<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
- -----------------------------------------------------------------
December 31, 1994
PROSPECTUS
- -----------------------------------------------------------------
United Municipal High Income Fund, Inc. (the "Fund") is an open-end
diversified management investment company. Its goal is to provide a high level
of income to shareholders which is not subject to Federal income taxation.
There is no assurance that the Fund will achieve its goal. The securities
offering the high income sought by the Fund are ordinarily in the medium and
lower rating categories of recognized rating agencies or are unrated but if
unrated are, in the opinion of the Manager, Waddell & Reed Investment Management
Company, of similar quality to rated municipal bonds in these categories. They
generally are subject to greater risks than securities in the higher rating
categories. Accordingly, investment in the Fund is not suitable for all
investors.
This Prospectus contains concise information about the Fund of which you
should be aware before investing. Additional information has been filed with
the Securities and Exchange Commission and is contained in a Statement of
Additional Information (the "SAI"), dated December 31, 1994. You may obtain a
copy of the SAI free of charge by request to the Fund or Waddell & Reed, Inc.,
its Underwriter, at the address or telephone number shown below. The SAI is
incorporated by reference into this Prospectus and you will not be aware of all
facts unless you read both this Prospectus and the SAI.
Investments in high-yield, high-risk securities (sometimes referred to as
"junk bonds") may entail risks that are different or more pronounced than those
involved in higher-rated securities. See "Risk Factors" included in this
Prospectus for a discussion of the risks associated with non-investment grade
securities.
Retain This Prospectus For Future Reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This supplement is required by the Securities Division of the State of
Washington
This fund invests primarily in lower rated bonds commonly known as "junk
bonds." Investments of this type are subject to a greater risk of loss of
principal and interest than higher rated bonds. Purchasers should carefully
assess the risks associated with an investment in this fund.
To be attached to the cover page of the Prospectus of
United Municipal High Income Fund, Inc.
This supplement is dated June 1, 1992
NUS1128
Supplement to Prospectus
This supplement is required by the Securities Division of the State of Arizona
This fund invests primarily in high-yield, high-risk securities and
therefore may not be suitable for all investors.
To be attached to the cover page of the Prospectus of
United High Income Fund, Inc.
United High Income Fund II, Inc.
United Municipal High Income Fund, Inc.
This supplement is dated July 8, 1992
NUS1129
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
Summary of Expenses
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Load Imposed on Purchases 4.25%
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested None
Dividends (as a percentage of offering price)
Deferred Sales Load (as a percentage
of original purchase price or redemption
proceeds, as applicable) None
Redemption Fees (as a percentage
of amount redeemed, if applicable) None
Exchange Fee None
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
Management Fees 0.52%
12b-1 Fees* 0.09%
Other Expenses 0.15%
(Includes, among other expenses, transfer
agency, accounting, custodian, audit and legal fees)
Total Fund Operating Expenses 0.76%
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of each
time period: $50 $66 $83 $133
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown.
*See "Management and Services" for further information about the 12b-1 service
fees.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
(Audited)
The following information has been audited by Price Waterhouse LLP,
independent accountants, and should be read in conjunction with the financial
statements and notes thereto, together with the report of Price Waterhouse LLP.
<TABLE>
<CAPTION>
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
period
from
For the fiscal year ended September 30, 1/21/86
--------------------------------------------------------------------------- through
1994 1993 1992 1991 1990 1989 1988 1987 9/30/86*
---- ---- ---- ---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $5.53 $5.23 $5.05 $4.85 $4.96 $4.84 $4.96 $5.22 $5.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment income .34 .35 .36 .38 .39 .41 .43 .43 .30
Net realized and unrealized gain
(loss) on investments(0.34) .34 .18 .20 (0.11) .12 (0.09) (0.24) .22
----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations ......... .00 .69 .54 .58 .28 .53 .34 .19 .52
Less distributions:
Dividends declared from net
investment income . (0.34) (0.35) (0.36) (0.38) (0.39) (0.41) (0.43) (0.43) (0.30)
Distribution from
capital gains ..... (0.07) (0.04) .00 .00 .00 .00 (0.03) (0.02) .00
----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions .. (0.41) (0.39) (0.36) (0.38) (0.39) (0.41) (0.46) (0.45) (0.30)
----- ----- ----- ----- ----- ----- ----- ----- -----
End of period ...... $5.12 $5.53 $5.23 $5.05 $4.85 $4.96 $4.84 $4.96 $5.22
===== ===== ===== ===== ===== ===== ===== ===== =====
Total return** ....... 0.05% 13.77% 11.08% 12.35% 5.89% 11.38% 7.27% 3.57% 15.86%***
Net assets, end of period (000
omitted) ............$345,162 $329,373 $260,777 $224,945 $192,440 $168,838 $117,838 $72,403 $27,918
Ratio of expenses to average net
assets ............. 0.76% 0.70% 0.72% 0.77% 0.75% 0.75% 0.80% 0.86% 0.52%****
Ratio of net investment income to
average net assets . 6.39% 6.49% 7.08% 7.63% 7.97% 8.36% 8.76% 8.42% 5.97%
Portfolio turnover rate 26.26% 26.13% 54.18% 60.83% 27.31% 38.94% 44.49% 56.93% 115.91%
*The Fund's inception date is September 9, 1985; however, since the Fund did not have investment activity or incur
expenses prior to the date of public offering, the per-share data and ratios are for a capital share outstanding
for the period from January 21, 1986 (initial public offering) through September 30, 1986. On an annual basis,
the ratios of expenses and net investment income to average net assets would have been approximately 0.75% and
8.65%, respectively.
**Total return calculated without taking into account the sales load deducted on an initial purchase.
***Annualized.
****Waddell & Reed, Inc. ("W&R"), the then investment manager, for the period from January 6, 1986 through September
30, 1986 voluntarily waived any management and shareholder service fees and paid Fund expenses to the extent
necessary to assure that on each day the Fund's total expenses did not exceed 1/365th of 0.75 of 1% of the Fund's
net assets. The ratio of expenses to average net assets shown in the table would have been 0.70% without this
assumption of expenses.
</TABLE>
Information regarding the performance of the Fund is contained in the
Fund's annual report to shareholders which may be obtained without charge by
request to the Fund at the address or phone number shown on the front cover of
this Prospectus.
<PAGE>
What is United Municipal High Income Fund, Inc.?
United Municipal High Income Fund, Inc. is a corporation organized under
Maryland law on September 9, 1985. It is an open-end diversified management
investment company commonly called a "mutual fund." The Fund has a Board of
Directors which has overall responsibility for the management of its affairs.
For the names of the Directors and other information about them, see the SAI.
The Fund has only one class of shares. Each share has the same rights to
dividends and to vote. Shares are fully paid and nonassessable when bought.
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 an annual or special
meeting called by the Board of Directors for such purpose.
Special meetings of shareholders may be called for any purpose upon receipt
by the Fund of a request in writing signed by shareholders holding not less than
25% of all shares entitled to vote at such meeting, provided certain conditions
stated in the Bylaws of the Fund are met. There will normally be no meeting of
shareholders for the purpose of electing directors until such time as less than
a majority of directors holding office have been elected by shareholders, at
which time the directors then in office will call a shareholders' meeting for
the election of directors. To the extent that Section 16(c) of the Investment
Company Act of 1940, as amended, applies to the Fund, the directors are required
to call a meeting of shareholders for the purpose of voting upon the question of
removal of any director when requested in writing to do so by the shareholders
of record of not less than 10% of the Fund's outstanding shares.
Performance Information
From time to time Waddell & Reed, Inc. or the Fund may include performance
data in advertisements or in information furnished to present or prospective
shareholders. Fund performance may be shown by presenting one or more
performance measurements, including yield, total return and performance
rankings.
The Fund's yield is based on a 30-day period ending on a specific date and
is computed by dividing the Fund's net investment income per share earned during
the period by the Fund's maximum offering price per share on the last day of the
period. The Fund may also advertise or include in information furnished to
present or prospective shareholders 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.
The Fund's total return is its overall change in value for the period shown
including the effect of reinvesting dividends and capital gains distributions
and any change in the net asset value per share. A cumulative total return
reflects the Fund's change in value over a stated period of time. An average
annual total return reflects the hypothetical annually compounded return that
would have produced the cumulative total return for a stated period if the
Fund's performance had been constant during each year of that period. Average
annual total returns are not actual year-by-year results and investors should
realize that total returns will fluctuate.
Standardized total return figures reflect payment of the maximum sales
charge. The Fund may also provide non-standardized performance information
which does not reflect deduction of such sales charge or which is for periods
other than those required to be presented or which differs otherwise from
standardized performance information. See the SAI for yield and total return
and methods of computation.
From time to time in advertisements and information furnished to present or
prospective shareholders the Fund may discuss its 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. The Fund may also compare its performance to
that of other selected mutual funds or selected recognized market indicators.
Performance information may be quoted numerically or presented in a table, graph
or other illustration.
All performance information which the Fund advertises or includes in
information provided to present or prospective shareholders is historical in
nature and is not intended to represent or guarantee future results. The value
of the Fund's shares when redeemed may be more or less than their original cost.
Goal and Investment Policies of the Fund
The goal of the Fund is to provide a high level of income which is not
subject to Federal income tax by investing in the medium and lower quality
"municipal bonds" which provide higher yields than bonds of higher quality.
This goal is a fundamental policy of the Fund and may not be changed without the
approval of shareholders. Municipal bonds are debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities the interest on which is exempt from Federal income tax. See
"Dividends, Distributions and Taxes" concerning the alternative minimum tax
("AMT"). The Fund anticipates that not more than one-half of the dividends it
will pay to shareholders will be subject to treatment as a preference item for
AMT purposes. It is also a fundamental policy of the Fund that during normal
market conditions the Fund will not purchase any securities unless thereafter at
least 80% of its assets will be invested in municipal bonds.
It is anticipated that during normal market conditions at least 75% of the
Fund's assets will be invested in medium and lower quality municipal bonds which
are bonds rated in the medium and lower categories of recognized rating agencies
or if unrated are, in the opinion of the Fund's Manager, Waddell & Reed
Investment Management Company (the "Manager"), of similar quality to rated
municipal bonds in these categories. Medium and lower categories are Baa
through C by Moody's Investors Services, Inc. or BBB through D by Standard &
Poor's Ratings Group ("S&P"). See Appendix A to this Prospectus for a
description of these rating categories. To varying degrees, bonds within these
rating categories may be considered speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
See "Risk Factors" for a discussion of the risks associated with non-investment
grade debt securities. The Fund may invest in higher quality municipal bonds
and have less than 75% of its assets in medium and lower quality municipal bonds
at times when yield spreads are narrow and the higher yields do not justify the
increased risk and when there is a lack of medium and lower quality issues in
which to invest. This might result in a decrease in the Fund's yield.
During normal market conditions, up to 20% of the Fund's assets may be
invested in a combination of debt securities other than municipal bonds
(referred to as "taxable obligations") and Debt Futures and Municipal Bond Index
Futures (defined below). The Manager may choose to invest in taxable
obligations under normal conditions in order to keep assets invested until
appropriate investments in municipal bonds may be made and may hold such
obligations in connection with investment in futures. Income from taxable
obligations and capital gains from Debt Futures and Municipal Bond Index Futures
will be subject to Federal income tax.
Municipal bonds are issued by a wide range of governments, agencies and
authorities for various public purposes. The types of municipal bonds in which
the Fund may invest are "general obligation" bonds and "revenue" bonds and
certain "industrial development" bonds. Industrial development bonds are
revenue bonds issued by or on behalf of public authorities to obtain funds to
finance privately operated facilities. Their credit quality is generally
dependent on the credit standing of the company involved.
Municipal obligations in which the Fund may invest also include municipal
lease obligations and participations in these obligations (collectively, "lease
obligations") of municipal authorities or entities. The Manager determines
liquidity of lease obligations in accordance with guidelines established by the
Fund's Board of Directors. Unrated municipal lease obligations will be
considered to be illiquid. In determining the credit quality of unrated
municipal lease obligations, one of the factors, among others, to be considered
will be the likelihood that the lease will not be canceled. Certain "non-
appropriation" lease obligations may present special risks because the
municipality's obligation to make future lease or installment payments depends
on money being appropriated each year for this purpose. See the SAI for further
information about lease obligations.
Municipal bonds vary widely as to interest rates, degree of security and
maturity. Factors which affect the yield on municipal bonds include general
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation and the nature of the issue.
The municipal bonds and taxable obligations which the Fund may purchase are
debt securities which go up and down in value depending in large part on changes
in prevailing interest rates. If interest rates go up after the Fund buys a
debt security, the value of that security may go down; if interest rates go down
the security value may go up. Debt securities with longer maturities, which may
produce higher yields, may go up or down more than debt securities which have
shorter maturities. The Fund holds securities with varying maturities but under
normal market conditions will be substantially invested in bonds with maturities
of 10 to 30 years. Changes in the values of the debt securities which the Fund
owns will affect its net asset value per share, but will not affect the income
the Fund receives.
The ability of the governments, agencies, companies or others to pay
principal and interest on debt securities held by the Fund may change. Such
changes, actual or expected, may also affect the value of these debt securities.
If interest is not in fact paid, the level of income the Fund receives and the
value of Fund shares may be affected; if principal is not paid, only the value
of Fund shares would be affected.
The Fund may invest 25% or more of its assets in industrial development
bonds. Certain risks are associated with industrial development bonds as
discussed further in the SAI. When market conditions dictate, the Fund may have
25% or more of its assets in securities the interest upon which is paid from
revenues of similar type projects. As a fundamental policy, it will not,
however, have more than 25% of its assets in industrial development bonds issued
for any one industry or in any one state. The Fund will not purchase an
industrial development bond if it would then have more than 5% of its assets
invested in industrial development bonds of companies with less than three years
operating history. Economic, business or political development or change
affecting such securities could have a greater effect than if a smaller
percentage were invested in such projects or in different types of projects.
See the SAI for examples of the types of projects in which the Fund may invest
from time to time and for a discussion of the risks associated with such
projects.
The only taxable obligations which the Fund may purchase are (i)
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities; (ii) bank obligations of domestic banks or savings and loan
associations which are subject to regulation by the U.S. Government, including
certificates of deposit and acceptances; (iii) commercial paper; and (iv)
repurchase agreements.
The Fund may purchase and write (sell) listed options on domestic debt
securities (including, without limitation, securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities) and on municipal bond
indices. Exchange-listed options on securities and on municipal bond indices are
issued by the Options Clearing Corporation.
The Fund may write options on securities for the purpose of increasing
income (which would be taxable) in the form of premiums paid by the purchaser of
the option. While writing calls may result in realization of income, the Fund
will lose the opportunity to profit from an increase in the price of the
security subject to the call over the exercise price. In writing puts, the Fund
assumes the risk of loss should the market value of the underlying security
decline below the exercise price at which the Fund is obligated to purchase the
security. The Fund will write a put only when it has determined that it would
be willing to purchase the underlying security at the exercise price.
The Fund may purchase calls to take advantage of an expected rise in the
market value of securities that the Fund does not hold in its portfolio and to
close positions in calls it has written. It may purchase puts on related
investments it owns ("protective puts") or on related investments it does not
own ("nonprotective puts"). Buying a protective put permits the Fund to protect
itself during the put period against a decline in the value of the related
investments below the exercise price by selling them through the exercise of the
put. Buying a nonprotective put permits the Fund, if the market price of the
related investments is below the put price during the put period, either to
resell the put or to buy the related investments and sell them at the exercise
price. The Fund may also purchase puts to close positions in puts it has
written. If an option purchased by the Fund is not exercised or sold, it will
become worthless at its expiration date and the Fund will lose the amount of the
premium it paid.
The Fund may also purchase and write (sell) listed options on municipal
bond indices. It may write options on municipal bond indices to generate income
(which would be taxable). It may also purchase calls on municipal bond indices
to hedge against an anticipated increase in the price of securities it wishes to
acquire and may purchase puts on municipal bond indices to hedge against an
anticipated decline in the market value of its portfolio securities. Because
municipal bond index options are settled in cash, the Fund cannot provide in
advance for its potential settlement obligations on a call it has written on a
municipal bond index by holding the underlying securities. The Fund bears the
risk that the value of the securities it holds will vary from the value of the
index.
Options offer large amounts of leverage, which will result in the Fund's
net asset value being more sensitive to changes in the value of the related
investment. There is no assurance that a liquid secondary market will exist for
exchange-listed options. If the Fund is not able to enter into a closing
transaction on an option it has written, it will be required to maintain the
securities or collateral used to "cover" the Fund's obligations under such
option until a closing transaction can be entered into or the option expires.
For the purpose of hedging the value of the municipal bonds and taxable
obligations held by the Fund from the potentially adverse consequences of
changes in interest rates, the Fund may also buy and sell futures contracts on
domestic debt securities ("Debt Futures"), futures contracts on municipal bond
indices ("Municipal Bond Index Futures") and options on Debt Futures.
Since futures contracts and options thereon can replicate movements in the
cash markets for the securities in which the Fund invests without the large cash
investments required for dealing in such markets, they may subject the Fund to
greater and more volatile risks than might otherwise be the case. The principal
risks associated with the use of such instruments are (i) imperfect correlation
between movements in the market price of the portfolio investments (held or
intended to be purchased) being hedged and in the price of the futures contract
or option; (ii) possible lack of a liquid secondary market for closing out
futures contract or options positions; (iii) the need for additional portfolio
management skills and techniques; and (iv) losses due to unanticipated market
price movements. For a hedge to be completely effective, the price change of
the hedging instrument should equal the price change of the security being
hedged. Such equal price changes are not always possible because the investment
underlying the hedging instrument may not be the same investment that is being
hedged. The Manager will attempt to create a closely correlated hedge, but
hedging activity may not be completely successful in eliminating market value
fluctuation. 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 distortion. Due to the possibility of
distortion, a correct forecast of general interest rate or market trends by the
Manager may still not result in a successful transaction. The Manager may be
incorrect in its expectations as to the extent of various interest rate or bond
market movements or the time span within which the movements take place. Gains
and losses on investments in options and futures contracts depend on the
Manager's ability to predict correctly the direction of stock prices, interest
rates and other economic factors. See the SAI for further information about
these instruments and their risks.
Options and futures transactions may increase the Fund's portfolio turnover
rate, creating greater commissions expenses, transaction costs and tax
consequences.
From time to time during unusual market conditions the Manager may believe
that a temporary defensive position is desirable due to present or anticipated
market or economic conditions which are affecting or could adversely affect the
values of municipal bonds. During such periods, the Fund may invest up to all
of its assets in taxable obligations which would result in a higher proportion
of the Fund's income being subject to Federal income taxes.
The Fund may also purchase municipal bonds on a when-issued basis and will
do so in order to secure an advantageous price and yield at the time of entering
into the transaction. These bonds are subject to market value fluctuation until
delivery and payment is completed so it is possible that their value when
delivered may be less than the price paid. See the SAI for additional
information on the characteristics of these bonds.
For the purpose of increasing income the Fund may purchase securities
subject to repurchase agreements which can be considered as collateralized loans
by the Fund. The income earned on repurchase agreements is subject to Federal
income tax. The majority of the repurchase transactions in which the Fund would
engage run from day to day and delivery pursuant to the resale typically will
occur within one to five days of the purchase. The Fund's risk is limited to
the ability of the vendor to pay the agreed-upon sum upon the delivery date.
The Fund may buy shares of other investment companies which do not redeem
their shares, subject to the conditions stated in the SAI. It may also have up
to 10% of its net assets invested in certain illiquid securities.
The Fund may purchase restricted securities, which are securities that
cannot freely be sold for legal or contractual reasons. Restricted securities
may be illiquid due to restrictions on their resale.
The Fund may invest in zero coupon securities. Although the Manager does
not believe that investing in such securities results in material risks, such
investing may affect the Fund's ability to meet its investment objective or meet
the requirements of Subchapter M of the Internal Revenue Code.
Risk Factors
The market for high-yield, high-risk debt securities rated in the medium
and lower rating categories or unrated is relatively new and much of its growth
paralleled a long economic expansion, during which this market involved a
significant increase in the use of high-yield debt securities to fund highly
leveraged corporate acquisitions and restructurings. Thereafter, this market
was affected by a relatively high percentage of defaults with respect to high-
yield securities as compared with higher rated securities. An economic downturn
or increase in interest rates is likely to have a greater negative effect on
this market, the value of high-yield debt securities in the Fund's portfolio,
the Fund's net asset value and the ability of the bonds' issuers to repay
principal and interest, meet projected business goals and obtain additional
financing than on higher rated securities. Yields on lower-rated municipal
bonds may not currently fully reflect the higher risks of such bonds.
Therefore, the risk of negative effect on their market value should interest
rates increase or credit quality concerns develop may be higher than has
historically been experienced. An investment in this Fund may be considered
more speculative than investment in shares of a fund which invests primarily in
higher rated debt securities.
Prices of high-yield debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities. Market
prices of high-yield debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash.
Where it deems it appropriate and in the best interests of Fund shareholders,
the Fund may incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to protect the interests
of security holders of its portfolio companies.
Because the market for lower rated securities may be thinner and less
active than for higher rated securities, there may be market price volatility
for these securities and limited liquidity in the resale market. Unrated
securities are usually not as attractive to as many buyers as rated securities
are, a factor which may make unrated securities less marketable. These factors
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. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield debt securities, especially in a thinly
traded market. To the extent the Fund owns or may acquire illiquid or
restricted high-yield securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties. Changes in values of debt securities which the Fund
owns will affect its net asset value per share. If market quotations are not
readily available for the Fund's lower rated or unrated securities, these
securities will be valued by a method that the Fund's Board of Directors
believes accurately reflects fair value. Valuation becomes more difficult and
judgment plays a greater role in valuing high-yield debt securities than with
respect to securities for which more external sources of quotations and last
sale information are available.
New and proposed laws may have an impact on the market for high-yield debt
securities. Special tax considerations are associated with investing in high-
yield debt securities structured as zero coupon or pay-in-kind securities. See
"Taxes" in the SAI.
While credit ratings are only one factor the Manager relies on in
evaluating high-yield debt securities, certain risks are associated with using
credit ratings. Credit ratings evaluate the safety of principal and interest
payments, not market value risk. Credit rating agencies may fail to timely
change the credit ratings to reflect subsequent events; however, the Manager
continuously monitors the issuers of high-yield debt securities in its portfolio
in an attempt to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments. Achievement of the
Fund's investment objective may be more dependent upon the Manager's credit
analysis than is the case for higher quality debt securities. Credit ratings
for individual securities may change from time to time and the Fund may retain a
portfolio security whose rating has been changed.
During the Fund's fiscal year ended September 30, 1994, the percentage of
the Fund's assets invested in debt securities in each of the rating categories
of S&P, and the debt securities not rated by an established rating service,
determined on a dollar weighted average, were as follows:
Rated by Percentage of
S&P Fund Assets
-------- -------------
AAA 2.5%
AA 0.5
A 3.4
BBB 31.0
BB 2.0
B 0.3
CCC 0.0
Unrated 57.3
-------
The percentage of assets in each category was calculated on the basis of a
monthly dollar weighted average. The monthly dollar weighted average was
calculated using the market value of the securities in the Fund's portfolio at
the end of each month in the thirteen-month period ended with the Fund's last
fiscal year, averaged over the Fund's last fiscal year. The rating used for
each security is that security's rating as of the end of each month and, as
ratings may change over time, does not necessarily indicate past or future
ratings of any particular security or the ratings of securities in the portfolio
in general. Asset composition of the Fund by rating categories at any
particular time does not necessarily indicate future asset composition by rating
categories.
The Fund's ability to invest more than 25% of its assets in municipal
bonds, the payment of principal and interest on which is derived from revenue of
similar projects, or in municipal bonds of issuers located in the same
geographic area may make the Fund more susceptible to the risks associated with
economic, political or regulatory occurrences which might adversely affect
particular projects or areas. The Fund's ability to invest up to 25% of its
assets in industrial revenue bonds issued for any one industry may make the Fund
susceptible to the risks associated with a particular industry. See the SAI for
further information concerning these risks.
The primary risks associated with the use of futures contracts are: (i)
imperfect correlation between the change in the market value of the securities
held in the Fund's portfolio and the prices of futures contracts purchased or
sold by the Fund; (ii) incorrect forecasts by the Manager concerning interest
rate changes which may result in the hedge being ineffective; and (iii) possible
lack of a liquid secondary market for a futures contract; the resulting
inability to close a futures position could adversely impact the Fund's hedging
ability. For a hedge to be completely effective, the price change of the
hedging instrument should equal the price change of the security being hedged.
The risk of imperfect correlation of these price changes increases as the
composition of the Fund's portfolio diverges from the debt securities underlying
the future or included in the index.
Management and Services
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the inception of the investment company, whichever was later, and
to TMK/United Funds, Inc. since its inception. On January 8, 1992, subject to
the authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned
its investment management duties (and assigned its professional staff for
investment management services) to Waddell & Reed Investment Management Company,
a wholly-owned subsidiary of Waddell & Reed, Inc. The Manager has also served
as investment manager for Waddell & Reed Funds, Inc. since its inception in
September 1992 and Torchmark Government Securities Fund, Inc. and Torchmark
Insured Tax-Free Fund, Inc. since each commenced operations in February 1993.
Waddell & Reed, Inc. serves as the Fund's underwriter and as underwriter for
each of the investment companies in the United Group of Mutual Funds, TMK/United
Funds, Inc. and Waddell & Reed Funds, Inc. Waddell & Reed, Inc. is an indirect
subsidiary of Torchmark Corporation, a holding company, and United Investors
Management Company, a holding company, and a direct subsidiary of Waddell & Reed
Financial Services, Inc., a holding company.
Subject to authority of the Fund's Board of Directors, the Manager provides
investment advice and supervises investments for which it is paid a fee
consisting of two elements: (i) a "Specific" fee computed on the Fund's net
asset value as of the close of business each day at the annual rate of .10 of 1%
of net assets and (ii) a pro rata participation based on the relative net asset
size of the Fund in a "Group" fee computed each day on the combined net asset
values of all of the funds in the United Group at the annual rates shown in the
following table. The fee is accrued and paid daily. Prior to the above-
described assignment to the Manager on January 8, 1992, the fees were paid to
Waddell & Reed, Inc.
Group Fee Rate
Group Net Asset Level Annual Group
(all dollars in millions) Fee Rate for Each Level
- ------------------------- -----------------------
From $ 0 to $ 750 .51 of 1%
From $ 750 to $ 1,500 .49 of 1%
From $ 1,500 to $ 2,250 .47 of 1%
From $ 2,250 to $ 3,000 .45 of 1%
From $ 3,000 to $ 3,750 .43 of 1%
From $ 3,750 to $ 7,500 .40 of 1%
From $ 7,500 to $12,000 .38 of 1%
Over $12,000 .36 of 1%
Waddell & Reed Services Company, a subsidiary of Waddell & Reed, Inc., acts
as transfer agent ("Shareholder Servicing Agent") for the Fund and processes the
payments of dividends. See the SAI for the fees paid for these services.
Inquiries concerning shareholder accounts should be sent to that company at the
address shown on the inside back cover of this Prospectus or to the Fund at the
address shown on the front cover of this Prospectus.
Waddell & Reed Services Company also acts as agent ("Accounting Services
Agent") in providing bookkeeping and accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services,
the Fund pays the Accounting Services Agent a monthly fee of one-twelfth of
the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- ------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to Waddell &
Reed, Inc., the principal underwriter for the Fund, in an amount not to exceed
.25% of the Fund's average annual net assets. The fee is to be paid to
reimburse Waddell & Reed, Inc. for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts. In particular, the Service Plan and a related Service
Agreement between the Fund and Waddell & Reed, Inc. contemplate that these
expenditures may include costs and expenses incurred by Waddell & Reed, Inc. and
its affiliates in compensating, training and supporting registered sales
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located at
field sales offices; engaging in other activities useful in providing personal
services to Fund shareholders and/or maintenance of shareholder accounts; and in
compensating broker-dealers, and other third parties, who may regularly sell
Fund shares for providing shareholder services and/or maintaining shareholder
accounts. See the SAI for additional information and terms of the Service Plan.
The combined net asset values of all of the funds in the United Group were
approximately $11.2 billion on September 30, 1994. Management fees for the
fiscal year ended September 30, 1994 were 0.52% of the Fund's average net
assets. The Fund's total expenses for that year were 0.76% of the average net
assets.
The Manager places transactions for the Fund's portfolio and in doing so
may consider sales of shares of the Fund and other funds it manages as a factor
in the selection of brokers to execute portfolio transactions. See the SAI for
further information.
John M. Holliday is primarily responsible for the day-to-day management of
the portfolio of the Fund. Mr. Holliday has held his Fund responsibilities
since the Fund's inception. He is Senior Vice President of the Manager and
Senior Vice President of Waddell & Reed Asset Management Company, an affiliate
of the Manager. He is Vice President of the Fund and Vice President of other
investment companies for which the Manager serves as investment manager. Mr.
Holliday has served as the portfolio manager for investment companies managed by
Waddell & Reed, Inc. or the Manager since August 1979 and has been an employee
of Waddell & Reed, Inc. or its successor, the Manager, since April 1978. Other
members of the Manager's investment management department provide input on
market outlook, economic conditions, investment research and other
considerations relating to the Fund's investments.
Dividends, Distributions and Taxes
Dividends are declared daily from net investment income, which includes
accrued interest, earned discount (both original issue discount and, if the Fund
so elects, market discount on municipal securities purchased after April 30,
1993) and other income earned on portfolio securities less expenses.
Ordinarily, dividends are paid on the 27th day of each month or on the last
business day prior to the 27th if the 27th falls on a weekend or a holiday.
When shares are redeemed, any declared but unpaid dividends on those shares will
be paid with the next regular dividend payment and not at the time of
redemption. The Fund also distributes substantially all of its net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) and net short-term capital gains, if any, after deducting any available
capital loss carryovers, with its regular dividend at the end of the calendar
year. The Fund may make additional distributions if necessary to avoid Federal
income or excise taxes on certain undistributed income and capital gains.
You have the option to receive dividends and distributions in cash, to
reinvest them without charge or to receive dividends in cash and reinvest
distributions, as you may instruct. In the absence of instructions, dividends
and distributions will be reinvested.
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986 so that it will be
relieved of Federal income tax on that part of its investment company taxable
income (consisting generally of taxable net investment income and net short-term
capital gains) and net capital gains that is distributed to its shareholders.
In addition, the Fund intends to continue to qualify to pay "exempt-interest"
dividends, which requires, among other things, that at the close of each quarter
of its taxable year at least 50% of the value of its total assets must consist
of municipal bonds.
Most of the distributions by the Fund will be designated by it as exempt-
interest dividends, which generally may be excluded by you from your gross
income. Dividends from the Fund's investment company taxable income are taxable
to you as ordinary income, to the extent of the Fund's earnings and profits,
whether received in cash or reinvested in additional Fund shares. Distributions
of the Fund's realized net capital gains, when designated as such, are taxable
to you as long-term gains, whether received in cash or reinvested in additional
Fund shares and regardless of the length of time you have owned your shares.
None of the dividends paid by the Fund is expected to be eligible for the
dividends-received deduction allowed to corporations. The Fund notifies you
after each calendar year-end as to the amounts and status of dividends and
distributions paid (or deemed paid) to you for that year.
Dividends exempt from Federal income tax may be subject to income taxation
under state and local tax laws.
The Tax Reform Act of 1986 eliminated the availability of tax-exempt
financing for certain functions and limited the availability of such financing
for certain other functions. This has resulted in a decrease in the number of
tax-exempt issues in which the Fund may invest. Interest on indebtedness
incurred or continued to purchase or carry Fund shares will not be deductible
for Federal income tax purposes to the extent the Fund's distributions consist
of exempt-interest dividends.
The Fund may invest in private activity bonds ("PABs") the interest on
which is treated as a tax preference item for purposes of determining your
liability for the AMT. If you may be subject to the AMT, you should consult
with your tax adviser concerning investment in the Fund. The Fund provides you
with information concerning the amount of distributions subject to the AMT after
the end of each calendar year.
Entities or other persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by PABs should consult their tax
adviser before purchasing Fund shares because, for users of certain of these
facilities, the interest on PABs is not exempt from Federal income tax. For
these purposes, the term "substantial user" is defined generally to include a
"non-exempt person" who regularly uses in trade or business a part of a facility
financed from the proceeds of PABs.
Proposals may be introduced before Congress for the purpose of restricting
or eliminating the Federal income tax exemption for interest on municipal bonds.
If such a proposal were enacted, the availability of municipal bonds for
investment by the Fund and the value of its portfolio would be affected. In
such event, the Fund would reevaluate its investment objective and policies.
The Fund is required to withhold 31% of all taxable dividends, capital
gains distributions and redemption proceeds payable to you if you are an
individual or certain other noncorporate shareholder and do not furnish the Fund
with a correct taxpayer identification number. Withholding at that rate from
taxable dividends and capital gains distributions also is required if you
otherwise are subject to backup withholding.
Your redemption of Fund shares will result in taxable gain or loss to you,
depending on whether the redemption proceeds are more or less than your adjusted
basis for the redeemed shares (which normally includes any sales charge paid).
An exchange of Fund shares for shares of any other fund in the United Group
generally will have similar tax consequences. However, special rules apply when
you dispose of Fund shares through a redemption or exchange within 90 days after
your purchase thereof and subsequently reacquire Fund shares or acquire shares
of another fund in the United Group without paying a sales charge due to the
thirty-day reinvestment privilege or exchange privilege. In these cases, any
gain on the disposition of the Fund shares would be increased, or loss
decreased, by the amount of the sales charge you paid when those shares were
acquired, and that amount will increase the adjusted basis of the shares
subsequently acquired. In addition, if you purchase Fund shares within thirty
days after redeeming other Fund shares at a loss, all or part of that loss will
not be deductible and will increase the basis of the newly purchased shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for a further discussion. There may be other Federal, state or local tax
considerations applicable to a particular investor; for example, exempt-interest
dividends paid by the Fund may be partially or wholly taxable under some state
and local laws. You are urged to consult your own tax adviser.
Purchase of Shares
You may purchase shares through Waddell & Reed, Inc. and its sales
representatives. To open an account you must complete an application. Orders
are accepted only at the home office of Waddell & Reed, Inc. (see inside back
cover of this Prospectus for address), and it need not accept any orders. The
offering price of a share is its net asset value next determined following
acceptance plus the sales charge shown in the table below. This net asset value
per share is the value of the Fund's assets, less liabilities, divided by the
number of shares outstanding. Net asset value is determined once each day as of
the later of the close of the regular session of the New York Stock Exchange or
the close of the regular session of any domestic securities or commodities
exchange on which a future or option held by the Fund is traded on each day the
New York Stock Exchange is open. The Fund's portfolio securities are valued
according to the prices quoted by a dealer in bonds which offers a pricing
service for valuation of municipal bonds or, if not available, at their fair
value in a manner determined in good faith by the Board of Directors. Short-
term debt securities are valued at amortized cost which approximates market
value. Other assets are valued at their fair value.
Sales Charge
Sales Charge as Approximate
as Percent of Percent of
Size of Purchase Offering PriceAmount Invested
Under $100,000 ...................... 4.25% 4.44%
$ 100,000 to less than $ 300,000 .. 3.25 3.36
300,000 to less than 500,000 .. 2.50 2.56
500,000 to less than 1,000,000 .. 1.75 1.78
1,000,000 to less than 2,000,000 .. 1.00 1.01
2,000,000 and over ................. 0.00 0.00
Ordinarily, the minimum initial investment is $500. A $100 minimum initial
investment pertains to certain exchanges of shares from other funds in the
United Group. A $50 minimum initial investment pertains to accounts for which
an investor has arranged, at the time of initial investment, to make subsequent
purchases for the account through automatic bank withdrawals, as described
below.
A shareholder may arrange with Waddell & Reed, Inc. to purchase shares by
having regular monthly withdrawals of $25 or more made from a bank account. A
shareholder may also arrange with Waddell & Reed, Inc. to purchase shares by
having regular monthly exchanges of shares with a value of $25 or more made from
United Cash Management, Inc., subject to certain conditions explained in the
SAI.
Lower sales charges are available by combining additional purchases of the
Fund, United Municipal Bond Fund, Inc. and United Government Securities Fund,
Inc. with the net asset value of shares already held ("rights of accumulation")
and by grouping all purchases made during a thirteen-month period ("Statement of
Intention"). Purchases by certain related persons may be grouped. Shares of
the Fund held for at least six months may be exchanged for shares of another
fund in the United Group (listed on the back cover of this Prospectus), unless
the exchange is for shares of United Government Securities Fund, Inc. or United
Municipal Bond Fund, Inc. or unless the Fund shares were acquired by
reinvestment of a dividend or distribution, in which cases there is no holding
period. There are no sales charges on such exchanges. Subject to certain
conditions, automatic monthly exchanges of shares of United Cash Management,
Inc. may be made into any other fund in the United Group (listed on the back
cover of this Prospectus). These exchange privileges may be eliminated or
modified at any time, upon notice in certain instances. Information as to
rights of accumulation, Statements of Intention, grouping by related persons,
exchange privileges, and Flexible Withdrawal Service is contained in the SAI.
Applicable forms are available from Waddell & Reed, Inc.'s representatives.
Fund shares may be purchased at net asset value by the Directors and
officers of the Fund, employees of Waddell & Reed, Inc., employees of their
affiliates, sales representatives of Waddell & Reed, Inc. and the spouse,
children, parents, children's spouses and spouse's parents of each such
Director, officer, employee and sales representative. Purchases in certain
trusts for these persons may also be made at net asset value. Shares may also
be issued at net asset value in a merger, acquisition or exchange offer made
pursuant to a plan of reorganization to which the Fund is a party. See the SAI
for additional information.
Redemption
You have the right to sell your shares back to the Fund (redeem) at any
time by sending a written request to the address on the front cover of this
Prospectus, stating how many shares or the amount in dollars you wish to redeem.
The written request must be in good order which requires that if more than one
person owns the shares, each owner must sign the written request. If you hold a
certificate, it must be properly endorsed and sent to the Fund. The Fund
reserves the right to require a signature guarantee by a national bank, a
federally chartered savings and loan or a member firm of a national stock
exchange or other eligible guarantor in accordance with procedures of the Fund's
transfer agent in certain situations, such as: the request for redemption is
made by a corporation, partnership or fiduciary, or the redemption request is
made by, or redemption proceeds are payable to, someone other than the owner of
record. If you recently purchased the shares by check, the payment of
redemption proceeds on these shares may be delayed. You may arrange for the
bank upon which the purchase check was drawn to provide to the Fund telephone or
written assurance, satisfactory to the Fund, that the check has cleared and been
honored. If no such assurance is given, payment of the redemption proceeds on
these shares will be delayed until the earlier of 10 days or when the Fund has
been able to verify that your purchase check has cleared and been honored.
The Fund will redeem your shares at their net asset value (which may be
more or less than what you paid) next computed after receipt of your written
request for redemption in good order at the Fund's address shown on the front
cover of this Prospectus. Payment is made within seven days, unless delayed
because of emergency conditions determined by the Securities and Exchange
Commission, when the New York Stock Exchange is closed (other than on weekends
and holidays) or when trading on the Exchange is restricted. Payment is made in
cash, although under extraordinary conditions redemptions may be made in
portfolio securities.
You may reinvest in the Fund all or part of the amount you redeemed without
charge by sending to the Fund the amount you wish to reinvest. The reinvested
amounts must be received within thirty days after the date of your redemption.
You may do this only once as to Fund shares.
The Fund reserves the right to redeem at net asset value all shares owned
by a particular shareholder in the Fund having an aggregate net asset value less
than $500. The Fund will give the shareholder notice of intention to redeem and
a 60-day opportunity to purchase a sufficient number of additional shares to
bring the net asset value of his or her shares in the Fund to $500. See the SAI
for further information.
Information concerning the establishment of automatic payments from an
account is available from sales representatives of Waddell & Reed, Inc.
<PAGE>
APPENDIX A
The following are descriptions of some of the ratings of securities which
the Fund may use. The Fund may also use ratings provided by other nationally
recognized statistical rating organizations in determining the securities
eligible for investment.
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Group. A Standard & Poor's 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 Standard & Poor's
by the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform any audit in connection with any
ratings 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 Standard & Poor's rating symbols and
their meanings follow:
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA also qualifies as high quality debt. Capacity to pay
interest and repay principal is very strong and debt rated AA differs from AAA
issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Debt rated CCC has a currently indefinable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in payment default. It is used when interest payments
or principal payments are not made on a due date even if the applicable grace
period has not expired, unless Standard & Poor's 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 Standard & Poor's
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 Legal
Investment 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. A brief description of the applicable Moody's
Investors Service rating symbols and their meanings follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest investment
attributes are designated by the symbol "1" following the rating.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
A Standard & Poor's 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 note.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings -- Moody's 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.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS
ALABAMA - 1.49%
The Medical Clinic Board of the City of
Birmingham-North, Revenue Bonds, Series
1991-A (Carraway Methodist Hospitals Project),
7.5%, 7-1-2015 ........................ $2,000 $ 2,050,000
The Colbert County-Northwest Alabama Health
Care Authority, Hospital Revenue Bonds,
Helen Keller Hospital, Series 1990,
8.75%, 6-1-2009 ....................... 1,000 1,093,750
The Medical Clinic Board of the City of Ozark,
Alabama, First Mortgage Revenue Bonds (United
States Health & Housing Foundation, Inc.
Project), Series 1988-A,
10.0%, 10-1-2015 ...................... 1,000 1,045,000
The Marshall County Health Care Authority,
Hospital Revenue Refunding Bonds,
Series 1992 (Guntersville-Arab
Medical Center),
7.0%, 10-1-2013 ....................... 1,000 970,000
Total ................................. 5,158,750
ALASKA - 0.98%
Alaska Industrial Development and Export
Authority, Refunding Revenue Bonds, Series
1989 (American President Lines Project),
8.0%, 11-1-2009 ....................... 1,820 1,901,900
Anchorage Parking Authority, Lease Revenue
Refunding Bonds, Series 1993 (5th Avenue
Garage Project),
6.75%, 12-1-2008 ...................... 1,500 1,490,625
Total ................................. 3,392,525
ARIZONA - 0.46%
The Industrial Development Authorities of
the City of Tucson, Arizona, and the
County of Pima, Subordinated Mortgage
Revenue Bonds, Series 1983B,
0.0%, 12-1-2016 ....................... 7,215 1,605,338
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
ARKANSAS - 1.01%
Baxter County, Arkansas, Industrial
Development Revenue Refunding Bonds
(Aeroquip Corporation Project),
Series 1993,
5.8%, 10-1-2013 ....................... $2,000 $ 1,797,500
The Fayetteville Public Facilities Board,
Refunding and Improvement Revenue Bonds,
Series 1989A (Butterfield Trail Village
Project),
9.5%, 9-1-2014 ........................ 1,600 1,694,000
Total ................................. 3,491,500
CALIFORNIA - 3.17%
San Joaquin Hills Transportation Corridor
Agency (Orange County, California):
Junior Lien Toll Road Revenue Bonds,
0.0%, 1-1-2002 ........................ 2,755 1,687,438
Senior Lien Toll Road Revenue Bonds,
0.0%, 1-1-2011 ........................ 2,500 1,496,875
Huntington Beach Public Financing Authority
(Orange County, California), 1992 Revenue
Bonds (Huntington Beach Redevelopment
Projects),
7.0%, 8-1-2024 ........................ 3,000 2,921,250
Certificates of Participation (1991 Capital
Improvement Project), Bella Vista Water
District (California),
7.375%, 10-1-2017 ..................... 1,500 1,561,875
Carson Redevelopment Agency (California),
Redevelopment Project Area No. 2,
Refunding Tax Allocation Bonds,
Series 1993,
6.0%, 10-1-2016 ....................... 1,500 1,338,750
Central Valley Financing Authority,
Cogeneration Project Revenue Bonds
(Carson Ice-Gen Project), 1993 Series,
6.1%, 7-1-2013 ........................ 1,000 921,250
Inglewood Public Financing Authority,
1992 Revenue Bonds, Series C (In-Town,
Manchester-Prairie and North Inglewood
Industrial Park Redevelopment Projects-
Housing Set-Aside Loans),
7.0%, 5-1-2022 ........................ 900 905,625
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CALIFORNIA (Continued)
Madera-Chowchilla Power Authority, California,
Floating Rate Bond,
3.3%, 9-1-2009 ........................ $ 95 $ 95,000
Total ................................. 10,928,063
COLORADO - 8.38%
City and County of Denver, Colorado,
Airport System Revenue Bonds:
Series 1991A,
8.75%, 11-15-2023 ..................... 6,000 6,330,000
Series 1994A,
7.5%, 11-15-2023 ...................... 3,000 2,868,750
Colorado Health Facilities Authority:
Hospital Revenue Bonds (PSL Healthcare
System Project), Series 1991B,
8.5%, 2-15-2021 ....................... 3,000 3,255,000
Retirement Housing Revenue Bonds (Liberty
Heights Project), 1990 Series A Term Bonds,
10.0%, 7-1-2019 (A) ................... 1,500 975,000
City and County of Denver, Colorado,
Revenue Bonds (Jewish Community Centers
of Denver Project), Series 1994:
8.25%, 3-1-2024 ....................... 2,390 2,357,138
7.875%, 3-1-2019 ...................... 815 803,794
City of Colorado Springs, Colorado,
Airport System Revenue Bonds, Series 1992A,
7.0%, 1-1-2022 ........................ 2,200 2,208,250
City of Central, Gilpin County, Colorado:
General Obligation Water Bonds,
Series 1992,
7.5%, 12-1-2012 ....................... 1,500 1,496,250
Water Revenue Bonds, Series 1991,
8.625%, 9-15-2011 ..................... 500 521,250
Brush Creek Village Water District, Pitkin
County, Colorado, General Obligation
Water Bonds, Series 1990,
8.875%, 11-15-2009 .................... 1,500 1,796,250
Pitkin County, Colorado, Lease Purchase
Agreement, Certificates of Participation
(County Administration Building Project),
Series 1991,
7.4%, 10-1-2011 ....................... 1,500 1,569,375
Mountain Village Metropolitan District, San
Miguel County, Colorado, General
Obligation Refunding Bonds, Series 1992,
8.1%, 12-1-2011 ....................... 1,435 1,553,388
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
COLORADO (Continued)
Columbia Metropolitan District, Arapahoe
County, Colorado, General Obligation Bonds,
Series 1986,
9.5%, 12-1-2005 ....................... $1,165 $ 1,181,019
School District No. 20, El Paso County,
Colorado, General Obligation Refunding
Bonds, Series 1993A, Capital
Appreciation Bonds,
0.0%, 6-15-2008 ....................... 2,600 1,020,500
Arapahoe Water and Sanitation District,
Arapahoe County, Colorado, General
Obligation Refunding Bonds, Series 1988B,
9.25%, 12-1-2013 ...................... 1,000 1,001,250
Total ................................. 28,937,214
CONNECTICUT - 1.71%
Connecticut Development Authority, First
Mortgage Gross Revenue Health Care
Project Bonds, Church Homes, Inc.:
Congregational Avery Heights Project -
1990 Series,
9.0%, 4-1-2020 ........................ 2,500 2,687,500
Congregational Avery Nursing Facilities
Project - 1991 Series,
8.5%, 4-1-2021 ........................ 1,490 1,549,600
Eastern Connecticut Resource Recovery
Authority, Wheelabrator Technologies, Inc.,
5.5%, 1-1-2014 ........................ 2,000 1,665,000
Total ................................. 5,902,100
DISTRICT OF COLUMBIA - 1.48%
Certificates of Participation, Series 1993,
District of Columbia,
7.3%, 1-1-2013 ........................ 3,000 3,030,000
District of Columbia Revenue Bonds
(National Public Radio Issue),
Series 1992,
7.625%, 1-1-2013 ...................... 2,000 2,067,500
Total ................................. 5,097,500
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
FLORIDA - 2.12%
Lake County, Florida, Resource Recovery
Industrial Development Refunding Revenue
Bonds (NRG/Recovery Group Project),
Series 1993A,
5.95%, 10-1-2013 ...................... $2,500 $ 2,215,625
Highlands County (Florida), Industrial
Development Authority, Industrial
Development Revenue Refunding Bonds
(Beverly Enterprises - Florida, Inc.
Project), Series 1991,
9.25%, 7-1-2007 ....................... 1,490 1,642,725
City of Fort Walton Beach, First Mortgage
Industrial Development Revenue Bonds,
Series 1986 (Ft. Walton Beach Ventures,
Inc. Project),
10.5%, 12-1-2016 ...................... 1,350 1,404,000
City of Winter Garden, Florida, Industrial
Development Revenue Refunding Bonds
(Beverly Enterprises-Florida, Inc. Project),
Series 1991,
8.75%, 7-1-2012 ....................... 1,000 1,082,500
The Lee County (Florida) Industrial
Development Authority, Economic Development
Revenue Refunding Bonds (Encore Nursing
Center Partners, Ltd.-85 Project),
Series 1992,
8.125%, 12-1-2007 ..................... 950 982,063
Total ................................. 7,326,913
GEORGIA - 1.35%
Hospital Authority of Savannah, Revenue
Refunding and Improvement Bonds
(Candler Hospital), Series 1992,
7.0%, 1-1-2011 ........................ 3,180 3,136,275
City of Atlanta, Special Purpose Facilities
Revenue Bonds, Series 1989B (Delta Air
Lines, Inc. Project),
7.9%, 12-1-2018 ....................... 1,500 1,518,750
Total ................................. 4,655,025
GUAM - 0.86%
Guam Airport Authority, General Revenue
Bonds, 1993 Series B,
6.6%, 10-1-2010 ....................... 3,000 2,966,250
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
IDAHO - 0.59%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.), Indexed Inverse
Floating Rate Securities,
8.21%, 2-15-2021 ...................... $2,000 $ 2,035,000
ILLINOIS - 4.81%
City of Hillsboro, Montgomery County,
Illinois, General Obligation Bonds
(Alternate Revenue Source), Series 1991,
7.5%, 12-1-2021 ....................... 2,640 2,735,700
Illinois Health Facilities Authority,
Revenue Bonds, Series 1992A
(Fairview Obligated Group Project),
8.75%, 10-1-2002 ...................... 2,500 2,590,625
Illinois Development Finance Authority
Revenue Bonds, Series 1993C (Catholic
Charities Housing Development
Corporation Project),
6.1%, 1-1-2020 ........................ 2,500 2,253,125
Village of Hanover Park, Cook and DuPage
Counties, Illinois, First Mortgage
Revenue Bonds, Series 1989 (Windsor
Park Manor Project),
9.5%, 12-1-2014 ....................... 2,000 2,062,500
Village of Lansing, Illinois, Landings
Redevelopment Project Area, Tax Increment
Refunding Revenue Bonds (Limited Sales
Tax Pledge), Series 1992,
7.0%, 12-1-2008 ....................... 2,000 1,950,000
City of Blue Island, Cook County, Illinois,
Golf Course Revenue Bonds (Utility Tax
Pledge), Series 1992,
7.375%, 5-1-2014 ...................... 2,000 1,920,000
Village of Bourbonnais, Kankakee County,
Illinois, Sewerage Revenue Bonds,
Series 1993,
7.25%, 12-1-2012 ...................... 1,085 1,079,575
City of Loves Park, Illinois, First Mortgage
Revenue Bonds, Series 1989A (Hoosier Care,
Inc. Project),
9.75%, 8-1-2019 ....................... 1,025 1,049,344
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
ILLINOIS (Continued)
City of Eureka, Woodford County, Illinois,
General Obligation Refunding Bonds
(Alternate Revenue Source), Series 1993,
6.25%, 7-1-2013 ....................... $1,000 $ 948,750
Total ................................. 16,589,619
INDIANA - 2.67%
Indiana Health Facility Financing Authority,
Hospital Revenue Bonds, Series 1990
(Hancock Memorial Hospital Project),
8.3%, 8-15-2020 ....................... 3,000 3,217,500
City of East Chicago, Indiana,
Pollution Control:
Refunding Revenue Bonds, Inland
Steel Company Project No. 10,
Series 1993,
6.8%, 6-1-2013 ........................ 2,000 1,917,500
Revenue Bonds, Inland Steel
Company Project No. 5,
Series 1977,
5.75%, 2-1-2007 ....................... 1,000 915,000
City of Carmel, Indiana, Retirement Rental
Housing Revenue Refunding Bonds (Beverly
Enterprises - Indiana, Inc. Project),
Series 1992,
8.75%, 12-1-2008 ...................... 1,500 1,627,500
Indiana Health Facility Financing
Authority, Hospital Revenue Bonds,
Series 1992 (Fayette Memorial Hospital
Project),
7.2%, 10-1-2022 ....................... 1,000 992,500
Indiana Housing Finance Authority, Residential
Mortgage Bonds, 1988 Series R-A,
0.0%, 1-1-2013 ........................ 2,525 542,875
Total ................................. 9,212,875
IOWA - 0.39%
City of Ottumwa, Iowa, Hospital Facility
Revenue Refunding and Improvement Bonds,
Series 1993 (Ottumwa Regional Health
Center, Incorporated),
6.0%, 10-1-2018 ....................... 1,550 1,334,938
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
KANSAS - 2.55%
Kansas Development Finance Authority,
Community Provider Loan Program (Community
Living Opportunities, Inc.), Series
1992A Revenue Bonds,
8.875%, 9-1-2011 ...................... $2,790 $ 2,929,500
Baldwin City, Kansas, Educational Facilities
Revenue Bonds (Baker University Project),
Series 1988,
9.5%, 10-1-2008 ....................... 2,000 2,102,500
City of Prairie Village, Kansas, Claridge
Court Project Revenue Bonds, Series 1993A:
8.5%, 8-15-2004 ....................... 1,000 976,250
8.75%, 8-15-2023 ...................... 1,000 973,750
Johnson County Park and Recreation District,
Johnson County, Kansas, Park and Recreation
Revenue Bonds, Series 1994A,
6.5%, 1-1-2019 ........................ 1,855 1,817,900
Total ................................. 8,799,900
KENTUCKY - 0.58%
County of Jefferson, Kentucky, Health
Facilities Revenue Refunding Bonds
(Beverly Enterprises Project),
Series 1985B,
9.75%, 8-1-2007 ....................... 900 999,000
County of Perry, Kentucky, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1994,
7.0%, 6-1-2024 ........................ 1,000 975,000
Total ................................. 1,974,000
LOUISIANA - 2.74%
Parish of St. Charles, State of Louisiana:
Environmental Revenue Bonds (Louisiana
Power & Light Company Project),
Series 1994-A,
6.875%, 7-1-2024 ...................... 2,750 2,688,125
Pollution Control Revenue Bonds
(Union Carbide Project),
Series 1992,
7.35%, 11-1-2022 ...................... 2,000 2,030,000
Board of Commissioners of the Port of New
Orleans, Industrial Development Revenue
Refunding Bonds (Continental Grain Company
Project), Series 1993,
7.5%, 7-1-2013 ........................ 2,000 1,962,500
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
LOUISIANA (Continued)
Parish of West Feliciana, State of Louisiana,
Pollution Control Revenue Bonds (Gulf
States Utilities Company Project),
Series 1984-II,
7.7%, 12-1-2014 ....................... $1,500 $ 1,573,125
LaFourche Parish Home Mortgage Authority,
Tax-Exempt Capital Appreciation Refunding
Bonds, Series 1990-B, Class B-2,
0.0%, 5-20-2014 ....................... 3,300 709,500
Parish of Pointe Coupee, Louisiana,
Pollution Control Revenue Refunding Bonds
(Gulf States Utilities Company Project),
Series 1993,
6.7%, 3-1-2013 ........................ 500 490,625
Total ................................. 9,453,875
MARYLAND - 0.29%
Baltimore County, Maryland, Pollution
Control Revenue Refunding Bonds,
Series 1994A (Bethlehem Steel
Corporation Project),
7.55%, 6-1-2017 ....................... 1,000 1,015,000
MASSACHUSETTS - 2.43%
Massachusetts Industrial Finance Agency:
Resource Recovery Revenue Bonds (SEMASS
Project), Series 1991B,
9.25%, 7-1-2015 ....................... 3,000 3,337,500
First Mortgage Revenue Bonds, Reeds
Landing Project, Series 1993,
8.625%, 10-1-2023 ..................... 3,000 2,880,000
Revenue Bonds, Beaver Country Day School
Issue, Series 1992, Subseries A,
8.1%, 3-1-2008 ........................ 1,665 1,640,025
Industrial Development Revenue Refunding
Bonds (Beverly Enterprises-Mass./Gloucester
and Lexington Projects), Series 1992,
8.375%, 5-1-2009 ...................... 500 527,500
Total ................................. 8,385,025
MICHIGAN - 3.24%
Pontiac Hospital Finance Authority,
Hospital Revenue Bonds (NOMC Obligated
Group), Series 1993,
6.0%, 8-1-2023 ........................ 3,000 2,493,750
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MICHIGAN (Continued)
Michigan State Hospital Finance Authority,
Hospital Revenue Refunding Bonds
(Crittenton Hospital), Series 1994A,
5.25%, 3-1-2014 ....................... $3,000 $ 2,460,000
Portage Lake Water and Sewage Authority,
Houghton County, Michigan, General
Obligation Limited Tax Bonds:
Series II,
7.625%, 10-1-2020 ..................... 1,000 1,062,500
Series III,
7.75%, 10-1-2020 ...................... 1,000 1,040,000
The Economic Development Corporation of
the Charter Township of Waterford
(Michigan), Limited Obligation Revenue
Bonds, Series 1993 (Canterbury Health
Care, Inc. Project),
8.375%, 7-1-2023 ...................... 2,000 2,075,000
Michigan Strategic Fund, Limited Obligation
Revenue Bonds:
Knollwood Corporation Project, Series A,
10.5%, 10-1-2016 (B) .................. 1,300 1,105,000
Mercy Services for Aging Project,
Series 1990,
9.4%, 5-15-2020 ....................... 900 957,375
Total ................................. 11,193,625
MINNESOTA - 1.31%
City of St. Anthony, Minnesota, Housing
Development Refunding Revenue Bonds
(Autumn Woods Project), Series 1992,
6.875%, 7-1-2022 ...................... 2,500 2,481,250
City of Mounds View, Minnesota, Gross
Revenue Golf Course Bonds, Series 1994A,
6.125%, 1-1-2014 ...................... 1,250 1,146,875
Housing and Redevelopment Authority of the
City of Saint Paul, Minnesota, Nursing Home
Development Revenue Bonds, Series 1988
(St. Mary's Home Project),
10.0%, 12-1-2018 ...................... 880 905,300
Total ................................. 4,533,425
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MISSISSIPPI - 0.95%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control Refunding
Revenue Bonds (Weyerhaeuser Company
Project), Series 1992B, Indexed Inverse
Floating/Fixed Term Bonds,
8.21%, 4-1-2022 ....................... $2,000 $ 2,025,000
Adams County, Mississippi, Hospital Revenue
Bonds, Series 1991 (Jefferson Davis Memorial
Hospital Project),
8.0%, 10-1-2016 ....................... 1,200 1,260,000
Total ................................. 3,285,000
MISSOURI - 7.00%
State Environmental Improvement and Energy
Resources Authority (State of Missouri),
Water Facilities Revenue Bonds
(Tri-County Water Authority Project),
Series 1992,
8.75%, 4-1-2022 ....................... 3,000 3,273,750
Bi-State Development Agency of the Missouri-
Illinois Metropolitan District, Adjustable
Rate Terminal Facilities, Revenue Refunding
Bonds (American Commercial Terminals, Inc.
Project), Series 1985,
7.75%, 6-1-2010 ....................... 3,000 3,210,000
The Industrial Development Authority of the
City of Hannibal, Missouri, Health
Facilities Revenue Bonds (Hannibal
Regional Healthcare System - Medical
Center of Northeast Missouri Project),
Series 1992,
9.5%, 3-1-2022 ........................ 2,500 2,890,625
Regional Convention and Sports Complex
Authority, Convention and Sports Facility
Project Bonds, Series C 1991 (The City of
St. Louis, Missouri, Sponsor):
7.9%, 8-15-2021 ....................... 1,500 1,571,250
7.75%, 8-15-2001 ...................... 1,100 1,142,625
Citizens Memorial Hospital District of
Polk County, Missouri, Hospital
Refunding and Improvement Revenue Bonds:
Series 1993,
6.5%, 8-1-2012 ........................ 1,500 1,365,000
Series 1994,
6.375%, 8-1-2007 ...................... 750 713,438
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MISSOURI (Continued)
Cape Girardeau County, Missouri, Single
Family Mortgage Revenue Bonds,
Series 1993,
0.0%, 12-1-2014 ....................... $7,500 $ 1,912,500
The City of Lake Saint Louis, Missouri,
Public Facilities Authority, Certificates
of Participation (Municipal Golf Course
Project), Series 1993,
7.55%, 12-1-2014 ...................... 2,000 1,872,500
The Industrial Development Authority of
the City of St. Louis, Missouri,
Industrial Revenue Refunding Bonds
(Kiel Center Multipurpose Arena Project),
Series 1992,
7.75%, 12-1-2013 ...................... 1,500 1,522,500
The Industrial Development Authority
of the City of Lee's Summit, Missouri,
Health Facilities Refunding and
Improvement Revenue Bonds (John Knox
Village Project), Series 1992,
7.125%, 8-15-2012 ..................... 1,500 1,509,375
The Industrial Development Authority of the
City of Springfield, Missouri,
Industrial Development Refunding Revenue
Bonds (Health Care Realty of Springfield,
Ltd. Project), Series 1988,
10.25%, 12-1-2010 ..................... 1,240 1,284,950
East Central Missouri Water and Sewer
Authority, St. Charles County, Missouri,
Water System Refunding Revenue Bonds,
Series 1992 (St. Charles County Public
Water Supply District No. 2 Project),
7.0%, 8-1-2011 ........................ 1,000 1,000,000
The Industrial Development Authority of
Callaway County, Missouri, Industrial
Development Revenue Bonds (A.P. Green
Refractories Co. Project), Series 1984,
8.6%, 11-1-2014 ....................... 900 883,125
Total ................................. 24,151,638
MONTANA - 0.82%
Montana Board of Investments, Resource Recovery
Revenue Bonds, Series 1993 (Yellowstone Energy
Limited Partnership Project),
7.0%, 12-31-2019 ...................... 3,000 2,827,500
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEVADA - 1.18%
Clark County, Nevada,
Industrial Development Revenue Bonds
(Southwest Gas Corporation),
1992 Series B,
7.5%, 9-1-2032 ........................ $4,000 $ 4,080,000
NEW HAMPSHIRE - 4.55%
New Hampshire Higher Educational and Health
Facilities Authority:
Hospital Revenue Bonds, Catholic Medical
Center Issue, Series 1989,
8.25%, 7-1-2013 ....................... 2,000 2,135,000
First Mortgage Revenue Bonds, RiverWoods
at Exeter Issue, Series 1993,
9.0%, 3-1-2023 ........................ 2,000 2,045,000
First Mortgage Revenue Bonds, RiverMead
at Peterborough Issue, Series 1994,
8.5%, 7-1-2024 ........................ 2,000 1,932,500
Revenue Bonds, New Hampshire Catholic
Charities Issue, Series 1991,
8.4%, 8-1-2011 ........................ 1,700 1,793,500
Hospital Revenue Bonds, Monadnock
Community Hospital Issue, Series 1990,
9.125%, 10-1-2020 ..................... 1,485 1,598,231
Hospital Revenue Bonds, St. Joseph Hospital
Issue, Series 1991,
7.5%, 1-1-2016 ........................ 1,000 1,035,000
The Industrial Development Authority of the
State of New Hampshire, Pollution Control
Revenue Bonds, Public Service Company of
New Hampshire Project:
1991 Tax-Exempt Series A,
7.65%, 5-1-2021 ....................... 2,000 2,052,500
1991 Tax-Exempt Series C,
7.65%, 5-1-2021 ....................... 2,000 2,052,500
Lisbon Regional School District, New
Hampshire, General Obligation Capital
Appreciation School Bonds,
0.0%, 2-1-2013 ........................ 2,050 1,066,000
Total ................................. 15,710,231
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW JERSEY - 2.19%
New Jersey Economic Development Authority:
First Mortgage Revenue Bonds
(The Evergreens-Series 1992),
9.25%, 10-1-2022 ...................... $2,000 $ 2,017,500
First Mortgage Revenue Fixed Rate Bonds
(Franciscan Oaks Project-Series 1992A),
8.5%, 10-1-2023 ....................... 1,500 1,548,750
Pollution Control Financing Authority of
Camden County (Camden County, New Jersey),
Solid Waste Disposal and Resource
Recovery System Revenue Bonds,
Series 1991B (AMT),
7.5%, 12-1-2009 ....................... 3,000 2,992,500
New Jersey Housing Finance Agency,
Multi-Family Mortgage Revenue Bonds,
1976 Series A,
8.25%, 11-1-2020 ...................... 1,000 1,000,000
Total ................................. 7,558,750
NEW MEXICO - 1.17%
New Mexico Educational Assistance
Foundation, Student Loan Purchase Bonds,
Second Subordinate 1994 Series II-C (AMJ),
6.0%, 12-1-2008 ....................... 3,000 2,748,750
City of Albuquerque, New Mexico, Gross
Receipts/Lodgers' Tax Refunding and
Improvement Revenue Bonds, Series 1991B,
0.0%, 7-1-2014 ........................ 5,000 1,300,000
Total ................................. 4,048,750
NEW YORK - 1.72%
The Port Authority of New York and New
Jersey, Special Project, Series 2,
Continental Airlines, Inc. and Eastern Air
Lines, Inc. Project, LaGuardia Airport
Passenger Terminal, Third Installment Bonds,
9.125%, 12-1-2015 ..................... 1,945 2,173,538
New York State Energy Research and
Development Authority, Solid Waste
Disposal Revenue Bonds (New York State
Electric & Gas Corporation Project),
1993 Series A,
5.7%, 12-1-2028 ....................... 2,000 1,735,000
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW YORK (Continued)
New York City Industrial Development Agency,
Civic Facility Revenue Bonds (YMCA of
Greater New York Project),
8.0%, 8-1-2016 ........................ $1,000 $ 1,043,750
Tompkins County Industrial Development
Agency, Life Care Community Revenue Bonds,
1994 (Kendal at Ithaca, Inc. Project),
7.875%, 6-1-2024 ...................... 1,000 980,000
Total ................................. 5,932,288
OHIO - 1.18%
Hamilton County, Ohio, Health System Revenue
Bonds, Providence Hospital Issue,
Series 1992,
6.875%, 7-1-2015 ...................... 2,000 1,940,000
County of Lorain, Ohio, First Mortgage
Revenue Bonds, 1992 Series A (Kendal at
Oberlin Project),
8.625%, 2-1-2022 ...................... 1,000 1,080,000
City of Fairfield, Ohio, Economic
Development Revenue Refunding Bonds
(Beverly Enterprises-Ohio, Inc. Project),
Series 1992,
8.5%, 1-1-2003 ........................ 1,000 1,058,750
Total ................................. 4,078,750
OKLAHOMA - 4.09%
Oklahoma County Industrial Authority,
Industrial Development Revenue Bonds:
1986 Series B (Choctaw Nursing
Center Project):
10.25%, 9-1-2016 ...................... 1,230 1,274,588
10.125%, 9-1-2006 ..................... 525 541,406
1986 Series A (Westlake Nursing Center
Project):
10.25%, 9-1-2016 ...................... 905 938,938
10.125%, 9-1-2006 ..................... 430 443,975
The Clinton Public Works Authority,
Refunding and Improvement Revenue
Bonds, Series 1994,
6.25%, 1-1-2019 ....................... 2,575 2,314,281
Trustees of the Tulsa Municipal Airport
Trust, Adjustable Rate Revenue
Obligations,
7.375%, 12-1-2020 ..................... 2,000 1,940,000
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
OKLAHOMA (Continued)
Trustees of the Oklahoma Ordnance Works
Authority, Industrial Development Revenue
Refunding Bonds (A.P. Green Industries,
Inc. Project), Series 1992,
8.5%, 5-1-2008 ........................ $1,600 $ 1,600,000
Pawnee Public Works Authority (Pawnee,
Oklahoma), Utility System Revenue Bonds,
Series 1993,
6.5%, 12-1-2018 ....................... 1,610 1,485,225
The Guthrie Public Works Authority
(Guthrie, Oklahoma), Utility System
Revenue Bonds, Series 1994A,
6.75%, 9-1-2019 ....................... 1,415 1,369,013
Cushing Municipal Authority (Cushing,
Oklahoma), Utility System Revenue Bonds,
Series 1993,
6.0%, 7-1-2016 ........................ 1,345 1,244,125
Oklahoma City Public Property Authority
(Oklahoma City, Oklahoma), Revenue Bonds,
Series 1991 (Oklahoma City Golf System),
8.0%, 10-1-2013 ....................... 1,000 966,250
Total ................................. 14,117,801
OREGON - 1.00%
Klamath Falls Intercommunity Hospital
Authority, Gross Revenue Bonds,
Series 1994 (Merle West Medical Center
Project),
7.1%, 9-1-2024 ........................ 3,500 3,434,375
PENNSYLVANIA - 6.71%
Delaware County Authority (Pennsylvania):
First Mortgage Revenue Bonds, Series 1992
(Riddle Village Project):
8.0%, 6-1-99 .......................... 1,500 1,522,500
9.25%, 6-1-2022 ....................... 1,000 1,073,750
Health Facilities Revenue Bonds, Series
1993B (Mercy Health Corporation of
Southeastern Pennsylvania Obligated Group),
6.0%, 11-15-2007 ...................... 2,750 2,512,813
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
PENNSYLVANIA (Continued)
Luzerne County Industrial Development
Authority:
Exempt Facilities Revenue Refunding Bonds,
1992 Series A (Pennsylvania Gas and
Water Company Project),
7.2%, 10-1-2017 ....................... $2,000 $ 1,995,000
Exempt Facilities Revenue Bonds, 1992
Series B (Pennsylvania Gas and Water
Company Project),
7.125%, 12-1-2022 ..................... 1,000 988,750
Allegheny County Industrial Development
Authority (Pennsylvania), Environmental
Improvement Revenue Bonds (USX Corporation
Project), Refunding Series A 1994,
6.7%, 12-1-2000 ....................... 3,000 2,891,250
Pennsylvania Economic Development Financing
Authority, Rescue Recovery Revenue Bonds
(Colver Project), Series 1994 D,
7.125%, 12-1-2015 ..................... 2,500 2,462,500
McKeesport Hospital Authority (Commonwealth
of Pennsylvania), Hospital Revenue Bonds,
Series of 1993 (McKeesport Hospital Project),
6.5%, 7-1-2008 ........................ 2,500 2,409,375
The Hospitals and Higher Education Facilities
Authority of Philadelphia, Hospital Revenue
Bonds, Series of 1993 (Temple University
Hospital),
6.5%, 11-15-2008 ...................... 2,335 2,250,356
South Wayne County Water and Sewer Authority
(Wayne County, Pennsylvania), Sewer Revenue
Bonds, Series of 1992,
8.2%, 4-15-2013 ....................... 1,925 1,888,906
Clarion County Industrial Development Authority
(Pennsylvania), Health Facilities Revenue
Refunding Bonds (Beverly Enterprises
Project), Series 1985,
10.125%, 5-1-2007 ..................... 900 1,009,125
Erie, Pennsylvania Sewer Authority,
Sewer Revenue Bonds,
6.0%, 6-1-2011 ........................ 1,000 921,250
The Hospitals Authority of Philadelphia,
Hospital Revenue Bonds, Series of 1979
(James C. Giuffre Medical Center),
8.25%, 7-1-2009 (A) ................... 1,415 636,750
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
PENNSYLVANIA (Continued)
Wilkins Area Industrial Development Authority
(Pennsylvania), First Mortgage Revenue
Bonds (Longwood at Oakmont, Inc. Continuing
Care Retirement Community Project),
Series 1991A,
10.0%, 1-1-2021 ....................... $ 525 $ 589,313
Total ................................. 23,151,638
RHODE ISLAND - 1.40%
Providence Public Buildings Authority
(Veazie Street School and Modular Classrooms
Projects), Revenue Bonds, Series 1991:
7.3%, 12-1-2010 ....................... 1,000 1,041,250
7.3%, 12-1-2011 ....................... 1,000 1,037,500
Pawtucket Public Buildings Authority (Water
System Project), Revenue Bonds, Series 1991:
7.6%, 7-1-2010 ........................ 840 898,800
7.6%, 7-1-2009 ........................ 785 839,950
Rhode Island Health and Educational Building
Corporation, Hospital Financing Revenue Bonds,
South County Hospital Issue - Series 1991,
7.25%, 11-1-2011 ...................... 1,000 1,018,750
Total ................................. 4,836,250
SOUTH CAROLINA - 2.95%
Charleston County, South Carolina, Industrial
Refunding Revenue Bonds, 1982 Series (Massey
Coal Terminal, South Carolina Corporate Project),
Adjustable Convertible Extendible Securities,
3.95%, 1-1-2007 ....................... 3,000 3,000,000
South Carolina State Housing, Finance
and Development Authority, Multifamily
Housing Mortgage Revenue Bonds (United
Dominion-Plum Chase), Series 1991,
8.5%, 10-1-2021 ....................... 2,000 2,192,500
McCormick County, South Carolina, Hospital
Facilities Revenue Bonds, Series 1988
(McCormick Health Care Center Project),
10.5%, 3-1-2018 ....................... 1,485 1,516,556
South Carolina Jobs-Economic Development Authority,
Economic Development Revenue Bonds (Carolinas
Hospital System Project), Series 1992,
7.0%, 9-1-2014 ........................ 1,500 1,460,625
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
SOUTH CAROLINA (Continued)
County of Chester, South Carolina, Industrial
Development Refunding Revenue Bonds (Springs
Industries, Inc. Project), Series 1992,
7.35%, 2-1-2014 ....................... $1,000 $ 1,047,500
Horry County, South Carolina, Hospital
Revenue Refunding Bonds, Series 1992
(Conway Hospital, Inc.),
6.75%, 7-1-2012 ....................... 1,000 966,250
Total ................................. 10,183,431
SOUTH DAKOTA - 0.54%
South Dakota Health and Educational
Facilities Authority, Refunding Revenue
Bonds (Westhills Village Retirement
Community Issue), Series 1993,
7.25%, 9-1-2013 ....................... 2,000 1,870,000
TENNESSEE - 3.10%
Memphis-Shelby County Airport Authority,
Special Facilities Revenue Bonds,
Series 1993 (Federal Express Corporation),
6.2%, 7-1-2014 ........................ 3,000 2,752,500
The Industrial Development Board of the
Metropolitan Government of Nashville and
Davidson County:
Multi-Family Housing Revenue Bonds
(River Retreat II, Ltd. Project),
Series 1986,
9.5%, 5-1-2017 ........................ 1,500 1,498,125
Industrial Development Revenue Bonds, Series
1986 (Shoney's Inn of Opryland Project),
10.0%, 12-1-2016 ...................... 1,100 1,119,250
The Industrial Development Board of the
County of McMinn, Solid Waste Recycling
Facilities Revenue Bonds, Series 1992
(Calhoun Newsprint Company Project -
Bowater Incorporated Obligor),
7.4%, 12-1-2022 ....................... 2,000 2,070,000
The Health and Educational Facilities
Board of the City of Crossville, Tennessee,
Hospital Revenue Improvement Bonds,
Series 1992 (Cumberland Medical Center),
6.75%, 11-1-2012 ...................... 2,000 1,942,500
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
TENNESSEE (Continued)
The Health and Educational Facilities Board
of the Metropolitan Government of
Nashville and Davidson County, Tennessee,
First Mortgage Revenue Bonds (Metropolitan
Nashville Teachers' Nursing Facility,
Inc. Project), Series 1989,
10.25%, 10-1-2019 (A) ................. $1,585 $ 1,307,625
Total ................................. 10,690,000
TEXAS - 4.43%
Alliance Airport Authority, Inc., Special
Facilities Revenue Bonds, Series 1991
(American Airlines, Inc. Project),
7.0%, 12-1-2011 ....................... 4,500 4,297,500
Retama Development Corporation, Special
Facilities Revenue Bonds (Retama Park
Racetrack Project), Series 1993,
8.75%, 12-15-2018 ..................... 3,500 3,456,250
Dallas-Fort Worth International Airport
Facility Improvement Corporation, American
Airlines, Inc. Revenue Bonds, Series 1990,
7.5%, 11-1-2025 ....................... 2,000 1,957,500
Dallas County Utility and Reclamation
District, Unlimited Ad Valorem Tax
Refunding Bonds, Series 1993,
0.0%, 2-15-2016 ....................... 7,915 1,889,706
Dallas-Fort Worth International Airport,
Facility Improvement Corporation, Delta
Air Lines, Inc. Revenue Bonds, Series 1994,
7.6%, 11-1-2011........................ 1,300 1,300,000
Texas Health Facilities Development
Corporation, Hospital Revenue Bonds (All
Saints Episcopal Hospitals of Fort Worth
Project), Series 1989A,
6.25%, 8-15-2010 ...................... 1,350 1,260,563
Housing Authority of the City of Odessa,
Texas, Multifamily Mortgage Revenue Bonds,
Series 1993A (Section 8 Assisted Project),
6.375%, 10-1-2010 ..................... 1,225 1,127,000
Total ................................. 15,288,519
UTAH - 1.25%
Carbon County, Utah, Solid Waste Disposal
Refunding Revenue Bonds, Series 1991
(Sunnyside Cogeneration Associates Project),
9.25%, 7-1-2018 ....................... 2,500 2,615,625
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
UTAH (Continued)
Brigham City, Box Elder County, Utah,
Special Assessment Bonds, Series 1990
(Brigham City, Utah, Special Improvement
District No. 22),
9.25%, 8-1-2010 ....................... $1,690 $ 1,706,900
Total ................................. 4,322,525
VERMONT - 0.73%
Vermont Industrial Development Authority,
Mortgage Revenue Bonds, Wake Robin
Corporation Project, Series 1993A,
8.75%, 3-1-2023 ....................... 2,500 2,518,750
VIRGIN ISLANDS - 0.41%
Virgin Islands Public Finance Authority,
Revenue Refunding Bonds (Virgin Islands
General Obligation/Matching Fund Loan
Notes), Series 1992 A,
7.25%, 10-1-2018 ...................... 1,400 1,431,500
VIRGINIA - 1.37%
Industrial Development Authority of the
County of Prince William (Virginia),
Residential Care Facility First Mortgage
Revenue Bonds (Westminster at Lake Ridge),
Series 1992A,
10.0%, 1-1-2022 ....................... 2,500 2,681,250
Virginia Housing Development Authority,
Commonwealth Mortgage Bonds:
1988 Series C, Subseries C-2,
8.0%, 1-1-2038 ........................ 1,000 1,025,000
1988 Series B, Subseries B-5,
7.8%, 7-1-2008 ........................ 1,000 1,020,000
Total ................................. 4,726,250
WASHINGTON - 0.26%
Stevens County Public Corporation, Pollution
Control Revenue Refunding Bonds (The
Washington Water Power Company Kettle
Falls Project), Series 1993,
6.0%, 12-1-2023 ....................... 1,000 892,500
See Notes to Schedule of Investments on page 38.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1994
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
WEST VIRGINIA - 0.60%
West Virginia Hospital Finance Authority,
State of West Virginia, Hospital Revenue
Refunding Bonds, Series of 1986 (Logan
General Hospital Project),
8.75%, 4-1-2013 ....................... $2,000 $ 2,067,500
WYOMING - 0.71%
Sweetwater County, Wyoming, Solid Waste
Disposal Revenue Bonds (FMC Corporation
Project), Series 1994B,
6.9%, 9-1-2024 ........................ 2,500 2,453,125
TOTAL MUNICIPAL BONDS - 94.92% $327,645,531
(Cost: $327,129,369)
TOTAL SHORT-TERM SECURITIES - 4.35% $ 14,998,560
(Cost: $14,998,560)
TOTAL INVESTMENT SECURITIES - 99.27% $342,644,091
(Cost: $342,127,929)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.73% 2,517,765
NET ASSETS - 100.00% $345,161,856
Notes to Schedule of Investments
(A) Non-income producing as the issuer has either missed its most recent
interest
payment or declared bankruptcy.
(B) Security is paying partial interest.
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 HIGH INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1994
Assets
Investment securities - at value
(Notes 1 and 3) ................................. $342,644,091
Cash ............................................. 10,125
Receivables:
Interest ........................................ 6,878,454
Investment securities sold ...................... 4,079,125
Fund shares sold ................................ 866,787
Prepaid insurance premium ........................ 13,612
------------
Total assets .................................. 354,492,194
------------
Liabilities
Payable for investment securities purchased ...... 8,069,296
Payable for Fund shares redeemed ................. 967,321
Dividends payable ................................ 186,875
Accrued service fee .............................. 66,289
Accrued transfer agency and dividend disbursing .. 22,685
Accrued accounting services fee .................. 4,167
Other ............................................ 13,705
------------
Total liabilities ............................. 9,330,338
------------
Total net assets ............................. $345,161,856
============
Net Assets
$1.00 par value capital stock, authorized --
100,000,000; shares outstanding -- 67,365,646
Capital stock ................................... $ 67,365,646
Additional paid-in capital ...................... 275,905,442
Accumulated undistributed gain:
Accumulated undistributed net realized
gain on investment transactions ............... 1,374,606
Net unrealized appreciation in value of
investments at end of period .................. 516,162
------------
Net assets applicable to outstanding
units of capital ............................. $345,161,856
============
Net asset value per share (net assets divided
by shares outstanding) ........................... $5.12
Sales load (offering price x 4.25%)................. .23
-----
Offering price (net asset value divided by 95.75%).. $5.35
=====
On sales of $100,000 or more the sales load
is reduced as set forth on page 14.
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1994
Investment Income
Interest (taxable portion - $163,691) ............ $24,334,359
-----------
Expenses (Note 2):
Investment management fee ....................... 1,756,750
Service fee ..................................... 310,860
Transfer agency and dividend disbursing ......... 280,665
Accounting services fee ......................... 50,000
Audit fees ...................................... 30,450
Custodian fees .................................. 23,325
Legal fees ...................................... 16,255
Other ........................................... 120,894
-----------
Total expenses ................................ 2,589,199
-----------
Net investment income ........................ 21,745,160
-----------
Realized and Unrealized Gain (Loss) on Investments
Realized net gain on investments ................. 1,527,051
Unrealized depreciation in value of investments
during the period ............................... (22,927,131)
-----------
Net loss on investments ......................... (21,400,080)
-----------
Net increase in net assets
resulting from operations .................... $ 345,080
===========
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year
ended September 30,
-------------------------
1994 1993
------------ ------------
Increase in Net Assets
Operations:
Net investment income ...............$ 21,745,160 $ 18,845,213
Realized net gain on investments .... 1,527,051 5,051,945
Unrealized appreciation
(depreciation) .................... (22,927,131) 14,102,680
------------ ------------
Net increase in net assets
resulting from operations ........ 345,080 37,999,838
------------ ------------
Dividends to shareholders from:*
Net investment income ............... (21,745,160) (18,845,213)
Realized net gain from investment
transactions ...................... (4,619,821) (2,193,823)
------------ ------------
(26,364,981) (21,039,036)
------------ ------------
Capital share transactions:
Proceeds from sale of shares
(10,978,008 and 11,521,464 shares,
respectively) ..................... 58,602,026 61,425,292
Proceeds from reinvestment of
dividends and/or capital gains
distribution (4,126,763 and 3,220,064
shares, respectively) ............. 21,969,625 17,133,052
Payments for shares redeemed
(7,325,581 and 5,063,005 shares,
respectively) ..................... (38,763,374) (26,922,626)
------------ ------------
Net increase in net assets
resulting from capital
share transactions ............... 41,808,277 51,635,718
------------ ------------
Total increase ................... 15,788,376 68,596,520
Net Assets
Beginning of period .................. 329,373,480 260,776,960
------------ ------------
End of period ........................$345,161,856 $329,373,480
============ ============
Undistributed net investment
income ............................ $--- $---
==== ====
*See "Financial Highlights" on page 42.
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:
<TABLE>
<CAPTION>
For a Share of Capital Stock Outstanding Throughout Each Period:
For the
period
from
For the fiscal year ended September 30, 1/21/86
--------------------------------------------------------------------------- through
1994 1993 1992 1991 1990 1989 1988 1987 9/30/86*
---- ---- ---- ---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $5.53 $5.23 $5.05 $4.85 $4.96 $4.84 $4.96 $5.22 $5.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment income .34 .35 .36 .38 .39 .41 .43 .43 .30
Net realized and unrealized gain
(loss) on investments(0.34) .34 .18 .20 (0.11) .12 (0.09) (0.24) .22
----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations ......... .00 .69 .54 .58 .28 .53 .34 .19 .52
Less distributions:
Dividends declared from net
investment income . (0.34) (0.35) (0.36) (0.38) (0.39) (0.41) (0.43) (0.43) (0.30)
Distribution from
capital gains ..... (0.07) (0.04) .00 .00 .00 .00 (0.03) (0.02) .00
----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions .. (0.41) (0.39) (0.36) (0.38) (0.39) (0.41) (0.46) (0.45) (0.30)
----- ----- ----- ----- ----- ----- ----- ----- -----
End of period ...... $5.12 $5.53 $5.23 $5.05 $4.85 $4.96 $4.84 $4.96 $5.22
===== ===== ===== ===== ===== ===== ===== ===== =====
Total return** ....... 0.05% 13.77% 11.08% 12.35% 5.89% 11.38% 7.27% 3.57% 15.86%***
Net assets, end of period (000
omitted) ............$345,162 $329,373 $260,777 $224,945 $192,440 $168,838 $117,838 $72,403 $27,918
Ratio of expenses to average net
assets ............. 0.76% 0.70% 0.72% 0.77% 0.75% 0.75% 0.80% 0.86% 0.52%****
Ratio of net investment income to
average net assets . 6.39% 6.49% 7.08% 7.63% 7.97% 8.36% 8.76% 8.42% 5.97%
Portfolio turnover rate 26.26% 26.13% 54.18% 60.83% 27.31% 38.94% 44.49% 56.93% 115.91%
*The Fund's inception date is September 9, 1985; however, since the Fund did not have investment activity or incur
expenses prior to the date of public offering, the per-share data and ratios are for a capital share outstanding
for the period from January 21, 1986 (initial public offering) through September 30, 1986. On an annual basis,
the ratios of expenses and net investment income to average net assets would have been approximately 0.75% and
8.65%, respectively.
**Total return calculated without taking into account the sales load deducted on an initial purchase.
***Annualized.
****Waddell & Reed, Inc. ("W&R"), the then investment manager, for the period from January 6, 1986 through September
30, 1986 voluntarily waived any management and shareholder service fees and paid Fund expenses to the extent
necessary to assure that on each day the Fund's total expenses did not exceed 1/365th of 0.75 of 1% of the Fund's
net assets. The ratio of expenses to average net assets shown in the table would have been 0.70% without this
assumption of expenses.
</TABLE>
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
NOTE 1 -- Significant Accounting Policies
United Municipal High Income Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. 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 prices quoted by
Muller and Company, a dealer in bonds which offers a pricing service.
Short-term debt securities, whether taxable or nontaxable, are valued at
amortized cost, which approximates market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined by the Internal
Revenue Code) and premiums on the purchase of bonds are amortized for both
financial and tax reporting purposes over the remaining lives of the bonds.
Interest income is recorded on the accrual basis. See Note 3 -- Investment
Security Transactions.
C. Federal income taxes -- The Fund intends to distribute all of its net
investment income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under the Internal Revenue Code.
The Fund intends to pay distributions as required to avoid imposition of
excise tax. Accordingly, provision has not been made for Federal income
taxes. In addition, the Fund intends to meet requirements of the Internal
Revenue Code which will permit it to pay dividends from net investment
income, substantially all of which will be exempt from Federal income tax.
See Note 4 -- Federal Income Tax Matters.
D. Dividends and distributions -- All of the Fund's net investment income is
declared and recorded by the Fund as dividends payable on each day to
shareholders of record at the time of the previous determination of net
asset value. During the period ended September 30, 1994, the Fund adopted
Statement of Position 93-2 Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. Accordingly, permanent book and tax
basis differences relating to future shareholder distributions have been
reclassified to additional paid-in capital. As of October 1, 1993, the
cumulative effect of such differences totaling $1,050 was reclassified from
accumulated undistributed net realized gain on investment transactions to
additional paid-in capital. Net investment income, net realized gains and
net assets were not affected by this change.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .10% of net assets and (ii)
a "Group" fee computed each day on the combined net asset values of all of the
funds in the United Group of mutual funds (approximately $11.2 billion of
combined net assets at September 30, 1994) at annual rates of .51% of the first
$750 million of combined net assets, .49% on that amount between $750 million
and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between
$2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion, .40%
between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly-owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The Fund also pays WARSCO a monthly per account charge for transfer agency
and dividend disbursement services of $1.0208 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 was paid in that month.
The Fund also reimburses W&R and WARSCO for certain out-of-pocket costs.
As principal underwriter for the Fund's shares, W&R received direct and
indirect gross sales commissions (which are not an expense of the Fund) of
$1,486,258, out of which W&R paid sales commissions of $836,974 and all expenses
in connection with the sale of Fund shares, except for registration fees and
related expenses.
Under a Service Plan adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may pay monthly a fee to W&R in an
amount not to exceed .25% of the Fund's average annual net assets. The fee is
to be paid to reimburse W&R for amounts it expends in connection with the
provision of personal services to Fund shareholders and/or maintenance of
shareholder accounts.
The Fund paid Directors' fees of $12,320.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and short-
term securities, aggregated $117,232,226, while proceeds from maturities and
sales aggregated $86,678,656. Purchases of short-term securities aggregated
$119,198,168, while proceeds from maturities and sales aggregated $112,431,990.
No U.S. Government securities were bought or sold during the period ended
September 30, 1994.
For Federal income tax purposes, cost of investments owned at September 30,
1994 was $342,127,929, resulting in net unrealized appreciation of $516,162, of
which $8,822,996 related to appreciated securities and $8,306,834 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $1,527,051 during the year ended September 30, 1994, of which a portion was
paid to shareholders during the period ended september 30, 1994. Remaining net
capital gains will be distributed to the Fund's shareholders.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
United Municipal High Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of United Municipal High Income Fund,
Inc. (the "Fund") at September 30, 1994, the results of its operations for the
year then ended and the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1994 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
October 31, 1994
<PAGE>
United Municipal High Income Fund, Inc.
Custodian Underwriter
United Missouri Bank, n.a. Waddell & Reed, Inc.
Kansas City, Missouri 6300 Lamar Avenue
P. O. Box 29217
Legal Counsel Shawnee Mission, Kansas 66201-9217
Kirkpatrick & Lockhart (913) 236-2000
1800 M Street, N. W.
Washington, D. C. Shareholder Servicing Agent
Waddell & Reed Services Company
Independent Accountants 6300 Lamar Avenue
Price Waterhouse LLP P. O. Box 29217
Kansas City, Missouri Shawnee Mission, Kansas 66201-9217
(913) 236-2000
Investment Manager
Waddell & Reed Investment Accounting Services Agent
Management Company Waddell & Reed Services Company
6300 Lamar Avenue 6300 Lamar Avenue
P. O. Box 29217 P. O. Box 29217
Shawnee Mission, Kansas 66201-9217 Shawnee Mission, Kansas 66201-9217
(913) 236-2000 (913) 236-2000
<PAGE>
United Municipal High Income Fund, Inc.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
PROSPECTUS
December 31, 1994
The United Group of Mutual Funds
United Funds, Inc.
United Bond Fund
United Income Fund
United Accumulative Fund
United Science and Technology Fund
United International Growth Fund, Inc.
United Continental Income Fund, Inc.
United Vanguard Fund, Inc.
United Retirement Shares, Inc.
United Municipal Bond Fund, Inc.
United High Income Fund, Inc.
United Cash Management, Inc.
United Government Securities Fund, Inc.
United New Concepts Fund, Inc.
United Gold & Government Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund II, Inc.
TABLE OF CONTENTS
Summary of Expenses ....... 2
Financial Highlights ...... 3
What is United Municipal High
Income Fund, Inc.? ...... 4
Performance Information ... 4
Goal and Investment Policies
of the Fund ............. 5
Risk Factors............... 8
Management and Services ... 10
Dividends, Distributions
and Taxes ................ 12
Purchase of Shares ........ 14
Redemption ................ 15
Appendix A ................ 16
Financial Statements....... 20
NUP1014(12-94)
printed on recycled paper
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
December 31, 1994
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 (the
"Prospectus") of United Municipal High Income Fund, Inc. (the "Fund") dated
December 31, 1994, which may be obtained from the Fund or its Underwriter,
Waddell & Reed, Inc., at the address or telephone number shown above.
TABLE OF CONTENTS
Performance Information ............................ 2
Investment Objective and Policies .................. 4
Investment Management and Other Services ........... 23
Purchase, Redemption and Pricing of Shares ......... 27
Directors and Officers ............................. 37
Payments to Shareholders ........................... 41
Taxes .............................................. 42
Portfolio Transactions and Brokerage ............... 46
Other Information .................................. 47
<PAGE>
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may from time to
time publish the Fund's total return information, yield information and/or
performance rankings in advertisements and sales materials.
Total Return
An average annual total return quotation is computed by finding the average
annual compounded rates of return over the one-, five-, and ten-year periods
that would equate the initial amount invested to the ending redeemable value.
Standardized total return information is calculated by assuming an initial
$1,000 investment from which the maximum sales load of 4.25% is deducted. All
dividends and distributions are assumed to be reinvested at net asset value as
of the day the dividend or distribution is paid. No sales load is charged on
reinvested dividends or distributions. The formula used to calculate the total
return 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 and it may
not reflect the sales charge. For example, the Fund may also compute total
return 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 were reflected, it would
reduce the performance quoted.
The average annual total return quotations as of September 30, 1994, which
is the most recent balance sheet included in the Prospectus, for the periods
shown were as follows:
With Without
Sales LoadSales Load
Deducted Deducted
One-year period from October 1, 1993 to
September 30, 1994: -4.21% 0.05%
Five-year period from October 1, 1989 to
September 30, 1994: 7.57% 8.50%
Period from January 21, 1986* to
September 30, 1994: 8.06% 8.60%
*initial public offering date
The Fund may also quote unaveraged or cumulative total return which
reflects the change in value of an investment over a stated period of time.
Cumulative total returns will be calculated according to the formula indicated
above but without averaging the rate for the number of years in the period.
Yield
A yield quoted for the Fund is computed by dividing the net investment
income per share earned during the period for which the yield is shown by the
maximum offering price per share on the last day of that period according to the
following formula:
6
Yield = 2((((a - b)/cd)+1) -1)
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
The yield computed according to the formula for the 30-day period ended on
September 30, 1994, the date of the most recent balance sheet included in the
Prospectus, is 6.70%.
The Fund may also advertise or include in sales material its tax equivalent
yield, which is calculated by applying the stated income tax rate to only the
net investment income exempt from taxation according to a standard formula which
provides for computation of tax equivalent yield by dividing that portion of the
Fund's yield which is tax exempt by one minus a stated income tax rate and
adding the product to that portion, if any, of the yield of the Fund that is not
tax exempt.
The tax equivalent yield computed according to the formula for the 30-day
period ended on September 30, 1994, the date of the most recent balance sheet
included in this SAI, is 7.86%, 9.26%, 9.66%, 10.40% and 11.02% 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.
Performance Rankings
Waddell & Reed, Inc. or the Fund also may from time to time publish in
advertisements or sales material performance rankings as published by recognized
independent mutual fund statistical services such as Lipper Analytical Services,
Inc., or by publications of general interest such as Forbes, Money, The Wall
Street Journal, Business Week, Barron's, Fortune or Morningstar Mutual Fund
Values. The Fund may also compare its performance to that of other selected
mutual funds or selected recognized market indicators such as the Standard &
Poor's 500 Stock Index and the Dow Jones Industrial Average. Performance
information may be quoted numerically or presented in a table, graph or other
illustration.
All performance information which 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 a Fund's shares when redeemed may be more or less
than their original cost.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are described in the
Prospectus, which refers to the following investment methods and practices.
Municipal Bonds
Municipal bonds are issued by a wide range of governments, agencies and
authorities for various public purposes. The two main kinds of municipal bonds
are "general obligation" bonds and "revenue" bonds. In "general obligation"
bonds, the issuer has pledged its full faith, credit and taxing power for the
payment of principal and interest. "Revenue" bonds are payable only from
specific sources; these may include revenues from a particular facility or class
of facilities or special tax or other revenue source.
A special class of municipal bonds are some, but not all, "industrial
development bonds." The Fund may purchase industrial development bonds only if
the interest on them is free from Federal income taxation, though such interest
is an item of tax preference for purposes of the alternative minimum tax. In
general, industrial development bonds are revenue bonds and are issued by or on
behalf of public authorities to obtain funds to finance privately operated
facilities. They generally depend for their credit quality on the credit
standing of the company involved. The Fund may invest an unlimited percentage
of its assets in municipal bonds which are industrial development bonds. As of
September 30, 1994, 10.01% of the Fund's net assets were invested in industrial
development bonds.
Another specific type of municipal bond in which the Fund may invest
includes municipal leases and participation interests therein. The factors to
be considered in determining whether or not any rated municipal lease
obligations are liquid include (i) the frequency of trades and quotes for the
obligations; (ii) the number of dealers willing to purchase or sell the security
and the number of other potential buyers; (iii) the willingness of dealers to
undertake to make a market in the securities; (iv) the nature of marketplace
trades, including the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer; (v) the likelihood that the
marketability of the obligation will be maintained through the time the
instrument is held; (vi) the credit quality of the issuer and the lessee; and
(vii) the essentiality to the lessee of the property covered by the lease.
Unrated municipal lease obligations will be considered to be illiquid. These
obligations, which may take the form of a lease, an installment purchase, or a
conditional sale contract, are issued by state and local governments and
authorities to acquire land and a variety of equipment and facilities. The Fund
has not held and does not intend to hold such obligations directly as a lessor
of the property, but may from time to time purchase a participation interest in
a municipal obligation from a bank or other third party. A participation
interest gives the Fund a specified, undivided interest in the obligation in
proportion to its purchased interest in the total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt, including
voter referenda, interest rate limits or public sale requirements. Leases,
installment purchases or conditional sale contracts have evolved as a means for
governmental issuers to acquire property and equipment without being required to
meet these constitutional and statutory requirements. Many leases and contracts
include "non-appropriation clauses" providing that the governmental issuer has
no obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the legislative body on a yearly or other
periodic basis. Non-appropriation clauses free the issuer from debt issuance
limitations. In determining the liquidity of a municipal lease obligation,
Waddell & Reed Investment Management Company (the "Manager"), the Fund's
investment Manager, will differentiate between direct interests in municipal
leases and municipal lease-backed securities, the latter of which may take the
form of a lease-backed revenue bond, a tax-exempt asset-backed security or any
other investment structure using a municipal lease-purchased agreement as its
base. While the former may present liquidity issues, the latter are based on a
well established method of securing payment of a municipal lease obligation.
For the purposes of the percentage investment restrictions noted in the
Prospectus and this SAI, the "issuer" of a municipal bond is considered to be
the entity (public or private) ultimately responsible for the payment of the
principal and interest on the bond. For example, the bond may be created by a
governmental entity but be backed only by the assets and revenues of a
subdivision of the entity such as an agency, instrumentality or authority. The
subdivision would be deemed to be the "issuer." In the case of industrial
development bonds, the private user of facilities financed by the bonds is
considered to be the "issuer."
The Fund and the Manager rely on the opinion of bond counsel for the issuer
in determining whether obligations are municipal bonds. If a court should hold
that obligations held by the Fund are not municipal bonds (i.e., that the
interest on them is taxable), the Fund will sell them as soon as possible, but
it might incur losses if it sold them in other than an orderly manner.
When-Issued Municipal Bonds
The Fund may also purchase municipal bonds on a when-issued basis; their
value may be less when delivered than the purchase price paid. For example,
delivery to the Fund and payment by the Fund may take place a month or more
after the date of the transaction. The purchase price is fixed on the
transaction date. The Fund will enter into when-issued transactions in order to
secure what is considered to be an advantageous price and yield at the time of
entering into the transaction. The municipal bonds so purchased by the Fund are
subject to market value fluctuation; their value may be less when delivered than
the purchase price paid. No interest accrues to the Fund until delivery and
payment is completed. When the Fund makes a commitment to purchase securities
on a when-issued basis the Fund will record the transaction and thereafter
reflect the value of the securities in determining its net asset value per
share.
Ordinarily the Fund purchases municipal bonds on a when-issued basis with
the intention of actually taking delivery of the securities. However, before
the securities are delivered to the Fund and before it has paid for them (the
"settlement date"), the Fund could sell the securities if the Manager decided it
was advisable to do so for investment reasons. The Fund will hold aside or
segregate cash or other municipal bonds, other than those purchased on a when-
issued basis, at least equal to the amount it will have to pay on the settlement
date; these other municipal bonds will mature or be sold at or before the
settlement date. There are no percentage limitations on the Fund's right to buy
municipal bonds on a when-issued basis.
Investments in Unseasoned Issuers
In order to comply with the regulations of certain states, the Fund will
not purchase a security if, as a result, more than 5% of its assets would be in
industrial development bonds for which the payment of principal and interest are
the responsibility of a company with less than three years operating history,
including predecessors.
Restricted Securities
Restricted securities, which are also referred to as private placements,
are subject to legal or contractual restrictions on resale because they are not
registered under the Securities Act of 1933, as amended, and are not exempt from
registration as a security issued by a government entity. In many cases,
issuers expect to sell these securities to institutional investors, such as the
Fund, initially under an exemptive provision and then file a registration
statement to register the securities for public distribution. Once the
securities have been registered, they may sell at a premium over the initial
offering price.
In the event that the securities are not registered by the issuer, the
Fund's ability to resell the unregistered securities may be limited. Limitation
on the resale of unregistered securities may have an adverse effect on their
marketability and may prevent the Fund's prompt disposition of them at
reasonable prices. The Fund may have to bear the expense of registering such
securities for resale and the risk of substantial delays in effecting such
registration. Valuation for restricted securities for which market quotations
are readily available will be at market value. Valuation for restricted
securities for which market quotations are not available will be at fair value
as determined in good faith under procedures established by the Board of
Directors.
Illiquid Investments
Due to their possible limited liquidity, the Fund may not purchase the
following investments if after such purchase more than 10% of its net assets
would consist of a combination of such investments: (i) repurchase agreements
not terminable within seven days; (ii) fixed time deposits subject to withdrawal
penalties other than overnight deposits; (iii) securities for which market
quotations are not readily available and (iv) restricted securities which are
securities which are subject to legal or contractual restrictions on resale.
However, this 10% limit does not include any obligations payable at principal
amount plus interest on demand or within seven days after demand.
Risks of Certain Types of Municipal Bonds
At any one time the Fund may have more than 25% of its assets in similar
type projects in which low quality municipal bonds are likely to be issued,
including the following: electrical utilities, steel, health care and life care
facilities and small industries. A substantial amount of the assets of the Fund
may therefore be invested in securities which are related in such a way that an
economic, business or political development or change affecting one such
security would likewise affect the other securities. For example, a declining
market for health care facilities might adversely affect the ability of
municipalities to make timely payments of principal and interest on revenue
bonds to be paid from hospital revenues. The Fund could also have more than 25%
of its assets invested in issuers in the same geographic area, but will not have
more than 25% of its assets in securities of issuers located in any one state.
Many of the low quality municipal bonds in which the Fund seeks to invest
will be industrial development bonds. It is likely that more than 25% of the
Fund's assets will be invested in industrial development bonds. As discussed
above under "Municipal Bonds," the entity responsible for payment of the
principal and interest on industrial development bonds is usually the
nongovernmental user of the facility being financed by the bond issue.
Consequently, to the extent the Fund invests up to 25% of its assets in bonds
issued by entities in any one industry, it will be subject to the risks inherent
in the industry to which the issuer belongs.
For example, a hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability of
the hospital to provide the services required, management and medical
capabilities, economic developments in the service area, efforts by insurers and
government agencies to limit rates and expenses, confidence in the hospital,
service area economic developments, competition, availability and expense of
malpractice insurance, Medicaid and Medicare funding, and possible Federal
legislation limiting the rates of increase of hospital charges. Significant
events impacting the hospital industry in any one of these areas might adversely
affect the industry's ability to service its debt or to pay principal when due.
Life care facilities are an alternative form of long-term housing for the
elderly. They are subject to a wide variety of risks. Primarily, the projects
must maintain adequate occupancy levels to be able to provide revenues adequate
to maintain debt service payments. Moreover, since a portion of housing,
medical care and other services may be financed by an initial deposit it is
important that the facility maintain adequate financial reserves to secure
estimated actuarial liabilities. The ability of management to accurately
forecast inflationary cost pressures weighs importantly in the process. The
facilities may also be impacted by regulatory cost restrictions applied to
health care delivery in general, particularly state regulations or changes in
Medicare and Medicaid payments or qualifications, or restrictions imposed by
medical insurance companies. They may also face competition from alternative
health care or conventional housing facilities in the private or public sector.
The electrical utility industry is facing certain problems, which may or
may not affect its ability to meet obligations on bonds. These problems include
the effects of: inflation on financing large construction programs; cost
increases and delays arising out of environmental considerations; limitation of
the capital market to absorb additional debt; the effect of shortages and high
prices of fuel on operations and profits; and 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.
Pollution control and other industrial development bonds are issued by
various state and local agencies to finance various projects, including those of
domestic steel producers, and are secured solely by agreements with such
companies. Domestic steel companies are suffering the consequences of such
adverse trends as high labor costs, high foreign imports encouraged by foreign
productivity increases and a strong U.S. dollar, and other cost pressures such
as are imposed by antipollution legislation. Domestic steel capacity is being
reduced currently by large-scale plant closings.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements. A
repurchase transaction occurs when, at the time the Fund purchases securities,
it also agrees to resell them to the vendor (normally a commercial bank or
broker-dealer), and must deliver those securities and/or securities substituted
for them under the repurchase agreement to the vendor on an agreed-upon date in
the future. In this section, such securities, including any securities so
substituted, are referred to as the "Resold Securities." The resale price is in
excess of the purchase price in that it reflects an agreed-upon market interest
rate effective for the period of time during which the Fund's money is invested
in the Resold Securities. The majority of the repurchase transactions in which
the Fund would engage run from day to day, and the delivery pursuant to the
resale typically will occur within one to five days of the purchase. The Fund's
risk is limited to the ability of the vendor to pay the agreed-upon sum upon the
delivery date. In the event of bankruptcy or other default by the vendor, there
may be possible delays or expenses in liquidating the Resold Securities, decline
in their value or loss of interest. Upon default, the Resold Securities
constitute collateral security for the repurchase obligation. The return on
such collateral may be more or less than that from the repurchase agreement.
The Fund's repurchase agreements will be structured so as to fully collateralize
the loans, i.e., the value of the Resold Securities is and, during the entire
term of the agreement, remains at least equal to the value of the loan,
including the accrued interest earned thereon. Such collateral will be held by
the Fund's custodian bank, or a third party that qualifies as a custodian under
section 17(f) of the Investment Company Act of 1940. Repurchase agreements are
entered into only with those entities approved on the basis of criteria
established by the Board of Directors.
Options, Futures Contracts and Options on Futures Contracts
The use of options, futures contracts and options on futures contracts is
subject to applicable regulations of the Securities and Exchange Commission
("SEC"), the several exchanges on which they are traded, the Commodity Futures
Trading Commission ("CFTC") and various state regulatory authorities. In
addition, the Fund's ability to use these instruments will be limited by tax
considerations. See "Taxes."
In addition to the instruments, strategies and risks described below and in
the Prospectus, the Manager expects to discover additional opportunities in
connection with options, futures contracts, options on futures contracts and
other similar or related techniques. These opportunities may become available
as the Manager develops new techniques, as regulatory authorities broaden the
range of permitted transactions and as new options, futures contracts, options
on futures contracts and other techniques are developed. The Manager may
utilize these opportunities to the extent that they are consistent with the
Fund's investment goals and are permitted by the Fund's investment limitations
and applicable regulatory authorities. The Fund's Prospectus or Statement of
Additional Information will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
Writing Calls on Securities. The Fund may write call options on
securities, but only if the investments to which the call relates (the "related
investments") are domestic debt securities, including, without limitation,
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Securities"). The above limitation is a
fundamental policy, which cannot be changed without a shareholder vote.
The Fund may write call options on domestic debt securities to attempt to
enhance the Fund's income or to reduce the overall risk of its investments. The
Fund may only write call options on securities if they are listed on a national
securities exchange.
If the Fund writes a call, it agrees to sell to the purchaser of the call
the securities subject to the call at a fixed price; this is referred to as the
exercise price. This price may be equal to, or more or less than, the market
price of the securities covered by the call. During the period of a call the
Fund must, if the call is exercised, sell at the exercise price no matter what
happens to the market price of the securities subject to the call.
As compensation for entering into this contract, the Fund receives a
premium. Should the market price of the security on which the Fund has written
a call go down during the call period, the premium would help to offset that
decline. However, the Fund would lose the opportunity to profit from an
increase in the market price of the securities that are subject to the call over
the exercise price except to the extent that the premium represents such a
profit. The Fund will write calls when the Manager believes that the amount of
the premium represents adequate compensation for the loss of the opportunity.
Writing calls is a highly specialized activity, which involves investment
techniques and risks different from those ordinarily associated with investment
companies. The personnel engaging in this activity have had experience with
other Funds in the United Group and in managed accounts engaging in this
activity. It is believed that the Fund's limitations on writing calls will tend
to reduce these risks.
The Fund may purchase calls to close its position in a call that it has
written. To do this, it will make a "closing transaction." (As discussed
below, it may also purchase calls other than as part of a closing transaction.)
This involves buying a call on the same security with the same exercise price
and expiration date as the call it has written. When the Fund sells a security
on which it has written a call, it may effect a closing transaction. The Fund
may also effect a closing transaction to avoid having to sell a security on
which it has written a call if the call is exercised. The Fund will have a
profit or loss from a closing transaction, depending on the amount of option
transaction costs and on whether the amount it pays to purchase the call is less
or more than the premium it received on the call that is closed out. A profit
will also be realized if the call lapses unexercised because the Fund retains
the premium received. There is no assurance that the Fund will be able to
effect a closing transaction if there is no market for the call in question; if
the Fund cannot do so, it may be required to hold the security on which the call
was written until the call expires or is exercised even though it might
otherwise be desirable to sell the security. If a call that the Fund wrote is
exercised, it could deliver the securities that it owns (or the securities that
it has the right to get). It could also deliver other securities that it
purchases.
Fund securities will be bought and sold in order to attempt to achieve the
goals of the Fund. However, the fact that listed calls can be written on a
particular security may be a factor in buying or keeping it if it is otherwise
considered suitable for the Fund.
Writing Puts on Securities. The Fund may write put options on securities,
but only if the related investments are domestic debt securities, including,
without limitation, U.S. Government Securities. The above limitation is a
fundamental policy, which cannot be changed without a shareholder vote.
The Fund may write put options on domestic debt securities to attempt to
enhance the Fund's income or to reduce the overall risk of its investments. The
Fund may only write put options on securities if they are listed on a national
securities exchange.
As with covered call writing, the Fund may write puts on securities for the
purpose of increasing income by receiving premiums from the purchaser of the
option. When the Fund writes a put, it receives a premium and agrees to
purchase the related investments from the purchaser of the put during the put
period at a fixed exercise price (which may differ from the market price of the
related investments) regardless of market price changes during the put period.
If the put is exercised, the Fund must purchase the related investments at the
exercise price. Puts are ordinarily sold when the Fund anticipates that, during
the option period, the market price of the underlying security will decline by
less than the amount of the premium. In writing puts, the Fund assumes the risk
of loss should the market value of the underlying security decline below the
exercise price of the option. The Fund's cost of purchasing the investments
will be adjusted by the amount of the premium it has received. The Fund will
write a put only when it has determined that it would be willing to purchase the
underlying security at the exercise price.
To terminate its obligation on a put that it has written, the Fund may
purchase a put in a "closing transaction." (As discussed below, it may also
purchase puts other than as part of a closing transaction.) A profit or loss
will be realized depending on the amount of option transaction costs and whether
the premium previously received is more or less than the cost of the put
purchased. A profit will also be realized if the put lapses unexercised because
the Fund retains the premium received.
Purchasing Calls and Puts on Securities. The Fund may purchase call and
put options on securities, but only if the related investments are domestic debt
securities, including, without limitation, U.S. Government Securities. The
above limitation is a fundamental policy, which cannot be changed without a
shareholder vote.
The Fund may purchase call and put options on domestic debt securities to
attempt to enhance the Fund's income or to attempt to reduce the overall risk of
its investments. The Fund may only purchase put and call options on securities
if they are listed on a national securities exchange.
The Fund may purchase a call in a closing transaction in order to terminate
its obligation on a call it has written. In addition, the Fund may purchase
calls on securities for the purpose of taking advantage of a rise in the market
value of the underlying securities.
When the Fund buys a call, it pays a premium and has the right to buy the
related investments from the seller of a call during the call period at a fixed
exercise price. The Fund benefits only if the market price of the related
investments is above the call price prior to the expiration date and the call is
either exercised or sold at a profit. If the call is not exercised or sold
(whether or not at a profit), it will become worthless at its expiration date
and the Fund will lose the premium paid and the right to purchase the related
investments.
The Fund may purchase puts on securities to protect against price declines
in the value of its portfolio securities. The Fund may purchase a put on a
security it owns ("protective put") or on a security it does not own
("nonprotective put"). When the Fund buys a put, it pays a premium and has the
right to sell the related investments to the seller of the put during the put
period at a fixed exercise price. Buying a protective put (as defined above)
permits the Fund to protect itself prior to the time the put expires against a
decline in the value of the related investments below the exercise price by
selling them through the exercise of the put. Buying a nonprotective put (as
defined above) permits the Fund, if the market price of the related investments
is below the put price during the put period, either to resell the put or to buy
the related investments and sell them at the exercise price. If the market
price of the related investments is above the exercise price and as a result the
put is not exercised or resold (whether or not at a profit), the put will become
worthless at its expiration date.
Risks of Options on Securities. The Fund is only authorized to write and
purchase options on securities that are listed. Exchange-listed options are
issued by a clearing organization affiliated with the exchange on which the
option is listed. A position in an exchange-listed option may be closed out
only on an exchange that provides a secondary market for options covering the
same related investment having the same exercise price and expiration date.
There is no assurance that a liquid secondary market will exist for any
particular option.
The Fund's put and call activities may affect its turnover rate and
brokerage commission payments. The exercise of calls or puts written by the
Fund may cause it to sell or purchase related investments, thus increasing its
turnover rate in a manner beyond its control. 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.
Such commissions may be higher than those that would apply to direct purchases
or sales.
Option premiums paid to control an amount of related investments are small
in relation to the market value of related investments and, consequently, put
and call options offer large amounts of leverage. The leverage offered by
trading in options will result in the Fund's net asset value being more
sensitive to changes in the value of the related investment.
Options on Municipal Bond Indices. The Fund may write and purchase options
on indices, but only if the indices are municipal bond indices. The above
limitation is a fundamental policy, which cannot be changed without a
shareholder vote.
The Fund may write and purchase options on municipal bond indices to
attempt to enhance the Fund's income or to reduce the overall risk of its
investments. The Fund may only write and purchase options on municipal bond
indices if they are listed on a national securities exchange.
The Fund may write options on municipal bond indices, primarily to generate
income, when the Manager anticipates that the index price will not increase or
decrease by more than the premium received by the Fund. The Fund may purchase
calls on municipal bond indices to hedge against anticipated increases in the
price of debt securities it wishes to acquire and purchase puts on municipal
bond indices to hedge against anticipated declines in the market value of
portfolio securities. Puts and calls on municipal bond indices are similar to
puts and calls on securities or futures contracts except that all settlements
are in cash and gain or loss depends on changes in the index in question (and
thus on price movements in the municipal bond market generally) rather than on
price movements in individual securities or futures contracts. When the Fund
writes a call on a municipal bond index, it receives a premium and agrees that,
prior to the expiration date, the purchaser of the call, upon exercise of the
call, will receive from the Fund an amount of cash if the closing level of the
municipal bond index upon which the call is based is greater than the exercise
price of the call. The amount of cash is equal to the difference between the
closing price of the index and the exercise price of the call times a specified
multiple ("multiplier"), which determines the total dollar value for each point
of such difference. When the Fund buys a call on a municipal bond index, it
pays a premium and has the same rights as to such call as are indicated above.
When the Fund buys a put on a municipal bond index, it pays a premium and has
the right, prior to the expiration date, to require the seller of the put, upon
the Fund's exercise of the put, to deliver to the Fund an amount of cash if the
closing level of the municipal bond index upon which the put is based is less
than the exercise price of the put, which amount of cash is determined by the
multiplier, as described above for calls. When the Fund writes a put on a
municipal bond index, it receives a premium and the purchaser has the right,
prior to the expiration date, to require the Fund to deliver to it an amount of
cash equal to the difference between the closing level of the municipal bond
index and the exercise price times the multiplier if the closing level is less
than the exercise price.
Risks of Options on Municipal Bond Indices. The risks of investment in
options on municipal bond indices may be greater than options on securities.
Because municipal bond index options are settled in cash, when the Fund writes a
call on a municipal bond index it cannot provide in advance for its potential
settlement obligations by acquiring and holding the underlying securities. The
Fund can offset some of the risk of writing a call index option by holding a
diversified portfolio of municipal bonds similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same municipal bonds as
underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if the Fund could assemble a municipal bond portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund as the call writer will not
learn that it has been assigned until the next business day at the earliest.
The time lag between exercise and notice of assignment poses no risk for the
writer of a covered call on a specific underlying security, such as a municipal
bond, because there the writer's obligation is to deliver the underlying
security, not to pay its value as of a fixed time in the past. So long as the
writer already owns the underlying security, it can satisfy its settlement
obligations by simply delivering it, and the risk that its value may have
declined since the exercise date is borne by the exercising holder. In
contrast, even if the writer of an index call holds municipal bonds that exactly
match the composition of the underlying index, it will not be able to satisfy
its assignment obligations by delivering those municipal bonds against payment
of the exercise price. Instead, it will be required to pay cash in an amount
based on the closing index value on the exercise date. By the time it learns
that it has been assigned, the index may have declined, with a corresponding
decline in the value of its municipal bond portfolio. This "timing risk" is an
inherent limitation on the ability of index call writers to cover their risk
exposure by holding municipal bond positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
Futures Contracts and Options Thereon. The Fund may engage in buying and
selling interest rate futures contracts, but only "Debt Futures" (futures
relating to domestic debt securities) and "Municipal Bond Index Futures"
(futures contracts relating to municipal bond indices). The Fund may also buy
and sell options on Debt Futures. The limitation on buying and selling futures
contracts to Debt Futures and Municipal Bond Index Futures, and the limitation
on buying and selling options on futures contracts to options on Debt Futures,
are fundamental policies, which cannot be changed without a shareholder vote.
When the Fund purchases a futures contract, it incurs an obligation to take
delivery of a specified amount of the obligation underlying the contract at a
specified time in the future for a specified price. When the Fund sells a
futures contract, it incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.
In the case of a Municipal Bond Index Future, the obligation underlying the
futures contract is an amount of cash equal to a specified dollar amount times
the difference between the index value at the close of the last trading day of
the futures contract and the price at which the futures contract is originally
struck. In the case of a Debt Future, the underlying obligation is the related
domestic debt security.
When the Fund writes an option on a futures contract, it becomes obligated,
in return for the premium paid, to assume a position in the futures contract at
a specified exercise price at any time during the term of the option. If the
Fund has written a call, it becomes obligated to assume a "short" position in
the futures contract, which means that it is required to deliver the underlying
securities. If it has written a put, it becomes obligated to assume a "long"
position in the futures contract, which means that it is required to take
delivery of the underlying securities. When the Fund purchases an option on a
futures contract, it acquires the right, in return for the premium it paid, to
assume a position in the futures contract, a "long" position if the option is a
call and a "short" position if the option is a put.
The Fund will not purchase or sell futures contracts or options thereon for
speculative purposes but rather only for the purpose of hedging against changes
in the market value of its portfolio securities or changes in the market value
of securities that the Manager anticipates that it may wish to include in the
portfolio of the Fund. The Fund may sell a Municipal Bond Index Future if the
Manager anticipates that a general market or market sector decline may adversely
affect the market value of any or all of the Fund's municipal bond holdings.
The Fund may buy a Municipal Bond Index Future if the Manager anticipates a
significant market sector advance in the municipal bonds it intends to purchase
for the Fund's portfolio. The Fund may purchase a Municipal Bond Index Future
as a temporary substitute for the purchase of individual bonds that may then be
purchased in an orderly fashion. In the case of debt securities, the Fund could
sell a Debt Future, or write a call or buy a put on a Debt Future, to attempt to
protect against the risk that the value of the debt securities held by the Fund
might decline. The Fund could purchase a Debt Future, or purchase a call or
write a put on a Debt Future, to protect against the risk of an increase in the
value of debt securities at a time when the Fund is not invested in debt
securities to the extent permitted by its investment policies. As securities
are purchased, corresponding futures or options positions would be terminated.
Futures strategies also can be used to manage the average duration of the
Fund's portfolio. If the Manager wishes to shorten the average duration of the
Fund, the Fund may sell a Debt Future or a call option thereon, or purchase a
put option on a Debt Future. If the Manager wishes to lengthen the average
duration of the Fund, the Fund may buy a Debt Future or a call option thereon,
or sell a put option on a Debt Future.
Unlike when the Fund purchases or sells a municipal bond or taxable
obligation, no price is paid or received by it when it purchases or sells a
futures contract. Initially, the Fund will be required to deposit an amount of
cash or U.S. Treasury Bills equal to a varying specified percentage of the
contract amount. This amount is known as initial margin. Cash held in the
margin account is not income producing. Subsequent payments, called variation
margin, to and from the broker will be made on a daily basis as the price of the
underlying debt securities or index fluctuates making the futures contract more
or less valuable, a process known as "marking-to-market."
If the Fund writes an option on a futures contract, it will be required to
deposit initial and variation margin pursuant to the requirements similar to
those applicable to futures contracts. Premiums received from the writing of an
option on a futures contract are included in the initial margin deposit.
Changes in variation margin are recorded by the Fund as unrealized gains or
losses. Initial margin payments will be deposited with the Fund's Custodian
bank in an account registered in the broker's name; access to the assets in that
account may be made by the broker only under specified conditions. At any time
prior to expiration of a futures contract or option thereon, the Fund may elect
to close the position by taking an opposite position, which will operate to
terminate its position in the futures contract or option. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or a gain. Although futures
contracts by their terms call for the actual delivery or acquisition of the
underlying obligation, in most cases the contractual obligation is fulfilled
without having to make or take delivery. The Fund does not generally intend to
make or take delivery of the underlying obligation. All transactions in futures
contracts and options thereon are made, offset or fulfilled through a clearing
house associated with the exchange on which the contracts are traded. Although
the Fund intends to buy and sell futures contracts and options thereon only on
exchanges where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular futures
contract or option thereon at any particular time. In such event, it may not be
possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or option thereon can vary
from the previous day's settlement price; once that limit is reached, no trades
may be made that day at a price beyond the limit. Daily price limits do not
limit potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing the liquidation
of unfavorable positions.
If the Fund were unable to liquidate a futures contract or option thereon
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, the Fund
would be required to make daily variation margin payments and might be required
to maintain the position being hedged by the futures contract or option or to
maintain cash or securities in a segregated account.
The Fund must operate within certain restrictions as to positions in
futures contracts and options thereon under a rule ("CFTC Rule") adopted by the
CFTC under the Commodity Exchange Act ("CEA") to be eligible for the exclusion
provided by the CFTC Rule from registration by the Fund with the CFTC as a
"commodity pool operator" (as defined under the CEA), and must represent to the
CFTC that it will operate within such restrictions. Under these restrictions,
to the extent that the Fund enters into futures contracts and options on futures
contracts that are not for bona fide hedging purposes (as defined by the CFTC),
the aggregate initial margin and premiums on these positions (excluding the
amount by which options are "in-the-money") may not exceed 5% of the Fund's net
assets. (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.)
Risks of Futures Contracts and Options Thereon. Since futures contracts
and options thereon can replicate movements in the cash markets for the
securities in which the Fund invests without the large cash investments required
for dealing in such markets, they may subject the Fund to greater and more
volatile risks than might otherwise be the case. The principal risks associated
with the use of such instruments are (i) imperfect correlation between movements
in the market price of the portfolio investments (held or intended to be
purchased) being hedged and in the price of the futures contract or option; (ii)
possible lack of a liquid secondary market for closing out futures contract or
options positions; (iii) the need for additional portfolio management skills and
techniques; and (iv) losses due to unanticipated market price movements.
For a hedge to be completely effective the price change of the hedging
instrument should equal the price change of the security being hedged. Such
equal price changes are not always possible because the investment underlying
the hedging instrument may not be the same investment that is being hedged. The
Manager will attempt to create a closely correlated hedge, but hedging activity
may not be completely successful in eliminating market value fluctuation. (See
below for additional discussion of correlation as it relates to Municipal Bond
Index Futures.)
The ordinary spreads between prices in the cash and futures markets
(including the options on futures market), due to differences in the natures of
those markets, are subject to the following factors, which may create
distortions. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions, which could distort the normal relationship between the
cash and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest rate or municipal bond market trends by the Manager may still
not result in a successful transaction. The Manager may be incorrect in its
expectations as to the extent of various interest rate or bond market movements
or the time span within which the movements take place.
The risk of imperfect correlation between movements in the price of a
Municipal Bond Index Future and movements in the price of the municipal bonds
that are the subject of the hedge increases as the composition of the Fund's
municipal bond portfolio diverges from the municipal bonds included in the
index. The price of the Municipal Bond Index Futures may move more than or less
than the price of the securities being hedged. If the price of the Municipal
Bond Index Future moves less than the price of the securities that are the
subject of the hedge, the hedge will not be fully effective but, if the price of
the securities being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price of
the securities being hedged has moved in a favorable direction, this advantage
will be partially offset by the futures contract. If the price of the futures
contract moves more than the price of the security, the Fund will experience
either a loss or a gain on the futures contract that will not be completely
offset by movements in the price of the securities that are the subject of the
hedge. To compensate for the imperfect correlation of movements in the price of
the securities being hedged and movements in the price of the Municipal Bond
Index Futures, the Fund may buy or sell Municipal Bond Index Futures in a
greater dollar amount than the dollar amount of the securities being hedged if
the historical volatility of the prices of such securities being hedged is more
than the historical volatility of the municipal bonds included in the index. It
is also possible that, where the Fund has sold futures contracts to hedge its
portfolio against decline in the market, the market may advance and the value of
the municipal bonds and taxable obligations held in the portfolio may decline.
If this occurred the Fund would lose money on the futures contract and also
experience a decline in value of its portfolio securities. However, while this
could occur for a very brief period or to a very small degree, over time the
value of a diversified portfolio of municipal bonds will tend to move in the
same direction as the municipal bond indices on which the futures contracts are
based.
Where Municipal Bond Index Futures are purchased to hedge against a
possible increase in the price of municipal bonds and/or taxable obligations
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 municipal bonds and/or taxable
obligations it had anticipated purchasing.
Limitations on the Use of Options on Securities, Municipal Bond Indices and
Futures Contracts. The Fund's use of options is governed by the following
guidelines, which can be changed by the Fund's Board of Directors without a
shareholder vote:
(1) options may be purchased or written only when the Manager believes
that there exists a liquid secondary market in such options;
(2) the Fund may not write call options having aggregate exercise prices
greater than 25% of its net assets; and
(3) the Fund may purchase a put or a call option (including straddles or
spreads) only if the value of its premium, when aggregated with the premiums on
all other options held by the Fund, does not exceed 5% of the Fund's total
assets.
Cover for Futures Contracts and Options on Securities, Municipal Bond
Indices and Futures Contracts. Transactions using futures contracts and options
(other than options that the Fund has purchased) expose the Fund to an
obligation to another party. The Fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities or
other options or futures contracts or (2) cash, receivables and short-term debt
securities with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. The Fund will comply with SEC
guidelines regarding cover for these instruments and, if the guidelines so
require, set aside cash, U.S. Government Securities or other liquid, high-grade
debt securities in a segregated account with its Custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding futures contract or option is open, unless
they are replaced with similar assets. As a result, the commitment of a large
portion of the Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Investment Restrictions
Certain of the Fund's investment restrictions and policies are described in
the Prospectus. The following are fundamental policies and, together with
certain restrictions described in the Prospectus, cannot be changed without
shareholder approval. Under these additional restrictions, the Fund:
(i) May not make any investments other than in municipal bonds and in the
taxable obligations, options, futures contracts and other financial
instruments described in the Prospectus;
(ii) May not purchase any voting securities, any commodities or commodity
contracts (except that it may buy and sell the options, futures
contracts and other financial instruments described in the Prospectus
whether or not any of them is considered to be a commodity or a
commodity contract), or any real estate or interests in real estate
investment trusts;
(iii) May not lend money or other assets; (neither purchasing the securities
in which the Fund may invest or engaging in repurchase agreements is
considered "lending.");
(iv) May not borrow money or pledge any of its assets except that, as a
temporary measure for extraordinary or emergency purposes and not for
investment purposes, the Fund may borrow from banks up to 5% of the
value of its total assets (this does not prohibit the escrow and
collateral arrangements contemplated in connection with investment in
options and futures contracts);
(v) May not invest for the purpose of exercising control or management of
other companies;
(vi) May not buy or continue to hold securities if any one of the Fund's
Directors or officers or certain others own more than .5 of 1% of the
securities of an issuer and if the persons who own that much or more
own 5% of that issuer's securities;
(vii) May not sell short, buy on margin, engage in arbitrage transactions or
participate on a joint, or a joint and several, basis in any trading
account in securities; however, it may make margin deposits in
connection with options and futures contracts;
(viii) May not engage in the underwriting of securities;
(ix) May not purchase the securities of any "issuer" if more than 5% of the
Fund's total assets, taken at market, would then be invested in that
"issuer." See "Municipal Bonds" for a description of an "issuer."
This restriction does not apply to cash or cash items, U.S. Government
Securities, i.e., securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
In applying this 5% restriction, the Fund applies the same standards
set forth under "Municipal Bonds" for determining who is an "issuer";
however, it also considers for the purpose of this 5% restriction that
a guarantee by a government or other entity of a municipal bond is a
separate security which would be given a value and included in the 5%
restriction if the value of all municipal bonds created by the
government or entity and owned by the Fund should exceed 10% of the
value of its total assets; or
(x) May not buy shares of other investment companies which redeem their
shares. The Fund may buy shares of investment companies which do not
redeem their shares if it does so in a regular transaction in the open
market and then does not have more than one tenth (i.e., 10%) of its
total assets in these shares. As a shareholder in an investment
company, the Fund would bear its pro rata share of that investment
company's expenses, which could result in duplication of fees,
including management and administrative fees.
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 was 26.26% for the fiscal year ended September 30, 1994
and 26.13% for the fiscal year ended September 30, 1993.
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 Waddell & Reed Investment Management Company, a wholly-
owned subsidiary of Waddell & Reed, Inc. Under the Management Agreement, the
Manager is employed to supervise the investments of the Fund and provide
investment advice to the Fund. The address of the Manager and Waddell & Reed,
Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission, Kansas 66201-9217.
Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's Directors prior to approving any Shareholder Servicing
Agreement or Accounting Services Agreement.
Torchmark Corporation and United Investors Management Company
The Manager is a wholly-owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly-owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly-
owned subsidiary of United Investors Management Company. United Investors
Management Company is a wholly-owned subsidiary of Torchmark Corporation.
Torchmark Corporation is a publicly held company. The address of Torchmark
Corporation and United Investors Management Company is 2001 Third Avenue South,
Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds
since 1940 or the company's inception date, whichever was later, and to
TMK/United Funds, Inc. since that fund's inception, until January 8, 1992 when
it assigned its duties as investment manager for these funds (and the related
professional staff) to the Manager. The Manager has also served as investment
manager for Waddell & Reed Funds, Inc. since its inception in September 1992 and
Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund,
Inc. since they each commenced operations in February 1993. Waddell & Reed,
Inc. serves as principal underwriter for the investment companies in the United
Group of Mutual Funds, TMK/United Funds, Inc. and Waddell & Reed Funds, Inc.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between Waddell &
Reed Services Company (the "Agent"), a subsidiary of Waddell & Reed, Inc., and
the Fund, 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 Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Directors without
shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for the Manager's management services, the
Fund pays the Manager a fee as described in the Prospectus.
Prior to the above-described assignment from Waddell & Reed, Inc. to
Waddell & Reed Investment Management Company, all fees were paid to Waddell &
Reed, Inc. The management fee paid to the investment manager for the fiscal
years ended September 30, 1994, 1993 and 1992 were $1,756,750, $1,510,519 and
$1,273,348, respectively. For purposes of calculating the daily fee the Fund
does not include money owed to it by Waddell & Reed, Inc. for shares which it
has sold but not yet paid to the Fund. The Fund accrues and pays this fee
daily.
Under the Shareholder Servicing Agreement, the Fund pays the Agent a
monthly fee of $1.0208 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, was paid in that month. It also pays
certain out-of-pocket expenses of the Agent, including long distance telephone
communications costs; microfilm and storage costs for certain documents; forms,
printing and mailing costs; and costs of legal and special services not provided
by Waddell & Reed, Inc., the Manager or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a fee for
accounting services as described in the Prospectus. Fees paid to the Agent for
the fiscal years ended September 30, 1994, 1993 and 1992 were $50,000, $50,000
and $50,000, respectively.
The State of California imposes limits on the amount of certain expenses
the Fund can pay and requires the Manager to reduce its fee if these expense
amounts are exceeded. The Manager must reduce the amount of such expenses to
the extent they exceed these expense limits. Not all of the Fund's expenses are
included in the limit. The excluded expenses include interest, taxes, brokerage
commissions and extraordinary expenses such as litigation that usually do not
arise in the normal operations of a mutual fund. The Fund's other expenses,
including its management fee, are included.
The Manager must, under California law, reduce the cost of any included
expenses which are over 2.5% of the Fund's first $30 million of average net
assets, 2% of the next $70 million of average net assets, and 1.5% of any
remaining average net assets during a fiscal year. The Fund will notify
shareholders of any change in the limitation.
Since the Fund pays a management fee for investment supervision and an
accounting services fee for accounting services as discussed above, the Manager
and the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement
are described above. Waddell & Reed, Inc. and affiliates pay the Fund's
Directors and officers who are affiliated with the Manager 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 amount of
underwriting commissions for the fiscal years ended September 30, 1994, 1993 and
1992 were $1,486,258, $1,688,436 and $1,338,253, respectively. The amounts
retained by Waddell & Reed, Inc. for each period were $649,284, $744,476 and
$590,487, respectively.
A major portion of the sales charge is paid to sales representatives and
managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may compensate its sales
representatives as to purchases for which there is no sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under a Service Plan (the "Plan") adopted by the Fund pursuant to Rule 12b-
1 under the Investment Company Act of 1940, the Fund may pay Waddell & Reed,
Inc., the principal underwriter for the Fund, a fee not to exceed .25% of the
Fund's average annual net assets, paid monthly, to reimburse Waddell & Reed,
Inc. for its costs and expenses in connection with the provision of personal
services to Fund shareholders and/or maintenance of shareholder accounts.
The Plan and a related Service Agreement between the Fund and Waddell &
Reed, Inc. contemplate that Waddell & Reed, Inc. may be reimbursed for amounts
it expends in compensating, training and supporting registered sales
representatives, sales managers and/or other appropriate personnel in providing
personal services to Fund shareholders and/or maintaining shareholder accounts;
increasing services provided to Fund shareholders by office personnel located at
field sales offices; engaging in other activities useful in providing personal
service to Fund shareholders and/or maintenance of shareholder accounts; and in
compensating broker-dealers, and other third parties, who may regularly sell
Fund shares for providing shareholder services and/or maintaining shareholder
accounts. Service fees in the amount of $310,860 were paid (or accrued) by the
Fund for the fiscal year ended September 30, 1994.
The Plan and the Service Agreement were approved by the Fund's Board of
Directors, including the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operations of the
Plan or any agreement referred to in the Plan (hereafter, the "Plan Directors").
The Plan was also approved by shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will be
effective only if approved, by the Directors including the Plan Directors acting
in person at a meeting called for that purpose, (iii) amounts to be paid by the
Fund under the Plan may not be materially increased without the vote of the
holders of a majority of the outstanding shares of the Fund, and (iv) while the
Plan remains in effect, the selection and nomination of the Directors who are
Plan Directors will be committed to the discretion of the Plan Directors.
Custodial and Auditing Services
The Fund's Custodian is United Missouri Bank, n.a., Kansas City, Missouri.
In general, the Custodian is responsible for holding the Fund's cash and
securities. Price Waterhouse LLP, Kansas City, Missouri, the Fund's independent
accountants, audits the Fund's financial statements.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Determination of Offering Price
The net asset value of each of the shares of the Fund is the value of the
Fund's assets, less what it owes, divided by the total number of shares. For
example, if on a particular day the Fund owned securities worth $100 and had
cash of $15, the total value of the assets would be $115. If it owed $5, the
net asset value would be $110 ($115 minus $5). If it had 11 shares outstanding,
the net asset value of one share would be $10 ($110 divided by 11).
Shares of the Fund are sold at their next determined net asset value plus
the sales charge described in the Prospectus. The price makeup as of September
30, 1994 was as follows:
Net asset value per share (net assets divided
by capital shares outstanding) .....................$5.12
Add: selling commission (4.25% of offering price) ..... .23
-----
Maximum offering price per share (net asset
value per share divided by 95.75%) .................$5.35
=====
The offering price of a share is its net asset value next determined
following acceptance of a purchase order plus the sales charge. The number of
shares you receive for your purchase depends on the next offering price after
Waddell & Reed, Inc. receives and accepts your order at its principal business
office at the address shown on the cover of this SAI. You will be sent a
confirmation after your purchase which will indicate how many shares you have
purchased. Shares are normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the Fund
may determine to discontinue offering Fund shares for purchase.
The net asset value per share and offering price are ordinarily computed
once on each day that the New York Stock Exchange is open for trading as of the
later of the close of the regular session of the New York Stock Exchange
(ordinarily, 4:00 p.m. Eastern time) or the close of the regular session of any
domestic securities or commodities exchange on which an option or future held by
the Fund is traded. The New York Stock Exchange annually announces the days on
which it will not be open for trading. The most recent announcement indicates
that the New York Stock Exchange will not be open on the following days: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. However, it is possible that the New
York Stock Exchange may close on other days. The net asset value will change
every business day, since the value of the assets changes every day and so does
the number of shares.
The Board of Directors has decided to use the prices quoted by a dealer in
bonds which offers a pricing service to value municipal bonds. The Board
believes that such a service does quote their fair value. The Board, however,
may hereafter determine to use another service or use the bid price quoted by
dealers if it should determine that such service or quotes more accurately
reflect the fair value of municipal bonds held by the Fund.
Short-term debt securities are valued at amortized cost, which approximates
market. Securities or other assets which are not valued by either of the
foregoing methods and for which market quotations are not readily available
would be valued by appraisal at their fair value as determined in good faith
under procedures established by and under the general supervision and
responsibility of the Board of Directors.
Options and futures contracts purchased and held by the Fund are valued at
the last sales price thereof on the securities or commodities exchanges on which
they are traded, or, if there are no transactions, at the mean between bid and
asked prices. Ordinarily, the close of the regular session for option trading
on national securities exchanges is 4:10 p.m. Eastern time and the close of the
regular session for commodities exchanges is 4:15 p.m. Eastern time. Futures
contracts will be valued with reference to established futures exchanges. The
value of a futures contract purchased by the Fund will be either the closing
price of that contract or the bid price. Conversely, the value of a futures
contract sold by the Fund will be either the closing price or the asked price.
Minimum Initial and Subsequent Investments
Initial investments must be at least $500 with the exceptions described in
this paragraph. A minimum initial investment of $25 is applicable to purchases
made through payroll deduction for or by employees of the Manager, Waddell &
Reed, Inc. or their affiliates. 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 $100 minimum initial
investment pertains to certain exchanges of shares from another fund in the
United Group. Except with respect to certain exchanges and automatic
withdrawals from a bank account, a shareholder may make subsequent investments
of any amount. See "Exchanges for Shares of Other Funds in the United Group."
Reduced Sales Charges
Account Grouping
Large purchases 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
retirement plan (for which investments in the Fund would not be appropriate) are
made only to illustrate how purchases of Fund shares may be grouped with
purchases made in other funds in the United Group.
1. Purchases by an individual for his or her own account (includes purchases
under the United Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own account
(includes United Funds Revocable Trust Form of spouse);
3. Purchases by that individual or his or her spouse in their joint account;
4. Purchases by that individual or his or her spouse for the account of their
child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in a
Uniform Gift to Minors Act ("UGMA") or Uniform Transfers to Minors Act
account;
6. Purchases by that individual or his or her spouse for his or her IRA, tax
sheltered annuity account ("T.S.A.") or Keogh plan account, provided that
the individual and spouse are the only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or her
spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother has an
account in her own name; A's father has an account in his own name;
the UGMA account may be grouped with A's father's account but may not
be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in the
trust account is eligible for grouping with an IRA account of W, H's
wife;
C. H's will provides for the establishment of a trust for the benefit of
his minor children upon H's death; his bank is named as trustee; upon
H's death, an account is established in the name of the bank, as
trustee; a purchase in the account may be grouped with an account held
by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account may
not be grouped with R's individual account. (If X's spouse, Y, was
successor trustee, this purchase could be grouped with Y's individual
account.)
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase 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 are subject to the reduced sales load applicable to a
purchase of $300,000 provided that Waddell & Reed, Inc. is advised
that the purchases are entitled to grouping.
Rights of Accumulation
If shares are held in any account and an additional purchase is made in
that account or in any account eligible for grouping with that account, the
additional purchase is combined with the net asset value of the existing account
as of the date the new purchase is accepted by Waddell & Reed, Inc. for the
purpose of determining the availability of a reduced sales charge.
Example: H is a current shareholder who invested in the Fund three years ago.
His account has a net asset value of $100,000. His wife, W, now
wishes to invest $15,000 in 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
purchase was subject to a full sales charge and the reduced charge
does not apply retroactively to that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan the shares held under the plan may be combined with the additional purchase
only if the contractual plan has been completed.
Statement of Intention
The benefit of a reduced sales charge for larger purchases is also
available under a Statement of Intention. By signing a Statement of Intention
form, which is available from Waddell & Reed, Inc., the purchaser indicates an
intention to invest, over a 13-month period, a dollar amount which is sufficient
to qualify for a reduced sales charge. The 13-month period begins on the date
the first purchase made under the Statement is accepted by Waddell & Reed, Inc.
Each purchase made from time to time under the Statement 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 made under the terms of
the Statement will be the sales charge in effect on the beginning date of the
13-month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, shares already held in the same account in which the purchase is being made
or in any account eligible for grouping with that account, as described above,
will be included.
Example: H signs a Statement of Intention indicating his intent to invest in
his own name a dollar amount sufficient to entitle him to purchase
shares at the sales charge applicable to a purchase of $300,000. H
has an UGMA for his child and the shares held in the account have a
net asset value as of the date the Statement is accepted by Waddell &
Reed, Inc. of $50,000; H's wife, W, has an account in her own name
invested in another fund in the United Group which charges the same
sales load as the Fund, with a net asset value as of the date of
acceptance of the Statement of $75,000; H needs to invest $175,000
over the 13-month period in order to qualify for the reduced sales
load applicable to a purchase of $300,000.
A copy of the Statement of Intention signed by a purchaser will be returned
to the purchaser after it is accepted by Waddell & Reed, Inc. and will set forth
the dollar amount which must be purchased within the 13-month period in order to
qualify for the reduced sales charge.
The minimum initial investment under a Statement of Intention is 5% of the
dollar amount which must be invested under the Statement. An amount equal to 5%
of the purchase required under the Statement will be held "in escrow." If a
purchaser does not, during the period covered by the Statement, invest the
amount required to qualify for the reduced sales charge under the terms of the
Statement, 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 made under a Statement which is not completed will be collected by
redeeming part of the shares purchased under the Statement and held "in escrow"
unless the purchaser makes payment of this amount to Waddell & Reed, Inc. within
20 days of Waddell & Reed, Inc.'s request for payment.
If the actual amount invested is higher than the amount an investor intends
to invest, and is large enough to qualify for a sales charge lower than that
available under the Statement of Intention, the lower sales charge will apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell &
Reed, Inc. to sell, the shares covered by the Statement.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement will be deducted in computing the aggregate purchases under the
Statement.
Other Funds in the United Group
Reduced sales charges for larger purchases apply to purchases of any of the
funds in the United Group which are subject to a sales charge. A purchase of,
or shares held, in any of the funds in the United Group which are subject to the
same sales charge as the Fund will be treated as an investment in the Fund for
the purpose of determining the applicable sales charge. The following funds in
the United Group are subject to a maximum 5.75% ("full") sales charge as
described in the prospectus of each Fund: United Funds, Inc., United
International Growth Fund, Inc., United Continental Income Fund, Inc., United
Vanguard Fund, Inc., United Retirement Shares, Inc., United High Income Fund,
Inc., United New Concepts Fund, Inc., United Gold & Government Fund, Inc. and
United High Income Fund II, Inc. The following funds in the United Group are
subject to a "reduced" sales charge as described in the prospectus of each fund:
United Municipal Bond Fund, Inc., United Government Securities Fund, Inc. and
United Municipal High Income Fund, Inc. For the purposes of obtaining the lower
sales charge which applies to large purchases, purchases in a fund in the United
Group which is subject to a full sales charge may not be grouped with purchases
in a fund in the United Group which is subject to a reduced sales charge;
conversely, purchases made in a fund with a reduced sales charge may not be
grouped or combined with purchases of a fund which is subject to a full sales
charge.
United Cash Management, Inc. is not subject to a sales charge. Purchases
in that fund are not eligible for grouping with purchases in any other fund.
Net Asset Value Purchases
As stated in the Prospectus, Fund shares may be purchased at net asset
value by the Directors and officers of the Fund, employees of Waddell & Reed,
Inc., employees of their affiliates, sales representatives of Waddell & Reed,
Inc. and the spouse, children, parents, children's spouses and spouse's parents
of each such Director, officer, employee and sales representative. "Child"
includes stepchild; "parent" includes stepparent. Trusts under which the
grantor and the trustee or a co-trustee are each an eligible purchaser are also
eligible for net asset value purchases. "Employees" includes retired employees.
A retired employee is an individual separated from service from Waddell & Reed,
Inc. or affiliated companies with a vested interest in any Employee Benefit Plan
sponsored by Waddell & Reed, Inc. or its affiliated companies. "Sales
representatives" includes retired sales representatives. A "retired sales
representative" is any sales representative who was, at the time of separation
from service from Waddell & Reed, Inc., a Senior Account Representative. A
custodian under the Uniform Gifts (or Transfers) to Minors Act purchasing for
the child or grandchild of any employee or sales representative may purchase at
net asset value whether or not the custodian himself is an eligible purchaser.
Reasons for Differences in Public Offering Price
As described herein and in the Prospectus, there are a number of instances
in which the Fund's shares are sold or issued on a basis other than the maximum
public offering price, that is, the net asset value plus the highest sales
charge. Some of these relate to lower or eliminated sales charges for larger
purchases, whether made at one time or over a period of time as under a
Statement of Intention or right of accumulation. See the table of sales charges
in the Prospectus. The reasons for these quantity discounts are, in general,
that (i) they are traditional and have long been permitted in the industry and
are therefore necessary to meet competition as to sales of shares of other funds
having such discounts; (ii) certain quantity discounts are required by rules of
the National Association of Securities Dealers, Inc. (as are elimination of
sales charges on the reinvestment of dividends and distribution); and (iii) they
are designed to avoid an unduly large dollar amount of sales charge on
substantial purchases in view of reduced selling expenses. Quantity discounts
are made available to certain related persons for reasons of family unity and to
provide a benefit to tax exempt plans and organizations.
The reasons for the other instances in which there are reduced or
eliminated sales charges are as follows. Exchanges at net asset value are
permitted because a sales charge has already been paid on the shares exchanged.
Sales without sales charge are permitted to Directors, officers and certain
others due to reduced or eliminated selling expenses and since such sales may
aid in the development of a sound employee organization, encourage incentive,
responsibility and interest in the United Group and an identification with its
aims and policies. Limited reinvestments of redemptions at no sales charge are
permitted to attempt to protect against mistaken or not fully informed
redemption decisions. 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 Investment Company Act of 1940 from the
otherwise applicable restrictions as to what sales charge must be imposed. In
no case in which there is a reduced or eliminated sales charge are the interests
of existing shareholders adversely affected since, in each case, the Fund
receives the net asset value per share of all shares sold or issued.
Redemptions
The Prospectus gives information as to redemption procedures; the emergency
or other extraordinary conditions there indicated under which payment may be
delayed beyond seven days are certain emergency conditions determined by the
Securities and Exchange Commission, when the New York Stock Exchange is closed
other than for weekends or holidays, or when trading on the Exchange is
restricted. The extraordinary conditions mentioned in the Prospectus under
which redemptions may be made in portfolio securities are that the Fund's Board
of Directors can decide that conditions exist making cash payments undesirable.
If they should, redemption payments could be made in securities. They would be
valued at the value used in figuring net asset value. There would be brokerage
costs to the redeeming shareholder in selling such securities. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, pursuant to which it is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of its net asset value during any 90-day period for any
one shareholder.
Flexible Withdrawal Service
If you qualify, you may arrange to receive regular monthly, quarterly,
semiannual or annual payments; this can be done by redeeming shares on a regular
basis. The shares on which this can be done are not only Fund shares but also
the shares of any of the funds in the United Group. It would be a disadvantage
to an investor to make additional purchases of shares while a withdrawal program
is in effect as this would result in duplication of sales charges.
To qualify for these arrangements, you must have invested at least $10,000
in shares which you still own of any of the funds in the United Group; or, you
must own shares having a value of at least $10,000. The value for this purpose
is not the net asset value but the value at the offering price, i.e., the net
asset value plus the sales charge.
These arrangements are called a Flexible Withdrawal Service (the
"Service"). To start this Service, you must fill out a form (available from
Waddell & Reed, Inc.), advising Waddell & Reed, Inc. of the manner in which you
want your shares redeemed to make the payments. You have three choices:
First. To get a monthly, quarterly, semiannual or annual payment of $50 or
more;
Second. To get 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 fix
the percentage; or
Third. To get a monthly or quarterly payment, which will change each month
or quarter, by redeeming a fixed number of shares (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.
The Fund, not Waddell & Reed, Inc., pays the costs of this Service. Having
the Service costs you nothing extra individually.
If you have a share certificate for the shares you want to make available
for this Service, you must enclose the certificate with the form initiating the
Service.
The dividends and distributions on shares you have made available for this
Service are reinvested in additional shares. All payments are made by redeeming
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 more payments. Thus, the payments are not an annuity or an income
or return on your investment.
You may, at any time change the manner in which you have chosen to have
shares redeemed to any of the other choices originally available to you. For
example, if you started out with a $50 monthly payment, you could change to a
$200 quarterly payment. You can at any time redeem part or all of the shares in
your account; if you redeem all of the shares, the Service is terminated. The
Fund can also terminate the Service by notifying you in writing.
After the end of each calendar year, information on shares redeemed will be
sent to you to assist you in completing your Federal income tax return.
Exchanges for Shares of Other Funds in the United Group
You may decide you would rather own shares of one or more of the other
funds in the United Group rather than Fund shares. An exchange of Fund shares
may be made only if you have held the shares for at least six months unless the
exchange is for shares of United Government Securities Fund, Inc. or United
Municipal Bond Fund, Inc. or unless the Fund shares were acquired by
reinvestment of a dividend or distribution, in which cases there is no holding
period. You may exchange for shares of another fund without payment of an
additional sales charge. You should ask for and read the prospectus for the
fund into which you are thinking of making an exchange before doing so.
Fund shares may be received in exchange for shares of any of the other
funds in the United Group, except for shares of United Cash Management, Inc.
acquired by direct purchase or received in payment of dividends on those shares.
Subject to the above rules regarding sales charges, you may have a specific
dollar amount of shares of United Cash Management, Inc. automatically exchanged
each month into the Fund or any other fund in the United Group. The shares of
United Cash Management, Inc. which you designate for automatic exchange must be
worth at least $100 or you must own shares of the fund in the United Group into
which you want to exchange. The minimum value of shares which you may designate
for automatic exchange monthly is $100, which may be allocated among different
funds in the United Group so long as each fund receives a value of at least $25.
Minimum initial investment and minimum balance requirements apply to such
automatic exchange service.
When you exchange shares, the total shares you receive will have the same
aggregate net asset value as the total shares you exchange. The relative values
are those next figured after the fund receives your written exchange request in
good order.
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any time
and any such exchange may not be accepted.
Reinvestment Privilege
The Prospectus discusses the reinvestment privilege under which, if you
redeem and then decide it was not a good idea, you may reinvest. If Fund shares
are then being offered, you can put all or part of your redemption payment back
into Fund shares without any sales charge at the net asset value next determined
after you have returned the amount. Your written request to do this must be
received within 30 days after your redemption request was received. You can do
this only once as to Fund shares.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to compel the redemption of shares held under any
account or any plan if the aggregate net asset value of such shares (taken at
cost or value as the Board of Directors may determine) is less than $500. The
Board has no intent to compel redemptions in the foreseeable future. If it
should elect to compel redemptions, shareholders who are affected will receive
prior written notice and will be permitted 60 days to bring their accounts up to
the minimum before this redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board 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.
Each of the Fund's Directors is also a Director of each of the other funds
in the United Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc.,
Torchmark Government Securities Fund, Inc. and Torchmark Insured Tax-Free Fund,
Inc. and each of its officers is also an officer of one or more of these funds.
The principal occupation of each Director and officer during at least the past
five years is given below. Each of the persons listed through and including Mr.
Wright is a member of the Fund's Board of Directors. The other persons are
officers but not Board members.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund; Chairman of the Board of
Directors of Waddell & Reed Financial Services, Inc., United Investors
Management Company and United Investors Life Insurance Company; Chairman of the
Board of Directors and Chief Executive Officer of Torchmark Corporation;
Chairman of the Board of Directors of Vesta Insurance Group, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed, Inc.
KEITH A. TUCKER*
President of the Fund; President, Chief Executive Officer and Director of
Waddell & Reed Financial Services, Inc.; Chairman of the Board of Directors of
the Manager, Waddell & Reed, Inc., Waddell & Reed Services Company, Waddell &
Reed Asset Management Company and Torchmark Distributors, Inc., an affiliate of
Waddell & Reed, Inc.; Vice Chairman of the Board of Directors, Chief Executive
Officer and President of United Investors Management Company; Vice Chairman of
the Board of Directors of Torchmark Corporation; Director of Southwestern Life
Corporation; formerly, partner in Trivest, a private investment concern;
formerly, Director of Atlantis Group, Inc., a diversified company.
HENRY L. BELLMON
Route 1
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma; prior to his current service as Director of the funds in the United
Group, TMK/United Funds, Inc., Waddell & Reed Funds, Inc., Torchmark Government
Securities Fund, Inc. and Torchmark Insured Tax-Free Fund, Inc., he served in
such capacity for the funds in the United Group and TMK/United Funds, Inc.
DODDS I. BUCHANAN
University of Colorado
Campus Box 419
Boulder, Colorado 80309
Advisory Director, The Hand Companies; President, Buchanan Ranch Corp.;
formerly, Senior Vice President and Director of Marketing Services, The Meyer
Group of Management Consultants; formerly, Chairman, Department of Marketing,
Transportation and Tourism, University of Colorado; formerly, Professor of
Marketing, College of Business, University of Colorado.
JAY B. DILLINGHAM
926 Livestock Exchange Building
Kansas City, Missouri 64102
Formerly, President and Director of Kansas City Stock Yards Company;
formerly, Partner in Dillingham Farms, a farming operation.
JOHN F. HAYES*
335 N. Washington
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Director of Central Financing
Corporation; formerly, President of Gilliland & Hayes, P.A., a law firm.
GLENDON E. JOHNSON
7300 Corporate Center Drive
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Financial Corporation
and related subsidiaries.
WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of the
Fund, each Fund in the United Group, TMK/United Funds, Inc., Waddell & Reed
Funds, Inc., Torchmark Government Securities Fund, Inc. and Torchmark Insured
Tax-Free Fund, Inc. (Mr. Morgan retired as Chairman of the Board of Directors
and President of these Funds on April 30, 1993); formerly, President, Director
and Chief Executive Officer of the Manager and Waddell & Reed, Inc.; formerly,
Chairman of the Board of Directors of Waddell & Reed Services Company; formerly,
Director of Waddell & Reed Asset Management Company, United Investors Management
Company and United Investors Life Insurance Company, affiliates of Waddell &
Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management and
investment; formerly, Director of The Vendo Company, a manufacturer and
distributor of vending machines.
FREDERICK VOGEL, III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Formerly, President and Director of Univest Corporation, a real estate
investment company; formerly, Director of Classified Financial Corp., an
insurance company.
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
LESLIE S. WRIGHT
Samford University
800 Lakeshore Drive
Birmingham, Alabama 35209
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association; formerly, President of Samford University.
Robert L. Hechler
Vice President and Principal Financial Officer of the Fund; Vice President,
Chief Operations Officer, Director and Treasurer of Waddell & Reed Financial
Services, Inc.; Executive Vice President, Principal Financial Officer, Director
and Treasurer of the Manager; President, Chief Executive Officer, Principal
Financial Officer, Director and Treasurer of Waddell & Reed, Inc.; Director and
Treasurer of Waddell & Reed Asset Management Company; President, Director and
Treasurer of Waddell & Reed Services Company; Vice President, Treasurer and
Director of Torchmark Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund; 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 the Manager and Waddell & Reed Asset Management Company; Senior Vice
President and Chief Investment Officer of United Investors Management Company.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund;
Vice President of Waddell & Reed Services Company.
Sharon K. Pappas
Vice President, Secretary and General Counsel of the Fund; Vice President,
Secretary and General Counsel of Waddell & Reed Financial Services, Inc.; Senior
Vice President, Secretary and General Counsel of the Manager and Waddell & Reed,
Inc.; Director, Senior Vice President, Secretary and General Counsel of Waddell
& Reed Services Company; Director, Secretary and General Counsel of Waddell &
Reed Asset Management Company; Vice President, Secretary and General Counsel of
Torchmark Distributors, Inc.; formerly, Assistant General Counsel of the
Manager, Waddell & Reed Financial Services, Inc., Waddell & Reed, Inc., Waddell
& Reed Asset Management Company and Waddell & Reed Services Company.
John M. Holliday
Vice President of the Fund; Senior Vice President of the Manager and
Waddell & Reed Asset Management Company; formerly, Senior Vice President of
Waddell & Reed, Inc.
Carl E. Sturgeon
Vice President of the Fund; Vice President of the Manager; formerly, Vice
President of Waddell & Reed, Inc.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
As of the date of this SAI, four of the Fund's Directors may be deemed to
be "interested persons" as defined in the Investment Company Act of 1940 of its
underwriter, Waddell & Reed, Inc., or the Manager. The Directors who may be
deemed to be "interested persons" are indicated as such by an asterisk.
The Board has created an honorary position of Director Emeritus, which
position a director may elect after resignation from the Board provided the
director has attained the age of 75 and has served as a director of the funds in
the United Group for a total of at least five years. A Director Emeritus
receives fees in recognition of his past services whether or not services are
rendered in his capacity as Director Emeritus, but has no authority or
responsibility with respect to management of the Fund. Currently, no person
serves as Director Emeritus.
The funds in the United Group, TMK/United Funds, Inc. and Waddell & Reed
Funds, Inc. pay to each Director a total of $40,000 per year, plus $500 for each
meeting of the Board of Directors attended and $500 for each committee meeting
attended which is not in conjunction with a Board of Directors' meeting, other
than Directors who are affiliates of Waddell & Reed, Inc. The fees to the
Directors who receive them are divided among the funds in the United Group,
TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. based on their relative
size. During the Fund's fiscal year ended September 30, 1994, its share was
$12,320. The officers are paid by the Manager or an affiliate of the Manager.
Shareholdings
As of November 30, 1994, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. As of such date
no person owned of record or was known by the Fund to own beneficially 5% or
more of the Fund's outstanding shares.
PAYMENTS TO SHAREHOLDERS
General
There are two sources for the payments the Fund makes to you as a
shareholder, other than payments when you redeem your shares. The first source
is the Fund's net investment income, which is derived from the interest and
earned discount on the securities it holds less its expenses. The second source
is realized gains, which are derived from the proceeds received from the sale of
securities at a price higher than the Fund's tax basis (usually cost) in such
securities; 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. Payments, if any, from long-term capital gains are called
distributions.
The Fund pays distributions only if it has net realized 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 or not securities are sold
and at what price. If the Fund has net capital gains, it will ordinarily pay
distributions once each year, in the latter part of the fourth calendar quarter.
Even if it has capital gains for a year, the Fund does not pay out the gains if
it has applicable prior year losses to offset the gains.
Choices You Have on Your Dividends and Distributions
In your application form, you can give instructions that (i) you want cash
for your dividends and distributions, (ii) you want your dividends and
distributions reinvested in Fund shares or (iii) you want cash for your
dividends and want your distributions reinvested in Fund shares. You can change
your instructions at any time. If you give no instruction, your dividends and
distributions will be reinvested in Fund shares. All reinvestments are at net
asset value without any sales charge. The net asset value used for this purpose
is that computed as of the record date for the dividend or distribution,
although this could be changed by the Directors.
Even if you get dividends and distributions in cash, you can thereafter
reinvest them (or distributions only) in Fund shares at net asset value (i.e.,
no sales charge) next determined after receipt by Waddell & Reed, Inc. of the
amount clearly identified as a reinvestment. The reinvestment must be within 45
days after the payment.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"),
the Fund must distribute to its shareholders for each taxable year at least 90%
of the sum of its investment company taxable income (consisting generally of net
investment income, net short-term capital gains and net gains from certain
foreign currency transactions) plus its net interest income excludable from
gross income under section 103(a) of the Code, and must meet several additional
requirements. These requirements include the following: (1) the Fund must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures contracts or forward contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) the Fund must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following, that were held for less than three months -- (i) options,
futures contracts or forward contracts or (ii) foreign currencies (or options,
futures contracts or forward contracts thereon) that are not directly related to
the Fund's principal business of investing in securities (or in options and
futures with respect to securities) ("Short-Short Limitation"); (3) at the close
of each quarter of the Fund's taxable year, at least 50% of the value of its
total assets must be represented by cash and cash items, U.S. Government
Securities, securities of other RICs and other securities that are limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets and that does not represent more than 10% of the
outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. Government Securities or
the securities of other RICs) of any one issuer.
Dividends paid by the Fund will qualify as "exempt-interest dividends," and
thus will be excludable from your gross income, if the Fund satisfies the
additional requirement that, at the close of each quarter of its taxable year,
at least 50% of the value of its total assets consists of securities the
interest on which is excludable from gross income under section 103(a); the Fund
intends to continue to satisfy this requirement. The aggregate dividends
excludable from all shareholders' gross income may not exceed the Fund's net
tax-exempt income. The treatment of dividends from the Fund under local and
state income tax laws may differ from the treatment thereof under the Code.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from the Fund still are
tax-exempt to the extent described above; they are only included in the
calculation of whether a recipient's income exceeds the established amounts.
If the Fund invests in any instruments that generate taxable income, under
the circumstances described in the Prospectus, distributions of the interest
earned thereon will be taxable to you as ordinary income to the extent of the
Fund's earnings and profits. Moreover, if the Fund realizes capital gains as a
result of market transactions, any distribution of that gain will be taxable to
you. There also may be collateral federal income tax consequences regarding the
receipt of tax-exempt dividends by shareholders such as S corporations,
financial institutions and property and casualty insurance companies. Any
shareholder that falls into any of these categories should consult its tax
adviser concerning its investment in Fund shares.
Dividends and distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months are deemed to have been paid by the Fund and received by you on
December 31 of that year even if they are paid by the Fund during the following
January. Accordingly, those dividends and distributions will be taxed to
shareholders for the year in which that December 31 falls.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares and any balance of the loss that is not disallowed will
be treated as long-term, instead of short-term, capital loss to the extent of
any distributions received on those shares. Investors also should be aware that
if shares are purchased shortly before the record date for a taxable dividend or
distribution, the purchaser will pay tax thereon, even though he is receiving
some portion of the purchase price back.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts. It is the
Fund's policy to make sufficient distributions each year to avoid imposition of
the Excise Tax. The Code permits the Fund to defer into the next calendar year
net capital losses incurred between each November 1 and the end of the current
calendar year.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses the
Fund realizes in connection therewith. Income from transactions in options and
futures derived by the Fund with respect to its business of investing in
securities will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures will be subject to
the Short-Short Limitation if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all of the Fund's hedging transactions. To the
extent this treatment is not available, the Fund may be forced to defer the
closing out of certain options and futures beyond the time when it otherwise
would be advantageous to do so, in order for the Fund to continue to qualify as
a RIC.
Any income the Fund earns from writing options is taxed as short-term
capital gains. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it receives for the option it wrote and the premium it pays for the
option it buys. If an option written by the Fund expires without being
exercised, the premium it receives also will be a short-term gain. If such an
option is exercised and the Fund thus sells the securities subject to the
option, the premium the Fund receives will be added to the exercise price to
determine the gain or loss on the sale. The Fund will not write so many options
that it could fail to continue to qualify as a RIC.
Certain options and futures contracts in which the Fund may invest may be
"section 1256 contracts." Section 1256 contracts held by the Fund at the end of
each taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which the Fund has made an election not to have the
following rules apply, are "marked-to-market" (that is, treated as sold for
their fair market value) for Federal income tax purposes, with the result that
unrealized gains or losses are treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, are
treated as long-term capital gains or losses, and the balance is treated as
short-term capital gains or losses. Section 1256 contracts also may be marked-
to-market for purposes of the Excise Tax and for other purposes.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Fund may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property.
Section 1092 generally provides that any loss from the disposition of a position
in a straddle may be deducted only to the extent the loss exceeds the unrealized
gain on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by the Manager pursuant to the Management
Agreement is to arrange the purchase and sale of securities for the portfolio of
the Fund. Purchases are made directly from issuers or from underwriters,
dealers or banks. Purchases from underwriters include a commission or
concession paid by the issuer to the underwriter. Purchases from dealers will
include the spread between the bid and asked prices. Brokerage commissions are
paid primarily for effecting transactions in securities traded on an exchange
and otherwise only if it appears likely that a better price or execution can be
obtained. The Fund has not effected transactions through brokers and does not
anticipate doing so. The individual who manages the Fund may manage other
advisory accounts with similar investment objectives. It can be anticipated
that the manager will frequently place concurrent orders for all or most
accounts for which the manager has responsibility. Transactions effected
pursuant to such combined orders are averaged as to price and allocated in
accordance with the purchase or sale orders actually placed for each fund or
advisory account.
To effect the portfolio transactions of the Fund, the Manager is authorized
to engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to achieve "best
execution" (prompt and reliable execution at the best price obtainable) for
reasonable and competitive commissions. The Manager need not seek competitive
commission bidding but is expected to minimize the commissions paid to the
extent consistent with the interests and policies of the Fund. Subject to
review by the Board of Directors, such policies include the selection of brokers
which provide execution and/or research services and other services, including
pricing or quotation services directly or through others ("brokerage services")
considered by the Manager to be useful or desirable for its investment
management of the Fund and/or the other funds and accounts over which the
Manager or its affiliates have investment discretion.
Brokerage services are, in general, defined by reference to Section 28(e)
of the Securities Exchange Act of 1934 as including (i) advice, either directly
or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities and the
availability of securities and purchasers or sellers; (ii) furnishing analyses
and reports; or (iii) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). "Investment
discretion" is, in general, defined as having authorization to determine what
securities shall be purchased or sold for an account, or making those decisions
even though someone else has responsibility.
The commissions paid to brokers that provide such brokerage services may be
higher than another qualified broker would charge for effecting comparable
transactions if a good faith determination is made by the Manager that the
commission is reasonable in relation to the brokerage services provided.
Subject to the foregoing considerations, the Manager may also consider the
willingness of particular brokers and dealers to sell shares of the Fund and
other funds managed by the Manager and its affiliates as a factor in its
selection. No allocation of brokerage or principal business is made to provide
any other benefits to the Manager or its affiliates.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of the Manager or its affiliates
and investment research received for the commissions of those other accounts may
be useful both to the Fund and one or more of such other accounts. To the
extent that electronic or other products provided by such brokers to assist the
Manager 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 the Manager.
Such investment research (which may be supplied by a third party at the
instance of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of the
Manager; serves to make available additional views for consideration and
comparisons; and enables the Manager to obtain market information on the price
of securities held in the Fund's portfolio or being considered for purchase.
In placing transactions for the Fund's portfolio, the Manager may consider
sales of shares of the Fund and other funds managed by the Manager and its
affiliates as a factor in the selection of brokers to execute portfolio
transactions. The Manager intends to allocate brokerage on the basis of this
factor only if the sale is $2 million or more and there is no sales charge.
This results in the consideration only of sales which by their nature would not
ordinarily be made by Waddell & Reed, Inc.'s direct sales force and is done in
order to prevent the direct sales force from being disadvantaged by the fact
that it cannot participate in Fund brokerage.
OTHER INFORMATION
The Shares of the Fund
The Fund presently has only one kind (class) of shares. Each share has the
same rights to dividends, to vote and to receive assets if the Fund liquidates
(winds up). Each fractional share has the same rights, in proportion, as a full
share. Shares are fully paid and nonassessable when bought.
