $ 4,472,812
Fiscal 1997 Series H,
6.125%, 8-1-2025 .................................................... 4,230 4,288,163
Dormitory Authority of the State of New York:
State University Educational Facilities,
Revenue Bonds, Series 1990B,
7.5%, 5-15-2011 ..................................................... 2,000 2,312,500
Department of Health of the State of
New York, Revenue Bonds, Series 1996,
5.5%, 7-1-2010 ...................................................... 2,000 2,030,000
Nyack Hospital, Revenue Bonds, Series 1996,
6.25%, 7-1-2013 ..................................................... 1,000 1,032,500
New York State Urban Development Corporation,
Correctional Capital Facilities Revenue Bonds,
1993A Refunding Series,
5.25%, 1-1-2014 ..................................................... 3,000 2,962,500
New York City Transitional Finance Authority,
Future Tax Secured Bonds, Fiscal 1999 Series C
Tax-Exempt Bonds,
5.0%, 5-1-2019 ...................................................... 3,000 2,707,500
Total ............................................................... 31,655,975
NORTH CAROLINA - 1.63%
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 4,837,500
North Carolina Medical Care Commission,
Hospital Revenue Bonds:
Gaston Health Care, Series 1998,
5.0%, 2-15-2019 ..................................................... 2,500 2,218,750
Halifax Regional Medical Center, Series 1998,
5.0%, 8-15-2018 ..................................................... 2,170 1,877,050
Rex Healthcare, Series 1998,
5.0%, 6-1-2017 ...................................................... 750 684,375
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 2,356,250
County of Cumberland, North Carolina, Hospital
Facility Revenue Bonds (Cumberland County
Hospital System, Inc.), Series 1999,
5.25%, 10-1-2019 .................................................... 2,500 2,287,500
Total ............................................................... 14,261,425
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
NORTH DAKOTA - 0.98%
City of Fargo, North Dakota, Health System
Revenue Bonds (Meritcare Obligated Group),
Series 1996A,
5.55%, 6-1-2016 ..................................................... $ 5,350 $ 5,289,812
County of Burleigh, North Dakota, Healthcare
Revenue Refunding Bonds, Series 1999
(Medcenter One, Inc.),
5.25%, 5-1-2013 ..................................................... 2,000 1,950,000
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 ..................................................... 1,380 1,295,475
Total ............................................................... 8,535,287
OHIO - 1.18%
State of Ohio Air Quality Development Revenue
Bonds (Columbus Southern Power Company
Project), Series 1985 B,
6.25%, 12-1-2020 .................................................... 4,500 4,561,875
County of Erie, Ohio, Franciscan Services
Corporation, Revenue Refunding Bonds,
Series 1993 A (Providence Hospital, Inc.),
6.0%, 1-1-2013 ...................................................... 4,000 4,050,000
City of Moraine, Ohio, Solid Waste
Disposal Revenue Bonds (General Motors
Corporation Project), Series 1994,
6.75%, 7-1-2014 ..................................................... 1,550 1,722,438
Total ............................................................... 10,334,313
OKLAHOMA - 0.69%
Oklahoma Housing Finance Agency, Single
Family Mortgage Revenue Bonds
(Homeownership Loan Program):
1995 Series B, Subseries B-2 (AMT),
7.625%, 9-1-2026 .................................................... 4,605 4,984,913
1996 Series A,
7.05%, 9-1-2026 ..................................................... 995 1,065,894
Total ............................................................... 6,050,807
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
OREGON - 0.67%
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 $ 3,256,313
1992 Series B,
6.875%, 7-1-2028 .................................................... 2,500 2,618,750
Total ............................................................... 5,875,063
PENNSYLVANIA - 3.79%
City of Philadelphia, Pennsylvania, Water
and Wastewater Revenue Bonds, Series 1993,
Inverse Rate Securities:
7.54%, 6-15-2012 (A) ................................................ 7,100 7,250,875
7.54%, 6-15-2012 (A) ................................................ 4,650 5,202,188
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 5,018,750
Allegheny County Hospital Development Authority
(Pennsylvania), UPMC Health System Revenue
Refunding Bonds, Series 1999B,
5.0%, 12-15-2017 .................................................... 5,000 4,550,000
The Philadelphia Parking Authority, Airport
Parking Revenue Bonds, Series of 1999,
5.25%, 9-1-2020 ..................................................... 3,000 2,790,000
City of Philadelphia, Pennsylvania, General
Obligation Bonds, Series 1998:
4.75%, 3-15-2017 .................................................... 1,615 1,423,219
4.75%, 3-15-2018 .................................................... 1,000 876,250
Pennsylvania Intergovernmental Cooperation
Authority, Special Tax Revenue Refunding
Bonds (City of Philadelphia Funding Program),
Series of 1999,
5.0%, 6-15-2021 ..................................................... 2,500 2,237,500
Falls Township Hospital Authority, Refunding
Revenue Bonds, The Delaware Valley Medical Center
Project (FHA Insured Mortgage), Series 1992,
7.0%, 8-1-2022 ...................................................... 2,000 2,152,500
Pennsylvania Higher Educational Facilities Authority,
Revenue Bonds (Thomas Jefferson University),
1999 Series A,
5.0%, 7-1-2019 ...................................................... 1,750 1,583,750
Total ............................................................... 33,085,032
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
SOUTH CAROLINA - 1.77%
South Carolina Jobs - Economic Development
Authority, Hospital Revenue Refunding and
Improvement Bonds (South Carolina Baptist
Hospital), Series 1993D, Intermediate Longs,
Inverse Floating Securities,
7.22%, 8-1-2021 (A) ................................................. $14,550 $ 13,495,125
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 1,937,500
Total ............................................................... 15,432,625
TENNESSEE - 0.80%
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 2,511,675
Multi-Modal Interchangeable Rate, Health Facility
Revenue Bonds (Richland Place, Inc. Project),
Series 1993,
5.5%, 5-1-2023 ...................................................... 1,950 1,845,187
Volunteer State Student Funding Corporation,
Educational Loan Revenue Bonds,
Junior Subordinate Series 1993C Bonds,
5.85%, 12-1-2008 .................................................... 2,700 2,639,250
Total ............................................................... 6,996,112
TEXAS - 6.26%
AllianceAirport Authority, Inc.,
Special Facilities Revenue Bonds,
Series 1991 (American Airlines, Inc.
Project),
7.0%, 12-1-2011 ..................................................... 14,400 15,876,000
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 4,862,500
1997 Series D (AMT) TEAMS Structure:
5.65%, 3-1-2029 ..................................................... 2,500 2,390,625
5.7%, 9-1-2029 ...................................................... 1,500 1,443,750
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
TEXAS (CONTINUED)
Trinity River Authority of Texas (Tarrant
County Water Project), Improvement and Refunding
Revenue Bonds, Series 1999,
5.25%, 2-1-2020 ..................................................... $7,415 $ 6,933,025
Amarillo Health Facilities Corporation,
Hospital Revenue Bonds (Baptist St. Anthony's
Hospital Corporation Project), Series 1998,
5.5%, 1-1-2015 ...................................................... 6,320 6,280,500
City of Austin, Texas, Subordinate Lien
Revenue Refunding Bonds, Series 1998,
5.25%, 5-15-2019 .................................................... 5,000 4,762,500
Gulf Coast Waste Disposal Authority,
Multi-Modal Interchangeable Rate Revenue
Bonds (Champion International Corporation
Project), Series 1992A,
6.875%, 12-1-2028 ................................................... 3,220 3,413,200
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 3,148,494
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 2,760,938
Midland County Hospital District, Hospital
Revenue Refunding Bonds, Series 1997,
5.375%, 6-1-2016 .................................................... 2,000 1,935,000
Collin County Housing Finance Corporation,
Student Housing Revenue Bonds (Collin
County Community College District Foundation,
Inc. Project), Series 1998A,
5.25%, 6-1-2031 ..................................................... 1,000 870,000
Total ............................................................... 54,676,532
UTAH - 5.80%
Tooele County, Utah, Hazardous Waste Treatment
Revenue Bonds (Union Pacific Corporation/
USPCI, Inc. Project), Series A,
5.7%, 11-1-2026 ..................................................... 37,200 33,945,000
Intermountain Power Agency, Power Supply
Revenue Refunding Bonds, 1993 Series A,
Inverse Floating Rate Securities (INFLOS),
7.266%, 7-1-2021 (A) ................................................ 18,200 16,766,750
Total ............................................................... 50,711,750
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
WASHINGTON - 7.32%
Washington Public Power Supply System:
Nuclear Project No. 3, Refunding Revenue Bonds:
Series 1989B,
7.125%, 7-1-2016 .................................................... $20,750 $ 23,836,563
Series 1993C, Inverse Floating Rate Security,
6.87%, 7-1-2012 (A) ................................................. 7,000 6,658,750
Nuclear Project No. 1, Refunding Revenue Bonds:
Series 1989B,
7.125%, 7-1-2016 .................................................... 8,200 9,419,750
Series 1993A, Inverse Floating Rate Security,
7.47%, 7-1-2011 (A) ................................................. 7,500 8,109,375
Nuclear Project No. 2, Refunding Revenue
Bonds, Series 1994A, Inverse Floating Rate
Securities,
6.52%, 7-1-2012 (A) ................................................. 2,500 2,418,750
State of Washington, Various Purpose General
Obligation Bonds, Series 1990A,
6.75%, 2-1-2015 ..................................................... 4,995 5,600,644
Pilchuck Development Public Corporation (State
of Washington), Special Facilities Airport
Revenue Bonds, Series 1993 (TRAMCO, INC. Project),
6.0%, 8-1-2023 ...................................................... 3,500 3,473,750
Public Utility District No. 1 of Douglas County,
Washington, Wells Hydroelectric Revenue Bonds,
Series of 1965,
3.7%, 9-1-2018 ...................................................... 4,130 3,458,875
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 .................................................... 875 980,000
Total ............................................................... 63,956,457
WEST VIRGINIA - 0.66%
Braxton County, West Virginia, Solid Waste
Disposal Revenue Bonds (Weyerhaeuser Company
Project), Series 1995A,
6.5%, 4-1-2025 ...................................................... 3,500 3,670,625
The County Commission of Monongalia County, West
Virginia, Pollution Control Revenue Bonds (The
Potomac Edison Company Fort Martin Station Project),
1993 Series B,
5.95%, 4-1-2013 ..................................................... 2,000 2,065,000
Total ............................................................... 5,735,625
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
<S> <C> <C>
MUNICIPAL BONDS (CONTINUED)
WISCONSIN - 0.95%
Wisconsin Public Power Incorporated SYSTEM
(The), Power Supply System Revenue Bonds,
Series 1993B-2, Yield Curve Notes (YCNs),
6.8%, 7-1-2014 (A) .................................................. $ 5,500 $ 5,390,000
Wisconsin Housing and Economic Development
Authority, Home Ownership Revenue Bonds,
1997 Series H,
5.75%, 9-1-2028 ..................................................... 3,000 2,917,500
Total ............................................................... 8,307,500
TOTAL MUNICIPAL BONDS - 94.91% $829,598,190
(Cost: $834,285,556)
TOTAL SHORT-TERM SECURITIES - 3.89% $ 33,952,154
(Cost: $33,952,154)
TOTAL INVESTMENT SECURITIES - 98.80% $863,550,344
(Cost: $868,237,710)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.20% 10,532,126
NET ASSETS - 100.00% $874,082,470
</TABLE>
SEE NOTES TO SCHEDULE OF INVESTMENTS ON PAGE .
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL BOND FUND, INC.
SEPTEMBER 30, 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 September 30, 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 September 30, 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 September 30, 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.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment securities--at value
(Notes 1 and 3) .................................................................. $863,550
Cash ................................................................................ 70
Receivables:
Interest ......................................................................... 12,690
Fund shares sold ................................................................. 165
Prepaid insurance premium ........................................................... 28
Other assets......................................................................... 10
--------
Total assets ................................................................... 876,513
--------
LIABILITIES
Payable to Fund shareholders ........................................................ 2,159
Accrued service fee (Note 2) ........................................................ 173
Accrued transfer agency and dividend
disbursing (Note 2) .............................................................. 75
Accrued management fee (Note 2) ..................................................... 12
Accrued accounting services fee (Note 2) ............................................ 7
Accrued distribution fee (Note 2) ................................................... 5
--------
Total liabilities .............................................................. 2,431
--------
Total net assets ............................................................ $874,082
========
NET ASSETS
$0.001 par value capital stock
Capital stock .................................................................... $ 127
Additional paid-in capital ....................................................... 873,386
Accumulated undistributed income:
Accumulated undistributed net investment
income ......................................................................... 701
Accumulated undistributed net realized gain on
investment transactions ........................................................ 4,555
Net unrealized depreciation in value of
investments .................................................................... (4,687)
--------
Net assets applicable to outstanding units
of capital .................................................................. $874,082
========
Net asset value per share (net assets divided
by shares outstanding)
Class A .......................................................................... $6.90
Class Y .......................................................................... $6.90
Capital shares outstanding
Class A .......................................................................... 126,596,042
Class Y .......................................................................... 281
Capital shares authorized .............................................................. 600,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest and amortization (Note 1B) ...................................................... $54,506
-------
Expenses (Note 2):
Investment management fee ............................................................. 4,196
Service fee - Class A.................................................................. 2,034
Transfer agency and dividend disbursing - Class A...................................... 758
Distribution fee - Class A............................................................. 129
Accounting services fee ............................................................... 85
Custodian fees ........................................................................ 37
Audit fees ............................................................................ 20
Legal fees ............................................................................ 14
Other ................................................................................. 168
-------
Total expenses ...................................................................... 7,441
-------
Net investment income ............................................................ 47,065
-------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTES 1 AND 3)
Realized net gain on securities .......................................................... 9,130
Realized net gain on put options purchased ............................................... 221
Realized net loss on futures contracts closed ............................................ (350)
-------
Net realized gain on investments ...................................................... 9,001
Net unrealized depreciation in value of
investments during the period ......................................................... (86,742)
-------
Net loss on investments ............................................................. (77,741)
-------
Net decrease in net assets resulting
from operations ............................................................... $(30,676)
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED SEPTEMBER 30,
-------------------------------------------
1999 1998
-------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income......................................... $47,065 $ 48,804
Realized net gain on
investments ................................................ 9,001 16,941
Unrealized appreciation
(depreciation).............................................. (86,742) 16,492
-------- --------
Net increase (decrease) in net assets
resulting from operations ............................... (30,676) 82,237
-------- --------
Distributions to shareholders from (Note 1D):*
Net investment income:
Class A .................................................... (47,791) (48,648)
Class Y** .................................................. --- ---
Realized gains on securities transactions:
Class A .................................................... (14,339) (12,104)
Class Y .................................................... --- ---
-------- --------
(62,130) (60,752)
-------- --------
Capital share transactions:
Proceeds from sale of shares:
Class A (25,266,631 and 41,023,912
shares, respectively) ................................... 185,060 307,508
Class Y (270 and 0 shares, respectively).................... 2 ---
Proceeds from reinvestment of dividends
and/or capital gains distribution:
Class A (7,012,942 and 6,763,886
shares, respectively) ................................... 51,386 50,042
Class Y (11 and 0 shares, respectively)**................... --- ---
Payments for shares redeemed:
Class A (36,372,123 and 50,159,643
shares, respectively) ................................... (266,449) (376,023)
Class Y (0 and 0 shares, respectively)...................... --- ---
--------- --------
Net decrease in net assets resulting
from capital share transactions ...................... (30,001) (18,473)
--------- --------
Total increase (decrease) ............................ (122,807) 3,012
NET ASSETS
Beginning of period ............................................. 996,889 993,877
--------- --------
End of period, including undistributed
net investment income of $701 and
$1,427, respectively ......................................... $874,082 $996,889
======== ========
</TABLE>
*See "Financial Highlights" on pages - .
**Amounts for the fiscal period ended September 30, 1999 not shown due to
rounding.
SEE NOTES TO FINANCIAL STATEMENTS.
<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 FISCAL YEAR ENDED
SEPTEMBER 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $7.63 $7.47 $7.32 $7.25 $6.91
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income ....................... 0.36 0.37 0.38 0.39 0.39
Net realized and
unrealized gain
(loss) on
investments .................. (0.61) 0.25 0.30 0.12 0.38
----- ----- ----- ----- -----
Total from investment
operations ...................... (0.25) 0.62 0.68 0.51 0.77
----- ----- ----- ----- -----
Less distributions:
From net investment
income ....................... (0.37) (0.37) (0.37) (0.39) (0.39)
From capital gains .............. (0.11) (0.09) (0.16) (0.05) (0.00)
In excess of capital
gains ........................ (0.00) (0.00) (0.00) (0.00) (0.04)
----- ----- ----- ----- -----
Total distributions ................ (0.48) (0.46) (0.53) (0.44) (0.43)
----- ----- ----- ----- -----
Net asset value,
end of period ................... $6.90 $7.63 $7.47 $7.32 $7.25
===== ===== ===== ===== =====
Total return* ...................... -3.46% 8.67% 9.77% 7.16% 11.51%
Net assets, end of
period (in
millions) ....................... $874 $997 $994 $997 $975
Ratio of expenses to
average net assets............... 0.79% 0.72% 0.67% 0.68% 0.65%
Ratio of net investment
income to average
net assets ...................... 4.98% 4.95% 5.14% 5.23% 5.51%
Portfolio
turnover rate ................... 30.93% 50.65% 47.24% 74.97% 70.67%
</TABLE>
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
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
9/30/99
-------
<S> <C>
Net asset value,
beginning of period.............. $7.41
-----
Income from investment
operations:
Net investment
income ....................... 0.28
Net realized and
unrealized loss
on investments ............... (0.51)
-----
Total from investment
operations ...................... (0.23)
-----
Less dividends from
net investment
income .......................... (0.28)
-----
Net asset value,
end of period ................... $6.90
=====
Total return ....................... -3.21%
Net assets, end of
period (in
thousands) ...................... $2
Ratio of expenses
to average net
assets .......................... 0.67%**
Ratio of net
investment income
to average net
assets .......................... 5.08%**
Portfolio
turnover rate ................... 30.93%***
</TABLE>
*Commencement of operations.
**Annualized.
***For the fiscal year ended September 30, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
UNITED MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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 tax. 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
<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. As of June
30, 1999, the fee is payable by the Fund at the annual rate of 0.525% of net
assets up to $500 million, 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 fee consisted 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 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 the 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.
<PAGE>
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 Fund) of
$993,053, out of which W&R paid sales commissions of $571,128 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 $36,815, 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 $280,808,480 while proceeds from maturities
and sales aggregated $305,245,576. Purchases of options aggregated $14,910,184
while proceeds from options aggregated $15,131,272 Purchases of short-term
securities aggregated $1,442,892,420 while proceeds from maturities and sales
aggregated $1,442,184,774. No long-term U.S. Government securities were bought
or sold during the period ended September 30, 1999.
For Federal income tax purposes, cost of investments owned at September
30, 1999 was $872,568,649, resulting in net unrealized appreciation of
$9,018,305, of which $22,876,651 related to appreciated securities and
$31,894,956 related to depreciated securities.
NOTE 4 -- FEDERAL INCOME TAX MATTERS
For Federal income tax purposes, the Fund realized capital gain net
income of $8,892,543 during its fiscal year ended September 30, 1999, of which a
portion was paid to the Fund's shareholders during the period ended September
30, 1999. Remaining capital gain net income 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
<PAGE>
of the contracts, the cumulative net change in the variation margin is recorded
as realized gain or loss. The Fund uses futures to attempt to reduce the overall
risk of its investments.
NOTE 6 -- OPTIONS
Options purchased by the Fund are accounted for in the same manner as
marketable portfolio securities. The cost of portfolio securities acquired
through the exercise of call options is increased by the premium paid to
purchase the call. The proceeds from securities sold through the exercise of put
options are decreased by the premium paid to purchase the put. The Fund uses
options to attempt to reduce the overall risk of its investments.
NOTE 7 -- MULTICLASS OPERATIONS
The Fund is authorized to offer four classes of shares, Class A, Class
B, Class C and Class Y, each of which have equal rights as to assets and voting
privileges. Only Class A and Class Y shares were issued during the fiscal year
ended September 30, 1999. Class Y shares are not subject to a sales charge on
purchases, are not subject to a Rule 12b-1 Distribution and Service Plan and are
subject to 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
their relative net assets as of the beginning of each day adjusted for the prior
day's capital share activity.
<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, 1999, and the related statement of operations for the fiscal
year then ended, the statements of changes in net assets for each of the two
fiscal years in the period then ended, and the financial highlights for each of
the five fiscal years in the 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 as of
September 30, 1999, by correspondence with the custodian. 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 September 30, 1999, the results of its
operations for the fiscal year then ended, the changes in its net assets for
each of the two fiscal years in the period then ended, and the financial
highlights for each of the five fiscal years in the period then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Kansas City, Missouri
November 5, 1999
