UNITED MUNICIPAL HIGH INCOME FUND, INC.
6300 Lamar Avenue
P. O. Box 29217
Shawnee Mission, Kansas 66201-9217
(913) 236-2000
January 30, 1996
Revised as of February 15, 1996
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") is not a prospectus.
Investors should read this SAI in conjunction with a prospectus ("Prospectus")
for the Class A shares or the Class Y shares, as applicable, of United Municipal
High Income Fund, Inc. (the "Fund") dated January 30, 1996, which may be
obtained from the Fund or its underwriter, Waddell & Reed, Inc., at the address
or telephone number shown above.
TABLE OF CONTENTS
Performance Information ............................ 2
Goals and Investment Policies ...................... 4
Investment Management and Other Services ........... 26
Purchase, Redemption and Pricing of Shares ......... 31
Directors and Officers ............................. 41
Payments to Shareholders ........................... 46
Taxes .............................................. 47
Portfolio Transactions and Brokerage ............... 51
Other Information .................................. 53
<PAGE>
PERFORMANCE INFORMATION
Waddell & Reed, Inc., the Fund's underwriter, or the Fund may from time to
time publish the Fund's total return information, yield information and/or
performance rankings in advertisements and sales materials.
Total Return
An average annual total return quotation is computed by finding the average
annual compounded rates of return over the one-, five-, and ten-year periods
that would equate the initial amount invested to the ending redeemable value.
Standardized total return information is calculated by assuming an initial
$1,000 investment and, for Class A shares from which the maximum sales load of
4.25% is deducted. All dividends and distributions are assumed to be reinvested
in shares of the applicable class at net asset value for the class as of the day
the dividend or distribution is paid. No sales load is charged on reinvested
dividends or distributions on Class A shares. The formula used to calculate the
total return for a particular class of the Fund is:
n
P(1 + T) = ERV
Where : P = $1,000 initial payment
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of the $1,000 investment for the
periods shown.
Non-standardized performance information may also be presented. For
example, the Fund may also compute total return for its Class A shares without
deduction of the sales load in which case the same formula noted above will be
used but the entire amount of the $1,000 initial payment will be assumed to have
been invested. If the sales charge applicable to Class A shares were reflected,
it would reduce the performance quoted for that class.
The average annual total return quotations for Class A shares as of
September 30, 1995, which is the most recent balance sheet included in this SAI,
for the periods shown were as follows:
With Without
Sales LoadSales Load
Deducted Deducted
One-year period from October 1, 1994 to
September 30, 1995: 5.93% 10.63%
Five-year period from October 1, 1990 to
September 30, 1995: 8.51% 9.46%
Period from January 21, 1986* to
September 30, 1995: 8.32% 8.81%
*initial public offering date
Prior to January 30, 1996, the Fund offered only one class of shares to the
public. Shares outstanding on that date were designated as Class A shares.
Since that date, Class Y shares of the Fund have been available to certain
institutional investors.
The Fund may also quote unaveraged or cumulative total return for a class
which reflects the change in value of an investment in that class over a stated
period of time. Cumulative total returns will be calculated according to the
formula indicated above but without averaging the rate for the number of years
in the period.
Yield
A yield quoted for a class of the Fund is computed by dividing the net
investment income per share of that class earned during the period for which the
yield is shown by the maximum offering price per share of that class on the last
day of that period according to the following formula:
6
Yield = 2((((a - b)/cd)+1) -1)
Where with respect to a particular class of the Fund:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares of the class outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last day
of the period.
The yield for Class A shares of the Fund computed according to the formula
for the 30-day period ended on September 30, 1995, the date of the most recent
balance sheet included in this SAI, is 6.25%.
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, 1995, the date of the most recent balance sheet
included in this SAI, is 7.34%, 8.66%, 9.03%, 9.73% and 10.31% for marginal tax
brackets of 15%, 28%, 31%, 36% and 39.6%, respectively.
Change in yields primarily reflect different interest rates received by the
Fund as its portfolio securities change. Yield is also affected by portfolio
quality, portfolio maturity, type of securities held and operating expenses of
the applicable class.
Performance Rankings
Waddell & Reed, Inc. or the Fund also may from time to time publish in
advertisements or sales material performance rankings as published by recognized
independent mutual fund statistical services such as Lipper Analytical Services,
Inc., or by publications of general interest such as Forbes, Money, The Wall
Street Journal, Business Week, Barron's, Fortune or Morningstar Mutual Fund
Values. Each class of the Fund may also compare its performance to that of
other selected mutual funds or selected recognized market indicators such as the
Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average.
Performance information may be quoted numerically or presented in a table, graph
or other illustration.
All performance information that the Fund advertises or includes in sales
material is historical in nature and is not intended to represent or guarantee
future results. The value of the Fund's shares when redeemed may be more or
less than their original cost.
GOALS AND INVESTMENT POLICIES
The goals and investment policies of the Fund are described in the
Prospectus, which refers to the following investment methods and practices.
Specific Securities and Investment Practices
Municipal Bonds
Municipal bonds are issued by a wide range of state and local governments,
agencies and authorities for various public purposes. The two main kinds of
municipal bonds are "general obligation" bonds and "revenue" bonds. In "general
obligation" bonds, the issuer has pledged its full faith, credit and taxing
power for the payment of principal and interest. "Revenue" bonds are payable
only from specific sources; these may include revenues from a particular
facility or class of facilities or special tax or other revenue source.
A special class of municipal bonds issued by state and local government
authorities and agencies are "industrial development bonds." The Fund may
purchase industrial development bonds only if the interest on them is free from
Federal income taxation, although such interest is an item of tax preference for
purposes of the alternative minimum tax. In general, 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 that
are industrial development bonds. As of September 30, 1995, 12.54% of the
Fund's net assets were invested in industrial development bonds.
Municipal leases and participation interests therein are another type of
municipal bond. The factors to be considered in determining whether or not any
rated municipal lease obligations are liquid include (i) the frequency of trades
and quotes for the obligations; (ii) the number of dealers willing to purchase
or sell the security and the number of other potential buyers; (iii) the
willingness of dealers to undertake to make a market in the securities; (iv) the
nature of marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer; (v) the
likelihood that the marketability of the obligation will be maintained through
the time the instrument is held; (vi) the credit quality of the issuer and the
lessee; and (vii) the essentiality to the lessee of the property covered by the
lease. Unrated municipal lease obligations are considered illiquid. These
obligations, which may take the form of a lease, an installment purchase, or a
conditional sale contract, are issued by state and local governments and
authorities to acquire land and a variety of equipment and facilities. The Fund
has not held and does not intend to hold such obligations directly as a lessor
of the property, but may from time to time purchase a participation interest in
a municipal obligation from a bank or other third party. A participation
interest gives the Fund a specified, undivided interest in the obligation in
proportion to its purchased interest in the total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt, including
voter referenda, interest rate limits or public sale requirements. Leases,
installment purchases or conditional sale contracts have evolved as a means for
governmental issuers to acquire property and equipment without being required to
meet these constitutional and statutory requirements. Many leases and contracts
include "non-appropriation clauses" providing that the governmental issuer has
no obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the legislative body on a yearly or other
periodic basis. Non-appropriation clauses free the issuer from debt issuance
limitations. In determining the liquidity of a municipal lease obligation,
Waddell & Reed Investment Management Company ("WRIMCO"), the Fund's investment
manager, will differentiate between direct interests in municipal leases and
municipal lease-backed securities, the latter of which may take the form of a
lease-backed revenue bond, a tax-exempt asset-backed security or any other
investment structure using a municipal lease-purchased agreement as its base.
While the former may present liquidity issues, the latter are based on a well
established method of securing payment of a municipal lease obligation.
WRIMCO and the Fund rely on the opinion of bond counsel for the issuer in
determining whether obligations are municipal bonds. If a court holds that an
obligation held by the Fund is not a municipal bond (i.e., that the interest
thereon is taxable), the Fund will sell the obligation as soon as possible, but
it might incur a loss upon such sale.
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 that 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.
Certain problems facing the generating industry in general may or may not
affect its ability to meet obligations on bonds. These problems include the
effects of (i) inflation on financing large construction programs, (ii) cost
increases and delays arising out of environmental considerations, (iii)
limitations of available capital on the ability to issue additional debt, (iv)
the effect of shortages and high prices of fuel on operations and profits, and
(v) the effect of energy conservation on sales. Problems of these types
generally affect the values of and the dividends paid on utility common stocks
rather than the ability to pay bond obligations.
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.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase municipal bonds on a when-issued or delayed-delivery
basis or sell them on a delayed-delivery basis. The bonds so purchased or sold
by the Fund are subject to market fluctuation; their value may be less or more
when delivered than the purchase price paid or received. For example, delivery
to the Fund and payment by the Fund in the case of a purchase by it, or delivery
by the Fund and payment to it in the case of a sale by the Fund, may take place
a month or more after the date of the transaction. The purchase or sale price
are fixed on the transaction date. The Fund will enter into when-issued or
delayed-delivery transactions in order to secure what is considered to be an
advantageous price and yield at the time of entering into the transaction. No
interest accrues to the Fund until delivery and payment is completed. When the
Fund makes a commitment to purchase municipal bonds on a when-issued or delayed-
delivery basis, it will record the transaction and thereafter reflect the value
of the bonds in determining its net asset value per share. The municipal bonds
so sold by the Fund on a delayed-delivery basis are also subject to market
fluctuation; their value when the Fund delivers them may be more than the
purchase price the Fund receives. When the Fund makes a commitment to sell
municipal bonds on a delayed basis, it will record the transaction and
thereafter value the bonds at the sales price in determining the Fund's net
asset value per share.
Ordinarily the Fund purchases municipal bonds on a when-issued or delayed-
delivery basis with the intention of actually taking delivery of the bonds.
However, before the bonds are delivered to the Fund and before it has paid for
them (the "settlement date"), the Fund could sell the bonds if WRIMCO decided it
was advisable to do so for investment reasons. The Fund will hold aside or
segregate cash or other securities, other than those purchased on a when-issued
or delayed-delivery basis, at least equal to the amount it will have to pay on
the settlement date; these other securities may, however, be sold at or before
the settlement date to pay the purchase price of the when-issued or delayed-
delivery bonds.
U.S. Government Securities
U.S. Government Securities include Treasury Bills (which mature within one
year of the date they are issued), Treasury Notes (which have maturities of one
to ten years) and Treasury Bonds (which generally have maturities of more than
10 years). All such Treasury securities are backed by the full faith and credit
of the United States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Federal National Mortgage Association, Farmers Home Administration, Export-
Import Bank of the United States, Small Business Administration, Government
National Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Farm Credit Banks, Maritime Administration, the Tennessee Valley Authority, the
Resolution Funding Corporation, and the Student Loan Marketing Association.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by the Federal National Mortgage
Association, are supported only by the credit of the instrumentality and not by
the Treasury. If the securities are not backed by the full faith and credit of
the United States, the owner of the securities must look principally to the
agency issuing the obligation for repayment and may not be able to assert a
claim against the United States in the event that the agency or instrumentality
does not meet its commitment.
U.S. Government Securities may include mortgage-backed securities of the
Government National Mortgage Association ("Ginnie Mae"), the Federal Home Loan
Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage
Association ("Fannie Mae"). These mortgage-backed securities include "pass-
through" securities and "participation certificates." Another type of mortgage-
backed security is a collateralized mortgage obligation ("CMO"). See "Mortgage-
Backed Securities." Timely payment of principal and interest on Ginnie Mae
pass-throughs is guaranteed by the full faith and credit of the United States.
Freddie Mac and Fannie Mae are both instrumentalities of the U.S. Government,
but their obligations are not backed by the full faith and credit of the United
States. It is possible that the availability and the marketability (i.e.,
liquidity) of the securities discussed in this section could be adversely
affected by actions of the U.S. Government to tighten the availability of its
credit.
Zero Coupon Bonds
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury security and selling them as
individual securities. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) can also be separated in this
fashion. Original issue zeros are zero coupon securities originally issued by
the U.S. Government, a government agency, or a corporation in zero coupon form.
Mortgage-Backed Securities
A mortgage-backed security may be an obligation of the issuer backed by a
mortgage or pool of mortgages or a direct interest in an underlying pool of
mortgages. Mortgage-backed securities are based on different types of mortgages
including those on commercial real estate or residential properties. Some
mortgage-backed securities, such as collateralized mortgage obligations, make
payments of both principal and interest at a variety of intervals; others make
semiannual interest payments at a predetermined rate and repay principal at
maturity (like a typical bond). Pass-through securities and participation
certificates represent pools of mortgages that are assembled, with interests
sold in the pool; the assembly is made by an "issuer," such as a mortgage
banker, commercial bank or savings and loan association, which assembles the
mortgages in the pool and passes through payments of principal and interest for
a fee payable to it. Payments of principal and interest by individual
mortgagors are passed through to the holders of the interest in the pool.
Monthly or other regular payments on pass-through securities and participation
certificates include payments of principal (including prepayments on mortgages
in the pool) rather than only interest payments.
The Fund may purchase mortgage-backed securities issued by both government
and non-government entities, such as banks, mortgage lenders, or other financial
institutions, as long as WRIMCO determines that it is consistent with the Fund's
goal and investment policies. The Fund does not intend to invest more than one-
third of its total assets in mortgage-backed securities. Other types of
mortgage-backed securities will likely be developed in the future, and the Fund
may invest in them if WRIMCO determines they are consistent with the Fund's goal
and investment policies.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are created when a U.S. Government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security ("PO") receives the
principal payments made by the underlying mortgage-backed security, while the
holder of the "interest-only" security ("IO") receives interest payments from
the same underlying security.
The prices of stripped mortgage-backed securities may be particularly
affected by changes in interest rates. As interest rates fall, prepayment rates
tend to increase, which tends to reduce prices of IOs and increase prices of
POs. Rising interest rates can have the opposite effect. The Fund intends to
invest less than five percent of its total assets in stripped mortgage-backed
securities.
Variable or Floating Rate Instruments
Variable or floating rate instruments (including notes purchased directly
from issuers) bear variable or floating interest rates and carry rights that
permit holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries. Floating rate
securities have interest rates that change whenever there is a change in a
designated base rate while variable rate instruments provide for a specified
periodic adjustment in the interest rate. These formulas are designed to result
in a market value for the instrument that approximates its par value.
Indexed Securities
The Fund may purchase securities whose prices are indexed to the prices of
other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators, as long as WRIMCO determines that it
is consistent with the Fund's goal and investment policies. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their maturity
value may increase when the specified currency value increases, resulting in a
security that performs similarly to a foreign-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each other.
Recent issuers of indexed securities have included banks, corporations, and
certain U.S. Government agencies. Certain indexed securities that are not
traded on an established market may be deemed illiquid. The Fund does not
intend to invest more than 25% of its total assets in indexed securities.
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 are subject to legal or contractual restrictions on
resale because they are not registered under the Securities Act of 1933, as
amended (the "1933 Act"). Restricted securities generally can be sold in
privately negotiated transactions, pursuant to an exemption from registration
under the 1933 Act or in a registered public offering. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to seek
registration and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to seek registration of the security.
There are risks associated with investment in restricted securities in that
there can be no assurance of a ready market for resale. Also, the contractual
restrictions on resale might prevent the Fund from reselling the securities at a
time when such sale would be desirable. Restricted securities in which the Fund
seeks to invest need not be listed or admitted to trading on a foreign or
domestic exchange and may be less liquid than listed securities. See "Illiquid
Investments" below.
Illiquid Investments
The Fund may not invest more than 10% of its net assets in illiquid
investments. Investments currently considered to be illiquid include: (i)
repurchase agreements not terminable within seven days; (ii) 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 not determined to be liquid pursuant to guidelines established by the
Fund's Board of Directors. However, this 10% limit does not include any
obligations payable at principal amount plus interest on demand or within seven
days after demand.
Repurchase Agreements
The Fund may purchase securities subject to repurchase agreements subject
to its limitation on investment in illiquid investments. See "Illiquid
Investments." A repurchase agreement is an instrument under which the Fund
purchases a security and the seller (normally a commercial bank or broker-
dealer) agrees, at the time of purchase, that it will repurchase the security at
a specified time and price. The amount by which the resale price is greater
than the purchase price reflects an agreed-upon market interest rate effective
for the period of the agreement. The return on the securities subject to the
repurchase agreement may be more or less than the return on the repurchase
agreement.
The majority of the repurchase agreements in which the Fund would engage
are overnight transactions, and the delivery pursuant to the resale typically
will occur within one to five days of the purchase. The primary risk is that
the Fund may suffer a loss if the seller fails to pay the agreed-upon amount on
the delivery date and that amount is greater than the resale price of the
underlying securities and other collateral held by the Fund. In the event of
bankruptcy or other default by the seller, there may be possible delays and
expenses in liquidating the underlying securities or other collateral, decline
in their value and loss of interest. The return on such collateral may be more
or less than that from the repurchase agreement. The Fund's repurchase
agreements will be structured so as to fully collateralize the loans, i.e., the
value of the underlying securities, which will be held by the Fund's custodian
bank or by a third party that qualifies as a custodian under Section 17(f) of
the Investment Company Act of 1940, as amended (the "1940 Act"), is and, during
the entire term of the agreement, will remain at least equal to the value of the
loan, including the accrued interest earned thereon. Repurchase agreements are
entered into only with those entities approved by WRIMCO on the basis of
criteria established by the Fund's Board of Directors.
Securities of Other Investment Companies
In order to comply with regulations of the State of Ohio, for so long as
such regulations are in effect and applicable to the Fund, the Fund will not
invest in securities of other investment companies, except by purchase in the
open market where no commission or profit to a sponsor or dealer results from
the purchase other than the customary broker's commission, or except when the
purchase is part of a plan of merger, consolidation, reorganization or
acquisition.
Options, Futures and Other Strategies
General. As discussed in the Prospectus, WRIMCO may use certain options to
attempt to enhance income or yield or may attempt to reduce overall risk of its
investments by using certain options and futures contracts (sometimes referred
to as "futures"). Options and futures are sometimes referred to collectively as
"Financial Instruments." The Fund's ability to use a particular Financial
Instrument may be limited by its investment limitations or operating policies.
See "Investment Restrictions."
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Financial Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge the Fund takes
a position in a Financial Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge the Fund takes a position in a Financial Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own
a corresponding security and, therefore, the transaction does not relate to a
security the Fund owns. Rather, it relates to a security that the Fund intends
to acquire. If the Fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the Fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to hedge
against price movements in one or more particular securities positions that the
Fund owns or intends to acquire. Financial Instruments on indices, in contrast,
generally are used to attempt to hedge against price movements in market sectors
in which the Fund has invested or expects to invest. Financial Instruments on
debt securities may be used to hedge either individual securities or broad debt
market sectors.
The use of Financial Instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several exchanges upon
which they are traded, the Commodity Futures Trading Commission (the "CFTC") and
various state regulatory authorities. In addition, the Fund's ability to use
Financial Instruments will be limited by tax considerations. See "Taxes."
In addition to the instruments, strategies and risks described below and in
the Prospectus, WRIMCO expects to discover additional opportunities in
connection with options, futures contracts, options on futures contracts and
other similar or related techniques. These new opportunities may become
available as WRIMCO develops new techniques, as regulatory authorities broaden
the range of permitted transactions and as new options, futures contracts,
options on futures contracts or other techniques are developed. WRIMCO may
utilize these opportunities to the extent that they are consistent with the
Fund's goal and permitted by the Fund's investment limitations and applicable
regulatory authorities. The Fund's Prospectus or SAI will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in the Prospectus.
Special Risks. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon WRIMCO's
ability to predict movements of the overall securities and interest rate
markets, which requires different skills than predicting changes in the prices
of individual securities. There can be no assurance that any particular
strategy will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Financial Instrument and price movements of the investments
being hedged. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match the Fund's current or anticipated investments exactly. The Fund may
invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if
the Fund entered into a short hedge because WRIMCO projected a decline in the
price of a security in the Fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Financial Instrument. Moreover, if the
price of the Financial Instrument declined by more than the increase in the
price of the security, the Fund could suffer a loss. In either such case, the
Fund would have been in a better position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties (i.e.,
Financial Instruments other than purchased options). If the Fund were unable to
close out its positions in such Financial Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close out a position
in a Financial Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the other party to the transaction ("counterparty")
to enter into a transaction closing out the position. Therefore, there is no
assurance that any position can be closed out at a time and price that is
favorable to the Fund.
Cover. Transactions using Financial Instruments, other than purchased
options, expose the Fund to an obligation to another party. The Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities or other options or futures contracts, or (2)
cash, receivables and short-term debt securities, with a value sufficient at all
times to cover its potential obligations to the extent not covered as provided
in (1) above. The Fund will comply with SEC guidelines regarding cover for
these instruments and will, if the guidelines so require, set aside cash, U.S.
Government Securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount as determined
daily on a mark-to-market basis.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Options on Securities. The Fund may write (sell) and purchase options on
securities, but only if the investments to which the options relate are domestic
debt securities, including, without limitation, U.S. Government Securities. The
above limitation is a fundamental policy, which cannot be changed without a
shareholder vote. The Fund has no fundamental policies as to percentage
limitations on its purchase and sale of options on securities.
The Fund may write and purchase options on domestic debt securities to
attempt to enhance income or to reduce the overall risk of its investments. The
Fund may only write and purchase options on domestic debt securities if they are
listed on a national securities exchange.
The purchase of call options serves as a long hedge, and the purchase of
put options serves as a short hedge. Writing put or call options can enable the
Fund to enhance income or yield by reason of the premiums paid by the purchasers
of such options. However, if the market price of the security underlying a put
option declines to less than the exercise price of the option, minus the premium
received, the Fund would expect to suffer a loss.
Writing call options can also serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value. The Fund will write calls on
securities when WRIMCO believes that the amount of the premium represents
adequate compensation for the loss of the opportunity.
Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a
price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Fund will be obligated to purchase the
security at more than its market value. The Fund will write a put option on a
security only when it has determined that it would be willing to purchase the
underlying security at the exercise price.
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
Risks of Options on Securities. The Fund is only authorized to write and
purchase options on securities that are listed on a national securities
exchange. Exchange-listed options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. However, there can be no
assurance that such a market will exist at any particular time.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Options on Municipal Bond Indices. The Fund may write and purchase options
on indices, but only if the indices are municipal bond indices. The above
limitation is a fundamental policy, which cannot be changed without a
shareholder vote. The Fund has no fundamental policies as to percentage
limitations on its purchase and sale of options on municipal bond indices.
The Fund may write and purchase options on municipal bond indices to
attempt to enhance the Fund's income or to reduce the overall risk of its
investments. The Fund may only write and purchase options on municipal bond
indices if they are listed on a national securities exchange.
Puts and calls on municipal bond indices are similar to puts and calls on
securities or futures contracts except that all settlements are in cash and gain
or loss depends on changes in the index in question rather than on price
movements in individual securities or futures contracts. When the Fund writes a
call on a municipal bond index, it receives a premium and agrees that, prior to
the expiration date, the purchaser of the call, upon exercise of the call, will
receive from the Fund an amount of cash if the closing level of the municipal
bond index upon which the call is based is greater than the exercise price of
the call. The amount of cash is equal to the difference between the closing
price of the index and the exercise price of the call times a specified multiple
("multiplier"), which determines the total dollar value for each point of such
difference. When the Fund buys a call on a municipal bond index, it pays a
premium and has the same rights as to such call as are indicated above. When
the Fund buys a put on a municipal bond index, it pays a premium and has the
right, prior to the expiration date, to require the seller of the put, upon the
Fund's exercise of the put, to deliver to the Fund an amount of cash if the
closing level of the municipal bond index upon which the put is based is less
than the exercise price of the put, which amount of cash is determined by the
multiplier, as described above for calls. When the Fund writes a put on a
municipal bond index, it receives a premium and the purchaser has the right,
prior to the expiration date, to require the Fund to deliver to it an amount of
cash equal to the difference between the closing level of the municipal bond
index and the exercise price times the multiplier if the closing level is less
than the exercise price.
Risks of Options on Municipal Bond Indices. The risks of investment in
options on municipal bond indices may be greater than options on securities.
Because municipal bond index options are settled in cash, when the Fund writes a
call on a municipal bond index it cannot provide in advance for its potential
settlement obligations by acquiring and holding the underlying securities. The
Fund can offset some of the risk of writing a call index option by holding a
diversified portfolio of municipal bonds similar to those on which the
underlying index is based. However, the Fund cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same municipal bonds as
underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if the Fund could assemble a municipal bond portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund as the call writer will not
learn that it has been assigned until the next business day at the earliest.
The time lag between exercise and notice of assignment poses no risk for the
writer of a covered call on a specific underlying security, such as a debt
security, because there the writer's obligation is to deliver the underlying
security, not to pay its value as of a fixed time in the past. So long as the
writer already owns the underlying security, it can satisfy its settlement
obligations by simply delivering it, and the risk that its value may have
declined since the exercise date is borne by the exercising holder. In
contrast, even if the writer of an index call holds municipal bonds that exactly
match the composition of the underlying index, it will not be able to satisfy
its assignment obligations by delivering those municipal bonds against payment
of the exercise price. Instead, it will be required to pay cash in an amount
based on the closing index value on the exercise date. By the time it learns
that it has been assigned, the index may have declined, with a corresponding
decline in the value of its municipal bond portfolio. This "timing risk" is an
inherent limitation on the ability of index call writers to cover their risk
exposure by holding municipal bond positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
Futures Contracts and Options Thereon. The Fund may buy and sell interest
rate futures contracts, but only futures contracts relating to domestic debt
securities ("Debt Futures") and futures contracts relating to municipal bond
indices ("Municipal Bond Index Futures"). The Fund may also buy and sell
options on Debt Futures. The limitation on buying and selling futures contracts
to Debt Futures and Municipal Bond Index Futures, and the limitation on buying
and selling options on futures contracts to options on Debt Futures, are
fundamental policies, which cannot be changed without a shareholder vote. The
Fund has no fundamental policies as to percentage limitations on futures
contracts and options on futures contracts; see below, however, as to
limitations relating to the CFTC.
The purchase of futures or call options on futures can serve as a long
hedge, and the sale of futures or the purchase of put options on futures can
serve as a short hedge. Writing call options on futures contracts can serve as
a limited short hedge, using a strategy similar to that used for writing call
options on securities or indices. Similarly, writing put options on futures
contracts can serve as a limited long hedge. The Fund will purchase futures
contracts and options thereon only for the purpose of hedging against changes in
the market value of its portfolio securities or changes in the market value of
securities that WRIMCO anticipates that it may wish to include in the portfolio
of the Fund.
Futures strategies also can be used to manage the average duration of the
Fund's fixed-income portfolio. If WRIMCO wishes to shorten the average duration
of the Fund's fixed-income portfolio, the Fund may sell a futures contract or a
call option thereon, or purchase a put option on that futures contract. If
WRIMCO wishes to lengthen the average duration of the Fund's fixed-income
portfolio, the Fund may buy a futures contract or a call option thereon, or sell
a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
consisting of cash or U.S. Government Securities in an amount generally equal to
10% or less of the contract value. Margin must also be deposited when writing a
call or put option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions in
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may
be closed only on an exchange or board of trade that provides a secondary
market. The Fund intends to enter into futures and options on futures only on
exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time. In such event, it may not be possible
to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or option thereon can vary
from the previous day's settlement price; once that limit is reached, no trades
may be made that day at a price beyond the limit. Daily price limits do not
limit potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing the liquidation
of unfavorable positions.
If the Fund were unable to liquidate a futures contract or option thereon
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the futures contract or option or to maintain cash or securities in a
segregated account.
As an operating policy, to the extent that the Fund enters into futures
contracts or options on futures contracts, in each case other than for bona fide
hedging purposes (as defined by the CFTC), the aggregate initial margin and
premiums required to establish those positions (excluding the amount by which
options are "in-the-money" at the time of purchase) will not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any contracts the Fund has entered into. (In
general, a call option on a futures contract is "in-the-money" if the value of
the underlying futures contract exceeds the strike, i.e., exercise, price of the
call; a put option on a futures contract is "in-the-money" if the value of the
underlying futures contract is exceeded by the strike price of the put.) This
policy does not limit to 5% the percentage of the Fund's assets that are at risk
in futures contracts and options on futures contracts.
Risks of Futures Contracts and Options Thereon. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to the differences in the natures of those markets, are subject to
the following factors, which may create distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of
general interest rate or municipal bond market trends by WRIMCO may still not
result in a successful transaction. WRIMCO may be incorrect in its expectations
as to the extent of various interest rate or bond market movements or the time
span within which the movements take place.
Municipal Bond Index Futures. The risk of imperfect correlation between
movements in the price of Municipal Bond Index Futures and movements in the
price of the municipal bonds that are the subject of the hedge increases as the
composition of the Fund's municipal bond portfolio diverges from the municipal
bonds included in the applicable index. The price of the Municipal Bond Index
Future may move more than or less than the price of the securities being hedged.
If the price of the Municipal Bond Index Future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
security, the Fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the Municipal Bond Index Futures, the Fund may buy or
sell Municipal Bond Index Futures in a greater dollar amount than the dollar
amount of the securities being hedged if the historical volatility of the prices
of such securities being hedged is more than the historical volatility of the
prices of the municipal bonds included in the index. It is also possible that,
where the Fund has sold Municipal Bond Index Futures to hedge against decline in
the market, the market may advance and the value of the securities held in the
portfolio may decline. If this occurred, the Fund would lose money on the
futures contract and also experience a decline in value of its portfolio
securities. However, while this could occur for a very brief period or to a very
small degree, over time the value of a diversified portfolio of municipal bonds
will tend to move in the same direction as the municipal bond indices on which
the futures contracts are based.
Where Municipal Bond Index Futures are purchased to hedge against a
possible increase in the price of securities before the Fund is able to invest
in them in an orderly fashion, it is possible that the market may decline
instead. If the Fund then concludes not to invest in them at that time because
of concern as to possible further market decline or for other reasons, it will
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities it had anticipated purchasing.
Limitations on the Use of Options on Securities, Municipal Bond Indices and
Futures Contracts. The Fund's use of options is governed by the following
guidelines, which can be changed by the Fund's Board of Directors without a
shareholder vote:
(1) options may be purchased or written only when WRIMCO believes that
there exists a liquid secondary market in such options;
(2) the Fund may not write call options having aggregate exercise prices
greater than 25% of its net assets; and
(3) the Fund may purchase a put or a call option (including straddles or
spreads) only if the value of its premium, when aggregated with the premiums on
all other options held by the Fund, does not exceed 5% of the Fund's total
assets.
Combined Positions. The Fund may purchase and write options in combination
with each other, or in combination with futures contracts, to adjust the risk
and return characteristics of its overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Turnover. The Fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by the Fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate.
Once the Fund has received an exercise notice on an option it has written, it
cannot effect a closing transaction in order to terminate its obligation under
the option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by the Fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
the Fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. The
Fund will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than
those that would apply to direct purchases or sales.
Investment Restrictions
Certain of the Fund's investment restrictions and policies are described in
the Prospectus. The following are fundamental policies and, together with
certain restrictions described in the Prospectus, cannot be changed without
shareholder approval. Under these additional restrictions, the Fund:
(i) May not make any investments other than in 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";
(x) May not buy shares of other investment companies that redeem their
shares. The Fund may buy shares of investment companies that 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.
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 19.07% for the fiscal year ended September 30, 1995
and 26.26% for the fiscal year ended September 30, 1994.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Management Agreement
The Fund has an Investment Management Agreement (the "Management
Agreement") with Waddell & Reed, Inc. On January 8, 1992, subject to the
authority of the Fund's Board of Directors, Waddell & Reed, Inc. assigned the
Management Agreement and all related investment management duties (and related
professional staff) to WRIMCO, a wholly-owned subsidiary of Waddell & Reed, Inc.
Under the Management Agreement, WRIMCO is employed to supervise the investments
of the Fund and provide investment advice to the Fund. The address of WRIMCO
and Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217, Shawnee Mission,
Kansas 66201-9217. Waddell & Reed, Inc. is the Fund's underwriter.
The Management Agreement permits Waddell & Reed, Inc. or an affiliate of
Waddell & Reed, Inc. to enter into a separate agreement for transfer agency
services ("Shareholder Servicing Agreement") and a separate agreement for
accounting services ("Accounting Services Agreement") with the Fund. The
Management Agreement contains detailed provisions as to the matters to be
considered by the Fund's Board of Directors prior to approving any Shareholder
Servicing Agreement or Accounting Services Agreement.
Torchmark Corporation and United Investors Management Company
WRIMCO is a wholly-owned subsidiary of Waddell & Reed, Inc. Waddell &
Reed, Inc. is a wholly-owned subsidiary of Waddell & Reed Financial Services,
Inc., a holding company. Waddell & Reed Financial Services, Inc. is a wholly-
owned subsidiary of United Investors Management Company. United Investors
Management Company is a wholly-owned subsidiary of Torchmark Corporation.
Torchmark Corporation is a publicly held company. The address of Torchmark
Corporation and United Investors Management Company is 2001 Third Avenue South,
Birmingham, Alabama 35233.
Waddell & Reed, Inc. and its predecessors served as investment manager to
each of the registered investment companies in the United Group of Mutual Funds,
except United Asset Strategy Fund, Inc., since 1940 or the company's inception
date, whichever was later, and to TMK/United Funds, Inc. since that fund's
inception, until January 8, 1992 when it assigned its duties as investment
manager for these funds (and the related professional staff) to WRIMCO. WRIMCO
has also served as investment manager for Waddell & Reed Funds, Inc. since its
inception in September 1992, and United Asset Strategy Fund, Inc. since it
commenced operations in March 1995. Waddell & Reed, Inc. serves as principal
underwriter for the investment companies in the United Group of Mutual Funds and
Waddell & Reed Funds, Inc. and serves as distributor for TMK/United Funds, Inc.
Shareholder Services
Under the Shareholder Servicing Agreement entered into between the Fund and
Waddell & Reed Services Company (the "Agent"), a subsidiary of Waddell & Reed,
Inc., the Agent performs shareholder servicing functions, including the
maintenance of shareholder accounts, the issuance, transfer and redemption of
shares, distribution of dividends and payment of redemptions, the furnishing of
related information to the Fund and handling of shareholder inquiries. A new
Shareholder Servicing Agreement, or amendments to the existing one, may be
approved by the Fund's Board of Directors without shareholder approval.
Accounting Services
Under the Accounting Services Agreement entered into between the Fund and
the Agent, the Agent provides the Fund with bookkeeping and accounting services
and assistance, including maintenance of the Fund's records, pricing of the
Fund's shares, and preparation of prospectuses for existing shareholders, proxy
statements and certain reports. A new Accounting Services Agreement, or
amendments to an existing one, may be approved by the Fund's Board of Directors
without shareholder approval.
Payments by the Fund for Management, Accounting and Shareholder Services
Under the Management Agreement, for WRIMCO's management services, the Fund
pays WRIMCO a fee as described in the Prospectus.
The management fees paid to WRIMCO for the fiscal years ended September 30,
1995, 1994 and 1993 were $1,860,352, $1,756,750 and $1,510,519, respectively.
The Fund accrues and pays this fee daily. For purposes of calculating the daily
fee the Fund does not include money owed to it by Waddell & Reed, Inc. for
shares which it has sold but not yet paid the Fund.
Under the Shareholder Servicing Agreement, with respect to Class A shares,
the Fund pays the Agent a monthly fee of $1.0208 for each shareholder account
that was in existence at any time during the prior month, plus $0.30 for each
account on which a dividend or distribution, of cash or shares, had a record
date in that month. For Class Y shares, the Fund pays the Agent a monthly fee
equal to one-twelfth of .15 of 1% of the average daily net assets of that class
for the preceding month. The Fund also pays certain out-of-pocket expenses of
the Agent, including long distance telephone communications costs, microfilm and
storage costs for certain documents, forms, printing and mailing costs, and
costs of legal and special services not provided by Waddell & Reed, Inc., WRIMCO
or the Agent.
Under the Accounting Services Agreement, the Fund pays the Agent a monthly
fee of one-twelfth of the annual fee shown in the following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
The fees paid to the Agent for the fiscal years ended September 30, 1995,
1994 and 1993 were $56,667, $50,000 and $50,000, respectively.
The State of California imposes limits on the amount of certain expenses
the Fund can pay and requires WRIMCO to reduce its fee if these expense amounts
are exceeded. WRIMCO 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.
WRIMCO 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, WRIMCO and
the Agent, respectively, pay all of their own expenses in providing these
services. Amounts paid by the Fund under the Shareholder Servicing Agreement
are described above. Waddell & Reed, Inc. and affiliates pay the Fund's
Directors and officers who are affiliated with WRIMCO and its affiliates. The
Fund pays the fees and expenses of the Fund's other Directors.
Waddell & Reed, Inc., under an agreement separate from the Management
Agreement, Shareholder Servicing Agreement and Accounting Services Agreement,
acts as the Fund's underwriter, i.e., sells its shares on a continuous basis.
Waddell & Reed, Inc. is not required to sell any particular number of shares,
and thus sells shares only for purchase orders received. Under this agreement,
Waddell & Reed, Inc. pays the costs of sales literature, including the costs of
shareholder reports used as sales literature, and the costs of printing the
prospectus furnished to it by the Fund. The aggregate dollar amount of
underwriting commissions for Class A shares for the fiscal years ended September
30, 1995, 1994 and 1993 were $1,016,772, $1,486,258 and $1,688,436,
respectively. The amounts retained by Waddell & Reed, Inc. for each period were
$430,473, $649,284 and $744,476, respectively.
A major portion of the sales charge for Class A shares is paid to account
representatives and managers of Waddell & Reed, Inc. Waddell & Reed, Inc. may
compensate its account representatives as to purchases for which there is no
sales charge.
The Fund pays all of its other expenses. These include the costs of
materials sent to shareholders, audit and outside legal fees, taxes, brokerage
commissions, interest, insurance premiums, custodian fees, fees payable by the
Fund under Federal or other securities laws and to the Investment Company
Institute and nonrecurring and extraordinary expenses, including litigation and
indemnification relating to litigation.
Under a Service Plan for Class A shares (the "Plan") adopted by the Fund
pursuant to Rule 12b-1 under the 1940 Act, the Fund may pay Waddell & Reed,
Inc., the principal underwriter for the Fund, a fee not to exceed .25% of the
Fund's average annual net assets attributable to Class A shares, paid monthly,
to reimburse Waddell & Reed, Inc. for its costs and expenses in connection with
the provision of personal services to Class A shareholders of the Fund and/or
maintenance of Class A shareholder accounts.
The Plan and a related Service Agreement between the Fund and Waddell &
Reed, Inc. contemplate that Waddell & Reed, Inc. may be reimbursed for amounts
it expends in compensating, training and supporting registered account
representatives, sales managers and/or other appropriate personnel in providing
personal services to Class A shareholders of the Fund and/or maintaining Class A
shareholder accounts; increasing services provided to Class A shareholders of
the Fund by office personnel located at field sales offices; engaging in other
activities useful in providing personal service to Class A shareholders of the
Fund and/or maintenance of Class A shareholder accounts; and in compensating
broker-dealers who may regularly sell Class A shares of the Fund, and other
third parties, for providing shareholder services and/or maintaining shareholder
accounts with respect to Class A shares. Service fees in the amount of $369,260
were paid (or accrued) by the Fund with respect to Class A shares for the fiscal
year ended September 30, 1995.
The Plan and the Service Agreement were approved by the Fund's Board of
Directors, including the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operations of the
Plan or any agreement referred to in the Plan (hereafter, the "Plan Directors").
The Plan was also approved by the affected shareholders of the Fund.
Among other things, the Plan provides that (i) Waddell & Reed, Inc. will
provide to the Directors of the Fund at least quarterly, and the Directors will
review, a report of amounts expended under the Plan and the purposes for which
such expenditures were made, (ii) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendments thereto will be
effective only if approved, by the Directors including the Plan Directors acting
in person at a meeting called for that purpose, (iii) amounts to be paid by the
Fund under the Plan may not be materially increased without the vote of the
holders of a majority of the outstanding Class A shares of the Fund, and (iv)
while the Plan remains in effect, the selection and nomination of the Directors
who are Plan Directors will be committed to the discretion of the Plan
Directors.
Custodial and Auditing Services
The Fund's Custodian is UMB Bank, n.a., Kansas City, Missouri. In general,
the Custodian is responsible for holding the Fund's cash and securities. 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 class of the shares of the Fund is the value of
the assets of that class, less that class's liabilities, divided by the total
number of outstanding shares of that class.
Class A shares of the Fund are sold at their next determined net asset
value plus the sales charge described in the Prospectus. The price makeup as of
September 30, 1995 was as follows:
Net asset value per Class A share (Class A net assets
divided by Class A shares outstanding) .............$5.27
Add: selling commission (4.25% of offering price) ..... .23
-----
Maximum offering price per Class A share (Class A
net asset value per Class A share divided
by 95.75%) .........................................$5.50
=====
The offering price of a Class A share is its net asset value next
determined following acceptance of a purchase order plus the sales charge. The
offering price of a Class Y share is its net asset value next determined
following acceptance of a purchase order. The number of shares you receive for
your purchase depends on the next offering price after Waddell & Reed, Inc.
receives and accepts your order at its principal business office at the address
shown on the cover of this SAI. You will be sent a confirmation after your
purchase which will indicate how many shares you have purchased. Shares are
normally issued for cash only.
Waddell & Reed, Inc. need not accept any purchase order, and it or the Fund
may determine to discontinue offering Fund shares for purchase.
The net asset value and offering price per share are ordinarily computed
once on each day that the New York Stock Exchange (the "NYSE") is open for
trading as of the later of the close of the regular session of the NYSE
(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 NYSE annually announces the days on which it will not
be open for trading. The most recent announcement indicates that the NYSE will
not be open on the following days: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, it is possible that the NYSE may close on other days.
The net asset value will change every business day, since the value of the
assets and the number of shares outstanding change every day.
The Board of Directors has decided to use the prices quoted by a dealer in
bonds that offers a pricing service to value municipal bonds. The Board of
Directors believes that such a service does quote their fair value. The Board
of Directors, however, may hereafter determine to use another service or use the
bid price quoted by dealers if it should determine that such service or quotes
more accurately reflect the fair value of municipal bonds held by the Fund.
Short-term debt securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates market. Securities or other assets
that are not valued by either of the foregoing methods and for which market
quotations are not readily available would be valued by appraisal at their fair
value as determined in good faith under procedures established by and under the
general supervision and responsibility of the Board of Directors.
Options and futures contracts purchased and held by the Fund are valued at
the last sales price thereof on the securities or commodities exchanges on which
they are traded, or, if there are no transactions, at the mean between bid and
asked prices. Ordinarily, the close of the regular session for option trading
on national securities exchanges is 4:10 p.m. Eastern time and the close of the
regular session for commodities exchanges is 4:15 p.m. Eastern time. Futures
contracts will be valued with reference to established futures exchanges. The
value of a futures contract purchased by the Fund will be either the closing
price of that contract or the bid price. Conversely, the value of a futures
contract sold by the Fund will be either the closing price or the asked price.
Minimum Initial and Subsequent Investments
For Class A shares, initial investments must be at least $500 with the
exceptions described in this paragraph. A minimum initial investment of $25 is
applicable to purchases made through payroll deduction for or by employees of
WRIMCO, Waddell & Reed, Inc. or their affiliates. 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."
For Class Y shares, investments by government entities or authorities or by
corporations must total at least $10 million within the first twelve months
after initial investment. There is no initial investment minimum for other
Class Y investors.
Reduced Sales Charges
Account Grouping (Applicable to Class A Shares Only)
Large purchases of Class A shares are subject to lower sales charges. The
schedule of sales charges appears in the Prospectus for Class A shares. For the
purpose of taking advantage of the lower sales charges available for large
purchases, a purchase in any of categories 1 through 7 listed below made by an
individual or deemed to be made by an individual may be grouped with purchases
in any other of these categories. References to purchases in an Individual
Retirement Account ("IRA") or other retirement plan (for which investments in
the Fund would not be appropriate) are made only to illustrate how purchases of
Fund shares may be grouped with purchases made in other funds in the United
Group.
1. Purchases by an individual for his or her own account (includes purchases
under the United Funds Revocable Trust Form);
2. Purchases by that individual's spouse purchasing for his or her own account
(includes United Funds Revocable Trust Form of spouse);
3. Purchases by that individual or his or her spouse in their joint account;
4. Purchases by that individual or his or her spouse for the account of their
child under age 21;
5. Purchase by any custodian for the child of that individual or spouse in a
Uniform Gift to Minors Act ("UGMA") or Uniform Transfers to Minors Act
("UTMA") account;
6. Purchases by that individual or his or her spouse for his or her IRA, tax
sheltered annuity account or Keogh plan account, provided that the
individual and spouse are the only participants in the Keogh plan; and
7. Purchases by a trustee under a trust where that individual or his or her
spouse is the settlor (the person who establishes the trust).
Examples:
A. Grandmother opens an UGMA account for grandson A; Grandmother has an
account in her own name; A's father has an account in his own name;
the UGMA account may be grouped with A's father's account but may not
be grouped with Grandmother's account;
B. H establishes a trust naming his children as beneficiaries and
appointing himself and his bank as co-trustees; a purchase made in the
trust account is eligible for grouping with an IRA account of W, H's
wife;
C. H's will provides for the establishment of a trust for the benefit of
his minor children upon H's death; his bank is named as trustee; upon
H's death, an account is established in the name of the bank, as
trustee; a purchase in the account may be grouped with an account held
by H's wife in her own name.
D. X establishes a trust naming herself as trustee and R, her son, as
successor trustee and R and S as beneficiaries; upon X's death, the
account is transferred to R as trustee; a purchase in the account may
not be grouped with R's individual account. (If X's spouse, Y, was
successor trustee, this purchase could be grouped with Y's individual
account.)
Account grouping as described above is available under the following
circumstances.
One-time Purchases
A one-time purchase of Class A shares in accounts eligible for grouping may
be combined for purposes of determining the availability of a reduced sales
charge. In order for an eligible purchase to be grouped, the investor must
advise Waddell & Reed, Inc. at the time the purchase is made that it is eligible
for grouping and identify the accounts with which it may be grouped.
Example: H and W open an account in the Fund and invest $100,000; at the same
time, H's parents open up two UGMA accounts for H and W's two minor
children and invest $100,000 in each child's name; the combined
purchases of Class A shares are subject to the reduced sales load
applicable to a purchase of $300,000 provided that Waddell & Reed,
Inc. is advised that the purchases are entitled to grouping.
Rights of Accumulation
If Class A shares are held in any account and an additional purchase is
made in that account or in any account eligible for grouping with that account,
the additional purchase is combined with the net asset value of the existing
account as of the date the new purchase is accepted by Waddell & Reed, Inc. for
the purpose of determining the availability of a reduced sales charge.
Example: H is a current Class A shareholder who invested in the Fund three
years ago. His account has a net asset value of $100,000. His wife,
W, now wishes to invest $15,000 in Class A shares of the Fund. W's
purchase will be combined with H's existing account and will be
entitled to the reduced sales charge applicable to a purchase in
excess of $100,000. H's original $100,000 purchase was subject to a
full sales charge and the reduced charge does not apply retroactively
to that purchase.
In order to be entitled to rights of accumulation, the purchaser must
inform Waddell & Reed, Inc. that the purchaser is entitled to a reduced charge
and provide Waddell & Reed, Inc. with the name and number of the existing
account with which the purchase may be combined.
If a purchaser holds shares which have been purchased under a contractual
plan, the shares held under 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 of Class A
shares is also available under a Statement of Intention. By signing a Statement
of Intention form, which is available from Waddell & Reed, Inc., the purchaser
indicates an intention to invest, over a 13-month period, a dollar amount which
is sufficient to qualify for a reduced sales charge. The 13-month period begins
on the date the first purchase made under the Statement of Intention is accepted
by Waddell & Reed, Inc. Each purchase made from time to time under the
Statement of Intention is treated as if the purchaser were buying at one time
the total amount which he or she intends to invest. The sales charge applicable
to all purchases of Class A shares made under the terms of the Statement of
Intention will be the sales charge in effect on the beginning date of the 13-
month period.
In determining the amount which the purchaser must invest in order to
qualify for a reduced sales charge under a Statement of Intention, the
investor's Rights of Accumulation (see above) will be taken into account; that
is, Class A shares already held in the same account in which the purchase is
being made or in any account eligible for grouping with that account, as
described above, will be included.
Example: H signs a Statement of Intention indicating his intent to invest in
his own name a dollar amount sufficient to entitle him to purchase
Class A shares at the sales charge applicable to a purchase of
$300,000. H has an UGMA for his child and the Class A shares held in
the account have a net asset value as of the date the Statement of
Intention is accepted by Waddell & Reed, Inc. of $50,000; H's wife, W,
has an account in her own name invested in another fund in the United
Group which charges the same sales load as the Fund, with a net asset
value as of the date of acceptance of the Statement of Intention of
$75,000; H needs to invest $175,000 in Class A shares over the 13-
month period in order to qualify for the reduced sales load applicable
to a purchase of $300,000.
A copy of the Statement of Intention signed by a purchaser will be returned
to the purchaser after it is accepted by Waddell & Reed, Inc. and will set forth
the dollar amount of Class A shares which must be purchased within the 13-month
period in order to qualify for the reduced sales charge.
The minimum initial investment under a Statement of Intention is 5% of the
dollar amount which must be invested under the Statement of Intention. An
amount equal to 5% of the purchase required under the Statement of Intention
will be held "in escrow." If a purchaser does not, during the period covered by
the Statement of Intention, invest the amount required to qualify for the
reduced sales charge under the terms of the Statement of Intention, he or she
will be responsible for payment of the sales charge applicable to the amount
actually invested. The additional sales charge owed on purchases of Class A
shares made under a Statement of Intention which is not completed will be
collected by redeeming part of the shares purchased under the Statement of
Intention and held "in escrow" unless the purchaser makes payment of this amount
to Waddell & Reed, Inc. within 20 days of Waddell & Reed, Inc.'s request for
payment.
If the actual amount invested is higher than the amount an investor intends
to invest, and is large enough to qualify for a sales charge lower than that
available under the Statement of Intention, the lower sales charge will apply.
A Statement of Intention does not bind the purchaser to buy, or Waddell &
Reed, Inc. to sell, the shares covered by the Statement of Intention.
With respect to Statements of Intention for $2,000,000 or purchases
otherwise qualifying for no sales charge under the terms of the Statement of
Intention, the initial investment must be at least $200,000, and the value of
any shares redeemed during the 13-month period which were acquired under the
Statement of Intention will be deducted in computing the aggregate purchases
under the Statement of Intention.
Other Funds in the United Group
Reduced sales charges for larger purchases of Class A shares apply to
purchases of shares of any of the funds in the United Group which are subject to
a sales charge. A purchase of, or shares held, in any of the funds in the
United Group which are subject to the same sales charge as the Fund will be
treated as an investment in the Fund for the purpose of determining the
applicable sales charge. The following funds in the United Group have shares
that are subject to a maximum 5.75% ("full") sales charge as described in the
prospectus of each Fund: United Funds, Inc., United International Growth Fund,
Inc., United Continental Income Fund, Inc., United Vanguard Fund, Inc., United
Retirement Shares, Inc., United High Income Fund, Inc., United New Concepts
Fund, Inc., United Gold & Government Fund, Inc., United Asset Strategy Fund,
Inc. and United High Income Fund II, Inc. The following funds in the United
Group have shares that are subject to a "reduced" sales charge as described in
the prospectus of each fund: United Municipal Bond Fund, Inc., United
Government Securities Fund, Inc. and United Municipal High Income Fund, Inc.
For the purposes of obtaining the lower sales charge which applies to large
purchases, purchases in a fund in the United Group of shares that are subject to
a full sales charge may not be grouped with purchases of shares in a fund in the
United Group that are subject to a reduced sales charge; conversely, purchases
of shares in a fund with a reduced sales charge may not be grouped or combined
with purchases of shares of a fund that are subject to a full sales charge.
United Cash Management, Inc. is not subject to a sales charge. Purchases
in that fund are not eligible for grouping with purchases in any other fund.
Net Asset Value Purchases of Class A Shares
As stated in the Prospectus, Class A shares of the Fund may be purchased at
net asset value by the Directors and officers of the Fund, employees of Waddell
& Reed, Inc., employees of their affiliates, account representatives of Waddell
& Reed, Inc. and the spouse, children, parents, children's spouses and spouse's
parents of each such Director, officer, employee and account representative.
"Child" includes stepchild; "parent" includes stepparent. Trusts under which
the grantor and the trustee or a co-trustee are each an eligible purchaser are
also eligible for net asset value purchases of Class A shares. "Employees"
includes retired employees. A retired employee is an individual separated from
service from Waddell & Reed, Inc. or affiliated companies with a vested interest
in any Employee Benefit Plan sponsored by Waddell & Reed, Inc. or its affiliated
companies. "Account representatives" includes retired account representatives.
A "retired account representative" is any account representative who was, at the
time of separation from service from Waddell & Reed, Inc., a Senior Account
Representative. A custodian under the UGMA or UTMA purchasing for the child or
grandchild of any employee or account representative may purchase Class A shares
at net asset value whether or not the custodian himself is an eligible
purchaser.
Reasons for Differences in Public Offering Price of Class A Shares
As described herein and in the Prospectus, there are a number of instances
in which the Fund's Class A shares are sold or issued on a basis other than the
maximum public offering price, that is, the net asset value plus the highest
sales charge. Some of these relate to lower or eliminated sales charges for
larger purchases of Class A shares, whether made at one time or over a period of
time as under a Statement of Intention or right of accumulation. See the table
of sales charges in the Prospectus. The reasons for these quantity discounts
are, in general, that (i) they are traditional and have long been permitted in
the industry and are therefore necessary to meet competition as to sales of
shares of other funds having such discounts; (ii) certain quantity discounts are
required by rules of the National Association of Securities Dealers, Inc. (as
are elimination of sales charges on the reinvestment of dividends and
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 of Class A shares without sales charge are permitted to Directors,
officers and certain others due to reduced or eliminated selling expenses and
since such sales may aid in the development of a sound employee organization,
encourage incentive, responsibility and interest in the United Group and an
identification with its aims and policies. Limited reinvestments of redemptions
of Class A shares at no sales charge are permitted to attempt to protect against
mistaken or not fully informed redemption decisions. Class A shares may be
issued at no sales charge in plans of reorganization due to reduced or
eliminated sales expenses and since, in some cases, such issuance is exempted by
the 1940 Act from the otherwise applicable restrictions as to what sales charge
must be imposed. In no case in which there is a reduced or eliminated sales
charge are the interests of existing shareholders adversely affected since, in
each case, the Fund receives the net asset value per share of all shares sold or
issued.
Redemptions
The Prospectus gives information as to redemption procedures. Redemption
payments are made within seven days unless delayed because of emergency
conditions determined by the SEC, when the NYSE is closed other than for
weekends or holidays, or when trading on the NYSE is restricted. Payment is
made in cash, although under extraordinary conditions redemptions may be made in
portfolio securities. Payment for redemption of shares of the Fund may be made
in portfolio securities when the Fund's Board of Directors determines that
conditions exist making cash payments undesirable. Securities used for payment
of redemptions are valued at the value used in figuring net asset value. There
would be brokerage costs to the redeeming shareholder in selling such
securities. The Fund, however, has elected to be governed by Rule 18f-1 under
the 1940 Act, pursuant to which it is obligated to redeem shares solely in cash
up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder.
Flexible Withdrawal Service for Class A Shareholders
If you qualify, you may arrange to receive regular monthly, quarterly,
semiannual or annual payments by redeeming Class A shares on a regular basis
through the Flexible Withdrawal Service (the "Service"). The Service is
available for Class A shares of the Fund, and also for Class A shares of any of
the funds in the United Group. It would be a disadvantage to an investor to
make additional purchases of Class A shares while a withdrawal program is in
effect as this would result in duplication of sales charges.
To qualify for the Service, you must have invested at least $10,000 in
Class A shares which you still own of any of the funds in the United Group; or,
you must own Class A shares having a value of at least $10,000. The value for
this purpose is not the net asset value but the value at the offering price,
i.e., the net asset value plus the sales charge.
To start the 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.
If you have a share certificate for the shares you want to make available
for the Service, you must enclose the certificate with the form initiating the
Service.
The dividends and distributions on shares you have made available for the
Service are paid in additional Class A shares. All payments 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 Class A
shares you own will decrease. When all of the shares in your account are
redeemed, you will not receive any further payments. Thus, the payments are not
an annuity or an income or return on your investment.
You may, at any time, change the manner in which you have chosen to have
shares redeemed to any of the other choices originally available to you. 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
Class A Share Exchanges. 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 payment 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 Class A shares of United Cash Management, Inc. automatically
exchanged each month into Class A shares of the Fund or any other fund in the
United Group. The shares of United Cash Management, Inc. which you designate
for automatic exchange must be worth at least $100 or you must own Class A
shares of the fund in the United Group into which you want to exchange. The
minimum value of shares which you may designate for automatic exchange monthly
is $100, which may be allocated among the Class A shares of different funds in
the United Group so long as each fund receives a value of at least $25. Minimum
initial investment and minimum balance requirements apply to such automatic
exchange service.
You may redeem your Class A shares of a Fund and use the proceeds to
purchase Class Y shares of that Fund if you meet the criteria for purchasing
Class Y shares.
Class Y Share Exchanges. Class Y shares of a Fund may be exchanged for
Class Y shares of any other fund in the United Group.
General Exchange Information. When you exchange shares, the total shares
you receive will have the same aggregate net asset value as the total shares you
exchange. The relative values are those next figured after the fund receives
your exchange request in good order.
These exchange rights and other exchange rights concerning the other funds
in the United Group can in most instances be eliminated or modified at any time
and any such exchange may not be accepted.
Reinvestment Privilege
The Prospectus for Class A shares discusses the reinvestment privilege for
Class A shares under which, if you redeem your Class A shares and then decide it
was not a good idea, you may reinvest. If Class A shares of the Fund are then
being offered, you can put all or part of your redemption payment back into
Class A shares of the Fund without any sales charge at the net asset value next
determined after you have returned the amount. Your written request to do this
must be received within 30 days after your redemption request was received. You
can do this only once as to Class A shares of the Fund. You do not use up this
privilege by redeeming Class A shares to invest the proceeds at net asset value
in a Keogh plan or an IRA.
Mandatory Redemption of Certain Small Accounts
The Fund has the right to compel the redemption of shares held under any
account or any plan if the aggregate net asset value of such shares (taken at
cost or value as the Board of Directors may determine) is less than $500. The
Board has no intent to compel redemptions in the foreseeable future. If it
should elect to compel redemptions, shareholders who are affected will receive
prior written notice and will be permitted 60 days to bring their accounts up to
the minimum before this redemption is processed.
DIRECTORS AND OFFICERS
The day-to-day affairs of the Fund are handled by outside organizations
selected by the Board of Directors. The Board of Directors has responsibility
for establishing broad corporate policies for the Fund and for overseeing
overall performance of the selected experts. It has the benefit of advice and
reports from independent counsel and independent auditors.
The principal occupation during at least the past five years of each
Director and officer is given below. Each of the persons listed through and
including Mr. Wright is a member of the Fund's Board of Directors. The other
persons are officers but not members of the Board of Directors. For purposes of
this section, the term "Fund Complex" includes each of the registered investment
companies in the United Group of Mutual Funds, Waddell & Reed Funds, Inc. and
TMK/United Funds, Inc. Each of the Fund's Directors is also a Director of each
of the other funds in the Fund Complex and each of its officers is also an
officer of one or more of the funds in the Fund Complex.
RONALD K. RICHEY*
2001 Third Avenue South
Birmingham, Alabama 35233
Chairman of the Board of Directors of the Fund and each of the other funds
in the Fund Complex; Chairman of the Board of Directors of Waddell & Reed
Financial Services, Inc., United Investors Management Company and United
Investors Life Insurance Company; Chairman of the Board of Directors and Chief
Executive Officer of Torchmark Corporation; Chairman of the Board of Directors
of Vesta Insurance Group, Inc.; formerly, Chairman of the Board of Directors of
Waddell & Reed, Inc. Father of Linda Graves, Director of the Fund and each of
the other funds in the Fund Complex.
KEITH A. TUCKER*
President of the Fund and each of the other funds in the Fund Complex;
President, Chief Executive Officer and Director of Waddell & Reed Financial
Services, Inc.; Chairman of the Board of Directors of WRIMCO, Waddell & Reed,
Inc., Waddell & Reed Services Company, Waddell & Reed Asset Management Company
and Torchmark Distributors, Inc., an affiliate of Waddell & Reed, Inc.; Vice
Chairman of the Board of Directors, Chief Executive Officer and President of
United Investors Management Company; Vice Chairman of the Board of Directors of
Torchmark Corporation; Director of Southwestern Life Corporation; formerly,
partner in Trivest, a private investment concern; formerly, Director of Atlantis
Group, Inc., a diversified company.
HENRY L. BELLMON
Route 1
P. O. Box 26
Red Rock, Oklahoma 74651
Rancher; Professor, Oklahoma State University; formerly, Governor of
Oklahoma.
DODDS I. BUCHANAN
905 13th Street
Boulder, Colorado 80302
Advisory Director, The Hand Companies; 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
Retired.
LINDA GRAVES*
1 South West Cedar Crest Road
Topeka, Kansas 66606
First Lady of Kansas; formerly, partner, Levy and Craig, P.C., a law firm.
Daughter of Ronald K. Richey, Chairman of the Board of the Fund and each of the
other funds in the Fund Complex.
JOHN F. HAYES*
335 N. Washington
P. O. Box 2977
Hutchinson, Kansas 67504-2977
Director of Central Bank and Trust; Chairman of Gilliland & Hayes, P.A., a
law firm; formerly, President of Gilliland & Hayes, P.A.
GLENDON E. JOHNSON
7300 Corporate Center Drive
P. O. Box 020270
Miami, Florida 33126-1208
Director and Chief Executive Officer of John Alden Financial Corporation
and subsidiaries.
JAMES B. JUDD
No. 1 Ward Parkway
Suite 138
Kansas City, Missouri 64112
Retired; formerly, partner, KPMG Peat Marwick. A petition relating to Mr.
Judd's property was filed under the Federal bankruptcy laws and is now final.
WILLIAM T. MORGAN*
1799 Westridge Road
Los Angeles, California 90049
Retired; formerly, Chairman of the Board of Directors and President of the
Fund and each fund in the Fund Complex then in existence. (Mr. Morgan retired
as Chairman of the Board of Directors and President of the funds in the Fund
Complex then in existence on April 30, 1993); formerly, President, Director and
Chief Executive Officer of WRIMCO and Waddell & Reed, Inc.; formerly, Chairman
of the Board of Directors of Waddell & Reed Services Company; formerly, Director
of Waddell & Reed Asset Management Company, United Investors Management Company
and United Investors Life Insurance Company, affiliates of Waddell & Reed, Inc.
DOYLE PATTERSON
1030 West 56th Street
Kansas City, Missouri 64113
Associated with Republic Real Estate, engaged in real estate management and
investment; formerly, Director of The Vendo Company, a manufacturer and
distributor of vending machines.
ELEANOR B. SCHWARTZ
5100 Rockhill Road
Kansas City, Missouri 64113
Chancellor, University of Missouri-Kansas City; formerly, Interim
Chancellor, University of Missouri-Kansas City; formerly, Vice Chancellor for
Academic Affairs, University of Missouri-Kansas City.
FREDERICK VOGEL III
1805 West Bradley Road
Milwaukee, Wisconsin 53217
Retired.
PAUL S. WISE
P. O. Box 5248
8648 Silver Saddle Drive
Carefree, Arizona 85377
Director of Potash Corporation of Saskatchewan.
LESLIE S. WRIGHT
2302 Brookshire Place
Birmingham, Alabama 35213
Chancellor of Samford University; formerly, Director of City Federal
Savings and Loan Association.
Robert L. Hechler
Vice President and Principal Financial Officer of the Fund and each of the
other funds in the Fund Complex; Vice President, Chief Operations Officer,
Director and Treasurer of Waddell & Reed Financial Services, Inc.; Executive
Vice President, Principal Financial Officer, Director and Treasurer of WRIMCO;
President, Chief Executive Officer, Principal Financial Officer, Director and
Treasurer of Waddell & Reed, Inc.; Director and Treasurer of Waddell & Reed
Asset Management Company; President, Director and Treasurer of Waddell & Reed
Services Company; Vice President, Treasurer and Director of Torchmark
Distributors, Inc.
Henry J. Herrmann
Vice President of the Fund and each of the other funds in the Fund Complex;
Vice President, Chief Investment Officer and Director of Waddell & Reed
Financial Services, Inc.; Director of Waddell & Reed, Inc.; President, Chief
Executive Officer, Chief Investment Officer and Director of WRIMCO and Waddell &
Reed Asset Management Company; Senior Vice President and Chief Investment
Officer of United Investors Management Company.
Theodore W. Howard
Vice President, Treasurer and Principal Accounting Officer of the Fund and
each of the other funds in the Fund Complex; Vice President of Waddell & Reed
Services Company.
Sharon K. Pappas
Vice President, Secretary and General Counsel of the Fund and each of the
other funds in the Fund Complex; Vice President, Secretary and General Counsel
of Waddell & Reed Financial Services, Inc.; Senior Vice President, Secretary and
General Counsel of WRIMCO and Waddell & Reed, Inc.; Director, Senior Vice
President, Secretary and General Counsel of Waddell & Reed Services Company;
Director, Secretary and General Counsel of Waddell & Reed Asset Management
Company; Vice President, Secretary and General Counsel of Torchmark
Distributors, Inc.; formerly, Assistant General Counsel of WRIMCO, Waddell &
Reed Financial Services, Inc., Waddell & Reed, Inc., Waddell & Reed Asset
Management Company and Waddell & Reed Services Company.
John M. Holliday
Vice President of the Fund and eight other funds in the Fund complex;
Senior Vice President of WRIMCO and Waddell & Reed Asset Management Company;
formerly, Senior Vice President of Waddell & Reed, Inc.
Carl E. Sturgeon
Vice President of the Fund and eleven other funds in the Fund complex; Vice
President of WRIMCO; formerly, Vice President of Waddell & Reed, Inc.
The address of each person is 6300 Lamar Avenue, P.O. Box 29217, Shawnee
Mission, Kansas 66201-9217 unless a different address is given.
As of the date of this SAI, five of the Fund's Directors may be deemed to
be "interested persons" as defined in the 1940 Act of its underwriter, Waddell &
Reed, Inc., or of WRIMCO. The Directors who may be deemed to be "interested
persons" are indicated as such by an asterisk.
The Board of Directors has created an honorary position of Director
Emeritus, which position a director may elect after resignation from the Board
provided the director has attained the age of 75 and has served as a director of
the funds in the United Group for a total of at least five years. A Director
Emeritus receives fees in recognition of his past services whether or not
services are rendered in his capacity as Director Emeritus, but has no authority
or responsibility with respect to management of the Fund. Currently, no person
serves as Director Emeritus.
The funds in the United Group (with the exception of United Asset Strategy
Fund, Inc.), TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. pay to each
Director a total of $40,000 per year, plus $1,000 for each meeting of the Board
of Directors attended (effective April 1, 1996, the fee will be $44,000 per year
and $1,000 for each meeting of the Board of Directors attended) and $500 for
each committee meeting attended which is not in conjunction with a Board of
Directors meeting, other than Directors who are affiliates of Waddell & Reed,
Inc. The fees to the Directors who receive them are divided among the funds in
the United Group (with the exception of United Asset Strategy Fund, Inc.),
TMK/United Funds, Inc. and Waddell & Reed Funds, Inc. based on their relative
size. During the Fund's fiscal year ended September 30, 1995, the Fund's
Directors received the following fees for service as a director:
COMPENSATION TABLE
Pension
or Retirement Total
Aggregate Benefits Compensation
Compensation Accrued As From Fund
From Part of Fund and Fund
Director Fund Expenses Complex
- -------- ------------ -------------- ------------
Ronald K. Richey $ 0 $0 $ 0
Keith A Tucker 0 0 0
Henry L. Bellmon 1,255 0 43,500
Dodds I. Buchanan 1,255 0 43,500
Jay B. Dillingham 1,255 0 43,500
Linda Graves 0 0 0
John F. Hayes 1,255 0 43,500
Glendon E. Johnson 1,255 0 43,500
James B. Judd 0 0 0
William T. Morgan 1,255 0 43,500
Doyle Patterson 1,255 0 43,500
Eleanor B. Schwartz 0 0 0
Frederick Vogel III 1,255 0 43,500
Paul S. Wise 1,255 0 43,500
Leslie S. Wright 1,227 0 42,500
The officers are paid by WRIMCO or its affiliates.
Shareholdings
As of December 31, 1995, all of the Fund's Directors and officers as a
group owned less than 1% of the outstanding shares of the Fund. As of such date
no person owned of record or was known by the Fund to own beneficially 5% or
more of the Fund's outstanding shares.
PAYMENTS TO SHAREHOLDERS
General
There are two sources for the payments the Fund makes to you as a
shareholder of a class of shares of the Fund, other than payments when you
redeem your shares. The first source is the Fund's net investment income, which
is derived from the interest and earned discount on the securities it holds less
expenses (which will vary by class). The second source is 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 realized capital gains, it will
ordinarily pay distributions once each year, in the latter part of the fourth
calendar quarter. Even if the Fund 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
On your application form, you can give instructions that (i) you want cash
for your dividends and distributions, (ii) you want your dividends and
distributions paid in shares of the same class as that with respect to which
they were paid, or (iii) you want cash for your dividends and want your
distributions paid in shares of the Fund of the same class as that with respect
to which they were paid. You can change your instructions at any time. If you
give no instructions, your dividends and distributions will be paid in shares of
the Fund of the same class as that with respect to which they were paid. All
payments in shares are at net asset value without any sales charge. The net
asset value used for this purpose is that computed as of the record date for the
dividend or distribution, although this could be changed by the Board of
Directors.
Even if you get dividends and distributions on Class A shares in cash, you
can thereafter reinvest them (or distributions only) in Class A shares of the
Fund at net asset value (i.e., no sales charge) next determined after receipt by
Waddell & Reed, Inc. of the amount clearly identified as a reinvestment. The
reinvestment must be within 45 days after the payment.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended (the
"Code"), the Fund must distribute to its shareholders for each taxable year at
least 90% of the sum of its investment company taxable income (consisting
generally of 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 contracts with respect to securities) ("Short-Short
Limitation"); (3) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government Securities, securities of other RICs and other securities
that are limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund's total assets and that does not represent
more than 10% of the outstanding voting securities of the issuer; and (4) at the
close of each quarter of the Fund's taxable year, not more than 25% of the value
of its total assets may be invested in securities (other than U.S. Government
Securities or the securities of other RICs) of any one issuer.
Dividends paid by the Fund will qualify as "exempt-interest dividends," and
thus will be excludable from your gross income, if the Fund satisfies the
additional requirement that, at the close of each quarter of its taxable year,
at least 50% of the value of its total assets consists of securities the
interest on which is excludable from gross income under section 103(a); the Fund
intends to continue to satisfy this requirement. The aggregate dividends
excludable from all shareholders' gross income may not exceed the Fund's net
tax-exempt income. The Fund uses the average annual method to determine the
exempt income portion of each distribution and the percentage of income
designated as tax-exempt for any particular distribution may be substantially
different from the percentage of the Fund's income that was tax-exempt during
the period covered by the distribution. The treatment of dividends from the
Fund under state and local income tax laws may differ from the treatment thereof
under the Code.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from the Fund still are
tax-exempt to the extent described above; they are only included in the
calculation of whether a recipient's income exceeds the established amounts.
If the Fund invests in any instruments that generate taxable income, under
the circumstances described in the Prospectus, distributions of the interest
earned thereon will be taxable to you as ordinary income to the extent of the
Fund's earnings and profits. Moreover, if the Fund realizes capital 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 ("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 Fund may 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 gain. If the Fund enters into a closing purchase transaction, it will
have a short-term capital gain or loss based on the difference between the
premium it received 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 capital 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.
The Fund may acquire zero coupon or other securities issued with original
issue discount. As a holder of those securities, the Fund must account for the
original issue discount that accrues on the securities during the taxable year
(and include in its income any such discount that accrues on taxable
securities), even if the Fund receives no corresponding payment on the
securities during the year. Because the Fund annually must distribute
substantially all of its investment company taxable income and net income
excludable from gross income under Section 103(a), including any original issue
discount, in order to satisfy the distribution requirement described above and
avoid imposition of the Excise Tax, the Fund may be required in a particular
year to distribute as a dividend an amount that is greater than the total amount
of cash it actually receives. Those distributions will be made from the Fund's
cash assets or from the proceeds of sales of portfolio securities, if necessary.
The Fund may realize capital gains or losses from those sales, which would
increase or decrease its investment company taxable income and/or net capital
gain. In addition, any such gains may be realized on the disposition of
securities held for less than three months. Because of the Short-Short
Limitation, any such gains would reduce the Fund's ability to sell other
securities, options or futures held for less than three months that it might
wish to sell in the ordinary course of its portfolio management.
PORTFOLIO TRANSACTIONS AND BROKERAGE
One of the duties undertaken by WRIMCO pursuant to the Management Agreement
is to arrange the purchase and sale of securities for the portfolio of the Fund.
Purchases are made directly from issuers or from underwriters, dealers or banks.
Purchases from underwriters include a commission or concession paid by the
issuer to the underwriter. Purchases from dealers will include the spread
between the bid and asked prices. Brokerage commissions are paid primarily for
effecting transactions in securities traded on an exchange and otherwise only if
it appears likely that a better price or execution can be obtained. The Fund
has not effected transactions through brokers and does not anticipate doing so.
The individual who manages the Fund may manage other advisory accounts with
similar investment objectives. It can be anticipated that the manager will
frequently place concurrent orders for all or most accounts for which the
manager has responsibility. Transactions effected pursuant to such combined
orders are averaged as to price and allocated in accordance with the purchase or
sale orders actually placed for each fund or advisory account.
To effect the portfolio transactions of the Fund, WRIMCO is authorized to
engage broker-dealers ("brokers") which, in its best judgment based on all
relevant factors, will implement the policy of the Fund to achieve "best
execution" (prompt and reliable execution at the best price obtainable) for
reasonable and competitive commissions. WRIMCO need not seek competitive
commission bidding but is expected to minimize the commissions paid to the
extent consistent with the interests and policies of the Fund. Subject to
review by the Board of Directors, such policies include the selection of brokers
which provide execution and/or research services and other services, including
pricing or quotation services directly or through others ("brokerage services")
considered by WRIMCO to be useful or desirable for its investment management of
the Fund and/or the other funds and accounts over which WRIMCO or its affiliates
have investment discretion.
Brokerage services are, in general, defined by reference to Section 28(e)
of the Securities Exchange Act of 1934 as including (i) advice, either directly
or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities and the
availability of securities and purchasers or sellers; (ii) furnishing analyses
and reports; or (iii) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). "Investment
discretion" is, in general, defined as having authorization to determine what
securities shall be purchased or sold for an account, or making those decisions
even though someone else has responsibility.
The commissions paid to brokers that provide such brokerage services may be
higher than another qualified broker would charge for effecting comparable
transactions if a good faith determination is made by WRIMCO that the commission
is reasonable in relation to the brokerage services provided. Subject to the
foregoing considerations, WRIMCO may also consider the willingness of particular
brokers and dealers to sell shares of the Fund and other funds managed by WRIMCO
and its affiliates as a factor in its selection. No allocation of brokerage or
principal business is made to provide any other benefits to WRIMCO or its
affiliates.
The investment research provided by a particular broker may be useful only
to one or more of the other advisory accounts of WRIMCO or its affiliates and
investment research received for the commissions of those other accounts may be
useful both to the Fund and one or more of such other accounts. To the extent
that electronic or other products provided by such brokers to assist WRIMCO in
making investment management decisions are used for administration or other non-
research purposes, a reasonable allocation of the cost of the product
attributable to its non-research use is made by WRIMCO.
Such investment research (which may be supplied by a third party at the
instance of a broker) includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of WRIMCO;
serves to make available additional views for consideration and comparisons; and
enables WRIMCO to obtain market information on the price of securities held in
the Fund's portfolio or being considered for purchase.
In placing transactions for the Fund's portfolio, WRIMCO may consider sales
of shares of the Fund and other funds managed by WRIMCO and its affiliates as a
factor in the selection of brokers to execute portfolio transactions. WRIMCO
intends to allocate brokerage on the basis of this factor only if the sale is $2
million or more and there is no sales charge. This results in the consideration
only of sales which by their nature would not ordinarily be made by Waddell &
Reed, Inc.'s direct sales force and is done in order to prevent the direct sales
force from being disadvantaged by the fact that it cannot participate in Fund
brokerage.
The Fund, WRIMCO and Waddell & Reed, Inc. have adopted a Code of Ethics
which imposes restrictions on the personal investment activities of their
employees, officers and interested directors.
OTHER INFORMATION
The Shares of the Fund
The Fund offers two classes of shares: Class A and Class Y. Prior to
January 30, 1996, the Fund offered only one class of shares to the public.
Shares outstanding on that date were designated as Class A shares. Each class
represents an interest in the same assets of the Fund and differ as follows:
each class of shares has exclusive voting rights on matters pertaining to
matters appropriately limited to that class; Class A shares are subject to an
initial sales charge and to an ongoing service fee; each class may bear
differing amounts of certain class-specific expenses; and each class has a
separate exchange privilege. The Fund does not anticipate that there will be
any conflicts between the interests of holders of the different classes of
shares of the Fund by virtue of those classes. On an ongoing basis, the Board
of Directors will consider whether any such conflict exists and, if so, take
appropriate action. Each share of the Fund is entitled to equal voting,
dividend, liquidation and redemption rights, except that due to the differing
expenses borne by the two classes, dividends and liquidation proceeds of Class A
shares are expected to be lower than for Class Y shares of the Fund. Each
fractional share of a class has the same rights, in proportion, as a full share
of that class.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS
ALABAMA - 1.09%
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 $ 2,117,500
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 1,051,250
The Marshall County Health Care Authority,
Hospital Revenue Refunding Bonds,
Series 1992 (Guntersville-Arab
Medical Center),
7.0%, 10-1-2013 ....................... 1,000 1,003,750
Total ................................. 4,172,500
ALASKA - 0.93%
Alaska Industrial Development and Export
Authority, Refunding Revenue Bonds, Series
1989 (American President Lines Project),
8.0%, 11-1-2009 ....................... 1,820 1,988,350
Anchorage Parking Authority, Lease Revenue
Refunding Bonds, Series 1993 (5th Avenue
Garage Project),
6.75%, 12-1-2008 ...................... 1,500 1,571,250
Total ................................. 3,559,600
ARIZONA - 0.55%
Hayden-Winkelman Unified School District
No. 41 of Gila County, Arizona, Capital
Appreciation Refunding Bonds, Series 1995,
0.0%, 7-1-2010 ........................ 6,145 2,120,025
ARKANSAS - 0.45%
The Fayetteville Public Facilities Board,
Refunding and Improvement Revenue Bonds,
Series 1989A (Butterfield Trail Village
Project),
9.5%, 9-1-2014 ........................ 1,600 1,702,000
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
CALIFORNIA - 5.89%
Foothill/Eastern Transportation Corridor
Agency, Toll Road Revenue Bonds, Series
1995A,
0.0%, 1-1-2013 (A) .................... $11,925 $ 6,424,594
San Joaquin Hills Transportation Corridor
Agency (Orange County, California):
Junior Lien Toll Road Revenue Bonds,
0.0%, 1-1-2002 ........................ 2,755 1,814,856
Senior Lien Toll Road Revenue Bonds,
0.0%, 1-1-2011 (A) .................... 2,500 1,790,625
Hi-Desert Memorial Hospital District,
Revenue Bonds, Series 1994A,
8.0%, 10-1-2019 ....................... 3,000 3,101,250
Huntington Beach Public Financing Authority
(Orange County, California), 1992 Revenue
Bonds (Huntington Beach Redevelopment
Projects),
7.0%, 8-1-2024 ........................ 3,000 2,917,500
Certificates of Participation (1991 Capital
Improvement Project), Bella Vista Water
District (California),
7.375%, 10-1-2017 ..................... 1,500 1,597,500
Sacramento Cogeneration Authority,
Cogeneration Project Revenue Bonds
(Procter & Gamble Project),
1995 Series,
6.5%, 7-1-2014 ........................ 1,500 1,518,750
Carson Redevelopment Agency (California),
Redevelopment Project Area No. 2,
Refunding Tax Allocation Bonds,
Series 1993,
6.0%, 10-1-2016 ....................... 1,500 1,402,500
Kings County Waste Management Authority,
Solid Waste Revenue Bonds, Series 1994
(California),
7.2%, 10-1-2014 ....................... 1,000 1,052,500
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 ........................ 890 917,812
Total ................................. 22,537,887
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
COLORADO - 7.70%
City and County of Denver, Colorado,
Airport System Revenue Bonds:
Series 1991A,
8.75%, 11-15-2023 ..................... $ 6,000 $ 6,922,500
Series 1994A,
7.5%, 11-15-2023 ...................... 3,000 3,202,500
Colorado Health Facilities Authority,
Hospital Revenue Bonds (PSL Healthcare
System Project), Series 1991B,
8.5%, 2-15-2021 ....................... 3,000 3,555,000
City and County of Denver, Colorado,
Revenue Bonds (Jewish Community Centers
of Denver Project), Series 1994:
8.25%, 3-1-2024 ....................... 2,390 2,461,700
7.875%, 3-1-2019 ...................... 815 840,469
Upper Eagle Regional Water Authority,
Eagle County, Colorado, Water Refunding
and Improvement Revenue Bonds,
Series 1995,
6.7%, 12-1-2018 ....................... 2,400 2,403,000
City of Colorado Springs, Colorado,
Airport System Revenue Bonds, Series 1992A,
7.0%, 1-1-2022 ........................ 2,200 2,285,250
City of Central, Gilpin County, Colorado:
General Obligation Water Bonds,
Series 1992,
7.5%, 12-1-2012 ....................... 1,500 1,741,875
Water Revenue Bonds, Series 1991,
8.625%, 9-15-2011 ..................... 500 534,375
Pitkin County, Colorado, Lease Purchase
Agreement, Certificates of Participation
(County Administration Building Project),
Series 1991,
7.4%, 10-1-2011 ....................... 1,500 1,614,375
Mountain Village Metropolitan District, San
Miguel County, Colorado, General
Obligation Refunding Bonds, Series 1992,
8.1%, 12-1-2011 ....................... 1,435 1,522,894
School District No. 20, El Paso County,
Colorado, General Obligation Refunding
Bonds, Series 1993A, Capital
Appreciation Bonds,
0.0%, 6-15-2008 ....................... 2,600 1,264,250
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
COLORADO (Continued)
Arapahoe Water and Sanitation District,
Arapahoe County, Colorado, General
Obligation Refunding Bonds, Series 1988A:
Prerefund Bonds,
9.25%, 12-1-2013 ...................... $ 850 $ 978,563
Unrefunded Bonds,
9.25%, 12-1-2013 ...................... 150 159,563
Total ................................. 29,486,314
CONNECTICUT - 1.59%
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 2,693,750
Congregational Avery Nursing Facilities
Project - 1991 Series,
8.5%, 4-1-2021 ........................ 1,490 1,573,813
Eastern Connecticut Resource Recovery
Authority, Solid Waste Revenue Bonds
(Wheelabrator Lisbon Project),
Series 1993A,
5.5%, 1-1-2014 ........................ 2,000 1,835,000
Total ................................. 6,102,563
DISTRICT OF COLUMBIA - 1.34%
Certificates of Participation, Series 1993,
District of Columbia,
7.3%, 1-1-2013 ........................ 3,000 3,022,500
District of Columbia Revenue Bonds
(National Public Radio Issue),
Series 1992,
7.625%, 1-1-2013 ...................... 2,000 2,092,500
Total ................................. 5,115,000
FLORIDA - 3.42%
City of Atlantic Beach, Florida,
Variable Rate Demand,
Improvement and Refunding Revenue Bonds,
Series 1994B (Fleet Landing Project),
4.8%, 10-1-2024 ....................... 3,700 3,700,000
Lake County, Florida, Resource Recovery
Industrial Development Refunding Revenue
Bonds (NRG/Recovery Group Project),
Series 1993A,
5.95%, 10-1-2013 ...................... 2,500 2,353,125
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
FLORIDA (Continued)
Dade County Industrial Development Authority,
Industrial Development Revenue Bonds,
Series 1995 (Miami Cerebral Palsy
Residential Services, Inc. Project),
8.0%, 6-1-2022 ........................ $ 2,000 $ 1,997,500
Highlands County (Florida), Industrial
Development Authority, Industrial
Development Revenue Refunding Bonds
(Beverly Enterprises - Florida, Inc.
Project), Series 1991,
9.25%, 7-1-2007 ....................... 1,435 1,591,056
City of Fort Walton Beach, First Mortgage
Industrial Development Revenue Bonds,
Series 1986 (Ft. Walton Beach Ventures,
Inc. Project),
10.5%, 12-1-2016 ...................... 1,335 1,388,400
City of Winter Garden, Florida, Industrial
Development Revenue Refunding Bonds
(Beverly Enterprises - Florida, Inc. Project),
Series 1991,
8.75%, 7-1-2012 ....................... 1,000 1,092,500
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 ..................... 900 947,250
Total ................................. 13,069,831
GEORGIA - 1.52%
Hospital Authority of Savannah, Revenue
Refunding and Improvement Bonds
(Candler Hospital), Series 1992,
7.0%, 1-1-2011 ........................ 3,180 3,231,675
Tri-City Hospital Authority, Georgia,
Revenue Certificates, Series 1993,
6.375%, 7-1-2016 ...................... 2,750 2,591,875
Total ................................. 5,823,550
GUAM - 0.79%
Guam Airport Authority, General Revenue
Bonds, 1993 Series B,
6.6%, 10-1-2010 ....................... 3,000 3,037,500
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
IDAHO - 0.57%
Idaho Health Facilities Authority, Hospital
Revenue Refunding Bonds, Series 1992
(IHC Hospitals, Inc.), Indexed Inverse
Floating Rate Securities,
7.6%, 2-15-2021 (B) ................... $ 2,000 $ 2,182,500
ILLINOIS - 6.23%
Village of Sauget, Illinois, Variable
Rate Demand Pollution Control Revenue
Refunding Bonds (Monsanto Company Project):
Series 1993,
4.05%, 5-1-2028 ....................... 2,000 2,000,000
Series 1992,
4.4%, 9-1-2022 ........................ 1,000 1,000,000
City of Hillsboro, Montgomery County,
Illinois, General Obligation Bonds
(Alternate Revenue Source), Series 1991,
7.5%, 12-1-2021 ....................... 2,640 2,831,400
City of Chicago, Chicago-O'Hare
International Airport, Special Facility
Revenue Refunding Bonds, Series 1994
(American Airlines, Inc. Project),
8.2%, 12-1-2024 ....................... 2,400 2,802,000
Illinois Health Facilities Authority,
Revenue Bonds, Series 1992A
(Fairview Obligated Group Project),
8.75%, 10-1-2002 ...................... 2,500 2,706,250
Illinois Development Finance Authority
Revenue Bonds, Series 1993C (Catholic
Charities Housing Development
Corporation Project),
6.1%, 1-1-2020 ........................ 2,500 2,381,250
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 2,152,500
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
City of Blue Island, Cook County, Illinois,
Golf Course Revenue Bonds (Utility Tax
Pledge), Series 1992,
7.375%, 5-1-2014 ...................... 2,000 2,017,500
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
ILLINOIS (Continued)
Village of Hodgkins, Cook County, Illinois,
Tax Increment Revenue Refunding Bonds,
Series 1995A,
7.625%, 12-1-2013 ..................... $ 1,750 $ 1,756,562
Village of Bourbonnais, Kankakee County,
Illinois, Sewerage Revenue Bonds,
Series 1993,
7.25%, 12-1-2012 ...................... 1,085 1,132,469
City of Eureka, Woodford County, Illinois,
General Obligation Refunding Bonds
(Alternate Revenue Source), Series 1993,
6.25%, 7-1-2013 ....................... 1,000 1,005,000
Total ................................. 23,847,431
INDIANA - 3.89%
Indiana Health Facility Financing Authority,
Hospital Revenue Bonds, Series 1990
(Hancock Memorial Hospital Project),
8.3%, 8-15-2020 ....................... 3,000 3,202,500
Indianapolis Airport Authority, Special
Facilities Revenue Bonds:
Series 1994 (Federal Express
Corporation Project),
7.1%, 1-15-2017 ....................... 1,500 1,586,250
Series 1995 A (United Air Lines, Inc.,
Indianapolis Maintenance Center Project),
6.5%, 11-15-2031 ...................... 1,500 1,462,500
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 1,997,500
Revenue Bonds, Inland Steel
Company Project No. 5,
Series 1977,
5.75%, 2-1-2007 ....................... 1,000 942,500
Indiana Development Finance Authority Pollution
Control Refunding Revenue Bonds (Inland Steel
Company Project No. 12), Series 1995,
6.85%, 12-1-2012 ...................... 2,500 2,531,250
City of Carmel, Indiana, Retirement Rental
Housing Revenue Refunding Bonds (Beverly
Enterprises - Indiana, Inc. Project),
Series 1992,
8.75%, 12-1-2008 ...................... 1,500 1,644,375
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
INDIANA (Continued)
Indiana Health Facility Financing
Authority, Hospital Revenue Bonds,
Series 1992 (Fayette Memorial Hospital
Project),
7.2%, 10-1-2022 ....................... $ 1,000 $ 988,750
Indiana Housing Finance Authority, Residential
Mortgage Bonds, 1988 Series R-A,
0.0%, 1-1-2013 ........................ 2,245 519,156
Total ................................. 14,874,781
IOWA - 0.36%
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 1,381,437
KANSAS - 2.43%
Kansas Development Finance Authority,
Community Provider Loan Program (Community
Living Opportunities, Inc.), Series
1992A Revenue Bonds,
8.875%, 9-1-2011 ...................... 2,790 3,002,737
Baldwin City, Kansas, Educational Facilities
Revenue Bonds (Baker University Project),
Series 1988,
9.5%, 10-1-2008 ....................... 2,000 2,127,500
City of Prairie Village, Kansas, Claridge
Court Project Revenue Bonds, Series 1993A:
8.75%, 8-15-2023 ...................... 1,000 1,042,500
8.5%, 8-15-2004 ....................... 1,000 1,040,000
City of Lenexa, Kansas, Multifamily Housing
Revenue Refunding Bonds (Point West
Apartments Project), Series 1995,
7.05%, 6-1-2020 ....................... 2,125 2,071,875
Total ................................. 9,284,612
KENTUCKY - 1.35%
Kenton County Airport Board (Commonwealth
of Kentucky), Special Facilities Revenue
Bonds, 1992 Series A (Delta Air Lines,
Inc. Project),
7.5%, 2-1-2020 ........................ 3,000 3,172,500
County of Perry, Kentucky, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1994,
7.0%, 6-1-2024 ........................ 1,000 1,021,250
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
KENTUCKY (Continued)
County of Jefferson, Kentucky, Health
Facilities Revenue Refunding Bonds
(Beverly Enterprises Project),
Series 1985B,
9.75%, 8-1-2007 ....................... $ 865 $ 955,825
Total ................................. 5,149,575
LOUISIANA - 2.04%
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 2,853,125
Pollution Control Revenue Bonds
(Union Carbide Project),
Series 1992,
7.35%, 11-1-2022 ...................... 2,000 2,117,500
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 2,050,000
LaFourche Parish Home Mortgage Authority,
Tax-Exempt Capital Appreciation Refunding
Bonds, Series 1990-B, Class B-2,
0.0%, 5-20-2014 ....................... 3,300 767,250
Total ................................. 7,787,875
MARYLAND - 0.27%
Baltimore County, Maryland, Pollution
Control Revenue Refunding Bonds,
Series 1994A (Bethlehem Steel
Corporation Project),
7.55%, 6-1-2017 ....................... 1,000 1,042,500
MASSACHUSETTS - 3.63%
Massachusetts Industrial Finance Agency:
Resource Recovery Revenue Bonds (SEMASS
Project), Series 1991B,
9.25%, 7-1-2015 ....................... 5,000 5,600,000
First Mortgage Revenue Bonds, Reeds
Landing Project, Series 1993,
8.625%, 10-1-2023 ..................... 3,000 3,026,250
Revenue Bonds, Beaver Country Day School
Issue, Series 1992, Subseries A,
8.1%, 3-1-2008 ........................ 1,665 1,704,544
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MASSACHUSETTS (Continued)
Massachusetts Health and Educational
Facilities Authority, Revenue Bonds,
New England Deaconess Hospital Issue,
Series D,
6.875%, 4-1-2022 ...................... $ 3,490 $ 3,568,525
Total ................................. 13,899,319
MICHIGAN - 3.19%
City of Detroit, Michigan, General
Obligation Refunding Bonds (Unlimited
Tax), Series 1995-B,
6.25%, 4-1-2009 ....................... 3,000 2,996,250
Michigan State Hospital Finance Authority,
Hospital Revenue Refunding Bonds
(Crittenton Hospital), Series 1994A,
5.25%, 3-1-2014 ....................... 3,000 2,670,000
Portage Lake Water and Sewage Authority,
Houghton County, Michigan, General
Obligation Limited Tax Bonds:
Series III,
7.75%, 10-1-2020 ...................... 1,000 1,195,000
Series II,
7.625%, 10-1-2020 ..................... 1,000 1,187,500
Michigan Strategic Fund, Limited Obligation
Revenue Bonds:
Knollwood Corporation Project, Series A,
9.65%, 10-1-2016 (C) .................. 1,300 1,105,000
Mercy Services for Aging Project,
Series 1990,
9.4%, 5-15-2020 ....................... 900 983,250
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 2,077,500
Total ................................. 12,214,500
MINNESOTA - 1.57%
City of St. Anthony, Minnesota, Housing
Development Refunding Revenue Bonds
(Autumn Woods Project), Series 1992,
6.875%, 7-1-2022 ...................... 2,500 2,528,125
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MINNESOTA (Continued)
Minneapolis Community Development Agency,
Limited Tax Supported Development Revenue
Bonds, Common Bond Fund Series 1995-1,
7.25%, 12-1-2015 ...................... $ 1,310 $ 1,360,763
City of Mounds View, Minnesota, Gross
Revenue Golf Course Bonds, Series 1994A,
6.125%, 1-1-2014 ...................... 1,250 1,220,312
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 ...................... 870 906,975
Total ................................. 6,016,175
MISSISSIPPI - 0.90%
Lowndes County, Mississippi, Solid Waste
Disposal and Pollution Control Refunding
Revenue Bonds (Weyerhaeuser Company
Project), Series 1992B, Indexed Inverse
Floating/Fixed Term Bonds,
6.7%, 4-1-2022 (D) .................... 2,000 2,157,500
Adams County, Mississippi, Hospital Revenue
Bonds, Series 1991 (Jefferson Davis Memorial
Hospital Project),
8.0%, 10-1-2016 ....................... 1,200 1,276,500
Total ................................. 3,434,000
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 ....................... 4,340 4,833,675
8.25%, 4-1-2002 ....................... 700 757,750
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 3,281,250
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 2,906,250
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MISSOURI (Continued)
The Industrial Development Authority of the
City of Kansas City, Missouri, Revenue Bonds
(The Bishop Spencer Place, Incorporated
Project), Series 1994,
8.0%, 9-1-2016 ........................ $ 2,965 $ 2,901,994
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 1,593,750
7.75%, 8-15-2001 ...................... 945 978,075
Certificates of Participation,
Series 1994, Public Water
Supply District No. 2 of St. Charles
County, Missouri,
8.25%, 12-1-2020 ...................... 2,000 2,105,000
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 2,082,500
Public Water Supply District No. 16 of
Jackson County, Missouri, Water System
Improvement Revenue Bonds, Series 1991,
9.25%, 1-1-2020 ....................... 1,800 1,620,000
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 1,582,500
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 ..................... 1,190 1,231,650
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 ....................... 900 934,875
Total ................................. 26,809,269
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
MONTANA - 0.75%
Montana Board of Investments, Resource Recovery
Revenue Bonds, Series 1993 (Yellowstone Energy
Limited Partnership Project),
7.0%, 12-31-2019 ...................... $ 3,000 $ 2,880,000
NEVADA - 1.09%
Clark County, Nevada, Industrial Development
Revenue Bonds (Southwest Gas Corporation),
1992 Series B,
7.5%, 9-1-2032 ........................ 4,000 4,175,000
NEW HAMPSHIRE - 4.50%
New Hampshire Higher Educational and Health
Facilities Authority:
Hospital Revenue Bonds:
Catholic Medical
Center Issue, Series 1989,
8.25%, 7-1-2013 ....................... 3,000 3,247,500
Monadnock Community Hospital
Issue, Series 1990,
9.125%, 10-1-2020 ..................... 1,470 1,591,275
St. Joseph Hospital Issue,
Series 1991,
7.5%, 1-1-2016 ........................ 1,000 1,052,500
First Mortgage Revenue Bonds:
RiverWoods at Exeter Issue,
Series 1993,
9.0%, 3-1-2023 ........................ 2,000 2,140,000
RiverMead at Peterborough Issue,
Series 1994,
8.5%, 7-1-2024 ........................ 2,000 2,042,500
Revenue Bonds, New Hampshire Catholic
Charities Issue, Series 1991,
8.4%, 8-1-2011 ........................ 1,700 1,831,750
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 2,115,000
1991 Tax-Exempt Series C,
7.65%, 5-1-2021 ....................... 2,000 2,115,000
Lisbon Regional School District, New
Hampshire, General Obligation Capital
Appreciation School Bonds,
0.0%, 2-1-2013 ........................ 1,940 1,103,375
Total ................................. 17,238,900
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
NEW JERSEY - 3.30%
New Jersey Economic Development Authority:
First Mortgage Revenue Fixed Rate Bonds:
Franciscan Oaks Project - Series 1992A,
8.5%, 10-1-2023 ....................... $ 3,500 $ 3,714,375
Fellowship Village Project - Series 1995A,
9.25%, 1-1-2025 ....................... 2,500 2,609,375
First Mortgage Revenue Bonds, The
Evergreens - Series 1992,
9.25%, 10-1-2022 ...................... 2,000 2,235,000
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 3,071,250
New Jersey Housing Finance Agency,
Multi-Family Mortgage Revenue Bonds,
1976 Series A,
8.25%, 11-1-2020 ...................... 1,000 1,000,000
Total ................................. 12,630,000
NEW MEXICO - 1.69%
City of Santa Fe, New Mexico, Industrial
Revenue Housing Refunding Bonds (Ponce
de Leon Limited Partnership Project)
Series 1995,
7.25%, 12-1-2005 ...................... 3,500 3,504,375
New Mexico Educational Assistance
Foundation, Student Loan Purchase Bonds,
Second Subordinate 1994 Series II-C (AMT),
6.0%, 12-1-2008 ....................... 3,000 2,947,500
Total ................................. 6,451,875
NEW YORK - 1.11%
The Port Authority of New York and New
Jersey, Special Project Bonds, Series 2,
Continental Airlines, Inc. and Eastern Air
Lines, Inc. Project, LaGuardia Airport
Passenger Terminal,
9.125%, 12-1-2015 ..................... 1,945 2,173,537
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
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 $ 1,072,500
Tompkins County Industrial Development
Agency, Life Care Community Revenue Bonds,
1994 (Kendal at Ithaca, Inc. Project),
7.875%, 6-1-2024 ...................... 1,000 1,011,250
Total ................................. 4,257,287
OHIO - 1.40%
Hamilton County, Ohio, Health System Revenue
Bonds, Providence Hospital Issue,
Series 1992,
6.875%, 7-1-2015 ...................... 2,000 2,020,000
City of Columbus, Ohio, Various Purpose
Adjustable Rate Unlimited Tax Bonds,
Series 1995-1,
4.2%, 6-1-2016 ........................ 1,200 1,200,000
County of Lorain, Ohio, First Mortgage
Revenue Bonds, 1992 Series A (Kendal at
Oberlin Project),
8.625%, 2-1-2022 ...................... 1,000 1,075,000
City of Fairfield, Ohio, Economic
Development Revenue Refunding Bonds
(Beverly Enterprises - Ohio, Inc. Project),
Series 1992,
8.5%, 1-1-2003 ........................ 1,000 1,068,750
Total ................................. 5,363,750
OKLAHOMA - 3.92%
Oklahoma County Industrial Authority,
Industrial Development Revenue Bonds:
1986 Series B (Choctaw Nursing
Center Project):
10.25%, 9-1-2016 ...................... 1,230 1,277,662
10.125%, 9-1-2006 ..................... 525 544,688
1986 Series A (Westlake Nursing Center
Project):
10.25%, 9-1-2016 ...................... 905 940,069
10.125%, 9-1-2006 ..................... 430 446,125
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
OKLAHOMA (Continued)
Bixby Public Works Authority, Utility
System Revenue Bonds, Refunding
Series 1994,
7.25%, 11-1-2019 ...................... $ 2,685 $ 2,849,456
The Clinton Public Works Authority,
Refunding and Improvement Revenue
Bonds, Series 1994,
6.25%, 1-1-2019 ....................... 2,575 2,478,438
The Broken Arrow Public Golf Authority
(Broken Arrow, Oklahoma), Recreational
Facilities Revenue Bonds, Series 1995,
7.25%, 8-1-2020 ....................... 2,025 2,050,313
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 1,658,000
The Guthrie Public Works Authority
(Guthrie, Oklahoma), Utility System
Revenue Bonds, Series 1994A,
6.75%, 9-1-2019 ....................... 1,415 1,448,606
Cushing Municipal Authority (Cushing,
Oklahoma), Utility System Revenue Bonds,
Series 1993,
6.0%, 7-1-2016 ........................ 1,345 1,326,506
Total ................................. 15,019,863
OREGON - 0.96%
Klamath Falls Intercommunity Hospital
Authority, Gross Revenue Bonds,
Series 1994 (Merle West Medical Center
Project),
7.1%, 9-1-2024 ........................ 3,500 3,688,125
PENNSYLVANIA - 6.23%
Pennsylvania Economic Development Financing
Authority:
Rescue Recovery Revenue Bonds
(Colver Project), Series 1994 D,
7.125%, 12-1-2015 ..................... 2,500 2,618,750
Exempt Facilities Revenue Bonds (MacMillan
Bloedel Clarion Limited Partnership Project),
Series of 1995,
7.6%, 12-1-2020 ....................... 2,000 2,180,000
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
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 $ 2,077,500
Exempt Facilities Revenue Bonds, 1992
Series B (Pennsylvania Gas and Water
Company Project),
7.125%, 12-1-2022 ..................... 1,000 1,033,750
Allegheny County Industrial Development
Authority (Pennsylvania), Environmental
Improvement Revenue Bonds (USX Corporation
Project), Refunding Series A 1994,
6.7%, 12-1-2020 ....................... 3,000 3,060,000
McKeesport Hospital Authority (Commonwealth
of Pennsylvania), Hospital Revenue Bonds,
Series of 1993 (McKeesport Hospital Project),
6.5%, 7-1-2008 ........................ 2,500 2,475,000
Allentown Area Hospital Authority, Hospital
Revenue Bonds (Sacred Heart Hospital of
Allentown), Series A of 1993,
6.75%, 11-15-2014 ..................... 2,115 2,085,919
South Wayne County Water and Sewer Authority
(Wayne County, Pennsylvania), Sewer Revenue
Bonds, Series of 1992,
8.2%, 4-15-2013 ....................... 1,880 1,922,300
Beaver County Industrial Development Authority
(Pennsylvania), Collateralized Pollution
Control Revenue Refunding Bonds, Series 1995
(The Cleveland Electric Illuminating Company
Beaver Valley Project),
7.625%, 5-1-2025 ...................... 1,500 1,545,000
The Cambria County Industrial Development
Authority (Pennsylvania), Pollution
Control Revenue Refunding Bonds,
Series 1994 (Bethlehem Steel
Corporation Project),
7.5%, 9-1-2015 ........................ 1,440 1,486,800
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
PENNSYLVANIA (Continued)
Delaware County Authority (Pennsylvania),
First Mortgage Revenue Bonds, Series 1992
(Riddle Village Project),
9.25%, 6-1-2022 ....................... $ 1,000 $ 1,112,500
Clarion County Industrial Development Authority
(Pennsylvania), Health Facilities Revenue
Refunding Bonds (Beverly Enterprises
Project), Series 1985,
10.125%, 5-1-2007 ..................... 865 962,313
The Hospitals Authority of Philadelphia,
Hospital Revenue Bonds, Series of 1979
(James C. Giuffre Medical Center),
8.25%, 7-1-2009 (E) ................... 1,415 707,500
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 ....................... 525 591,281
Total ................................. 23,858,613
RHODE ISLAND - 1.30%
Providence Public Buildings Authority
(Veazie Street School and Modular Classrooms
Projects), Revenue Bonds, Series 1991:
7.3%, 12-1-2010 ....................... 1,000 1,076,250
7.3%, 12-1-2011 ....................... 1,000 1,073,750
Pawtucket Public Buildings Authority (Water
System Project), Revenue Bonds, Series 1991:
7.6%, 7-1-2010 ........................ 840 919,800
7.6%, 7-1-2009 ........................ 785 861,537
Rhode Island Health and Educational Building
Corporation, Hospital Financing Revenue Bonds,
South County Hospital Issue - Series 1991,
7.25%, 11-1-2011 ...................... 1,000 1,046,250
Total ................................. 4,977,587
SOUTH CAROLINA - 2.48%
Charleston County, South Carolina, Industrial
Refunding Revenue Bonds, 1982 Series (Massey
Coal Terminal, South Carolina Corporate Project),
Adjustable Convertible Extendible Securities,
4.45%, 1-1-2007 ....................... 3,000 3,000,000
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
SOUTH CAROLINA (Continued)
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 $ 2,190,000
South Carolina Jobs-Economic Development Authority,
Economic Development Revenue Bonds (Carolinas
Hospital System Project), Series 1992,
7.0%, 9-1-2014 ........................ 1,500 1,723,125
McCormick County, South Carolina, Hospital
Facilities Revenue Bonds, Series 1988
(McCormick Health Care Center Project),
10.5%, 3-1-2018 ....................... 1,470 1,510,425
County of Chester, South Carolina, Industrial
Development Refunding Revenue Bonds (Springs
Industries, Inc. Project), Series 1992,
7.35%, 2-1-2014 ....................... 1,000 1,075,000
Total ................................. 9,498,550
SOUTH DAKOTA - 0.51%
South Dakota Health and Educational
Facilities Authority, Refunding Revenue
Bonds (Westhills Village Retirement
Community Issue), Series 1993,
7.25%, 9-1-2013 ....................... 2,000 1,935,000
TENNESSEE - 2.27%
Memphis-Shelby County Airport Authority,
Special Facilities Revenue Bonds,
Series 1993 (Federal Express Corporation),
6.2%, 7-1-2014 ........................ 3,000 3,000,000
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 2,120,000
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 2,045,000
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
TENNESSEE (Continued)
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 $ 1,533,750
Total ................................. 8,698,750
TEXAS - 3.03%
Alliance Airport Authority, Inc., Special
Facilities Revenue Bonds, Series 1991
(American Airlines, Inc. Project),
7.0%, 12-1-2011 ....................... 4,500 4,820,625
Dallas-Fort Worth International Airport
Facility Improvement Corporation:
American Airlines, Inc. Revenue Bonds,
Series 1990,
7.5%, 11-1-2025 ....................... 2,000 2,112,500
Delta Air Lines, Inc. Revenue Bonds,
Series 1991,
7.6%, 11-1-2011........................ 1,300 1,387,750
Retama Development Corporation, Special
Facilities Revenue Bonds (Retama Park
Racetrack Project), Series 1993,
8.75%, 12-15-2018 ..................... 3,500 2,100,000
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 1,162,219
Total ................................. 11,583,094
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
UTAH - 1.17%
Carbon County, Utah, Solid Waste Disposal
Refunding Revenue Bonds, Series 1991
(Sunnyside Cogeneration Associates Project),
9.25%, 7-1-2018 ....................... $ 2,500 $ 2,725,000
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 1,753,375
Total ................................. 4,478,375
VERMONT - 0.68%
Vermont Industrial Development Authority,
Mortgage Revenue Bonds, Wake Robin
Corporation Project, Series 1993A,
8.75%, 3-1-2023 ....................... 2,500 2,615,625
VIRGIN ISLANDS - 0.39%
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 1,475,250
VIRGINIA - 0.98%
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 2,709,375
Virginia Housing Development Authority,
Commonwealth Mortgage Bonds,
1988 Series C, Subseries C-2,
8.0%, 1-1-2038 ........................ 1,000 1,051,250
Total ................................. 3,760,625
WASHINGTON - 0.25%
Stevens County Public Corporation, Pollution
Control Revenue Refunding Bonds (The
Washington Water Power Company Kettle
Falls Project), Series 1993,
6.0%, 12-1-2023 ....................... 1,000 958,750
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Principal
Amount in
Thousands Value
MUNICIPAL BONDS (Continued)
WEST VIRGINIA - 0.94%
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 $ 2,085,000
Upshur County, West Virginia, Solid Waste
Disposal Revenue Bonds (TJ International
Project), Series 1995,
7.0%, 7-15-2025 ....................... 1,500 1,526,250
Total ................................. 3,611,250
WYOMING - 0.67%
Sweetwater County, Wyoming, Solid Waste
Disposal Revenue Bonds (FMC Corporation
Project), Series 1994B,
6.9%, 9-1-2024 ........................ 2,500 2,568,750
TOTAL MUNICIPAL BONDS - 99.32% $376,375,763
(Cost: $360,775,467)
TOTAL SHORT-TERM SECURITIES - 0.51% $ 1,954,000
(Cost: $1,954,000)
TOTAL INVESTMENT SECURITIES - 98.83% $378,329,763
(Cost: $362,729,467)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.17% 4,475,166
NET ASSETS - 100.00% $382,804,929
See Notes to Schedule of Investments on page 77.
<PAGE>
THE INVESTMENTS OF
UNITED MUNICIPAL HIGH INCOME FUND, INC.
SEPTEMBER 30, 1995
Notes to Schedule of Investments
(A) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(B) Coupon resets weekly to 11.95% - Kenny S&P Index. Minimum coupon rate is
0%. On February 15, 1999, rate becomes fixed at 6.65%.
(C) Security is paying partial interest.
(D) Coupon resets weekly to 11.95% - Kenny S&P Index. Minimum coupon rate is
0%. On April 1, 1999, rate becomes fixed at 6.70%.
(E) Non-income producing as the issuer has either missed its most recent
interest
payment or declared bankruptcy.
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, 1995
Assets
Investment securities - at value
(Notes 1 and 3) ................................. $378,329,763
Cash ............................................. 5,259
Receivables:
Interest ........................................ 7,648,890
Fund shares sold ................................ 428,590
Prepaid insurance premium ........................ 12,853
------------
Total assets .................................. 386,425,355
------------
Liabilities
Payable for investment securities purchased ...... 2,076,213
Payable for Fund shares redeemed ................. 1,070,498
Dividends payable ................................ 223,244
Accrued service fee .............................. 70,660
Accrued transfer agency and dividend disbursing .. 26,531
Accrued accounting services fee .................. 5,000
Other ............................................ 148,280
------------
Total liabilities ............................. 3,620,426
------------
Total net assets ............................. $382,804,929
============
Net Assets
$1.00 par value capital stock, authorized --
100,000,000; shares outstanding -- 72,674,203
Capital stock ................................... $ 72,674,203
Additional paid-in capital ...................... 297,551,298
Accumulated undistributed income (loss):
Accumulated undistributed net realized
loss on investment transactions ............... (3,020,868)
Net unrealized appreciation in value of
investments at end of period .................. 15,600,296
------------
Net assets applicable to outstanding
units of capital ............................. $382,804,929
============
Net asset value per share (net assets divided
by shares outstanding) ........................... $5.27
Sales load (offering price x 4.25%)................. .23
-----
Offering price (net asset value divided by 95.75%).. $5.50
=====
On sales of $100,000 or more the sales load is reduced as set forth in the
Prospectus.
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1995
Investment Income
Interest ......................................... $27,187,810
-----------
Expenses (Note 2):
Investment management fee ....................... 1,860,352
Service fee ..................................... 369,260
Transfer agency and dividend disbursing ......... 295,349
Accounting services fee ......................... 56,667
Audit fees ...................................... 31,116
Custodian fees .................................. 20,755
Legal fees ...................................... 14,959
Other ........................................... 112,033
-----------
Total expenses ................................ 2,760,491
-----------
Net investment income ........................ 24,427,319
-----------
Realized and Unrealized Gain (Loss) on Investments
Realized net loss on securities .................. (1,115,328)
Realized net loss on futures contracts closed .... (1,606,563)
-----------
Net realized loss on investments ................ (2,721,891)
Unrealized appreciation in value of investments
during the period ............................... 15,084,134
-----------
Net gain on investments ......................... 12,362,243
-----------
Net increase in net assets resulting
from operations .............................. $36,789,562
===========
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year
ended September 30,
-----------------------------
1995 1994
-------------- ------------
Increase in Net Assets
Operations:
Net investment income ...............$ 24,427,319 $ 21,745,160
Realized net gain (loss)
on investments .................... (2,721,891) 1,527,051
Unrealized appreciation
(depreciation) .................... 15,084,134 (22,927,131)
------------ ------------
Net increase in net assets
resulting from operations ........ 36,789,562 345,080
------------ ------------
Dividends to shareholders:*
From net investment income .......... (24,427,319) (21,745,160)
From realized net gain from
investment transactions ........... --- (4,619,821)
In excess of realized net gain
from investment transactions ...... (1,673,583) ---
------------ ------------
(26,100,902) (26,364,981)
------------ ------------
Capital share transactions:
Proceeds from sale of shares
(9,693,367 and 10,978,008 shares,
respectively) ..................... 49,317,843 58,602,026
Proceeds from reinvestment of
dividends and/or capital gains
distribution (3,868,221 and 4,126,763
shares, respectively) ............. 19,837,687 21,969,625
Payments for shares redeemed
(8,253,031 and 7,325,581 shares,
respectively) ..................... (42,201,117) (38,763,374)
------------ ------------
Net increase in net assets
resulting from capital
share transactions ............... 26,954,413 41,808,277
------------ ------------
Total increase ................... 37,643,073 15,788,376
Net Assets
Beginning of period .................. 345,161,856 329,373,480
------------ ------------
End of period ........................$382,804,929 $345,161,856
============ ============
Undistributed net investment
income ............................ $--- $---
==== ====
*See "Financial Highlights" on page 81.
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the fiscal year ended
September 30,
------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Net asset value,
beginning of
period ........... $5.12 $5.53 $5.23 $5.05 $4.85
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income........... .35 .34 .35 .36 .38
Net realized and
unrealized gain
(loss) on
investments ..... .17 (0.34) .34 .18 .20
----- ----- ----- ----- -----
Total from investment
operations ....... .52 0.00 .69 .54 .58
----- ----- ----- ----- -----
Less distributions:
Dividends declared from
net investment
income .......... (0.35) (0.34) (0.35) (0.36) (0.38)
Distribution from
capital gains ... (0.00) (0.07) (0.04) (0.00) (0.00)
Distribution in excess
of capital gains. (0.02) (0.00) (0.00) (0.00) (0.00)
----- ----- ----- ----- -----
Total distributions. (0.37) (0.41) (0.39) (0.36) (0.38)
----- ----- ----- ----- -----
Net asset value, end
of period ........ $5.27 $5.12 $5.53 $5.23 $5.05
===== ===== ===== ===== =====
Total return* ...... 10.63% 0.05% 13.77% 11.08% 12.35%
Net assets, end
of period (000
omitted) .......... $382,805$345,162$329,373$260,777$224,945
Ratio of expenses to
average net
assets ........... 0.76% 0.76% 0.70% 0.72% 0.77%
Ratio of net investment
income to average
net assets ....... 6.75% 6.39% 6.49% 7.08% 7.63%
Portfolio turnover
rate ............. 19.07% 26.26% 26.13% 54.18% 60.83%
*Total return calculated without taking into account the sales load deducted on
an initial purchase.
See notes to financial statements.
<PAGE>
UNITED MUNICIPAL HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
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 with remaining maturities of 60 days or less,
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. Net investment income distributions and capital gains
distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are due to differing treatments for items such as deferral of
wash sales and post-October losses, net operating losses and expiring
capital loss carryforwards.
E. Futures -- See Note 5 -- Futures.
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 $13.3 billion of
combined net assets at September 30, 1995) 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
$1,016,772, out of which W&R paid sales commissions of $586,299 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 $13,369.
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 $105,001,566, while proceeds from maturities and
sales aggregated $67,215,923. Purchases of short-term securities aggregated
$113,965,281, while proceeds from maturities and sales aggregated $127,188,169.
No U.S. Government securities were bought or sold during the period ended
September 30, 1995.
For Federal income tax purposes, cost of investments owned at September 30,
1995 was $363,791,664, resulting in net unrealized appreciation of $14,538,099,
of which $17,892,088 related to appreciated securities and $3,353,989 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized net capital gain net
income of $301,051 during the fiscal year ended September 30, 1995, all of which
has been paid to shareholders during the period ended September 30, 1995
Remaining net capital gains will be distributed to the Fund's shareholders.
Internal Revenue Code regulations permit the Fund to defer into its next
fiscal year net capital losses or net long-term capital losses incurred from
November 1 to the end of its fiscal year ("post-October losses"). From November
1, 1994 through September 30, 1995, the Fund incurred net capital losses of
$1,960,745, which have been deferred to the fiscal year ending September 30,
1996.
NOTE 5 -- Futures
The Fund may engage in buying and selling interest rate futures contracts,
but only Debt Futures and Municipal Bond Index Futures. Upon entering into a
futures contract, the Fund is required to deposit, in a segregated account, an
amount of cash or U.S. Treasury Bills equal to a varying specified percentage of
the contract amount. This amount is known as the initial margin. Subsequent
payments ("variation margins") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying debt security
or index. These changes in the variation margins are recorded by the Fund as
unrealized gains or losses. Upon the closing of the contracts, the cumulative
net change in the variation margin is recorded as realized gain or loss.
<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, 1995, 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, 1995 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Kansas City, Missouri
November 3, 1995
